**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,DC 20549**

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**FORM 10-KSB**

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**ANNUALREPORT UNDER SECTION 13 OR 15(D) OFTHE SECURITIES EXCHANGE ACT OF 1934**

**Forthe fiscal year ended December 31, 2006Commission File No. 0-28882**

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**WORLD HEART CORPORATION**

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| **Canada**                               |   | **52-2247240**       |
|------------------------------------------|--------|----------------------|
| (State or other  Jurisdiction of         |   | (I.R.S. Employer     |
| Incorporation or  Organization)          |   | Identification  No.) |
| ** **                               |   | ** **           |
| **7799 Pardee  Lane**               |   | ** **           |
| **Oakland,  California, USA**            |   | **94621**            |
| (Address of  Principal Executive Office) |   | (Zip Code)      |

 

**(510) 563-5000**(Issuer’sTelephone Number)

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**Securitiesregistered under Section 12(b) of the Exchange Act:**

| **Title of each class**                                                            |   | **Name of  each exchange on which registered** |
|------------------------------------------------------------------------------------|--------|------------------------------------------------|
| Common Shares, no  par value                                                       |   | The Nasdaq Stock  Market LLC                   |
|                                                                               |   |                                           |
| **Securities  registered under Section 12(g) of the Exchange Act: None** |

 

Check whether the issuer isnot required to file reports pursuant to Section 13 or 15(d) of theExchange Act. o

Check whether the issuer (1) filedall reports required to be filed by Section 13 or 15(d) of theExchange Act during the past 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

| Yes x |   | No o |
|-------|--------|------|

 

Check if there is nodisclosure of delinquent filers in response to Item 405 ofRegulation S-B contained in this form, and no disclosure will becontained, to the best of the registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-KSBor any amendment to this Form 10-KSB. o

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).

| Yes o |   | No x |
|-------|--------|------|

 

The issuer’s revenues forits most recent fiscal year ended December 31, 2006 were $8,616,038.

The aggregate market valueof the voting and non-voting common equity held by non-affiliates computed byreference to the price at which the common equity was sold, or the average bidand asked price of such common equity, as of March 1, 2007 was$12,779,480.

The number of common sharesoutstanding as of March 1, 2007 was 115,072,749.

**DOCUMENTSINCORPORATED BY REFERENCE**

**Designated portions of registrant’s Definitive ProxyStatement for its 2007 Annual Meeting of Shareholders are incorporated byreference into Part III of this Form 10-KSB.**

TransitionalSmall Business Disclosure Format (Check one): Yes o       Nox

 

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**TABLEOF CONTENTS**
| **PART I**       |   | 1                                                                                                                                                 |   |
|-----------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| Item 1.               |   | Description  of Business                                                                                                                          |   | 1 |   |
| Item 2.               |   | Description  of Property                                                                                                                          |   | 18 |   |
| Item 3.               |   | Legal  Proceedings                                                                                                                                |   | 18 |   |
| Item 4.               |   | Submission  of Matters to a Vote of Security Holders                                                                                              |   | 18 |   |
| **PART II**      |   | 19                                                                                                                                                |   |
| Item 5.               |   | Market  for Common Equity and Related Stockholder Matters and Small Business Issuer  Purchases of Equity Securities                               |   | 19 |   |
| Item 6.               |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                       |   | 21 |   |
| Item 7.               |   | Financial  Statements                                                                                                                             |   | 35 |   |
| Item 8.               |   | Change  In and Disagreements with Accountants on Accounting and Financial Disclosure                                                              |   | 35 |   |
| Item 8A.              |   | Controls  and Procedures                                                                                                                          |   | 35 |   |
| Item 8B.              |   | Other  Information                                                                                                                                |   | 35 |   |
| **PART III**     |   | 36                                                                                                                                                |   |
| Item 9.               |   | Directors,  Executive Officers, Promoters, Control Persons and Corporate Governance;  Compliance With Section 16(a) of the Exchange Act |   | 36 |   |
| Item 10.              |   | Executive  Compensation                                                                                                                           |   | 36 |   |
| Item 11.              |   | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                                                  |   | 36 |   |
| Item 12.              |   | Certain  Relationships and Related Transactions, and Director Independence                                                                        |   | 36 |   |
| Item 13.              |   | Exhibits                                                                                                                                          |   | 36 |   |
| Item 14.              |   | Principal  Accountant Fees and Services                                                                                                           |   | 39 |   |
| SIGNATURES            |   | 40                                                                                                                                                |   |
| EXHIBIT INDEX         |   | 41                                                                                                                                                |   |
| FINANCIAL  STATEMENTS |   | F-1                                                                                                                                               |   |

 

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**PART I**

**Item 1.**                        Descriptionof Business.

**SPECIAL NOTEREGARDING FORWARD-LOOKING STATEMENTS**

This Annual Reporton Form 10-KSB includes “forward-looking statements” within themeaning of Section 27A of the United States Securities Act of 1933, asamended (the Securities Act) and Section 21E of the United StatesSecurities Exchange Act of 1934, as amended (the Exchange Act). Theforward-looking statements include statements regarding our expectations withrespect to future development plans for our next generation product candidates,particularly the LevacorTM Rotary VAD, the timing and scope ofpre-clinical testing and clinical trials, our ability to secure additionalfunding or the ability to form strategic partnerships, our cost reductionefforts and their impact on our ability to maintain operations, as well asother statements that can be identified by the use of forward-looking language,such as “believe,” “feel,” “expect,” “may,” “will,” “should,” “seek,” “plan,” “anticipate,”or “intend” or the negative of those terms, or by discussions of strategy orintentions. These forward-looking statements involve known and unknown risks,uncertainties and other factors that may cause our actual results andperformance to be materially different from any future results and performanceexpressed or implied by these forward-looking statements. Important factorsthat could cause our actual results to differ materially from those expressedor implied by such forward-looking statements include:

·       ourneed for additional significant financings in the future;

·       costsand delays associated with clinical trials for our products and next-generationproduct candidates, such as Levacor Rotary VAD and Novacor II;

·       decisions,and the timing of decisions, made by health regulatory agencies regardingapproval of our products;

·       continuedshift in market demand away from first generation VAD products, resulting infurther reduced sales of our NovacorÒ LVAS (LeftVentricular Assist System) product;

·       continuedslower Destination Therapy adoption rate for VADs;

·       limitationson third-party reimbursements;

·       ourability to obtain and enforce in a timely manner patent and other intellectualproperty protection for our technology and products;

·       ourability to avoid, either by product design, licensing arrangement or otherwise,infringement of third parties’ intellectual property;

·       ourability to enter into corporate alliances or other strategic relationshipsrelating to the development and commercialization of our technology andproducts;

·       lossof commercial market share to competitors due to our financial condition; and

·       otherfactors we discuss under the heading “RISK FACTORS.”

We undertake no obligationto update publicly or revise any forward-looking statements, whether as aresult of new information, future events or otherwise, except as may berequired under applicable securities laws.

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**CORPORATE STRUCTURE**

**Name, Address andIncorporation**

WorldHeart was incorporated by articles ofincorporation under the laws of the Province of Ontario on April 1, 1996. OnDecember 14, 2005, WorldHeart filed articles of continuance and continuedunder the laws of Canada. Our head office is located at 7799 Pardee Lane,Oakland, California, USA, 94621 and our head office telephone number is 510-563-5000.We have an office at Cereslaan 34, 5384 VT, Heesch, Netherlands and a researchfacility at 4750 Wiley Post Way, Suite 120, Salt Lake City, Utah, USA,84116. Our registered office is located at 40 Elgin Street, Suite 1400,Ottawa, Ontario, Canada, K1P 5K6 and our telephone number is (613) 238-2000.

Our articles ofincorporation were amended on June 22, 2000, to create a first series of1,374,750 preferred shares designated as Cumulative Redeemable ConvertiblePreferred Shares, Series A (the Series A Shares), in connection withthe acquisition by WorldHeart of the Novacor division of Edwards LifesciencesLLC (Edwards). On November 26, 2003, our articles were amended to amendthe rights and privileges of the Series A Shares in connection with theconversion by Edwards Lifesciences (U.S.) Inc. of its Series A Shares aspart of our financing transaction completed in September 2003. Ourarticles were amended again on December 1, 2003, to effect a one commonshare for seven common shares share consolidation. WorldHeart filed articles ofcontinuance on December 14, 2005, associated with the reincorporationunder the laws of Canada from the Province of Ontario. In conjunction with thecontinuance, a new by-law was adopted by our directors.

**IntercorporateRelationships**

World Heart Inc. is our wholly-owned subsidiary,incorporated under the laws of the State of Delaware on May 22, 2000. WorldHeart Inc. acquired the assets and liabilities of the Novacor division ofEdwards in June 2000, and is responsible for the manufacturing and primarysales, marketing and support of the Novacor left ventricular assist system(Novacor LVAS or Novacor) as well as next-generation product development.

World Heart B.V. is our wholly-owned subsidiary,incorporated under the laws of the Netherlands on March 5, 2004, throughwhich we carry on sales, sales support and distribution in Europe.

2007262 Ontario Inc.(2007262), was an associated research and development company of WorldHeart,incorporated under the laws of the Province of Ontario on November 29,2001, to carry out specified research and development for us. WorldHeart andNew Generation Biotech (Equity) Fund Inc. (NewGen), an Ontario labour-sponsoredventure capital corporation, each held 100 common shares of 2007262. On January 1,2006, WorldHeart purchased the 100 common shares of NewGen and became the soleshareholder of 2007262. 2007262 was dissolved by articles of dissolution on March 5,2007.

**BUSINESS OFWORLDHEART**

**The Company**

WorldHeart’s business is focused on the developmentand sale of ventricular assist devices (VADs), particularly our LevacorTM Rotary VAD (Levacor VAD or Levacor). VADs aremechanical assist devices that supplement the circulatory function of the heartby re-routing blood flow through a mechanical pump allowing for the restorationof normal blood circulation. WorldHeart believes both pulsatile and rotarypumps are required to treat the full spectrum of the clinical needs of end andlate-stage heart failure patients and that pulsatile devices are best suited forend-stage patients with poor ventricular contractility, who require fullsupport or functional replacement. Alternatively, rotary devices may best meetthe clinical needs of late-stage patients, with some contractility, who requireonly partial support or an assist.

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VADs are used for treatment of patients with severeheart failure including primarily patients whose hearts are irreversiblydamaged and cannot be treated effectively by medical or surgical means otherthan transplant. Bridge-to-Transplant therapy involves implanting a VAD in atransplant-eligible patient to maintain or improve the patient’s health until adonor heart becomes available. Destination Therapy is the implanting of a VADto provide long-term support for a patient not currently eligible for a naturalheart transplant. Bridge-to-Recovery involves use of VADs to restore a patient’scardiac function helping them recover use of their natural heart allowingremoval of the VAD.

We are focused on the development of the LevacorRotary VAD, the next-generation rotary device which we acquired as part of ouracquisition of the assets of MedQuest Products, Inc. (MedQuest) in July 2005.It uses a magnetically-levitated rotor resulting in no moving parts subject towear, which is expected to provide multi-year support. The Levacor VAD is inthe clinical development stage with initial human feasibility clinical trialssuccessfully completed in Europe during 2006. Two hospitals in Canada, TorontoGeneral Hospital and the University of Ottawa Heart Institute, are currentlyapproved to implant the Levacor Rotray VAD as a bridge to cardiac transplantunder Health Canada’s Therapeutic Product Directorate Special Access Program. WorldHeartintends to begin feasibility clinical trials in the United States in the fourthquarter of 2007.

The Novacor LVAS (Novacor), WorldHeart’s firstgeneration pulsatile VAD, is commercially available as a Bridge-to-Transplantin Europe, Japan, the United States and Canada. In Europe, it is also availableas an alternative to transplantation and as a Bridge-to-Recovery to supportpatients who may be able to recover the use of their natural heart. WorldHeart  is currently supporting medical centers andpatients utilizing Novacor, but not actively marketing the product.

WorldHeart’s next-generation pulsatile VAD, theNovacor II, is currently in pre-clinical development. The Novacor IIis being designed as a smaller implantable heart assist device to providelong-term pulsatile blood flow to patients suffering from heart failure. The firstanimal implants of the Novacor II were completed in 2005 and 2006. Weintend to progress the development of the Novacor II after completion of theLevacor VAD design, contingent on our ability to fund this program.

The pediatric VAD (PVAD)is a small, magnetically levitated, axial rotary VAD currently underpre-clinical development. Based on WorldHeart’s proprietary technology, it isintended for use in newborns and infants. The PVAD is being developed by aconsortium, including WorldHeart and the University of Pittsburgh, with fundingprovided by the National Institutes of Health.

**Three-Year Historyand Development of WorldHeart**

Effective January 1, 2004, we assumed full salesand support responsibility for the Novacor LVAS worldwide with the exception ofJapan. Edwards was previously our exclusive distributor for the Novacor LVAS inall countries other than the United States. We continue to distribute theNovacor LVAS through Edwards in Japan and through other distributors inselected markets.

On March 18, 2004, our common shares, which hadbeen delisted from the Nasdaq Global Market (Nasdaq) on October 15, 2002,were re-listed on Nasdaq under the symbol WHRT.

On April 22, 2004, with the announcement of ourfirst quarter results, we commenced reporting our results in United Statesdollars.

On July 12, 2004, we announced that our firstquarter results would be restated, and on August 12, 2004, we released ourrestated quarterly results. Restated revenues for the first quarter decreasedby $1.3 million to $2.2 million, as a result of a decrease in kitshipments recognized as revenue by 25 kits to a total of 26 kits, which alsoincreased the net loss for the period.

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In July 2004, we announced certain managementchanges including the appointment of Jal S. Jassawalla as Presidentand Chief Executive Officer replacing Roderick M. Bryden who resigned fromthose positions and from the board of directors of WorldHeart.

In August 2004, we commenced consolidation of ouroperations from Ottawa, Canada to Oakland, California. The consolidation wassubstantially completed by June 30, 2005.

On September 16, 2004, we completed the sale of$13,318,750 of convertible debentures and warrants. The debentures wereconvertible, at the option of the holder, into common shares at a conversionrate of $1.25 per common share until September 15, 2009. The purchasers ofthe convertible debentures were also issued a total of 10,655,000 warrantsto purchase common shares at an exercise price of $1.55 per common shareexercisable until September 15, 2009.

On January 31, 2005, we entered into an assetpurchase agreement with MedQuest, as amended by amendment no. 1 dated March 22,2005, under which we agreed to purchase all of the assets of MedQuest for atotal purchase price of approximately $16.0 million plus the assumption ofcertain liabilities of approximately $3.5 million, subject to certainconditions, including shareholder approval (the MedQuest Acquisition). Inaddition, we entered into a purchase agreement with Maverick Venture Management,LLC (Maverick) to complete a private placement of 8.9 million common shares ofWorldHeart at $1.35 per common share for an aggregate purchase price of$12 million. The closing of the private placement was contingent on the closingof the MedQuest Acquisition and other conditions.

On March 22, 2005, WorldHeart announced that ithad ceased to be a “foreign private issuer” as defined under the Exchange Actas a result of the consolidation and relocation of its headquarter operationsto Oakland, California.

On July 18, 2005, WorldHeart held its annual andspecial meeting of shareholders and received approval from its shareholders forthe MedQuest Acquisition, the issuance of common shares of WorldHeart toMaverick in the private placement, and a reduction of the exercise price from$1.55 to $1.00 of certain warrants of WorldHeart in connection with theconversion of all of the convertible debentures and exercise of all of thewarrants issued in September 2004. Matters related to the WorldHeartemployee stock option plan were also approved, as well as the continuance ofWorldHeart under the Canada Business Corporations Act.

On July 29, 2005, WorldHeart successfullycompleted the MedQuest Acquisition, raised approximately $22.7 million in grossfinancing proceeds from the private placement with Maverick and the exercise ofall the outstanding warrants, and converted all of its convertible debentures.At the closing of the transactions, Maverick and the shareholders of MedQuestheld approximately 33% of the common shares of WorldHeart. Maverick was giventhe right to nominate up to two designees to WorldHeart’s Board of Directors solong as it holds or controls at least 25% of our issued and outstanding commonshares. Upon completion of the acquisition, WorldHeart retained most ofMedQuest’s employees at its facility in Salt Lake City, Utah, which continuesto serve as the primary development site for our Levacor Rotary VAD product.

On December 15, 2005, we reincorporated in Canadafrom the Province of Ontario. In conjunction with our reincorporation inCanada, Jal S. Jassawalla, President and Chief Executive Officer, was appointedto the Board of Directors.

On December 21, 2005, the Board of Directors ofWorldHeart approved the accelerated vesting of all outstanding stock optionsheld by current employees or consultants, except for the options held by thenon-employee members of the Board of Directors.

On March 8, 2006, WorldHeart announced asuccessful first in human implant of its next-generation Levacor VAD. Theprocedure, performed at St. Luke’s Hospital in Thessaloniki, Greece, was the 

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beginning of the LevacorVAD feasibility trial. On May 10, 2006, a second successful Levacorimplant was completed at St. Luke’s Hospital. Both patients were successfullyweaned from the device and discharged from the hospital in 2006.

On November 13, 2006, we entered into a purchaseagreement with certain new and current investors for a private placementfinancing consisting of two tranches. The first tranche of the financing relatedto the sale of 11.0 million common shares at $0.25 per share for a total of$2.75 million in gross proceeds to WorldHeart was closed on November 16,2006. The second closing for $11.31 million in gross proceeds to WorldHeart, or45.2 million common shares, took place on December 21, 2006, followingshareholder approval received at our annual and special meeting held on December 20,2006. Gross proceeds from both tranches of the financing totaled approximately$14.1 million at a price of $0.25 per common share. In addition, we incurredplacement agent fees equal to 6% of the gross proceeds payable in common sharestotaling approximately 3.4 million common shares. Under the terms of thetransaction, we registered for resale all of the common shares issued in bothtranches of the financing.

On November 14, 2006, we announced a significantrestructuring and realignment of our business operations to better focus on thedevelopment of our next generation Levacor VAD. The restructuring programreduced manufacturing, selling and administrative costs, primarily associatedwith the Novacor LVAS product. The program included a reduction in workforce of41 persons, primarily at our Oakland, California, and Heesch, Netherlandslocations. The costs attributable to the restructuring recorded during the yearended December 31, 2006 were $0.6 million consisting of severance costsand a fixed assets write down. In addition, WorldHeart wrote off $4.6 million($3.5 million and $1.1 million in the third and fourth quarters of 2006,respectively) of raw material, in-process and finished goods inventoryassociated with the Novacor LVAS product, which management has determined willnot be utilized in future periods.

On December 14, 2006,we announced that, consistent with the restructuring program and afterdiscussions with the FDA, we were discontinuing enrollment in our Novacor LVASRELIANT Trial. WorldHeart had commenced the RELIANT Trial in 2004 to seekapproval for Novacor for use in Destination Therapy. At this time, we alsoannounced that two clinical teams from prestigeous medical center’s in Canadacompleted the technical and clinical training for use of our Levacor Rotary VADin Canada.

**Our Products**

Our currentbusiness is based on several generations of implantable VADs. The currentgeneration, commercially available product is our Novacor LVAS. Ourdevelopment-stage VADs include the Levacor VAD and Novacor II productcandidates. In addition, WorldHeart is developing the PVAD and a MinimallyInvasive VAD (MIVAD) based on PVAD technology. Specifically:

·       theNovacor LVAS is currently commercially available as a Bridge-to-Transplant inthe United States, Canada, Europe and Japan. In Europe, it is also commerciallyavailable for Destination Therapy and as a Bridge-to-Recovery.

·       theLevacor Rotary VAD is a small, fourth-generation, magnetically levitated,centrifugal, rotary VAD. Two human feasibility clinical trials weresuccessfully completed in Europe in 2006.

·       theNovacor II is a small, bearingless, next-generation, pulsatile VADcurrently in pre-clinical development. Successful animal experiments wereconducted in July 2005 and August 2006.

·       thePVAD is a small, magnetically levitated, axial rotary VAD currently underdevelopment by a consortium, including WorldHeart, intended for use in infants.Development is funded by the National Institutes of Health, under a contractawarded to the University of Pittsburgh.

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·       WorldHeart’s MinimallyInvasive VAD design is based on the technology incorporated in the PVAD deviceusing vascular connections to allow placement through minimally invasivetechniques. It is intended to provide partial circulatory support in patientsat an earlier stage of heart failure than currently used VADs.

*The Novacor LVAS*

The Novacor LVAS is our commercially available,implantable, pulsatile VAD, which has been in clinical use for more than 20years and has been implanted in more than 1,700 patients worldwide. The productis an electromagnetically-driven pump, about the size of a human heart, thatprovides circulatory support for patients with life-threatening heart failureby taking over part or all of the workload of the left ventricle of the heart. TheNovacor LVAS is self-regulating, responding instantaneously to the recipient’schanging heartbeat and circulatory demands.

Novacor sales during 2006 did not meet our growthtargets and, in November 2006, we announced that we would reduce ourcommercial efforts on the Novacor to focus our resources on the development ofour Levacor Rotary VAD. WorldHeart will continue to make the Novacor LVASavailable to medical centers and will continue to support current patients onthe device.

WorldHeart commenced anequivalency clinical trial in the second quarter of 2004 in the United States,called the RELIANT Trial to seek approval for the Novacor LVAS for use inDestination Therapy. In conjunction with the above restructuring and our focuson next-generation technology, we announced in December 2006 that we werediscontinuing the RELIANT Trial.

*Next-Generation VADPlatform*

*Levacor Rotary VAD*

Through the acquisition of MedQuest in July of2005, we obtained the Levacor Rotary VAD, a fourth-generation, rotary bloodpump intended for a range of circulatory support indications. Unlike theinitial generation of rotary pumps with blood-lubricated bearings, the LevacorVAD is a compact, bearingless, magnetically-levitated, centrifugal pump with animpeller that is completely magnetically levitated. Full magnetic levitationeliminates wear mechanisms within the pump and provides for greater clearancesfor more optimized blood flow around the impeller, while eliminating dependenceon the patient’s blood for suspension. The product’s levitation technologyemploys a unique combination of passive and single-axis active control, resultingin a system of optimal simplicity.

Having successfullycompleted initial human feasibility clinical trials in Europe in 2006, weexpect to conduct additional feasibility use in Canada in the first half of2007. We intend to start a U.S. feasibility trial late in 2007 and a CE marktrial in Europe in the first half of 2008, subject to successful initial trialresults and the availability of funding. If clinical testing is successfullycompleted and regulatory approvals are obtained, we plan to pursue commercialapprovals in Europe and the United States.

*Novacor II VAD*

Our next-generationpulsatile VAD, Novacor II, has been under development as an implantable,pulsatile VAD designed for a range of circulatory support indications. Novacor IIis expected to be approximately half the size of the Novacor LVAS, with nomechanical bearings. For the fully implantable configuration, its dual chamberdesign eliminates the need for volume compensation and the need for externalventing, and incorporates remote power and monitoring (i.e. across-the-skinpower and data transfer) and an implanted controller/battery. These featuresare expected to provide recipients with an enhanced quality of life by allowingfreedom of movement and minimal limitations to their regular activities. It ismagnetically-driven, allowing for simple operation with no wearing elements orprecision 

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components.In conjunction with the restructuring, we suspended development of the NovacorII. Subsequent to the development of the Levacor VAD, we expect to resume thedevelopment and clinical evaluation of the Novacor II, dependent, in part, onour ability to fund this program.

*Research andDevelopment Expenditures*

WorldHeart’s research anddevelopment expenditures were $9,002,373, $7,388,385 and $5,838,754 in 2006,2005, and 2004, respectively. Research and development spending for the LevacorVAD is expected to increase in 2007.

**Third-partyReimbursement for VADs**

The United States currently provides for publicreimbursement of VADs used as a Bridge-to-Transplant. In addition, the majorityof private insurance carriers in the United States provide reimbursement forVAD use. In October 2003, a National Coverage Decision by the Centers forMedicare & Medicaid Services (CMS) in the United States extendedreimbursement to VADs approved by the U.S. Food and Drug Administration (FDA)for Destination Therapy. In October 2004, CMS implemented a previouslyannounced increase in reimbursements for centers implanting VADs resulting inaverage domestic reimbursement rates of $130,000 to $140,000. In October 2005,CMS updated Healthcare Common Procedural Coding System (HCPCS) codes to includecoverage of VADs.

Japan and severalcountries in Europe provide reimbursement for VADs. Reimbursements, however,vary between countries and governmental budget constraints can limit certainreimbursements.

**Application ofVentricular Assist Devices (VADs) in Patient Care**

*Current TreatmentMethods for End-Stage Heart Failure*

Research is ongoingfor an effective treatment for advanced heart failure. While providing somebenefit, therapies such as medication and transplantation have significantlimitations, and alternative emerging technologies are being investigated. Thefollowing are treatment methods currently being employed for advanced heartfailure:

·       *Medication*.   Pharmaceutical drugs are the first line ofdefense against heart failure; however, in spite of many advances, drugtherapies continue to be able to provide only limited benefit particularly inadvanced heart failure patients. Drug therapies usually do not treat theunderlying disorder and, thus, can only slow progression of the disease. Moreover,a significant number of heart failure patients may be resistant to treatmentwith drug therapies, and often such therapies have adverse side effects.

·       *Heart Transplantation*.   Hearttransplantation is currently the intervention of choice for some patients withend-stage heart failure. However, the availability of donor organs, as well asother major limitations, has limited the number of transplants worldwide toabout 4,000 per year and about 2,000 in the United States according to theAmerican Heart Association. Limited availability of and waiting times forsuitable donor hearts, as well as high costs, have impacted adversly theutility of heart transplantation.

·       *Artificial Heart Technology*.   Both VADs and totalartificial hearts (each a form of mechanical circulatory support) have beenshown to be viable treatments for end-stage heart failure. These devices havesaved thousands of lives during temporary use as a Bridge-to-Transplant andhave selectively been used for Bridge-to-Recovery or as an alternative totransplantation. Adoption rates for long-term use are continuing to increase,although at a slower rate than anticipated.

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*Advantages of VADs*

VADs that are either externally placed or implantedhave been demonstrated as being effective in supporting blood circulation inpatients with a failing heart. To date, more than 10,000 patients have beensupported by VADs.

The followingadvantages over other treatments generally apply to VADs that are currentlyapproved and in use, including the Novacor LVAS. Although certain advantagesmay not apply in every situation or for all patients, we expect that thesepotential advantages will also apply to our Levacor Rotary VAD and theNovacor II:

·       *Supply*.   As a manufactured device,VADs are generally available as and when needed, including on an emergencybasis, to treat advanced heart failure patients.

·       *Reduced Hospitalization*.   Unliketransplant patients, VAD patients go to surgery without a protracted wait for adonor organ, and in the case of implantable VADs, patients are generally ableto leave the hospital after a relatively short recovery period, thuspotentially reducing health care costs.

·       *Improved Patient Health*.   After VADimplantation, blood circulation is improved throughout the body and mostpatients experience improved levels of health as shown in a number of clinicalstudies, including those for the Novacor LVAS.

·       *Reduction in Medication Use*.   Unliketransplants, VADs typically do not cause rejection responses and, as a result,VAD patients typically do not need the administration of immuno-suppressivemedication. Accordingly, patients are not subject to the risks and costsassociated with long-term administration of these medications.

·       *Natural Heart Recovery*.   Unlike total artificial heartsystems, VADs leave the natural heart intact and assist it when it is unable toprovide sufficient cardiac function to maintain blood circulation. Severalpatients have been weaned from the Novacor LVAS and the first two Levacor VADpatients were successfully weaned from the device.

