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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Amendment No. 2

FORM 10

GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or (g) of The Securities Exchange Act of 1934

HEARTWARE LIMITED

(Exact name of registrant as specified in its charter)


State of Victoria, Australia		98-0498958

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

Level 57
MLC Centre
19-29 Martin Place
Sydney NSW 2000
Australia
+61 2 9238 2064

(Address of principal executive offices) (Zip Code)

(Registrant’s telephone number, including area code)

Securities to be registered pursuant to Section 12(b) of the Act: None

Securities to be registered pursuant to Section 12(g) of the Act:

Ordinary Shares, No Par Value

(Title of class)

References

Unless the context requires otherwise, references in this registration statement to:

	•		“HeartWare,” “the Company,” “Successor”, “we,” “us” and “our” refer to HeartWare Limited and its consolidated subsidiary.

	•		“HeartWare, Inc.” and “Predecessor” refer to HeartWare, Inc., a Delaware corporation incorporated on April 3, 2003. HeartWare, Inc. was acquired by HeartWare Limited on January 24, 2005.

	•		We use HeartWare, HVAD, MVAD and IV VAD as trademarks in the United States, Australia and other countries. All other trademarks and tradenames mentioned in this registration statement are the property of their respective owners.

Forward-Looking Statements

This registration statement contains forward-looking statements that are based on our management’s beliefs and assumptions and on information currently available to our management. The forward-looking statements are contained principally in the sections entitled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” Forward-looking statements include, but are not limited to, statements about:

	•		our expectations with respect to regulatory submissions and approvals;

	•		our expectations with respect to our clinical trials, including enrollment in our clinical trials;

	•		our expectations with respect to our intellectual property position;

	•		our ability to commercialize our products;

	•		our ability to develop and commercialize new products; and

	•		our estimates regarding our capital requirements and our need for additional financing.

In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “potential” and similar expressions intended to identify forward-looking statements. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this registration statement, particularly in the

“Risk Factors” section, that could cause actual results or events to differ materially from the forward-looking statements that we make.

You should read this registration statement and the documents that we have filed as exhibits to this registration statement completely and with the understanding that our actual future results may be materially different from what we expect. We do not assume any obligation to update any forward-looking statements.

Corporate Information

We were registered on November 26, 2004 under the laws of the state of Victoria, Australia. We further discuss our corporate history under “Business—Corporate History”. Our principal executive offices are located at Level 57, MLC Centre, 19-29 Martin Place, Sydney NSW 2000, Australia. Our telephone number is 011-61-2-9238-2064. Our website address is www.heartware.com. We have included our website address in this registration statement as an inactive textual reference only. The information on, or that can be accessed through, our website is not part of this registration statement.

US Dollars

Unless indicated otherwise in this registration statement, all references to $ or dollars refer to US dollars. References to AU$ mean the lawful currency of the Commonwealth of Australia.

ITEM 1. BUSINESS

Overview

We are a medical device company focused on developing and commercializing a family of blood pumps that are surgically implanted to help augment blood circulation in patients suffering from chronic and end-stage heart failure, which is one of the leading causes of death in the developed world. Using our proprietary technology, we develop blood pumps, which are also known as left ventricular assist devices, or LVADs, or circulatory assist devices, that are significantly smaller and are designed to be more reliable than those that are currently available. We believe that the unique design, smaller size and increased reliability of these pumps will enable physicians to treat a wider range of patients using less invasive surgical techniques. We also believe that our blood pumps have the potential to provide significant clinical benefits to patients suffering from advanced heart failure, leading to fewer complications and improved outcomes.

Our proprietary technology has been in development for over ten years. Key features of our technology include:

•

small device size which allows for routine implantation in the space immediately surrounding the heart, known as the pericardial space in all patients, directly adjacent to the heart, unlike other full-output LVADs that are currently available;

	•		a hybrid magnetic and hydrodynamic impeller suspension system which eliminates the need for mechanical bearings, providing a “wearless mechanism”;

	•		a wide-bladed impeller which facilitates clear blood flow paths through the pump;

	•		an integrated inflow cannula which optimizes blood flow characteristics and facilitates pericardial placement;

	•		dual motor stators and related circuitry which enhance system reliability; and

	•		efficient coupling and motor design to maximize power efficiency and enable the delivery of up to ten liters per minute of blood flow.

We are currently conducting a combined European and Australian human clinical trial for our lead device, the HeartWare Ventricular Assist Device, or HVAD pump, which is aimed at receiving European and Australian regulatory approval in late 2007 or early 2008. The trial began in March 2006 and calls for the implantation of the device in 20 patients with advanced heart failure. The endpoint for the trial is patient survival to the earlier of 180 days or transplantation. As of July 13, 2007, we have completed implants in 16 patients with a cumulative support duration of more than 2,400 days. We currently expect to complete enrollment of 20 patients by September 30, 2007. We intend to aggregate the Australian and European clinical trial results into a single data set for European and Australian regulatory approval submissions and to use this data to support an application for approval of the HVAD pump by the US Food and Drug Administration, or FDA.

We believe that the HVAD pump is the smallest full-output LVAD, which is an LVAD with the capacity to pump blood at the rate of up to and exceeding 8 liters of blood per minute, that is currently in clinical trials or in the marketplace and is the only centrifugal LVAD designed to be implanted above the diaphragm in all patients.

Our next generation device, the Miniaturized Ventricular Assist Device, or MVAD, is based on the same technology platform as the HVAD pump but adopts an axial flow, rather than a centrifugal flow, configuration. The MVAD, which is currently at the prototype stage and undergoing animal studies, is approximately one-third the size of the HVAD pump. We believe that the MVAD will be implantable by surgical techniques that are even less invasive than those required to implant the HVAD pump. We expect to initiate human clinical trials for the MVAD in mid-2009.

In parallel with our development of the MVAD, we have commenced design work on our third generation blood pump, which we currently call the IV VAD. The IV VAD will rely on the same underlying technology platform and will be a smaller version of the MVAD. Unlike the HVAD pump or the MVAD, the IV VAD is intended to be positioned within the body’s vascular network and implanted by minimally invasive catheter-based techniques. Once the IV VAD is fully developed, we expect the IV VAD to be about one-tenth the size of the HVAD pump.

Market Opportunity

Heart Failure

Heart failure is one of the leading causes of death in the developed world, affecting over 20 million people globally and 5 million people in the United States alone. Heart failure is a of cardiovascular disease with both an increasing incidence and death rate. Each year, approximately 550,000 new cases are diagnosed and 300,000 patients die from advanced heart failure in the United States. According to a November 2001 article in The New England Journal of Medicine on a study entitled “Randomized Evaluation of Mechanical Assistance for the Treatment of Congestive Heart Failure,” or the REMATCH study, the five-year survival rate for patients suffering from heart failure is 50% and the one-year mortality rate for those affected by advanced heart failure may exceed 50%. A 2006 article appearing in The Journal of Heart and Lung Transplantation referred to the REMATCH study in detail and confirmed that clinical results for LVADs had improved in the post-REMATCH era. The majority of patients with heart failure have underlying cardiovascular disorders that are often the precursors to heart failure, the most common of which are atherosclerosis, myocardial infarction, hypertension, cardiomyopathy and arrhythmia. These conditions generally initiate heart failure because they either damage the muscle of the left ventricle or cause it to pump inefficiently.

In a healthy person, the left ventricle of the heart pumps oxygenated blood into the aorta and the blood is then circulated throughout the body until it returns through the venous system to the right side of the heart, which pumps it into the lungs where it is re-oxygenated. If the left ventricle is not working properly, the oxygenated blood is not fully cleared from the lungs and the blood is not circulated effectively. The human body generally tries to compensate when one of its parts is not working properly, and the heart is no exception: If the muscle of the left ventricle is damaged or is not working efficiently, it will tend to work harder in an effort to supply adequate blood flow into the aorta. Unfortunately, the increased effort results in dilation, or enlargement, of the ventricle, rather than increased blood flow. This dilation then makes it harder for the heart to contract effectively which results in even lower blood flow, increased effort and further dilation of the ventricle. This degenerative process generally continues until the patient becomes debilitated and eventually dies from inadequate clearing of the lungs and inadequate flow of oxygenated blood to the organs. The inadequate lung clearance or lung congestion is why the advanced stages of heart failure are called congestive heart failure, or CHF. When someone dies from “multi-organ failure” it is generally because the heart failed to provide adequate blood supply to the organs. Patients can spend months or years of near complete debilitation because of their heart failure before death. The symptoms of heart failure can be treated by pharmaceuticals or pacemaker technology but the underlying process is largely irreversible.

A commonly accepted method for categorizing the stages of heart failure is the New York Heart Association, or NYHA, functional classification system, which identifies four levels of heart failure in a steady progression of the disease by relating symptoms to everyday activities and the patient’s quality of life. These classes are:


Class		Patient Symptoms

Class I (Mild)		No limitation of physical activity. Ordinary physical activity does not cause undue fatigue, palpitation or dyspnea (shortness of breath).

Class II (Mild)		Slight limitation of physical activity. Comfortable at rest, but ordinary physical activity results in fatigue, palpitation or dyspnea.

Class III (Moderate)		Marked limitation of physical activity. Comfortable at rest, but less than ordinary activity causes fatigue, palpitation or dyspnea.

Class IV (Severe)		Unable to carry out any physical activity without discomfort. Symptoms of cardiac insufficiency at rest. If any physical activity is undertaken, discomfort is increased.

LVAD Treatment for Advanced Heart Failure

Circulatory assist devices are designed to take over some or all of the pumping function of the heart by mechanically pumping blood into the aorta. Implantation of circulatory assist devices is the only therapy that has been shown to fully rehabilitate a patient from NYHA Class IV to Class I. The REMATCH Study concluded that “the use of a left ventricular assist device in patients with advanced heart failure resulted in a clinically meaningful survival benefit and an improved quality of life. A left ventricular assist device is an acceptable alternative therapy in selected patients who are not candidates for cardiac transplantation.” In addition, a recent study conducted at the Harefield Hospital in the United Kingdom and cited in a November 2006 article in The New England Journal of Medicine has also shown that approximately 75% of patients receiving an LVAD, coupled with drug therapy, recovered.

A large population of end-stage heart failure patients can benefit from LVAD therapy, such as our HVAD pump. Within this population there are 3 different indications of use of LVADs, which are “bridge-to-transplant” therapy, “destination therapy” and “bridge-to-recovery” therapy.

Bridge-to-transplant therapy – Each year, the number of heart failure patients in need of a heart transplant exceeds the number of donor hearts that become available. According to information available in 2006, there are approximately 3,000 heart transplant procedures conducted each year. The company estimates that approximately 58% of patients spend one year or more on the transplant waiting list and approximately 37% of patients wait as long as three years or more. We estimate that approximately 30% of current transplant patients receive an LVAD as a bridge to transplant, meaning that the LVAD implantation is intended to stabilize the patient until a heart transplant becomes possible. We expect this percentage to increase as surgeons become more familiar with the technology and confidence in the procedure grows in line with improving clinical data and device reliability.

Destination therapy – Circulatory assist devices can be used as a permanent or quasi-permanent therapy in those patients who are not candidates for heart transplantation due to, for example, their age or the presence of other diseases. The National Institutes of Health, or NIH,

estimates that destination therapy represents a long-term option for up to 100,000 patients in the United States. For these late stage patients, drug therapy is currently the only alternative but even with drug therapy the 12-month mortality rate is approximately 75%. We believe that device durability and reliability, together with ease of implantation, are important factors in determining whether destination therapy will become accepted by physicians and patients. Since we believe that our devices will offer superior durability and reliability, we expect that the HVAD pump will be primarily used in destination therapy.

Bridge-to-recovery therapy – Circulatory assist devices that provide prolonged unloading of the heart muscle, or myocardium, have been shown recently to lead to “recovery of the heart” in some patients. In these patients, the combination of ventricular unloading combined with pharmaceutical therapy enables the physician to wean the patient from the pump and eventually remove it. This potential application of LVADs was cited in the November 2006 New England Journal of Medicine article that described a recovery rate of approximately 75% in the Harefield Hospital study. Confirmatory studies are underway in the United States by Thoratec Corporation, which has established the Harefield Recovery Protocol Study, or HARPS, with initial patient enrollment in the trial expected to occur in the first half of 2007. We believe that if use of LVADs in these circumstances achieves widespread physician acceptance, the potential market for use of our HVAD pump in bridge-to-recovery therapy could increase significantly since removal of the device reduces the clinical risks presented by pumps that are left in place for multiple years.

LVAD technology can be categorized in broad “generations.” The first generation circulatory assist devices, which were first introduced in the 1960’s, were pulsatile pumps, meaning they were designed to replicate the heart’s normal mechanical or contraction activity. These volume displacement pumps are relatively large and mechanically complex. They are implanted in the abdomen, with inflow and outflow cannulae routed through the diaphragm to the patient’s heart. As such, they are the most invasive LVADs. We believe that the size, weight and limited durability of these LVADs have limited their utilization as destination therapy devices and that cardiologists have remained cautious about referring patients for LVAD implants because they are skeptical about the merit and reliability of the current devices. First generation devices are the only ones currently available for sale in the United States.

A range of second generation pumps is being developed. These are rotary, continuous flow devices within which a spinning impeller, or rotor, is held in place by mechanical contact bearings. These pumps are non-pulsatile, do not require valves and have fewer moving parts. They are smaller than the first generation volume-displacement pumps, have lower energy requirements, are expected to have a lower risk of mechanical failure and are less invasive than the first generation devices. However, these second generation devices still require abdominal surgery for implantation. In addition, we believe that the use of mechanical bearings might limit the reliability of these devices over the long term. As bearings wear over time, they typically diminish LVAD performance and can ultimately cause an LVAD to fail.

Third generation pumps eliminate the use of mechanical contact bearings by introducing magnetic or hydrodynamic “bearings” to suspend the impeller. The absence of any points of mechanical contact within these devices is expected to improve system longevity. We believe our HVAD pump is the smallest third generation device in development and the only one that

can be implanted in the pericardial space. We believe that the combination of our HVAD pump’s wearless suspension and its small size will give us a significant and sustainable advantage over our competitors’ devices. In addition, the early results from our clinical trial highlight the benefits of the key features of our HVAD pump which we believe will offer additional advantages such as ease of implantation, device reliability and energy efficiency.

Most of the data currently available analysing the benefits of LVAD therapy are based on studies of first generation pumps, which represent relatively old technology. These devices are perceived to be less reliable than the second and third generation pumps. Further, the more recent clinical success of second and third generation circulatory assist devices manufactured by companies such as Thoratec Corporation and Ventracor Limited leads us to believe that these more reliable devices are likely to gain wider physician acceptance. These devices both appear to offer substantial advantages relative to the first generation devices currently available for sale in the United States. However, we believe that even these devices lack the considerable size and ease of use advantages of the HVAD pump.

Our Target Markets—Class III and Class IV Patients

Our devices will be targeted primarily to Class III and Class IV heart failure patients and their physicians, which include the cardiologists who refer patients for implantation as well as heart surgeons who conduct the actual implantation of the device. We estimate that that the number of Class III or Class IV heart failure patients worldwide is approximately seven million and that approximately 20% of these patients could be assisted by a circulatory assist device. We believe that there is a significant market opportunity for LVADs that are smaller, easier to use and more reliable than the devices that are currently available.

We estimate that there are approximately five million Class III heart failure patients worldwide. Of these five million patients, we estimate that approximately one million patients are severely impacted by CHF but are not yet nearing the end stages of the disease. While these patients suffer on a daily basis, they do not need the same full support as the sicker, later-stage Class IV patients and they may be less willing to undergo the open chest procedure required for the placement of the HVAD pump or other LVADs. We believe that up to one-third of these one million patients would be candidates for a less invasive surgical approach such as the one we are developing with the MVAD. We believe that this less invasive surgical approach should make more patients and referring physicians comfortable with the benefits of the implant because of the potential for reduced surgical risk and shorter post-operative recovery periods.

We expect the IV VAD to address the clinical needs of the balance of these one million Class III patients. The IV VAD will be a catheter-delivered implantable pump, requiring minimal surgery and convalescence time. The pump will be aimed at treating Class III patients whose quality of life is impacted by their condition but whose illness does not yet warrant the implantation of a full-output pump.

Other Treatment Options and Their Limitations

Heart transplantation is the only current curative therapy and ultimately provides the best recovery of cardiac function. Heart transplantation has become an effective and accepted

surgical procedure that can result in end-stage heart failure patients resuming relatively normal lives for a period usually expected to be up to ten years. However, the therapy is significantly constrained by the limited number of available donor hearts. Also, many patients with heart failure are ineligible for heart transplantation because of factors such as age or the presence of other diseases.

Drug treatment and pacing devices that are designed to stimulate the heart do not halt the progression of the disease. Other approaches such as devices that allow physicians to reduce the size of the heart and cell based therapy are either in the early development stages or are otherwise not achieving outcomes that lead physicians to see them as viable solutions. Pharmacologic management of CHF focuses primarily on increasing the force of heart contractions. A drug regimen of beta-blockers, diuretics, digitalis and angiotensin-converting enzymes, or ACE inhibitors, aim to improve the effectiveness of the heart’s contractions and slow CHF progression. Some investigations have suggested that the increase in survival is limited and that drug treatments merely delay the advance of CHF.

Biventricular pacing, or BVP, devices are designed to stimulate both sides of the heart electrically such that the contractions of the left and right ventricles are re-synchronized. A 2002 article in The New England Journal of Medicine discussing the Multicenter InSync Randomized Clinical Evaluation (MIRACLE) trial demonstrated that, of the eligible CHF patients, almost one third showed no improvement or became worse after treatment using a BVP device. In those patients who responded positively, the heart’s pumping ability improved only minimally by approximately 5%. This result was subsequently confirmed in a 2006 article in the American Heart Journal. Like drugs, pacing has not been shown to halt or reverse disease progression.

Coronary artery bypass graft surgery is a surgical procedure designed to route blood flow around a blockage or narrowing of an artery located on the heart. This procedure is considered in heart failure patients primarily when there is evidence of “hibernating” heart muscle that will exhibit improved function with restoration of normal blood flow. Improvements have resulted following bypass in such cases; however, the inability to accurately identify suitable patients limits the applicability of the procedure.

Heart restraint devices are investigational devices placed either inside or outside of the dilated heart, which are intended to reduce the size of the enlarged heart, lower wall stress and improve cardiac function. The use of a device inside the heart involves surgeons removing sections of the heart thereby allowing the reduced heart to pump more effectively. In the alternative, outside-the-heart approaches involve a sock-like device that is designed to reduce the heart’s size by physically pushing inwards on it. The first such device from Acorn Cardiovascular recently failed to meet its clinical study endpoint, and the FDA has denied approval for this device at this stage.

Cell-based therapies are currently at an early research stage. Although cell-based therapies may ultimately provide a cure for the underlying myocardial dysfunction in CHF, we believe that viable cell-based CHF therapies are at least a decade away from receiving FDA approval.

Intra-aortic balloon pumps have been in clinical use since the late 1960’s and are inserted by a cardiologist or surgeon to reduce acute heart failure symptoms or improve cardiac output. A balloon-tipped catheter is placed in the aorta, where the balloon inflates and deflates in counter-pulsation to the heart’s natural contractions. Clinically, these pumps are used for temporary support in patients with acute reversible heart failure and are not perceived as a curative therapy for advanced heart failure.

Extra-aortic balloon pumps are devices are applied to the external surface of the ascending aorta, with advantages of ease of surgical implantation and no contact with circulating blood. Several of these devices are in or expected to enter clinical trials. We believe these devices do not provide sufficient blood flow augmentation for patients in end-stage heart failure.

Total artificial hearts are implanted to replace the patient’s native heart, similar to heart transplantation therapy. Artificial hearts are large, highly complicated devices requiring extensive surgical procedures, and we believe they will be used only in a very minor subset of end-stage CHF patients.

Our Solution and Products

Proprietary Pump Technology

At the core of our technology platform is our proprietary “hybrid” system for suspending the impeller, or rotor, which is the only moving part within the pump. The impeller is suspended within the pump housing through a combination of passive magnets and a hydrodynamic thrust bearing. The hydrodynamic thrust bearing operates by establishing a “cushion” of blood between the impeller and the pump housing. Once power is applied to the device and the impeller begins to rotate, there are no points of mechanical contact within the pump, thus providing a completely “wearless” mechanism.

The hybrid suspension system has several important advantages over traditional technologies. The elimination of the internal mechanical bearings which are characteristic of second generation devices removes all points of friction or mechanical contact within the pump. We believe that this removal of contact should lead both to longer term reliability of the device and to a reduced risk of physical damage to blood cells as they pass through the pump. Our hybrid suspension technology also establishes a miniaturization “path”, which we believe will allow us to significantly downsize our pump technology without compromising clinical performance. We believe competing pump designs which rely on either magnetic or hydrodynamic forces alone face various physical constraints that may limit their ability to downsize.

The HeartWare HVAD pump

The first product in our portfolio, the HVAD pump, is a small, permanently implantable LVAD capable of generating up to ten liters per minute of blood flow. With a displaced volume of only 45 cubic centimeters and a mass of 145 grams, the HVAD pump is the only full-output pump implantable in the pericardial space, directly adjacent to the heart. It is also the only centrifugal pump designed to be implanted above the diaphragm in all patients. The reduced surgical complexity involved in implanting the HVAD pump in the pericardial space should lead

to shorter surgery time and a less invasive procedure relative to alternative devices, which are generally implanted in the abdomen in a surgically created pump “pocket”.

Device reliability is also enhanced through the use of dual motor stators with independent drive circuitry, allowing a seamless transition between dual and single stator mode if required. The pump’s inflow cannula is integrated with the device itself, providing proximity between the heart and the pumping mechanism, facilitating ease of implant and helping to ensure optimal blood flow characteristics. The use of a wide-bladed impeller and the clear flow paths through the pump help minimize the risk of pump-induced haemolysis, which refers to damage to blood cells, or thrombus, which means blood clotting.

Upon commercialization, we intend to provide the HVAD pump and its related components in one of three separate “kits” to be purchased in combination or separately, depending upon intended use. One kit will be a patient kit that will include the HVAD pump, a patient control unit, a battery pack, a battery charger and an AC power supply, and also the necessary surgical implant tools. Another kit will be a center support kit designed for each implantation facility that will include a clinical monitor, backup controller, batteries and accessories. The third kit will be a center implementation kit for facilities initiating HVAD pump implant programs that will include a contracted number of patient kits, a center support kit and associated training materials.

The HVAD pump product design is fundamentally complete as it is currently in use in human clinical trials. We have made and will likely continue to make design improvements or enhancements as data from these trials are returned and preliminary feedback is received by us. In order for the HVAD pump to be available for commercialization, the current international clinical trial must be successfully completed. The successful completion of this international clinical trial will enable us to commercialize the HVAD pump in Australia and certain European countries without further regulatory approval. In the United States, we must obtain the approval of the FDA before the HVAD pump can be commercialized. We expect that if the international clinical trial is successfully completed we will be able to provide the resulting trial data to the FDA, which we expect will form the basis for our application to the FDA for approval of the HVAD. Once regulatory approvals have been obtained, availability of the HVAD will depend upon our ability to manufacture larger quantities of the product and be subject to other general business risks and uncertainties identified elsewhere herein.

Transcutaneous Energy Transfer System

Currently, the HVAD pump and all commercially available LVADs are powered by a controller and battery pack worn external to the body. Power is transferred to the implanted pump via a thin electrical cable called a driveline, which exits the patient’s skin in the abdominal area.

We are working to develop a transcutaneous energy transfer, or TET, system, which will be compatible across the HeartWare family of pumps. This system will be designed to enable a fully implanted battery pack to be periodically recharged using induction across the skin, eliminating the need for a driveline and allowing complete implantation of the LVAD system,

including the controller and batteries. TET systems are already used to power pacemakers and other implantable electronic devices.

We believe that a TET system will be appealing to physicians and patients. The system will enable patients to charge their implanted batteries and “detach” for periods of time, thereby allowing them more easily to engage in normal daily activities and further improving their quality of life. The TET system is in the early stages of development. We are beginning to selectively recruit personnel who have previously developed TET systems for other companies. Before the TET system will be available for clinical trials, the Company must undertake significant work, including building functional prototypes of the implantable system, completing animal studies, developing manufacturing processes and completing formal verification testing and GLP animal testing.

We anticipate that our ongoing development efforts in this area, aided by the continuing improvements in electronics and battery technologies, will result in our development of a TET system that will be attractive to both physicians and patients alike.

We believe that the Company may also have a unique opportunity to provide a leading TET system due to the inherently lower power consumption and energy efficiency advantages in our HVAD pump as compared with others’ devices.

The HeartWare MVAD

The MVAD is a miniaturized device intended for chronic heart failure patients. The current design is a full-output axial flow pump with a fully suspended rotor and a volume approximately one-third that of the HVAD pump. The MVAD has been shown in animal trials to have comparable blood flow characteristics to the HVAD pump and thus should support the human heart’s full cardiac output. The MVAD is expected to require only minimally invasive surgery to implant by avoiding the need to make an incision through the midline of the breastbone, or sternum, in order to gain access to the heart (a median sternotomy).

By way of comparison, one of the key breakthroughs that led to an expansion of the pacemaker market was the elimination of the sternotomy. We are hopeful that this will hold true for LVADs when the MVAD is introduced. It is likely that many more patients and the physicians who refer them will be willing to undergo a minimally invasive surgical procedure than are currently comfortable with the full sternotomy required for LVAD implantation. We anticipate that the MVAD will increase the potential pool of eligible patients in the United States from the 100,000 per year who would be candidates for the HVAD pump to approximately 300,000.

The first MVAD preclinical trials began in August 2005. Animal studies are on-going with the recent focus being on novel, less invasive implantation techniques. Before the MVAD product will be available for commercial sale, we need to achieve the following milestones:

	•		finalization of surgical implantation techniques and procedures, including identification of necessary surgical implant tools;

	•		completion of the rotor hydraulic and suspension system designs;

	•		finalization of device (pump) prototypes and performance of confirmatory in-vivo (animal) studies;

	•		development of system peripherals (e.g., control, batteries, power adapters) utilizing the HVAD system components;

	•		successfully conduct a clinical trial; and

	•		obtaining regulatory approvals.

The HeartWare IV VAD

Our IV VAD, which is currently at the early prototype stage, is an axial flow pump which is approximately one-tenth the size of the HVAD pump. The IV VAD is being designed to be delivered via a catheter and implanted fully within the patient’s aorta. The initial prototype and design work suggests that this pump will have a three liter per minute output, making it ideal for Class III patients who do not need the full output of the MVAD or HVAD pump but who also are not sufficiently advanced in their disease to warrant thoracic, or chest, surgery. The IV VAD will likely be either fully percutaneous or will only require a small “cut down” in the patient’s iliac artery. We believe that this reduction in procedural invasiveness will vastly expand the potential pool of IV VAD patients. We estimate that one million of the five million patients in the United States who suffer from Class III heart failure would be potential candidates for the IV VAD. Catching patients early in the progression of their heart failure would halt disease progression earlier and improve the possibility that the heart would fully recover.

Before the IV VAD product will be available for commercial sale, we need to achieve the following milestones:

	•		completion of a working prototype;

	•		completion of marketing requirements study to determine the system requirements;

	•		selection of the surgical implantation techniques and procedures and identification of necessary implant tools;

	•		development of the device support and anchoring systems;

	•		completion of the rotor hydraulic and suspension system designs;

	•		development of system peripherals (e.g., control, batteries, power adapters) utilizing the HVAD system components, if appropriate;

	•		successfully conduct a clinical trial; and

	•		obtaining regulatory approvals.

Our Business Strategy

Our goal is to be at the forefront of innovation in the LVAD sector by maintaining a proprietary technology platform that enables the development of a pipeline of ever-smaller heart pumps that will reduce procedural invasiveness and simultaneously increase the number of patients who can benefit from our products.

We believe that our technology provides us with a significant competitive advantage in the LVAD market. To capitalize on that advantage our strategy is to obtain regulatory approval

for our initial product, the HVAD pump, and begin commercial HVAD pump sales, while at the same time develop new products. Our plan includes:

Obtaining regulatory approval and commercially launching the HVAD pump — Our first priority is to obtain regulatory approval, internationally and in the United States, for the HVAD pump and to launch the HVAD pump commercially. We are currently conducting a combined European and Australian clinical trial for which we expect complete enrollment by September 30, 2007. This trial is aimed at achieving European and Australian regulatory approval for the HVAD pump which is targeted for late 2007 or early 2008. If we complete the trial successfully, we intend to use the trial results to support pilot and pivotal human trials of the HVAD pump in the United States. We expect that the first trial would be a multi-center pilot trial for bridge-to-transplant patients. If that trial is successful, we would then submit for approval to commence a multi-center pivotal trial for bridge-to-transplant patients, followed by a second multi-center destination therapy trial.

Commencing our sales and marketing activities — Once we obtain regulatory approval to sell our product commercially, we intend to develop a network of training centers at the sites where our clinical trials are being conducted. We intend to work with a broad spectrum of physicians and key opinion leaders to promote the clinical benefits of our device. We also plan to recruit and train a direct sales force to market our product in the United States, Canada, Australia and some European countries and engage distributors elsewhere, particularly in the Asia-Pacific region.

Focusing on continuous product development — In parallel with the clinical development of the HVAD pump, we plan to advance the development of our next generation products, such as our MVAD and IV VAD. Our first MVAD animal trials began in August 2005 and our first IV VAD animal trial is scheduled to begin in the first quarter of 2008. We are also developing a prototype of a transcutaneous energy transfer system, or TET system, that will improve a patient’s quality of life by allowing our devices to be recharged through skin induction without the need for a separate line that connects the pump to an externally-worn controller and battery pack. We expect our TET system prototype to be available during the third quarter of 2007. We are also developing enhancements to our existing HVAD pump peripheral equipment based upon early clinician and patient feedback as well as continuing to develop physiological control algorithms. The objective of these projects is improved ease of implantation and use of the HVAD pump system that we believe will lead to enhancing market acceptance.

Partnering with leading professionals in the fields of cardiovascular surgery and heart centers around the world — Our Advisory Board is composed of leading professionals in the fields of cardiovascular surgery and cardiology. We have established relationships with several leading heart centers around the world and continue to expand this network. We believe these relationships are key to our growth as they help to drive clinical awareness of our products.

Clinical Trials and Pre-Clinical Studies

International Clinical Trial

We are currently conducting a combined European and Australian human clinical trial which is aimed at receiving European and Australian regulatory approval for the HVAD pump in late 2007 or early 2008. Implants are being conducted at a maximum of five centers, being the Vienna General Hospital in Austria, Royal Perth Hospital in Australia, Harefield Hospital in the United Kingdom, Hannover Medical Centre in Germany and St. Vincent’s Hospital in Australia. The endpoint for the trial is patient survival to the earlier of 180 days or transplantation. The trial began in March 2006 and calls for the implantation of the device in 20 patients with advanced heart failure. As of July 13, 2007, we have completed implants in 16 patients with cumulative support duration of more than 2,400 days. We currently expect to complete enrollment of 20 patients by September 30, 2007.

We initiated this pilot bridge-to-transplant trial, which has been designed in accordance with FDA protocols, at the Vienna General Hospital under the supervision of Dr Georg Wieselthaler, a member of our Advisory Board. This trial has since expanded into the Royal Perth Hospital in Australia, Harefield Hospital in the United Kingdom, the Hannover Medical Centre in Germany and St. Vincent’s Hospital in Australia. This trial is designed to enable us to commence bridge-to-transplant clinical trials as soon as possible in the United States. A successful US bridge-to-transplant clinical trial will be a prerequisite for the commencement of a destination therapy trial, and we believe that the results achieved so far in our international trial will favorably affect our ability to begin human implantation in the United States. Since Australian regulations are comparable to those in Europe, we intend to aggregate the Australian and European clinical trial results into a single data set for European and Australian regulatory approval submissions. This data will also be used to support FDA regulatory applications.

Pre-Clinical Studies

Prior to the commencement of our international clinical trial for the HVAD pump, we were required to complete a series of formal animal trials under “good laboratory practice,” or GLP, guidelines. These studies were conducted successfully over a period of approximately six months during 2005 at the Texas Heart Institute, one of the world’s leading heart facilities. Under the GLP study, six sheep were implanted with the HVAD pump for a period of approximately 90 days. At the end of the 90-day implant period, the HVAD pumps were explanted and detailed pathology conducted at the Texas Heart Institute. The study results demonstrated that the pumps performed according to design, with minimal hemolysis and no evidence of pump-related thrombosis. Data from the study formed the basis of our technical submissions to regulatory bodies and ethical committees prior to beginning our international clinical trial.

Prior to the GLP study, we conducted a series of pre-GLP trials of the HVAD pump in vitro and in animals. These trials were essentially design development animal trials for the HVAD pump and they were conducted to assess anatomical fitting, design, pump mechanics and long-term compatibility with blood components.

In 2005, we commenced a series of similar design development animal trials for the MVAD. These studies are continuing in 2007 with the recent focus of animal studies concentrating on innovative cannulation techniques which we expect to lead to less invasive surgical techniques.

Sales and Marketing

Cardiologists manage patients using medicines and work with interventional cardiologists and heart surgeons to ensure continuity of care for those patients who could benefit from device treatments. Cardiologists are the main source of patient referrals for surgeons and interventionists. Heart surgeons implant circulatory assist devices and, as such, they represent our primary target market for the HVAD pump. Interventional cardiologists typically work with specialized catheter-mounted instruments, which they thread through the vasculature in order to perform cardiovascular treatments. We anticipate that interventional cardiologists will become a key target market for our miniaturized devices, particularly the IV VAD, which is designed to be implanted via catheter.

Once we obtain regulatory approval to sell our product commercially, we intend to develop a network of training centers for our products. We plan to use selected trial centers in Australia, Europe and the United States as training centers and the participating physicians as advocates for the HVAD pump implantation procedure.

We intend to work with a broad spectrum of health care industry participants to promote the clinical benefits of our device, including hospital administrators, cardiac surgery centers, cardiologists, surgeons, physicians, insurers and government and industry representatives. The responsibility for ordering, paying for, stocking and generally managing our devices will rest with individual hospitals. While we do not expect hospitals to be responsible for deciding which device to purchase, they will be important in the broader decision making processes. We will seek to establish strong relationships with key personnel within the hospital supply chain, including managers with authority for making equipment purchase decisions.

We also plan to recruit and train a direct sales force to market our product in the United States, Canada, Australia and some European countries and engage distributors elsewhere, particularly in the Asia-Pacific region. We expect that our Australian operations center will serve as a base of operations to enter the Asian market for the HVAD pump.

Intellectual Property

We rely on a combination of patents, trade secrets, trademarks and copyrights, together with non-disclosure and confidentiality agreements, to protect our proprietary rights in our technologies.

We have an extensive patent portfolio which includes 15 issued US patents and 10 issued Australian patents, 3 issued patents in each of Germany, the United Kingdom and France, as well as patents issued in the Netherlands, Spain, Italy, Korea, Canada and Israel. We also have 17 pending US patent applications and a number of international patent applications filed under the Patent Cooperation Treaty, as well as in Japan, Europe and Australia.

Our US and foreign issued patents and patent applications cover fundamental technologies underlying our hemodynamically and physiologically compatible full-output, long-term circulatory assist devices. The main technologies claimed in patents and patent applications include:

	•		use of dual stators in a blood pump;

	•		the combination of passive magnetic bearings and hydrodynamic thrust bearings;

	•		channels or wide-bladed impellers in a blood pump;

	•		the use of ceramic between an impeller and motor stator; and

	•		flow estimation based on impeller speed and viscosity.

