SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-KSB includes “forward-looking statements” within the meaning of Section 27A of the United States Securities Act of 1933, as amended (the Securities Act) and Section 21E of the United States Securities Exchange Act of 1934, as amended (the Exchange Act). The forward-looking statements include statements regarding our expectations with respect to future development plans for our next generation product candidates, particularly the Levacor TM  Rotary VAD, the timing and scope of pre-clinical testing and clinical trials, our ability to secure additional funding or the ability to form strategic partnerships, our cost reduction efforts and their impact on our ability to maintain operations, as well as other statements that can be identified by the use of forward-looking language, such as “believe,” “feel,” “expect,” “may,” “will,” “should,” “seek,” “plan,” “anticipate,” or “intend” or the negative of those terms, or by discussions of strategy or intentions. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results and performance to be materially different from any future results and performance expressed or implied by these forward-looking statements. Important factors that could cause our actual results to differ materially from those expressed or implied by such forward-looking statements include:

·        our need for additional significant financings in the future;

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

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

·        continued shift in market demand away from first generation VAD products, resulting in further reduced sales of our Novacor Ò LVAS (Left Ventricular Assist System) product;

·        continued slower Destination Therapy adoption rate for VADs;

·        limitations on third-party reimbursements;

·        our ability to obtain and enforce in a timely manner patent and other intellectual property protection for our technology and products;

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

·        our ability to enter into corporate alliances or other strategic relationships relating to the development and commercialization of our technology and products;

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

·        other factors we discuss under the heading “RISK FACTORS.”

We undertake no obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.

CORPORATE STRUCTURE

Name, Address and Incorporation

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

Our articles of incorporation were amended on June 22, 2000, to create a first series of 1,374,750 preferred shares designated as Cumulative Redeemable Convertible Preferred Shares, Series A (the Series A Shares), in connection with the acquisition by WorldHeart of the Novacor division of Edwards Lifesciences LLC (Edwards). On November 26, 2003, our articles were amended to amend the rights and privileges of the Series A Shares in connection with the conversion by Edwards Lifesciences (U.S.) Inc. of its Series A Shares as part of our financing transaction completed in September 2003. Our articles were amended again on December 1, 2003, to effect a one common share for seven common shares share consolidation. WorldHeart filed articles of continuance on December 14, 2005, associated with the reincorporation under the laws of Canada from the Province of Ontario. In conjunction with the continuance, a new by-law was adopted by our directors.

Intercorporate Relationships

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

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

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

BUSINESS OF WORLDHEART

The Company

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

VADs are used for treatment of patients with severe heart failure including primarily patients whose hearts are irreversibly damaged and cannot be treated effectively by medical or surgical means other than transplant. Bridge-to-Transplant therapy involves implanting a VAD in a transplant-eligible patient to maintain or improve the patient’s health until a donor heart becomes available. Destination Therapy is the implanting of a VAD to provide long-term support for a patient not currently eligible for a natural heart transplant. Bridge-to-Recovery involves use of VADs to restore a patient’s cardiac function helping them recover use of their natural heart allowing removal of the VAD.

We are focused on the development of the Levacor Rotary VAD, the next-generation rotary device which we acquired as part of our acquisition of the assets of MedQuest Products, Inc. (MedQuest) in July 2005. It uses a magnetically-levitated rotor resulting in no moving parts subject to wear, which is expected to provide multi-year support. The Levacor VAD is in the clinical development stage with initial human feasibility clinical trials successfully completed in Europe during 2006. Two hospitals in Canada, Toronto General Hospital and the University of Ottawa Heart Institute, are currently approved to implant the Levacor Rotray VAD as a bridge to cardiac transplant under Health Canada’s Therapeutic Product Directorate Special Access Program. WorldHeart intends to begin feasibility clinical trials in the United States in the fourth quarter of 2007.

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

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

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

Three-Year History and Development of WorldHeart

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

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

On April 22, 2004, with the announcement of our first quarter results, we commenced reporting our results in United States dollars.

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

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

In August 2004, we commenced consolidation of our operations from Ottawa, Canada to Oakland, California. The consolidation was substantially completed by June 30, 2005.

