** **

**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-QSB**

** **

**(Mark One)**

x          **QUARTERLY REPORT UNDERSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**For quarterly periodended  June 30, 2006**

** **

o            **TRANSITION REPORT UNDERSECTION 13 OR 15(d) OF THE EXCHANGE ACT**

**For the transition periodfrom              to            **

** **

**Commission filenumber:  000-28882**

** **

**WORLD HEART CORPORATION**

(Exact name of Company as specified in its charter)

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

** **

**7799 Pardee Lane,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 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 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the 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 SecuritiesExchange Act of 1934).    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 July 27,2006 was 55,479,549.

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

 

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**TABLE OFCONTENTS**

 
|    |   |     |                                                            |
|---------|--------|----------|-----------------------------------------------------------------|
|    |   | **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                                                      |
|    |   |     |                                                            |

 

 

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**PART I—FINANCIAL INFORMATION**

**ITEM1. FINANCIAL STATEMENTS.**

**WORLD HEART CORPORATIONConsolidated Balance Sheets**(United States Dollars)
| ** **                                                                                         | ** ** | **June 30, 2006** | ** **     | **December 31, 2005** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|-----------------------------|----------------|---------------------------------|------------|
| ** **                                                                                         | ** ** | **(unaudited)**             | ** **     | ** **                      | ** ** |
| **ASSETS**                                                                                         | ** ** | ** **                  | ** **     | ** **                      | ** ** |
| **Current assets**                                                                                 | ** ** | ** **                  | ** **     | ** **                      | ** ** |
| Cash and cash  equivalents                                                                         |       | $                           | 4,568,059      |                            | $          | 10,661,682 |   |
| Trade and other  receivables                                                                       |       | 2,475,227                   |           | 3,896,281                       |       |
| Prepaid expenses                                                                                   |       | 1,142,479                   |           | 778,007                         |       |
| Inventory                                                                                          |       | 7,580,236                   |           | 8,215,995                       |       |
|                                                                                               |       | 15,766,001                  |           | 23,551,965                      |       |
| **Long-term assets**                                                                               | ** ** | ** **                  | ** **     | ** **                      | ** ** |
| Cash pledged as  collateral for lease                                                              |       | 750,000                     |           | 750,000                         |       |
| Capital assets                                                                                     |       | 1,584,946                   |           | 1,837,540                       |       |
| Intangible  assets                                                                                 |       | 586,476                     |           | 682,188                         |       |
|                                                                                               |       | 2,921,422                   |           | 3,269,728                       |       |
| **Total assets**                                                                                   | ** ** | **$**                       | **18,687,423** | ** **                      | **$**      | **26,821,693** | ** ** |
|                                                                                               |       |                        |           |                            |       |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                     | ** ** | ** **                  | ** **     | ** **                      | ** ** |
| **Current liabilities**                                                                            | ** ** | ** **                  | ** **     | ** **                      | ** ** |
| Accounts payable  and accrued liabilities                                                          |       | $                           | 3,855,678      |                            | $          | 3,754,620 |   |
| Indirect taxes  payable                                                                            |       | 343,082                     |           | 343,082                         |       |
| Accrued  compensation                                                                              |       | 855,495                     |           | 806,367                         |       |
| Deferred revenue                                                                                   |       | 167,508                     |           | 1,205,107                       |       |
| **Total liabilities**                                                                              | ** ** | **$**                       | **5,221,763**  | ** **                      | **$**      | **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                                                                        |       | 2,221,973                   |           | 2,138,765                       |       |
| Cumulative other  comprehensive income                                                             |       | (6,285,577                  | )              | (6,285,577                      | )          |
| Accumulated  deficit                                                                               |       | (259,378,738                | )              | (252,048,673                    | )          |
| Total  shareholders’ equity                                                                   |       | 13,465,660                  |           | 20,712,517                      |       |
|                                                                                               |       |                        |           |                            |       |
| **Total liabilities and  shareholders’ equity**                                               | ** ** | **$**                       | **18,687,423** | ** **                      | **$**      | **26,821,693** | ** ** |

 

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

3

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**WORLD HEART CORPORATIONConsolidated Statements of Operations**(United States Dollars)(unaudited)
| ** **                                                | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                      |       |                                                |       |                                              |       |   |   |   |   |
| **Revenue**                                               |       | $                                                   | 2,988,071  |                                              | $          | 2,449,178 |   | $ | 6,272,887 |   | $ | 5,866,166 |   |
| **Cost of  goods sold**                                   |       | (1,910,476                                          | )          | (2,142,266                                        | )          | (3,322,217 | ) | (4,253,968 | ) |
|                                                      |       |                                                |       |                                              |       |   |   |   |   |
| **Gross  margin**                                         |       | 1,077,595                                           |       | 306,912                                           |       | 2,950,670 |   | 1,612,198 |   |
| ** **                                                | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Operating  expenses**                                   | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Selling, general and administrative                       |       | 2,275,644                                           |       | 3,017,330                                         |       | 4,731,486 |   | 6,463,159 |   |
| Research and development                                  |       | 2,763,492                                           |       | 1,274,510                                         |       | 5,662,390 |   | 2,462,068 |   |
| Restructuring costs                                       |       | —                                              |       | 211,905                                           |       | — |   | 341,403 |   |
| Amortization of intangibles                               |       | 47,856                                              |       | 127,513                                           |       | 95,712 |   | 255,027 |   |
| ** **                                                |       |                                                |       |                                              |       |   |   |   |   |
| **Total operating expenses**                              |       | 5,086,992                                           |       | 4,631,258                                         |       | 10,489,588 |   | 9,521,657 |   |
| ** **                                                |       |                                                |       |                                              |       |   |   |   |   |
| **Operating  loss**                                       |       | (4,009,397                                          | )          | (4,324,346                                        | )          | (7,538,918 | ) | (7,909,459 | ) |
| ** **                                                | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Other  income (expenses)**                              | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Foreign exchange gain (loss)                              |       | 47,219                                              |       | 7,093                                             |       | 40,521 |   | (17,279 | ) |
| Investment and other income                               |       | 73,704                                              |       | 11,742                                            |       | 166,976 |   | 32,240 |   |
| Loss on disposal of capital assets                        |       | —                                              |       | —                                            |       | (271 | ) | — |   |
| Interest expense and financing costs                      |       | —                                              |       | (337,230                                          | )          | 1,627 |   | (690,639 | ) |
| ** **                                                |       |                                                |       |                                              |       |   |   |   |   |
| **Net  loss for the quarter**                             |       | $                                                   | (3,888,474 | )                                                 | $          | (4,642,741 | ) | $ | (7,330,065 | ) | $ | (8,585,137 | ) |
| ** **                                                | ** ** |                                                | ** ** |                                              | ** ** |   | ** ** |   | ** ** |
| **Weighted  average number of common shares outstanding** | ** ** | 55,479,549                                          | ** ** | 17,101,359                                        | ** ** | 55,479,549 | ** ** | 16,830,658 | ** ** |
| ** **                                                |       |                                                |       |                                              |       |   |   |   |   |
| **Basic and diluted loss per  common share**              |       | $                                                   | (0.07      | )                                                 | $          | (0.27 | ) | $ | (0.13 | ) | $ | (0.51 | ) |