**Marketing,Manufacturing and Distribution Strategy**

Since the acquisition of the Novacor division ofEdwards in 2000, WorldHeart has had access to several key medical centersinvolved in cardiac transplantation in North America, Europe and Japan. Until November 2006,we sold directly within the United States through a dedicated sales force. Before2004, the Novacor LVAS was distributed by Edwards outside the United States. InJanuary 2004, we assumed full sales and support responsibility for theNovacor LVAS primarily in Europe but excluding Japan. WorldHeart continues todistribute its products through Edwards in Japan and through other distributorsin selected markets. Our United States operations have experienced clinical andtechnical personnel who support key medical centers, as well as their leadingclinicians and medical staff. Approximately 64% of WorldHeart’s 2006 revenuecame from sales of the Novacor LVAS in the United States.

WorldHeart manufactures,distributes and services its commercial product at its Oakland, Californiafacility. Manufacturing is highly specialized, requiring qualified personneland a facility that is compliant with the provisions of the United StatesQuality System Regulations and ISO Standards that pertain to the manufacture,inspection, and distribution of medical devices.

**IntellectualProperty**

We have been granted six active United States patentsfor the Novacor LVAS and its associated subsystems. A subset of these patentshas also been filed and granted in the major European countries, in Canada andin Japan.

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To date, we have been granted two United Statespatents and two patent applications are pending for the Novacor II, andcorresponding applications are also pending in Europe, Japan and Canada. TheTranscutaneous Energy Transfer technology licensed to WorldHeart from theOttawa Heart Institute, has been patented in the United States, Canada and theUnited Kingdom.

WorldHeart holds various patents and licenses topatents related to the Levacor Rotary VAD and other potential future products.These licenses are through university research foundations and otherorganizations. WorldHeart has ownership and/or exclusive licenses to 11 patentsrelated to the Levacor implantable blood pump technology. In addition, twopatents related to control of rotary blood pumps are non-exclusively licensed.Additional patents are pending.

We have a number of trademarks, and we have federallyregistered several, including the WORLDHEART logo mark and the NOVACOR mark,the MEDQUEST mark and the AUTOME mark. Pending applications for registration ofother marks include the HEARTQUEST mark, MAGLEV mark and the LEVACOR mark.

We generally enter intoconfidentiality and invention agreements with our employees and consultants,and control access to and distribution of information related to our technologyand products, documentation and other proprietary information.

**License Agreements**

Licenses related to theLevacor Rotary VAD include an exclusive license with the University of Utah onfour issued patents and on which WorldHeart has no future obligations, anexclusive royalty-based license on four patents with the University of Virginiaand an exclusive royalty-based license with Magnetic Moments, Inc. (d.b.a.LaunchPoint Technologies) on four issued and pending patents. In addition tothe Levacor VAD product, we hold an exclusive fully paid and royalty-basedlicense from the University of Pittsburgh on patents related to a rightventricular assist device (RVAD), and the PVAD. There is also a royalty-basedagreement with The Heart Lung Institute, LLC, which funded early research ofthe Levacor VAD.

**Competition**

*Overview*

In addition to competing with other less-invasivetherapies for heart failure, our VADs compete with commercially approved VADsand VADs under development sold by a number of companies. Competition frommedical device companies is intense and may increase. Many of our competitorshave substantially greater financial, technical, manufacturing, distributionand marketing resources than WorldHeart.

At present, only two companies in North America havedeveloped implantable, electric VADs approved for commercial sale in the UnitedStates:  WorldHeart and ThoratecCorporation (Thoratec). Thoratec has two pulsatile left ventricular assistdevice models of its HeartMate that have been approved in the United States forcommercial sale. One is pneumatically driven (Heartmate IP LVAS), and the otheris electrically driven (HeartMate XVE). The HeartMate XVE has maintained adominant market share in the United States.

Thoratec, and other companies such as Abiomed, Inc.(Abiomed), have VADs that are designed for temporary use but are not typicallyimplanted in the body. Their pumps are external and are attached to the naturalheart via connecting tubes running through the recipient’s skin and tissue. Abiomed’sVAD is approved by the FDA for in-hospital use only.

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In Europe and certainother countries outside North America, several companies including BerlinHeart, Medos Medizentechnik AG, Ventracor Limited, Micromed Inc., HeartwareLimited and Jarvik Heart, Inc. provide VADs.

*Future ProductCompetition*

*Pulsatile versusRotary Flow (Non-Pulsatile) VADs*

We believe that effectivetreatment of advanced heart failure will require both pulsatile and rotarypumps to treat the full spectrum of clinical needs of end- and late-stage heartfailure patients. Further, we believe that pulsatile devices are best suitedfor end-stage patients with poor ventricular contractility, who requirefunctional replacement; while rotary devices are better suited for late-stagepatients, with some left ventricular contractility, who require only partialsupport or, assist.

*Rotary Flow VADs*

There are a number of non-pulsatile, or rotary flow,VADs in varying stages of development. Thoratec is developing the Heartmate II,a second generation axial rotary pump which is in advanced clinical developmentin the United States. Thoratec recently discontinued development on acentrifugal pump, called the HeartMate III. Ventracor Limited, an Australiancompany, is developing the VentrAssist, a third generation rotary VAD, which isin clinical development in Australia and the United States. Another Australiancompany, HeartWare Limited is in clinical development with a third generationrotary device, called the HeartWare HVAD. Another rotary device, which had beenundergoing United States clinical trials and is approved for use in Europe, isthe MicroMed DeBakey® VAD being developed by MicroMed Technology, Inc. TheJarvik 2000 Flowmaker®, developed by Jarvik Heart, is a device at a comparablestate of development similar to the MicroMed VAD. The Incor rotary pump fromBerlin Heart is also approved for use in Europe.

We believe that theLevacor Rotary VAD is the most technologically advanced, fourth generation,rotary pump under development. This bearingless, centrifugal,magnetically-levitated rotor results in a pump with no moving parts subject towear, in a small device design to provide patients with multi-year support. Webelieve, WorldHeart is currently the only company that has technologies capableof developing next-generation rotary and pulsatile VAD systems.

**GovernmentRegulations**

*Overview*

Most countries, includingthe United States, Canada and countries that comprise the European Community(EC), require regulatory approval prior to the commercial distribution ofmedical devices. In particular, active implantable medical devices generallyare subject to rigorous clinical testing as a condition of approval by the FDAand by similar authorities in Canada, in the EC and in other countries. Theapproval process for our Levacor Rotary VAD and the Novacor II  will be expensive and time consuming.

*United StatesRegulation*

In the United States, the FDA regulates themanufacture, distribution, labeling and promotion of medical devices pursuantto the United States Federal Food, Drug and Cosmetic Act (FDC Act) andregulations under the FDC Act. The Novacor LVAS, Levacor Rotary VAD and NovacorII devices are regulated as Class III medical devices. Human clinicaltrials are conducted pursuant to an Investigational Design Exemption (IDE) inthe United States, the results of which must demonstrate, to the satisfactionof the FDA, the safety and efficacy of the medical device.

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Before commercial distribution of our devices ispermitted in the United States, an application for Premarket Approval must beapproved by the FDA.

In addition, any medicaldevice distributed in the United States is subject to continuing regulation bythe FDA. Products must be manufactured in registered establishments and must bemanufactured in accordance with the Quality System Regulation. Labeling andpromotional activities are subject to scrutiny by the FDA and, in certaininstances, by the Federal Trade Commission. Failure to comply with theserequirements could result in enforcement action, including seizure, injunction,prosecution, civil penalties, recall and suspension of FDA approval.

*Canadian Regulation*

The sale and advertising of medical devices in Canadaare governed by the Food and Drugs Act (Canada) through the Medical DevicesRegulations, administered by the Medical Devices Bureau of Health Canada (MDB).The current Medical Devices Regulations are undergoing revisions that may alignthe Canadian regulatory process with those of Canada’s international tradingpartners. We believe that international harmonization of the regulatory processwill be more likely to accelerate, rather than slow, the approval process as itrelates to WorldHeart’s next-generation VAD, Levacor Rotary VAD and the NovacorII.

Our Levacor Rotary VAD andthe Novacor II are expected to be classified as Class IV medical devicesunder the Medical Devices Regulations, requiring WorldHeart to apply forauthorization from the MDB to conduct investigational testing on human subjectsin Canada. At the conclusion of the human clinical trials, we plan to apply fora medical device license that will allow for general marketing of the device.

*RegulatoryRequirements in Other Countries*

It is also our intention to market the Levacor RotaryVAD and the Novacor II in the EC and other countries. We will be required tomeet the applicable medical devices standards in each such country or region. Althoughharmonization has been under negotiation for some time among various countries,the approval process varies from country to country and approval in one countrydoes not necessarily result in approval in another.

We intend to apply for “CE”marking, an international symbol of quality and compliance, for the LevacorRotary VAD and the Novacor II. The International Standards Organization (ISO)is a worldwide federation of national bodies, founded in Geneva, Switzerland in1946. ISO standards are integrated requirements which, when implemented, formthe foundation and framework for an effective quality management system. These standardswere developed and published by the ISO. ISO certification is widely regardedas essential to enter Western European markets. All companies are required toobtain ISO certification and the “CE” mark, in order to market medical devicesin Europe. ISO 13485:2003 certification is the most current and most stringentstandard in the ISO series and covers design, production, installation andservicing of products. WorldHeart received ISO 13485:2003 certification in September 2005.WorldHeart received the “CE” mark for the Novacor LVAS in 1993.

*Other RegulatoryRequirements*

We are also subject tovarious Canadian and United States federal, provincial, state and local lawsand regulations relating to such matters as safe working conditions, laboratoryand manufacturing practices, and the use, handling and disposal of hazardous orpotentially hazardous substances used in connection with WorldHeart’s research,development and production work. The manufacture of biomaterials is alsosubject to compliance with various federal environmental regulations and thoseof various provincial, state and local agencies. Although we believe that weare in compliance with these laws and regulations in all 

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materialrespects, there can be no assurance that we will not be required to incursignificant cost to comply with environmental and health and safety regulationsin the future.

**Our Employees**

At March 15, 2007, we had 63 full time employeeslocated primarily in Oakland, California and in Salt Lake City, Utah. Approximately78% of our employees are involved with research, development, manufacturing,quality, clinical affairs and regulatory, and 22% are in finance andadministration.

We currently maintaincompensation, benefits, equity participation and work environment policiesintended to assist in attracting and retaining qualified personnel. We believethat the success of our business will depend, to a significant extent, on ourability to attract and retain such personnel. We have access to skilled laborresources in Oakland and Salt Lake City where there are well-developedtechnology industries. None of our employees are subject to a collectivebargaining agreement nor have we experienced any work stoppages.

**RISK FACTORS**

You should carefullyconsider the following risk factors in evaluating WorldHeart. Additional risksand uncertainties not presently known to us or that we currently consider notmaterial may also impair our business, financial condition and results ofoperations. If any of the events described below actually occurs, our business,financial condition and results of operations could be materially adverselyaffected.

**Risk FactorsRelating to Our Business**

*We will requiresignificant capital investment to continue our product development programs andto bring future products and product enhancements to market, and if adequatefunding is not available, our financial condition will be adversely affectedand we may have to further curtail or eliminate our development programs andsignificantly reduce our expenses.*

Our investment of capital has been and will continueto be significant. Developing our technology, future products and continuedproduct enhancements, including those of the Levacor Rotary VAD and Novacor IItechnologies, require a commitment of substantial funds to conduct the costlyand time-consuming research and clinical trials necessary for such developmentand regulatory approval. We have had difficulties raising the necessarycapital, and while we recently completed a private placement financing raisinggross proceeds of about $14.1 million, we will require additional financings inthe future. If adequate funds are not available when needed, we may be requiredto delay, reduce the scope of, or eliminate one or more of our research ordevelopment programs or obtain funds through arrangements with collaborativepartners or others that may require us to relinquish rights to certain of ourtechnologies, potential products or products that we would otherwise seek todevelop or commercialize ourselves. In addition, while in November 2006 weannounced a significant restructuring and cost reductions initiatives, we maybe required to further reduce our operating expenses, including but not limitedto, reductions in salaries and/or elimination of employees and consultants. Theinability to obtain additional financing or enter into strategic relationshipswhen needed will have a material adverse effect on our business, financialcondition and results of operations. In addition, our November 2006restructuring may not result in the cost reductions that we anticipate and ourability to curtail expenses in the future may be limited.

*We have hadsubstantial losses since incorporation and expect to continue to operate at aloss while our products are under development, and we may never becomeprofitable.*

Since our inception in 1996, we incurred cumulativelosses of approximately $272 million, a significant portion of which relates tothe costs of internally developed and acquired technologies. Our research anddevelopment expenses have increased significantly over the past year, primarilydue to our investment in 

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the development programsfor our next generation products, Levacor Rotary VAD and Novacor II. Ourresearch and development activities will likely result in additionalsignificant losses in future periods. These expenditures include costsassociated with performing pre-clinical testing and clinical trials for ournext generation products, continuing research and development, seekingregulatory approvals and, if we receive these approvals, commencing commercialmanufacturing, sales and marketing of our products.

*We may be unable toobtain regulatory approvals, which will prevent us from selling our productsand generating revenue.*

Most countries, including the United States, Canadaand countries in Europe, require regulatory approval prior to the commercialdistribution of medical devices. In particular, implanted medical devicesgenerally are subject to rigorous clinical testing as a condition of approvalby the FDA and by similar authorities in Canada (e.g., Health Canada), and inEuropean and other countries. The approval process is expensive and timeconsuming. Non-compliance with applicable regulatory requirements can resultin, among other things, fines, injunctions, civil penalties, recall or seizureof products, total or partial suspension of production, government refusal togrant marketing approval for devices, withdrawal of marketing approvals andcriminal prosecution. The inability to obtain the appropriate regulatoryapprovals for our products in the United States, Canada and the rest of theworld will prevent us from selling our products, which would have a materialadverse effect on our business, financial condition and resultsof operations.

In the United States, we commenced our RELIANT Trialin the second quarter of 2004 to support submission of a PMA Supplement to theFDA for the use of the Novacor LVAS for Destination Therapy. Although in April 2006we received conditional approval from the FDA to change the trial inclusioncriteria and to reduce the number of patients required for approvability,enrolment in the RELIANT Trial continued to be slower than anticipated,primarily due to what we believe to be a shift in market demand away from firstgeneration VADs, including our Novacor LVAS, and the loss of commercial market share to our competitorsdue to our financial condition. As a result, in December 2006 wediscontinued enrollment in the RELIANT Trial to focus our resources on thenext generation products, in particular our Levacor Rotary VAD, which began aninitial human feasibility clinical trial in March 2006 in Europe.

There can be no assurance that the FDA, Health Canadaor any other regulatory authority will act favorably or quickly in its review ofour applications, if and when made, and we may face significant difficultiesand costs obtaining such approvals that could delay or preclude us from sellingour next-generation products in the United States, Europe, Canada and elsewhere.Failure to receive, or delays in receiving, such approvals, including the needfor extended clinical trials or additional data as a prerequisite to approval,limitations on the intended use of our next-generation products, therestriction, suspension or revocation of any approvals obtained or any failureto comply with approvals obtained could have a material adverse effect on ourbusiness, financial condition and results of operations.

*We are dependent ona limited number of products.*

To date, all of our revenues have resulted from salesof the Novacor LVAS and related technologies. With our restructuring announcedin November 2006, we expect those revenues to continue to decline. Ourfuture financial performance depends primarily on our ability to realign ourresources to focus on the development, regulatory approval, introduction,customer acceptance and sales and marketing of the Levacor Rotary VAD. Prior toany commercial use, our products currently under development will requiresignificant additional capital for research and development efforts, extensivepre-clinical and clinical testing and regulatory approval.

New product development is highly uncertain andunanticipated developments, clinical and regulatory delays, adverse orunexpected side effects or inadequate therapeutic efficacy could delay orprevent the commercialization of the Levacor Rotary VAD and Novacor II. Anysignificant delays in, or premature 

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termination of, clinicaltrials of our products under development would have a material adverse effecton our business, financial condition and results of operations.

*Market acceptanceof our technologies and products is uncertain and our selling and distributioncapability is limited and has been further reduced by our recent cost reductioninitiatives.*

The Novacor LVAS and our next-generation LevacorRotary VAD and Novacor II represent ventricular assist technologies thatmust compete with other products as well as with other therapies for heartfailure, such as medication, transplants, cardiomyoplasty and total artificialheart devices. In addition, although we believe that the Destination Therapymarket opportunity for VADs is significant, adoption rates have continued to bemuch slower than anticipated.

We have a limited number of sales and technicalsupport personnel compared with other medical device companies in our industrysegment, and our financial condition recently required us to make significantpersonnel reductions in those areas, which may put us at a further competitivedisadvantage in the marketplace. Failure of our products to achieve significantmarket acceptance due to competitive therapies and our very limited selling anddistribution could have a material adverse effect on our business, financialcondition and results of operations.

*We face significantcompetition and technological obsolescence of our products.*

In addition to competing with other less-invasivetherapies for heart failure, including medications and pacing technology, ourproducts, if regulatory approvals are obtained, will compete with ventricularassist technology being developed and sold by a number of other companies. Competitionfrom medical device companies and medical device subsidiaries of healthcare andpharmaceutical companies is intense and expected to increase.

Most of our competitors have financial, technical,manufacturing, distribution and marketing resources substantially greater thanours. Third parties may succeed in developing or marketing technologies andproducts which are more effective and more timely than those developed ormarketed by us which could render our technology and products non-competitiveor obsolete, or we may not be able to keep pace with technological developmentsor our competitors’ time frames, all of which could have a material adverseeffect on our business, financial condition and results of operations.

In addition, companies in similar businesses areentering into business combinations with one another, which may create morepowerful or aggressive competitors. We may not be able to compete successfullyas future markets evolve, and we may have to pursue additional acquisitions orother business combinations or strategic alliances. Increased competitivepressure could lead to lower sales and prices of our products, and this couldharm our business, results of operations and financial condition.

*There arelimitations on third-party reimbursement for the cost of implanting ourdevices.*

Individual patients will seldom be able to paydirectly for the costs of implanting our devices. Successful commercializationof our products will depend in large part upon the availability of adequatereimbursement for the treatment and medical costs from third-party payers,including governmental and private health insurers and managed careorganizations. Consequently, we expect that our products will typically bepurchased by healthcare providers, clinics, hospitals and other users who willbill various third-party payers, such as government programs and privateinsurance plans, for the healthcare services provided to their patients.

The coverage and the level of payment provided bythird-party payers in the United States and other countries vary according to anumber of factors, including the medical procedure, third-party payer, locationand cost. In the United States, many private payers follow the recommendationsof the Centers of Medicare and Medicaid Services, which establish guidelinesfor the governmental coverage of procedures, services and medical equipment.

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There can be no assurance with respect to any marketsin which we seek to distribute our products that third-party coverage andreimbursement will be adequate, that current levels of reimbursement will notbe decreased in the future or that future legislation, regulation orreimbursement policies of third-party payers will not otherwise adverselyaffect the demand for our products or our ability to sell our products on aprofitable basis, particularly if the installed cost of our systems and devicesshould be more expensive than competing products or procedures. Theunavailability of third-party payer coverage or the inadequacy of reimbursementwould have a material adverse effect on our business, financial condition andresults of operations.

*If we cannotprotect our intellectual property, our business could be adversely affected.*

Our intellectual property rights, including thoserelating to our Levacor Rotary VAD, are and will continue to be, a criticalcomponent of our success. The loss of critical licenses, patents or tradesecret protection for technologies or know-how relating to our current productand our products in development could adversely affect our business prospects. Ourbusiness will also depend in part on our ability to defend our existing andfuture intellectual property rights and conduct our business activities free ofinfringement claims by third parties. We intend to seek additional patents, butour pending and future patent applications may not be approved, may not give usa competitive advantage and could be challenged by others. Patent proceedingsin the United States and in other countries may be expensive and time consuming.In addition, patents issued by foreign countries may afford less protectionthan is available under United States intellectual property law, and may notadequately protect our proprietary information.

Our competitors may independently develop proprietarynon-infringing technologies and processes that are substantially similar toours, or design around our patents. In addition, others could developtechnologies or obtain patents, which would render our patents and patentrights obsolete. Claims by competitors and other third parties that ourproducts allegedly infringe the patent rights of others could have a materialadverse effect on our business. We could encounter legal and financialdifficulties in enforcing our licenses and patent rights against allegedinfringers. The medical device industry and cardiovascular device market, inparticular, is characterized by frequent and substantial intellectual propertylitigation. Intellectual property litigation is complex and expensive and theoutcome of this litigation is difficult to predict. Any future litigation,regardless of outcome, could result in substantial expense and significantdiversion for our technical and management personnel. An adverse determinationin any such proceeding could subject us to significant liabilities or requireus to seek additional licenses from third parties, pay damages and/or royaltiesthat may be substantial or force us to redesign the related product. Thesealternatives may be uneconomical or impossible. Furthermore, we cannot assureyou that if additional licenses are necessary that they would be available onsatisfactory terms or at all. Accordingly, an adverse determination in a judicialor administrative proceeding or failure to obtain necessary licenses couldprevent us from manufacturing or selling certain of our products, any of whichcould have a material adverse effect on our business, financial condition andresults of operations.

*We are exposed toproduct liability claims.*

Our business exposes us to an inherent risk ofpotential product liability claims related to the manufacturing, marketing andsale of the Novacor LVAS, and if and when regulatory approvals are received, theLevacor Rotary VAD and the Novacor II, by device recipients in whom thedevices are implanted or by their families. Claims of this nature, ifsuccessful, could result in substantial damage awards to the claimants, whichmay exceed the limits of any applicable insurance coverage held by us. Asuccessful claim brought against us in excess of, or outside of, our insurancecoverage would have a material adverse effect on our financial condition. Claimsagainst us, regardless of their merit or potential outcome, could also have amaterial adverse effect on our ability to obtain physician endorsement of ourproducts, to expand our business or obtain insurance in the future, which couldhave a material adverse effect on our business and results of operations.

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*We face risksassociated with our manufacturing operations, risks resulting from dependenceon third-party manufacturers, and risks related to dependence on solesuppliers.*

The manufacture of our products is a complex operationinvolving a number of separate processes and components. Material costs arehigh and certain of the manufacturing processes involved are labor-intensive. Theconduct of manufacturing operations is subject to numerous risks, includingreliance on third-party manufacturers, unanticipated technological problems anddelays. We, or any entity manufacturing products or components on our behalf,may not be able to comply with applicable governmental regulations or satisfyregulatory inspections in connection with the manufacture of our products,which would have a material adverse effect on our business, financial conditionand results of operations.

We often depend on single-source third-partymanufacturers for several of the components used in our products. We do nothave agreements with many of such single-source manufacturers and purchasethese components pursuant to purchase orders placed from time to time in theordinary course of business. We are substantially dependent on the ability ofthese manufacturers to provide adequate inventories of these components on atimely basis and on favorable terms. These manufacturers also producecomponents for certain of our competitors, as well as other large customers,and there can be no assurance that such manufacturers will have sufficientproduction capacity to satisfy our inventory or scheduling requirements duringany period of sustained demand, or that we will not be subject to the risk ofprice fluctuations and periodic delays. Although we believe that ourrelationships with our manufacturers are satisfactory and that alternativesources for the components we currently purchase from single-source suppliersare currently available, the loss of the services of such manufacturers orsubstantial price increases imposed by such manufacturers, in the absence ofreadily available alternative sources of supply, would have a material adverseeffect on us. Failure or delay by such manufacturers in supplying components tous on favorable terms could also adversely affect our operating margins and ourability to develop and deliver our products on a timely and competitive basis,which could have a material adverse effect on our business, financial conditionand results of operations.

*We are dependent onkey personnel.*

As a result of thespecialized scientific nature of our business, we are dependent on our abilityto attract and retain qualified scientific, technical and key managementpersonnel. We face intense competition for such persons and we may not be ableto attract or retain such individuals. Our recent restructuring and costreduction efforts may make it even more difficult for us to attract and retainqualified personnel.

**Risk FactorsRelating to Our Common Shares**

*The price of ourshares is highly volatile, and if we do not regain compliance with Nasdaqminimum share price requirements, we may be delisted.*

As a small capitalization medical device company, theprice of our common shares has been, and is likely to continue to be, highlyvolatile. Future announcements concerning us or our competitors, quarterlyvariations in operating results, introduction of new products, delays in theintroduction of new products or changes in product pricing policies by us orour competitors, acquisition or loss of significant customers, partners,distributors and suppliers, changes in earnings estimates or our ratings byanalysts, regulatory developments, or fluctuations in the economy or generalmarket conditions, among other factors, could cause the market price of ourcommon shares to fluctuate substantially. There can be no assurance that themarket price of our common shares will not decline below its current price orthat it will not experience significant fluctuations in the future, includingfluctuations that are unrelated to our performance.

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Currently our common shares are quoted on the NasdaqCapital Market under the symbol “WHRT” and listed on the Toronto Stock Exchange(TSX) under the symbol “WHT.”  We mustsatisfy certain minimum listing maintenance requirements to maintain the Nasdaqquotation, including a series of financial tests relating to shareholdersequity or net income or market value, public float, number of market makers andshareholders, market capitalization, and maintaining a minimum bid price of$1.00 per share.

On June 20, 2006 we received a letter from NasdaqGlobal Market, where our shares were listed at the time, indicating that, for30 consecutive business days, the bid price of our common shares had closedbelow the minimum $1.00 per share requirement for continued listing on Nasdaqand that, in accordance with Nasdaq rules, we had 180 calendar days (until December 18,2006) to regain compliance. On November 20, 2006, we received a letterfrom the Nasdaq Global Market indicating that our shareholders’ equity did notcomply with the minimum $10,000,000 requirement for continued listing on theNasdaq Global Market. On December 5, 2006, we announced that we appliedfor transfer of the listing of our common shares to the Nasdaq Capital Market,which transfer was effective on December 13, 2006.

As part of the transfer to the Nasdaq Capital Market,we have been granted an additional 180-day period, or until June 15,2007, to regain compliance with the minimum bid price rules. If we do notregain compliance within the allotted compliance period, our common shares maybe delisted from Nasdaq. At that time, we would be entitled to appeal the staff’sdetermination to a Nasdaq Listing Qualifications Panel. If the common shareswere to be delisted, they would trade on the Over-the-Counter Bulletin Board orin the “pink sheets” maintained by the National Quotation Bureau, Inc.,which are viewed by most investors as less desirable and less liquid marketplaces. This could make trading more difficult for our investors, leading tolower trading volumes and declines in share price, which would also make itmore difficult and expensive for us to raise additional capital.

Our Board of Directors believes that a reverse stocksplit may be the most effective means of avoiding delisting of our commonshares from the Nasdaq Capital Market, and therefore has unanimously approvedan amendment to our articles that would permit the Board, in its solediscretion, to effect a reverse stock split of our outstanding common shares inan exchange ratio ranging from two-to-one to ten-to-one. The discretionaryauthority to allow our Board of Directors to amend our articles was approved byour shareholders at our Annual and Special Meeting of Shareholders held on December 20,2006. The reverse stock split, if effected, may not result in our regainingcompliance with Nasdaq rules.

*The sales of commonshares by our shareholders could depress the price of our common shares.*

If our shareholders sell substantial amounts of ourcommon shares in the public market, the market price of our common shares couldfall. These sales might also make it more difficult for us to sell equity orequity related securities at a time and price that we would deem appropriate. Allof the common shares we issued in the private placement during the fourthquarter of 2006 have been registered pursuant to a resale registrationstatement. We have also previously registered for resale shares issued inconnection with the MedQuest acquisition and a related private placementcompleted in 2005. Sales by these shareholders could have an adverse impact onthe trading price of our common shares.