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

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

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

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

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

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

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

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

beginning of the Levacor VAD feasibility trial. On May 10, 2006, a second successful Levacor implant was completed at St. Luke’s Hospital. Both patients were successfully weaned from the device and discharged from the hospital in 2006.

On November 13, 2006, we entered into a purchase agreement with certain new and current investors for a private placement financing consisting of two tranches. The first tranche of the financing related to the sale of 11.0 million common shares at $0.25 per share for a total of $2.75 million in gross proceeds to WorldHeart was closed on November 16, 2006. The second closing for $11.31 million in gross proceeds to WorldHeart, or 45.2 million common shares, took place on December 21, 2006, following shareholder approval received at our annual and special meeting held on December 20, 2006. Gross proceeds from both tranches of the financing totaled approximately $14.1 million at a price of $0.25 per common share. In addition, we incurred placement agent fees equal to 6% of the gross proceeds payable in common shares totaling approximately 3.4 million common shares. Under the terms of the transaction, we registered for resale all of the common shares issued in both tranches of the financing.

On November 14, 2006, we announced a significant restructuring and realignment of our business operations to better focus on the development of our next generation Levacor VAD. The restructuring program reduced manufacturing, selling and administrative costs, primarily associated with the Novacor LVAS product. The program included a reduction in workforce of 41 persons, primarily at our Oakland, California, and Heesch, Netherlands locations. The costs attributable to the restructuring recorded during the year ended December 31, 2006 were $0.6 million consisting of severance costs and a fixed assets write down. In addition, WorldHeart wrote off $4.6 million ($3.5 million and $1.1 million in the third and fourth quarters of 2006, respectively) of raw material, in-process and finished goods inventory associated with the Novacor LVAS product, which management has determined will not be utilized in future periods.

On December 14, 2006, we announced that, consistent with the restructuring program and after discussions with the FDA, we were discontinuing enrollment in our Novacor LVAS RELIANT Trial. WorldHeart had commenced the RELIANT Trial in 2004 to seek approval for Novacor for use in Destination Therapy. At this time, we also announced that two clinical teams from prestigeous medical center’s in Canada completed the technical and clinical training for use of our Levacor Rotary VAD in Canada.

Our Products

Our current business is based on several generations of implantable VADs. The current generation, commercially available product is our Novacor LVAS. Our development-stage VADs include the Levacor VAD and Novacor II product candidates. In addition, WorldHeart is developing the PVAD and a Minimally Invasive VAD (MIVAD) based on PVAD technology. Specifically:

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

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

·        the Novacor II is a small, bearingless, next-generation, pulsatile VAD currently in pre-clinical development. Successful animal experiments were conducted in July 2005 and August 2006.

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

·        WorldHeart’s Minimally Invasive VAD design is based on the technology incorporated in the PVAD device using vascular connections to allow placement through minimally invasive techniques. It is intended to provide partial circulatory support in patients at an earlier stage of heart failure than currently used VADs.

The Novacor LVAS

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

Novacor sales during 2006 did not meet our growth targets and, in November 2006, we announced that we would reduce our commercial efforts on the Novacor to focus our resources on the development of our Levacor Rotary VAD. WorldHeart will continue to make the Novacor LVAS available to medical centers and will continue to support current patients on the device.

WorldHeart commenced an equivalency clinical trial in the second quarter of 2004 in the United States, called the RELIANT Trial to seek approval for the Novacor LVAS for use in Destination Therapy. In conjunction with the above restructuring and our focus on next-generation technology, we announced in December 2006 that we were discontinuing the RELIANT Trial.

Next-Generation VAD Platform

Levacor Rotary VAD

Through the acquisition of MedQuest in July of 2005, we obtained the Levacor Rotary VAD, a fourth-generation, rotary blood pump intended for a range of circulatory support indications. Unlike the initial generation of rotary pumps with blood-lubricated bearings, the Levacor VAD is a compact, bearingless, magnetically-levitated, centrifugal pump with an impeller that is completely magnetically levitated. Full magnetic levitation eliminates wear mechanisms within the pump and provides for greater clearances for more optimized blood flow around the impeller, while eliminating dependence on the patient’s blood for suspension. The product’s levitation technology employs a unique combination of passive and single-axis active control, resulting in a system of optimal simplicity.

