**UNITED STATESSECURITIES AND EXCHANGECOMMISSION****Washington, D.C. 20549**

**FORM 10-QSB**

**(MarkOne)**

**x****     ****QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

**For quarterly period ended   September 30****, 2006**

**o****        ****TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGEACT**

**For the transition periodfrom       to**

**Commission filenumber:  000-28882**

**WORLD HEART CORPORATION**(Exact name of Company as specified in itscharter)

| **Canada**                                                      |   | **52-2247240**                     |
|-----------------------------------------------------------------|--------|------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |   | (IRS Employer  Identification No.) |

 

**7799 PardeeLane, Oakland, California, USA, 94621**(Address of principal executive offices)

**(510)563-5000**(Issuer’s telephone number)

**N/A**(Former name, former address and former fiscal year, if changed since lastreport)

Check whether the issuer (1) filed all reportsrequired to be filed by Section 13 or 15(d) of the Exchange Actduring the past 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.      Yes   x   No   o

Indicate by check mark whether the Registrant is ashell company (as defined in Rule 12b-2 of the Securities Exchange Act of1934).        Yes   o   No   x

State the number of shares outstanding of each of theissuer’s classes of common equity, as of the latest practicable date:

The number of common shares outstanding as of  October 31, 2006 was 55,479,549.

TransitionalSmall Business Disclosure Format (Check one):      Yes   o   No   x

 

----

**TABLEOF CONTENTS**

 
|              | ** ** | **Item**   | ** ** | ** **                                                      | ** ** |
|--------------|------------|------------|------------|-----------------------------------------------------------------|------------|
| ** **   | ** ** | ** ** | ** ** | ** **                                                      | ** ** |   |
| Part I  |       | 1          |       | Financial  Statements                                           |       |   |
|         |       |       |       |                                                            |       |   |
|         |       | 2          |       | Management’s Discussion and Analysis or Plan of  Operation |       |   |
|         |       |       |       |                                                            |       |   |
|         |       | 3          |       | Controls and Procedures                                         |       |   |
|         |       |       |       |                                                            |       |   |
| Part II |       | 1          |       | Legal  Proceedings                                              |       |   |
|         |       |       |       |                                                            |       |   |
|         |       | 2          |       | Unregistered Sales of Equity Securities and Use of  Proceeds    |       |   |
|         |       |       |       |                                                            |       |   |
|         |       | 3          |       | Defaults Upon Senior Securities                                 |       |   |
|         |       |       |       |                                                            |       |   |
|         |       | 4          |       | Submission of Matters to a Vote of Security Holders             |       |   |
|         |       |       |       |                                                            |       |   |
|         |       | 5          |       | Other  Information                                              |       |   |
|         |       |       |       |                                                            |       |   |
|         |       | 6          |       | Exhibits                                                        |       |   |
|         |       |       |       |                                                            |       |   |
|         |       |       |       | Signatures                                                      |       |   |
|              |            |            |            |                                                                 |            |  |  |  |  |

 

----

 

----

**PART I—FINANCIAL INFORMATION**

**ITEM 1.  FINANCIALSTATEMENTS**

**WORLD HEART CORPORATION****Consolidated BalanceSheets**(United States Dollars)
| ** **                                                                                         | ** ** | **September 30, 2006** | ** **     | **December 31, 2005** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|----------------------------------|----------------|---------------------------------|------------|
| ** **                                                                                         | ** ** | **(Unaudited)**                  | ** **     | ** **                      | ** ** |
| **ASSETS**                                                                                         | ** ** | ** **                       | ** **     | ** **                      | ** ** |
| **Current assets**                                                                                 | ** ** | ** **                       | ** **     | ** **                      | ** ** |
| Cash and cash  equivalents                                                                         |       | $                                | 1,541,399      |                            | $          | 10,661,682 |   |
| Trade and other  receivables                                                                       |       | 1,721,316                        |           | 3,896,281                       |       |
| Prepaid expenses                                                                                   |       | 1,145,277                        |           | 778,007                         |       |
| Inventory                                                                                          |       | 4,202,882                        |           | 8,215,995                       |       |
|                                                                                               |       | 8,610,874                        |           | 23,551,965                      |       |
| **Long-term assets**                                                                               | * *   | * *                         | * *       | * *                        | * *   |
| Cash pledged as  collateral for lease                                                              |       | 750,000                          |           | 750,000                         |       |
| Capital assets                                                                                     |       | 1,435,218                        |           | 1,837,540                       |       |
| Intangible  assets                                                                                 |       | 538,620                          |           | 682,188                         |       |
|                                                                                               |       | 2,723,838                        |           | 3,269,728                       |       |
| **Total assets**                                                                                   | ** ** | **$**                            | **11,334,712** | ** **                      | **$**      | **26,821,693** | ** ** |
| ** **                                                                                         | ** ** | ** **                       | ** **     | ** **                      | ** ** |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                     | ** ** | ** **                       | ** **     | ** **                      | ** ** |
| **Current liabilities**                                                                            | ** ** | ** **                       | ** **     | ** **                      | ** ** |
| Accounts payable  and accrued liabilities                                                          |       | $                                | 4,265,217      |                            | $          | 3,754,620 |   |
| Indirect taxes  payable                                                                            |       | 402,612                          |           | 343,082                         |       |
| Accrued  compensation                                                                              |       | 645,008                          |           | 806,367                         |       |
| Deferred revenue                                                                                   |       | 123,084                          |           | 1,205,107                       |       |
| **Total liabilities**                                                                              | ** ** | **$**                            | **5,435,921**  | ** **                      | **$**      | **6,109,176** | ** ** |
| ** **                                                                                         | * *   | * *                         | * *       | * *                        | * *   |
| **Shareholders’ equity**                                                                      |       |                             |           |                            |       |
| Share capital:                                                                                     |       |                             |           |                            |       |
| Issued and  outstanding - 55,479,549 common shares (December 31, 2005 - 55,479,549 common  shares) |       | 276,908,002                      |           | 276,908,002                     |       |
| Additional  paid-in-capital                                                                        |       | 2,273,747                        |           | 2,138,765                       |       |
| Cumulative other  comprehensive income                                                             |       | (6,285,577                       | )              | (6,285,577                      | )          |
| Accumulated  deficit                                                                               |       | (266,997,381                     | )              | (252,048,673                    | )          |
| Total  shareholders’ equity                                                                   |       | $                                | 5,898,791      |                            | $          | 20,712,517 |   |
|                                                                                               |       |                             |           |                            |       |
| **Total liabilities and  shareholders’ equity**                                               | ** ** | **$**                            | **11,334,712** | ** **                      | **$**      | **26,821,693** | ** ** |

 

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

 

