Washington,
      D.C. 20549





FORM
      10-K/A




AMENDMENT
        NO. 2





x ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES
      EXCHANGE ACT OF 1934





FOR
      THE
      FISCAL YEAR ENDED DECEMBER 31, 2005





o TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES
      EXCHANGE ACT OF 1934





FOR
      THE
      TRANSITION PERIOD FROM ______ TO _____











COMMISSION
      FILE NUMBER 000-551030







OccuLogix,
      Inc.




(Exact
      name of Registrant as specified in its charter)







DELAWARE
            
            59 343 4771(State
                or other jurisdiction of incorporation or organization)
            
            (I.R.S.
                Employer Identification No.)







2600
                Skymark Avenue, Unit 9, Suite 201Mississauga,
                Ontario L4W 5B2(Address
                of principal executive offices)





(905) 602-0887


(Registrant’s
      telephone number, including area code)





SECURITIES
      REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE





SECURITIES
      REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:


COMMON
      STOCK, $0.001 PAR VALUE


(Title
      of
      Class)








Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act. Yes o No x





Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act. Yes o No x





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





Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the best
      of the Registrant’s knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-K or any amendment to
      this
      Form 10-K. o





Indicate
      by check mark whether the Registrant is an accelerated filer (as defined in
      Rule
      12b-2 of the Act). Yes x No o





Indicate
      by check mark if the Registrant is a shell company (as defined in Rule 12b-2
      of
      the Exchange Act). Yes o No x







1





The
      aggregate market value of the voting common stock held by non-affiliates of
      the
      Registrant (assuming officers, directors and 10% stockholders are affiliates),
      based on the last sale price for such stock on June 30, 2005: $131,655,528.
      The
      Registrant has no non-voting common stock.





As
      of
      March 15, 2006, there were 42,181,779 shares of the Registrant’s Common Stock
      outstanding.




EXPLANATORY
      NOTE




This
        Amendment No. 2 to this Annual Report on Form
        10-K  is being filed in order to replace Exhibits 31.1 and 31.2 to the
        Annual Report on Form 10-K, filed on March 16, 2006, and to the Amendment
        No. 1
        to the Annual Report on Form 10-K, filed on March 20, 2006.





DOCUMENTS
      INCORPORATED BY REFERENCE





Portions
      of the Registrant’s Proxy Statement for the 2006 Annual Meeting of Stockholders
      of the Registrant to be held June 23, 2006 are incorporated by reference into
      Part III of this Form 10-K.





The
      Registrant makes available free of charge on or through its website
      (http://www.occulogix.com) its Annual Report on Form 10-K, Quarterly Reports
      on
      Form 10-Q, Current Reports on Form 8-K and any amendments to those reports
      filed
      or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange
      Act
      of 1934. The material is made available through the Registrant’s website as soon
      as reasonably practicable after the material is electronically filed with or
      furnished to the U.S. Securities and Exchange Commission, or SEC. All of the
      Registrant’s filings may be read or copied at the SEC’s Public Reference Room at
      100 F Street, N.E., Room 1580, Washington D.C. 20549. Information on the hours
      of operation of the SEC’s Public Reference Room can be obtained by calling the
      SEC at 1-800-SEC-0330. The SEC maintains a website (http://www.sec.gov) that
      contains reports and proxy and information statements of issuers that file
      electronically.





2





PART
      I





SPECIAL
      NOTE REGARDING FORWARD LOOKING STATEMENTS





This
      Annual Report on Form 10-K contains forward-looking statements relating to
      future events and our future performance within the meaning of Section 27A
      of
      the Securities Act of 1933, as amended, and Section 21E of the Securities
      Exchange Act of 1934, as amended. In some cases, you can identify
      forward-looking statements by terms such as “may”, “will”, “should”, “could”,
“would”, “expects”, “plans”, “intends”, “anticipates”, “believes”, “estimates”,
“projects”, “predicts”, “potential” and similar expressions intended to identify
      forward-looking statements. These statements involve known and unknown risks,
      uncertainties and other factors that may cause our actual results, performance
      or achievements to be materially different from any future results,
      performances, time frames or achievements expressed or implied by the
      forward-looking statements.





Given
      these risks, uncertainties and other factors, you should not place undue
      reliance on these forward-looking statements. Information regarding market
      and
      industry statistics contained in this Annual Report on Form 10-K is included
      based on information available to us that we believe is accurate. It is
      generally based on academic and other publications that are not produced for
      purposes of securities offerings or economic analysis. We have not reviewed
      or
      included data from all sources and cannot assure you of the accuracy of the
      market and industry data we have included.





Unless
      the context indicates or requires otherwise, in this Annual Report on Form
      10-K,
      references to the “Company” shall mean OccuLogix, Inc. and its subsidiaries.
      References to “$” or “dollars” shall mean U.S. dollars unless otherwise
      indicated. References to “C$” shall mean Canadian dollars.





ITEM
                1.
            BUSINESS.





**Overview**





We
      are an
      ophthalmic therapeutic company founded to commercialize innovative treatments
      for eye diseases, including age-related macular degeneration, or AMD. AMD is
      the
      leading cause of late onset visual impairment and legal blindness in people
      over
      the age of 50 in the United States and other Western industrialized societies.
      We believe that Dry AMD, the most common form of the disease, afflicts
      approximately 13.0 to 13.5 million people in the United States, representing
      approximately 85% to 90% of all AMD cases. Although the exact cause of AMD
      is
      not known, researchers have identified several factors that are associated
      with
      AMD, including poor microcirculation and the gradual build-up of cellular waste
      material in the retina. We believe that improved microcirculation increases
      the
      supply of oxygen and nutrients to the compromised retina and facilitates the
      removal of cellular waste material from the retina. We believe that a treatment
      that improves microcirculation in the retina can help to enhance the metabolic
      efficiency of the retina and the removal of waste material and thereby aid
      in
      the treatment of Dry AMD. We believe there is a significant opportunity for
      such
      a treatment.





Our
      product, the RHEOTM System, is designed to improve microcirculation in the eye by
      filtering high molecular weight proteins and other macromolecules from the
      patient’s plasma. The RHEOTM System is used to perform the RheopheresisTM
procedure, which we refer to under our trade name RHEOTM Therapy. The
      RheopheresisTM procedure is a blood filtration process that selectively removes
      molecules from plasma. The RHEOTM System consists of the OctoNova Pump and a
      disposable treatment set, containing two filters, through which the patient’s
      blood circulates. We believe that the RHEOTM System is the only Dry AMD treatment
      to target what we believe to be the underlying cause of AMD rather than its
      symptoms and that, based on early data, appeared to demonstrate improved vision
      in some patients. The only currently accepted treatment option for persons
      with
      advanced cases of Dry AMD are over-the-counter vitamins, antioxidants and zinc
      supplements that can reduce the five-year risk of conversion to Wet AMD, the
      other form of the disease, by approximately 25%.





3





We
      conducted a pivotal clinical trial, called MIRA-1, or Multicenter Investigation
      of Rheopheresis for AMD, which, if successful, was expected to support our
      application to the U.S. Food and Drug Administration, or FDA, to obtain approval
      to market the RHEOTM System in the United States. On February 3, 2006, we
      announced that, based on a preliminary analysis of the data from MIRA-1, MIRA-1
      did not meet its primary efficacy endpoint as it did not demonstrate a
      statistically significant difference in the mean change of Best
      Spectacle-Corrected Visual Acuity applying the Early Treatment Diabetic
      Retinopathy Scale, or ETDRS BCVA, between the treated and placebo groups in
      MIRA-1 at 12 months post-baseline. As expected, the treated group demonstrated
      a
      positive result. An anomalous response of the control group is the principal
      reason why the primary efficacy endpoint was not met. There were subgroups
      that
      did demonstrate statistical significance in their mean change of ETDRS BCVA
      versus control.





The
      MIRA-1 protocol required us to obtain a minimum of 150 complete clinical data
      sets. To that end, we had enrolled a total
      of 185 patients in MIRA-1 as of December 31, 2004. On November 17, 2005, we
      announced that we had collected complete 12-month post-treatment data sets
      for
      169 of these patients. As of December 31, 2004, we had also submitted to the
      FDA
      the first three of four modules of the Pre-market Approval Application, or
      PMA,
      filing, the non-clinical portion. The
      non-clinical portion of the PMA consisted of technical data relating to
      components of the RHEOTM System. In late 2001, with the permission of the FDA, we
      submitted an interim analysis of 36 complete data sets from the first 43
      patients enrolled. The remaining seven patients did not complete all of the
      required follow-up and thus their results did not qualify as a complete data
      set. Of the 36 data sets analyzed, 11 were from placebo patients. Fifty-eight
      percent of, or 11 of 19, patients in the MIRA-1 interim analysis entering the
      clinical trial with worse than legal driving vision, which is defined as best
      corrected visual acuity, or BCVA, of worse than 20/40, improved to meet or
      exceed the requirements to regain a driver’s license. Although
      we had intended to submit the fourth module, which consists of the follow-up
      clinical data, in two components, following discussions with the FDA, we
      subsequently elected to file only one PMA clinical module following completion
      of our 12-month data on at least 150 data sets.





Subsequent
      to the February 3, 2006 announcement, the Company completed an in-depth analysis
      of the MIRA-1 study data identifying subjects that were included in the
      intent-to-treat, or ITT, population but who deviated from the MIRA-1 protocol
      as
      well as those patients who had documented losses or gains in vision for reasons
      not related to retinal disease such as cataracts. Those subjects in the ITT
      population who met the protocol requirements, and who did not exhibit ophthalmic
      changes unrelated to retinal disease, comprised the modified per-protocol
      population.





In
      the
      modified per-protocol analysis, eyes treated with RHEOTM Therapy demonstrated a
      mean vision gain of 0.8 lines of ETDRS BCVA at 12 months post-baseline, compared
      to a mean vision loss of 0.1 lines of ETDRS BCVA in the eyes in the placebo
      group. The result was statistically significant (repeated measure p value =
      0.0147). The following table presents a summary of the ETDRS BCVA changes
      observed 12 months post-baseline in the modified per-protocol analysis of
      MIRA-1:





4





Treatment
                Group
            Placebo
                Group(n=69)
            (n=46)Vision
                improvement greater or equal to:1
                line
            46.4%
            19.6%2
                lines
            27.5%
            8.7%3
                lines
            8.7%
            2.2%Vision
                loss greater or equal to:1
                line
            11.6%
            23.9%2
                lines
            5.8%
            6.5%3
                lines
            2.9%
            2.2%







Within
      the modified per-protocol population with pre-treatment vision worse than 20/40,
      50.0% of RHEOTM Therapy-treated eyes improved, after treatment, to 20/40 or
      better and would be able to qualify for a driver’s license 12 months
      post-baseline, compared to 20.0% of placebo eyes.





MIRA-1
      data supports historical clinical and commercial experience with respect to
      the
      safety of RHEOTM Therapy, with observed treatment side effects generally being
      mild, transient and self-limiting.





We
      will
      be re-evaluating our PMA submission strategy. Our per-protocol population
      analysis comprises 115 complete data sets, while we had been required to obtain
      a minimum of 150 complete data sets. We are planning to meet with
      representatives of the FDA in the second quarter of 2006 in order to discuss
      the
      impact on our PMA submission strategy of the MIRA-1 study results and the fact
      of the per-protocol population being fewer than 150. It is more likely than
      not
      that we will be required to conduct a follow-up clinical trial of the RHEOTM
System. However, until we have discussions with the FDA, we will not know if
      a
      follow-up clinical trial will be necessary and, if one is necessary, what its
      nature, size, scope or duration will be.





We
      cannot
      begin commercialization in the United States until we receive FDA approval.
      Until we have discussions with the FDA, we will not be able to anticipate when,
      if ever, we will receive FDA approval. Accordingly, at this time, we do not
      know
      when we can expect to begin to generate revenues in the United
      States.





Prior
      to
      our announcement on February 3, 2006 of the preliminary analysis of the data
      from MIRA-1, in anticipation of commercialization in the United States, we
      were
      establishing a plan to educate members of the eye care community about RHEOTM
Therapy. We were in the process of identifying multi-facility health care
      service providers, including hospitals, dialysis clinics and ambulatory surgery
      centers, as well as private practices, which we believe may be interested in
      providing RHEOTM Therapy in their facilities. We believe that one of these
      potential providers may be our principal shareholder, TLC Vision Corporation,
      or
      TLC Vision, an eye care services company, which we believe has relationships
      with a large number of optometrists and ophthalmologists in the United States.
      Pending the outcome of our discussions with the FDA and the determination of
      the
      parameters of any follow-up clinical trial of the RHEOTM System, we have
      suspended, for the time being, all of our activities that were being conducted
      in anticipation of commercialization in the United States.





In
      2003,
      we received Health Canada approval for the components of the RHEOTM System. The
      approval allows us to market the RHEOTM System in Canada for use in the treatment
      of patients suffering from dysproteinemia due, for example, to abnormal plasma
      viscosity and/or macular disease. Upon receiving our approval, we began limited
      commercialization of the RHEOTM System through sales of OctoNova pumps and
      disposable treatment sets to three clinics in Canada. In September 2004, we
      signed an agreement with a private Canadian company called Rheo Therapeutics
      Inc. (now Veris Health Services Inc., or Veris), a provider of RHEOTM Therapy,
      which agreed to purchase approximately 8,000 treatment sets and 20 OctoNova
      pumps by the end of 2005, with an option to purchase up to an additional 2,000
      treatment sets, subject to availability. However, due to delays in its plans
      to
      open a number of commercial treatment centers in various Canadian cities where
      RHEOTM Therapy would be performed, Veris no longer required the contracted-for
      number of treatment sets for such period. We agreed to keep the original pricing
      for a reduced number of treatment sets. In December 2005, by letter agreement,
      we agreed to the volume and other terms for the purchase and sale of treatment
      sets and pumps for the period ending February 28, 2006. We intend to negotiate
      with Veris purchase orders for the future. Dr. Jeffrey Machat, who is an
      investor in and one of the directors of Veris, was a co-founder and former
      director of TLC Vision.





5





We
      have
      exclusive rights to commercialize the RHEOTM System for ophthalmic uses in North
      America, certain countries in the Caribbean, Australia, New Zealand, Colombia
      and Venezuela. We have a non-exclusive right to commercialize the RHEOTM System
      for ophthalmic uses in Italy. In order to sell or export a medical device in
      the
      European community, a Conformité Européene or CE Mark, is required. The
      RheopheresisTM procedure for the selective removal of molecules from plasma
      received CE Mark approval in 1998.





As
      indicated above, our primary activities to date have included commercialization
      of the RHEOTM System in Canada, working to obtain FDA regulatory approval for the
      RHEOTM System and building an operating infrastructure to support potential U.S.
      sales following approval by the FDA. Pending the outcome of our discussions
      with
      the FDA regarding the full analysis of the MIRA-1 study data, it is reasonably
      likely that the focus of our primary activities will change.





**Our
      History and Major Relationships**





Shortly
      after our inception, we began commercialization of therapeutic apheresis by
      opening a therapeutic apheresis center in Florida. This site generated revenues
      of $900,200 and $1,277,800 for the years ended June 30, 1999 and 1998,
      respectively. The therapeutic apheresis center was closed in 1999 pursuant
      to a
      directive issued by the FDA. After obtaining an FDA investigational device
      exemption in 1999, we initiated the MIRA-1 pivotal clinical trial to support
      an
      application to the FDA for approval to market the RHEOTM System and completed
      this trial in 2005.





*Relationship
      with TLC Vision*





TLC
      Vision beneficially owns approximately 51.0% of our outstanding common stock,
      or
      46.5% on a fully diluted basis. Elias Vamvakas, the Chairman and former CEO
      of
      TLC Vision, became our Chairman in 2003 and is now also our CEO. In addition,
      two of our other directors, Thomas N. Davidson and Richard L. Lindstrom, are
      also directors of TLC Vision. Mr. Vamvakas beneficially owns 3,384,989 common
      shares of TLC Vision, representing approximately 4.99% of TLC Vision’s
      outstanding shares. Mr. Davidson beneficially owns 34,827 common shares of
      TLC
      Vision, representing approximately 0.05% of TLC Vision’s outstanding shares, and
      Dr. Lindstrom does not beneficially own any common shares of TLC
      Vision.





On
      December 8, 2004, we purchased TLC Vision’s 50% interest in OccuLogix, L.P. in
      exchange for which we issued 19,070,234 shares of our common stock to TLC
      Vision. This
      resulted in OccuLogix, L.P. becoming our wholly-owned subsidiary. Accordingly,
      100% of the results of OccuLogix, L.P.’s operations are included in the
      consolidated financial statements since that date. We licensed to OccuLogix,
      L.P. all of the distribution and marketing rights for the RHEOTM System for
      ophthalmic indications to which we are entitled. Prior to the acquisition,
      our
      only profit stream had come from our share of OccuLogix, L.P.’s earnings. Our
      acquisition of TLC Vision’s 50% ownership interest in OccuLogix, L.P.
      transferred the earnings potential for sales of the RHEOTM System entirely to
      us.





6





As
      part
      of the formation of OccuLogix, L.P. in July 2002, we licensed certain patent
      rights, trademark rights and know-how rights to OccuLogix, L.P. We also provided
      OccuLogix, L.P. with licenses to our in-house software as well as sublicensing
      software that we have licensed from TLC Vision. TLC Vision agreed to provide
      OccuLogix, L.P., upon request, with $200,000 in funding at an annual interest
      rate equal to the Bank of America prime rate of interest on the date the loan
      is
      made, plus two percent. As at December 8, 2004, Occulogix, L.P. had not
      requested funding from TLC Vision.





On
      December 31, 2005, OccuLogix, L.P. transferred all of its assets and
      liabilities, including the licensed patent, trademark and know-how rights and
      the licensed distribution and marketing rights for the RHEOTM System, to our
      newly incorporated subsidiary, OccuLogix Canada Corp. We completed the wind-up
      of OccuLogix, L.P. on February 6, 2006. We believe that going forward, our
      value
      resides solely in OccuLogix Canada Corp.





Until
      June 2005, one of Occulogix, L.P.’s primary customers was RHEO Clinic Inc., or
      RHEO Clinic, a subsidiary of TLC Vision, for which Occulogix, L.P. has reported
      revenues of $81,593, $401,236, $459,730 and nil for the years ended December
      31,
      2005, 2004, 2003 and 2002, respectively. RHEO Clinic used the RHEOTM
      System to
      treat
      patients, for which it charged its customers (the patients) a per-treatment
      fee.
      RHEO Clinic has advised us that all of its revenues, in Canadian dollars, of
      $192,430, $595,275, $836,696 and nil for the years ended December 31, 2005,
      2004, 2003 and 2002, respectively, are derived from sales to unrelated third
      parties. The revenues reported from RHEO Clinic are unaudited and have not
      been
      independently verified by us. However, management believes the amounts to be
      accurate.





Since
      it
      has ceased the treatment of commercial patients in 2005, RHEO Clinic has not
      been a source of revenue for us, nor will it be a source of revenue for us
      in
      the future. On July 29, 2005, the Company entered into an agreement with RHEO
      Clinic to purchase fixed assets and intellectual property valued at C$61,812
      to
      be used for the Company’s clinical trial activities and other purposes. The
      Company agreed to share equally in losses incurred by RHEO Clinic, to a maximum
      of C$28,952, for assets that RHEO Clinic is not able to dispose of. To date,
      RHEO Clinic has not advised us of the final calculation of any losses. In
      addition, the Company reimbursed RHEO Clinic C$281,581, which amount represented
      that proportion of the costs incurred by RHEO Clinic deemed applicable to our
      clinical trial activities from October 1, 2004 to June 30, 2005.





Dr.
      Jeffrey Machat, a co-founder of TLC Vision, served as a director of TLC Vision
      from 1993 to 1999. From 1993 to 2001, Dr. Machat served as a Co-National Medical
      Director of TLC Vision. Dr. Machat is an independent contractor to TLC Vision
      York Mills Centre and pays the Centre a per-procedure facility fee for using
      the
      Centre to perform LASIK on his patients. Based on public filings, we believe
      that Dr. Machat is a shareholder of TLC Vision but does not own more than 5%
      of
      the shares of TLC Vision. We have been advised that Dr. Machat is a co-founder
      and shareholder of Veris and one of its three directors. He also serves as
      Veris’ National Medical Director. We have been advised that Dr. Machat owns 25%
      of the shares of Veris. We signed an agreement with Veris to provide it with
      the RHEOTM
      System in
      Canada. In December 2005, by letter agreement, we agreed to the volume and
      other
      terms for the purchase and sale of treatment sets and pumps for the period
      ending February 28, 2006. We intend to negotiate with Veris purchase orders
      for
      the future.





*Other
      Major Relationships*





In
      October 2003, our stockholders created a new company called Rheogenx BioSciences
      Corporation, or Rheogenx, to further develop the use of the current components
      of the RHEOTM
      System for
      non-ophthalmic uses. At that time, we licensed our rights to the RHEOTM
      System and
      associated intellectual property to Rheogenx for these non-ophthalmic uses,
      only
      to the extent that we had them or would have acquired them in the future. Under
      the terms of our license with Rheogenx, Rheogenx had the right to use the RHEOTM
      System patent
      rights, know-how rights and trademark rights for non-ophthalmic uses in Canada,
      the United States and Mexico. In exchange for these rights, Rheogenx compensated
      us for the full cost of the license, including royalties and applicable license
      fees. On March 28, 2005, the Company terminated the license and entered into
      a
      marketing agreement with Rheogenx. The marketing agreement secures for Rheogenx
      and its affiliates, including PherēSys
      Therapeutics Corporati on,
      or PherēSys ,
      a
      supply of OctoNova pumps and treatment sets from the Company. Pursuant to the
      marketing agreement, the Company will also provide marketing support for PherēSys ’
mobile
      apheresis business upon receipt by the Company of FDA approval to market the
      RHEO TM
System
      in the United States.





7





The
      components of the RHEOTM
      System were
      developed by our suppliers, Diamed Medizintechnik GmbH, or Diamed, and Asahi
      Medical Co., Ltd., or Asahi Medical.





In
      2002,
      Apheresis Technologies, Inc., or Apheresis Technologies, which is managed by
      John Cornish, one of our stockholders, our Vice President of Operations and
      one
      of our directors from April 1997 to September 2004, was spun off from us. The
      purpose of the spin off was to allow us to focus on our clinical trials. This
      spin off was accomplished by our transferring all the assets we had in
      connection with our plasma filter distribution business to our then wholly-owned
      subsidiary, Apheresis Technologies. In consideration for the transfer of those
      assets, Apheresis Technologies agreed to pay us $25,000. The full amount of
      this
      consideration was applied to amounts owing by us to Apheresis Technologies.
      Following this transfer, we distributed the stock we owned in Apheresis
      Technologies to our stockholders, such that the identity and relative ownership
      of our stockholders and Apheresis Technologies’ stockholders were the same. We
      did not assume any liabilities in connection with this transfer. Shortly after
      the spin off, we entered into a distribution services agreement with Apheresis
      Technologies to provide us with logistical support, including warehousing,
      order
      fulfillment, shipping and billing services. We had the right to terminate this
      agreement at any time and terminated it on March 28, 2005.





In
      June
      2003, we entered into a reimbursement agreement with Apheresis Technologies
      whereby we reimbursed it for the applicable percentage of time that its
      employees provided services to us. One of these employees was John Cornish,
      our
      Vice President of Operations. Effective April 1, 2005, the Company terminated
      its reimbursement agreement with Apheresis Technologies such that the Company
      no
      longer compensates Apheresis Technologies in respect of any salary paid to,
      or
      benefits provided to, Mr. Cornish by Apheresis Technologies. As of April 1,
      2005, the Company has an employment agreement with Mr. Cornish pursuant to
      which
      we pay him an annual base salary of $113,103, representing compensation to
      him
      for devoting 85% of his time to the business and affairs of the Company. Mr.
      Cornish participates in the Company’s bonus plan.





In
      2005,
      the Company paid approximately $100,000 in fees to Innovasium Inc., or
      Innovasium, for the provision of website creation and maintenance and other
      related services. Fifty percent of Innovasium is beneficially owned by the
      husband of Julie Fotheringham, our Vice President, Marketing.





8





**Industry**





***Overview
      of the Human Eye***





The
      human
      eye is composed of focusing elements in the front, the cornea and lens, and
      a
      light-sensing element in the back, the retina. Light falls on the photoreceptors
      that are part of the retina and is converted into electrical energy, which
      travels via the optic nerve to the brain. The brain processes the complex
      signals sent from the retina into vision. The central 5% of the area of the
      retina is the macula, the region responsible for seeing color and for the
      central vision necessary for activities such as reading, face recognition,
      watching television and driving. Due to its extremely small size, any damage
      to
      the macula can result in significant visual impairment, including legal
      blindness. In the Western World, the major diseases that usually result in
      blindness in adults are those affecting the retina, including AMD.










9





***Age-Related
      Macular Degeneration (AMD)***





AMD
      is a
      chronic, progressive disease of the macula that results in the loss of central
      vision. The most common symptoms include central distortion, loss of contrast
      sensitivity and loss of color vision, none of which can be corrected by
      refractive means, including glasses, contact lenses or laser eye surgery.
      Peripheral vision usually remains unaffected so that patients are often forced
      to look to the side of objects to see them, but are still unable to see detail.
      AMD typically affects people initially in one eye, with a high probability
      of
      occurrence in the second eye over time. People with AMD often have difficulty
      living independently and performing routine daily activities.





We
      believe that approximately 15 million people in the United States suffer from
      AMD. According to a ten-year study published in *Ophthalmology* in
      October 2002, the prevalence of AMD among a selected sample of U.S. residents
      increased sharply with age, from 28.2% among people 65 to 74 years of age to
      46.2% among people 75 years and older. A study by Duke University published
      in
      2003 reported that the prevalence of AMD among a selected sample of U.S.
      residents aged 65 and older was 27% in 1999. According to the U.S. Census
      Bureau, the number of people in the United States aged 50 or older is
      approximately 80 million and is expected to increase by approximately 40% over
      the next two decades. We expect that this increase in the number of elderly
      people will result in a significant increase in the number of cases of AMD
      in
      the United States.





AMD
      occurs in two forms — a non-exudative ‘‘dry’’ form and an exudative ‘‘wet’’
form.





***Dry
      AMD.*** Dry
      AMD
      is the most common form of the disease. We believe that Dry AMD affects
      approximately 13.0 to 13.5 million people in the United States, or approximately
      85% to 90% of all AMD cases. Dry AMD is characterized by a gradual decrease
      of
      visual acuity, by pigment abnormalities on the macula and by the build-up of
      protein and lipid deposits, called drusen. This build-up of macromolecules
      affects the microcirculation in the eye. Research suggests that the retinal
      cells, overwhelmed by the lack of oxygen and nutrients and the build-up of
      debris, enter into a dysfunctional state of dormancy. Without treatment, the
      retinal cells ultimately die and do not regenerate, leading to irreversible
      vision loss either through the progression of Dry AMD or conversion to Wet
      AMD.
      Patients with Dry AMD are classified at the time of diagnosis into four
      categories of worsening severity. The higher the category, the greater the
      risk
      of progression, or conversion, to Wet AMD within five years.





The
      following table contains the principal characteristics of each category as
      described by the Age Related Eye Disease Report, or AREDS Report, No.
      8:





10




**Category**
            
            **Risk
                of Wet AMD****in
                Five Years**
            
            **Key
                Characteristics**Category
                1
            
            No
                Risk
            
            •no
                pigment changes and less than five small drusen•BCVA(1)better
                than 20/32 in each eye•neither
                eye with Wet AMDCategory
                2
            
            Low
                Risk
              (Less
                than 2%)
            
            •any
                combination of multiple small drusen, one isolated intermediate drusen
                or
                mild pigment abnormalities in one or both eyes•BCVA
                better than 20/32 in each eye•neither
                eye with Wet AMDCategory
                3(2)
            
            Moderate
                Risk
              (18%)
            
            •any
                combination of at least one large drusen, extensive intermediate
                drusen or
                geographic atrophy not involving the central macula•neither
                eye with Wet AMD•BCVA
                better than 20/32 in at least one eyeCategory
                4(2)
            
            High
                Risk
            
            •one
                eye with no signs of Wet AMD(42%)
            
            •other
                eye with either Wet AMD or BCVA worse than 20/32 due to Dry
                AMD








(1)
            BCVA
                means best corrected visual acuity.





(2)
            Categories
                3 and 4 are commonly referred to as “Advanced Dry
                AMD”.





***Wet
      AMD.*** We
      believe that Wet AMD affects approximately 1.5 to 2.0 million people in the
      United States, representing approximately 10% to 15% of all cases of AMD in
      the
      United States. Wet AMD occurs when new blood vessels grow into the macular
      tissues of the eye. This abnormal blood vessel growth generally is known as
      neovascularization. These new blood vessels tend to be fragile and often bleed,
      leaking fluid into the macula, resulting in loss of vision. Untreated, this
      blood vessel growth and leakage can lead to scarring, atrophy and, eventually,
      macular cell death. Wet AMD patients experience vision loss more rapidly than
      Dry AMD patients, usually within months of diagnosis. If treatment is not
      received in this small window of time, the damage is usually irreversible.
      As a
      result, the number of people who have Wet AMD that are considered ‘‘potentially
      treatable’’, or hoping for significant, positive visual outcomes, will stay
      relatively small each year as opposed to the number of people who have Dry
      AMD.





**Treatment
      Alternatives for Wet and Dry AMD**





***Wet
      AMD***





There
      is
      currently no cure for Wet AMD. However, retinal specialists may treat the
      symptoms in an attempt to reduce blood vessel growth and leakage, using one
      of
      very few approved therapies currently available — thermal laser treatment,
      photodynamic therapy and drug therapies. In addition, there are currently more
      than 30 therapies being evaluated in U.S. clinical studies for the treatment
      of
      Wet AMD. These treatments may slow the progression of the disease but do not
      prevent the reoccurrence of abnormal blood vessel growth and do not restore
      lost
      vision.





·
            ***Thermal
                Laser Treatment and Photodynamic Therapy.***Thermal
                laser treatment of Wet AMD entails the use of a high-energy laser
                to
                destroy the abnormal blood vessels that are growing and leaking in
                the
                macula. This is a surgical procedure involving a medical device that
                was
                approved more than two decades ago by the FDA. Because the laser-treated
                portions of the retina are irreversibly destroyed due to collateral
                damage
                from intense heat, thermal laser treatment generally is now used
                only for
                the minority of Wet AMD patients whose abnormal blood vessel growth
                and
                vessel leakage occur away from the center of the macula. A more targeted
                approach, photodynamic therapy, involves the use of a light-activated
                drug
                named Visudyne, which was developed by QLT, Inc. This therapy involves
                a
                two-step process in which the drug is administered systemically by
                intravenous infusion, after which a dose of low energy light is delivered
                to the target site to activate the drug and destroy the newly grown
                abnormal blood vessels.





11





·
            ***Drug
                Therapies.***Rather
                than attempting to destroy abnormal blood vessels, many drug therapies
                are
                designed to slow or stop the proliferation of abnormal blood vessels
                before they can further damage the retina. Current ongoing drug therapies
                in clinical trials for Wet AMD, which have been developed by Genentech,
                Inc. and Genaera Corporation, are believed to block the effect of
                vascular
                endothelial growth factor, or VEGF, a natural protein that stimulates
                the
                production and growth of blood vessels, using different mechanisms
                of
                action. Alcon Laboratories, Inc.’s Retaane is a modified steroid targeting
                enzymes produced by stimulated blood vessels by blocking the effects
                of
                multiple growth factors. Eyetech Pharmaceuticals, Inc.’s Macugen is a
                pegylated anti-VEGF aptamer, which binds to VEGF. Eyetech Pharmaceuticals,
                Inc. was recently acquired by OSI Pharmaceuticals,
                Inc.





***Dry
      AMD***





Dry
      AMD
      is not a well understood disease, and there is no medical consensus regarding
      its underlying cause. As a result, there have been few resources devoted to
      developing a therapy for Dry AMD. However, there is some research that suggests
      a vascular component to the disease. This ‘‘vascular model’’ suggests that Dry
      AMD results from a disorder of the vascular microcirculation in the retina
      which
      leads to a reduction in the amount of oxygen and nutrients that reach the
      retina. This disorder also results in the accumulation of debris between the
      cellular layers of the retina and the subsequent formation of drusen. In
      addition, studies have shown that AMD progression may be related to the presence
      of elevated blood levels of certain macromolecules. Current research has
      identified a number of high molecular weight blood components that may have
      a
      detrimental effect on normal cellular functions and microcirculation.





There
      is
      currently no FDA-approved therapy for Dry AMD. Dry AMD is diagnosed and
      monitored by a primary eye care doctor, such as an optometrist or
      ophthalmologist, through a routine retinal exam. The AREDS Report provides
      evidence that vitamin, antioxidant and zinc supplements only reduce the
      five-year risk of conversion into Wet AMD by up to 25% for Category 3 and
      Category 4 Dry AMD cases. Regardless of the supplement treatments, Dry AMD
      may
      ultimately lead to irreversible vision loss, whether or not it converts into
      Wet
      AMD.





**Potential
      Causes of AMD**





The
      precise cause of AMD is not known. However, researchers have identified certain
      factors that are associated with AMD:





·
            ***Reduced
                Metabolic Efficiency of Retina.***The
                macula must be able to function at an extremely high rate of metabolic
                efficiency to provide sharp vision. The macula, therefore, has an
                unusually high nutrient and oxygen requirement. Intact cell transport
                mechanisms are required to supply the necessary nutrients and oxygen.
                In
                addition to blood vessels in the retina, the macula receives its
                blood
                supply from a tiny meshwork of blood vessels, called the choroid,
                which
                lies underneath the retina. The blood supply in this network decreases
                in
                older people but even more so in some AMD patients. It has been proposed
                that the decreased blood flow in the retina of AMD patients reduces
                the
                metabolism in the retina resulting in significant degradation of
                visual
                function.





·
            ***Poor
                Waste Material Disposal.***Conversion
                of light in the retina into electrical energy is a photochemical
                process
                which produces a large quantity of cellular waste materials. Some
                researchers believe that life-long environmental, oxidative and chemical
                stresses progressively injure eye tissues, making it more difficult
                to
                clear away the waste material generated by the vision-producing cells.
                This may explain why waste products like drusen are often seen in
                the
                retinas of AMD patients and why their presence is associated with
                an
                increased risk of progressive vision loss.





12





We
      believe that a treatment that improves microcirculation in the retina can help
      to enhance the metabolic efficiency of the retina and the removal of waste
      material and thereby aid in the treatment of Dry AMD. We continue to believe
      there is a significant market opportunity for such a treatment.