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

Novacor II VAD

Our next-generation pulsatile VAD, Novacor II, has been under development as an implantable, pulsatile VAD designed for a range of circulatory support indications. Novacor II is expected to be approximately half the size of the Novacor LVAS, with no mechanical bearings. For the fully implantable configuration, its dual chamber design eliminates the need for volume compensation and the need for external venting, and incorporates remote power and monitoring (i.e. across-the-skin power and data transfer) and an implanted controller/battery. These features are expected to provide recipients with an enhanced quality of life by allowing freedom of movement and minimal limitations to their regular activities. It is magnetically-driven, allowing for simple operation with no wearing elements or precision

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

Research and Development Expenditures

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

Third-party Reimbursement for VADs

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

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

Application of Ventricular Assist Devices (VADs) in Patient Care

Current Treatment Methods for End-Stage Heart Failure

Research is ongoing for an effective treatment for advanced heart failure. While providing some benefit, therapies such as medication and transplantation have significant limitations, and alternative emerging technologies are being investigated. The following are treatment methods currently being employed for advanced heart failure:

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

·        Heart Transplantation .   Heart transplantation is currently the intervention of choice for some patients with end-stage heart failure. However, the availability of donor organs, as well as other major limitations, has limited the number of transplants worldwide to about 4,000 per year and about 2,000 in the United States according to the American Heart Association. Limited availability of and waiting times for suitable donor hearts, as well as high costs, have impacted adversly the utility of heart transplantation.

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

Advantages of VADs

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

The following advantages over other treatments generally apply to VADs that are currently approved and in use, including the Novacor LVAS. Although certain advantages may not apply in every situation or for all patients, we expect that these potential advantages will also apply to our Levacor Rotary VAD and the Novacor II:

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

·        Reduced Hospitalization .   Unlike transplant patients, VAD patients go to surgery without a protracted wait for a donor organ, and in the case of implantable VADs, patients are generally able to leave the hospital after a relatively short recovery period, thus potentially reducing health care costs.

·        Improved Patient Health .   After VAD implantation, blood circulation is improved throughout the body and most patients experience improved levels of health as shown in a number of clinical studies, including those for the Novacor LVAS.

·        Reduction in Medication Use .   Unlike transplants, VADs typically do not cause rejection responses and, as a result, VAD patients typically do not need the administration of immuno-suppressive medication. Accordingly, patients are not subject to the risks and costs associated with long-term administration of these medications.

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

Marketing, Manufacturing and Distribution Strategy

Since the acquisition of the Novacor division of Edwards in 2000, WorldHeart has had access to several key medical centers involved in cardiac transplantation in North America, Europe and Japan. Until November 2006, we sold directly within the United States through a dedicated sales force. Before 2004, the Novacor LVAS was distributed by Edwards outside the United States. In January 2004, we assumed full sales and support responsibility for the Novacor LVAS primarily in Europe but excluding Japan. WorldHeart continues to distribute its products through Edwards in Japan and through other distributors in selected markets. Our United States operations have experienced clinical and technical personnel who support key medical centers, as well as their leading clinicians and medical staff. Approximately 64% of WorldHeart’s 2006 revenue came from sales of the Novacor LVAS in the United States.

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

Intellectual Property

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

To date, we have been granted two United States patents and two patent applications are pending for the Novacor II, and corresponding applications are also pending in Europe, Japan and Canada. The Transcutaneous Energy Transfer technology licensed to WorldHeart from the Ottawa Heart Institute, has been patented in the United States, Canada and the United Kingdom.

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

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

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

License Agreements

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

Competition

Overview

In addition to competing with other less-invasive therapies for heart failure, our VADs compete with commercially approved VADs and VADs under development sold by a number of companies. Competition from medical device companies is intense and may increase. Many of our competitors have substantially greater financial, technical, manufacturing, distribution and marketing resources than WorldHeart.

