Document:

EX-10.1  Audited Consolidated Financial Statements of World Heart Corporation

                                       F-1
<PAGE>

INDEX TO AUDITED  CONSOLIDATED  FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER
31, 2000

Page

F-4       Management's Statement of Responsibility.

F-4       Auditors' Report to the Shareholders of World Heart Corporation.

F-5       Consolidated Balance Sheets as at December 31, 2001 and 2000.

F-6       Consolidated  Statements of Loss for the Year ended December 31, 2001,
          2000,and 1999.

F-7       Consolidated  Statements  of  Shareholders'  Equity for the Year ended
          December 31, 2001, 2000, and 1999.

F-8       Consolidated  Statements of Cash Flow for the Years ended December 31,
          2001, 2000 and 1999.

F-9       Notes to the Audited Consolidated Financial Statements

                                       F-2
<PAGE>

                             WORLD HEART CORPORATION

                             Financial Statements
                             December 31, 2001

                                       F-3
<PAGE>

Management's Statement of Responsibility

Management is responsible for the preparation of the consolidated financial
statements and all other information in the annual report. The financial
statements have been prepared in accordance with Canadian generally accepted
accounting principles ("GAAP") and reflect management's best estimates and
judgments. The financial information presented elsewhere in the annual report is
consistent with the consolidated financial statements.

Management has developed and maintains a system of internal controls to provide
reasonable assurance that all assets are safeguarded and to facilitate the
preparation of relevant, reliable and timely financial information. Consistent
with the concept of reasonable assurance, the Corporation recognizes that the
relative cost of maintaining these controls should not exceed their expected
benefits.

The Audit Committee, which is comprised of independent directors, reviews the
financial statements, considers the report of the external auditors, assesses
the adequacy of the Corporation's internal controls, and recommends to the Board
of Directors the independent auditors for appointment by the shareholders. The
financial statements were reviewed by the Audit Committee and approved by the
Board of Directors.

The consolidated financial statements were audited by PricewaterhouseCoopers
LLP, the external auditors, in accordance with generally accepted auditing
standards on behalf of the shareholders.

Original signed by:                         Original signed by:
Roderick M. Bryden                          Ian W. Malone
President                                   Chief Financial Officer

Auditors' Report to the Shareholders of World Heart Corporation

We have audited the consolidated balance sheets of World Heart Corporation as at
December 31, 2001 and 2000, and the consolidated statements of loss,
shareholders' equity and cash flows for the years ended December 31, 2001, 2000
and 1999. These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing standards
in both Canada and the United States. Those standards require that we plan and
perform an audit to obtain reasonable assurance whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.

In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Corporation as at December 31,
2001 and 2000 and the results of its operations and its cash flows for the years
ended December 31, 2001, 2000 and 1999 in accordance with Canadian generally
accepted accounting principles.

Original signed by:
Pricewaterhouse Coopers LLP
Chartered Accountants
Ottawa, Canada
February 1, 2002

                                      F-4
<PAGE>

WORLD HEART CORPORATION
Consolidated Balance Sheets
(Canadian Dollars)

<TABLE>

<S>                                                                     <C>                 <C>
                                                                        December 31,        December 31,
                                                                                2001                2000
---------------------------------------------------------------------------------------------------------

 ASSETS

 Current assets
  Cash and cash equivalents (note 2)                                   $  15,345,159        $ 23,624,549
  Short-term investments (note 2)                                          6,881,300          22,696,677
  Accounts receivable and other (net of allowance for
      doubtful accounts of $ 81,800, 1999 - $100,912) (note 13)            4,041,966           2,515,373
  Tax credit receivable (note 3)                                           2,770,000                   -
  Prepaid expenses                                                           698,376             690,122
  Inventory (note 4)                                                       8,117,621           9,966,873
                                                                  ---------------------------------------
                                                                          37,854,422          59,493,594
 Cash pledged as collateral for capital lease (note 15)                            -             226,316
 Capital assets (note 5)                                                   5,293,824           6,263,544
 Goodwill and other intangible assets (note 6)                            34,734,872          49,941,394
                                                                  ---------------------------------------

                                                                       $  77,883,118       $ 115,924,848
                                                                  =======================================

 LIABILITIES AND SHAREHOLDERS' EQUITY

 Current liabilities
  Accounts payable and accrued liabilities (note 13)                   $   9,514,115        $  6,522,676
  Accrued compensation                                                     1,979,902           1,792,925
  Current portion of capital lease (note 15)                                 162,487             150,933
                                                                  ---------------------------------------
                                                                          11,656,504           8,466,534
 Future income taxes (note 11)                                                     -           4,828,672
 Preferred shares (note 8)                                                65,684,726          55,211,759
 Capital lease obligation (note 15)                                           63,829             226,316
                                                                  ---------------------------------------
                                                                          77,405,059          68,733,281
                                                                  ---------------------------------------

 Contingencies and commitments (note 14)

                       Shareholders' equity
                       --------------------
 Common stock
  Issued and outstanding - 14,943,127 common shares
     (2000 - 15,117,427 common shares) (note 9)                           72,902,159          73,752,739
 Special warrants and rights (note 9)                                     18,306,665                   -
 Contributed surplus (note 9)                                             38,885,336          36,951,336
 Accumulated deficit                                                   (129,616,101)        (63,512,508)
                                                                  ---------------------------------------
                                                                             478,059          47,191,567
                                                                  ---------------------------------------

                                                                       $  77,883,118       $ 115,924,848
                                                                  =======================================

 Signed on behalf of the Board of Directors
  Original signed by Roderick M. Bryden and Ian Malone

               (The accompanying notes are an integral part of these consolidated financial statements.)
</TABLE>

                                      F-5
<PAGE>

WORLD HEART CORPORATION
Consolidated Statements of Loss
(Canadian Dollars)

<TABLE>
                                                        Year ended          Year ended        Year ended
                                                      December 31,        December 31,      December 31,
                                                              2001                2000              1999
---------------------------------------------------------------------------------------------------------
<S>                                                   <C>                <C>                 <C>

Revenue                                               $  8,252,624       $   4,674,485         $       -
                                                 --------------------------------------------------------
Cost of goods sold
  Direct materials and labour                         (3,925,702)         (2,443,610)                  -
  Overhead and other                                  (4,361,356)         (4,825,735)                  -
                                                 --------------------------------------------------------
                                                      (8,287,058)         (7,269,345)                  -
                                                 --------------------------------------------------------

Gross margin                                             (34,434)         (2,594,860)                  -
                                                 --------------------------------------------------------

Expenses

  Selling, general and administrative                (13,258,320)         (6,760,277)       (5,629,074)
  Research and development                           (33,594,623)        (18,395,885)      (13,034,576)
  Amortization of intangibles                        (15,209,647)         (7,491,865)           (8,000)
                                                 --------------------------------------------------------
                                                     (62,062,590)        (32,648,027)      (18,671,650)
                                                 --------------------------------------------------------
Loss before the undernoted                           (62,097,024)        (35,242,887)      (18,671,650)

Other income (expenses)
   Foreign exchange gain (loss)                        (2,913,150)            (16,686)            58,948
   Investment income                                    1,209,125           2,380,983          1,169,961
   Interest expense                                    (6,853,763)         (3,049,792)                 -
                                                 --------------------------------------------------------
 Loss before income taxes                              (70,654,812)        (35,928,382)      (17,442,741)

Recovery of future income taxes (note 11)                4,988,244           5,542,960                 -
                                                 --------------------------------------------------------

Net loss for the year                                $(65,666,568)      $ (30,385,422)     $(17,442,741)
                                                 ========================================================

Weighted average number of common shares
   outstanding (note 10)                                15,069,229          14,878,625        13,463,943
                                                 ========================================================

Basic and diluted loss per common share                  $  (4.36)           $  (2.04)         $  (1.30)
                                                 ========================================================

 (The accompanying notes are an integral part of these consolidated financial statements.)
</TABLE>

                                      F-6
<PAGE>

<TABLE>
<CAPTION>
   WORLD HEART CORPORATION
   Consolidated Statements of Shareholders' Equity
   (Canadian Dollars)

                                                                                            Warrants,
                                                                 Special      Warrants and  Options and
                                         Common Stock      Warrants and Rights  Options     Contributed   Accumulated  Shareholders'
                                         ------------      ------------ ------  -------         Surplus      Deficit          Equity
                                        Number  Amount      Number      Amount  Number
-----------------------------------------------------------------------------------------------------------------------------------
<S>                               <C>        <C>                 <C>   <C>     <C>          <C>       <C>           <C>
Balance as at December 31, 1998   12,243,000 $30,347,768          -     $   -  519,300        $    -   $(15,684,345)  $14,663,423

   Share issues
     Public offering                 1,780,548 26,548,107         -         -        -             -            -      26,548,107
     Common shares through
      exercise of options                4,794     42,411         -         -        -             -            -          42,411
     Common shares through
      exercise of warrants             122,197    800,510         -         -  (147,749)           -            -         800,510

   Net loss for the year
      ended December 31, 1999                 -          -        -         -         -            -   (17,442,741)   (17,442,741)
                                    -----------------------------------------------------------------------------------------------

   Balance as at December 31, 1999  14,150,539  57,738,796        -         -   371,551            -   (33,127,086)    24,611,710

   Value of conversion right attached
   to preferred shares (note 8)              -          -         -         -         -    36,951,336            -     36,951,336
   Share issues
     Public offering
                                       850,000  15,132,742        -         -    85,000             -            -     15,132,742
     Common shares through
      exercise of options               12,282    116,147         -         -         -             -            -        116,147
     Common shares through
      exercise of warrants             104,606    765,054         -         -  (112,280)            -            -        765,054

   Net loss for the year
      ended December 31, 2000                -         -          -         -         -             -  (30,385,422)   (30,385,422)
                                    -----------------------------------------------------------------------------------------------

   Balance as at December 31, 2000  15,117,427 73,752,739         -         -   344,271    36,951,336  (63,512,508)    47,191,567

   Special warrants issued
      through private placements             -          -  3,027,000 14,886,649 157,490             -            -     14,886,649
   Rights issued through
      private placement                      -          -    637,000  3,420,016       -             -            -      3,420,016
   Warrants issued in connection
      with government grant (note 7)         -          -          -          - 650,000     1,200,000            -      1,200,000
   Stock options issued for services         -          -          -          -  34,243       197,000            -        197,000
      Warrants issued for services           -          -          -          - 130,000       537,000            -        537,000
      Expired warrants                       -          -          -          -(224,271)            -            -            -
      Share repurchase                (174,300)  (850,580)         -          -        -            -     (437,025)    (1,287,605)
   Net loss for the year
      ended December 31, 2001                 -          -         -          -        -            -  (65,666,568)   (65,666,568)
                                    -----------------------------------------------------------------------------------------------

   Balance as at December 31, 2001   14,943,127 $72,902,159 3,664,000 $18,306,6651,091,733 $38,885,336 $(129,616,101)     $478,059
                                    ===============================================================================================

                       (The accompanying notes are an integral part of these consolidated financial statements.)
</TABLE>

                                       F-7
<PAGE>

<TABLE>
<CAPTION>
WORLD HEART CORPORATION
Consolidated Statements of Cash Flow
(Canadian Dollars)

--------------------------------------------------------------------------------------------------------------------------
                                                                            Year ended       Year ended        Year ended
                                                                          December 31,     December 31,      December 31,
                                                                                  2001             2000              1999
--------------------------------------------------------------------------------------------------------------------------
<S>                                                                      <C>               <C>                <C>
CASH FLOWS FROM (USED IN)