Major patents and pending patent applications covering technologies for our HVAD pump system are scheduled to expire at various times between 2016 and 2027. Pending patent applications covering technologies for our MVAD are scheduled to expire in 2024 and 2025. Pending patent applications covering technologies for our IV VAD are scheduled to expire in 2025 and 2028.

We actively monitor our intellectual property position and periodically review new developments to identify prudent extensions to our patent portfolio. We plan to file additional patent applications on inventions that we believe are patentable and important to our business. Accordingly, we intend to pursue and defend aggressively patent protection on our proprietary technologies.

We are aware of other companies developing ventricular assist devices, including centrifugal and axial flow ventricular assist devices and of patents and published patent applications held by these companies in those fields. To this end, we have reviewed all ventricular assist device patents owned by third parties of which we are aware and believe that our current products do not infringe any valid claims of the third party patents that we have analyzed. There are a large number of patents directed to ventricular assist device therapies, however, and there may be other patents or pending patent applications of which we are currently unaware that may impair our ability to operate. We are currently not aware of any third parties infringing our issued claims.

Despite our efforts, we may be subject to challenges, with or without merit, regarding our patents or other intellectual property. The medical device industry is characterized by a large number of patents and by frequent and substantial intellectual property litigation. Our products and technologies could infringe, or other persons could allege that our products and technologies infringe, the proprietary rights of third parties. If third parties successfully assert infringement or other claims against us, we may not be able to sell our products. In addition, patent or intellectual property disputes or litigation may be costly, result in product development delays or divert the efforts and attention of our management and technical personnel. If any such disputes or litigation arise, we may seek to enter into a royalty or licensing arrangement. However, such an arrangement may not be available on commercially acceptable terms, if at all. We may decide, in the alternative, to litigate the claims or to design around the patented or otherwise proprietary technology. At this time we are not party to any legal proceedings that relate to patents or proprietary rights.

Our intellectual property also includes non-patented technology, processes and procedures, and technical knowledge and know-how accumulated or acquired since inception, all

of which are significant to our competitive position. It is our policy to enter into confidentiality, non-disclosure and intellectual property assignment agreements with employees and consultants to help ensure that we can protect our rights in developed proprietary technology and prohibit the disclosure of any confidential information or trade secrets.

We own a registered trademark in the United States and Australia for HEARTWARE. In addition, we are seeking ownership of the HEARTWARE mark in Europe. In addition, we have filed applications for certain other trademarks that are currently pending in the United States, Europe and Australia.

Government Regulation

United States

Each of our heart pumps will be regulated by the FDA as a medical device under the US Food, Drug, and Cosmetic Act. FDA regulations govern:

	•		product design and development;

	•		product testing;

	•		product manufacturing;

	•		product safety;

	•		product labeling;

	•		product storage;

	•		record keeping;

	•		pre-market approval;

	•		advertising and promotion;

	•		distribution;

	•		product sales and post-market activities;

	•		import and export;

	•		medical device (adverse event) reporting; and

	•		field corrective actions (e.g., recalls).

Each product that we currently plan to distribute commercially in the United States will require prior pre-market approval from the FDA. Because our pumps are implanted devices, they are deemed to pose a significant risk. To market our products in the United States, the FDA must approve the device following a Company submission for pre-market approval (PMA). The

FDA can also impose restrictions on the sale, distribution or use of devices at the time of their clearance or approval, or subsequent to marketing.

Pre-market Approval

Each of our devices will be regulated as a Class III medical device. FDA approval of a PMA is required before marketing of a Class III medical device in the United States can proceed. The process of obtaining a PMA is costly, lengthy and uncertain. A PMA must be supported by extensive data including, but not limited to, technical, preclinical and clinical trials to demonstrate to the FDA’s satisfaction the safety and effectiveness of the device. Among other information, the PMA must also contain a full description of the device and its components, a full description of the methods, facilities and controls used for manufacturing, and proposed device labeling.

If the FDA determines that a PMA is complete, the FDA accepts the application and begins an in-depth review of the submitted information. The FDA, by statute and regulation, has 180 days to review an accepted pre-market approval application, although the review and response activities generally occurs over a significantly longer period of time, typically one year, and can take up to several years. During this review period, the FDA may request additional information or clarification of information already provided. Also during the review period, an advisory panel of experts from outside the FDA may be convened to review and evaluate the application and provide recommendations to the FDA as to the approvability of the device. Because there is no FDA-approved second or third generation LVAD, a review panel may be convened as part of any FDA review of our HVAD pump. In addition, the FDA will conduct a pre-approval inspection of our and our suppliers’ facilities to evaluate compliance with the quality system regulation. Under the Medical Device User Fee and Modernization Act of 2002, the fee to submit a PMA can be up to $259,600 per PMA, but certain companies, like HeartWare, may qualify for a small business exemption. New PMAs or supplemental PMAs are required for significant modifications to the manufacturing process, labeling, use and design of a device that is approved through the pre-market approval process. Pre-market approval supplements often require submission of the same type of information as a PMA except that the supplement is limited to information needed to support any changes from the device covered by the original PMA.

Clinical Trials

A clinical trial is almost always required to support a PMA. Clinical trials for a “significant risk” device such as ours require submission of an application for an investigational device exemption, or IDE, to the FDA. The IDE application must be supported by appropriate data, such as animal and laboratory testing results, showing that it is safe to test the device in humans and that the testing protocol is scientifically sound. Clinical trials for a significant risk device may begin once the IDE application is allowed to proceed by the FDA and the institutional review boards overseeing the clinical trial at the various investigational sites. We will obtain all such required approvals for our US clinical trial prior to enrolling patients at our investigational sites. Clinical trials require extensive recordkeeping and reporting requirements. Our clinical trials must be conducted under the oversight of an institutional review board at the relevant clinical trial site and in accordance with applicable regulations and policies including,

but not limited to, the FDA’s good clinical practice, or GCP, requirements. We, the trial data safety monitoring board, the FDA or the institutional review board at each site at which a clinical trial is being performed may suspend a clinical trial at any time for various reasons, including a belief that the risks to study patients outweigh the anticipated benefits.

Pervasive and Continuing FDA Regulation

Both before and after FDA approval, numerous regulatory requirements apply. These include:

	•		quality system regulation, which requires manufacturers to follow design, testing, control, documentation and other quality assurance procedures during the design and manufacturing processes;

	•		regulations which govern product labels and labeling, prohibit the promotion of products for unapproved or “off-label” uses and impose other restrictions on labeling and promotional activities;

	•		medical device reporting regulations, which require that manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if it were to recur; and

	•		notices of correction or removal and recall regulations.

Advertising and promotion of medical devices are also regulated by the Federal Trade Commission and by state regulatory and enforcement authorities. Recently, some promotional activities for FDA-regulated products have resulted in enforcement actions brought under healthcare reimbursement laws and consumer protection statutes. In addition, under the federal Lanham Act, competitors and others can initiate litigation relating to advertising claims.

Compliance with regulatory requirements is enforced through periodic, unannounced facility inspections by the FDA. Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may include any of the following sanctions:

	•		warning letters or untitled letters;

	•		fines, injunction and civil penalties;

	•		recall or seizure of our products;

	•		customer notification, or orders for repair, replacement or refund;

	•		operating restrictions, partial suspension or total shutdown of production or clinical trials;

	•		refusing our request for pre-market approval of new products;

	•		withdrawing pre-market approvals that are already granted; and

	•		criminal prosecution.

European Union

The primary regulatory environment in Europe is that of the European Union, or EU which consists of 25 countries encompassing nearly all the major countries in Europe. The EU has adopted two directives that cover medical devices—Directive 93/42/EEC covering medical devices generally and Directive 90/385/EEC for implantable medical devices, as well as numerous standards that govern and harmonize the national laws and standards regulating the design, manufacture, clinical trials, labeling and adverse event reporting for medical devices that are marketed in member states. Medical devices that comply with the requirements of the national law of the member state in which they are first marketed will be entitled to bear CE marking, indicating that the device conforms to applicable regulatory requirements, and, accordingly, can be commercially marketed within EEC states and other countries that recognize this mark for regulatory purposes.

We intend to apply for CE marking approval for our HVAD pump and expect to have final CE marking approval at the end of 2007. The method of assessing conformity with applicable regulatory requirements varies depending on the class of the device, but for our HVAD pump, the method involves a combination of self-assessment by the manufacturer of the safety and performance of the device, and a third party assessment by a Notified Body, usually of the design of the device and of the manufacturer’s quality system. A Notified Body is a private commercial entity that is designated by the national government of a member state as being competent to make independent judgments about whether a product complies with applicable regulatory requirements. The manufacturer’s assessment will include a clinical evaluation of the conformity of the device with applicable regulatory requirements. We intend to use BSI Management Systems America, Inc. as the Notified Body for our CE marking approval process.

Australia

In Australia, the Therapeutic Goods Administration, or TGA, is responsible for administering the Australian Therapeutics Goods Act. The Office of Devices, Blood and Tissues is the department within the TGA responsible for devices. The TGA recognizes five classes of medical devices and HeartWare’s circulatory assist device falls under the category of “active implantable medical devices.”

The Australian Register of Therapeutic Goods, or ARTG, controls the legal supply of therapeutic goods in Australia. The ARTG is the register of information about therapeutic goods for human use that may be imported, supplied in, or exported from Australia. Any use of an unapproved medical device in humans, even in pilot trials, requires an exemption from the requirement for inclusion on the ARTG.

In order for the Australian trials to satisfy FDA requirements, we will remain responsible for implementing the Australian trial protocol and investigational brochure, as well as maintaining clinical quality systems.

TGA approval is expected to follow receipt of CE Mark in Europe.

Other Regulations

We are also subject to various federal, state and local laws and regulations, both in the United States and in Australia, 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 our research and development work. Although we believe we are in compliance with these laws and regulations in all material respects, we cannot provide assurance that we will not be required to incur significant costs to comply with environmental laws or regulations in the future.

Third Party Reimbursement

In the United States, hospitals and doctors generally rely on third-party payers, such as Medicare, private health insurance plans and health maintenance organizations to reimburse all or part of the cost of medical devices and the related surgical procedures.

In 2001, the Center for Medicare and Medicaid Services, or CMS, filed a notice that implantable ventricular assist devices would be reimbursed under Diagnosis Related Group (DRG) 103, which is the highest DRG that covers heart transplantation. Using the new published payment rates, the base Medicare payment to CMS-certified centers increased to $136,000, with $76,000 typically assigned for each pump. Actual payments are subject to other variables such as center geography and patient circumstances. In addition, when LVAD patients are discharged from the hospital and then readmitted for transplantation, hospitals may qualify for two separate DRG 103 payments.

We believe that our products will be Medicare-eligible and therefore that they should be entitled to reimbursement. Reimbursement is expected to apply during US clinical trials once an IDE has been approved. Several insurance providers have also implemented US policies for circulatory assist devices, including Blue Cross and Blue Shield. We believe that most private insurers will cover our devices if they are also covered by Medicare.

European reimbursement varies from country to country and often hospital to hospital. The European system is more effective at focusing resource intensive procedures in a small number of centers within each country and LVAD’s fall into that category of resource intensive procedures. In those hospitals that perform LVAD implantation, there is adequate budget to purchase circulatory assist devices. As in the United States, the physician will continue to drive the decision as to which LVAD to purchase.

Competition

Competition in the LVAD industry is expected to increase as better devices become available. In the long run, we believe that only smaller, less invasive, reliable and durable devices will remain as viable alternatives for the treatment of CHF.

Our principal competitors include Thoratec Corporation, World Heart Corporation, Arrow International, Jarvik Heart, MicroMed Technology, Inc, Ventracor Limited, Berlin Heart

AG, Abiomed, Inc. and Terumo Heart, Inc. We are not aware of whether any of these competitors is currently developing a new full-output pump that is equivalent or lesser size to the HVAD pump and which is designed to be implanted by minimally invasive techniques, including implantation above the diaphragm in all patients. Further, there may be companies unknown to us that are developing competitive pumps or products, and we can offer no assurance that the above competitors or these other parties will not be successful in their efforts.

AbioMed’s AbioCor, Thoratec’s HeartMate I LVAS and WorldHeart’s Novacor LVAS are all “first generation” devices. We believe that the size, weight and limited durability of these LVADs have limited their utilization as destination therapy devices.

Examples of “second generation” devices include the HeartMate II LVAS produced by Thoratec and is expected to gain approval in 2007, the Jarvik 2000 FlowMaker pump produced by Jarvik Heart and MicroMed’s Debakey VAD pump. These devices are less invasive than first generation devices but, with the exception of the Jarvik 2000, all require abdominal surgery to implant.

We believe that the key features of our technology that provide us with a competitive advantage over our competitor’s products include:

	•		small device size which allows for routine implantation in the space immediately surrounding the heart, known as the pericardial space in all patients, directly adjacent to the heart, unlike other full-output LVADs that are currently available;

	•		a hybrid magnetic and hydrodynamic impeller suspension system which eliminates the need for mechanical bearings, providing a “wearless mechanism”; and

	•		a design that includes a wide-bladed impeller which facilitates clear blood flow paths through the pump and an integrated inflow cannula which optimizes blood flow characteristics.

Although we believe our technology provides us with a competitive advantage over our competitor’s products, we note that:

	•		our products are in the early stages of development, we have limited implantation experience, and our success is dependent on our international clinical trials proving the safety and efficacy of our products;

	•		a number of our competitors have significantly greater financial and human resources than we do and have established reputations, as well as worldwide distribution channels and sales and marketing capabilities that are larger and more established than ours; and

	•		our market is an emerging market and is reliant upon acceptance of LVAD technology.

Research and development

From the date of our inception through March 31, 2007, we have incurred approximately $25.5 million on research and development of our LVAD technologies. For the quarter ended March 31, 2007 and each of the years ended December 31, 2006 and 2005, we incurred research and development expenses of $3.1 million, $11.7 million and $10.7 million, respectively. Research and development costs include activities related to the research, development, design, testing, and manufacturing of prototypes of our products. It also includes clinical activities and regulatory costs. Research and development costs also include cost associated with certain HeartWare employees engaged in research and development activities, as well as external consultants and contractors that we may engage from time to time. We expect our research and development expenses to increase significantly as we continue the development of our HVAD pump, initiate commercialization activities, research the application of, and develop our miniaturized heart pump technology, conduct additional clinical trials and hire additional employees.

Manufacturing

Our products are currently being utilized only in connection with clinical trials. Our manufacturing activities to date, and for the foreseeable future, will continue to consist primarily of process development, component assembly, quality control testing and research and development activities.

A number of critical components of our HVAD, including the center post, pump housing and impeller, are provided by outside suppliers and then assembled and tested by us in-house. We do not presently have supply agreements in place with our suppliers, other than a production services agreement with Minnextronix, Inc., which is described elsewhere herein. We have identified second source suppliers for all of our critical components, except for Minnetronix, Inc.

Employees

As of May 31, 2007, we had 70 employees, 13 of whom hold masters or doctorate degrees. Approximately 54 employees are engaged in research and development including manufacturing and operations, 4 in clinical and 12 in finance, legal and other administrative functions. None of our employees are represented by a labor union or covered by a collective bargaining agreement. We consider our relations with our employees to be good.

Medical Advisory Board

HeartWare maintains a six-person Medical Advisory Board (“Advisory Board”) which guides the Company in both clinical and product development strategies. Our Advisory Board is comprised of a group of cardiac surgeons and cardiologists. Their compensation is on a per diem basis to the extent their services are requested by the Company. The following are biographical summaries of the members of our Medical Advisory Board.

O. Howard “Bud” Frazier, MD, Chairman & Chief Transplant Services, Director Cardiovascular Research, Texas Heart Institute. Dr. Frazier has been a pioneer in the surgical treatment of severe heart failure. He has been director of cardiopulmonary

transplantation for 20 years at the Texas Heart Institute. He serves on the editorial boards of several medical journals, including Circulation, the journal of the American Heart Association. Dr. Frazier is a former chairman of the Federal Affairs Committee for the American Society for Artificial Internal Organs and has also served on the Education Committee of the American Society of Transplant Surgeons and the Advisory Board of the National Heart, Lung and Blood Institute. In 2001, he was elected president of the American Society for Artificial Internal Organs. Dr. Frazier’s academic appointments include Professor of Surgery at the University of Texas Health Science Center in Houston, Clinical Associate Professor of Surgery at the University of Texas M.D. Anderson Cancer Center, and Clinical Professor at Baylor College of Medicine in Houston.

Steven W. Boyce, MD, Director of Heart Transplantation and Cardiac Assist Device Programmes, Washington Hospital Center. Dr. Boyce has served as Director of the Cardiac Transplantation and Mechanical Circulatory Assist Device Programs for the Washington Hospital Center, as well as Director of the Cardiac Surgery Research Program, for over ten years. He is certified with the American Board of Thoracic Surgery and performs approximately 500 adult cardiac surgeries per year. Dr. Boyce has served as principal investigator on a number of FDA pharmaceutical and device investigational protocols. He has worked with a variety of mechanical circulatory support devices, both investigational and commercially available. Dr. Boyce graduated from Johns Hopkins University’s undergraduate program and the University of Maryland’s medical school program. Dr. Boyce’s professional affiliations include the International Society of Heart and Lung Transplantation, the American College of Surgeons, the Society of Thoracic Surgeons, the American College of Cardiology, the Heart Failure Society of America and the International Society for Minimally Invasive Cardiac Surgery.

Leslie Miller, MD, Director of Cardiology, Washington Hospital Center Walters Chair of Cardiology, Georgetown School of Medicine. Dr. Miller joined the Washington Hospital Center in 2006. He was previously Professor and Director of the Cardiovascular Division and Director of the Heart Failure/Heart Transplant Program at the University of Minnesota in Minneapolis. Dr. Miller has been an investigator in over 80 clinical trials studying the safety and efficacy of therapies for heart failure, cardiac transplantation and ventricular assist devices. He is a Past President of the International Society for Heart and Lung Transplantation and the American Society of Transplant Physicians and is currently a Member of the Board of the American Heart Association. He is Founder and Chairman of the Working Group of Transplant Cardiologists and a member of the Cardiac Transplant Research Database Executive Committee. Dr. Miller is also a current member on the US Federal Agency Advisory Committees for national coverage policy for the use of left ventricular assist devices and the American Heart Association Committee on Heart Failure/Transplantation. Dr. Miller received his medical degree from the University of Missouri School of Medicine. He is a Fellow of the American College of Cardiology, the American College of Chest Physicians and the American Heart Association Council on Clinical Cardiology.

Georg M. Wieselthaler, MD, Clinical Director of Mechanical Circulatory Support, University of Vienna, Dept. of Cardiothoracic Surgery, Vienna General Hospital. Dr. Wieselthaler has extensive experience with numerous ventricular assist device systems. He is the primary surgeon implanting VAD systems and supervising patient care at the University of Vienna and Vienna General Hospital. Dr. Wieselthaler has implanted a range of circulatory

assist devices. He was the first to implant the MicroMed DeBakey rotary LVAD and has since supported more than 40 patients with this pump. Dr. Wieselthaler conducted the first-ever implant of the HeartWare HVAD pump. Dr. Wieselthaler is currently the Secretary General of the International Society of Rotary Blood Pumps.

Laman A. Gray, Jr., MD, Professor of Surgery and Director of the Division of Thoracic and Cardiovascular Surgery at the University of Louisville School of Medicine. Dr. Gray is highly experienced in the fields of cardiac surgery and development of artificial hearts and circulatory support systems. He was an original investigator for the Novacor Ventricular Assist System, he performed the first clinical use of ABIOMED’s SupraCor IABP and he implanted the first AbioCor Implantable Replacement Heart. Dr. Gray has been the Director of the University of Louisville School of Medicine’s Division of Thoracic and Cardiovascular Surgery for more than 20 years, is a founding member of the Jewish Hospital Heart and Lung Institute and is currently the Director of the Cardiovascular Innovation Institute. Dr. Gray received his M.D. from Johns Hopkins University in Baltimore.

Gerry O’Driscoll, MB, BCh, BAO, DMed, PhD, Professor of Cardiology at University of Notre Dame, Western Australia, Consultant Cardiologist at Royal Perth Hospital. Dr. O’Driscoll is Consultant Cardiologist at Royal Perth Hospital and Medical Head of West Australian Advanced Heart Failure & Cardiac Transplant Services. He is also Head of the Cardiovascular Research Group at Royal Perth Hospital and a Board Member of the Heart & Lung Transplant Foundation of Western Australia. Dr. O’Driscoll has worked extensively with a wide range of mechanical circulatory support devices over the past decade. He has experience with the Thoratec, Heartmate, Novacor, Ventrassist, Biomedicus, Abiomed, Jarvik and HeartWare devices. Dr. O’Driscoll serves as a reviewer for several national funding bodies including the National Heart Foundation and National Health and Medical Research Council. He is a member of several national committees in clinical cardiology and a reviewer for a number of international scientific journals, including the American Journal of Cardiology, Lancet, Circulation and the Journal of the American College of Cardiology. Dr. O’Driscoll received his medical degree from the University College Cork in Ireland. He received his DMed from the National University of Ireland and his PhD from the University of Western Australia. He is a Fellow of the Royal Australasian College of Physicians, the Cardiac Society of Australia & New Zealand, the European Society of Cardiology and the American College of Cardiology.

Legal Proceedings

From time to time, we may be involved in litigation relating to claims arising out of our operations. However, we are not currently involved in any legal proceedings.

Corporate History

HeartWare Limited was registered under the laws of the state of Victoria, Australia on November 26, 2004. On January 24, 2005, HeartWare Limited acquired all of the voting stock of HeartWare, Inc. in exchange for the issuance by HeartWare Limited of 88 million ordinary shares and a convertible note in the principal amount of $1.1 million.

Our operating subsidiary, HeartWare, Inc, is a Delaware corporation which was incorporated on April 8, 2003 under the name Perpetual Medical, Inc., and which changed its

name to HeartWare, Inc. on July 10, 2003. Since July 10, 2003, HeartWare, Inc. has operated the business formerly owned and operated by Kriton Medical, Inc., or Kriton, which had been developing the HVAD pump since approximately 1995.

In May 2003, Kriton filed for protection from creditors under Chapter 11 of the United States Bankruptcy Code. On May 20, 2003, Kriton and its lead investor Apple Tree Partners I, L.P. proposed a joint plan of liquidation for Kriton. On June 20, 2003, the United States Bankruptcy Court of the Southern District of Florida issued a court order confirming the plan of liquidation. This court order, together with a supplemental court order approving a settlement between Apple Tree Partners and various stockholders of Kriton issued on July 3, 2003, approved the sale of substantially all the assets of Kriton to HeartWare, Inc., and on July 10, 2003, HeartWare, Inc. purchased substantially all of the assets of Kriton free and clear of any and all liens, security interests, encumbrances and claims. HeartWare, Inc. continued to operate as an independent entity until it was acquired by HeartWare Limited.

ITEM 1A. RISK FACTORS

Our business faces many risks. We believe the risks described below are the material risks facing the Company. However, the risks described below may not be the only risks we face. Additional unknown risks or risks that we currently consider immaterial, may also impair our business operations. If any of the events or circumstances described below actually occurs, our business, financial condition or results of operations could suffer, and the trading price of our ordinary shares could decline significantly. Investors should consider the specific risk factors discussed below, together with the cautionary statements under the caption “Forward-Looking Statements” and the other information and documents that we file from time to time with the Securities and Exchange Commission.

Risks Relating to Our Business

We have incurred operating losses since our inception and anticipate that we will continue to incur operating losses for the foreseeable future.

We are a development stage company with a limited operating history. We have incurred net losses since our inception, including net losses of $4.8 million for the quarter ended March 31, 2007 and $17.4 million and $13.8 million for the fiscal years ended December 31, 2006 and 2005, respectively. As of March 31, 2007, our accumulated deficit was $36.1 million. We do not currently have any products that have been approved for marketing, and we continue to incur research and development and general and administrative expenses related to our operations. We expect to continue to incur significant and increasing operating losses for the foreseeable future as we incur costs associated with the conduct of our clinical trials, continue our product research and development programs, seek regulatory approvals, expand our sales and marketing capabilities, increase our manufacturing operations and comply with the requirements related to being a public company. To become and remain profitable, we must succeed in developing and commercializing products with significant market potential. This will require us to succeed in a range of challenging activities, including conducting clinical trials, obtaining regulatory approvals and manufacturing, marketing and selling commercial products. We may never

succeed in these activities, and we may never generate revenues sufficient to achieve profitability. If we do achieve profitability, we may not be able to sustain it.

We may need substantial additional funding and may be unable to raise capital when needed, which would force us to delay, reduce or eliminate our product development programs or commercialization efforts.

Currently, we have no products available for commercial sale, and to date we have not generated any product revenue. We believe our cash and cash equivalents on hand and expected cash flows from operations will not be sufficient to fund our operations for at least the next twelve months unless we obtain additional funding. In addition, the report of our independent registered public accounting firm contains a going concern opinion in connection with its audit of our financial statements for the fiscal year ended December 31, 2006. Our continued operations are dependent on our ability to obtain additional funding during 2007. However, additional funding may not be available on terms favorable to us, or at all. If we raise additional funding through the issuance of equity securities, our ordinary shares may suffer dilution. If we are unable to secure additional funding, our product development programs and our commercialization efforts would be delayed, reduced or eliminated.

We have no products approved for commercial sale, and our success will depend heavily on the success of our international clinical trial for our lead device, the HVAD pump. If we are unable to complete this trial or if we experience significant delays in the trial, our ability to obtain regulatory approval to commercialize our products and to generate revenues will be harmed.

Our lead device, the HVAD pump, is currently undergoing a clinical trial at sites in Austria, Australia, the United Kingdom and Germany. Our international clinical trial protocol requires us to obtain clinical data from at least 20 patients to meet our primary safety and efficacy endpoints. As of June 20, 2007, we have completed implants in 14 patients with a cumulative support duration of more than 2,200 days. We currently expect to complete enrollment of 20 patients by September 30, 2007 and achieve regulatory approval for the HVAD pump by late 2007 or early 2008. Completion could be delayed or adverse events during the trial could cause us to repeat or terminate the trial. If our clinical trial is delayed, if it must be repeated or if it is terminated, our costs associated with the trial will increase, and it will take us longer to obtain regulatory approvals and commercialize the product. Our clinical trials may also be suspended or terminated at any time by regulatory authorities or by us. Any failure or significant delay in completing clinical trials for our products candidates could harm our financial results and the commercial prospects for our products candidates.

The completion of our international clinical trial could be substantially delayed or prevented by several factors, including:

	•		slower than expected rates of patient recruitment and enrollment;

	•		failure of patients to complete the clinical trial;

	•		unforeseen safety issues;

	•		lack of efficacy during clinical trials;

	•		inability or unwillingness of patients or medical investigators to follow our clinical trial protocols;

	•		inability to monitor patients adequately during or after treatment;

	•		risks associated with trial design, which may result in a failure of the trial to show statistically significant results even if the product is effective;

	•		governmental and regulatory delays or changes in regulatory requirements, policies or guidelines; and

	•		varying interpretation of data by regulatory agencies.

If our international clinical trial does not demonstrate the safety and efficacy of the HVAD pump or if we do not receive regulatory approval in Europe and Australia, we will be unable to commercialize our product and generate revenues.

Before we can obtain regulatory approval to commercialize the HVAD pump in Europe and Australia, which are the first places where we intend to seek such approval, we must be able to demonstrate the safety and efficacy of our product by meeting the endpoint of the trial. The endpoint is that 20 patients with advanced heart failure shall have been implanted with the HVAD pump and shall have survived to the earlier of 180 days or to the time that they have received a heart transplant. Despite the encouraging results that we have observed to date, we may not be able to demonstrate the safety and efficacy of the HVAD pump by meeting the endpoint of the trial. Even if we complete our international clinical trial successfully, we may not receive regulatory approval in Europe and Australia. If we are unable to meet the endpoint or we do not obtain regulatory approval, we will be unable to commercialize our product and generate revenues.

Even if our international clinical trial is successful and we obtain foreign regulatory approvals, we will need to obtain FDA approval to commercialize our product in the United States, which will require us to receive FDA approval to conduct clinical trials in the United States and to complete those trials successfully. If we fail to obtain approval from the FDA, we will not be able to market and sell our products in the United States.

We do not have the necessary regulatory approvals to commercialize our HVAD pump, or any of our other products, in the United States. Although we intend to use the data from our international clinical trial to support an application for approval of the HVAD pump by the FDA, we can offer no assurance that our HVAD pump, or any of our future products, will obtain FDA approval.

In order to obtain FDA approval for our HVAD pump, we will be required to receive PMA from the FDA. A PMA must be supported by pre-clinical and clinical trials to demonstrate safety and efficacy. A clinical trial will be required to support an application for a PMA, but before we can commence a clinical trial, we will first be required to apply for and receive an investigational device exemption, or IDE, which must be supported by appropriate data showing

that it is safe to test the device in humans. We do not know whether our IDE for our products or the protocols for any of our clinical trials will be accepted by the FDA. We do not know if our clinical trials will begin or be completed on schedule or at all. Even if completed, we do not know if these trials will produce clinically meaningful results sufficient to show the safety and efficacy of our products so as to support an application for a PMA.

The process of obtaining marketing approval or clearance from the FDA for our HVAD pump, or any future products or enhancements or modifications to any products, could:

	•		take a significant period of time;

	•		require the expenditure of substantial resources;

	•		involve rigorous pre-clinical and clinical testing;

	•		require changes to our products; and

	•		result in limitations on the indicated uses of the products.

There can be no assurance that we will receive the required approvals from the FDA or if we do receive the required approvals, that we will receive them on a timely basis. The failure to receive product approval clearance by the FDA could have a material adverse effect on our business, financial condition or results of operations.

We may not meet regulatory quality standards applicable to our manufacturing and quality processes, which could have an adverse effect on our business, financial condition or results of operations.

Even after products have received marketing approval or clearance, product approvals and clearances by the FDA can be withdrawn due to failure to comply with regulatory standards or the occurrence of unforeseen problems following initial approval. As a device manufacturer, we are required to demonstrate and maintain compliance with the FDA’s Quality System Regulation, or QSR. The QSR is a complex regulatory scheme that covers the methods and documentation of the design, testing, control, manufacturing, labeling, quality assurance, packaging, storage and shipping of our products. The FDA enforces the QSR through periodic unannounced inspections. In addition, the US federal Medical Device Reporting regulations require us to provide information to the FDA whenever there is evidence that reasonably suggests that a device may have caused or contributed to a death or serious injury or, if a malfunction were to occur, could cause or contribute to a death or serious injury. Compliance with applicable regulatory requirements is subject to continual review and is rigorously monitored through periodic inspections by the FDA. Our failure to comply with the QSR or to take satisfactory corrective action in response to an adverse QSR inspection could result in enforcement actions, including a public warning letter, a shutdown of or restrictions on our manufacturing operations, delays in approving or clearing a product, refusal to permit the import or export of our products, a recall or seizure of our products, fines, injunctions, civil or criminal penalties, or other sanctions, any of which could cause our business and operating results to suffer.

In the European Union, we are required to maintain certain ISO certifications in order to sell our products and must undergo periodic inspections by notified bodies to obtain and maintain these certifications. If we do not comply, the FDA or European Union organizations may withdraw clearance to market, require a product recall or take other enforcement action.

We plan to operate in multiple regulatory environments that require costly and time consuming approvals.

Even if we obtain regulatory approvals to commercialize the HVAD pump or any other product that we may develop, sales of our products in other jurisdictions will be subject to regulatory requirements that vary from country to country. The time and cost required to obtain approvals from these countries may be longer or shorter than that required for FDA approval, and requirements for licensing may differ from those of the FDA. Laws and regulations regarding the manufacture and sale of our products are subject to future changes, as are administrative interpretations and policies of regulatory agencies. If we fail to comply with applicable foreign, federal, state or local market laws or regulations, we could be subject to enforcement actions. Enforcement actions could include product seizures, recalls, withdrawal of clearances or approvals, and civil and criminal penalties, which in each case would harm our business.

Our LVADs may never achieve market acceptance even if we obtain regulatory approvals.

Even if we obtain regulatory approvals to commercialize the HVAD pump or any other product that we may develop, our products may not gain market acceptance among physicians, patients, health care payers or the medical community. The degree of market acceptance of any of the devices that we may develop will depend on a number of factors, including:

	•		the perceived effectiveness of the product;

	•		the prevalence and severity of any side effects;

	•		potential advantages over alternative treatments;

	•		the strength of marketing and distribution support; and

	•		sufficient third party coverage or reimbursement.

If our HVAD pump, or any other product that we may develop, is approved but does not achieve an adequate level of acceptance by physicians, patients, health care payers and the medical community, we may not generate product revenue and we may not become profitable or be able to sustain profitability.

If we fail to obtain an adequate level of reimbursement for our products by third party payers, there may be no commercially viable markets for our product candidates or the markets may be much smaller than expected.

The availability and levels of reimbursement by governmental and other third party payers affect the market for our product candidates. The efficacy, safety, performance and

cost-effectiveness of our product candidates and of any competing products will determine the availability and level of reimbursement. Reimbursement and health care payment systems in international markets vary significantly by country, and include both government sponsored health care and private insurance. To obtain reimbursement or pricing approval in some countries, we may be required to produce clinical data, which may involve one or more clinical trials, that compares the cost-effectiveness of our products to other available therapies. We may not obtain international reimbursement or pricing approvals in a timely manner, if at all. Our failure to receive international reimbursement or pricing approvals would negatively impact market acceptance of our products in the international markets in which those approvals are sought.

We believe that future reimbursement may be subject to increased restrictions both in the United States and in international markets. Future legislation, regulation or reimbursement policies of third party payers may adversely affect the demand for our products currently under development and limit our ability to sell our product candidates on a profitable basis. In addition, third party payers continually attempt to contain or reduce the costs of health care by challenging the prices charged for health care products and services. If reimbursement for our products is unavailable or limited in scope or amount or if pricing is set at unsatisfactory levels, market acceptance of our products would be impaired and our future revenues, if any, would be adversely affected.

If hospitals do not conduct destination therapy procedures using our LVADs, market opportunities for our product will be diminished.

If hospitals do not conduct destination therapy procedures using our LVADs, our market opportunities will be diminished. The number of destination therapy procedures actually performed depends on many factors, most of which are out of our direct control, including:

	•		the number of sites approved for destination therapy by relevant regulatory agencies;

	•		the clinical outcomes of destination therapy procedures;

	•		cardiology and referring physician education, and their commitment to destination therapy;

	•		the economics of the destination therapy procedure for individual hospitals, which includes the costs of the LVAD and related pre-and post-operative procedures and their reimbursement; and

	•		the economics of hospital’s not conducting a destination therapy procedure, including the costs and related reimbursements of long-term hospitalization.

The different outcomes of these and other factors, and their timing, may have a significant negative impact on our future results.

We have limited sales, marketing and distribution experience.

To develop and increase internal sales, distribution and marketing capabilities, we would have to invest significant amounts of financial and management resources. In developing these sales, marketing and distribution functions ourselves, we could face a number of risks, including:

	•		we may not be able to attract and build a significant marketing or sales force;

	•		the cost of establishing, training and providing regulatory oversight for a marketing or sales force may be substantial; and

	•		there are significant legal and regulatory risks in medical device marketing and sales that we have never faced, and any failure to comply with all legal and regulatory requirements for sales, marketing and distribution could result in enforcement action by the FDA or other authorities that could jeopardize our ability to market the product or could subject us to substantial liability.