3

----

** **

**WORLDHEART CORPORATIONConsolidated Statements of Operations**(United States Dollars)(Unaudited)

 
| ** **                                                | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                      |       |                                                 |       |                                                |       |   |   |   |   |
| **Revenue**                                               |       | $                                                    | 1,387,096  |                                                | $          | 2,149,751 |   | $ | 7,659,983 |   | $ | 8,015,917 |   |
| **Cost of goods sold**                                    |       | (4,524,142                                           | )          | (1,726,158                                          | )          | (7,846,359 | ) | (5,980,126 | ) |
|                                                      |       |                                                 |       |                                                |       |   |   |   |   |
| **Gross margin**                                          |       | (3,137,046                                           | )          | 423,593                                             |       | (186,376 | ) | 2,035,791 |   |
|                                                      |       |                                                 |       |                                                |       |   |   |   |   |
| **Operating expenses**                                    |       |                                                 |       |                                                |       |   |   |   |   |
| Selling, general  and administrative                      |       | 1,963,831                                            |       | 2,540,113                                           |       | 6,695,317 |   | 9,003,272 |   |
| Research and  development                                 |       | 2,429,875                                            |       | 1,913,941                                           |       | 8,092,265 |   | 4,376,010 |   |
| Restructuring  costs                                      |       | —                                               |       | (8,373                                              | )          | — |   | 333,030 |   |
| Amortization of  intangibles                              |       | 47,856                                               |       | 31,491                                              |       | 143,568 |   | 286,518 |   |
| Acquired in  process research and development             |       | —                                               |       | 18,147,341                                          |       | — |   | 18,147,341 |   |
|                                                      |       |                                                 |       |                                                |       |   |   |   |   |
| **Total  operating expenses**                             |       | 4,441,562                                            |       | 22,624,513                                          |       | 14,931,150 |   | 32,146,171 |   |
|                                                      |       |                                                 |       |                                                |       |   |   |   |   |
| **Operating loss**                                        |       | (7,578,608                                           | )          | (22,200,920                                         | )          | (15,117,526 | ) | (30,110,380 | ) |
|                                                      |       |                                                 |       |                                                |       |   |   |   |   |
| **Other income (expenses)**                               |       |                                                 |       |                                                |       |   |   |   |   |
| Foreign exchange  gain (loss)                             |       | 588                                                  |       | (51,279                                             | )          | 41,109 |   | (68,558 | ) |
| Investment and  other income                              |       | 37,130                                               |       | 91,841                                              |       | 204,106 |   | 124,081 |   |
| Loss on disposal  of capital assets                       |       | —                                               |       | —                                              |       | (271 | ) | (959 | ) |
| Interest expense  and financing costs                     |       | (77,753                                              | )          | (90,750                                             | )          | (76,126 | ) | (780,429 | ) |
|                                                      |       |                                                 |       |                                                |       |   |   |   |   |
| **Net loss for the quarter**                              |       | $                                                    | (7,618,643 | )                                                   | $          | (22,251,108 | ) | $ | (14,948,708 | ) | $ | (30,836,245 | ) |
|                                                      |       |                                                 |       |                                                |       |   |   |   |   |
| **Effect of warrant exchange**                            |       | —                                               |       | (5,860,250                                          | )          | — |   | (5,860,250 | ) |
|                                                      |       |                                                 |       |                                                |       |   |   |   |   |
| **Net loss applicable to common  shareholders**           |       | $                                                    | (7,618,643 | )                                                   | $          | (28,111,358 | ) | $ | (14,948,708 | ) | $ | (36,696,495 | ) |
|                                                      |       |                                                 |       |                                                |       |   |   |   |   |
| **Weighted average number of  common shares outstanding** |       | 55,479,549                                           |       | 43,797,104                                          |       | 55,479,549 |   | 25,918,252 |   |
|                                                      |       |                                                 |       |                                                |       |   |   |   |   |
| **Basic and diluted loss per common share**               |       | $                                                    | (0.14      | )                                                   | $          | (0.64 | ) | $ | (0.27 | ) | $ | (1.42 | ) |

 

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

 

4

----

**WORLDHEART CORPORATIONConsolidated Statements of Cash Flow**(United States Dollars)|(Unaudited)

 
| ** **                                                                             | ** ** | **Three Months Ended  September 30,** | ** **    | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------------|------------|------------------------------------------------------|---------------|-----------------------------------------------------|------------|
| ** **                                                                             | ** ** | **2006**                                             | ** **    | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| **CASH FLOWS FROM (USED IN)**                                                          |       |                                                 |          |                                                |       |   |   |   |   |
| ** **                                                                             |       |                                                 |          |                                                |       |   |   |   |   |
| **Operating activities**                                                               |       |                                                 |          |                                                |       |   |   |   |   |
| Net loss for the period                                                                |       | $                                                    | (7,618,643    | )                                                   | $          | (22,251,108 | ) | $ | (14,948,708 | ) | $ | (30,836,245 | ) |
| Items not involving  cash —                                                       |       |                                                 |          |                                                |       |   |   |   |   |
| Amortization and  depreciation                                                         |       | 240,455                                              |          | 196,479                                             |       | 663,894 |   | 765,540 |   |
| Loss on disposal  of capital assets                                                    |       | —                                               |          | —                                              |       | 271 |   | 959 |   |
| In-process  research and development                                                   |       | —                                               |          | 18,147,341                                          |       | — |   | 18,147,341 |   |
| Write down of  capital and intangible assets                                           |       | —                                               |          | —                                              |       | — |   | 36,842 |   |
| Non-cash expense  on stock options                                                     |       | 51,774                                               |          | 160,935                                             |       | 134,982 |   | 160,935 |   |
| Interest and  accretion on convertible debentures                                      |       | —                                               |          | 93,153                                              |       | — |   | 770,954 |   |
| Unrealized  foreign exchange loss (gain)                                               |       | —                                               |          | 108,496                                             |       | 945 |   | 385,124 |   |
| Change in operating  components of working capital                                     |       | 4,342,625                                            |          | (1,235,921                                          | )          | 5,146,608 |   | (1,079,436 | ) |
| **Cash used in operating  activities**                                                 | ** ** | **(2,983,789**                                       | **)**         | **(4,780,625**                                      | **)**      | **(9,002,008** | **)** | **(11,647,986** | **)** |
|                                                                                   |       |                                                 |          |                                                |       |   |   |   |   |
| **Investing activities**                                                               |       |                                                 |          |                                                |       |   |   |   |   |
| Redemption (purchase)  of short-term investments                                       |       | —                                               |          | —                                              |       | — |   | 4,999,035 |   |
| Deferred transaction  costs paid                                                       |       | —                                               |          | (1,255,696                                          | )          | — |   | (1,255,696 | ) |
| Purchase of capital  assets                                                            |       | (42,871                                              | )             | (12,274                                             | )          | (118,275 | ) | (127,954 | ) |
| **Cash provided by (used in)  investing activities**                                   | ** ** | **(42,871**                                          | **)**         | **(1,267,970**                                      | **)**      | **(118,275** | **)** | **3,615,385** | ** ** |
|                                                                                   |       |                                                 |          |                                                |       |   |   |   |   |
| **Financing activities**                                                               |       |                                                 |          |                                                |       |   |   |   |   |
| Repayment of bridge  loan                                                              |       | —                                               |          | (3,500,000                                          | )          | — |   | (3,500,000 | ) |
| Issuance of common  shares through private placement                                   |       | —                                               |          | 12,000,000                                          |       | — |   | 12,000,000 |   |
| Common shares issued  through exercise of warrants                                     |       | —                                               |          | 10,655,000                                          |       | — |   | 10,655,000 |   |
| **Cash provided by financing  activities**                                             |       | —                                               | ** **    | **19,155,000**                                      | ** ** | **—** | ** ** | **19,155,000** | ** ** |
| ** **                                                                             |       |                                                 |          |                                                |       |   |   |   |   |
| **Effect of exchange rates on  cash and cash equivalents**                             |       | —                                               |          | 3,497                                               |       | — |   | (19,333 | ) |
| **Change in cash and cash  equivalents for the period**                                | ** ** | **(3,026,660**                                       | **)**         | **13,109,902**                                      | ** ** | **(9,120,283** | **)** | **11,103,066** | ** ** |
|                                                                                   | ** ** | ** **                                           | ** **    | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Cash and cash equivalents,  beginning of the period**                                | ** ** | **4,568,059**                                        | ** **    | **1,811,931**                                       | ** ** | **10,661,682** | ** ** | **3,818,767** | ** ** |
|                                                                                   | ** ** | ** **                                           | ** **    | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Cash and cash equivalents, end  of the period**                                      | ** ** | **$**                                                | **1,541,399** | ** **                                          | **$**      | **14,921,833** | ** ** | **$** | **1,541,399** | ** ** | **$** | **14,921,833** | ** ** |
|                                                                                   | ** ** | ** **                                           | ** **    | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                                                   | ** ** | ** **                                           | ** **    | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Supplementary Cash Flow  Information**                                               |       |                                                 |          |                                                |       |   |   |   |   |
|                                                                                   |       |                                                 |          |                                                |       |   |   |   |   |
| Convertible debentures  settled with the issuance of common shares                     |       | $                                                    | —        |                                                | $          | 11,639,289 |   | $ | — |   | $ | 13,318,750 |   |
|                                                                                   |       |                                                 |          |                                                |       |   |   |   |   |
| Accrued interest on convertible debentures settled with the issuance  of common shares |       | —                                               |          | 301,988                                             |       | — |   | 320,988 |   |

 

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

 

5

----

**WORLDHEART CORPORATION**

#### **Notes to Unaudited Consolidated FinancialStatements**

**1.****              Going Concern**

These interim unauditedconsolidated financial statements have been prepared on the basis of accountingprinciples applicable to a going concern, which assumes that World HeartCorporation (the Corporation or WorldHeart) will continue in operation for theforeseeable future and will be able to realize its assets and discharge itsliabilities in the normal course of operations.