**Our
      Solution**





The RHEOTM
      System ,
      which
      consists of a pump and a disposable treatment set, containing two filters,
      is
      designed to filter high molecular weight proteins and macromolecules from the
      patient’s plasma, leading to improved microcirculatory function. Researchers
      involved in MIRA-1 believe that blood filtered with the RHEOTM
      System is able
      to flow more easily through the tiny capillaries of the eye and that the
      resulting improved microcirculation more effectively supplies the macular cells
      with oxygen and nutrients which facilitates removal of cellular waste materials.
      The RHEOTM
      System represents a fundamentally new approach to the treatment of Dry AMD and offers
      the following potential benefits:





·
            ***Addresses
                a large AMD patient population with limited current treatment options.***Current
                Wet AMD treatments are effective only on patients who are newly diagnosed
                with Wet AMD, of which there are approximately 200,000 in the United
                States each year.RHEOTM
                Therapy,
                however, is a treatment for most patients in the Category 3 and Category
                4
                Dry AMD populations, which, according to the AREDS Report, represent
                approximately 54% of the total U.S. AMD patients, or currently
                approximately 8 million people.RHEOTM
                Therapyis
                not appropriate for everyone in the Category 3 and Category 4 Dry
                AMD
                population. For example,RHEOTM
                Therapywould not be appropriate for potential patients who may have existing
                ailments that would make it unsafe for them to receive any blood
                transfusion type procedure.





·
            ***Preserves
                or improves vision of Dry AMD patients.***Success
                in treating AMD is generally measured by the ability to slow or halt
                progression of the disease. We believe thatRHEOTM
                Therapyis
                currently the only Dry AMD therapy that, based on an interim analysis
                of
                36 complete data sets from the first 43 patients enrolled in MIRA-1
                and
                the modified per-protocol analysis of the final MIRA-1 study data,
                appears
                to demonstrate improved vision in some patients. However, MIRA-1
                did not
                meet its primary efficacy endpoint as it did not demonstrate a
                statistically significant difference in the mean change of ETDRS
                BCVA
                between the treated and placebo groups in MIRA-1 at 12 months
                post-baseline.





·
            ***Patient-friendly
                procedure.***RHEOTM
                Therapyis
                a form of therapeutic apheresis, a procedure that selectively removes
                molecules from the plasma. Apheresis has been used safely for more
                than
                twenty years in the United States and Europe to treat various diseases,
                including leukemia, rheumatoid arthritis, sickle cell disease and
                several
                other medical conditions. AlthoughRHEOTM
                Therapyis
                a patient-friendly procedure, it is time consuming, with an initial
                course
                ofRHEOTM
                Therapyrequiring
                eight procedures over a 10- to 12-week period, with each procedure
                lasting
                between two and four hours depending on patient weight and height.
                Patients recline in a comfortable chair and typically listen to music
                or
                otherwise relax during the procedure. As with any medical procedure,
                there
                are potential side effects associated withRHEOTM
                Therapy,
                which are all temporary and generally mild, including drops in blood
                pressure, abnormal heart rate, nausea, chills and localized bleeding,
                swelling, pain and numbness in the area of the arms where the needles
                are
                inserted.





13





·
            ***Limited
                barriers to adoption for eye care professionals and health care service
                providers.***We
                believe that theRHEOTM
                Systemrequires lower capital expenditures and less physical space than
                equipment
                used in many other procedures performed by eye care professionals,
                including laser vision correction and cataract surgery. TheRHEOTM
                Systemrequires
                no special installation and minimal maintenance costs. We believe
                thatRHEOTM
                Therapy,
                which can be administered by a nurse, can be easily integrated into
                our
                potential customers’ workflow and offers an attractive source of
                additional revenues for both facilities and providers. However, our
                success is dependent upon achieving widespread acceptance ofRHEOTM
                Therapyamong
                ophthalmologists and optometrists who may be reluctant to acceptRHEOTM
                Therapy.





·
            ***Cost-effective
                procedure.***The
                initial course ofRHEOTM
                Therapyis
                initially expected to cost between $16,000 and $25,600. We believe
                that
                Medicare and third-party payors will determine that the benefits
                ofRHEO
                TherapyTMwill
                justify the cost of reimbursement. However, should Medicare and
                third-party payors decline to provide coverage ofRHEOTM
                Therapyor
                set broad restrictions on patient coverage or on treatment settings
                in
                whichRHEOTM
                Therapyis
                covered, our potential revenues may be significantly limited, particularly
                if potential patients deem our treatment to be too expensive. Nonetheless,
                we believe that to the extent thatRHEOTM
                Therapyis
                not reimbursed by the government or private third-party payors, some
                patients with the economic means to do so will be willing to pay
                forRHEOTM
                Therapythemselves
                in order to avoid the consequences of uncorrectable impaired vision,
                including, but not limited to, the inability to
                drive.





**Our
      Strategy**





Our
      goal
      is to establish RHEOTM
      Therapy as
      the
      leading treatment for Dry AMD in North America. Pending the outcome of the
      full
      analysis of the MIRA-1 study data and the determination of the parameters of
      any
      follow-up clinical trial of the RHEO TM
      System ,
      the
      timetable for the achievement of our goal and the implementation of our strategy
      will be delayed. To date, key elements of our strategy have included and, other
      than as indicated below to the contrary, will continue to include:





·
            ***Creating
                a plan to develop market awareness of******RHEOTM
                Therapy******by
                educating eye care professionals and patients.***IfRHEOTM
                Therapyis
                approved by the FDA, we intend to increase market awareness ofRHEOTM
                Therapyby
                identifying and developing relationships with key opinion leaders
                in each
                of the eye care disciplines, including ophthalmologists and optometrists.
                We believe that these opinion leaders, some of whom are members of
                our
                Scientific Advisory Board or investigators in MIRA-1, will help establish
                acceptance ofRHEOTM
                Therapy.
                If and when the FDA grants approval forRHEOTM
                Therapy,
                we intend to launch a public relations campaign targeted directly
                at
                patients and advocacy groups to alert them of our treatment. Certain
                members of our management team were leaders in creating market awareness
                of laser vision correction when it was introduced to the North American
                market in the 1990s and, in doing so, were effective in creating
                relationships with a large number of optometrists and ophthalmologists
                in
                the United States.





·
            ***Establishing
                third-party reimbursement for******RHEOTM
                Therapy******.***We
                believe that an insurance billing code established by the American
                Medical
                Association in January 2003 accurately characterizes theRHEOTM
                Therapy procedure.
                This code identifies therapeutic apheresis with extracorporeal selective
                adsorption or selective filtration and plasma reinfusion. The procedure
                for which this billing code currently applies is a category of low
                density
                lipids, or LDL, apheresis, which partially filters the ‘‘bad’’ cholesterol
                from the blood plasma. If and when the FDA grants marketing clearance
                for
                theRHEO
                TM System,
                we plan on seeking a Medicare National Coverage Determination forRHEOTM
                Therapyfor
                specified patients with Dry AMD, with the goal of securing Medicare
                coverage under the existing procedure code for use in treatment of
                Dry
                AMD. Currently, Medicare covers and pays for other FDA-licensed services
                billed with this code only when performed in a hospital outpatient
                setting. A payment rate for FDA-licensed services billed with this
                code
                when performed in a physician Medicare office-based setting has been
                established by the Center for Medicare and Medicaid Services, or
                CMS,
                effective on January 1, 2005. IfRHEOTM
                Therapyis
                cleared for marketing by the FDA and covered by Medicare for treatment
                of
                Dry AMD, we believe that this Medicare office-based reimbursement
                policy
                will similarly apply for this procedure and will provide a significant
                positive impact on our revenues. We also plan to assist our customers
                in
                securing coverage and appropriate reimbursement forRHEOTM
                Therapyfrom Medicare and private insurers through a dedicated reimbursement
                group
                and the provision of detailed supporting
                documentation.





14





·
            ***Securing
                relationships with key multi-facility health care service providers.***To
                facilitate a rapid rollout of theRHEOTM
                Systemif
                and when we receive FDA approval, we have been identifying key groups
                of
                multi-facility health care service providers, including hospitals,
                dialysis clinics and ambulatory surgery centers, as well as private
                practices, which may be future treatment centers for theRHEOTM
                System.
                To date, our marketing activities have been limited to identifying
                to whom
                we will choose to market if and when we receive FDA approval. We
                are not
                currently in negotiations with any U.S. healthcare service provider
                to
                supply or license theRHEOTM
                System,
                nor can we pursue any such relationship unless and until we receive
                FDA
                approval. In advance of commercialization in the United States, we
                intend
                to develop a plan to ensure that there is an adequate supply of trained
                nurses to support our service provider partners. We intend to leverage
                the
                experience of clinics in Canada currently using theRHEOTM
                Systemto
                assist in training nurses and our service provider partners in advance
                of
                FDA approval. The components of theRHEOTM
                Systemhave had Health Canada approval since 2003. We currently supply four
                clinics in Canada which commercially provideRHEOTM
                Therapyto
                Dry AMD patients at the direction of their physicians. We have an
                agreement to provide theRHEOTM
                Systemin
                Canada to Veris. Dr. Machat, who is an investor in and one of the
                directors of Veris, was a co-founder and former director of TLC Vision.
                We
                believe that our experience in Canada and the experience of one of
                our
                principal stockholders and suppliers in Germany, Diamed, will allow
                us to
                develop best practice guidelines for integratingRHEOTM
                Therapyinto a clinic setting.





·
            ***Ensuring
                sufficient manufacturing capacity and inventory to support our
                commercialization plan.***We
                have been working with our manufacturing and supplier partners to
                ensure
                that there is sufficient capacity and inventory to support our
                commercialization plans. In anticipation of FDA approval, we had
                been
                accumulating an inventory of filters and pumps to support a rapid
                product
                launch. We have a distribution agreement with Asahi Medical which
                appoints
                us its exclusive distributor of filters in the United States, Canada,
                Mexico, certain countries in the Caribbean, Australia, New Zealand,
                Colombia and Venezuela. The distribution agreement with Asahi Medical
                also
                appoints us a non-exclusive distributor of filters in Italy. We ordered
                4,000 filter sets per quarter in 2005 and intended to do the same
                in 2006
                in order to accumulate inventory in excess of our current requirements
                until we receive FDA approval in order to maximize the number of
                filters
                available to us due to manufacturing constraints on the number of
                cellulose acetate filters that Asahi Medical can produce. Each filter
                set
                consists of one Plasmaflo filter and one Rheofilter, and each filter
                has a
                shelf life of three years. We will be re-evaluating our inventory
                accumulation strategy pending the outcome of our discussions with
                the FDA
                and the determination of the parameters of any follow-up clinical
                trial of
                the RHEOTM
                System and in accordance with our consequent estimate of the likely
                timing
                of receipt of FDA approval, if any.
                We have been working with Asahi Medical to develop and conduct clinical
                tests on a next generation polysulfone Rheofilter with similar
                characteristics to the current cellulose acetate Rheofilter. We believe
                that the proposed polysulfone Rheofilter will be able to be manufactured
                at significantly higher volumes and lower costs than the current
                filter
                technology.





15





·
            ***Maintaining
                our intellectual property portfolio and other barriers to entry.***We
                believe that our intellectual property position may assist us in
                maintaining our competitive position. We also believe that the
                manufacturing process expertise relating to the production by Asahi
                Medical of the Rheofilter is protected by Asahi Medical as a trade
                secret.
                We believe that the exclusive nature of our supplier relationship
                with
                Asahi Medical gives us a competitive advantage. We intend to continue
                to
                strengthen our relationships with our exclusive suppliers and to
                strengthen our current patents and seek additional patent
                protection.





**Our
      Product**





***The*** **RHEOTM
      System**





The RHEOTM
      System employs
      a
      double filtration apheresis process, whereby a pair of single-use blood and
      plasma filters sequentially separate and partially remove the targeted plasma
      components. The system removes macromolecules greater than a specified size
      from
      the plasma. The RHEOTM
      System consists
      of two primary components:





·
            ***OctoNova
                Pump.***The
                OctoNova pump is a microprocessor controlled device used to circulate
                blood and plasma from the patient, through the filter and back to
                the
                patient. The OctoNova pump is complemented by single-use sterilized
                tubing
                which creates a closed-loop system. Blood is pumped through the tubing
                with small gear-like sprockets that create a peristaltic action in
                the
                tube similar to that which occurs in our intestines. The smooth-edged
                teeth of the sprockets press against the outside surface of the tube
                pushing the blood along the length of the tube as the wheels turn
                all at
                the same rate and direction. No blood ever leaves the closed-loop
                system.
                The OctoNova pump was developed in the 1990s by Diamed and licensed
                to us
                in 2002. We are seeking FDA approval of the OctoNova pump as part
                of theRHEOTM
                SystemPMA. However, pending the outcome of our discussions with the FDA
                and the
                conduct of any follow-up clinical trial, we anticipate that the submission
                of the PMA will be delayed.





·
            ***Disposable
                Treatment Sets.***Disposable
                treatment sets consist of the tubing and two filters, the Plasmaflo
                filter
                and the Rheofilter. One treatment set is used for each treatment
                undertaken by the patient. The Plasmaflo filter performs the initial
                function of separating the blood cells from the plasma. The Rheofilter
                is
                a single-use, hollow-fiber nanopore membrane, which is used to filter
                specific high molecular weight proteins and other macromolecules
                from the
                plasma. Following this, the filtered plasma is reconstituted with
                the
                blood cells and returned into the patient. The tubing and the filters
                are
                easily disposed of after each patient procedure by the administering
                nurse, providing us with a recurring source of revenue. The Rheofilter
                was
                developed in the early 1980s by Asahi Medical. We are seeking FDA
                approval
                of the tubing and two filters as part of theRHEOTM
                SystemPMA
                and have been working to complete the PMA with Asahi Medical. Upon
                FDA
                approval of the PMA, we have an agreement to transfer this FDA approval
                to
                Asahi Medical. In that same agreement, Asahi Medical agreed to us
                being
                the exclusive distributor of the Plasmaflo filter and the Rheofilter
                in
                the United States, Canada, Mexico and certain countries in the Caribbean
                until the end of the ten-year period following the date of the FDA
                approval, which term is automatically renewable for one-year terms
                unless
                terminated upon six months’ notice. The Rheofilter is currently made of a
                cellulose acetate filter material. We have been working with Asahi
                Medical
                to develop a new filter made of polysulfone to replace the current
                filter.
                Asahi Medical has conducted clinical trials of the new polysulfone
                filter
                in Germany to support the safety data necessary to obtain a CE Mark.
                Following obtaining a CE Mark, we will work with Asahi Medical to
                obtain
                the necessary regulatory approvals to use the new polysulfone filter
                in
                theRHEOTM
                Systemin
                Canada and the United States.





16





The
      disposable treatment sets received Health Canada regulatory approval in 2002.
      The OctoNova pump received Health Canada approval in 2003. The RHEO TM System
      components have also been granted a CE Mark in Europe, where, other than in
      Italy, the commercialization rights for the Rheopheresis TM
      procedure are
      exclusively held by Diamed, one of our principal stockholders and suppliers.
      We
      have been conducting clinical studies with the goal of obtaining FDA approval
      and intend to continue to do so, with a view to gaining widespread physician
      acceptance of RHEOTM
      Therapy .





***The*** ***RHEOTM
      Procedure***





Each RHEOTM
      Therapy procedure typically takes between two and four hours to complete and begins
      by
      placing one intravenous line in each forearm of the patient. Blood is pumped
      from a large vein in one arm and circulated through the filtration system where
      the whole blood is separated from the plasma by the Plasmaflo filter. The plasma
      is filtered through the Rheofilter, which filters high molecular weight proteins
      and other macromolecules from the patient’s plasma. The plasma is then remixed
      with the blood and is returned to the patient intravenously. Only approximately
      1.25 pints of blood are outside the patient’s body, and, at all times, blood
      remains in a sterile closed circuit. Throughout the RHEOTM
      Therapy procedure ,
      the
      attending nurse monitors the blood pressure, heart rate, oxygen saturation,
      cardiac rhythm and activated clotting time of the patient. The attending nurse
      also gauges the flow rates, temperature and pressures of the filters. No blood
      products or medications are added, other than a small amount of heparin to
      prevent clotting in the tubing system. We believe the initial course of eight
      procedures of RHEOTM
      Therapy given
      over a 10- to 12-week period provides the best results for patients with Dry
      AMD. Typically, one or two booster procedures are given each 12 to 18 months
      thereafter to maintain the clinical benefits derived from the initial course
      of RHEOTM
      Therapy. The
      referring physician monitors post-procedure follow-up. The following graphic
      shows the RHEOTM
      Therapy process:









***Background
      of Rheopheresis*** *TM*





Researchers
      discovered Rheopheresis TM for AMD
      during the search for a blood treatment for elevated cholesterol levels in
      the
      mid-1980s. Asahi Medical developed a filter aimed at selectively removing the
      low-density lipid, or LDL, macromolecules known as the ‘‘bad’’ cholesterol in an
      apheresis procedure. Although the filter successfully removed LDL, it also
      removed several other large molecules, including von Willebrand’s factor,
      fibrinogen, lipoprotein A and C reactive protein. Researchers have confirmed
      that apheresis, a plasma filtering or exchange procedure, is a relatively safe
      procedure and that there do not appear to be negative consequences to also
      filtering out these large molecules. At approximately the same time, however,
      the first statin drug was proven to be effective in lowering LDL levels in
      the
      blood, thereby eliminating the need for an apheresis procedure to remove LDL.
      Shortly thereafter, Asahi Medical ceased its efforts to develop and
      commercialize apheresis treatment for elevated LDL levels.





17





In
      the
      late 1980s, researchers at the University of Cologne in Germany were searching
      for a treatment for a small group of patients referred to the university with
      a
      condition known as refractory uveitis, a chronic inflammatory eye condition
      that
      was not responding to conventional therapy. Having learned that the Asahi
      Medical filters had the ability to remove large molecules from the blood and
      that the eye condition was related to significant levels of many of the same
      molecules, the researchers performed a small pilot study. The filtration
      procedure was effective for uveitis but also showed preliminary success in
      improving the vision of two patients in the study who also had AMD. This led
      the
      researchers to conduct several years of clinical research to develop apheresis
      for AMD in Germany. The research suggested that eight procedures over a 10-
      to
      12-week period was the optimal treatment regime.





**Clinical
      Studies**





We
      recently completed our FDA clinical trial, MIRA-1, or Multicenter Investigation
      of Rheopheresis for AMD. Two other clinical trials have been conducted by third
      parties: MAC-1, which was conducted in Germany from 1995 to 1998; and the
      Rheopheresis TM pilot
      study which was conducted by the University of Utah from 1997 to 1998. While
      the
      protocols of these three clinical trials were not identical, the interim results
      of MIRA-1 and results of each of these other two studies have been generally
      consistent. On February 3, 2006, we announced that, based on a preliminary
      analysis of the data from MIRA-1, MIRA-1 did not meet its primary efficacy
      endpoint.





MIRA-1
      was conducted at 12 treatment centers in the United States and Canada. We have
      an agreement with Promedica International, a contract research organization,
      to
      oversee each center. Promedica International provided study monitoring and
      site
      and data management services. We paid Promedica International a total of
      approximately $2,000,000 for certain fees and expenses for the period from
      2003
      to the completion of the MIRA-1 study and are continuing to incur additional
      expenses with Promedica International in connection with MIRA-1 close-out
      activities and our LEARN studies (which are discussed below).





In
      November 2005, we signed an agreement with Veris pursuant to which it agreed
      to
      provide clinical trial services to us in connection with MIRA-PS, a clinical
      trial of Asahi Medical’s new polysulfone filter that we intended to sponsor for
      purposes of obtaining the necessary regulatory approvals to use this new filter
      in the RHEO TM
System
      in Canada. Patient enrollment for MIRA-PS has not commenced. Pending the outcome
      of the analysis of the MIRA-1 study data, our discussions with the FDA and
      the
      determination of the parameters of any follow-up clinical trial for purposes
      of
      supporting our PMA filing, we have suspended MIRA-PS.





***MIRA-1***





MIRA-1
      was a randomized, placebo-controlled trial designed to evaluate the safety
      and
      efficacy of RHEOTM
      Therapy in
      patients with intermediate-to-late stage, or Category 3 and Category 4, Dry
      AMD.





In
      September 1999, we received an Investigational Device Exemption from the FDA
      to
      begin MIRA-1. Between early 2000 and August 2001, we enrolled 98 patients in
      MIRA-1. In August 2001, due to financial constraints, we temporarily suspended
      the new enrollment of patients but continued to pursue follow-up with the
      remaining patients in MIRA-1. In late 2001, with the permission of the FDA,
      we
      submitted the data sets of the 43 patients who had reached their full 12-month
      follow-up in MIRA-1 for independent third-party analysis. Over the course of
      the
      next several months, the FDA addressed a number of matters relating to MIRA-1.
      First, the FDA allowed us to submit the PMA in modules. Second, it acknowledged
      that MIRA-1 is intended to be the pivotal trial for obtaining FDA approval
      for RHEOTM
      Therapy. Third,
      the FDA allowed us to treat the patients in the placebo group with RHEOTM
      Therapy free of
      charge once their full 12-month follow-up data had been obtained. Fourth, it
      confirmed that we would be required to submit at least 150 full data sets from
      the 180 patients that were to be enrolled in the trial. Following disclosure
      of
      the interim results of MIRA-1 and these changes to the MIRA-1 protocol, we
      were
      able to obtain new financing. As a result of the new financing, in October
      2003,
      we began screening additional patients for enrollment in MIRA-1 and then opened
      five additional MIRA-1 sites and, at the completion of the study, were operating
      12 MIRA-1 sites.





18





As
      of
      December 31, 2004, we had enrolled a total of 185 patients in MIRA-1 and had
      also submitted to the FDA the first three of four modules of the PMA filing,
      the
      non-clinical portion. These
      first three modules contain non-clinical results of bench tests and quality
      assurance and document manufacturing processes on the components of the RHEOTM
      System .
      Although we had intended to submit the fourth module, which consists of the
      follow-up clinical data, in two components, following discussions with the
      FDA,
      we elected to file only one PMA clinical module following completion of our
      12-month data on at least 150 data sets.





To
      be
      included in MIRA-1, a patient’s eyes must have demonstrated intermediate-to-late
      stage Dry AMD, corresponding to Category 3 and Category 4, with ten or more
      intermediate or large drusen. Additionally, patients must have shown elevated
      serum levels of at least two out of three macromolecules associated in previous
      studies that suggested the best positive treatment outcomes. Primary eyes in
      the
      study must have shown no signs of Wet AMD and must have demonstrated best
      corrected visual acuity, or BCVA, between 20/32 and 20/125,
      inclusive.





Two
      out
      of every three patients were treated in the trial, while the third was a placebo
      or control patient. Patients received eye exams prior to treatment and at
      three-, six-, nine-, and 12-month follow-up intervals. Each patient received
      either eight RHEOTM
      Therapy or eight
      placebo procedures over ten weeks. Patients in the placebo-control group were
      made to believe that they were receiving RHEOTM
      Therapy .
      All
      subjects, including those randomized to the placebo group, were shrouded from
      the neck down to prevent them from observing their treatment and received actual
      needle sticks in both arms. Additionally, a partition was positioned in front
      of
      the OctoNova pump so that the patient could not see the system. The machine
      was
      activated so that the patients could hear the background noise of the machine,
      but those patients in the placebo group were not connected to the tubing
      circuit. In addition, all subjects, including those randomized in the placebo
      group, were required to take the same dose of antioxidant vitamins that are
      commonly recommended for Dry AMD patients as a possible inhibitor of conversion
      into Wet AMD.





The
      study’s primary endpoint was the mean change in BCVA. In this trial, visual
      acuity was measured as the number of letters that the patient can read on the
      Early Treatment Diabetic Retinopathy Study, or ETDRS, eye chart. This is the
      standard eye chart used in these types of trials. Five letters on the ETDRS
      eye
      chart equate to one line of visual acuity. Secondary and tertiary endpoints
      included:





·
            the
                ability to pass a vision test in order to regain a driver’s
                license;





·
            vision
                improvement;





·
            vision
                loss;





·
            drusen
                reduction;





·
            the
                Pepper Visual Skills for Reading Test, which is a measure of reading
                ability;





19





·
            the
                National Eye Institute visual functioning questionnaire;
                and





·
            progression
                to legal blindness.





The
      following chart presents the interim 12-month results of the first 43 patients
      in the MIRA-1 study. Of these 43 patients, we only obtained 12-month results
      from 36 patients, because three treated patients and four patients in the
      placebo group did not complete all of the required follow-up.





**Total
                Cohort****Primary
                Eyes**
            
            **Placebo**
            
            **Net
                lines****(n=25)**
            
            **(n=11)**
            
            **difference**
            
            **P
                Value**Mean
                change BCVA
            
            
            0.74
            
            
            -0.87
            
            
            1.61
            
            
            0.0011Vision
                improvement greater or equal to:3
                lines
            
            
            3(12
            %)
            
            0(0
            %)2
                lines
            
            
            7(28
            %)
            
            2(18
            %)1
                line
            
            
            12(48
            %)
            
            3(27
            %)Vision
                loss greater or equal to:3
                lines
            
            
            1(4
            %)
            
            2(18
            %)2
                lines
            
            
            2(8
            %)
            
            2(18
            %)Drusen
                reduction
            
            
            29
            %
            
            13
            %Progression
                to legal blindness
            
            
            0
            %
            
            18
            %







The
      following chart represents the subgroup of 28 patients with worse than legal
      driving vision, or a BCVA of worse than 20/40, prior to enrolling in the trial.
      Twenty-six patients (19 treatment and seven placebo) completed the entire
      12-month follow-up; the remaining two patients in the placebo group who did
      not
      complete 12-month follow-up are not included.




20





**Cohort
                (Sub-Group) With BCVA****Worse
                Than 20/40 at Enrollment****Treatment
                Group**
            
            **Placebo**
            
            **Net
                lines****(n=19)**
            
            **(n=7)**
            
            **difference**
            
            **P
                value**Mean
                change BCVA
            
            
            +1.1
            
            
            -1.9
            
            
            3.00
            
            
            0.0014Improved
                to >20/40 (legal driving vision)
            
            
            11(58
            %)
            
            1(14
            %)Vision
                improvement greater or equal to:3
                lines
            
            
            3(16
            %)
            
            0(0
            %)2
                lines
            
            
            6(31
            %)
            
            1(14
            %)1
                line
            
            
            11(58
            %)
            
            2(29
            %)Vision
                loss greater or equal to:3
                lines
            
            
            1(5
            %)
            
            2(29
            %)2
                lines
            
            
            1(5
            %)
            
            2(29
            %)Drusen
                reduction
            
            
            35
            %
            
            14
            %




21





Vision
      research typically uses a ‘‘standard measurement’’ called the ‘‘change in
      BCVA’’, which is measured using a chart that provides five letters per line of
      decreasing size or increasing difficulty. Each letter has a relative value
      of
      0.2 or 20% of the entire line. A patient entering the study who gains two lines
      of vision will be able to read ten additional letters or two complete lines
      of
      vision.





“Mean
      change” is the cumulative averaging of all patient results in a specific
      category. For example, a patient entering the study with 20/40 vision and
      gaining 1.4 lines following treatment would have improved to 20/32 plus two
      letters on the 20/25 line. This number, 1.4, would be included in the
      calculation with all other individual patient results when calculating the
      cumulative average.





The
      completed MIRA-1 results were not consistent with the interim results, which
      are
      based on a very small number of subjects. On February 3, 2006, we announced
      that, based on a preliminary analysis of the data from MIRA-1, MIRA-1 did not
      meet its primary efficacy endpoint as it did not demonstrate a statistically
      significant difference in the mean change of ETDRS BCVA between the treated
      and
      placebo groups in MIRA-1 at 12 months post-baseline. As expected, the treated
      group demonstrated a positive result. An anomalous response of the control
      group
      is the principal reason why the primary efficacy endpoint was not met. There
      were subgroups that did demonstrate statistical significance in their mean
      change of ETDRS BCVA versus control.





Subsequent
      to the February 3, 2006 announcement, the Company completed an in-depth analysis
      of the MIRA-1 study data identifying subjects that were included in the
      intent-to-treat, or ITT, population but who deviated from the MIRA-1 protocol
      as
      well as those patients who had documented losses or gains in vision for reasons
      not related to retinal disease such as cataracts. Those subjects in the ITT
      population who met the protocol requirements, and who did not exhibit ophthalmic
      changes unrelated to retinal disease, comprised the modified per-protocol
      population.





22





In
      the
      modified per-protocol analysis, eyes treated with RHEOTM Therapy demonstrated a
      mean vision gain of 0.8 lines of ETDRS BCVA at 12 months post-baseline, compared
      to a mean vision loss of 0.1 lines of ETDRS BCVA in the eyes in the placebo
      group. The result was statistically significant (repeated measure p value =
      0.0147). The following table presents a summary of the ETDRS BCVA changes
      observed 12 months post-baseline in the modified per-protocol analysis of
      MIRA-1:





Treatment
                Group
            Placebo
                Group(n=69)
            (n=46)Vision
                improvement greater or equal to:1
                line
            46.4%
            19.6%2
                lines
            27.5%
            8.7%3
                lines
            8.7%
            2.2%Vision
                loss greater or equal to:1
                line
            11.6%
            23.9%2
                lines
            5.8%
            6.5%3
                lines
            2.9%
            2.2%




Within
      the modified per-protocol population with pre-treatment vision worse than 20/40,
      50.0% of RHEOTM Therapy-treated eyes improved, after treatment, to 20/40 or
      better and would be able to qualify for a driver’s license 12 months
      post-baseline, compared to 20.0% of placebo eyes.





MIRA-1
      data supports historical clinical and commercial experience with respect to
      the
      safety of RHEOTM Therapy, with observed treatment side effects generally being
      mild, transient and self-limiting.





***LEARN
      Studies***





On
      February 28, 2005, we announced that the FDA had completed a review of the
      Long-term Efficacy in AMD from Rheopheresis in North America, or LEARN,
      protocols submitted to it by us on January 21, 2005 and had given us permission
      to initiate two studies.





LEARN-1
      is an open-label multi-center study that will enroll up to 120 subjects who
      were
      treated in the MIRA-1 study. There will be up to 12 investigational sites where
      the subjects will be randomized in a 1:1 fashion to receive either two or four
      RHEO Therapy “booster” procedures. The results between the groups will be
      compared after three, six, nine and 12 months of follow-up from
      baseline.





LEARN-2
      is an open-label multi-center study that will enroll up to 60 subjects who
      were
      placebo patients in the MIRA-1 study. There will be up to 12 investigational
      sites where the subjects will receive eight RHEO Therapy procedures and will
      have a three-, six-, nine- and 12-month follow-up from baseline
      evaluation.





LEARN-1
      and LEARN-2 are both currently in the enrollment phase.





***OMER***





We
      intend
      to conduct a clinical study, called OMER, or Objective Measurement of the Effect
      of Rheopheresis, with the assistance of Columbia University and New
      York-Presbyterian Hospital. OMER will be an open-label study of five patients,
      the objective of which will be to evaluate any change in the multi-focal
      electrophysiological activity of their macula from baseline evaluation to
      post-treatment. Each patient will receive a series of eight RHEOTM Therapy
      treatments over a ten- to 12-week period, and clinical data will be collected
      at
      three, six and 12-month intervals following the baseline
      evaluation.





23





It
      is
      hypothesized that an increase in electrophysiological activity in the macula
      may
      be indicative of an improvement in the functioning of the macula.





***MAC-1***





The
      MAC-1
      trial was a 40-patient study conducted in Germany by the University of Cologne
      from 1995 to 1998 and resulted in Rheopheresis TM for Dry
      AMD achieving the CE Mark. The patients were randomized into two groups, a
      treatment group and a placebo-control group. The treatment group was treated
      ten
      times over a period of 21 weeks.





Unlike
      MIRA-1, the investigators and each patient knew whether that patient was in
      the
      treatment group or the control group because the 20 patients in the control
      group did not receive placebo treatments but were simply examined at the
      designated follow-up intervals. The MAC-1 study also included patients with
      signs of Wet AMD and included patients with significant soft drusen. Eighteen
      of
      the patients in the study had signs of Wet AMD and would have been excluded
      from
      MIRA-1 under the MIRA-1 protocol.





The
      main
      parameter of the study was BCVA. Electrical activity in the eye was also
      recorded. Plasma and whole-blood speed and volume in the macular region were
      also measured. The results of MAC-1 were similar to the interim results that
      have been seen in MIRA-1: statistically significant relative improvement of
      1.6
      lines of BCVA immediately following the course of treatment, with the same
      level
      of benefit seen at 12 months. For patients with soft drusen, the average
      difference was 2.3 lines (p<0.01); for patients without soft drusen, the
      difference was only 0.64 lines (p=0.43). In the treated group, improvement
      in
      electrical activity was statistically significant, indicating that the cells
      of
      the retina were functioning more efficiently. The speed and volume of blood
      flow
      in the choridial arteries which supply blood to the retina were found to be
      decreased by 37% and 33%, respectively, in patients with AMD. Following
      treatment of those patients, blood flow increased by 22%. There were no serious
      adverse events noted.





***Rheopheresis*** TM ***Pilot Study***





The
      study
      was conducted from 1997 to 1998 by physicians at the University of Utah Health
      Sciences Center in Salt Lake City, Utah under an Investigational Device
      Exemption from the FDA. The University of Utah’s Institutional Review Board also
      provided approval for human experimentation prior to enrollment. The study
      involved 30 patients. The trial measured electrical activity in the cells of
      the
      macula before and after treatment. The results of this study were used to
      support the application for the Investigational Device Exemption to conduct
      MIRA-1.





***PERC
      Study***





In
      April
      2004, RHEO Clinic, a subsidiary of TLC Vision, received Institutional Review
      Board approval for and launched a new study called the Prospective Evaluation
      of
      Rheopheresis in Canada, or PERC.





PERC
      is a
      single center study in Canada designed to examine the effect of RHEOTM
      Therapy on
      60
      patients with Dry AMD to gain a greater understanding of the treatment’s method
      of action. Although at the outset PERC was contemplated to study the outcome
      variables for 60 patients, it was subsequently decided to limit the enrollment
      in PERC to 20 patients. Each patient received a series of eight RHEOTM
      Therapy treatments over
      a
      10- to 12-week period. Clinical data was collected at three-month intervals
      for
      one year following the initial treatments.





One
      objective of the study is to develop a complete description of the physiological
      changes produced by RHEOTM
      Therapy .
      This
      will be done using structural and functional objective tests and subjective
      measures of vision in its broad context. This includes measurements of the
      size
      and shape of the retina, retinal electrical activity and vascular function
      as
      well as general visual performance using standard measurements of acuity,
      reading speed, and color and contrast sensitivity. Subjective vision assessments
      using the National Eye Institute Visual Functioning Questionnaire 25 were
      evaluated to gain understanding about general quality of life and AMD-specific
      visual symptoms.





24





Early
      analysis of the visual acuity of the 20 patients in PERC showed findings similar
      to those shown by the interim analysis conducted on 36 complete data sets from
      the first 43 patients enrolled in MIRA-1. Further analysis of the other
      parameters measured in the PERC study is being conducted.





David
      T.
      Wong, MD, FRCSC or Fellow of the Royal College of Surgeons of Canada, is the
      principal investigator of the PERC study. Dr. Wong has been our Medical Director
      since July 2004. Dr. Wong is an Assistant Professor of Ophthalmology at the
      University of Toronto, Active Staff Ophthalmologist at St. Michael’s Hospital
      and Director of Fellowship Training in Ophthalmology at the University of
      Toronto. Dr. Wong is a sub-specialist surgical ophthalmologist in the areas
      of
      the vitreous and retina of the eye. Dr. Wong is a member of numerous
      organizations, including the Canadian Ophthalmology Society, American Academy
      of
      Ophthalmology, the American Society of Retina Specialists and the Association
      for Research in Vision and Ophthalmology. Dr. Wong is a frequently invited
      lecturer in North America, Asia and Europe, has authored numerous scientific
      papers and publications and is an investigator in numerous FDA clinical trials,
      including trials for QLT’s Visudyne, Eyetech’s Macugen and Alcon’s
      Retaane.





