**UNITEDSTATES**

**SECURITIESAND EXCHANGE**

**COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-QSB**

**(Mark One)**

| **x**                                                                           | ** ** | **QUARTERLY  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |
|---------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------|
| ** **                                                                      | ** ** | ** **                                                                                        |
| **For  quarterly period ended   ****September  30, 2007**        |
| ** **                                                                      | ** ** | ** **                                                                                        |
| **o**                                                                           | ** ** | **TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT**                    |
| ** **                                                                      | ** ** | ** **                                                                                        |
| **For  the transition period from       to** |
| ** **                                                                      | ** ** | ** **                                                                                        |
| **Commission  file number:  000-28882**                               |

 

**WORLDHEART CORPORATION**

(Exact name of smallbusiness issuer as specified in its charter)

 

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

 

 

**7799Pardee Lane, Oakland, California, USA, 94621**

(Address of principalexecutive offices)

 

**(510)563-5000**

(Issuer’s telephonenumber)

 

**N/A**

(Former name, former addressand former fiscal year, if changed since last report)

 

Check whether the issuer (1) filed all reports required to befiled by Section 13 or 15(d) of the Exchange Act during the past 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.            Yes    x    No    o

 

Indicate by check mark whether theRegistrant is a shell company (as defined in Rule 12b-2 of the ExchangeAct).

 

Yes    o    No    x

 

State the number of sharesoutstanding of each of the issuer’s classes of common equity, as of the latestpracticable date:

 

The number of common shares outstanding as of October 31, 2007 was11,507,275.

 

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

 

 

----

 

**TABLE OF CONTENTS**

 
| ** **   | **Item** | ** **                                                      | ** ** |
|--------------|----------|-----------------------------------------------------------------|------------|
|         |     |                                                            |       |
| Part I  | 1        | Financial Statements                                            | 3          |
|         |     |                                                            |       |
|         | 2        | Management’s  Discussion and Analysis or Plan of Operation | 13         |
|         |     |                                                            |       |
|         | 3        | Controls and  Procedures                                        | 18         |
|         |     |                                                            |       |
| Part II | 1        | Legal Proceedings                                               | 19         |
|         |     |                                                            |       |
|         | 2        | Unregistered  Sales of Equity Securities and Use of Proceeds    | 19         |
|         |     |                                                            |       |
|         | 3        | Defaults Upon  Senior Securities                                | 19         |
|         |     |                                                            |       |
|         | 4        | Submission of Matters  to a Vote of Security Holders            | 19         |
|         |     |                                                            |       |
|         | 5        | Other Information                                               | 19         |
|         |     |                                                            |       |
|         | 6        | Exhibits                                                        | 19         |
|         |     |                                                            |       |
|         |     | Signatures                                                      | 20         |

 

 

----

 

**PART I—FINANCIAL INFORMATION**

 

**ITEM 1.  FINANCIAL STATEMENTS.**

 

**WORLD HEART CORPORATION**

**Condensed Consolidated Balance Sheets**

(United States Dollars)

(Unaudited)

** **

| ** **                                                                                                         | ** ** | **September 30, 2007** | ** **    | **December 31, 2006 (1)** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|------------------------|---------------|---------------------------|------------|
| **ASSETS**                                                                                                         | ** ** | ** **             | ** **    | ** **                | ** ** |
| **Current  assets**                                                                                                | ** ** | ** **             | ** **    | ** **                | ** ** |
| Cash and cash  equivalents                                                                                         |       | $                      | 2,413,811     |                      | $          | 12,216,671 |   |
| Trade and other  receivables                                                                                       |       | 463,059                |          | 2,297,769                 |       |
| Prepaid expenses                                                                                                   |       | 846,996                |          | 703,689                   |       |
| Inventory                                                                                                          |       | 1,866,035              |          | 3,088,359                 |       |
| Cash pledged as  collateral for lease/site restoration                                                             |       | 568,468                |          | 750,000                   |       |
|                                                                                                               |       | 6,158,369              |          | 19,056,488                |       |
| **Long-term  assets**                                                                                              | ** ** | ** **             | ** **    | ** **                | ** ** |
| Property and  equipment                                                                                            |       | 581,423                |          | 950,470                   |       |
| Intangible  assets                                                                                                 |       | 347,196                |          | 490,764                   |       |
|                                                                                                               |       | 928,619                |          | 1,441,234                 |       |
| **Total  assets**                                                                                                  | ** ** | **$**                  | **7,086,988** | ** **                | **$**      | **20,497,722** | ** ** |
|                                                                                                               |       |                   |          |                      |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                     | ** ** | ** **             | ** **    | ** **                | ** ** |
| ** **                                                                                                         | ** ** | ** **             | ** **    | ** **                | ** ** |
| **Current  liabilities**                                                                                           | ** ** | ** **             | ** **    | ** **                | ** ** |
| Accounts payable  and accrued liabilities                                                                          |       | $                      | 1,764,782     |                      | $          | 3,526,448 |   |
| Accrued site  restoration                                                                                          |       | 426,889                |          | 876,000                   |       |
| Accrued  compensation                                                                                              |       | 730,022                |          | 919,146                   |       |
| Deferred  clinical fees                                                                                            |       | —                 |          | 309,998                   |       |
| Deferred revenue                                                                                                   |       | 30,088                 |          | 159,801                   |       |
| **Total  liabilities**                                                                                             |       | 2,951,781              |          | 5,791,393                 |       |
| ** **                                                                                                         | ** ** | ** **             | ** **    | ** **                | ** ** |
| **Shareholders’  equity**                                                                                     | ** ** | ** **             | ** **    | ** **                | ** ** |
| Preferred stock,  no par value, no shares issued and outstanding                                                   |       |                   |          |                      |       |
| Common stock, no  par value, 11,507,275 shares issued and outstanding at September 30, 2007 and  December 31, 2006 |       | 290,750,131            |          | 290,750,131               |       |
| Additional  paid-in-capital                                                                                        |       | 2,729,225              |          | 2,375,497                 |       |
| Cumulative other  comprehensive income                                                                             |       | (6,285,577             | )             | (6,285,577                | )          |
| Accumulated  deficit                                                                                               |       | (283,058,572           | )             | (272,133,722              | )          |
| Total  shareholders’ equity                                                                                   |       | 4,135,207              |          | 14,706,329                |       |
| **Total  liabilities and shareholders’ equity**                                                               | ** ** | **$**                  | **7,086,988** | ** **                | **$**      | **20,497,722** | ** ** |
|                                                                                                                    |            |                        |               |                           |            |  |  |  |  |  |

 

(The accompanying notesare an integral part of these condensed consolidated financial statements.)

 

(1)  Derived from the Company’s auditedconsolidated financial statements as of December 31, 2006.

