WHRTD World Heart (MM)

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UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

For the transition period from       to       

Commission file number:  000-28882

WORLD HEART CORPORATION

(Exact name of registrant as specified in its charter)

7799 Pardee Lane, Oakland, California, USA, 94621

(Address of principal executive offices)

(510) 563-5000

(Registrant’s telephone number)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.              Yes x     No o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. :

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

Yes o     No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date :

The number of common shares outstanding as of November 4, 2008 was 13,253,964.

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PART I—FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS.

WORLD HEART CORPORATION

Condensed Consolidated Balance Sheets

(United States Dollars) (Unaudited)

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

(1)  Derived from the Corporation's audited consolidated financial statements as of December 31, 2007.

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WORLD HEART CORPORATION

Condensed Consolidated Statements of Operations

(United States Dollars)

(Unaudited)

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

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WORLD HEART CORPORATION

Condensed Consolidated Statements of Cash Flow

(United States Dollars)

(Unaudited)

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

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WORLD HEART CORPORATION

Condensed Consolidated Statement of Equity

(United States Dollars)

(Unaudited)

Nine Months Ended September 30, 2008

(1) Includes conversion of $1.4 million bridge notes payable

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

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WORLD HEART CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements

1.                                      Nature of Operations of the Corporation

World Heart Corporation (“WorldHeart” or the “Corporation”) is developing and commercializing implantable ventricular assist devices (VADs), which are mechanical pumps that allow for the restoration of normal blood circulation to patients suffering from advanced heart failure. WorldHeart has facilities in Oakland, California, Salt Lake City, Utah and Herkenbosch, Netherlands. WorldHeart currently derives its revenue from its Novacor LVAS (left ventricular assist system) and related peripheral equipment which it sells directly to medical clinics and hospitals in the United States, Europe and Canada and through distributors in other countries.  As previously announced, after more than twenty years in clinical use, the Corporation is phasing out its first-generation Novacor LVAS as it approaches the natural end of its life cycle. The Corporation is focusing on the development of its next-generation Levacor™ Rotary VAD (the “Levacor”) and on activities leading to the start of a U.S. clinical trial with the Levacor in 2009. The Corporation expects to realize cost recoveries from the use of the Levacor in a U.S. clinical trial. Such recoveries are expected to be an important part of the Corporation’s overall operating cash flows in the future.

On July 31, 2008, WorldHeart completed a $30.0 million private placement transaction and recapitalization under the terms of the Recapitalization Agreement dated June 20, 2008 and amended on July 31, 2008 (See Note 9 of the Notes to Unaudited Condensed Consolidated Financial Statements).  With the completion of the private placement and recapitalization, the Corporation believes it has sufficient cash to fund operations for at least twelve months and that it will be able to realize its assets and discharge its liabilities in the normal course of business. The Corporation also believes that it can sustain compliance with NASDAQ Marketplace Rules 4310(c)(3), the “Minimum Equity Rule” and 4310(c)(4), the “Minimum Bid Price Rule” with the issuance of 12.86 million common shares as part of the private placement transaction and recapitalization and with its recently completed 30-to-1 reverse stock split (See Note 2 of the Notes to Unaudited Condensed Consolidated Financial Statements).

2.                                      Subsequent Events

Reverse Stock Split

On October 28, 2008, the Corporation effected a reverse stock split of 30-to-1 of its capital stock. The reverse stock split was previously approved by the Corporation’s Board of Directors and by the Corporation’s shareholders during the October 9, 2008 Special Meeting of Shareholders.

Pursuant to the reverse stock split, each holder of the Corporation’s common shares, options or warrants on October 28, 2008, the date of effectiveness of the reverse stock split, became entitled to receive one new common share, option or warrant in exchange for every thirty old common shares, options or warrants held by such shareholder.

The effect of the reverse stock split has been retroactively applied throughout the financial statements contained herein. All numbers of common shares set forth herein are shown on a post-consolidated basis, unless otherwise noted.