During the quarter endedSeptember 30, 2006, the Corporation incurred a net loss of $7.6 million andused cash in its operations of $3.0 million. As at September 30, 2006, WorldHearthad cash and cash equivalents of $1.5 million and current liabilities of $5.3million. 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, theCorporation entered into a purchase agreement with certain new and currentinvestors for a private placement financing. The completion of the privateplacement is subject to shareholder approval which is expected to occur at theCorporation’s Annual and Special Meeting to be held on December 20, 2006. Grossproceeds from the financing are expected to be about $14.1 million at a priceof $0.25 per common share. A first closing of the financing of $2.75 million isexpected to occur on or before November 17, 2006. A second closing of about $11.3million is expected to occur immediately after shareholder approval. Inaddition, the Corporation will pay investment banking fees equal to 6% of thegross proceeds payable in common shares. Under the terms of the transaction,the Corporation is required to register for resale the common shares issued pursuantto the private placement.

In addition, as part ofthe Corporation’s continuing efforts to control spending, and in response tochanging market conditions for its Novacor® LVAS product, WorldHeart announced onNovember 14, 2006 a significant restructuring and realignment of its businessoperations.  The restructuring program will reduce manufacturing, sellingand administrative costs, primarily associated with the Novacor LVAS product. The program will include a reduction in workforce of 50 to 55 persons, orabout 50% of its current workforce, primarily at its Oakland, California andHeesch, Netherlands locations.  In addition, during the quarter, theCorporation wrote off approximately $3.6 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.  In thefourth quarter of 2006, the Corporation expects to incur charges of about $0.7 million,primarily related to severance, in connection with the announced restructuring,and may take a further write down of its Novacor LVAS inventory and fixedassets. The Corporation’s continuation as a going concern is dependent on completion ofthe private placement and the restructuring and realignment of its businessoperations.  The Company believes the financing,in combination with the restructuring, will provide sufficient funds tocontinue operations through, at least the first quarter of 2008.These interimunaudited consolidated financial statements do not include any adjustmentsrelating to the carrying values of assets and liabilities and the reportedexpenses and balance sheet classifications that would be necessary, were thegoing concern assumption inappropriate, and these adjustments could bematerial.

**2.****              SignificantAccounting Policies**

*Principles of consolidation andbasis of presentation*

The accompanying interim unaudited 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 inter-company transactions and balances have been eliminated. These interimunaudited consolidated financial statements follow the same accounting policiesand methods of application as the Corporation’s audited consolidated financialstatements for the year ended December 31, 2005, except the

6

----

accountingfor stock-based compensation as noted in Note 3. These interim unauditedconsolidated financial statements do not conform in all respects to therequirements of U.S. GAAP for annual financial statements. These condensednotes to the interim unaudited consolidated financial statements should be readin conjunction with the audited consolidated financial statements and notes forthe year ended December 31, 2005. In the opinion of management, theseinterim unaudited consolidated financial statements reflect all normal andrecurring adjustments considered necessary to state fairly the results for theperiods presented.

The accounting  principles used as a basis for theseconsolidated financial statements also conform in all material respects withCanadian generally accepted accounting principles (Canadian GAAP) except asdescribed in Note 8. The interim unaudited consolidated financialstatements are expressed in U.S. dollars.

*Use ofestimates*

Thepreparation of these interim unaudited consolidated financial statements inconformity with U.S. GAAP requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the dates of  the financial statements and the reportedamounts of revenues and expenses during the reporting periods. Actual resultscould differ from these estimates.

**3.   Stock-based Compensation**

The Corporation has an employee stock option plan(ESOP).  The maximum number of sharesreserved and set aside under options to eligible persons pursuant to the ESOPis 9,757,904 common shares.  The exerciseprice for all options issued under the ESOP is based on the fair market valueof the common share price which is the closing price quoted on the TorontoStock Exchange on the last trading day before the date of grant. The optionsgenerally vest annually in equal portions over either a five-year period or athree-year period and expire from seven to nine years from the date ofgrant.  All stock option grants arecompensatory and shares issued upon exercise of options are in accordance withthe ESOP.

Prior to January 1, 2006, theCorporation accounted for its stock option plan in accordance with theFinancial Accounting Standards Board’s (FASB) Statement of Financial AccountingStandards (SFAS) No. 123, “Accounting for Stock Based Compensation,” andAccounting Principles Board (APB) Opinion No. 25, “Accounting for StockIssued to Employees.”  Under thesestandards no compensation expense was recognized when options were issued toemployees with exercise prices at the grant date equal to prevailing marketprices.

Effective January 1, 2006, the Corporation adopted Statementof Financial Accounting Standards No. 123 (Revised 2004), “Share —BasedPayment” (FAS 123(R)).  FAS 123(R)requires the recognition of the fair value of stock compensation as an expensein the calculation of net income. WorldHeart recognizes the stock compensationexpense over the vesting period of the individual equity instruments. Stock options issued in lieu of cash to non-employees for servicesperformed are recorded at the fair value of the options at the time they areissued and are expensed as service is provided.

WorldHeart has elected the modified prospective transitionmethod for adopting FAS 123 (R). Under this method, the provisions of FAS 123(R) apply to all stock-based awards granted after the effective date.  The unrecognized expense of awards not yetvested as of January 1, 2006, the date of FAS 123 (R) adoption by theCorporation, are also recognized as an expense in the calculation of netincome.   As FAS 123(R) requiresthat stock-based compensation expense be based on awards that are ultimatelyexpected to vest, stock-based compensation for the nine-month period endedSeptember 30, 2006 has been reduced for estimated forfeitures. When estimatingforfeitures, voluntary termination behaviors as well as trends of actual optionforfeitures are considered. To the extent actual forfeitures differ from ourcurrent estimates, cumulative adjustments to stock-based compensation expensewill be recorded in the period estimates are revised.

In December 2005, theBoard of Directors of WorldHeart approved the accelerated vesting of alloutstanding stock options held by current employees or consultants, except forthe options held by the non-employee members of the 

7

----

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 of FAS 123(R).

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

The stock-based compensationexpense for the three and nine-month period ended September 30, 2006 was asfollows:

 
| ** **                           | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | **September 30, 2006** | ** ** |
| Selling, general  and administrative |       | 51,037                           |       | 133,630                         |       |
| Research and  development            |       | 737                              |       | 1,352                           |       |
|                                 |       | $                                | 51,774     |                            | $          | 134,982 |   |
|                                      |            |                                  |            |                                 |            |  |  |

 

This stock compensation expense had a negligibleimpact on the Corporation’s earnings per common share for the third quarter2006. The unrecognized expense of awards not yet vested, net of estimatedforfeitures, was $219,000 and the related stock-based compensation expense willbe recognized over the following eleven quarters beginning September 30, 2006.

*Stock-based Compensation AwardActivity*

The following tablesummarizes activity under our ESOP for the three and nine months endedSeptember 30, 2006:
| ** **                         | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise Price** | ** ** |
|------------------------------------|------------|------------|------------|---------------------------------------------|------------|
| Outstanding at  January 1, 2006    |       | 6,803,803  |       | $                                           | 1.73       |   |
| Granted                            |       | 3,000      |       | $                                           | 0.59       |   |
| Exercised                          |       | —     |       | —                                      |       |
| Forfeited/  expired / cancelled    |       | (54,368    | )          | $                                           | 37.44      |   |
| Outstanding at  March 31, 2006     |       | 6,752,435  |       | $                                           | 1.44       |   |
| Granted                            |       | 148,000    |       | $                                           | 1.12       |   |
| Exercised                          |       | —     |       | —                                      |       |
| Forfeited/  expired / cancelled    |       | (150,298   | )          | $                                           | 6.08       |   |
| Outstanding at  June 30, 2006      |       | 6,750,137  |       | $                                           | 1.77       |   |
| Granted                            |       | 3,500      |       | $                                           | 0.68       |   |
| Exercised                          |       | —     |       | $                                           | —     |   |
| Forfeited/  expired / cancelled    |       | (2,551     | )          | $                                           | 39.74      |   |
| Outstanding at  September 30, 2006 |       | 6,751,086  |       | $                                           | 1.76       |   |
| Exercisable at  September 30, 2006 |       | 6,356,590  |       | $                                           | 1.79       |   |
| Nonvested at September  30, 2006   |       | 394,496    |       | $                                           | 1.28       |   |

The aggregate intrinsic value is calculated as the differencebetween the exercise price of the options and the quoted price of our commonshares that were in the money at September 30, 2006. At September 30, 2006, theaggregate

8

----

intrinsic value of all outstanding options was nil with aweighted average remaining contractual term of approximately 6.6 years. Of the6,751,086 outstanding options, exercisable options were 6,356,590 with aweighted average remaining contractual life of 6.5 years and 394,496 wereunvested with a weighted average remaining contractual life of 7.6 years. Nooptions were exercised under our stock option plan during the three and ninemonth periods ended September 30, 2006. The weighted average grant-date fairvalue of options granted in the three and nine month periods ended September30, 2006 were $0.52 and $0.85, respectively.