***RHEONET
      Registry***





The
      RHEONET Registry is a collaborative effort between the Apheresis Research
      Institute in Cologne, Germany and us. The registry contains a database of
      Rheopheresis TM procedures from centers and clinics performing the Rheopheresis TM
      procedure commercially in Germany, using systems sold by Diamed or provided by Diamed
      for
      some local research projects and, in Canada, using systems sold by us. In
      February 2006, a total of 5,936 Rheopheresis TM procedures (4,482 in Germany and 1,454 in Canada) on 919 patients were
      registered, including 665 patients with AMD. Ophthalmological data of 291 eyes
      of 200 patients with Dry AMD could be analyzed from the registry as of February
      2006. Results of RHEONET Registry analyses will be presented, when available,
      at
      scientific meetings in 2006.





**Supplier
      Relationships**





We
      have
      three key supplier arrangements — with Asahi Medical, who manufactures the
      treatment sets, including the Rheofilter and the Plasmaflo filter, and with
      Diamed and MeSys GmbH, or MeSys, the designer and the manufacturer,
      respectively, of the OctoNova pump. The Rheofilter, the Plasmaflo filter and
      the
      OctoNova pump are all key components of the RHEOTM
      System .





***Rheofilter
      and Plasmaflo Filter.*** We
      purchase the Rheofilter and Plasmaflo filter from Asahi Medical. We make these
      purchases pursuant to a distribution agreement which appoints us Asahi Medical’s
      exclusive distributor of the Rheofilter and the Plasmaflo filter for use in
      treating AMD in the United States, Canada, Mexico, certain countries in the
      Caribbean, Australia, New Zealand, Colombia and Venezuela, subject to us
      obtaining necessary regulatory approvals in those agreed countries where we
      choose to sell the filters. The distribution agreement appoints us a
      non-exclusive distributor of the Rheofilter and the Plasmaflo filter in Italy
      where we are obligated to make best efforts to obtain regulatory approval
      therefor. Under this agreement:





·
            we
                may not market or sell any product that is similar to or competitive
                with
                the filters;





25





·
            we
                must use our best efforts to support providers in their efforts to
                secure
                reimbursement from public and private U.S. health insurers on behalf
                of
                patients whose Dry AMD treatment involves utilization of these
                filters;





·
            for
                North America, including the Caribbean, we must purchase a minimum
                of
                9,000 filters during the one-year period commencing six months following
                FDA approval, 15,000 filters in the succeeding one-year period and
                22,500
                filters in the next succeeding one-year period. If we fail to meet
                our
                minimum purchase requirements under our agreement with Asahi Medical,
                our
                agreement may be terminated or rendered non-exclusive at the sole
                discretion of Asahi Medical;





·
            for
                Australia, New Zealand, Colombia, Venezuela and Italy, we have committed
                to purchase an aggregate of 200 filters, 1,400 filters and 2,500
                filters
                in 2006, 2007 and 2008,
                respectively;





·
            we
                must transfer the whole ownership of the FDA approval, if obtained,
                to
                Asahi Medical upon receipt. We will, however, continue to own the
                clinical
                trial data from MIRA-1. We have agreed with Asahi Medical to allow
                it to
                use the clinical data from MIRA-1 to obtain approval to sell the
                Rheofilters in other countries so long as we are granted a distributorship
                in those other countries; and





·
            regulatory
                approvals obtained, if any, in Australia, New Zealand, Colombia,
                Venezuela
                or Italy will be held by Asahi Medical.





Although
      we have an obligation to purchase a minimum annual quantity of filters, Asahi
      Medical has the right to reject any order but may not unreasonably reject any
      order placed by us in order to satisfy our minimum purchase requirements. Under
      the agreement, Asahi Medical can cease to supply Rheofilters and Plasmaflo
      filters to us, after a 12-month notice period, in the event that: (1) Asahi
      Medical cannot economically supply the product; (2) due to special
      circumstances, such as patent infringement liability or product liability
      issues, Asahi Medical cannot supply the product; or (3) Asahi Medical develops
      an improved product, in which case, we have a right of first refusal to become
      the exclusive distributor of that new product in the same territories where
      we
      are the exclusive distributor of the Rheofilter on terms and conditions
      satisfactory to Asahi Medical and to us.





Asahi
      Medical has indicated that it intends to discontinue manufacturing the cellulose
      acetate Rheofilter in 2008 and to replace it with a newer polysulfone
      Rheofilter. Asahi Medical has completed clinical trials of its new polysulfone
      filter in Germany to support the safety data necessary to obtain a CE Mark.
      Following obtaining a CE Mark, we will work with Asahi Medical to obtain the
      necessary approvals to use the new polysulfone filter in the RHEOTM
      System in
      Canada and the United States. Based on the discussions we have had with Asahi
      Medical to date, we expect to obtain distribution rights to this new filter
      on
      terms substantially equivalent to the terms for the existing filter. We are
      currently not seeking an alternative supplier of the Rheofilter because we
      believe that Asahi is the only manufacturer possessing the requisite
      technological and production capabilities to produce the
      Rheofilter.





This
      agreement has a term of ten years from our obtaining FDA approval to use the
      filters to treat AMD and is automatically renewable for one-year terms unless
      terminated upon six months’ notice. In addition, Asahi Medical may terminate our
      agreement in certain circumstances, including:





·
            if
                we become insolvent or are petitioned into
                bankruptcy;





·
            if
                we transfer all or an important part of our business to a third
                party;





26





·
            if
                we are unable to obtain FDA approval and other necessary approvals
                in the
                territories for which we have distribution rights by the end of December
                2006;





·
            if
                we breach the agreement and do not remedy the default within 30 days
                of
                Asahi Medical notifying us that we are in default;
                or





·
            if
                any essential changes in our management or ownership of our shares
                would
                adversely affect the sale of filters in the territories in which
                we have
                exclusive distribution rights.





***OctoNova
      Pump.*** We
      purchase the OctoNova pump pursuant to a marketing and distribution agreement
      with Diamed, the developer of the OctoNova pump, and a distribution agreement
      with MeSys, the company that manufactures the pumps for Diamed.





Under
      the
      agreement with Diamed, we have been appointed Diamed’s exclusive distributor of
      the OctoNova pump in the United States, Canada, Mexico and certain countries
      in
      the Caribbean. Under this agreement:





·
            we
                have committed to use our best efforts in promoting the sale and
                use of,
                and securing orders and developing the market for, the OctoNova pump
                in
                the territories for which we have distribution rights;
                and





·
            we
                are obligated to use our best efforts in promoting public and private
                medical insurance reimbursement for the treatment of hemo-rheological
                disorders in microcirculation in the United
                States.





This
      agreement has a term of ten years from FDA approval of the RHEOTM
      System and is
      automatically renewable for one-year terms unless terminated upon six months’
notice. In addition, Diamed may terminate this agreement in certain
      circumstances, including:





·
            if
                we become insolvent or are petitioned into
                bankruptcy;





·
            if
                the whole or an important part of our business is transferred to
                a third
                party and such transfer would adversely affect the sale of the OctoNova
                pump;





·
            if
                we breach the agreement and do not remedy the default within 30 days
                of
                Diamed notifying us that we are in
                default;





·
            if
                any essential changes in our management or our share ownership would
                adversely affect the sale of the OctoNova
                pump;





·
            if
                our distribution agreement with MeSys is terminated;
                or





·
            if
                we are unable to obtain FDA approval and other necessary approvals
                in the
                territories for which we have distribution rights by the end of
                2006.





Under
      this agreement, we have an obligation to purchase a minimum quantity of 1,000
      OctoNova pumps before the fifth anniversary of FDA approval. If we fail to
      meet
      our minimum purchase requirements under our agreement with Diamed, our agreement
      may be terminated or rendered non-exclusive at the sole discretion of Diamed.
      Subsequent minimum purchase orders will be as mutually agreed.





Under
      our
      agreement with MeSys, MeSys agrees to manufacture and sell to us the OctoNova
      pump. Under this agreement, we have an obligation to purchase a minimum annual
      quantity of OctoNova pumps. This agreement expires on the third anniversary
      of
      our obtaining FDA approval to use the OctoNova pump to treat AMD. In addition,
      MeSys may terminate our agreement in certain circumstances,
      including:





27





·
            if
                we become insolvent or are petitioned into
                bankruptcy;





·
            if
                we breach the agreement and do not remedy the default within 60 days
                of
                MeSys notifying us that we are in
                default;





·
            if
                Diamed’s manufacturing agreement with MeSys is terminated;
                or





·
            if
                our marketing agreement with Diamed is
                terminated.





**Sales
      and Marketing**





Although
      our Chief Operating Officer has sales, marketing and distribution experience,
      we
      currently have limited sales and marketing capabilities and no distribution
      capabilities. We have been seeking to develop our own sales and marketing
      infrastructure to commercialize the RHEOTM
      System, and we
      were intending to recruit our domestic ophthalmic sales force in order to have
      an established sales and marketing capability if and when we receive FDA
      approval to market the RHEOTM
      System in
      the
      United States. However, pending the outcome of our discussions with the FDA
      and
      the determination of the parameters of any follow-up clinical trial of the RHEOTM System,
      we have suspended, for the time being, all sales and marketing activities that
      were being conducted in anticipation of commercialization in the United
      States.





We
      expect
      eventually to focus our sales and marketing efforts on multi-facility health
      care service providers, including hospitals, dialysis clinics and ambulatory
      surgery centers, as well as private eye care professionals, including
      optometrists and ophthalmologists. Each of these two groups would be serviced
      by
      separate dedicated sales forces, with knowledge of the particular needs and
      concerns of each group.





In
      order
      to make the RHEOTM
      System more
      attractive to multi-facility health care service providers and private eye
      care
      professionals, prior to commercialization in the United States, we will seek
      to
      create a training program for nurses, leveraging existing clinics in Canada
      and
      potential partners who already have experience in apheresis treatments, such
      as
      dialysis clinics, to ensure an adequate supply of trained nurses for our service
      provider partners.





If
      the RHEOTM
      System is
      approved for commercialization by the FDA, we also intend to increase market
      awareness of RHEOTM
      Therapy by
      identifying and developing relationships with key opinion leaders in each of
      the
      eye care disciplines, including ophthalmologists and optometrists. We believe
      that these opinion leaders, some of whom are members of our Scientific Advisory
      Board or investigators in MIRA-1, will help establish credibility for RHEOTM
      Therapy .
      If and
      when we obtain FDA approval, we intend to launch a public relations campaign
      targeted directly at patients and advocacy groups to alert them to this new
      treatment. Certain members of our management team were leaders in creating
      market awareness of laser vision correction when it was introduced to the North
      American market in the 1990s and, in doing so, were effective in creating
      relationships with a large number of optometrists and ophthalmologists in the
      United States.





In
      Canada, we are currently marketing and selling the RHEOTM
      System through
      a small, dedicated Canadian sales force. In September 2004, we signed an
      agreement with Veris which had agreed to purchase approximately 8,000 treatment
      sets and an estimated 20 OctoNova pumps by the end of 2005, with an option
      to
      purchase up to an additional 2,000 treatment sets, subject to availability.
      However, due to delays in its plans to open a number of commercial treatment
      centers in various Canadian cities where RHEO TM
Therapy
      is performed, Veris no longer required the contracted-for number of treatment
      sets for such period. We agreed to the original pricing for a reduced number
      of
      treatment sets. Under
      our
      agreement with Veris, either party may terminate the agreement with 90 days’
written notice to the other party. However, if Veris gives notice to terminate
      the agreement before all of its orders have been shipped, it will be liable
      for
      the remaining balance of its orders. Currently, there are no orders outstanding
      under this agreement. In
      December 2005, by letter agreement, we agreed to the volume and other terms
      for
      the purchase and sale of treatment sets and pumps for the period ending February
      28, 2006. We
      intend to negotiate with Veris purchase orders for the future. Dr. Machat,
      who
      is an investor in and one of the directors of Veris, was a co-founder and former
      director of TLC Vision.





28





**Competition**





The
      pharmaceutical, biotechnology and medical industries are intensely competitive.
      We specifically target those afflicted with Dry AMD. While we are aware that
      a
      number of companies have developed or are in the process of developing
      treatments for Wet AMD, including Eyetech Pharmaceuticals, Inc./Pfizer Inc.,
      Genentech, Inc./Novartis Ophthalmics, Alcon Laboratories, Inc., Iridex
      Corporation, QLT Inc. and Gen Vec, Inc., we are not aware of any companies
      developing treatments specifically for Dry AMD, other than Acuity Medical,
      Inc.
      which, we understand, is pursuing an electrical stimulation technology to treat
      Dry AMD. This puts us in a strong competitive position. However, some of these
      companies may develop new treatments for Dry AMD or may develop modifications
      to
      their treatments for Wet AMD that may be effective for Dry AMD as well. In
      addition, other companies also may be involved in competitive activities of
      which we are not aware.





While
      there are other suppliers who manufacture a pump that could be used in the RHEOTM
      Therapy ,
      there
      are no other suppliers of Asahi’s Rheofilter, and, consequently, we believe that
      a third party could not readily make a system similar to the RHEOTM
      System .
      Furthermore, if a third party were to be successful in making a system similar
      to the RHEOTM
      System ,
      it
      would be required to have that system approved for marketing in the United
      States by the FDA.





**Patents
      and Proprietary Rights**





Our
      success depends in part on our ability to develop a competitive intellectual
      property advantage over potential competitors for the treatment of Dry AMD.
      There is currently no FDA-approved therapy for Dry AMD, and, to date, we are
      not
      aware of any other treatment in clinical development in North America. We own
      or
      have licenses to certain patents, and we have exclusive arrangements with
      certain suppliers that we believe will help us develop this competitive
      advantage. We also rely on know-how, continuing technological innovation and
      in-licensing opportunities to further develop our proprietary position. Our
      ability and the ability of our licensors to obtain intellectual property
      protection for the RHEOTM
      System and
      related processes, and our ability to operate without infringing the
      intellectual property rights of others and to prevent others from infringing
      our
      intellectual property rights, will be an important factor to our success. Our
      strategy is to seek to protect our proprietary position by, among other methods,
      filing U.S. patent applications related to our technology, inventions and
      improvements that are important to the development of our business.





One
      aspect of the RHEOTM
      System is
      a
      treatment method described in an issued U.S. patent which expires in 2017.
      This
      patent, issued under U.S. patent number 6,245,038 and entitled “Method for
      Treatment of Ophthalmological Diseases”, is directed to a process for treating
      ocular diseases using apheresis. We license this patent from the two co-owners
      of the patent under a separate license agreement with each owner. Under the
      license agreements, we have the exclusive right to use the claimed treatment
      method in the U.S. during the term of the patent. As part of those agreements,
      we are required to make royalty payments in the aggregate of 2% of the sales
      for
      the OctoNova pumps and filters, subject to minimum required payments in the
      aggregate amount of $25,000 during each calendar quarter.





29





We
      expect
      that we will request re-issuance of the patent licensed to us at the U.S. Patent
      and Trademark Office, and we believe that a more detailed claim set will be
      issued. Subsequent to entering into these license agreements, we determined
      that
      certain prior art publications may not have been considered by the Examiner
      during prosecution of this patent and that these references may warrant the
      submission of new claims. We therefore intend to request re-issuance in order
      to
      have the issued claims in this patent considered in view of these publications.
      During the re-issuance proceeding, we also intend to submit additional claims,
      which are narrower in scope than the issued claims, and are limited to the
      use
      of plasma filtration processes for treatment of ophthalmological diseases.
      The
      timing of the submission of our re-issuance application has not yet been
      determined and will depend, to some degree, on our future estimate of when
      we
      will be in a position to begin commercializing the RHEO TM
System
      in the United States.





In
      addition, we own one issued patent in the United States, which expires in 2019.
      This patent, issued under U.S. patent number 6,551,266 and entitled
‘‘Rheological Treatment Methods and Related Apheresis Systems’’, is directed to
      methods of screening and identifying patient candidates for RHEOTM
      Therapy .
      We also
      have three additional pending patent applications in the United States, Europe
      and Japan relating to the 6,551,266 patent.





The
      patent position of companies like ours is generally uncertain and involves
      complex legal and factual questions. Our ability to maintain and solidify a
      proprietary position for our technology will depend on our success in obtaining
      effective claims and enforcing those claims once granted. We do not know whether
      any part of our patent applications will result in the issuance of any patents.
      Our issued patents and those that may issue in the future, or those licensed
      to
      us, may be challenged, invalidated or circumvented, which could limit our
      ability to stop competitors from marketing our product or the length of term
      of
      patent protection that we may have for our processes. The request for
      re-issuance of patent 6,245,038 may result in the patent being rejected and
      no
      claims of commercial value being issued or it may result in competitors
      acquiring intervening rights. In addition, the rights granted under any issued
      patents may not provide us with proprietary protection or competitive advantages
      against competitors with similar technology. Because of the extensive time
      required for development, testing and regulatory review of a potential product,
      it is possible that, before any of our products can be commercialized, any
      related patent may expire or remain in force for only a short period following
      commercialization, thereby reducing any advantage of the patent.





In
      addition to patent protection, we have registered the following U.S.
      trademarks:





·
            OCCULOGIX;





·
            OUR
                VISION IS YOUR VISION;





·
            RHEOTHERAPY;





·
            VASCULAR
                SCIENCES; and





·
            RHEOPHERESIS





We
      also
      have the right to use the following registered trademarks from Asahi Medical:
      Rheofilter and Plasmaflo.





We
      may
      rely, in some circumstances, on trade secrets to protect our technology.
      However, trade secrets are difficult to protect. We seek to protect our
      proprietary technology and processes, in part, by confidentiality agreements
      with our employees, consultants, scientific advisors and other contractors.
      These agreements may be breached, and we may not have adequate remedies for
      any
      breach. In addition, our trade secrets may otherwise become known or be
      independently discovered 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.





30





**Government
      Regulation**





Government
      authorities in the United States and other countries extensively regulate,
      among
      other things, the research, development, testing, manufacture, labeling,
      promotion, advertising, distribution and marketing of the RHEOTM
      System ,
      which
      is a medical device. In the United States, the FDA regulates medical devices
      under the Federal Food, Drug, and Cosmetic Act and implementing regulations.
      Failure to comply with the applicable FDA requirements, both before and after
      approval, may subject us to administrative and judicial sanctions, such as
      a
      delay in approving or refusal by the FDA to approve pending applications,
      warning letters, product recalls, product seizures, total or partial suspension
      of production or distribution, injunctions, administrative fines and/or criminal
      prosecution.





Unless
      exempted by regulation, medical devices may not be commercially distributed
      in
      the United States unless they have been cleared or approved by the FDA. Medical
      devices are classified into one of the three classes, Class I, II or III, on
      the
      basis of the controls necessary to reasonably assure their safety and
      effectiveness. Class I devices are subject to general controls, such as
      labeling, pre-market notification and adherence to good manufacturing practices.
      Class II devices are subject to general and specific controls, such as
      performance standards, pre-market notification, patient registries and FDA
      guidelines. Generally, Class III devices are those which must receive approval
      of a PMA by the FDA to provide reasonable assurance of their safety and
      effectiveness. For example, life-sustaining, life-supporting and implantable
      devices, or new devices which have not been found substantially equivalent
      to
      legally marketed devices, generally require approval of a PMA by the
      FDA.





There
      are
      two review procedures by which medical devices can receive clearance or
      approval. Some products may qualify for clearance under a Section 510(k)
      procedure, in which the manufacturer provides a pre-market notification that
      it
      intends to begin marketing the product, and shows that the product is
      substantially equivalent to another legally marketed product, that is that
      it
      has the same intended use and is as safe and effective as a legally marketed
      device and does not raise different questions of safety and effectiveness than
      does a legally marketed device. In some cases, the submission must include
      data
      from human clinical studies. Marketing may commence when the FDA issues a
      clearance letter finding substantial equivalence. The Section 510(k) procedure
      is not applicable to Class III devices.





If
      the
      medical device does not qualify for the 510(k) procedure, either because it
      is
      not substantially equivalent to a legally marketed device or because it is
      a
      Class III device required to have an approved PMA, then the FDA must approve
      a
      submitted PMA before marketing can begin. A PMA must demonstrate, among other
      matters, that the medical device is safe and effective. A PMA is typically
      a
      complex submission, usually including the results of preclinical and clinical
      studies, and preparing an application is a detailed and time-consuming process.
      The PMA must be accompanied by the payment of user fees which currently exceed
      $200,000 for most submissions. When modular submissions are used, the entire
      fee
      is due when the first module is submitted to the FDA. Once a PMA has been
      submitted, the FDA’s review may be lengthy and may include requests for
      additional data. The FDA usually inspects device manufacturers before approval
      of a PMA, and the FDA will not approve the PMA unless the manufacturer’s
      compliance with the quality systems regulation is satisfactory.





The RHEOTM
      System is
      a
      Class III device and will require approval of a PMA, which has not yet been
      submitted to the FDA. Prior to our discussions with the FDA and the making
      of
      any determination regarding any follow-up clinical trial of the RHEO TM
System,
      we will not be able to anticipate the timing of our PMA submission. Once
      it
      is submitted, we cannot be sure when the FDA’s review will be complete or that
      the FDA will approve a PMA for our product in a timely fashion, or at all.
      FDA
      requests for additional studies during the review period are not uncommon and
      can significantly delay approvals. Even if we were able to obtain approval
      of a
      PMA of a product for one indication, changes to the product, its indication
      or
      its labeling can require additional clearances or approvals.





31





To
      obtain
      approval of a PMA, clinical studies demonstrating the safety and effectiveness
      of the medical device must be conducted. Prior to beginning such studies, an
      Investigational Device Exemption, or IDE, for the study must become effective.
      The IDE will automatically become effective 30 days after its receipt by the
      FDA, unless the FDA raises concerns or questions about the conduct of the study.
      In that case, the concerns and questions must be resolved before the study
      can
      begin. Even after an IDE becomes effective, the FDA may suspend it at any time
      on various grounds, including a finding that patients are being exposed to
      an
      unacceptable health risk. The RHEOTM
      System is the
      subject of an effective IDE, but we cannot be sure that the FDA will not suspend
      it, which would prevent us from completing our ongoing studies or from
      conducting new ones using the RHEO TM
      System.





Regardless
      of whether a medical device requires FDA clearance or approval, a number of
      other FDA requirements apply to the device, its manufacturer and those who
      distribute it. Device manufacturers must be registered and their products listed
      with the FDA, and certain adverse events and product malfunctions must be
      reported to the FDA. The FDA also regulates the product labeling, promotion
      and,
      in some cases, advertising, of medical devices. In addition, manufacturers
      and
      their suppliers must comply with the FDA’s quality system regulation which
      establishes extensive requirements for quality and manufacturing procedures.
      Thus, suppliers, manufacturers and distributors must continue to spend time,
      money and effort to maintain compliance, and failure to comply can lead to
      enforcement action. The FDA periodically inspects facilities to ascertain
      compliance with these and other requirements.





**Employees**





As
      of
      December 31, 2005, we had 35 full-time employees. Of our full-time workforce,
      13
      employees are engaged in clinical trial activities and 22 **** are
      engaged in business development, finance and administration. We also retain
      outside consultants. None of our employees are covered by collective bargaining
      arrangements, and our management considers its relationships with our employees
      to be good. To date, our strategy has been to limit the size of our full-time
      workforce and to outsource several of our key operating functions, including
      the
      management of the MIRA-1 clinical trial. We rely on the resources of one of
      our
      major stockholders, TLC Vision, to provide us with infrastructure
      support.





We
      currently expect that there will be some downsizing of our workforce and
      restructuring of our operations in view of the anticipated delay in the timing
      of receipt of FDA approval, if any, and the consequent delay in the
      commercialization of the RHEOTM System in the United States. At the present time,
      we do not know the exact nature or scope of the downsizing and
      restructuring.





**Risk
      Factors**





**Risks
      Relating to Our Business**





***We
      have incurred losses since inception and anticipate that we will incur continued
      losses for the foreseeable future.***





We
      have
      incurred losses in each year since our inception in 1996. Our net loss for
      the
      fiscal years ended December 31, 2005, 2004, 2003, 2002 and 2001 was $163.0
      million, $21.8 million, $2.5 million, $2.9 million and $4.1 million,
      respectively. The loss in 2005 includes a charge for impairment of goodwill
      of
      $147.5 million. As of December 31, 2005, we had an accumulated deficit of $211.0
      million. These losses, among other things, have had and will continue to have
      an
      adverse effect on our stockholders’ equity and working capital. We expect our
      clinical and regulatory expenses to increase significantly in connection with
      any follow-up clinical trial of the RHEOTM System and other clinical trials that
      we may initiate. In addition, subject to FDA approval of the RHEOTM System, we
      expect to incur significant sales, marketing and procurement expenses. As a
      result, we expect to continue to incur significant and increasing operating
      losses for the next several years. Because of the numerous risks and
      uncertainties associated with developing new medical therapies, we are unable
      to
      predict the extent of any future losses or when we will become profitable,
      if
      ever.





32





***Our
      business may not generate the cash necessary to fund our
      operations.***





Since
      inception, we have funded our operations through private placements of our
      equity and debt securities, early stage revenues and a successful initial public
      offering, or IPO. Prior to the IPO, our cash resources were limited. We may
      need
      additional capital in the future, and our prospects for obtaining it are
      uncertain. We expect that the funding requirements for our operating activities
      will continue to increase substantially in the future, especially if we are
      required to conduct a follow-up clinical trial of the RHEOTM System to support
      our PMA application to the FDA, and as a consequence of our planned subsequent
      commercialization of the RHEOTM System. We may need to seek additional funds in
      the future from a combination of sources, including product licensing, joint
      development and other financing arrangements. In addition, we may issue debt
      or
      equity securities if we determine that additional cash resources could be
      obtained under favorable conditions or if future funding requirements cannot
      be
      satisfied with available cash resources. Additional capital may not be available
      on terms favorable to us, or at all. If adequate capital is unavailable, and
      if
      our operations do not generate cash, our commercialization of the RHEOTM System
      will be delayed and we may be unable to continue our operations.





***We
      do not know whether we will be able to increase our revenues, derive revenues
      from sources other than sales to a related party or become profitable in the
      future.***





We
      were
      founded in 1996 but the focus of our operations since 2000 was directed towards
      our pivotal trial, MIRA-1, for the RHEOTM System. Prior to 2000, our focus had
      been on commercializing and performing therapeutic apheresis, or blood
      filtering. We generated revenues of approximately $900,200 and $1,277,800 for
      the years ended June 30, 1999 and 1998, respectively, all of which were earned
      in the United States. For the years ended December 31, 2005, 2004 and 2003,
      we
      had revenues of $1,840,289, $969,357 and $390,479, respectively, of which
      $81,593, $731,757 and $390,479, respectively, were derived from sales of the
      RHEOTM System to OccuLogix, L.P., a related party, which then sold the RHEOTM
System to three clinics in Canada, one of which is a related party, RHEO Clinic
      Inc., a subsidiary of TLC Vision. For the period from July 2002 to December
      8,
      2004, our only customer was OccuLogix, L.P., a related party. Subsequent to
      December 8, 2004, OccuLogix, L.P. became wholly owned by us. Our ability to
      increase our revenues and to earn revenues in the United States is dependent
      on
      a number of factors, including:





•
            obtaining
                FDA approval to market the RHEOTM System in the United States which may
                require us to conduct a follow-up clinical trial to support our PMA
                application;





•
            successfully
                building the infrastructure and manufacturing capacity to market
                and sell
                the RHEOTM System;





•
            achieving
                widespread acceptance of RHEOTM Therapy among physicians and patients;
                and





•
            agreement
                of governmental and third-party payors to reimburse for RHEOTM
                Therapy.





We
      cannot
      begin commercialization in the United States until we receive FDA approval.
      Until we have discussions with the FDA, we will not be able to anticipate when,
      if ever, we will receive FDA approval. Accordingly, at this time, we do not
      know
      when we can expect to begin to generate revenues in the United States. If we
      do
      not obtain FDA approval and are required to focus our efforts on marketing
      the
      RHEOTM System to clinics in Canada, or if we are unable to generate significant
      revenues in the United States, we may not become profitable, and we may be
      unable to continue our operations.





33





***MIRA-1’s
      failure to meet its primary efficacy endpoint may impact adversely the business
      prospects and financial condition generally of our sole customer,
      Veris.***





Currently,
      Veris is our sole customer. The Company’s announcement of February 3, 2006 that
      MIRA-1 did not meet its primary efficacy endpoint may impact adversely Veris’
business prospects and financial condition generally. A failure of Veris to
      continue its operations would adversely affect our ability to generate any
      revenues since, at this time, there is no other commercial provider of RHEOTM
Therapy in any jurisdiction in which we have distribution and marketing rights
      to the RHEOTM System. We have taken a provision for bad debts of $1,049,297 in
      respect of Veris, of which $518,852 related to revenue reported prior to
      December 2005 and $530,445 related to goods shipped to it in December 2005
      and
      for which revenue was not recognized. We also reported an inventory loss of
      $252,071, representing the cost of goods shipped to Veris in December 2005,
      which we do not anticipate will be returned to us.





***MIRA-1
      did not meet its primary efficacy endpoint, and it is more likely than not
      that
      we will be required to conduct a follow-up clinical trial of the RHEOTM
System***  ***to
      support our PMA application.***





We
      are
      required to obtain FDA approval to market the RHEOTM System in the United States.
      To support an application for FDA approval, we conducted, at our own expense,
      MIRA-1 to evaluate the safety and efficacy of RHEOTM Therapy in humans. MIRA-1
      did not meet its primary efficacy endpoint, and it is more likely than not
      that
      we will be required to conduct a follow-up clinical trial to support our PMA
      application. The outcome of another trial would be uncertain. Clinical testing
      is expensive and can take many years. Failure can occur at any stage of the
      testing. We may encounter numerous factors during, or as a result of, a new
      clinical trial that could delay or prevent us from completing it and receiving
      FDA approval for a number of reasons, including:





•
            we
                may be unable to obtain the complete number of data sets required
                by the
                protocol that will be filed with the FDA in connection with a new
                clinical
                trial;





•
            costs
                of a new clinical trial may be greater than we anticipate;





•
            we,
                or the regulators, may suspend or terminate such a clinical trial
                if the
                participating patients are being exposed to unacceptable health risks;
                and





•
            negative
                or inconclusive results may arise, and we may decide, or regulators
                may
                require us, to conduct additional clinical and/or preclinical
                testing.





***We
      may not receive FDA approval to market the RHEOTM System in the United
      States.***





We
      may
      not receive FDA approval to market the RHEOTM System in the United States.
      Obtaining FDA approval is a lengthy and expensive process, and approval is
      uncertain. We may never receive FDA approval for the RHEOTM System, and, in any
      event, we expect to experience a delay in receiving approval since, as a result
      of MIRA-1’s failure to reach its primary efficacy endpoint, it is more likely
      than not that we will be required to conduct a follow-up clinical trial of
      the
      RHEOTM System to support our PMA application. One or more delays in obtaining or
      failure to obtain FDA approval would delay or prevent the successful
      commercialization of the RHEOTM System, diminish our competitive advantage and/or
      defer or decrease our receipt of revenues. Even if we eventually obtain FDA
      approval, this approval may only be for a limited or narrow class of Dry AMD
      patients, thereby diminishing the size of the class of prospective patients
      for
      whose use the RHEOTM System can be promoted.





34





In
      addition, changes to the RHEOTM System can require additional FDA approvals. The
      RHEOTM System currently uses a cellulose acetate Rheofilter which is manufactured
      by Asahi Medical. We have been informed by Asahi Medical that it intends to
      discontinue manufacturing the cellulose acetate filter in 2008, and we have
      been
      working with Asahi Medical to develop a new polysulfone filter to replace it.
      We
      will require FDA approval to replace the cellulose acetate Rheofilter with
      the
      new polysulfone Rheofilter which may require the generation and submission
      of
      additional clinical data which could delay the timing of the application and
      increase the cost of obtaining such approval. If we do not receive FDA approval
      for the new polysulfone Rheofilter or if obtaining the approval takes longer
      than we expect, we may be unable to market the RHEOTM System.





***Our
      purchase commitments may adversely affect our
      liquidity.***





We
      currently have commitments to purchase approximately $19.2 million of OctoNova
      pumps (based on current exchange rates) within five years after FDA approval,
      $13.3 million of Rheofilters and Plasmaflo filters over a three-year period
      beginning six months after FDA approval with respect to North America and $1.2
      million of Rheofilters and Plasmaflo filters between 2006 and 2008 with respect
      to Australia, New Zealand, Colombia, Venezuela and Italy. We expect to fund
      our
      purchase commitments with cash generated from operations following FDA approval
      or, in the event we do not have sufficient cash from operations, other financing
      sources. Should these sources be insufficient to fund our purchase commitments,
      our liquidity may be adversely affected.





***We
      currently depend on single sources for key components of the RHEOTM System. The
      loss of any of these sources could delay our clinical trials or prevent or
      delay
      commercialization of the RHEOTM System.***





We
      currently depend on single sources for the filters and the OctoNova pump used
      in
      the RHEOTM System. We have entered into a supply agreement for the filters with
      Asahi Medical and for the OctoNova pump with Diamed, which designed the OctoNova
      pump, and MeSys, which manufactures the pumps for Diamed. We currently have
      commitments to purchase $19.2 million of OctoNova pumps (based on current
      exchange rates) within five years after FDA approval, $13.3 million of
      Rheofilters and Plasmaflo filters over a three-year period beginning six months
      after FDA approval with respect to North America and $1.2 million of Rheofilters
      and Plasmaflo filters between 2006 and 2008 with respect to Australia, New
      Zealand, Colombia, Venezuela and Italy. **** If
      we
      fail to meet our minimum purchase requirements under our agreements with Diamed
      or Asahi Medical, those agreements may be terminated or rendered non-exclusive
      at the sole discretion of the supplier. If any of these suppliers ceases to
      supply components to us or does not supply an adequate number of components,
      our
      sales and growth could be restricted, potentially materially. If we do not
      achieve FDA approval and other necessary approvals in certain of the territories
      for which we have distribution rights by the end of December 2006 (and by the
      end of December 2010 with respect to others of the territories to which we
      have
      distribution rights), Asahi Medical can terminate the supply agreement for
      the
      filters and Diamed can terminate the supply agreement for the pumps. In light
      of
      MIRA-1’s failure to reach its primary efficacy endpoint, we will not achieve FDA
      approval and the other necessary approvals by the end of December 2006 and
      will
      be discussing the consequences of such failure with Asahi Medical and Diamed.
      Our agreement with Asahi Medical as it relates to the United States, Canada,
      Mexico and certain countries in the Caribbean and our agreement with Diamed
      each
      have a term ending ten years after the date of FDA approval and is automatically
      renewable for one-year terms unless terminated upon six months’ notice. In
      addition, Diamed may terminate its agreement upon the termination of our
      manufacturing agreement with MeSys, which has a term of three years following
      FDA approval. We believe that establishing additional or replacement suppliers
      for these components may not be possible as these suppliers have trade secrets,
      patents and other intellectual property that may prevent a third party from
      manufacturing a suitable replacement product. Even if we switch to replacement
      suppliers and the supplier can manufacture the necessary components without
      violating any third-party intellectual property rights, we may face additional
      regulatory delays and the distribution of the RHEOTM System could be interrupted
      for an extended period of time, which may delay or slow the commercialization
      of
      RHEOTM Therapy and adversely impact our financial condition and results of
      operations.