Operating activities
     Net loss for the year                                              $ (65,666,568)    $(30,385,422)      $(17,442,741)
     Items not involving cash -
        Amortization and depreciation                                      17,339,528        8,702,580            346,938
        Interest on preferred shares                                        6,853,763        3,049,792                  -
        Recovery of future income taxes                                    (4,988,244)      (5,542,960)                 -
        Exchange loss on preferred shares                                   3,047,835          531,035                  -
        Expenses paid by issuance of options                                  734,000                -                  -
   Net change in operating components of working capital (note 16)          2,056,797        2,021,194            458,493
                                                                     ----------------------------------------------------
                                                                          (40,622,889)     (21,623,781)       (16,637,310)
                                                                      ----------------------------------------------------
Investing activities
     Purchase of short-term investments                                  (7,381,300)     (90,093,497)        (28,301,236)
     Redemption of short-term investments                                23,196,677       81,077,529          23,191,626
     Payment of expenses relating to the Novacor acquisition                      -       (1,684,689)                  -
     Purchase of capital assets                                          (1,205,121)        (902,398)           (246,620)
     Reduction in collateral pledged for capital lease                      226,316          150,931             140,197
                                                                      ----------------------------------------------------
                                                                         14,836,572      (11,452,124)         (5,216,033)
                                                                      ----------------------------------------------------
Financing activities
     Capital lease repayments                                              (150,933)        (140,195)           (130,227)
     Issuance of common shares and/or special warrants
       through public offering                                           16,654,418       15,331,875          27,616,299
     Payment of expenses relating to the issue of common
       shares and/or special warrants                                    (1,690,672)        (199,133)         (1,068,192)
     Issuance of preferred shares                                                 -       29,612,000                   -
     Investment by third party in subsidiary                              3,465,501                -                   -
     Repurchase of common shares                                         (1,287,605)               -                   -
     Issuance of common shares through exercise of options                        -          116,147              42,411
     Issuance of common shares through exercise of warrants                       -          765,054             800,510
                                                                      ----------------------------------------------------

                                                                         16,990,709       45,485,748          27,260,801
                                                                      ----------------------------------------------------

Effect of exchange rate changes on cash and cash equivalents                516,218          245,307                   -
                                                                      ----------------------------------------------------

Increase (decrease) in cash and cash equivalents for the year            (8,279,390)      12,655,150           5,407,458
Cash and cash equivalents beginning of the year                          23,624,549       10,969,399           5,561,941
                                                                      ----------------------------------------------------

Cash and cash equivalents end of the year                               $15,345,159      $23,624,549        $ 10,969,399
                                                                      ====================================================

             (The accompanying notes are an integral part of these consolidated financial statements.)
</TABLE>

                                      F-8
<PAGE>

WORLD HEART CORPORATION
Notes to the Consolidated Financial Statements

1.  Significant Accounting Policies

(a)      Basis of presentation
         ---------------------

These consolidated financial statements have been prepared by management in
accordance with accounting principles generally accepted in Canada (GAAP), and
include all assets, liabilities, revenues and expenses of World Heart
Corporation (Corporation or WorldHeart) and its subsidiaries.

These principles also conform in all material respects with accounting
principles generally accepted in the United States (US GAAP) except as described
in Note 20.

(b)      Nature of operations
         --------------------

The Corporation develops artificial heart technologies through operations in
Oakland, California, United States and Ottawa, Ontario, Canada. WorldHeart is
currently focused on two technologies, Novacor(R) LVAS (Novacor LVAS), which is
currently in commercial production and the HeartSaver Ventricular Assist Device
(HeartSaver), which is currently under development.

The HeartSaver is being developed from licensed artificial heart and related
technologies developed by the Cardiovascular Devices Division (CVD) of the
Ottawa Heart Institute Research Corporation.

On July 11, 1996, with effect at April 1, 1996, the Corporation entered into a
research agreement with CVD (Research Agreement) under which the Corporation
agreed to fund a substantial portion of CVD's remaining research efforts
relating to HeartSaver artificial heart technology, and all of the costs related
to the commercialization of the technology. In exchange, the Corporation has
acquired joint ownership with CVD of any technology arising from CVD's research
pursuant to the Research Agreement after May 15, 1996. CVD has also granted the
Corporation an exclusive twenty-five year license to market the product and
certain other related technologies for an initial license fee of $200,000 and
royalties of 7%.

On June 30, 2000 the Corporation acquired Edwards Novacor LLC (Novacor) from
Edwards Lifesciences LLC (Edwards). As a result of this acquisition, WorldHeart
manufactures and distributes the Novacor LVAS.

(c)      Use of estimates
         ----------------

The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the dates of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those
estimates.

                                      F-9
<PAGE>

(d)      Cash equivalents and short-term investments
         -------------------------------------------

Cash equivalents are defined as highly liquid investments with maturities at
acquisition of three months or less. Short-term investments are those with terms
to maturity in excess of three months but less than one year. All cash
equivalents and short-term investments are classified as available for sale.

(e)      Inventory
         ---------

Inventory of raw materials and work in progress is valued at the lower of
average cost and replacement cost. Finished goods are valued at the lower of
average cost and net realizable value.

(f)      Investment tax credits
         ----------------------

Investment tax credits, which are earned as a result of qualifying research and
development expenditures, are recognized when the expenditures are made and
their realization is reasonably assured, and are applied to reduce related costs
and expenses in the year.

(g)      Capital assets
         --------------

Capital assets are recorded at cost. Amortization is calculated using the
following rates and bases:

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

The carrying value of capital assets is assessed annually and/or when factors
indicating a possible impairment are present. If an impairment is determined to
exist, the assets are reported at the lower of carrying value or net recoverable
amount.

(h)      Goodwill and other intangible assets
         ------------------------------------

Goodwill and intangible assets are amortized on a straight-line basis. Goodwill
is amortized over its estimated useful life of 5 years. Other intangible assets,
consisting of purchased technology, patents, trademarks and other identified
rights, are amortized over their legal or estimated useful lives, whichever is
shorter, which generally ranges from 3 to 5 years.

The Corporation's policy is to review the carrying amounts of goodwill and other
intangible assets whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Such events or circumstances
might include a significant decline in market share, a significant decline in
profits, rapid changes in technology, significant litigation or other items. In
evaluating the recoverability of goodwill and other intangible assets,
management's policy is to compare the carrying amounts of such assets with the
undiscounted estimated future operating cash flows. In the event an impairment
exists, an impairment charge would be determined by comparing the carrying

                                      F-10
<PAGE>

amounts of the asset to the applicable undiscounted estimated future cash flows.
In addition, the remaining amortization period for the impaired asset would be
reassessed and revised if necessary.

(i)      Income taxes
         ------------

Income taxes are provided for using the liability method whereby future tax
assets and liabilities are recognized using current tax rates on the difference
between the financial statement carrying amounts and the respective tax basis of
assets and liabilities. The Corporation provides a valuation allowance on future
tax assets when it is more likely than not that such assets will not be
realized.

(j)      Common stock
         ------------

Common stock is recorded as the net proceeds received on issuance after
deducting all share issue costs.

(k)      Revenue recognition
         -------------------

Revenue from product sales is recognized when all of the following criteria are
met: persuasive evidence of an agreement exists, delivery has occurred, the
price is fixed and determinable and collection is reasonably assured. The
Corporation provides for returns based on prior experience.

(l)      Stock-based compensation
         ------------------------

The Corporation has a stock option plan as described in Note 9. No compensation
expense is recognized when capital stock or stock options are issued to
employees. Any consideration paid by employees on exercise of stock options or
purchase of capital stock is credited to share capital.

Stock options issued in lieu of cash to non-employees for services performed are
expensed at the value of the options at the time they are issued, which is their
fair value.

(m)      Research and development costs
         ------------------------------

Research costs, including research performed under contract by third parties,
are expensed as incurred. Development costs are also generally expensed as
incurred unless such costs meet the criteria under GAAP for deferral and
amortization. To qualify for deferral, the costs must relate to a technically
feasible, identifiable product that the Corporation intends to produce and
market, there must be a clearly defined market for the product and the
Corporation must have the resources, or access to the resources, necessary to
complete the development. The Corporation has not deferred any such development
costs to date.

(n)      Government assistance
         ---------------------

Government assistance is recognized when the expenditures that qualify for
assistance are made and the Corporation has complied with the conditions for the
receipt of government assistance. Government assistance is applied first to
reduce the carrying value of any assets and next to reduce eligible expenses
incurred in the year. A liability to repay government assistance, if any, is
recorded in the period when the

                                      F-11
<PAGE>

conditions arise that cause the assistance to become repayable.

(o)      Foreign currency translation
         ----------------------------

Monetary assets and liabilities denominated in foreign currencies are translated
into Canadian dollars at exchange rates prevailing at the balance sheet date.
Non-monetary items and any related amortization of such items are translated at
the rates of exchange in effect when the assets were acquired or obligations
occurred. All other income and expense items are translated at average exchange
rates prevailing during the year. Exchange gains and losses are included in net
loss for the year.

Translation of the financial statements of integrated foreign operations are
translated in accordance with the policies noted above.

2.  Cash and Cash Equivalents and Short-Term Investments

The Corporation's cash equivalents and short-term investments consist of highly
liquid, highly rated financial instruments. These cash equivalents and
short-term investments are held with four Canadian financial institutions. The
Corporation has established guidelines relative to credit ratings,
diversification, and terms to maturity designed to mitigate this risk and
provide safety and liquidity:

<TABLE>
<CAPTION>

                                                               2001                                2000
                                        ----------------------------------------------------------------------
                                        Cash and Cash         Short-term       Cash and Cash      Short-term
                                          Equivalents         Investments        Equivalents      Investments
                                        ----------------------------------------------------------------------
<S>                                     <C>                   <C>           <C>                <C>
Cash                                    $ 4,016,860           $      -       $ 2,772,693       $          -
Asset backed notes held                                              -
  with financial institutions            11,328,299                           18,566,191         11,796,841
Corporate securities                              -             6,881,300      2,511,981         10,899,836
                                        ----------------------------------------------------------------------
                                         15,345,159             6,881,300     23,850,865         22,696,677

Cash pledged as collateral
  for capital lease                               -                  -          (226,316)                 -
                                        ----------------------------------------------------------------------

                                        $ 15,345,159          $ 6,881,300    $23,624,549       $ 22,696,677
                                        ======================================================================
</TABLE>

3.  Tax Credit Receivable

Starting in the third quarter of fiscal 2001, the Corporation recorded an
Ontario Business Research Institute (OBRI) tax credit receivable of $2,770,000.
This research tax credit was applied to reduce research and development expenses
during the quarter. The province of Ontario permits this refundable tax credit
for scientific research and development expenditures incurred in the province as
part of an

                                      F-12
<PAGE>

eligible research institute contract. This tax credit is subject to review and
acceptance by the Ontario Ministry of Finance.