*The concentrationof our capital stock ownership, following the completion of the recent privateplacement, may limit your ability to influence corporate matters.*

Our common shares are held by a relatively smallnumber of investors. After the completion of our $14.1 million privateplacement financing in December 2006, our two largest shareholderscollectively beneficially own approximately 52% of our common shares. Theseinvestors also have certain rights to designate members of our Board ofDirectors and may exercise significant influence over all matters requiringshareholder approval, including elections of directors and significantcorporate transactions, such as a merger or other sale of our Company or ourassets for the foreseeable future. This concentrated 

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control may limit yourability to influence corporate matters, and, as a result, we may take actionsthat our shareholders do not view as beneficial.

*Because we do notintend to pay, and have not paid, any cash dividends on our common shares, ourshareholders will not be able to receive a return on their common shares unlessthe value of our common shares appreciates and they sell them.*

We have never paid anycash dividends on our common shares and intent to retain future earnings, ifany, to finance the development and expansion of our business. We do notanticipate paying any cash dividends on our common shares in the foreseeablefuture. As a result, our shareholders will not be able to receive a return ontheir common shares unless the value of our common shares appreciates and theysell them.

**Item 2.**                        Descriptionof Property.

**Our Facilities**

Our headquarters, manufacturing and research anddevelopment facility, located in Oakland, California, currently includes twobuildings with approximately 40,000 square feet of space. The Oakland facilitylease expires on April 30, 2007. We are in the process of negotiating arenewal of the lease in Oakland for approximately one-half of the currentlyleased space.

Our facility in Salt Lake City, Utah is comprised of24,044 square feet of research and office space with a lease that expires on January 31,2008. Our office in Heesch, Netherlands consists of approximately 2,500 squarefeet under a lease expiring December 31, 2007.

We are not aware of anyenvironmental issues that may affect the use of our properties. We currentlyhave no investments in real estate, real estate mortgages or real estatesecurities, and do not anticipate making any such investments. However, ourpolicy with respect to investments in real estate assets may change in thefuture without a vote of shareholders.

**Item 3.**                        LegalProceedings.

In the normal course ofbusiness, we may be a party to legal proceedings. We are not currently a partyto any material legal proceedings.

**Item 4.**                        Submissionof Matters to a Vote of Security Holders.

As previously disclosed in a Current Report on Form 8-Kfiled with the SEC on December 22, 2006, WorldHeart held its annual andspecial shareholders meeting on December 20, 2006. The complete votingresults have been published as an exhibit to the above Current Report on Form 8-Kand are incorporated herein by reference.

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**PART II**

**Item 5.**                        Marketfor Common Equity and Related Stockholder Matters and Small Business IssuerPurchases of Equity Securities.

Our common shares are traded on the Nasdaq CapitalMarket under the symbol WHRT and are listed on the Toronto Stock Exchange (TSX)under the symbol WHT. Our common shares have been trading on one of the Nasdaqexchanges since August 1998. On December 5, 2006, we announced thatwe applied for a transfer of listing of our common shares from the NasdaqGlobal Market to the Nasdaq Capital Market, which transfer was effective on December 13,2006.

The following table setsforth the high and low bid prices for our common shares as reported on theNasdaq for the periods indicated:

| ** **     | ** ** | **Common Shares** | ** ** |
|----------------|------------|------------------------|------------|
| **2005**       | ** ** | **High**               | ** ** | **Low** | ** ** |
| First Quarter  |       | $                      | 2.62       |   | $ | 1.12 |   |
| Second Quarter |       | $                      | 1.60       |   | $ | 0.90 |   |
| Third Quarter  |       | $                      | 1.50       |   | $ | 0.98 |   |
| Fourth Quarter |       | $                      | 1.09       |   | $ | 0.44 |   |

 

| ** **     | ** ** | **Common Shares** | ** ** |
|----------------|------------|------------------------|------------|
| **2006**       | ** ** | **High**               | ** ** | **Low** | ** ** |
| First Quarter  |       | $                      | 1.09       |   | $ | 0.47 |   |
| Second Quarter |       | $                      | 1.40       |   | $ | 0.57 |   |
| Third Quarter  |       | $                      | 0.82       |   | $ | 0.16 |   |
| Fourth Quarter |       | $                      | 0.70       |   | $ | 0.26 |   |

 

| ** **           | ** ** | **Common Shares** | ** ** |
|----------------------|------------|------------------------|------------|
| **2007**             | ** ** | **High**               | ** ** | **Low** | ** ** |
| January              |       | $                      | 0.52       |   | $ | 0.41 |   |
| February             |       | $                      | 0.48       |   | $ | 0.38 |   |
| March 15,  2007 |       | $                      | 0.43       |   | $ | 0.35 |   |

 

Thefollowing table sets forth the high and low sales prices in Canadian dollarsfor our common shares as reported on the TSX for the periods indicated:

| ** **     | ** ** | **Common Shares** | ** ** |
|----------------|------------|------------------------|------------|
| **2005**       | ** ** | **High**               | ** ** | **Low** | ** ** |
| First Quarter  |       | Cdn $2.36              |       | Cdn $1.33 |   |
| Second Quarter |       | Cdn $1.99              |       | Cdn $1.18 |   |
| Third Quarter  |       | Cdn $1.78              |       | Cdn $1.15 |   |
| Fourth Quarter |       | Cdn $1.30              |       | Cdn $0.51 |   |

 

| ** **     | ** ** | **Common Shares** | ** ** |
|----------------|------------|------------------------|------------|
| **2006**       | ** ** | **High**               | ** ** | **Low** | ** ** |
| First Quarter  |       | Cdn $1.25              |       | Cdn $0.56 |   |
| Second Quarter |       | Cdn $1.52              |       | Cdn $0.64 |   |
| Third Quarter  |       | Cdn $0.91              |       | Cdn $0.26 |   |
| Fourth Quarter |       | Cdn $0.75              |       | Cdn $0.33 |   |

 

19

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| ** **           | ** ** | **Common Shares** | ** ** |
|----------------------|------------|------------------------|------------|
| **2007**             | ** ** | **High**               | ** ** | **Low** | ** ** |
| January              |       | Cdn $0.60              |       | Cdn $0.45 |   |
| February             |       | Cdn $0.54              |       | Cdn $0.45 |   |
| March 15,  2007 |       | Cdn $0.50              |       | Cdn $0.44 |   |

 

As of March 1, 2007,the approximate number of holders of record of our common shares was 300 andthe approximate number of beneficial holders of our common shares was 9,750.

**CERTAIN INCOME TAXCONSIDERATIONS**

*Canadian FederalIncome Tax Considerations*

This summary is applicable to a holder or prospectivepurchaser of common shares who is not (and is not deemed to be) resident inCanada, does not (and is not deemed to) use or hold the common shares in, or inthe course of, carrying on a business in Canada, and is not an insurer thatcarries on an insurance business in Canada and elsewhere.

This summary is based on the current provisions of the*Income Tax Act* (Canada), the regulationsthereunder, all specific proposals to amend such Act and regulations publiclyannounced by or on behalf of the Minister of Finance (Canada) prior to the datehereof and WorldHeart’s understanding of the published administrative andassessing practices and policies of the Canada Revenue Agency. This summarydoes not otherwise take into account any change in law or administrativepractice, whether by judicial, governmental, legislative or administrativeaction, nor does it take into account provincial, territorial or foreign incometax consequences, which may vary from the Canadian federal income taxconsiderations described herein.

This summary is of ageneral nature only and it is not intended to be, nor should it be construed tobe, legal or tax advice to any holder of the common shares and norepresentation with respect to Canadian federal income tax consequences to anyholder of common shares is made herein. Accordingly, prospective purchasers andholders of the common shares should consult their own tax advisers with respectto their individual circumstances.

*Dividends on CommonShares*

Canadian withholding taxat a rate of 25.0% (subject to reduction under the provisions of any relevanttax treaty) will be payable on dividends paid or credited to a holder of commonshares. Under the Canada-U.S. income tax treaty, the withholding tax rateis generally reduced to 15.0% for a holder entitled to the benefits of thetreaty (or 5.0% if the holder is a corporation that owns at least 10.0% of thecommon shares).

*Capital Gains andLosses*

Subject to the provisions of a relevant tax treaty,capital gains realized by a holder on the disposition or deemed disposition ofcommon shares held as capital property will not be subject to Canadian taxunless the common shares are taxable Canadian property (as defined in the *Income Tax Act* (Canada)), in which case the capital gainswill be subject to Canadian tax at rates which will approximate those payableby a Canadian resident. Common shares will not be taxable Canadian property toa holder provided that, at the time of the disposition or deemed disposition,the common shares are listed on a prescribed stock exchange (which currentlyincludes the TSX) unless such holder, persons with whom such holder did notdeal at arms length or such holder together with all such persons, owned 25.0%or more of the issued shares of any class or series of shares of WorldHeart atany time within the 60 month period immediately preceding such time.

20

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Under the Canada-U.S.income tax treaty, a holder entitled to the benefits of the treaty and to whomthe common shares are taxable Canadian property will not be subject to Canadiantax on the disposition or deemed disposition of the common shares unless at thetime of disposition or deemed disposition, the value of the common shares isderived principally from real property situated in Canada.

**EQUITY COMPENSATIONPLAN INFORMATION**

The discussion under the above heading in ourdefinitive proxy statement for the 2007 Annual Meeting of Shareholders isincorporated herein by reference to such proxy.

In December 2006, WorldHeart repurchased for$1,000 a total of 125,714 warrants from one of its warrant holders.

As of December 31,2006, WorldHeart has not engaged in any share repurchases and does not have anypublicly announced repurchase programs.

**Item 6.**                        Management’sDiscussion and Analysis of Financial Condition and Results of Operations.

**INTRODUCTION**

World Heart Corporation and its subsidiaries arecollectively referred to as WorldHeart. The following Management Discussion andAnalysis of Financial Condition and Results of Operations was prepared bymanagement and discusses material changes in WorldHeart’s financial conditionand results of operations and cash flows for the years ended December 31,2006, 2005 and 2004. Such discussion and comments on the liquidity and capitalresources should be read in conjunction with the information contained in theaccompanying audited consolidated financial statements prepared in accordancewith U.S. GAAP. In this discussion, all amounts are in United States dollars(U.S. dollars) unless otherwise stated.

The discussion andcomments contained hereunder include both historical information andforward-looking information. The forward-looking information, which generallyis information stated to be anticipated, expected, or projected by management,involves known and unknown risks, uncertainties and other factors that maycause the actual results and performance to be materially different from anyfuture results and performance expressed or implied by such forward-lookinginformation. Potential risks and uncertainties include, without limitation: ourability to raise additional funding, numerous uncertainties and time delaysinherent in the development of products, particularly our LevacorTM Rotary VAD; WorldHeart’s need to establishreimbursement mechanisms and product acceptance from third-party payers;extensive government regulation of our products; rapid developments intechnology by competitors some of whom have significantly greater financial,production and marketing resources; and slower than anticipated growth in theDestination Therapy market, as well as other risks and uncertainties set forthunder the heading “Risk Factors” and elsewhere in this Annual Report on Form 10-KSB.

**OVERVIEW**

WorldHeart is engaged in development of mechanicalcirculatory support systems focused on developing and commercializingimplantable ventricular assist devices (VADs), which are mechanical pumps thatallow for the restoration of normal blood circulation to patients sufferingfrom advanced heart failure. WorldHeart believes that it has a broad platformof next-generation products under development for long-term circulatory supportand that both pulsatile and rotary pumps are required to treat the fullspectrum of clinical needs of end and late-stage heart failure patients. WorldHeartbelieves that pulsatile devices are best suited for end-stage patients withpoor ventricular contractility, who require full support, or functionalreplacement. Alternatively, rotary devices are best suited to late-stagepatients, with some contractility, who require only partial support, or anassist.

21

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WorldHeart currently derives most of its revenue fromits Novacor LVAS and related peripheral equipment, which it sells, directly tomedical clinics and hospitals in the United States, Europe and Canada andthrough a distributor in certain other countries. The Novacor LVAS iscommercially approved as a Bridge-to-Transplant device in the United States andCanada. In Europe, the Novacor LVAS has unrestricted approval for use as analternative to transplantation, Bridge-to-Transplantation and to supportpatients who may be able to recover the use of their natural heart. In Japan,the device is commercially approved for use in cardiac patients at risk ofimminent death from non-reversible left ventricular failure for which there isno alternative except heart transplantation.

In July 2005, WorldHeart acquired the assets ofMedQuest Products, Inc. (MedQuest) including a rotary VAD, now called theLevacor Rotary VAD. In conjunction with the acquisition, WorldHeart raised approximately $22.7 million in grossfinancing proceeds from a private placement with Maverick and the exercise ofcertain warrants and also converted all of its remaining convertible debenturesfrom an earlier financing. Pre-clinical testing of the Levacor VADwas accelerated after the acquisition, with successful initial humanfeasibility clinical studies in Europe completed during 2006.

In November 2006, WorldHeart announced arestructuring plan, which included a reduction of commercial operationsassociated with the Novacor LVAS, and a refocusing of its resources on thedevelopment of its next generation products, particularly the Levacor RotaryVAD. WorldHeart also reduced its workforce and will consolidate its facilitiesin Oakland, in an effort to reduce expenses. Further feasibility clinicalstudies are planned in Canada during the first half of 2007, and clinicaltrials are expected to begin in the United States late in 2007.

WorldHeart is also developing a next-generationimplantable pulsatile VAD, called the Novacor II. Development work on theNovacor II achieved an important milestone with successful initial animalimplants completed in 2005 and 2006. Further development work on the Novacor IIis expected to resume after completion of the development of Levacor Rotary VADand subject to additional funding availability.

Research and development by WorldHeart’s competitorsis proceeding on several rotary flow devices. Certain of these devices havereceived the CE mark in Europe and are advancing through clinical trials in theUnited States and Europe. WorldHeart believes that its Levacor VAD is the mostadvanced fourth-generation rotary device under development.

Although the DestinationTherapy patient population continues to be largely untreated by cardiac assistdevices, and the adoption rates have been slower than anticipated, we believethat the Destination Therapy market will evolve more rapidly when devices areevaluated clinically and as experience with the next-generation VADs increases.

**SELECTED FINANCIALINFORMATION**

Inthousands (000’s) except for per share amounts

| ** **                                           | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                           | ** ** | **2006**                                   | ** ** | **2005** | ** ** |
| Net revenue                                          |       | $                                          | 8,616      |   | $ | 11,646 |   |
| Net income (loss)  for the year                      |       | (20,085                                    | )          | (52,834 | ) |
| Net income (loss)  applicable to common shareholders |       | (20,085                                    | )          | (58,694 | ) |
| Basic and diluted  income (loss) per share           |       | (0.34                                      | )          | (1.76 | ) |
| Total assets                                         |       | 20,498                                     |       | 26,822 |   |
| Shareholders’ equity                            |       | 14,706                                     |       | 20,713 |   |
|                                                      |            |                                            |            |  |  |  |  |

 

22

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**SUMMARY OFQUARTERLY RESULTS**

Inthousands (000’s) except for per share amounts

| ** **                                  | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------|------------|------------------------|------------|
| ** **                                  | ** ** | **December 31,**  | ** ** | **September 30,** | ** ** | **June 30,** | ** ** | **March 31,** | ** ** |
| ** **                                  | ** ** | **2006**               | ** ** | **2006** | ** ** | **2006** | ** ** | **2006** | ** ** |
| Net revenue                                 |       |                   | $          | 956 |   |   |   | $ | 1,387 |   |   | $ | 2,988 |   |   | $ | 3,285 |   |   |
| Net loss for the  period                    |       |                   | (5,136     | ) |   |   | (7,619 | ) |   | (3,888 | ) |   | (3,442 | ) |   |
| Net loss  applicable to common shareholders |       |                   | (5,136     | ) |   |   | (7,619 | ) |   | (3,888 | ) |   | (3,442 | ) |   |
| Basic and diluted loss  per share           |       |                   | $          | (0.08 | ) |   |   | $ | (0.14 | ) |   | $ | (0.07 | ) |   | $ | (0.06 | ) |   |

 

| ** **                                           | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------|------------|------------------------|------------|
| ** **                                           | ** ** | **December 31,**  | ** ** | **September 30,** | ** ** | **June 30,** | ** ** | **March 31,** | ** ** |
| ** **                                           | ** ** | **2005**               | ** ** | **2005** | ** ** | **2005** | ** ** | **2005** | ** ** |
| Net revenue                                          |       |                   | $          | 3,630 |   |   |   | $ | 2,150 |   |   | $ | 2,449 |   |   | $ | 3,417 |   |   |
| Net income (loss)  for the period                    |       |                   | (21,998    | ) |   |   | (22,251 | ) |   | (4,643 | ) |   | (3,942 | ) |   |
| Net income (loss)  applicable to common shareholders |       |                   | (21,998    | ) |   |   | (28,111 | ) |   | (4,643 | ) |   | (3,942 | ) |   |
| Basic and diluted income  (loss) per share           |       |                   | $          | (0.40 | ) |   |   | $ | (0.64 | ) |   | $ | (0.27 | ) |   | $ | (0.24 | ) |   |

 

**RESULTS OF OPERATIONS FOR THE YEAR ENDEDDECEMBER 31, 2006 COMPARED WITH THE YEAR ENDED DECEMBER 31, 2005**

In thousands (000’s)

| ** **                                      | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                      | ** ** | **2006**                                   | ** ** | **2005** | ** ** |
| **Revenue**                                     |       | $                                          | 8,616      |   | $ | 11,646 |   |
| **Cost of goods sold**                          |       | (10,201                                    | )          | (8,479 | ) |
| **Gross margin**                                |       | (1,585                                     | )          | 3,167 |   |
| **Operating  expenses**                         | ** ** | ** **                                 | ** ** | ** ** | ** ** |
| Selling, general and administrative             |       | 8,664                                      |       | 12,041 |   |
| Research and development                        |       | 9,002                                      |       | 7,388 |   |
| Restructuring costs                             |       | 646                                        |       | 333 |   |
| Amortization of intangibles                     |       | 192                                        |       | 339 |   |
| Acquired in-process research and development    |       | —                                     |       | 18,147 |   |
| Goodwill impairment                             |       | —                                     |       | 17,180 |   |
| Total operating expenses                        |       | 18,504                                     |       | 55,428 |   |
| **Operating loss before the undernoted**        |       | (20,089                                    | )          | (52,261 | ) |
| **Other income (expense)**                      | ** ** | ** **                                 | ** ** | ** ** | ** ** |
| Foreign exchange loss                           |       | 55                                         |       | (144 | ) |
| Investment income                               |       | 192                                        |       | 369 |   |
| Loss on disposal of assets                      |       | (248                                       | )          | (1 | ) |
| Interest and financing expenses                 |       | 5                                          |       | (797 | ) |
| **Net loss for the year**                       |       | (20,085                                    | )          | (52,834 | ) |
| **Effect of warrant exchange**                  |       | —                                     |       | (5,860 | ) |
| **Net  loss applicable to common shareholders** |       | $                                          | (20,085    | ) | $ | (58,694 | ) |

 

***Revenue.***   Thesale of Novacor LVAS implant kits and related peripheral equipment and servicesaccounts for substantially all of WorldHeart’s revenues. WorldHeart primarilysells its products directly, except for a few countries where we sell throughdistributors. 

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Thecomposition of revenue in thousands ($000’s), except for units, is as follows:

| ** **            | ** ** | **2006** | ** ** | **2005**  | ** ** |
|-----------------------|------------|----------|------------|-----------|------------|
| ** **            | ** ** | **$**    | ** ** | **Units** | ** ** | **$** | ** ** | **Units** | ** ** |
| Implant kits          |       | $        | 5,148      |      |       | 74 |   |   | $ | 7,600 |   |   | 118 |   |   |
| Peripherals and other |       | 3,468    |       |      |       |   |   | 4,046 |   |   |   |   |   |
| Revenue               |       | $        | 8,616      |      |       |   |   |   | $ | 11,646 |   |   |   |   |   |

 

Net revenue for the year ended December 31, 2006,decreased by $3.0 million, or 26%, compared with 2005. Implant kit revenue in2006 decreased by $2.5 million, or 32%, compared with 2005. During 2006the average price per kit was $69,600, compared with $64,400 during 2005,reflecting primarily a reduction in discounted sales in 2006. In the fourthquarter of 2006, net revenue of $1.0 million was significantly below netrevenue of $3.6 million in the fourth quarter of 2005.

Peripherals and other revenues, including Novacor LVAShardware and peripheral sales, services and other revenue for the year endedDecember 31, 2006, were $3.5 million, a decrease of 14%, comparedwith peripherals and other revenue of $4.0 million recorded in the yearended December 31, 2005. In the fourth quarter of 2006, peripherals andother revenues were $0.5 million, compared with peripherals and other revenueof $1.2 million for the fourth quarter of 2005.

Implant kits recognized as revenue in the year endedDecember 31, 2006, were 74, compared with 118 in the year endedDecember 31, 2005. WorldHeart recognized revenue on 45 implant kits in theUnited States in 2006, compared with 87 implant kits in 2005. In Europe, Canadaand the rest-of-world, WorldHeart recognized revenue on 29 implant kits in2006, compared with 31 in 2005. 

At December 31, 2005, 11 of our Novacor implantkits had been shipped and invoiced, however, the revenue was deferred as thetransactions did not meet our revenue recognition criteria. Revenue wasrecognized on 10 of these kits during 2006. At December 31, 2006, therewas one remaining Novacor kit and some peripherals in deferred revenue,resulting in a year end balance of $0.1 million. Based on ourNovember 2006 restructuring plan, we reduced our commercial efforts on ourNovacor LVAS program and expect implant kit and peripherals revenue to continueto decrease in future periods

***Cost of goods sold.******  ***For the yearended December 31, 2006, the cost of goods sold exceeded revenue (118% asa percentage of revenue), compared with cost of goods sold as a percentage ofrevenue of 73% at December 31, 2005. The cost of goods sold for the yearended December 31, 2006, includes write-offs totaling $4.6 million in thethird and fourth quarter of 2006 related to redundant Novacor inventories andan increase in warranty provision of $0.2 million.

***Selling, generaland administrative.***   Selling, general andadministrative expenses consist primarily of payroll and related expenses forexecutives, sales, accounting and administrative personnel. Otheradministrative expenses include professional fees, communication expenses,insurance premiums, public reporting costs and other general corporateexpenses. 

The composition ofselling, general and administrative expenses in thousands ($000’s) is asfollows:

| ** **                 | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------|------------|--------------------------------------------|------------|
| ** **                 | ** ** | **2006**                                   | ** ** | **2005** | ** ** |
| Selling                    |       | $                                          | 3,471      |   | $ | 5,776 |   |
| General and administrative |       | 5,193                                      |       | 6,265 |   |
| Total                      |       | $                                          | 8,664      |   | $ | 12,041 |   |

 

Selling, general and administrative expense for theyear ended December 31, 2006 decreased by $3.4 million, or 28%,versus the same period in 2005. Selling expenses for the year endedDecember 31, 

24

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2006 decreased by $2.3million, or 40%, compared with the same period in 2005. Selling expensesdecreased due to lower sales commissions on reduced Novacor sales, theelimination of the domestic sales group in November 2006 and reducedselling expenses in Europe. Selling expenses are expected to continue todecrease in 2007. 

General and administrative expenses decreased by $1.1million, or 17%, for the year ended December 31, 2006, compared with 2005.These reductions are primarily due to cost savings associated with theconsolidation of our North American Novacor operations in December 2005,as well as reduced consulting fees, insurance and non-cash, stockoption-related compensation expenses in 2006. Administrative expenses areexpected to remain at current levels in the next several quarters.

***Research anddevelopment.******  ***Research and development expensesconsist principally of salaries and related expenses for research personnel,prototype manufacturing, testing, clinical trial, material purchases andregulatory affairs incurred at our Oakland and Salt Lake City facilities.

Research and development expenses for the year endedDecember 31, 2006 increased by $1.6 million, or 22%, compared with theyear ended December 31, 2005. In 2006, the full year impact of the Levacordevelopment program, primarily at our Salt Lake City operations was realized,with resulting expenses in 2006 $3.3 million higher than in 2005, offsetsomewhat by lower research expenses associated with the Novacor product at ourOakland operations. The overall research and development cost increase during 2006consisted primarily of salaries and supplies, offset somewhat by $0.5 milliondecrease in non-cash, stock option-related compensation expense and a $0.7million credit in the fourth quarter of 2006 associated with the successfuloutcome of a Canadian tax appeal. Development work and related expenses on ournext-generation Levacor Rotary VAD are expected to increase with additionalanimal studies and human clinical trials, primarily in the United States andCanada.

***Restructuringcosts.*****  **OnNovember 14, 2006, we announced a significant restructuring andrealignment of our business designed to control spending and better positionWorldHeart to changing market conditions and diminished demand for ourfirst-generation Novacor LVAS. 

We reduced our manufacturing program and downsizedselling and administrative personnel numbers associated with the Novacor LVAS,although we will continue to support the product for existing patients, and atthe medical centers. The restructuring also included a reduction inWorldHeart’s workforce by 41 people. Employee reductions occurredprimarily in the related manufacturing and sales departments. Restructuringexpenses of about $646,000, including $470,000 severance-related charges and $176,000related to the disposal of fixed assets, were incurred in the fourth quarter of2006. At December 31, 2006, $91,000 of the $470,000 severance relatedcharges had been disbursed, with the remaining $379,000 included in accountspayable and accrued liabilities. 

In August 2004, WorldHeart approved a separateplan to consolidate the Ottawa, Canada, operations into our facilities inOakland, California, where the Novacor LVAS was manufactured. Thisconsolidation reduced ongoing business expenses in 2004 and 2005 and benefitedoperational efficiency and effectiveness. The restructuring was completed bythe end of June 2005. The total restructuring costs of $2.1 million wereincurred and paid through 2005. 

***Acquired in-processresearch and development.******  ***During thethird quarter of 2005, we recorded a one-time, non-cash charge of $18.1 millionto expense the in-process research and development acquired from MedQuest. Wehad estimated the value of the Levacor Rotary VAD project using an incomeapproach and applied risk-adjusted discount rates to the estimated futurerevenue and expenses attributable to this technology and the MagLev Plus at thetime of the acquisition. We determined at the time of the acquisition thatthese projects had no alternative future use and therefore, as required underSFAS 142, we expensed the amounts immediately. There was no acquired in-processresearch and development expense recorded in 2006. 

25

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***Amortization ofintangibles.******  ***Amortization of intangibles for theyear ended December 31, 2006 was $191,000 compared with $338,000 in 2005.Amortization expense in 2006 related to the $766,000 value assigned to theMedQuest workforce acquired in July 2005. In the first two quarters of2005, we recorded amortization of $255,000 related to the intangible assetspurchased with the Novacor business. At the end of the second quarter of 2005these assets had been fully amortized. In the second half of 2005, we recorded$83,000 in amortization expense related entirely to the value assigned to thevalue of the MedQuest workforce. These intangibles are being amortized over afour-year period. 

***Goodwillimpairment.******  ***The purchase of Novacor from Edwardsin 2000 resulted in the recording of goodwill of $17.2 million. Since then,management has performed an annual impairment assessment on our goodwill inaccordance with SFAS 142. At December 31, 2005, we determined that thefair value of our goodwill was impaired and, accordingly, we recorded agoodwill impairment charge of $17.2 million in the fourth quarter of 2005. Theimpairment was largely a result of slower than anticipated adoption of theNovacor LVAS product. There was no goodwill impairment in 2006.