35





***Our
      supply agreement with Asahi Medical requires us to transfer the FDA approval
      of
      the RHEOTM System to it upon receipt which will limit our control of the FDA
      approval.***




In
        the
        2001 supply agreement with Asahi Medical for the filters that are used in
        the
        RHEOTM System, we agreed to obtain the FDA approval in the name of Asahi Medical
        and to maintain that approval. In a subsequent 2003 amendment to that agreement,
        we agreed to transfer FDA approval to Asahi Medical upon receipt from the
        FDA.
        Any clinical data contained in the application for FDA approval continues
        to
        belong to us. Asahi Medical will have the right to use the data in any territory
        where Asahi Medical grants us a distributorship. This agreement also makes
        us
        the exclusive distributor of Asahi Medical’s RHEOTM System filters in the United
        States, Canada, Mexico and certain countries in the Caribbean for a term
        that
        expires at the end of the ten-year period following the date of the FDA
        approval, which exclusivity is automatically renewable for one-year terms
        unless
        it is terminated upon six months’ notice.  The agreement also provides that
        Asahi Medical may terminate the exclusivity provision if certain post-FDA
        approval minimum purchase requirements are not met. This transfer of FDA
        approval to Asahi Medical may limit our flexibility to make changes in the
        FDA
        approval such as the addition of alternate suppliers of RHEOTM System components
        without Asahi Medical’s consent, or limit our ability to prevent changes to the
        FDA approval that we might consider detrimental, such as the addition of
        labeling changes or the substitution of alternate component suppliers. This
        agreement further makes us the exclusive distributor of such filters in
        Australia, New Zealand, Colombia and Venezuela and a non-exclusive distributor
        in Italy for a term that expires on December 31, 2010. Regulatory approvals
        obtained for the RHEOTM System, if any, in Australia, New Zealand, Colombia,
        Venezuela or Italy will be held by Asahi Medical.


***If
      we or our suppliers fail to comply with the extensive regulatory requirements
      to
      which we and the RHEOTM System are subject, the RHEOTM System could be subject to
      restrictions or withdrawals from the market and we could be subject to
      penalties.***





We,
      our
      suppliers and our products are subject to numerous FDA requirements covering
      the
      design, testing, manufacturing, quality control, labeling, advertising,
      promotion and export of the RHEOTM System and other matters. Failure to comply
      with statutes and regulations administered by the FDA could result in, among
      other things, any of the following actions:





•
            warning
                letters;





•
            fines
                and other civil penalties;





•
            unanticipated
                expenditures;





•
            withdrawal
                of FDA approval;





•
            delays
                in approving or refusal to approve the RHEOTM System;





•
            product
                recall or seizure;





•
            interruption
                of production;





•
            operating
                restrictions;





•
            border
                stops;





•
            injunctions;
                and





•
            criminal
                prosecution.





36





We
      and
      our suppliers are subject to numerous federal, state and local laws relating
      to
      such matters as safe working conditions, manufacturing practices, environmental
      protection, fire hazard control and disposal of hazardous or potentially
      hazardous substances. In addition, advertising and promotional materials
      relating to medical devices are, in certain instances, subject to regulation
      by
      the Federal Trade Commission. We and our suppliers may be required to incur
      significant costs to comply with such laws and regulations in the future, and
      such laws and regulations may materially harm our business. Unanticipated
      changes in existing regulatory requirements, the failure of us or our
      manufacturers to comply with such requirements or the adoption of new
      requirements could materially harm our business.





***We
      may be unable to commercialize the RHEOTM System successfully in the United
      States.***





Even
      if
      we successfully obtain FDA approval for the RHEOTM System, our success depends on
      our ability to market and sell the RHEOTM System. Successful commercialization of
      the RHEOTM System depends on a number of factors, including:





•
            achieving
                widespread acceptance of RHEOTM Therapy among physicians and
                patients;





•
            agreement
                of governmental and third-party payors to provide reimbursement for
                RHEOTM
                Therapy;





•
            maintaining
                our relationships with our single source
                suppliers;





•
            obtaining
                sufficient quantities of components for the RHEOTM
                System;





•
            establishing
                adequate sales and marketing capabilities;





•
            obtaining
                sufficient facility space;





•
            our
                ability to identify and sell the RHEOTM System to key multi-facility health
                care providers as well as to private eye care professional
                practices;





•
            our
                ability to successfully sell the RHEOTM System at our projected selling
                price;





•
            whether
                there are adverse side effects or unfavorable publicity concerning
                the
                RHEOTM System; and





•
            whether
                there is competition for the RHEOTM System from new or existing products,
                which may prove to be safer, more efficacious or more cost-effective
                than
                the RHEOTM System.





***RHEOTM
      Therapy is based on a model that has not achieved widespread acceptance and
      may
      be proven incorrect. If we are unsuccessful in achieving widespread acceptance
      of RHEOTM Therapy among physicians and patients, our business may not
      succeed.***





AMD
      is
      not a well understood disease and its underlying cause is not known. RHEOTM
Therapy is based on a disease model that has not achieved widespread acceptance
      with eye care professionals. Unlike traditional therapeutic treatments for
      eye
      diseases, RHEOTM Therapy is a systemic approach for the treatment of Dry AMD,
      rather than a localized approach. Our success is dependent upon achieving
      widespread acceptance of RHEOTM Therapy among ophthalmologists and optometrists.
      Eye care professionals and health care service providers may not be willing
      to
      integrate RHEOTM Therapy into their workflow. In addition, because RHEOTM Therapy
      can be performed by health care providers other than eye care professionals,
      eye
      care professionals may be reluctant to endorse RHEOTM Therapy. The fact that
      MIRA-1 did not meet its primary efficacy endpoint may strengthen opposition
      to
      RHEOTM Therapy or impede its acceptance.





37





Even
      if
      we are successful in achieving widespread acceptance of RHEOTM Therapy among
      physicians, we may be unable to achieve widespread acceptance among potential
      patients. An initial course of RHEOTM Therapy is time consuming, requiring eight
      procedures over a 10- to 12-week period, with each procedure lasting between
      two
      and four hours. Some patients may be reluctant to undergo RHEOTM Therapy because
      of the time commitment. In addition, RHEOTM Therapy providers may not be easily
      accessible to all patients and some patients may be unwilling or unable to
      travel to receive RHEOTM Therapy. If we are unable to achieve widespread
      acceptance, our financial condition and results of operations will be adversely
      affected.





In
      August
      1997, our predecessor opened its sole client facility, the Rheotherapy Center,
      in Tampa, Florida to perform therapeutic apheresis commercially. In 1999, the
      FDA’s Office of Compliance issued a directive notifying our predecessor that
      further conducting of therapeutic apheresis would need to be conducted under
      the
      authority of an Investigational Device Exemption filed with the FDA. In a
      related action, our predecessor, on behalf of one of our founders, Dr. Richard
      C. Davis, made a payment in the amount of $10,000 to cover legal expenses
      incurred by the Florida Board of Medicine in prosecuting our predecessor’s
      unauthorized advertising of new medical therapies. Our predecessor closed the
      Rheotherapy Center in 1999 and we have since received an Investigational Device
      Exemption and subsequently focused our resources on completing MIRA-1 in order
      to obtain FDA approval of the RHEOTM System. Dr. Davis was our Chief Executive
      Officer from January to June 2003 and was our Chief Science Officer from July
      2003 to April 2004 and since then has served as a consultant to us. Dr. Davis
      is
      also a former director of ours. We believe that the activities of the
      Rheotherapy Center engendered opposition in certain segments of the eye care
      community to RHEOTM Therapy and if this opposition continues, acceptance of RHEOTM
Therapy among eye care professionals and patients may be difficult to
      achieve.





***If
      RHEOTM Therapy is not reimbursed by governmental and other third-party payors, or
      is only reimbursed on a limited basis, our business may not
      succeed.***





Undergoing
      RHEOTM Therapy is expensive, with an initial course of treatment expected to
      initially cost between $16,000 and $25,600 in the United States. Continuing
      efforts of governmental and third-party payors to contain or reduce the costs
      of
      health care could negatively affect the sale of the RHEOTM System. Our ability to
      commercialize the RHEOTM System successfully will depend in substantial part on
      favorable determinations by governmental payors, most prominently Medicare,
      private health insurers and state-funded health care coverage programs. Without
      the establishment of timely, favorable coverage and reimbursement policies,
      we
      may be unable to set or maintain price levels sufficient to realize an
      appropriate return on our investment in product development. Other significant
      insurance coverage limitations, such as narrow restrictions on patient coverage
      criteria and restrictions on treatment settings in which RHEOTM Therapy is
      covered, may also limit our potential revenues.





***Our
      patents may not be valid and we may not be able to obtain and enforce patents
      to
      protect our proprietary rights from use by
      competitors.***





Our
      owned
      and licensed patents may not be valid and we may not be able to obtain and
      enforce patents and to maintain trade secret protection for our technology.
      The
      extent to which we are unable to do so could materially harm our
      business.





We
      have
      applied for and will continue to apply for patents for certain processes used
      in
      the RHEOTM System. Such applications may not result in the issuance of any
      patents, and any patents now held or that may be issued may not provide us
      with
      adequate protection from competition. In addition, we expect that we will seek
      to have the patent licensed to us re-issued at the U.S. Patent and Trademark
      Office, and we believe that a more detailed claim set will be issued. The timing
      of the submission of our re-issuance application has not yet been determined
      and
      will depend, to some degree, on our future estimate of when we will be in a
      position to begin commercializing the RHEOTM System in the United States. The
      application for re-issuance of this patent may result in the patent being
      rejected or no claims of commercial value being issued or it may result in
      competitors acquiring intervening rights. Furthermore, it is possible that
      patents issued or licensed to us may be challenged successfully. In that event,
      if we have a preferred competitive position because of such patents, any
      preferred position held by us would be lost. If we are unable to secure or
      to
      continue to maintain a preferred position, the components of the RHEOTM System
      could become subject to competition from the sale of generic
      products.





38





Patents
      issued or licensed to us may be infringed by the products or processes of
      others. The cost of enforcing our patent rights against infringers, if such
      enforcement is required, could be significant, and the time demands could
      interfere with our normal operations. There has been substantial litigation
      and
      other proceedings regarding patent and other intellectual property rights in
      the
      pharmaceutical, biotechnology and medical technology industries. We may become
      a
      party to patent litigation and other proceedings. The cost to us of any patent
      litigation, even if resolved in our favor, could be substantial. Some of our
      competitors may be able to sustain the costs of such litigation more effectively
      than we can because of their substantially greater financial resources.
      Litigation may also absorb significant management time.





Unpatented
      trade secrets, improvements, confidential know-how and continuing technological
      innovation are important to our scientific and commercial success. Although
      we
      attempt to and will continue to attempt to protect our proprietary information
      through reliance on trade secret laws and the use of confidentiality agreements
      with our corporate partners, collaborators, employees and consultants and other
      appropriate means, these measures may not effectively prevent disclosure of
      our
      proprietary information, and, in any event, others may develop independently,
      or
      obtain access to, the same or similar information.





Certain
      of our patent rights are licensed to us by third parties. If we fail to comply
      with the terms of these license agreements, our rights to those patents may
      be
      terminated, and we will be unable to conduct our business.





***Patents
      of other companies could require us to stop using or pay to use required
      technology.***





It
      is
      possible that a court may find us to be infringing upon validly issued patents
      of third parties. In that event, in addition to the cost of defending the
      underlying suit for infringement, we may have to pay license fees and/or damages
      and we may be enjoined from conducting certain activities. Obtaining licenses
      under third-party patents can be costly, and such licenses may not be available
      at all. Under such circumstances, we may need to materially alter our products
      or processes and we may be unable to do so successfully.





***If
      we are unable to establish adequate sales and marketing capabilities, we may
      not
      be able to generate significant revenue and may not become
      profitable.***





While
      our
      management team has some experience in marketing medical technology, we do
      not
      have a sales organization and have limited experience as a company in the sales,
      marketing and distribution of ophthalmic therapy products. In order to
      commercialize RHEOTM Therapy, we must develop our sales, marketing and
      distribution capabilities or make arrangements with a third party to perform
      these functions. If and when marketing of the RHEOTM System is eventually
      approved by the FDA, our plan will be to establish our own sales force to market
      the RHEOTM System in the United States. Developing a sales force is expensive and
      time consuming and we may not be able to develop this capacity. If we are unable
      to establish adequate sales, marketing and distribution capabilities,
      independently or with others, we may not be able to generate significant revenue
      and may not become profitable.





39





***Our
      suppliers may not have sufficient manufacturing capacity and inventory to
      support our commercialization plans.***





Our
      success requires that our suppliers have adequate manufacturing capacity and
      inventory in order to facilitate a rapid rollout of the RHEOTM System. We have
      been informed by Asahi Medical that the current Rheofilter being used in the
      RHEOTM System will be discontinued in 2008 and that, even if it is not
      discontinued, Asahi Medical would not be able to produce enough of the current
      cellulose acetate Rheofilter to meet our anticipated demand. Although we have
      been working with Asahi Medical to develop a new polysulfone filter that we
      believe Asahi Medical will be able to manufacture in larger quantities and
      at a
      lower cost to us, there can be no assurance that we and Asahi Medical will
      be
      successful in these efforts. Even if we are able to develop a new filter, we
      may
      not be able to obtain FDA approval for the new filter and the new filter may
      not
      be manufactured at a lower cost to us. If we are unable to obtain FDA approval
      for, or the necessary quantities of, this new filter, we may not be able to
      generate product revenue and may not become profitable.





We
      had
      planned to use between $9.5 million and $10.5 million of the net proceeds of
      our
      IPO to stockpile an inventory of filters from Asahi Medical and, to date, have
      used $4.8 million to do so. We have been accumulating inventory in advance
      of
      FDA approval in order to maximize the number of filters available to us due
      to
      manufacturing constraints on the number of cellulose acetate filters that Asahi
      Medical can produce. However, it is not clear when we will be in a position
      to
      commercially market the RHEOTM System in the United States, if ever. Each filter
      has a shelf life of approximately three years. It is possible that some or
      all
      of these filters will expire before they are used. Moreover, holding inventory
      in this manner will decrease our short term liquidity.





Our
      ability to conduct clinical trials and commercialize the RHEOTM System depends,
      in large part, on our ability to have components manufactured at a competitive
      cost and in accordance with FDA and other regulatory requirements. We do not
      control the manufacturing processes of our suppliers. If current manufacturing
      processes are modified, or the source or location of our product supply is
      changed, voluntarily or involuntarily, the FDA will require us to demonstrate
      that the material produced from the modified or new process or facility is
      equivalent to the material used in the clinical trials or products previously
      approved. Any such modifications to the manufacturing process or supply may
      not
      achieve or maintain compliance with the applicable regulatory requirements.
      In
      many cases, prior approval by regulatory authorities may be required before
      any
      changes can be made, which may adversely affect our business.





***Our
      success depends upon our ability to sell to key multi-facility health care
      providers as well as private eye care professional
      practices.***





In
      order
      to facilitate a rapid rollout of the RHEOTM System if and when we receive FDA
      approval, we will need to establish relationships with key organized groups
      of
      multi-facility health care service providers, including hospitals, dialysis
      clinics and ambulatory surgery centers, as well as private practices. We may
      be
      unsuccessful in establishing these relationships, which could limit our ability
      to commercialize the RHEOTM System.





We
      anticipate that RHEOTM Therapy will be prescribed by physicians and administered
      by nurses, and therefore our service provider customers will need the support
      of
      an adequate supply of trained nurses. Training nurses to administer RHEOTM
Therapy may be costly, and our customers may experience shortages of nurses
      from
      time to time. If there is a shortage of trained nurses to work in our customers’
facilities, our commercialization of RHEOTM Therapy may be
      unsuccessful.





40





***RHEOTM
      Therapy may produce adverse side effects in patients that prevent its adoption
      or that necessitate withdrawal from the market.***





RHEOTM
      Therapy may produce unexpected side effects not previously observed during
      clinical trials. These undesirable and unintended side effects in patients
      may
      prevent or limit its commercial adoption and use. Side effects that have been
      observed in MIRA-1 were all temporary and generally mild and included temporary
      drops in blood pressure, abnormal heart rate, nausea, chills and localized
      bleeding, pain, numbness and swelling in the area of the arms where the needles
      were inserted. Even after approval by the FDA and other regulatory authorities,
      the RHEOTM System may later be found to produce adverse side effects that prevent
      widespread use or necessitate withdrawal from the market. The manifestation
      of
      such side effects could cause our business to suffer. In some cases, regulatory
      authorities may require additional disclosure to patients that could add
      warnings or restrict usage based on unexpected side effects seen after marketing
      a medical treatment.





***We
      may face future product liability claims that may result from the use of our
      products.***





The
      testing, manufacturing, marketing and sale of therapeutic products entails
      significant inherent risks of allegations of product liability. Our use of
      such
      products in clinical trials and our sale of the RHEOTM System may expose us to
      liability claims. These claims might be made directly by patients, health care
      providers or others selling the RHEOTM System. We carry clinical trials and
      product liability insurance to cover certain claims that could arise during
      MIRA-1 or during the commercial use of RHEOTM Therapy. We currently maintain
      clinical trials and product liability insurance with coverage limits of
      $2,000,000 **** in
      the
      aggregate annually. Such coverage, and any coverage obtained in the future,
      may
      be inadequate to protect us in the event of a successful product liability
      claim, and we may not be able to increase the amount of such insurance coverage
      or even renew it. A successful product liability claim could materially harm
      our
      business. In addition, substantial, complex or extended litigation could cause
      us to incur large expenditures and divert significant resources.





***In
      the medium or long term, we will need to increase the size of our organization,
      and we may experience difficulties in managing our
      growth.***





In
      order
      to commercialize the RHEOTM System, we will need to expand our employee base for
      management of operational, sales and marketing, financial and other resources.
      It is not clear when we will be able to commercially launch the RHEOTM System, if
      ever. Future growth will impose significant additional responsibilities on
      members of management, including the need to identify, recruit, maintain and
      integrate additional employees. Our future financial performance and our ability
      to commercialize the RHEOTM System and to compete effectively will depend, in
      part, on our ability to manage any future growth effectively. To that end,
      we
      must be able to:





•
            integrate
                additional management, administrative, distribution and sales and
                marketing personnel;





•
            develop
                our administrative, accounting and management information systems
                and
                controls; and





•
            hire
                and train additional qualified personnel.





We
      may
      not be able to accomplish these tasks, and our failure to accomplish any of
      them
      could prevent us from achieving or maintaining profitability.





***We
      may face competition and may not be successful in addressing
      it.***





The
      pharmaceutical, biotechnology and medical technology industries are
      characterized by rapidly changing technology and intense competition. AMD is
      not
      a well-understood disease and researchers are continuing to investigate
      different theories of the cause of AMD. If the cause of AMD is determined,
      competitors could potentially develop a treatment for Dry AMD that would replace
      RHEOTM Therapy. In addition, competitors may develop alternative treatments for
      Dry AMD that prove to be superior to, or more cost-effective than, RHEOTM
Therapy. Some of these competitors may include companies which have access
      to
      financial, technical and marketing resources significantly greater than ours
      and
      substantially greater experience in developing, manufacturing and distributing
      products, conducting preclinical and clinical testing and obtaining regulatory
      approvals.





41





We
      are
      aware of a number of companies which have developed or are in the process of
      developing treatments for Wet AMD, including Eyetech Pharmaceuticals,
      Inc./Pfizer Inc., Genentech, Inc./Novartis Ophthalmics, Alcon Laboratories,
      Inc., Iridex Corporation, Genaera Corporation, QLT, Inc. and GenVec, Inc. Some
      of these treatments are in late-stage clinical development or have been approved
      by the FDA. Some of these companies may develop new treatments for Dry AMD
      or
      may develop modifications to their treatments for Wet AMD that may be effective
      for Dry AMD as well. We are aware that Acuity Medical, Inc. is pursuing an
      electrical stimulation technology to treat Dry AMD. In addition, other companies
      also may be involved in competitive activities of which we are not
      aware.





***We
      may be unable to attract and retain key personnel which may adversely affect
      our
      business.***





Our
      success depends on the continued contributions of our executive officers and
      scientific personnel. Many of our key responsibilities have been assigned to
      a
      relatively small number of individuals. We will be required to hire eyecare
      specialists as well as personnel with skill sets in apheresis, nursing,
      training, equipment maintenance, finance, distribution, logistics, warehousing,
      sales and service to meet our personnel needs. There is competition for
      qualified personnel, and the failure to secure the services of key personnel
      or
      loss of services of key personnel could adversely affect our
      business.





The
      additional uncertainty regarding our business prospects that has been created
      by
      MIRA-1’s failure to reach its primary efficacy endpoint may impede our ability
      to attract and retain key personnel.





We
      currently expect that there will be some downsizing of our workforce and
      restructuring of our operations in view of the anticipated delay in the timing
      of receipt of FDA approval, if any, and the consequent delay in the
      commercialization of the RHEOTM System in the United States. This may impede our
      ability to fulfill certain functions which, in turn, may adversely affect our
      business.





***For
      as long as TLC Vision owns a substantial portion of our common stock, our other
      stockholders may be effectively unable to affect the outcome of stockholder
      voting.***





TLC
      Vision beneficially owns approximately 51.0% **** of
      our
      outstanding common stock, or 46.5% **** on
      a
      fully diluted basis. Accordingly, TLC Vision on its own could possess an
      effective controlling vote on matters submitted to a vote of the holders of
      our
      common stock.





While
      it
      owns a substantial portion of our common stock, TLC Vision will effectively
      control decisions with respect to:





•
            our
                business direction and policies, including the election and removal
                of our
                directors;





•
            mergers
                or other business combinations involving us;





•
            the
                acquisition or disposition of assets by us;





•
            our
                financing; and





•
            amendments
                to our certificate of incorporation and bylaws.





42





Furthermore,
      TLC Vision may be able to cause or prevent a change of control of the Company,
      and this concentration of ownership may have the effect of discouraging others
      from pursuing transactions involving a potential change of control of the
      Company, in either case regardless of whether a premium is offered over
      then-current market prices.





***Conflicts
      of interest may arise between us and TLC Vision, which has three directors
      on
      our board and for which our Chief Executive Officer and Chairman serves as
      Chairman. Our Chairman and Chief Executive Officer will also devote a portion
      of
      his time to TLC Vision, which may divert his attention from our business and
      operations.***





TLC
      Vision beneficially owns approximately 51.0% of our outstanding common stock,
      or
      46.5% on a fully diluted basis. Our directors, Elias Vamvakas, Thomas Davidson
      and Richard Lindstrom, are also directors of TLC Vision. Mr.
      Vamvakas beneficially owns 3,384,989 common shares of TLC Vision, representing
      approximately 4.99% of TLC Vision’s outstanding shares. Mr. Davidson
      beneficially owns 34,827 common shares of TLC Vision, representing approximately
      0.05% of TLC Vision’s outstanding shares, and Dr. Lindstrom does not
      beneficially own any common shares of TLC Vision. Because
      Messrs. Vamvakas and Davidson and Dr. Lindstrom are directors of TLC Vision,
      a
      conflict of interest could arise. Conflicts may arise between TLC Vision and
      us
      as a result of our ongoing agreements. We may not be able to resolve all
      potential conflicts with TLC Vision, and even if we do, the resolution may
      be
      less favorable to us than if we were dealing with an unaffiliated third
      party.





In
      addition, our Chairman and Chief Executive Officer, Mr. Vamvakas, also serves
      as
      Chairman of TLC Vision and, therefore, devotes a portion of his time to matters
      other than our business and operations. We believe that Mr. Vamvakas devotes
      approximately 20% of his time, on average, to TLC’s operations, which may divert
      his attention from our business operations and which may adversely affect our
      business.





***We
      have entered into a number of related party transactions with suppliers,
      creditors, stockholders, officers and other parties, each of which may have
      interests which conflict with those of our public
      stockholders.***





We
      have
      entered into several related party transactions with our suppliers, creditors,
      stockholders, officers and other parties, each of which may have interests
      which
      conflict with those of our public stockholders.





***Certain
      of our directors and management team members have been with us for only a short
      time.***





John
      Caloz, our Chief Financial Officer and Treasurer, Nozhat Choudry, our Vice
      President, Clinical Research, and Stephen Parks, our Vice President, Sales,
      and
      our directors, Adrienne Graves and Gilbert Omenn, have all served as members
      of
      our management team for less than one year. Thomas P. Reeves, our President
      and
      Chief Operating Officer, Stephen Kilmer, our Vice President, Corporate Affairs,
      Julie Fotheringham, our Vice President, Marketing, and our directors, Thomas
      Davidson, Jay Holmes and Richard Lindstrom, have all served as members of our
      management team for less than two years. This poses a number of risks, including
      the risk that these persons may:





•
            have
                limited familiarity with our past practices;





•
            lack
                experience in communicating effectively within the team and with
                other
                employees;





•
            lack
                settled areas of responsibility; and





•
            lack
                an established track record in managing our business strategy, including
                clinical trials.




43





ITEM
                2.
            PROPERTIES.





In
      December 2004, we moved from our previous headquarters which we subleased from
      TLC Vision to our current headquarters, which are also in Mississauga. Until
      January 31, 2006, we subleased our current headquarters from Echo Online
      Internet, Inc. and, as of February 1, 2006, have been leasing them from Penyork
      Properties III Inc. The facility presently consists of approximately 6,600
      square feet of office space utilized for corporate finance and clinical trial
      management personnel. Our current arrangement expires on July 31, 2007. Our
      current annual lease obligation for rent for this facility is C$138,138. As
      a
      result of negotiated rent-free periods, the future minimum obligation under
      this
      lease is C$98,104 for 2006. TLC Vision has advised us that it does not have
      any
      ownership interest in our current headquarters.





We
      also
      lease space in a facility in Palm Harbor, Florida consisting of 5,020 square
      feet of space used for warehousing the RHEOTM System components and providing
      office space for our clinical trial personnel, John Cornish, who is our Vice
      President, Operations, and administrative personnel and records. The facility
      consists of office and working space and an approximately 1,700 square foot
      warehouse in the back. Our lease on this property expired on December 31, 2005
      and has been renewed until December 31, 2006. Our current monthly lease
      obligation for rent for this facility is approximately $2,745. The landlord
      under this lease is Cornish Properties, which is owned by Mr. Cornish. Mr.
      Cornish was also one of our directors from April 1997 to September
      2004.





We
      believe that if our existing facilities are not adequate to meet our business
      requirements for the near-term, additional space will be available on
      commercially reasonable terms.





ITEM
                3.
            LEGAL
                PROCEEDINGS.





We
      are
      not aware of any litigation involving us that is outstanding, threatened or
      pending.





ITEM
                4.
            SUBMISSION
                OF MATTERS TO A VOTE OF SECURITY
                HOLDERS.





No
      matter
      was submitted during the fourth quarter of the Company’s 2005 fiscal year to a
      vote of security holders, through the solicitation of proxies or otherwise.




44





PART
      II





ITEM
                5.
            MARKET
                FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER
                MATTERS.





**Market
      for Common Equity**





Our
      Common Stock commenced trading on the NASDAQ National Market System under the
      symbol “RHEO” and the Toronto Stock Exchange under the symbol “RHE” on December
      9, 2004, in connection with our initial public offering which closed on December
      16, 2004.





The
      following table sets forth the range of high and low sales prices per share
      of
      our Common Stock on both the NASDAQ National Market System and the Toronto
      Stock
      Exchange for the fiscal periods indicated. Prior to December 9, 2004, there
      was
      no established public trading market for our Common Stock. Therefore, 2004
      fourth quarter high and low sales prices per share can only be calculated from
      December 9, 2004 through December 31, 2004.





Common
                Stock PricesFiscal
                2005
            
            Fiscal
                2004High
            
            Low
            
            High
            
            LowNASDAQ
                National Market SystemFirst
                Quarter
            
            $
            10.68
            
            $
            7.06
            
            
            --
            
            
            --Second
                Quarter
            
            
            9.35
            
            
            5.92
            
            
            --
            
            
            --Third
                Quarter
            
            
            9.78
            
            
            6.05
            
            
            --
            
            
            --Fourth
                Quarter
            
            
            8.78
            
            
            5.88
            
            $
            13.86
            
            $
            9.35Toronto
                Stock ExchangeFirst
                Quarter
            
            C$
            12.90
            
            C$
            8.75
            
            
            --
            
            
            --Second
                Quarter
            
            
            11.17
            
            
            7.57
            
            
            --
            
            
            --Third
                Quarter
            
            
            11.70
            
            
            7.00
            
            
            --
            
            
            --Fourth
                Quarter
            
            
            10.49
            
            
            6.94
            
            C$
            16.50
            
            C$
            12.04





The
      closing share price for our Common Stock on March 14, 2006 as reported by the
      NASDAQ National Market System, was $3.94. The closing share price for our Common
      Stock on March 14, 2006, as reported by the Toronto Stock Exchange, was
      C$4.48.





As
      of
      March 14, 2006, there were approximately 120 stockholders of record of our
      Common Stock.





We
      have
      never declared or paid any cash dividends on shares of our capital stock. We
      currently intend to retain all available funds to support operations and to
      finance the growth and development of our business. Any determination related
      to
      payments of future dividends will be at the discretion of our board of directors
      after taking into account various factors that our board of directors deems
      relevant, including our financial condition, operating results, current and
      anticipated cash needs, plans for expansion and debt restrictions.





**(a)**
            **Unregistered
                Issuances of Capital Stock**





On
      March
      24, 2005, we issued an aggregate of 50,000 shares of Common Stock to Center
      for
      Clinical Research at a purchase price of $0.04 per share in consideration for
      cash.





On
      March
      30, 2005, we issued an aggregate of 2,000 shares of Common Stock to Carol Jones
      at a purchase price of $0.99 in consideration for cash.





45





On
      June
      14, 2005, we issued an aggregate of 8,550 shares of Common Stock to Don
      Strickland at a purchase price of $0.99 per share in consideration for
      cash.





On
      July
      29, 2005, we issued an aggregate of 13,750 shares of Common Stock to Richard
      Davis at a purchase price of $1.30 per share in consideration for
      cash.





On
      August
      1, 2005, we issued an aggregate of 150,000 shares of Common Stock to Richard
      Davis at a purchase price of $0.99 per share in consideration for
      cash.





On
      August
      1, 2005, we issued an aggregate of 9,583 shares of Common Stock to Ramon
      Gonzalez at a purchase price of $0.80 per share consideration for
      cash.





On
      October 5, 2005, we issued an aggregate of 20,202 shares of Common Stock to
      David Eldridge at a purchase price of $0.99 per share in consideration for
      cash.





On
      November 24, 2005, we issued an aggregate of 25,000 shares of Common Stock
      to
      Reinhard Klingel at a purchase price of $0.99 per share in consideration for
      cash.





No
      underwriters were involved in the foregoing sales of securities. The foregoing
      sales were made upon the exercise of options granted to our employees, officers,
      directors or consultants under written compensatory benefit plans in reliance
      upon the exemption from the registration requirements of the Securities Act
      of
      1933, as amended, provided by Rule 701 thereunder.





ITEM
                6.
            SELECTED
                FINANCIAL DATA.





The
      following tables set forth our selected historical consolidated financial data
      for the years ended December 31, 2005, 2004, 2003, 2002 and 2001 which have
      been
      derived from our consolidated financial statements included elsewhere in this
      Form 10-K and our consolidated financial statements included on Form S-1 for
      the
      years ended December 31, 2003, 2002 and 2001. The following tables should be
      read in conjunction with our financial statements, the related notes thereto
      and
      the information contained in “Item 7 - Management’s Discussion and Analysis of
      Financial Condition and Results of Operations”.





**Year
                Ended December 31,****2001**
            
            **2002**
            
            **2003**
            
            **2004**
            
            **2005**(in
                thousands except per share amounts)**Consolidated
                Statements of Operations Data:**Revenues
                from related party
            
            $
            —
            
            $
            94
            
            $
            390
            
            $
            732
            
            **$**
            **81**Revenues
                from third parties
            
            
            —
            
            
            —
            
            
            —
            
            
            238
            
            **$**
            **1,759**Total
                revenues
            
            
            —
            
            
            94
            
            
            390
            
            
            970
            
            **$**
            **1,840**Cost
                of goods sold to related party
            
            
            —
            
            
            81
            
            
            373
            
            
            689
            
            
            **43**Cost
                of goods sold to third parties
            
            
            —
            
            
            —
            
            
            —
            
            
            134
            
            
            **3,251**Royalty
                costs
            
            
            —
            
            
            78
            
            
            109
            
            
            135
            
            
            **100**Gross
                margin (loss)
            
            
            —
            
            
            (65
            )
            
            (92
            )
            
            12
            
            
            **(1,554**
            **)**Operating
                expensesGeneral
                and administrative
            
            
            911
            
            
            449
            
            
            1,565
            
            
            17,530
            
            
            **8,729**Clinical
                and regulatory
            
            
            1,873
            
            
            1,447
            
            
            731
            
            
            3,995
            
            
            **5,251**Sales
                and marketing
            
            
            —
            
            
            —
            
            
            —
            
            
            220
            
            
            **2,165**Impairment
                of goodwill
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            **147,452**2,784
            
            
            1,896
            
            
            2,296
            
            
            21,745
            
            
            **163,597**Other
                (expenses) income
            
            
            (1,342
            )
            
            (921
            )
            
            (82
            )
            
            (110
            )
            
            **1,536**Earnings
                from discontinued operations
            
            
            67
            
            
            —
            
            
            —
            
            
            —
            
            
            **—**Loss
                for the period before Income taxes
            
            $
            (4,059
            )
            $
            (2,882
            )
            $
            (2,470
            )
            $
            (21,843
            )
            **$**
            **(163,615**
            **)**Income
                tax benefit
            
            
            —
            
            
            —
            
            
            —
            
            
            24
            
            
            **643**Net
                loss for the period
            
            $
            (4,059
            )
            $
            (2,882
            )
            $
            (2,470
            )
            $
            (21,819
            )
            **$**
            **(162,972**
            **)****Per
                Share Data:**Loss
                per share from continuing operations — basic and diluted
            
            $
            (1.15
            )
            $
            (0.77
            )
            $
            (0.62
            )
            $
            (2.96
            )
            **$**
            **(3.89**
            **)**Earnings
                per share from discontinued operations
            
            
            0.02
            
            
            —_
            
            
            —
            
            
            —
            
            
            **—**Net
                loss per share
            
            $
            (1.13
            )
            $
            (0.77
            )
            $
            (0.62
            )
            $
            (2.96
            )
            **$**
            **(3.89**
            **)**Weighted
                average number of shares used in per share calculations — basic and
                diluted
            
            
            3,603
            
            
            3,735
            
            
            3,977
            
            
            7,370
            
            
            **41,931**





46


**As
                of December 31,****2001**
            
            **2002**
            
            **2003**
            
            **2004**
            
            **2005**(in
                thousands)**Consolidated
                Balance Sheet Data:**Cash
                and cash equivalents
            
            $
            (8
            )
            $
            602
            
            $
            1,237
            
            $
            17,531
            
            **$**
            **9,600**Marketable
                securities
            
            
            —
            
            
            —
            
            
            —
            
            
            42,500
            
            
            **31,663**Working
                capital (deficiency)
            
            
            (2,848
            )
            
            (1,780
            )
            
            (2,538
            )
            
            58,073
            
            
            **44,415**Total
                assets
            
            
            768
            
            
            1,038
            
            
            1,868
            
            
            301,601
            
            
            **137,806**Long-term
                debt (including current portion due to stockholders)
            
            
            7,820
            
            
            1,507
            
            
            3,694
            
            
            517
            
            
            **158**Total
                liabilities
            
            
            9,526
            
            
            2,693
            
            
            4,134
            
            
            13,502
            
            
            **11,765**Common
                stock
            
            
            4
            
            
            4
            
            
            5
            
            
            42
            
            
            **42**Series
                A Convertible Preferred Stock
            
            
            1
            
            
            2
            
            
            2
            
            
            ―
            
            
            **―**Series
                B Convertible Preferred Stock
            
            
            —
            
            
            1
            
            
            1
            
            
            ―
            
            
            **―**Additional
                paid-in capital
            
            
            11,839
            
            
            22,057
            
            
            23,915
            
            
            336,064
            
            
            **336,978**Accumulated
                deficit
            
            
            (20,602
            )
            
            (23,718
            )
            
            (26,188
            )
            
            (48,007
            )
            
            **(210,979**
            **)**Total
                stockholders’ equity (deficiency)
            
            
            (8,759
            )
            
            (1,655
            )
            
            (2,266
            )
            
            288,098
            
            
            **126,041**





47





ITEM
                7.
            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 in conjunction with our consolidated financial
      statements and related notes, included in item 8 of this Form 10-K. Unless
      otherwise specified, all dollar amounts are U.S. dollars.*





**Overview**





We
      are an
      ophthalmic therapeutic company founded to commercialize innovative treatments
      for eye diseases, including age-related macular degeneration, or AMD. The RHEOTM
System is used to perform the RheopheresisTM procedure, a procedure that
      selectively removes molecules from plasma, which is designed to treat Dry AMD,
      the most common form of the disease.