 

3

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**WORLDHEART CORPORATION**

**Condensed Consolidated Statements ofOperations**

(United States Dollars)

(Unaudited)

 

| ** **                                                                  | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                  | ** ** | **2007**                              | ** ** | **2006**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                        |       |                                  |       |                                 |       |   |   |   |   |
| **Revenue**                                                                 |       | $                                     | 531,575    |                                 | $          | 1,387,096 |   | $ | 2,227,884 |   | $ | 7,659,983 |   |
| **Cost of  goods sold**                                                     |       | (381,875                              | )          | (4,524,142                           | )          | (2,273,707 | ) | (7,846,359 | ) |
| ** **                                                                  | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Gross  profit**                                                           |       | 149,700                               |       | (3,137,046                           | )          | (45,823 | ) | (186,376 | ) |
|                                                                        |       |                                  |       |                                 |       |   |   |   |   |
| **Operating  expenses**                                                     | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Selling, general  and administrative                                        |       | 1,456,527                             |       | 1,963,831                            |       | 4,459,171 |   | 6,695,317 |   |
| Research and  development                                                   |       | 2,164,249                             |       | 2,429,875                            |       | 7,169,141 |   | 8,092,265 |   |
| Amortization of  intangibles                                                |       | 47,856                                |       | 47,856                               |       | 143,568 |   | 143,568 |   |
|                                                                        |       |                                  |       |                                 |       |   |   |   |   |
| **Total  operating expenses**                                               |       | 3,668,632                             |       | 4,441,562                            |       | 11,771,880 |   | 14,931,150 |   |
| ** **                                                                  | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Operating  loss**                                                         |       | (3,518,932                            | )          | (7,578,608                           | )          | (11,817,703 | ) | (15,117,526 | ) |
| ** **                                                                  | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Other  income (expenses)**                                                | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Foreign exchange  gain (loss)                                               |       | (160,115                              | )          | 588                                  |       | (29,184 | ) | 41,109 |   |
| Investment and  other income                                                |       | 665,498                               |       | 37,130                               |       | 923,696 |   | 204,106 |   |
| Loss on disposal  of property and equipment                                 |       | (4,632                                | )          | —                               |       | (1,659 | ) | (271 | ) |
| Interest  (expense)                                                         |       | —                                |       | (77,753                              | )          | — |   | (76,126 | ) |
| ** **                                                                  | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Total  Other income (expense)**                                           |       | 500,751                               |       | (40,035                              | )          | 892,853 |   | 168,818 |   |
| ** **                                                                  | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net  loss**                                                               |       | $                                     | (3,018,181 | )                                    | $          | (7,618,643 | ) | $ | (10,924,850 | ) | $ | (14,948,708 | ) |
| ** **                                                                  | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Weighted  average number of common shares outstanding basic and diluted** |       | 11,507,275                            |       | 5,547,955                            |       | 11,507,275 |   | 5,547,955 |   |
| ** **                                                                  | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Basic  and diluted loss per common share**                                |       | $                                     | (0.26      | )                                    | $          | (1.37 | ) | $ | (0.95 | ) | $ | (2.69 | ) |

 

(The accompanying notesare an integral part of these condensed consolidated financial statements.)

 

4

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**WORLDHEART CORPORATION**

**Condensed Consolidated Statements ofCash Flow**

(United States Dollars)

(Unaudited)

 

| **CASH FLOWS FROM:**                                               | ** ** | **Nine Months Ended September 30,** | ** **    |
|--------------------------------------------------------------------|------------|-------------------------------------|---------------|
| ** **                                                         | ** ** | **2007**                            | ** **    | **2006** | ** ** |
| **Operating  activities**                                          | ** ** | ** **                          | ** **    | ** ** | ** ** |
| Net loss for the  period                                           |       | $                                   | (10,924,850   | ) | $ | (14,948,708 | ) |
| Adjustments to  reconcile net loss to net cash used in operations: |       |                                |          |   |   |
| Amortization and  depreciation                                     |       | 522,710                             |          | 663,894 |   |
| (Gain) loss on  disposal of property and equipment                 |       | 1,659                               |          | 271 |   |
| Write down of  property and equipment                              |       | 197,819                             |          | — |   |
| Write down of  inventory                                           |       | 425,000                             |          | — |   |
| Stock-based  compensation expense                                  |       | 353,728                             |          | 134,982 |   |
| Foreign exchange  loss (gain)                                      |       | (183,440                            | )             | 945 |   |
| Change in  operating components of working capital                 |       | 591,063                             |          | 5,146,608 |   |
| **Cash  used in operating activities**                             | ** ** | **(9,016,311**                      | **)**         | **(9,002,008** | **)** |
|                                                               |       |                                |          |   |   |
| **Investing  activities**                                          | ** ** | ** **                          | ** **    | ** ** | ** ** |
| Purchase of  property and equipment                                |       | (209,573                            | )             | (118,275 | ) |
| Cash pledged as  collateral for site restoration                   |       | (568,468                            | )             | — |   |
| **Cash  used in investing activities**                             | ** ** | **(778,041**                        | **)**         | **(118,275** | **)** |
|                                                               |       |                                |          |   |   |
| **Effect  of exchange rates on cash and cash equivalents**         |       | (8,508                              | )             | — | ** ** |
| **Decrease  in cash and cash equivalents for the period**          | ** ** | **(9,802,860**                      | **)**         | **(9,120,283** | **)** |
| ** **                                                         | ** ** | ** **                          | ** **    | ** ** | ** ** |
| **Cash  and cash equivalents, beginning of the period**            | ** ** | **12,216,671**                      | ** **    | **10,661,682** | ** ** |
| ** **                                                         | ** ** | ** **                          | ** **    | ** ** | ** ** |
| **Cash  and cash equivalents, end of the period**                  | ** ** | **$**                               | **2,413,811** | ** ** | **$** | **1,541,399** | ** ** |

 

(The accompanying notesare an integral part of these condensed consolidated financial statements.)

 

5

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**WORLD HEART CORPORATION**

**Notes to Unaudited CondensedConsolidated Financial Statements**

 

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

 

These consolidated financial statements have been prepared on the basisof accounting principles applicable to a going concern, which assume that WorldHeart Corporation and its subsidiaries (collectively referred to as WorldHeartor the Corporation) will continue in operation for the foreseeable future andwill be able to realize its assets and discharge its liabilities in the normalcourse of operations.

 

During the quarter ended September 30, 2007, the Corporation incurred anet loss of $3.0 million and used cash in its operations of  $3.5 million. At September 30, 2007, WorldHeart had cash and cash equivalents of $2.4million, current assets of $6.2 million and current liabilities of $3.0million. The Corporation expects to continue to generate operating losses atleast through 2007 and 2008. As a result, there is considerable doubt about theability of the Corporation to meet its obligations as they come due and theappropriateness of the use of accounting principles applicable to a goingconcern.

 

In November 2006, the Corporation entered into a purchaseagreement with certain new and current investors for a private placementfinancing. The private placement was approved by shareholders at theCorporation’s Annual and Special Meeting held on December 20, 2006. Netproceeds from the financing were $13.8 million. The Corporation, at that time, also announced a significantrestructuring and realignment of its business operations to focus ondevelopment of its LevacorTM Rotary VAD product and reducedcommercial efforts on the Novacor® LVAS product. The restructuring program wasdirected at reducing manufacturing, selling and administrative costs,associated with the Corporation’s Novacor LVAS product.