 

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

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**WORLD HEART CORPORATIONConsolidated Statements of Cash Flow**(United States Dollars)(Unaudited)
| **CASH FLOWS FROM (USED IN)**                                      | ** ** | **Three Months Ended June 30,** | ** **    | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------------------------------------------------|------------|-----------------------------------------------------|---------------|---------------------------------------------------|------------|
| ** **                                                                             | ** ** | **2006**                                            | ** **    | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Operating  activities**                                                              | ** ** | ** **                                          | ** **    | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net loss for the  period                                                               |       | $                                                   | (3,888,474    | )                                                 | $          | (4,642,741 | ) | $ | (7,330,065 | ) | $ | (8,585,137 | ) |
| Items not  involving cash —                                                       |       |                                                |          |                                              |       |   |   |   |   |
| Amortization and depreciation                                                          |       | 223,734                                             |          | 315,246                                           |       | 423,439 |   | 609,771 |   |
| Loss on disposal of capital assets                                                     |       | —                                              |          | —                                            |       | 271 |   | — |   |
| Non-cash expense on stock options                                                      |       | 51,652                                              |          | —                                            |       | 83,208 |   | — |   |
| Non-cash interest on debt                                                              |       | —                                              |          | —                                            |       | — |   |   |   |
|                                                                                   |       |                                                |          |                                              |       |   |   |   |   |
| Interest and accretion on convertible debentures                                       |       | —                                              |          | 330,479                                           |       | — |   | 677,801 |   |
| Unrealized foreign exchange loss (gain)                                                |       | —                                              |          | 179,451                                           |       | 945 |   | 276,999 |   |
| Change in  operating components of working capital                                     |       | 1,000,325                                           |          | 1,389,873                                         |       | 803,983 |   | 422,161 |   |
| **Cash  used in operating activities**                                                 | ** ** | **(2,612,763**                                      | **)**         | **(2,427,692**                                    | **)**      | **(6,018,219** | **)** | **(6,598,405** | **)** |
| **Investing  activities**                                                              | ** ** | ** **                                          | ** **    | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                                                   |       |                                                |          |                                              |       |   |   |   |   |
| Redemption  (purchase) of short-term investments                                       |       | —                                              |          | —                                            |       | — |   | 4,999,034 |   |
| Purchase of  capital assets                                                            |       | (46,695                                             | )             | (22,768                                           | )          | (75,404 | ) | (115,680 | ) |
| **Cash  provided by (used in) investing activities**                                   | ** ** | **(46,695**                                         | **)**         | **(22,768**                                       | **)**      | **(75,404** | **)** | **4,883,354** | ** ** |
|                                                                                   |       |                                                |          |                                              |       |   |   |   |   |
| **Financing  activities**                                                              | ** ** | ** **                                          | ** **    | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Deferred  financing and transaction costs paid                                         |       | —                                              |          | (265,122                                          | )          | — |   | (268,956 | ) |
| **Cash  provided by financing activities**                                             | ** ** | **—**                                          | ** **    | **(265,122**                                      | **)**      | **—** | ** ** | **(268,956** | **)** |
| **Effect  of exchange rates on cash and cash equivalents**                             | ** ** | —                                              | ** **    | (9,348                                            | )          | — | ** ** | (22,829 | ) |
| **Change  in cash and cash equivalents for the period**                                | ** ** | **(2,659,458**                                      | **)**         | **(2,724,930**                                    | **)**      | **(6,093,623** | **)** | **(2,006,836** | **)** |
| **Cash  and cash equivalents, beginning of the period**                                | ** ** | **7,227,517**                                       | ** **    | **4,536,861**                                     | ** ** | **10,661,682** | ** ** | **3,818,767** | ** ** |
| **Cash  and cash equivalents, end of the period**                                      | ** ** | **$**                                               | **4,568,059** | ** **                                        | **$**      | **1,811,931** | ** ** | **$** | **4,568,059** | ** ** | **$** | **1,811,931** | ** ** |
|                                                                                   |       |                                                |          |                                              |       |   |   |   |   |
| **Supplementary  Cash Flow Information**                                               | ** ** | ** **                                          | ** **    | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Convertible  debentures settled with the issuance of common shares                     |       | $                                                   | —        |                                              | $          | — |   | $ | — |   | $ | 1,679,461 |   |
| Accrued interest on  convertible debentures settled with the issuance of common shares |       | —                                              |          | —                                            |       | — |   | 19,977 |   |

 

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

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**WORLD HEART CORPORATIONNotes to Unaudited Consolidated Financial Statements**

**1. Going Concern Assumption**

These interim unaudited financial statements have been prepared on thebasis of accounting principles applicable to a going concern, which assumesthat World Heart Corporation (the Corporation or WorldHeart) will continue inoperation for the foreseeable future and will be able to realize its assets anddischarge its liabilities in the normal course of operations.

The use of these principles may not be appropriatebecause, at June 30, 2006, there was substantial doubt that the Corporationwould be able to continue as a going concern. The Corporation’s ability to continue as a going concern is primarilydependent upon its ability to obtain additional financing, reduce expenses orenter into corporate collaborations.

As shown in the interim unaudited consolidatedfinancial statements, the Corporation incurred a net loss of $3.9 million andused cash in its operations of $2.6 million during the quarter ended June 30,2006. WorldHeart had cash and cash equivalents of $4.6 million at June 30,2006. WorldHeart believes it has sufficient funds to continue operations toapproximately the end of the third quarter of 2006. The current financialcondition, among other factors, indicates that there is substantial doubt aboutthe Corporation’s ability to continue as a going concern. The interim unauditedconsolidated financial statements do not include any adjustments relating tothe recoverability of assets that might be necessary should the Corporation beunable to continue as a going concern. Such adjustments could be material.