<TABLE>
4.  Inventory

                                                                                  2001                   2000
                                                                     ------------------ --- ------------------
                                                                     ------------------ --- ------------------
<S>                                                                     <C>                    <C>

    Raw materials                                                         $ 2,226,013            $ 4,614,224
    Work in progress                                                        3,359,268              2,742,580
    Finished goods                                                          2,532,340              2,610,069
                                                                     ------------------ --- ------------------
                                                                     ------------------ --- ------------------

                                                                          $ 8,117,621            $ 9,966,873
                                                                     ================== === ==================
</TABLE>
5.  Capital Assets
<TABLE>
<CAPTION>
                                                                                2001
                                                 -------------------------------------------------------------
                                                                              Accumulated            Net Book
                                                               Cost          Amortization               Value
                                                 -------------------------------------------------------------

    <S>                                                 <C>                   <C>                  <C>
    Furniture and fixtures                              $   651,794           $   264,813          $  386,981
    Computer equipment and software                       2,007,386               698,462           1,308,924
    Manufacturing and research equipment                  5,999,479             2,480,656           3,518,823
    Leasehold improvements                                  753,042               673,946              79,096
                                                 -------------------------------------------------------------

                                                        $ 9,411,701           $ 4,117,877          $5,293,824
                                                 =============================================================
</TABLE>

<TABLE>
<CAPTION>
                                                                                 2000
                                                 -------------------------------------------------------------
                                                                              Accumulated            Net Book
                                                               Cost          Amortization               Value
                                                 -------------------------------------------------------------
    <S>                                                 <C>                   <C>                  <C>
    Furniture and fixtures                              $   706,579           $   173,633          $  532,946
    Computer equipment and software                       1,329,781               286,404           1,043,377
    Manufacturing and research equipment                  5,500,269             1,135,153           4,365,116
    Leasehold improvements                                  735,685               413,580             322,105
                                                 -------------------------------------------------------------

                                                        $ 8,272,314           $ 2,008,770          $6,263,544
                                                 =============================================================
</TABLE>

                                      F-13
<PAGE>

<TABLE>
6.  Goodwill and Other Intangible Assets

                                                                                     2001
                                                    ------------------- ------------------- -------------------
                                                                              Accumulated            Net Book
                                                                 Cost        Amortization               Value
                                                    ------------------- ------------------- -------------------
   <S>                                                   <C>                  <C>                <C>
   Purchased technology                                  $ 17,043,321         $ 7,853,793         $ 9,189,528
   Other intangible assets                                 18,454,585           9,084,760           9,369,825
   Goodwill                                                21,941,116           5,765,597          16,175,519
                                                    ------------------- ------------------- -------------------

                                                         $ 57,439,022        $ 22,704,150        $ 34,734,872
                                                   =================== =================== ===================

                                                                                     2000
                                                 -------------------------------------------------------------
                                                                              Accumulated            Net Book
                                                                 Cost        Amortization               Value
                                                  -------------------------------------------------------------

   Purchased technology                                  $ 17,043,321         $ 2,617,932        $ 14,425,389
   Other intangible assets                                 18,454,585           3,050,920          15,403,665
   Goodwill                                                21,941,116           1,828,776          20,112,340
                                                 -------------------------------------------------------------

                                                         $ 57,439,022         $ 7,497,628        $ 49,941,394
                                                 =============================================================
</TABLE>

7.  Technology Partnerships Canada Grant

On November 2, 2001, the Corporation was approved for a grant from Technology
Partnerships Canada ("TPC"). The amount to be received pursuant to this grant is
equal to the lesser of $9.98 million and 31.1% of the eligible costs incurred by
the Corporation in connection with the prototype development and clinical trials
of HeartSaverVAD. These costs are subject to review and acceptance by Industry
Canada. The Corporation is required to pay TPC a royalty equal to 1% of gross
revenues from the first version of HeartSaverVAD for a period of six years from
commencement of commercial sales. If by the end of this period cumulative
royalties have not reached $19.7 million, the royalty period will continue for a
further four years, or until cumulative royalties are $19.7 million, whichever
occurs first. The royalties are payable from sales of the product. As part of
this agreement, TPC received warrants for 650,000 common shares of WorldHeart,
exercisable until December 4, 2006 at an exercise price of $6.61 per share.

At December 31, 2001, no warrants had been exercised. The Corporation has
recorded the warrants at their fair value, which is estimated to be $2.5
million.

During the quarter ended December 31, 2001, the Corporation recognized $1.2
million as receivable from TPC relating to the prototype development and
clinical trials of HeartSaverVAD.

                                      F-14
<PAGE>

8.  Preferred Shares

(a)      Authorized
         ----------

Authorized preferred stock of the Corporation consists of an unlimited number of
shares issuable in series.

(b)      Issued
         ------

On June 30, 2000 the Corporation issued redeemable, convertible preferred shares
to Edwards Lifesciences LLC (Edwards) for US$20.0 million that are convertible
at Edward's option after June 30, 2006 into 1,374,570 common shares
(representing a per share conversion price of US $14.55), plus additional common
shares for the accumulated but unpaid dividends to the date of conversion,
without payment of additional consideration. These preferred shares are
non-voting except that Edwards can elect one director of the Corporation. These
shares are callable for cash at the face amount plus accumulated but unpaid
dividends at the Corporation's option at any time up to June 30, 2007, at which
time they are mandatorily redeemable for the face amount of US$20.0 million plus
accumulated dividends. Dividends accumulate at 5% per year for the first three
years and 10% per year for years four through seven.

Also on June 30, 2000, World Heart Inc. issued redeemable, cumulative
participating Series A preferred shares to Edwards in connection with the
Corporation's acquisition of Novacor. These Series A shares are non-voting.
Dividends accumulate at 4% per year on the subscription price of US$58.0 million
for the first three years and accumulate at 7% per year thereafter until
maturity on June 30, 2015 at which time they are mandatorily redeemable for the
face amount of US$58.0 million plus accumulated dividends. Edwards is entitled
to receive 25% of any dividends declared to the common shareholders of World
Heart Inc. The shares are redeemable at the Corporation's option for cash plus
accumulated but unpaid dividends at any time after three years. For a one-year
period commencing June 30, 2002, Edwards will have the right to put the Series A
shares to the Corporation in exchange for 4,981,128 of the Corporation's common
shares. This conversion right is subject to dilution protection should the
Corporation issue shares or options at less than fair market value. Edwards has
waived such rights with respect to the Corporation's sale of Special Warrants on
December 19, 2001.

The convertible preferred shares and the Series A shares (together the Preferred
Shares) are accounted for in accordance with their substance and are presented
in the financial statements as their debt and equity components, measured at
their respective fair values at the time of issue. The debt components have been
calculated at the present value of the required dividend payments discounted at
12%, being the estimated interest rate that would have been applicable to
non-convertible debt at the time the Preferred Shares were issued. Interest
expense is determined on the debt components as the amount necessary to increase
the debt components to their face amount at maturity.

The Preferred Shares carry a preference upon liquidation of the Corporation in
an amount equal to the par value plus accumulated but unpaid dividends, after
which the Preferred Shares share ratably with the common shares. The equity
component is shown as contributed surplus.

                                      F-15
<PAGE>

(c)      Edwards Lifesciences Agreements
         -------------------------------

In conjunction with Edwards investment in the Preferred Shares and the
Corporation's acquisition of Novacor, the Corporation has entered into a
distribution agreement (the Distribution Agreement) with Edwards whereby Edwards
will be the sole distributor, except in the United States, of the Corporation's
heart assist and heart replacement products for a period of five years
commencing July 1, 2000. As a result of the Distribution Agreement, WorldHeart
is committed to paying a minimum of US$2.0 million annually to Edwards in
guaranteed gross margin on sales in any year that Edwards' purchases are less
than US$10.0 million. The Corporation accounts for any shortfall of the
guaranteed gross margin on sales as a reduction of revenues.

During the year ended December 31, 2001, revenue included $3,622,102 (2000 -
$1,961,539) resulting from sales to Edwards. The obligation accrued for the
shortfall of the guaranteed gross margin on sales and included as a reduction of
revenues was $833,880 (2000 - $498,576).

The Corporation has also entered into a supply agreement with Edwards whereby
Edwards will be the sole supplier of certain components to the heart assist and
heart replacement products of the Corporation for a period of five years
commencing July 1, 2000. For the year ended December 31, 2001, purchases from
Edwards for components were $ 1,050,000 (2000 - $549,325). These amounts are
included in cost of goods sold.

Other purchases from Edwards for research and development materials and support
and other services amounted to $881,066 (2000 - $87,347).

9.  Shareholders' Equity

Common stock

(a)      Authorized
         ----------

Authorized common stock of the Corporation consists of an unlimited number of
shares.

(b)      Issued
         ------

In May 1999, the Corporation issued 1,780,548 common shares for net proceeds of
$26,548,107, after deducting issue costs of $2,830,935.

On March 17, 2000, the Corporation issued 850,000 common shares for net proceeds
of $15,132,742, after deducting issue costs of $199,133.

Share Repurchase

Commencing on September 17, 2001 and ending on October 12, 2001, the Corporation
purchased 174,300 of its common shares at market prices on the Nasdaq National
Market (NASDAQ) for a total cost

                                      F-16
<PAGE>

of $1,287,606. Of this total amount paid, $437,025 has been charged directly to
deficit, representing a premium paid on redemption of common shares with the
balance being charged to share capital.

All repurchased shares have been cancelled.

Employee Stock Option Plan

The Corporation has an employee stock option plan (ESOP). The maximum number of
shares that may be reserved and set aside under options to eligible persons
pursuant to the ESOP may not exceed 2,320,000 common shares. The maximum number
of common shares at any time available for issuance under the ESOP, or pursuant
to other outstanding options, to any one person may not exceed 2% of the common
shares then issued and outstanding. The ESOP is administered by a committee
appointed by the Board of Directors. The option exercise price for all options
issued under the ESOP is based on the fair market value on the date of grant.
The options generally vest in equal portions over either a five-year period or
three-year period and must be exercised within a four-year period from each date
of vesting.

During 2000, the Corporation granted to executives options outside the ESOP for
40,000 common shares. The options vest ratably over one year from the date of
grant or over a three year period.

Special Warrants Offerings

On December 19, 2001, pursuant to a private placement, the Corporation issued
3,027,000 special warrants (the "Special Warrants") for net proceeds of
$14,886,649 after deducting expenses of the placement of $1,761,851.

Each Special Warrant is convertible without additional consideration into one
common share of the Corporation and one warrant to purchase one common share.
Each warrant is exercisable at a price of $6.01 for a period of 24 months from
the date the Special Warrants are exercised or are deemed to have been
exercised.

The Corporation granted the Underwriters 112,280 underwriters' warrants and the
US Agents 45, 210 underwriters' warrants (collectively the "Underwriters'
Warrants") to acquire an aggregate of 157,490 underwriters' compensation options
(the "Underwriters" Compensation Options"). Each Underwriters' Compensation
Option entitles the holder to acquire one common share of the Corporation and
one Underwriters' underlying warrant (the "Underwriters' underlying Warrants")
at an exercise price of $6.05 per share. The Underwriters' Compensation Options
are exercisable for a four-year period ending December 19, 2005. Each
Underwriters' Underlying Warrant entitles the holder to acquire one common share
at an exercise price of $6.01 per share at any time for a period ending 24
months from the date of issue.

On January 17, 2002, the Corporation filed a final short-form prospectus with
Canadian securities regulatory authorities to qualify the 3,027,000 common
shares and 3,027,000 warrants issuable upon the exercise of the Special Warrants
and 157,490 Underwriters' Compensation Options upon the exercise of the
Underwriters' Warrants. All of the Special Warrants were deemed to have been
exercised by the holders on January 24, 2002.

                                      F-17
<PAGE>

Rights related to 2007262 Ontario Inc.

On December 19, 2001, WorldHeart incorporated 2007262 Ontario Inc. ("2007262")
to carry out specified research and development related to the HeartSaver
Implanted Controller, the HeartSaver External Controller and all the software
developed to control, monitor and power the HeartSaver VAD. WorldHeart and New
Generation Biotech (Equity) Fund Inc. ("NewGen"), an Ontario labour sponsored
venture capital corporation, subscribed for an equal number of common shares of
2007262. Additionally, NewGen subscribed for 637,000 Series 1 preferred shares
(the "Series 1 Shares") of 2007262 for net proceeds of $3,420,016 after
deducting expenses of the placement of $83,484. WorldHeart sold to 2007262
certain technology in exchange for 100,000 Series 2 preferred shares (the
"Series 2 Shares") of 2007262 and a promissory note in the amount of $2,000,000.

The promissory note was repaid to WorldHeart from the proceeds of the Series 1
preferred shares and the balance of the Series 1 preferred share proceeds is to
be used to improve and enhance the technology transferred by WorldHeart.

NewGen may redeem the Series 1 preferred shares at any time and 2007262 may
redeem the Series 1 preferred shares at any time after the earlier of the date
that the remaining proceeds are expended on the research and development of the
technology and March 19, 2003 ("the Earliest Redemption Date"). The redemption
price of these shares is an amount equal to the fair market value at the time of
redemption of 637,000 common shares and 637,000 common share purchase warrants
of WorldHeart, exercisable at $6.01 per common share until December 19, 2003,
(the "Redemption Amount"). The Redemption Amount may be paid at WorldHeart's
option either in cash or by delivery of the 637,000 common shares and 637,000
common share purchase warrants.

WorldHeart may redeem its Series 2 preferred shares at any time and 2007262 may
redeem them at any time after the Earliest Redemption Date by WorldHeart
delivering to 2007262 the consideration, in cash or in kind, to fund the Series
1 preferred share Redemption Amount and 2007262 delivering to WorldHeart the
technology and all improvements and enhancements. The Series 1 preferred shares
are automatically redeemed if the Series 2 preferred shares are redeemed.