 

Despite the 2006 financing and restructuring, the Corporation has animmediate need to raise additional capital to allow for the on-goingsatisfaction of its obligations on a timely basis and to continue in operation.WorldHeart is aggressively exploring financing alternatives, including equityfinancing transactions and corporate collaborations, to meet cash requirements.Equity financings could include, but are not limited to, private investments inpublic equity transactions and convertible debt or strategic equity investmentsby interested companies. Corporate collaborations could include licensing theCorporation’s products, co-funding of the Corporation’s products or potentialsale of the Corporation or its subsidiaries. Management is taking steps to conserve cash pending a definitive outcomeof these activities.  Additional measurestaken, beginning in the third quarter of 2007, include reducing raw materialpurchases and prototype manufacturing activities to better align inventorieswith current commercial shipments and curtailing all discretionaryspending.  There can be no assurance thatthe alternatives the Corporation is exploring will be successful.  If not successful in securing additionalfinancing or on implementing strategic alternatives in the near term,WorldHeart will not be able to continue its operations.

 

These consolidated financial statements do not reflect adjustments inthe carrying values of assets and liabilities, the reported revenues andexpenses, and the balance sheet classifications used that would be necessary ifthe going concern assumption were not appropriate. These adjustments could bematerial.

 

**2. ****R****everse Stock Split**

 

On May 30, 2007, the Corporation announced that it effected aone-for-ten reverse stock split of its capital stock. The reverse stock splitwas previously approved by the Corporation’s Board of Directors and by theCorporation’s shareholders.

 

Pursuant to the reverse stock split, each holder of the Corporation’scommon shares on May 30, 2007, the date of effectiveness of the reverse stocksplit, became entitled to receive one new common share in exchange for everyten old common shares held by such shareholder.

 

The effect of the reverse stock split has been retroactively appliedthroughout the financial statements contained herein.

 

 

6

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**WORLD HEART CORPORATION**

**Notes to Unaudited Condensed ConsolidatedFinancial Statements-continued**

 

**3.  Significant Accounting Policies**

 

*Basis of presentation*

 

The accompanying interimunaudited condensed consolidated financial statements have been prepared bymanagement pursuant to the rules and regulations of the Securities and ExchangeCommission (the SEC) and include all assets, liabilities, revenues and expensesof the Corporation and its wholly-owned subsidiaries: World Heart Inc. andWorld Heart B.V. All material inter-company transactions and balances have beeneliminated. These interim unaudited condensed consolidated financial statementsand notes thereto should be read in conjunction with Management’s Discussionand the audited financial statements and notes thereto included in theCorporation’s Annual Report on Form 10-KSB, as amended, for the year ended December31, 2006. In the opinion of management, these interim unaudited consolidatedfinancial statements reflect all normal and recurring adjustments considerednecessary to state fairly the results for the periods presented. The resultsfor the period ended September 30, 2007 are not necessarily indicative of theresults to be expected for the entire fiscal year ended December 31, 2007 orfor any future period.

 

*Earnings per share and common stockprice per share*

 

The weighted average shares outstanding used to calculate loss pershare in all periods were adjusted for the Corporation’s one-for-ten reversestock split during the second quarter of 2007. The reverse stock split istreated as if it happened at the beginning of each period presented. The pershare price of shares and stock options discussed in this document have alsobeen adjusted to reflect the reverse stock split.

 

*Use of estimates*

 

The preparation of these consolidated financial statements inaccordance with accounting principles generally accepted in the United Statesof America, requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the dates of the financial statements and the reportedamounts of revenues and expenses during the reporting periods. Such managementestimates include allowance for doubtful accounts, sales and other allowances,inventory reserves, income taxes, valuation reserve for net deferred taxassets, stock-based compensation, site restoration, deferred revenue, warrantyreserves and legal reserves. Actual results could differ from these estimates.

 

**4. Stock-based Compensation**

 

On January 1, 2006, WorldHeart adopted FAS 123(R) using the modifiedprospective transition method. Under this method, the provisions of FAS 123(R)apply to all stock-based awards granted after the effective date. Theunrecognized expense of awards not yet vested as of January 1, 2006 arerecognized as an expense in the calculation of net loss. As FAS 123(R) requiresthat stock-based compensation expense be based on awards that are ultimatelyexpected to vest, stock-based compensation for 2007 has been reduced forestimated forfeitures. When estimating forfeitures, voluntary termination behaviorsas well as trends of actual option forfeitures are considered. To the extentactual forfeitures differ from our current estimates, cumulative adjustments tostock-based compensation expense are recorded.

 

On May 30, 2007, the Corporation announced that it effected aone-for-ten reverse stock split of its capital stock. The reverse stock splitwas previously approved by the Corporation’s Board of Directors and by theCorporation’s shareholders. The effect of the reverse stock split has beenapplied to all share numbers contained herein.

 

WorldHeart uses the Black-Scholes valuation model for estimating thefair value of stock compensation.

 

 

7

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**WORLD HEART CORPORATION**

**Notes to Unaudited Condensed ConsolidatedFinancial Statements-continued**

 

Thestock-based compensation expense recorded for the three and nine month periodsended September 30, 2007 and September 30, 2006 were as follows:

| ** **                           | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **                           | ** ** | **2007**                             | ** ** | **2006**                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| Selling, general  and administrative |       | $                                    | 131,293    |                                | $          | 51,037 |   | $ | 273,149 |   | $ | 133,630 |   |
| Research and  development            |       | 53,258                               |       | 737                                 |       | 80,453 |   | 1,352 |   |
| Total                                |       | $                                    | 184,551    |                                | $          | 51,774 |   | $ | 353,602 |   | $ | 134,982 |   |

 

The unrecognized expense of awards not yet vested is $890,000 atSeptember 30, 2007. This will be recognized over the next twelvequarters.  The aggregate intrinsic value is calculated as the differencebetween the exercise price of the options outstanding and the quoted price of ourcommon shares that were in the money at September 30, 2007. At September 30,2007, the aggregate intrinsic value of all options outstanding was $3,500 andthe aggregate intrinsic value of all options that were exercisable was nil.

 

The following tablesummarizes stock option activity for the nine months ended September 30, 2007:
| ** **                             | ** ** | **Employees** | ** ** | **Non-Employees**                    | ** ** | ** **  | ** ** |
|----------------------------------------|------------|---------------|------------|--------------------------------------|------------|-------------|------------|
| ** **                             | ** ** | **Options**   | ** ** | **Weighted average  exercise price** | ** ** | **Options** | ** ** | **Weighted average  exercise price** | ** ** | **Total Options** | ** ** |
| Outstanding at  December 31, 2006 |       | 600,348       |       | $                                    | 12.27      |        | 61,792     |   | $ | 18.01 |   | 662,140 |   |
| Granted                                |       | 297,300       |       | 4.10                                 |       | 25,000      |       | 4.10 |   | 322,300 |   |
| Expired                                |       | (2,069        | )          | 134.50                               |       | (55         | )          | 386.40 |   | (2,124 | ) |
| Outstanding at  March 31, 2007         |       | 895,579       |       | $                                    | 9.30       |        | 86,737     |   | $ | 13.80 |   | 982,316 |   |
| Granted                                |       | 34,900        |       | 3.38                                 |       | 12,500      |       | 3.40 |   | 47,400 |   |
| Expired                                |       | (2,090        | )          | 141.50                               |       | —      |       | — |   | (2,090 | ) |
| Forfeited                              |       | (2,328        | )          | 5.83                                 |       | —      |       | — |   | (2,328 | ) |
| Outstanding at  June 30, 2007          |       | 926,061       |       | $                                    | 12.10      |        | 99,237     |   | $ | 12.49 |   | 1,025,298 |   |
| Granted                                |       | 19,000        |       | 2.49                                 |       | —      |       | — |   | 19,000 |   |
| Expired                                |       | (482          | )          | 139.71                               |       | (124        | )          | 106.18 |   | (606 | ) |
| Forfeited                              |       | (300          | )          | 4.10                                 |       | —      |       | — |   | (300 | ) |
| Outstanding at  September 30, 2007     |       | 944,279       |       | $                                    | 7.95       |        | 99,113     |   | $ | 11.18 |   | 1,043,392 |   |

 

At September 30, 2007, 668,575 of the outstanding options areexercisable, with a weighted average remaining contractual term of 5.3 years.