***Foreign exchange.***   Duringthe year ended December 31, 2006, a foreign exchange gain of approximately$55,000 was recorded, compared with a loss of $144,000 for the year endedDecember 31, 2005. The change in foreign exchange in 2006, compared withthe previous year, related primarily to fluctuations in the relative value ofthe U.S. dollar compared with the Euro, and reductions in certain Canadiandollar denominated assets throughout the first half of 2005. We anticipate thatforeign exchange gains and losses will diminish in 2007 with reduced Novacorcommercial activity in Europe.

***Investment andother income (expense).***   Investment and otherincome (expense) was $191,000 and $370,000 for 2006 and 2005, respectively. For2006, investment income of $224,000 resulted from interest earned on ourinvested cash, offset somewhat by a bad debt expense of $33,000. For 2005, investmentincome was $245,000 and other income, consisting of the write off of long termliabilities at two medical centers, which, as determined during the period,were no longer payable, was $125,000. The decrease in investment income in 2006was due to lower average invested cash balances in 2006, compared with 2005.

***Loss on disposal ofassets.***   During the year endedDecember 31, 2006, a loss of approximately $248,000 on disposal of assetswas recorded compared with a loss on disposal of assets of less than $1,000 forthe year ended December 31, 2005.

***Interest expenseand financing expenses.***   In 2006 we recordeda credit of $5,000 due primarily to a deferred gain on a foreign loan. In 2005,interest expenses and other financing costs, related primarily to non-cashinterest and accretion associated with the convertible debentures, were$797,000. All outstanding debentures were converted in July 2005 resultingin a significant expense reduction for the remainder of 2005. We anticipateminimal interest expenses in 2007.

***Effect of warrantexchange.***   We recorded a one-time charge of$5.9 million in the third quarter of 2005 resulting from a reduction in theexercise price of approximately 10.7 million warrants originally issued, in aprivate placement in September 2004. The exercise price of these warrantswas reduced by $0.55 from $1.55 to $1.00. There was no such charge recorded in2006.

***Stock option acceleration.******  ***InDecember 2005, the Board of Directors of WorldHeart approved theaccelerated vesting of all outstanding stock options held by current employeesor consultants, except for the options held by the non-employee members of theBoard of Directors. The purpose of the acceleration of vesting was to improveemployee morale and to minimize the amount of compensation expense in futureperiods following the adoption by WorldHeart of SFAS 123(R) in 2006. Thisprogram resulted in a reduction of pre-tax charges under SFAS 123(R) of$3.4 million, of which $2.0 million and $1.4 million would have been recognizedin fiscal 2006 and 2007, respectively. The accelerated vesting of stock optionsin 2005 resulted in a non-cash charge of $4.9 million, reflected in thefootnote disclosure in the notes to the consolidated financial statements.

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**RESULTS OF OPERATIONS FOR THE YEAR ENDEDDECEMBER 31, 2005 COMPARED WITH THE YEAR ENDED DECEMBER 31, 2004**

In thousands (000’s)

| ** **                                               | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                               | ** ** | **2005**                                   | ** ** | **2004** | ** ** |
| **Revenue**                                              |       | $                                          | 11,646     |   | $ | 9,576 |   |
| **Cost of goods sold**                                   |       | (8,479                                     | )          | (7,681 | ) |
| **Gross margin**                                         |       | 3,167                                      |       | 1,895 |   |
| % of Revenue                                             |       | 27                                         | %          | 20 | % |
| **Operating  expenses**                                  | ** ** | ** **                                 | ** ** | ** ** | ** ** |
| Selling, general and administrative                      |       | 12,041                                     |       | 13,363 |   |
| Research and development                                 |       | 7,388                                      |       | 5,839 |   |
| Restructuring costs                                      |       | 333                                        |       | 1,787 |   |
| Amortization of intangibles                              |       | 339                                        |       | 515 |   |
| Acquired in-process research and development             |       | 18,147                                     |       | — |   |
| Goodwill impairment                                      |       | 17,180                                     |       | — |   |
| Total operating expenses                                 |       | 55,428                                     |       | 21,504 |   |
| **Operating loss before the undernoted**                 |       | (52,261                                    | )          | (19,609 | ) |
| **Other  income (expense)**                              | ** ** | ** **                                 | ** ** | ** ** | ** ** |
| Foreign exchange loss                                    |       | (144                                       | )          | (308 | ) |
| Investment income                                        |       | 370                                        |       | 99 |   |
| Loss on disposal of assets                               |       | (1                                         | )          | (46 | ) |
| Interest and financing expenses                          |       | (797                                       | )          | (6,278 | ) |
| **Net income (loss) for the year**                       |       | (52,834                                    | )          | (26,142 | ) |
| **Effect of warrant exchange**                           |       | (5,860                                     | )          | — |   |
| **Net  income (loss) applicable to common shareholders** |       | $                                          | (58,694    | ) | $ | (26,142 | ) |

 

***Revenue.***   Thesale of Novacor LVAS implant kits and related peripheral equipment and servicesaccounts for substantially all of WorldHeart’s revenues. WorldHeart primarilysells its products directly, except for a few countries where we sell throughdistributors. Prior to January 1, 2004, WorldHeart sold its productsdirectly in the United States and through our distributor, Edwards, outside theUnited States.

The composition of revenuein thousands ($000’s), except for units, is as follows:

| ** **            | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------|------------|--------------------------------------------|------------|
| ** **            | ** ** | **2005**                                   | ** ** | **2004** | ** ** |
| ** **            | ** ** | **$**                                      | ** ** | **Units** | ** ** | **$** | ** ** | **Units** | ** ** |
| Implant kits          |       | $                                          | 7,600      |   |   | 118 |   |   | $ | 7,056 |   |   | 113 |   |   |
| Peripherals and other |       | 4,046                                      |       |   |   |   |   | 2,520 |   |   |   |   |   |
| Revenue               |       | $                                          | 11,646     |   |   |   |   |   | $ | 9,576 |   |   |   |   |   |

 

Net revenue for the year ended December 31, 2005,increased by $2.1 million representing an increase of 22% over the year endedDecember 31, 2004. Implant kit revenue in 2005 increased by $544,000,representing an 8% increase compared with 2004. During 2005, the averageprice per kit was $64,400, compared with $62,400 during 2004, reflectingprimarily a reduction in discounted sales in 2005. 

Peripherals and other revenues, including Novacor LVAShardware and peripheral sales, services and other revenue for the year endedDecember 31, 2005, were $4.0 million, which represents an increase of

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about 60% over peripheralsand other revenue of $2.5 million recorded in the year endedDecember 31, 2004. 

Implant kits recognized as revenue in the year endedDecember 31, 2005, were 118, compared with 113 in the year endedDecember 31, 2004. WorldHeart recognized revenue on 87 implant kits in theUnited States in 2005 compared with 59 implant kits in 2004. In Europe, Canadaand the rest-of-world, WorldHeart recognized revenue on 31 implant kits in 2005compared with 54 in 2004. 

At December 31, 2004, 17 implant kits had beenshipped and invoiced, however, the revenue was deferred as the transactions didnot meet our revenue recognition criteria. Revenue was recognized on 14 ofthese kits during 2005 and revenue from 8 additional kits was deferred,resulting in 11 implant kits remaining in deferred revenue at December 31,2005. These kits, plus some undelivered components of multiple elementtransactions, resulted in deferred revenue at year-end 2005 of $1.2 million.During the first quarter of 2006, several implant kits previously shipped toone of our medical centers, and on which revenue recognition was deferred, metour revenue recognition criteria, resulting in a further reduction in ourdeferred revenue balance. 

***Cost of goods sold.******  ***For the yearended December 31, 2005, the cost of goods sold as a percent of revenuewas 73%, compared with 80% at December 31, 2004. We were able to improve margins in 2005 by continuing to implement costimprovement programs and improve our product sales mix to include higher marginperipheral products.

***Selling, generaland administrative.***   Selling, general andadministrative expenses consist primarily of payroll and related expenses forexecutives, sales, marketing, accounting and administrative personnel,professional fees, communication expenses, promotional activities, costsassociated with meeting multi-jurisdictional regulatory requirements, insurancepremiums, and occupancy and other general corporate expenses. 

Thecomposition of selling, general and administrative expenses in thousands($000’s) is as follows:

| ** **                 | ** ** | **Year Ended  December 31,** | ** ** |
|----------------------------|------------|----------------------------------------|------------|
| ** **                 | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| Selling                    |       | $                                      | 5,776      |   | $ | 5,994 |   |
| General and administrative |       | 6,265                                  |       | 7,370 |   |
| Total                      |       | $                                      | 12,041     |   | $ | 13,364 |   |

 

Selling, general and administrative expense for theyear ended December 31, 2005 decreased by $1.3 million, or 10%,versus the same period in 2004. Selling expenses for the year endedDecember 31, 2005 decreased by $0.2 million, or 4%, compared with the sameperiod in 2004. Selling expenses decreased due to lower promotional costs, aswell as lower salaries and selling commissions.

General and administrative expenses decreased by $1.1million, or 15%, for the year ended 2005 compared with 2004. These reductionsare primarily due to cost savings associated with the consolidation of ourNorth American Novacor operations, offset somewhat by $382,000 in non-cashcompensation expense related to the accelerated vesting of stock options inDecember 2005.

***Research anddevelopment.******  ***Research and development expensesconsist principally of salaries and related expenses for research personnel,prototype manufacturing, testing, clinical trial expenses, factory costs andregulatory affairs expenses incurred at our Oakland and Salt Lake Cityfacilities.

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Research and development expenses for the year ended December 31,2005 increased by $1.5 million, or 27%, compared with the year ended December 31,2004. The MedQuest Acquisition in July 2005 resulted in $2.1 million of additional researchand development expenses in the second half of 2005. Other research anddevelopment costs decreased by $600,000, or 10%, during 2005, compared with thesame period in 2004, reflecting the reduction in expenses due to theconsolidation of the North American Novacor operations. This $600,000 decreaseincludes $498,000 in non-cash compensation expense relating to the acceleratedvesting of stock options in December 2005 and $147,000 in other researchand development costs.

***Restructuringcosts.*****  **OnAugust 25, 2004, we approved a plan to consolidate the Ottawa, Ontariooperations into our facilities in Oakland, California where the Novacor LVAS ismanufactured. The consolidation of the North American Novacor operations intoone location reduced ongoing business expenses in 2004 and 2005 to continue tobenefit operational efficiency and effectiveness.

The restructuring was completed by the end of June 2005.For the year ended December 31, 2005, restructuring costs of $333,000 wererecorded, compared with  $1.8 million forthe year ended December 31, 2004.

The following wererestructuring costs for 2005 and 2004:

| ** **                                                | ** ** | **Employee  Severance** | ** ** | **Contract  Settlement** | ** ** | **Write down** | ** ** | **Other** | ** ** | **Total**  | ** ** |
|-----------------------------------------------------------|------------|-------------------------|------------|--------------------------|------------|---------------------|------------|-----------|------------|------------|------------|
| Costs accrued  during 2004                                |       | $                       | 1,396,037  |                     | $          | 57,653              |       | $         | 338,595    | ** ** | $          | 22,509 |   | $ | 1,814,794 |   |
| Costs paid or settled  in 2004                            |       | (795,923                | )          | —                   |       | (338,595            | )          | (8,624    | )          | (1,143,142 | )          |
| Balance in  accrued liabilities at December 31, 2004 |       | $                       | 600,114    |                     | $          | 57,653              |       | $         | —     |       | $          | 13,885 |   | $ | 671,652 |   |
| Costs accrued  during 2005                                |       | 122,352                 |       | 192,012                  |       | (6,801              | )          | 25,467    |       | 333,030    |       |
| Costs paid or  settled in 2005                            |       | (722,466                | )          | (249,665                 | )          | 6,801               |       | (39,352   | )          | (1,004,682 | )          |
| Balance in accrued  liabilities at December 31, 2005 | ** ** | **$**                   | —     | ** **               | **$**      | —              |       | **$**     | —     |       | **$**      | — |   | **$** | — | ** ** |

 

Employee severance costs represent the amountemployees earned. Contract settlement costs were recorded when notice wasprovided that the contract was being terminated and WorldHeart ceased using therights conveyed under the contract. The capital assets were written down totheir net realizable value when the decision was made to consolidate the NorthAmerican operations and it was determined that the carrying value of thecapital assets was impaired. Other restructuring costs were recognized when theservices were actually received.

***Acquired in-processresearch and development.******  ***During thethird quarter of 2005, we recorded a one-time, non-cash charge of $18.1 millionto expense the in-process research and development acquired from MedQuest. Wehad estimated the value of the Levacor Rotary VAD project using an incomeapproach and applied risk-adjusted discount rates to the estimated futurerevenue and expenses attributable to this technology and the MagLev Plus at thetime of the acquisition. We determined at the time of the acquisition thatthese projects had no alternative future use and therefore, as required underSFAS 142, we expensed the amounts immediately. There was no acquired in-processresearch and development expense recorded in 2004.

***Amortization ofintangibles.******  ***Amortization of intangibles for theyear ended December 31, 2005 was $338,000, compared with $515,000 for thesame period in 2004. In the first two quarters of 2005, we recordedamortization of $255,000 related to the intangible assets purchased with theNovacor business. At the end of the second quarter of 2005, these assets hadbeen fully amortized. In the second half of 2005, we recorded $83,000 inamortization expense, which related entirely to the $766,000 value assigned tothe 

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workforce acquired in theMedQuest Acquisition. These intangibles are being amortized over a four-yearperiod.

***Goodwill impairment.******  ***The purchaseof Novacor from Edwards in 2000 resulted in the recording of goodwill of $17.2million. Since then, management has performed an annual impairment assessmenton our goodwill in accordance with SFAS 142. At December 31, 2005, wedetermined that the fair value of our goodwill was impaired and, accordingly,we recorded a goodwill impairment charge of $17.2 million in the fourth quarterof 2005. The impairment is largely a result of slower than anticipated adoptionof the Novacor LVAS product.

***Foreign exchangelosses.***   During the year ended December 31,2005, a foreign exchange loss of approximately $144,000 was recorded comparedwith a loss of $308,000 for the year ended December 31, 2004. The decreasein foreign exchange loss in 2005 compared with the previous year relates tofluctuations in the relative value of the U.S. dollar compared with theCanadian dollar and the Euro, and reductions in certain Canadian dollardenominated assets throughout the first half of 2005.

***Investment andother income.***   Investment income resultsprimarily from interest earned on cash equivalents and short-term investments. Investmentand other income was $370,000 and $99,000 for 2005 and 2004, respectively. For2005, investment income was $245,000 and other income, consisting of the writeoff of long term liabilities at two medical centers which, as determined duringthe period, were no longer payable, was $125,000. The increase in investmentincome in 2005 was due to higher average balances invested at higher averageinterest rates, compared with 2004.

***Interest expenseand financing expenses.***   Interest expense andfinancing costs during the year ended December 31, 2005 were $0.8 million,compared with $6.3 million during the year ended December 31, 2004.Interest expense and financing costs consisted primarily of non-cash interestand accretion related to the convertible debentures. During 2005, interestexpenses related to the convertible debentures were $797,000. All outstandingdebentures were converted in July 2005 resulting in a significant expensereduction for the remainder of 2005. During the year ended December 31,2004, interest expense and financing costs were $6.3 million, consisting of a$5.8 million non-cash charge related to the beneficial conversion feature ofthe convertible debentures issued on September 15, 2004, plus thecorresponding accrued interest related to these convertible debentures.

***Effect of warrantexchange.***   We recorded a one-time charge of$5.9 million in the third quarter of 2005 resulting from a reduction in the exerciseprice of about 10.7 million warrants originally issued, with convertibledebentures, in a private placement in September 2004 and subsequentlyexercised during July 2005. The exercise price of these warrants wasreduced by $0.55 from $1.55 to $1.00.

***Stock option acceleration.******  ***In December,2005, the Board of Directors of WorldHeart approved the accelerated vesting ofall outstanding stock options held by current employees or consultants, exceptfor the options held by the non-employee members of the Board of Directors. Thepurpose of the acceleration of vesting was to improve employee morale and tominimize the amount of compensation expense in future periods following theadoption by WorldHeart of SFAS 123(R). This program will result in a reductionof future pre-tax charges under SFAS 123(R) of $3.4 million, of which $2.0million and $1.4 million would have been recognized in fiscal 2006 and 2007,respectively. The accelerated vesting of stock options in 2005 results in anon-cash charge of $4.9 million, reflected in the footnote disclosure in thenotes to the consolidated financial statements.

**LIQUIDITY ANDCAPITAL RESOURCES**

Historically, WorldHeart has funded operations throughthe sale of equity and issuance of debt instruments. Combined with revenues,these funds have provided us with the resources to operate our 

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business, attract andretain key personnel, fund our research and development program and clinicaltrials, apply and obtain the necessary regulatory approvals and develop ourtechnology and products.

***Liquidity.***   AtDecember 31, 2006, WorldHeart had cash and cash equivalents of$12.2 million, compared with $10.7 million at December 31, 2005,an increase of $1.5 million. This increase was primarily due to financingactivities offset by cash outflows from operations. In the fourth quarterof  2006, we received net cash of $13.9million from a private placement of common stock to several of our currentinvestors and two new investors.

During 2006, cashused to fund operating activities was $12.2 million, consisting primarily of the net loss for the periodof  $20.1 million offset by non-cashcharges related to:

·       losson the disposal of capital assets and the write down of capital assets relatedto restructuring of $0.2 million and $0.2 million, respectively;

·       amortizationand depreciation charges and non-cash expense on stock options of $0.8 millionand $0.2 million, respectively;

·       aninventory write-off of $4.6 million associated with the Novacor I product; and

·       workingcapital changes of $1.9 million, consisting of a reduction of  $0.5 million in inventory, $1.7 million inaccounts receivable, other receivables and prepaid expenses, and a $0.1 millionincrease in accrued compensation, offset somewhat by a reduction of $0.4 millionin accounts payable.

Investing activities for 2006 used cash of $0.1million for capital asset purchases.

With the completion of the private placement andthrough restructuring programs in the fourth quarter of 2006, based on ourcurrent operating expenses and projected sales of our Novacor LVAS and LevacorVAD products, we believe we have sufficient cash to fund operations through thefirst quarter of 2008.

We are continuing to explore various financingalternatives, including equity financing transactions and corporatecollaborations. Equity financings would likely include, but are not limited to,private investments in public equity (PIPE) transactions or strategic equityinvestment by interested companies. Corporate collaborations could includelicensing of one or more of our products for upfront and milestone payments, orco-development and co-funding of our products. We have completed arestructuring program initiated in the fourth quarter of last year re-aligningour spending to focus on key development program, the Levacor Rotary VAD, andwill continue to carefully manage our overall cash usage. While WorldHeart isexploring opportunities to maintain and improve its financial condition, thereis no assurance that these programs will be successful. This would result in asignificant delay in the completion, reduction in scope or termination of ourdevelopment programs.

Our long-term workingcapital and capital requirements will depend upon numerous factors, includingthe following: our continued ability to generate Novacor LVAS sales without anactive selling effort and staff; the rate of investment in our next-generationtechnologies, particularly the Levacor Rotary VAD; the clinical trial costs andthe approval process for our next-generation products; our general efforts toimprove operational efficiency, conserve cash and implement other costconservation programs.

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**CONTRACTUALOBLIGATIONS**

Thefollowing table sets forth WorldHeart’s contractual obligations as of December 31,2006.

| ** **                   | ** ** | **Total** | ** ** | **Less than  1 year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **Thereafter** | ** ** |
|------------------------------|------------|-----------|------------|---------------------------------|------------|--------------------|------------|--------------------|------------|----------------|------------|
| Operating lease  obligations |       | $         | 595,227    |                            | $          | 532,782            |       | $                  | 62,445     |           |       | $ | — |   |   |   | $ | — |   |   |
| Other long term  obligations |       | 152,000   |       | 76,000                          |       | 76,000             |       |               | —     |           |       |   | — |   |   |
| Total                        |       | $         | 747,227    |                            | $          | 608,782            |       | $                  | 138,445    |           |       | $ | — |   |   |   | $ | — |   |   |

 

Other long-termobligations primarily include payments due under a license agreement.

*Operating Leases*

In 2004, $750,000 in cashpledged against a letter of credit issued by WorldHeart to cover certainobligations under its facility lease in Oakland, California, is not availablefor general operations**.**The SaltLake City facility lease has a security deposit of $9,200. The ContractualObligations table above shows a reduction in operating lease obligations infuture years. This reduction is mainly due to the expiration of the currentoperating lease for the Oakland facility in April 2007 and expiration ofthe Salt Lake City facility lease in January 2008. We may expand the sizeof our Salt Lake City facility, and we intend to reduce the amount of leasedspace in Oakland by approximately one half.

*Novacor LVASRoyalties*

WorldHeart is committed,under the Novacor LVAS royalty agreement, to provide royalty payments tocertain employees. Royalties are payable on annual consolidated gross revenuesat a rate of 0.808% up to a maximum of $3,232,000. Cumulative royalty paymentsto December 31, 2006 total $1,190,800 (2005—$1,121,226). Royalty paymentscharged to cost of goods sold for the year ended December 31, 2006 were$68,461 (2005—$94,042).

*TechnologyPartnerships Canada Contribution Agreement*

During 2002, WorldHeartentered into a shared funding program with Technology Partnerships Canada (TPC)under which the Canadian government shares costs of certain research anddevelopment activities. Funding in the amount of  $6.6 million was claimed. Effective January 1,2004, repayment is in the form of royalties on annual consolidated grossrevenues at a rate of 0.65% for a nine-year period ending December 31,2012. If during this period royalty payments reach the maximum of  $20.3 million, no further repayments will be required.If the royalty payments do not exceed $20.3 million during this period, they will continue until 2015 or untilthe maximum is reached**,**whichevercomes first. In connection with the agreement, we also granted TPC 92,857warrants to purchase an equivalent number of our common shares exercisableuntil December 4, 2006, at an exercise price of $29.05 per share. Thesewarrants expired, unexercised in December 2006.

**CAPITAL EXPENDITURES**

| ** **            | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------|------------|----------|------------|----------|------------|----------|------------|
| Capital  Expenditures |       | $        | 118,273    |     | $          | 306,296  |       | $ | 363,224 |   |
|                       |            |          |            |          |            |          |            |  |  |  |

 

Capital expenditures for 2006 were reduced from 2005as part of WorldHeart’s cost reduction programs. WorldHeart anticipates thatcapital expenditures for 2007 will increase slightly.

At December 31, 2005,WorldHeart occupied three facilities. WorldHeart’s Oakland, Californiaheadquarters facility consists of approximately 40,000 square feet ofmanufacturing, research and office 

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space. TheOakland leases were renewed in 2002 for a five-year term expiring on April 30,2007. WorldHeart is in the process of negotiating a renewal of the lease inOakland for approximately one-half of the currently leased space. The Salt LakeCity facility consists of 24,044 square feet of research and office space witha lease that expires on January 31, 2008. WorldHeart’s European locationis in Heesch, Netherlands consists of approximately 2,500 square feet ofwarehouse and office space. The Heesch lease was signed in 2004 for athree-year term expiring on December 31, 2007. The former Ottawa, Canadafacility originally comprised 22,755 square feet of manufacturing and officespace with a lease that originally expired on December 31, 2006. TheOttawa location was closed and the building lease was terminated as part of therestructuring plan in August 2004.

**MARKET RISK**

WorldHeart is subject to investment risk oninvestments that it makes with excess cash.

Investment risk is mitigated by close adherence to anestablished investment policy, which has been approved by the Board ofDirectors. The policy sets liquidity criteria, and counter party riskdiversification criteria and restricts investments to investment grade qualityinstruments of AA or better or R1 medium or better in the case of commercialpaper. Income exposure resulting from a decline in interest rates is notsignificant due to the short term maturity of investments, all of which were inmoney market funds during 2006.

WorldHeart has assets andliabilities denominated in foreign currencies, including primarily the Euro andCanadian dollar. WorldHeart’s current foreign currency exposure is immaterial.However, it may, in the future, enter into foreign exchange contracts in orderto mitigate its foreign exchange risks. WorldHeart did not enter into foreignexchange forward contracts or hedging transactions in 2006.

**CRITICAL ACCOUNTINGESTIMATES AND POLICIES**

WorldHeart’s managementmakes certain assumptions and estimates that impact the reported amounts ofassets, liabilities and stockholders’ equity, and revenues and expenses. Theseassumptions and estimates are inherently uncertain. Management judgements thatare currently the most critical are related to revenue recognition, inventoryvaluation, valuation of goodwill and long-lived assets, restructuring and stockbased compensation. Below we describe these policies as well as the estimatesinvolved. For a more detailed discussion on accounting policies, see the notesto the audited consolidated financial statements.

*Revenue recognition*

Revenue from product and service sales is recognizedwhen all of the following criteria are met: persuasive evidence of an agreement exists; delivery has occurred orservices have been rendered; the price is fixed and determinable; andcollection is reasonably assured. WorldHeart occasionally rents certainin-hospital equipment to customers. Rental income is included in revenue whenearned. WorldHeart provides for returns based on prior experience.

For multiple element offerings, WorldHeart allocatesthe proceeds to the elements based on their relative fair values. Revenue fromeach element is recognized when the product is delivered or services are deemedto have been completed.

The Levacor Rotary VAD product was initially shippedto clinical centers during the fourth quarter of 2006 and has been paid for bythose centers. WorldHeart has treated these payments as deferred clinical fees.Upon completion of the implant, a credit to research and development expenseswill be recognized.

Certain products arecovered by a limited warranty. Warranty costs are based on historicalexperience and estimated and recorded when the related sales are recognized. Anyadditional costs are recorded when incurred or when they can reasonably beestimated.

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*Inventory valuation*

During 2006, WorldHeartwrote-down the carrying value of its inventory by $4.6 million. Managementestimated future usage of inventory on hand by projecting future sales of itsNovacor product, and using these to predict raw material parts and componentsthat would be consumed in manufacturing product to meet these sales. Futurewrite-downs may be required based on actual sales achieved and will be recordedwhen they can be reasonable determined.

*Valuation ofgoodwill and long-lived assets*

In accordance with SFAS No. 144, “Accounting forthe Impairment or Disposal of Long-Lived Assets,” WorldHeart reviews thecarrying value of long-lived assets whenever events or changes in circumstancesindicate that the carrying amount of an asset may not be recoverable. Suchevents or circumstances might include a significant decline in market share, asignificant decline in revenue and/or profits, changes in technology,significant litigation or other items.

WorldHeart performs animpairment test of goodwill, at least, annually. At December 31, 2005, inevaluating whether there was an impairment of goodwill, management compared thecarrying amounts of such assets with the related enterprise value. Enterprisevalue was used to measure the value of the goodwill. Estimates of theenterprise value at December 31, 2005 were determined in part by adiscounted cash flow valuation using estimates of revenue and net income, a 30%discount rate and an eight-year period. The fair value method and the revenuemultiples method were also factored into the estimate of enterprise value. Uponcompletion of its goodwill impairment test, WorldHeart determined that theentire amount of the Novacor goodwill was impaired. A goodwill impairmentcharge of $17.2 million was recorded in 2005.

*Stock BasedCompensation*

WorldHeart accounts forits stock option plan in accordance with the Financial Accounting StandardsBoard’s (FASB) Statement of Financial Accounting Standards (SFAS) No. 123,“Accounting for Stock Based Compensation, Revised.”  Stock options issued to employees and in lieuof cash to non-employees for services performed are recorded at the fairvalue of the options at the time they are issued and are expensed as service isprovided. The fair value of options granted is determined using theBlack-Scholes model. Use of this model requires management estimates and assumptionsregarding: expected option life (estimated at six years), volatility (based onhistorical average daily stock prices), risk free interest rate (estimatedbased on United States Treasury rates), and dividend yields (nil). Optionforfeitures are estimated at 25% based on our historical forfeiture rates.