We have limited capabilities and manufacturing personnel, and if our manufacturing facilities are unable to provide an adequate supply of products, our growth could be limited and our business could be harmed.

We currently manufacture our LVAD at our facilities in Miramar, Florida. If there were a disruption to our existing manufacturing facility, for example, due to a hurricane, we would have no other means of manufacturing our LVAD until we were able to restore the manufacturing capability at our facility or develop alternative manufacturing facilities. If we were unable to produce sufficient quantities of our LVADs for use in our current and planned clinical trials, or if our manufacturing process yields substandard LVADs, our development and commercialization efforts would be delayed.

We currently have limited resources, facilities and experience to commercially manufacture our products. In order to produce our products in the quantities that we anticipate will be required to meet anticipated market demand, we will need to increase the production process by a significant factor over the current level of production. There are technical challenges to increasing manufacturing capacity, and developing commercial-scale manufacturing facilities would require the investment of substantial additional funds and hiring and retaining additional management and technical personnel who have the necessary manufacturing experience. We may not successfully complete any required increase in a timely manner or at all. If we are unable to do so, we may not be able to produce our LVADs in sufficient quantities to meet the requirements for the launch of the product or to meet future demand, if at all.

If we are unable to manufacture a sufficient supply of our LVADs, or if we cannot do so efficiently, our revenues, business and financial prospects would be adversely affected.

Our manufacturing facilities and the manufacturing facilities of our suppliers must comply with applicable regulatory requirements. If we fail to achieve regulatory approval for these manufacturing facilities, our business and our results of operations would be harmed.

Completion of our clinical trials and commercialization of our products require access to, or the development of, manufacturing facilities that meet applicable regulatory standards to

manufacture a sufficient supply of our products. In addition, the FDA must approve facilities that manufacture our products for US commercial purposes, as well as the manufacturing processes and specifications for the product. Suppliers of components of, and products used to manufacture, our products must also comply with FDA and foreign regulatory requirements, which often require significant time, money and record-keeping and quality assurance efforts and subject us and our suppliers to potential regulatory inspections and stoppages. We and our suppliers may not satisfy these requirements. If we or our suppliers do not achieve required regulatory approval for our manufacturing operations, our commercialization efforts could be delayed, which would harm our business and our results of operations.

We rely on specialized suppliers for certain components and materials.

We depend on a number of suppliers to successfully manufacture sufficient quantities of the components we use in our products. We rely on suppliers for critical components including the center post, housing and impeller that are assembled into our primary product, the HVAD, as well as finished products that comprise our peripheral and external equipment that is included in the HVAD system. Lead times for our components are significant and can be up to as long as sixteen weeks. We are in the process of negotiating supply agreements with our key suppliers but have not formalized any supply arrangements, with the exception of the productions service agreement described below.

We have second-source suppliers for many of our components. If, however, any critical components are not delivered on time or at all, for any reason, contractual or otherwise, our business may be seriously harmed financially. Additionally, significant changes to our components may require product redesign and new regulatory clearances, either of which could significantly delay or prevent production or involve substantial cost.

We have a production services agreement with Minnetronix, Inc., located in Minnesota, as the supplier of the patient monitor and controllers. The agreement, effective August 17, 2006, is for an initial term of one year, and will automatically renew for additional periods of one year unless either party elects not to renew the agreement by giving at least 90 days prior written notice. The agreement may also be terminated in an event of a breach upon specified notice, or for convenience by either party giving the other party 180 days prior written notice. Although we are required to submit 12-month forecasts to Minnetronix, we cannot assure you that they will be able to have the capacity to accommodate our demand.

While we have identified second-source suppliers for other key components, we have not entered into contractual arrangements with these suppliers and we cannot assure you that we will be able to maintain our manufacturing schedule without undue delay or substantial cost if any of these agreements are terminated.

Additionally, we may experience problems or delays in our own manufacturing process, which again may be significantly harmful to our financial status or reputation and therefore make it more difficult or expensive for us to continue with or enter into relationships with specialized suppliers. Our business plan is predicated on entering into and renewing agreements with one or more external parties to manufacture components of our technology. If we are unable to secure

or maintain agreements with these manufacturers on favorable terms or at all, then our ability to commercialize our technology and expand our operations will be impaired.

We may not be able effectively to protect our intellectual property rights which could have an adverse effect on our business, financial condition or results of operations.

Our success depends in part on our ability to obtain and maintain protection in the United States and other countries of the intellectual property relating to or incorporated into our technology and products. As of March 31, 2007, we owned 15 issued patents in the United States and 18 patent applications in the United States, as well as 15 patents and 28 patent applications in foreign jurisdictions. Our pending and future patent applications may not issue as patents or, if issued, may not issue in a form that will provide us any competitive advantage. Even if issued, existing or future patents may be challenged, narrowed, invalidated or circumvented, which could limit out ability to stop competitors from marketing similar products or limit the length of terms of patent protection we may have for our products. Changes in patent laws or their interpretation in the United States and other countries could also diminish the value of our intellectual property or narrow the scope of our patent protection. In addition, the legal systems of certain countries do not favor the aggressive enforcement of patents, and the laws of foreign countries may not protect our rights to the same extent as the laws of the United States. As a result, our patent portfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours. In order to preserve and enforce our patent and other intellectual property rights, we may need to make claims or file lawsuits against third parties. This can entail significant costs to us and divert our management’s attention from developing and commercializing our products.

Intellectual property litigation could be costly and disruptive to us.

In recent years, there has been significant litigation involving medical device patents and other intellectual property rights. From time to time, third parties may assert patent, copyright, trademark and other intellectual property rights to technologies used in our business. Any claims, with or without merit, could be time-consuming, result in costly litigation, divert the efforts of our technical and management personnel or require us to pay substantial damages. If we are unsuccessful in defending ourselves against these types of claims, we may be required to do one or more of the following:

	•		stop our ongoing or planned clinical trials or delay or abandon commercialization of the product that is the subject of the suit;

	•		attempt to obtain a license to sell or use the relevant technology or substitute technology, which license may not be available on reasonable terms or at all; or

	•		redesign those products that use the relevant technology.

In the event a claim against us was successful and we could not obtain a license to the relevant technology on acceptable terms or license a substitute technology or redesign our products to avoid infringement, our business would be significantly harmed.

If we are unable to protect the confidentiality of our proprietary information and know-how, the value of our technology and products could be adversely affected.

In addition to patented technology, we rely on our unpatented proprietary technology, trade secrets, processes and know-how. We generally seek to protect this information by confidentiality agreements with our employees, consultants, scientific advisors and third parties. These agreements may be breached, and we may not have adequate remedies for any such breach. In addition, our trade secrets may otherwise become known or be independently developed by competitors. To the extent that our employees, consultants or contractors use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions.

If we are unable to manage our expected growth, we may not be able to commercialize our product candidates.

We expect to expand our operations and grow our research and development, product development, regulatory, manufacturing, sales, marketing and administrative operations. This expansion has placed, and is expected to continue to place, a significant strain on our management and operational and financial resources. To manage any further growth and to commercialize our products, we will be required to improve existing and implement new operational and financial systems, procedures and controls and expand, train and manage our growing employee base. In addition, we will need to manage relationships with various manufacturers, suppliers and other organizations. Our ability to manage our operations and growth will require us to improve our operational, financial and management controls, as well as our internal reporting systems and controls. We may not be able to implement such improvements to our management information and internal control systems in an efficient and timely manner and may discover deficiencies in existing systems and controls. Our failure to accomplish any of these tasks could materially harm our business.

We compete against companies that have longer operating histories, more established products and greater resources than we do, which may prevent us from achieving further market penetration or improving operating results.

Competition in the medical device industry is intense. Our products will compete against products offered by public companies, such as Thoratec, Inc. and Ventracor Limited, as well as several smaller specialized private companies, such as Jarvik Heart, Inc. Some of these competitors have significantly greater financial and human resources than we do and have established reputations, as well as worldwide distribution channels and sales and marketing capabilities that are larger and more established than ours. Additional competitors may enter the market, and we are likely to compete with new companies in the future. We also face competition from other medical therapies which may focus on our target market as well as competition from manufacturers of pharmaceutical and other devices that have not yet been developed. Competition from these companies could adversely affect our business.

Our ability to compete effectively depends upon our ability to distinguish our company and our products from our competitors and their products. Factors affecting our competitive position include:

	•		product performance and design;

	•		product safety;

	•		sales, marketing and distribution capabilities;

	•		success and timing of new product development and introductions; and

	•		intellectual property protection.

Amortization of our intangible assets, which represent a significant portion of our total assets, will adversely affect our net income and we may never realize the full value of our intangible assets.

A substantial portion of our assets is composed of goodwill and identified intangible assets, which we recorded as a result of our acquisition of HeartWare, Inc. on January 24, 2005. We may not receive the recorded value for our intangible assets if we sell or liquidate our business or assets. The material concentration of intangible assets increases the risk of a large charge to operations if the revenue or recoverability of these intangible assets is impaired. Such a charge to operations could adversely affect our financial results.

The competition for qualified personnel is particularly intense in our industry. If we are unable to retain or hire key personnel, we may not be able to sustain or grow our business.

Our ability to operate successfully and manage our potential future growth depends significantly upon our ability to attract, retain and motivate highly skilled and qualified research, technical, clinical, regulatory, sales, marketing, managerial and financial personnel. We face intense competition for such personnel, and we may not be able to attract, retain and motivate these individuals. We compete for talent with numerous companies, as well as universities and nonprofit research organizations. Our future success also depends on the personal efforts and abilities of the principal members of our senior management and scientific staff to provide strategic direction, manage our operations and maintain a cohesive and stable environment. Although we have employment and incentive compensation agreements with all of our executive officers and incentive and compensation plans for our other personnel providing them with various economic incentives to remain employed with us, these incentives may not be sufficient to retain them. We do not maintain key man life insurance on the lives of any of the members of our senior management other than for Mr. LaRose, our Chief Scientific Officer. The loss of key personnel for any reason or our inability to hire, retain and motivate additional qualified personnel in the future could prevent us from sustaining or growing our business.

Product liability claims could damage our reputation or adversely affect our business.

The design, manufacture and marketing of human medical devices carries an inherent risk of product liability claims. Such liability claims may be expensive to defend and may result in large judgments against us. We maintain a limited amount of product liability insurance. However, we cannot be certain that our insurance policies will be sufficient to cover all claims that may be made against us. Our insurance policies generally must be renewed on an annual basis. We may not be able to maintain or increase such insurance on acceptable terms or at

reasonable costs. A successful claim brought against us in excess, or outside, of our insurance coverage could seriously harm our financial condition and results of operations. Generally, our clinical trials will be conducted in patients with serious life-threatening diseases for whom conventional treatments have been unsuccessful or for whom no conventional treatment exists, and, during the course of treatment, these patients could suffer adverse medical effects or die for reasons that may or may not be related to our medical devices. Any of these events could result in a claim of liability. Any such claims against us, regardless of their merit, could result in significant awards against us that could materially harm our business, financial condition and results of operations.

We will incur increased costs as a result of being a US reporting company and we have no experience as a US reporting company.

As of December 31, 2006, we are no longer a “foreign private issuer” as such term is defined under the US securities laws and have thus become subject to the periodic reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Although the existing listing of our ordinary shares on the Australian Securities Exchange (ASX) requires us to file financial information and make certain other filings with the ASX, our status as a reporting company under the Exchange Act will cause us to incur additional legal, accounting and other expenses that we have not previously incurred, including costs related to compliance with the requirements of the Sarbanes-Oxley Act of 2002. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly. We also expect these rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as executive officers. We cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.

Investors could lose confidence in our financial reports, and the value of our ordinary shares may be adversely affected, if our internal controls over financial reporting are found not to be effective by management or by an independent registered public accounting firm or if we make disclosure of existing or potential significant deficiencies or material weaknesses in those controls.

In the near future, Section 404 of the Sarbanes-Oxley Act of 2002 requires us to include an internal control report with our Annual Report on Form 10-K. The internal control report must include management’s assessment of the effectiveness of our internal controls over financial reporting as of the end of the fiscal year. Additionally, our independent registered public accounting firm will be required to issue a report on management’s assessment of our internal control over financial reporting and a report on their evaluation of the operating effectiveness of our internal control over financial reporting.

In connection with our fiscal year 2006 audit, our accounting firm informed us that they had identified significant deficiencies in our internal controls. No material weaknesses were identified. A significant deficiency is defined as a control deficiency that adversely affects a company’s ability to initiate, authorize, record, process or report financial data reliably in

accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the company’s financial statements that is more than inconsequential will not be prevented or detected by the company’s internal control. The audit identified significant deficiencies related to the lack of segregation of duties surrounding journal entries and the physical protection of assets against environmental threats.

We continue to evaluate our existing internal controls over financial reporting against the standards adopted by the Public Company Accounting Oversight Board, or PCAOB. During the course of our ongoing evaluation of the internal controls, we may identify areas requiring improvement, and may have to design enhanced processes and controls to address issues identified through this review. Remediating any deficiencies, significant deficiencies or material weaknesses that we or our independent registered public accounting firm may identify may require us to incur significant costs and expend significant time and management resources. We cannot assure you that any of the measures we implement to remedy any such deficiencies will effectively mitigate or remedy such deficiencies. The existence of one or more material weaknesses could affect the accuracy and timing of our financial reporting. Investors could lose confidence in our financial reports, and the value of our ordinary shares may be adversely affected, if our internal controls over financial reporting are found not to be effective by management or by an independent registered public accounting firm or if we make disclosure of existing or potential significant deficiencies or material weaknesses in those controls.

Fluctuations in foreign currency exchange rates could adversely affect our financial results.

Changes in foreign currency exchange rates can affect the value of our assets, liabilities, costs and revenues. Currently, all of our clinical activities occur outside of the United States though most of our expenditures are incurred in US dollars. We may, but do not currently, try to mitigate our exposure to currency exchange rate risks by using hedging transactions or holding funds in US dollars. We may suffer losses as a result of exchange rate fluctuations.

Risk Factors Related to Our Ordinary Shares

There is no current trading market for our ordinary shares in the United States and no such market may develop.

Although our ordinary shares are currently listed on the ASX in Australia, there is not any current trading market for our ordinary shares in the United States. In the future, we may seek to list our ordinary shares or American Depositary Receipts on a US securities exchange; however, there is no certainty that we would be successful in achieving a listing. As a result, no trading market for the ordinary shares may develop in the United States and you may not be able to transfer or resell your shares at their fair value or at all.

Conversion of our outstanding convertible note or other future issuances of our ordinary shares will dilute the ownership interests of existing shareholders.

As of March 31, 2007, we had an AU$1,482,684 convertible note outstanding with a conversion price of AU$1.00 which may be converted into 1,482,684 ordinary shares. The conversion of this convertible note, together with interest accrued to the date of conversion, will dilute the ownership interest of our existing shareholders, and any subsequent sales in the public

market of the ordinary shares issuable upon this conversion could adversely affect prevailing market prices of our ordinary shares. Further, the existence of the convertible note may encourage short selling of our ordinary shares by market participants because the conversion of the convertible note could depress the price of our ordinary shares. In addition, future sales of substantial amounts of our shares, or the perception that such sales could occur, could adversely affect the market price of our shares. Sales of our shares and the potential for such sales could cause our share price to decline.

The price of our ordinary shares may fluctuate significantly.

Our ordinary shares have been traded on the ASX since January 31, 2005. The price of our ordinary shares has been, and is likely to continue to be, volatile, which means that it could decline substantially within a short period of time. For example, our closing share price has ranged from AU$0.64 to AU$1.40 in the 12 months ended December 31, 2006 and has ranged from AU$0.64 to AU$0.92 in the period from January 1, 2007 to May 31, 2007. The price of our ordinary shares could fluctuate significantly for many reasons, including the following:

	•		future announcements concerning us or our competitors;

	•		regulatory developments, enforcement actions bearing on advertising, marketing or sales, and disclosure regarding completed, ongoing or future clinical trials;

	•		quarterly variations in operating results, which we have experienced in the past and expect to experience in the future;

	•		introduction of new products or changes in product pricing policies by us or our competitors;

	•		acquisition or loss of significant customers, distributors or suppliers;

	•		business acquisitions or divestitures;

	•		changes in third party reimbursement practices;

	•		fluctuations of investor interest in the medical device sector; and

	•		fluctuations in the economy, world political events or general market conditions.

In addition, stock markets in general and the market for shares of health care stocks in particular, have experienced extreme price and volume fluctuations in recent years, fluctuations that frequently have been unrelated to the operating performance of the affected companies. These broad market fluctuations may adversely affect the market price of our ordinary shares. The market price of our ordinary shares could decline below its current price and the market price of our shares may fluctuate significantly in the future. These fluctuations may be unrelated to our performance.

Your interests may differ or conflict with those of the Company’s controlling shareholder.

As of May 31, 2007, Apple Tree Partners I, L.P., or Apple Tree, owned approximately 49% of our outstanding ordinary shares, without giving effect to the conversion of a convertible note held by Apple Tree. As a result, Apple Tree has and will continue to have control over the outcome of any matter, including a change of control, requiring approval of holders of ordinary shares under Australian law and the rules of any stock exchange on which our ordinary shares may be listed. The interests of Apple Tree may differ from or conflict with the interests of other shareholders regarding a potential change of control of us or other matters requiring a vote of shareholders. Apple Tree’s control over us and our subsidiaries may delay or prevent a change in control even if desired by the other holders of ordinary shares, which could adversely affect the trading price of the ordinary shares.

If there are substantial sales of ordinary shares, our share price could decline.

If our existing shareholders sell a large number of ordinary shares or the public market, should one develop, perceives that existing shareholders might sell a large number of ordinary shares, the prices at which our ordinary shares may trade could decline significantly. Sales of substantial amounts of ordinary shares by shareholders in the public market, or even the potential for such sales, are likely to adversely affect the market price of the ordinary shares.

We do not intend to pay cash dividends on our ordinary shares in the foreseeable future.

We have never declared or paid any cash dividends on our ordinary shares, and we currently do not anticipate paying any cash dividends in the foreseeable future. We intend to retain any earnings to finance the development and expansion of our products and business. Accordingly, our shareholders will not realize a return on their investment unless the trading price of our ordinary shares appreciates.

We are currently classified as a PFIC for US federal income tax purposes. As long as we remain a PFIC, US holders of our ordinary shares may be subject to adverse tax consequences.

We are currently classified as a passive foreign investment company, or PFIC, for US federal income tax purposes because all of our income is currently derived from interest on our cash balances. As a result, for so long as we remain a PFIC, US holders of our ordinary shares could be subject to substantially increased US tax liability, including an interest charge upon the sale or other disposition of their ordinary shares or upon the receipt of “excess distributions” from us. These investors may be able to avoid some of their increased tax liability by electing to treat the Company as a qualified electing fund, or QEF. However, in order for US investors to be able to make such an election, we would be required, among other things, to provide certain information to them on an annual basis regarding the US shareholder’s pro rata share of capital gain and ordinary income for the year and the amount of cash and property distributed to the shareholder. Due to the time and expense required to provide such information, we do not currently intend to provide it. US investors should consult their own tax advisors concerning the US federal income tax consequences that would apply to their investment in our ordinary shares.

Some provisions of Australian law have anti-takeover effects that could discourage or prohibit the acquisition of us by others, even if such an acquisition would be beneficial to our shareholders.

Entities wishing to acquire us will need to comply with Australian laws, including the Corporations Act and the Foreign Acquisition and Takeover Act. These laws prescribe the steps that an acquirer must undertake in order to acquire a significant interest, being greater than 20%, in the Company. A summary of these requirements are set out under Item 11 “– Acquisition of the Company” and “– Foreign Acquisition and Takeover Act”. These laws may discourage or prohibit the acquisition of us by others, even if such an acquisition would be beneficial to our shareholders.

We may be subject to arbitrage risks.

Investors may seek to profit by exploiting the difference, if any, in the price of our ordinary shares on the ASX and the price of our ordinary shares available for sale in the United States, whether such sales would take place on a US securities exchange or in the over-the-counter market or otherwise. Such arbitrage activities could cause our share price in the market with the higher value to decrease to the price set by the market with the lower value.

ITEM 2. FINANCIAL INFORMATION

SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated statement of operations data for the years ended December 31, 2006, 2005 and 2004 and for the period from November 26, 2004 (inception) to December 31, 2006 and the balance sheet data as of December 31, 2006 and 2005 (referred to as “Successor”) have been derived from our consolidated audited financial statements included elsewhere in this registration statement. The selected consolidated statement of operations data for the three months ended March 31, 2007 and 2006 and the balance sheet data as of March 31, 2007 have been derived from our consolidated unaudited financial statements included elsewhere in this registration statement. The selected consolidated balance sheet data as of December 31, 2004 have been derived from our audited consolidated financial statements which are not included in this registration statement. The selected consolidated financial data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below and our audited consolidated financial statements and notes thereto appearing elsewhere in this registration statement.

On January 24, 2005, we acquired all of the voting stock of HeartWare, Inc., the Predecessor. Our consolidated financial statements reflect the results of HeartWare, Inc. for all periods after January 24, 2005. The selected financial data for the Predecessor are derived from the audited financial statements included elsewhere in this registration statement.


	Successor																		Predecessor
																Cumulative
																Period									Cumulative
																from									Period from
																November									April 8,
																26, 2004									2003
																(Inception)									(Inception)
																Through									Through
																December									December
	Quarters Ended March 31,						Years Ended December 31,									31,			Years Ended December 31,						31,
(In thousands, except per share data)	2007			2006			2006			2005			2004			2006			2004			2003			2004

Statement of Operations:
Revenues	$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—
General and administrative expenses		1,770			1,340			6,024			4,312			—			10,336			138			166			304
Research and development expenses		3,147			1,950			11,650			10,732			—			22,383			4,795			1,271			6,066
Depreciation		—			—			—			—			—			—			88			35			123
In process research and development expensed when acquired		—			—			—			—			—			—			—			3,984			3,984
Other income (expense)		82			139			248			1,211			—			1,459			(982	)		(248	)		(1,230	)
Provision for income taxes		—			—			—			—			—			—			—			—			—
Net loss		(4,835	)		(3,151	)		(17,427	)		(13,833	)		—			(31,260	)		(6,003	)		(5,704	)		(11,707	)
Basic and diluted loss per share		(0.03	)		(0.02	)		(0.10	)		(0.10	)		—


	As of
	March 31,							As of December 31,											As of December 31,
	2007							2006			2005			2004					2004			2003
Balance Sheet Data:
Cash and cash equivalents	$	12,143						$	16,698		$	10,037		$	1				$	139		$	197
Total assets		16,005							20,243			11,970			1					372			419
Total liabilities		2,614							2,779			2,245			—					12,027			6,070
Total shareholders’ equity		13,391							17,464			9,725			1					11,654			5,651

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes appearing elsewhere in this registration statement. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. You should review the “Risk Factors” section of this registration statement for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements described in the following discussion and analysis.

Overview

HeartWare Limited was registered in the state of Victoria, Australia on November 26, 2004 for the purpose of raising funds and acquiring HeartWare, Inc., a US-based medical device company that had developed LVAD technology. The sole shareholder of HeartWare Limited, prior to raising funds through its initial public offering, was Apple Tree Partners I, L.P., a US based early-stage venture capital fund. Apple Tree Partners I, L.P. was also the majority shareholder of HeartWare, Inc. prior to its acquisition by HeartWare Limited. The companies had entered into a securities exchange agreement on December 13, 2004 whereby HeartWare Limited agreed to acquire all of the outstanding voting shares of HeartWare, Inc. from Apple Tree Partners I, L.P. and various others provided that HeartWare Limited raised $24.5 million prior to the acquisition.

On January 24, 2005, HeartWare Limited completed its initial public offering in Australia and acquired all of the outstanding voting stock of HeartWare, Inc. in exchange for the issuance by HeartWare Limited of 88 million ordinary shares and a convertible note in the principal amount of $1.1 million. As the acquisition of HeartWare, Inc. by HeartWare Limited is considered to be an exchange of equity interests among entities under common control, the Company is not permitted to treat the acquisition as a “business combination” under SFAS No. 141, “Business Combinations”. Instead, the Company is required to account for the transaction at historical cost. Accordingly, the consideration of the transaction is based on the historical value of the assets and liabilities of HeartWare, Inc. at the time of acquisition.

The initial application of our blood pump technology is our HeartWare Ventricular Assist Device, or HVAD pump, which we believe is the smallest full-output left ventricle assist device, or LVAD that is currently in clinical trials or in the marketplace. We believe the HVAD pump is the only centrifugal LVAD designed to be implanted above the diaphragm in all patients.

For more than ten years, we have conducted a series of trials of our HVAD pump in vitro, in animals and, more recently, in humans pursuant to an international clinical trial. The design development animal trials for the HVAD pump were conducted to assess anatomical fitting, design, pump mechanics and long-term compatibility with blood components and were completed in 2001. From 2002 until 2004, we conducted other animal studies which culminated in the commencement of “good laboratory practice”, or GLP, animal trials in early 2005. Our GLP animal trials were completed in September 2005, and we commenced our international human clinical trial in Vienna, Austria in March 2006.

Beyond the HVAD pump, we are also evaluating our next generation device, the Miniaturized Ventricular Assist Device, or MVAD. The MVAD is based on the same technology platform as the HVAD pump but adopts an axial flow, rather than a centrifugal flow, configuration. The MVAD, which is currently at the prototype stage and undergoing animal studies, is approximately one-third the size of the HVAD pump. We believe that the MVAD will be implantable by surgical techniques that are even less invasive than those required to implant the HVAD pump. We expect to initiate human clinical trials for the MVAD during mid-2009.

In parallel with the MVAD project, we have commenced design work on our third generation blood pump, which we currently call the IV VAD. The IV VAD will rely on the same underlying technology platform and will be an even miniature version of the MVAD. Unlike the HVAD pump or the MVAD, the IV VAD is intended to be positioned within the vasculature and implanted by minimally invasive catheter-based techniques. Once the IV VAD is fully developed, we expect the IV VAD to be about one-tenth the size of the HVAD pump.

We are a development stage company with a limited operating history, and we currently have no products approved for sale. To date, we have not generated any significant revenue, and we have incurred net losses in each year since our inception. The only revenue we have generated has been from interest. We expect our losses to continue and to increase as we expand our clinical trial activities and initiate commercialization activities.

We have financed our operations primarily through our January 2005 initial public offering of ordinary shares in Australia and concurrent US private placement of ordinary shares which raised aggregate net proceeds of approximately $23.4 million and a private placement of ordinary shares in May 2006 which raised net proceeds of approximately $23.4 million from both US and Australian investors.

Critical Accounting Policies and Estimates

We prepare our financial statements in accordance with accounting principles generally accepted in the United States. We are required to make estimates and judgments in preparing the financial statements that affect the reported amounts of our assets, liabilities, revenue and expenses. We base our estimates on our historical experience and on various other assumptions that we believe are reasonable under the circumstances. If our assumptions prove inaccurate or if our future results are not consistent with our historical experience, we may be required to make adjustments in our policies that affect our reported results. Our most critical accounting policies and estimates include: the valuation of identifiable intangible assets acquired in business combinations, useful lives assigned to identifiable intangible assets, translation of foreign currency, accounting for research and development costs and accounting for share based payments. We also have other key accounting policies that are less subjective and, therefore, their application would not have a material impact on our reported results of operations. The following is a discussion of our most critical policies, as well as the estimates and judgments involved.

Translation of Non-US Currency

We translate all assets and liabilities of non-US entities at the year-end exchange rate and translate revenue and expenses at the average exchange rates in effect during the year. The net effect of these translation adjustments is shown in the accompanying financial statements as a component of shareholders’ equity. Foreign currency transaction gains and losses are included in other, net in the consolidated statements of operations.

We have concluded that the functional currency of our Australian operations is the Australian dollar.

Research and Development

Research and development costs, including new product development programs, regulatory compliance and clinical research, are expensed as incurred.

Share-Based Compensation

We elected to early adopt SFAS 123R effective January 1, 2005. We use a Black-Scholes option value method. Under the fair value recognition provisions of SFAS 123R, we recognize share-based compensation net of an estimated forfeiture rate and therefore only recognize compensation cost for those shares expected to vest over the service period of the award.

Calculating share-based compensation expense requires the input of highly subjective assumptions, including an estimated expected life of the options, share price volatility and a forfeiture rate. We have used the contractual life of the option in determining the fair value.

We estimate the volatility of our ordinary shares on the date of grant based on the historical volatility of our publicly-traded ordinary shares. We estimate the forfeiture rate based on our historical experience of our employee retention rate. If our actual forfeiture rate is materially different from our estimate, the share-based compensation expense could be significantly different from what we have recorded in the current period.

The assumptions used in calculating the fair value of share-based awards represent our best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future.

Three months ended March 31, 2007 and 2006

Revenue

We are a development stage company and have no revenues to date. We are currently conducting a combined European and Australian clinical trial with our first product, the HVAD pump, and will not generate revenue until we begin a U.S. trial that qualifies for reimbursement from third-party payers, such as Medicare, private health insurance plans and health maintenance organizations or we receive regulatory approval and begin commercial sales of our product.

Cost of Goods Sold

There was no cost of goods sold recognized during the quarters ended March 31, 2007 or 2006, as we had no revenue from the sale of products in those periods.

General and Administrative

General and administrative expenses include office expenses associated with general corporate administration. These costs are primarily related to salaries and wages and related employee costs, depreciation of fixed assets, travel, external consultants and contractors, legal and accounting fees and general infrastructure costs.

During 2006 and into 2007, we experienced significant growth as we negotiated and obtained regulatory approvals to commence our international clinical trials and successfully initiated the trial by implanting the first patient with an HVAD pump. As a result, we experienced a significant expansion of our staff, including senior management, and a related expansion in infrastructure costs.

General and administrative expenses for the quarter ended March 31, 2007 were approximately $1.8 million, or 36% of operating expenses, compared to $1.3 million, or 41% of operating expenses, for the quarter ended March 31, 2006. The increase of approximately $500,000 was primarily attributable to increased share-based compensation, legal costs associated with initial U.S. filing requirements and other additional infrastructure costs related to corporate growth.

Research and Development

Research and development expenses are the direct and indirect costs associated with developing our products. These expenses consist primarily of salaries and wages and related employee costs, external research and regulatory expenses, materials and costs associated with clinical trials. Additional costs include travel, facilities and overhead allocations. We expect that research and development expenses will continue to represent a significant portion of our operating expenses.

As noted above, we experienced significant growth in 2006 and achieved significant research and development milestones, including the commencement of animal trials for our next generation heart pump, the MVAD pump.

Research and development expenses for the quarter ended March 31, 2007 were $3.1 million, or 64% of operating expenses, compared to $2.0 million, or 59% of operating costs, for the quarter ended March 31, 2006. Of the increase of approximately $1.2 million, approximately $847,000 was attributable to increased salaries and wages and related employee costs and approximately $169,000 was attributable to increased share based compensation. Other increases were attributable to increased material costs, expenses related to clinical trials and travel costs.

Other Income

Other Income consists primarily of interest income and foreign exchange income or loss. Interest income was approximately $190,000 for the quarter ended March 31, 2007 as compared to $59,000 for the quarter ended March 31, 2006. The increase was primarily due to increased average cash balances in the first quarter 2007 as compared to the first quarter 2006 due to the private placement completed in May 2006. Foreign exchange loss was approximately $108,000 for the quarter ended March 31, 2007 as compared to foreign exchange income of approximately $80,000 for the quarter ended March 31, 2006. The difference was due to fluctuations in the value of our Australian and U.S. dollar-based cash holdings as a result of movements in the exchange rate between the Australian dollar and the U.S. dollar.

Income Taxes

We are subject to taxation in the United States and Australia. We have incurred losses since inception. Changes in share ownership, as well as other factors, may limit our ability to utilize any net operating loss carry-forwards, and as such a deferred tax asset has not been recorded.

As of March 31, 2007, we did not have revenues or profit which would be sufficient to allow deferred tax assets to be recognized with a substantial degree of certainty. Accordingly, we applied a 100% valuation allowance against our net deferred tax assets. We intend to monitor closely the question of whether to record a deferred tax asset as we progress toward the commercialization of our products.

Liquidity and Capital Resources

At March 31, 2007, our cash and cash equivalents were $12.1 million as compared to $16.7 million at December 31, 2006. The decrease was primarily due to cash used in operations and the purchase of plant and equipment.

Cash used in operating activities for the quarter ended March 31, 2007 was approximately $4.3 million as compared to $2.8 million for the quarter ended March 31, 2006. For the quarter ended March 31, 2007, this amount included a net loss of $4.8 million, non-cash adjustments to net income of approximately $578,000, primarily comprising approximately $132,000 of depreciation and amortization and $611,000 of share-based payments offset by a decrease in operating assets and liabilities.

For the quarter ended March 31, 2006 cash used in operating activities included a net loss of $3.2 million, non-cash adjustments to net income of approximately $348,000, primarily comprising $94,000 of depreciation and amortization and $258,000 of share-based compensation expense.

Investing activities used cash of approximately $468,000 and $158,000 for the quarters ended March 31, 2007 and 2006, respectively. The amounts in the first quarter of 2007 were primarily to acquire property, plant and equipment and capitalized patent costs. The amounts in the first quarter 2006 related to the purchase of plant and equipment.

Cash provided by financing activities for quarter ended March 31, 2007 was $6,000 from the issuance of shares pursuant to the exercise of an employee stock option. There was no cash provided by financing activities for the quarter ended March 31, 2006.

We will require additional funds to support our operations. We believe that cash and cash equivalents on hand and expected cash flows from operations will not be sufficient to fund our operations for the next twelve months unless we obtain additional funding. This means that we must raise capital in order to continue to moving toward commercialization of our products.

On June 14, 2007 the Company announced that it has received commitments for approximately AU$30 million with an issue price of AU$0.60 per share under a private placement to retail, sophisticated and institutional investors in Australia, the United States and Europe conditional upon the approval of shareholders of the Company. We plan to seek approval of shareholders to issue up to 58,333,333 shares with an issue price per share of AU$0.60 on July 26, 2007. There can be no assurance that shareholders will approve the issuance. If approved, funds raised by the issue of new shares will be primarily used for the purposes of funding continued clinical trials, marketing costs, research and development, manufacturing and operational costs and other regulatory and compliance costs as well as general working capital.

Fiscal Years 2006 and 2005

Revenue

We are a development stage company and have no revenues to date. We are currently conducting a combined European and Australian clinical trial with our first product, the HVAD pump, and will not generate revenue until we begin a US trial that qualifies for reimbursement or we receive regulatory approval and begin commercial sales of our product.

Cost of Goods Sold

There was no cost of goods sold recognized during the years ended December 31, 2006 or 2005, as we had no revenue from sale of products in those years.

General and Administrative

During 2006, we experienced significant growth as we negotiated and obtained regulatory approvals to commence our international clinical trials, and successfully initiated the trial by implanting the first patient with an HVAD pump. As a result, we experienced a significant expansion of our staff, including senior management, and a related expansion in infrastructure costs.