At present, only two companies in North America have developed implantable, electric VADs approved for commercial sale in the United States:  WorldHeart and Thoratec Corporation (Thoratec). Thoratec has two pulsatile left ventricular assist device models of its HeartMate that have been approved in the United States for commercial sale. One is pneumatically driven (Heartmate IP LVAS), and the other is electrically driven (HeartMate XVE). The HeartMate XVE has maintained a dominant market share in the United States.

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

In Europe and certain other countries outside North America, several companies including Berlin Heart, Medos Medizentechnik AG, Ventracor Limited, Micromed Inc., Heartware Limited and Jarvik Heart, Inc. provide VADs.

Future Product Competition

Pulsatile versus Rotary Flow (Non-Pulsatile) VADs

We believe that effective treatment of advanced heart failure will require both pulsatile and rotary pumps to treat the full spectrum of clinical needs of end- and late-stage heart failure patients. Further, we believe that pulsatile devices are best suited for end-stage patients with poor ventricular contractility, who require functional replacement; while rotary devices are better suited for late-stage patients, with some left ventricular contractility, who require only partial support or, assist.

Rotary Flow VADs

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

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

Government Regulations

Overview

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

United States Regulation

In the United States, the FDA regulates the manufacture, distribution, labeling and promotion of medical devices pursuant to the United States Federal Food, Drug and Cosmetic Act (FDC Act) and regulations under the FDC Act. The Novacor LVAS, Levacor Rotary VAD and Novacor II devices are regulated as Class III medical devices. Human clinical trials are conducted pursuant to an Investigational Design Exemption (IDE) in the United States, the results of which must demonstrate, to the satisfaction of the FDA, the safety and efficacy of the medical device.

Before commercial distribution of our devices is permitted in the United States, an application for Premarket Approval must be approved by the FDA.

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

Canadian Regulation

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

Our Levacor Rotary VAD and the Novacor II are expected to be classified as Class IV medical devices under the Medical Devices Regulations, requiring WorldHeart to apply for authorization from the MDB to conduct investigational testing on human subjects in Canada. At the conclusion of the human clinical trials, we plan to apply for a medical device license that will allow for general marketing of the device.

Regulatory Requirements in Other Countries

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

We intend to apply for “CE” marking, an international symbol of quality and compliance, for the Levacor Rotary VAD and the Novacor II. The International Standards Organization (ISO) is a worldwide federation of national bodies, founded in Geneva, Switzerland in 1946. ISO standards are integrated requirements which, when implemented, form the foundation and framework for an effective quality management system. These standards were developed and published by the ISO. ISO certification is widely regarded as essential to enter Western European markets. All companies are required to obtain ISO certification and the “CE” mark, in order to market medical devices in Europe. ISO 13485:2003 certification is the most current and most stringent standard in the ISO series and covers design, production, installation and servicing of products. WorldHeart received ISO 13485:2003 certification in September 2005. WorldHeart received the “CE” mark for the Novacor LVAS in 1993.

Other Regulatory Requirements

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

material respects, there can be no assurance that we will not be required to incur significant cost to comply with environmental and health and safety regulations in the future.

Our Employees

At March 15, 2007, we had 63 full time employees located primarily in Oakland, California and in Salt Lake City, Utah. Approximately 78% of our employees are involved with research, development, manufacturing, quality, clinical affairs and regulatory, and 22% are in finance and administration.

We currently maintain compensation, benefits, equity participation and work environment policies intended to assist in attracting and retaining qualified personnel. We believe that the success of our business will depend, to a significant extent, on our ability to attract and retain such personnel. We have access to skilled labor resources in Oakland and Salt Lake City where there are well-developed technology industries. None of our employees are subject to a collective bargaining agreement nor have we experienced any work stoppages.

RISK FACTORS

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

Risk Factors Relating to Our Business

We will require significant capital investment to continue our product development programs and to bring future products and product enhancements to market, and if adequate funding is not available, our financial condition will be adversely affected and we may have to further curtail or eliminate our development programs and significantly reduce our expenses.