2007262 has been accounted for as a research and development arrangement.
WorldHeart has recorded the NewGen funding as contributed surplus and the
amounts expended by 2007262 from the NewGen funding as research and development
expenses in the period. The unexpended balance as at December 31, 2001 of
$1,465,501 has been included in cash and cash equivalents.

Warrants Issued to Technology Partnerships Canada

During the year ended December 31, 2001, the Corporation granted Technology
Partnerships Canada 650,000 warrants to purchase an equivalent number of common
shares of WorldHeart, exercisable until December 4, 2006 at an exercise price of
$6.61 per share, as described in Note 7.

                                      F-18
<PAGE>

Stock Option and Warrant Activity

The following table presents the number of options and warrants outstanding and
the weighted average exercise price:

<TABLE>
                                     Employees                Non-Employees
                           -----------------------------------------------------
                                         Weighted                  Weighted                    Weighted
                                         average                    average                     average
                                         exercise                  exercise                    exercise
                                Options     price        Options      price         Warrants      price
                                      #         $              #          $                #           $      Total
                           ------------- ----------- ------------ -------------- ------------ ------------ -----------
<S>                            <C>         <C>          <C>           <C>         <C>           <C>           <C>
Outstanding at
   December 31, 1998            243,885      8.16        12,500         6.80      519,300        9.43         775,685
Granted                         286,694     12.41        39,587        12.39            -           -         326,281
Exercised                        (4,794)     8.85             -            -     (147,749)       8.65        (152,543)
Cancelled                        (1,500)    12.00             -            -             -          -          (1,500)
Forfeited                       (29,400)    10.66        (4,000)       12.00             -          -         (33,400)
                           ------------- ----------- ------------ -------------- ------------ ------------ -----------

Outstanding at
   December 31, 1999            494,885     10.46     48,087            10.97     371,551         9.73      914,523
Granted                         581,693     16.77     11,500            20.50      85,000        20.40      678,193
Exercised                       (12,248)     9.45        (34)           12.65    (112,280)        7.86     (124,562)
Cancelled                      (161,000)    17.20          -                -           -            -     (161,000)
Forfeited                      (139,672)    15.25     (3,105)           12.65           -            -     (142,777)
                           ------------- ----------- ------------ -------------- ------------ ------------ -----------

Outstanding at
   December 31, 2000            763,658     12.99      56,448           12.82     344,271        12.98     1,164,377
Granted                         537,195     10.67      68,243           10.79     937,490         6.71     1,542,928
Exercised                             -         -           -               -           -            -             -
Cancelled                             -         -           -               -           -            -             -
Forfeited                      (133,967)    11.30      (9,256)          10.80    (224,271)       10.31      (367,494)
                           ------------- ----------- ------------ -------------- ------------ ------------ -----------
Outstanding at
   December 31, 2001          1,166,886     12.11      115,435           11.78   1,057,490        7.98     2,339,811
                           ------------- ----------- ------------ -------------- ------------ ------------ -----------

</TABLE>

<TABLE>

                                                                         Options
                                                     -------------------------------------------
                                                           Employees           Non-Employees          Warrants
                                                     ---------------------- -------------------- --------------------
<S>                                                           <C>                      <C>          <C>

Weighted average exercise price:
         December 31, 1999                                           10.46                10.97           9.73
         December 31, 2000                                           13.01                12.82          12.98
         December 31, 2001                                           12.13                11.78           7.98
Number of exercisable options and warrants:
         December 31, 1999                                           67,203               21,900       371,551
         December 31, 2000                                          154,279               30,404       344,271
         December 31, 2001                                          165,566               40,083     1,057,490

Range of exercise prices at December 31, 2001:
         From                                                       $  5.23              $  5.23      $   6.01
         To                                                           21.83                21.83         20.40
Range of expiry dates at December 31, 2001:
         From                                                March 31, 2002       March 31, 2002       March 17, 2002
         To                                               November 20, 2009    February 22, 2009     December 4, 2006
</TABLE>

                                      F-19
<PAGE>

The following table presents information about the outstanding options and
warrants at December 31, 2001:

<TABLE>

                               Range of                Number            Weighted average     Weighted average
                         exercise price           outstanding              exercise price        life in years
                  --------------------------------------------------------------------------------------------
<S>                     <C>                      <C>                      <C>                         <C>

                        $  5.23 to 6.80               949,973                    $6.51                  4.4
                           6.81 to 9.25               218,737                     8.46                  2.4
                          9.26 to 12.50               648,012                    10.90                  3.9
                         12.51 to 15.00               132,824                    12.71                  3.9
                         15.01 to 18.00               288,442                    16.99                  5.5
                         18.01 to 21.83               101,823                    20.42                  1.0
                                            ------------------    --------------------------------------------

                                                    2,339,811                  $ 10.16                  4.0
                                            ==================    ============================================
</TABLE>

10.  Earnings Per Share

For all of the years presented, diluted loss per share equals basic loss per
share due to the anti-dilutive effect of convertible preferred shares, employee
stock options and warrants. These instruments could potentially dilute basic
earnings per share in the future by being converted into common shares:

<TABLE>
                                                                 Number of common shares to be issued on
                                                                            exercise or conversion
                                                                     2001               2000           1999
                                                          ---------------------------------------------------
<S>                                                            <C>                 <C>               <C>
Convertible preferred shares                                     6,355,698          6,355,698              -
Employee stock options                                           1,282,321            820,106        542,972
Warrants, including special warrants                             8,542,980            344,271        371,551
Total potentially dilutive instruments                          16,180,999          7,520,075        914,523
                                                          ===================================================
</TABLE>

                                      F-20
<PAGE>

11.  Income Taxes

The Corporation operates in several tax jurisdictions. Its income is subject to
varying rates of tax and losses incurred in one jurisdiction cannot be used to
offset income taxes payable in another. A reconciliation of the combined
Canadian federal and provincial income tax rate with the Corporation's effective
tax rate is as follows:

<TABLE>
                                                       Year ended           Year ended            Year ended
                                                       December 31,         December 31,         December 31,
                                                               2001                2000                 1999
                                                    -------------------------------------------------------------
<S>                                                     <C>                 <C>                  <C>

Domestic loss                                             $ (24,291,044)      $ (16,600,519)      $ (17,442,741)
United States' loss                                         (46,202,777)        (18,796,828)                   -
                                                    -------------------------------------------------------------

Loss before income taxes                                  $ (70,493,821)      $ (35,397,347)      $ (17,442,741)
                                                    ===================== =================== ===================
Expected statutory rate                                           41.74%              43.95%              44.62%
Expected recovery of income tax                           $ (29,430,000)      $ (15,557,000)       $ (7,779,000)
Effect of foreign tax rate differences                           320,000             546,000                   -
Permanent differences                                          6,210,000           1,359,000              97,000
Provincial income tax incentives                                       -            (571,000)           (352,000)
Increase in valuation allowance                               14,870,000           8,010,000           8,034,000
Effect of changes in SR&ED carryforwards                         980,000             368,000                   -
Effect of tax rate changes                                     1,170,000             283,000                   -
Effect of exchange rate differences                              892,000              19,000                   -
                                                    -------------------------------------------------------------

Recovery of income taxes                                    $(4,988,000)       $ (5,543,000)            $      -
                                                    ============================================================
</TABLE>

The Canadian statutory income tax rate of 41.74% is comprised of federal income
tax at 28.12% and provincial income tax at 13.62%. For the year ended December
31, 2001, the recovery of income taxes relates entirely to the United States
operations. For the year ended December 31, 2001, permanent differences relate
primarily to imputed interest expense on the Preferred Shares and goodwill
amortization for which no temporary difference arises.

                                      F-21
<PAGE>

The primary temporary differences affecting future taxes are approximately as
follows:

<TABLE>
                                                                                       2001                2000
                                                                          ------------------- -------------------
<S>                                                                           <C>               <C>
Future tax assets:
     SR&ED expenditures                                                        $ 16,610,000      $   15,590,000
     Net operating losses                                                        23,780,000           9,770,000
     Investment tax credits                                                       5,170,000           4,040,000
     Share issue costs                                                            3,810,000           3,230,000
     Asset basis differences                                                      1,390,000             600,000
                                                                          ---------------------------------------
                                                                                 50,760,000          33,230,000
     Less: valuation allowance                                                  (44,190,000)        (29,320,000)
                                                                          ---------------------------------------
                                                                                  6,570,000           3,910,000
Future tax liabilities:
     Asset basis differences                                                     (6,570,000)         (8,740,000)
                                                                          ---------------------------------------

Net future income tax liability                                                $           -      $    (4,830,000)
                                                                          =======================================
</TABLE>

As at December 31, 2001, the Corporation has unclaimed Scientific Research and
Experimental Development (SR&ED) expenditures, income tax loss carryforwards and
investment tax credits. The unclaimed amounts and their expiry dates are as
follows:

<TABLE>
                                                                   2001                2000              1999
                                                        ---------------------------------------------------------
<S>                                                        <C>                  <C>                <C>

SR&ED expenditures (carried forward
      without expiry)                                       $ 39,800,000        $ 35,500,000        $ 20,000,000
Income tax loss carryforwards:
     Federal (Canada)      (expire 2003-2008)                 28,300,000          14,300,000          12,000,000
     Provincial            (expire 2003-2008)                 36,800,000          25,800,000          20,000,000
     United States         (expire 2010-2015)                 32,700,000           9,600,000                   -
Investment tax credits     (expire 2006-2010)                  8,900,000           7,200,000           4,400,000
</TABLE>

12.  Acquisition

On June 30, 2000 the Corporation acquired Novacor from Edwards for a total
purchase price of approximately $62.5 million, consisting of $58.9 million
Series A cumulative participating preferred shares (Series A shares) of
WorldHeart Inc., plus expenses related to the transaction of $3.6 million. The
acquisition was accounted for using the purchase method and, therefore,
Novacor's operating results have been included in the consolidated financial
statements from the date of acquisition.

                                      F-22
<PAGE>

The allocation of the purchase price was based on an independent valuation and
was allocated among the identifiable tangible and intangible assets based on the
fair market value of those assets as follows:

<TABLE>
<S>                                                               <C>
     Consideration given                                           $ 62,485,000

     Fair value of identifiable net assets acquired:
     Net tangible assets                                             15,519,000
     Purchased technology                                            17,043,000
     Other intangible assets                                         18,255,000
     Future income taxes                                            (10,273,000)
                                                             -------------------

                                                                     40,544,000
                                                             -------------------

     Goodwill                                                       $21,941,000
                                                             ===================
</TABLE>

Purchased technology was valued using a risk adjusted cash flow model, under
which future cash flows were discounted taking into account risks related to
existing and future markets and an assessment of the life expectancy of the
technology. Other intangible assets consist of Novacor's work force, customer
base, patents and trademarks. The excess of the purchase price over the
identifiable assets was allocated to goodwill.

The following table presents pro-forma financial information for the years ended
December 31, 2000 and 1999 as though the acquisition of Novacor had occurred at
the beginning of the year ended December 31, 1999. The pro-forma financial
information has been restated to account for the change in accounting policy
described in Note 18.
                                                   Year ended        Year ended
                                                 December 31,       December 31,
                                                        2000               1999
                                            ------------------------------------
                                                           (Unaudited)
     Total revenue                              $   9,938,000       $ 15,222,000
     Loss before income taxes                      59,021,000         64,396,000
     Net loss for the year                         59,021,000         54,123,000

     Basic and diluted loss per share           $      (3.97)      $      (4.02)

13.  Related Party Transactions

CVD is considered a related party by virtue of the fact that the Chairman and
Chief Scientific Officer of the Corporation is also the Director of CVD.

                                      F-23
<PAGE>

The following related party amounts are included in amounts receivable and
accounts payable and accrued liabilities:

                               2001                2000                1999
                       -------------------  -----------------  -----------------

      Due from CVD           $ 69,195           $  188,276         $  175,454
                       ===================  =================  =================

      Due to CVD           $  483,279            $ 443,089          $ 218,510
                       ===================  =================  =================

During the year ended December 31, 2001, the Corporation paid $1,000,000 (2000 -
$1,000,000, 1999 - $7,600,000) for research and development fees to CVD under
the Research Agreement described in Note 1(b). In addition, the Corporation paid
$150,000 (2000 - $150,000, 1999 - $150,000) to CVD relating to the research
chair under the Research Agreement.