In 2006, general and administrative expenses were approximately $6.0 million, or 34% of operating expenses, compared to $4.3 million, or 29% of operating expenses, in 2005. The

increase was primarily attributable to increased salaries and wages and related employee costs. Additional infrastructure costs associated with an expansion of our manufacturing facilities, accounting fees and travel also significantly contributed to the increase in general and administrative expenses.

Research and Development

As discussed above, we experienced significant growth in 2006 and achieved significant research and development milestones, including the commencement of animal trials for our next generation heart pump, the MVAD. In 2006, research and development expenses were $11.6 million, or 66% of operating expenses, compared to $10.7 million, or 71% of operating expenses, in 2005. The increase of approximately $0.9 million was primarily attributable to increased salaries and wages and related employee costs, material costs and travel costs related to clinical trials, which was partially offset by a decrease of expenses related to external consultants.

Other Income

Other Income consists primarily of interest income and foreign exchange income or loss.

Interest income was approximately $844,500 in 2006 as compared to $717,000 in 2005. The increase was primarily due to increased average cash balances in 2006 as a result of our May 2006 private placement of ordinary shares in which we raised net proceeds of approximately $23.4 million.

Foreign exchange loss was approximately $584,000 in 2006 as compared to foreign exchange income of approximately $494,000 in 2005. The difference was due to fluctuations in the value of our Australian and US dollar-based cash holdings as a result of movements in the exchange rate between the Australian dollar and the US dollar.

Income Taxes

As of December 31, 2006, we did not have revenues or profit which would be sufficient to allow deferred tax assets to be accrued with a substantial degree of certainty. We intend to monitor closely the question of whether to record a deferred tax asset as we progress toward the commercialization of our products.

Fiscal Years 2005 and 2004

HeartWare Limited was registered on November 26, 2004 for the sole purpose of acquiring HeartWare, Inc. The acquisition occurred on January 24, 2005. HeartWare, Inc. was incorporated on April 8, 2003 for the sole purpose of acquiring certain assets from Kriton Medical. The majority of operations, which consists primarily of research and development activities, prior to and post acquisition are contained within HeartWare, Inc. HeartWare Limited is a holding company that performs corporate and administrative functions.

For discussion purposes we are a providing a comparison of results of operations for the consolidated entity in 2005 versus HeartWare, Inc., our Predecessor, in 2004.

Revenue

The Company is a development stage company with no revenues to date.

Cost of Goods Sold

There was no cost of goods sold recognized during the years ended December 31, 2005 or 2004, as we had no revenue from sale of products in those years.

General and Administrative

In 2005, general and administrative expenses were approximately $4.3 million, or 29% of operating expenses, compared to $138,000, or 3% of operating expenses, in 2004. The increase was primarily attributable to increased management personnel and other infrastructure costs associated with the Company’s establishment of a professional management team and an initial public offering in January 2005.

Research and Development

In 2005, research and development expenses were $10.7 million, or 71% of operating expenses, compared to $4.8 million, or 96% of operating expenses, in 2004. The increase of approximately $5.9 million was primarily attributable to increased salaries and wages and related employee costs, material costs and travel costs related to clinical trials incurred in 2005.

Other Income

Other Income consists primarily of interest income and foreign exchange income (loss).

Interest income was approximately $717,000 in 2005 as compared to interest expense of $983,000 in 2004. The increase was primarily due to an increase cash balance due to the company’s initial public offering in 2005. In 2004, interest expense related to a convertible note outstanding. The note was retired prior to the Company’s acquisition of HeartWare, Inc.

In 2005, we generated foreign income of approximately $494,000 in 2005 as a result of fluctuations in the value of our Australian and US dollar-based cash holdings as a result of movements in the exchange rate between the Australian dollar and the US dollar. We did not generate foreign income in 2004 as all operations of the predecessor company were US based.

Liquidity and Capital Resources

At December 31, 2006, our cash and cash equivalents were $16.7 million as compared to $10 million at December 31, 2005. The increase was primarily due to the issuance, in a private placement, of ordinary shares in May 2006, which was offset in part by cash used in operations and the purchase of plant and equipment.

Cash used in operating activities for the year ended December 31, 2006 was approximately $15.9 million as compared to $11.2 million for the year ended December 31, 2005. In 2006 this amount included a net loss of $17.4 million, non-cash adjustments to net income of $1.5 million, primarily comprising approximately $388,000 of depreciation and amortization, and $890,000 of share-based payments, which was partially offset by a net increase in cash attributable to a change in current assets and liabilities. In 2005 cash used in operating activities included a net loss of $13.8 million, non-cash adjustments to net income of $2.6 million, primarily comprising approximately $258,000 of depreciation and amortization, and $1.9 million of share-based payments, which was partially offset by a net increase in cash attributable to a change in current assets and liabilities.

Investing activities used cash of approximately $1.7 million and $1.5 million for the years ended December 31, 2006 and 2005, respectively. The amounts in 2006 were primarily to acquire property, plant and equipment and software which related to our moving from research activities towards the development of manufacturing capabilities for our first product, the HVAD pump. The amounts in 2005 included purchases of plant and equipment of $1.4 million and additions to patents of $209,000 offset by net cash provided by our acquisition of HeartWare, Inc. of $126,000.

Cash provided by financing activities for years ended December 31, 2006 and 2005 was $23.5 million in each year from the net proceeds from the issuance of ordinary shares. We describe our issuances of ordinary shares under Item 10, “Recent Sales of Unregistered Securities.” We used the proceeds from the sales of our ordinary shares in 2006 to fund the on-going cost of operations, including general working capital, continued research and development of the HVAD and other products, and to fund the Company’s human clinical trials. We intend to use the remainder of the proceeds for similar operating activities.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements as such term is defined in the rules promulgated by the SEC.

Contractual Obligations

The table below summarizes our commitments and contingencies at December 31, 2006. The information in the table reflects future unconditional payments and is based on the terms of the relevant agreements and appropriate classification of items under generally accepted accounting principles currently in effect.


	Payments due by period
Contractual Obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years

Operating Leases Obligations	$	1,346,927	$	793,087	$	471,620	$	82,220	$	—

Total	$	1,346,927	$	793,087	$	471,620	$	82,220	$	—

We have entered into several operating lease agreements for facilities, primarily for our manufacturing facility in Miramar, Florida and our office building in Sydney, Australia. Terms of certain lease arrangements include renewal options, payment of certain costs such as insurance and common area maintenance.

In addition to the above, we have the following contingent liabilities, all payable to Dr. Robert B. Fine, a former CEO of Kriton Medical, the business that previously held the Company’s technology, resulting from the acquisition by HeartWare, Inc. of Kriton Medical:

	•		a milestone payment of $750,000 when our first circulatory assist device is approved for sale in Europe, provided that we have at least $15,000,000 in cash on hand;

	•		a milestone payment of $1,250,000 when our first circulatory assist device is approved for sale in the US, provided that we have at least $25,000,000 in cash on hand; and

	•		a special payment of up to $500,000 upon a sale of HeartWare, Inc., if such sale generates proceeds in excess of the aggregate liquidation preferences of all of HeartWare, Inc.’s outstanding preferred stock (i.e., $15.4 million).

Recent Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation Number 48, “Accounting for Uncertainty in Income Taxes — an interpretation of

FASB Statement No. 109” (“FIN 48”). The interpretation contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. The interpretation is effective for the first interim period beginning after December 15, 2006. We have not been able to complete our evaluation of the impact of adopting FIN 48 and as a result, we are not able to estimate the effect the adoption will have on our financial position and results of operations.

In September 2006, the SEC Office of the Chief Accountant and Divisions of Corporation Finance and Investment Management released SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB No. 108”), that provides interpretive guidance on how the effects of the carry-over or reversal of prior year misstatements should be considered in quantifying a current year misstatement. SAB No. 108 states that registrants should quantify errors using both a balance sheet and an income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. This guidance is effective for fiscal years ending after November 15, 2006. The adoption of SAB No. 108 did not have a material impact on our financial position, results of operations or cash flows.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). This statement provides a single definition of fair value, a framework for measuring fair value and expanded disclosures concerning fair value. Previously, different definitions of fair value were contained in various accounting pronouncements creating inconsistencies in measurement and disclosures. SFAS No. 157 applies under those previously issued pronouncements that prescribe fair value as the relevant measure of value, except SFAS No. 123(R) and related interpretations and pronouncements that require or permit measurement similar to fair value but are not intended to measure fair value. This pronouncement is effective for fiscal years beginning after November 15, 2007. We do not expect the adoption of SFAS No. 157 to have a material impact on our financial position, results of operations or cash flows.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159). SFAS 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. Subsequent changes in fair value of these financial assets and liabilities would by recognized in earnings when they occur. SFAS 159 is effective for the Company’s financial statements for the year beginning January 1, 2008, with earlier adoption permitted. The Company does not expect adoption of this statement to have an impact on its consolidated financial position and results of operations.

A variety of proposed or otherwise potential accounting standards are currently under study by standard-setting organizations and various regulatory agencies. Because of the tentative and preliminary nature of these proposed standards, management has not determined whether

implementation of such proposed standards would be material to our condensed consolidated financial statements.

Quantitative and Qualitative Disclosures About Market Risk

Market risk represents the risk of changes in the value of market risk sensitive instruments caused by fluctuations in interest rates, foreign exchange rates and commodity prices. Changes in these factors could cause fluctuations in our results of operations and cash flows.

Interest Rate Risk

Our exposure to interest rate risk is currently confined to our cash that is invested in highly liquid money market funds. The primary objective of our investment activities is to preserve our capital to fund operations. We also seek to maximize income from our investments without assuming significant risk. We do not presently use derivative financial instruments in our investment portfolio. Our cash and investments policy emphasizes liquidity and preservation of principal over other portfolio considerations.

Our convertible note does not bear interest rate risk as the note was issued at a fixed rate of interest.

Foreign Currency Rate Fluctuations

We conduct business in foreign countries. Our headquarters is located in Sydney, Australia and primarily comprises the executive functions of the Company. All of our trials are presently conducted outside of the United States, with trials within the United States expected to commence towards the end of 2007. Our manufacturing operations are located in Miramar, Florida.

For US reporting purposes, the Company translates all assets and liabilities of its non-US entities at the year-end exchange rate and translates revenue and expenses at the average exchange rates in effect during the year. The net effect of these translation adjustments is shown in the accompanying financial statements as a component of stockholders’ equity. Foreign currency transaction gains and losses are included in other, net in the consolidated statements of operations.

We do not presently utilize foreign currency forward contracts and instead hold cash reserves in the currency in which those reserves are anticipated to be expended.

ITEM 3. PROPERTIES

As of May 31, 2007, we leased an approximately 30,000 square foot technology development and manufacturing center in Miramar, Florida, which includes electronics, mechanical and quality assurance laboratories as well as controlled manufacturing space and a clean room, quality control functions, research and development operations and some administrative functions. This lease expires in April 2008, and we are in negotiations with the

landlord to extend the lease term. While we believe we can renew this lease on terms acceptable to us, there is no assurance that we will be able to do so.

Until June 30, 2007, we also leased 2,900 square-feet of office space in Sydney, Australia, where our corporate headquarters were located. The Company has assigned its leasehold obligations under the existing lease to the Royal Bank of Scotland and has, with effect from July 1, 2007, leased 1,100 square-feet of new office space in Sydney, Australia where our corporate headquarters are now located. The lease expires in June 2008, and we do not have a right to renew this lease. We also lease small offices in Pleasanton, California and Framingham, Massachusetts.

Our products are currently being utilized only in connection with clinical trials. Our manufacturing activities to date consist primarily of process development, component assembly, quality control testing and research and development activities. Currently, we estimate that approximately two-thirds of our space in Miramar is being used for these production activities.

We believe that our main facility located in Miramar, Florida and our other office spaces are suitable and adequate for our needs now and for the foreseeable future. We believe that the current facilities of ours and our specialized suppliers will be sufficient to meet our needs now and for the foreseeable future. We intend to continue utilizing our suppliers and assembling our products for the foreseeable future in the same manner in which we have been operating.

ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth, as of May 31, 2007, information regarding beneficial ownership of our ordinary shares by the following:

	•		each person, or group of affiliated persons, who is known by us to beneficially own 5% or more of any class of our voting securities;

	•		each of our directors;

	•		each of our named executive officers; and

	•		all current directors and executive officers as a group.

Beneficial ownership is determined according to the rules of the SEC. Beneficial ownership generally includes voting or investment power of a security and includes shares underlying options that are currently exercisable or exercisable within 60 days after the measurement date. This table is based on information supplied by officers, directors and principal shareholders. Except as otherwise indicated, we believe that the beneficial owners of the ordinary shares listed below, based on the information each of them has given to us, have sole investment and voting power with respect to their shares, except where community property laws may apply.


	Number of Shares			Shares
Name and Address of Beneficial Owner	Beneficially Owned			Outstanding

5% Shareholders
Apple Tree Partners I, L.P. 54th Floor, 405 Lexington Avenue, New York, NY 10174		93,075,612	(1)		50.0	%

Directors and Named Executive Officers
Robert Thomas		2,540,102	(2)		1.4	%
Dr. Seth Harrison		93,075,612	(3)		50.0	%
Dr. Denis Wade		1,200,000	(4)		*
Dr. Christine Bennett		200,000	(5)		*
Robert Stockman		—			*
Douglas Godshall		37,305			*
David McIntyre		410,102	(6)		*
Jeffrey LaRose		1,922,102	(7)		1.0	%
Dozier Rowe		260,000	(8)		*
Jane Reedy		573,152	(9)		*
William Rissman (10)		—			*
Stuart McConchie (11)		—			*
All directors and executive officers as a group (12 persons)		100,218,375	(12)		53.8	%


*		Indicates less than 1%

(1)		Includes 1,486,830 shares issuable upon conversion of a convertible note.

(2)		Includes 782,102 shares subject to options exercisable within 60 days of May 31, 2007 and 950,000 shares held in trust.

(3)		Represents shares held by Apple Tree Partners I, L.P., the Company’s largest shareholder. Dr. Harrison is Managing General Partner in Apple Tree Partners I, L.P. Dr. Harrison disclaims beneficial ownership of such shares, except to the extent of his pecuniary interest therein.

(4)		Represents 1,000,000 shares held by a family trust and 200,000 shares subject to options exercisable within 60 days of May 31, 2007.

(5)		Represents shares subject to options exercisable within 60 days of May 31, 2007.

(6)		Represents 382,102 shares subject to options exercisable within 60 days of May 31, 2007 and 28,000 shares held by Mr. McIntyre’s spouse.

(7)		Represents shares subject to options exercisable within 60 days of May 31, 2007.


(8)		Includes 250,000 shares subject to options exercisable within 60 days of May 31, 2007.


(9)		Represents shares subject to options exercisable within 60 days of May 31, 2007.

(10)		Mr. Rissmann was our Vice President, Manufacturing and Product Development, until his resignation effective May 13, 2006.

(11)		Mr. McConchie was our Chief Executive Officer until his resignation effective September 4, 2006.

(12)		Includes 4,309,458 shares subject to options exercisable within 60 days of May 31, 2007.

ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS

Our directors and executive officers and their respective ages are as follows:


Name	Age		Position (1)
DIRECTORS:
Robert Thomas		62	Chairman, Non-Executive Director
Dr. Seth Harrison		46	Deputy Chairman, Non-Executive Director
Douglas Godshall		42	Executive Director, Chief Executive Officer
Dr. Christine Bennett		51	Non-Executive Director
Dr. Denis Wade, AM		69	Non-Executive Director
Robert Stockman		53	Non-Executive Director

EXECUTIVES:
Douglas Godshall		42	Managing Director, Chief Executive Officer
David McIntyre		36	Chief Financial Officer, Company Secretary
Dozier Rowe		54	Chief Operating Officer
Jeffrey LaRose		45	Chief Scientific Officer
Jane Reedy		47	Vice President, Clinical and Marketing
Barry Yomtov		51	Vice President, Engineering
Jennifer Foley		48	Vice President, Clinical and Regulatory Affairs


(1)		We use the term “Executive Director” with respect to Mr. Godshall to identify him as a member of our Board of Directors who is also an employee of the Company; the term “Managing Director” with respect to Mr. Godshall is a job title given to him by the Company.

Biographical Summaries

Robert Thomas. Mr. Thomas has been our director and non-executive chairman since November 2004. Since October 2004, Mr. Thomas has been a consultant to Citigroup Corporate and Investment Bank. He is also currently a director of a number of Australian public companies, including Virgin Blue Holdings Limited and Australian Wealth Management Limited. Between March 2003 and September 2004, Mr. Thomas was the Chairman, Global Corporate and Investment Bank, Australia and New Zealand of Citigroup Global Markets Australia Pty Limited. Prior thereto, Mr. Thomas was CEO of Citigroup’s (formerly known as Salomon Smith Barney) Corporate and Investment Bank, Australia and New Zealand from October 1999 until February 2003. Mr. Thomas holds a Bachelor of Economics from Monash University, Australia. He is a Master Stockbroker and has also been a member of the Securities Institute of Australia for almost four decades and a Fellow for a decade.

Dr. Seth Harrison. Dr. Harrison has been a director and deputy chairman and non-executive director since November 2004 and was Chief Executive Officer of HeartWare, Inc. from July 2003 through November 2004. Since September 1999, Dr. Harrison has been Managing General Partner of Apple Tree Partners I, L.P., an early stage life sciences venture capital firm, which is our major shareholder. Prior to September 1999, he held senior executive positions with Oak Investment Partners, Sevin Rosen Funds and Nazem & Company. Dr. Harrison received a Bachelor of Arts from Princeton University. He received his medical degree and a Masters of Business Administration from Columbia University and completed a surgery internship at Columbia Presbyterian Hospital in New York. He serves on the board of and chairs

the Finance Committee of the International Partnership for Microbicides, a Rockefeller Foundation/Gates Foundation-sponsored public-private partnership engaged in the development of anti-HIV microbicides. Dr. Harrison is also Vice Chairman of the Board of Trustees of the New York Studio School for Drawing, Painting and Sculpture.

Douglas Godshall. Mr. Godshall has been Chief Executive Officer since September 2006 and became a director in October 2006. Prior to joining HeartWare, Mr. Godshall served in various executive and managerial positions at Boston Scientific Corporation, where he had been employed since 1990, including as a member of Boston Scientific’s Operating Committee and since January 2005, as President, Vascular Surgery. Prior thereto, Mr. Godshall spent five years as Vice President, Business Development, at Boston Scientific, where he was focused on acquisition strategies for the cardiology, electrophysiology, neuroradiology and vascular surgery divisions. Mr. Godshall has a Bachelor of Arts in Business from Lafayette College and Masters of Business Administration from Northeastern University in Boston, Massachusetts.

Robert Stockman. Mr. Stockman has been a director since December 2006. Since 1999, Mr. Stockman has been the President and CEO of Group Outcome LLC, a U.S.-based merchant banking firm which deploys its capital and that of its financial partners in private equity and venture capital investments in medical technology companies. He is also the co-founder and Chairman of REVA Medical, Inc, an interventional coronary medical device company. Prior to establishing Group Outcome LLC, Mr. Stockman spent eighteen years with Johnston Associates and Narragansett Capital Corporation, where he focused on venture capital investments in healthcare. Mr. Stockman holds a Bachelors Degree from Harvard College and a Master in Business Administration from The Tuck School at Dartmouth College.

Dr. Denis Wade, AM. Dr. Wade has been a director since December 2004. From 1998 until his retirement in 2003, Dr. Wade was Managing Director of Johnson & Johnson Research Pty Ltd, a research arm of Johnson & Johnson. Dr. Wade is the former Foundation Professor of Clinical Pharmacology at the University of New South Wales in Australia. Dr. Wade also serves on industry bodies in Australia, is a former President of the Australian Society of Clinical and Experimental Pharmacology and has held senior positions in the International Union of Pharmacology, serving as Chairman of the Clinical Pharmacology Section. Dr. Wade holds a Bachelor degree in Medicine and Surgery from the University of New South Wales (Australia) and a Doctorate in Philosophy from Oxford (in the United Kingdom). He was awarded an Honorary Doctorate in Science from the University of New South Wales. He is a Fellow of the Royal Australasian College of Physicians, the Australian Institute of Company Directors and the Australian Academy of Technological Sciences and Engineering.

Dr. Christine Bennett. Dr. Bennett has been a director since December 2004. In May 2006, Dr. Bennett was appointed as Group Executive, Health and Financial Solutions and Chief Medical Officer of MBF Australia Limited, Australia’s second largest national health insurer. Prior thereto, Dr. Bennett held the position of Chief Executive Officer and Managing Director of Research Australia, a national body of Australian organizations and companies that are committed to making health and medical research a higher national priority in Australia and globally, from September 2002 to May 2006. Dr. Bennett has also been the Chief Executive Officer and Managing Director of Total Healthcare Enterprises Limited from September 2001 to August 2002, a partner of KPMG Australia in the health and life sciences area from May 2000 to

September 2001 and Chief Executive Officer of Westmead Hospital and Health Service in Sydney from May 1997 to May 2000. Dr. Bennett has over twenty years experience in the Australian health sector in senior executive, strategic and clinical roles. Specifically, Dr. Bennett brings substantial experience as a specialist clinician, strategist and planner and chief executive in both the public and private sectors. Dr. Bennett holds a Bachelor of Medicine and Surgery (from the University of Sydney, Australia), Master of Paediatrics (from the University of New South Wales, Australia) and is a Fellow of the Royal Australasian College of Physicians.

David McIntyre. Mr. McIntyre has been our Chief Financial Officer and Company Secretary since February 2005. From November 2003 to February 2005, Mr. McIntyre was Chief Financial Officer and General Counsel with Unilife Medical Solutions Limited. Mr. McIntyre was also in private practice as a senior attorney with KPMG Legal from May 2003 to October 2003 and Legal and Business Affairs Manager with Bulldogs League Club Limited from November 2001 to April 2003 and, prior thereto, he was a senior attorney in private practice specializing in corporate, mergers and acquisitions and capital markets with Baker & McKenzie. Mr. McIntyre has also held senior financial reporting roles in multinational companies, among them Coal & Allied Limited, an ASX-listed subsidiary of the Rio Tinto group of companies. Mr. McIntyre holds a Bachelor of Economics (in Accounting) from the University of Sydney (in Australia) as well as a Bachelor of Law from the University of Technology, Sydney (in Australia). He is a Certified Practising Accountant (CPA), is admitted as a Legal Practitioner of the Supreme Court of New South Wales (in Australia) and is a member of the Law Society of New South Wales.

Dozier Rowe. Mr. Rowe joined HeartWare in April 2006 as our Chief Operating Officer. Prior to joining us, Mr. Rowe was the President / Managing Director of D. Rowe Consulting, Inc., a manufacturing consulting company, from March 2005 to April 2006. Prior to this Mr. Rowe had over twenty-five years of experience in the medical device, pharmaceutical and diagnostic industry, having held senior positions at Boston Scientific Corporation between September 1998 and December 2004, including the positions of Vice President / General Manager Miami Operations from April 2002 to December 2004 and Vice President Fremont Operations from October 2001 to April 2002. Mr. Rowe has also held various other senior roles with St. Jude Medical Inc. and Baxter Healthcare Corporation.

Jeffrey LaRose. Mr. LaRose is our Chief Scientific Officer and has been with the Company since its inception. Prior to joining HeartWare, since April 1999, he was involved in the development of HeartWare’s technology through his employment with Kriton Medical, which the Company acquired in 2003. He is responsible for all aspects of the design and physiological controls for HeartWare’s left ventricular assist device, the HVAD pump. Mr. LaRose also leads the development of our miniaturization technology and has twenty years of experience in hydraulic technology development including roles with AEA Technology Engineering Software and Babcock and Wilcox. He holds a Master of Science in Mechanical Engineering from the University of Akron, Ohio.

Jane Reedy. Ms. Reedy joined HeartWare in May 2005 as Vice President, Clinical and Marketing. Ms. Reedy has over twenty years of experience in directing clinical affairs, sales and marketing in the circulatory assist device industry. Prior to joining HeartWare, Ms. Reedy was an independent consultant advising a variety of medical device companies from March 2003 to

May 2005. Ms. Reedy was also employed by Thoratec Corporation from November 1993 to March 2003 in a variety of roles, including Director of Market Development from 1999 to 2003. Ms. Reedy has developed clinical and regulatory strategies for complex medical products, designed and directed multi-centre studies, formulated and executed global sales and marketing strategies and managed a network of distributors and clinical specialists worldwide. Ms. Reedy has a Master of Science in nursing from St. Louis University and has served as Department Head of Cardiothoracic Services at St. Louis University Hospital.

Barry Yomtov. Mr. Yomtov joined HeartWare in July 2006 as Vice President, Product Development and is responsible for the design and development of new products. He has over twenty-eight years experience in the medical device industry specializing in Class III implantable medical devices. Prior to joining HeartWare, Mr. Yomtov held senior management positions as follows: Director, Engineering at Massachusetts Eye and Ear Infirmary from January 2005 to July 2006 and Director, Engineering at MicroCHIPS, Inc. from October 2001 to October 2004. Prior thereto, Mr. Yomtov was Director, Systems Integration at Abiomed, Inc. In addition, from 1978 to 1988 Mr. Yomtov held various positions in the design of pacemakers, neuro-stimulators and defibrillators at Cordis Corporation. Mr. Yomtov holds a Masters of Engineering in Biomedical Engineering from Rensselaer Polytechnic Institute. He has nine patents issued, two patents pending and ten publications in the field of medical devices.

Jennifer Foley. Ms. Foley joined HeartWare in January 2007 as Vice President, Clinical & Regulatory Affairs. Ms. Foley has more than twenty years of experience in clinical trial management and regulatory activities. Prior to joining HeartWare, Ms. Foley was Vice-President, Clinical Sciences, Clinical Program Management and Operations at Boston Scientific from February 2002 to December 2006. Prior thereto, Ms. Foley was Senior Director, Clinical Affairs at The Medicines Company from July 2000 to February 2002. Ms. Foley also spent five years in various leadership positions at Parexel International Corporation, one of the world’s largest contract research organizations, from July 1995 to July 2000. Before that, Ms. Foley was Clinical Program Manager at GlaxoSmithKline from April 1991 to June 1995. Ms. Foley holds a Masters of Business Administration from Boston University.

ITEM 6. EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

The following discussion and analysis of compensation arrangements of our named executive officers for 2006 should be read together with the compensation tables and related disclosures set forth below. This discussion contains forward looking statements that are based on our current plans, considerations, expectations and determinations regarding future compensation programs. Actual compensation programs that we adopt may differ materially from currently planned programs as summarized in this discussion.

Role of the Compensation Committee

Our named executive officer compensation program is overseen and administered by the Nomination and Remuneration Committee (“Compensation Committee”) of the Board of

Directors. The members of this Committee are Mr. Robert Thomas (Chairman), Dr. Seth Harrison, Dr. Denis Wade and Dr. Christine Bennett.

The Compensation Committee advises the Board on compensation policies and practices generally. In addition, the Compensation Committee makes specific recommendations on compensation packages and other terms of employment for our senior executives and non-executive directors and considers recommendations from senior management regarding amendments to existing employee entitlements. In order for the Compensation Committee to make recommendations to the Board of Directors regarding compensation and incentive packages, the Compensation Committee requests that senior management obtain information for the Compensation Committee in order to assist the Compensation Committee with its decision-making process. The Board considers the recommendations of the Compensation Committee and makes the final determination of compensation.

Philosophy

The market for medical device employees is highly competitive and, accordingly, employees in the medical device sector are generally relatively highly compensated, particularly in the United States. Because we do not currently have revenue or significant levels of detailed long-term human data for our products, potential new employees may perceive us as having a higher risk profile than other established medical device companies. Therefore, our executives are compensated in line with our perception of wider medical device industry compensation practices, especially with those of development-stage companies, and after taking into consideration the relevant employee’s compensation prior to joining the Company together with a variety of other factors, including their contribution, responsibilities, experience, importance to the Company, work ethic and seniority following commencement with the Company.

During 2006, the Company retained an external consultant to assist the Company in reviewing the levels of our executives’ base salaries using compensation data in the medical device and biotechnology industries. While we consider compensation data regarding other comparable companies, we do not engage in benchmarking of compensation. Other factors considered included years of experience, the executives’ roles and responsibilities and individual executives’ compensation and employment history.

While equity-based compensation has been and remains a strong financial motivator for employees, the Board of Directors recognizes that the salary component of each employee’s compensation will, in the short term, constitute the vast majority of an employee’s total compensation. To that end, all options granted to employees during 2006 carried exercise prices significantly above market prices of our ordinary shares on the relevant grant date with this “premium-to-market” ranging between 14% and 43%.

We believe that this philosophy of emphasizing cash compensation in the short term and granting premium options is currently appropriate if we are to attract and retain key executives to manage the business and affairs of the Company, be a significant player in the growing circulatory assist market and increase shareholder value. We continue to monitor both our cash and option compensation approaches to ensure that they are competitive and motivating.

Compensation Objectives and Principles

We believe that our compensation policies and practices are central to our ability to attract and retain our employees. In particular, we recognize that employee attraction and retention are of the utmost importance as we transition from a development company to an early-stage manufacturer of implantable circulatory assist devices. Moreover, on a global basis, there are a limited number of individuals with significant mechanical circulatory assist experience or related medical device experience, such as pacemaker or defibrillator experience, and competition for executives with relevant experience is intense. We also recognize that because our facilities are located in the southeastern United States, in many instances potential new employees must consider the additional burden of relocation.

During this period of growth and development, we depend on a concentrated pool of employees who, consequently, are imparted with a wider set of responsibilities and obligations than would normally be expected in larger, more mature organizations. For this reason, the retention of these employees, together with their accumulated knowledge and experiences, are of great significance and directly impact on our ability to achieve our corporate objectives in a timely manner.

Our compensation policies are therefore designed to attract, retain and motivate executive officers and to align compensation and related financial incentives with the interests of shareholders.

The key principles of our compensation policies are as follows:

	•		offer sufficient rewards to attract and retain executives in light of current employment market conditions in our industry;

	•		link rewards for executives to the achievement of corporate goals thereby aligning the interest of our executives and our shareholders;

	•		ensure parity in terms of compensation among executives; and

	•		assess and reward executives using a variety of measures of performance.

Elements of Compensation

Compensation packages are set at levels that are intended to attract and retain executives capable of managing our diverse operations and achieving our strategic objectives in a timely manner.

Base Salary

For the short term, the base salary component will be the dominant factor in executive compensation. Base salaries are set by reference to the scope of the executive’s responsibilities, the nature of the relevant individual’s role and the extent of the executive’s ongoing contributions to our strategic direction. Other relevant considerations include perceived long-term value to HeartWare, succession planning and retention and the executives’ compensation

prior to joining the Company. In 2006, we retained an external consultant in Florida, Kingston Bay Associates, to assist us in determining the appropriate levels of our executives’ base salaries using compensation data in the medical device and biotechnology industries. The Company considered the base salaries of named executive officers in light of their historical salary levels, together with their overall contribution, work ethic, responsibilities, tenure with the Company and other case-by-case factors such as replaceability or the importance of that individual to the Company. The Company did not attribute any specific weighting to the elements of individual performance or contribution or otherwise adopt any other formal mechanism in its determination of the relevant salary level for the named executive officers. The assessment of each individual was therefore undertaken following consideration of the above factors on an aggregated basis. Salaries are typically reviewed annually.

Bonus

Sign-on bonus and performance-based bonuses are an important element of our compensation strategy. These bonuses are used to attract new executives and to reward the achievement of significant corporate milestones in circumstances where this can be linked to the delivery of improved shareholder value, subject to corporate cash flow and general working capital considerations.

We use sign-on bonuses as an additional incentive for potential executives to join us because we believe that this element of compensation often significantly influences the potential executive’s decision-making process. The decision to offer such bonuses generally evolves as part of the employment negotiation process.

In 2006, we hired Mr. Godshall to be our new Chief Executive Officer and President, and Mr. Godshall was paid a sign-on bonus of $75,000 upon the commencement of his employment on September 18, 2006. This bonus was paid on the basis that we determined that it was imperative that we attract a new Chief Executive Officer with the appropriate skills, experience and qualifications to lead the Company through an important growth stage. The amount of the bonus was set following a recommendation from the Company’s recruitment consultant, Russell Reynolds Associates, and based on the Board of Directors’ belief that $75,000 would be a sufficiently strong incentive for Mr. Godshall taking into account Mr. Godshall’s existing compensation levels. We therefore paid this bonus as an incentive in order to ensure that we retained the services of Mr. Godshall as our Chief Executive Officer and President as he considered multiple employment offers.

The Compensation Committee and the Board of Directors also determined to pay a discretionary bonus on June 30, 2006 in recognition of the substantial achievements and progress made by the Company over a period of more than twelve months. Specifically, this discretionary bonus reflected the fact that the Company had been able to expedite the finalization of the development of the HVAD pump, successfully and quickly commence and complete GLP animal trials, negotiate and obtain regulatory approvals to commence a human clinical trial in Europe (Germany, Austria and the United Kingdom) and Australia, and importantly, to successfully initiate the Company’s international human clinical trial by implanting the first patient with a HVAD pump in March 2006. These accomplishments were achieved through an enormous contribution and personal sacrifice by the Company’s executives over an extended

period of time and the Company determined that the payment of this bonus to executives was appropriate in the circumstances. As the above bonus was both discretionary and retrospective in nature, there were no objectives established for any of the named executive officers in relation to this bonus.

All of our executives who were employed by us prior to December 1, 2005 were eligible to receive this discretionary bonus. The bonus of each individual executive was determined in conjunction with our annual performance review process. Factors considered included the employees’ position and rank within the organization and their specific roles and responsibilities and their performance therein, with the Company’s Chief Executive Officer having the largest potential bonus with lesser ranked executives eligible for lower amounts commensurate with their relative ranks. The executives who received this bonus were:

	•		David McIntyre, who received $35,000;

	•		Jeff LaRose, who received $45,000;

	•		Jane Reedy, who received $25,000; and

	•		Stuart McConchie, who received $45,200.

The Chief Executive Officer and the Board of Directors considered the achievements of the Company in the preceding 18 months and then considered the aggregate contribution of each of its named executive officers to the Company’s achievements. Mr. LaRose was determined to have provided the most significant and valuable contribution to the Company during the relevant period and the Board of Directors therefore determined to pay him a bonus of $45,000, substantially equivalent to that which was awarded to the Company’s former Chief Executive Officer, Mr. Stuart McConchie. The Board of Directors believed that this amount was appropriate given Mr. LaRose’s contribution and provided sufficient financial recognition to Mr. LaRose for his performance. Mr. McIntyre was then determined to have provided the next most significant contribution to the Company with Ms. Reedy following thereafter with $10,000 descending increments, determined by the Board of Directors to be appropriate.

Option Awards

We have adopted the HeartWare Limited Employee Share Option Plan, or ESOP. The ESOP is utilized for the purpose of attracting new executives, retention and as a long-term incentive program. We perceive that it is a generally accepted practice in the medical device industry that potential employers offer senior executives compensation packages that include a significant option component. In line with this perception, we often make an initial grant of options to an incoming senior executive with effect from the commencement of employment, with subsequent awards being given at the sole discretion of the Board of Directors. We have offered our Chief Executive Officer an option package roughly equal to 3% of our then-outstanding equity. Other executive officers are granted an initial option package that ranges from 0.75% to 1.5% of our then-outstanding equity, however, specific grants are negotiated on a case by case basis that considers a range of employment factors, including specific roles and responsibilities, historical compensation and market information. Compensation packages are often determined and negotiated with the assistance of an independent executive recruiter if one

is utilized or, in the absence of the Company using such a recruiter, by reference to salary data sourced from the American Society of Human Resource Management.