NASDAQ Notice on Non-Compliance

On October 29, 2008, the Corporation received a NASDAQ Staff Deficiency Letter indicating that WorldHeart does not comply with Marketplace Rule 4310(c)(7) which requires the Corporation to maintain a minimum of 500,000 publicly held shares for continued listing on the NASDAQ Capital Market. For purposes of this requirement, the number of publicly held shares excludes shares held by affiliates, including officers, directors, or ten percent shareholders. The NASDAQ staff is reviewing the Corporation’s eligibility for continued listing on the NASDAQ Capital Market and had asked the Corporation to provide, on or before November 21, 2008, the Corporation’s specific plan to achieve and sustain compliance with all the NASDAQ Capital Market listing requirements, including the time frame for completion of the plan. The Corporation filed a registration statement to register certain shares held by affiliates and others that were issued or are issuable in connection with the previously announced US$30.0 million private placement transaction and recapitalization. The registration statement has been declared effective and the Corporation expects that sales in the open market will result in an increase in the number of publicly held shares. WorldHeart also intends to submit a specific plan to achieve and sustain compliance with Marketplace Rule 4310(C)(7) by November 21, 2008.

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WORLD HEART CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements – continued

3.                                      Summary of Significant Accounting Policies

Basis of presentation

The accompanying interim condensed unaudited consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States (“GAAP”) and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these consolidated financial statements include all assets, liabilities, revenue and expenses of the Corporation and its wholly owned subsidiaries: World Heart Inc. and World Heart B.V. All material inter-company transactions and balances have been eliminated. These interim unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the audited financial statements and notes thereto included in the Corporation’s Annual Report on Form 10-KSB/A, for the year ended December 31, 2007. In the opinion of management, the condensed balance sheet at December 31, 2007 which has been derived from audited financial statements and these interim unaudited consolidated financial statements reflect all normal and recurring adjustments considered necessary to state fairly the results for the periods presented. The results for the period ended September 30, 2008 are not necessarily indicative of the results to be expected for the entire fiscal year ended December 31, 2008 or for any future period.

Use of estimates

The preparation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, 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 revenue and expenses during the reporting periods. Such management estimates include allowance for doubtful accounts, sales and other allowances, inventory reserves, income taxes, realizability of deferred tax assets, stock-based compensation, deferred revenue, warranty reserves and legal reserves. Actual results could differ from these estimates.

Revenue recognition

Revenue from product and service sales is recognized when all of the following criteria are met:  persuasive evidence of an agreement exists; delivery has occurred or services have been rendered; price is fixed or determinable; and collection is reasonably assured.

The significant elements of the Corporation’s multiple-element offerings are Implant Kits, Peripherals and Other. For arrangements with multiple elements, the Corporation recognizes revenue using the residual method as described in SOP 98-9. Under the residual method, revenue is allocated and deferred for the undelivered elements based on relative fair value. The determination of fair value of the undelivered elements in multiple elements arrangements is based on the price charged when such elements are sold separately, which is commonly referred to as vendor-specific objective-evidence, or VSOE. Each element’s revenue is recognized when all of the revenue recognition criteria are met for each of the elements.

Shipping and Handling Costs

In accordance with Emerging Issues Task Force (“EITF”) 00-10, “Accounting for Shipping and Handling Fees and Costs,” the Corporation records freight billed to its customers as sales of product and services and the related freight costs as a cost of sales, product and services. The Corporation’s shipping and handling costs are not significant.

4.                                      Stock-based Compensation

On January 1, 2006, WorldHeart adopted Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Accounting for Stock-Based Compensation (“FAS 123(R)”), using the modified prospective transition method. Under this method, the provisions of FAS 123(R) apply to all stock-based awards granted after the effective date. The unrecognized expense of awards not yet vested as of January 1, 2006 is recognized as an expense in the calculation of net income. As FAS 123(R) requires that stock-based compensation expense be based on awards that are ultimately expected to vest, stock-based compensation for the third quarter of 2008 has been reduced for estimated forfeitures. When estimating forfeitures, voluntary termination behaviors, as well as trends of actual option forfeitures are considered. To the extent actual forfeitures differ from the Corporation’s current estimates, cumulative adjustments to stock-based compensation expense are recorded.