 

The weighted average grant-date fair value of options granted duringthe three and nine month periods ended September 30, 2007 and September 30,2006 were $1.97 and $0.52 and $3.05 and $0.85, respectively.  The following assumptions were used tocalculate the weighted average fair values:

 

| ** **                       | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **                       | ** ** | **2007**                             | ** ** | **2006**                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| Average risk  free interest rate |       | 4.7                                  | %          | 4.6                                 | %          | 4.7 | % | 4.5 | % |
| Expected life  (in years)        |       | 5.5                                  |       | 5.5                                 |       | 5.5 |   | 5.6 |   |
| Expected  volatility             |       | 100                                  | %          | 95                                  | %          | 99 | % | 93 | % |
| Dividend yield                   |       | 0                                    | %          | 0                                   | %          | 0 | % | 0 | % |

 

 

8

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**WORLD HEART CORPORATION**

**Notes to Unaudited Condensed ConsolidatedFinancial Statements-continued**

 

The dividend yield of zero is based on the fact that WorldHeart hasnever paid cash dividends and has no present intention to pay cashdividends.  Expected volatility is based on the historical volatility ofthe Corporation’s common shares over the period commensurate with the expectedlife of the options.  The risk free interest rate is based on averagerates for 5 and 7 year treasury notes as published by the United States FederalReserve.

 

**5. Performance Bonus**

 

On March 8, 2007 the Compensation Committee of the Board of Directorsapproved a 2007 Performance Bonus plan for its employees.  The bonus willbe earned based on achievement of goals related to the Corporation’s business. The maximum bonus is approximately $848,000 and will be paid 25% in cashand 75% in common shares.

 

The cash and share payments will be paid when the CompensationCommittee determines that the 2007 performance goals have been achieved. If the performance goals are not achieved on or before December 31, 2007,then no performance bonuses will be paid. Based on management’s currentevaluation of its performance goals, $222,000 was recorded as a Performance Bonus liability at September 30,2007.  This constitutes an expensereduction of $118,000 in the current quarter compared to a charge of $340,000in the second quarter as expectations of achieving planned objectivesdiminished during this quarter.

 

**6. Comprehensive Income**

 

For the three and nine months ended September 30, 2007 and September30, 2006, there were no significant differences between the Corporation’scomprehensive loss and its net loss.

 

**7. Recent Accounting Pronouncements**

 

In February 2007, the Financial Accounting Standards Board (“FASB”)issued Statement of Financial Accounting Standards No. 159, “The Fair ValueOption of Financial Assets and Liabilities” (“SFAS 159”).  SFAS 159provides entities with the option to report selected financial assets andliabilities at fair value.  Business entities adopting SFAS 159 willreport unrealized gains and losses in earnings at each subsequent reportingdate on items for which fair value option has been elected.   SFAS159 established presentation and disclosure requirements designed to facilitatecomparisons between entities that choose different measurement attributes forsimilar types of assets and liabilities.  SFAS 159 requires additionalinformation that will help investors and other financial statements users tounderstand the effect of an entity’s choice to use fair value on itsearnings.  SFAS 159 is effective for fiscal years beginning after November15, 2007, with earlier adoption permitted. The Corporation is currentlyassessing the impact that the adoption of SFAS 159 may have on its consolidatedfinancial position, results of operation and cash flows.

 

In June 2006, the FASB issued interpretation No. 48, “Accounting forUncertainty in Income Taxes-An interpretation of FASB Statement 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized inenterprises’ financial statements in accordance with Statement of FinancialAccounting Standards No. 109, “Accounting for Income Taxes” (“FAS 109”). This interpretation prescribes a recognition threshold and measurementattribute for the financial statement recognition and measurement of a taxposition taken or expected to be taken in a tax return. FIN 48 also providesguidance on recognition of tax benefits, classification on the balance sheet,interest and penalties, accounting in interim periods, disclosure, andtransition.  The Corporation adopted FIN 48 effective January 1,2007.  In accordance with FIN 48, the Corporation has decided to classifyany interest and penalties as a component of tax expense. There was no interestand penalties in the three or nine month periods ended September 30,2007.  As a result of the implementation of FIN 48, the Corporationrecognized no material adjustment in income tax expense or in its net deferredtax asset in 2007. The Corporation files income tax returns in the UnitedStates federal jurisdiction, Canadian jurisdiction, in certain Europeanjurisdictions, and various states. The Corporation is not under examination inany of these jurisdictions.

 

 

9

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**WORLD HEART CORPORATION**

**Notes to Unaudited Condensed ConsolidatedFinancial Statements-continued**

 

**8. Warrants and Certain Stock Options Denominated in Canadian dollars**

 

Effective January 1, 2004, WorldHeart determined that itsfunctional currency had changed from the Canadian dollar to the U.S. dollarbecause the majority of its business operations and investors were in theUnited States.

 

Concurrent with this change in functional currency, WorldHeart adoptedthe U.S. dollar as its reporting currency. Prior to January 1, 2004 thefunctional and reporting currency was the Canadian dollar.

 

WorldHeart has primarily financed its operations from the sale ofequity and debt securities that have been denominated in U.S. and Canadiandollars. As part of these financings, WorldHeart has issued warrants topurchase common stock that have also been denominated in U.S. and Canadiandollars, and therefore, had warrants outstanding at September 30, 2007 andDecember 31, 2006 that are denominated in both currencies.

 

The SEC and FASB have issued recent interpretations that suggest warrantswhose exercise price is different from the entity’s functional currency cannotbe classified as equity and should be treated as derivatives, which would berecorded as liabilities and carried at their fair value. Changes in the fairvalue from period to period would be recorded as a gain or loss in thestatement of operations.

 

The recent SEC and FASB interpretations relate to FASBStatement No. 133, “Accounting for Derivative Instruments and HedgingActivities” and Emerging Issue Task Force  (“EITF”) “EITF 00-19 “Accountingfor Derivative Financial Instruments Indexed to and Potentially Settled in aCompany’s Own Stock”. The FASB has initiated a project to determine theaccounting treatment for certain equity instruments with elements of foreigncurrency risk. This project is expected to provide further guidance withrespect to accounting for such items WorldHeart is awaiting the results of theFASB’s project and has not, therefore, recorded warrants outstanding that haveexercise prices in Canadian dollars, as derivatives.  If the Corporation had recorded suchinstruments as derivatives, it would have reported an incremental gain in netincome of nil for the three and nine months ended September 30, 2007 and an incrementalgain in net income of nil for the quarter ended September 30, 2006 and $0.6million for the nine months ended September 30, 2006, related to theseinstruments in the statement of operations for these periods.  The amounts were calculated using theBlack-Scholes option pricing model. The Corporation used the followingassumptions to value the instruments: a 0% dividend rate for both quartersended September 30, 2007 and September 30, 2006, volatility of 100% and 95% forquarters ended September 30, 2007 and September 30, 2006, respectively, theactual exercise price of each instrument, the actual Corporation closing shareprice for September 30, 2007 and September 30, 2006, the estimated remaininglife of the underlying warrant at September 30, 2007 and September 30, 2006,and the Canadian risk free interest rate based on the estimated remaining lifeof each related warrant.