A summary of the status and changes of our non-vested sharesrelated to our ESOP as of and during the nine months ended September 30, 2006is presented below. The weighted average grant date fair value on non-vestedshares represent the gross value of unvested options, excluding estimatedforfeitures.
| ** **                       | ** ** | **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                                                   |       |
| Nonvested at  September 30, 2006 |       | 394,496    |       | $                                                      | 0.95       |   |

 

***ValuationAssumptions***

WorldHeart calculated the fair value of each option awardon the date of grant using the Black-Scholes option pricing model. Thefollowing assumptions were used to calculate the fair value of options grantedduring the three and month periods ended September 30, 2006:
| ** **                       | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                       | ** ** | **September 30, 2006** | ** ** |
| Average risk  free interest rate |       |                             | 4.6        | %                               |       |   | 4.5 | % |   |
| Expected life  (in years)        |       |                             | 5.5        |                            |       |   | 5.6 |   |   |
| Expected  volatility             |       |                             | 95         | %                               |       |   | 93 | % |   |
| Dividend yield                   |       |                             | 0          | %                               |       |   | 0 | % |   |

 

Thedividend yield of zero is based on the fact that WorldHeart has never paid cashdividends and has no present intention to pay cash dividends.  Expected volatility is based on thehistorical volatility of the Corporations’ common stock over the periodcommensurate with the expected life of the options.  The risk free interest rate is based onaverage rates for 5 and 7 year treasury notes as published by the FederalReserve.

FAS 123(R) requires theCorporation to present pro forma information for the comparative period prior toadoption as if WorldHeart had accounted for all employee stock options underthe fair value method of the original FAS 123. The following table illustratesthe effect on net income and earnings per share if WorldHeart had applied thefair value recognition provisions of  FAS123 to stock-based employee compensation to the prior-year periods.
| ** **                                             | ** ** | **Three months ended  September 30,** | ** **  | **Nine months ended  September 30,** | ** ** |
|--------------------------------------------------------|------------|------------------------------------------------------|-------------|-----------------------------------------------------|------------|
| ** **                                             | ** ** | **2005**                                             | ** **  | **2005**                                            | ** ** |
| Net loss  applicable to common shareholders            |       | $                                                    | (28,111,358 | )                                                   | $          | (36,696,495 | ) |
| Adjustment for  stock based costs included in net loss |       | 160,931                                              |        | 160,931                                             |       |
| Stock-based  costs under fair value method             |       | (1,214,519                                           | )           | (1,863,823                                          | )          |
| Adjusted pro  forma net loss                           |       | $                                                    | (29,164,946 | )                                                   | $          | (38,399,387 | ) |
|                                                   |       |                                                 |        |                                                |       |
| Reported basic  and diluted loss per common share      |       | $                                                    | (0.64       | )                                                   | $          | (1.42 | ) |
| Stock-based  compensation costs per common share       |       | (0.03                                                | )           | (0.07                                               | )          |
| Pro forma basic  and diluted net loss per common share |       | $                                                    | (0.67       | )                                                   | $          | (1.48 | ) |

 

9

----

The following table summarizes information aboutthe outstanding options as at September 30, 2006: 
| ** **              | ** ** | **Number outstanding** | ** ** | **Weighted average  exercise price** | ** ** | **Weighted average  remaining life in  years** | ** ** |
|-------------------------|------------|-----------------------------|------------|------------------------------------------------|------------|---------------------------------------------------------------|------------|
| $0.59 to  $1.25    |       | 1,242,679                   |       | $                                              | 1.11       |                                                          | 6.30       |   |
| $1.26 to  $2.50    |       | 5,247,646                   |       | $                                              | 1.37       |                                                          | 6.86       |   |
| $2.51 to  $10.00   |       | 217,412                     |       | $                                              | 8.21       |                                                          | 3.30       |   |
| $10.01 to  $119.25 |       | 43,349                      |       | $                                              | 34.61      |                                                          | 1.07       |   |
|                    |       | 6,751,086                   |       | $                                              | 1.76       |                                                          | 6.61       |   |

 

**4.**              Comprehensive Income

For the three months and ninemonths ended September 30, 2006 and September 30, 2005, there were nosignificant differences between the Corporation’s comprehensive income or lossand its net income or loss.

**5.**              MedQuest Acquisition

On July 29, 2005, WorldHeart completed theacquisition (MedQuest Acquisition) of all assets and assumption of certainliabilities of MedQuest Products, Inc. (MedQuest), raised approximately $22.7million in gross financing proceeds from a private placement of common shareswith Maverick Venture Management, LLC (Maverick)and the exercise of all the outstanding warrants. In addition, pursuant to thepurchase agreement, WorldHeart repaid $3.5 million owed by MedQuest to Maverickupon closing of the MedQuest Acquisition. As a result, WorldHeart received netproceeds of approximately $8.5 million from the private placement.

The acquisition resulted in a one-time charge to earnings for the valueof the acquired in-process research and development of approximately $18.1million in the period ended September 30, 2005.

**6.**              Convertible Debentures and Warrants

As part of the MedQuestAcquisition, the Company issued tender offers to the holders of its unsecuredconvertible debentures (the “Debentures”) and the holders of its common stockpurchase warrants issued to investors in September 2004 (the “Warrants”).The holders of the Debentures unanimously agreed to convert all of theoutstanding Debentures at the stated conversion price of $1.25 per common sharealong with all accrued interest. On July 18, 2005, the shareholdersapproved a reduction in the Warrant exercise price from $1.55 to $1.00 pershare on the condition that the Warrant holders exercise the Warrants immediately.The holders of the Warrants unanimously agreed to exercise the 10,655,000Warrants into 10,655,000 common shares. During the last two weeks ofJuly 2005, all of the Warrants were exercised into common shares and theremaining outstanding Debentures were converted to common shares. In addition,the accrued interest on the Debentures was also converted into an additional236,097 common shares at a conversion price equal to the volume weightedaverage stock price at the date of conversion.

Asa result of the change in fair value attributed to the decrease in the exerciseprice of the Warrants from $1.55 to $1.00, $5,860,250 was recorded in the thirdquarter of 2005 as an increase in net loss applicable to common shareholdersand an increase in the carrying value of the Warrants included in additionalpaid-in capital.

**7.**              Restructuring

On August 25, 2004, theCompany approved a plan to consolidate its Ottawa, Ontario operations into itsfacilities in Oakland, California where the Novacor LVAS is manufactured. Theconsolidation of the North American operations

10

----

#### into one location has reduced ongoingbusiness expenses.  The consolidation wascompleted by June 30, 2005. These interim unaudited financials statementsdo not include any provision for the costs of restructuring announced onNovember 14, 2006.

**8.**              Canadian Accounting Principles

Theinterim unaudited consolidated financial statements have been prepared inaccordance with U.S. GAAP. These principles differ, as they affect theCorporation, for the three and nine month periods ended September 30, 2006 and2005 and for the balance sheets as at September 30, 2006 and December 31,2005, in the following material respects from Canadian GAAP.