During the year ended December 31, 2001, the Corporation incurred salary expense
of $484,387 (2000 - $670,271, 1999 - $2,509,055) relating to employees that have
been seconded by the Corporation to CVD. These funds were reimbursed by CVD to
the Corporation.

14.  Contingencies and Commitments

(a)      Research Agreement

The Corporation's research funding to CVD under the Research Agreement described
in Note 1(b) was $18.1 million for the period April 1, 1996 to December 31,
2001.

Under the Research Agreement, the Corporation has agreed to fund, to the extent
reasonable (and to the extent funding is not available from other sources), any
additional research and development costs incurred by CVD in connection with
such product development, and to the extent reasonable, the costs of the
product's commercialization. The Research Agreement provides that any funding
for research and development of the HeartSaver provided by the Corporation in
excess of $33.0 million will be creditable against any future CVD royalty
entitlement over a period up to ten years, with interest at 8% per annum from
the year in which such excess is provided. The Research Agreement stipulates
that the parties will negotiate to establish payment terms for repayment of any
remaining balance, provided that if agreement as to such payment terms is not
reached then such remaining balance shall become due and repayable by CVD within
twelve months following the end of the respective ten-year period.

The Corporation has also agreed with CVD to fund $150,000 per year for the
period from July 1, 1996 to June 30, 2002 for a research chair in medical
devices at the University of Ottawa Heart Institute.

                                      F-24
<PAGE>

(b)      Operating Leases

The Corporation is committed to minimum lease payments for office facilities and
equipment as follows:

      Year ended December 31,     2002       $   733,262
                                  2003            94,244
                                  2004             5,171
                                  2005             5,171
                                  2006               431

15.  Capital Lease Obligation

In December 1997, the Corporation entered into a capital lease with a sixty-five
month term with interest charged at a floating rate equal to the prevailing rate
for Bankers' Acceptances plus 3%.

The Corporation has provided a $250,720 letter of credit in favour of the lessor
to cover the term of the lease (2000 - $419,130, 1999 - $575,450). In the past,
as collateral for this letter of credit, the Corporation pledged cash and cash
equivalents (2000 - $226,316, 1999 - $377,247). The Corporation no longer
pledges any amount as collateral.

The minimum lease payments, prior to any adjustment for changes in interest
rates, are as follows:

      Year ended December 31,     2002       $   173,796
                                  2003            64,923
                                               ---------
                                                 238,719
      Less: amount representing interest         (12,403)
                                                 --------

      Capital lease obligation                 $ 226,316
                                                 ========

16.  Net Change in Operating Components of Working Capital

The net change in operating components of working capital is comprised of:
<TABLE>
<CAPTION>

                                                          Year ended          Year ended         Year ended
                                                         December 31,        December 31,       December 31,
                                                                 2001               2000               1999
                                                 ----------------------------------------------------------

<S>                                                     <C>                <C>                  <C>

Accounts receivable and other                           $ (3,096,593)      $ (2,871,227)        $(214,013)
Prepaid expenses                                              (8,254)          (143,723)         (110,350)
Inventory                                                   1,849,252          1,580,137                 -
Accounts payable and accrued liabilities                    3,125,415          2,783,026           453,468
Accrued compensation                                          186,977            672,981           329,388
                                                 ----------------------------------------------------------

                                                          $ 2,056,797         $2,021,194         $ 458,493
                                                 ==========================================================

</TABLE>

                                      F-25
<PAGE>

17.  Segmented Information

Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
Corporation's chief decision maker in deciding how to allocate resources and
assess performance. The Corporation's chief decision maker is the Chief
Executive Officer.

The Corporation's reportable segments are its commercial operations related to
the sale of the Novacor LVAS and related components and its research and
development activities focused mainly on development of the HeartSaver. On June
30, 2000, the Corporation acquired Novacor whose commercial operations now
comprise the Corporation's commercial operations segment.

The accounting policies of the Corporation's operating segments are the same as
those described in Note 1. The Corporation does not use a measure of segment
assets to assess performance or allocate resources. As a result, segment asset
information is not presented.

The following presents segmented operation results for the year ending December
31, 2001:
<TABLE>
<CAPTION>

                                                     Commercial         Research and
                                                     Operations          Development                Total
                                                ---------------- -------------------- --------------------
<S>                                                 <C>                 <C>                  <C>
Revenue                                              $8,252,624              $     -          $ 8,252,624
                                                ---------------- -------------------- --------------------

Cost of goods sold
     Direct materials and labour                    (3,925,702)                    -          (3,925,702)
     Overheard and other                            (4,361,356)                    -          (4,361,356)
                                                ---------------- -------------------- --------------------
                                                    (8,287,058)                    -          (8,287,058)
                                                ---------------- -------------------- --------------------

Gross margin                                           (34,434)                    -             (34,434)
                                                ---------------- -------------------- --------------------

Expenses
     Selling, general and administrative            (5,824,004)          (7,434,316)         (13,258,320)
     Research and development                                 -         (33,594,623)         (33,594,623)
                                                ---------------- -------------------- --------------------

                                                    (5,824,004)         (41,028,939)         (46,852,943)
                                                ---------------- -------------------- --------------------

Loss before the undernoted                        $ (5,858,438)       $ (41,028,939)         (46,887,377)
                                                ================ ====================
     Amortization of intangibles                                                             (15,209,647)
     Other income (expenses), net                                                             (8,557,788)
     Recovery of future income taxes                                                           4,988,244
                                                                                      --------------------

Net loss for the year                                                                      $ (65,666,568)
                                                                                      ====================

</TABLE>

                                      F-26
<PAGE>

The following presents segment operating results for the year ending December
31, 2000:
<TABLE>
<CAPTION>

                                                 Commercial             Research and
                                                 Operations             Development        Total
                                               --------------------------------------------------------------
<S>                                               <C>                 <C>                  <C>
Revenue                                           $  4,674,485        $            -       $   4,674,485
                                               --------------------------------------------------------------

Cost of goods sold
     Direct materials and labour                    (2,443,610)                   -            (2,443,610)
     Overheard and other                            (4,825,735)                   -            (4,825,735)
                                               --------------------------------------------------------------
                                                    (7,269,345)                   -            (7,269,345)
                                               --------------------------------------------------------------

Gross margin                                        (2,594,860)                   -            (2,594,860)
                                               --------------------------------------------------------------

Expenses
     Selling, general and administrative            (1,894,622)          (4,865,655)           (6,760,277)
     Research and development                                -          (18,395,885)          (18,395,885)
                                               --------------------------------------------------------------
                                                    (1,894,622)         (23,261,540)          (25,156,162)
                                               --------------------------------------------------------------
Loss before the undernoted                        $ (4,489,482)       $ (23,261,540)          (27,751,022)
                                               ===========================================
     Amortization of intangibles                                                               (7,491,865)
     Other income (expenses), net                                                                (685,495)
     Recovery of future income taxes                                                            5,542,960
                                                                                            -----------------
Net loss for the year                                                                       $ (30,385,422)
                                                                                            =================

</TABLE>

                                      F-27
<PAGE>

The following presents segment operating results for the year ending December
31, 1999:
<TABLE>
<CAPTION>
                                                 Commercial             Research and
                                                 Operations             Development        Total
                                               --------------------------------------------------------------
<S>                                               <C>                 <C>                  <C>
Revenue                                           $      -            $      -             $      -
                                               --------------------------------------------------------------
Cost of goods sold
     Direct materials and labour                         -                   -                    -
     Overheard and other                                 -                   -                    -
                                               --------------------------------------------------------------
                                                         -                   -                    -
                                               --------------------------------------------------------------

Gross margin                                             -                   -                    -
                                               --------------------------------------------------------------

Expenses
     Selling, general and administrative                 -               (5,629,074)           (5,629,074)
     Research and development                            -              (13,034,576)          (13,034,576)
                                               --------------------------------------------------------------
                                                         -              (18,663,650)          (18,663,650)
                                               --------------------------------------------------------------
Loss before the undernoted                        $      -            $ (18,663,650)          (18,663,650)
                                               ===========================================
     Amortization of intangibles                                                                   (8,000)
     Other income (expenses), net                                                               1,228,909
     Recovery of future income taxes                                                                    -
                                                                                        --------------------

Net loss for the year                                                                       $ (17,442,741)
                                                                                        ====================
</TABLE>

The following geographic area data includes revenue based on product shipment
destination and long-lived assets based on physical location. The Corporation
has a location in Canada and the United States:
<TABLE>
<CAPTION>

                                                 For the year ended December 31,
                                  2001                         2000                         1999
                      ---------------------------------------------------------------------------------------
                           Revenue       Long-lived                  Long-lived      Revenue      Long-lived
                                             assets      Revenue         assets                       assets
                      ---------------------------------------------------------------------------------------
<S>                      <C>            <C>            <C>           <C>             <C>         <C>
Canada                     $158,974     $ 1,529,433     $ 93,963     $5,241,966      $    -      $ 1,009,719
United States             5,463,618      38,776,263    2,712,946     50,962,972           -                -
Netherlands               3,463,912               -    2,366,152              -           -                -
Less:  Edwards fee         (833,880)               -    (498,576)             -           -                -
                      ---------------------------------------------------------------------------------------
                         $8,252,624     $40,305,696   $4,674,485    $56,204,938      $    -      $ 1,009,719
                      =======================================================================================
</TABLE>

At December 31, 2001, two customers had accounts receivable balances greater
than 10% of the Corporation's total accounts receivable balance. At December 31,
2000, three customers had accounts receivable balances greater than 10% of the
Corporation's accounts receivable balance. During 2001,

                                      F-28
<PAGE>

three customers accounted for 35% of the total revenue for the year. During
2000, one customer accounted for 11% of the total revenue for the year. No
customer accounted for more than 10% of the total revenue in 1999.

18.  Change in Accounting Policy for Foreign Currency Translation

In November 2001, the Accounting Standards Board ("AcSB") of the Canadian
Institute of Chartered Accountants ("CICA") approved amendments to CICA Handbook
Section 1650, "Foreign Currency Translation" that requires exchange gains or
losses arising on the translation or settlement of a foreign currency
denominated monetary item or a non-monetary item carried at market to be
included in the determination of net income for the current period. Previously,
unrealized translation gains and losses on non-current monetary assets and
liabilities were deferred and amortized over the remaining life of the monetary
item. The Corporation has adopted this new pronouncement in the quarter ended
December 31, 2001 and has restated the prior period financial statements.

The effect of this restatement on the financial statements was to decrease
deferred foreign exchange loss and increase net loss by $3,047,835 (2000 -
$531,035, 1999 - $nil). The effect of this change is to increase basic and
diluted loss per common share by $0.20 (2000 - $0.03, 1999 - $nil).

19.  Financial Instruments

Financial instruments recognized in the balance sheet consist of cash and cash
equivalents, short-term investments, accounts receivable and other, accounts
payable and accrued liabilities, a capital lease and preferred shares. The
Corporation does not hold or issue financial instruments for trading purposes.

The Corporation invests the majority of its excess cash in high-grade
instruments and diversifies the concentration of cash among different financial
institutions.

(a)      Fair value

The Corporation believes that the carrying values of its financial instruments
other than the capital lease and the preferred shares approximates their fair
values because of their short terms to maturity. The Corporation believes that
the carrying value of the capital lease obligation also approximates fair value
because of its floating market rate of interest. The Corporation believes that
the carrying value of the preferred shares also approximates fair value based
originally on an independent valuation and that their imputed 12% rate of
interest approximates market.

The Corporation claims qualified Scientific Research and Experimental
Development ("SR&ED") deductions and related investment tax credits based on
management's interpretation of the applicable legislation in the Income Tax Act
of Canada. These claims are subject to review and acceptance by Canada Customs
and Revenue Agency.

                                      F-29
<PAGE>
(b)      Interest rate risk

The Corporation is subject to interest rate risks because of the short-term to
maturity of its cash equivalents and short-term investments and the floating
rate nature of its capital lease.