Our investment of capital has been and will continue to be significant. Developing our technology, future products and continued product enhancements, including those of the Levacor Rotary VAD and Novacor II technologies, require a commitment of substantial funds to conduct the costly and time-consuming research and clinical trials necessary for such development and regulatory approval. We have had difficulties raising the necessary capital, and while we recently completed a private placement financing raising gross proceeds of about $14.1 million, we will require additional financings in the future. If adequate funds are not available when needed, we may be required to delay, reduce the scope of, or eliminate one or more of our research or development programs or obtain funds through arrangements with collaborative partners or others that may require us to relinquish rights to certain of our technologies, potential products or products that we would otherwise seek to develop or commercialize ourselves. In addition, while in November 2006 we announced a significant restructuring and cost reductions initiatives, we may be required to further reduce our operating expenses, including but not limited to, reductions in salaries and/or elimination of employees and consultants. The inability to obtain additional financing or enter into strategic relationships when needed will have a material adverse effect on our business, financial condition and results of operations. In addition, our November 2006 restructuring may not result in the cost reductions that we anticipate and our ability to curtail expenses in the future may be limited.

We have had substantial losses since incorporation and expect to continue to operate at a loss while our products are under development, and we may never become profitable.

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

the development programs for our next generation products, Levacor Rotary VAD and Novacor II. Our research and development activities will likely result in additional significant losses in future periods. These expenditures include costs associated with performing pre-clinical testing and clinical trials for our next generation products, continuing research and development, seeking regulatory approvals and, if we receive these approvals, commencing commercial manufacturing, sales and marketing of our products.

We may be unable to obtain regulatory approvals, which will prevent us from selling our products and generating revenue.

Most countries, including the United States, Canada and countries in Europe, require regulatory approval prior to the commercial distribution of medical devices. In particular, implanted medical devices generally are subject to rigorous clinical testing as a condition of approval by the FDA and by similar authorities in Canada (e.g., Health Canada), and in European and other countries. The approval process is expensive and time consuming. Non-compliance with applicable regulatory requirements can result in, among other things, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, government refusal to grant marketing approval for devices, withdrawal of marketing approvals and criminal prosecution. The inability to obtain the appropriate regulatory approvals for our products in the United States, Canada and the rest of the world will prevent us from selling our products, which would have a material adverse effect on our business, financial condition and results of operations.

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

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

We are dependent on a limited number of products.

To date, all of our revenues have resulted from sales of the Novacor LVAS and related technologies. With our restructuring announced in November 2006, we expect those revenues to continue to decline. Our future financial performance depends primarily on our ability to realign our resources to focus on the development, regulatory approval, introduction, customer acceptance and sales and marketing of the Levacor Rotary VAD. Prior to any commercial use, our products currently under development will require significant additional capital for research and development efforts, extensive pre-clinical and clinical testing and regulatory approval.

New product development is highly uncertain and unanticipated developments, clinical and regulatory delays, adverse or unexpected side effects or inadequate therapeutic efficacy could delay or prevent the commercialization of the Levacor Rotary VAD and Novacor II. Any significant delays in, or premature

termination of, clinical trials of our products under development would have a material adverse effect on our business, financial condition and results of operations.

Market acceptance of our technologies and products is uncertain and our selling and distribution capability is limited and has been further reduced by our recent cost reduction initiatives.

The Novacor LVAS and our next-generation Levacor Rotary VAD and Novacor II represent ventricular assist technologies that must compete with other products as well as with other therapies for heart failure, such as medication, transplants, cardiomyoplasty and total artificial heart devices. In addition, although we believe that the Destination Therapy market opportunity for VADs is significant, adoption rates have continued to be much slower than anticipated.

We have a limited number of sales and technical support personnel compared with other medical device companies in our industry segment, and our financial condition recently required us to make significant personnel reductions in those areas, which may put us at a further competitive disadvantage in the marketplace. Failure of our products to achieve significant market acceptance due to competitive therapies and our very limited selling and distribution could have a material adverse effect on our business, financial condition and results of operations.

We face significant competition and technological obsolescence of our products.

In addition to competing with other less-invasive therapies for heart failure, including medications and pacing technology, our products, if regulatory approvals are obtained, will compete with ventricular assist technology being developed and sold by a number of other companies. Competition from medical device companies and medical device subsidiaries of healthcare and pharmaceutical companies is intense and expected to increase.