In the interest of promoting long-term shareholder value, we presently grant options that progressively vest in four annual tranches, commencing on the first anniversary of the date of employment. Further, all options granted under the ESOP in 2006 were granted at a premium to the then-current market price.

See “—HeartWare Limited Employee Share Option Plan” below for further information on our option awards.

Pensions

All executives receive retirement benefits.

In the United States, our executives are eligible to participate in a 401(k) retirement plan after 90 days of employment. We do not provide matching funds.

In Australia, we are legally obliged to contribute “superannuation”, at the rate of 9% of the relevant annual gross salary, with respect to each Australian employee. Superannuation is a retirement or pension contribution that is made to a pension fund selected by the employee. The amount is not available to the employee until retirement. As an Australian, Mr. McIntyre was entitled to this benefit until his transfer to the United States with effect from May 1, 2006.

Perquisites and Other Benefits

In the United States, we maintain health, dental and life insurance plans for the benefit of eligible executives. Each of these benefit plans requires the executive to pay a portion of the premium, with the Company paying the remainder of the premiums. These benefits are offered on the same basis to all employees. As noted above, we also maintain a 401(k) retirement plan that is available to all eligible US employees.

Life, accidental death, dismemberment and disability, and short and long-term disability insurance coverage is also offered to all eligible executives, and we pay these premiums in full. No other voluntary benefits, such as vision insurance, supplemental life and specific coverage insurance supplements, tuition assistance and work-life balance programs are currently made available to any executive.

Australian employees are not eligible to receive any of the above benefits. If Australian executives receive a benefit under their employment agreement, such as a car parking space, or other perquisites, then we are required to gross-up the cost of the benefit and to pay fringe benefits tax on this grossed-up amount to the Australian Taxation Office. The amount of any fringe tax benefits paid by us in this regard is included in the relevant employees’ reported earnings. As an Australian, Mr. McIntyre received a fringe benefit in the form of a parking space and a maintained motor vehicle until his transfer the United States, with effect from May 1, 2006. The Company paid fringe benefit tax on these benefits to the Australian Taxation Office as required under Australian law and this amount is reflected in Mr. McIntyre’s reported earnings.

Some executives may, generally on commencement of employment with us, be required to relocate residences in order to fulfill their job responsibilities. In this case, we negotiate a relocation allowance with the relevant executive on a case-by-case basis, and this allowance may include our making contributions toward the cost of relocation, establishment of housing and utilities, travel and, in rare cases, rental assistance.

We also provide Blackberry communication devices to various executives at no cost to the executive in circumstances where we consider that it is reasonable to do so.

HeartWare Limited Employee Share Option Plan

We have adopted the ESOP which allows us to grant options to purchase our ordinary shares to employees and directors. The ESOP is primarily designed to provide employees and directors with the opportunity to participate in our growth and success and to provide an incentive for such participants to have a greater involvement with, and to focus on, our long-term goals. We believe that this is an important component of executive retention and central to our long-term development.

We have offered our Chief Executive Officer an option package roughly equal to 3% of our then-outstanding equity. Other executive officers are granted an initial option package that ranges from 1% to 1.5% of our then-outstanding equity, however, specific grants are negotiated on a case by case basis that considers a range of employment factors, including specific roles and responsibilities, historical compensation and market information. Typically, options are granted upon hiring and additional grants are made annually based on performance.

Each option issued under the ESOP allows the holder to subscribe for and be issued one of our ordinary shares. In accordance with the Company’s ESOP rules (as adopted by shareholders on May 23, 2006), all ESOP options issued after we became listed on the ASX must have an exercise price which is not less than the weighted average sale price of ordinary shares sold during the five days (or such other period as our Board may determine) prior to the issue of the ESOP option.

Options may generally be exercised after they have vested and prior to the specified expiration date if the applicable exercise conditions are met. The expiration date can be for periods of up to ten years after the grant of the option.

Exercise conditions, if any, are determined by the Board and may include performance criteria set by the Board. No exercise conditions, other than continued employment, have been applied to any grants of options to executives at this stage. In addition and subject to the approval by the Board, options may be exercised at any time if we enter into a scheme of arrangement or a takeover occurs, or if an entity acquires a relevant interest in sufficient number of our ordinary shares to enable them to replace all or a majority of the Board.

There are a number of events that may cause options to lapse under the ESOP including, for example, where a participant ceases to be an employee or director of ours, for whatever reason. If we issue our ordinary shares as a share dividend, the number of ordinary shares which an option holder is entitled to receive upon the exercise of the option will be adjusted accordingly.

ESOP options are not listed for quotation on the ASX. Options issued under the ESOP are not transferable, except during a takeover in which case the options can be transferred to the bidder.

Options are typically granted upon hiring and annually based on performance thereafter.

We made the following grants of options to our executives during 2006:

	•		On April 20, 2006, we granted 1,000,000 options to Mr. Rowe on commencement of his employment with us and otherwise in accordance with the terms of his employment agreement. The exercise price of these options was AU$1.41, which constituted a 15% premium to the share price at the date of grant, which was AU$1.23.

	•		On September 27, 2006, we granted 5,581,264 options to Mr. Godshall on commencement of his employment with us and otherwise in accordance with the terms of his employment agreement. The exercise price of these options was AU$1.10, which constituted a 43% premium to the share price at the date of grant, which was AU$0.77.

	•		On October 28, 2006, we granted an aggregate of 800,000 options to the following executives: Mr. McIntyre, Mr. LaRose, Ms. Reedy and Mr. Rowe each received 200,000 ESOP options. The exercise price of these options was AU$1.10, which constituted a 41% premium to the share price at the date of grant, which was AU$0.78. We had previously in 2006 deferred the consideration of a grant of options to these executives as part of the annual review process until later in 2006 and this grant was therefore made following reconsideration of the issue.

As noted above, each of the above options was granted with an issue price of AU$1.10 per option. The Compensation Committee determined to apply this exercise price as this was the same price at which we completed a capital raising in May 2006.

The Board considers potential options grants to executives upon commencement of employment and as part of our annual employee performance review process that is completed in May and June each calendar year.

Employment Agreements and Severance Arrangements

All of our named executive officers have employment agreements, including the Chief Executive Officer and the Chief Financial Officer. These contracts do not have a fixed term, and the executives serve on an “at will” basis. The employment agreements of Douglas Godshall, David McIntyre, Dozier Rowe and Jane Reedy contain provisions which will entitle these executives to certain payments or benefits if their employment is terminated under certain circumstances, including after a “change in control” of the Company occurs.

The material terms of each named executive officer’s employment agreement, and the payments or benefits which the named executive officers would receive under different

termination circumstances, are set forth below in “-Employment Agreements” and “-Potential Post-Employment Payments”, respectively.

Material Change

Except as set out below, since December 31, 2006, there has been no material change to the compensation arrangements of the named executive officers:

	•		On January 2, 2007, Ms. Foley was appointed Vice President, Clinical and Regulatory Affairs, and Ms. Reedy assumed the responsibilities of Vice President, Sales and Marketing, from that date.

	•		As a consequence of her assuming new responsibilities, Ms. Reedy’s salary was increased from $200,000 to $220,000 per annum.

Share Ownership

We do not have share ownership guidelines or requirements for employees or directors.

Compensation Components of Named Executive Officers

The following summary compensation table sets forth compensation information for our last fiscal year with regard to (i) our Chief Executive Officer, (ii) our Chief Financial Officer, (iii) our other three most highly compensated executive officers during fiscal 2006 and (iv) two additional individuals for whom disclosures would have been provided but for the fact that the individuals were not serving as executive officers at the end of fiscal 2006, to whom we refer collectively as the “named executive officers.”

SUMMARY COMPENSATION TABLE
For the Year Ended December 31, 2006


									Change in Pension
									Value and
									Nonqualified
									Deferred
							Option Awards		Compensation		All Other
	Salary			Bonus			(1)		Earnings (2)		Compensation			Total
Name and Principal Position	($)			($)			($)		($)		($)			($)

Douglas Godshall Chief Executive Officer		87,500		75,000		(3)		2,217,984		—		—			2,380,484
David McIntyre Chief Financial Officer	186,834		(4)		35,000	(5)		79,367		5,003	111,127		(6)		417,331
Dozier Rowe Chief Operating Officer		147,212			—			79,367		—		—			226,579
Jeffrey LaRose Chief Scientific Officer		211,539			45,000	(5)		79,367		—		—			335,906
Jane Reedy Vice President, Clinical and Marketing		200,000			25,000	(5)		79,367		—		—			304,367
William Rissmann (7) Former Vice President, Manufacturing and Product Development		226,534			—			—		—		—			226,534
Stuart McConchie (8) Former Chief Executive Officer		567,813			45,200	(5)		—		50,368	39,667 (9)				703,048


(1)		All option awards are issued with an exercise price in AU$. Amounts were converted using the exchange rate at December 31, 2006 of AU$1.00 = US$.7913. The amount referenced is calculated using the Black-Scholes


		valuation model using the assumptions described in Note 3 and Note 12 of the Notes to Consolidated Financial Statements included in our audited Consolidated Financial Statements for the fiscal years ended December 31, 2006 and 2005 appearing elsewhere in this registration statement.

(2)		Statutory payments for superannuation (i.e., pension) fund equal to 9% of annual salary. This only applies to Australian employees.

(3)		Represents a sign-on bonus upon commencement of employment in September 2006.

(4)		Mr. McIntyre’s base salary includes AU$73,333 paid in Australian dollars while Mr. McIntyre resided in Australia. Amounts were converted using the average exchange rate during the year.

(5)		Represents a cash bonus paid on June 30, 2006 as part of a Company-wide bonus in recognition of our progressing into human clinical trials.

(6)		Includes a one-time payment of $27,750 as a relocation allowance and seven monthly after-tax payments of approximately US$6,000 (gross cost US$9,000) for the purposes of assisting Mr. McIntyre with the provision of comparative housing, financing of motor vehicles, rental shortfall on his Australian residence and other incremental recurring costs associated with his relocation to this United States. As of December 31, 2006, a pre-tax amount of US$80,077 (AU$105,647) has been paid to Mr. McIntyre in this regard. Also includes $3,300 related to the cost of providing a maintained motor vehicle and car parking space during his employment in Australia.

(7)		Mr. Rissmann was our Vice President, Manufacturing and Product Development, until his resignation effective May 13, 2006.

(8)		Mr. McConchie was our Chief Executive Officer until his resignation effective September 4, 2006.

(9)		Represents payments to Mr. McConchie in the form of a relocation allowance that assisted Mr. McConchie with costs associated with him relocating his family from the United Kingdom to Australia.

The following table lists all options granted to named executive officers during 2006:

GRANTS OF PLAN-BASED AWARDS
For the Year Ended December 31, 2006


									All Other
									Option Awards:					Grant Date
			Estimated Future Payouts Under Non-						Number of					Fair
			Equity Incentive Plan Awards						Securities			Exercise Price		Value of
			Threshold				Maximum		Underlying			of Option		Option
Name and Position	Grant Date		($)		Target ($)		($)		Options (#)			Awards ($/Sh)		Awards ($)

Douglas Godshall Chief Executive Officer		09/27/06		75,000		75,000		75,000		5,581,264	(1)		0.87		2,217,984
David McIntyre Chief Financial Officer		10/28/06		—		—		—	200,000		(2)		0.87		79,367
Dozier Rowe		10/28/06		—		—		—		200,000	(2)		0.87		79,367
Chief Operating Officer		04/20/06		—		—		—		1,000,000	(1)		1.12		688,250
Jeffrey LaRose Chief Scientific Officer		10/28/06		—		—		—		200,000	(2)		0.87		79,367
Jane Reedy Vice President, Clinical and Marketing		10/28/06		—		—		—		200,000	(2)		0.87		79,367


(1)		Options granted upon commencement of employment in accordance with employment agreement.

(2)		Options granted pursuant to annual review process.

Options are granted with exercise prices in Australian dollars (i.e., AU$) and otherwise in accordance with the terms of the Company’s ESOP rules. The exercise price per share and the calculated Black-Scholes value at option grant date per share in the table above has been converted to US dollars using the exchange rate at December 31, 2006 of AU$1.00 = US$.7913. Under the terms of the Company’s ESOP rules, all options issued after we became listed on the ASX must have an exercise price which is not less than the weighted average sale price of our ordinary shares sold during the five days (or such other period as our Board may determine) prior to the time of the issuance of the option.

All options granted under the Company’s ESOP rules to date, including options granted to named executive officers, vest in four equal annual tranches commencing on the first anniversary of the grant date. This vesting schedule was determined following consultation with the Company’s lawyers, Corrs Chambers Westgarth, and the Company’s corporate advisers, Inteq Limited, in late 2004.

The following table summarizes all outstanding equity awards for the named executive officers as of December 31, 2006:

OUTSTANDING EQUITY AWARDS

AT DECEMBER 31, 2006


	Option Awards
					Equity Incentive
					Plan Awards:
	Number of		Number of		Number of
	Securities		Securities		Securities
	Underlying		Underlying		Underlying
	Unexercised		Unexercised		Unexercised		Option
	Options (#		Options (#		Unearned Options		Exercise Price		Option
	Exercisable)		Unexercisable)		(#)		($)(1)		Expiration Date
Douglas Godshall		—		5,581,264		—		0.87		09/04/16
Chief Executive Officer
David McIntyre		191,051						0.47		01/31/10
Chief Financial Officer				191,051		—		0.59		01/31/10
				191,051				0.79		01/31/10
				191,051				1.19		01/31/10
				764,204				0.59		11/30/12
				200,000				0.87		10/18/16
Dozier Rowe		—		1,000,000		—		1.12		04/20/16
Chief Operating Officer				200,000				0.87		10/18/16
Jeffrey LaRose		1,540,000		—		—		0.16		01/31/10
Chief Scientific Officer		191,051		—				0.40		04/27/15
				573,153				0.40		04/27/15
				200,000				0.87		10/18/16
Jane Reedy		286,576		859,730		—		0.40		04/27/15
Vice President, Clinical and Marketing				200,000				0.87		10/18/16
William Rissmann (2)		—		—		—		—		—
Former Vice President, Manufacturing and Product Development
Stuart McConchie (3)		1,146,307		—		—		0.47		01/31/10
Former Chief Executive Officer				1,146,307				0.59		01/31/10
				1,146,307				0.79		01/31/10
				1,146,307				1.19		01/31/10


(1)		Options are granted with exercise prices in AU$. Amounts referenced are converted to US$ at the spot rate in effect at December 31, 2006.

(2)		Mr. Rissmann was the Company’s Vice President, Manufacturing and Product Development until his resignation effective May 13, 2006.

(3)		Mr. McConchie was the Company’s Chief Executive Officer until his resignation effective September 4, 2006.

Deferred Compensation

We do not have any deferred compensation arrangements.

Employment Agreements

We have entered into employment agreements with all of our named executive officers. These agreements do not have a fixed term of employment.

Employment agreements with our named executive officers generally include certain restrictive covenants, including a confidentiality covenant that will apply during each officer’s employment with us and thereafter. In the case of Mr. Godshall, Mr. McIntyre, Mr. LaRose and Ms. Reedy, their employment contracts also include a non-solicitation covenant for the duration of their employment and one year thereafter and a non-competition covenant for the duration of their employment and one year thereafter.

Those named executive officers with a “technical competence” also enter into a Proprietary Information, Confidentiality and Inventions Assignment Agreement whereby the relevant employee, amongst other things, assigns all rights, including all intellectual property rights, to us without further compensation.

Below is a summary of each named executive officer’s employment agreement.

Doug Godshall, President, Chief Executive Officer and Executive Director

As Chief Executive Officer, Mr. Godshall is responsible for our day-to-day management, as well as for planning and directing all of our policies, objectives and initiatives. Mr. Godshall’s employment agreement was determined and negotiated with the assistance of an executive recruiter, Russell Reynolds Associates, during which process the role and responsibilities, available market data and Mr. Godshall’s previous compensation were considered.

Key elements of Mr. Godshall’s employment agreement include:

	•		Annual salary of $350,000.

	•		A sign-on bonus of $75,000 paid upon commencement of employment (the sign-on bonus was used as an incentive to persuade Mr. Godshall to join HeartWare as he considered multiple employment offers).


	•		An annual performance bonus of $75,000 subject to satisfaction of agreed annual performance criteria (the criteria and quantitative components of such bonus, by percentage, are set forth below).


	•		Full participation in our employee benefits program, including life and disability insurance (short and long term), health and group dental.


	•		Upon commencement of employment, and pursuant to the terms of his employment agreement, Mr. Godshall was granted 5,581,264 options under our ESOP, with an exercise price of AU$1.10 per share (the number of options equals approximately 3% of the then-outstanding shares of the Company and was based on the Company’s understanding of comparable executive equity packages as confirmed by the Company’s recruitment consultant, Russell Reynolds Associates, and the exercise price per share was equal to the per share price of the Company’s most recent capital raise at the time of grant). Consistent with all our options granted under the ESOP rules, these options, vest in four equal annual tranches commencing on the first anniversary of the grant date. This vesting schedule was established following consultation with the Company’s lawyers, Corrs Chambers Westgarth, and the Company’s corporate advisers, Inteq Limited, in late 2004.

Mr. Godshall’s employment agreement does not include a fixed term. Mr. Godshall is entitled to a period of notice on termination in various circumstances, including where we terminate Mr. Godshall’s employment “without cause”. Mr. Godshall does not receive any additional compensation, except as provided above, for his role as an executive director of the Company.

Mr. Godshall’s annual performance bonus, targeted at $75,000, for the year ending October 31, 2007, will be determined based on whether and to the extent the following criteria have been satisfied:


Criteria	% of Bonus
• Completion of capital raise		40	%

• Completion of CE Mark Enrollment		20	%

• Submission of the HVAD IDE application		15	%

• Development of a shareholder communication strategy		15	%

• Overall leadership and development of the Company		10	%

The above objectives for Mr. Godshall were discussed, negotiated and agreed by Mr. Godshall and Mr. Robert Thomas, Chairman of the Company, immediately following the commencement of Mr. Godshall’s employment with the Company. Mr. Thomas provided his initial suggestions on the objectives to Mr. Godshall and then the appropriateness of these objectives, and their respective weightings, were agreed by Mr. Thomas and Mr. Godshall following a series of meetings and communications. The objectives and their respective weightings were then approved by the Company’s Nomination and Remuneration Committee.

David McIntyre, Chief Financial Officer and Company Secretary

As Chief Financial Officer and Company Secretary, Mr. McIntyre is responsible for directing our financial, taxation, compliance (non-clinical), risk and company secretarial functions.

Until April 30, 2006, Mr. McIntyre resided in Sydney, Australia and traveled frequently to the United States. As of May 1, 2006, Mr. McIntyre has temporarily relocated to our operations facility located in Miramar, Florida, in order to assist with, among other things, the management of our growth and development.

Mr. McIntyre has an employment agreement with HeartWare Limited that has been temporarily suspended as of April 30, 2006. Key elements of this agreement include:

	•		Annual salary of AU$220,000.

	•		Superannuation calculated at the statutory rate of 9% per annum.

	•		Provision of one car parking space and a maintained motor vehicle.


	•		Upon commencement of employment, and pursuant to the terms of his employment agreement, Mr. McIntyre was granted an aggregate of 764,204 options under the ESOP, with exercise prices between AU$0.60 and AU$1.50 per share. The number of options granted in this regard was approximately equal to 0.75% of the Company’s issued capital at the relevant time and was negotiated and agreed with Mr. McIntyre prior to the commencement of his employment. Consistent with all our options granted under the ESOP rules, these options vest in four equal annual tranches commencing on the first anniversary of the grant date. This vesting schedule was established following consultation with the Company’s lawyers, Corrs Chambers Westgarth, and the Company’s corporate advisers, Inteq Limited, in late 2004.

Mr. McIntyre’s employment agreement does not contain a fixed term and may be terminated by either party on three months’ notice. This employment agreement, including all accrued but unpaid leave entitlements, will resume upon Mr. McIntyre’s return to Australia.

While serving us in the United States, and with effect from May 1, 2006, Mr. McIntyre is subject to a service agreement with HeartWare, Inc. The arrangements with Mr. McIntyre, including relocation benefits, were determined following a detailed external, independent review. This review, which was conducted by Ernst & Young, compared host country (Miami, Florida) and home country (Sydney, Australia) relativities incorporating a net income comparison, spending and housing cost differentials as well as standards of living comparatives. In addition, market data provided by recognized relocation experts were also assessed and consideration was given to the additional financial burden associated with an international relocation including, among other things, consideration of the loss of income for Mr. McIntyre’s spouse as a certified practicing accountant. Set out below is an overview of the key elements of this service agreement:

•

Annual salary of $225,000.

	•		Full participation in our employee benefits program, including life and disability insurance (short and long term), health and group dental.

	•		Relocation benefits as follows:

	(i)		A one-time pre-tax relocation allowance of $27,750 upon commencement of assignment in the United States. The allowance is provided to assist Mr. McIntyre with meeting out-of-pocket expenses that are incurred on relocation to the United States, such as installation and purchase of electrical appliances, house cleaning, telephone installation etc, together with associated costs of leaving Australia (termination of services etc).

	(ii)		A monthly after-tax payment of approximately $6,000, with a gross cost to us of $9,000, for the purposes of assisting Mr. McIntyre with the provision of comparative housing, financing of motor vehicles, rental shortfall on his Australian residence and other incremental recurring costs associated with his relocation to the United States.

In addition, we have adopted an international relocation policy pursuant to which Mr. McIntyre’s family is entitled to one return trip to Australia following each year of completed service in the United States. Further, Mr. McIntyre and his spouse are entitled to a return flight to Australia in the event of a death in their respective families.

Mr. McIntyre’s service agreement does not contain a fixed term and may be terminated by either party at will.

Dozier Rowe, Chief Operating Officer

As Chief Operating Officer, Mr. Rowe is responsible for our manufacturing and operational processes including final product development, assembly methods, plant layout, workflow and workforce utilization. Mr. Rowe has an employment agreement with us. Set out below are the key elements of the terms of his employment agreement:

	•		Annual salary commenced at $205,000 and was revised to $225,000 on the completion of a ninety-day review.

	•		Full participation in our employee benefits program, including life and disability insurance (short and long term), health and group dental.


	•		Upon commencement of employment, Mr. Rowe was granted 1,000,000 options under our ESOP, with an exercise price of AU$1.41 per share. The number of options granted to Mr. Rowe was negotiated with him following recommendations made to the Company by its recruitment consultant, Russell Reynolds Associates. Consistent with all our options granted under the ESOP rules, these options vest in four equal annual tranches commencing on the first anniversary of the grant date. This vesting schedule was established following consultation with the Company’s lawyers, Corrs Chambers Westgarth, and the Company’s corporate advisers, Inteq Limited, in late 2004.

Mr. Rowe’s employment agreement does not contain a fixed term and may be terminated by either party at will.

Jeffrey LaRose, Chief Scientific Officer

As Chief Scientific Officer, Mr. LaRose is responsible for technology and intellectual property development.

Mr. LaRose has an employment agreement with HeartWare, Inc., the material terms of which are set out below:

	•		Annual salary of $225,000.

	•		Full participation in our employee benefits program, including life and disability insurance (short and long term), health and group dental.

Mr. LaRose’s employment agreement does not contain a fixed term and may be terminated by either party at will.

Jane Reedy, Vice President Clinical and Marketing

As Vice President Clinical and Marketing, Ms. Reedy is responsible for global marketing, managing reimbursement systems in domestic and international markets, and directing clinical trials to support product registration.

Ms. Reedy has an employment agreement with us, the material terms of which are as follows:

	•		Annual salary of $200,000.

	•		A one-time payment of $40,000 as a sign-on bonus upon commencement of her employment, which bonus was paid in May 2005.

	•		Full participation in our employee benefits program, including life and disability insurance (short and long term), health and group dental.


	•		Upon commencement of her employment, Ms. Reedy was granted 1,146,306 options under our ESOP, with an exercise price of AU$0.50 per share. The number of options granted to Ms. Reedy was agreed following protracted negotiations between Ms. Reedy and the Company. Ms. Reedy had been acting as a consultant to the Company for an extended period of time and was able to negotiate a higher number of options as a result. Consistent with all our options granted under the ESOP rules, these options vest in four equal annual tranches commencing on the first anniversary of the grant date. This vesting schedule was established following consultation with the Company’s lawyers, Corrs Chambers Westgarth, and the Company’s corporate advisers, Inteq Limited, in late 2004.

Ms. Reedy’s employment agreement does not contain a fixed term and may be terminated by either party at will.

Potential Post-Employment Payments

Under the employment agreements we have with our named executive officers, each is entitled to certain compensation from us in the event that his or her employment is terminated. The amount of compensation that each named executive officer would be entitled to receive depends on the circumstances in which the employment is terminated and the relevant terms of the individual named executive officer’s employment agreement.

One or more of our named executive officers are entitled to post-termination benefits if their employment is terminated in one or more of the following circumstances:

	•		by the Company without cause;

	•		by the executive for “good reason”;

	•		upon death or disability; and

	•		following a change in control.

The following sections discuss the estimated benefits that our named executive officers would receive as of December 31, 2006 in each of these termination circumstances, as applicable. The calculations set forth below are intended to provide reasonable estimates of the potential benefits are based on a number of assumptions and may not represent the actual amount a named executive officer would receive if the executive’s employment is terminated in any of these circumstances.

Termination Without Cause

If we terminate the employment of a named executive officer without cause, then that executive is entitled to receive his or her then-current base salary for six months following the date of termination. The above applies to each of our named executive officers except Mr. LaRose and Ms. Foley, who are not entitled to any further compensation if they are terminated without cause.

The following additional terms also apply to the named executive officers referred to below if we terminate their employment without cause:

•

For Mr. Godshall, he is also entitled to:

	o		a further three months notice in writing of such termination or payment of three months’ salary in lieu of notice;

	o		the continuation of all benefits provided to him and his family for six months following the date of termination; and

the acceleration of a pro-rata portion of the options that would otherwise vest on the next anniversary of Mr. Godshall’s commencement date with the Company following the date of termination, calculated by multiplying the relevant number of options that would otherwise vest by a fraction, the numerator of which is the number of months Mr. Godshall has worked since the most recent anniversary of Mr. Godshall’s commencement date and the denominator of which is 12.

	•		For Mr. McIntyre, he is also entitled to reimbursement of the reasonable costs of relocating him and his family from Miami to Sydney unless he accepts a new position with another employer that covers his relocation expenses, in which case the Company shall pay the excess of his relocation benefit over the expenses actually paid by such new employer.

	•		For Ms. Reedy, she is entitled to receive her then-current base salary for an additional six months following the date of termination of her employment.

Termination for Good Reason

If any of Mr. Godshall, Mr. McIntyre or Ms. Reedy terminates his or her employment for “good reason” (as defined in his or her employment agreement), the executive shall be entitled to receive the same benefits as are set out under the heading “Termination Without Cause” above.

If Mr. Rowe terminates his employment for “good reason” (as defined in his employment agreement), he shall be entitled to receive his then-current base salary for six months following the date of termination of his employment.

The following table shows the potential payments to each named executive officer if his or her employment was terminated without cause or for good reason as of December 31, 2006.

Termination Without Cause and Termination for “Good Cause”


			Payment in
			Lieu of		Share
	Severance		Notice ($)		Options ($)		Benefits ($)
Name	Payment ($)		(1)		(2)		(3)		Relocation ($)		Total ($)

Douglas Godshall		175,000		87,500		119,406		5,342		—		387,248
David McIntyre		166,500		—		—		—	67,750(4)			234,250
Dozier Rowe		112,500		—		—		—		—		112,500
Jane Reedy		220,000		—		—		—		—		220,000


(1)		Assumes that the Company elects to make a payment in lieu of notice to the named executive officer instead of providing written notice of termination.

(2)		Represents the Black-Scholes value of share options calculated as of December 31, 2006.

(3)		Represents the cost to the Company of benefits for the named executive officer and his family.

(4)		Represents the estimated cost to relocate Mr. McIntyre and his family from Miami to Sydney.

Death or Disability

Except for Mr. Godshall, none of our named executive officers have specific provisions in their employment agreements that govern termination in the event of death or disability.

For Mr. Godshall, the following provisions apply:

	•		If Mr. Godshall becomes incapacitated such that, in the opinion of an independent physician, the incapacitation prevents Mr. Godshall from performing his duties for three consecutive months or three months in aggregate in any twelve month period, then Mr. Godshall shall be entitled to receive his salary and health insurance benefits for three months following termination, and Mr. Godshall’s options shall accelerate in the manner specified above under the heading “Termination Without Cause”.

	•		Upon Mr. Godshall’s death, his estate shall be entitled to receive the benefits as set out under the heading “Termination Without Cause” above.

The following table shows the potential payments to Mr. Godshall if his employment was terminated in the event of death or disability, as of December 31, 2006.


	Death										Disability
													Share
	Severance		Payment in		Share						Severance		Options
	Payment		Lieu of		Options		Benefits ($)				Payment		($)		Benefits ($)
Name	($)		Notice ($)		($)(1)		(2)		Total ($)		($)		(1)		(2)		Total ($)

Douglas Godshall		175,000		87,500		119,406		5,342		387,249		87,500		119,406		2,671		209,577


(1)		Represents the Black-Scholes value of share options calculated as of December 31, 2006.

(2)		Represents the cost to the Company of benefits for the named executive officer and his family.

Change of Control

Our employment agreements with each of Mr. McIntyre, Mr. Rowe and Ms. Reedy contain certain provisions that apply if the employment of these executives is terminated following a “change of control”. The payments or benefits these executives shall be entitled to receive are in addition to those that the named executive officer would otherwise be entitled to receive if his or her employment were terminated under the same circumstance but for the change in control having occurred.

For Mr. McIntyre, if his employment is terminated by the Company without cause following a “change in control” and the Company does not provide him with three months notice of the termination, then he shall be entitled to a payment equal to an additional three months base salary. These provisions are in addition to the benefits that Mr. McIntyre would otherwise receive if his employment was terminated without cause by the Company.

For Mr. Rowe or Ms. Reedy, if either of their employment is terminated by the Company without cause or if he or she terminates his or her employment for good reason, and if such termination occurs within twelve months following the change in control, then all his or her options held by the executive on the date of and immediately prior to the transaction constituting the change in control and that would have vested on or before the date which is twelve months after the date on which the change in control occurs shall vest and be immediately exercisable.

Under each of the relevant employments agreements, a “change of control” occurs if:

	•		a person or entity becomes the owner, directly or indirectly, of more than fifty percent of the Company’s voting power (except by way of a merger, consolidation or similar transaction);

	•		there is a merger, consolidation or similar transaction where the Company’s existing shareholders do not own, directly or indirectly, more than fifty percent of the Company’s voting power of the surviving entity in a merger, consolidation or similar transaction (except where these circumstances arise in the context of a public offering); or

	•		there is a consummated sale, lease, exclusive license or other disposition of the Company’s consolidated assets.

The following table shows the potential incremental payments or benefits to each of Mr. McIntyre, Mr. Rowe and Ms. Reedy if his or her employment was terminated by the Company for cause or by the named executive officer for good reason following a change of control, as of December 31, 2006.

Change of Control (1)


	Severance		Payment		Share
	Payment		in Lieu of		Options ($)		Benefits		Relocation
Name	($)		Notice ($)		(2)		($)		($)		Total ($)

David McIntyre		—		83,250		—		—		—		83,250
Dozier Rowe		—		—		92,886		—		—		92,886
Jane Reedy		—		—		102,805		—		—		102,805


(1)		The benefits referred to above are the incremental benefits the named executive officer would receive upon a change of control in the event of a termination without cause or a termination for good reason, which are separately disclosed in a table preceding the above table.

(2)		Represents the Black-Scholes value of share options calculated as December 31, 2006.

Non-Continuing Named Executive Officers

Our former Chief Executive Officer, Mr. McConchie, and our former Vice President, Manufacturing and Product Development, Mr. Rissmann, both resigned their positions in 2006.

The Company and Mr. McConchie entered into an agreement upon the termination of his employment pursuant to which Mr. McConchie provided various undertakings to the Company. Under this agreement, we agreed to pay Mr. McConchie a severance payment equal to twelve months salary, or $356,243, plus attorney’s fees of approximately $6,000.

The Company also entered into an agreement with Mr. Rissmann upon the termination of his employment. In return for certain undertakings from Mr. Rissmann, the Company paid Mr. Rissmann severance payments equal to six months salary, or $112,500, plus benefits for the same period, the estimated value of which was $10,684.

DIRECTOR COMPENSATION

The following table sets out total compensation for the year ended December 31, 2006 to our non-executive directors. Executive directors do not receive compensation for their service as directors.

DIRECTOR COMPENSATION


											Change in Pension
											Value and
			Fees								Nonqualified
			Earned or		Stock		Option		Non-Equity		Deferred
	Year Ended		Paid in		Awards		Awards		Incentive Plan		Compensation		All Other
Name and Position	December 31,		Cash ($)		($)		($)		Compensation ($)		Earnings ($)(1)		Compensation ($)		Total ($)

Robert Thomas Chairman		2006		90,956		—		—		—		8,186		—		99,142
Seth Harrison, M.D. Deputy Chairman		2006		75,796		—		—		—		6,822		—		82,618
Dr. Christine Bennett Non-executive director		2006		45,478		—		—		—		4,093		—		49,571
Dr. Denis Wade Non-executive director		2006		26,529		—		—		—		23,042		—		49,571
Robert Stockman (2) Non-executive director		2006		—		—		—		—		—		—		—


(1)		Statutory contributions of 9% of fees to a superannuation fund (i.e., pension) for Australian directors only.

(2)		Mr. Stockman was appointed to the Board of Directors as of December 11, 2006 and has elected to not receive director’s fees.

Compensation Components

The compensation for our non-executive directors was determined in late 2004 in consultation with our corporate advisers and by reference to what the Board of Directors then understood to be comparable levels of compensation for similar entities in the life sciences and/or biotechnology industries. Consideration was given to the size of companies, the stage of companies (i.e., whether such companies were pre- or post-revenue) and whether or not comparable companies were publicly held. The Company did not undertake a formal study or rely on specific benchmarking data in setting director compensation. Compensation is paid to non-employee, or non-executive, directors only, and employee or executive directors do not receive any additional compensation for their directorships.

In the two-year period since our ordinary shares have been listed on the ASX, the compensation of our directors has not changed or otherwise increased. In addition, no incremental equity participation has been afforded to directors in this period. A review of the performance of individual directors has not been undertaken.

Compensation Committee Interlocks and Insider Participation

The Compensation Committee consists of four non-executive directors: Mr. Robert Thomas (Chairman), Dr. Seth Harrison, Dr. Denis Wade and Dr. Christine Bennett. None of the members of the Compensation Committee is a former officer of the Company. Dr. Harrison previously acted as Chief Executive Officer of the Company’s subsidiary, HeartWare, Inc., prior to its acquisition by the Company in January 2005. Dr. Harrison was Acting Chief Executive Officer of HeartWare, Inc. between July 2003 and November 2004 and was not paid any compensation for the services that he rendered in this regard.


ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Certain Relationships and Related Party Transactions

Since January 2004, we have not been a party to, and we have no plans to be a party to, any transaction or series of similar transactions in which the amount involved exceeded or will exceed $120,000 and in which any current director, executive officer, holder of more than 5% of our capital stock, or entities affiliated with them, had or will have a material interest, except that in January 2005, we issued a convertible note in the principal amount of $1.1 million to Apple Tree Partners I, L.P., our largest shareholder, which note remains outstanding.

Corporate Governance

Our Board of Directors currently consists of six (6) members: Robert Thomas, Seth Harrison, MD, Douglas Godshall, Dr. Christine Bennett, Dr. Denis Wade and Robert Stockman.

Our Board of Directors has determined that all of our directors, other than Dr. Harrison and Mr. Godshall, are “independent” within the meaning of applicable NASDAQ Global Select Market listing standards. In addition to being a member of our Board of Directors, Dr. Harrison is also the managing general partner of Apple Tree Partners I, L.P., which owned 49.2% of the outstanding voting shares of the Company May 31, 2007. In addition, Mr. McConchie was a member of our Board of Directors in 2006 until his resignation on September 4, 2006. Mr. McConchie was not deemed to be “independent” within the meaning of applicable NASDAQ Global Select Market listing standards.

Policies and Procedures for Review and Approval of Related Party Transactions

We have not adopted formal written policies and procedures for the review, approval or ratification of transactions, such as those described above, with our executive officers, directors and significant stockholders. However, we are subject to the Corporations Act and the listing requirements of the ASX. Chapter 10 of the ASX Listing Rules includes provisions related to acquisitions or disposals of substantial assets to related parties, purchases of securities by related parties, payments to directors and termination of benefits as they related to transactions with persons in a position of influence. Furthermore, Chapter 2E of the Corporations Act requires public companies to seek shareholder approval where a financial benefit is to be provided to a related party except for certain circumstances such as arm’s lengths transactions, reasonable compensation and standard benefits.


ITEM 8. LEGAL PROCEEDINGS

None.


ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

HeartWare’s ordinary shares have been listed on the ASX under the trading symbol “HTW”, since January 24, 2005.

Our high and low sales prices on the ASX for the respective periods are shown below, both in Australian dollars and in United States dollars.


	High		Low		High		Low
Period	(AU$)		(AU$)		(US$)		(US$)
Fiscal Year 2007:
Second Quarter		0.92		0.60		0.78		0.51
First Quarter		0.87		0.64		0.70		0.52
Fiscal Year 2006:
First Quarter		1.25		0.73		0.89		0.52
Second Quarter		1.40		0.78		1.04		0.58
Third Quarter		1.10		0.76		0.82		0.57
Fourth Quarter		0.84		0.64		0.66		0.51
Fiscal Year 2005:
First Quarter		0.49		0.38		0.38		0.29
Second Quarter		0.46		0.34		0.35		0.26
Third Quarter		0.47		0.37		0.36		0.28
Fourth Quarter		0.75		0.44		0.55		0.32

All currency conversions are based on the prevailing Australian dollar to US dollar rate applicable on the last day of each respective quarter.

As of December 31, 2006, 20,501,250 of our ordinary shares were subject to outstanding options.

As of December 31, 2006, there were approximately 1,556 holders of record of our ordinary shares.

We expect that it will be beneficial to the Company to establish a trading market for our ordinary shares in the United States. We are presently considering how to establish such a trading market and on May 1, 2007 the Company announced that it intended to establish a Level II American Depositary Receipts (“ADR”) program and listing on the NASDAQ. The Company is also considering a full listing of its ordinary shares, or their equivalent, on the NASDAQ. Irrespective of the mechanism finally adopted, the establishment of a trading market in the United States requires the Company to comply with, among other things, a complex array of Australian and US securities law issues. While it remains the Company’s intention to establish a trading market in the United States, there can be no assurance that the Company will satisfy the relevant legal and related requirements or that such a trading market will indeed develop.

Rule 144

In general, under Rule 144 under the Securities Act of 1933, as amended (the Securities Act), a person who acquires our ordinary shares in a transaction not registered under the Securities Act and has beneficially owned such shares for at least one year would be entitled to sell within any three-month period those shares subject to certain restrictions, including volume and manner of sale restrictions.

Under Rule 144(k) under the Securities Act, a person who is not deemed to have been one of our affiliates at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, is entitled to sell the shares without complying with the volume and manner of sale restrictions of Rule 144.

Of our ordinary shares outstanding, at least 91,500,000 were eligible for resale under Rule 144 as of January 31, 2007, subject to the volume and manner of sale restrictions thereof.

As of January 31, 2007, at least 67,735,000 of our ordinary shares were either freely tradable or eligible for resale under Rule 144(k).

Dividends

We have not paid any dividends on our ordinary shares, and we do not expect to pay dividends in the foreseeable future. We expect to retain all earnings to provide funds for the growth and development of our business. The declaration and payment of dividends in the future will be determined by the Board based upon our earnings, financial condition, capital

requirements and such other factors as the Board may deem relevant at that time. We are not under any contractual restriction as to our present or future ability to pay dividends.

Equity Compensation Plan Information

The following table describes shares of our ordinary shares that are available for purchase as at December 31, 2006 under outstanding options:

Number of

securities to be

Number of securities

issued upon

Weighted-

remaining available for

exercise of

average exercise

future issuance under

outstanding

price of

equity compensation

options,

outstanding

plans (excluding

warrants and

options, warrants

securities reflected in

Plan Category

rights

and rights

column (a))

Equity compensation plans approved by security holders

19,001,250

0.64

1,487,581

Equity compensation plans not approved by security holders

1,500,000

0.74

—

Total

20,501,250

0.65

1,487,581

On exercise and payment of the relevant subscription monies, each of the above options entitles the holder to be issued one ordinary share in the Company for each option exercised.

Additional information required by this Item is contained under Item 11 “–Taxes” and “– Foreign Acquisition and Takeover Act”.

ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES

Since November 26, 2004, our inception, we have issued the following securities that were not registered under the Securities Act:

	•		In connection with our initial public offering in Australia, on January 24, 2005, we issued 55,838,000 ordinary shares. The aggregate offering price for this issuance was $21.6 million (AU$27.9 million), and we incurred underwriting commissions of $1.6 million (AU$2.1 million). Our principal underwriter was EG Capital. The sales of these ordinary shares were exempt from registration pursuant to Regulation S promulgated under the Securities Act.

	•		Also on January 24, 2005, we issued 9,000,876 ordinary shares, for an aggregate consideration of approximately $3.5 million (AU$4.5 million), in a private placement exempt from registration pursuant to Regulation D promulgated under the Securities Act and Section 4(2) of the Securities Act.

	•		Also on January 24, 2005, in connection with our acquisition of all of the common stock of HeartWare, Inc., we issued 88,000,000 ordinary shares and a $1.1 million (AU$1.42 million) note that is convertible into our ordinary shares at a conversion price of AU$1.00 per share. The issuance of these ordinary shares and note was exempt from registration pursuant to Section 4(2) of the Securities Act.

	•		On April 20, 2005, we issued 2,589,998 ordinary shares to Dr. Robert Fine, former CEO of Kriton Medical, Inc., upon the cashless exercise by Dr. Fine of three warrants to purchase 5,259,076 ordinary shares at an exercise price of AU$0.20 per share. These warrants had originally been issued to him by Kriton Medical’s subsidiary, HeartWare, Inc., on October 3, 2003. The issuance of these ordinary shares was exempt from registration pursuant to Section 4(2) of the Securities Act.

	•		On May 23, 2006, we issued 29,679,220 ordinary shares in a private placement. The aggregate proceeds to us in connection with this offering were US$23.4 million. The issuance of these ordinary shares was exempt from registration pursuant to Regulation S and Regulation D promulgated under the Securities Act.

	•		On June 15, 2006, we issued 75,452 ordinary shares to our Australian shareholders pursuant to our Shareholder Share Purchase Plan for aggregate proceeds to us of AU$82,997. The issuance of these ordinary shares was exempt from registration pursuant to Regulation S promulgated under the Securities Act.

	•		From June 2005 to August 2006, we issued an aggregate of 806,552 ordinary shares pursuant to the exercise of options under our ESOP at exercise prices ranging from $0.16 to $0.36 (AU$0.20 to AU$0.50) for aggregate proceeds of $162,713 (AU$218,656) to five individuals. The issuance of these ordinary shares was exempt from registration pursuant to Rule 701 under the Securities Act.

ITEM 11. DESCRIPTION OF REGISTRANT’S SECURITIES TO BE REGISTERED

The rights of the holders of our ordinary shares are governed by our Constitution and the Australian Corporations Act 2001, or the Corporations Act. In addition, because our ordinary shares are listed on the ASX we are also subject to Australian securities laws and the ASX Listing Rules.

A summary of the principal rights attaching to our ordinary shares is as follows:

Rights affecting our ordinary shares and related matters

Issuance of shares

Australian law does not recognize the concepts of “authorized capital” or “par value”. As such, we do not have an authorized capital and our ordinary shares do not have a par value. Pursuant to our Constitution and subject to various restrictions as set out under the ASX Listing Rules and the Corporations Act, the power to issue ordinary shares in the Company is vested in the Board of Directors and, as such, the Board may issue ordinary shares to any person on such terms and with such rights as the Board may determine.

The Board may determine that ordinary shares are to be issued with preferred, deferred or other special rights or restrictions, whether in regard to dividends, voting, return of share capital, payment of calls or otherwise. However, the issuance of a new class of securities with rights

which are not identical to the rights of an existing class of ordinary shares is deemed to constitute a variation of class rights under the Australian Corporations Act 2001 and will require the approval of a 75% majority at a meeting of ordinary shareholders.

General meetings and voting

Under Australian law, our annual general meeting is required to be held within five months after the end of each financial year. For other general meetings, our directors are required to call a general meeting when requested to do so by shareholders holding at least 5% of the votes that may be cast at the meeting or being at least 100 in number, and such shareholders may propose a resolution for consideration at the next general meeting occurring more than two months’ after the date of their notice.

Each shareholder is entitled to receive notice of, and to attend and vote at, general meetings of the Company. Notice of a general meeting of the Company must be given to shareholders at least 28 days before the date of the meeting. At a general meeting of shareholders, each shareholder has one vote for each ordinary share held. Two shareholders present in person or by proxy constitute a quorum for a general meeting.

Resolutions put to shareholders generally require the approval of a majority of votes cast by those present and voting. Super-majority approval is required under Australian law for certain special resolutions and cumulative voting is not permitted under the Company’s Constitution. Approval by special resolution of shareholders is required for actions such as modifying or repealing the Company’s Constitution, changing the Company’s name or type, selectively reducing or buying back capital (in some circumstances), giving financial assistance in connection with the acquisition of shares in the Company and undertaking a voluntary winding up of the Company.

Under Australian law, because we are a public company traded on the Australian Securities Exchange, our shareholders are not permitted to approve corporate matters by written consent.

Voting exclusion

The ASX Listing Rules require the Company to disregard votes cast on resolutions at shareholders’ meetings by certain persons and their “associates.” The resolutions and the persons excluded from voting are as follows:

	•		Participation in new issues of securities of the Company: votes cast by a person who may participate in the issue are disregarded.

	•		Change to the terms of options granted by the Company: votes cast by a person who holds the option the subject of the approval are disregarded.

	•		Issues of capital exceeding 15% of the Company’s capital: votes cast by a person who may participate in the proposed issue and a person who might obtain a benefit, except a benefit solely in the capacity of a security holder, if the resolution is passed, are disregarded.


	•		Cancellation of forfeited shares: votes cast by a person whose shares are to be cancelled or liability is to be released or waived are disregarded.

	•		Acquisition and disposal of substantial assets where the asset is, or in the ASX’s opinion is, 5% or more of the Company’s shareholders’ equity as set out in the financial statements most recently filed with the ASX: votes cast by a party to the transaction are disregarded.

	•		Issues of securities by the Company to related parties of the Company or to any other party that the ASX determines that approval should be obtained: votes cast by a party to the transaction are disregarded.

	•		Issues of securities under an employee incentive scheme to directors: votes cast by directors are disregarded.

	•		Increase of the amount of directors’ fees payable to directors of the Company or any of its subsidiaries: votes cast by directors are disregarded.

	•		Payment of a termination benefit to a director where such termination benefit exceeds 5% or more of the Company’s shareholders’ equity as set out in the financial statements most recently filed with the ASX: votes cast by directors are disregarded.

	•		Significant change, either direct or indirect, to the nature or scale of the Company’s activities: votes cast by a person who may receive a benefit, except a benefit solely in the capacity of a security holder, if the resolution is passed, are disregarded.

	•		Disposal of a major asset of the Company: votes cast by a party to the transaction to acquire the asset are disregarded.

Each of the above voting exclusions applies to the party referenced (“primary person”) and to their “associate”. An associate includes a reference to:

•

a person in concert with whom the primary person is acting, or proposes to act; and

	•		a person who may be prescribed as an “associate” from time to time under regulations; and

	•		a person with whom the primary person is, or proposes to become, associated, whether formally or informally.

Dividends

Subject to any special rights and restrictions attaching to an ordinary share, our Board may declare that dividends are payable to shareholders on each ordinary share.

Winding-up rights

If the Company is wound up, any property that remains after satisfaction of all debts and liabilities of the Company, the payment of the costs, charges and expenses of winding up and any adjustment of the rights of the contributories among shareholders, must be distributed among the shareholders equally.

Directors and director remuneration

The Company must have at least three directors. At least two directors must ordinarily reside in Australia. Australian law does not require a majority of directors to be independent. The ASX Guidelines (as defined below) recommend that the majority of directors be independent. A majority of directors of the Company are independent. A resolution of the Board must be passed by a majority vote. Under the ASX Listing Rules and our Constitution, the maximum amount which may be paid to non-employee directors for their services as directors may not exceed the amount approved by shareholders at a general meeting.

Australia has recently enacted legislation that gives shareholders of listed companies, such as holders of our ordinary shares, the right to participate in a non-binding vote, to be held at the annual general meeting, on the adoption of the remuneration report of the Company. The remuneration report is included in the Company’s Annual Report and is to contain a discussion of the Board’s policy in relation to remuneration of directors of the Company.

Transactions involving directors or officers

The Corporations Act prohibits us from giving directors a financial benefit unless we obtain the approval of our shareholders or the financial benefit is otherwise exempt. Exempt financial benefits include indemnities, insurance premiums and payments for legal costs that are not otherwise prohibited by the Corporations Act and benefits given on arms’ length terms.

The ASX Listing Rules prohibit us from acquiring a substantial asset from, or disposing of a substantial asset to, one of our directors without shareholder approval. In addition, subject to certain exceptions, the ASX Listing Rules prohibit us from issuing shares to a director without shareholder approval.

Issues exceeding 15% of capital

Subject to certain exceptions, the ASX Listing Rules prohibit us from issuing or agreeing to issue ordinary shares or other equity securities in any 12-month period which amount to more than 15% of our ordinary shares without shareholder approval.

Minority shareholders

Under the Corporations Act, any shareholder can bring an action in cases of conduct which is either contrary to the interests of shareholders as a whole, or oppressive to, unfairly prejudicial to or unfairly discriminatory against, any shareholders in their capacity as a shareholder, or themselves in a capacity other than as a shareholder. Former shareholders can also bring an action if it relates to the circumstances in which they ceased to be a shareholder. A

statutory derivative action may be instituted by a shareholder, former shareholder or person entitled to be registered as a shareholder. In all cases, permission of the court is required to bring a statutory derivative action.

Australian law does not provide for appraisal rights.

Right to inspect corporation books and records

Under Australian law, a shareholder may not obtain access to the Company’s books and records unless the shareholder first obtains a court order to do so.

Acquisition of the Company

Australian law restricts a person acquiring interests in the voting shares of a company where, as a result of the acquisition, that person’s or someone else’s voting power in that company increases from 20% or below to more than 20%. Generally, such acquisitions cannot be made unless the person acquires 3% or less of the voting shares in a company in any six-month period, the acquisition is made with shareholder approval or the acquisition is made under a takeover bid made in accordance with Australian law. Takeover bids must treat all shareholders alike and must not involve any collateral benefits to certain shareholders which are not otherwise made generally available. Various restrictions about conditional offers exist, and there are also substantial restrictions concerning the withdrawal and suspension of offers.

In addition, the Corporations Act provides that if an offer is received for a specified proportion of the ordinary shares of a company, a resolution of “Eligible Shareholders”, who are persons other than the bidder or an associate of the bidder, who, as at the end of the day on which the first offer under a bid was made, held ordinary shares in the class of ordinary shares to which the bid relates, must approve the takeover bid before it may take effect. If approval is obtained, the offer may proceed. If approval is not obtained, the offer will be taken to have been withdrawn. The rule does not apply to a takeover bid for all of the ordinary shares of the Company. The rule ceases to apply at the end of three years following its date of adoption or last renewal by shareholders of the Company by resolution at a general meeting.

If the acquisition of a security results in the purchaser acquiring a relevant interest in 5% or more of the total number of votes attached to voting shares in a company, the purchaser will also be required to make disclosures as to its substantial holdings under the Corporations Act. Disclosure obligations, including obligations on substantial shareholders, and limitations on acquisitions may, depending on the purchaser’s interests in, or voting power in relation to, ordinary shares, apply to the purchaser in respect of acquisitions, continuing holdings, exercises and disposals of ordinary shares.

Foreign Acquisition and Takeovers Act

The Foreign Acquisition and Takeovers Act 1975, or FATA, empowers the Treasurer of Australia to prohibit a proposed acquisition of shares in a company where as a result of the acquisition a non-Australian person, together with its associates, would have an interest of at least 15% of the total issued shares in that company, or two or more foreign persons, together with their associates, would in the aggregate have an interest of at least 40% of the total issued

shares in that company. However, FATA only applies where a company is valued, based upon the acquisition consideration to be paid in the transaction, at AU$100 million or more for acquirers that are non-US persons, and for acquirers that are US persons, a company must be valued at AU$871 million or more for FATA to apply.

Where an acquisition by a non-Australian person or persons has already occurred, the Treasurer has the power to order the acquirer to dispose of the shares. In addition, FATA requires certain persons who propose to make such acquisitions first to notify the Treasurer of their intention to do so. The concepts of acquisition, interest, associate and foreign person are broadly defined in FATA.

Rights of Non-Australian Holders of Ordinary Shares

Except with respect to restrictions under the Foreign Acquisition and Takeovers Act 1975 described above, neither our Constitution nor the laws of Australia restrict in any way the ownership, voting or other rights of our ordinary shares by non-residents or persons who are not citizens of Australia. See “-Foreign Acquisition and Takeovers Act”.

Non-marketable parcels

In certain circumstances, we may sell the ordinary shares of a shareholder who holds less than a “marketable parcel” of ordinary shares by giving that shareholder written notice prior to the sale. The power may be invoked only once by the Company in any 12 month period. A “marketable parcel” of ordinary shares is generally construed to mean securities with a value of at least $500. The Company may not sell a non-marketable parcel if a takeover has been announced, if the Company has not followed appropriate notice and procedure provisions as set forth by the ASX or if the shareholder notifies the Company within six weeks of receiving notice that it does not wish the securities to be sold. If a non-marketable parcel is to be sold, the Company acts as the shareholder’s agent and directs the sales of the underlying securities. The cost of the sale shall be borne by the Company or the purchaser of the securities.

Corporate Governance

Corporate governance for companies whose securities are listed on the ASX, such as the Company, is governed by the ASX’s Corporate Governance Council’s “Principles of Good Corporate Governance and Best Practice Recommendations” (the “ASX Guidelines”). The ASX Guidelines require companies to prepare a Corporate Governance Statement for inclusion in the Australian Annual Financial Report.

The ASX Guidelines set out various corporate governance principles and recommendations, and the Company is required to disclose compliance against those principles and recommendations on an “if not, why not” basis; that is, the Company must disclose whether it is complying with the principles and, if it is not complying, it must disclose why it is not complying.

The Company has prepared an Australian Annual Financial Report for each of the financial years ended December 31, 2005 and 2006. Included in each of those Annual Financial

Reports is a Corporate Governance Statement for the relevant period. Copies of the Annual Financial Report may be obtained from the Company’s website (www.heartware.com) or the ASX’s website (www.asx.com.au).

Taxation Considerations

Summary of Taxation Implications

The following is a general summary of the Australian taxation implications that may arise for certain shareholders in respect of holding and disposing of shares in the Company.

As taxation laws are complex, the following discussion is intended as a general guide to the Australian implications only. Shareholders should not rely on this discussion as advice in relation to their own affairs but should consult their own tax adviser applicable to their own needs and circumstances.

Dividends paid by HeartWare Limited

The Company has not historically declared or paid any dividends on its ordinary shares and no dividend is expected to be declared or paid in the foreseeable future. Further, whether such dividends, if any, paid to US residents in the future will be franked or unfranked cannot be determined at this time. The decision to declare a franked or unfranked dividend will depend on a number of unknown factors, including the Company’s tax position both in Australia and the United States, together with double-tax arrangements between the United States and Australia, and the Company’s underlying financial position, profitability and prospects at the relevant future time. Further, the Company is prohibited under Australian law from paying a dividend except out of profits, as determined under Australian accounting standards, and there can be no assurance that the Company will ever have sufficient profits in order to declare a dividend.

In respect of franked (Australian tax paid) dividends paid to non-residents of Australia (including US residents), no withholding tax applies.

In respect of unfranked dividends paid to non-residents of Australia (including US residents), the rate of Australian withholding tax, prima facie, shall be:

	•		US residents and residents of countries with which Australia has a double tax agreement (DTA) – 15%.

	•		US residents (also United Kingdom residents) that are a company which holds directly at least 10% of the voting power in the company paying the dividend – 5%.

	•		Tax residents of a country that does not have a DTA with Australia – 30%.

However, in respect of unfranked dividends paid to non-residents of Australia, so much of the part of the distribution that HeartWare declares is ‘conduit foreign income’ is:

•

Not assessable not exempt income of a foreign resident; and

•

Not subject to Australian withholding tax.

Conduit foreign income is non-Australian income received by the Company that is not otherwise taxable in Australia and that is then distributed by the Company to non-Australian residents. This would include non-Australian income such as branch profits, non-Australain non-portfolio dividends and tax exempt gains from the sale of a non-Australian company with an underlying active business. If the Company should receive such foreign income and then should make a distribution to non-residents of Australia where it declares all or a part of the distribution to be conduit foreign income, then that part of the distribution which is declared to be conduit foreign income would not be subject to Australian withholding tax and is not assessable not exempt income of the non-Australian resident. Whether such unfranked dividends will be declared and whether any part of such dividend, if any, would be categorized as conduit foreign income cannot be determined at this time and there can be no assurance that a dividend with a conduit foreign income will ever be declared or paid.

Australian Capital Gains Tax (“CGT”) on sale of ordinary shares in HeartWare Limited

Prior to December 12, 2006, a non-Australian resident holder of ordinary shares, including a US resident, would not be required to pay Australian CGT, provided the non-residents’ interest represented less than 10% of the total number of our issued ordinary shares.

From December 12, 2006, Australian capital gains realized by non-Australian residents on the sale of ordinary shares shall be disregarded for CGT purposes, unless our real property assets exceed 50% of our total assets. As we do not, at this time, own any Australian real property, no Australian CGT shall apply to non-Australian residents, including US residents that sell ordinary shares.

ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Under Australian law, we may not exempt a director from liability to the Company incurred in his or her capacity as a director. Further, we may not indemnify a director or officer against a liability owed to the Company or certain related entities. We are also not permitted to indemnify a director or officer against the cost of legal proceedings where such proceedings result in them being found to have a liability to the Company or certain related entities.

However, under Australian law, we may indemnify a director or officer against a liability owed to someone other than the Company or certain related entities (and also the cost of any related legal proceedings), provided the liability does not arise out of conduct involving a lack of good faith and is not a penalty or compensation order made under the Corporations Act.

Accordingly, we may indemnify each officer, director and company secretary out of the assets of the Company against any liability incurred or to be incurred by the officer, director or secretary in or arising out of the discharge of their duties. We may pay the insurance premium for an officer, director or company secretary in respect of a contract of insurance in relation to liability incurred by the officer, director or secretary arising out of the activities of the Company and their proper performance of any duty.

We have entered into a Deed of Indemnity, Access and Insurance pursuant to which each of the officers, directors and the company secretary are entitled, to the extent permitted by Australian law, to the benefit of certain indemnities from the Company. In addition, these persons have certain rights of access to our books and records.

We have also paid premiums to insure each of the directors and officers against all liabilities for costs and expenses incurred by them in defending any legal proceedings arising out of their conduct while acting in the capacity of director of the Company, other than conduct involving a willful breach of duty in relation to the Company.

ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our consolidated financial statements, and those of our predecessor together with the reports of our independent registered public accounting firm, appear on pages F-1 through F-37 of this registration statement.


ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS

(a) Financial Statements

Our financial statements and those of our predecessor, appear at the end of this Form 10. Please see the table of contents to the financial statements on page F-1.

(b) Exhibits


3.01		Constitution *

10.01		Convertible Note between HeartWare Limited and Apple Tree Partners I, L.P. dated December 15, 2004 *

10.02		Securities Exchange Agreement between Apple Tree Partners I, L.P., Anthony Low-Beer, Edward Nerssissian, Garrett and Carol Thunen, HeartWare, Inc. and HeartWare Limited dated December 13, 2004 *

10.03		Business Lease, dated as of March 1, 2001, between Sunbeam Properties, Inc. and Kriton Medical, Inc. *

10.04		Lease extension, dated as of February 23, 2004, between Sunbeam Properties, Inc. and HeartWare, Inc. *

10.05		Second lease extension, dated as of February 20, 2005, between Sunbeam Properties, Inc. and HeartWare, Inc. *


10.06		Sublease Agreement, dated June 1, 2006, between Starkey Laboratories, Inc. and HeartWare, Inc. *

10.07		Addendum to Sublease Agreement, dated as of June 1, 2006, between Starkey Laboratories, Inc. and HeartWare, Inc. *

10.08		Employment Agreement, dated as of September 18, 2006, between HeartWare Limited, HeartWare, Inc and Doug Godshall *

10.09		Employment Agreement, dated as of April 11, 2006, between HeartWare, Inc. and Dozier Rowe *

10.10		Employment Agreement, dated as of May 1, 2006, between HeartWare, Inc. and David McIntyre *

10.11		Employment Agreement, dated as of November, 2004, between HeartWare, Inc. and Jeff LaRose*

10.12		Employment Agreement, dated as of April 14, 2005 and amended January 2, 2007, between HeartWare, Inc. and Jane Reedy *

10.13		Employment Agreement, dated as of April, 2005 between HeartWare Limited and Howard Liebman *

10.14		Employment Agreement, dated as of May 30, 2006, between HeartWare, Inc. and Barry Yomtov *

10.15		Employment Agreement, dated as of January 1, 2007, between HeartWare, Inc. and Jennifer Foley *

10.16		Employment Agreement, dated as of December 15, 2004 between HeartWare Limited and Stuart McConchie *

10.17		Deed of Release, dated as of September 4, 2006, between HeartWare Limited and Stuart McConchie *

10.18		Clinical Investigation Agreement, dated as of March 21, 2006 between Medical University of Vienna and HeartWare, Inc. *

10.19		Clinical Investigation Agreement, dated as of February 17, 2006, between Royal Perth Hospital and HeartWare, Inc. *

10.20		Clinical Investigation Agreement, dated as of October 23, 2006, between Royal Brompton & Harefiled NHS Trust and HeartWare, Inc. *

10.21		Clinical Investigation Agreement, dated as of May 17, 2006, between Hannover Medical School and HeartWare, Inc. *



10.22**		Production Services Agreement, dated August 17, 2006, between Minnetronix, Inc. and HeartWare, Inc.


10.23		Servicing Agreement, dated August 17, 2006, between Minnetronix, Inc. and HeartWare, Inc. *

10.24		Sustaining Services and Clinical Support Agreement, dated August 17, 2006, between Minnetronix, Inc. and HeartWare, Inc.*

10.25		Form of Deed of Indemnity, Access and Insurance Agreement for directors and executive officers *

10.26		Letter of Appointment as a Director of the Company dated December 1, 2006 between HeartWare Limited and Robert Stockman *

10.27		Letter of Appointment as a Director of the Company dated December 15, 2004 between HeartWare Limited and Robert Thomas *

10.28		Letter of Appointment as a Director of the Company dated December 15, 2004 between HeartWare Limited and Christine Bennett *

10.29		Letter of Appointment as a Director of the Company dated December 15, 2004 between HeartWare Limited and Denis Wade *

10.30		Clinical Trial Agreement, dated as of February 13, 2007 between HeartWare Limited and St. Vincent’s Hospital, Sydney Limited *

10.31		Employment Agreement, dated as of February, 2005 between HeartWare Limited and David McIntyre *

10.32		HeartWare Limited Employee Share Option Plan Rules *

21.01		List of Subsidiaries *

23.1		Consent of Independent Registered Public Accounting Firm


*		Previously filed.

**		Confidential treatment has been requested for certain provisions of this Exhibit pursuant to Rule 24b-2 of the Securities Exchange Act.

INDEX TO FINANCIAL STATEMENTS


	Page
HeartWare Limited and Subsidiary for the quarters ended March 31, 2007 and 2006:

Consolidated Balance Sheets		F-2
Consolidated Statements of Operations		F-3
Consolidated Statements of Shareholders’ Equity		F-4
Consolidated Statements of Cash Flows		F-5
Notes to Consolidated Financial Statements		F-6

HeartWare Limited and Subsidiary for the years ended December 31, 2006 and 2005:

Report of Independent Certified Public Accounting Firm		F-14
Consolidated Balance Sheets		F-15
Consolidated Statements of Operations		F-16
Consolidated Statements of Shareholders’ Equity		F-17
Consolidated Statements of Cash Flows		F-18
Notes to Consolidated Financial Statements		F-18

HeartWare, Inc. (Predecessor) for the years ended December 31, 2004 and 2003:

Report of Independent Certified Public Accounting Firm		F-36
Balance Sheets		F-37
Statement of Operations		F-38
Statement of Changes in Shareholders’ Deficit		F-39
Statements of Cash Flows		F-40
Notes to Financial Statements		F-41

F-1

HEARTWARE LIMITED
(A Development Stage Company)

CONDENSED CONSOLIDATED BALANCE SHEETS
(restated)


	March 31,			December 31,
	2007			2006
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	12,142,586		$	16,697,769
Receivables		27,574			18,050
Prepaid expenses and other assets		572,620			598,793


Total current assets		12,742,780			17,314,612

Property, plant and equipment, net		2,993,927			2,710,870
Other intangible assets, net		268,765			217,197


Total Assets	$	16,005,472		$	20,242,679


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	255,150		$	308,364
Accrued expenses and other current liabilities		1,142,485			1,287,142
Convertible notes, current		1,196,526			1,167,481


Total current liabilities		2,594,161			2,762,987

Long-term convertible notes
Other long-term payables		20,230			15,936

Shareholders’ equity:
Ordinary shares, no par value - 186,302,097 and 186,262,097 shares outstanding at March 31, 2007 and December 31, 2006 respectively		—			—
Additional paid-in capital		49,271,607			48,654,298
Deficit accumulated during the development stage		(36,094,922	)		(31,260,167	)

Accumulated other comprehensive income:
Cumulative translation adjustments		214,396			69,625


Total Shareholders’ Equity		13,391,081			17,463,756



Total Liabilities and Shareholders’ Equity	$	16,005,472		$	20,242,679

The accompanying notes are an integral part of these condensed financial statements

F-2

HEARTWARE LIMITED
(A Development Stage Company)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited and restated)


							Cumulative Period
							from November 26,
							2004 (Inception)
	Three Months Ended March 31,						Through
	2007			2006			March 31, 2007
Revenues	$	—		$	—		$	—

Operating expenses:
General and administrative expenses		1,769,967			1,339,514			12,105,980
Research and development expenses		3,147,158			1,950,666			25,529,744


Total operating expenses		4,917,125			3,290,180			37,635,724

Loss from operations		(4,917,125	)		(3,290,180	)		(37,635,724	)

Foreign exchange income (loss)		(107,702	)		79,918			(197,684	)
Interest income, net		190,072			59,012			1,751,715
Other, net		—			—			(13,229	)


Loss before income taxes		(4,834,755	)		(3,151,250	)		(36,094,922	)
Provision for income taxes		—			—			—


Net loss	$	(4,834,755	)	$	(3,151,250	)	$	(36,094,922	)


Loss per ordinary share — basic and diluted	$	(0.03	)	$	(0.02	)

Weighted average shares outstanding - basic and diluted		186,295,430			156,096,274

The accompanying notes are an integral part of these condensed financial statements

F-3

HEARTWARE LIMITED
(A Development Stage Company)

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(unaudited and restated)


									Deficit
							Accumulated		Accumulated
	Ordinary Shares				Additional		Other		During
	Shares				Paid-In		Comprehensive		Development
	Issued		$		Capital		Income		Stage			Total
Balance December 31, 2006		186,262,097	$	—	$	48,654,298	$	69,625	$	(31,260,167	)	$	17,463,756
Issuance of ordinary shares pursuant to stock option exercise		40,000		—		6,285		—		—			6,285
Share based compensation		—		—		611,024		—		—			611,024
Net loss		—		—		—		—		(4,834,755	)		(4,834,755	)
Other accumulated comprehensive income (loss):		—		—		—		—		—			—
Foreign currency translation adjustment		—		—		—		144,771		—			144,771


Balance March 31, 2007		186,302,097	$	—	$	49,271,607	$	214,396	$	(36,094,922	)	$	13,391,081

The accompanying notes are an integral part of these condensed financial statements

F-4

HEARTWARE LIMITED
(A Development Stage Company)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited and restated)


							Cumulative Period from
							November 26, 2004
	Three Months Ended March 31,						(Inception) Through
	2007			2006			March 31, 2007
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(4,834,755	)	$	(3,151,250	)	$	(36,094,922	)
Adjustments to reconcile net loss to net cash used in operating activities:								—
Depreciation		131,644			90,982			750,370
Amortization		4,695			2,616			31,685
Share-based compensation expense		611,024			257,541			3,448,880
Loss on disposal of assets		—			—			13,229
Accrued interest		5,728			5,458			47,081
Increase (decrease) in operating assets and liabilities, excluding the effect of acquisitions:
Accounts receivable		(9,165	)		13,856			(25,920	)
Prepaid expenses and other current assets		32,143			86,571			(227,030	)
Note receivable, current		—			—			794
Accounts payable		(53,988	)		(740,755	)		(571,130	)
Accrued expenses and other current liabilities		(144,246	)		632,531			1,188,569

Net cash used in operating activities		(4,256,920	)		(2,802,450	)		(31,438,394	)

CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment		(412,223	)		(157,548	)		(3,557,118	)
Additions to patents		(56,263	)		—			(300,450	)
Net cash provided by acquisition		—			—			126,380
Proceeds from dispositions of assets		—			—			23,701

Net cash flows used in investing activities		(468,486	)		(157,548	)		(3,707,487	)

CASH FLOWS FROM FINANCING ACTIVITIES

Net proceeds from issuance of share capital		6,285			—			47,046,217


Net cash provided by financing activities		6,285			—			47,046,217

Effect of exchange rate on cash		163,938			(132,948	)		242,250

INCREASE IN CASH AND CASH EQUIVALENTS		(4,555,183	)		(3,092,946	)		12,142,586


CASH AND CASH EQUIVALENTS — BEGINNING OF PERIOD		16,697,769			10,036,941			—

CASH AND CASH EQUIVALENTS — END OF PERIOD	$	12,142,586		$	6,943,995		$	12,142,586


Supplemental cash flow information:
Cash paid during the year for:
Interest	$	5,728		$	5,458		$	48,374

The accompanying notes are an integral part of these condensed financial statements

F-5

1. Basis of Presentation

Development Stage

We have operated as a development stage enterprise since our inception. We are a medical device company that is focused on developing and commercializing a family of blood pumps that are surgically implanted to help augment blood circulation in patients suffering from chronic and end-stage heart failure. We devote substantially all of our efforts to research and development of products, raising capital and developing markets for our products. Accordingly, our financial statements have been prepared in accordance with the accounting and reporting principles prescribed by Statement of Financial Accounting Standard (“SFAS”) No. 7, “Accounting and Reporting by Development Stage Enterprises,” issued by the Financial Accounting Standards Board (“FASB”).