(c)      Foreign exchange risk

The Corporation enters into various foreign exchange contracts to protect the
Corporation from the risk that the investments held are not adversely affected
by changes in currency exchange rates. These contracts are short-term in nature.
At December 31, 2000, the Corporation had outstanding a foreign exchange forward
contract to sell US$4.1 million at an exchange rate of US$1 for $1.54 maturing
on January 10, 2001. As at December 31, 2001, the Corporation had no outstanding
foreign exchange financial instruments.

(d)      Credit risk

Financial instruments that potentially subject the Corporation to a
concentration of credit risk consist of cash and accounts receivable. The
Corporation has a limited number of customers, all of which operate in the
health care industry. As at December 31, 2001 approximately 14% (2000 - 49%) of
the accounts receivable balance was due from Edwards. The Corporation performs
ongoing credit evaluations of its customers' financial condition and, generally,
requires no collateral from its customers. The Corporation maintains an
allowance for doubtful accounts receivable based upon the expected collectiblity
of accounts receivable.

                                      F-30

<PAGE>

20.   United States Accounting Principles

The consolidated financial statements have been prepared in accordance with
Canadian GAAP. These principles differ, as they affect the Corporation, for the
year ended December 31, 2001 and 2000 in the following material respects from US
GAAP. There were no differences in reported cash flows for the periods
presented.
<TABLE>
<CAPTION>
(a)      Balance sheets
         --------------

                                                                  December 31, 2001   December 31, 2000
                                                                  ----------------- -------------------
<S>                                                                   <C>                 <C>
ASSETS
   Current assets                                                      $37,854,422        $ 59,493,594
   Cash pledged as collateral for capital lease                                  -             226,316
   Capital assets                                                        5,293,824           6,263,544
   Goodwill and other intangible assets (1)                             30,216,648          42,188,399
                                                                  ----------------- -------------------
                                                                       $73,364,894        $108,171,853
                                                                  ================= ===================

LIABILITIES AND SHAREHOLDERS' EQUITY
   Current liabilities                                                 $11,656,504        $  8,466,534
   Capital lease obligation                                                 63,829             226,316
   Deferred income taxes                                                         -           5,066,840
   Obligation under a research and development arrangement (6)           3,420,016                   -
                                                                  ----------------- -------------------

                                                                        15,140,349          13,759,690
                                                                  ----------------- -------------------

   Preferred shares (2)                                                105,319,402          92,671,602

Shareholders' Equity
   Common stock (4)                                                    121,565,309         122,415,889
   Special warrants and rights                                          14,886,649                   -
   Accumulated deficit (3 & 4)                                       (183,546,815)        (120,675,328)
                                                                  ----------------- -------------------

                                                                      (47,094,857)           1,740,561
                                                                  ----------------- -------------------

                                                                       $73,364,894        $108,171,853
                                                                  ================= ===================
</TABLE>

                                      F-31
<PAGE>

(b)      Statements of loss for the years ended December 31, 2001, 2000 and 1999
         -----------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                  Year ended         Year ended        Year ended
                                                                 December 31,       December 31,      December 31,
                                                                        2001               2000              1999
                                                            ------------------------------------------------------
<S>                                                            <C>               <C>               <C>
Net loss in accordance with Canadian GAAP                      $ (65,666,568)    $ (30,385,422)    $ (17,442,741)
Adjustments to reconcile to US GAAP:
Write-off of purchased in-process research
     and development (1)                                                    -       (9,036,448)                 -
Amortization of purchased in-process research and
     development  (1)                                               3,234,771         1,283,453                 -
Interest on preferred shares (2)                                    6,853,763         3,049,792                 -
Foreign exchange translation on preferred shares (2)               (1,926,777)         (508,507)                -
Recovery of deferred income taxes                                   3,175,957        (3,287,960)                -
Foreign exchange translation on deferred income taxes                 112,003                 -                 -
                                                            ------------------------------------------------------

Net loss and comprehensive loss in accordance with US GAAP        (54,216,851)      (38,885,092)      (17,442,741)
Accretion on preferred shares (2)                                  (7,071,611)       (3,080,000)                -
                                                            ------------------------------------------------------

Net loss applicable to common shareholders                     $  (61,288,462)    $ (41,965,092)    $ (17,442,741)
                                                            ======================================================

Loss per common share

Weighted average number of common shares outstanding               15,168,879        14,878,625        13,463,943
                                                            ======================================================
Basic and diluted loss per common share                              $ (4.04)          $ (2.82)          $ (1.30)
                                                            ======================================================
</TABLE>

(c)      Footnotes
         ---------

(1)  Under US GAAP acquired in-process research and development is required to
     be expensed if the related technology has not reached technological
     feasibility and does not have an alternative future use. Under Canadian
     GAAP this amount is capitalized and amortized over its useful life. This
     also results in a difference in the related deferred income taxes.
(2)  Under US GAAP mandatorily redeemable convertible preferred shares are
     recorded as mezzanine financing at their fair value on the date of issue
     and excluded from both shareholders' equity and long-term debt. Dividends
     are accumulated on these shares at the average dividend rate and this
     amount, together with the amount necessary to accrete the fair value to the
     redemption price on maturity, are charged first to retained earnings; if no
     retained earnings, then to accumulated paid-in capital; if no accumulated
     paid-in capital, then to accumulated deficit. Under Canadian GAAP these
     shares are treated as compound instruments and divided into their debt and
     equity components based on their fair value at the time of issue and
     dividends and imputed interest related to the debt component are charged to
     earnings. The different presentation on the balance sheet results in a
     difference in exchange as, under Canadian GAAP the amount in shareholders'
     equity is translated at

                                      F-32
<PAGE>

     historical rates and the amount in long-term debt is translated at current
     rates. Under US GAAP, the full amount is translated at current rates.
(3)  Under US GAAP, the difference between the issue price and initial public
     offering (IPO) price of shares issued within a one-year period prior to the
     IPO is generally accounted for as an expense and charged against earnings
     for the period with a corresponding and equal amount recorded as paid-in
     capital. This difference of $48,663,150 increased the accumulated deficit
     and capital stock reported for the period ended December 31, 1996 under US
     GAAP, with no difference reported in total shareholders' equity.
(4)  Under US GAAP the Corporation's policy is to review the carrying amounts of
     goodwill and other intangible assets in a manner consistent with that
     described in note 1 (h), except that, in the event an impairment exists, an
     impairment charge would be determined by comparing the carrying amounts of
     the asset to the applicable estimated future cash flows, discounted at a
     risk-adjusted interest rate.
(5)  Under US GAAP net loss includes depreciation and amortization relating to
     capital assets and goodwill and other intangible assets of $2,937,228 and
     $11,971,751 respectively for 2001 (2000 - $1,210,715 and $6,208,412
     respectively; 1999 - $455,204 and $8,000 respectively).
(6)  Under US GAAP, the obligation under the research and development
     arrangement is classified as a liability. Under Canadian GAAP, this amount
     is reflected as equity as NewGen will receive equity securities of the
     Corporation upon completion of the R&D arrangement.

(d)      Share based compensation
         ------------------------

The Corporation has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" (SFAS 123). The Corporation applies Accounting Principles Board
opinion No. 25, "Accounting for Stock Issued to Employees", in accounting for
its stock option grants and accordingly, because the exercise price of employee
stock options equals the market price of the underlying common shares on the
date of grant, no compensation expense has been recognized for grants made
during the period.

Had compensation costs been determined based on the fair value of options on the
date of grant, consistent with the methodology prescribed under SFAS 123, the
Corporation's net loss and loss per share would have increased to the following
pro-forma amounts:
<TABLE>
<CAPTION>
                                                             Year ended          Year ended          Year ended
                                                            December 31,        December 31,        December 31,
                                                                   2001                2000                1999
                                                   -------------------------------------------------------------
<S>                                                       <C>                <C>                 <C>
Net loss under US GAAP                                    $(54,216,851)      $ (38,885,092)      $ (17,442,741)
Estimated share based compensation costs                    (1,612,087)           (877,224)           (430,141)
                                                   -------------------------------------------------------------

Pro forma net loss                                         (55,828,938)        (39,762,316)        (17,872,882)
Accretion on preferred shares                               (7,071,611)         (3,080,000)                   -
                                                   -------------------------------------------------------------

Net loss applicable to common shareholders                $(62,900,549)      $ (42,842,316)      $ (17,872,882)
                                                   =============================================================

Pro forma basic loss per share                                  ($4.15)             ($2.88)             ($1.33)
                                                   =============================================================

</TABLE>
The weighted average fair value of the options issued during the year ended
December 31, 2001 was $3.70 (2000 - $7.52, 1999 - $8.67). This fair value of
each option granted during 2001, 2000 and 1999 is

                                      F-33
<PAGE>

estimated on the date of the grant using the Black-Scholes model with the
following weighted average assumptions:

                                                  2001         2000         1999
                                             ----------  ----------  -----------

     Expected option life, in years                  7           7            7

     Volatility                                    75%         75%        66.6%

     Risk free interest rate                        6%          6%           5%

     Dividend yield                                Nil         Nil          Nil

(e)      New accounting pronouncements
         ------------------------------

In July 2001, the Canadian Institute of Chartered Accountants ("CICA") issued
Section 1581 "Business Combinations"" which replaces Section 1580 "Business
Combinations," and requires all business combinations to use the purchase method
of accounting, and Section 3062 "Goodwill and Other Intangible Assets", which
requires intangible assets with an indefinite life and goodwill to be tested for
impairment on an annual basis. Goodwill and indefinite life intangibles will no
longer be amortized. Intangible assets with a definite life will continue to be
amortized over their useful life. The new Sections are consistent with those
recently issued by the Financial Accounting Standards Board (FASB) in the United
States. For the Corporation these pronouncements will be effective for the
fiscal year beginning January 1, 2002 and will be applied prospectively. The
Corporation is evaluating the effect of this pronouncement on the financial
statements.

In November 2001, the CICA issued Section 3870 "Stock-Based Compensation and
Other Stock-Based Payments". The new Section requires that stock-based payments
to non-employees and direct awards of stock to employees and non-employees be
accounted for using a fair value-based method of accounting. The Section also
requires enterprises to account for stock appreciation rights ("SARs") and
similar awards to be settled in cash by measuring, on an ongoing basis, the
amount by which the quoted market price exceeds the option price. The new
Section encourages, but does not require, the use of the fair value-based method
to account for all other stock-based transactions with employees. The new
Section is based on FASB Statement No. 123, Accounting for Stock-based
Compensation, which is one of the two US standards covering stock-based
compensation arrangements in that country. For the Corporation this
pronouncement will be effective for the fiscal year beginning January 1, 2002
and will apply to awards granted on or after that date.

In December 2001, the CICA issued AcG 13 - "Hedging Relationships" ("AcG 13").
The guideline presents the view of the Canadian Accounting Standards Board on
the identification, designation, documentation and effectiveness of hedging
relationships, for the purpose of applying hedge accounting. The guideline is
effective for all fiscal years beginning on or after January 1, 2002, which is
the fiscal year beginning December 1, 2002 for the Corporation. The Corporation
does not believe that the adoption of this guideline will have a material impact
on its results of operations or financial position, as it does not apply hedge
accounting.

                                      F-34
<PAGE>

PRICEWATERHOUSECOOPERS

                                                    PricewaterhouseCoopers LLP
                                                    Chartered Accountants
                                                    99 Bank Street
                                                    Suite 800
                                                    Ottawa Ontario
                                                    Canada K1P 1E4
                                                    Telephone + 1 (613) 237 3702
                                                    Facsimile + 1 (613) 237 3963

Our report on the consolidated financial statements of World Heart Corporation
as of December 31, 2001 and 2000 and for the years ended December 31, 2001, 2000
and 1999 is included in Item 18 of their Form 20-F. In connection with our
audits of such financial statements, we have also audited the related financial
statement schedule II included in Item 18 (a) of this Form 20-F.

In our opinion, the financial statement schedule referred to above, when
considered in relation to the consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information required to be
included therein.