The Corporation’s continuation as a going concern isdependent upon its ability to obtain additional cash to allow for thesatisfaction of its obligations on a timely basis. WorldHeart is aggressivelyexploring all possible financing and strategic alternatives, including equityor debt financing transactions and corporate collaborations. Equity financingscould include, but are not limited to, private investment in public equitytransactions. Corporate collaborations could include licensing of one or moreproducts, co-development and co-funding of WorldHeart’s products or potentialsale or merger of the Corporation.  Managementis taking steps to conserve cash pending a definitive outcome of theseactivities. Additional measures taken, beginning in the third quarter of 2006,include reducing raw material purchases and manufacturing activities to betteralign inventories with current commercial shipments and curtailingdiscretionary spending. WorldHeart has engaged an investment banker to assistthe Corporation in the evaluation and completion of financing andimplementation of strategic alternatives. Although WorldHeart has been and is exploring all opportunities toimprove its financial condition, these efforts have not been successful todate, and there is no assurance that these programs will be successful. If theCorporation is not successful in securing additional funding or in implementingstrategic alternatives in the very near term, the Corporation will not be able tocontinue its operations.

2. Significant Accounting Policies

*Principlesof consolidation and basis of presentation*

The accompanying interimunaudited consolidated financial statements have been prepared by management inaccordance with accounting principles generally accepted in the United States(U.S. GAAP), and include all assets, liabilities, revenues and expenses of theCorporation and its wholly owned subsidiaries: World Heart Inc. and World HeartB.V. All material inter-company transactions and balances have been eliminated.These interim unaudited consolidated financial statements follow the sameaccounting policies and methods of application as the Corporation’s auditedconsolidated financial statements for the year ended December 31, 2005, exceptthe accounting for stock-based compensation as noted in Note 3. These interimunaudited consolidated financial statements do not conform in all respects tothe requirements 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, these interimunaudited consolidated financial statements reflect all normal and recurringadjustments considered necessary to state fairly the results for the periodspresented.

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The accounting  principles usedas a basis for these consolidated financial statements also conform in allmaterial respects with Canadian generally accepted accounting principles(Canadian GAAP) except as described in Note 5. The consolidated financialstatements are expressed in U.S. dollars.

*Use ofestimates*

The preparation of these 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 andthe reported amounts of revenues and expenses during the reporting periods.Actual results could differ from these estimates.

**3. Stock-based Compensation**

The Corporation has an employee stock option plan(ESOP). The maximum number of shares reserved and set aside under options toeligible persons pursuant to the ESOP is 9,757,904 common shares.  The exercise price for all options issuedunder the ESOP is based on the fair market value of the common share pricewhich is the closing price quoted on the Toronto Stock Exchange on the lasttrading day before the date of grant. The options generally vest annually inequal portions over either a five-year period or a three-year period and expirefrom seven to nine years from the date of grant. All stock option grants arecompensatory and shares issued upon exercise of options are in accordance withthe ESOP.

Prior to January 1, 2006, the Corporation accountedfor its stock option plan in accordance with the Financial Accounting StandardsBoard’s (FASB) Statement of Financial Accounting Standards (SFAS) No. 123, “Accountingfor Stock Based Compensation,” and Accounting Principles Board (APB) OpinionNo. 25, “Accounting for Stock Issued to Employees.”  Under these standards no compensation expensewas recognized when options were issued to employees with exercise prices atthe grant date equal to prevailing market prices.

Effective January 1, 2006, the Corporation adoptedStatement of Financial Accounting Standards No. 123 (Revised 2004), “Share —BasedPayment” (FAS 123(R)). FAS 123(R) requires the recognition of the fair value ofstock compensation as an expense in the calculation of net income. WorldHeartrecognizes the stock compensation expense over the vesting period of theindividual equity instruments.  Stockoptions issued in lieu of cash to non-employees for services performed arerecorded at the fair value of the options at the time they are issued and areexpensed as service is provided.

WorldHeart has elected the modified prospective transition method foradopting SFAS 123 (R). Under this method, the provisions of SFAS 123 (R) applyto all stock-based awards granted after the effective date.  The unrecognized expense of awards not yetvested as of January 1, 2006, the date of SFAS 123 (R) adoption by theCorporation, are also recognized as an expense in the calculation of netincome.  As FAS 123(R) requires thatstock-based compensation expense be based on awards that are ultimatelyexpected to vest, stock-based compensation for the six-month period ended June30, 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, the Board of Directors of WorldHeartapproved the accelerated vesting of all outstanding stock options held bycurrent employees or consultants, except for the options held by thenon-employee members of the Board of Directors. The purpose of the accelerationof vesting was to improve employee morale and to minimize the amount ofcompensation expense in future periods following the adoption of FAS 123(R).

WorldHeart uses the Black-Scholes valuation model for estimating thefair value of stock compensation. During the six-month period ended June 30,2006.

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The stock-based compensation expense for the three andsix-month period ended June 30, 2006 was as follows: 

|                                      | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                           | ** ** | **June 30, 2006**      | ** ** |
|                                 |       |                             |       |                           |       |
| Selling, general  and administrative |       | 51,037                           |       | 82,593                         |       |
| Research and  development            |       | 615                              |       | 615                            |       |
|                                 |       | 51,652                           |       | 83,208                         |       |

 

This stock compensation expense had a negligible impact on theCorporation’s earnings per common share for the second quarter 2006.  The unrecognized expense of awards not yetvested, net of estimated forfeitures, was $270,000 and the related stock-basedcompensation expense will be recognized over the following eleven quartersbeginning June 30, 2006.

*Stock-basedCompensation Award Activity*

The following table summarizes activity under our ESOPfor the three and six months ended June 30, 2006: 

|                                 | ** ** | ** ** | ** ** | **Weighted-**           | ** ** |
|---------------------------------|------------|------------|------------|-------------------------|------------|
| ** **                      | ** ** | ** ** | ** ** | **Average**             | ** ** |
| ** **                      | ** ** | **Shares** | ** ** | **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       |   |
| Exercisable at  June 30, 2006   |       | 6,252,474  |       | $                       | 1.81       |   |
| Nonvested at June 30,  2006     |       | 497,663    |       | $                       | 1.29       |   |

 

The aggregate intrinsicvalue is calculated as the difference between the exercise price of the optionsand the quoted price of our common shares that were in the money at June 30,2006. At June 30, 2006, the aggregate intrinsic value of all outstandingoptions was nil with a weighted average remaining contractual term ofapproximately 6.9 years. Of the 6,750,137 outstanding options, exercisableoptions were 6,252,474 with a weighted average remaining contractual life of6.8 years and 497,663 were unvested with a weighted average remainingcontractual life of 7.8 years. No options were exercised under our stock optionplan during the three and six month periods ended June 30, 2006. The weightedaverage grant-date fair value of options granted in the three and six monthperiods ended June 30, 2006 were $0.44 and $0.86, respectively.