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

In addition, companies in similar businesses are entering into business combinations with one another, which may create more powerful or aggressive competitors. We may not be able to compete successfully as future markets evolve, and we may have to pursue additional acquisitions or other business combinations or strategic alliances. Increased competitive pressure could lead to lower sales and prices of our products, and this could harm our business, results of operations and financial condition.

There are limitations on third-party reimbursement for the cost of implanting our devices.

Individual patients will seldom be able to pay directly for the costs of implanting our devices. Successful commercialization of our products will depend in large part upon the availability of adequate reimbursement for the treatment and medical costs from third-party payers, including governmental and private health insurers and managed care organizations. Consequently, we expect that our products will typically be purchased by healthcare providers, clinics, hospitals and other users who will bill various third-party payers, such as government programs and private insurance plans, for the healthcare services provided to their patients.

The coverage and the level of payment provided by third-party payers in the United States and other countries vary according to a number of factors, including the medical procedure, third-party payer, location and cost. In the United States, many private payers follow the recommendations of the Centers of Medicare and Medicaid Services, which establish guidelines for the governmental coverage of procedures, services and medical equipment.

There can be no assurance with respect to any markets in which we seek to distribute our products that third-party coverage and reimbursement will be adequate, that current levels of reimbursement will not be decreased in the future or that future legislation, regulation or reimbursement policies of third-party payers will not otherwise adversely affect the demand for our products or our ability to sell our products on a profitable basis, particularly if the installed cost of our systems and devices should be more expensive than competing products or procedures. The unavailability of third-party payer coverage or the inadequacy of reimbursement would have a material adverse effect on our business, financial condition and results of operations.

If we cannot protect our intellectual property, our business could be adversely affected.

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

Our competitors may independently develop proprietary non-infringing technologies and processes that are substantially similar to ours, or design around our patents. In addition, others could develop technologies or obtain patents, which would render our patents and patent rights obsolete. Claims by competitors and other third parties that our products allegedly infringe the patent rights of others could have a material adverse effect on our business. We could encounter legal and financial difficulties in enforcing our licenses and patent rights against alleged infringers. The medical device industry and cardiovascular device market, in particular, is characterized by frequent and substantial intellectual property litigation. Intellectual property litigation is complex and expensive and the outcome of this litigation is difficult to predict. Any future litigation, regardless of outcome, could result in substantial expense and significant diversion for our technical and management personnel. An adverse determination in any such proceeding could subject us to significant liabilities or require us to seek additional licenses from third parties, pay damages and/or royalties that may be substantial or force us to redesign the related product. These alternatives may be uneconomical or impossible. Furthermore, we cannot assure you that if additional licenses are necessary that they would be available on satisfactory terms or at all. Accordingly, an adverse determination in a judicial or administrative proceeding or failure to obtain necessary licenses could prevent us from manufacturing or selling certain of our products, any of which could have a material adverse effect on our business, financial condition and results of operations.

We are exposed to product liability claims.

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

We face risks associated with our manufacturing operations, risks resulting from dependence on third-party manufacturers, and risks related to dependence on sole suppliers.

The manufacture of our products is a complex operation involving a number of separate processes and components. Material costs are high and certain of the manufacturing processes involved are labor-intensive. The conduct of manufacturing operations is subject to numerous risks, including reliance on third-party manufacturers, unanticipated technological problems and delays. We, or any entity manufacturing products or components on our behalf, may not be able to comply with applicable governmental regulations or satisfy regulatory inspections in connection with the manufacture of our products, which would have a material adverse effect on our business, financial condition and results of operations.