 

 

10

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**WORLD HEART CORPORATION**

**Notes toUnaudited Condensed Consolidated Financial Statements-continued**

 

**9. Commitments and Contingencies**

 

**(a)****         ****Operating Leases**

 

The Corporation is committed tominimum lease payments for office facilities, equipment and licenses. On April30, 2007, the Oakland lease expired (the “Prior Lease”) and the Corporation hadbeen negotiating with the Lessor on the terms of certain restorationobligations with respect to the premises under the Prior Lease, as well as theterms of the New Lease. On July 20, 2007, the Corporation entered into aCompromise Agreement and executory Standard Industrial/Commercial Single TenantLease Agreement (the “New Lease”) with Oakport Associates (the “Lessor”) withrespect to the Corporation’s headquarters, administration and engineeringfacility in Oakland, California. As part of the compromise agreement,WorldHeart released the $750,000 balance of pledged cash used as collateral tothe landlord and it was applied towards the reserve for the site restoration ofthe building associated with the lease currently occupied by World Heart. Inaddition, the Corporation opened an escrow account for $568,000 as a pledgetowards further work on site restoration for the building vacated by theCorporation. As progress work on site restoration for the vacated facility iscompleted, the escrow account will be used for progress payments to therestoration contractor; and after final sign off by the landlord of this workthe building will be returned to Lessor.

 

Pursuant to the terms of theCompromise Agreement, WorldHeart will continue to lease the premises undersubstantially similar terms as the Prior Lease, except on a month-to-monthbasis at a base rent of $41,572 per month, until it performs agreed-uponrestoration work on one of the two buildings it occupied under the Prior Lease,which work it must complete by January 30, 2008, subject to certain extensionsdue to events outside of the Corporation’s control.  When such restorationwork is completed in a timely and satisfactory manner, the New Lease willbecome effective with respect to the one remaining building that the Corporationwill continue to occupy.  Any restoration obligation with respect to thisremaining building was satisfied by the Lessor which drew down on the Letter ofCredit in the amount of $750,000 in the third quarter of 2007, which has beenin place in connection with the premises under the Prior Lease.

 

The New Lease will be for a term ofthree years and a base rent of $20,000 per month in year one, $21,000 per monthin year two and $22,000 per month in year three. In addition, the Lessor agreedto apply $100,000 of a $150,000 security deposit under the Prior Lease towardsthe security deposit under the New Lease and to return the balance, plus allaccrued interest, to the Corporation at this time.  If the New Leasebecomes effective as planned, the parties will mutually release each other fromall claims under the Prior Lease, including without limitation any furtherrestoration obligations on behalf of the Corporation.  If WorldHeart isunable to fulfill its obligations under the Compromise Agreement, it will bedeemed a holdover tenant and, among other obligations, will be subject to theholdover rent payments in the amount of 150% of the base rent under the termsof the Prior Lease.

 

 

11

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**WORLD HEART CORPORATION**

**Notes toUnaudited Condensed Consolidated Financial Statements-continued**

 

**(b) Research Agreement**

 

Effective April 1, 1996, the Corporation entered into a researchagreement with the Cardiovascular Devices Division (CVD) of the Ottawa HeartInstitute Research Corporation (OHIRC) under which the Corporation agreed tofund a substantial portion of CVD’s remaining research efforts relating toartificial heart technology.  Inaddition, certain technology licenses were executed.  The Corporation acquired joint ownership withCVD of the technology arising from CVD’s research under the Research Agreementand an exclusive twenty-five year license to market the product and certainother related technologies for an initial license fee of $147,544 and royaltiesof 7%.

 

The Corporation’s research funding to CVD under the Research Agreementwas $13,400,000 for the period from April 1, 1996 to December 31,2004. No payments were made during the last three years.  In September 2007, the Corporation and OHIRCterminated the Research Agreement and amended the TET License Agreement andsigned a Release Agreement, whereby the parties agreed that there were nopayments between the parties.  TheAmended TET License Agreement gives WorldHeart exclusive access to certainintellectual property associated with the TET System, in consideration ofroyalty payments to OHIRC for products in which it utilizes the TET System inthe future.  Such royalty payments, ifany, will be immaterial for, at least, the next two years.

 

In addition, a former officer of WorldHeart, currently employed at CVD,had made additional claims for certain payments, which WorldHeartdisputed.  In August 2007, a settlementand release of claims was agreed to between the parties.   A payment of $245,000 was made during thequarter resulting in an expense reduction of $300,000 which was previouslyexpensed in prior quarters and eliminating the accrued liability for thisformer officer.

 

 

12

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**ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSISOR PLAN OF OPERATION**

 

**INTRODUCTION**

 

World Heart Corporationand its subsidiaries are collectively referred to as WorldHeart. The followingManagement Discussion and Analysis of Financial Condition and Results ofOperations (MD&A) discusses material changes in WorldHeart’s financialcondition and results of operations and cash flows for the three and ninemonths ended September 30, 2007 and September 30, 2006. Such discussion andcomments on the liquidity and capital resources should be read in conjunctionwith the information contained in WorldHeart’s audited consolidated financialstatements for the year ended December 31, 2006, prepared in accordancewith the rules and regulations of the SEC included in our Annual Report onForm 10-KSB, as amended, for the fiscal year ended December 31, 2006.

 

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: ourimmediate need to raise additional funding or complete corporatecollaborations, numerous uncertainties and time delays inherent in thedevelopment of products, particularly our LevacorTM Rotary VAD; WorldHeart’s need to establishreimbursement mechanisms and product acceptance from third-party payers;extensive government regulation of our products; rapid developments intechnology by competitors some of whom have significantly greater financial,production and marketing resources; and slower than anticipated growth in theDestination Therapy market, as well as other risks and uncertainties set forthunder the heading “Risk Factors” in our Annual Report on Form 10-KSB, asamended, for year ended December 31, 2006.

 

On May 30, 2007, weannounced a one-for-ten reverse stock split, the effect of which has beenretroactively applied throughout the financial statements contained herein.

 

**OVERVIEW**

 

WorldHeart is engaged indevelopment of mechanical circulatory support systems focused oncommercializing implantable ventricular assist devices (VADs), which aremechanical pumps that allow for the restoration of normal blood circulation topatients suffering from advanced heart failure. WorldHeart believes that it hasa broad platform of next-generation products under development for long-termcirculatory support and that both pulsatile and rotary pumps are required totreat the full spectrum of clinical needs of end and late-stage heart failurepatients. WorldHeart believes that rotary devices are best suited forlate-stage patients, with some contractility, who require only partial support,or an assist. Alternatively, pulsatile devices are best suited for end-stagepatients with poor ventricular contractility, who require full support, orfunctional replacement.