We
      conducted a pivotal clinical trial, called MIRA-1, or Multicenter Investigation
      of Rheopheresis for AMD, which, if successful, was expected to support our
      application to the U.S. Food and Drug Administration, or FDA, to obtain approval
      to market the RHEOTM System in the United States. On February 3, 2006, we
      announced that, based on a preliminary analysis of the data from MIRA-1, MIRA-1
      did not meet its primary efficacy endpoint as it did not demonstrate a
      statistically significant difference in the mean change of Best
      Spectacle-Corrected Visual Acuity applying the Early Treatment Diabetic
      Retinopathy Scale, or ETDRS BCVA, between the treated and placebo groups in
      MIRA-1 at 12 months post-baseline. As expected, the treated group demonstrated
      a
      positive result. An anomalous response of the control group is the principal
      reason why the primary efficacy endpoint was not met. There were subgroups
      that
      did demonstrate statistical significance in their mean change of ETDRS BCVA
      versus control.





Subsequent
      to the February 3, 2006 announcement, the Company completed an in-depth analysis
      of the MIRA-1 study data identifying subjects that were included in the
      intent-to-treat, or ITT, population but who deviated from the MIRA-1 protocol
      as
      well as those patients who had documented losses or gains in vision for reasons
      not related to retinal disease such as cataracts. Those subjects in the ITT
      population who met the protocol requirements, and who did not exhibit ophthalmic
      changes unrelated to retinal disease, comprised the modified per-protocol
      population.





In
      the
      modified per-protocol analysis, eyes treated with RHEOTM Therapy demonstrated a
      mean vision gain of 0.8 lines of ETDRS BCVA at 12 months post-baseline, compared
      to a mean vision loss of 0.1 lines of ETDRS BCVA in the eyes in the placebo
      group. The result was statistically significant (repeated measure p value =
      0.0147). The following table presents a summary of the ETDRS BCVA changes
      observed 12 months post-baseline in the modified per-protocol analysis of
      MIRA-1:





Treatment
                Group
            Placebo
                Group(n=69)
            (n=46)Vision
                improvement greater or equal to:1
                line
            46.4%
            19.6%2
                lines
            27.5%
            8.7%3
                lines
            8.7%
            2.2%Vision
                loss greater or equal to:1
                line
            11.6%
            23.9%2
                lines
            5.8%
            6.5%3
                lines
            2.9%
            2.2%




48





Within
      the modified per-protocol population with pre-treatment vision worse than 20/40,
      50.0% of RHEOTM Therapy-treated eyes improved, after treatment, to 20/40 or
      better and would be able to qualify for a driver’s license 12 months
      post-baseline, compared to 20.0% of placebo eyes.





MIRA-1
      data supports historical clinical and commercial experience with respect to
      the
      safety of RHEOTM Therapy, with observed treatment side effects generally being
      mild, transient and self-limiting.





In
      light
      of MIRA-1’s failure to meet its primary efficacy endpoint, it is more likely
      than not that we will be required to conduct a follow-up clinical trial of
      the
      RHEOTM System in order to support our Pre-Market Approval, or PMA, application to
      the FDA. However, until we have discussions with the FDA, we will not know
      the
      nature, size, scope or duration of any follow-up clinical trial. Nor, until
      such
      time, will we be able to anticipate when we will receive FDA approval, if ever,
      or when we can expect to commercialize the RHEOTM System in the United States and
      to begin to generate revenues there.





As
      a
      result of the announcement on February 3, 2006, the share price of our stock
      as
      traded on the NASDAQ National Market System decreased from $12.75 on February
      2,
      2006 to close at $4.10 on February 3, 2006. The 10-day average price of the
      stock immediately following the announcement was $3.65 and reflected a decrease
      in our market capitalization from $536.6 million on February 2, 2006 to $153.6
      million based on the 10-day average share price subsequent to the announcement.
      The resulting decrease in the share price was identified as an indicator of
      impairment leading to an analysis of our intangible assets and goodwill and
      resulting in our reporting an impairment charge to goodwill of $147,451,758
      in
      the fourth quarter of 2005. We believe that the announcement made it unlikely
      that we would be able to collect on amounts outstanding from Veris, resulting
      in
      a provision for bad debts of $1,049,297, of which $518,852 related to revenue
      recognized prior to December 2005 and $530,445 related to goods shipped to
      Veris, in December 2005, and for which revenue was not recognized. We also
      recognized an inventory loss of $252,071, representing the cost of goods shipped
      to Veris in December 2005 which we do not anticipate will be returned by
      Veris. **** We
      have
      also fully expensed the $165,661 advance paid to Veris in connection with
      clinical trial services to be provided by Veris for MIRA-PS, one of our clinical
      trials. We evaluated our ending inventories as at December 31, 2005 on the
      basis
      that Veris may not be able to increase its commercial activities in Canada
      in
      line with our initial expectations. Accordingly, we have set up a provision
      for
      obsolescence of $1,990,830 for treatment sets that are unlikely to be utilized
      prior to their expiration dates. No other adjustments were made as a result
      of
      the February 3, 2006 announcement that impact the financial results as of
      December 31, 2005.





**Revenues**





Up
      to
      December 8, 2004, the date of our acquisition of TLC Vision’s 50% interest in
      OccuLogix, L.P., we derived the majority of our revenues from sales of the
      OctoNova pump and disposable treatment sets, which include two disposable
      filters and applicable tubing, to OccuLogix, L.P., which then sold the pumps
      and
      treatment sets to three clinics in Canada, one of which is a related party,
      RHEO
      Clinic Inc., or RHEO Clinic, a subsidiary of TLC Vision. Historically, we set
      sales prices at a level which would reimburse our cost of sales excluding the
      effects of ongoing minimum royalty commitment costs. Following our acquisition
      of TLC Vision’s 50% interest in OccuLogix, L.P., our revenues have been derived
      from sales of the OctoNova pumps and disposable treatment sets directly to
      RHEO
      Clinic and to other commercial providers of RHEOTM Therapy in Canada. Currently,
      Veris is the only such provider. We believe that, in the future, provided that
      the RHEOTM System gains acceptance, sales of disposable treatment sets will
      provide a recurring source of revenue and that the percentage of our revenues
      that we derive from disposable treatment sets will increase over time as our
      installed base of OctoNova pumps increases. We also expect to derive additional
      revenues from miscellaneous services for annual calibration, maintenance and
      training, which are not already included in the initial sale and service of
      the
      RHEOTM System.





49





One
      of
      OccuLogix, L.P.’s primary customers was RHEO Clinic, for which OccuLogix, L.P.
      has reported revenues of $81,593, $401,236 and $459,730 for the years ended
      December 31, 2005, 2004 and 2003, respectively. RHEO Clinic used the RHEOTM
System to treat patients, for which it charged its customers (the patients)
      a
      per-treatment fee. Since it has ceased the treatment of commercial patients
      in
      2005, RHEO Clinic has not been a source of revenue for us, nor will it be a
      source of revenue for us in the future.





The
      Company’s announcement of February 3, 2006 that MIRA-1 did not meet its primary
      efficacy endpoint may impact adversely Veris’ business prospects and financial
      condition generally. A failure of Veris to continue its operations would
      adversely affect our ability to generate any revenues since, at this time,
      there
      is no other commercial provider of RHEOTM Therapy in any jurisdiction in which we
      have distribution and marketing rights to the RHEO TM System.





We
      cannot
      begin commercialization in the United States until we receive FDA approval.
      Until we have discussions with the FDA, we will not be able to anticipate when,
      if ever, we will receive FDA approval. Accordingly, at this time, we do not
      know
      when we can expect to begin to generate revenues in the United
      States.





**Cost
      of Sales**





Cost
      of
      sales includes costs of goods sold and royalty costs. Our cost of goods sold
      consists primarily of costs for the manufacture of the RHEOTM System, including
      the costs we incur for the purchase of component parts from our suppliers,
      applicable freight and shipping costs, fees related to warehousing, logistics
      inventory management and recurring regulatory costs associated with conducting
      business in Canada and ISO certification. We evaluated our ending inventories
      as
      at December 31, 2005 on the basis that Veris may not be able to increase its
      commercial activities in Canada in line with our initial expectations.
      Accordingly, we have set up a provision for obsolescence of $1,990,830 for
      treatment sets that are unlikely to be utilized prior to their expiration dates.
      Also included in cost of sales expenses for the year ended December 31, 2005
      is
      $252,071 which reflects the inventory loss associated with treatment sets and
      pumps shipped to Veris in December 2005 for which revenue was not recognized
      due
      to our anticipation that the customer will not return the products shipped
      and
      would not be able to pay for the amounts invoiced.





To
      acquire the necessary licensing and distribution rights for the components
      of
      the RHEOTM System, in 2002, we entered into agreements with Mr. Hans Stock and
      Dr. Richard Brunner, the owners of a patent that we license, that requires
      us to
      pay them an aggregate of 2% of our cost of the disposable filter sets purchased
      from Asahi Medical Co., Ltd., or Asahi Medical, and of sales of the OctoNova
      pumps and the tube sets (which, together with the filter sets, make up the
      treatment sets) in those jurisdictions where the patent is enforceable, with
      minimum required payments to Mr. Stock and Dr. Brunner in the aggregate amount
      of $25,000 during each calendar quarter. This resulted in royalty payments
      for
      each of the years ended December 31, 2005, 2004 and 2003 of $100,000. To date,
      the minimum required quarterly payments have exceeded the amounts that would
      have been payable absent the requirement of a minimum payment, and we are
      entitled to apply this excess in future periods if and when our revenue
      increases sufficiently to generate royalty payments in excess of the minimum
      payments. We treat these minimum royalty payments as an expense within cost
      of
      sales as they are only recoverable based on sufficient volume. A portion of
      the
      net proceeds of our initial public offering had been used to accumulate
      inventory levels to help ensure our ability to meet forecasted sales levels
      if
      and when we obtain FDA approval. We will be re-evaluating our inventory
      accumulation strategy pending the outcome of our discussions with the FDA and
      the determination of whether we will be required to conduct a follow-up clinical
      trial of the RHEOTM System and in accordance with our consequent estimate of the
      likely timing of receipt of FDA approval, if any. To the extent that our sales
      increase in the future, royalty payments to Mr. Stock and Dr. Brunner will
      increase and may exceed the minimum payment requirement.





50





We
      have
      entered into an agreement in 2002 with Mr. Stock in consideration for assisting
      us in procuring a distribution agreement with Asahi Medical relating to the
      filters used in the RHEOTM System and for his commitment to assist in the
      procurement of distribution rights for new product lines. This agreement with
      Mr. Stock requires us to pay royalties of 5% of the price we pay to Asahi
      Medical for all products it supplies to us. We record these royalties as an
      expense when we sell the products. Royalty expenses reflected in cost of sales
      as a result of this agreement in the years ended December 31, 2005, 2004 and
      2003 were nil, $35,457 and $9,234, respectively.





**Operating
      Expenses**





Our
      operating expenses consist primarily of clinical and regulatory expenses,
      general and administrative expenses and sales and marketing expenses. In 2005,
      we took a charge for impairment of goodwill. Clinical and regulatory expenses
      have consisted primarily of those expenses related to MIRA-1 and related
      clinical trials. These expenses include payments to clinical trial sites for
      conducting the trial, costs of contract research monitoring organizations and
      other non-employee consultants and experts as well as compensation and overhead
      for those of our employees who are primarily involved in clinical trial
      activities. As of December 31, 2005, we had 13 full-time employees engaged
      in
      clinical trial activities. We
      expect
      clinical and regulatory expenses to increase significantly in 2006 if the
      Company is required to conduct a follow-up clinical trial of the RHEOTM
System.





General
      and administrative expenses consist primarily of the costs of corporate
      operations and personnel, rent, legal and accounting expenses. As of December
      31, 2005, we had 17 full-time employees allocated to general and administrative
      activities. We expect that general and administrative expenses will increase
      in
      the future as we incur additional costs related to the growth of our business.
      Included in general and administrative expenses is the amortization related
      to
      intangibles expense of $1,716,667 for the year ended December 31, 2005,
      resulting from our acquisition of TLC Vision’s 50% interest in OccuLogix, L.P.
      on December 8, 2004.





Sales
      and
      marketing expenses consist primarily of costs of establishing sales and
      marketing efforts to promote the use of the RHEOTM System in Canada and, upon FDA
      approval, in the United States. As of December 31, 2005, we had five full-time
      sales and marketing employees. Pending the outcome of our discussions with
      the
      FDA and the determination of the parameters of any follow-up clinical trial
      of
      the RHEOTM System, we have suspended, for the time being, all sales and marketing
      activities that were being conducted in anticipation of commercialization in
      the
      United States. Sales and marketing expenses for the year ended December 31,
      2005
      include bad debt expense of $518,852 and reflect the allowance for doubtful
      amounts due to us from Veris for the purchase of treatment sets, pumps and
      other
      services made prior to December 2005.





We
      currently expect that there will be some downsizing of our workforce and
      restructuring of our operations in view of the anticipated delay in the timing
      of receipt of FDA approval, if any, and the consequent delay in the
      commercialization of the RHEOTM System in the United States. At the present time,
      we do not know the exact nature or scope of the downsizing and
      restructuring.





We
      performed our annual goodwill impairment analysis on October 1, 2005 in
      accordance with Statement of Financial Accounting Standard (SFAS) No. 142,
      “Goodwill and Other Intangible Assets” (SFAS 142). This analysis requires
      management to make a series of critical assumptions to evaluate whether any
      impairment exists and to measure the amount of impairment. SFAS 142 requires
      that we estimate the fair value of the Company as compared to its estimated
      book
      value. If the estimated fair value is less than the estimated book value, then
      an impairment is deemed to have occurred. In estimating the fair value of the
      Company, we primarily used the market capitalization approach which estimates
      fair value of the Company as determined by the market (based on the total market
      price of all outstanding units). Based on the goodwill impairment analysis,
      we
      concluded that there was no indication of an impairment in the carrying value
      of
      the Company’s goodwill as of that date. However, due to the result of the
      preliminary analysis of the data from MIRA-1 and our current market
      capitalization, we concluded that there were sufficient indicators to require
      management to assess whether our recorded goodwill was impaired as of December
      31, 2005. Having determined the fair value of the Company’s assets and using the
      market capitalization method to value the Company (based on the ten-day average
      of the closing price of the Company’s stock as traded on the NASDAQ National
      Market System subsequent to the February 3, 2006 announcement that MIRA-1 did
      not meet its primary efficacy endpoint, we concluded that a goodwill impairment
      charge of $147,451,758 was necessary for the year ended December 31,
      2005.





51




**Other
      Income (Expenses)**





Other
      income (expenses) consists primarily of interest, the impact of foreign exchange
      gains and losses and other non-recurring transactions. Interest income reflects
      interest revenue earned from the Company’s cash position.





**Income
      Tax Benefit**





Income
      tax benefit represents the amortization of the deferred tax liability net of
      an
      income tax liability for the year ended December 31, 2005. The deferred tax
      liability was recorded based on the difference between the fair value of the
      intangible asset acquired on December 8, 2004 (being TLC’s 50% ownership
      interest in OccuLogix, L.P., thus rendering OccuLogix, L.P. a wholly-owned
      subsidiary of ours) and its tax basis and is being amortized over 15 years,
      the
      estimated useful life of the intangible asset.





**Results
      of Operations**





The
      components of the RHEOTM System have been given regulatory approval in Canada.
      Our wholly owned subsidiary, OccuLogix, L.P., was actively commercializing
      the
      sale of the RHEOTM System in Canada. Currently, the cost of the treatments in
      Canada is not covered by third parties such as insurance companies or government
      health programs. As a result, sales levels have remained modest. We intend
      to
      pursue reimbursement of the treatment in Canada but believe that it will be
      necessary that both FDA approval of the RHEOTM System and a National Coverage
      Decision by the Center for Medicare and Medicaid Services in the United States
      to reimburse patients for RHEOTM Therapy treatments be obtained before we will be
      successful in obtaining reimbursement in Canada. However, we may not receive
      FDA
      approval to market the RHEOTM System in the United States. Until we have
      discussions with the FDA, we will not be able to anticipate when, if ever,
      we
      will receive FDA approval.





Following
      the acquisition of TLC Vision’s 50% interest in OccuLogix, L.P. on December 8,
      2004, revenues reflecting direct sales to clinics using the RHEOTM System
      increased, while cost of sales was not expected to change materially. Clinical
      and regulatory expenses were not impacted by the acquisition, but general and
      administrative expenses increased, reflecting the creation of the organizational
      structure necessary for the commercialization process. Sales and marketing
      expenses also increased as we continued to incur sales and marketing expenses
      related to establishing sales and marketing efforts to promote the use of the
      RHEOTM System in Canada and, upon FDA approval, in the United
      States.





In
      light
      of MIRA-1’s failure to meet its primary efficacy endpoint, it is more likely
      than not that we will be required to conduct a follow-up clinical trial of
      the
      RHEOTM System in order to support our Pre-Market Approval application to the FDA.
      However, until we have discussions with the FDA, we will not know the nature,
      size, scope or duration of any follow-up clinical trial. Nor, until such time,
      will we be able to anticipate when we will receive FDA approval, if ever, or
      when we can expect to commercialize the RHEOTM System in the United States and to
      begin to generate revenues there.





52





We
      currently expect that there will be some downsizing of our workforce and
      restructuring of our operations in view of the anticipated delay in the timing
      of receipt of FDA approval, if any, and the consequent delay in the
      commercialization of the RHEOTM System in the United States. At the present time,
      we do not know the exact nature or scope of the downsizing and
      restructuring.





***Years
      Ended December 31, 2005 and 2004***





***Revenues.*** Revenues
      increased by 90% to $1,840,289 for the year ended December 31, 2005 from
      $969,357 for the year ended December 31, 2004. This increase was due to sales
      of
      treatment sets, pumps and services to Veris of $1,752,782 and reflects the
      impact of the acquisition of TLC Vision’s 50% ownership interest in OccuLogix,
      L.P. Included in revenues for the year ended December 31, 2005 are sales made
      to
      RHEO Clinic, for which we have reported revenues of $81,593 in the year. We
      do
      not expect that RHEO Clinic will be a source of revenue going forward since
      it
      has ceased the treatment of commercial patients.





***Cost
      of Sales and Gross Margin.*** Cost of
      sales increased by 255% to $3,394,102 for the year ended December 31, 2005
      from
      $957,269 for the year ended December 31, 2004, as a result of the increase
      in
      sales from the prior period and the impact of the acquisition of TLC Vision’s
      50% ownership interest in OccuLogix, L.P. We evaluated our ending inventories
      as
      at December 31, 2005 on the basis that Veris may not be able to increase its
      commercial activities in Canada in line with our initial expectations.
      Accordingly, we have set up a provision for obsolescence of $1,990,830 for
      treatment sets that are unlikely to be utilized prior to their expiration dates.
      Also included in cost of sales expenses for the year ended December 31, 2005
      is
      $252,071 which reflects the inventory loss associated with treatment sets and
      pumps shipped to Veris in December 2005 for which revenue was not recognized
      due
      to the likelihood that the customer will not return the products shipped and
      would not be able to pay for the amounts invoiced.





Gross
      margin on sales was (84%) for the year ended December 31, 2005 due primarily
      to
      the impact of the provision for inventory obsolescence of $1,990,830 and the
      inventory loss of $252,071 recorded during the year. Gross margin on sales
      was
      1% for the year ended December 31, 2004. Prior to the acquisition of OccuLogix,
      L.P. on December 8, 2004, sales to OccuLogix, L.P. were essentially at cost.
      The
      Company’s gross margins are affected by product mix. As our customers’ treatment
      sites are established, they are expected to purchase a continuous supply of
      disposable treatment sets for which the margins are much higher.





***General
      and Administrative Expenses.*** General
      and administrative expenses were $8,729,456 for the year ended December 31,
      2005, a decrease of 50% from $17,530,019 for the year ended December 30, 2004.
      This decrease is due primarily to the requirement to expense the intrinsic
      value
      of options granted in December 2003 over the vesting period of these options.
      All of these options became fully vested upon the Company’s initial public
      offering, and, therefore, $15,392,323, reflecting the remaining unamortized
      balance of stock based compensation charges as of December 31, 2003, was
      expensed in the year ended December 31, 2004. This decrease was partially offset
      by increased professional fees to establish agreements, to review and amend
      existing contracts, the fees associated with compliance with Section 404 of
      the
      Sarbanes-Oxley Act of 2002 as well as other public company costs, the cost
      of
      several key executives and employees hired part way through the third quarter
      of
      2004 and amortization expense of the intangible asset acquired on the purchase
      of TLC Vision’s 50% interest in OccuLogix, L.P.





***Clinical
      and Regulatory Expenses*** *.* Clinical
      and regulatory expenses were $5,250,492 for the year ended December 31, 2005,
      an
      increase of 31% from $3,994,967 for the year ended December 31, 2004, as a
      result of increased activities associated with the MIRA-1, LEARN and other
      clinical trials. Also included in clinical trial expenses for the year ended
      December 31, 2005 is the advance payment of C$195,000 or $165,661 made to Veris
      for the provision of clinical trial services in connection with our MIRA-PS
      trial. This unrecoverable amount has been fully expensed in the year ended
      December 31, 2005 as the Company had suspended the MIRA-PS trial pending the
      outcome of the detailed analysis of the MIRA-1 study data, the outcome of the
      Company’s discussions with the FDA and the determination of the parameters of
      any follow-up clinical trial required by the FDA for purposes of supporting
      our
      PMA submission. **** No
      other
      adjustments were made as a result of the announcement.





53





***Sales
      and Marketing Expenses.*** ** Sales
      and marketing expenses were $2,165,337 for the year ended December 31, 2005,
      an
      increase of 886% from $219,556 for the year ended December 31, 2004, since
      virtually all sales and marketing expenses had been incurred by OccuLogix,
      L.P.
      prior to our acquisition of TLC Vision’s 50% interest in OccuLogix, L.P. In the
      third and fourth quarters of 2004, we hired three new employees to begin
      establishing sales and marketing efforts to promote the use of the RHEOTM System
      in Canada and, upon FDA approval, in the United States. Sales and marketing
      expenses consist primarily of costs of establishing sales and marketing efforts
      to promote the use of the RHEOTM System in Canada and, upon FDA approval, in the
      United States. Sales and marketing expenses for the year ended December 31,
      2005
      include bad debt expense of $518,852 and reflect the allowance for doubtful
      amounts due to us from Veris for the purchase of treatment sets, pumps and
      other
      services.





***Impairment
      of Goodwill.*** The
      aforementioned decrease in our stock price subsequent to the February 3, 2006
      announcement of the MIRA-1’s failure to meet its primary endpoint was identified
      as an indicator of impairment which led to an analysis of our intangible assets
      and goodwill resulting in the reporting of an impairment charge of $147,451,758.
      The impairment of goodwill charge of $147,451,758 for the year ended December
      31, 2005 represents the reduction in the carrying value of goodwill acquired
      on
      the purchase of TLC Vision’s 50% interest in OccuLogix, L.P. for which the
      carrying value exceeded the fair value. There was no comparable charge in the
      year ended December 31, 2004.





***Other
      Income (Expenses).*** ** Other
      income was $1,536,341 for the year ended December 31, 2005, compared to an
      expense of $110,190 for the year ended December 31, 2004. This change was due
      primarily to interest income earned for the year ended December 31, 2005 as
      a
      result of the Company’s cash and short-term investment position following the
      raising of capital in the Company’s initial public offering in December
      2004.





***Income
      Tax Recovery.*** ** Income
      tax recovery was $642,529 for the year ended December 31, 2005, an increase
      of
      2,603% from $23,771 for the year ended December 31, 2004. Income tax recovery
      primarily represents the amortization of the deferred tax liability which was
      recorded based on the difference between the fair value of the intangible asset
      acquired in December 2004 and its tax basis. The deferred tax liability of
      $9,527,500 is being amortized over 15 years, the estimated useful life of the
      intangible asset.





***Years
      Ended December 31, 2004 and 2003***





***Revenues.*** Revenues
      increased by 148% to $969,357 for the year ended December 31, 2004 from $390,479
      for the year ended December 31, 2003. This increase was due to sales of
      treatment sets and pumps in the fourth quarter of the year to Veris in
      accordance with our agreement with it.





***Cost
      of Sales.*** Cost
      of
      sales increased by 98% to $957,269 for the year ended December 31, 2004 from
      $482,780 for the year ended December 31, 2003, as a result of the increase
      in
      sales in the year.





***Gross
      Margin*** .
      Gross
      margin was impacted by the sales of OccuLogix, L.P. which we acquired on
      December 8, 2004. OccuLogix, L.P. sales, post-acquisition, to third parties
      generated sufficient profit to bring the consolidated gross margin
      positive.





54





***General
      and Administrative Expenses.*** General
      and administrative expenses increased by 1,021% to $17,530,019 for the year
      ended December 31, 2004 from $1,564,362 for the year ended December 31, 2003.
      This increase resulted primarily from the requirement to expense the intrinsic
      value of options granted in December 2003 over the vesting period of these
      options. We estimated the intrinsic value of these options to be $15,905,400
      which resulted in a monthly expense of $513,077 over the vesting period of
      the
      options. All of these options became fully vested upon the Company’s initial
      public offering and therefore the remaining unamortized balance of stock-based
      compensation charges as of December 31, 2003 was expensed in the year ended
      December 31, 2004. The expense for the years ended December 31, 2004 and 2003
      was $15,392,323 and $513,077, respectively. Employee and related travel costs
      increased 141% to $1,126,641 for the year ended December 31, 2004 from $468,000
      for the year ended December 31, 2003 as a result of our having received
      sufficient additional funding at the end of the first half of 2003 to fully
      resume operations and the hiring of new employees in 2004. Expenses related
      to
      the hiring of professionals increased 70% to $634,128 for the year ended
      December 31, 2004 from $374,000 for the year ended December 31, 2003, due
      primarily to costs related to the audit process. Amortization expense of the
      intangible assets acquired on the acquisition of TLC Vision’s 50% interest in
      OccuLogix, L.P. was $106,138 for the year ended December 31, 2004. There was
      no
      comparable expense in the year ended December 31, 2003.





***Clinical
      and Regulatory Expenses.*** Clinical
      and regulatory expenses increased by 446% to $3,994,967 for the year ended
      December 31, 2004 from $731,166 for the year ended December 31, 2003, as a
      result of increased activities associated with MIRA-1. We increased our
      activities as a result of additional funding we have received from TLC Vision
      and Diamed since July 2003.





***Sales
      and Marketing Expenses.*** Sales
      and
      marketing expenses were $219,556 for the year ended December 31, 2004 with
      no
      comparable expense for the year ended December 31, 2003. In the third quarter
      of
      2004, we hired two new employees to begin establishing sales and marketing
      efforts to promote the use of the RHEOTM System in Canada and, upon FDA approval,
      in the United States.





***Other
      Expenses.*** Other
      expenses totaled $110,190 for the year ended December 31, 2004, an increase
      of
      34% over the year ended December 31, 2003. This increase was due primarily
      to
      the $100,000 owed to Apheresis Technologies, Inc. in accordance with the amended
      distribution services agreement, which agreement has since been terminated.
      Also, foreign currency exchange loss was $43,548 for the year ended December
      31,
      2004, compared to a foreign exchange gain of $2,063 for the year ended December
      31, 2003 due to foreign exchange rate fluctuations. These increases were
      partially offset by the decrease in net interest expense from $67,997 in the
      year ended December 31, 2004 to a net interest income of $35,735 in the year
      ended December 31, 2004 due to the conversion of certain debt into common stock
      and interest revenue from the Company’s cash position subsequent to its initial
      public offering.





***Income
      Tax Benefit.*** The
      income tax benefit of $23,771 represents the amortization of the deferred tax
      liability of $39,271, net of an income tax liability for the year ended December
      31, 2004 of $15,500. This deferred tax liability was recorded based on the
      difference between the fair value of the intangible asset acquired in December
      2004 and its tax basis. The deferred tax liability of $9,527,500 is being
      amortized over 15 years, the estimated useful life of the intangible asset.
      There was no corresponding tax benefit in the year ended December 31,
      2003.





**Liquidity
      and Capital Resources**





In
      December 2004, we raised $67,200,000 of gross cash proceeds (less issuance
      costs
      of $7,858,789) in our initial public offering. Immediately prior to the initial
      public offering, the primary source of the Company’s liquidity was cash raised
      through the issuance of debentures.





To
      date,
      cash has been primarily utilized to finance increased infrastructure costs,
      to
      accumulate inventory and to fund costs of the MIRA-1 clinical trial and, more
      recently, the LEARN and MIRA-PS trials. We expect that, in the future, we will
      continue to use our cash resources to fund the development of our infrastructure
      and to conduct clinical trials. It is possible that we will be required to
      conduct a clinical trial of the RHEOTM System, following up MIRA-1, in order to
      support our PMA application to the FDA. Cash and cash equivalents and short-term
      investments as at December 31, 2005 were $41,262,795 compared to $60,030,552
      as
      at December 31, 2004. Working capital as of December 31, 2005 was $44,414,948,
      a
      decrease of $13,657,977 from $58,072,925 as at December 31, 2004.





55





Management
      believes that the existing cash and cash equivalents and short term investments,
      together with funds expected to be generated from operations, will be sufficient
      to fund the Company’s anticipated level of operations and other demands and
      commitments until the latter half of 2007.





Our
      forecast of the period of time through which our financial resources will be
      adequate to support our operations is a forward-looking statement and involves
      risks and uncertainties. Actual results could vary as a result of a number
      of
      factors. We have based this estimate on assumptions that may prove to be wrong,
      and we could utilize our available capital resources sooner than we currently
      expect. Our future funding requirements will depend on many factors, including
      but not limited to:





·
            the
                cost and results of any follow-up clinical trial of the RHEOTM System to
                support our PMA application to the
                FDA;





·
            the
                rate of progress, cost and results of the LEARN and other clinical
                trials;





·
            our
                ability to obtain FDA approval to market and sell the RHEOTM System in the
                United States and the timing of such approval, if
                any;





·
            our
                ability to continue to sell the RHEOTM System in
                Canada;





·
            whether
                government and third-party payors agree to reimburse treatments using
                the
                RHEOTM System;





·
            the
                costs and timing of building the infrastructure to market and sell
                the
                RHEOTM System;





·
            the
                costs of filing, prosecuting, defending and enforcing any patent
                claims
                and other intellectual property
                rights;





·
            the
                costs of establishing sales, marketing and distribution capabilities;
                and





·
            the
                effect of competing technological and market
                developments.





We cannot begin
      commercialization in the United States until we receive FDA approval. Until
      we
      have discussions with the FDA, we will not be able to anticipate when, if ever,
      we will receive FDA approval. Accordingly, at this time, we do not know when
      we
      can expect to begin to generate revenues in the United States. Until we
      can generate a sufficient amount of revenue, we expect to finance future cash
      needs through public or private equity offerings, debt financings, corporate
      collaboration or licensing or other arrangements. We cannot be certain that
      additional funding will be available on acceptable terms, or at all. To the
      extent that we raise additional funds by issuing equity securities, our
      stockholders may experience dilution. In addition, future debt financing, if
      available, may involve restrictive covenants. To the extent that we raise
      additional funds through collaboration and licensing arrangements, it may be
      necessary to relinquish some rights to our technologies, or grant licenses
      on
      terms that are not favorable to us. If adequate funds are not available, we
      may
      be required to delay or reduce the scope of, or eliminate, some of our
      commercialization efforts.





56





The
      following table summarizes our contractual commitments as of December 31, 2005
      and the effect those commitments are expected to have on liquidity and cash
      flow
      in future periods.





**Payments
                Due by Period****Less
                than**
            
            
            
            **More
                than****Contractual
                Commitments**
            
            **Total**
            
            **1
                year**
            
            **1
                to 3 years**
            
            **3
                years**Operating
                leases
            
            $
            219,505
            
            $
            122,977
            
            $
            96,528
            
            $
            —Royalty
                payments
            
            $
            1,150,000
            
            $
            100,000
            
            $
            300,000
            
            $
            750,000Consulting
                and non-competition agreements
            
            $
            180,000
            
            $
            180,000
            
            $
            —
            
            $
            —




Pursuant
      to the terms of our distribution agreement with MeSys GmbH, or MeSys, dated
      January 1, 2002, we undertook a minimum purchase commitment of 25 OctoNova
      pumps
      per year beginning after FDA approval of the RHEOTM System, representing an
      annual commitment after FDA approval of €405,000, or approximately $479,625. The
      marketing and distributorship agreement with Diamed provides for a minimum
      purchase of 1,000 OctoNova pumps during the period from the date of the
      agreement until five years after FDA approval, representing an aggregate
      commitment of €16,219,000, or approximately $19,207,513, based on exchange rates
      as of December 31, 2005.