We often depend on single-source third-party manufacturers for several of the components used in our products. We do not have agreements with many of such single-source manufacturers and purchase these components pursuant to purchase orders placed from time to time in the ordinary course of business. We are substantially dependent on the ability of these manufacturers to provide adequate inventories of these components on a timely basis and on favorable terms. These manufacturers also produce components for certain of our competitors, as well as other large customers, and there can be no assurance that such manufacturers will have sufficient production capacity to satisfy our inventory or scheduling requirements during any period of sustained demand, or that we will not be subject to the risk of price fluctuations and periodic delays. Although we believe that our relationships with our manufacturers are satisfactory and that alternative sources for the components we currently purchase from single-source suppliers are currently available, the loss of the services of such manufacturers or substantial price increases imposed by such manufacturers, in the absence of readily available alternative sources of supply, would have a material adverse effect on us. Failure or delay by such manufacturers in supplying components to us on favorable terms could also adversely affect our operating margins and our ability to develop and deliver our products on a timely and competitive basis, which could have a material adverse effect on our business, financial condition and results of operations.

We are dependent on key personnel.

As a result of the specialized scientific nature of our business, we are dependent on our ability to attract and retain qualified scientific, technical and key management personnel. We face intense competition for such persons and we may not be able to attract or retain such individuals. Our recent restructuring and cost reduction efforts may make it even more difficult for us to attract and retain qualified personnel.

Risk Factors Relating to Our Common Shares

The price of our shares is highly volatile, and if we do not regain compliance with Nasdaq minimum share price requirements, we may be delisted.

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

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

On June 20, 2006 we received a letter from Nasdaq Global Market, where our shares were listed at the time, indicating that, for 30 consecutive business days, the bid price of our common shares had closed below the minimum $1.00 per share requirement for continued listing on Nasdaq and that, in accordance with Nasdaq rules, we had 180 calendar days (until December 18, 2006) to regain compliance. On November 20, 2006, we received a letter from the Nasdaq Global Market indicating that our shareholders’ equity did not comply with the minimum $10,000,000 requirement for continued listing on the Nasdaq Global Market. On December 5, 2006, we announced that we applied for transfer of the listing of our common shares to the Nasdaq Capital Market, which transfer was effective on December 13, 2006.

As part of the transfer to the Nasdaq Capital Market, we have been granted an additional 180-day period, or until June 15, 2007, to regain compliance with the minimum bid price rules. If we do not regain compliance within the allotted compliance period, our common shares may be delisted from Nasdaq. At that time, we would be entitled to appeal the staff’s determination to a Nasdaq Listing Qualifications Panel. If the common shares were to be delisted, they would trade on the Over-the-Counter Bulletin Board or in the “pink sheets” maintained by the National Quotation Bureau, Inc., which are viewed by most investors as less desirable and less liquid market places. This could make trading more difficult for our investors, leading to lower trading volumes and declines in share price, which would also make it more difficult and expensive for us to raise additional capital.

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

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

If our shareholders sell substantial amounts of our common shares in the public market, the market price of our common shares could fall. These sales might also make it more difficult for us to sell equity or equity related securities at a time and price that we would deem appropriate. All of the common shares we issued in the private placement during the fourth quarter of 2006 have been registered pursuant to a resale registration statement. We have also previously registered for resale shares issued in connection with the MedQuest acquisition and a related private placement completed in 2005. Sales by these shareholders could have an adverse impact on the trading price of our common shares.

The concentration of our capital stock ownership, following the completion of the recent private placement, may limit your ability to influence corporate matters.

Our common shares are held by a relatively small number of investors. After the completion of our $14.1 million private placement financing in December 2006, our two largest shareholders collectively beneficially own approximately 52% of our common shares. These investors also have certain rights to designate members of our Board of Directors and may exercise significant influence over all matters requiring shareholder approval, including elections of directors and significant corporate transactions, such as a merger or other sale of our Company or our assets for the foreseeable future. This concentrated

control may limit your ability to influence corporate matters, and, as a result, we may take actions that our shareholders do not view as beneficial.

Because we do not intend to pay, and have not paid, any cash dividends on our common shares, our shareholders will not be able to receive a return on their common shares unless the value of our common shares appreciates and they sell them.

We have never paid any cash dividends on our common shares and intent to retain future earnings, if any, to finance the development and expansion of our business. We do not anticipate paying any cash dividends on our common shares in the foreseeable future. As a result, our shareholders will not be able to receive a return on their common shares unless the value of our common shares appreciates and they sell them.