 

WorldHeart currentlyderives all of its revenue from its Novacor LVAS and related peripheralequipment, which it sells directly to medical clinics and hospitals in theUnited States, Europe and Canada and through a distributor in certain othercountries. The Novacor LVAS is commercially approved as a Bridge-to-Transplantdevice in the United States and Canada. In Europe, the Novacor LVAS hasunrestricted approval for use as an alternative to transplantation,Bridge-to-Transplantation and to support patients who may be able to recoverthe use of their natural heart. In Japan, the device is commercially approvedfor use in cardiac patients at risk of imminent death from non-reversible leftventricular failure for which there is no alternative except hearttransplantation.

 

In July 2005,WorldHeart acquired the assets of MedQuest Products, Inc. (MedQuest)including a rotary VAD, now called the Levacor Rotary VAD. In conjunction withthe acquisition, WorldHeart raised approximately $22.7 million in grossfinancing proceeds from a private placement with Maverick Venture Management,LLC and the exercise of certain warrants and also converted all of itsremaining convertible debentures from an earlier financing. Pre-clinicaltesting of the Levacor Rotary VAD was accelerated after the acquisition, withsuccessful initial human feasibility clinical implants in Europe completedduring 2006.

 

In November 2006,WorldHeart announced a restructuring plan, which included a reduction ofcommercial operations associated with the Novacor LVAS, and a refocusing of itsresources on the development of its next generation products, particularly theLevacor Rotary VAD. WorldHeart also reduced its workforce and consolidated itsfacilities in Oakland, in an effort to further reduce expenses.

 

 

13

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Efforts are currentlydirected towards completion of preclinical qualification activities of theLevacor VAD in advance of the planned clinical trials, which are expected tobegin in the United States in early 2008 subject to availability of additionalfunding.  Refinements to external system components, intended to enhancesystem ergonomics and improve the quality of life of VAD recipients, have beenimplemented.  In addition, manufacturing capabilities in WorldHeart’s SaltLake City facility are being enhanced, including expansion of clean room space.

 

WorldHeart has anext-generation implantable pulsatile VAD, called the Novacor II.Development work on the Novacor II achieved an important milestone withsuccessful initial animal implants completed in 2005 and 2006. Furtherdevelopment work on the Novacor II is expected to resume after completion ofthe development of Levacor Rotary VAD and subject to additional fundingavailability.

 

In addition, WorldHeartis developing the PediaFlowTM VAD (PVAD) and a minimally invasiveVAD (MIVAD) based on PVAD technology.  The PVAD is a small, magneticallylevitated, axial rotary VAD currently under development by a consortium,including WorldHeart, intended for use in infants. Development is funded by theNational Institutes of Health, under a contract awarded to the University ofPittsburgh.  WorldHeart’s MIVAD design is based on the technologyincorporated in the PVAD device using vascular connections to allow placementthrough minimally invasive techniques. It is intended to provide partialcirculatory support in patients at an earlier stage of heart failure than currentlyused VADs.  In third quarter of 2007, successful initial animal implantsof the PediaFlow were completed at the University of Pittsburgh.

 

Research and developmentby WorldHeart’s competitors is proceeding on several rotary flow devices.Certain of these devices have received the CE mark in Europe and are advancingthrough clinical trials in the United States and Europe. WorldHeart believesthat its Levacor Rotary VAD is the most advanced rotary device underdevelopment.

 

Although the DestinationTherapy patient population continues to be largely untreated by cardiac assistdevices, and the adoption rates have been slower than anticipated, theCorporation believes that the Destination Therapy market will evolve morerapidly as next-generation devices are evaluated clinically and as experiencewith these VADs increases.

 

**Summary of Quarterly Results**

In thousands (000’s) except per share amounts

(Unaudited)

| ** **                                  | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------|------------|------------------------|------------|
| ** **                                  | ** ** | **September 30,**      | ** ** | **June 30,** | ** ** | **March 31,** | ** ** |
| ** **                                  | ** ** | **2007**               | ** ** | **2007** | ** ** | **2007** | ** ** |
| Net revenue                                 |       | $                      | 531        |   | $ | 849 |   | $ | 848 |   |
| Net loss for the  period                    |       | (3,018                 | )          | (4,477 | ) | (3,430 | ) |
| Net loss  applicable to common shareholders |       | (3,018                 | )          | (4,477 | ) | (3,430 | ) |
| Basic and  diluted loss per share           |       | $                      | (0.26      | ) | $ | (0.39 | ) | $ | (0.30 | ) |

 

| ** **                                  | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------|------------|------------------------|------------|
| ** **                                  | ** ** | **September 30,**      | ** ** | **June 30,** | ** ** | **March 31,** | ** ** |
| ** **                                  | ** ** | **2006**               | ** ** | **2006** | ** ** | **2006** | ** ** |
| Net revenue                                 |       | $                      | 1,387      |   | $ | 2,988 |   | $ | 3,285 |   |
| Net loss for the  period                    |       | (7,619                 | )          | (3,888 | ) | (3,442 | ) |
| Net loss  applicable to common shareholders |       | (7,619                 | )          | (3,888 | ) | (3,442 | ) |
| Basic and  diluted loss per share           |       | $                      | (1.37      | ) | $ | (0.70 | ) | $ | (0.60 | ) |

 

 

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**RESULTS OF OPERATIONS FOR THE THREEAND NINE MONTH PERIOD ENDED SEPTEMBER 30, 2007 COMPARED WITH THE THREE ANDNINE MONTH PERIOD ENDED SEPTEMBER 30, 2006**

** **

| **(Unaudited)**                                                             | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                  | ** ** | **2007**                              | ** ** | **2006**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Revenue**                                                                 |       | $                                     | 531        |                                 | $          | 1,387 |   | $ | 2,228 |   | $ | 7,660 |   |
| **Cost of  goods sold**                                                     |       | (381                                  | )          | (4,524                               | )          | (2,274 | ) | (7,847 | ) |
| ** **                                                                  | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Gross  profit**                                                           |       | 150                                   |       | (3,137                               | )          | (46 | ) | (187 | ) |
| ** **                                                                  | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Operating  expenses**                                                     | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Selling, general  and administrative                                        |       | 1,456                                 |       | 1,964                                |       | 4,459 |   | 6,695 |   |
| Research and  development                                                   |       | 2,164                                 |       | 2,430                                |       | 7,169 |   | 8,092 |   |
| Amortization of  intangibles                                                |       | 48                                    |       | 48                                   |       | 144 |   | 144 |   |
|                                                                        |       |                                  |       |                                 |       |   |   |   |   |
| **Total  operating expenses**                                               |       | 3,668                                 |       | 4,442                                |       | 11,772 |   | 14,931 |   |
| ** **                                                                  | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Operating  loss**                                                         |       | (3,518                                | )          | (7,579                               | )          | (11,818 | ) | (15,118 | ) |
|                                                                        |       |                                  |       |                                 |       |   |   |   |   |
| **Other  income (expense)**                                                 |       | 500                                   |       | (40                                  | )          | 893 |   | 169 |   |
| ** **                                                                  | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net  loss applicable to common shareholders**                             |       | $                                     | (3,018     | )                                    | $          | (7,619 | ) | $ | (10,925 | ) | $ | (14,949 | ) |
|                                                                        |       |                                  |       |                                 |       |   |   |   |   |
| **Weighted  average number of common shares outstanding basic and diluted** |       | 11,507                                |       | 5,548                                |       | 11,507 |   | 5,548 |   |
| ** **                                                                  | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Basic  and diluted loss per common share**                                |       | $                                     | (0.26      | )                                    | $          | (1.37 | ) | $ | (0.95 | ) | $ | (2.69 | ) |
|                                                                             |            |                                       |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