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A summary of the status and changes of our non-vestedshares related to our ESOP as of and during the six months ended June 30, 2006is presented below. The weighted average grant date fair value on non-vestedshares represent the gross value of unvested options, excluding estimatedforfeitures. 

|                               | ** ** | ** ** | ** ** | **Weighted Average** | ** ** |
|-------------------------------|------------|------------|------------|---------------------------|------------|
| ** **                    | ** ** | ** ** | ** ** | **Grant-Date Fair**  | ** ** |
| ** **                    | ** ** | **Shares** | ** ** | **Value**                 | ** ** |
| Nonvested at  January 1, 2006 |       | 413,330    |       | $                         | 0.99       |   |
| Granted                       |       | 151,000    |       | 0.85                      |       |
| Vested                        |       | (66,667    | )          | 1.12                      |       |
| Nonvested at June 30,  2006   |       | 497,663    |       | $                         | 0.93       |   |

 

*Valuation Assumptions*

WorldHeart calculated thefair value of each option award on the date of grant using the Black-Scholesoption pricing model. The following assumptions were used to calculate the fairvalue of options granted during the quarter: 

|                                  | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                       | ** ** | **June 30, 2006**      | ** ** |
| Average risk  free interest rate |       | 4.5                              | %          | 4.5                            | %          |
| Expected life  (in years)        |       | 5.5                              |       | 5.6                            |       |
| Expected  volatility             |       | 95                               | %          | 93                             | %          |
| Dividend yield                   |       | 0                                | %          | 0                              | %          |

 

The dividend yield of zero is based on thefact that WorldHeart has never paid cash dividends and has no present intentionto pay cash dividends.  Expectedvolatility is based on the historical volatility of the Corporations’ commonstock over the period commensurate 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 priorto adoption 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**       | ** ** | **Six Months**         | ** ** |
|----------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                         | ** ** | **Ended**                   | ** ** | **Ended**                   | ** ** |
| ** **                                         | ** ** | **June 30, 2005** | ** ** | **June 30, 2005** | ** ** |
| Net loss as  reported                              |       | $                           | (4,642,741 | )                           | $          | (8,585,137 | ) |
| Share-based  compensation costs                    |       | (317,584                    | )          | (649,304                    | )          |
| Pro forma net  income (loss)                       |       | $                           | (4,960,325 | )                           | $          | (9,234,441 | ) |
| Reported basic and diluted loss per common share   |       | $                           | (0.27      | )                           | $          | (0.51 | ) |
| Share-based compensation costs per common share    |       | $                           | (0.02      | )                           | $          | (0.04 | ) |
| Pro forma basic  and diluted loss per common share |       | $                           | (0.29      | )                           | $          | (0.55 | ) |

 

9

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The following tablesummarizes information about the outstanding options as at June 30, 2006:  

|                    | ** ** | ** **                  | ** ** | ** **                | ** ** | **Weighted average**       | ** ** |
|--------------------|------------|-----------------------------|------------|---------------------------|------------|---------------------------------|------------|
| ** **         | ** ** | ** **                  | ** ** | **Weighted average** | ** ** | **remaining life in** | ** ** |
| ** **         | ** ** | **Number outstanding** | ** ** | **exercise price**   | ** ** | **years**                       | ** ** |
| 0$to $1.25         |       | 1,239,179                   |       | $                         | 1.11       |                            | 6.63       |   |
| $1.26 to $2.50     |       | 5,247,646                   |       | $                         | 1.37       |                            | 7.12       |   |
| $2.51 to $10.00    |       | 217,430                     |       | $                         | 8.21       |                            | 3.59       |   |
| $10.01 to  $119.25 |       | 45,882                      |       | $                         | 34.90      |                            | 1.26       |   |
|               |       | 6,750,137                   |       | $                         | 1.77       |                            | 6.88       |   |

 

**4. Comprehensive Income**

For the three months andsix months ended June 30, 2006 and June 30, 2005, there were no significantdifferences between the Corporation’s comprehensive income or loss and its netincome or loss.

**5. Canadian Accounting Principles**

The interimunaudited consolidated financial statements have been prepared in accordancewith U.S. GAAP. These principles differ, as they affect the Corporation, forthe three and six month periods ended June 30, 2006 and 2005 and for thebalance sheets as at June 30, 2006 and December 31, 2005, in the followingmaterial respects from Canadian GAAP. 

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**BalanceSheets - Canadian GAAP**

 
|                                                      | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                           | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| ** **                                           | ** ** | **(unaudited)**   | ** ** | ** **            | ** ** |
| **ASSETS**                                           | ** ** | ** **        | ** ** | ** **            | ** ** |
| **Current  assets**                                  |       | $                 | 15,766,001 |                  | $          | 23,551,965 |   |
| Cash pledged as collateral for lease                 |       | 750,000           |       | 750,000               |       |
| Capital assets                                       |       | 1,584,946         |       | 1,837,540             |       |
| In-process research and development, net             |       | 15,406,801        |       | 17,317,249            |       |
|                                                 |       | $                 | 33,507,748 |                  | $          | 43,456,754 |   |
|                                                 |       |              |       |                  |       |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**       | ** ** | ** **        | ** ** | ** **            | ** ** |
| ** **                                           | ** ** | ** **        | ** ** | ** **            | ** ** |
| **Current  liabilities**                             |       | $                 | 5,221,763  |                  | $          | 6,109,176 |   |
|                                                 |       | 5,221,763         |       | 6,109,176             |       |
|                                                 |       |              |       |                  |       |
| **Shareholders’  equity (deficiency)**          | ** ** | ** **        | ** ** | ** **            | ** ** |
| Common shares                                        |       | 238,597,956       |       | 238,597,956           |       |
| Contributed surplus                                  |       | 18,435,944        |       | 18,352,736            |       |
| Cumulative translation adjustment                    |       | (6,490,184        | )          | (6,490,184            | )          |
| Accumulated deficit                                  |       | (222,257,731      | )          | (213,112,930          | )          |
| Total shareholders’ equity                      |       | 28,285,985        |       | 37,347,578            |       |
|                                                 |       |              |       |                  |       |
| **Total liabilities and  shareholders’ equity** |       | $                 | 33,507,748 |                  | $          | 43,456,754 |   |