Except for transactions with employees and directors that are within the scope of FAS 123(R), all transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable.  Additionally, in accordance with EITF 96-18, “Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling Goods or Services or Combined with Cash” (“EITF 96-18”), the Corporation has determined that the

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WORLD HEART CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements – continued

dates used to value the transaction are either: (1) the date at which a commitment for performance by the counter party to earn the equity instruments is established; or (2) the date at which the counter party’s performance is complete.

WorldHeart uses the Black-Scholes valuation model for estimating the fair value of stock compensation. The stock-based compensation expense for the three and nine month periods ended September 30, 2008 and 2007 are as follows:

As of September 30, 2008, approximately $501,084 of total unrecognized compensation cost related to stock options is expected to be recognized over a period of approximately 10 quarters.

The aggregate intrinsic value is calculated as the difference between the exercise price of all outstanding options and the quoted price of our common shares that were in the money at September 30, 2008. At September 30, 2008, the aggregate intrinsic value of all outstanding options was zero with a weighted average remaining contractual term of approximately 5.5 years. Of the 33,533 outstanding options, 26,047 options were exercisable, with a weighted average remaining contractual life of 4.6 years and 7,486 options were unvested, with a weighted average remaining contractual life of 7.6 years. No options were exercised or granted under the Corporation’s 2006 Equity Incentive Plan during the third quarter of 2008.

A summary of the status and changes the Corporation’s non-vested options, subject to FAS123(R) calculation as of the quarter ended September 30, 2008 is presented below:

Valuation Assumptions

WorldHeart calculates the fair value of each option award on the date of grant using the Black-Scholes option pricing model.  During the three months ended September 30, 2008, no stock options were granted.  For the three and nine month periods ended September 30, 2008, the weighted average fair value of the options granted was $0 and $59.10, respectively. For the three and nine month periods ended September 30, 2007, the weighted average fair value of the options granted was $42.30 and $15.60, respectively. The following weighted average assumptions were utilized:

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WORLD HEART CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements – continued

The dividend yield of zero is based on the fact that WorldHeart has never paid cash dividends and has no present intention to pay cash dividends. Expected volatility is based on the historical volatility of the Corporation’s common shares over the period commensurate with the expected life of the options. Expected life in years is based on the “simplified” method as permitted by the SEC’s Staff Accounting Bulletin No. 110 (“SAB 110”). WorldHeart believes that all stock options issued under its stock option plans meet the criteria of “plain vanilla” stock options. The Corporation uses a term of 5.5 years for all its stock options. The risk free interest rate is based on average rates for five and seven-year treasury notes as published by the Federal Reserve. The following table summarizes stock option and warrant activity for the quarter ended September 30, 2008:

5.                                      Inventory

The components of net inventory are as follows:

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WORLD HEART CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements – continued

6.                                      Current Liabilities

Accrued Compensation

Accrued compensation includes accruals for quarter-end employee wages and Board of Director fees, vacation, related payroll taxes and clinical and performance bonus. The components of accrued compensation, inclusive of payroll taxes, are as follows:

During the third quarter of this year, the Corporation made full payments on deferred wages owed to six executives and officers of the Corporation.

Performance Bonus

On February 15, 2008, the Compensation Committee of the Board of Directors approved the 2008 cash performance bonus program. All employees, including the Corporation’s executive officers, are eligible for performance bonuses, which are earned upon the achievement of certain performance milestones relevant to the Corporation’s business. As of September 30, 2008, except for a $21,225 balance, the majority of accrued bonuses pursuant to the terms and conditions of the Corporation’s 2007 Performance Bonus Plan and 2006 Equity Incentive Plan have been paid, totaling $152,639 in cash and $457,908 in stock.  No accrual for the 2008 cash performance bonus program has been made as the performance milestones through September 30, 2008 have not been achieved.

Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities consist of the following:

7.                                      Comprehensive Income

For the three and nine month periods ended September 30, 2008 and September 30, 2007, there were no significant differences between the Corporation’s comprehensive loss and its net loss.

8.                                      Convertible Debentures and Warrants, Beneficial Conversion and Clinical and Marketing Support Expenses

On July 31, 2008, the Corporation closed a previously announced $30.0 million private placement transaction and recapitalization under the terms of the Recapitalization Agreement (the “Recapitalization Agreement”) dated June 20, 2008 and amended on July 31, 2008, among the Corporation, its wholly owned subsidiary World Heart Inc. (“WHI”), Abiomed, Inc. (“Abiomed”), Venrock Partners V, L.P., Venrock Associates V, L.P. and Venrock Entrepreneurs Fund V, L.P. (collectively “Venrock”), Special Situations Fund III QP, L.P., Special Situations Cayman Fund, L.P., Special Situations Private Equity Fund, L.P., Special Situations Life Sciences Fund, L.P. and Austin W. Marxe (collectively “SSF”) and New Leaf Ventures II, L.P (“New Leaf”).  Simultaneously with the closing, Abiomed entered into a Termination and Release Letter Agreement dated July 31, 2008 with WorldHeart and WHI. Under the terms of the Termination and Release Letter Agreement, WorldHeart converted the full amount of principal and interest owed on the $5.0 million 8% Secured Convertible Promissory Note (the “Note”) previously issued to Abiomed by the Corporation and WHI into 2,866,666 common shares of the Corporation (the “Conversion”). Additionally,

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WORLD HEART CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements - continued

Abiomed released the security interest in all of the assets of the Corporation and WHI that secured the Note, terminated the warrants Abiomed held to purchase 113,333 common shares of the Corporation, forgave other amounts owed by WorldHeart and terminated all the previously existing agreements, arrangements and understandings with WorldHeart.

The induced conversion of the Note and simultaneous termination of previously existing agreements, arrangements and understanding between WorldHeart and Abiomed, and the subsequent issuance of 2,866,666 common shares of the Corporation, as approved by the Corporation’s shareholders during its Special Meeting of Shareholders held on October 9, 2008, were accounted for under the provisions of SFAS No. 84, “Induced Conversion of Convertible Debt”, or SFAS No. 84. The Corporation recorded a non-recurring expense upon inducement in the amount of approximately $3.9 million against additional paid-in capital.

Prior to the July 31, 2008 termination of the Corporation’s agreements with Abiomed, on January 3, 2008, the Corporation recorded a non-cash clinical and marketing support expense of $6.5 million based on the fair value of warrants issued to purchase 90,000 of the Corporation’s common shares, upon receipt of $4.0 million in funding from Abiomed pursuant to a now cancelled clinical and marketing support services agreement. The Corporation applied the provisions of FAS 123R and EITF 96-18 to account for the expense associated with the warrants granted to Abiomed.  The Corporation used the Black-Scholes method to compute the fair value of the warrants issued as consideration for the clinical and marketing support services agreement. The measurement dates used were the dates when the Corporation received funding as defined by EITF 96-18. As a result of the beneficial conversion features of the Note, the Corporation recorded a non-cash interest expense charge of approximately $1.4 million in the nine-month ended period September 30, 2008.