***Revenue:*** The sale of Novacor LVAS implant kitsand related peripheral equipment and services accounts for all of WorldHeart’srevenues.  We primarily sell our products directly, except for a fewcountries where we sell through distributors

 

The composition of revenue in thousands ($000’s) is as follows exceptfor units:

 

| ** **            | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| **(Unaudited)**       | ** ** | **2007**                             | ** ** | **2006**                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **            | ** ** | **$**                                | ** ** | **Units**                           | ** ** | **$** | ** ** | **Units** | ** ** | **$** | ** ** | **Units** | ** ** | **$** | ** ** | **Units** | ** ** |
|                  |       |                                 |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Implant kits          |       | $                                    | 306        |                                | 4          |   | $ | 656 |   | 9 |   | $ | 990 |   | 14 |   | $ | 4,725 |   | 68 |   |
| Peripherals and other |       | 225                                  |       |                                |       | 731 |   |   |   | 1,238 |   |   |   | 2,935 |   |   |   |
|                  |       |                                 |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenue               |       | $                                    | 531        |                                |       |   | $ | 1,387 |   |   |   | $ | 2,228 |   |   |   | $ | 7,660 |   |   |   |
|                       |            |                                      |            |                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Revenue for the quarterended September 30, 2007 was $531,000 reflecting a decrease of $856,000, or62%, compared with $1,387,000 for the quarter ended September 30, 2006. Implantkit revenue in the third quarter of 2007 decreased by $350,000, or 53%,compared with the third quarter of 2006.  Implant kits recognized asrevenue were 4 and 9 in the quarters ended September 30, 2007 and September30, 2006, respectively. The significant decrease in revenue during 2007resulted from the decision made in the fourth quarter of 2006 to reducecommercial efforts on WorldHeart’s first generation Novacor LVAS product.

 

Peripherals and otherrevenues, including Novacor LVAS hardware and peripheral sales, services andother revenue for the quarter ended September 30, 2007 were $225,000, adecrease of  $506,000, compared withperipherals and other revenue of  $731,000 recorded in the quarter endedSeptember 30, 2006. We expect Novacor LVAS revenue to continue to declineduring the fourth quarter of 2007 and future quarters.

 

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Revenue during the firstnine months of 2007 was $2,228,000, a decrease of $5,432,000, or 71%, comparedwith $7,660,000 recorded in same period of 2006. Implant kit revenue of$990,000 decreased by 79% for the nine months ended September 30, 2007,compared with $4,725,000 for the nine months ended September 30, 2006. Implantkits recognized as revenue for the nine months ended September 30, 2007 totaled14, compared with 68 during the same period of 2006.

 

***Cost of goods sold:***  For the three months ended September 30, 2007,the cost of goods sold as a percent of revenue was 72%.  Cost of goods sold exceeded revenue duringthe first nine months of 2007 and 2006 due primarily to the write off of excessNovacor inventory in the United States and Europe and expensing ofmanufacturing variances primarily during the first quarter of 2007.

 

***Selling, general and administrative:*** Selling, general and administrativeexpenses consist primarily of payroll and related expenses for executives,sales, marketing, accounting and administrative personnel, professional fees,communication expenses, promotional activities, costs associated with meetingmulti-jurisdictional regulatory requirements, insurance premiums, facilitycosts and other general corporate expenses.

 

The composition of selling, general and administrative expenses inthousands ($000’s) is as follows:

 
| ** **                  | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| **(Unaudited)**             | ** ** | **2007**                             | ** ** | **2006**                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                  | ** ** | ** **                           | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Selling                     |       | $                                    | 199        |                                | $          | 805 |   | $ | 1,051 |   | $ | 2,831 |   |
| General and  administrative |       | 1,257                                |       | 1,159                               |       | 3,408 |   | 3,864 |   |
| Total                       |       | $                                    | 1,456      |                                | $          | 1,964 |   | $ | 4,459 |   | $ | 6,695 |   |

 

Selling, general andadministrative expense for the three months ended September 30, 2007 decreasedby $508,000, or 26%, compared with the same period in 2006, and for the ninemonths ended September 30, 2007 decreased by $2,236,000, or 33%, versus thesame period in 2006.  Selling expenses for the three months endedSeptember 30, 2007 decreased by $606,000, or 75%, compared with the same periodin 2006, and for the nine month period ended September 30, 2007 decreased by $1,780,000,or 63%, compared with the same period last year. Selling expenses decreased in2007 due to our November 2006 restructuring, which eliminated most of our salesforce and reduced personnel costs in Europe.

 

General andadministrative expenses for the three months ended September 30, 2007 increasedby $98,000 or 8%, compared with the same period in 2006 primarily due tosite restoration costs at our Oakland facility and additional legal andadministrative expenses.  For the ninemonths ended September 30, 2007,  generaland administrative expenses decreased by $456,000, or 12%. The reductionis primarily due to the restructuring of our operations in the fourth quarterof 2006, offset slightly by costs related to the Oakland site restoration.  For the three and nine month periods endedSeptember 30, 2007, WorldHeart recorded $131,000 and $273,000 in stock-basedcompensation expense, respectively, compared with $51,000 and $134,000 for thethree and nine month periods ended September 30, 2006. Administrativeexpenses are expected to increase somewhat in the following quarters with theimplementation of additional internal control systems, related toSarbanes-Oxley Act of 2002, section 404 compliance, as well as administrativesupport of our product development programs.

 

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***Research and development:*** Research and development expenses consist principallyof salaries and related expenses for research personnel, prototypemanufacturing, testing, clinical trial expenses, factory costs and regulatoryaffairs expenses incurred at our Oakland and Salt Lake City facilities.

 

Research and developmentexpenses for the three months ended September 30, 2007 were $2,164,000, adecrease of  $266,000, compared with $2,430,000 for the three months endedSeptember 30, 2006.  Research and development expenses for the nine monthsended September 30, 2007 decreased by $923,000 compared with the nine monthsended September 30, 2006.  For the comparable three and nine month periods,research and development and clinical costs of our Levacor Rotary VAD increasedin 2007, while Novacor related expenses in 2006 were significantly reduced inthe second half of the year. Research and development expenses for our LevacorRotary VAD are expected to increase throughout the fourth quarter of 2007 foron-going animal studies and the preparation for the United States feasibilityclinical trials. For the three and nine month periods ended September 30, 2007,WorldHeart recorded $53,000 and $80,000 in stock-based compensation expense,respectively, compared with nil and $1,000 for the same periods of 2006.

 

***Amortization of intangibles:*** Amortization of intangibles for thethree and nine month periods ended September 30, 2007 were $48,000 and $144,000,respectively. These intangible assets were recorded as part of the MedQuestacquisition and represent the estimated intangible value of the MedQuestworkforce of $765,000, which is being amortized on a straight-line basis overfour years.