 

11

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**Statements of loss - Canadian GAAP(unaudited)**
| ** **                                                         | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                         | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                               |       |                                                |       |                                              |       |   |   |   |   |
| **Net  loss in accordance with U.S. GAAP**                         |       | $                                                   | (3,888,474 | )                                                 | $          | (4,642,741 | ) | $ | (7,330,065 | ) | $ | (8,585,137 | ) |
|                                                               |       |                                                |       |                                              |       |   |   |   |   |
| Adjustments to reconcile to Canadian  GAAP:                        |       |                                                |       |                                              |       |   |   |   |   |
|                                                               |       |                                                |       |                                              |       |   |   |   |   |
| Non-cash share based compensation  costs (1)                       |       | —                                              |       | (320,721                                          | )          | — |   | (652,441 | ) |
|                                                               |       |                                                |       |                                              |       |   |   |   |   |
| Interest and accretion on convertible  debentures                  |       | —                                              |       | (261,372                                          | )          | — |   | (535,238 | ) |
|                                                               |       |                                                |       |                                              |       |   |   |   |   |
|                                                               |       |                                                |       |                                              |       |   |   |   |   |
| Amortization of purchased in-process  research and development (2) |       | (907,368                                            | )          | —                                            |       | (1,814,736 | ) | — |   |
| ** **                                                         | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net loss in accordance with Canadian  GAAP**                     |       | $                                                   | (4,795,842 | )                                                 | $          | (5,224,834 | ) | $ | (9,144,801 | ) | $ | (9,772,816 | ) |
| ** **                                                         |       |                                                |       |                                              |       |   |   |   |   |
| **Weighted average number of common  shares outstanding**          |       | 55,479,549                                          |       | 17,101,359                                        |       | 55,479,549 |   | 16,830,658 |   |
|                                                               |       |                                                |       |                                              |       |   |   |   |   |
| **Basic and diluted loss per common  share**                       |       | $                                                   | (0.09      | )                                                 | $          | (0.31 | ) | $ | (0.16 | ) | $ | (0.58 | ) |

----

(1)             Priorto January 2006, under U.S. GAAP, the Corporation accounted for its stockoption plan in accordance with APB Opinion No. 25 and provided pro forma netincome and pro forma income per share disclosure as if the fair value basedmethod as defined in SFAS No. 123 had been applied to stock-based awards.  Under Canadian GAAP, the Corporationaccounted for its stock option plan in accordance with CICA 3870 which requiresentities to account for employee stock options using the fair value basedmethod, where compensation cost is measured at fair value at the date of grantand is expensed over the stock-based awards vesting period. With the January 1,2006 adoption of FAS 123(R), this difference has been eliminated.

(2)             UnderU.S. GAAP, acquired in-process research and development is required to beexpensed if the related technology has not reached technological feasibilityand does not have an alternative future use. Under Canadian GAAP, in-process research and development and work forceintangible assets, acquired in the Medquest acquisition in July 2005, were capitalizedand are being amortized on a straight-line basis over their useful lives.

 

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**ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLANOF OPERATION**

**INTRODUCTION**

World HeartCorporation and its subsidiaries are collectively referred to as WorldHeart.The following Management Discussion and Analysis of Financial Condition andResults of Operations (MD&A) discusses material changes in WorldHeart’sfinancial condition and results of operations and cash flows for the threemonth and six month periods ended June 30, 2006 and June 30, 2005. Suchdiscussion and comments on the liquidity and capital resources should be readin conjunction with the information contained in WorldHeart’s auditedconsolidated 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, for the fiscal year ended December 31, 2005. Significantdifferences between Canadian GAAP and U.S. GAAP are presented in Note 5 to theinterim unaudited consolidated financial statements. In this discussion, allamounts 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:slow market acceptance of and demand for 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; loss of commercialmarket share to competitors due to WorldHeart’s financial condition; immediateand significant need for additional financing; delays in completion of costreductions programs or implementation of other alternative programs ortransactions.

**OVERVIEW**

WorldHeart is adeveloper of mechanical circulatory support systems, including ventricularassist devices (VADs), which are mechanical pumps that allow for therestoration of normal blood circulation to patients suffering from advancedheart failure. WorldHeart believes that both pulsatile and rotary pumps are requiredto treat the full spectrum of clinical needs of end and late-stage heartfailure patients. The Corporation believes that pulsatile devices are bestsuited for end-stage patients with poor ventricular contractility, who requirefull support, or functional replacement. Alternatively, rotary devices are bestsuited to late-stage patients, with some contractility, who require onlypartial support, or an assist. The Corporation has 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 hospitalsin the United States, most of Europe and Canada and through a distributor incertain other countries.

The Novacor LVASis commercially approved as a bridge-to-transplantation device in the UnitedStates and Canada. In Europe, the Novacor LVAS has unrestricted approval foruse as an alternative to transplantation, a bridge-to-transplantation, and tosupport patients who may have an ability to recover the use of their naturalheart. In Japan, the device is commercially approved for use in cardiacpatients at risk of imminent death from non-reversible left ventricular failurefor which there is no alternative except heart transplantation.

WorldHeart is conducting a long-term use pivotal trialin the United States called RELIANT (Randomized Evaluation of the Novacor LVASin a Non-Transplant Population).  Datafrom the RELIANT Trial is expected to support a Pre-market Approval Supplementthat will request approval for the use of the Novacor LVAS by non-transplanteligible, or Destination Therapy, patients in the United States. In April 2006,the FDA conditionally approved significant changes to the RELIANT Trialprotocol, including an approximate 50% reduction in patient sample size andseveral changes in patient enrollment criteria.