**OUTSTANDING SHARE DATA**

Theoutstanding share data as at December 31, 2006, December 31, 2005,and December 31, 2004, is a follows:

| ** **                                     | ** ** | **Number of shares outstanding** | ** ** |
|------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                     | ** ** | **2006**                                        | ** ** | **2005** | ** ** | **2004** | ** ** |
| Common shares                                  |       | 115,072,749                                     |       | 55,479,549 |   | 15,744,522 |   |
| Options to  purchase common shares             |       | 6,621,397                                       |       | 6,803,803 |   | 3,172,771 |   |
| Warrants to  purchase common shares            |       | 12,427,775                                      |       | 13,048,363 |   | 24,424,233 |   |
| Debentures  convertible to common shares       |       | —                                          |       | — |   | 10,655,000 |   |
| Accrued interest  convertible to common shares |       | —                                          |       | — |   | 1,997,813 |   |

 

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During the fourth quarterof 2006, 56.2 million common shares were issued in a private placementtransaction. The 2006 reduction in warrants was primarily due to 125,714warrants repurchased by the Company during 2006. In conjunction with theacquisition of MedQuest in July 2005, 10,655,000 warrants were exercisedand 10,891,097 debentures were converted into common shares.

**NEW ACCOUNTINGPRONOUNCEMENTS**

On September 15, 2006, the FASB issued Statementof Financial Accounting Standards No. 157, “Fair Value Measurement” (FAS157). The new standard applies whenever other standards require (or permit)assets or liabilities to be measured at fair value. FASB states FAS 157 “doesnot expand the use of fair value in any new circumstances.”  WorldHeart intends to adopt this standardeffective at the beginning fiscal 2008 and has not yet determined the impact,if any, that this standard will have on its financial statements.

In June 2006, the FASB issued Interpretation ofFinancial Accounting Standards No. 48, “Accounting for Uncertainty inIncome Taxes—an interpretation of FASB Statement No. 109.”  This interpretation clarifies the accountingfor uncertainty in income taxes recognized in an enterprise’s financialstatements in accordance with FASB Statement No. 109, Accounting forIncome Taxes. This interpretation prescribes a recognition threshold andmeasurement attribute for the financial statement recognition and measurementof a tax position taken or expected to be taken in a tax return. WorldHeartintends to adopt the interpretation for fiscal year 2007 and has not yetdetermined the impact, if any, that this standard will have on its financialstatements.

On September 13,2006, the U.S. Securities and Exchange Commission (SEC) released StaffAccounting Bulletin (SAB) No. 108 on Quantifying Financial StatementMisstatements (SAB 108). WorldHeart has adopted these guidelines effective forfiscal year ended December 31, 2006.

**Item 7.**                        FinancialStatements.

The financial statementsrequired to be filed pursuant to this Item 7 are included in this AnnualReport on Form 10-KSB on pages F-1 to F-29.

**Item 8.**                        ChangeIn and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

**Item 8A.**                Controls andProcedures.

*Evaluationof disclosure controls and procedures.*   Based ontheir evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Exchange Act) as of a date within 90 days of thefiling date of this Annual Report on Form 10-KSB, our president andchief executive officer (principal executive officer) and our chief financialofficer (principal accounting and financial officer) have concluded that ourdisclosure controls and procedures are designed to ensure that informationrequired to be disclosed by us in the reports that we file or submit under theExchange Act is recorded, processed, summarized and reported within the timeperiods specified in the Securities and Exchange Commission’s rules andforms and are operating in an effective manner at the reasonable assuranceslevel.

*Changes in internalcontrols over financial reporting:*   There was nochange in our internal controls over financial reporting that occurred duringthe quarter ended December 31, 2006, that has materially affected, or isreasonably likely to materially affect, our internal controls over financialreporting.

**Item 8B.**               OtherInformation.

None.

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**PART III**

**Item 9.**                        Directors,Executive Officers, Promoters, Control Persons and Corporate Governance;Compliance With Section 16(a) of the Exchange Act.

The information relating to our directors, nomineesfor election as directors, and executive officers under the headings “Electionof Directors,” “Executive Officers” and “Corporate Governance” in ourdefinitive proxy statement for the 2007 Annual Meeting of Shareholders isincorporated herein by reference to such proxy statement.

We have adopted a writtencode of business conduct and ethics that applies to our principal executiveofficer and principal financial and accounting officer, or persons performingsimilar functions. We intend to disclose any amendments to, or waivers from,our code of business conduct and ethics that are required to be publiclydisclosed pursuant to rules of the Securities and Exchange Commission andNasdaq by filing such amendment or waiver with the Securities and ExchangeCommission.

**Item 10.**                 ExecutiveCompensation.

The discussion under theheading “Executive Compensation” in our definitive proxy statement for the 2007Annual Meeting of Shareholders is incorporated herein by reference to suchproxy statement.

**Item 11.**                 SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters.

The discussion under theheading “Voting Shares, Record Date and Principal Holders” in our definitiveproxy statement for the 2007 Annual Meeting of Shareholders is incorporatedherein by reference to such proxy statement.

**Item 12.**                 CertainRelationships and Related Transactions, and Director Independence.

The discussion under theheading U.S. “Certain Relationships and Related Transactions, and DirectorIndependence” in our definitive proxy statement for the 2007 Annual Meeting ofShareholders is incorporated herein by reference to such proxy statement.

**Item13.**                 Exhibits. 
| Exhibit 2.1 | Asset Purchase Agreement between World Heart  Corporation and MedQuest, dated as of January 31, 2005 (incorporated by  reference to the Corporation’s Report on Form 6-K dated  February 1, 2005).                                                                   |
|------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Exhibit 3.1 | Article of  Continuance, dated December 14, 2005 (incorporated by reference to the  Corporation’s report on Form 8-K dated December 14, 2005  (Commission File No. 000-28882)).                                                                            |
| Exhibit 3.4 | By-laws of the  Corporation (incorporated by reference to the Corporation’s report on  Form 8-K dated December 21, 2005 (Commission File  No. 000-28882)).                                                                                                           |
| Exhibit 4.1 | Form of Common  Share Certificate (incorporated by reference to the Corporation’s report on  Form 10-KSB for the year ended December 31, 2005 (Commission  File No. 000-28882)).                                                                                |
| Exhibit 4.2 | Registration Rights  Agreement, dated September 22, 2003, between the Corporation and the  purchasers named therein (incorporated by reference to Exhibit 4.2  to the Corporation’s Registration Statement on Form F-3  (Commission File No. 333-111512)). |

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| Exhibit 4.3  | Warrant Indenture, dated  September 22, 2003, between the Corporation and CIBC Mellon Trust  Company (incorporated by reference to Exhibit 4.3 to the  Corporation’s Registration Statement on Form F-3 (Commission File  No. 333-111512)).                                                   |
|-------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Exhibit 4.4  | U.S. Purchase Agreement  for Units, dated September 22, 2003 (incorporated by reference to  Exhibit 4.4 to the Corporation’s Registration Statement on  Form F-3 (Commission File No. 333-111512)).                                                                                                |
| Exhibit 4.5  | Agency Agreement, dated  September 22, 2003, between the Corporation and Research Capital  Corporation (incorporated by reference to Exhibit 4.5 to the  Corporation’s Registration Statement on Form F-3 (Commission File  No. 333-111512)).                                                      |
| Exhibit 4.7  | Registration Rights  Agreement, dated September 15, 2004, between the Corporation and the  purchasers named therein (incorporated by reference to Exhibit 4.2  to the Corporation’s Registration Statement on Form F-3  (Commission File No. 333-119750)).                                         |
| Exhibit 4.9  | Purchase Agreement,  dated as of January 31, 2005, between the Corporation and Maverick  Venture Management, LLC (incorporated by reference to the Corporation’s  Report on Form 6-K dated February 1, 2005).                                                                                           |
| Exhibit 4.10 | Registration Rights  Agreement dated as of July 29, 2005, between the Corporation, MedQuest  Products, Inc. and Maverick Venture Management, LLC. (incorporated by  reference to Exhibit 4.1 to the Corporation’s Form 10-QSB for  the period ended June 30, 2005 (Commission File No.000-28882)). |
| Exhibit 4.11 | Form of  Registration Rights Agreement dated as of November 13, 2006, between the  Corporation and the investors named therein (incorporated by reference to  Exhibit 4.1 to the Corporation’s Form S-3 (Commission File  No. 333-138872)).                                                        |
| Exhibit 4.12 | Form of Purchase  Agreement, dated as of November 13, 2006, between the Corporation and  the investors named therein (incorporated by reference to Exhibit 4.2 to  the Corporation’s Report on Form S-3 (Commission File No. 333-138872)).                                                         |
| Exhibit 10.1 | Restated and Amended  Distribution Agreement, dated December 31, 2003, between the Corporation  and Edwards Lifesciences LLC (incorporated by reference to Exhibit 99.1  to Amendment No. 1 the Corporation’s Registration Statement on  Form F-3 (Commission File No. 333-111512)).               |
| Exhibit 10.2 | Consulting Agreement,  dated July 13, 2004, between the Corporation and Synergistic Business  Solutions (incorporated by reference to Exhibit 10.2 to the  Corporation’s Form 10-KSB/A for the year ended December 31,  2004 (Commission File No. 000-28882)).                                     |
| Exhibit 10.3 | Letter Agreement, dated  June 23, 2000, as amended on October 12, 2004, between the  Corporation and Phillip J. Miller (incorporated by reference to  Exhibit 10.7 to the Corporation’s Form 10-KSB/A for the year  ended December 31, 2004 (Commission File No. 000-28882)).                 |
| Exhibit 10.4 | Letter Agreement, dated  October 6, 2003, as amended on October 12, 2004, between the  Corporation and John Marinchak (incorporated by reference to  Exhibit 10.6 to the Corporation’s Form 10-KSB/A for the year  ended December 31, 2004 (Commission File No. 000-28882)).                  |
| Exhibit 10.5 | Employment and  Arbitration Agreement dated 2006 between the Corporation and Petrus Jansen  (incorporated by reference to the Corporation’s Form 10-QSB for  the period ended June 30, 2006 (Commission File No. 000-28882)).                                                                                |

37

----

 
| Exhibit 10.6  | Letter Agreement dated  June 23, 2000, as amended on October 28, 2004, between the  Corporation and Jal S. Jassawalla (incorporated by reference to  Exhibit 10.1 to the Corporation’s Form 10-QSB for the period  ended March 31, 2005 (Commission File No. 000-28882)).                                        |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Exhibit 10.7  | Letter Agreement dated  January 24, 2005, between the Corporation and Pratap Khanwilkar  (incorporated by reference to Exhibit 10.3 to the Corporation’s  Form 10-QSB for the period ended June 30, 2005 (Commission  File No. 000-28882)).                                                                           |
| Exhibit 10.8  | Letter Agreement, dated  May 19, 2005, between the Corporation and John Vajda (incorporated by  reference to Exhibit 10.1 to the Corporation’s Form 10-QSB  for the year ended June 30, 2005 (Commission File No. 000-28882)).                                                                                        |
| Exhibit 10.9  | Letter Agreement dated  May 27, 2005, between the Corporation and A. Richard Juelis  (incorporated by reference to Exhibit 10.1 to the Corporation’s  Form 10-QSB for the period ended June 30, 2005 (Commission  File No. 000-28882)).                                                                               |
| Exhibit 10.10 | Form of  indemnification agreement (incorporated by reference to the Corporation’s  report on Form 8-K dated December 21, 2005 (Commission File  No. 000-28882)).                                                                                                                                                          |
| Exhibit 10.11 | License Agreement dated  March 31, 1999, as amended on June 8, 2005, between the Corporation  and the University of Utah Research Foundation (incorporated by reference to  the Corporation’s report on Form 10-KSB for the year ended  December 31,2005 (Commission File No. 000-28882)).                            |
| Exhibit 10.12 | License Agreement dated  March 31, 1999, between the Corporation and the University of Virginia  Patent Foundation (incorporated by reference to the Corporation’s report on  Form 10-KSB for the year ended December 31,2005 (Commission  File No. 000-28882)).                                                           |
| Exhibit 10.13 | License Agreement dated  February 13, 2002, between the Corporation and University of Pittsburgh  (incorporated by reference to the Corporation’s report on Form 10-KSB  for the year ended December 31,2005 (Commission File No. 000-28882)).                                                                             |
| Exhibit 10.14 | Operating Agreement of  Heart Lung Institute, LLC dated October 13,1998, as amended  July 15, 2005, between the Corporation and the Heart and Lung Research  foundation (incorporated by reference to the Corporation’s report on  Form 10-KSB for the year ended December 31,2005 (Commission  File No. 000-28882)). |
| Exhibit 10.15 | World Heart Corporation  2006 Equity Incentive Plan (formerly known as World Heart Corporation  Employee Stock Option Plan) (incorporated by reference to Exhibit 99.2  to the Corporation’s Form 8-K dated December 20, 2006  (Commission File No. 000-28882)).                                                           |
| Exhibit 10.16 | Form of Stock  Option Grant Notice to World Heart Corporation 2006 Equity Incentive Plan  (incorporated by reference to Exhibit 99.1 to the Corporation’s  Form 8-K dated February 7, 2007 (Commission File No. 000-28882)).                                                                                          |
| Exhibit 10.17 | Form of Restricted  Stock Award Agreement to World Heart Corporation 2006 Equity Incentive Plan  (incorporated by reference to Exhibit 99.2 to the Corporation’s  Form 8-K dated February 7, 2007 (Commission File No. 000-28882)).                                                                                   |
| Exhibit 14.1  | Amended  and Restated Code of Conduct of the Corporation, adopted on  October 26, 2004. (incorporated by reference to Exhibit 99.1  to the Corporation’s Form 10-KSB for the year ended  December 31, 2004 (Commission File No 000-28882).                                                                       |
| Exhibit 21.1  | List of All Subsidiaries  of World Heart Corporation.*                                                                                                                                                                                                                                                                                              |
| Exhibit 23.1  | Consent of Independent  Accountants.*                                                                                                                                                                                                                                                                                                               |

38

----

 
| Exhibit 24.1 | Power of Attorney  (reference is made to the signature page to this Form 10-KSB).*                                         |
|-------------------|--------------------------------------------------------------------------------------------------------------------------------------|
| Exhibit 31.1 | Certification of  Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.*                      |
| Exhibit 31.2 | Certification of  Principal Financial Officer pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.*                      |
| Exhibit 32.1 | Certification of  Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002, 18 U.S.C. 1350.*      |
| Exhibit 32.2 | Certification of  Principal Financial Officer pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002, 18 U.S.C. 1350.* |

----

* Filed herewith

**Item 14.**                 PrincipalAccountant Fees and Services.

The discussion under the heading “Appointment ofAuditors” in our definitive proxy statement for the 2007 Annual Meeting ofShareholders in incorporated herein by reference to such proxy statement.

39

----

**SIGNATURES**

Inaccordance with Section 13 or 15(d) of the Exchange Act, theregistrant caused this report to be signed on its behalf by the undersigned,duly authorized.

|        |   | WORLD HEART  CORPORATION               |
|--------|--------|----------------------------------------|
|   |   | (Registrant)                           |
|   |   |                                   |
|   |   | By /s/ JAL S. JASSAWALLA               |
|   |   | President and  Chief Executive Officer |
|   |   | (Signature and  Title)                 |
|   |   |                                   |
|   |   | Date March 29, 2007               |

 

We, the undersigned, directors and officers of WorldHeart Corporation do hereby severally constitute and appoint JAL S. JASSAWALLAand A. RICHARD JUELIS and each or any of them, our true and lawful attorneysand agents, with full power of substitution and resubstitution, for him or herand in his or her name, place and stead, in any and all capacities, to sign anyand all amendments to the Registrant’s Annual Report on Form 10-KSBfor the fiscal year ended December 31, 2006, and to file the same with allexhibits thereto, and all other documents in connection therewith, with theSecurities and Exchange Commission, granting unto said attorneys and agents,and each or any of them, full power and authority to do and perform each andevery act and thing requisite and necessary to be done, as fully to all intentsand purposes as he or she might or could do in person, hereby ratifying andconfirming all that said attorneys and agents, and each of them, or substituteor substitutes, may lawfully do or cause to be done by virtue hereof.

Inaccordance with the Exchange Act, this report has been signed below by thefollowing persons on behalf of the registrant and in the capacities and datesindicated.

|                               | **Name** | ** **                                           | ** ** | ** **           | **Title** | ** ** | ** ** | ** ** | **Date** | ** ** |
|-------------------------------|----------|------------------------------------------------------|------------|----------------------|-----------|------------|------------|------------|----------|------------|
| /s/ JAL S.  JASSAWALLA   |     | President, Chief  Executive Officer and Director     |       | March 29,  2007 |
| Jal  S. Jassawalla            |     | (principal executive officer)                        |       |                 |
| /s/ A. RICHARD  JUELIS   |     | Vice President,  Finance and Chief Financial Officer |       | March 29,  2007 |
| A.  Richard Juelis            |     | (principal financial and accounting officer)         |       |                 |
| /s/ WILLIAM  C. GARRIOCK |     | Director                                             |       | March 29,  2007 |
| William  C. Garriock          |     |                                                 |       |                 |
|                          |     |                                                 |       |                 |
| /s/ ROBERT  J. MAJTELES  |     | Director                                             |       | March 29,  2007 |
| Robert  J. Majteles           |     |                                                 |       |                 |
|                          |     |                                                 |       |                 |
| /s/ C. IAN  ROSS         |     | Chairman of the  Board and Director                  |       | March 29,  2007 |
| C. Ian Ross                   |     |                                                 |       |                 |

 

40

----

**EXHIBITINDEX**
| Exhibit 2.1  |   | Asset Purchase Agreement between World Heart  Corporation and MedQuest, dated as of January 31, 2005 (incorporated by  reference to the Corporation’s Report on Form 6-K dated February 1,  2005).                                                                                                           |
|-------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Exhibit 3.1  |   | Article of  Continuance, dated December 14, 2005 (incorporated by reference to the  Corporation’s report on Form 8-K dated December 14, 2005  (Commission File No. 000-28882)).                                                                                                                    |
| Exhibit 3.4  |   | By-laws of the  Corporation (incorporated by reference to the Corporation’s report on  Form 8-K dated December 21, 2005 (Commission File  No. 000-28882)).                                                                                                                                                   |
| Exhibit 4.1  |   | Form of Common  Share Certificate (incorporated by reference to the Corporation’s report on  Form 10-KSB for the year ended December 31, 2005 (Commission File  No. 000-28882)).                                                                                                                        |
| Exhibit 4.2  |   | Registration Rights  Agreement, dated September 22, 2003, between the Corporation and the  purchasers named therein (incorporated by reference to Exhibit 4.2  to the Corporation’s Registration Statement on Form F-3 (Commission  File No. 333-111512)).                                         |
| Exhibit 4.3  |   | Warrant Indenture, dated  September 22, 2003, between the Corporation and CIBC Mellon Trust  Company (incorporated by reference to Exhibit 4.3 to the  Corporation’s Registration Statement on Form F-3 (Commission File  No. 333-111512)).                                                   |
| Exhibit 4.4  |   | U.S. Purchase Agreement  for Units, dated September 22, 2003 (incorporated by reference to  Exhibit 4.4 to the Corporation’s Registration Statement on  Form F-3 (Commission File No. 333-111512)).                                                                                                |
| Exhibit 4.5  |   | Agency Agreement, dated  September 22, 2003, between the Corporation and Research Capital  Corporation (incorporated by reference to Exhibit 4.5 to the  Corporation’s Registration Statement on Form F-3 (Commission File  No. 333-111512)).                                                      |
| Exhibit 4.7  |   | Registration Rights  Agreement, dated September 15, 2004, between the Corporation and the  purchasers named therein (incorporated by reference to Exhibit 4.2  to the Corporation’s Registration Statement on Form F-3 (Commission  File No. 333-119750)).                                         |
| Exhibit 4.9  |   | Purchase Agreement,  dated as of January 31, 2005, between the Corporation and Maverick  Venture Management, LLC (incorporated by reference to the Corporation’s  Report on Form 6-K dated February 1, 2005).                                                                                           |
| Exhibit 4.10 |   | Registration Rights  Agreement dated as of July 29, 2005, between the Corporation, MedQuest  Products, Inc. and Maverick Venture Management, LLC. (incorporated by  reference to Exhibit 4.1 to the Corporation’s Form 10-QSB for the  period ended June 30, 2005 (Commission File No.000-28882)). |
| Exhibit 4.11 |   | Form of  Registration Rights Agreement dated as of November 13, 2006, between the  Corporation and the investors named therein (incorporated by reference to  Exhibit 4.1 to the Corporation’s Form S-3 (Commission File  No. 333-138872)).                                                        |
| Exhibit 4.12 |   | Form of Purchase  Agreement, dated as of November 13, 2006, between the Corporation and  the investors named therein (incorporated by reference to Exhibit 4.2 to  the Corporation’s Report on Form S-3 (Commission File  No. 333-138872)).                                                        |

41

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| Exhibit 10.1  |   | Restated and Amended  Distribution Agreement, dated December 31, 2003, between the Corporation  and Edwards Lifesciences LLC (incorporated by reference to Exhibit 99.1  to Amendment No. 1 the Corporation’s Registration Statement on  Form F-3 (Commission File No. 333-111512)).       |
|--------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Exhibit 10.2  |   | Consulting Agreement,  dated July 13, 2004, between the Corporation and Synergistic Business  Solutions (incorporated by reference to Exhibit 10.2 to the  Corporation’s Form 10-KSB/A for the year ended December 31, 2004  (Commission File No. 000-28882)).                             |
| Exhibit 10.3  |   | Letter Agreement, dated  June 23, 2000, as amended on October 12, 2004, between the  Corporation and Phillip J. Miller (incorporated by reference to  Exhibit 10.7 to the Corporation’s Form 10-KSB/A for the year ended  December 31, 2004 (Commission File No. 000-28882)).         |
| Exhibit 10.4  |   | Letter Agreement, dated  October 6, 2003, as amended on October 12, 2004, between the  Corporation and John Marinchak (incorporated by reference to  Exhibit 10.6 to the Corporation’s Form 10-KSB/A for the year ended  December 31, 2004 (Commission File No. 000-28882)).          |
| Exhibit 10.5  |   | Employment and  Arbitration Agreement dated 2006, between the Corporation and Petrus Jansen  (incorporated by reference to the Corporation’s Form 10-QSB for the  period ended June 30, 2006 (Commission File No. 000-28882)).                                                                       |
| Exhibit 10.6  |   | Letter Agreement dated  June 23, 2000, as amended on October 28, 2004, between the  Corporation and Jal S. Jassawalla (incorporated by reference to  Exhibit 10.1 to the Corporation’s Form 10-QSB for the period ended  March 31, 2005 (Commission File No. 000-28882)).             |
| Exhibit 10.7  |   | Letter Agreement dated  January 24, 2005, between the Corporation and Pratap Khanwilkar  (incorporated by reference to Exhibit 10.3 to the Corporation’s  Form 10-QSB for the period ended June 30, 2005 (Commission  File No. 000-28882)).                                                |
| Exhibit 10.8  |   | Letter Agreement, dated  May 19, 2005, between the Corporation and John Vajda (incorporated by  reference to Exhibit 10.1 to the Corporation’s Form 10-QSB for the  year ended June 30, 2005 (Commission File No. 000-28882)).                                                             |
| Exhibit 10.9  |   | Letter Agreement dated  May 27, 2005, between the Corporation and A. Richard Juelis  (incorporated by reference to Exhibit 10.1 to the Corporation’s  Form 10-QSB for the period ended June 30, 2005 (Commission File  No. 000-28882)).                                                    |
| Exhibit 10.10 |   | Form of  indemnification agreement (incorporated by reference to the Corporation’s  report on Form 8-K dated December 21, 2005 (Commission File  No. 000-28882)).                                                                                                                               |
| Exhibit 10.11 |   | License Agreement dated  March 31, 1999, as amended on June 8, 2005, between the Corporation  and the University of Utah Research Foundation (incorporated by reference to  the Corporation’s report on Form 10-KSB for the year ended  December 31,2005 (Commission File No. 000-28882)). |
| Exhibit 10.12 |   | License Agreement dated  March 31, 1999, between the Corporation and the University of Virginia  Patent Foundation (incorporated by reference to the Corporation’s report on  Form 10-KSB for the year ended December 31,2005 (Commission File  No. 000-28882)).                                |

42

----

 
| Exhibit 10.13 |   | License Agreement dated  February 13, 2002, between the Corporation and University of Pittsburgh  (incorporated by reference to the Corporation’s report on Form 10-KSB  for the year ended December 31,2005 (Commission File  No. 000-28882)).                                                                            |
|--------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Exhibit 10.14 |   | Operating Agreement of  Heart Lung Institute, LLC dated October 13,1998, as amended  July 15, 2005, between the Corporation and the Heart and Lung Research  foundation (incorporated by reference to the Corporation’s report on  Form 10-KSB for the year ended December 31,2005 (Commission File  No. 000-28882)). |
| Exhibit 10.15 |   | World Heart Corporation  2006 Equity Incentive Plan (formerly known as World Heart Corporation  Employee Stock Option Plan) (incorporated by reference to Exhibit 99.2  to the Corporation’s Form 8-K dated December 20, 2006 (Commission  File No. 000-28882)).                                                           |
| Exhibit 10.16 |   | Form of Stock  Option Grant Notice to World Heart Corporation 2006 Equity Incentive Plan  (incorporated by reference to Exhibit 99.1 to the Corporation’s  Form 8-K dated February 7, 2007 (Commission File  No. 000-28882)).                                                                                         |
| Exhibit 10.17 |   | Form of Restricted  Stock Award Agreement to World Heart Corporation 2006 Equity Incentive Plan  (incorporated by reference to Exhibit 99.2 to the Corporation’s  Form 8-K dated February 7, 2007 (Commission File  No. 000-28882)).                                                                                  |
| Exhibit 14.1  |   | Amended  and Restated Code of Conduct of the Corporation, adopted on  October 26, 2004. (incorporated by reference to Exhibit 99.1  to the Corporation’s Form 10-KSB for the year ended December 31,  2004 (Commission File No 000-28882).                                                                       |
| Exhibit 21.1  |   | List of All Subsidiaries  of World Heart Corporation.                                                                                                                                                                                                                                                                                               |
| Exhibit 23.1  |   | Consent of Independent  Accountants.                                                                                                                                                                                                                                                                                                                |
| Exhibit 24.1  |   | Power of Attorney  (reference is made to the signature page to this Form 10-KSB).                                                                                                                                                                                                                                                         |
| Exhibit 31.1  |   | Certification of  Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                                                                                                                                                                                                      |
| Exhibit 31.2  |   | Certification of  Principal Financial Officer pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                      |
| Exhibit 32.1  |   | Certification of Principal  Executive Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002, 18 U.S.C. 1350.                                                                                                                                                                                                                      |
| Exhibit 32.2  |   | Certification of  Principal Financial Officer pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002, 18 U.S.C. 1350.                                                                                                                                                                                                                 |

 

43

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**WORLDHEART CORPORATION**
|                                                                                                                       | ** ** | **Page** |
|-----------------------------------------------------------------------------------------------------------------------|------------|----------|
| Management’s Statement of  Responsibility                                                                        |       | F-2      |
| Auditors’ Report to the  Shareholders of World Heart Corporation                                                 |       | F-3      |
| AUDITED CONSOLIDATED FINANCIAL STATEMENTS:                                                                            |       |     |
| Consolidated Balance Sheets as of  December 31, 2006 and 2005                                                    |       | F-4      |
| Consolidated Statements of  Operations for the years ended December 31, 2006, 2005 and 2004                 |       | F-5      |
| Consolidated Statements of  Shareholders’ Equity for the years ended December 31, 2006, 2005  and 2004 |       | F-6      |
| Consolidated Statements of  Cash Flows for the years ended December 31, 2006, 2005 and 2004                 |       | F-7      |
| Notes  to Consolidated Financial Statements                                                                           |       | F-8      |

 

F-1

----

**MANAGEMENT’SSTATEMENT OF RESPONSIBILITY**

Management is responsible for the preparation of theconsolidated financial statements and all other information in the annualreport. The financial statements have been prepared in accordance withgenerally accepted accounting principles in the United States (“U.S. GAAP”) andreflect management’s best estimates and judgments. The financial informationpresented elsewhere in the annual report is consistent with the consolidatedfinancial statements.