9. Private Placement Transaction and Recapitalization

On July 31, 2008, WorldHeart completed a $30.0 million private placement transaction and recapitalization previously announced under the terms of the Recapitalization Agreement. Under the terms of the Recapitalization Agreement, WorldHeart issued 10 million common shares for an aggregate purchase price of $30.0 million (the “Issuance”), of which Venrock invested $11.0 million, SSF invested $9.0 million and New Leaf invested $10.0 million. The purchase price delivered by Venrock and SSF at the closing was offset by repayment of the principal and interest owed on the bridge loan facility of $1.4 million (the “Bridge Facility”) that Venrock and SSF had previously provided to WorldHeart. Simultaneously with the closing of the Issuance, Abiomed entered into a Termination and Release Letter Agreement dated July 31, 2008 with WorldHeart and WHI (See Note 8 of the Notes to Unaudited Condensed Consolidated Financial Statements). In connection with the Issuance, the parties to the Recapitalization Agreement entered into a Registration Rights Agreement dated July 31, 2008, as amended October 31, 2008, to register the common shares issued in connection with the Issuance and the Conversion.

WorldHeart paid an aggregate cash commission of $750,000 and issued warrants to purchase an aggregate of 83,333 common shares to its advisors, Pacific Growth Equities, LLC and Stifel, Nicolaus and Company. The warrants, with an exercise price of $3.30 per share, were subject to shareholder approval and were approved by the Corporation’s shareholders during the Special Meeting of Shareholders held on October 9, 2008. We calculated the fair value of the warrants using the Black-Scholes Option Valuation Model. Accordingly, the amount of $283,000 was attributed to the issuance of warrants as advisor fees for services related to the financing and recapitalization. The issuance of the warrants had no impact on total equity and did not impact operating results for the quarter or nine months ended September 30, 2008.

In accordance with terms pursuant to the Recapitalization Agreement, the following terms were satisfied and, where required, carried by majority votes by the Corporation’s shareholders during the Special Meeting of Shareholders held on October 9, 2008:

(i)                                    The approval of a reverse split of its common shares;

(ii)                                 The election as Directors of the Corporation of the nominees of each of Abiomed, Venrock, SSF and New Leaf , to hold office until the next annual meeting or until their successors are elected or appointed; and

(iii)                              The termination of Abiomed’s current distribution rights with WorldHeart and replacement with reduced distribution rights, under which WorldHeart is required to negotiate in good faith with Abiomed regarding distribution arrangements for certain of the Corporation’s products before engaging a third-party distributor; and

(iv)                             The establishment of an equity incentive program for the benefit of the Corporation’s independent directors, officers, employees and consultants covering, together with the Corporation’s existing plans, a maximum of 1,466,666 common shares of WorldHeart.

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WORLD HEART CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements - continued

10.          Commitment and Contingencies

On September 15, 2008, WorldHeart and LaunchPoint Technologies LLC (“LaunchPoint”) entered into an Assignment Agreement (the “Agreement”) wherein all of LaunchPoint’s right, title and interest in and to the assigned technology and intellectual property relating to physiological control of rotary blood pumps were assigned, sold, transferred granted and delivered to WorldHeart for $230,000. In addition, the Agreement confirmed a 0.5% royalty on net future sales through 2020 of products using such technology. The purchase price of $230,000 will be paid in equal installments of $10,000 over 23 months beginning in October 2008.

Under the Agreement, LaunchPoint agreed to provide exclusive research and development (“R&D”) services to WorldHeart, for approximately two years, for the design, production, distribution or sale of rotary blood pumps that provide assisted circulation. In return, WorldHeart will engage LaunchPoint in ‘Active Projects’ with one of them being the Pediatric Ventricular Assist Device (PediaFLow™) project. The PediaFlow is a small, magnetically levitated rotary VAD intended for use in newborns and infants. WorldHeart will provide LaunchPoint with an annual funding of $120,000 until termination on either (i) the second anniversary of the Agreement, (ii) expiration of the period of exclusivity according to the terms of any Active Project or (iii) termination of R&D services pursuant to any Active Project.

The Corporation accounted for the purchase of R&D technology under the Agreement in accordance with Financial Accounting Standards Board (“FASB”) Statement No. 2, “Accounting for Research and Development Costs,” as interpreted by FASB Interpretation (FIN) No. 4, “Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method.” The Corporation recorded a one time R&D expense of $230,000 during the quarter ended September 30, 2008 based on the fact that alternative future value or realizability of this technology is not determinable as of the date of the Agreement.