WorldHeart is developing a next-generation smallimplantable pulsatile VAD (the Novacor II) and, during the third quarter of2005, acquired MedQuest’s technology and development programs associated with amagnetically levitated centrifugal rotary VAD (the WorldHeart Rotary VAD).  Development work on the Novacor II achieved

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important milestones with a successful initial animalimplant completed in July 2005 and a second successful chronic animal implant completed in March 2006. Further animal trials are planned for 2006 assuming the Corporation secures additional funding. A successful first in-human clinical trial of the WorldHeart Rotary VAD was initiated in Europe in March 2006 with a second successful implant inMay.  The first implanted patient was weaned from the Rotary VAD and discharged from the hospital in June 2006.  Additional clinical implants are planned in 2006.

Research and development by WorldHeart’s competitorsis proceeding for several next-generation non-pulsatile continuous flow assistdevices. Certain of these devices have received the CE Mark in Europe and areadvancing through clinical trials 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 devices are acceptedas reliable and durable. A wider adoption of VADs for DT may occur with thenext-generation VADs.

**Summary of Quarterly Results**In thousands (000’s) except for pershare amounts (unaudited)
| ** **                                  | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|
| ** **                                  | ** ** | **June 30,**                | ** ** | **March 31,** | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
| ** **                                  | ** ** | **2006**                         | ** ** | **2006** | ** ** | **2005** | ** ** | **2005** | ** ** |
|                                        |       |                             |       |   |   |   |   |   |   |
| Net revenue                                 |       | $                                | 2,988      |   | $ | 3,285 |   | $ | 3,630 |   | $ | 2,150 |   |
| Net loss for the  period                    |       | (3,888                           | )          | (3,442 | ) | (21,998 | ) | (22,251 | ) |
| Net loss  applicable to common shareholders |       | (3,888                           | )          | (3,442 | ) | (21,998 | ) | (28,111 | ) |
| Basic and  diluted loss per share           |       | $                                | (0.07      | ) | $ | (0.06 | ) | $ | (0.40 | ) | $ | (0.64 | ) |

 
| ** **                                  | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|
| ** **                                  | ** ** | **June 30,**                | ** ** | **March 31,** | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
| ** **                                  | ** ** | **2005**                         | ** ** | **2005** | ** ** | **2004** | ** ** | **2004** | ** ** |
|                                        |       |                             |       |   |   |   |   |   |   |
| Net revenue                                 |       | $                                | 2,449      |   | $ | 3,417 |   | $ | 2,987 |   | $ | 2,250 |   |
| Net loss for the  period                    |       | (4,643                           | )          | (3,942 | ) | (5,609 | ) | (11,621 | ) |
| Net loss  applicable to common shareholders |       | (4,643                           | )          | (3,942 | ) | (6,294 | ) | (10,936 | ) |
| Basic and  diluted loss per share           |       | $                                | (0.27      | ) | $ | (0.24 | ) | $ | (0.41 | ) | $ | (0.71 | ) |

 

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**RESULTS OF OPERATIONS FOR THE THREEAND SIX MONTH PERIODS ENDED JUNE 30, 2006 COMPARED WITH THE THREE AND SIX MONTHPERIODS ENDED JUNE 30, 2005**(unaudited)
| ** **                             | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                             | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                   |       |                                                |       |                                              |       |   |   |   |   |
| **Revenue**                            |       | $                                                   | 2,988,071  |                                              | $          | 2,449,178 |   | $ | 6,272,887 |   | $ | 5,866,166 |   |
| **Cost of  goods sold**                |       | (1,910,476                                          | )          | (2,142,266                                        | )          | (3,322,217 | ) | (4,253,968 | ) |
| **Gross  margin**                      |       | 1,077,595                                           |       | 306,912                                           |       | 2,950,670 |   | 1,612,198 |   |
| **Operating  expenses**                | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Selling, general and                   |       |                                                |       |                                              |       |   |   |   |   |
| administrative                         |       | 2,275,644                                           |       | 3,017,330                                         |       | 4,731,486 |   | 6,463,159 |   |
| Research and development               |       | 2,763,492                                           |       | 1,274,510                                         |       | 5,662,390 |   | 2,462,068 |   |
| Restructuring costs                    |       | —                                              |       | 211,905                                           |       | — |   | 341,403 |   |
| Amortization of intangibles            |       | 47,856                                              |       | 127,513                                           |       | 95,712 |   | 255,027 |   |
| **Total operating expenses**           |       | 5,086,992                                           |       | 4,631,258                                         |       | 10,489,588 |   | 9,521,657 |   |
| **Operating  loss**                    |       | (4,009,397                                          | )          | (4,324,346                                        | )          | (7,538,918 | ) | (7,909,459 | ) |
| **Other  income (expenses)**           | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Foreign exchange gain (loss)           |       | 47,219                                              |       | 7,093                                             |       | 40,521 |   | (17,279 | ) |
| Investment and other income            |       | 73,704                                              |       | 11,742                                            |       | 166,976 |   | 32,240 |   |
| Loss on disposal of capital assets     |       | —                                              |       | —                                            |       | (271 | ) | — |   |
| Interest expense and financing   costs |       | —                                              |       | (337,230                                          | )          | 1,627 |   | (690,639 | ) |
| **Net loss for the quarter**           |       | $                                                   | (3,888,474 | )                                                 | $          | (4,642,741 | ) | $ | (7,330,065 | ) | $ | (8,585,137 | ) |

 

***Revenue:***The sale ofNovacor LVAS implant kits and related peripheral equipment and servicesaccounts for substantially all of WorldHeart’s revenues.  WorldHeart primarily sells its productsdirectly, except for a few countries where it sells through distributors.

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

(unaudited)
| ** **             | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **             | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **             | ** ** | **$**                                               | ** ** | **Units**                                         | ** ** | **$** | ** ** | **Units** | ** ** | **$** | ** ** | **Units** | ** ** | **$** | ** ** | **Units** | ** ** |
|                   |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Implant kits           |       | $                                                   | 1,844      |                                              | 27         |   | $ | 1,545 |   | 23 |   | $ | 4,069 |   | 59 |   | $ | 3,691 |   | 55 |   |
| Peripherals and  other |       | $                                                   | 1,144      |                                              |       |   | $ | 904 |   |   |   | $ | 2,204 |   |   |   | $ | 2,175 |   |   |   |
| Revenue                |       | $                                                   | 2,988      |                                              |       |   | $ | 2,449 |   |   |   | $ | 6,273 |   |   |   | $ | 5,866 |   |   |   |

 

Revenue for the quarter ended June 30, 2006 was $2,988,000 reflectingan increase of $539,000, or 22%, compared with the quarter ended June 30, 2005.Implant kit revenue in the second quarter of 2006 increased by $299,000, or19%, compared with the second quarter of 2005. During the second quarter of 2006, the average price per kit was $68,300,compared with $67,200 during the second quarter of 2005, reflecting primarily areduction in

15

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discounted sales in the 2006 second quarter. Implantkits recognized as revenue were 27 and 23 in the quarters ended June 30, 2006and June 30, 2005, respectively.