Management has developed and maintains a system ofinternal controls to provide reasonable assurance that all assets aresafeguarded and to facilitate the preparation of relevant, reliable and timelyfinancial information. Consistent with the concept of reasonable assurance, theCorporation recognizes that the relative cost of maintaining these controlsshould not exceed their expected benefits.

The Audit Committee, which is comprised of independentdirectors, reviews the consolidated financial statements, considers the reportof the external auditors, assesses the adequacy of the Corporation’s internalcontrols, and recommends to the Board of Directors the independent auditors forappointment by the shareholders. The consolidated financial statements werereviewed by the Audit Committee and approved by the Board of Directors.

Theconsolidated financial statements were audited by PricewaterhouseCoopers LLP,the external auditors, on behalf of the shareholders. 
| Original signed by:      | Original signed  by:     |
|--------------------------|--------------------------|
| Jal S. Jassawalla        | A. Richard Juelis        |
| Chief Executive  Officer | Chief Financial  Officer |

 

March 29, 2007

F-2

----

**AUDITORS’ REPORT TOTHE SHAREHOLDERS OF WORLD HEART CORPORATION**

We have audited the accompanying consolidated balancesheets of World Heart Corporation and its subsidiaries as of December 31,2006 and 2005, and the related consolidated statements of operations,shareholders’ equity and cash flow for the years ended December 31, 2006,2005 and 2004. These financial statements are the responsibility of theCorporation’s management. Our responsibility is to express an opinion on thesefinancial statements based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe our audits provide a reasonable basis for our audit opinion.

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of World Heart Corporation and its subsidiaries at December 31,2006 and 2005 and the results of their operations and their cash flows for theyears ended December 31, 2006, 2005 and 2004 in conformity with accountingprinciples generally accepted in the United States.

Theaccompanying financial statements have been prepared assuming that theCorporation will continue as a going concern. As discussed in Note 1 to thefinancial statements, the Corporation has suffered recurring losses that raisesubstantial doubt about its ability to continue as a going concern. Management’splans in regard to these matters are also described in Note 1. The financialstatements do not include any adjustments that might result from the outcome ofthis uncertainty.
| Ottawa, Canada      | PRICEWATERHOUSECOOPERS LLP |
|---------------------|----------------------------|
| March 29, 2007 | Chartered Accountants      |

 

F-3

----

**WORLD HEART CORPORATIONCONSOLIDATED BALANCE SHEETS(United States Dollars)**

| ** **                                                                                                    | ** ** | **December 31, 2006** | ** **   | **December 31, 2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|---------------------------------|--------------|---------------------------------|------------|
| **ASSETS**                                                                                                    | ** ** |                            | ** **   | ** **                      |       |   | ** ** | ** ** |   |
| **Current assets**                                                                                            | ** ** |                            | ** **   | ** **                      |       |   | ** ** | ** ** |   |
| Cash and cash equivalents                                                                                     |       |                            | $            | 12,216,671                      |       |   |   | $ | 10,661,682 |   |   |
| Trade and other receivables                                                                                   |       |                            | 2,297,769    |                            |       |   | 3,896,281 |   |   |
| Prepaid expenses                                                                                              |       |                            | 703,689      |                            |       |   | 778,007 |   |   |
| Inventory                                                                                                     |       |                            | 3,088,359    |                            |       |   | 8,215,995 |   |   |
|                                                                                                          |       |                            | 18,306,488   |                            |       |   | 23,551,965 |   |   |
| **Long-term assets**                                                                                          |       |                            |         |                            |       |   |   |   |   |
| Cash pledged as collateral for lease                                                                          |       |                            | 750,000      |                            |       |   | 750,000 |   |   |
| Capital assets                                                                                                |       |                            | 950,470      |                            |       |   | 1,837,540 |   |   |
| Intangible assets                                                                                             |       |                            | 490,764      |                            |       |   | 682,188 |   |   |
|                                                                                                          |       |                            | 2,191,234    |                            |       |   | 3,269,728 |   |   |
| **Total  assets**                                                                                             | ** ** |                            | **$**        | **20,497,722**                  | ** ** |   |   | **$** | **26,821,693** | ** ** |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                | ** ** |                            | ** **   | ** **                      |       |   | ** ** | ** ** |   |
| **Current liabilities**                                                                                       | ** ** |                            | ** **   | ** **                      |       |   | ** ** | ** ** |   |
| Accounts payable and accrued liabilities                                                                      |       |                            | $            | 4,402,448                       |       |   |   | $ | 3,754,620 |   |   |
| Indirect taxes payable                                                                                        |       |                            | —       |                            |       |   | 343,082 |   |   |
| Accrued compensation                                                                                          |       |                            | 919,146      |                            |       |   | 806,367 |   |   |
| Deferred clinical fees                                                                                        |       |                            | 309,998      |                            |       |   | — |   |   |
| Deferred revenue                                                                                              |       |                            | 159,801      |                            |       |   | 1,205,107 |   |   |
| **Total  liabilities**                                                                                        |       |                            | 5,791,393    |                            |       |   | 6,109,176 |   |   |
| **Commitments  and Contingencies**                                                                            | * *   | * *                        | * *     | * *                        | * *   | * * | * * | * * | * * |
| **Shareholders’  equity**                                                                                |       |                            |         |                            |       |   |   |   |   |
| Share capital:                                                                                                |       |                            |         |                            |       |   |   |   |   |
| Issued and outstanding—115,072,749 common shares (December 31,  2005—55,479,549 common shares) |       |                            | 290,750,131  |                            |       |   | 276,908,002 |   |   |
| Additional paid-in-capital                                                                                    |       |                            | 2,375,497    |                            |       |   | 2,138,765 |   |   |
| Cumulative other comprehensive income                                                                         |       |                            | (6,285,577   | )                               |       |   | (6,285,577 | ) |   |
| Accumulated deficit                                                                                           |       |                            | (272,133,722 | )                               |       |   | (252,048,673 | ) |   |
| Total shareholders’ equity                                                                               |       |                            | 14,706,329   |                            |       |   | 20,712,517 |   |   |
| **Total  liabilities and shareholders’ equity**                                                          | ** ** |                            | **$**        | **20,497,722**                  | ** ** |   |   | **$** | **26,821,693** | ** ** |   |

 

(The accompanying notes are an integral part of theseconsolidated financial statements.)

| Signed on behalf of the  Board of Directors   Original signed by C. Ian Ross and Jal S. Jassawalla |
|----------------------------------------------------------------------------------------------------|
| ** **                                                                                         | ** ** | ** ** |
| **Director**                                                                                       | ** ** | **Director** |

 

F-4

----

**WORLD HEART CORPORATIONCONSOLIDATED STATEMENTS OF OPERATIONS(United States Dollars)**

| ** **                                                 | ** ** | **Year Ended  December 31,** | ** **  | **Year Ended  December 31,** | ** ** | **Year Ended  December 31,** | ** ** |
|------------------------------------------------------------|------------|----------------------------------------|-------------|----------------------------------------|------------|----------------------------------------|------------|
| ** **                                                 | ** ** | **2006**                               | ** **  | **2005**                               | ** ** | **2004**                               | ** ** |
| **Revenue**                                                |       | $                                      | 8,616,038   |                                   | $          | 11,645,954                             |       | $ | 9,575,761 |   |
| **Cost of  goods sold**                                    |       | (10,200,695                            | )           | (8,478,855                             | )          | (7,680,384                             | )          |
| **Gross  margin**                                          |       | (1,584,657                             | )           | 3,167,099                              |       | 1,895,377                              |       |
| **Operating  expenses**                                    | ** ** | ** **                             | ** **  | ** **                             | ** ** | ** **                             | ** ** |
| Selling, general and administrative                        |       | 8,664,306                              |        | 12,041,345                             |       | 13,363,796                             |       |
| Research and development                                   |       | 9,002,373                              |        | 7,388,385                              |       | 5,838,754                              |       |
| Restructuring costs                                        |       | 646,057                                |        | 333,030                                |       | 1,787,129                              |       |
| Amortization of intangibles                                |       | 191,424                                |        | 338,507                                |       | 515,012                                |       |
| Acquired in-process research and development               |       | —                                 |        | 18,147,341                             |       | —                                 |       |
| Goodwill impairment                                        |       | —                                 |        | 17,179,643                             |       | —                                 |       |
| **Total operating expenses**                               |       | 18,504,160                             |        | 55,428,251                             |       | 21,504,691                             |       |
| **Operating loss**                                         |       | (20,088,817                            | )           | (52,261,152                            | )          | (19,609,314                            | )          |
| **Other  income (expenses)**                               | ** ** | ** **                             | ** **  | ** **                             | ** ** | ** **                             | ** ** |
| Foreign exchange gain (loss)                               |       | 54,761                                 |        | (144,268                               | )          | (308,338                               | )          |
| Investment and other income (expense)                      |       | 191,344                                |        | 369,671                                |       | 99,427                                 |       |
| Loss on disposal of capital assets                         |       | (247,640                               | )           | (959                                   | )          | (46,431                                | )          |
| Interest expense and financing costs                       |       | 5,303                                  |        | (797,067                               | )          | (6,277,142                             | )          |
| **Net  loss for the year**                                 |       | (20,085,049                            | )           | (52,833,775                            | )          | (26,141,798                            | )          |
| **Effect of warrant exchange**                             |       | —                                 |        | (5,860,250                             | )          | —                                 |       |
| **Net  income (loss) applicable to common shareholders**   |       | $                                      | (20,085,049 | )                                      | $          | (58,694,025                            | )          | $ | (26,141,798 | ) |
| **Weighted average number of common shares   outstanding** |       | 58,227,308                             |        | 33,369,318                             |       | 15,373,689                             |       |
| **Basic  and diluted loss per common share**               |       | $                                      | (0.34       | )                                      | $          | (1.76                                  | )          | $ | (1.70 | ) |

 

(The accompanying notes are an integral part of these consolidated financial statements.)

F-5

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**WORLD HEART CORPORATIONCONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY(United States Dollars)**

| ** **                                                                   | ** ** | ** **            | ** ** | ** **  | ** **      | ** **        | ** ** | **Cumulative**  | ** ** | ** **  | ** ** | ** **             | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------|------------|-------------|-----------------|-------------------|------------|-----------------|------------|-------------|------------|------------------------|------------|
| ** **                                                                   | ** ** | ** **            | ** ** | ** **  | ** **      | **Additional**    | ** ** | **Other**       | ** ** | ** **  | ** ** | **Shareholders’** | ** ** |
| ** **                                                                   | ** ** | **Common Stock** | ** ** | **Paid-in** | ** **      | **Comprehensive** | ** ** | **Accumulated** | ** ** | **Equity**  | ** ** |
| ** **                                                                   | ** ** | **Number**            | ** ** | **Amount**  | ** **      | **Capital**       | ** ** | **Income**      | ** ** | **Deficit** | ** ** | **(Deficiency)**       | ** ** |
| **Balance  as at December 31,  2003**                                   |       | 15,023,689            |       | $           | 212,457,492     |              | $          | 1,081,977       |       |        | $          | (6,285,577             | )          |   | $ | (167,212,850 | ) |   | $ | 40,041,042 |   |   |
| Common shares and  warrants issued in connection with convertible debentures |       | 470,874               |       | 659,166     |            | 4,548,920         |       |            | —     |        |       | —                 |       |   | 5,208,086 |   |   |
| Value of  debentures’ beneficial conversion feature                     |       | —                |       | —      |            | 5,821,370         |       |            | —     |        |       | —                 |       |   | 5,821,370 |   |   |
| Common shares  issued upon exercise of warrants                              |       | 250,000               |       | 1,499,403   |            | —            |       |            | —     |        |       | —                 |       |   | 1,499,403 |   |   |
| Warrants  repurchased                                                        |       | —                |       | —      |            | (1,000            | )          |            | —     |        |       | —                 |       |   | (1,000 | ) |   |
| Net loss for the  year ended December 31, 2004                          |       | —                |       | —      |            | —            |       |            | —     |        |       | (26,141,798            | )          |   | (26,141,798 | ) |   |
| **Balance  as at December 31, 2004**                                    |       | 15,744,563            |       | 214,616,061 |            | 11,451,267        |       |            | (6,285,577 | )           |       | (193,354,648           | )          |   | 26,427,103 |   |   |
| Common shares  issued upon exercise of warrants                              |       | 10,655,000            |       | 20,884,420  |            | (10,229,420       | )          |            | —     |        |       | —                 |       |   | 10,655,000 |   |   |
| Common shares  issued in private placement                                   |       | 8,888,889             |       | 12,000,000  |            | —            |       |            | —     |        |       | —                 |       |   | 12,000,000 |   |   |
| Common shares  issued upon conversion of convertible debentures and interest |       | 10,891,097            |       | 14,769,475  |            | (5,821,370        | )          |            | —     |        |       | —                 |       |   | 8,948,105 |   |   |
| Common shares  issued to purchase MedQuest assets                            |       | 9,300,000             |       | 14,694,000  |            | —            |       |            | —     |        |       | —                 |       |   | 14,694,000 |   |   |
| Effect of warrant  exchange                                                  |       | —                |       | —      |            | 5,860,250         |       |            | —     |        |       | (5,860,250             | )          |   | — |   |   |
| Non-cash stock  compensation                                                 |       | —                |       | —      |            | 880,038           |       |            | —     |        |       | —                 |       |   | 880,038 |   |   |
| Registration fees                                                            |       | —                |       | (55,954     | )               | —            |       |            | —     |        |       | —                 |       |   | (55,954 | ) |   |
| Warrants  repurchased                                                        |       | —                |       | —      |            | (2,000            | )          |            | —     |        |       | —                 |       |   | (2,000 | ) |   |
| Net loss for the  year ended December 31, 2005                          |       | —                |       | —      |            | —            |       |            | —     |        |       | (52,833,775            | )          |   | (52,833,775 | ) |   |
| **Balance  as at December 31, 2005**                                    |       | 55,479,549            |       | 276,908,002 |            | 2,138,765         |       |            | (6,285,577 | )           |       | (252,048,673           | )          |   | 20,712,517 |   |   |
| Common shares  issued in private placement                                   |       | 59,593,200            |       | 14,055,000  |            | —            |       |            | —     |        |       | —                 |       |   | 14,055,000 |   |   |
| Non-cash stock  compensation                                                 |       | —                |       | —      |            | 237,732           |       |            | —     |        |       | —                 |       |   | 237,732 |   |   |
| Registration fees                                                            |       | —                |       | (212,871    | )               | —            |       |            | —     |        |       | —                 |       |   | (212,871 | ) |   |
| Warrants  repurchased                                                        |       | —                |       | —      |            | (1,000            | )          |            | —     |        |       | —                 |       |   | (1,000 | ) |   |
| Net loss for the  year ended December 31, 2006                          |       | —                |       | —      |            | —            |       |            | —     |        |       | (20,085,049            | )          |   | (20,085,049 | ) |   |
| **Balance  as at December 31,  2006**                                   | ** ** | **115,072,749**       | ** ** | **$**       | **290,750,131** | ** **        | **$**      | **2,375,497**   | ** ** | ** **  | **$**      | **(6,285,577**         | **)**      | ** ** | **$** | **(272,133,722** | **)** | ** ** | **$** | **14,706,329** |   |   |

 

(The accompanying notes are an integral part of these consolidated financial statements.)

F-6

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**WORLD HEART CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOW(United States Dollars)**

| ** **                                                                                                     | ** ** | **Year Ended December 31,** | ** **     |
|----------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|----------------|
| ** **                                                                                                     | ** ** | **2006**                                   | ** **     | **2005** | ** ** | **2004** | ** ** |
| **CASH FLOWS FROM (USED IN)**                                                                                  | ** ** | ** **                                 | ** **     | ** ** | ** ** | ** ** | ** ** |
| **Operating  activities**                                                                                      |       |                                       |           |   |   |   |   |
| Net loss for the period                                                                                        |       | $                                          | (20,085,049    | ) | $ | (52,833,775 | ) | $ | (26,141,798 | ) |
| Items not involving cash—                                                                                 |       |                                       |           |   |   |   |   |
| Amortization and depreciation                                                                                  |       | 772,803                                    |           | 1,033,441 |   | 1,390,508 |   |
| Loss on disposal of capital assets                                                                             |       | 247,640                                    |           | 959 |   | 46,431 |   |
| Acquired in-process research and development                                                                   |       | —                                     |           | 18,147,341 |   | — |   |
| Goodwill impairment                                                                                            |       | —                                     |           | 17,179,643 |   | — |   |
| Write down of capital                                                                                          |       | 176,324                                    |           | — |   | 438,273 |   |
| Write down of intangible assets                                                                                |       | —                                     |           | — |   | 109,093 |   |
| Write down of inventory                                                                                        |       | 4,625,824                                  |           | — |   | — |   |
| Non-cash expense on stock options                                                                              |       | 237,732                                    |           | 880,038 |   | 81,466 |   |
| Non-cash interest on debt                                                                                      |       | —                                     |           | 778,603 |   | 6,266,027 |   |
| Long-term receivable                                                                                           |       | —                                     |           | 318,553 |   | — |   |
| Unrealized foreign exchange loss (gain)                                                                        |       | (5,997                                     | )              | 65,168 |   | 7,956 |   |
| Change in operating components of working capital                                                              |       | 1,847,371                                  |           | (1,236,970 | ) | (5,132,726 | ) |
| **Cash used in operating activities**                                                                          | ** ** | **(12,183,352**                            | **)**          | **(15,666,999** | **)** | **(22,934,770** | **)** |
| **Investing  activities**                                                                                      |       |                                       |           |   |   |   |   |
| Redemption (purchase) of short-term investments                                                                |       | —                                     |           | 4,999,035 |   | 6,504,997 |   |
| Purchase of capital assets                                                                                     |       | (118,273                                   | )              | (306,296 | ) | (363,224 | ) |
| Repayment of bridge loan in connection with MedQuest  Acquisition                                              |       | —                                     |           | (3,500,000 | ) | — |   |
| Transaction costs paid in connection with MedQuest  Acquisition                                                |       | —                                     |           | (1,255,696 | ) | — |   |
| Cash pledged as collateral for lease                                                                           |       | —                                     |           | — |   | (222,003 | ) |
| **Cash used investing activities**                                                                             | ** ** | **(118,273**                               | **)**          | **(62,957** | **)** | **5,919,770** | ** ** |
| **Financing  activities**                                                                                      |       |                                       |           |   |   |   |   |
| Convertible debenture proceeds                                                                                 |       | —                                     |           | — |   | 13,318,750 |   |
| Common shares issued through private placement                                                                 |       | 14,055,000                                 |           | 12,000,000 |   | — |   |
| Common shares issued through exercise of warrants                                                              |       | —                                     |           | 10,655,000 |   | 1,498,403 |   |
| Repurchase of warrants                                                                                         |       | (1,000                                     | )              | (2,000 | ) | — |   |
| Payment of expenses related to convertible  debentures, financing, exercise of warrants and issuance of shares |       | (212,871                                   | )              | (55,955 | ) | (378,162 | ) |
| **Cash provided by financing activities**                                                                      | ** ** | **13,841,129**                             | ** **     | **22,597,045** | ** ** | **14,438,991** | ** ** |
| **Effect of exchange rates on cash and cash  equivalents**                                                     | ** ** | **15,485**                                 | ** **     | **(24,175** | **)** | **57,099** | ** ** |
| **Change in cash and cash equivalents for the  period**                                                        | ** ** | **1,554,989**                              | ** **     | **6,842,915** | ** ** | **(2,518,910** | **)** |
| **Cash and cash equivalents, beginning of the  period**                                                        | ** ** | **10,661,682**                             | ** **     | **3,818,767** | ** ** | **6,337,677** | ** ** |
| **Cash and cash equivalents, end of the period**                                                               | ** ** | **$**                                      | **12,216,671** | ** ** | **$** | **10,661,682** | ** ** | **$** | **3,818,767** | ** ** |
| **Supplementary Cash Flow Information**                                                                        |       |                                       |           |   |   |   |   |
| Convertible debentures settled with the issuance of  common shares                                             |       | $                                          | —         |   | $ | 8,627,117 |   | $ | — |   |
| Accrued interest on convertible debentures settled  with the issuance of common shares                         |       | —                                     |           | 320,988 |   | — |   |
| Purchase of  MedQuest assets with issuance of common shares                                                    |       | —                                     |           | 14,694,000 |   |   |   |

 

(The accompanying notes are an integral part of these consolidated financial statements.)

F-7

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**WORLD HEART CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

**1.**                 GOINGCONCERN

These consolidated financial statements have beenprepared on the basis of accounting principles applicable to a going concern,which assume that World Heart Corporation (“WorldHeart” or “the Corporation”)will continue in operation for the foreseeable future and will be able torealize its assets and discharge its liabilities in the normal course ofoperations.

During the year ended December 31, 2006, theCorporation incurred a net loss of $20.1 million and used cash in itsoperations of $12.2 million. At December 31, 2006, WorldHeart had cash andcash equivalents of $12.2 million and current liabilities of $5.8 million. TheCorporation expects to continue to generate operating losses at least through2007 and 2008. As a result, there is substantial doubt about the ability of theCorporation to meet its obligations as they come due and the appropriateness ofthe use of accounting principles applicable to a going concern.

On November 13, 2006, the Corporation enteredinto a purchase agreement with certain new and current investors for a privateplacement financing. The private placement was approved by shareholders at theCorporation’s Annual and Special Meeting held on December 20, 2006. Netproceeds from the financing were $13.8 million.

On November 14, 2006, the Corporation announced asignificant restructuring and realignment of its business operations to focuson development of its LevacorTM Rotary VADproduct and reduced commercial efforts on the Novacor product. Therestructuring program was directed at reducing manufacturing, selling andadministrative costs, associated with the Corporation’s Novacor® LVAS product. Theprogram included a reduction in workforce of 41 persons at its Oakland,California and Heesch, Netherlands locations. The costs attributable to therestructuring recorded during the fourth quarter, were $0.6 million. Inaddition, the Corporation wrote off approximately $4.6 million of raw material,in-process and finished goods inventory associated with the Novacor LVAS product,which management determined will not be utilized in future periods.

Despite the 2006 financing and restructuring, theCorporation will be required to raise additional capital to allow for theon-going satisfaction of its obligations on a timely basis. WorldHeart intendsto explore various financing alternatives, including equity financingtransactions and corporate collaborations, during 2007 to meet this cashrequirement. Equity financings could include, but are not limited to, privateinvestments in public equity transactions or strategic equity investments byinterested companies. Corporate collaborations could include licensing ourproducts for upfront and milestone payments, or co-development and co-fundingof our products. There can be no assurance that the alternatives theCorporation plans to explore will be successful.

These consolidatedfinancial statements do not reflect adjustments in the carrying values ofassets and liabilities, the reported revenues and expenses, and the balancesheet classifications used that would be necessary if the going concernassumption were not appropriate. These adjustments could be material.

**2.**                 NATUREOF OPERATIONS OF THE CORPORATION

WorldHeart is developingmechanical circulatory support systems focused on developing andcommercializing implantable ventricular assist devices (VADs), which aremechanical pumps that allow for the restoration of normal blood circulation topatients suffering from advanced heart failure. WorldHeart has facilities inOakland, California, Salt Lake City, Utah and Heesch, Netherlands. WorldHeartcurrently derives its revenue from its Novacor LVAS (left ventricular assistsystem) and related peripheral 

F-8

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**WORLD HEART CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

equipmentwhich it manufactures in Oakland and sells directly to medical clinics and hospitalsin the United States, Europe and Canada and through distributors in othercountries. The Corporation is focusing on the development of itsnext-generation LevacorTM Rotary VAD and expects to realize costrecoveries in 2007 from clinical use of the product.

**3.**                 SIGNIFICANTACCOUNTING POLICIES

**(a)**         Basisof presentation

These consolidatedfinancial statements have been prepared by management in accordance withaccounting principles generally accepted in the United States (U.S. GAAP), andinclude all assets, liabilities, revenues and expenses of the Corporation andits wholly owned subsidiaries; World Heart Inc. and World Heart B.V. Allmaterial intercompany transactions and balances have been eliminated.

**(b)**         Useof estimates

The preparation of theseconsolidated financial statements in conformity with U.S. GAAP requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the dates of the financial statements and the reported amounts of revenuesand expenses during the reporting periods. Actual results could differ fromthese estimates.

**(c)**          Cashequivalents and short-term investments

Cash equivalents andshort-term investments include money market funds, debt instruments ofcommercial enterprises, financial institutions and government entities. TheCorporation has established guidelines relative to credit ratings,diversification and maturities that are intended to mitigate risk and provideliquidity. Cash equivalents include highly liquid and highly rated investmentswith maturity periods of three months or less when purchased. Short-terminvestments include those investments with maturities in excess of three monthsbut less than one year.

**(d)**         Inventory

Inventory is valued at thelower of average cost and net realizable value.

**(e)**          Capitalassets

Capitalassets are recorded at cost. Amortization is calculated using the followingrates and bases: 

| Furniture and fixtures                |   | 20% declining balance             |
|---------------------------------------|--------|-----------------------------------|
| Computer equipment and  software      |   | 30% declining balance             |
| Manufacturing and  research equipment |   | 30% declining balance             |
| Leasehold improvements                |   | Straight-line over the lease term |

 

The carrying value ofcapital assets is assessed when factors indicating a possible impairment arepresent. The Corporation records an impairment loss in the period when it isdetermined that the carrying amounts may not be recoverable. The impairmentloss would be calculated as the amount by which the carrying amount exceeds theundiscounted future cash flows from the asset.

F-9

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**WORLD HEART CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(f)**            Goodwilland other intangible assets

Goodwill and intangible assets with an indefinite lifeare not amortized but are tested for impairment on at least an annual basis asrequired under Statement of Financial Accounting Standard No. 142 (“SFAS 142”).Intangible assets with a definite life are amortized over their legal orestimated useful lives, whichever is shorter.

The Corporation reviews the carrying amounts ofintangible assets with a definite life whenever events or changes incircumstances indicate that the carrying amount of an asset may not berecoverable. Such events or circumstances might include a significant declinein market share, a significant decline in profits, changes in technology,significant litigation or other items. The Corporation records an impairmentloss in the period when it is determined that the carrying amounts may not berecoverable. The impairment loss would be calculated as the amount by which thecarrying amount exceeds the undiscounted future cash flows from the asset.

The impairment test forgoodwill is a two-step process. Step one consists of a comparison of the fairvalue of a reporting unit with its carrying amount, including the goodwillallocated to the reporting unit. Measurement of the fair value of a reportingunit is based on one or more fair value measures including the Corporation’smarket capitalization, present value techniques of estimated future cash flowsand estimated amounts at which the unit as a whole could be bought or sold in acurrent transaction between willing parties. If the carrying amount of thereporting unit exceeds the fair value, step two requires the fair value of thereporting unit to be allocated to the underlying assets and liabilities of thatreporting unit, resulting in an implied fair value of goodwill. If the carryingamount of the reporting unit goodwill exceeds the implied fair value of thatgoodwill, an impairment loss equal to the excess is recorded in net earnings(loss). This test is performed on the last business day of December ineach year.