**Balance Sheets - Canadian GAAP**
| ** **                                           | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                           | ** ** | **(Unaudited)**              | ** ** | ** **                  | ** ** |
| **ASSETS**                                           | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| **Current  assets**                                  |       | $                            | 8,610,874  |                        | $          | 23,551,965 |   |
| Cash pledged as collateral for lease                 |       | 750,000                      |       | 750,000                     |       |
| Capital assets                                       |       | 1,435,218                    |       | 1,837,540                   |       |
| In-process research and development, net             |       | 14,451,577                   |       | 17,317,249                  |       |
|                                                 |       | $                            | 25,247,669 |                        | $          | 43,456,754 |   |
|                                                 |       |                         |       |                        |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**       | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| **Current  liabilities**                             |       | $                            | 5,435,921  |                        | $          | 6,109,176 |   |
|                                                 |       | 5,435,921                    |       | 6,109,176                   |       |
|                                                 |       |                         |       |                        |       |
| **Shareholders’  equity (deficiency)**          | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Common shares                                        |       | 238,597,956                  |       | 238,597,956                 |       |
| Contributed surplus                                  |       | 18,487,718                   |       | 18,352,736                  |       |
| Cumulative translation adjustment                    |       | (6,490,184                   | )          | (6,490,184                  | )          |
| Accumulated deficit                                  |       | (230,783,742                 | )          | (213,112,930                | )          |
| Total shareholders’ equity                      |       | 19,811,748                   |       | 37,347,578                  |       |
|                                                 |       |                         |       |                        |       |
| **Total liabilities and  shareholders’ equity** |       | $                            | 25,247,669 |                        | $          | 43,456,754 |   |

 

11

----

 

**Statementsof loss - Canadian GAAP**

(Unaudited)
| ** **                                                         | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                         | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| * *                                                           | * *   | * *                                             | * *   | * *                                            | * *   | * * | * * | * * | * * |
| **Net  loss in accordance with U.S. GAAP**                         |       | $                                                    | (7,618,643 | )                                                   | $          | (22,251,108 | ) | $ | (14,948,708 | ) | $ | (30,836,245 | ) |
| Adjustments to  reconcile to Canadian GAAP:                        |       |                                                 |       |                                                |       |   |   |   |   |
| Non-cash share based compensation costs (1)                        |       | —                                               |       | (1,053,588                                          | )          | — |   | (1,703,192 | ) |
| Interest and accretion on convertible debentures                   |       | —                                               |       | (73,673                                             | )          | — |   | (608,910 | ) |
| In-process research and development (2)                            |       | —                                               |       | 18,147,341                                          |       | — |   | 18,147,341 |   |
| Amortization of purchased in-process research and  development (3) |       | (907,368                                             | )          | (604,912                                            | )          | (2,722,104 | ) | (604,912 | ) |
|                                                               |       |                                                 |       |                                                |       |   |   |   |   |
| **Net  loss in accordance with Canadian GAAP**                     |       | $                                                    | (8,526,011 | )                                                   | $          | (5,835,940 | ) | $ | (17,670,812 | ) | $ | (15,605,918 | ) |
| ** **                                                         | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Weighted  average number of common shares outstanding**          |       | 55,479,549                                           |       | 43,797,104                                          |       | 55,479,549 |   | 25,918,252 |   |
| ** **                                                         | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Basic  and diluted loss per common share**                       |       | $                                                    | (0.15      | )                                                   | $          | (0.13 | ) | $ | (0.32 | ) | $ | (0.60 | ) |

----

Footnotes

(1)          Prior to January 2006, underU.S. GAAP, the Corporation accounted for its stock option plan in accordancewith APB Opinion No. 25 and provided pro forma net income and pro forma incomeper share disclosure as if the fair value based method as defined in SFAS No.123 had been applied to stock-based awards. Under Canadian GAAP, the Corporation accounted for its stock option planin accordance with CICA 3870 which requires entities to account for employeestock options using the fair value based method, where compensation cost ismeasured at fair value at the date of grant and is expensed over thestock-based awards vesting period. With the January 1, 2006 adoption of FAS123(R), this difference has been eliminated.

(2)          Under U.S. GAAP, acquiredin-process research and development is required to be expensed if the related technologyhas not reached technological feasibility and does not have an alternativefuture use.  Under Canadian GAAP,in-process research and development and work force intangible assets, acquiredin the Medquest acquisition in July 2005, were capitalized and are beingamortized on a straight-line basis over their useful lives.

(3)          Under U.S. GAAP, theCorporation charged the in-process research and development acquired in theMedQuest Acquisition to earnings at the time the acquisition was completed.Under Canadian GAAP, the Corporation accounts for this as an acquiredintangible and amortizes the $18.1 million value originally assigned to itagainst earnings on a straight-line basis over its estimated useful life offive years.

12

----

 

**ITEM2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION**

**INTRODUCTION**

WorldHeart Corporation and its subsidiaries are collectively referred to asWorldHeart. The following Management Discussion and Analysis of FinancialCondition and Results of Operations (MD&A) discusses material changes inWorldHeart’s financial condition and results of operations and cash flows forthe three month and nine month periods ended September 30, 2006 and September30, 2005. Such discussion and comments on the liquidity and capital resourcesshould be read in conjunction with the information contained in WorldHeart’saudited consolidated financial statements for the year ended December 31,2005, prepared in accordance with U.S. GAAP included in our Annual Report on Form 10—KSB,as amended. Significant differences between Canadian GAAP and U.S. GAAP arepresented in Note 8 to the interim unaudited consolidated financial statements.In this discussion, all amounts are in 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:continued slow market acceptance of and shift in demand away from firstgeneration VAD products, including the Corporation’s Novacor® LVAS (LeftVentricular Assist Pump) product; costs and delays associated with clinicaltrials; limitations on third-party reimbursement; inability to protectproprietary technology; slow Destination Therapy adoption rate for VADs(Ventricular Assist Device), including our Novacor LVAS; continued loss ofcommercial market share to competitors due to WorldHeart’s financialcondition;  failure to complete the privateplacement financing announced on November 14, 2006 for any reason andsignificant need for additional financings in the future; inability to enterinto strategic relationships; delays in completion of the cost reductionprograms associated with restructuring announced on November 14, 2006; andcosts and delays associated with the development in clinical trials of theLevacor Rotary VAD product.

**OVERVIEW**

WorldHeart is a developer ofmechanical circulatory support systems, including VADs , which are mechanicalpumps that allow for the restoration of normal blood circulation to patientssuffering from advanced heart failure. WorldHeart believes that both pulsatileand rotary pumps are required to treat the full spectrum of clinical needs ofend and late-stage heart failure patients. The Corporation believes thatpulsatile devices are best suited for end-stage patients with poor ventricularcontractility, who require full support or functional replacement.Alternatively, rotary devices are best suited to late-stage patients, with somecontractility, who require only partial support or an assist. The Corporationhas facilities in Oakland, California, Salt Lake City, Utah and Heesch, Netherlands.  WorldHeart currently derives substantiallyall of its revenue from its Novacor LVAS and related peripheral equipment whichit manufactures in Oakland and sells directly to medical clinics and hospitals inthe United States, most of Europe and Canada and through a distributor incertain other countries.

The Novacor LVAS is commercially approved as abridge-to-transplantation device in the United States and Canada. In Europe,the Novacor LVAS has unrestricted approval for use as an alternative totransplantation, a bridge-to-transplantation, and to support patients who mayhave an ability to recover the use of their natural heart. In Japan, the deviceis commercially approved for use in cardiac patients at risk of imminent deathfrom non-reversible left ventricular failure for which there is no alternativeexcept heart transplantation.

WorldHeart isconducting a long-term use pivotal trial in the United States called RELIANT(Randomized Evaluation of the Novacor LVAS in a Non-Transplant Population).  Data from the RELIANT Trial is required tosupport a Pre-market Approval Supplement that will request approval for the useof the Novacor LVAS by non-transplant eligible, or Destination Therapy,patients in the United States. In April 2006, the FDA conditionally approvedsignificant changes to the RELIANT Trial protocol, including an approximate 50%reduction in patient sample size and several changes in patient enrollmentcriteria.

13

----

The Corporation’s primary development program is for a magnetically levitatedcentrifugal rotary VAD (called Levacor). A successful first in-human clinical trial of the Levacor VAD wasinitiated in Europe in March 2006 with a second successful implant in May.  The first and second implanted patients wereweaned from the Levacor VAD and discharged from the hospital in June and August2006, respectively.  Additional clinicalimplants are planned for North America. Assuming successful completion of thenecessary financing, WorldHeart plans to develop in the future other next-generationdevices including a small implantable pulsatile VAD (the Novacor II).

Researchand development by WorldHeart’s competitors is proceeding for severalnext-generation non-pulsatile continuous flow assist devices. Certain of thesedevices have received the CE Mark in Europe and are advancing through clinicaltrials in the United States and Europe.

Although the Destination Therapy patient populationcontinues to be largely untreated by cardiac assist devices, WorldHeartbelieves that the DT market will evolve more rapidly when next-generation VADdevices are shown, by the medical community, to be reliable and durable.

These interimunaudited consolidated financial statements have been prepared on the basis ofaccounting principles applicable to a going concern, which assumes that WorldHeart Corporation (the Corporation or WorldHeart) will continue in operationfor the foreseeable future and will be able to realize its assets and dischargeits liabilities in the normal course of operations.