On
      March
      4, 2005, we placed an order with MeSys for the purchase of 70 OctoNova pumps,
      of
      which 40 had been received by year-end. In October 2005, we extended our
      commitment to an additional 40 pumps (in addition to the 30 pumps that remained
      undelivered as at December 31, 2005) to be delivered by April 30, 2006.
      Accordingly, as at December 31, 2005, we are committed to the purchase of 70
      pumps representing a commitment of approximately $1,344,526, based on exchange
      rates as of December 31, 2005.





Pursuant
      to the terms of the distribution agreement with Asahi Medical, dated January
      1,
      2002, we undertook a commitment to purchase a minimum of 9,000, 15,000, and
      22,500 of each of Plasmaflo filters and Rheofilters in years 1, 2 and 3
      respectively beginning six months after FDA approval of the RHEOTM System.
      Minimum purchase orders for the fourth year shall be determined immediately
      after the term of the first year by mutual consent but shall not be less than
      that of the previous year. This same method shall be used in subsequent years
      to
      determine future minimum purchase quantities such that minimum purchase
      quantities are always fixed for three years. Future minimum annual commitments
      in respect of North America, including the Caribbean, after FDA approval are
      approximately as follows:





Year
                1
            
            $
            2,565,000Year
                2
            
            $
            4,275,000Year
                3
            
            $
            6,412,500





57




Pursuant
      to the terms of our agreement with Asahi Medical, in respect of Australia,
      New
      Zealand, Colombia, Venezuela and Italy, we undertook a commitment to purchase
      a
      minimum of 200, 1400 and 2,500 of each of Plasmaflo filters and Rheofilters
      in
      2006, 2007 and 2008, respectively. Minimum purchase orders for the years 2009
      and 2010 shall be discussed and determined at the beginning of the year 2008
      by
      mutual consent and, in respect of these countries other than Italy, shall not
      be
      less than the minimum for the previous year.





Future
      minimum annual commitments, in respect of Australia, New Zealand, Colombia,
      Venezuela and Italy, are approximately as follows:





2006
            
            $
            57,0002007
            
            $
            399,0002008
            
            $
            712,500




***Cash
      Used in Operating Activities***





Cash
      used
      in operating activities was $18,710,320, $5,382,465 and $2,374,820 for the
      years
      ended December 31, 2005, 2004 and 2003, respectively. Changes in net cash used
      in operating activities for the year ended December 31, 2005 reflect net loss
      of
      $162,971,986 adjusted for non-cash items of $149,187,316 and netted against
      changes in working capital of $4,925,650. Non-cash items consisted primarily
      of
      goodwill impairment of $147,451,758 and the amortization of intangibles, fixed
      assets, patents and trademarks of $1,821,680 and the premium/discounts on
      investments of $147,337 netted by applicable deferred income taxes of $635,167.
      Additional non-cash items result from stock-based compensation expense of
      $366,781 and the provision for doubtful collection of subscriptions receivable
      of $34,927. Changes in working capital in the period reflect a $82,810 increase
      in amounts receivable primarily from accrued interest receivable on investments,
      a $3,431,743 increase in inventory as we continue to maintain our order level
      in
      line with supplier expectations and a $322,455 increase in prepaid expenses
      due
      to advance payments to insurance providers and to participating clinical
      research organizations and clinical trial sites. Amounts due to related parties
      increased by $13,291 primarily due to the amount owed to RHEO Clinic for
      clinical and administrative support provided by RHEO Clinic. Accounts payable
      and accrued liabilities decreased by $262,468 as payments are being made for
      costs associated with clinical trial activities and the initial public offering
      and the related corporate reorganization. Amounts due to stockholders also
      decreased by $358,523 with the payment of $411,829 due to TLC Vision. In
      addition, deferred revenue decreased by $485,047 due to the shipment of
      treatment sets for which we had received an advance payment in
      2004.





***Cash
      Provided by (Used in) Investing Activities***





Cash
      provided by (used in) investing activities was $10,451,255, ($43,428,156),
      ($175,780) for the years ended December 31, 2005, 2004 and 2003, respectively.
      Net cash provided by investing activities for the year ended December 31, 2005
      was from the net sale of short term investments of $10,689,818 [2004 -
      $42,500,000; 2003 - nil] offset by cash used to protect and maintain patents
      and
      trademarks in the amount of $36,290 [2004 - $28,990; 2003 - $15,064] and the
      purchase of fixed assets of $202,273 [2004 - $192,281; 2003 - $164,776].





***Cash
      Provided by Financing Activities***





Cash
      provided by financing activities was $328,463 for the year ended December 31,
      2005 and relates to the exercise of stock options for cash proceeds of $231,235
      and the receipt of $186,734 as part of the balance due from stockholders from
      the exercise of warrants in 2004. This was offset by additional share issue
      costs of $88,714 in the year ended December 31, 2005 in relation to our initial
      public offering. Net cash provided by financing activities was $65,104,005
      and
      $3,185,311 in the years ended December 31, 2004 and 2003, respectively, and
      primarily reflects the issuances of common stock, convertible debentures as
      well
      as the issuance of convertible preferred stock.





58





**Critical
      Accounting Policies and Estimates**





Our
      discussion and analysis of our financial condition and results of operations
      is
      based upon our audited consolidated financial statements, which have been
      prepared in accordance with accounting principles generally accepted in the
      United States. The preparation of these financial statements requires us to
      make
      estimates and judgments that affect the reported amount of assets, liabilities,
      sales and expenses, and related disclosure of contingent assets and liabilities.
      On an ongoing basis, we evaluate our estimates, including those related to
      our
      intangible asset, uncollectible receivables, inventories, goodwill and
      stock-based compensation. We base our estimates on historical experience and
      on
      various other assumptions that we believe to be 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. Because this can vary in each situation, actual results may
      differ from these estimates under different assumptions or
      conditions.





We
      believe the following critical accounting policies affect our more significant
      judgments and estimates used in the preparation of our audited consolidated
      financial statements.





***Revenue
      Recognition***





We
      recognize revenue from the sale of the RHEOTM System which is comprised of
      OctoNova pumps and the related disposable treatment sets. We receive a signed
      binding purchase order from our customers. The pricing is a negotiated amount
      between our customers and us.





We
      have
      the obligation to train our customers and to calibrate the OctoNova pumps
      delivered to them. Only upon the completion of these services, do we recognize
      revenue for the pumps. We are also responsible for providing a one-year warranty
      on the OctoNova pumps, and the estimated cost of providing this service is
      accrued at the time revenue is recognized. The treatment sets do not require
      any
      additional servicing and revenue is recognized upon passage of title. All
      related costs of revenue are accrued for by us.





***Bad
      Debt Reserves***





We
      evaluate the collectibility of our accounts receivable based on a combination
      of
      factors. In cases where we are aware of circumstances that may impair a specific
      customer’s ability to meet its financial obligations to us, a specific allowance
      against amounts due to us is recorded which reduces the net recognized
      receivable to the amount we reasonably believe will be collected. For all other
      customers, we recognize allowances for doubtful accounts based on the length
      of
      time the receivables are past due, the current business environment and
      historical experience. As at December 31, 2005 and 2004, we had bad debt
      reserves of $1,049,297 and nil, respectively. We expensed amounts related to
      bad
      debt reserves of $518,852, nil and nil during the years ended December 31,
      2005,
      2004 and 2003, respectively, and set up a provision for $530,445 representing
      invoices for product shipped to customers in December 2005 for which revenue
      was
      not recognized due to the likelihood that the customer would not be able to
      pay
      for the amounts invoiced.





***Inventory
      Valuation***





Inventory
      is recorded at the lower of cost and net realizable value and consists of
      finished goods. Cost is accounted for on a first-in, first-out basis. Deferred
      cost of sales (included in finished goods) consists of products shipped but
      not
      recognized as revenue because they did not meet the revenue recognition
      criteria.





59





We
      receive free inventory from Asahi Medical for the purpose of the MIRA-1 and
      related clinical
      studies. We account for this inventory at a value equivalent to the cost we
      pay
      for the same filters purchased for commercial sales to related and unrelated
      third parties. Disposable inventory has a shelf life of three years which
      necessitates that we review the likelihood that disposable inventory on hand
      will be utilized prior to its expiration date. As of December 31, 2005 and
      2004,
      we had taken a provision for obsolescence of $1,990,830 and nil, respectively.
      We expensed amounts related to inventory obsolescence of $1,990,830, nil and
      nil
      during the years ended December 31, 2005, 2004 and 2003, respectively, as a
      result of the slower than expected commercialization of the RHEOTM System in
      Canada following the February 3, 2006 announcement of MIRA-1 clinical trial
      results.





***Impairment*** **** ***of
      long-lived assets***





We
      review
      our fixed assets and intangible asset for impairment whenever events or changes
      in circumstances indicate that the carrying amount of an asset might not be
      recoverable. When such an event occurs, management estimates the future
      undiscounted cash flows expected to result from the use of the asset and its
      eventual disposition. In the event the undiscounted cash flows are less than
      the
      carrying amount of the asset, a further analysis is required to estimate the
      fair value of the asset using the discounted cash flow method and then an
      impairment loss equal to the excess of the carrying amount over the fair value
      is charged to operations.





Our
      intangible asset is comprised of the value of the exclusive distribution
      agreements we have with Asahi Medical and MeSys. The intangible asset is
      amortized using the straight-line method over an estimated useful life of 15
      years.





As
      a
      result of the February 3, 2006 press release regarding the preliminary results
      of MIRA-1, we reviewed the carrying value of our intangible assets in accordance
      with FAS 142. Based on this analysis, we determined that the Company’s future
      undiscounted cash flows exceeded the carrying value of our intangible asset.
      Accordingly, we did not perform the second step of this analysis which would
      require us to compare the carrying value of our intangible asset to the present
      value of future cash flows of the Company.





***Impairment
      of Goodwill***





Effective
      January 1, 2002, goodwill is no longer amortized and is subject to an annual
      impairment test. Goodwill impairment is evaluated between annual tests upon
      the
      occurrence of certain events or circumstances. Goodwill impairment is assessed
      based on a comparison of the fair value of the reporting unit to the underlying
      carrying value of the reporting unit’s net assets, including goodwill. When the
      carrying amount of the reporting unit exceeds its fair value, the fair value
      of
      the reporting unit’s goodwill is compared with its carrying amount to measure
      the amount of impairment loss, if any. The Company is a single reporting unit.
      Therefore, management has determined the fair value of the Company’s goodwill
      using its market capitalization as opposed to the fair value of its assets
      and
      liabilities. As a result of the announcement on February 3, 2006, our stock
      as
      traded on NASDAQ National Market System decreased from $12.75 on February 2,
      2006 to close at $4.10 on February 3, 2006. The 10-day average price of the
      stock immediately following the announcement was $3.65 and reflected a decrease
      in our market capitalization from $536.6 million on February 2, 2006 to $153.6
      million based on the 10-day average share price subsequent to the announcement.
      The resulting decrease in the share price was identified as an indicator of
      impairment leading to an analysis of our intangible assets and goodwill and
      resulting in our reporting an impairment charge to goodwill of
      $147,451,758.





***Stock-based
      Compensation***





We
      follow
      Statement of Financial Accounting Standard No. 123 “Accounting for Stock-Based
      Compensation” (“SFAS No. 123”). The provisions of SFAS No. 123 allow companies
      to either expense the estimated fair value of stock options or to continue
      to
      follow the intrinsic method set forth in Accounting Principles Board Opinion
      No.
      25, “Accounting for Stock Issued to Employees” (“APB 25”) but disclose the pro
      forma effects on net income (loss) had the fair value of the options been
      expensed. We have elected to apply APB 25 in accounting for stock-based
      compensation for the years ended December 31, 2005, 2004 and 2003.





60





Pursuant
      to SFAS No. 123, the weighted-average fair values of employee options granted
      during the years ended December 31, 2005, 2004 and 2003 were $3.57, $6.96 and
      $11.91, respectively. The estimated fair value was determined using the
      following assumptions:





•
            Volatility:
                2005 - 73.2%, 2004 - 89.1%, 2003 -
                75%,;





•
            Expected
                life of option: 2005 - 2.4 years, 2004 - 3 years, 2003 - 4.1
                years;





•
            Risk-free
                interest rate: 2005 - 3.88%, 2004 - 3.21%, 2003 -
                2.15%.





Compensation
      expense associated with non-employee stock options was $309,055, $47,637 and
      $196,686 for the years ended December 31, 2005, 2004 and 2003, respectively.
      The
      fair value of these options was determined using the Black-Scholes fair value
      options model using the same assumptions above and is included in general and
      administrative expenses within the consolidated statement of
      operations.





On
      December 11, 2005, the Company’s Board of Directors approved accelerating the
      vesting of unvested stock options granted prior to December 31, 2004 to
      employees, officers and directors. As a result of the vesting acceleration,
      options to purchase 438,561 shares of the Company’s common stock became
      exercisable immediately, including 308,611 held by executive officers, 48,958
      held by non-employee directors and 80,992 held by other employees. These
      accelerated stock options represent approximately 30% of the total employee
      stock options of the Company that would not have been vested as at December
      31,
      2005. The weighted average exercise price of the options that were accelerated
      was $11.78. The purpose of the acceleration was to enable the Company to avoid
      recognizing compensation expense associated with these options in future periods
      in its consolidated statements of operations upon the adoption of SFAS 123R
      on
      January 1, 2006. In accordance with APB No. 25, the Company recorded a
      compensation expense of $53,295 for the year ended December 31, 2005 as 2%
      of
      the total options accelerated or 9,033 options were “in-the-money” as at
      December 31, 2005.





**Effective
      Corporate Tax Rate**





***Income
      Taxes***





As
      of
      December 31, 2005, we had net operating loss carry forwards for federal income
      taxes of $41.2 million. Our utilization of the net operating loss and tax credit
      carry forwards may be subject to annual limitations pursuant to Section 382
      of
      the Internal Revenue Code, and similar state provisions, as a result of changes
      in our ownership structure. The annual limitations may result in the expiration
      of net operating losses and credits prior to utilization.





At
      December 31, 2005, we had recorded a deferred tax liability due to the
      difference between the fair value of our intangible asset and its tax basis.
      We
      also had deferred tax assets representing the benefit of net operating loss
      carry forwards and certain stock issuance costs capitalized for tax purposes.
      We
      did not record a benefit for the deferred tax asset because realization of
      the
      benefit was uncertain, and, accordingly, a valuation allowance is provided
      to
      offset the deferred tax asset.





**Recent
      Accounting Pronouncements**





In
      May
      2005, the Financial Accounting Standards Board, or FASB, issued SFAS 154,
“Accounting Changes and Error Corrections” (SFAS 154) which replaces Accounting
      Principles Board Opinions (APB) No. 20 “Accounting Changes” (APB No. 20) and
      SFAS 3, “Reporting Accounting Changes in Interim Financial Statements - An
      Amendment of APB Opinion No. 28”. SFAS 154 provides guidance on the accounting
      for and reporting of accounting changes and error corrections. It establishes
      retrospective application, or the earliest practicable date, as the required
      method for reporting a change in accounting principle and restatement with
      respect to the reporting of a correction of an error. SFAS 154 is effective
      for
      accounting changes and corrections of errors made in fiscal years beginning
      after December 15, 2005. Accordingly, we are required to adopt SFAS 154
      beginning January 1, 2006.





61





In
      June
      2005, the FASB issued a FASB Staff Position (FSP) interpreting FASB Statement
      143, “Accounting for Asset Retirement Obligations”, specifically FSP 143-2,
“Accounting for Electronic Equipment Waste Obligations” (FSP 143-1). FSP 143-1
      addresses the accounting for obligations associated with Directive 2002/96/EC,
      Waste Electrical and Electronic Equipment, which was adopted by the European
      Union (EU). The FSP provides guidance on how to account for the effects of
      the
      Directive but only with respect to historical waste associated with products
      placed on the market on or before August 13, 2005. FSP 143-1 is effective on
      the
      later of the first reporting period ending after June 8, 2005 and the date
      of
      the adoption of the law by the applicable EU-member country. The adoption of
      FSP
      143-1 did not have a material impact on the Company’s results of operations or
      financial conditions.





In
      June
      2005, the Emerging Issues Task Force, or EITF, reached a consensus on Issue
      No.
      05-06, “Determining the Amortization Period for Leasehold Improvements” (EITF
      05-06). EITF 05-06 provides guidance for determining the amortization period
      used for leasehold improvements acquired in a business combination or purchased
      after the inception of a lease, collectively referred to as subsequently
      acquired leasehold improvements. EITF 05-06 provides that the amortization
      period used for the subsequently acquired leasehold improvements to be the
      lesser of (a) the subsequently acquired leasehold improvements useful lives
      and
      (b) a period that reflects renewals that are reasonably assured upon the
      acquisition or the purchase. EITF 05-06 is effective on a prospective basis
      for
      subsequently acquired leasehold improvements purchased or acquired in periods
      beginning after the date of the FASB’s ratification, which was on June 29, 2005.
      The adoption of EITF 05-06 did not have a material impact on our consolidated
      results of operations and financial position.





In
      November 2004, FASB issued SFAS No. 151, “Inventory Costs - An Amendment of ARB
      No. 43, Chapter 4” (SFAS No. 151). SFAS No. 151 requires that items such as idle
      facility expense, excessive spoilage, double freight and rehandling costs be
      excluded from the cost of inventory and expensed as incurred. Additionally,
      SFAS
      No. 151 requires that the allocation of fixed overheads be based on the normal
      capacity of the production facilities. SFAS No. 151 is effective for fiscal
      years beginning after June 15, 2005. We are currently evaluating the effect
      that
      the adoption of SFAS No. 151 will have on our consolidated results of operations
      and financial position.





In
      December 2004, FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets - An
      Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions” (SFAS
      No. 153). SFAS 153 eliminates the exception from fair value measurement for
      nonmonetary exchanges of similar productive assets and replaces it with an
      exception for exchanges that do not have commercial substance. SFAS No. 153
      specifies that a nonmonetary exchange has commercial substance if the future
      cash flows of the entity are expected to change significantly as a result of
      the
      exchange. SFAS No. 153 is effective for fiscal periods beginning after June
      15,
      2005. The adoption of SFAS No. 153 did not have a material impact on our
      consolidated results of operations and financial position.





In
      December 2004, FASB issued SFAS No. 123R, “Share-Based Payment”, which revised
      SFAS No. 123 and supersedes APB No. 25. SFAS No. 123R requires all share-based
      payments to employees, including grants of employee stock options to be
      recognized in the financial statements based on their fair values. The pro
      forma
      disclosures previously permitted under SFAS No. 123 will no longer be an
      alternative to financial statement recognition. SFAS No. 123R is effective
      at
      the beginning of the first interim or annual period beginning after June 15,
      2005. In April 2005, the United States Securities and Exchange Commission
      (“SEC”) announced the adoption of a new rule that amends the compliance dates
      for SFAS No. 123R. The SEC’s new rule allows companies to implement SFAS No.
      123R at the beginning of their next fiscal year, instead of the next reporting
      period that begins after June 15, 2005. Accordingly, we are required to adopt
      SFAS No. 123R beginning January 1, 2006.





We
      have
      selected the Black-Scholes option-pricing model as our method for determining
      the fair value for awards and will recognize compensation cost on a
      straight-line basis over the awards’ vesting periods. We expect that the
      adoption of SFAS 123R will have a material impact on our results of operations.
      However, uncertainties, including future stock-based compensation strategy,
      stock price volatility, estimated forfeitures and employee stock option exercise
      behavior, make it difficult to determine whether the stock-based compensation
      expense that we will incur in future periods will be similar to the SFAS 123
      pro
      forma expense disclosed in Note 2 to the consolidated financial statements.
      In
      addition, the amount of stock-based compensation expense to be incurred in
      future periods will be reduced by the acceleration of certain unvested stock
      options in fiscal 2005 as disclosed in Note 16[f] to the consolidated financial
      statements.




62





ITEM
                7A.
            QUANTITATIVE
                AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





**Quantitative
      and Qualitative Disclosure of Market Risk**





***Currency
      Fluctuations and Exchange Risk***





All
      of
      our sales are in U.S. dollars or are linked to the U.S. dollar, while a portion
      of our expenses are in Canadian dollars and Euros. We cannot predict any future
      trends in the exchange rate of the Canadian dollar or Euro against the U.S.
      dollar. Any strengthening of the Canadian dollar or Euro in relation to the
      U.S.
      dollar would increase the U.S. dollar cost of our operations, and affect our
      U.S. dollar measured results of operations. We do not engage in any hedging
      or
      other transactions intended to manage these risks. In the future, we may
      undertake hedging or other similar transactions or invest in market risk
      sensitive instruments if we determine that is advisable to offset these
      risks.





***Interest
      Rate Risk***





The
      primary objective of our investment activity is to preserve principal while
      maximizing interest income we receive from our investments, without increasing
      risk. We believe this will minimize our market risk.




63





ITEM
                8.
            FINANCIAL
                STATEMENTS AND SUPPLEMENTARY DATA.





Consolidated
      Financial Statements





**OccuLogix,
      Inc.**





December
      31, 2005 and 2004




64





**REPORT
      OF INDEPENDENT REGISTERED**





**PUBLIC
      ACCOUNTING FIRM**








To
      the
      Board of Directors and Shareholders of **OccuLogix,
      Inc.**





We
      have
      audited the accompanying consolidated balance sheets of **OccuLogix,
      Inc.** as of
      December 31, 2005 and 2004, and the related consolidated statements of
      operations, changes in stockholders’ equity (deficiency), and cash flows for
      each of the years in the three-year period ended December 31, 2005. 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 examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements. An audit also includes assessing the accounting principles used
      and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. 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 **OccuLogix,
      Inc.** at
      December 31, 2005 and 2004, and the results of its operations and its cash
      flows
      for each of the years in the three-year period ended December 31, 2005, in
      conformity with U.S. generally accepted accounting principles.





We
      have
      also audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the effectiveness of **OccuLogix,
      Inc.’s** internal
      control over financial reporting as of December 31, 2005, based on criteria
      established in Internal Control - Integrated Framework issued by the Committee
      of Sponsoring Organizations of the Treadway Commission and our report dated
      March 1, 2006 expressed an unqualified opinion thereon.







Toronto,
                Canada,
            /s/
                Ernst & Young LLPMarch
                1, 2006
            Chartered
                Accountants





65





**OccuLogix,
      Inc.**





**CONSOLIDATED
      BALANCE SHEETS**


*[expressed
      in U.S. dollars]*





**As
                at December 31,****2005**
              **$**
            
            **2004**
              **$****ASSETS****Current**Cash
                and cash equivalents
            
            
            **9,599,950**
            
            
            17,530,552Short-term
                investments
            
            
            **31,662,845**
            
            
            42,500,000Amounts
                receivable, net of bad debt reserves of $518,852 in 2005 and nil
                in 2004*[note
                12]*
            
            
            **554,966**
            
            
            472,156Due
                from related party*[note
                12]*
            
            
            —
            
            
            8,226Inventory,
                net of provision for inventory obsolescence of $1,990,830 in 2005
                and nil
                in 2004
            
            
            **4,701,464**
            
            
            1,086,339Prepaid
                expenses
            
            
            **803,268**
            
            
            480,813Deposit
            
            
            **4,891**
            
            
            8,996**Total
                current assets**
            
            
            **47,327,384**
            
            
            62,087,082Fixed
                assets, net*[note
                5]*
            
            
            **470,561**
            
            
            367,589Patents
                and trademarks, net*[note
                6]*
            
            
            **135,232**
            
            
            104,654Intangible
                asset, net*[note
                7]*
            
            
            **23,927,195**
            
            
            25,643,862Goodwill*[note
                3]*
            
            
            **65,945,686**
            
            
            213,397,444**137,806,058**
            
            
            301,600,631**LIABILITIES
                AND STOCKHOLDERS’ EQUITY****Current**Accounts
                payable
            
            
            **522,520**
            
            
            221,063Accrued
                liabilities*[note 14]*
            
            
            **2,226,619**
            
            
            2,791,291Deferred
                revenue and rent inducement*[notes
                9 and 10]*
            
            
            —
            
            
            485,047Due
                to related party*[note
                12]*
            
            
            **5,065**
            
            
            —Due
                to stockholders*[note
                11]*
            
            
            **158,233**
            
            
            516,756**Total
                current liabilities**
            
            
            **2,912,437**
            
            
            4,014,157Deferred
                tax liability*[note
                13]*
            
            
            **8,853,062**
            
            
            9,488,229**Total
                liabilities**
            
            
            **11,765,499**
            
            
            13,502,386Commitments
                and contingencies*[note
                15]***Stockholders’
                equity**Capital
                stock*[note
                16]*Common
                stock
            
            
            **42,086**
            
            
            41,807Par
                value of $0.001 per share;Authorized:
                75,000,000; Issued and outstanding:December
                31, 2005 - 42,085,853;December
                31, 2004 - 41,806,768;Additional
                paid-in capital
            
            
            **336,977,578**
            
            
            336,063,557Accumulated
                deficit
            
            
            **(210,979,105**
            **)**
            
            (48,007,119
            )**Total
                stockholders’ equity**
            
            
            **126,040,559**
            
            
            288,098,245**137,806,058**
            
            
            301,600,631




*See
      accompanying notes*





66





**OccuLogix,
      Inc.**





**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


*[expressed
      in U.S. dollars except number of shares]*





**Years
                ended December 31,****2005**
            
            **2004**
            
            **2003****$**
            
            **$**
            
            **$****Revenue**Sales
                to related parties*[note
                12]*
            
            
            **81,593**
            
            
            731,757
            
            
            390,479Sales
                to unrelated parties
            
            
            **1,758,696**
            
            
            237,600
            
            
            —**1,840,289**
            
            
            969,357
            
            
            390,479**Cost
                of goods sold**Cost
                of goods sold to related parties*[note
                12]*
            
            
            **43,236**
            
            
            688,102
            
            
            373,546Cost
                of goods sold to unrelated parties
            
            
            **3,250,866**
            
            
            133,710
            
            
            —Royalty
                costs*[note
                12]*
            
            
            **100,000**
            
            
            135,457
            
            
            109,234**3,394,102**
            
            
            957,269
            
            
            482,780**Gross
                margin**
            
            
            **(1,553,813**
            **)**
            
            12,088
            
            
            (92,301
            )**Operating
                expenses**General
                and administrative*[notes
                11, 12 and 16[f]]*
            
            
            **8,729,456**
            
            
            17,530,019
            
            
            1,564,362Clinical
                and regulatory*[note
                12]*
            
            
            **5,250,492**
            
            
            3,994,967
            
            
            731,166Sales
                and marketing*[note
                12]*
            
            
            **2,165,337**
            
            
            219,556
            
            
            —Impairment
                of goodwill*[note
                3]*
            
            
            **147,451,758**
            
            
            —
            
            
            —**163,597,043**
            
            
            21,744,542
            
            
            2,295,528Loss
                from operations
            
            
            **(165,150,856**
            **)**
            
            (21,732,454
            )
            
            (2,387,829
            )**Other
                income (expenses)**Interest
                income (expense)
            
            
            **1,593,366**
            
            
            35,735
            
            
            (67,997
            )Other
            
            
            **(57,025**
            **)**
            
            (145,925
            )
            
            (14,062
            )**1,536,341**
            
            
            (110,190
            )
            
            (82,059
            )Loss
                from operations before income taxes
            
            
            **(163,614,515**
            **)**
            
            (21,842,644
            )
            
            (2,469,888
            )Recovery
                of income taxes*[note
                13]*
            
            
            **642,529**
            
            
            23,771
            
            
            —**Net
                loss for the year**
            
            
            **(162,971,986**
            **)**
            
            (21,818,873
            )
            
            (2,469,888
            )**Weighted
                average number of shares outstanding - basic and
                diluted**
            
            
            **41,931,240**
            
            
            7,369,827
            
            
            3,976,921**Net
                loss per share - basic and diluted**
            
            **$**
            **(3.89**
            **)**
            $
            (2.96
            )
            $
            (0.62
            )





*See
      accompanying notes*





67





**OccuLogix,
      Inc.**








**CONSOLIDATED
      STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
      (DEFICIENCY)**


*[expressed
      in U.S. dollars]*





**Voting
                common stock at par value**
            
            **Series
                A convertible preferred stock at par value**
            
            **Series
                B convertible preferred stock at par value**
            
            **Additional
                paid-in capital**
            
            **Accumulated
                deficit**
            
            **Stockholders’
                equity (deficiency)****shares
                issued**
            
            **shares
                issued**
            
            **shares
                issued****#**
            
            $
            
            #
            
            $
            
            #
            
            $
            
            $
            
            $
            
            $**Balance,
                December 31, 2002**
            
            
            3,894,635
            
            
            3,895
            
            
            1,767,740
            
            
            1,768
            
            
            620,112
            
            
            620
            
            
            22,057,189
            
            
            (23,718,358
            )
            
            (1,654,886
            )Conversion
                of debt into commonstock*[notes
                12 and 16[c]]*
            
            
            507,604
            
            
            508
            
            
            -
            
            
            -
            
            
            
            
            
            -
            
            
            480,507
            
            
            -
            
            
            481,015Stock
                issued in lieu of consulting services*[note
                16[e]]*
            
            
            17,375
            
            
            17
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            22,571
            
            
            -
            
            
            22,588Stock
                issued pursuant to private offering memorandum*[note
                16[e]]*
            
            
            613,292
            
            
            613
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            578,683
            
            
            -
            
            
            579,296Contribution
                of inventory from related party*[note
                12]*
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            66,300
            
            
            -
            
            
            66,300Stock-based
                compensation*[note
                2]*
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            709,762
            
            
            -
            
            
            709,762Net
                loss for the year
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (2,469,888
            )
            
            (2,469,888
            )**Balance,
                December 31, 2003**
            
            
            5,032,906
            
            
            5,033
            
            
            1,767,740
            
            
            1,768
            
            
            620,112
            
            
            620
            
            
            23,915,012
            
            
            (26,188,246
            )
            
            (2,265,813
            )Stock-based
                compensation*[note
                16[f]]*
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            15,439,960
            
            
            -
            
            
            15,439,960Stock
                issued on exercise of options*[note
                16[f]]*
            
            
            272,200
            
            
            273
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            129,147
            
            
            -
            
            
            129,420Stock
                issued on exercise of warrants*[note
                16[g]]*
            
            
            102,369
            
            
            102
            
            
            379,284
            
            
            379
            
            
            -
            
            
            -
            
            
            1,415,840
            
            
            -
            
            
            1,416,321Subscription
                receivable*[note
                16[g]]*
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (221,661
            )
            
            -
            
            
            (221,661
            )Contribution
                of inventory from related party*[note
                12]*
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            146,905
            
            
            -
            
            
            146,905Conversion
                of Series A convertible preferred stock into common stock*[note
                16[b][ii]]*
            
            
            3,603,350
            
            
            3,603
            
            
            (2,147,024
            )
            
            (2,147
            )
            
            -
            
            
            -
            
            
            (1,456
            )
            
            -
            
            
            -Conversion
                of Series B convertible preferred stock into common stock*[note
                16[b][ii]]*
            
            
            1,019,255
            
            
            1,019
            
            
            -
            
            
            -
            
            
            (620,112
            )
            
            (620
            )
            
            (399
            )
            
            -
            
            
            -Conversion
                of convertible grid debentures into common stock*[notes
                12 and 16[b][ii]]*
            
            
            7,106,454
            
            
            7,107
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            6,992,893
            
            
            -
            
            
            7,000,000Fractional
                payout of converted shares due to preferred stockholders
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (747
            )
            
            -
            
            
            (747
            )Shares
                issued on acquisition of OccuLogix, L.P.*[note
                16[b][ii]]*
            
            
            19,070,234
            
            
            19,070
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            228,823,738
            
            
            -
            
            
            228,842,808Initial
                public offering, net of issue costs*[note
                16[e]]*
            
            
            5,600,000
            
            
            5,600
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            59,424,325
            
            
            -
            
            
            59,429,925Net
                loss for the year
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (21,818,873
            )
            
            (21,818,873
            )**Balance,
                December 31, 2004**
            
            
            41,806,768
            
            
            41,807
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            336,063,557
            
            
            (48,007,119
            )
            
            288,098,245




68




**OccuLogix,
      Inc.**





**CONSOLIDATED
      STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIENCY)
      continued**


*[expressed
      in U.S. dollars]*





**Voting
                common stock at par value**
            
            **Series
                A convertible preferred stock at par value**
            
            **Series
                B convertible preferred stock at par value**
            
            **Additional
                paid-in capital**
            
            **Accumulated
                deficit**
            
            **Stockholders’
                equity (deficiency)****shares
                issued**
            
            **shares
                issued**
            
            **shares
                issued****#**
            
            $
            
            #
            
            $
            
            #
            
            $
            
            $
            
            $
            
            $**Balance,
                December 31, 2004 [balance forward]**
            
            
            41,806,768
            
            
            41,807
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            336,063,557
            
            
            (48,007,119
            )
            
            288,098,245Stock-based
                compensation*[note
                16[f]]*
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            366,781
            
            
            -
            
            
            366,781Stock
                issued on exercise of options*[note
                16[f]]*
            
            
            279,085
            
            
            279
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            230,956
            
            
            -
            
            
            231,235Subscription
                receivable*[note
                16[g]]*
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            221,661
            
            
            -
            
            
            221,661Contribution
                of inventory from related party*[note
                12]*
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            167,730
            
            
            -
            
            
            167,730Contribution
                of inventory from unrelated party
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            15,652
            
            
            -
            
            
            15,652Fractional
                payout of converted shares due to preferred stockholders
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (45
            )
            
            -
            
            
            (45
            )Additional
                share issue costs related to initial public offering*[note
                16[e]]*
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (88,714
            )
            
            -
            
            
            (88,714
            )Net
                loss for the year
            
            
            **-**
            
            
            **-**
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (162,971,986
            )
            
            (162,971,986
            )**Balance,
                December 31, 2005**
            
            
            **42,085,853**
            
            
            **42,086**
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            **336,977,578**
            
            
            **(210,979,105**
            **)**
            
            **126,040,559**





*See
      accompanying notes*





69





**OccuLogix,
      Inc.**





**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


*[expressed
      in U.S. dollars]*





**Years
                ended December 31,****2005**
            
            **2004**
            
            **2003**$
            
            $
            
            **$****OPERATING
                ACTIVITIES**Net
                loss for the year
            
            
            **(162,971,986**
            **)**
            
            (21,818,873
            )
            
            (2,469,888
            )Adjustments
                to reconcile net loss to cash used in operating
                activities:Stock-based
                compensation*[note16[f]]*
            
            
            **366,781**
            
            
            15,439,960
            
            
            709,761Shares
                issued for services performed
            
            
            **—**
            
            
            —
            
            
            22,588Gain
                on settlement of debt
            
            
            **—**
            
            
            —
            
            
            (7,190
            )Amortization
                of fixed assets
            
            
            **99,301**
            
            
            42,956
            
            
            12,742Amortization
                of patents and trademarks
            
            
            **5,712**
            
            
            5,480
            
            
            3,887Amortization
                of intangible asset
            
            
            **1,716,667**
            
            
            106,138
            
            
            —Impairment
                of goodwill*[note
                3]*
            
            
            **147,451,758**
            
            
            —
            
            
            —Amortization
                of premiums/discounts on short-term investments
            
            
            **147,337**
            
            
            —
            
            
            —Provision
                for subscription receivable*[note
                16(g)]*
            
            
            **34,927**
            
            
            —
            
            
            —Deferred
                income taxes*[note
                13]*
            
            
            **(635,167**
            **)**
            
            (39,271
            )
            
            —Gain
                on sale of fixed assets
            
            
            **—**
            
            
            (6,000
            )
            
            (1,746
            )Impairment
                of fixed assets
            
            
            **—**
            
            
            13,850
            
            
            46,128Net
                change in non-cash working capital balances related to operations*[note
                17]*
            
            
            **(4,925,650**
            **)**
            
            873,295
            
            
            (691,102
            )**Cash
                used in operating activities**
            
            
            **(18,710,320**
            **)**
            
            (5,382,465
            )
            
            (2,374,820
            )**INVESTING
                ACTIVITIES**Proceeds
                on sale of fixed assets
            
            
            **—**
            
            
            6,000
            
            
            4,000Sale
                of (purchase of) short-term investments
            
            
            **10,689,818**
            
            
            (42,500,000
            )
            
            —Additions
                to fixed assets
            
            
            **(202,273**
            **)**
            
            (192,281
            )
            
            (164,716
            )Additions
                to patents and trademarks
            
            
            **(36,290**
            **)**
            
            (28,990
            )
            
            (15,064
            )Acquisition
                costs*[note
                4]*
            
            
            **—**
            
            
            (768,808
            )
            
            —Cash
                acquired on the acquisition OccuLogix, L.P.
            