 

***Foreign Exchange:*** Foreign exchange transactions resulted in a loss of$160,000 for the three month period ended September 30, 2007, comparedwith a gain of $1,000 for the three month period ended September 30, 2006.Foreign exchange transactions resulted in a loss of $29,000 for the nine monthperiod ended September 30, 2007, compared with a gain of $41,000 for thenine month period ended September 30, 2006. These changes during the threeand nine month periods in 2007 and 2006 were primarily due to fluctuations ofthe U.S. dollar versus the Euro and Canadian dollar during the periods.

 

***Investment and other income:*** Investment and other income for thequarter ended September 30, 2007 was $665,000, compared with $37,000 during thequarter ended September 30, 2006.  Investment and other income was$924,000 for the nine month period ended September 30, 2007, compared with$204,000 for the nine month period ended September 30, 2006. Theincrease of $720,000 for the nine months ended September 30, 2007 compared withthe nine months ended September 30, 2006 consisted of approximately $100,000increase in interest income and approximately $620,000 in other income due tothe recognition of deferred revenue for a certain previously shipped Novacorproduct and the recognition of deferred clinical fees associated withpreviously shipped Levacor VAD clinical product.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Historically, WorldHearthas funded losses from operations through the sale of equity and issuance ofdebt instruments. Combined with revenues and investment income, these fundshave provided WorldHeart with the resources to operate our business, sell andsupport our products, fund our research and development program and clinicaltrials, apply for and obtain the necessary regulatory approvals and develop newtechnologies and products.

 

At September 30, 2007, wehad cash and cash equivalents of $2.4 million, a decrease of $9.8 millionfrom December 31, 2006 and a decrease of $4.2 million from June 30, 2007.During the nine month period ended September 30, 2007, cash used to fundoperating activities was $9.0 million, consisting primarily of the net loss forthe period of $10.9 million offset somewhat by non-cash charges relatedprimarily to an inventory write off of $0.4 million associated with the Novacorproduct, and $0.9 million in non-cash stock based compensation, depreciationand amortization expenses. Working capital changes since June 30, 2007 of $0.6million consisted primarily of $1.7 million decrease in trade and otherreceivables and $1.2 million inventory, offset by a $2.0 million decrease inaccounts payable and accrued compensation.

 

Investing activities inthe three quarters of 2007 requiring cash resources consisted of $0.2 millionin capital equipment additions and $0.6 million of cash pledged for the Oaklandfacility site restoration.  There were nofinancing activities during the three quarters of 2007.

 

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With the completion ofthe private placement in November 2006 and restructuring programs initiated inthe fourth quarter of 2006, based on our current operating expenses andprojected revenues of our Novacor LVAS and reimbursement from the LevacorRotary VAD, we have sufficient cash to fund operations only into late fourth quarterof 2007.

 

We are continuing toaggressively explore all strategic and financing alternatives, including equityfinancing transactions and corporate collaborations. Equity financings couldinclude, but are not limited to, private investments in public equitytransactions, convertible debentures and strategic equity investment byinterested companies. Corporate collaborations could include licensing of oneor more of our products, co-funding of our products or potential sale ofWorldHeart or its subsidiaries. We have completed a restructuring programinitiated in the fourth quarter of 2006 re-aligning our spending to focus onour key development program, the Levacor Rotary VAD, have further reducedspending and will continue to carefully manage our overall cash usage. WhileWorldHeart has been and is exploring all opportunities to improve its financialcondition, there is no assurance that these programs will be successful. If weare not successful in securing additional funding or implementing strategic alternativesin the very near term, we will not be able to continue operations.

 

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

 

**CRITICAL ACCOUNTING ESTIMATES**

 

As a result of theCorporation’s decision to reduce commercial operations associated with theNovacor LVAS, and refocus its resources on the development of its nextgeneration products, WorldHeart wrote off $4.6 million of Novacor relatedinventories during the third and fourth quarter of 2006 that managementestimated were surplus. In the quarter ended March 31, 2007, the Corporationwrote off  $0.2 million of inventory and in the quarter ended June 30,2007 wrote off an additional $0.2 million of inventory in Oakland and Europe.Management estimated future usage of inventory on hand by projecting futuresales of its Novacor product, and used these to predict raw material parts andcomponents that would be consumed in manufacturing product to meet these sales.Future write downs may be required based on actual sales achieved and will berecorded when they can be reasonably determined.

 

**OFF- BALANCE SHEET ARRANGEMENTS**

 

None.

 

**ITEM 3.   CONTROLS AND PROCEDURES**

 

*Evaluationof disclosure controls and procedures*: Based on their evaluation of our disclosure controlsand procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Exchange Act) as of September 30, 2007, our presidentand chief executive officer (principal executive officer) and our chieffinancial officer (principal accounting and financial officer) have concludedthat our disclosure controls and procedures are designed to ensure that informationrequired to be disclosed in the reports that we file or submit under theExchange Act is recorded, processed, summarized and reported within the timeperiods specified in the Securities and Exchange Commission’s rules andforms and are operating in an effective manner at the reasonable assuranceslevel.

 

*Changesin internal controls over financial reporting:* There was no change in our internal controls overfinancial reporting that occurred during the quarter ended September 30, 2007that has materially affected, or is reasonably likely to materially affect, ourinternal controls over financial reporting.

 

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**PART II—OTHER INFORMATION**

 

**ITEM 1.LEGAL PROCEEDINGS**

 

(None)

 

**ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIESAND USE OF PROCEEDS**

 

The Corporation has madeno repurchases of common shares during the period covered by this report.

 

**ITEM 3.DEFAULTS UPON SENIOR SECURITIES**

 

(None)

 

**ITEM 4.SUBMISSIONS OF MATTERS TO AVOTE OF SECURITY HOLDERS**

 

(None)

 

**ITEM 5. OTHER INFORMATION**

 

(None)

 

**ITEM6.  EXHIBITS**

 

(a)        Exhibits

 
| Exhibit 10.21     |   | Compromise Agreement  with Oakland Associates, LP dated July 20, 2007, and Standard Industrial  Commercial Single Tenant Lease Agreement (incorporated by reference to Exhibit  10.21 to the  Corporation’s Form 10-QSB for the quarter Ended June 30, 2007 (Commission  File No. 000-28882)). |
|-------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|              |   |                                                                                                                                                                                                                                                                                                |
| Exhibit 10.22     |   | Employment Agreement by  and among World Heart Corporation and David Pellone. (filed as an  exhibit to the Current Report on Form-8K filed on September 4, 2007 and  incorporated herein by  reference (Commission File No. 000-28882)).                                                            |
|              |   |                                                                                                                                                                                                                                                                                                |
| Exhibit 31.1 |   | Certification of  Principal Executive Officer pursuant to Section 302 of the Sarbanes-Exley 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.                                                                                                                                                                     |

 

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**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 13, 2007 |                                   | /s/ Jal S. Jassawalla |
|--------------------------------|----------------------------------------|-----------------------|
|                           | Jal S. Jassawalla, President and Chief |
|                           | Executive Officer                      |

 

 
| Dated:  November 13, 2007 |                                   | /s/ David Pellone |
|--------------------------------|----------------------------------------|-------------------|
|                           | David Pellone, Vice President, Finance |
|                           | and Chief Financial Officer            |

 

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