11.                Recent Accounting Pronouncements

Since the beginning of 2008 the following new standards have been issued that may impact the Corporation:

In June 2008, the FASB issued FASB Staff Position (“FSP”) EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” This FSP provides that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. The FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. This FSP is not applicable to WorldHeart since the Corporation does not issue dividends and has no intention to do so.

In April 2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP FAS 142-3”). FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No.142, Goodwill and Other Intangible Assets. FSP FAS 142-3 also requires expanded disclosure related to the determination of intangible asset useful lives. FSP FAS 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Corporation is currently evaluating the impact this adoption may have on its results of operations and financial condition, but does not expect it will have a material impact, if any.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework and gives guidance regarding the methods used for measuring fair value, and expands disclosures about fair value measurements. In February 2008, the FASB issued FASB Staff Position 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13” (“FSP 157-1”) and FASB Staff Position 157-2, “Effective Date of FASB Statement No. 157” (“FSP 157-2”). FSP 157-1 amends SFAS 157 to remove certain leasing transactions from its scope. FSP 157-2 delays the effective date of SFAS 157 for all non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until fiscal years beginning after November 15, 2008. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The measurement and disclosure requirements related to financial assets and financial liabilities are effective beginning the first quarter of fiscal 2009. The Corporation does not believe that the adoption of SFAS 157 for financial assets and financial liabilities will have a material impact on its financial position or results of operations. The Corporation is currently assessing the impact that SFAS 157 will have on its results of operations and financial position when it is applied to non-financial assets and non-financial liabilities beginning in the first quarter of fiscal 2010.

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ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION

World Heart Corporation and its subsidiaries are collectively referred to as “WorldHeart” or the “Corporation.” The following Management Discussion and Analysis of Financial Condition and Results of Operations (MD&A) discusses material changes in WorldHeart’s financial condition and results of operations and cash flows for the three and nine months ended September 30, 2008 and September 30, 2007. Such discussion and comments on the liquidity and capital resources should be read in conjunction with the information contained in WorldHeart’s audited consolidated financial statements for the year ended December 31, 2007, prepared in accordance with U.S. GAAP included in our Annual Report on Form 10—KSB/A for the fiscal year ended December 31, 2007.

The discussion and comments contained hereunder include both historical information and forward-looking information. The forward-looking information, which generally is information stated to be anticipated, expected, or projected by management, involves known and unknown risks, uncertainties and other factors that may cause the actual results and performance to be materially different from any future results and performance expressed or implied by such forward-looking information. Potential risks and uncertainties include, without limitation: our need for additional significant financing in the future; costs and delays associated with research and development, pre-clinical testing and clinical trials for our products and next-generation product candidates, such as the Levacor Rotary VAD; our ability to manufacture, sell and market our products; decisions, and the timing of decisions, made by health regulatory agencies regarding approval of our products; competition from other products and therapies for heart failure; continued slower than anticipated 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; our ability to remain listed on the NASDAQ Capital Market; as well as other risks and uncertainties set forth under the heading “Risk Factors” in our Annual Report on Form 10-KSB/A, for the fiscal year ended December 31, 2007.

OVERVIEW

We are engaged in development of mechanical circulatory support systems focused on developing and commercializing implantable ventricular assist devices (“VADs”), which are mechanical pumps that allow for the restoration of normal blood circulation to patients suffering from advanced heart failure.

To date we derive most of our revenue from our Novacor LVAS (“Novacor LVAS” or “Novacor”) and related peripheral equipment, which we sell directly to medical clinics and hospitals in the United States, Europe and Canada and through distributors in certain other countries. The Novacor LVAS is commercially approved for use as a bridge-to-transplant in the United States and Canada. In Europe, the Novacor LVAS has unrestricted approval for use as an alternative to transplantation, Bridge-to-Transplantation and to support patients who may be able to recover the use of their natural heart. In Japan, the device is commercially approved for use in cardiac patients at risk of imminent death from non-reversible left ventricular failure for which there is no alternative except heart transplantation.