            
            **—**
            
            
            55,923
            
            
            —**Cash
                provided by (used in) investing activities**
            
            
            **10,451,255**
            
            
            (43,428,156
            )
            
            (175,780
            )**FINANCING
                ACTIVITIES**Increase
                in long-term convertible debentures*[note
                12]*
            
            
            **—**
            
            
            4,350,000
            
            
            2,650,000Repayment
                of long-term debt
            
            
            **—**
            
            
            —
            
            
            (25,000
            )Share
                issuance costs
            
            
            **(88,714**
            **)**
            
            (7,770,075
            )
            
            (18,985
            )Debt
                issuance costs
            
            
            **—**
            
            
            —
            
            
            (24,796
            )Proceeds
                from exercise of common stock options and warrants*[notes 16[e] and [f]]*
            
            
            **231,235**
            
            
            263,900
            
            
            604,092Proceeds
                from exercise of Series A convertible preferred stock warrants*[note 16[g]]*
            
            
            **186,734**
            
            
            1,060,180
            
            
            —Fractional
                payout of converted shares due to preferred stockholders
            
            
            **(792**
            **)**
            
            —
            
            
            —Proceeds
                from issuance of common stock*[note
                16[e]]*
            
            
            **—**
            
            
            67,200,000
            
            
            —**Cash
                provided by financing activities**
            
            
            **328,463**
            
            
            65,104,005
            
            
            3,185,311**Net
                increase (decrease) in cash and cash equivalents during the year**
            
            
            **(7,930,602**
            **)**
            
            16,293,384
            
            
            634,711Cash
                and cash equivalents, beginning of year
            
            
            **17,530,552**
            
            
            1,237,168
            
            
            602,457**Cash
                and cash equivalents, end of year**
            
            
            **9,599,950**
            
            
            17,530,552
            
            
            1,237,168





*See
      accompanying notes*





70





**OCCULOGIX,
      INC.**




**Notes
      to Consolidated Financial Statements**


*[expressed
      in U.S. dollars except as otherwise noted]*






**1.
      NATURE OF OPERATIONS**





OccuLogix,
      Inc. and its subsidiaries, OccuLogix Holdings, Inc., OccuLogix, L.P. [the
“Partnership”], OccuLogix LLC and OccuLogix Canada Corp. [collectively the
“Company”], is an ophthalmic therapeutic company founded to commercialize
      innovative treatments for eye diseases, including age-related macular
      degeneration, or AMD. The RHEOTM System contains a pump that circulates blood
      through two filters and is used to perform Rheopheresis, a form of apheresis,
      which the Company refers to under the trade name RHEOTM Therapy, which is
      designed to treat Dry AMD, the most common form of the disease. The RHEOTM System
      is designed to improve microcirculation in the eye by filtering high molecular
      weight proteins and other macromolecules from the patient’s plasma.





The
      Company owns and/or has licensed certain patents relating to the RHEOTM System
      and has the exclusive right to develop and sell the equipment which comprises
      the RHEOTM System in the North American markets.





The
      Company began limited commercialization of the RHEOTM System at some clinics in
      Canada in 2003. The Company conducted a clinical trial, called MIRA-1, which,
      if
      successful, was expected to support its application with the U.S. Food and
      Drug
      Administration [“FDA”] to obtain approval to market the RHEOTM System in the
      United States *[note
      21]* .





In
      the
      Company’s February 3, 2006 announcement of the preliminary analysis of the data
      from MIRA-1, the Company announced that MIRA-1 did not demonstrate a
      statistically significant difference in the mean change of Best Spectacle
      Corrected Acuity applying the Early Treatment Diabetic Retinopathy Scale between
      the treated and placebo groups at 12 months post-baseline. As expected, the
      treated group demonstrated a positive response. An anomalous response of the
      control group is the principal reason that the primary efficacy endpoint was
      not
      met *[note 21]* .





The
      Company licensed its right to develop and sell the RHEOTM System to the
      Partnership in exchange for a 50% interest in the Partnership *[note* *8]* .
      The
      other 50% interest in the Partnership was owned by TLC Vision Corporation [“TLC
      Vision”], which is a significant stockholder of the Company. On December 8,
      2004, as part of the reorganization transactions *[note
      16[b]]* ,
      the
      Company purchased TLC Vision’s 50% interest in the Partnership and the results
      of the Partnership’s operations have been included in the consolidated financial
      statements since that date.





On
      December 31, 2005 as part of the Company’s continued reorganization, the
      Partnership transferred all of its assets and liabilities, including the
      licensed patent, trademark and know-how rights for the RHEOTM System, to the
      Company’s newly incorporated subsidiary, OccuLogix Canada Corp. The Company
      completed the process of the wind-up of the Partnership on February 6, 2006 *[note
      16[b]]* .





**2.
      SIGNIFICANT ACCOUNTING POLICIES**





The
      consolidated financial statements have been prepared by management in conformity
      with accounting principles generally accepted in the United States [“U.S.
      GAAP”].





**Basis
      of consolidation**





The
      consolidated financial statements include the accounts of OccuLogix, Inc. and
      its wholly-owned subsidiaries. All significant intercompany transactions and
      balances have been eliminated on consolidation.





**Use
      of estimates**





The
      preparation of consolidated financial statements in conformity with U.S. GAAP
      requires management to make estimates and assumptions that affect the reported
      amounts of assets and liabilities and disclosure of contingent assets and
      liabilities at the date of the consolidated financial statements and the
      reported amounts of revenue and expenses during the reporting periods. Some
      of
      the Company’s more significant estimates include those related to uncollectible
      receivables, inventory, goodwill, stock-based compensation and its intangible
      asset. Actual results could differ from those estimates.





71





**OCCULOGIX,
      INC.**




**Notes
      to Consolidated Financial Statements**


*[expressed
      in U.S. dollars except as otherwise noted]*






**Revenue
      recognition**





The
      Company recognizes revenue from the sale of the RHEOTM System, which is comprised
      of OctoNova pumps and the related disposable treatment sets. The Company
      receives a signed, binding purchase order from its customers. The pricing is
      a
      negotiated amount between the Company and its customers.





The
      Company has the obligation to train its customers and to calibrate the OctoNova
      pumps delivered to its customers. Only upon the completion of these services
      does the Company recognize revenue for the pumps. The Company is also
      responsible for providing a one-year warranty period, and the estimated cost
      of
      providing this service is accrued at the time revenue is recognized. The
      treatment sets do not require any additional servicing and revenue is recognized
      upon passage of title.





During
      the year ended December 31, 2005, the Company did not recognize as revenue
      $530,445 in sales of products that were shipped in December 2005 due to
      collectibility not being reasonably assured.





**Cost
      of goods sold**





Cost
      of
      sales includes costs of goods sold and royalty costs. The Company’s cost of
      goods sold consists primarily of costs for the manufacture of the RHEOTM System,
      including the costs the Company incurs for the purchase of component parts
      from
      its suppliers, applicable freight and shipping costs, fees related to
      warehousing, logistics inventory management and recurring regulatory costs
      associated with conducting business in Canada and ISO certification. In addition
      to these direct costs, included in the cost of goods sold are licensing costs
      associated with distributing the RHEOTM System in Canada and minimum royalty
      payments due to Mr. Hans Stock and Dr. Richard Brunner that are only recoverable
      based on sufficient volume *[notes
      11 and 12]* .





**Cash
      and cash equivalents**





Cash
      and
      cash equivalents comprise cash on hand and highly liquid short-term investments
      with original maturities of 90 days or less at the date of
      purchase.





**Short-term
      investments**





Short-term
      investments include $22,925,000 of auction rate securities, which are available
      to support the Company’s current operations. These investments are classified as
      available-for-sale securities and are recorded at fair value with unrealized
      gains or losses reported in other comprehensive income. Due to the short time
      period between the reset dates of the interest rates, there are no unrealized
      gains or losses associated with these securities. All of the auction rate
      securities have contractual maturities of more than three years. As at December
      31, 2005, the balance of short-term investments also included corporate and
      euro
      dollar bonds and corporate and United States federal agency notes, with
      maturities of one year or less, which are classified as held-to-maturity
      securities and carried at amortized cost. These investments are recorded at
      amortized cost unless a decline in value is deemed other than temporary, in
      which case the carrying value is reduced. The amortization of premiums and
      the
      accretion of discounts and any unrealized losses deemed other than temporary
      are
      included in the current year’s statement of operations.





**Bad
      debt reserves**





The
      Company evaluates the collectibility of its accounts receivable based on a
      combination of factors. In cases where management is aware of circumstances
      that
      may impair a specific customer’s ability to meet its financial obligations to
      the Company, a specific allowance against amounts due to the Company is recorded
      which reduces the net recognized receivable to the amount management reasonably
      believes will be collected. For all other customers, the Company recognizes
      allowances for doubtful accounts based on the length of time the receivables
      are
      past due, the current business environment and historical experience. As at
      December 31, 2005 and 2004, the Company had bad debt reserves of $518,852 and
      nil, respectively.





72





**OCCULOGIX,
      INC.**




**Notes
      to Consolidated Financial Statements**


*[expressed
      in U.S. dollars except as otherwise noted]*






**Inventory**





Inventory
      is recorded at the lower of cost and net realizable value and consists of
      finished goods. Cost is accounted for on a first-in, first-out basis. Deferred
      cost of sales (included in finished goods) consists of products shipped but
      not
      recognized as revenue because they did not meet the revenue recognition
      criteria. The Company evaluates its ending inventories for estimated excess
      quantities and obsolescence. This evaluation includes analyses of sales levels
      and projections of future demand within specific time horizons. Inventories
      in
      excess of future demand are reserved. In addition, the Company assesses the
      impact of changing technology and market conditions on its inventory-on-hand
      and
      writes off inventories that are considered obsolete. As at December 31, 2005
      and
      2004, the Company had inventory reserves of $1,990,830 and nil, respectively.
      During the years ended December 31, 2005, 2004 and 2003 the Company expensed
      amounts related to inventory reserves of $1,990,830, nil and nil, respectively,
      representing estimated inventories in excess of future demand.





The
      Company receives free inventory from Asahi Medical Co., Ltd. [“Asahi Medical”],
      which is credited to additional paid-in capital within stockholders’ equity, for
      the purpose of MIRA-1 and related clinical studies *[note 12]* .
      The
      Company accounts for this inventory at a value equivalent to the cost the
      Company pays for the same filters purchased for commercial sales to unrelated
      third parties. As at December 31, 2005 and 2004, of the total inventory value
      of
      $4,701,464 and $1,086,339, respectively, $264,615 and $106,020 relate to free
      inventory received by the Company from Asahi. In addition, the Company receives
      free vitamins from a certain supplier for the purpose of the MIRA-1 and related
      clinical studies. Included in inventory as at December 31, 2005 and 2004 are
      $6,397 and $3,118, respectively, which relate to free vitamins received by
      the
      Company.





**Fair
      value of financial instruments**





Fair
      value of a financial instrument is defined as the amount at which the instrument
      could be exchanged in a current transaction between willing parties. The
      estimated fair values of cash and cash equivalents, short-term investments,
      amounts receivable, due to/from related parties, accounts payable, accrued
      liabilities and due to stockholders approximate their carrying values due to
      the
      short-term maturities of these instruments.





**Fixed
      assets**





Fixed
      assets are recorded at cost less accumulated amortization. Amortization is
      calculated using the straight-line method, commencing when the assets become
      available for productive use, based on the following estimated useful
      lives:





Furniture
                and office equipment
            7
                yearsComputer
                equipment and software
            3
                yearsMedical
                equipment
            5
                years





**Impairment
      of long-lived assets**




The
      Company reviews its fixed assets and intangible asset for impairment whenever
      events or changes in circumstances indicate that the carrying amount of an
      asset
      might not be recoverable. When such an event occurs, management estimates the
      future undiscounted cash flows expected to result from the use of the asset
      and
      its eventual disposition. In the event the undiscounted cash flows are less
      than
      the carrying amount of the asset, an impairment loss equal to the excess of
      the
      carrying amount over the fair value is charged to operations.





73





**OCCULOGIX,
      INC.**




**Notes
      to Consolidated Financial Statements**


*[expressed
      in U.S. dollars except as otherwise noted]*






The
      Company’s intangible asset is comprised of the value of the exclusive
      distribution agreements the Company has with Asahi Medical, the manufacturer
      of
      the Rheofilter and the Plasmaflo filter, and Diamed Medizintechnik GmbH
      [“Diamed”] and MeSys GmbH, the designer and manufacturer, respectively, of the
      OctoNova pumps. The intangible asset is amortized using the straight-line method
      over an estimated useful life of 15 years.





**Investments**





Investments
      are accounted for using the equity method if the Company has significant
      influence, but not control, over an investee. Accordingly, prior to the purchase
      of TLC Vision’s 50% interest in the Partnership, the Company, through its
      wholly-owned subsidiary OccuLogix Holdings, Inc. [“OHI”], which owned a 50%
      interest in the Partnership, recorded its share of loss from the Partnership
      using the equity method. Subsequent to the purchase of the remaining 50%
      interest in the Partnership, the Company commenced consolidating the
      Partnership’s results effective December 9, 2004.





**Patents
      and trademarks**





Patents
      and trademarks have been recorded at historical cost and are amortized using
      the
      straight-line method over their estimated useful lives, not to exceed 15
      years.





**Goodwill**





Goodwill
      is not amortized and instead is subject to an annual impairment test. The
      Company’s annual impairment test is conducted effective October 1 and is
      evaluated between annual tests upon the occurrence of certain events or
      circumstances. Goodwill impairment is assessed based on a comparison of the
      fair
      value of the reporting unit to the underlying carrying value of the reporting
      unit’s net assets, including goodwill. When the carrying amount of the reporting
      unit exceeds its fair value, the fair value of the reporting unit’s goodwill is
      compared with its carrying amount to measure the amount of impairment loss,
      if
      any. The Company is a single reporting unit, therefore, management has
      determined the fair value of its goodwill using the Company’s market
      capitalization as compared to the fair value of its assets and
      liabilities.





**Foreign
      currency translation**





The
      Company’s functional and reporting currency is the U.S. dollar. The assets and
      liabilities of the Company’s Canadian operations are maintained in U.S. dollars.
      Monetary assets and liabilities denominated in foreign currencies are translated
      into U.S. dollars at exchange rates in effect at the consolidated balance sheet
      dates, and non-monetary assets and liabilities are translated at exchange rates
      in effect on the date of the transaction. Revenue and expenses are translated
      into U.S. dollars at average exchange rates prevailing during the year.
      Resulting exchange gains and losses are included in net loss for the year and
      are not material in any of the years presented.





**Clinical
      and regulatory costs**





Clinical
      and regulatory costs attributable to the performance of contract services are
      recognized as the services are performed. Non-refundable, up-front fees paid
      in
      connection with these contracted services are deferred and recognized as an
      expense on a straight-line basis over the estimated term of the related
      contract.





**Income
      taxes**





The
      Company uses the liability method of accounting for income taxes. Deferred
      tax
      assets and liabilities are recorded based on the differences between the income
      tax basis of assets and liabilities and their carrying amounts for financial
      reporting purposes at the applicable enacted statutory tax rates. Deferred
      tax
      assets are reduced by a valuation allowance if, based on the weight of available
      evidence, it is not more likely than not that some portion or all of the
      deferred tax assets will be realized.





74





**OCCULOGIX,
      INC.**




**Notes
      to Consolidated Financial Statements**


*[expressed
      in U.S. dollars except as otherwise noted]*






**Stock-based
      compensation**





The
      Company follows Statement of Financial Accounting Standard (“SFAS”) No. 123,
“Accounting for Stock-Based Compensation” [“SFAS No. 123”]. The provisions of
      SFAS No. 123 allow companies to either expense the estimated fair value of
      employee stock options or to follow the intrinsic value method set forth in
      Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
      Employees” [“APB 25”], but disclose the pro forma effects on net loss if the
      fair value of the options had been expensed. The Company has elected to apply
      APB 25 in accounting for employee stock options *[note* *16[f]]* .





The
      following table illustrates the pro forma net loss and pro forma loss per share
      as if the fair value method had been applied to all awards:


**Years
                ended December 31,****2005**
            
            **2004**
            
            **2003**$
            
            $
            
            **$****Net
                loss, as reported**
            
            
            **(162,971,986**
            **)**
            
            (21,818,873
            )
            
            (2,469,888
            )Adjustment
                for APB 25*[note
                16[f]]*
            
            
            **57,726**
            
            
            15,392,323
            
            
            513,077Adjustment
                for SFAS No. 123*[i]*
            
            
            **(6,664,395**
            **)**
            
            (15,673,031
            )
            
            (539,012
            )**Pro
                forma net loss**
            
            
            **(169,578,655**
            **)**
            
            (22,099,581
            )
            
            (2,495,823
            )**Pro
                forma loss per share - basic and diluted**
            
            **$**
            **(4.04**
            **)**
            $
            (3.00
            )
            $
            (0.63
            )





[i]
            On
                December 11, 2005, the Company’s Board of Directors approved accelerating
                the vesting of unvested stock options granted prior to December 31,
                2004
                to employees, officers and directors. As a result of the vesting
                acceleration, options to purchase 438,561 shares of the Company’s common
                stock became exercisable immediately. SFAS No. 123 treats the vesting
                acceleration as a modification of the original award and provides
                that
                such a modification is an exchange of the original award for a new,
                more
                valuable award. SFAS No. 123 considers the modification to be the
                "repurchase" of the old award from the employee and the grant of
                a new
                one, resulting in additional compensation expense for the incremental
                difference in value. This incremental difference in value is measured
                as
                the difference between (1) the fair value of the modified option
                determined in accordance with the provisions of SFAS No. 123 and
                (2) the
                value of the old option immediately before its terms are modified,
                determined based on the shorter of (a) its remaining expected life
                or (b)
                the expected life of the modified option. SFAS No. 123 provides that
                this
                incremental fair value, plus the remaining unrecognized compensation
                cost
                from the original measurement of the fair value of the old option,
                must be
                recognized over the remaining vesting period. As the options are
                vested as
                at December 31, 2005, the compensation cost should be recognized
                immediately. Included in the adjustment for SFAS No. 123 of $6,664,395
                for
                the year ended December 31, 2005 is the incremental fair value of
                $98,791
                and the remaining unrecognized compensation cost of $2,998,456 in
                respect
                of these options [note 16[f]]. Pursuant to SFAS No. 123, the weighted
                average fair values of employee stock options granted during the
                years
                ended December 31, 2005, 2004 and 2003 were $3.57, $6.96 and $11.91,
                respectively. The estimated fair value was determined using the following
                weighted average assumptions:




75


**OCCULOGIX,
        INC.**
  **Notes
        to Consolidated Financial Statements**
 *[expressed
        in U.S. dollars except as otherwise noted]*


**Years
                ended December 31,****2005**
            
            **2004**
            
            **2003**Volatility****
            
            
            **73.2**
            **%**
            
            89.1
            %
            
            75.0
            %Expected
                life of option
            
            
            **2.4
                yrs**
            
            
            3.0
                yrs
            
            
            4.1
                yrsRisk-free
                interest rate
            
            
            **3.88**
            **%**
            
            3.21
            %
            
            2.15
            %





The
      assumed dividend yield for all years presented is nil.





**Net
      loss per share**





The
      Company follows SFAS No. 128, “Earnings Per Share” [“SFAS No. 128”]. In
      accordance with SFAS No. 128, companies that are publicly held or have complex
      capital structures are required to present basic and diluted earnings per share
      (“EPS”) on the face of the statement of income. Basic EPS excludes dilution and
      is computed by dividing net loss available to common stockholders by the
      weighted average number of shares of common stock outstanding for the year.
      Diluted EPS reflects the potential dilution that could occur if securities
      or
      other contracts to issue common stock were exercised or converted and the
      resulting additional shares are dilutive because their inclusion decreases
      the
      amount of EPS.





The
      following table presents the potentially dilutive effects of outstanding
      securities:





**Years
                ended December 31,****2005**
            
            **2004**
            
            **2003****#**
            
            **#**
            
            **#****Weighted
                average number of shares outstanding - basic**
            
            
            **41,931,240**
            
            
            7,369,827
            
            
            3,976,921Effect
                of dilutive securities:Convertible
                debentures
            
            
            **—**
            
            
            —
            
            
            1,179,310Convertible
                preferred stock
            
            
            **—**
            
            
            —
            
            
            3,986,106Warrants
            
            
            **—**
            
            
            —
            
            
            960,145Stock
                options
            
            
            **1,246,809**
            
            
            1,498,950
            
            
            910,920**Weighted
                average number of shares outstanding - diluted**
            
            
            **43,178,049**
            
            
            8,868,777
            
            
            11,013,402




Potentially
      dilutive securities have not been used in the calculation of diluted loss per
      share as they are anti-dilutive.





76





**OCCULOGIX,
      INC.**




**Notes
      to Consolidated Financial Statements**


*[expressed
      in U.S. dollars except as otherwise noted]*






**Recent
      accounting pronouncements**





In
      May
      2005, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 154,
“Accounting Changes and Error Corrections” [“SFAS No. 154”] which replaces
      Accounting Principles Board Opinion [“APB”] No. 20, “Accounting Changes” [“APB
      20”] and SFAS No. 3, “Reporting Accounting Changes in Interim Financial
      Statements - An Amendment of APB Opinion No. 28”. SFAS No. 154 provides guidance
      on the accounting for and reporting of accounting changes and error corrections.
      It establishes retrospective application, or the earliest practicable date,
      as
      the required method for reporting a change in accounting policy and restatement
      with respect to the reporting of a correction of an error. SFAS No. 154 is
      effective for accounting changes and corrections of errors made in fiscal years
      beginning after December 15, 2005 and is required to be adopted by the Company
      beginning January 1, 2006. The adoption of SFAS No. 154 did not have a material
      impact on the Company’s results of operations or financial
      condition.





In
      June
      2005, FASB issued a FASB Staff Position [“FSP”] interpreting FASB Statement 143,
“Accounting for Asset Retirement Obligations”, specifically FSP 143-2,
“Accounting for Electronic Equipment Waste Obligations” [“FSP 143-1”]. FSP 143-1
      addresses the accounting for obligations associated with Directive 2002/96/EC,
      Waste Electrical and Electronic Equipment, which was adopted by the European
      Union [“EU”]. The FSP provides guidance on how to account for the effects of the
      Directive but only with respect to historical waste associated with products
      placed on the market on or before August 13, 2005. FSP 143-1 is effective on
      the
      later of the first reporting period ending after June 8, 2005 and or the date
      of
      the adoption of the law by the applicable EU-member country. The adoption of
      FSP
      143-1 did not have a material impact on the Company’s results of operations or
      financial condition.





In
      June
      2005, the EITF reached a consensus on Issue No. 05-06, “Determining the
      Amortization Period for Leasehold Improvements” [“EITF 05-06”]. EITF 05-06
      provides guidance for determining the amortization period used for leasehold
      improvements acquired in a business combination or purchased after the inception
      of a lease, collectively referred to as subsequently acquired leasehold
      improvements. EITF 05-06 provides that the amortization period used for the
      subsequently acquired leasehold improvements to be the lesser of (a) the
      subsequently acquired leasehold improvements useful lives and (b) a period
      that
      reflects renewals that are reasonably assured upon the acquisition or purchase.
      EITF 05-06 is effective on a prospective basis for subsequently acquired
      leasehold improvements purchased or acquired in periods beginning after the
      date
      of the FASB’s ratification, which was on June 29, 2005. The adoption of EITF
      05-06 did not have a material impact on the Company’s results of operations and
      financial position.





In
      November 2004, FASB issued SFAS No. 151, “Inventory Costs - An Amendment of ARB
      No. 43, Chapter 4” [“SFAS No. 151”]. SFAS No. 151 requires that items such as
      idle facility expense, excessive spoilage, double freight and rehandling costs
      be excluded from the cost of inventory and expensed as incurred. Additionally,
      SFAS No. 151 requires that the allocation of fixed overheads be based on the
      normal capacity of the production facilities. SFAS No. 151 is effective for
      fiscal years beginning after June 15, 2005. The Company is currently
      evaluating the effect that the adoption of SFAS No. 151 will have on the
      consolidated results of operations and financial position.





In
      December 2004, FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets - An
      Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions” [“SFAS
      No. 153”]. SFAS 153 eliminates the exception from fair value measurement for
      nonmonetary exchanges of similar productive assets and replaces it with an
      exception for exchanges that do not have commercial substance. SFAS No. 153
      specifies that a nonmonetary exchange has commercial substance if the future
      cash flows of the entity are expected to change significantly as a result of
      the
      exchange. SFAS No. 153 is effective for the fiscal periods beginning after
      June 15, 2005. The adoption of SFAS No. 153 did not have a material impact
      on the Company’s consolidated results of operations and financial
      position.





In
      December 2004, FASB issued SFAS No. 123R “Share-Based Payment” [“SFAS No.
      123R”], which revised SFAS No. 123 and supersedes APB No. 25, SFAS No. 123R
      requires all share-based payments to employees, including grants of employee
      stock options to be recognized in the financial statements based on their fair
      values. The pro forma disclosures previously permitted under SFAS No. 123 will
      no longer be an alternative to financial statement recognition. SFAS No. 123R
      is
      effective at the beginning of the first interim or annual period beginning
      after
      June 15, 2005. In April 2005, the United States Securities and Exchange
      Commission [“SEC”] announced the adoption of a new rule that amends the
      compliance dates for SFAS No. 123R. The SEC’s new rule allows companies to
      implement SFAS No. 123R at the beginning of their next fiscal year, instead
      of
      the next reporting period that begins after June 15, 2005. Accordingly, the
      Company is required to adopt SFAS No. 123R beginning January 1,
      2006.





77





**OCCULOGIX,
      INC.**




**Notes
      to Consolidated Financial Statements**


*[expressed
      in U.S. dollars except as otherwise noted]*






The
      Company has selected the Black-Scholes option-pricing model as its method of
      determining the fair value for its awards and will recognize compensation cost
      on a straight-line basis over the awards’ vesting periods. The Company expects
      that the adoption of SFAS 123R will have a material impact on its results of
      operations. However, uncertainties, including future stock-based compensation
      strategy, stock price volatility, estimated forfeitures and employee stock
      option exercise behavior, make it difficult to determine whether the stock-based
      compensation expense that the Company will incur in future periods will be
      similar to the SFAS 123 pro forma expense disclosed in elsewhere within note
      2
      to the consolidated financial statements. In addition, the amount of stock-based
      compensation expense to be incurred in future periods will be reduced by the
      acceleration of certain unvested stock options in fiscal 2005 as disclosed
      in
      Note 16[f] to the consolidated financial statements.





**3.
      GOODWILL**





The
      carrying amount of goodwill was $65,945,686 and $213,397,444 as at December
      31,
      2005 and 2004, respectively.





The
      Company performed its goodwill impairment analysis on October 1, 2005 using
      the
      market capitalization method. SFAS 142 requires that management estimates the
      fair value of the Company as compared to its estimated book value. If the
      estimated fair value is less than the estimated book value, then an impairment
      is deemed to have occurred. In estimating the fair value of the Company,
      management used the market capitalization approach which estimates fair value
      of
      the Company as determined by the market (based on the total market price of
      all
      outstanding units). Based on the goodwill impairment analysis, management
      concluded that there was no indication of an impairment in the carrying value
      of
      the Company’s goodwill as of that date.





Based
      on
      the result of the preliminary analysis of the data from MIRA-1 and the Company’s
      current market capitalization, the Company concluded that there were sufficient
      indicators to require management to re-assess whether the Company’s recorded
      goodwill was impaired as of December 31, 2005. Having determined the fair value
      of the Company’s assets and using the market capitalization method to value the
      Company (using a ten-day average of the stock value as traded on the NASDAQ
      National Market System subsequent to public disclosure of the preliminary MIRA-1
      findings), the Company concluded that a goodwill impairment charge of
      $147,451,758 should be recorded during the year ended December 31,
      2005.





**4.
      ACQUISITIONS**





On
      December 8, 2004 ,
      as part
      of the reorganization transactions *[note
      16[b]]* *,* the
      Company acquired TLC Vision’s 50% interest in the Partnership in exchange for
      the issuance to TLC Vision of 19,070,234 shares of its common stock. The stock
      consideration was valued based on the Company’s initial offering share price of
      $12.00 per share. The
      results of the Partnership’s operations have been included in the consolidated
      financial statements since that date.





The
      purchase price of the acquisition consisted of 19,070,234 shares of common
      stock
      of the Company valued at $228,842,808, plus acquisition costs of $768,808 for
      a
      total acquisition cost of $229,611,616. The purchase price was allocated as
      follows:





78





**OCCULOGIX,
      INC.**




**Notes
      to Consolidated Financial Statements**


*[expressed
      in U.S. dollars except as otherwise noted]*







**2004****$**Net
                tangible assets
            
            
            (8,328
            )Deferred
                tax liability
            
            
            (9,527,500
            )Intangible
                asset
            
            
            25,750,00016,214,172Goodwill
            
            
            213,397,444229,611,616




If
      the
      acquisition of TLC Vision’s 50% share of the Partnership had been completed by
      January 1, 2003, the unaudited pro forma effects on the consolidated statements
      of operations for the years ended December 31, 2004 and 2003 would have been
      to
      decrease revenue by $166,634 and increase revenue by $95,915, respectively.
      The
      unaudited net loss for the years ended December 31, 2004 and 2003 would have
      increased by $1,008,371 and $26,573, respectively. As a result of the impact
      of
      the above pro forma changes to net loss, combined with the dilutive effect
      from
      the increased number of shares, the unaudited net loss per share for the years
      ended December 31, 2004 and 2003 would have been reduced by $2.06 and $0.51
      per
      share, respectively. There is no pro forma effect on the consolidated statement
      of operation and the net loss per share for the year ended December 31, 2005
      as
      the results of the Partnership’s operations are included in the consolidated
      financial statements.





The
      unaudited pro forma information is presented for information purposes only
      and
      may not be indicative of the results of operations if the acquisition had
      occurred on January 1, 2003, nor is it necessarily indicative of the results
      of
      operations which may occur in the future.





**5.
      FIXED ASSETS**





**2005**
            
            **2004****Cost**
            
            **Accumulated
                Amortization**
            
            **Cost**
            
            **Accumulated
                Amortization**$
            
            $
            
            $
            
            $Furniture
                and office equipment
            
            
            **52,077**
            
            
            **23,924**
            
            
            34,828
            
            
            20,024Computer
                equipment and software
            
            
            **155,194**
            
            
            **53,345**
            
            
            52,654
            
            
            20,675Medical
                equipment
            
            
            **846,555**
            
            
            **505,996**
            
            
            764,071
            
            
            443,265**1,053,826**
            
            
            **583,265**
            
            
            851,553
            
            
            483,964Less
                accumulated amortization
            
            
            **583,265**
            
            
            
            
            
            483,964**470,561**
            
            
            
            
            
            367,589




79





**OCCULOGIX,
      INC.**




**Notes
      to Consolidated Financial Statements**


*[expressed
      in U.S. dollars except as otherwise noted]*






During
      the year ended December 31, 2004, the Company recorded a reduction to the
      carrying value of fixed assets of $13,850 [2003 - $46,128], of which $12,640
      [2003 - $26,840] reflects a write down of certain of the Company’s medical
      equipment to a value at December 31, 2004 of nil. The assets written down did
      not represent the most current technology available and were no longer being
      used in the clinical trials, and the Company has made the decision to write
      down
      these assets to their fair value and intends to evaluate the best disposal
      option. In addition to the write down of medical equipment, the carrying values
      of certain furniture and office equipment were reduced in 2004 to current value.
      This was in addition to a reduction in the carrying values of these same assets
      in prior years. The Company did not write down the carrying value of any of
      its
      fixed assets during the year ended December 31, 2005.





**6.
      PATENTS AND TRADEMARKS**





**2005**
            
            **2004****Cost**
            
            **Accumulated
                Amortization**
            
            **Cost**
            
            **Accumulated
                Amortization**$
            
            $
            
            $
            
            $Patents
            
            
            **95,289**
            
            
            **10,843**
            
            
            87,859
            
            
            6,777Trademarks
            
            
            **56,468**
            
            
            **5,682**
            
            
            27,608
            
            
            4,036**151,757**
            
            
            **16,525**
            
            
            115,467
            
            
            10,813Less
                accumulated amortization
            
            
            **16,525**
            
            
            
            
            
            10,813**135,232**
            
            
            
            
            
            104,654




Estimated
      amortization expense for patents and trademarks for each of the next five years
      are as follows:





**Patents**
              **$**
            
            **Trademarks**
              **$**
            
            **Total**
              **$**2006
            
            
            4,066
            
            
            1,884
            
            
            5,9502007
            
            
            4,066
            
            
            2,967
            
            
            7,0332008
            
            
            4,066
            
            
            3,304
            
            
            7,3702009
            
            
            4,066
            
            
            3,379
            
            
            7,4452010
            
            
            6,344
            
            
            3,703
            
            
            10,04722,608
            
            
            15,237
            
            
            37,845




80





**OCCULOGIX,
      INC.**




**Notes
      to Consolidated Financial Statements**


*[expressed
      in U.S. dollars except as otherwise noted]*






**7.
      INTANGIBLE ASSET**





The
      Company’s intangible asset consists of **** the
      value
      of the exclusive distribution agreements that the Company has with Asahi
      Medical, the manufacturer of the Rheofilter and the Plasmaflo filter, and Diamed
      and MeSys GmbH, the designer and manufacturer, respectively, of the OctoNova
      pumps. The distribution agreements are amortized using the straight-line method
      over an estimated useful life of 15 years. Amortization expense was $1,716,667
      for the year ended December 31, 2005 [2004 - $106,138; 2003 - nil].