During the quarterended September 30, 2006, the Corporation incurred a net loss of $7.6 millionand used cash in its operations of $3.0 million. As at September 30, 2006, WorldHearthad cash and cash equivalents of $1.5 million and current liabilities of $5.3 million.As a result, there is substantial doubt about the ability of the Corporation tomeet its obligations as they come due and the appropriateness of the use ofaccounting principles applicable to a going concern.

On November 13, 2006, theCorporation entered into a purchase agreement with certain new and currentinvestors for a private placement financing. The completion of the privateplacement is subject to shareholder approval which is expected to occur at theCorporation’s Annual and Special Meeting to be held on December 20, 2006. Grossproceeds from the financing are expected to be about $14.1 million at a priceof $0.25 per common share. A first closing of the financing of $2.75 million isexpected to occur on or before November 17, 2006. A second closing of about $11.3million is expected to occur immediately after shareholder approval. Inaddition, the Corporation will pay investment banking fees equal to 6% of thegross proceeds payable in common shares. Under the terms of the transaction,the Corporation is required to register for resale the common shares acquiredpursuant to the private placement.

In addition, aspart of the Corporation’s continuing efforts to control spending, and inresponse to changing market conditions for its Novacor LVAS product, WorldHeartalso announced on November 14, 2006 a significant restructuring and realignmentof its business operations.  The restructuring program will reducemanufacturing, selling and administrative costs, primarily associated with theNovacor LVAS product.  The program will include a reduction in workforceof 50 to 55 persons, or about 50% of its current workforce, primarily at itsOakland, California and Heesch, Netherlands locations.  In addition,during the quarter, the Corporation wrote off approximately $3.6 million of rawmaterial, in-process and finished goods inventory associated with the NovacorLVAS product, which management has determined will not be utilized in futureperiods.  In the fourth quarter of 2006, the Corporation expects to incurcharges of about $0.7 million, primarily related to severance, inconnection with the announced restructuring and may take a further write downof its Novacor LVAS inventory and fixed assets.

The Corporation’scontinuation as a going concern is dependent on completion of the privateplacement and the restructuring and realignment of its business operations. TheCompany believes the financing, in combination with the restructuring, willprovide sufficient funds to continue operations through, at least the firstquarter of 2008. These interim unaudited consolidated financial statements donot include any adjustments relating to the carrying values of assets andliabilities and the reported expenses and balance sheet classifications thatwould be necessary, were the going concern assumption inappropriate, and theseadjustments could be material.

14

----

**MEDQUESTACQUISITION**

OnJuly 29, 2005, WorldHeart completed the acquisition (MedQuest Acquisition)of all assets and assumption of certain liabilities of MedQuest Products, Inc.(MedQuest), raised approximately $22.7 million in gross financing proceeds froma private placement of common shares with Maverick Venture Management,LLC (Maverick) and the exercise of all theoutstanding warrants. In addition, pursuant to the purchase agreement,WorldHeart repaid $3.5 million owed by MedQuest to Maverick upon closing of theMedQuest Acquisition. As a result, WorldHeart received net proceeds ofapproximately $8.5 million from the private placement.

The acquisition resulted in aone-time charge to earnings for the value of the acquired in-process researchand development of approximately $18.1 million in the period endedSeptember 30, 2005.

 

** **

**Summaryof Quarterly Results**

In thousands (000’s)except for per share amounts

(unaudited)
| ** **                                  | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|
| ** **                                  | ** ** | **September 30,  2006**     | ** ** | **June 30,  2006** | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
| Net revenue                                 |       | $                                | 1,387      |   | 2,988 |   | $ | 3,285 |   | $ | 3,630 |   |
| Net loss for the  period                    |       | (7,619                           | )          | (3,888 | ) | (3,442 | ) | (21,998 | ) |
| Net loss  applicable to common shareholders |       | (7,619                           | )          | (3,888 | ) | (3,442 | ) | (21,998 | ) |
| Basic and diluted loss per share            |       | $                                | (0.14      | ) | (0.07 | ) | $ | (0.06 | ) | $ | (0.40 | ) |

 
| ** **                                  | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|
| ** **                                  | ** ** | **September 30,  2005**     | ** ** | **June 30,  2005** | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|                                        |       |                             |       |   |   |   |   |   |   |
| Net revenue                                 |       | $                                | 2,150      |   | 2,449 |   | $ | 3,417 |   | $ | 2,987 |   |
| Net loss for the  period                    |       | (22,251                          | )          | (4,643 | ) | (3,942 | ) | (6,294 | ) |
| Net loss  applicable to common shareholders |       | (28,111                          | )          | (4,643 | ) | (3,942 | ) | (6,294 | ) |
| Basic and diluted loss per share            |       | $                                | (0.64      | ) | (0.27 | ) | $ | (0.24 | ) | $ | (0.41 | ) |

 

15

----

**RESULTS OFOPERATIONS FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2006COMPARED WITH THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2005**

(Unaudited)
| ** **                                      | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                      | ** ** | **2006**                                                 | ** ** | **2005**                                                | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                            |       |                                                     |       |                                                    |       |   |   |   |   |
| **Revenue**                                     |       | $                                                        | 1,387      |                                                    | $          | 2,150 |   | $ | 7,660 |   | $ | 8,016 |   |
| **Cost of  goods sold**                         |       | (4,524                                                   | )          | (1,726                                                  | )          | (7,846 | ) | (5,980 | ) |
| ** **                                      | ** ** | ** **                                               | ** ** | ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Gross  margin**                               |       | (3,137                                                   | )          | 424                                                     |       | (186 | ) | 2,036 |   |
| ** **                                      | ** ** | ** **                                               | ** ** | ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Operating  expenses**                         | ** ** | ** **                                               | ** ** | ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Selling, general and administrative             |       | 1,964                                                    |       | 2,540                                                   |       | 6,695 |   | 9,003 |   |
| Research and development                        |       | 2,430                                                    |       | 1,914                                                   |       | 8,092 |   | 4,376 |   |
| Restructuring costs                             |       | —                                                   |       | (8                                                      | )          | — |   | 333 |   |
| Acquired in-process research and development    |       | —                                                   |       | 18,147                                                  |       | — |   | 18,147 |   |
| Amortization of intangibles                     |       | 48                                                       |       | 31                                                      |       | 144 |   | 287 |   |
|                                            |       |                                                     |       |                                                    |       |   |   |   |   |
| **Total operating expenses**                    |       | 4,442                                                    |       | 22,624                                                  |       | 14,931 |   | 32,146 |   |
| ** **                                      | ** ** | ** **                                               | ** ** | ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Operating  loss**                             |       | (7,579                                                   | )          | (22,201                                                 | )          | (15,118 | ) | (30,110 | ) |
|                                            |       |                                                     |       |                                                    |       |   |   |   |   |
| **Other  income (expenses)**                    |       | (40                                                      | )          | (50                                                     | )          | 169 |   | (726 | ) |
| ** **                                      | ** ** | ** **                                               | ** ** | ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net  loss for the quarter**                   |       | $                                                        | (7,619     | )                                                       | $          | (22,251 | ) | $ | (14,948 | ) | $ | (30,836 | ) |
|                                            |       |                                                     |       |                                                    |       |   |   |   |   |
| **Effect  of warrant exchange**                 |       | —                                                   |       | (5,860                                                  | )          | — |   | (5,860 | ) |
|                                            |       |                                                     |       |                                                    |       |   |   |   |   |
| **Net  loss applicable to common shareholders** |       | $                                                        | (7,619     | )                                                       | $          | (28,111 | ) | $ | (14,948 | ) | $ | (36,696 | ) |

 

***Revenue:***The sale of Novacor LVASimplant kits and related peripheral equipment and services accounts forsubstantially all of WorldHeart’s revenues. WorldHeart primarily sells its products directly, except for a fewcountries where it sells through distributors.