**(g)**          Incometaxes

Income taxes are providedfor using the asset and liability method whereby deferred tax assets andliabilities are recognized using current tax rates on the difference betweenthe financial statement carrying amounts and the respective tax basis of theassets and liabilities. The Corporation provides a valuation allowance ondeferred tax assets when it is more likely than not that such assets will notbe realized.

**(h)**         Commonshares

Common shares are recordedas the net proceeds received on issuance after deducting all share issue costs.

**(i)**            Revenuerecognition

Revenue from product and service sales is recognizedwhen all of the following criteria are met: persuasive evidence of an agreement exists; delivery has occurred orservices have been rendered; the price is fixed or determinable; and collectionis reasonably assured.

For multiple element offerings, the Corporationallocates the proceeds to the elements based on their relative fair values. Revenuefrom each element is recognized when the product is delivered or servicesrendered. The Corporation provides for returns based on prior experience. Thecost of implant kits and equipment is charged to cost of sales upon delivery.The Corporation also rents certain in-hospital equipment to customers. Rentalincome is included in revenue when earned.

F-10

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**WORLD HEART CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

The Corporation has provided certain customers withdeferred payment terms. The Corporation has, in certain instances, transferredfuture payments under these contracts to third-party financing institutions ona non-recourse basis. In situations where the Corporation assumedresponsibility for interest payments, revenue was recorded net of the presentvalue of the committed future interest cost. The transfer of the relatedaccounts receivable was recorded when control of the receivable wassurrendered.

Certain products arecovered by a limited warranty. Warranty costs are based on historicalexperience and estimated and recorded when the related sales are recognized. Anyadditional costs are recorded when incurred or when they can reasonably beestimated.

**(j)**            Stock-basedcompensation

Effective January 1, 2006, the Corporationadopted Statement of Financial Accounting Standards (“SFAS”) No. 123(Revised 2004) (“SFAS 123 (R)”), “Share—Based Payment”. SFAS 123(R) requiresthe recognition of the fair value of stock compensation as an expense in thecalculation of net income. WorldHeart recognizes the stock compensation expenseover the vesting period of the individual equity instruments. Stock optionsissued in lieu of cash to non-employees for services performed arerecorded at the fair value of the options at the time they are issued and areexpensed as service is provided.

WorldHeart has elected the modified prospectivetransition method for adopting SFAS 123 (R). Under this method, the provisionsof SFAS 123 (R) apply to all stock-based awards granted after theeffective date. The unrecognized expense of awards not yet vested as of January 1,2006, the date of SFAS 123 (R) adoption by the Corporation, are alsorecognized as an expense in the calculation of net income.

Prior to January 1,2006, the Corporation accounted for its stock option plan in accordance withthe Financial Accounting Standards Board’s (FASB) Statement of FinancialAccounting Standards No. 123 (“SFAS 123”), “Accounting for Stock BasedCompensation,” and Accounting Principles Board Opinion No. 25 (“APB25”), “Accountingfor Stock Issued to Employees.”  Nocompensation expense was recognized when shares were issued at prevailingmarket prices or options were issued to employees with exercise prices at thegrant date equal to prevailing market prices. Any consideration paid byemployees on the exercise of stock options or purchase of capital stock wascredited to share capital. The pro forma fair value expense of options issuedby the Corporation is disclosed in Note 10.

**(k)**         Researchand development costs

Research and developmentcosts, including research performed under contract by third parties, areexpensed as incurred. The Levacor Rotary VAD product was initially shipped toclinical centers during the fourth quarter of 2006 and has been paid for bythose centers. WorldHeart has treated these payments as deferred clinical fees.Upon completion of the implant, a credit to research and development expenseswill be recognized.

**(l)**            Governmentassistance

Government assistance isrecognized when the expenditures that qualify for assistance are made and theCorporation has complied with the conditions for the receipt of governmentassistance. Government assistance is applied to reduce the carrying value ofany assets acquired or to reduce eligible expenses incurred. A liability torepay government assistance, if any, is recorded in the period when conditionsarise that causes the assistance to become repayable.

F-11

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**WORLD HEART CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(m)**     Foreigncurrency translation

The consolidated financialstatements of the Corporation are presented in U.S. dollars. The financialstatements of the Corporation’s subsidiaries are translated into U.S. dollarsas follows:  monetary assets andliabilities are translated at exchange rates prevailing at the balance sheetdate; non-monetary items and any related amortization of such items aretranslated at the rates of exchange in effect when the assets were acquired orobligations incurred; and all income and expense items are translated ataverage exchange rates prevailing during the year. Exchange gains and lossesare included in net loss for the year.

**(n)**         Changein functional and reporting currency

Effective January 1, 2004, the functionalcurrency of the Corporation changed from the Canadian dollar to theU.S. dollar. In general, this change resulted from the Corporation’srestructuring and issuance of common shares and warrants during the year ended December 31,2003 along with a gradual increase in the overall proportion of businessactivities conducted in U.S. dollars. Concurrent with this change infunctional currency, the Corporation adopted the U.S. dollar as itsreporting currency.

The change was effectedfor prior periods as follows: assets and liabilities were translated at thespot rate on that date; income and expense items for those periods weretranslated at the average rate for each period; and equity transactions weretranslated at historic rates. The resulting net translation adjustment has beenposted to the cumulative other comprehensive income account.

**4.**                 PRIVATEPLACEMENT

On November 13, 2006,the Corporation entered into a purchase agreement with certain new and existinginvestors for a private placement financing consisting of two tranches. Thefirst tranche of the financing related to the sale of 11 million common sharesat $0.25 per share for total consideration of $2.75 million and was closed on November 16,2006. The second closing, related to the sale of 45.2 million common shares at$0.25 per share for total consideration of $11.31 million, and was closed on December 21,2006 following shareholder approval received at our Annual and Special Meetingheld on December 20, 2006. Gross proceeds of the financing wereapproximately $14.1 million. In addition, the Corporation incurred placementagent fees equal to 6% of the gross proceeds payable in common shares totalingapproximately 3.4 million shares. Under the terms of the transaction theCorporation registered for resale all of the common shares issued in thefinancing.

**5.**                 CASHAND CASH EQUIVALENTS

At December 31,2006 and December 31, 2005, substantially all of WorldHeart’s cash wasinvested in money market funds. The securities in the following table at December 31,2006 and 2005 are classified as available for sale.

| ** **   | ** ** | **Year Ended December 31,** | ** ** |
|--------------|------------|--------------------------------------------|------------|
| ** **   | ** ** | **2006**                                   | ** ** | **2005** | ** ** |
| ** **   | ** ** | **Cash and Cash  Equivalents**   | ** ** | **Cash and Cash  Equivalents** | ** ** |
| Cash         |       |                                       | $          | 712,905 |   |   |   | $ | 1,609,892 |   |   |
| Money market |       |                                       | 11,503,766 |   |   |   | 9,051,790 |   |   |
|         |       |                                       | $          | 12,216,671 |   |   |   | $ | 10,661,682 |   |   |

 

F-12

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**WORLD HEART CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**6.**                 INVENTORY

Inventoryor consignment at customer sites at December 31, 2006 and 2005 was $33,430and $401,889, respectively.

| ** **       | ** ** | **December 31,** | ** ** |
|------------------|------------|-----------------------|------------|
| ** **       | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Raw materials    |       | $                     | 266,182    |   | $ | 2,464,825 |   |
| Work in progress |       | 1,219,133             |       | 3,440,131 |   |
| Finished goods   |       | 1,603,044             |       | 2,311,039 |   |
|             |       | $                     | 3,088,359  |   | $ | 8,215,995 |   |

 

**7.**                 CAPITAL ASSETS

| ** **                            | ** ** | **2006**  | ** ** |
|---------------------------------------|------------|-----------|------------|
| ** **                            | ** ** | **Cost**  | ** ** | **Accumulated  Amortization** | ** ** | **Net Book  Value** | ** ** |
| Furniture and  fixtures               |       | $         | 183,857    |   | $ | (100,824 | ) | $ | 83,033 |   |
| Computer  equipment and software      |       | 564,609   |       | (369,531 | ) | 195,078 |   |
| Manufacturing and  research equipment |       | 3,223,634 |       | (2,551,275 | ) | 672,359 |   |
| Leasehold  improvements               |       | 267,980   |       | (267,980 | ) | — |   |
|                                  |       | $         | 4,240,080  |   | $ | (3,289,610 | ) | $ | 950,470 |   |

 

| ** **                            | ** ** | **2005**  | ** ** |
|---------------------------------------|------------|-----------|------------|
| ** **                            | ** ** | **Cost**  | ** ** | **Accumulated  Amortization** | ** ** | **Net Book  Value** | ** ** |
| Furniture and  fixtures               |       | $         | 304,745    |   | $ | (187,967 | ) | $ | 116,778 |   |
| Computer  equipment and software      |       | 930,973   |       | (564,839 | ) | 366,134 |   |
| Manufacturing and  research equipment |       | 5,339,951 |       | (4,045,907 | ) | 1,294,044 |   |
| Leasehold  improvements               |       | 579,031   |       | (518,447 | ) | 60,584 |   |
|                                  |       | $         | 7,154,700  |   | $ | (5,317,160 | ) | $ | 1,837,540 |   |

 

During2006, the Corporation wrote-off certain of its fixed assets. $247,640 wasbooked as a loss on the disposal of fixed assets and $176,324 was written offas restructuring costs.

**8.**                 INTANGIBLEASSETS

Thecost and accumulated amortization of the Corporation’s intangible assets as of December 31,2006 and December 31, 2005 are as follows:

| ** **               | ** ** | **December 31, 2006** | ** ** |
|--------------------------|------------|---------------------------------|------------|
| ** **               | ** ** | **Cost**                        | ** ** | **Accumulated  Amortization** | ** ** | **Net Book  Value** | ** ** |
| Purchased  technology    |       | $                               | 6,191,698  |   | $ | 6,191,698 |   | $ | — |   |
| Other intangible  assets |       | 5,137,242                       |       | 4,646,478 |   | 490,764 |   |
|                     |       | $                               | 11,328,940 |   | $ | 10,838,176 |   | $ | 490,764 |   |

 

F-13

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**WORLD HEART CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

 

| ** **               | ** ** | **December 31, 2005** | ** ** |
|--------------------------|------------|---------------------------------|------------|
| ** **               | ** ** | **Cost**                        | ** ** | **Accumulated  Amortization** | ** ** | **Net Book  Value** | ** ** |
| Purchased  technology    |       | $                               | 6,191,698  |   | $ | 6,191,698 |   | $ | — |   |
| Other intangible  assets |       | 5,137,242                       |       | 4,455,054 |   | 682,188 |   |
|                     |       | $                               | 11,328,940 |   | $ | 10,646,752 |   | $ | 682,188 |   |

 

The net book value ofother intangible assets of $490,764 and $682,188 at December 31, 2006, and2005 respectively, relate to the $765,669 value assigned to the MedQuestworkforce acquired in July 2005, and are net of $191,424 and $83,481 inamortization expense recognized in 2006 and 2005, respectively. The purchasedtechnology and other intangible assets that are fully amortized relate to theCorporation’s Novacor product.

**9.**                 INDIRECTTAXES PAYABLE

The Corporation accrued$832,000 in 2004 related to a sales tax assessment received from the Provinceof Ontario during that year. The amount is included in research and developmentexpenses in 2004 as the assessment relates to taxes assessed on certain ofthose expenses incurred in the prior years. The Corporation paid $488,918during 2005, and appealed the tax assessment. In March 2007, WorldHeartreceived a letter from the Ministry of Finance for Ontario recommending aresolution of the appeal with a favorable outcome for WorldHeart. TheCorporation has recorded the effect of this outcome at December 31, 2006,resulting in a net receivable from the Ministry of $391,000.

**10.**          SHAREHOLDERS’EQUITY

**Common shares**

Authorized common sharesof the Corporation consist of an unlimited number of shares with no par value.

**Preferred Shares**

**Authorizedpreferred shares of the Corporation consist of an unlimited number of sharesissuable in series. WorldHeart had no outstanding preferred shares in 2005 and2006.**

**Employee StockOption Plan**

The Corporation has an employee stock option plan(ESOP). The maximum number of shares reserved and set aside under options toeligible persons pursuant to the ESOP could not exceed 1,501,857 common shares.At December 31, 2004, options for 789,046 common shares were granted. Inaddition, on September 23, 2004, the Corporation granted, subject toshareholder approval, an increase in the number of options available under theplan to 2,383,725 common shares to employees, officers, directors and consultants,and granted additional options to employees, officers, directors andconsultants. This grant was conditional on the forfeiture by the employees,officers, directors and consultants of 251,685 options for common shares alreadyissued and outstanding under the ESOP. The maximum number of common shares atany time available for issuance under the ESOP, or pursuant to otheroutstanding options, to any one person was 5% of the common shares then issuedand outstanding. The Compensation Committee appointed by the Board of Directorsadministers the ESOP. The exercise price for all options issued under 

F-14

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**WORLD HEART CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

the ESOP was based on thefair market value of the common share price which is the closing price quotedon the Toronto Stock Exchange on the last trading day before the date of grant.The options generally vest annually in equal portions over either a five-yearperiod or a three-year period and must be exercised within a four-year to asix-year period from each date of vesting.

On July 18, 2005, shareholders approved tworesolutions amending the ESOP. The first resolution increased the number ofcommon shares of the Corporation reserved for issuance from 1,501,857 commonshares to 9,772,505 common shares representing an additional increase from the2,383,725 common shares initially contemplated on September 23, 2004 bythe Corporation. Shareholders also approved the second resolution to remove therestriction providing that the aggregate number of options reserved forissuance to any one person shall not exceed 5% of the issued and outstandingcommon shares.

On December 21, 2005, the Board of Directors ofWorldHeart approved the accelerated vesting of all outstanding stock optionsheld by current employees or consultants, except for the options held by thenon-employee members of the Board of Directors. The accelerated options hadexercise prices ranging from $0.98 to $59.95 per share and a weighted averageexercise price of $1.77 per share. The purpose of the acceleration of vesting wasto improve employee morale and to minimize the amount of compensation expensein future periods following the adoption of SFAS 123 (R) by WorldHeart.

Without the acceleration of vesting of stock options,the pre-tax charges under SFAS 123 relating to these options would have been$2.0 million in 2006 and $1.4 million in 2007. The adjustment for stock basedcompensation under the fair value method is $4.9 million consisting of $3.4million due to options vesting acceleration and $1.5 million due to optionsvesting during 2005, reflected in the proforma table in this note.

Of the 6.8 million options to purchase shares of theCorporation’s common stock, 6.3 million options became immediately exercisableon December 21, 2005 as a result of the acceleration. Vesting was notaccelerated for 520,000 options previously granted to non-employee directors. Nochanges were made to the exercise price of any outstanding options.

On December 20, 2006,the Corporation’s shareholders approved the 2006 Equity Incentive Plan, whichamended and restated the World Heart Corporation Employee Stock Option Plan, toallow the issuance of restricted stock awards, restricted stock unit awards,stock appreciation rights, performance shares and other share-based awards, inaddition to stock options, under the Plan and to increase the number of commonshares reserved pursuant to the Plan by an additional 5,000,000 shares. The9,772,505 common shares available under the Plan prior to the amendment andrestatement were registered on Forms S-8 filed with the Securities andExchange Commission on June 21, 2001 (No. 333-63580) and April 13,2006 (No. 333-133258). The additional 5,000,000 shares approved bythe shareholders on December 20, 2006, were registered on Form S-8on January 17, 2007 (No. 333-7140041).

**Stock-basedCompensation**

On January 1, 2006, WorldHeart adopted FAS 123(R)using the modified prospective transition method. Under this method, theprovisions of FAS 123(R) apply to all stock-based awards granted after theeffective date. The unrecognized expense of awards not yet vested as of January1, 2006 are recognized as an expense in the calculation of net income. As FAS123(R) requires that stock-based compensation expense be based on awards thatare ultimately expected to vest, stock-based compensation for 2006 has beenreduced for estimated forfeitures. When estimating forfeitures, voluntarytermination behaviors as 

F-15

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**WORLD HEART CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

well as trends of actualoption forfeitures are considered. To the extent actual forfeitures differ fromour current estimates, cumulative adjustments to stock-based compensationexpense are recorded.

WorldHeart uses the Black-Scholes valuation model forestimating the fair value of stock compensation. 

Thestock-based compensation expense for the year ended December 31, 2006 was asfollows:

| Selling, general  and administrative |   | $     | 233,890 |   |
|--------------------------------------|--------|-------|---------|--------|
| Research and  development            |   | 3,842 |    |
|                                 |   | $     | 237,732 |   |

 

This stock compensation expense had a negligibleimpact on the Corporation’s earnings per common share for the year 2006. Theunrecognized expense of awards not yet vested, net of estimated forfeitures,was $116,855 and the related stock-based compensation expense will berecognized over the following ten quarters beginning March 30, 2007. 

The aggregate intrinsic value is calculated as thedifference between the exercise price of the options and the quoted price ofour common shares that were in the money at December 31, 2006. At December 31,2006, the aggregate intrinsic value of all outstanding options was nil with aweighted average remaining contractual term of approximately 6.1 years. Of the6,621,396 outstanding options, exercisable options were 6,327,900 with aweighted average remaining contractual life of 6.0 years and 293,496 wereunvested with a weighted average remaining contractual life of 7.4 years. Nooptions were exercised under our stock option plan during 2006.

Asummary of the status and changes of our non-vested shares related to our ESOPas of the year ended December 31, 2006 is presented below. The weighted averagegrant date fair value on non-vested shares represent the gross value ofunvested options, excluding estimated forfeitures.

| ** **                      | ** ** | **Shares** | ** ** | **Weighted Average  Grant-Date Fair  Value** | ** ** |
|---------------------------------|------------|------------|------------|--------------------------------------------------------|------------|
| Nonvested at  January 1, 2006   |       | 413,330    |       |                                                   | $          | 0.99 | ** ** |   |
| Granted                         |       | 154,500    |       |                                                   | 0.84       | ** ** |   |
| Vested                          |       | (173,334   | )          |                                                   | 0.97       | ** ** |   |
| Forfeited                       |       | (101,000   | )          |                                                   | 0.92       | ** ** |   |
| Nonvested at December  31, 2006 |       | 293,496    |       |                                                   | $          | 0.95 | ** ** |   |

 

*Valuation Assumptions*

WorldHeart calculated the fair value of each optionaward on the date of grant using the Black-Scholes option pricing model. 

F-16

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**WORLD HEART CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Theweighted average fair value of the options granted during the years endedDecember 31, 2006, 2005 and 2004 was $0.84, $0.94 and $4.39, respectively. For2006, 2005 and 2004, the following weighted average assumptions were utilized:

| ** **                      | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Expected option  life, in years |       | 5.5      |       | 6        |       | 6        |       |
| Volatility                      |       | 95       | %          | 83       | %          | 73       | %          |
| Risk free  interest rate        |       | 4.52     | %          | 4.17     | %          | 4.00     | %          |
| Dividend yield                  |       | Nil      |       | Nil      |       | Nil      |       |

 

The dividend yield of zero is based on the fact thatWorldHeart has never paid cash dividends and has no present intention to paycash dividends. Expected volatility is based on the historical volatility ofthe Corporation’s common stock over the period commensurate with the expectedlife of the options. The risk free interest rate is based on average rates forfive and seven year treasury notes as published by the Federal Reserve.

FAS123(R) requires the Corporation to present pro forma information for thecomparative period prior to adoption as if WorldHeart had accounted for allemployee stock options under the fair value method of the original FAS 123. Thefollowing table illustrates the effect on net income and earnings per share ifWorldHeart had applied the fair value recognition provisions of FAS 123 tostock-based employee compensation to the prior-year periods.

| ** **                                                     | ** ** | **December 31,** | ** **  |
|----------------------------------------------------------------|------------|-----------------------|-------------|
| ** **                                                     | ** ** | **2005**              | ** **  | **2004** | ** ** |
| Net income (loss)  applicable to common shareholders           |       | $                     | (58,694,025 | ) | $ | (26,141,798 | ) |
| Adjustment for  stock-based costs under the fair market method |       | (4,970,236            | )           | (2,134,707 | ) |
| Adjusted pro  forma net loss                                   |       | $                     | (63,664,261 | ) | $ | (28,276,505 | ) |
| Reported basic  and diluted loss per share                     |       | $                     | (1.76       | ) | $ | (1.70 | ) |
| Pro forma basic loss per  share                                |       | $                     | (1.91       | ) | $ | (1.84 | ) |

 

F-17

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**WORLD HEART CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Stock Option andWarrant Activity**

The following tablesummarizes the number of options and warrants outstanding and the weightedaverage exercise prices:

| ** **                             | ** ** | **Employees** | ** ** | **Non-Employees**                      | ** ** | ** **  | ** ** | ** **                             | ** ** | ** **   | ** ** |
|----------------------------------------|------------|---------------|------------|----------------------------------------|------------|-------------|------------|----------------------------------------|------------|--------------|------------|
| ** **                             | ** ** | **Options**   | ** ** | **Weighted  average  exercise  price** | ** ** | **Options** | ** ** | **Weighted  average  exercise  price** | ** ** | **Warrants** | ** ** | **Weighted  average  exercise price** | ** ** | **Total** | ** ** |
| ** **                             | ** ** | **#**         | ** ** | **$**                                  | ** ** | **#**       | ** ** | **$**                                  | ** ** | **#**        | ** ** | **$** | ** ** | **#** | ** ** |
| Outstanding at  December 31, 2003 |       | 1,144,348     |       |                                   | 10.98      |        |       | 39,665                                 |       |         | 13.54      |   |   | 14,592,665 |   |   | 6.99 |   |   | 15,776,678 |   |
| Granted                                |       | 127,852       |       |                                   | 6.46       |        |       | 3,095                                  |       |         | 7.77       |   |   | 10,923,566 |   |   | 1.58 |   |   | 11,054,513 |   |
| Exercised                              |       | —        |       |                                   | —     |        |       | —                                 |       |         | —     |   |   | (250,000 | ) |   | 5.93 |   |   | (250,000 | ) |
| Repurchased                            |       | —        |       |                                   | —     |        |       | —                                 |       |         | —     |   |   | (300,000 | ) |   | 5.93 |   |   | (300,000 | ) |
| Expired                                |       | (7,166        | )          |                                   | 52.46      |        |       | —                                 |       |         | —     |   |   | (541,998 | ) |   | 26.84 |   |   | (549,164 | ) |
| Forfeited                              |       | (514,165      | )          |                                   | 8.01       |        |       | (4,583                                 | )          |         | 8.48       |   |   | — |   |   | — |   |   | (518,748 | ) |
| Outstanding at December 31, 2004  |       | 750,869       |       |                                   | 11.85      |        |       | 38,177                                 |       |         | 13.68      |   |   | 24,424,233 |   |   | 4.15 |   |   | 25,213,279 |   |
| Granted                                |       | 5,799,141     |       |                                   | 1.27       |        |       | 588,000                                |       |         | 1.33       |   |   | — |   |   | — |   |   | 6,387,141 |   |
| Exercised                              |       | —        |       |                                   | —     |        |       | —                                 |       |         | —     |   |   | (10,655,000 | ) |   | 1.55 |   |   | (10,655,000 | ) |
| Repurchased                            |       | —        |       |                                   | —     |        |       | —                                 |       |         | —     |   |   | (720,870 | ) |   | 5.93 |   |   | (720,870 | ) |
| Cancelled                              |       | (367,689      | )          |                                   | 15.74      |        |       | (4,695                                 | )          |         | 8.19       |   |   | — |   |   | — |   |   | (372,384 | ) |
| Outstanding at December 31, 2005  |       | 6,182,321     |       |                                   | 1.69       |        |       | 621,482                                |       |         | 2.03       |   |   | 13,048,363 |   |   | 6.18 |   |   | 19,852,166 |   |
| Granted                                |       | 154,500       |       |                                   | 1.10       |        |       | —                                 |       |         | —     |   |   | — |   |   | — |   |   | 154,500 |   |
| Exercised                              |       | —        |       |                                   | —     |        |       | —                                 |       |         | —     |   |   | — |   |   | — |   |   | — |   |
| Repurchased                            |       | —        |       |                                   | —     |        |       | —                                 |       |         | —     |   |   | (125,714 | ) |   | 8.61 |   |   | (125,714 | ) |
| Expired                                |       | (215,676      | )          |                                   | 9.84       |        |       | (3,564                                 | )          |         | 41.91      |   |   | (494,874 | ) |   | 14.35 |   |   | (514,481 | ) |
| Forfeited                              |       | (117,667      | )          |                                   | 1.27       |        |       | —                                 |       |         | —     |   |   | — |   |   | — |   |   | (317,300 | ) |
| Outstanding at  December 31, 2006 |       | 6,003,478     |       |                                   | $          | 1.23        |       |                                   | 617,918    |         |       | $ | 1.80 |   |   | 12,427,775 |   |   | $ | 5.82 |   |   | 19,049,171 |   |
|                                        |            |               |            |                                        |            |             |            |                                        |            |              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-18

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**WORLD HEART CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

 

| ** **                                                                       | ** ** | **Options**        | ** ** | ** **         | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                                                                       | ** ** | **Employees**      | ** ** | **Non-Employees**  | ** ** | **Warrants** | ** ** |
| Weighted average  exercise price of exercisable options and warrants:            |       |               |       |               |       |   |   |
| December 31, 2004                                                           |       | 18.09              |       | 18.34              |       | 4.15 |   |
| December 31, 2005                                                           |       | 1.69               |       | 2.03               |       | 6.18 |   |
| December 31, 2006                                                           |       | 1.78               |       | 1.53               |       | 5.82 |   |
| Number of exercisable  options and warrants:                                     |       |               |       |               |       |   |   |
| December 31, 2004                                                           |       | 287,102            |       | 17,867             |       | 24,424,233 |   |
| December 31, 2005                                                           |       | 5,662,223          |       | 621,482            |       | 13,048,363 |   |
| December 31, 2006                                                           |       | 5,718,890          |       | 617,918            |       | 12,427,775 |   |
| Range of exercise prices  of all options and warrants at December 31, 2006: |       |               |       |               |       |   |   |
| From                                                                             |       | $                  | 0.60       |               | $          | 1.12 |   | $ | 1.55 |   |
| To                                                                               |       | $                  | 119.00     |               | $          | 82.25 |   | $ | 8.61 |   |
| Range of expiry dates of  all options and warrants at December 31, 2006:    |       |               |       |               |       |   |   |
| From                                                                             |       | Jan. 4, 2007  |       | Jan. 4, 2007  |       | Dec. 18, 2007 |   |
| To                                                                               |       | July 23, 2015 |       | Oct. 19, 2012 |       | Sept. 15, 2009 |   |

 

The following tablesummarizes information about the outstanding options and warrants as atDecember 31, 2006:

| **Range of exercise price** | ** ** | ** ** | ** ** | **Number  outstanding** | ** ** | **Weighted  average   exercise price** | ** ** | **Weighted  average  remaining life  in years** | ** ** |
|--------------------------------------------|------------|------------|------------|-------------------------|------------|--------------------------------------------------|------------|-----------------------------------------------------------|------------|
| $0.59 to $1.25                             |       | 1,181,678  |       |                    | $          | 1.12                                             |       |                                                      |       | 5.56 |   |   |
| $1.26 to $2.50                             |       | 5,381,447  |       |                    | $          | 1.38                                             |       |                                                      |       | 6.23 |   |   |
| $2.51 to $6.00                             |       | 11,430,310 |       |                    | $          | 5.70                                             |       |                                                      |       | 1.73 |   |   |
| $6.01 to 10.00                             |       | 1,016,448  |       |                    | $          | 8.50                                             |       |                                                      |       | 1.46 |   |   |
| $10.01 to $119.25                          |       | 39,288     |       |                    | $          | 33.12                                            |       |                                                      |       | 0.91 |   |   |
|                                       |       | 19,049,171 |       |                    | $          | 4.40                                             |       |                                                      |       | 3.22 |   |   |

 

F-19

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**WORLD HEART CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**11.   RESTRUCTURING**

*2006 Restructuring*

In response to the changing market demand for itsfirst-generation Novacor LVAS, on November 14, 2006, the Corporationapproved a plan to restructure its business reducing its spending andrefocusing on development of its Levacor Rotary VAD. The Corporation completedthe majority of the restructuring by December 31, 2006.