PricewaterhouseCoopers LLP
Chartered Accountants
Ottawa, Ontario
February 1, 2002

PricewaterhouseCoopers refers to the Canadian firm of PricewaterhouseCoopers LLP
and other members of the worldwide PricewaterhouseCoopers organization.

                                      F-35
<PAGE>

                             WORLDHEART CORPORATION

                                  SCHEDULE II

                        VALUATION AND QUALIFYING ACCOUNTS

Allowance for doubtful accounts:

     Balance at June 30, 2000 acquisition of Novacor        $           100,912
     Bad debt expense for the year                                            -
     Write-off/adjustments                                                    -
                                                             -------------------
     Balance at December 31, 2000                                       100,912
                                                             -------------------

     Bad debt expense for the year                                        3,167
     Write-off/adjustments                                             (22,279)
                                                             -------------------
     Balance at December 31, 2001                           $            81,800
                                                             -------------------

Tax valuation reserve:

     Balance at December 31, 1998                           $        10,180,000
     Increase in valuation allowance                                 11,130,000
     Write-off/adjustments                                                    -
                                                             -------------------
     Balance at December 31, 1999                                    21,310,000
                                                             -------------------

     Increase in valuation allowance                                  8,010,000
     Write-off/adjustments                                                    -
                                                             -------------------
     Balance at December 31, 2000                                    29,320,000
                                                             -------------------

     Increase in valuation allowance                                 14,870,000
     Write-off/adjustments                                                    -
                                                             -------------------
     Balance at December 31, 2001                           $        44,190,000
                                                             -------------------
                                      F-36
<PAGE><PAGE>
                                                                     EXHIBIT 4.1

================================================================================

                         TENNESSEE GAS PIPELINE COMPANY

                                     ISSUER

                                       AND

                               JPMORGAN CHASE BANK

                                     TRUSTEE

                                -----------------

                          FIFTH SUPPLEMENTAL INDENTURE

                            DATED AS OF JUNE 10, 2002

                                       TO

                                    INDENTURE

                            DATED AS OF MARCH 4, 1997

                           8 3/8% NOTES DUE JUNE 15, 2032

================================================================================
<PAGE>
         FIFTH SUPPLEMENTAL INDENTURE, dated as of June 10, 2002 (herein called
the "Fifth Supplemental Indenture"), between TENNESSEE GAS PIPELINE COMPANY, a
Delaware corporation (herein called the "Company"), having its principal office
at 1001 Louisiana Street, Houston, Texas 77002 and JPMORGAN CHASE BANK (formerly
known as The Chase Manhattan Bank), a banking corporation duly organized and
existing under the laws of the State of New York, as trustee under the Indenture
referred to below (herein called the "Trustee").

                             RECITALS OF THE COMPANY

         WHEREAS, the Company has heretofore executed and delivered to the
Trustee the Indenture, dated as of March 4, 1997 (herein called the "Original
Indenture"), providing for the issuance from time to time of one or more series
of the Company's unsecured debentures, notes or other evidences of indebtedness
(herein called the "Securities"), the terms of which are to be determined as set
forth in Section 301 of the Original Indenture; and

         WHEREAS, Section 901 of the Indenture provides, among other things,
that the Company and the Trustee may enter into indentures supplemental to the
Original Indenture for, among other things, the purpose of setting forth the
terms of Securities of any series; and

         WHEREAS, the Company desires to create a series of the Securities in an
aggregate principal amount of $240,000,000, which series shall be designated the
8?% Notes due June 15, 2032 (the "Senior Notes"), and all action on the part of
the Company necessary to authorize the issuance of the Senior Notes under the
Original Indenture and this Fifth Supplemental Indenture has been duly taken;
and

         WHEREAS, all acts and things necessary to make the Senior Notes, when
executed by the Company and completed, authenticated and delivered by the
Trustee as provided in the Original Indenture and this Fifth Supplemental
Indenture, the valid and binding obligations of the Company and to constitute
these presents a valid and binding supplemental indenture and agreement
according to its terms, have been done and performed;

         NOW, THEREFORE, THIS FIFTH SUPPLEMENTAL INDENTURE WITNESSETH:

         That in consideration of the premises and the issuance of the Senior
Notes, the Company covenants and agrees with the Trustee, for the equal and
proportionate benefit of all holders of the Senior Notes, as follows:

                                   ARTICLE I

              TERMS AND ISSUANCE OF 8 3/8% NOTES DUE JUNE 15, 2032

         SECTION 1.01 Issue of Senior Notes. A series of Securities which shall
be designated the "8 3/8% Notes due June 15, 2032" shall be executed,
authenticated and delivered in accordance with the provisions of, and shall in
all respects be subject to, the terms, conditions and covenants of the Original
Indenture, including without limitation the terms set forth in this Fifth
Supplemental Indenture (including the form of Senior Notes referred to in
Section 1.02 hereof). The aggregate principal amount of Senior Notes which may
be authenticated and

<PAGE>

delivered under the Original Indenture shall not exceed $240,000,000, except
that the series may be reopened in the future without the consent of the holders
of the then Outstanding 8 3/8% Notes due June 15, 2032 to issue additional
Senior Notes of the series authorized hereby in accordance with the provisions
of the Original Indenture and this Fifth Supplemental Indenture and except as
otherwise permitted by the provisions of the Original Indenture. The entire
amount of Senior Notes may forthwith be executed by the Company and delivered to
the Trustee and shall be authenticated by the Trustee and delivered to or upon
the order of the Company pursuant to Section 303 of the Indenture.

         SECTION 1.02 Forms of Senior Notes and Authentication Certificate. The
Senior Notes initially shall be issuable in the form of one or more Global
Securities. The forms of the Senior Notes and the Trustees certificate of
authentication shall be substantially as set forth on Exhibit A hereto.

         SECTION 1.03 Modification of Section 1104 in Respect of the Senior
Notes. Notwithstanding the terms of Section 1104 of the Original Indenture, if
the Company elects to redeem any of the Outstanding 8 3/8% Notes due June 15,
2032, the notice of redemption required to be furnished pursuant to Section 1104
of the Original Indenture does not need to specify the Make-Whole Price (as such
term is defined in the form of Senior Note attached hereto as Exhibit A), but
may instead specify the manner of calculation of the Make-Whole Price. In such
event, the Company shall notify the Trustee of the Make-Whole Price with respect
to such redemption in an Officer's Certificate promptly after the calculation
thereof, and the Trustee shall not be responsible for such calculation.

         SECTION 1.04 Amendment to Section 205 of the Original Indenture. From
and after the date of this Fifth Supplemental Indenture, Section 205 of the
Original Indenture shall be amended by deleting such provision in its entirety
and replacing it with the following:

                  SECTION 205 Form of Trustee's Certificate of Authentication.
                  The Trustee's certificates of authentication shall be in
                  substantially the following form:

                  This is one of the Securities of the series designated therein
                  referred to in the within-mentioned Indenture.

                                              JPMORGAN CHASE BANK,
                                                 AS TRUSTEE

                                              By:
                                                  ----------------------------
                                                      Authorized Officer

                                       2
<PAGE>
                                   ARTICLE II

                                  MISCELLANEOUS

         SECTION 2.01 Execution as Supplemental Indenture. This Fifth
Supplemental Indenture is executed and shall be construed as an indenture
supplemental to the Original Indenture and, as provided in the Original
Indenture, this Fifth Supplemental Indenture forms a part thereof. Except as
herein expressly otherwise defined, the use of the terms and expressions herein
is in accordance with the definitions, uses and constructions contained in the
Original Indenture.

         SECTION 2.02 Responsibility for Recitals, Etc. The recitals herein and
in the Senior Notes (except in the Trustee's certificate of authentication)
shall be taken as the statements of the Company, and the Trustee assumes no
responsibility for the correctness thereof. The Trustee makes no representations
as to the validity or sufficiency of this Fifth Supplemental Indenture or of the
Senior Notes. The Trustee shall not be accountable for the use or application by
the Company of the Senior Notes or of the proceeds thereof.

         SECTION 2.03 Provisions Binding on Company's Successors. All the
covenants, stipulations, promises and agreements in this Fifth Supplemental
Indenture contained by the Company shall bind its successors and assigns whether
so expressed or not.

         SECTION 2.04 New York Contract. THIS FIFTH SUPPLEMENTAL INDENTURE AND
EACH SENIOR NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS
OF THE STATE OF NEW YORK.

         SECTION 2.05 Execution and Counterparts. This Fifth Supplemental
Indenture may be executed with counterpart signature pages or in any number of
counterparts, each of which shall be an original but such counterparts shall
together constitute but one and the same instrument.

         SECTION 2.06 Capitalized Terms. Capitalized terms not otherwise defined
in this Fifth Supplemental Indenture shall have the respective meanings assigned
to them in the Original Indenture.

                                       3
<PAGE>
         IN WITNESS WHEREOF, said TENNESSEE GAS PIPELINE COMPANY has caused this
Fifth Supplemental Indenture to be executed in its corporate name by its
Chairman of the Board or its President or one of its Vice Presidents, and said
JPMORGAN CHASE BANK has caused this Fifth Supplemental Indenture to be executed
in its corporate name by one of its Assistant Vice Presidents as of June 10,
2002.

                                            TENNESSEE GAS PIPELINE COMPANY

                                            By:     /s/ Greg G. Gruber
                                                 ----------------------------
                                            Name:   Greg G. Gruber
                                            Title:  Senior Vice President and
                                                    Chief Financial Officer

                                            JPMORGAN CHASE BANK,
                                            AS TRUSTEE

                                            By:     /s/ William G. Keegan
                                                 ----------------------------
                                                    William G. Keenan
                                                    Assistant Vice President

                                       4
<PAGE>
                                                                       EXHIBIT A

         THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE
HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITARY OR A
NOMINEE THEREOF. THIS SECURITY MAY NOT BE TRANSFERRED TO, OR REGISTERED OR
EXCHANGED FOR SECURITIES REGISTERED IN THE NAME OF, ANY PERSON OTHER THAN THE
DEPOSITARY OR A NOMINEE THEREOF AND NO SUCH TRANSFER MAY BE REGISTERED, EXCEPT
IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE. EVERY SECURITY
AUTHENTICATED AND DELIVERED UPON REGISTRATION OF, TRANSFER OF, OR IN EXCHANGE
FOR OR IN LIEU OF, THIS SECURITY SHALL BE A GLOBAL SECURITY SUBJECT TO THE
FOREGOING, EXCEPT IN SUCH LIMITED CIRCUMSTANCES.

         UNLESS THIS SECURITY IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF
THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION, TO THE COMPANY OR ITS
AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY SECURITY ISSUED
IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (AND ANY PAYMENT IS
MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY), ANY TRANSFER, PLEDGE OR OTHER
USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL IN AS MUCH AS
THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.

                         TENNESSEE GAS PIPELINE COMPANY

                          8 3/8% NOTE DUE JUNE 15, 2032

NO.                                                                 U.S.$
CUSIP No.  880451AW9

         TENNESSEE GAS PIPELINE COMPANY, a corporation duly incorporated and
existing under the laws of Delaware (herein called the "Company," which term
includes any successor Person under the Indenture hereinafter referred to), for
value received, hereby promises to pay to Cede & Co., or registered assigns, the
principal sum of ___________________ United States Dollars on June 15, 2032, and
to pay interest thereon from June 10, 2002, or from the most recent Interest
Payment Date to which interest has been paid or duly provided for, semi-annually
on June 15 and December 15 in each year, commencing December 15, 2002, at the
rate of 8 3/8% per annum, until the principal hereof is paid or made available
for payment. The interest so payable, and punctually paid or duly provided for,
on any Interest Payment Date will, as provided in such Indenture, be paid to the
Person in whose name this Security (or one or more Predecessor Securities) is
registered at the close of business on the Regular Record Date for such

                                      A-1
<PAGE>

interest, which shall be the June 1 or December 1 (whether or not a Business
Day), as the case may be, next preceding such Interest Payment Date. Any such
interest not so punctually paid or duly provided for shall forthwith cease to be
payable to the Holder on such Regular Record Date and shall either be paid to
the Person in whose name this Security (or one or more Predecessor Securities)
is registered at the close of business on a Special Record Date for the payment
of such Defaulted Interest to be fixed by the Trustee, notice of which shall be
given to Holders of Securities of this series not less than 10 days prior to
such Special Record Date, or be paid at such time in any other lawful manner not
inconsistent with the requirements of any securities exchange on which the
Securities of this series may be listed, and upon such notice as may be required
by such exchange, all as more fully provided in such Indenture.