The composition ofrevenue in thousands ($000’s) is as follows except for units:

(Unaudited)
| ** **             | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **             | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **             | ** ** | **$**                                                | ** ** | **Units**                                           | ** ** | **$** | ** ** | **Units** | ** ** | **$** | ** ** | **Units** | ** ** | **$** | ** ** | **Units** | ** ** |
| Implant kits           |       | $                                                    | 656        |                                                | 9          |   | $ | 1,482 |   | 22 |   | $ | 4,725 |   | 68 |   | $ | 5,173 |   | 77 |   |
| Peripherals and  other |       | 731                                                  |       |                                                |       | 668 |   |   |   | 2,935 |   |   |   | 2,843 |   |   |   |
|                   |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenue                |       | $                                                    | 1,387      |                                                |       |   | $ | 2,150 |   |   |   | $ | 7,660 |   |   |   | $ | 8,016 |   |   |   |

 

Revenue for the quarter ended September 30, 2006 was $1,387,000reflecting a decrease of $763,000, or 35%, compared with the quarter endedSeptember 30, 2005. Implant kit revenue in the third quarter of 2006 decreasedby

16

----

$826,000, or 56%, comparedwith the third quarter of 2005. During the third quarter of 2006, the average price per kit was $73,000,compared with $67,000 during the third quarter of 2005, reflecting primarily areduction in discounted sales in the 2006 third quarter.  Implant kits recognized as revenue were 9 and22 in the quarters ended September 30, 2006 and September 30, 2005,respectively. We believe that the decrease in sales of our implant kits duringthe three months ended September 30, 2006 is indicative of the continued shiftin market demand away from the first generation VAD products, including ourNovacor LVAS, to next generation VAD products. In addition, WorldHeart’sfinancial condition prevented us from pursuing our normal sales and marketingefforts during the quarter.  We expect tosee a recovery in Novacor LVAS sales with the completion of the financing butwe will continue to monitor sales for the Novacor LVAS and realign our resources,as needed. We also plan to initiate revenue generating clinical trials of ourLevacor Rotary VAD in the first half of 2007.

Peripherals and other revenues, including Novacor LVAS hardware andperipheral sales, services and other revenue for the quarter ended September30, 2006 were $731,000, an increase of 9%, compared with peripherals and otherrevenue of  $668,000 recorded in thequarter ended September 30, 2005. Peripherals and other revenues for the ninemonths ended September 30, 2006 were $2,935,000, a 3% increase compared withperipherals and other revenue of $2,843,000 for the nine months ended September30, 2005. Despite a reduction in Novacor LVAS implant kit sales, we willcontinue to sell Novacor LVAS hardware and peripherals in future periods.

Revenue during thefirst nine months of 2006 was $7,660,000, reflecting a decrease of $356,000, or4%, over the same period in 2005. Implant kit revenue for the nine months endedSeptember 30, 2006 decreased by$448,000, or 9%, compared with the nine months of 2005. Implant kits recognized as revenue were 68 and 77 for the nine monthsended September 30, 2006 and September 30, 2005, respectively.

At September 30, 2006, oneimplant kit from June 30, 2006 remains in deferred revenue.  There were no new deferred kits in the thirdquarter of 2006.

***Cost of goods sold:**** *For the three months ended September 30, 2006,the cost of goods sold was $4,524,000, compared with $1,726,000 for the threemonths ended September 30, 2005.  Cost ofgoods sold during the first nine months of 2006 was $7,846,000, compared with$5,980,000 for the same period in 2005. Based on reduced sales levels ofour Novacor LVAS product during the thirdquarter, we determined that certain of our inventory would not be utilized infuture periods, and have therefore written off approximately $3.6 million inraw material, in-process and finished goods inventory related to the NovacorLVAS product.  Excluding the inventory write off, cost ofgoods sold for the three and nine month periods in 2006 were lower than thecomparative periods in 2005 due to reduced levels of manufacturing variances.There was no inventory write off in 2005. We will continue to monitor NovacorLVAS sales in the future and may further reduce inventories to be aligned withmarket demand.

***Selling, general andadministrative:*** 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, facility costs and other general corporate expenses. 

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

 
| ** **                  | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                  | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Selling                     |       | $                                                    | 804        |                                                | $          | 1,020 |   | $ | 2,831 |   | $ | 4,356 |   |
| General and  administrative |       | 1,159                                                |       | 1,520                                               |       | 3,864 |   | 4,647 |   |
| Total                       |       | $                                                    | 1,964      |                                                | $          | 2,540 |   | $ | 6,695 |   | $ | 9,003 |   |

 

Selling, generaland administrative expense for the three months ended September 30, 2006 decreased by $576,000, or 23%,versus the same period in 2005, and for the nine months ended September 30, 2006decreased by $2,308,000, or 26%, versus the same period in 2005.  Selling expenses for the three months endedSeptember 30, 

17

----

2006 decreased by $216,000, or 21%, compared with thesame period in 2005, and for the nine month period decreased by $1,525,000, or35%, compared with the same period last year. Selling expenses decreased due to lower promotional costs, consulting,and travel expenses, as well as, reduced sales commissions on lower revenuesand reduced personnel costs, particularly in Europe.

General andadministrative expenses for the three months ended September 30, 2006 decreasedby $361,000, or 24%, compared with the same period in 2005, and for the ninemonths ended September 30, 2006 decreased by $783,000, or 17%. These reductionswere primarily due to lower consulting, capital taxes and insurance expenses in2006. In addition, for the comparative nine month periods, there were lowercosts in 2006 resulting from the consolidation of our North American Novacoroperations which was completed in June 2005. Following the adoption ofFAS123(R), WorldHeart recorded $51,000 and $134,000 in stock-based compensationexpense for the three and nine month periods ended September 30, 2006,respectively.  WorldHeart recorded $161,000in stock based compensation expense for the three and nine month periods endedSeptember 30, 2005. The stock-based compensation expense in 2005 related to theintrinsic value of September 2004 grants which were subject to shareholderapproval of an increase in the number of options available under the employeestock option plan. Administrative expenses are expected to continue to decreaseslightly in the next quarter resulting from previously implemented costreduction programs.

***Research and development:***Research anddevelopment expenses consist principally of salaries and related expenses forresearch personnel, prototype manufacturing, testing, clinical trial expenses,factory costs and regulatory affairs expenses incurred at our Oakland and SaltLake City facilities.

Research anddevelopment expenses for the three months ended September 30, 2006 were$2,430,000, an increase of $516,000 or 27%, compared with the three monthsended September 30, 2005.  Research anddevelopment expenses for the nine months ended September 30, 2006 increased by$3,716,000 or 85%, compared with the nine months ended September 30, 2005.  These increases are primarily due to theacquisition of MedQuest in July 2005 and related development and clinical costsof our Levacor Rotary VAD.  We expect toincrease research and development spending on the Levacor Rotary VAD in thenext quarters.

***Restructuringcosts:***  On August 25, 2004, we approved a planto consolidate the Ottawa, Ontario operations into our facilities in Oakland,California where the Novacor LVAS is manufactured. The consolidation of theNorth American Novacor operations into one location has reduced ongoingbusiness expenses and improved operational efficiency and effectiveness. Therestructuring was completed by the end of June 2005. During the threemonths and nine months ended September 30,2006, no restructuring costs were recorded.Duringthe nine months ended September 30, 2005, a restructuring cost of $333,000 wasrecorded. No restructuring costs were incurred during the three months endedSeptember 30, 2005.

***Amortization of intangibles:**** *Amortizationof intangible assets for the three and nine month periods ended September 30,2006 were $48,000 and $144,000, respectively. For the three month period endedin September 30, 2005, amortization of these intangible assets was $31,000.These intangible assets were recorded as part of the MedQuest acquisition andrepresent the estimated value of the MedQuest workforce of $765,000, which isbeing amortized on a straight-line basis over four years. Through the secondhalf of 2005, amortization of $255,000 was recorded related to the Novacorasset. At June 30, 2005, the Novacor assets were fully amortized.

***Effect of warrant exchange: ***We recorded a one-time charge of $5.9 million inthe third quarter of 2005 resulting from a reduction in the exercise price ofabout 10.7 million warrants originally issued, with convertible debentures, ina private placement in September 2004 and subsequently exercised duringJuly 2005. The exercise price of these warrants was reduced by $0.55 from$1.55 to $1.00.

***Acquired in-process research anddevelopment:*******During the third quarter of2005, we recorded a one-time, non-cash charge of approximately $18.1 millionassociated with the MedQuest Acquisition. The $18.1 million valuation was basedon an income approach, applying risk-adjusted discount rates to the estimatedfuture revenues and expenses attributable to in-process research anddevelopment programs at MedQuest. An aggregate amount of approximately $14.6million was allocated to purchased research and development. The estimated fairvalue of the purchased research and development was increased by approximately $3.5 million, the amount by which the value of theacquisition consideration of approximately $15.9 million exceeded the fairvalue of net assets acquired of approximately $12.4 million.