Restructuringcosts through December 31, 2006, are as follows:

| ** **                                                | ** ** | **Employee   Severance** | ** ** | **Fixed Asset   Write down** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------|------------|-------------------------------|------------|---------------------------------------------|------------|-----------|------------|
| Costs accrued  during 2006                                |       | $                             | 469,733    |                                        | $          | 176,324   |       | $ | 646,057 |   |
| Costs paid or  settled in 2006                            |       | (90,686                       | )          | (176,324                                    | )          | (267,010  | )          |
| Balance in accrued  liabilities at December 31, 2006 |       | $                             | 379,047    |                                        | $          | —    |       | $ | 379,047 |   |

 

In addition, theCorporation wrote off approximately $4.6 million of raw material, in-processand finished goods inventory associated with the Novacor LVAS product, whichmanagement has determined will not be utilized in future periods.

*2005 Restructuring*

On August 25, 2004, the Corporation approved aplan to consolidate its Ottawa, Ontario operations into its facilities inOakland, California where the Novacor LVAS is manufactured. The consolidationof the North American operations into one location reduced business expensesand improved on-going operational efficiency.

Duringthe year ended December 31, 2005, restructuring costs of $333,000 wererecorded and no accrual balance remained at December 31, 2005.

| ** **                                                | ** ** | **Employee   Severnace** | ** ** | **Contract   Settlement** | ** ** | **Write down** | ** ** | **Other** | ** ** | **Total**  | ** ** |
|-----------------------------------------------------------|------------|-------------------------------|------------|--------------------------------|------------|---------------------|------------|-----------|------------|------------|------------|
| Costs accrued  during 2004                                |       | $                             | 1,396,037  |                           | $          | 57,653              |       | $         | 338,595    |       | $          | 22,509 |   | $ | 1,814,794 |   |
| Costs paid or  settled in 2004                            |       | (795,923                      | )          | —                         |       | (338,595            | )          | (8,624    | )          | (1,143,142 | )          |
| Balance in  accrued liabilities at December 31, 2004 |       | $                             | 600,114    |                           | $          | 57,653              |       | $         | —     |       | $          | 13,885 |   | $ | 671,652 |   |
| Costs accrued during 2005                                 |       | 122,352                       |       | 192,012                        |       | (6,801              | )          | 25,467    |       | 333,030    |       |
| Costs paid or  settled in 2005                            |       | (722,466                      | )          | (249,665                       | )          | 6,801               |       | (39,352   | )          | (1,004,682 | )          |
| Balance in accrued  liabilities at December 31, 2005 |       | $                             | —     |                           | $          | —              |       | $         | —     |       | $          | — |   | $ | — |   |

 

F-20

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**WORLD HEART CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**12.**       LOSSPER COMMON SHARE

Forall of the years presented, diluted loss per share equals basic loss per sharedue to the anti-dilutive effect of convertible debentures, options andwarrants, as applicable.

| ** **                                     | ** ** | **Number of common shares to be issued  on exercise or conversion** | ** ** |
|------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                     | ** ** | **2006**                                                                                                         | ** ** | **2005** | ** ** | **2004** | ** ** |
| Employee and  non-employee stock options       |       | 6,621,396                                                                                                        |       | 6,803,803 |   | 789,046 |   |
| Warrants                                       |       | 12,427,775                                                                                                       |       | 13,048,363 |   | 24,424,233 |   |
| Convertible  debentures                        |       | —                                                                                                           |       | — |   | 10,655,000 |   |
| Stock options  subject to shareholder approval |       | —                                                                                                           |       | — |   | 2,383,725 |   |
| Total potentially  dilutive instruments        |       | 19,049,171                                                                                                       |       | 19,852,166 |   | 38,252,004 |   |

 

**13.**          INCOMETAXES

TheCorporation operates in several tax jurisdictions. Its income is subject tovarying rates of tax and losses incurred in one jurisdiction cannot be used tooffset income taxes payable in another. A reconciliation of the combinedCanadian federal and provincial income tax rate with the Corporation’seffective tax rate is as follows:

| ** **                              | ** ** | **December 31,** | ** ** |
|-----------------------------------------|------------|-----------------------|------------|
| ** **                              | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Canadian loss                           |       | $                     | (874,000   | ) | $ | (26,813,000 | ) | $ | (15,790,000 | ) |
| United States’  loss               |       | (19,126,000           | )          | (24,169,000 | ) | (9,053,000 | ) |
| European loss                           |       | (85,000               | )          | (1,852,000 | ) | (1,300,000 | ) |
| Loss before  income taxes               |       | (20,085,000           | )          | (52,834,000 | ) | (26,143,000 | ) |
| Expected statutory rate                 |       | 32.12                 | %          | 36.12 | % | 36.12 | % |
| Expected recovery  of income tax        |       | (6,450,000            | )          | (19,084,000 | ) | (9,440,000 | ) |
| Effect of foreign  tax rate differences |       | (1,492,000            | )          | (1,281,000 | ) | (510,000 | ) |
| Permanent  differences                  |       | (860,000              | )          | 6,354,000 |   | 2,316,000 |   |
| Change in  valuation allowance          |       | 8,358,000             |       | 15,240,000 |   | 7,930,000 |   |
| Effect of changes  in carry forwards    |       | 4,218,000             |       | 371,000 |   | 2,256,000 |   |
| Effect of tax  rate changes             |       | (4,403,000            | )          | — |   | 268,000 |   |
| Effect of  exchange rate differences    |       | 629,000               |       | (1,600,000 | ) | (2,820,000 | ) |
| Recovery of income taxes                |       | $                     | —     |   | $ | — |   | $ | — |   |

 

F-21

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**WORLD HEART CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

TheCanadian statutory income tax rate of 32.12% is comprised of federal income taxat approximately 32.12% and provincial income tax at approximately 0.00%. Forthe years ended December 31, 2005 and 2004, the Canadian statutory incometax rate of 36.12% is comprised of federal income tax at approximately 22.12%and provincial income tax at approximately 14.00%. For the years ended December 31,2005 and 2004, the permanent differences relate primarily to imputed interestexpense on the Preferred Shares and goodwill amortization.

| ** **                             | ** ** | **2006**    | ** ** | **2005**    | ** ** | **2004**    | ** ** |
|----------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| **Deferred  tax assets:**              |       |        |       |        |       |        |       |
| SR&ED expenditures                 |       | $           | 12,300,000 |        | $          | 10,410,000  |       | $ | 10,280,000 |   |
| Net operating losses                   |       | 56,797,000  |       | 45,810,000  |       | 37,750,000  |       |
| Investment tax credits                 |       | 5,825,000   |       | 5,610,000   |       | 5,540,000   |       |
| Share issue costs                      |       | 704,000     |       | 5,240,000   |       | 4,790,000   |       |
| Asset basis differences                |       | 7,526,000   |       | 7,740,000   |       | 1,500,000   |       |
|                                   |       | 83,152,000  |       | 74,810,000  |       | 59,860,000  |       |
| Less: valuation allowance              |       | (83,152,000 | )          | (74,810,000 | )          | (59,570,000 | )          |
|                                   |       | —      |       | —      |       | 290,000     |       |
| **Deferred tax liabilities:**          | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** |
| Asset basis differences                |       | —      |       | —      |       | (290,000    | )          |
| **Net  deferred income tax liability** |       | $           | —     |        | $          | —      |       | $ | — |   |

 

The primary temporary differences affecting deferredtaxes and their approximate effects are as follows:

As at December 31,2006, the Corporation has unclaimed Scientific Research and ExperimentalDevelopment (SR&ED) expenditures, income tax loss carryforwards andinvestment tax credits. The unclaimed amounts and their expiry dates are asfollows:

| ** **                                                  | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|-------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| SR&ED  expenditures—carried forward without expiry |       | $          | 28,684,000 |       | $          | 28,816,205 |       | $ | 28,500,000 |   |
| Income tax loss  carryforwards:                             |       |       |       |       |       |       |       |
| Federal (Canada) (expire 2005-2026)                         |       | 55,288,000 |       | 61,484,493 |       | 57,054,000 |       |
| Provincial (expire 2005-2015)                               |       | 54,859,000 |       | 62,568,187 |       | 55,900,000 |       |
| United States (expire 2010-2026)                            |       | 82,354,000 |       | 62,400,000 |       | 49,100,000 |       |
| Europe                                                      |       | 3,148,000  |       | 3,103,820  |       | 1,400,000  |       |
| Investment tax credits  (expire 2006-2012)                  |       | 7,093,000  |       | 7,203,480  |       | 7,100,000  |       |
|                                                             |            |            |            |            |            |            |            |  |  |  |

 

F-22

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**WORLD HEART CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**14.**          COMMITMENTSAND CONTINGENCIES

**(a) Operating Leases**

TheCorporation is committed to minimum lease payments for office facilities andequipment and licenses as follows:

| **Year** | ** ** | ** ** | ** ** | **Lease   payments** | ** ** | **Licenses and   other** | ** ** |
|----------|------------|------------|------------|---------------------------|------------|------------------------------------|------------|
| 2007     |       | $          | 532,782    |                      |       | $                                  | 76,000     |   |   |
| 2008     |       | 57,810     |       |                      | 76,000     |                               |       |
| 2009     |       | 4,635      |       |                      | —     |                               |       |
| 2010     |       | —     |       |                      | —     |                               |       |
|          |            |            |            |                           |            |                                    |            |  |  |  |  |

 

Total rent expense for theyears ended December 31, 2006, 2005, and 2004 was $972,071, $1,084,866,and $1,026,315, respectively. The balance of pledged cash used as collateralfor the Oakland lease was $750,000 at December 31, 2006 and December 31,2005. In addition, WorldHeart has paid a $150,000 security deposit and hasestablished an $876,000 reserve for potential site restoration associated withthe Oakland lease. The Oakland lease expires on April 30, 2007 andmanagement is in the process of negotiating a new lease.

**(b)**         NovacorLVAS Royalties

The Corporation iscommitted under the Novacor LVAS royalty agreement to make royalty payments tocertain employees. Royalties are payable on annual consolidated gross revenuesat a rate of 0.808% up to a cumulative maximum of $3,232,000. Cumulativeroyalty payments to December 31, 2006, total $1,190,800 (2005 -$1,121,225).

**(c)**          TechnologyPartnerships Canada Contribution Agreement

During 2002, theCorporation entered into a shared funding program with Technology PartnershipsCanada (TPC) under which the Canadian government shares costs of certainresearch and development activities. Through December 31, 2005, theCorporation claimed funding in the amount of approximately $6.6 million.Effective January 1, 2004, repayment would be in the form of royaltiespayable on annual consolidated gross revenues at a rate of 0.65% for anine-year period ending December 31, 2012. If during this period royaltypayments reach the maximum of $20.3 million no further repayments will berequired. If the royalty payments do not exceed $20.3 million during thisperiod they will continue until 2015 or until the maximum is reached, whichevercomes first. Royalty expenses for the period ended December 31, 2006 total$64,000. In connection with the agreement, the Corporation also granted TPC92,857 warrants to purchase an equivalent number of common shares of theCorporation, exercisable until December 4, 2006, at an exercise price of$29.05 per share. These warrants expired, unexercised in December 2006.

F-23

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**WORLD HEART CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(d)**         ResearchAgreement

Effective April 1, 1996, the Corporation enteredinto a research agreement with the Cardiovascular Devices Division (CVD) of theOttawa Heart Institute Research Corporation (Research Agreement) under whichthe Corporation agreed to fund a substantial portion of CVD’s remainingresearch efforts relating to artificial heart technology. The Corporationacquired joint ownership with CVD of the technology arising from CVD’s researchunder the Research Agreement and an exclusive twenty-five year license tomarket the product and certain other related technologies for an initiallicense fee of $147,544 and royalties of 7%. The Corporation is no longerfocused on developing or commercializing this technology and as a result is notexpected to make any royalty payments to CVD.

The Corporation’s research funding to CVD under theResearch Agreement was $13,400,000 for the period from April 1, 1996 to December 31,2004. No payments were made during 2005 or 2006 and the Corporation does notanticipate any future payments under the Research Agreement, as it is notpursuing development of the CVD artificial heart technology.

The Corporation has beenin and continues discussions with the Ottawa Heart Institute to resolve certainpayments which both parties believe are owed by the other. In addition, aformer officer of WorldHeart currently employed at CVD has made additionalclaims for certain payments. WorldHeart believes that most of these claims areunsubstantiated and without merit. At December 31, 2006, World Heart hasaccrued liabilities of approximately $1,076,000 and recorded accountsreceivable of $613,000 related to CVD and the former officer.

**15.**          NETCHANGE IN OPERATING COMPONENTS OF WORKING CAPITAL AND SUPPLEMENTAL CASH FLOWDISCLOSURE

Thenet change in operating components of working capital is comprised of:

| ** **                                | ** ** | **December 31,** | ** ** |
|-------------------------------------------|------------|-----------------------|------------|
| ** **                                | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Accounts and  other receivables           |       | $                     | 1,545,018  |   | $ | 341,768 |   | $ | (475,399 | ) |
| Prepaid expenses                          |       | 74,362                |       | (184,180 | ) | 52,000 |   |
| Inventory                                 |       | 478,877               |       | (103,470 | ) | (2,176,785 | ) |
| Accounts payable  and accrued liabilities |       | (371,875              | )          | (754,091 | ) | (2,172,728 | ) |
| Accrued  compensation                     |       | 120,989               |       | (536,997 | ) | (359,814 | ) |
|                                      |       | $                     | 1,847,371  |   | $ | (1,236,970 | ) | $ | (5,132,726 | ) |

 

**16.**          SEGMENTEDINFORMATION

Operating segments are defined as components of anenterprise about which separate financial information is available that isevaluated regularly by the Corporation’s chief decision maker in deciding howto allocate resources and assess performance. The Corporation’s chief decisionmaker is the Chief Executive Officer.

The Corporation has oneoperating segment for the purpose of making operating decisions and assessingperformance and operates in several geographic locations.

F-24

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**WORLD HEART CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

*GeographicLocations*

Thefollowing geographic data provides revenue based on product shipmentdestination and long-lived assets based on physical location. The Corporationhas locations in the United States and Europe:

| ** **    | ** ** | **2006**    | ** **    | **2005**                        | ** ** |
|---------------|------------|-------------|---------------|---------------------------------|------------|
| ** **    | ** ** | **Revenue** | ** **    | **Long lived Assets** | ** ** | **Revenue** | ** ** | **Long lived Assets** | ** ** |
| United States |       | $           | 5,539,427     |                            |       | $ | 1,397,838 |   |   | $ | 8,978,882 |   |   | $ | 2,265,834 |   |   |
| Europe        |       | 1,948,259   |          |                            | 43,396     |   |   | 1,698,957 |   |   | 253,894 |   |   |
| Canada        |       | 865,159     |          |                            | —     |   |   | 685,959 |   |   | — |   |   |
| Japan         |       | 263,193     |          |                            | —     |   |   | 282,156 |   |   | — |   |   |
| **Total**     | ** ** | **$**       | **8,616,038** | ** **                      | ** ** | **$** | **1,441,234** |   | ** ** | **$** | **11,645,954** | ** ** | ** ** | **$** | **2,519,728** |   |   |

 

During 2006, LDS Hospitalaccounted for 12.5% of revenue. During 2005 and 2004, Edwards accounted for 5%and 7% of revenue, respectively. No other customer accounted for more than 10%of revenue in any of the three prior years.

**17.**          FINANCIALINSTRUMENTS

Financial instrumentsrecognized in the balance sheet at December 31, 2006, consist of cash andcash equivalents, trade and other receivables, accounts payable and certainaccrued liabilities. The Corporation does not hold or issue financialinstruments for trading purposes. During 2006, the Corporation invested all ofits excess cash in money market funds.

**(a)**         Fairvalue

The Corporation believesthat the carrying values of its financial instruments approximate their fairvalues because of their short terms to maturity.

**(b)**         Interestrate risk

During 2006, all ofWorldHeart’s investments were in money market funds with no interest rate risk.The Corporation may be subject to interest rate risks in the future if itpurchases longer-term investments.

**(c)**          Foreignexchange risk

WorldHeart has assets andliabilities denominated in foreign currencies; primarily the Euro and Canadiandollar. The Corporation’s current foreign currency exposure is not significantdue to the nature of the underlying assets and liabilities.

**(d)**         Creditrisk

Financial instruments thatpotentially subject the Corporation to a concentration of credit risk consistof cash, cash equivalents, short-term investments and accounts receivable. TheCorporation has established guidelines for cash, cash equivalents andshort-term investments relative to credit ratings, diversification andmaturities that are intended to maintain safety and liquidity. The Corporationhas a limited number of customers, all of which operate in the health-careindustry.   The Corporation performsongoing credit evaluations of its customers’ financial condition and generallyrequires no collateral from its customers. 

F-25

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**WORLD HEART CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

TheCorporation maintains an allowance for doubtful accounts receivable based uponthe expected collectibility of accounts receivable.

**18.**          NEWACCOUNTING  PRONOUNCEMENTS

**On September 15, 2006, theFASB issued Statement of Financial Accounting Standards No. 157, “FairValue Measurement” (FAS 157). The new standard applies whenever other standardsrequire (or permit) assets or liabilities to be measured at fair value. FASBstates FAS 157 “does not expand the use of fair value in any new circumstances.”  WorldHeart intends to adopt this standardeffective at the beginning fiscal 2008. The Company has not yet determined theimpact, if any, that this standard will have on our financial statements.**

In June 2006, the FASB issued Interpretation ofFinancial Accounting Standards No. 48, “Accounting for Uncertainty inIncome Taxes—an interpretation of FASB Statement No. 109.”  This interpretation clarifies the accountingfor uncertainty in income taxes recognized in an enterprise’s financialstatements in accordance with FASB Statement No. 109, Accounting forIncome Taxes. This interpretation prescribes a recognition threshold and measurementattribute for the financial statement recognition and measurement of a taxposition taken or expected to be taken in a tax return. WorldHeart intends toadopt the interpretation for fiscal year 2007. The Company has not yetdetermined the impact, if any, that this standard will have on our financialstatements.

On September 13,2006, the U.S. Securities and Exchange Commission (SEC) released StaffAccounting Bulletin (SAB) No. 108 on Quantifying Financial StatementMisstatements (SAB 108). WorldHeart intends to follow these guidelineseffective for fiscal year 2007. The Company has not yet determined the impact,if any, that this standard will have on our financial statements.

*Warrant and certainstock options denominated in Canadian dollars*

Effective January 1, 2004, the WorldHeartdetermined that its functional currency had changed from the Canadian dollar tothe U.S. dollar because the majority of its business operations and investorswere in the United States. Concurrent with change in functional currency,WorldHeart adopted the U.S. dollar as its reporting currency. Prior to January 1,2004 the functional and reporting currency was the Canadian dollar.

WorldHeart had primarily financed its operations fromthe sale of equity and debt securities that have been denominated in U.S. andCanadian dollars. As part of these financings, WorldHeart has issued warrantsto purchase common stock that have also been denominated in U.S. and Canadiandollars, and therefore, had warrants outstanding at December 31, 2006,2005 and 2004 that are denominated in both currencies.

The SEC and FASB have issued recent interpretationsfor U.S. GAAP that suggest warrants whose exercise price is different for theentity’s functional currency cannot be classified as equity and should betreated as derivatives, which would be recorded as liabilities and carried attheir fair value. Changes in the fair value from period to period would berecorded as a gain or loss in the statement of operations.

The recent SEC and FASB interpretations relate to FASBStatement No. 133, “Accounting for Derivative Instruments and HedgingActivities” and  Emerging Issue TaskForce  (“EITF”) “EITF 00-19 “Accountingfor Derivative Financial Instruments Indexed to and Potentially Settled in aCompany’s Own Stock”. The FASB has initiated a project to determine theaccounting treatment for certain equity 

F-26

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**WORLD HEART CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

instruments with elementsof foreign currency risk. This project is expected to provide further guidancewith respect to U.S. GAAP accounting for such items.

WorldHeart is awaiting theresults of the FASB’s project and had not, therefore, recorded warrantsoutstanding that have exercise prices in Canadian dollars, as derivatives. If  the Corporation had recorded such instrumentsas derivatives, it would have reported an incremental gain in net income ofapproximately $61.0 million, $9.9 million and $0.2 million related to theseinstruments in the statement of operations for the years ended December 31,2004, 2005 and 2006, respectively, under U.S. GAAP. The amounts were calculatedusing the Black-Scholes option pricing model. The Corporation used thefollowing assumptions to value the instruments: a 0% dividend rate for allperiods presented, volatility of 93%, 83% and 73% for fiscal 2006, 2005 and2004, the actual exercise price of each instrument, the actual Corporation closingstock price for December 31, 2006, 2005 and 2004, the estimated remaininglife of the underlying warrant at December 31, 2006, 2005 and 2004, andthe Canadian risk free interest rate based on the estimated remaining life ofthe related warrant.

**19.**          MEDQUESTACQUISITION

On July 29, 2005, the Corporation completed itsacquisition (MedQuest Acquisition) of MedQuest Products, Inc. (MedQuest),the developer of the Levacor Rotary VAD, a small rotary pump, for aggregateconsideration of 9.3 million common shares plus the assumption of $3.5 millionin debt and the payment of transaction costs of WorldHeart. The acquisition wasaccounted for as an acquisition of assets as the operations of MedQuest did notmeet the definition of a business as defined in Emerging Issues Task ForceIssue (EITF) Abstract No. 98-3 “Determining Whether a Non-monetaryTransaction Involves Receipt of Productive Assets or of a Business”. Assetsacquired and liabilities assumed were recorded at their estimated fair values.The value of the acquisition consideration, including certain acquisition andclosing costs, exceeded the fair value of the net assets acquired byapproximately $3.8 million. The excess was allocated to the relative fairvalues of the non-monetary assets acquired. Amounts allocated to identifiableintangible assets are being amortized over their estimated useful lives.Amounts allocated to purchased in-process research and development wereexpensed immediately.

The value of the acquisition consideration was asfollows:

| Issuance of  WorldHeart common shares |   | $         | 14,694,000 |   |
|---------------------------------------|--------|-----------|------------|--------|
| Bridge loan  repayment                |   | 3,500,000 |       |
| Transaction costs                     |   | 1,255,696 |       |
| Total purchase price                  |   | $         | 19,449,696 |   |

 

The allocation of the purchase price, based on theestimated fair values of the assets acquired, at the acquisition date of July 29,2005 is as follows:

An aggregate amount of $14.6 million was originallyallocated to purchased in-process research and development. We used an incomeapproach and applied risk-adjusted discount rates to the estimated futurerevenues and expenses attributable to IPR&D programs at MedQuest. The mostsignificant in-process program relates primarily to the development of theLevacor Rotary VAD, an advanced, next generation, rotary blood pump intendedfor the Destination Therapy market. The Levacor Rotary VAD had an estimatedfair value at the time of purchase of approximately $9.6 million. The othermajor development program called MagLev Plus had an estimated fair value ofapproximately $5.0 million.

F-27

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**WORLD HEART CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

The estimated fair value of the IPR&D wasincreased by approximately$3.6 million related to the excess of the purchase price over the estimatedfair value of the net assets acquired. Therefore, the IPR&D was valued atapproximately $18.1 million.

The Corporation recorded anon-cash charge to operations in the third quarter of 2005 of approximately $18.1 millionto immediately expense the purchased IPR&D as required under SFAS No. 141where such purchased IPR&D is determined to have no alternative future use.

*Private Placement*

In connection with theMedQuest Acquisition on July 29, 2005, WorldHeart entered into a privateplacement agreement with Maverick Venture Management, LLC (Maverick) in whichMaverick purchased approximately 8.9 million common shares of WorldHeart at apurchase price of $1.35 per share for total gross proceeds of approximately $12.0 million. Pursuantto the asset purchase agreement between MedQuest and WorldHeart, WorldHeartassumed certain liabilities of MedQuest, including approximately $3.5 million owed to Maverick in connection withthe ongoing operations of the MedQuest business and repaid that amount toMaverick upon closing of the MedQuest Acquisition.

**20.**          GOODWILL

On December 31, 2005,the Corporation completed its annual goodwill impairment test in accordancewith SFAS 142. In evaluating whether there was an impairment of goodwill, managementcompared the fair value of the reporting unit against its carrying amount,including the goodwill. Measurement of the fair value was based on thereporting unit’s market capitalization, discounted cash flows, and a multipleof revenues. As the carrying amount exceeded the estimated fair value, the fairvalue was allocated to the reporting unit’s assets and liabilities andmanagement then determined that the carrying value of the goodwill exceeded theimplied fair value of the goodwill. Accordingly, a goodwill impairment chargeof $17,179,643 was recorded in fiscal 2005. Management believes this impairmentarose primarily as a result of slower than anticipated adoption of the NovacorLVAS product.

**21.**          CONVERTIBLEDEBENTURES AND WARRANTS

During 2005, in conjunction with its acquisition ofMedQuest’s assets, WorldHeart issued tender offers to the holders of itsunsecured convertible debentures (Debentures) and the holders of its commonshare purchase warrants issued to investors on September 15, 2004 (Warrants).The holders of the Debentures unanimously agreed to convert all of theoutstanding Debentures at the stated conversion price of $1.25 per common share.On July 18, 2005, the shareholders approved a reduction in the Warrantexercise price from $1.55 to $1.00 per share on the condition that the Warrantholders exercise the Warrants immediately. The holders of the Warrantsunanimously agreed to exercise the 10,655,000 Warrants into 10,655,000 commonshares. During the last two weeks of July 2005, all of the Warrants wereexercised into common shares and the outstanding Debentures were converted tocommon shares. In addition, the accrued interest on the Debentures wasconverted into an additional 236,097 common shares at a conversion price equalto the volume weighted average stock price at the date of conversion.

The Debentures, which would have become due on September 15,2009, were convertible at any time at the holder’s option into common shares ofthe Corporation at a price of $1.25 per share, and accumulated non-compoundinginterest at an annual rate of 3%. The interest was convertible at any time 

F-28

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**WORLD HEART CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

into common shares ofWorldHeart at a price equal to the volume weighted average stock price at thedate of conversion.

The Corporation could have redeemed the Debentureswhen the trading price of the common shares was greater than $3.00 for 20consecutive days, subject to a maximum of 20% of the initially issuedDebentures in any 90-day period. The Warrants allowed the holders topurchase 10,655,000 common shares of WorldHeart at an exercise price of $1.55per share and were exercisable for a period of five years. WorldHeart couldhave called the Warrants when the trading price of the common shares wasgreater than $4.50 for 20 consecutive trading days, subject to a maximum of 20%of the initially issued Warrants in any 90-day period.

The Corporation issued to its agents 470,833 commonshares of the Corporation with a value of $659,166 and granted agent’s warrantsexercisable for 193,800 common shares of the Corporation with a value of$179,759 having the same terms as the warrants.

As a result of the change in fair value attributed tothe decrease in the exercise price of the Warrants from $1.55 to $1.00,$5,860,250 was recorded in 2005 as an increase in net loss applicable to commonshareholders and an increase in the carrying value of the Warrants included inadditional paid-in capital.

F-29

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