         Payment of the principal of and premium, if any, and interest on this
Security will be made by transfer of immediately available funds to a bank
account in New York, New York designated by the Holder in such coin or currency
of the United States of America as at the time of payment is legal tender for
payment of public and private debts.

         Reference is hereby made to the further provisions of this Security set
forth on the reverse hereof, which further provisions shall for all purposes
have the same effect as if set forth at this place.

         Unless the certificate of authentication hereon has been executed by
the Trustee referred to on the reverse hereof by manual signature, this Security
shall not be entitled to any benefit under the Indenture or be valid or
obligatory for any purpose.

         IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed.

Dated:

                                               TENNESSEE GAS PIPELINE COMPANY

                                               By:
                                                    ---------------------------
                                               Name:
                                               Title:

This is one of the Securities of the series designated therein referred to in
the within-mentioned Indenture.

                                               JPMORGAN CHASE BANK,
                                               AS TRUSTEE

                                               By:
                                                   --------------------------
                                                       Authorized Officer

                                       2
<PAGE>
                         TENNESSEE GAS PIPELINE COMPANY
                          8 3/8% NOTE DUE JUNE 15, 2032

         This Security is one of a duly authorized issue of Securities of the
Company (the "Securities"), issued and to be issued in one or more series under
an Indenture dated as of March 4, 1997 (the "Indenture"), between the Company
and JPMorgan Chase Bank (formerly known as The Chase Manhattan Bank), as Trustee
(the "Trustee," which term includes any successor trustee under the Indenture),
to which Indenture and all indentures supplemental thereto reference is hereby
made for a statement of the respective rights, limitations of rights,
obligations, duties and immunities thereunder of the Company, the Trustee and
the Holders of the Securities and of the terms upon which the Securities are,
and are to be, authenticated and delivered. As provided in the Indenture, the
Securities may be issued in one or more series, which different series may be
issued in various aggregate principal amounts, may provide for re-opening in the
future to issue additional Securities of the series without the consent or
approval of the holders of Outstanding Securities, may mature at different
times, may bear interest, if any, at different rates, may be subject to
different redemption provisions, if any, may be subject to different sinking,
purchase or analogous funds, if any, may be subject to different covenants and
Events of Default and may otherwise vary as in the Indenture provided or
permitted. This Security is one of a series of Securities designated on the face
hereof limited in aggregate principal amount to U.S. $240,000,000, except that
the series of Securities may be reopened in the future without the consent of
holders of Outstanding Securities to issue additional Securities of the series.

         The Securities of this series are redeemable, upon not less than 30 nor
more than 60 days' notice by mail, as a whole or in part, at the option of the
Company at any time at the "Make-Whole Price." As used herein, the term
"Make-Whole Price" means an amount equal to the greater of:

         (1)      100% of the principal amount of the Securities to be redeemed;
                  and

         (2)      as determined by an Independent Investment Banker, the sum of
                  the present values of the remaining scheduled payments of
                  principal and interest on the Securities to be redeemed (not
                  including any portion of such payments of interest accrued as
                  of the redemption date) discounted back to the redemption date
                  on a semi-annual basis (assuming a 360-day year consisting of
                  twelve 30-day months) at the Treasury Rate (as defined below)
                  plus 50 basis points;

plus, in the case of both (1) and (2), accrued and unpaid interest to the
redemption date, but interest installments whose Stated Maturity is on or prior
to such date of redemption will be payable to the Holders of such Securities, or
one or more Predecessor Securities, of record at the close of business on the
relevant Record Dates referred to on the face hereof, all as provided in the
Indenture. On and after the applicable redemption date, interest will cease to
accrue on the Senior Notes to be redeemed, unless a default is made in payment
of the Make-Whole Price.

                                       3
<PAGE>

         "Comparable Treasury Issue" means the United States Treasury security
selected by an Independent Investment Banker as having a maturity comparable to
the remaining term of the Securities to be redeemed that would be utilized, at
the time of selection and in accordance with customary financial practice, in
pricing new issues of corporate debt securities of comparable maturity to the
remaining term of the Securities.

         "Comparable Treasury Price" means, with respect to any redemption date,
(1) the average of four Reference Treasury Dealer Quotations for such redemption
date, after excluding the highest and lowest of such Reference Treasury Dealer
Quotations, or (2) if the Trustee obtains fewer than four such Reference
Treasury Dealer Quotations, the average of all such Reference Treasury Dealer
Quotations.

         "Independent Investment Banker" means Credit Suisse First Boston
Corporation and its successors, or, if such firm or the successors, if any, to
such firm, as the case may be, are unwilling or unable to select the Comparable
Treasury Issue, an independent investment banking institution of national
standing appointed by the Trustee after consultation with the Company.

         "Reference Treasury Dealer" means Credit Suisse First Boston
Corporation and three additional primary U.S. government securities dealers in
New York City (each a "Primary Treasury Dealer") selected by the Trustee after
consultation with the Company, and their respective successors (provided,
however, that if any such firm or any such successor, as the case may be, shall
cease to be a primary U.S. government securities dealer in New York City, the
Trustee, after consultation with the Company, shall substitute therefor another
Primary Treasury Dealer).

         "Reference Treasury Dealer Quotations" means, with respect to each
Reference Treasury Dealer and any redemption date, the average, as determined by
the Trustee, of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) quoted in
writing to the Trustee by such Reference Treasury Dealer at 5:00 p.m. on the
third Business Day preceding such redemption date.

         "Treasury Rate" means, with respect to any redemption date, (1) the
yield, under the heading which represents the average for the immediately
preceding week, appearing in the most recently published statistical release
designated "H.15(519)" or any successor publication that is published weekly by
the Board of Governors of the Federal Reserve System and that establishes yields
on actively traded United States Treasury securities adjusted to constant
maturity under the caption "Treasury Constant Maturities," for the maturity
corresponding to the Comparable Treasury Issue (if no maturity is within three
months before or after the Stated Maturity, yields for the two published
maturities most closely corresponding to the Comparable Treasury Issue shall be
determined, and the Treasury Rate shall be interpolated or extrapolated from
such yields on a straight-line basis, rounding to the nearest month) or (2) if
such release (or any successor release) is not published during the week
preceding the calculation date or does not contain such yields, the rate per
annum equal to the semi-annual equivalent yield to maturity of the Comparable
Treasury Issue, calculated using a price for the Comparable Treasury Issue
(expressed as a percentage of its principal amount) equal to the Comparable
Treasury Price for such Redemption Date. The Treasury Rate shall be calculated
on the third Business Day preceding the redemption date.

                                       4
<PAGE>

         In the event of redemption of this Security in part only, a new
Security or Securities of this series and of like tenor for the unredeemed
portion hereof will be issued in the name of the Holder hereof upon the
cancellation hereof.

         If an Event of Default with respect to the Securities of this series
shall occur and be continuing, the principal of the Securities of this series
may be declared due and payable in the manner and with the effect provided in
the Indenture.

         The Indenture permits, with certain exceptions as therein provided, the
amendment thereof and the modification of the rights and obligations of the
Company and the rights of the Holders of the Securities of each series to be
affected under the Indenture at any time by the Company and the Trustee with the
consent of not less than the Holders of a majority in aggregate principal amount
of the Outstanding Securities of all series to be affected (voting as one
class).

         The Indenture also contains provisions permitting the Holders of a
majority in aggregate principal amount of the Outstanding Securities of all
affected series (voting as one class), on behalf of the Holders of all
Securities of such series, to waive compliance by the Company with certain
provisions of the Indenture. The Indenture permits, with certain exceptions as
therein provided, the Holders of a majority in aggregate principal amount of
Securities of all affected series then Outstanding (voting as a single class) to
waive past defaults under the Indenture with respect to such Securities and
their consequences. Any such consent or waiver by the Holder of this Security
shall be conclusive and binding upon such Holder and upon all future Holders of
this Security and of any Security issued upon the registration of transfer
hereof or in exchange herefor or in lieu hereof, whether or not notation of such
consent or waiver is made upon this Security.

         As provided in and subject to the provisions of the Indenture, the
Holder of this Security shall not have the right to institute any proceeding
with respect to the Indenture or for the appointment of a receiver or trustee or
for any other remedy thereunder, unless such Holder shall have previously given
the Trustee written notice of a continuing Event of Default with respect to the
Securities of this series, the Holders of not less than 25% in principal amount
of the Securities of all affected securities at the time Outstanding (treated as
a single class) shall have made written request to the Trustee to institute
proceedings in respect of such Event of Default as Trustee and offered the
Trustee reasonable indemnity and the Trustee shall not have received from the
Holders of a majority in principal amount of the Securities of this series at
the time Outstanding a direction inconsistent with such request, and shall have
failed to institute any such proceeding, for 60 days after receipt of such
notice, request and offer of indemnity. The foregoing shall not apply to any
suit instituted by the Holder of this Security for the enforcement of any
payment of principal hereof or interest hereon on or after the respective due
dates expressed herein.

         No reference herein to the Indenture and no provision of this Security
or of the Indenture shall alter or impair the obligation of the Company, which
is absolute and unconditional, to pay the principal of, premium, if any, and
interest on this Security at the times, place(s) and rate, and in the coin or
currency, herein prescribed.

                                       5
<PAGE>

         This Global Security or portion hereof may not be exchanged for
Definitive Securities except in the limited circumstances provided in the
Indenture.

         The holders of beneficial interests in this Global Security will not be
entitled to receive physical delivery of Definitive Securities except as
described in the Indenture and will not be considered the Holders hereof for any
purpose under the Indenture.

         The Securities of this series are issuable only in registered form,
without coupons, in denominations of U.S. $1,000 and any integral multiple
thereof. As provided in the Indenture and subject to certain limitations therein
set forth, the Securities of this series are exchangeable for a like aggregate
principal amount of Securities of this series and of like tenor of a different
authorized denomination, as requested by the Holder surrendering the same.

         No service charge shall be made for any such registration of transfer
or exchange, but the Company may require payment of a sum sufficient to cover
any transfer tax or other similar governmental charge payable in connection
therewith.

         Prior to due presentment of this Security for registration of transfer,
the Company, the Trustee and any agent of the Company or the Trustee may treat
the Person in whose name this Security is registered as the owner hereof for all
purposes, whether or not this Security be overdue, and neither the Company, the
Trustee nor any such agent shall be affected by notice to the contrary.

         No recourse under or upon any obligation, covenant or agreement of or
contained in the Indenture or of or contained in any Security, or for any claim
based thereon or otherwise in respect thereof, or in any Security, or because of
the creation of any indebtedness represented thereby, shall be had against any
incorporator, stockholder, officer or director, as such, past, present or
future, of the Company or of any successor Person, either directly or through
the Company or any successor Person, whether by virtue of any constitution,
statute or rule of law, or by the enforcement of any assessment, penalty or
otherwise; it being expressly understood that all such liability is hereby
expressly waived and released by the acceptance hereof and as a condition of,
and as part of the consideration for, the Securities and the execution of the
Indenture.

         The Indenture provides that the Company (a) will be discharged from any
and all obligations in respect of the Securities (except for certain obligations
described in the Indenture), or (b) need not comply with certain restrictive
covenants of the Indenture, in each case if the Company deposits, in trust, with
the Trustee money or U.S. Government Obligations (or a combination thereof)
which through the payment of interest thereon and principal thereof in
accordance with their terms will provide money, in an amount sufficient to pay
all the principal of and interest of the Securities, but such money need not be
segregated from other funds except to the extent required by law.

         This Security shall be governed by and construed in accordance with the
laws of the State of New York.

         All terms used in this Security which are defined in the Indenture
shall have the meanings assigned to them in the Indenture.

                                       6

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00040-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00040-of-00352.parquet"}]]