18

----

***Foreign Exchange****:* Foreign exchange transactions resultedin a gain of $600 for the three month period ended September 30, 2006,compared with a loss of $51,000 for the three month period endedSeptember 30, 2005. Foreign exchange transactions resulted in a gain of$41,000 for the nine month period ended September 30, 2006, compared witha loss of $69,000 for the nine month period ended September 30, 2005**.** The losses during the three and ninemonth periods in 2006 were primarily due to fluctuations of the U.S. dollarversus the Euro during these periods. The changes during the three and ninemonth periods in 2005 were primarily due to the fluctuations of the U.S. dollaragainst the Euro and the Canadian dollar.

***Investment and other income:***Investment and other income for the quarter ended September 30, 2006 was$37,000, compared with $92,000 during the quarter ended September 30,2005.  Investment and other income was$204,000 for the nine month period ended September 30, 2006, compared with$124,000 for the nine month period ended September 30, 2005**. **The decrease in investment andother income during the three months ended September 30, 2006, compared withthe same period last year was due to a lower average cash balance during the2006 quarter. Higher investment and other income for the nine months endedSeptember 30, 2006, compared with the same period last year was due to higheraverage cash balances during the first nine months of 2006.

***Interest, other expense and financing costs****:* Interest, other expense and financing costs were $78,000 and $91,000during the three months ended September 30, 2006 and September 30, 2005,respectively. Interest, other expense and financing costs were $76,000 and$780,000 for the nine month period ended September 30, 2006 andSeptember 30, 2005, respectively.  Interest, other expense andfinancing costs during the three month and nine month periods ended September30, 2006 relate primarily to the write off of some old accounts receivable.  Interest and other expense and financingcosts during the three and nine month periods ended September 30, 2005 relateprimarily to convertible debentures, all of which were converted inJuly 2005.

**LIQUIDITY AND CAPITAL RESOURCES**

Historically,WorldHeart has funded losses from operations through the sale of equity andissuance of debt instruments. Combined with revenues and investment income,these funds have provided WorldHeart with the resources to operate ourbusiness, sell and support our products, fund our research and developmentprogram and clinical trials, apply for and obtain the necessary regulatoryapprovals and develop new technologies and products.

AtSeptember 30, 2006, we had cash and cash equivalents of $1.5 million, adecrease of $9.1 million for the nine month period from December 31, 2005and a decrease of $3.0 from June 30, 2006. During the third quarter of 2006, cash used to fund operating activitieswas $3.0 million reflecting our net loss for the period of  $7.6 million, offset primarily by $ 4.3 millionof changes in working capital. Changes in working capital consisted primarilyof an increase in accounts payable and accrued liabilities of $0.2 million, adecrease  in accounts receivable of $0.8million, and a decrease in inventory of $3.4 million,  consisting primarily of the $3.6 millionwrite down of inventory.

Investingactivities in the third quarter of 2006 and nine months ended September 30,2006 requiring cash resources consisted of capital equipment additions of$43,000 and $119,000 respectively. There were no financing activities duringthis year..

On November 13, 2006, theCorporation entered into a purchase agreement with certain new and currentinvestors for a private placement financing. The completion of the privateplacement is subject to shareholder approval which is expected to occur at theCorporation’s Annual and Special Meeting to be held on December 20, 2006. Grossproceeds from the financing are expected to be about $14.1 million at a priceof $0.25 per common share. A first closing of the financing of $2.75 million isexpected to occur on or before November 17, 2006. A second closing of about $11.3million is expected to occur immediately after shareholder approval. Inaddition, the Corporation will pay investment banking fees equal to 6% of thegross proceeds payable in common shares at the time of the second closing.Under the terms of the transaction, the Corporation is required to register forresale the common shares issued pursuant to the private placement.

As part of our continuingefforts to control spending, and in response to changing market conditions for our

19

----

Novacor LVAS product, we also announced on November 14,2006 a significant restructuring and realignment of our business operations. The restructuring program will reduce manufacturing, selling andadministrative costs, primarily associated with the Novacor LVAS product. The program will include a reduction in workforce of 50 to 55 persons, orabout 50% of our current workforce, primarily at our Oakland, California andHeesch, Netherlands locations.  In thefourth quarter of 2006, the corporation expects to incur charges of about $0.7million, primarily related to severance, in connection with the announcedrestructuring, and may take a further write down of its Novacor LVAS inventoryand fixed assets.

The Company believes the financing, in combinationwith the restructuring, will provide sufficient funds to continue operations through,at least the first quarter of 2008.

We do not expect to achieveNovacor LVAS sales levels experienced in previous periods. However, we expectto see an increase in Novacor LVAS sales levels over the third quarter 2006 saleslevel. We will continue to monitor sales for our Novacor LVAS and we intend tocontinue to realign our resources towards the development of our nextgeneration Levacor Rotary VAD in future periods.

***Ourlong-term working capital and capital requirements will depend upon numerousfactors, including the following: our ability to maintain the current reducedlevel in Novacor LVAS kit sales, the rate of investment in our next-generationtechnologies, including the Levacor Rotary VAD; clinical trial costs and theapproval process for the next-generation products; our ability to achieveoperational efficiencies and planned cost reductions associated with ourrestructuring programs; and our ability to secure additional financing or enterin to strategic relationships or transactions.***

**IMPACT OF THE ADOPTION OF FAS123(R)**

Effective January 1,2006, we adopted Statement of Financial Accounting Standards No. 123(Revised 2004), “Share —Based Payment. FAS 123(R) requires the recognition of the fair value of stock-basedcompensation as an expense in the calculation of net income. We recognize thestock compensation expense over the vesting period of the individual equityinstruments.

WorldHeart has electedthe modified prospective transition method for adopting FAS 123(R). Under thismethod, the provisions of  FAS 123(R)apply to all stock-based awards granted after the effective date.  The unrecognized expense of awards not yetvested as of January 1, 2006, the date of FAS 123(R) adoption by theCorporation, are also recognized as an expense in the calculation of netincome. For a detailed discussion of the impact of FAS123(R) on the Corporation’sfinancial statements, please refer to Note 3.

**OFF- BALANCESHEET ARRANGEMENTS**

None

**ITEM3.    CONTROLS AND PROCEDURES**

*Evaluation of disclosure controls and procedures*: Based on their evaluation of our disclosure controls and procedures(as defined in Rules 13a-15(e) and 15d-15(e) under the ExchangeAct) as of September 30, 2006, ourpresident and chief executive officer (principal executive officer) and ourchief financial officer (principal accounting and financial officer) haveconcluded that our disclosure controls and procedures are designed to ensurethat information required to be disclosed in the reports that we file or submitunder the Exchange Act is recorded, processed, summarized and reported withinthe time periods specified in the Securities and Exchange Commission’srules and forms and are operating in an effective manner at the reasonableassurances level.

*Changes in internal controls over financial reporting:* There was no change in our internal controls over financial reportingthat occurred during the quarter ended September 30, 2006 that has materially affected, or is reasonably likely to materiallyaffect, our internal controls over financial reporting.

20

----

**PART II—OTHERINFORMATION**

**ITEM 1. LEGAL PROCEEDINGS**

(None)

**ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OFPROCEEDS**

The Corporation has made norepurchases of common shares during the period.

**ITEM 3. DEFAULTS UPON SENIOR SECURITIES**

(None)

**ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITYHOLDERS**

(None)

**ITEM 5. OTHER INFORMATION**

(None)

**ITEM 6.  EXHIBITS**

(a)               Exhibits
| 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.  |   |

----

 

21

----

**SIGNATURES**

In accordance with therequirements of the Exchange Act, the registrant caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.
|                                |                                                                                           |             World  Heart Corporation |
|--------------------------------|------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------|
|                           |                                                                                           |             (Registrant)             |
|                           |                                                                                           |                                                                                             |
|                           |                                                                                           |                                                                                             |
| Dated:  November 14, 2006 |             /s/  JAL S. JASSAWALLA |
|                           | Jal S. Jassawalla, President and Chief  Executive Officer                                      |
|                           |                                                                                           |                                                                                             |
|                           |                                                                                           |                                                                                             |
| Dated:  November 14, 2006 |             /s/  A. RICHARD JUELIS |
|                           | A. Richard Juelis, Vice President, Finance  and Chief Financial Officer                        |

 

22

----