Peripherals and otherrevenues, including Novacor LVAS hardware and peripheral sales, services andother revenue for the quarter ended June 30, 2006 were $1,144,000, an increaseof 27%, compared with peripherals and other revenue of $904,000 recorded in thequarter ended June 30, 2005.

Revenue during the first sixmonths of 2006 was $6,273,000, an increase of $407,000, or 7%, over the sameperiod in 2005. Implant kit revenue of $4,069,000, increased by 10% for the sixmonths ended June 30, 2006, compared with approximately $3,691,000 for the sixmonths ended June 30, 2005. Implant kits recognized as revenue for the sixmonths ended June 30, 2006 totaled 59, compared with 55 during the same periodof 2005.

At March 31, 2006, threeimplant kits were recorded as deferred revenue. During the second quarter of2006, revenue was recognized on two previously deferred kits with no newdeferred kits, resulting in one implant kit remaining in deferred revenue atJune 30, 2006.  Resulting deferredrevenue at June 30, 2006 was $168,000, consisting of one implant kit, hardwareand peripheral sales and services and other revenue, compared with $357,000 atMarch 31, 2006.

***Cost of goods sold:***For the threemonths ended June 30, 2006, the cost of goods sold as a percent of revenue was64%, compared with 88% for the three months ended June 30, 2005.  Cost of goods as a percent of revenue duringthe first six months of 2006 was 53%, compared with 73%, over the same periodin 2005.  The significantly lower cost ofgoods sold and the resulting improvement in gross profit margins in this year’ssecond quarter and the six months ended June 30, 2006 was due, principally, tomore favorable manufacturing variances. This was partially offset by thewritedown of some of our expired kits recorded as cost of goods sold in thesecond quarter of 2006. In addition, our other, non-implant kit product revenuemix was at a lower average cost of sales than in the comparative periods of2005.

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

The composition of selling, general andadministrative expenses in thousands ($000’s) is as follows: (unaudited) 
| ** **                  | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                  | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
|                        |       |                                                |       |                                              |       |   |   |   |   |
| Selling                     |       | $                                                   | 1,004      |                                              | $          | 1,617 |   | $ | 2,027 |   | $ | 3,385 |   |
| General and  administrative |       | 1,272                                               |       | 1,400                                             |       | $ | 2,704 |   | $ | 3,078 |   |
| Total                       |       | $                                                   | 2,276      |                                              | $          | 3,017 |   | $ | 4,731 |   | $ | 6,463 |   |

 

Selling, general and administrative expense for thethree months ended June 30, 2006 decreased by $741,000, or 25%, versus the sameperiod in 2005, and for the six months ended June 30, 2006 decreased by$1,732,000, or 27%, versus the same period in 2005.  Selling expenses for the three months endedJune 30, 2006 decreased by $613,000, or 38%, compared with the same period in2005, and for the six month period decreased by $1,358,000, or 40%, comparedwith the same period last year.  Sellingexpenses decreased due to lower promotional costs, consulting, and travelexpenses, as well as reduced personnel costs particularly in Europe.

General andadministrative expenses for the three months ended June 30, 2006 decreased by$128,000, or 9%, compared with the same period in 2005,  and for the six months ended June 30, 2006decreased  by $374,000, or 12%. Thesereductions are primarily due to cost savings associated with the consolidationof our North American Novacor operations. For the three month and six monthperiods ended June 30, 2006, WorldHeart recorded $51,000 

16

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and $83,000 in stock-based compensation expenserespectively, following the adoption of FAS 123(R). There was no stock-based compensation expense recorded inthe quarter ended June 30, 2005.  Administrativeexpenses are expected to decrease slightly in the next several quartersresulting from previously implemented cost reduction programs.

***Research anddevelopment:***Researchand development expenses consist principally of salaries and related expensesfor research personnel, prototype manufacturing, testing, clinical trialexpenses, factory costs and regulatory affairs expenses incurred at our Oaklandand Salt Lake City facilities.

Research and developmentexpenses for the three months ended June 30, 2006 were $2,763,000, anincrease  of $1,488,000, compared withthe three months ended June 30, 2005. Research and development expenses for the six months ended June 30, 2006increased by $3,200,000, compared with the six months ended June 30, 2005.These increases are primarily due to the acquisition of MedQuest in July 2005 andrelated development and clinical costs of our WorldHeart Rotary VAD.

***Restructuring costs:***On August 25, 2004, we approved a plan to consolidatethe Ottawa, Ontario operations into our facilities in Oakland, California wherethe Novacor LVAS is manufactured. The consolidation of the North AmericanNovacor operations into one location has reduced ongoing business expenses andimproved operational efficiency and effectiveness. The restructuring wascompleted by the end of June 2005. During the three months and six months endedJune 30, 2006, no restructuring costs were recorded compared with $212,000recorded in the three months and $341,000 recorded in the six months ended June30, 2005.

***Amortization of intangibles:***Amortization of intangibles for the threeand six month periods ended June 30, 2006 were $48,000 and $96,000,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. The amortization of the Novacor asset intangibles for the three andthe six month periods ended June 30, 2005 were $128,000 and $255,000, respectively. At June 30, 2005, the Novacor assets were fully amortized.

***Foreign Exchange:***Foreign exchange transactions resulted in a gain of$47,000 for the three month period ended June 30, 2006, compared with a gain of$7,000 for the three month period ended June 30, 2005. Foreign exchangetransactions resulted in a gain of $41,000 for the six month period ended June30, 2006, compared with a loss of $17,000 for the six month period ended June30, 2005. The gains during the three and six month periods in 2006 wereprimarily due to fluctuations of the U.S. dollar versus the Euro during theseperiods. The changes during the three and six month periods in 2005 wereprimarily due to the fluctuations of the U.S. dollar against the Euro and theCanadian dollar.

***Investment and other income:*** Investment and other income for thequarter ended June 30, 2006 was $74,000, compared with $12,000 during thequarter ended June 30, 2005.  Investmentand other income was $167,000 for the six month period ended June 30, 2006,compared with $32,000 for the six month period ended June 30, 2005.  The increases reflect higher average cashbalances on our investments and higher investment interest rates in 2006.