The Company’s success will depend in part on its ability to successfully complete clinical trials, obtain necessary regulatory approvals, obtain patents and product license rights, maintain trade secrets and operate without infringing on the proprietary rights of others, both in the United States and other countries.

Interim Financial Statements

The accompanying unaudited interim condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for reporting of interim financial information. Pursuant to such rules and regulations, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. Accordingly, these statements do not include all the disclosures normally required by accounting principles generally accepted in the United States of America for annual financial statements and should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2006 included in the Form 10 filed by the Company with the Securities and Exchange Commission. The consolidated statements of operations for the quarter ended March 31, 2007 are not necessarily indicative of the results to be expected for any future period or for the full year.

In the opinion of management, the accompanying unaudited interim condensed financial statement of the Company contain all adjustments (consisting of only normally recurring adjustments) necessary to present fairly the financial position of the Company as of the dates and for the periods presented.

2. Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of HeartWare Limited and its subsidiary, HeartWare, Inc. All inter-company balances and transactions have been eliminated on consolidation.

Accounting Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

F-6

Net Loss Per Ordinary Share

Basic loss per share is computed by dividing net loss for the period by the weighted average number of ordinary shares outstanding during the period. Diluted loss per share is computed by dividing net loss for the period by the weighted average number of ordinary shares outstanding during the period, plus the dilutive effect of ordinary share equivalents, such as options, using the treasury stock method.

Share-based Payments

We elected to early adopt SFAS 123(R) “Share-Based Payments” effective January 1, 2005. We use a Black-Scholes option value method. Under the fair value recognition provisions of SFAS 123(R), we recognize share-based compensation net of an estimated forfeiture rate and therefore only recognize compensation cost for those shares expected to vest over the service period of the award.

Calculating share-based compensation expense requires the input of highly subjective assumptions, including an estimated expected life of the option, share price volatility and a forfeiture rate. We have used the estimated life of the option in determining the fair value.

We estimate the volatility of our ordinary shares on the date of grant based on the historical volatility of our publicly-traded ordinary shares. We estimate the expected term to equal the contractual term at the time of grant. We estimate the forfeiture rate based on our historical experience of our employee retention rate. If our actual forfeiture rate is materially different from our estimate, the share-based compensation expense could be significantly different from what we have recorded in the current period.

The assumptions used in calculating the fair value of share-based awards represent our best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our share based compensation expense could be materially different in the future.

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). This statement provides a single definition of fair value, a framework for measuring fair value, and expanded disclosures concerning fair value. Previously, different definitions of fair value were contained in various accounting pronouncements creating inconsistencies in measurement and disclosures. SFAS No. 157 applies under those previously issued pronouncements that prescribe fair value as the relevant measure of value, except SFAS No. 123(R) and related interpretations and pronouncements that require or permit measurement similar to fair value but are not intended to measure fair value. This pronouncement is effective for fiscal years beginning after November 15, 2007. We do not expect the adoption of SFAS No. 157 to have a material impact on our financial position, results of operations, or cash flows.

F-7

3. Property and Equipment

Property and equipment, net consists of the following:


			As of
			March 31,			December 31,
	Useful Lives		2007			2006
Property, Plant and Equipment
Machinery and equipment		5 to 7 years	$	2,930,550		$	2,811,800
Leasehold improvements		3 to 5 years		268,217			209,116
Office equipment, furniture and fixtures		5 to 7 years		297,669			143,886
Software		5 to 7 years		362,119			276,092

				3,858,555			3,440,894
Less: accumulated depreciation				(864,628	)		(730,024	)

			$	2,993,927		$	2,710,870

Depreciation expense was $131,644 and $90,982 for the quarters ended March 31, 2007 and 2006, respectively.

4. Accrued Liabilities

Accrued expenses consist of the following:


	March 31,		December 31,
	2007		2006
Accrued expenses and other current liabilities
Accrued research and development materials	$	459,195	$	504,528
Accrued payroll and other employee costs		337,057		409,441
Accrued professional fees		279,883		261,317
Other accrued expenses		66,350		111,856

	$	1,142,485	$	1,287,142

5. Lease Obligations

Future minimum rental commitments at March 31, 2007 under non-cancelable operating lease agreements are as follows:


	Operating Leases
2007	$	793,087
2008		395,725
2009		75,895
2010		75,895
2011		6,325

Total minimum lease payments	$	1,346,927

F-8

Rent expense was $206,865 and $85,161 for the quarters ended March 31, 2007 and 2006, respectively.

6. Income Taxes

The Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”, (FIN No. 48), on January 1, 2007. Previously, the Company had accounted for tax contingencies in accordance with Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies”. As required by FIN 48, which clarifies SFAS No. 109, “Accounting for Income Taxes”, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. At the adoption date, the Company applied FIN 48 to all tax positions for which the statute of limitation remained open. No liabilities for resulting unrecognized tax benefits were identified in connection with the implementation of FIN 48. The amount of unrecognized tax benefits as of January 1, 2007 was $0. There have been no material changes in unrecognized tax benefits through March 31, 2007.

The Company is subject to income taxes in Australia, the U.S. federal jurisdiction and various states jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. The Company is subject to income tax examinations by tax authorities for all years since inception. The Company is not currently under examination by any tax authority. The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits in its income tax provision.

7. Share-based Compensation

The Company has granted plan and non-plan stock options to employees, officers, directors and advisors to the Company. The HeartWare Limited Employee Share Option Plan (“ESOP”), adopted on December 15, 2004, allows the Company to grant options for ordinary shares of up to 11% of the Company’s ordinary shares then outstanding. In accordance with the ESOP Rules, all ESOP options issued after the Company became listed on the ASX must have an exercise price which is not less than the weighted average sale price of ordinary shares sold during the five days (or such other period as the Board determines) prior to the grant of the ESOP option. The options generally vest ratably and can have expiration dates of up to ten years from the date of grant.

The Company has also granted an aggregate of 1,500,000 options outside of our ESOP or any formal plan. Of these options, 1,000,000 were granted to three non-executive directors and 500,000 were granted to a third party for services rendered to the Company. The options granted to the third party service provider have exercise prices per share ranging from AU$0.60 to AU$1.50 per share and were immediately exercisable upon granting. The options granted to the non-executive directors are subject to a vesting schedule whereby, as of December 31, 2006, 800,000 of the 1,000,000 options have vested and the remaining 200,000 options will vest in December 2007. The exercise prices per share with respect to the options granted to non-executive directors range from AU$0.60 to AU$1.50.

Information related to options, including non-plan options, at March 31, 2007 is as follows:

F-9


						Weighted
				Weighted		Average
				Average		Remaining		Aggregate
				Exercise		Contractual		Intrinsic
	Options			Price		Life		Value

Outstanding at December 31, 2006		20,501,250		$	0.65		6.90	$	—
Granted		1,150,000			0.89
Exercised		(40,000	)		0.16
Forfeited		(95,000	)		0.89

Outstanding at March 31, 2007		21,516,250			0.67		6.90		—

Exercisable at March 31, 2007		6,562,584			0.33		3.39		1,610,616

We generally recognize compensation expense for our share awards using a straight-line method over the substantive vesting period. The Company allocates expense to general and administrative expense and research and development expense based on the option holders’ employment function. For the quarters ended March 31, 2007 and 2006, the Company recorded general and administrative share-based expense of approximately $347,759 and $153,676, respectively and research and development share-based expense of approximately $263,265 and $103,865, respectively.

We recognize share-based compensation for the value of the portion of awards that are ultimately expected to vest. Statement No. 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The term “forfeitures” is distinct from “cancellations” or “expirations” and represents only the unvested portion of the surrendered option. We have applied an annual forfeiture rate of approximately 12.12% to all unvested share awards as of March 31, 2007, which represents the portion that we expect will be forfeited each year over the vesting period. We will re-evaluate this analysis periodically and adjust the forfeiture rate as necessary. Ultimately, we will only recognize expense for those shares that vest.

Under the provisions of Statement No. 123(R), we expect to recognize approximately $3.1 million, net of estimated forfeitures, of future expense for awards granted as of March 31, 2007. These awards have a weighted average remaining vesting period of 1.7 years.

The weighted average grant date fair value per share of options granted for the quarter ended March 31, 2007 using the Black-Scholes option pricing model was $0.35. There were no options granted during the quarter ended March 31, 2006.

Shares reserved for future issuance under the Company’s ESOP totaled approximately 476,981 at March 31, 2007.

Information related to options, both plan and non-plan, outstanding and exercisable at March 31, 2007 is as follows:


	Stock Options Outstanding						Stock Options Exercisable
			Weighted
			Average		Weighted
			Remaining		Average				Weighted
			Contractual		Exercise				Average
	Options		Life		Price		Options		Exercise Price
$0.00 - $0.50		7,534,416		4.36	$	0.27		5,289,431	$	0.25
$0.50 - $1.00		12,299,732		8.49		0.85		1,173,153		0.71
$1.00 - $1.50		1,682,102		6.55		1.17		100,000		1.21

		21,516,250		6.90	$	0.67		6,562,584	$	0.33

F-10

We recognize share-based compensation on fixed awards with pro rata vesting on a straight-line basis over the award’s vesting period. The fair value of the options used to calculate net loss and net loss per share was estimated using the Black-Scholes option pricing model with the following weighted average assumptions:


	March 31,
	2007			2006

Dividend yield		0	%		0	%
Estimated annual volatility		51.10	%		55.14	%
Risk-free interest rate		5.85	%		5.35	%
Estimated forfeiture rate		12.12	%		6.67	%
Estimated holding period (years)		10			10

Intangible Assets

The gross carrying amount of intangible assets and the related accumulated amortization for intangible assets subject to amortization are as follows:


	March 31, 2007					December 31, 2006
	Gross					Gross
	Carrying		Accumulated			Carrying		Accumulated
	Amount		Amortization			Amount		Amortization
Amortizable Intangible Assets
Patents	$	300,450	$	(31,685	)	$	244,187	$	(26,990	)

Amortization expense for the quarters ended March 31, 2007 and 2006 was $4,695 and $2,616, respectively.

Estimated amortization expense for each of the five succeeding fiscal years based upon the Company’s intangible asset portfolio at March 31, 2007 is as follows:


	Estimated
	Amortization
	Expense

2007	$	20,030
2008		20,030
2009		20,030
2010		20,030
2011		20,030

F-11

Convertible Note – Related Party

The Company has a convertible note, denominated in Australian dollars, in the principal amount of AU$1.42 million outstanding at March 31, 2007 and 2006. At March 31, 2007 and December 31, 2006, the principal amount of this note translated into US$1.1 million plus accrued interest that would convert into approximately 1.5 million ordinary shares at that time.

The note accrues interest at 2.0% per annum. The conversion price is AU$1.00 per ordinary share. The principal and interest on the convertible note is repayable on demand as of January 31, 2007, and is therefore included as a current liability. The note has not been converted and the holder of the note, Apple Tree Partners I, L.P., the Company’s majority shareholder, has given a written indication to the Company that it is its present intention to convert the note rather than demand repayment. Interest expense on this note was $5,728 for the quarter ended March 31, 2007 and $22,062 for the year ended December 31, 2006, respectively.

10.

Net Loss Per Share

Basic net loss per share is computed by dividing net loss applicable to ordinary shares by the weighted-average of ordinary shares outstanding during the period. Diluted earnings (loss) per share adjusts basic earnings (loss) per share for the dilutive effects of convertible securities, options and other potentially dilutive instruments, only in the periods in which such effect is dilutive. The following securities have been excluded from the calculation of diluted loss per share, as their effect would be anti-dilutive:


	March 31,		December 31,
Ordinary shares issuable upon:	2007		2006

Exercise of stock options		21,516,250		20,501,250
Conversion of convertible note		1,482,684		1,475,396

11.

Restatement

Subsequent to the issuance of the Company’s consolidated financial statements as of and for three months ended March 31, 2007 and March 31, 2006, for the year ended December 31, 2006 and for the cumulative period from November 26, 2004 (date of inception) through March 31, 2007, the Company’s management determined that business combination accounting was improperly applied to the January 24, 2005 acquisition of HeartWare, Inc. by HeartWare Limited. Rather, as the acquisition was an exchange of equity interests among entities under common control, the transaction should be accounted for at the historical costs of the assets and liabilities acquired.

The total impact of the adjustments related to the quarters ended March 31, 2007 and 2006 is a decrease in net loss of $435,553 and $441,474, respectively.

A summary of the significant effects on the restatement on the Company’s consolidated balance sheet as of March 31, 2007 and December 31, 2006 and consolidated statement of operations for the quarters ended March 31, 2007 and 2006 are as follows:

F-12


	As Previously			As
	Reported			Restated
Consolidated balance sheet (As of March 31, 2007):
Other intangible assets, net	$	16,307,716		$	268,765
Goodwill		15,371,221			—
Additional paid-in capital		84,507,891			49,271,607
Deficit accumulated during the development stage		(39,921,034	)		(36,094,922	)


	As Previously			As
	Reported			Restated
Consolidated balance sheet (As of December 31, 2006):
Other intangible assets, net	$	16,691,701		$	217,197
Goodwill		15,371,221			—
Additional paid-in capital		83,890,582			48,654,298
Deficit accumulated during the development stage		(34,650,726	)		(31,260,167	)


	As Previously			As
	Reported			Restated
Consolidated statement of operations – March 31, 2007
Research and development expenses	$	3,142,463		$	3,147,158
Amortization of intangibles		440,248			—
Net loss		(5,270,308	)		(4,834,755	)


	As Previously			As
	Reported			Restated
Consolidated statement of operations – March 31, 2006
Research and development expenses	$	1,948,049		$	1,950,666
Amortization of intangibles		444,090			—
Net loss		(3,592,724	)		(3,151,250	)

F-13

REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM

Board of Directors
HeartWare Limited

We have audited the accompanying consolidated balance sheets of HeartWare Limited (a Development Stage Company) (the “Company”) as of December 31, 2006 and 2005 and the consolidated statements of operations, shareholders’ equity and cash flows for the years ended December 31, 2006 and 2005, the period from November 26, 2004 (date of inception) through December 31, 2004, and the cumulative period from November 26, 2004 (date of inception) through December 31, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of HeartWare Limited (a Development Stage Company) as of December 31, 2006 and 2005, and the results of its operations and its cash flows for the years ended December 31, 2006 and 2005, the period from November 26, 2004 (date of inception) through December 31, 2004, and the cumulative period from November 26, 2004 (date of inception) through December 31, 2006, in conformity with accounting principles generally accepted in the United States of America.

As described in Note 17, the accompanying financial statements for the periods referred to above have been restated.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has incurred and expects to continue to incur significant costs in pursuit of the development of its products. There is no assurance that the Company’s plans to raise capital will be successful. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are described in Note 2. These financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Grant Thornton LLP

Fort Lauderdale, Florida
July 12, 2007

F-14

HEARTWARE LIMITED
(A Development Stage Company)

CONSOLIDATED BALANCE SHEETS
(restated)


	December 31,
	2006			2005
ASSETS
Current assets:
Cash and cash equivalents	$	16,697,769		$	10,036,941
Receivables		18,050			16,496
Prepaid expenses and other assets		598,793			345,514


Total current assets		17,314,612			10,398,951

Property, plant and equipment, net		2,710,870			1,372,399
Other intangible assets, net		217,197			198,780


Total Assets	$	20,242,679		$	11,970,130


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	308,364		$	963,443
Accrued expenses and other current liabilities		1,287,142			195,268
Convertible notes — related party		1,167,481			—


Total current liabilities		2,762,987			1,158,711

Long-term convertible note		—			1,061,081
Other long-term payables		15,936			25,613

Shareholders’ equity:
Ordinary shares, no par value - 186,262,097 and 156,096,274 shares outstanding in 2006 and 2005 respectively		—			—
Additional paid-in capital		48,654,298			24,221,219
Deficit accumulated during the development stage		(31,260,167	)		(13,833,459	)
Accumulated other comprehensive income (loss):
Cumulative translation adjustments		69,625			(663,036	)


Total Shareholders’ Equity		17,463,756			9,724,724


Total Liabilities and Shareholders’ Equity	$	20,242,679		$	11,970,129

The accompanying notes are an integral part of these financial statements

F-15

HEARTWARE LIMITED
(A Development Stage Company)

CONSOLIDATED STATEMENTS OF OPERATIONS
(restated)



							Period from		Cumulative Period
							November 26, 2004		from November 26,
							(Inception) through		2004 (Inception)
	Years Ended December 31,						December 31,		Through December 31,
	2006			2005			2004		2006
Revenues	$	—		$	—		$	—	$	—

Operating expenses:
General and administrative expenses		6,024,374			4,311,639			—		10,336,013
Research and development expenses		11,649,822			10,732,764			—		22,382,586


Total operating expenses		17,674,196			15,044,403			—		32,718,599

Loss from operations		(17,674,196	)		(15,044,403	)		—		(32,718,599	)

Foreign exchange income (loss)		(583,805	)		493,823			—		(89,982	)
Interest income, net		844,522			717,121			—		1,561,643
Other, net		(13,229	)		—			—		(13,229	)


Loss before income taxes		(17,426,708	)		(13,833,459	)		—		(31,260,167	)
Provision for income taxes		—			—			—		—


Net loss	$	(17,426,708	)	$	(13,833,459	)	$	—	$	(31,260,167	)


Loss per ordinary share - basic and diluted	$	(0.10	)	$	(0.10	)	$	—

Weighted average shares outstanding - basic and diluted		174,689,977			144,648,898			2,000

The accompanying notes are an integral part of these financial statements

F-16

HEARTWARE LIMITED
(A Development Stage Company)

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(restated)


								Accumulated			Deficit
								Other			Accumulated
	Ordinary Shares				Additional			Comprehensive			During
	Shares				Paid-In			Income			Development
	Issued		$		Capital			(Loss)			Stage			Total
Balance at November 26, 2004, (inception)		—	$	—	$	—		$	—		$	—		$	—
Issuance of founding ordinary shares		2,000		—		794			—			—			794
Net loss		—		—		—			—			—			—

Balance December 31, 2004		2,000		—		794			—			—			794

Issuance of ordinary shares pursuant to the acquisition of HeartWare, Inc.		88,000,000		—		(1,224,284	)		—			—			(1,224,284	)
Issuance of ordinary shares pursuant to initial public offering, net of offering costs		64,838,876		—		23,437,597			—			—			23,437,597
Issuance of ordinary shares pursuant to stock option exercise		395,400				59,576			—			—			59,576
Issuance of ordinary shares pursuant to cashless warrant exercise		2,859,998		—		—			—			—			—
Share based compensation		—		—		1,947,537			—			—			1,947,537
Net loss		—		—		—			—			(13,833,459	)		(13,833,459	)
Other accumulated comprehensive income (loss):
Foreign currency translation adjustment		—		—		—			(663,036	)		—			(663,036	)

Balance December 31, 2005		156,096,274		—		24,221,220			(663,036	)		(13,833,459	)		9,724,725

Issuance of ordinary shares pursuant to private placement		29,679,220				23,378,369			—			—			23,378,369
Issuance of ordinary shares pursuant to shareholder purchase plan		75,452				61,254			—			—			61,254
Issuance of ordinary shares pursuant to stock option exercise		411,151				103,136			—			—			103,136
Share based compensation		—		—		890,319			—			—			890,319
Net loss		—		—		—			—			(17,426,708	)		(17,426,708	)
Other accumulated comprehensive income (loss):
Foreign currency translation adjustment		—		—		—			732,661			—			732,661

Balance December 31, 2006		186,262,097	$	—	$	48,654,298		$	69,625		$	(31,260,167	)	$	17,463,756

The accompanying notes are an integral part of these financial statements

F-17

HEARTWARE LIMITED
(A Development Stage Company)

CONSOLIDATED STATEMENTS OF CASH FLOWS
(restated)


									Cumulative Period
							Period from November		from November 26,
							26, 2004 (Inception)		2004 (Inception)
	Years Ended December 31,						through December 31,		Through
	2006			2005			2004		December 31, 2006
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(17,426,708	)	$	(13,833,459	)	$	—	$	(31,260,167	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation & Amortization		371,497			247,229			—		618,726
Amortization		16,528			10,462			—		26,990
Share-based compensation expense		890,319			1,947,537			—		2,837,856
Loss on disposal of assets		13,229			—			—		13,229
Accrued interest, long-term		22,126			19,227			—		41,353

Increase (decrease) in operating assets and liabilities, excluding the effect of acquisitions:		—			—			—		—
Accounts receivable		(259	)		(16,496	)		—		(16,755	)
Prepaid expenses and other current assets		(229,430	)		(29,743	)		—		(259,173	)
Note receivable, current		—			794			—		794
Accounts payable		(666,383	)		149,241			—		(517,142	)
Accrued expenses and other current liabilities		1,071,959			260,855			—		1,332,814


Net cash used in operating activities		(15,937,122	)		(11,244,353	)		—		(27,181,475	)

CASH FLOWS FROM INVESTING ACTIVITIES

Additions to property and equipment		(1,732,372	)		(1,412,523	)		—		(3,144,895	)
Additions to patents		(34,945	)		(209,242	)		—		(244,187	)

Net cash provided by acquisition		—			126,380			—		126,380
Proceeds from dispositions of assets		23,701			—			—		23,701


Net cash flows used in investing activities		(1,743,616	)		(1,495,385	)		—		(3,239,001	)

CASH FLOWS FROM FINANCING ACTIVITIES

Net proceeds from issuance of share capital		23,542,759			23,497,173			—		47,039,932
		—			—			—		—

Net cash provided by financing activities		23,542,759			23,497,173			—		47,039,932

Effects of exchange rate changes on cash		798,807			(720,494	)		—		78,313

INCREASE IN CASH AND CASH EQUIVALENTS		6,660,828			10,036,941			—		16,697,769


CASH AND CASH EQUIVALENTS — BEGINNING OF PERIOD		10,036,941			—			—		—

CASH AND CASH EQUIVALENTS — END OF PERIOD	$	16,697,769		$	10,036,941		$	—	$	16,697,769


Supplemental cash flow information:
Cash paid during the year for:
Interest	$	22,496		$	20,150		$	—	$	42,646

The accompanying notes are an integral part of these financial statements

F-18

Note 1 Description of Business

HeartWare Limited, referred to in these notes collectively with its subsidiary, HeartWare, Inc. as “we,” “our,” “HeartWare” or the “Company”, is a medical device company focused on developing and commercializing a family of blood pumps that are surgically implanted to help augment blood circulation in patients suffering from chronic and end-stage heart failure, which is one of the leading causes of death in the developed world.

The initial application of our blood pump technology is our HeartWare Ventricular Assist Device, or HVAD pump, which we believe is the smallest full-output left ventricle assist device, or LVAD, that is currently in clinical trials. The HVAD pump is the only centrifugal LVAD designed to be implanted above the diaphragm in all patients.

Beyond the HVAD pump, we are also evaluating our next generation device, the Miniaturized Ventricular Assist Device, or MVAD. The MVAD is based on the same technology platform as the HVAD pump but adopts an axial flow, rather than a centrifugal flow, configuration. The MVAD, which is currently at the prototype stage and undergoing animal studies, is approximately one-third the size of the HVAD pump. We believe that the MVAD will be implantable by surgical techniques that are even less invasive that those required to implant the HVAD pump. We expect to initiate human clinical trials for the MVAD during mid-2009.

In parallel with our development of the MVAD, we have commenced design work on our third generation blood pump, which we currently call the IV VAD. The IV VAD will rely on the same underlying technology platform and will be a smaller version of the MVAD. Unlike the HVAD pump or the MVAD, the IV VAD is intended to be positioned within the body’s vasculature network and implanted by minimally invasive catheter-based techniques. Once the IV VAD is fully developed, we expect the IV VAD to be about one-tenth the size of the HVAD pump.

We are headquartered in Sydney, Australia and have operations and manufacturing facilities in Miramar, Florida.

We are a development stage company that has generated significant losses since our inception, and we expect to continue to incur substantial losses for the foreseeable future. Our primary business activities relate to the research and development of the HVAD pump and the development of future products. As of December 31, 2006, we had an accumulated deficit of approximately $31.3 million (which includes approximately $2.8 million in share-based charges and other non-cash charges).

Development Stage

We have operated as a development stage enterprise since our inception by devoting substantially all of our efforts to raising capital, research and development of products noted above, and developing markets for our products. Accordingly, our financial statements have been prepared in accordance with the accounting and reporting principles prescribed by Statement of Financial Accounting Standard (“SFAS”) No. 7, “Accounting and Reporting by

F-19

Development Stage Enterprises,” issued by the Financial Accounting Standards Board (“FASB”).

Prior to marketing its products in the United States, the Company’s products must undergo rigorous pre-clinical and clinical testing and an extensive regulatory approval process implemented by the Food and Drug Administration (the “FDA”) and other regulatory authorities. There can be no assurance that the Company will not encounter problems in clinical trials that will cause us or the FDA to delay or suspend clinical trials. The Company’s success will depend in part on its ability to successfully complete clinical trials, obtain necessary regulatory approvals, obtain patents and product license rights, maintain trade secrets and operate without infringing on the proprietary rights of others, both in the United States and other countries. There can be no assurance that patents issued to or licensed by the Company will not be challenged, invalidated or circumvented, or that the rights granted thereunder will provide proprietary protection or competitive advantages to the Company. The Company will require substantial future capital in order to meet its objectives. The Company currently has no committed sources of capital. The Company will need to seek substantial additional financing through public and/or private financing, and financing may not be available when the Company needs it or may not be available on acceptable terms.

Note 2 Going Concern

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States, which contemplate continuation of the Company as a going concern. However, the Company has sustained substantial losses from operations since its inception, and such losses have continued through December 31, 2006. In addition, as of December 31, 2006, the Company had a deficit accumulated during the development stage of $31.3 million.

Our continuation as a going concern is dependent on our ability to raise capital in order to continue to commercialize our technology and as such we are actively seeking to obtain additional capital and financing, though there is no assurance we will be successful in our efforts. Funds raised will be primarily applied for the purposes of meeting costs associated with expanding the Company’s human clinical trials, product development (including in relation to the Company’s transcutaneous energy transfer system and its next generation devices, the IV VAD and MVAD), regulatory and other compliance costs as well as for general working capital. The Company continually monitors its cash position.

The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.

Note 3 Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of HeartWare Limited and its wholly- owned subsidiary, HeartWare, Inc. All inter-company balances and transactions have been eliminated in consolidation.

F-20

Accounting Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“US GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents are recorded in the consolidated balance sheets at cost, which approximates fair value. The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

Plant and Equipment

The Company records plant, equipment and leasehold improvements at historical cost. Expenditures for maintenance and repairs are charged to expense; additions and improvements are capitalized. The Company generally provides for depreciation using the straight-line method at rates that approximate the estimated useful lives of the assets. Leasehold improvements are amortized on a straight-line basis over the shorter of the useful life of the improvement or the remaining term of the lease.

Share-based Payments

We estimate the volatility of our ordinary shares on the date of grant based on the volatility of our publicly-traded ordinary shares. We estimate the forfeiture rate based on our historical experience of our employee retention rate. If our actual forfeiture rate is materially different from our estimate, the share-based compensation expense could be significantly different from what we have recorded in the current period.

The assumptions used in calculating the fair value of share-based awards represent our best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our share-based compensation expense could be materially different in the future.

F-21

Impairment of Long-Lived Assets

The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable from future undiscounted cash flows. Impairment losses are recorded for the excess, if any, of the carrying value over the fair value of the long-lived assets.

Impairment of Intangible Assets

The Company records intangible assets at historical cost. The Company amortizes its intangible assets using the straight-line method over their estimated useful lives of fifteen years.

On an annual basis, the Company performs its annual fair value assessment of indefinite-lived intangible assets. The annual test date is December 31 of each year. In addition, the Company reviews its intangible assets subject to amortization quarterly to determine if any adverse conditions exist or a change in circumstances has occurred that would indicate impairment or a change in the remaining useful life. Conditions that would indicate impairment and trigger a more frequent impairment assessment include, but are not limited to, a significant adverse change in legal factors or business climate that could affect the value of an asset, or an adverse action or assessment by a regulator. If the carrying value of an asset exceeds its fair value, the Company writes-down the carrying value of the intangible asset to its fair value in the period identified. The Company generally calculates fair value of intangible assets as the present value of estimated future cash flows to be generated by the asset using a risk-adjusted discount rate. If the estimate of an intangible asset’s remaining useful life is changed, the Company amortizes the remaining carrying value of the intangible asset prospectively over the revised remaining useful life.

Income Taxes

The provision for income taxes is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities and certain other adjustments. The Company provides for deferred taxes under the asset and liability method, in accordance with SFAS 109, “Accounting for Income Taxes.” Under such method, deferred taxes are adjusted for tax rate changes as they occur. Deferred income tax assets and liabilities are computed annually for differences between the financial statements and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates then applicable to the periods in which the differences are expected to affect taxable income. A valuation allowance is provided for deferred tax assets if it is more likely than not that these items will either expire before the Company is able to realize their benefit or the future deductibility is uncertain.

Translation of Foreign Currency

The Company translates all assets and liabilities of non-US entities at the year-end exchange rate and translates sales and expenses at the average exchange rates in effect during the year. The net effect of these translation adjustments is shown in the accompanying financial statements as a component of shareholders’ equity, titled “Accumulated Other Comprehensive Income (Loss).” Foreign currency transaction gains and losses are included in the consolidated statements of operations.

F-22

Research and Development

Research and development costs, including new product development programs, regulatory compliance and clinical research, are expensed as incurred.

Net Loss Per Ordinary Share

New Accounting Standards

In June 2006, the FASB issued Interpretation Number 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”). The interpretation contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. The interpretation is effective for the first interim period beginning after December 15, 2006. We have not been able to complete our evaluation of the impact of adopting FIN 48 and as a result, are not able to estimate the effect the adoption will have on our financial position and results of operations.

In September 2006, the SEC’s Office of the Chief Accountant and Divisions of Corporation Finance and Investment Management released SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB No. 108”), that provides interpretive guidance on how the effects of the carry-over or reversal of prior year misstatements should be considered in quantifying a current year misstatement. SAB No. 108 states that registrants should quantify errors using both a balance sheet and an income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. This guidance is effective for fiscal years ending after November 15, 2006. The adoption of SAB No. 108 did not have a material impact on our financial position, results of operations, or cash flows.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). This statement provides a single definition of fair value, a framework for measuring fair value, and expanded disclosures concerning fair value. Previously, different definitions of fair value were contained in various accounting pronouncements creating inconsistencies in measurement and disclosures. SFAS No. 157 applies under those previously issued pronouncements that prescribe fair value as the relevant measure of value, except SFAS No. 123(R) and related interpretations and pronouncements that require or permit measurement similar to fair value but are not intended to measure fair value. This pronouncement is effective

F-23

for fiscal years beginning after November 15, 2007. We do not expect the adoption of SFAS No. 157 to have a material impact on our financial position, results of operations, or cash flows.

Note 4 Other Balance Sheet Information

Components of selected captions in the consolidated balance sheets at December 31 are as follows:

F-24


	Estimated Useful		December 31,
	Lives		2006			2005

Property, Plant and Equipment
Machinery and equipment		5 to 7 years	$	2,811,800		$	1,472,691
Leasehold improvements		3 to 5 years		209,116			161,912
Office equipment, furniture and fixtures		5 to 7 years		143,886			113,019
Software		5 to 7 years		276,092			—

				3,440,894			1,747,662
Less: accumulated depreciation				(730,024	)		(375,223	)

			$	2,710,870		$	1,372,399

Depreciation expense was $371,497 and $247,229 for the years ended December 31, 2006 and 2005, respectively.


	December 31,
	2006		2005

Accrued expenses and other current liabilities
Accrued R&D materials	$	504,528	$	—
Accrued payroll and other employee costs		409,441		121,331
Accrued professional fees		261,317		56,862
Other accrued expenses		111,856		17,075

	$	1,287,142	$	195,268

Note 5 Business Combination

On January 24, 2005, HeartWare Limited acquired all of the outstanding voting stock of HeartWare, Inc., a company based in Miramar, Florida developing heart pump technology that now forms the Company’s core technology platform. HeartWare Limited issued 88 million ordinary shares and a convertible note in the principal amount of $1.1 million less a write-off of amounts due to shareholder of approximately $140,000.

As the acquisition is an exchange of equity interests among entities under common control, the transaction was accounted for at the historical cost of the assets and liabilities acquired from HeartWare, Inc. The accompanying consolidated statements of income for the years ended December 31, 2006 and 2005 reflect the results of operations of HeartWare, Inc. from the date of acquisition, January 24, 2005.

The following table summarizes the historical costs of the assets acquired and liabilities assumed at the date of acquisition:

F-25


Cash	$	126,380
Receivable		75,000
Prepayments		220,000
Other non-current assets		20,771
Trade creditors		(558,103	)
Other current payables		(256,099	)
Other non-current payables		(100,000	)
Property, plant & equipment		205,453

Total purchase price	$	(266,598	)

Note 6 Intangible Assets

The gross carrying amount of intangible assets and the related accumulated amortization for intangible assets subject to amortization at December 31 are as follows:


	2006					2005
	Gross					Gross
	Carrying		Accumulated			Carrying		Accumulated
	Amount		Amortization			Amount		Amortization
Amortizable Intangible Assets
Patents	$	244,187	$	(26,990	)	$	209,242	$	(10,462	)

Amortization expense for the years ended December 31, 2006 and 2005 was $16,528 and $10,462, respectively.

Estimated amortization expense for each of the five succeeding fiscal years based upon the Company’s intangible asset portfolio at December 31, 2006 is as follows:


	Estimated
	Amortization
	Expense
2007	$	16,279
2008		16,279
2009		16,279
2010		16,279
2011		16,279

Note 7 Borrowings and Credit Facilities

Convertible Note – Related Party

The Company has a convertible note, denominated in Australian dollars, in the principal amount of AU$1.42 million outstanding at December 31, 2006 and 2005. At December 31, 2006, the principal amount of this note translated into US$1.1 million plus accrued interest that would convert into approximately 1.5 million ordinary shares at that time. At December 31, 2005, the principal amount of this note translated into US$1.1 million plus accrued interest that would convert into 1.4 million ordinary shares at that time.

F-26

The note accrues interest at 2.0% per annum. The conversion price is AU$1.00 per ordinary share. The principal and capitalized interest on the convertible note is repayable on demand as of January 31, 2007, and is therefore included as a current liability, but, as of December 31, 2006, the note has not been converted and the holder of the note, Apple Tree Partners I, L.P., the Company’s majority shareholder, has given a written indication to the Company that it is its present intention to convert the note rather than demand repayment. Interest expense on this note was $22,062 and $19,227 for the years ended December 31, 2006 and 2005, respectively.