In July 2005, we acquired the assets of MedQuest Products, Inc. (“MedQuest”), including a rotary VAD, now called the Levacor™ Rotary VAD. In conjunction with the acquisition, we raised approximately $22.7 million in gross financing proceeds from a private placement with Maverick Venture Management, LLC and the exercise of certain warrants and also converted all of its remaining convertible debentures from an earlier financing. Pre-clinical testing of the Levacor Rotary VAD was accelerated after the acquisition, with successful initial human feasibility use in Europe in 2006.

In November 2006, we announced a restructuring plan, which included a reduction of commercial operations associated with the Novacor LVAS, and a refocusing of our resources on the development of the next generation product, particularly the Levacor Rotary VAD. After more than twenty years in clinical use, the Novacor LVAS has reached the natural end of its life cycle and we have been focusing on the development of the Levacor Rotary VAD and on activities leading to the start of a US clinical trial with the Levacor Rotary VAD in 2009.

In July 2008, we completed a $30.0 million private placement transaction and recapitalization under the terms of the Recapitalization Agreement (the “Recapitalization Agreement”) dated June 20, 2008 and amended on July 31, 2008, among the Corporation, our wholly owned subsidiary World Heart Inc. (“WHI”), Abiomed, Inc. (“Abiomed”), Venrock Partners V, L.P., Venrock Associates V, L.P. and Venrock Entrepreneurs Fund V, L.P. (collectively, “Venrock”), Special Situations Fund III QP, L.P., Special Situations Cayman Fund, L.P., Special Situations Private Equity Fund, L.P., Special Situations Life Sciences Fund, L.P. and Austin W. Marxe (collectively, “SSF”) and New Leaf Ventures II, L.P. (“New Leaf”).Simultaneously with the closing of the recapitalization, Abiomed entered into a Termination and Release Letter Agreement with us and converted the full amount of

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principal and interest owed on the $5,000,000 8% Secured Convertible Promissory Note (the “Note”) previously issued to Abiomed by the Corporation and WHI into 2,866,667 of our common shares (the “Conversion”), released the security interest in all of our assets and those of WHI that secured the Note, terminated the warrant Abiomed held to purchase 113,333 of our common shares, forgave other amounts we owed to Abiomed and terminated previously existing agreements, arrangements and understandings with us. The purchase price delivered by Venrock and SSF at the closing was offset by repayment of the principal and interest owed on the bridge loan facility (the “Bridge Loan”) of $1,400,000 that Venrock and SSF had previously provided to us. As part of the recapitalization transaction, we issued warrants to purchase an aggregate of 83,333 common shares to our advisors, Pacific Growth Equities, LLC and Stifel, Nicolaus and Company (See Notes 8 and 9 of the Notes to Unaudited Condensed Consolidated Financial Statements).

In August 2008, we announced that we were embarking on a phased consolidation into our current facility in Salt Lake City, Utah. This included a search for a new CEO to reside in Salt Lake City and the termination or relocation of several employees from our Oakland facility by approximately mid 2009. We are still in the process of evaluating all our alternatives and expect to complete the evaluation process by early 2009, at which time we will determine the  impact, if any, on our financial position.

Research and development by our competitors is proceeding on several rotary flow devices. Certain of these devices have received the CE mark in Europe and are advancing through clinical trials in the United States and Europe, and one device has just received U.S. marketing approval. We believe that our Levacor VAD is the most advanced fourth-generation rotary device under development.

Although the patient population for Destination Therapy, the implanting of a VAD to provide support for a patient not currently eligible for a heart transplant, continues to be largely untreated by cardiac assist devices, and the adoption rates have been slower than anticipated, we believe that the Destination Therapy market will evolve more rapidly when newer devices are evaluated clinically and as experience with next-generation VADs increases.

Summary of Quarterly Results

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

(Unaudited)

15

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RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2008 COMPARED WITH THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2007