***Interest and financing costs:*** There were no interest and financing costs during the three months endedJune 30, 2006, compared with an expense of $337,000 during the three monthsended June 30, 2005, consisting primarily of non-cash interest and accretionrelated to convertible debentures. Interest and financing costs were $1,600 for the six month period endedJune 30, 2006, compared with $691,000 for the six month period ended June 30,2005. The decrease relates to convertible debentures, all of which wereconverted in July 2005.

**LIQUIDITYAND 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 June 30, 2006,we had cash and cash equivalents of $4.6 million, a decrease of $6.1 millionfor the six month period from December 31, 2005 and a decrease of $2.7 fromMarch 31, 2006.  During the secondquarter of 2006, cash used to fund operating activities was $2.6 millionreflecting our net loss for the period of $3.9 million, offset by $1.0 millionof changes in working capital and $0.2 million of amortization anddepreciation. Working

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capital changes consisted primarily of an increase inaccounts payable and accured liabilities of $0.5 million, a decrease inaccounts receivable of $0.2 million and a decrease in inventory of $0.3million.

Investing activities in the second quarter of 2006 andsix months ended June 30, 2006 requiring cash resources consisted of capitalequipment additions of $47,000 and $75,000 respectively. There were nofinancing activities during this year’s second quarter. Based on our currentcash we believe we have sufficient cash to fund operations to approximately theend of the third quarter of 2006.

We are aggressively exploring all possible financingand strategic alternatives, including equity, or debt financing transactions,corporate collaborations and sale of the Corporation. Equity financings couldinclude, but are not limited to, private investment in public equitytransactions. Corporate collaborations could include licensing of one or more products,co-development and co-funding of WorldHeart’s products or potential sale ormerger of the Corporation. Management is taking steps to conserve cash pendinga definitive outcome of these activities. Additional measures taken, beginningin the third quarter of 2006, include reducing raw material purchases andmanufacturing activities to better align inventories with current commercialshipments and curtailing discretionary spending. We have engaged an investmentbanker to assist the Corporation in the evaluation and completion of financingand implementation of strategic alternatives. Although WorldHeart has been and is exploring all opportunities toimprove its financial condition, these efforts have not been successful todate, and there is no assurance that these programs will be successful. If theCorporation is not successful in securing additional funding or in implementingstrategic alternatives in the very near term, we will not be able to continue ouroperations.

Our long-termworking capital and capital requirements will depend upon numerous factors,including the following: our continued focus on improving commercialoperations; expanded Novacor LVAS kit sales and enrollment in the RELIANTTrial; decreasing production costs through manufacturing cost reductionprograms; the rate of investment in our next-generation technologies, includingour Novacor II and WorldHeart Rotary VAD; clinical trials costs and theapproval process for the next-generation products; our general efforts toimprove operational efficiency and conserve cash, including continued synergiesfrom the acquisition of MedQuest and other cost improvement programs.

**IMPACTOF THE ADOPTION OF FAS 123(R)**

Effective January 1,2006, we adopted Statement of Financial Accounting Standards No. 123 (Revised2004), “Share-Based Payment.  FAS 123(R)requires the recognition of the fair value of stock-based compensation as anexpense in the calculation of net income. We recognize the stock compensationexpense over the vesting period of the individual equity instruments.

WorldHeart has elected the modified prospectivetransition method for adopting FAS 123(R). Under this method, the provisions ofFAS 123(R) apply to all stock-based awards granted after the effectivedate.  The unrecognized expense of awardsnot yet vested 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-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) and 15d-15(e) under the ExchangeAct) as of June 30, 2006, our president and chief executive officer (principalexecutive officer) and our chief financial officer (principal accounting and 

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financial officer) have concluded that our disclosurecontrols and procedures are designed to ensure that information required to bedisclosed in the reports that we file or submit under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin the Securities and Exchange Commission’s rules and forms and are operatingin an effective manner at the reasonable assurances level.

*Changes in internal controls overfinancial reporting:*There was no change in our internal controls over financial reporting thatoccurred during the quarter ended June 30, 2006 that has materially affected, or isreasonably likely to materially affect, our internal controls over financialreporting.

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**PART II—OTHER INFORMATION****ITEM 1. LEGAL PROCEEDINGS**

(None)

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

The Corporation has made no repurchases of common shares during the period.

**ITEM 3.DEFAULTS UPON SENIOR SECURITIES**

(None)

**ITEM 4.SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS**

(None)

**ITEM 5.OTHER INFORMATION**

On July 12, 2006,the Corporation amended its employment agreement with Dr. Piet Jansen. Underthe current agreement, as the Corporation’s Chief Medical Officer, he receivesan annual salary of $205,000, and is entitled to receive reimbursement ofcertain moving expenses for his relocation in Oakland, California up to$50,000. The initial term of employment under the current agreement is eighteenmonths, during which time Dr. Jansen may be terminated for cause (as defined inthe agreement), and after such initial term, Dr. Jansen’s employment will beat-will. If, following a change of control of WorldHeart (as defined in theagreement) but prior to the expiration of the initial term of employment, Dr.Jansen is terminated, then he is entitled to receive, as severance, theremainder of his compensation that he would have been paid during the initialterm of employment.

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** **

**ITEM 6.  EXHIBITS**

(a)           Exhibits
| Exhibit 10.16 |   | Employment agreement with Dr. Piet Jansen.                                                                               |
|---------------|--------|--------------------------------------------------------------------------------------------------------------------------|
|          |   |                                                                                                                     |
| 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. |

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** **

**SIGNATURES**

Inaccordance with the requirements of the Exchange Act, the registrant causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized. 
|                         |                                                                                                              | World Heart Corporation |
|-------------------------|-------------------------------------------------------------------------------------------------------------------|-------------------------|
|                    |                                                                                                              | (Registrant)            |
|                    |                                                                                                              |
|                    |                                                                                                              |
| Dated: August  11, 2006 |                 /s/  Jal S. Jassawalla |
|                    | Jal S. Jassawalla, President and Chief                                                                            |
|                    | Executive Officer                                                                                                 |
|                    |                                                                                                              |
|                    |                                                                                                              |
| Dated: August  11, 2006 |                 /s/  A. Richard Juelis |
|                    | A. Richard Juelis, Vice President, Finance                                                                        |
|                    | and Chief Financial Officer                                                                                       |

 

 

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