Note 8 Leases

Rent expense amounted to $484,226 in 2006 and $284,969 in 2005. Future minimum rental commitments at December 31, 2006 under non-cancelable operating lease agreements are as follows:


	Operating
	Leases
2007	$	793,087
2008		395,725
2009		75,895
2010		75,895
2011		6,325


Total minimum lease payments	$	1,346,927

Note 9 Income Taxes

At December 31, 2006 and 2005, the Company had deferred tax assets in excess of deferred tax liabilities of $13.2 million and $5.9 million, respectively. The Company determined that there is substantial doubt that such assets will be realized, and as such has taken a valuation allowance of $13.2 million and $5.9 million as of December 31, 2006 and 2005, respectively. The Company evaluates its ability to realize its deferred tax assets on a quarterly basis and adjusts the amount of its valuation allowance, if necessary. The Company operates within multiple taxing jurisdictions and is subject to audit in those jurisdictions. Because of the complex issues involved, any claims can require an extended period to resolve.

SFAS No. 109 requires that a valuation allowance be established when it is more likely than not that all or a portion of a deferred tax asset will not be realized. A review of all available positive and negative evidence needs to be considered, including our current and past performance, the market environment in which we operate, the utilization of past tax credits and length of carry-back and carry-forward periods. Forming a conclusion that a valuation allowance is not needed is difficult when there is negative objective evidence such as cumulative losses in recent years. Cumulative losses weigh heavily in the overall assessment. The Company has applied a 100% valuation allowance against its net deferred tax assets as of December 31, 2006 and 2005.

F-27

The Company expects to continue to maintain a valuation allowance on certain future tax benefits until an appropriate level of profitability is reached or the Company is able to develop tax strategies which would enable it to conclude that it is more likely than not that a portion of its net deferred tax assets would be realized.

The United States and foreign components of loss before income taxes were as follows:


	For the Year Ended December 31,
	2006			2005			2004

United States	$	(13,467,250	)	$	(9,433,864	)	$	—
Foreign		(3,959,458	)		(4,399,595	)

	$	(17,426,708	)	$	(13,833,459	)	$	—

The effective tax rate of 0% differs from the statutory rate of 35% for all periods presented due primarily to the valuation allowance.

The primary components of future deferred tax assets are as follows:


	At December 31,
	2006			2005

Net operating loss and other carryforwards	$	10,800,477		$	4,516,651
Share based compensation		1,078,385			740,064

Total deferred tax assets		11,878,862			5,256,714
Valuation allowance		(11,878,862	)		(5,256,714	)

Net deferred tax assets		—			—

At December 31, 2006, the Company had net operating loss carryforwards of approximately $22.9 million for US federal income tax purposes and $5.5 million for non-US income tax purposes. Non-US losses have an unlimited carry over period and the US operating losses expire as follows:


	US Operating
Year of Expiration	Losses

2025	$	9,433,864
2026		13,467,250


	$	22,901,114

Note 10 Commitments and Contingencies

The Company has the following contingent liabilities resulting from the acquisition by HeartWare, Inc. of a business that previously held the Company’s technology:

•

a milestone payment of $750,000 when the first circulatory assist device is approved for sale in Europe, provided that the Company has at least $15,000,000 in cash on hand;

F-28

	•		a milestone payment of $1,250,000 when the first circulatory assist device is approved for sale in the US, provided that the Company has at least $25,000,000 in cash on hand; and

	•		a special payment of up to $500,000 upon a sale of HeartWare, Inc. if such sale generates proceeds in excess of the aggregate liquidation preferences of all of HeartWare, Inc.’s then outstanding preferred stock.

In addition to the above, the Company has entered into employment agreements with all of its executive officers, including the Chief Executive Officer and the Chief Financial Officer. These contracts do not have a fixed term and are constructed on an “at will” basis. Some of these contracts provide executives with the right to receive lump sum payments up to, but not exceeding, nine-months of their highest annual salary if their employment is terminated after a change in control of the Company, as defined in such agreements.

Note 11 Shareholders’ Equity

Ordinary Shares

As of December 31, 2006, the Company has outstanding 186,262,097 ordinary shares. Under Australian law, the Company does not have authorized capital and the shares do not have a par value. Subject to the Corporations Act, the Company’s Constitution and the Australian Securities Exchange Listing Rules, the Board of Directors may allot and issue ordinary shares to any person on such terms and with such rights as the Board determines. The Board may determine that ordinary shares are to be issued with preferred, deferred or other special rights or restrictions, whether in regard to dividends, voting, return of share capital, payment of calls or otherwise.

Holders of ordinary shares are entitled to one vote per share at meetings of shareholders and cumulative voting is not permitted under the Company’s constitution. Holders of ordinary shares are entitled to receive dividends if and when declared by the Board of Directors and to share ratably in the assets of the Company legally available for distribution to its shareholders in the event of liquidation. Holders of ordinary shares have no preemptive, subscription, anti-dilution, redemption or conversion rights. The holders of a majority of the ordinary shares can elect all of the directors and can control the management and affairs of the Company.

Since November 26, 2004, our inception, we have issued the following securities:


	•		In connection with our initial public offering in Australia, on January 24, 2005, we issued 55,838,000 ordinary shares. The aggregate offering price for this issuance was $21.6 million (AU$27.9 million), and we incurred underwriting commissions of $1.6 million (AU$2.1 million).



	•		Also on January 24, 2005, we issued 9,000,876 ordinary shares, for an aggregate consideration of approximately $3.5 million (AU$4.5 million), in a private placement exempt from registration pursuant to Regulation D promulgated under the Securities Act and Section 4(2) of the Securities Act.

F-29


	•		Also on January 24, 2005, in connection with our acquisition of all of the common stock of HeartWare, Inc., we issued 88,000,000 ordinary shares.



	•		On April 20, 2005, we issued 2,859,998 ordinary shares to Dr. Robert Fine, former CEO of Kriton Medical, Inc., upon the cashless exercise by Dr. Fine of three warrants to purchase 5,259,076 ordinary shares at an exercise price of AU$0.20 per share. These warrants had originally been issued to him by Kriton Medical’s subsidiary, HeartWare, Inc., on October 3, 2003.


	•		On May 23, 2006, we issued 29,679,220 ordinary shares in a private placement. The aggregate proceeds to us in connection with this offering were US$23.4 million.

	•		On June 15, 2006, we issued 75,452 ordinary shares to our Australian shareholders pursuant to our Shareholder Purchase Plan for aggregate proceeds to us of $61,254 (AU$82,997).

	•		From June 2005 to August 2006, we issued an aggregate of 806,551 ordinary shares pursuant to the exercise of options under our ESOP at exercise prices ranging from $0.16 to $0.36 (AU$0.20 to AU$0.50) for aggregate proceeds of $162,712 (AU$218,656) to five individuals. The issuance of these ordinary shares was exempt from registration pursuant to Rule 701 under the Securities Act.

Note 12 Share Option Plan

Employee Share Option Plan

On December 15, 2004, the Company adopted the HeartWare Limited Employee Share Option Plan (“ESOP”). The ESOP allows the Company to grant options for ordinary shares in the Company to employees and directors. The ESOP provides for the issuance of up to 11% of the ordinary shares at any time outstanding.

Each option issued under the ESOP allows the holder to subscribe for and be issued with one ordinary share in the capital of the Company. In accordance with the ESOP Rules, all ESOP options issued after the Company became listed on the ASX must have an exercise price which is not less than the weighted average sale price of ordinary shares sold during the five days (or such other period as the Board determines) prior to the grant of the ESOP option.

Options may generally be exercised after they have vested and prior to the specified expiry date if applicable exercise conditions are met. The expiry date can be for periods of up to ten years from the date of grant of the option.

Non-Plan Options

F-30

to the third party service provider have exercise prices per share ranging from AU$0.60 to AU$1.50 per share and were immediately exercisable upon granting. The options granted to the non-executive directors were granted for no consideration and are subject to a vesting schedule whereby, as of December 31, 2006, 800,000 of the 1,000,000 options have vested and the remaining 200,000 options will vest on December 31, 2007. The exercise prices per share with respect to the options granted to non-executive directors range from AU$0.60 to AU$1.50. Information related to options, including non-plan options, at December 31 is as follows:


	2006					2005					2004
				Weighted					Weighted				Weighted
				Average					Average				Average
				Exercise					Exercise				Exercise
(option amounts in thousands)	Options			Price		Options			Price		Options		Price

Outstanding at January 1		16,145,410		$	0.51		1,000,000		$	0.74		0		—
Granted		10,116,324			0.89		15,808,462			0.48		1,000,000	$	0.74
Exercised		(411,051	)		0.27		(395,400	)		0.16		0		—
Forfeited		(5,349,433	)		0.71		(267,652	)		0.33		0		—

Outstanding at December 31		20,501,250			0.65		16,145,410			0.51		1,000,000		0.74

Exercisable at December 31		5,524,880			0.32		3,855,600			0.25		—		—

We generally recognize compensation expense for our share awards using a straight-line method over the substantive vesting period. The Company allocates expense to general and administrative expense and research and development expense based on the option holders’ employment function. For the years ended December 31, 2006 and 2005, the Company recorded general and administrative share-based expense of approximately $598,000 and $693,000, respectively and research and development share-based expense of approximately $293,000 and $1,255,000, respectively.

We recognize share-based compensation for the value of the portion of awards that are ultimately expected to vest. Statement No. 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The term “forfeitures” is distinct from “cancellations” or “expirations” and represents only the unvested portion of the surrendered option. We have applied an annual forfeiture rate of approximately 12% to all unvested share awards as of December 31, 2006, which represents the portion that we expect will be forfeited each year over the vesting period. We will re-evaluate this analysis periodically and adjust the forfeiture rate as necessary. Ultimately, we will only recognize expense for those shares that vest.

Under the provisions of Statement No. 123(R), we expect to recognize approximately $3.4 million, net of estimated forfeitures, of future expense for awards granted as of December 31, 2006. These awards have a weighted average remaining vesting period of 2.15 years.

There was no aggregate intrinsic value of outstanding options at December 31, 2006. At December 31, 2005, the aggregate intrinsic value of outstanding options was $683,000. The aggregate intrinsic value of options which were exercisable at December 31, 2006 and 2005 was $1.1 million and $1.2 million, respectively. The intrinsic value of exercised options was $135,000 at December 31, 2006 as compared to $97,000 at December 31, 2005.

F-31

The weighted average grant date fair value per share of options granted, calculated using the Black-Scholes option pricing model, was $0.46 for the year ended December 31, 2006, $0.21 for the year ended December 31, 2005 and $0.15 for the year ended December 31, 2004.

Shares reserved for future issuance under the Company’s ESOP totaled approximately 1,487,581 at December 31, 2006.

Information related to options, both plan and non-plan, outstanding and exercisable at December 31, 2006 is as follows:


	Stock Options Outstanding						Stock Options Exercisable
			Weighted
			Average		Weighted				Weighted
			Remaining		Average				Average
			Contractual		Exercise				Exercise
	Options		Life		Price ($)		Options		Price ($)

$0.00-$0.50		7,574,416		4.60		0.27		4,824,880		0.25
$0.50-$1.00		11,244,732		8.62		0.84		600,000		0.79
$1.00-$1.50		1,682,102		6.80		1.14		100,000		1.19

		20,501,250		6.90		0.65		5,524,880		0.32

The Company recognizes share-based compensation on fixed awards with pro rata vesting on a straight-line basis over the award’s vesting period. The fair value of the options used to calculate net loss and net loss per share was estimated using the Black-Scholes option pricing model with the following weighted average assumptions:


	2006			2005

Dividend yield		0	%		0	%
Estimated annual volatility		54.82	%		55.33	%
Risk-free interest rate		5.67	%		5.47	%
Estimated forfeiture rate		12.12	%		7.69	%
Estimated holding period (years)		10			6.15

Dividend Yield

Since inception, we have not paid any dividends to our shareholders. We currently do not intend to pay dividends, and presently intend to retain all of our earnings for the purposes of investing in the continued growth of our business. Therefore, we have assumed an expected dividend yield of 0% in our grant date fair value assessment.

Estimated Annual Volatility

We used our historical share price volatility as a basis to estimate expected volatility in our valuation of share options.

F-32

Risk-Free Interest Rate

We use yield rates government bonds as prescribed by the Australian government for a period approximating the expected term of the award to estimate the risk-free interest rate in our grant date fair value assessment.

Estimated Forfeiture Rate

We estimate forfeiture rate based on historical employee retention rate data.

Expected Term

We estimate the expected term to equal the outstanding contractual term at the time of grant.

Note 13 Retirement Savings Plan

We have established a 401(k) plan and substantially all of our employees are eligible to participate. Contributions made by employees are limited to the maximum allowable for U.S. federal income tax purposes. We have not made any contributions to the plan.

Note 14 Net Loss Per Share

Basic earnings (loss) per share is computed by dividing net income (loss) applicable to ordinary shares by the weighted-average of ordinary shares outstanding during the period. Diluted earnings (loss) per share adjusts basic earnings (loss) per share for the dilutive effects of convertible securities, options and other potentially dilutive instruments, only in the periods in which such effect is dilutive. The following securities have been excluded from the calculation of diluted loss per share, as their effect would be anti-dilutive.


Ordinary shares issuable upon:	2006		2005

Exercise of stock options		20,501,250		16,145,410
Conversion of convertible note		1,475,396		1,446,205

Note 15 Quarterly Results of Operations (Unaudited)

The following is a summary of our unaudited quarterly results of operations for the years ended December 31, 2006 and 2005:


(In thousands, except per share data)	First			Second			Third			Fourth

Fiscal Year 2006
Revenue	$	—		$	—		$	—		$	—
Net loss		(3,151	)		(3,930	)		(4,332	)		(6,014	)
Basic and diluted net loss per share		(0.02	)		(0.02	)		(0.02	)		(0.03	)
Fiscal Year 2005
Revenue	$	—		$	—		$	—		$	—
Net loss		(4,054	)		(3,445	)		(3,083	)		(3,251	)
Basic and diluted net loss per share		(0.04	)		(0.02	)		(0.02	)		(0.02	)

F-33

Note 16 Subsequent Events

The matters or circumstances that have arisen since December 31, 2006 which have or may significantly affect our operations, the results of those operations or our state of affairs in future financial years are as follows:

•

On January 2, 2007, we granted 1,150,000 options to new senior appointments under the Company’s ESOP, at an exercise price of AU$1.10 per share.

Except as stated above, no other matters or circumstances have arisen since December 31, 2006 that have significantly affected or are expected to significantly affect our future results of our operations or our financial condition.

Note 17 Restatement

Subsequent to the issuance of the Company’s consolidated financial statements as of and for the years ended December 31, 2006 and 2005 and for the cumulative period from November 26, 2004 (date of inception) through December 31, 2006, the Company’s management determined that business combination accounting was improperly applied to the January 24, 2005 acquisition of HeartWare, Inc. by HeartWare Limited. Rather, as the acquisition was an exchange of equity interests among entities under common control, the transaction should be accounted for at the historical costs of the assets and liabilities acquired.

The total impact of the adjustments related to the years ended 2006 and 2005 is a decrease in net loss of $1,771,819 and $1,618,740, respectively.

A summary of the significant effects on the restatement on the Company’s consolidated balance sheet as of December 31, 2006 and 2005 and consolidated statement of operations for the years ended December 31, 2006 and 2005 are as follows:


	As Previously			As
	Reported			Restated
Consolidated balance sheet (As of December 31, 2006):

Other intangible assets, net	$	16,691,701		$	217,197
Goodwill		15,371,221			—
Additional paid-in capital		83,890,582			48,654,298
Deficit accumulated during the development stage		(34,650,726	)		(31,260,167	)

F-34


	As Previously			As
	Reported			Restated
Consolidated balance sheet (As of December 31, 2005):

Other intangible assets, net	$	18,445,103		$	198,780
Goodwill		15,371,221			—
Additional paid-in capital		59,457,504			24,221,219
Deficit accumulated during the development stage		(15,452,199	)		(13,833,459	)


	As Previously			As
	Reported			Restated
Consolidated statement of operations - 2006

Research and development expenses	$	11,633,294		$	11,649,822
Amortization of intangibles		1,788,347			—
Net loss		(19,198,527	)		(17,426,708	)


	As Previously			As
	Reported			Restated
Consolidated statement of operations - 2005

Research and development expenses	$	10,722,302		$	10,732,764
Amortization of intangibles		1,629,202			—
Net loss		(15,452,199	)		(13,833,459	)

F-35

REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS

Board of Directors
HeartWare, Inc.

We have audited the accompanying balance sheets of HeartWare, Inc. (a Development Stage Company) (the “Company”) as of December 31, 2004 and 2003, and the related statements of operations, shareholders’ deficit, and cash flows for the year ended December 31, 2004, the period from April 8, 2003 (date of inception) through December 31, 2003 and the period from April 8, 2003 (date of inception) through December 31, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America as established by the American Institute of Certified Public Accountants. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of HeartWare, Inc. (a Development Stage Company) as of December 31, 2004 and 2003, and the results of its operations and its cash flows for the year ended December 31, 2004, the period from April 8, 2003 (date of inception) through December 31, 2003 and the period from April 8, 2003 (date of inception) through December 31, 2004 in conformity with accounting principles generally accepted in the United States of America.

/s/ Grant Thornton LLP

Fort Lauderdale, Florida
April 23, 2007

F-36

HeartWare, Inc.
(A Development Stage Company)

BALANCE SHEETS


	December 31,
	2004			2003
ASSETS
Current assets:
Cash and cash equivalents	$	139,242		$	197,039


Total current assets		139,242			197,039

Property, plant and equipment, net		212,377			186,954
Other non-current assets		20,771			35,071


Total Assets	$	372,390		$	419,064


LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	425,753		$	177,292
Accrued expenses and other current liabilities		1,354,559			311,251
Debt agreement, short-term portion		180,000			180,000
Notes payable, convertible — related party		9,951,509			5,106,535


Total current liabilities		11,911,821			5,775,078

Debt agreement		115,000			295,000


Total liabilities		12,026,821			6,070,078

Shareholders’ deficit:
Common stock, $0.001 par value; 2,000,000 shares authorized, none issued or outstanding		—			—
Preferred stock, $0.001 par value; 2,000,000 shares authorized Series A-1, 626,700 shares issued and outstanding; liquidation preference of $10.00 per share		627			627
Series A-2, 436,500 shares issued and outstanding; liquidation preference of $21.00 per share		436			436
Series B, 603,150 shares issued and outstanding; participating; convertible; liquidation preference of $10.00 per share		603			603
Additional paid-in capital		51,158			51,158
Deficit accumulated during the development stage		(11,707,255	)		(5,703,838	)


Total shareholders’ deficit		(11,654,431	)		(5,651,014	)


Total Liabilities and Shareholders’ Deficit	$	372,390		$	419,064

The accompanying notes are an integral part of these financial statements

F-37

HeartWare, Inc.
(A Development Stage Company)

STATEMENTS OF OPERATIONS


							Cumulative
							Period from
							April 8, 2003
				Period from April 8,			(Inception)
	Year Ended			2003 (Inception)			Through
	December 31,			December 31,			December 31,
	2004			2003			2004
Revenue	$	—		$	—		$	—

Costs and expenses
Research and development		4,795,012			1,270,995			6,066,007
Depreciation		87,825			35,446			123,271
General and administrative		137,860			166,493			304,353
In process research and development expensed when acquired		—			3,984,388			3,984,388

		5,020,697			5,457,322			10,478,019

Loss from operations		(5,020,697	)		(5,457,322	)		(10,478,019	)

Other expenses
Interest — related party		982,720			246,516			1,229,236


Loss before provision for income taxes		(6,003,417	)		(5,703,838	)		(11,707,255	)

Provision for income taxes		—			—			—

Net loss	$	(6,003,417	)	$	(5,703,838	)	$	(11,707,255	)

The accompanying notes are an integral part of these financial statements

F-38

HeartWare, Inc.
(A Development Stage Company)

STATEMENT OF CHANGES IN SHAREHOLDERS’ DEFICIT


	Preferred Stock
	Series A-1				Series A-2				Series B						Deficit
															Accumulated
													Additional		During the
													Paid- In		Development
	Shares		Amount		Shares		Amount		Shares		Amount		Capital		Stage			Total

Balance at April 8, 2003 (inception)		—	$	—		—	$	—		582,610	$	583	$	49,417	$	—		$	50,000

Issuance of stock in conjunction with July 10, 2003 acquisition		626,700		627		436,500		436		20,540		20		1,741		—			2,824

Net loss		—		—		—		—		—		—		—		(5,703,838	)		(5,703,838	)


Balance at December 31, 2003		626,700		627		436,500		436		603,150		603		51,158		(5,703,838	)		(5,651,014	)


Net loss																(6,003,417	)		(6,003,417	)

Balance at December 31, 2004		626,700	$	627		436,500	$	436		603,150	$	603	$	51,158	$	(11,707,255	)	$	(11,654,431	)

The accompanying notes are an integral part of these financial statements

F-39

HeartWare, Inc.
(A Development Stage Company)

STATEMENT OF CASH FLOWS


							Cumulative Period
	For the Year			For the period from			from April 8, 2003
	Ended			April 8, 2003			(Inception)
	December			(Inception) through			Through
	31, 2004			December 31, 2003			December 31, 2004
Cash flows from operating activities
Net loss	$	(6,003,417	)	$	(5,703,838	)	$	(11,707,255	)
Adjustments to reconcile net loss to net cash used in operating activities (net of effects of acquisition):
In process research and development acquired		—			3,984,388			3,984,388
Depreciation		87,825			35,446			123,271
Changes in assets and liabilities Decrease in other non-current assets		14,300			—			14,300
Increase in accounts payable		248,461			177,292			425,753
Increase in accrued expenses		1,043,308			311,251			1,354,559

Net cash used in operating activities		(4,609,523	)		(1,195,461	)		(5,804,984	)
Cash flows from investing activities
Additions to property, plant and equipment		(113,248	)		—			(113,248	)

Net cash used in investing activities		(113,248	)		—			(113,248	)

Cash flows from financing activities
Proceeds from issuance of convertible debt — related party		4,844,974			1,417,500			6,262,474
Proceeds from issuance of preferred stock, net		—			50,000			50,000
Payments on debt agreement		(180,000	)		(75,000	)		(255,000	)

Net cash provided by financing activities		4,664,974			1,392,500			6,057,474
Net (decrease) increase in cash and cash equivalents		(57,797	)		197,039			139,242

Cash and cash equivalents, beginning of period		197,039			—			197,039


Cash and cash equivalents, end of period	$	139,242		$	197,039		$	336,281


Supplemental disclosure of cash flow information:
Cash paid for interest	$	—		$	—		$	—
Cash paid for taxes	$	—		$	—		$	—


Noncash investing and financing activities:
On July 10, 2003, the Company issued preferred stock in connection with the acquisition of certain assets and certain liabilities of Kriton Medical, Inc.
The following assets and liabilities were transferred:

Property and equipment				$	222,400		$	222,400
In process research and development					3,984,388			3,984,388
Other non current assets					35,071			35,071
Debt agreement					(550,000	)		(550,000	)
Notes payable, convertible					(3,689,035	)		(3,689,035	)

Net					2,824			2,824

Net cash paid					—			—
Preferred stock issued					(2,824	)		(2,824	)
Total price consideration					(2,824	)		(2,824	)


				$	—		$	—

The accompanying notes are an integral part of these financial statements

F-40

Note A — NATURE OF THE BUSINESS

HeartWare, Inc. f/k/a Perpetual Medical, Inc. (the “Company”) was incorporated in the State of Delaware on April 8, 2003 and operates as a biotechnology company developing and commercializing a family of blood pumps that are surgically implanted to help augment blood circulation in patients suffering from chronic and end-stage heart failure, which is one of the leading causes of death in the developed world.

Note B — KRITON MEDICAL, INC. ACQUISITION

On July 10, 2003, the Company purchased substantially all of the assets and certain intellectual property related to the business of Kriton Medical, Inc. (“Kriton”), a privately held company engaged in the business of developing a ventricular assist device (“VAD”). The asset purchase agreement was executed on April 8, 2003 contemporaneous with a petition filed pursuant to Chapter 11 of Title 11 of the United States Code with the Untied States Bankruptcy Court. Kriton continued to operate with debtor-in-possession financing provided by Apple Tree Partners I, L.P., one of Kriton’s debtors and a shareholder of the Company. However, the transaction could not be consummated until the order was approved by the Bankruptcy Court. Such approval was received June 20, 2003, and the Assignment, Assumption and Bill of Sale was executed on July 10, 2003. With the exception of the Apple Tree Partners I, L.P. financing, by virtue of the Court Order, the Company took the Kriton assets free and clear of any and all liens, security interests, encumbrances and claims. In addition, there are certain restrictions placed on the minority shareholders on transferring their shares and voting.

The acquisition was accounted for as a purchase in accordance with Statement of Financial Accounting Standard No. 141 (“SFAS No. 141”). Under this method of accounting, the Company allocated the purchase price to the fair value of the assets acquired, including identifiable intangible assets. The allocation was based on management’s estimates, which included an independent third party valuation on the intangible assets.

The purchase price totaled $4,241,859 and was paid through a combination of cash, debt, issuance of preferred stock, and assumption of liabilities. Certain of the cash paid was paid by Apple Tree Partners I, L.P. on behalf of the Company and is included in the notes payable amount in the following table. The following table summarizes the estimated fair values of the assets acquired, liabilities assumed and shares issued as of the acquisition date:

F-41


Property and equipment	$	222,400
In-process research and development		3,984,388
Other assets		35,071
Debt agreement		(550,000	)
Notes payable		(3,689,035	)
Preferred stock		(2,824	)


Net assets	$	—

Of the purchase price, $3,984,388 represents the estimated fair value of projects that, as of the acquisition date, had not reached technological feasibility and had no alternative future use. Accordingly, this amount was immediately expensed as in-process research and development costs as of the acquisition date.

Note C — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Property and Equipment

Property and equipment is stated at cost. The costs of additions and betterments are capitalized and expenditures for repairs and maintenance are expensed in the period incurred. When items of property and equipment are sold or retired, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is included in income. The Company generally provides for depreciation using the straight line method at rates that approximate the estimated useful lives of the assets ranging from 3 to 5 years.

Estimates

The preparation of financial statements in conformity 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 date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The estimates are based on historical experience and various other assumptions that the Company believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates under different assumptions or conditions.

Income Taxes

The provision for income taxes and corresponding balance sheet accounts are determined in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS No. 109”). Under SFAS 109, deferred tax assets and liabilities are determined based on the difference between the financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates in effect for the years in which the differences are expected to reverse. A valuation allowance is provided for that portion of deferred tax assets, which the Company cannot determine is more likely that not to be

F-42

recognized due to the Company’s cumulative losses and uncertainty as to future recoverability.

Cash and Cash Equivalents

The Company considers all investments purchased with an original maturity of three months or less to be cash or cash equivalents.

Fair Value of Financial Instruments

The carrying amounts reported in the accompanying consolidated balance sheets for cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to the short-term nature of these accounts.

Research and Development Expenses

Research and development expenses are comprised of the following types of costs incurred in performing research and development activities: salaries and benefits, overhead and occupancy costs, clinical trial and related clinical manufacturing costs, contract services, and other outside costs. Research and development costs are expensed as incurred.

Note D — PROPERTY AND EQUIPMENT

Property and equipment at December 31 consists of the following:


	2004		2003
Furniture, fixtures and equipment	$	335,649	$	222,400
Less: Accumulated depreciation		123,272		35,446

	$	212,377	$	186,954

Depreciation expense for the year ended December 31, 2004 and the period ended December 31, 2003 totaled $87,825 and $35,446 respectively.

Note E — INCOME TAXES

The Company has not recorded an income tax expense or benefit due to the operating losses incurred.

As of December 31, 2004 and December 31, 2003, the Company had Federal and State net operating loss carryforwards, which may be applied to future taxable income, approximating $11.7 million and $5.7 million, respectively. This net operating loss carryforward expires in 2023 and 2024. The Company believes it is more likely than not the deferred tax assets resulting from the net operating loss carryforwards will not be realized. Accordingly, a full valuation has been recorded against the deferred tax assets as of December 31 2004 and December 31, 2003.

The effective tax rate of 0% differs from the statutory rate of 35% for all periods presented due primarily to the valuation allowance.

F-43

Note F — NOTES PAYABLE, CONVERTIBLE — RELATED PARTY

As of December 31, 2004 and December 31, 2003, the Company has issued convertible notes payable in the amount of $9,951,509 and $5,106,535, respectively. Under certain conditions, these notes can be converted into the Company’s next series of preferred stock to be issued, if any, at the face value of these notes, including accrued interest not yet paid.

On November 19, 2004 the Company entered into a revised promissory note that superseded a series of prior loan agreements. The revised promissory note bears interest at eighteen percent (18%) per annum and is repayable to the Company’s majority stockholder, Apple Tree Partners I, L.P. The note is secured by all of the Company’s assets.

The revised promissory note replaces prior loan agreements with Apple Tree Partners I, L.P. which bore interest at ten percent (10%) per annum and if not repaid within a defined time period, would go into default, whereby the interest rate would increase to twelve percent (12%). At December 31, 2003 these loan agreements were in technical default.

There was no interest paid on these convertible notes for the period ending December 31, 2004 or December 31, 2003. Interest expense relating to these convertible notes payable was $982,720 for the year ended December 31, 2004 and $246,516 for the period ended December 31, 2003. Accrued interest payable on these notes was $1,229,236 at December 31, 2004 and $246,516 at December 31, 2003.

Note G — DEBT AGREEMENT

As part of the purchase consideration for the Kriton acquisition, the Company agreed to assume a 2003 agreement between Apple Tree Partners I, L.P., the Company’s majority stockholder, and the former CEO of Kriton, which called for the Company to pay to the former CEO of Kriton $550,000 in monthly payments of $15,000 per month for a period of three years. This agreement was included as part of the Kriton purchase consideration. The balance due on this agreement as of December 31, 2004 and December 31, 2003 was $295,000 and $475,000, respectively. The current portion of this agreement as of December 31, 2004 and December 31, 2003 was $180,000.

Note H — SHAREHOLDERS’ DEFICIT

Common Stock

At December 31, 2004 and December 31, 2003, the Company has authorized 2,000,000 shares of $0.001 par value common stock none of which has been issued nor is outstanding.

Preferred Stock

At December 31, 2004 and December 31, 2003, the Company has authorized 2,000,000 shares of preferred stock of which 626,700 are designated as Series A-1, non-voting preferred stock, par value $0.001, 436,500 shares are designated as Series A-2, non-voting preferred stock, par value $0.001, collectively known as “Series A Preferred Stock”, 603,150

F-44

shares are designated as Series B convertible participating preferred stock, par value $0.001 and 333,650 shares are undesignated preferred stock, par value $0.001.

Series A-1

At December 31, 2004 and December 31, 2003, the Company has 626,700 shares of Series A-1 non-voting, non-cumulative, preferred stock outstanding. The preferred shares rank senior to the common stock and have liquidation preference of $10 per share.

Series A-2

At December 31, 2004 and December 31, 2003, the Company has 436,500 shares of Series A-2 non-voting, non-cumulative, preferred stock outstanding. The preferred shares rank senior to the common stock and have liquidation preference of $21 per share.

Series B

At December 31, 2004 and December 31, 2003, the Company has 603,150 shares of Series B, voting, non-cumulative, convertible preferred stock outstanding. Currently each preferred stock is convertible, at the option of the holders, into shares of common stock on a one for one basis.

The preferred shares rank senior to the common stock and have a liquidation preference of $10 per share plus any declared unpaid dividends on each share. The Series B preferred stock ranks pari passu with any dividends paid on any other class of capital stock and also with other series of preferred stock with respect to rights to dividends and rights upon liquidation of dissolution. The common stock and Series B stock are the only voting stock and the Series B stock is the only stock entitled to receive dividends. At December 31, 2004 and December 31, 2003 the company had not declared any dividends and there were no dividends in arrears.

Note I — COMMITMENTS AND CONTINGENCIES

Leases

The Company has an operating lease for office space. The future minimum lease payments as required under this agreement as of December 31, 2004 are as follows:


	Amount
2005	$	191,121
2006		196,856
2007		66,262

	$	454,239

Rent expense for the year ended December 31, 2004 and the period ended December 31, 2003 was $213,794 and $101,708, respectively.

F-45

Agreement with former Chief Executive Officer (CEO)

Apple Tree Partners I, L.P. entered into an agreement with the former CEO of Kriton on behalf of the Company. The details of this arrangement are as follows:

$550,000 to be paid by the Company in monthly installments of $15,000. See Note H. In addition to this debt agreement, the agreement included certain milestone based accelerations. These milestones are as follows:

	a.		Payment of $750,000 by the Company when the first circulatory assist device is approved for sale in Europe, provided that the Company has at least $15,000,000 in cash on hand;

	b.		Payment of $1,250,000 by the Company when the first circulatory assist device is approved for sale in the United States, provided that the Company has at least $25,000,000 in cash on hand;

	c.		A special payment of up to $500,000 by the Company upon the sale of the Company if such sale generates proceeds in excess of the aggregate liquidation preferences of all the Company’s then outstanding preferred stock, see Note I; and

	d.		A warrant for three percent (3%) of the Company on a fully diluted basis (“3% warrant”). The warrants have a strike price based upon future funding. In a separate Agreement, Apple Tree has paid $300,000 to the former CEO of Kriton for the option to acquire 66.67% of the 3% warrant.

Significant Contract

In January 2004, the Company entered into a system development proposal with Minnetronix, Inc. This proposal provides that Minnetronix, Inc. will serve as the Company’s design partner focusing on the control software to accompany the ventricular assist device (“VAD”) and will assist with commercialization of the Company’s products. The term of this agreement shall continue until the completion of phase II of the VAD. The Company may terminate this agreement at any time with a thirty (30) day notice. The Company incurred approximately $780,000 of research and development expense as a result of this contract in 2004.

Note J — SUBSEQUENT EVENT

On January 24, 2005 the stockholders of the Company sold all outstanding voting stock to HeartWare Limited, an unrelated company, headquartered in Sydney, Australia and listed on the Australian Securities Exchange. Prior to the transaction, all of the Company’s outstanding convertible notes were converted into equity. The transaction was a share for share exchange valued at approximately $35 million.

F-46


	Option Awards
	Number of Shares
	Acquired on		Value Realized on
Name	Exercise (#)		Exercise ($)
William Rissmann (1)
Former Vice President, Manufacturing and Product Development		191,151		40,921


	Page
ITEM 1. BUSINESS		2
ITEM 1A. RISK FACTORS		26
ITEM 2. FINANCIAL INFORMATION		41
ITEM 3. PROPERTIES		54
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT		55
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS		58
ITEM 6. EXECUTIVE COMPENSATION		61
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE		84
ITEM 8. LEGAL PROCEEDINGS		85
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS		85
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES		87
ITEM 11. DESCRIPTION OF REGISTRANT’S SECURITIES TO BE REGISTERED		88
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS		95
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA		96
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE		96
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS		96
EX-10.22 Production Services Agreement
Ex-23.1 Consent of Independent Registered Public Accounting Firm


	HeartWare Limited (Registrant)


Date: July 13, 2007	By:	/s/ Douglas Godshall

		Name: Douglas Godshall
		Title: Chief Executive Officer