Estimated
      amortization expense for the intangible asset for each of the next five years
      is
      as follows:





**$**2006
            
            
            1,716,6672007
            
            
            1,716,6672008
            
            
            1,716,6672009
            
            
            1,716,6672010
            
            
            1,716,667





As
      a
      result of the preliminary analysis of the data from MIRA-1, the Company
      concluded that there was sufficient indication that the carrying value may
      no
      longer be recoverable, thus requiring management to assess whether the Company’s
      intangible asset subject to amortization was impaired as of December 31, 2005.
      Based on management’s estimates of forecasted undiscounted cash flows as of
      December 31, 2005, the Company concluded that there is no indication of an
      impairment of the Company’s acquired intangible asset.





**8.
      INVESTMENT IN LIMITED PARTNERSHIP**





On
      July
      25, 2002, the Partnership was formed by an agreement between OHI, TLC Apheresis,
      L.P. [“Apheresis L.P.”], a wholly-owned subsidiary of TLC Vision, and OccuLogix
      Management, Inc. [“General Partner”] for the purpose of pursuing commercial
      applications of technologies owned or licensed by the Company applicable to
      the
      evaluation, diagnosis, monitoring and treatment of Dry AMD. The Company had
      an
      agreement with the Partnership appointing the Partnership as the sole
      distributor of the RHEOTM System and its component parts in North America, the
      Caribbean and Israel. Pricing was reviewed quarterly and adjusted as required
      for future sales. Each of OHI and Apheresis L.P. directly or indirectly owned
      a
      50% interest in the Partnership and the General Partner; in exchange for the
      50%
      interest, each of the partners contributed certain assets which were recorded
      at
      fair value which was nominal.





The
      Company did not consolidate the Partnership’s results for the year ended
      December 31, 2003 as TLC Vision’s effective interest in the Partnership was
      greater than 50% due to its direct ownership and indirect ownership through
      the
      Company. Accordingly, the Partnership was consolidated by TLC Vision. In
      addition, the Partnership’s management was primarily comprised of TLC Vision’s
      representatives and TLC Vision had disproportionately funded the activity of
      the
      Partnership.





The
      amount reported represented the Company’s proportionate share of the
      Partnership’s cumulative earnings on an equity basis.





81





**OCCULOGIX,
      INC.**




**Notes
      to Consolidated Financial Statements**


*[expressed
      in U.S. dollars except as otherwise noted]*






The
      Company did not recognize in the consolidated statements of operations its
      50%
      interest in the net loss of the Partnership for the year ended December 31,
      2003, as the net loss of the Partnership exceeded the net investment of the
      Company.





On
      December 8, 2004, as part of the reorganization transactions *[note
      16[b]],* the
      Company purchased TLC Vision’s 50% interest in the Partnership and the results
      of the Partnership’s operations have been included in the consolidated financial
      statements since that date.





On
      December 31, 2005 as part of the Company’s continued reorganization, the
      Partnership transferred all of its assets and liabilities, including the
      licensed patent, trademark and know-how rights for the RHEOTM System, to the
      Company’s newly incorporated subsidiary, OccuLogix Canada Corp. The Company
      completed the process of the wind-up of the Partnership in February 6, 2006 *[note
      16[b]].*





**9.
      DEFERRED REVENUE**





Deferred
      revenue for the year ended December 31, 2004 includes the sale of six pumps
      to
      Veris Health Sciences Inc. [“Veris”] [formerly RHEO Therapeutics, Inc.] (an
      Ontario, Canada corporation) for $187,200. Also included in deferred revenue
      for
      the year ended December 31, 2004 is the balance of the advance payment received
      from Veris for the purchase of 660 treatment sets, of which the total amount
      received was $495,000. Of the 660 treatment sets, 252 treatment sets, at a
      total
      purchase price of $202,230 [plus applicable taxes], had been delivered to the
      customer and is included in the revenue reported in the consolidated statement
      of operations for the year ended December 31, 2004. The balance in deferred
      revenue for the year ended December 31, 2005 was nil.





**10.
      RENT INDUCEMENT**





Deferred
      rent for the year ended December 31, 2004 represents the benefit of operating
      lease inducements of $5,077, net, which is being amortized on a straight-line
      basis over the related term of the lease. The balance of deferred rent for
      the
      year ended December 31, 2005 was nil.





**11.
      DUE TO STOCKHOLDERS**





**December
                31,****2005**
              **$**
            
            **2004**
              **$****Due
                to**TLC
                Vision Corporation*[note
                12]*
            
            
            **116,070**
            
            
            473,929Other
                stockholder*[note
                12]*
            
            
            **42,163**
            
            
            42,827**158,233**
            
            
            516,756




The
      balance owing to TLC Vision of $116,070 and $473,929 as at December 31, 2005
      and
      2004, respectively, is related to computer and administrative support provided
      by TLC Vision, all of which has been expensed during the years ended December
      31, 2005 and 2004, respectively, and included in general and administrative
      expenses.





82





**OCCULOGIX,
      INC.**




**Notes
      to Consolidated Financial Statements**


*[expressed
      in U.S. dollars except as otherwise noted]*






**12.
      RELATED PARTY TRANSACTIONS**





The
      following are the Company’s related party transactions in addition to those
      disclosed in notes 1, 8, 11 and 15





**[a]**
            **RHEO
                Clinic Inc.**





**December
                31,****2005**
              **$**
            
            **2004**
              **$****Due
                (to) from**RHEO
                Clinic Inc.
            
            
            **(5,065**
            **)**
            
            8,226**(5,065**
            **)**
            
            8,226




One
      of
      the Company’s primary customers was RHEO Clinic Inc., a subsidiary of TLC
      Vision. For the years ended December 31, 2004 and 2003, prior to the Partnership
      being a wholly-owned subsidiary of the Company, the Company has reported
      revenues of $401,236 and $459,730, respectively. The Partnership became a
      wholly-owned subsidiary of the Company on December 8, 2004 and the results
      of
      the Partnership’s operations have been included in the consolidated financial
      statements of the Company since that date. Therefore, the results of the
      Partnership’s operations for the years ended December 31, 2004 and 2003 are not
      reflected in the consolidated financial statements of the Company for these
      periods except as to the equity accounted earnings *[note
      8]* .





RHEO
      Clinic Inc. used the RHEOTM System to treat patients for which it charged its
      customers [the patients] a per-treatment fee. During the third quarter of 2005,
      RHEO Clinic Inc. determined that it will no longer operate the RHEO Clinic
      and
      subsequently sold off certain of its assets to the Company at a purchase price
      of C$61,812, including all applicable taxes. Included in the balance due to
      RHEO
      Clinic Inc. as at December 31, 2005 and 2004 is the amount owing to the
      Partnership for the purchase of the components of the RHEOTM System net of the
      amount owing to RHEO Clinic Inc. for clinical and administrative support
      provided by RHEO Clinic Inc. for the Company’s MIRA-1 and related clinical
      trials.





On
      July
      29, 2005, the Company entered into an agreement with RHEO Clinic Inc. to
      purchase fixed assets and intellectual property valued at C$61,812 to be used
      for the Company’s clinical trial activities and other purposes. The Company
      agreed to share equally in losses incurred by RHEO Clinic Inc., to a maximum
      of
      C$28,952, for assets that RHEO Clinic is not able to dispose of. To date, RHEO
      Clinic Inc. has not advised the Company of the final calculation of any losses.
      In addition, the Company reimbursed RHEO Clinic Inc. C$281,581, which amount
      represented that portion of the costs incurred by RHEO Clinic Inc. deemed
      applicable to the Company’s clinical trial activities from October 1, 2004 to
      June 30, 2005.





**[b]**
            **TLC
                Vision and Diamed**





On
      June
      25, 2003, the Company entered into agreements with TLC Vision and Diamed to
      issue grid debentures in the maximum aggregate principal amount of $12,000,000
      in connection with the funding of the Company’s MIRA-1 and related clinical
      trials. $7,000,000 of the aggregate principal amount was convertible into shares
      of common stock of the Company at a price of $0.98502 per share, and $5,000,000
      of the aggregate principal amount was non-convertible.





The
      $5,000,000 portion of the $12,000,000 commitment which was not convertible
      into
      the Company’s common stock was not advanced and the commitment was terminated
      prior to the completion of the initial public offering.





83


**OCCULOGIX,
        INC.**
  **Notes
        to Consolidated Financial Statements**
 *[expressed
        in U.S. dollars except as otherwise noted]*


During
      the years ended December 31, 2004 and 2003, the Company issued an aggregate
      of
      $4,350,000 and $2,650,000, respectively, under the convertible portion of the
      grid debentures. On December 8, 2004, as part of the reorganization transactions *[note
      16[b]],* the
      Company issued 7,106,454 shares of common stock to TLC Vision and Diamed, upon
      conversion of $7,000,000 of aggregate principal amount of convertible debentures
      at a conversion price of $0.98502 per share. Collectively, as at December 31,
      2005, the two companies have a combined direct and indirect 55.87% equity
      interest in the Company on a fully diluted basis.





The
      Company is economically dependent on Diamed to control the supply of the
      OctoNova pumps used in the RHEOTM System. The Company believes that the OctoNova
      pumps are a critical component in the RHEOTM System.





**[c]**
            **Asahi
                Medical Co., Ltd.**





The
      Company is party to a distributorship agreement with Asahi Medical pursuant
      to
      which Asahi Medical supplies the filter products used in the RHEOTM
System.





The
      Company is economically dependent on Asahi Medical to continuously provide
      filters and believes that the filter products provided by Asahi Medical are
      a
      critical component in the RHEOTM System. In the event the Company is not able to
      obtain regulatory approval for the RHEOTM System from the FDA and other necessary
      approvals in the territories for which the Company has distribution rights
      by
      the end of December 2006, Asahi Medical can terminate the distributorship
      agreement.





The
      Company receives free inventory from Asahi Medical for the purpose of the MIRA-1
      and related clinical studies. The Company has accounted for this inventory
      at a
      value equivalent to the cost the Company has paid for the same filters for
      commercial sales to the Partnership or the Company’s other commercial
      subsidiaries. The value of the free inventory received was $167,730 and $146,905
      for the years ended December 31, 2005 and 2004, respectively.





**[d]**
            **Mr.
                Hans Stock***[see
                note 11]*





On
      February 21, 2002, the Company entered into an agreement with Mr. Stock as
      a
      result of his assistance in procuring a distributor agreement for the filter
      products used in the RHEOTM System from Asahi Medical. Mr. Stock agreed to
      further assist the Company in procuring new product lines from Asahi Medical
      for
      marketing and distribution by the Company. The agreement will remain effective
      for a term consistent with the term of the distributorship agreement with Asahi
      Medical and Mr. Stock will receive a 5% royalty payment on the purchase of
      the
      filters from Asahi Medical. During the years ended December 31, 2005 and 2004,
      the Company paid Mr. Stock $240,657 and $6,327, respectively, as royalty fees.
      Included in due to stockholders as at December 31, 2005 and 2004 is $29,663
      and
      $30,327, respectively, due to Mr. Stock.





On
      June
      25, 2002, the Company entered into a consulting agreement with Mr. Stock for
      the
      purpose of procuring a patent license for the extracorporeal applications in
      ophthalmic diseases for that period of time in which the patent was effective.
      Mr. Stock was entitled to 1.0% of total net revenue from the Company’s
      commercial sales of products sold in reliance and dependence upon the validity
      of the patent’s claims and rights in the United States. The Company agreed to
      make advance consulting payments to Mr. Stock of $50,000 annually, payable
      on a
      quarterly basis, to be credited against any and all future consulting payments
      payable in accordance with this agreement. Due to the uncertainty of future
      royalty payment requirements, all required payments to date have been
      expensed.





On
      August
      6, 2004, the Company entered into a patent license and royalty agreement with
      Mr. Stock to obtain an exclusive license to U.S. Patent No. 6,245,038. The
      Company is required to make royalty payments totalling 1.5% of product sales
      to
      Mr. Stock, subject to minimum advance royalty payments of $12,500 per quarter.
      The advance payments are credited against future royalty payments to be made
      in
      accordance with the agreement. This agreement replaces the June 25, 2002
      consulting agreement with Mr. Stock which provided for a royalty payment of
      1%
      of product sales *.* In each
      of the years ended December 31, 2005 and 2004, the Company paid $50,000 to
      Mr.
      Stock as royalty fees. Included in due to stockholders as at December 31, 2005
      and 2004 is $12,500 and $12,500, respectively, due to Mr.
      Stock.





84





**OCCULOGIX,
      INC.**




**Notes
      to Consolidated Financial Statements**


*[expressed
      in U.S. dollars except as otherwise noted]*






**[e]**
            **Apheresis
                Technologies, Inc.**





On
      May 1,
      2002, the Company entered into an exclusive distribution services agreement
      with
      Apheresis Technologies, Inc. [“ATI”], a company controlled by certain
      stockholders of the Company pursuant to which the Company pays ATI 5% of the
      Company’s cost of components of the RHEOTM System. Under this agreement, ATI is
      the exclusive provider of warehousing, order fulfillment, shipping, billing
      services and customer service related to shipping and billing to the
      Company.





On
      July
      30, 2004, the Company amended its distribution services agreement with ATI
      such
      that the Company would have the sole discretion as to when the agreement would
      terminate. In consideration of this amendment, the Company agreed to pay ATI
      $100,000 on the successful completion of the initial public offering. On January
      18, 2005, the Company paid ATI $100,000 as provided for in the amended
      distribution services agreement. On March 28, 2005, the Company terminated
      its
      distribution services agreement with ATI.





**[f]**
            **Other**





On
      June
      25, 2003, the Company entered into a reimbursement agreement with ATI, pursuant
      to which employees of ATI provide services to the Company and ATI is reimbursed
      for the applicable percentage of time the employees spend working for the
      Company. Effective April 1, 2005, the Company terminated its reimbursement
      agreement with ATI such that the Company no longer compensates ATI in respect
      of
      any salary paid to, or benefits provided to, Mr. Cornish by ATI. Until April
      1,
      2005, Mr. Cornish did not have an employment contract with the Company and
      received no direct compensation from the Company. On April 1, 2005, Mr. Cornish
      entered into an employment agreement with the Company under which he will
      receive an annual base salary of $106,450, representing compensation to him
      for
      devoting 80% of his time to the business and affairs of the Company. Effective
      June 1, 2005, the Company amended its employment agreement with Mr. Cornish
      such
      that he will receive an annual base salary of $113,103, representing
      compensation to him for devoting 85% of his time to the business and affairs
      of
      the Company. Mr. Cornish continues to participate in the Company’s bonus plan.
      Mr. Cornish is one of the Company’s stockholders and the Company’s Vice
      President, Operations.





Effective
      January 1, 2004, the Company entered into a rental agreement with a related
      party whereby the Company will lease space from Cornish Properties Corporation
      at $2,745 per month. The term of the lease extends to December 31, 2005. In
      each
      of the years ended December 31, 2005 and 2004, the Company paid Cornish
      Properties Corporation an amount of $32,940. On November 8, 2005, as provided
      for in the rental agreement, the Company extended the term of the rental
      agreement with Cornish Properties Corporation for another year ending December
      31, 2006.





Effective
      June 25, 2003, Elias Vamvakas, the Chairman of TLC Vision, became the Chairman
      and Secretary of both the Company and the General Partner of the Partnership.
      500,000 stock options issued to Mr. Vamvakas in December 2003 were accounted
      for
      in accordance with APB 25. The Company estimated the intrinsic value of these
      options granted to Mr. Vamvakas to be approximately $5,880,000. Management
      estimated the fair value of the underlying common stock based on management’s
      estimate of the Company’s value. The intrinsic value of the options is being
      amortized over the vesting period. However, upon the successful completion
      of
      the Company’s initial public offering, the options vested immediately, and
      therefore, any unvested compensation expense was expensed immediately. The
      impact of this stock compensation expense for the years ended December 31,
      2005,
      2004 and 2003 was nil, $5,690,323 and $189,677, respectively.





In
      addition, the Company entered into a consultancy and non-competition agreement
      on July 1, 2003 with the Center for Clinical Research [“CCR”], then a
      significant shareholder, which requires the Company to pay a fee of $5,000
      per
      month. For the year ended December 31, 2003, CCR agreed to forego the payment
      of
      $75,250 due to it in exchange for options to purchase 20,926 shares of common
      stock of the Company at an exercise price of $0.13. In addition, CCR also agreed
      to the repayment of the balance of $150,500 due to it at $7,500 per month
      beginning in July 2003. Included in accounts payable as at December 31, 2005
      and
      2004 are nil and $15,500, respectively, due to CCR. On August 22, 2005, the
      Company amended the consultancy and non-competition agreement with CCR such
      that
      the fee payable to it was increased from $5,000 to $15,000 per month effective
      January 1, 2005, the payment of a one-time bonus of $200,000 upon successful
      FDA
      approval of the RHEOTM System and the grant of 60,000 options to CCR at an
      exercise price of $7.15. These options are expected to fully vest on successful
      FDA approval of the RHEOTM System. This resulted in a combined consulting
      expense, included within clinical and regulatory expense for the year ended
      December 31, 2005, of $249,831 which is in accordance with SFAS No.
      123.




85





**OCCULOGIX,
      INC.**




**Notes
      to Consolidated Financial Statements**


*[expressed
      in U.S. dollars except as otherwise noted]*







On
      September 29, 2004, the Partnership signed a product purchase agreement with
      Veris for the purchase from the Partnership of 8,004 treatment sets over the
      period from October 2004 to December 2005, a transaction valued at $6,003,000,
      after introductory rebates. However, due to delays in opening its planned number
      of clinics throughout Canada, Veris no longer required the contracted-for number
      of treatment sets in the period. The Company agreed to the original pricing
      for
      the reduced number of treatment sets required in the period. Dr. Machat, who
      is
      an investor in and one of the directors of Veris, was a co-founder and former
      director of TLC Vision. In December 2005, by letter agreement, the Company
      agreed to the volume and other terms for the purchase and sale of treatment
      sets
      and pumps for the period ending February 28, 2006. As at December 31, 2005,
      the
      Partnership had received a total of $1,779,566 from Veris. Included in amounts
      receivable as at December 31, 2005 and 2004 are $1,047,622 and $322,920,
      respectively, due from Veris for the purchase of additional pumps and treatment
      sets. Veris has agreed to the payment of interest at the rate of 8% per annum
      on
      all amounts outstanding for more than 45 days up to the date of final payment
      on
      March 31, 2006. Included in amounts receivable as at December 31, 2005 is
      accrued interest receivable from Veris of $4,495 on amounts outstanding for
      more
      than 45 days. Based on discussions with Veris, the Company believes that Veris
      will not be able to meet its financial obligations to the Company by March
      31,
      2006. Therefore, the Company has recorded an allowance for doubtful accounts
      of
      $1,047,622 against the amount due from Veris for the year ended December 31,
      2005.





In
      addition, the Company entered into a clinical trial agreement on November 22,
      2005 with Veris which requires Veris to provide certain clinical trial services
      to the Company. The agreement provides for an advance payment of C$195,000
      to
      Veris which represents 30% of the total value of the contract. The Company
      paid
      Veris C$195,000 on November 22, 2005 as provided for in the clinical trial
      agreement. This amount has been expensed during the year ended December 31,
      2005
      as the Company has suspended the clinical trial in question pending the outcome
      of the detailed analysis of the MIRA-1 study data, the outcome of the Company’s
      discussions with the FDA and the determination of the parameters of any
      follow-up clinical trial required by the FDA.





On
      March
      28, 2005, the Company entered into a supply and co-marketing agreement with
      Rheogenx Biosciences Corporation [“Rheogenx”] for the supply of pumps and
      disposable treatment sets to Rheogenx and its affiliates, including PhereSys
      Therapeutics Corporation [“PhereSys”], Rheogenx’s wholly-owned subsidiary. Under
      this agreement, the Company will provide marketing support for PhereSys’s mobile
      apheresis business upon obtaining FDA approval to market the RHEOTM System in the
      United States. In connection with entering into this agreement, the Company
      also
      entered into an asset purchase agreement with Rheogenx on March 28, 2005 to
      effectively terminate the patent, know-how and trademark rights to
      non-ophthalmic indications for the RHEOTM System in North America which the
      Company had previously licensed to Rheogenx. The purchase price of the assets
      under the asset purchase agreement was $10 and has been included within accrued
      liabilities.





During
      the fourth quarter of 2004, the Company began a business relationship with
      Innovasium Inc., an Ontario, Canada corporation. Innovasium Inc. designed and
      built some of the Company’s websites and also created some of the sales and
      marketing materials to reflect the look of the Company’s websites. Daniel
      Hageman, who is the President and one of the owners of Innovasium Inc., is
      the
      husband of an officer of the Company. During the year ended December 31, 2005,
      the Company paid Innovasium Inc. C$123,967. Included in accounts payable and
      accrued liabilities as at December 31, 2005 is C$15,798 due to Innovasium Inc.
      These amounts are expensed in the period incurred and paid when
      due.





86





**OCCULOGIX,
      INC.**




**Notes
      to Consolidated Financial Statements**


*[expressed
      in U.S. dollars except as otherwise noted]*







**13.
      INCOME TAXES**





Significant
      components of the Company’s deferred tax assets and liabilities are as
      follows:





**December
                31,****2005**
              **$**
            
            **2004**
              **$****Deferred
                tax assets**Intangibles
            
            
            ―
            
            
            ―Fixed
                assets
            
            
            (52,219
            )
            
            3,754Stock
                options
            
            
            4,191,762
            
            
            5,565,688Accruals
                and other
            
            
            1,332,602
            
            
            60,914Foreign
                tax credit
            
            
            ―
            
            
            15,500Net
                operating loss carryforwards
            
            
            15,251,744
            
            
            10,448,10120,723,889
            
            
            16,093,957Valuation
                allowance
            
            
            (20,723,889
            )
            
            (16,093,957
            )**Deferred
                tax asset**
            
            
            ―
            
            
            ―





**December
                31,****2005**
              **$**
            
            **2004**
              **$****Deferred
                tax liability**Intangible
                assets (other than goodwill)
            
            
            (8,853,063
            )
            
            (9,488,229
            )**Deferred
                tax liability**
            
            
            (8,853,063
            )
            
            (9,488,229
            )







The
      following is a reconciliation of the recovery of income taxes between those
      that
      are expected, based on substantively enacted tax rates and laws, to those
      currently reported:





87


**OCCULOGIX,
        INC.**
  **Notes
        to Consolidated Financial Statements**
 *[expressed
        in U.S. dollars except as otherwise noted]*


**December
                31,****2005**
              **$**
            
            **2004**
              **$**
            
            **2003**
              **$****Net
                loss for the year before income taxes**
            
            
            **(163,614,515**
            **)**
            
            (21,803,373
            )
            
            (2,469,888
            )Expected
                recovery of income taxes [tax rate of 37%]
            
            
            **(60,537,371**
            **)**
            
            (8,067,250
            )
            
            (913,859
            )Goodwill
                impairment (permanent difference basis)
            
            
            **54,557,150**Stock-based
                compensation
            
            
            **38,628**
            
            
            312,292
            
            
            7,018Provision
                for warrants
            
            
            **12,923**
            
            
            ―
            
            
            ―Tax
                free income
            
            
            **(46,979**
            **)**Return
                to provision
            
            
            **1,252,842**
            
            
            ―
            
            
            8,957Non-deductible
                expenses
            
            
            **19,656**
            
            
            3,700
            
            
            2,442Change
                in valuation allowance
            
            
            **4,060,621**
            
            
            7,727,487
            
            
            895,442**Recovery
                of income taxes**
            
            
            **(642,530**
            **)**
            
            (23,771
            )
            
            **―**





The
      Company and its subsidiaries have current and prior year losses available to
      reduce taxable income and taxes payable in future years and, if not utilized,
      will expire as follows:





**$**2012
            
            
            3,455,0292018
            
            
            4,500,4012019
            
            
            1,893,7002020
            
            
            4,488,3612021
            
            
            3,356,9922022
            
            
            2,497,6022023
            
            
            1,896,1672024
            
            
            6,246,5812025
            
            
            12,899,632





88





**OCCULOGIX,
      INC.**




**Notes
      to Consolidated Financial Statements**


*[expressed
      in U.S. dollars except as otherwise noted]*







**14.
      ACCRUED LIABILITIES**





**December
                31,****2005**
              **$**
            **2004**
              **$**Due
              to professionals
            **348,044**
            190,762Due
                to clinical trial sites
            **32,936**
            571,078Due
                clinical trial specialists
            **227,009**
            526,848Due
                to ATI
            **7,490**
            100,000Due
                to employees and directors
            **993,177**
            79,329Sales
                tax and capital tax payable
            **155,604**
            85,472Legal
                and professional fees associated with initial public offering and
                related
                reorganization
            **-**
            1,041,151Due
                to MeSys GmbH for pumps
            **191,692**
            -Corporate
                compliance
            **141,667**
            -Miscellaneous
            **129,000**
            196,651**2,226,619**
            2,791,291








**15.
      COMMITMENTS AND CONTINGENCIES**





**Commitments**





The
      Company leases office space from a related party *[note
      12]* ** under
      a
      lease agreement expiring December 31, 2006. The Company may terminate the lease
      with three months’ notice. The future minimum obligation under the lease is
      $32,940 for 2006. Rent paid amounted to $32,940, $32,940 and $5,580 for the
      years ended December 31, 2005, 2004 and 2003, respectively.





The
      Company also leases office space from an unrelated party under a lease agreement
      expiring January 29, 2006. The future minimum obligation under this lease is
      nil. Rent paid was C$72,537, C$13,189 and nil for the years ended December
      31,
      2005, 2004 and 2003, respectively. On October 17, 2005, the Company entered
      into
      a new lease agreement with the unrelated party commencing February 1, 2006
      and
      expiring July 31, 2007. The current annual lease obligation for rent for this
      facility is C$138,138. As a result of negotiated rent-free periods, the future
      minimum obligation under this lease is C$98,104 for 2006.





In
      May
      and June 2002, the Company entered into two separate agreements with Dr. Richard
      Brunner and Mr. Stock, respectively, to obtain the exclusive license to U.S.
      Patent No. 6,245,038. The Company is required to make royalty payments totalling
      1.5% of product sales. The Company is required to make minimum advance quarterly
      royalty payments of $25,000 and amounts credited against future royalty payments
      to be made in accordance with the agreements. These agreements may be terminated
      by the Company upon the first to occur of:





89





**OCCULOGIX,
      INC.**




**Notes
      to Consolidated Financial Statements**


*[expressed
      in U.S. dollars except as otherwise noted]*







[a]
            all
                patents of the patent rights expiring, which is June
                2017;





[b]
            all
                patent claims of the patent rights being invalidated;
                or





[c]
            the
                introduction of a similar competing technology deployed in the United
                States which could not be deterred by enforcement of the
                patent.





On
      August
      6, 2004, the Company entered into a patent license and royalty agreement with
      Mr. Stock to obtain an exclusive license to U.S. Patent No. 6,245,038. The
      Company is required to make royalty payments totalling 1.5% of product sales
      to
      Mr. Stock, subject to minimum advance royalty payments of $12,500 per quarter.
      The advance payments are credited against future royalty payments to be made
      in
      accordance with the agreement. This agreement replaces the June 25, 2002
      consulting agreement with Mr. Stock, which provided for a royalty payment of
      1%
      of product sales. This agreement effectively increases the total royalty
      payments required to be made in respect of U.S. Patent No. 6,245,038 to 2%
      of
      product sales *[note
      12].*





Future
      minimum royalty payments under the agreements as at December 31, 2005 are
      approximately as follows:




**$**2006
            100,0002007
            100,0002008
            100,0002009
            100,0002010
                and thereafter
            750,0001,150,000




In
      addition, the Company entered into a consultancy and non-competition agreement
      on July 1, 2003 with CCR *[note
      12]* ,
      which
      requires the Company to pay a fee of $5,000 per month. On August 22, 2005,
      the
      Company amended the consultancy and non-competition agreement with CCR such
      that
      the fee payable was increased from $5,000 to $15,000 per month effective January
      1, 2005. The monthly fee is fixed regardless of actual time incurred by CCR
      in
      performance of the services rendered to the Company. The agreement allows either
      party to convert the payment arrangement to a fee of $2,500 daily. In the event
      of such conversion, CCR shall provide services on a daily basis as required
      by
      the Company and will invoice the Company for the total number of days that
      services were provided in that month. The future minimum obligation under the
      consultancy and non-competition agreement for 2006 is $180,000. Pursuant to
      the
      terms of the amended consulting and non-competition agreement with CCR, the
      Company agreed to pay it a one-time bonus of $200,000 upon successful FDA
      approval of the RHEOTM System.





On
      March
      4, 2005, the Company placed an order with MeSys GmbH for the purchase of 70
      OctoNova pumps representing a total commitment of €1,135,330 or approximately
      $1,344,526 based on exchange rates as of December 31, 2005. The Company expects
      to make monthly payments to MeSys GmbH for the pumps as manufacturing is
      completed. As at December 31, 2005, a total payment of €817,925 or approximately
      $1,000,779 has been made to MeSys GmbH on the above purchase order for 50
      OctoNova pumps of which 40 have been received as at December 31,
      2005.





90





**OCCULOGIX,
      INC.**




**Notes
      to Consolidated Financial Statements**


*[expressed
      in U.S. dollars except as otherwise noted]*







**Contingencies**





During
      the ordinary course of business activities, the Company may be contingently
      liable for litigation and a party to claims. Management believes that adequate
      provisions have been made in the accounts where required. Although it is not
      possible to estimate the extent of potential costs and losses, if any,
      management believes that the ultimate resolution of any such contingencies
      will
      not have a material adverse effect on the financial position and results of
      operations of the Company.





Pursuant
      to the terms of the distribution agreement with MeSys GmbH, dated January 1,
      2002, the Company undertook a commitment to purchase a minimum of 25 OctoNova
      pumps yearly beginning after FDA approval of the RHEOTM System, representing an
      annual commitment of $538,000.





Pursuant
      to the terms of the distribution agreement with Asahi Medical, dated January
      1,
      2002, the Company undertook a commitment to purchase a minimum of 9,000, 15,000,
      and 22,500 each of Plasmaflo filters and Rheofilters in years 1, 2 and 3,
      respectively, beginning six months after FDA approval of the RHEOTM System.
      Minimum purchase orders for the fourth year shall be determined immediately
      after the term of the first year by mutual consent but shall not be less than
      that of the previous year. This same method shall be used in subsequent years
      to
      determine future minimum purchase quantities such that minimum purchase
      quantities are always fixed for three years. Future minimum annual commitments
      in respect of North America, including the Caribbean, after FDA approval are
      approximately as follows:





**$**Year
                1
            
            
            2,565,000Year
                2
            
            
            4,275,000Year
                3
            
            
            6,412,500





Pursuant
      to the terms of the Company’s agreement with Asahi Medical, in respect of
      Australia, New Zealand, Colombia, Venezuela and Italy, the Company undertook
      a
      commitment to purchase a minimum of 200, 1400 and 2,500 of each of Plasmaflo
      filters and Rheofilters in 2006, 2007 and 2008, respectively. Minimum purchase
      orders for the years 2009 and 2010 shall be discussed and determined at the
      beginning of the year 2008 by mutual consent and, in respect of these countries
      other than Italy, shall not be less than the minimum for the previous
      year.





Future
      minimum annual commitments, in respect of Australia, New Zealand, Colombia,
      Venezuela and Italy, are approximately as follows:





2006
            
            $
            57,0002007
            
            $
            399,0002008
            
            $
            712,500




91





**OCCULOGIX,
      INC.**




**Notes
      to Consolidated Financial Statements**


*[expressed
      in U.S. dollars except as otherwise noted]*







**16.
      CAPITAL STOCK**





**[a]**
            **Authorized
                share capital**





The
      total
      number of authorized shares of common stock is 75,000,000. Each share of common
      stock has a par value of $0.001 per share. The total number of authorized shares
      of preferred stock is 10,000,000. Each share of preferred stock has a par value
      of $0.001 per share.





**[b]**
            **Reorganizations**





[i]
            On
                July 18, 2002, the Company’s former parent company, OccuLogix Corp. [“Old
                OccuLogix”], merged with the Company, which was then a wholly-owned
                subsidiary of Old OccuLogix, to form OccuLogix, Inc. Pursuant to
                the
                merger, the Company effected a one for four stock split of its common
                and
                convertible preferred stock pursuant to which each share of Old OccuLogix
                common stock outstanding immediately prior to the merger was converted
                into one-fourth of one fully paid and non-assessable share of the
                Company’s common stock. Each outstanding share of Old OccuLogix Series A
                preferred stock was converted into one-fourth of one fully paid and
                non-assessable share of the Company’s Series A convertible preferred
                stock.





At
      the
      effective time of the merger, each outstanding warrant and option to purchase
      common stock of Old OccuLogix was assumed by the Company and converted into
      a
      warrant or option to purchase common stock of the Company, with appropriate
      adjustments to the exercise price and number of shares for which such warrants
      or options were exercisable.





[ii]
            On
                December 8, 2004, the Company consummated certain reorganization
                transactions, which is collectively referred to as the “Reorganization”
                which consisted of the following:





·
            4,622,605
                shares of common stock issued upon the automatic conversion of all
                outstanding shares of Series A and Series B convertible preferred
                stock;





·
            7,106,454
                shares of common stock issued to TLC Vision and Diamed upon conversion
                of
                $7,000,000 aggregate principal amount of convertible debentures held
                by
                them. The conversion price was $0.98502 per share;
                and





·
            19,070,234
                shares of common stock issued to TLC Vision in connection with the
                purchase by the Company of TLC Vision’s 50% interest in the Partnership.
                This amount includes 1,281,858 shares of common stock which was issued
                upon the exchange of shares of OccuLogix ExchangeCo ULC, one of the
                Company’s Canadian subsidiaries, issued for tax purposes to TLC Vision in
                connection with the purchase of the
                Partnership.





Following
      the Reorganization, the Partnership’s U.S. business was carried on, and will
      continue to be carried on, by OccuLogix LLC, a Delaware limited liability
      company that is the Company’s wholly-owned, indirect subsidiary. The Partnership
      carried on the Canadian business until December 31, 2005.





The
      Company had licensed to the Partnership all of the distribution and marketing
      rights for the RHEO TM System
      for ophthalmic indications to which it is entitled. Prior to the Reorganization,
      the Company’s only profit stream came from its share of the Partnership’s
      earnings. The Company’s acquisition of TLC Vision’s 50% ownership interest in
      the Partnership achieved through the Reorganization moved the earnings potential
      for sales of the RHEO TM System
      to the Company.





[iii]
            On
                December 31, 2005, the Partnership transferred all of its assets
                and
                liabilities, and assigned its right to develop and sell the RHEOTM System
                to OccuLogix Canada Corp., a wholly-owned subsidiary of the Company.
                Following the transfer, the Partnership’s Canadian business will be
                carried on by OccuLogix Canada Corp. The Partnership and its General
                Partner has subsequently been wound up.





92





**OCCULOGIX,
      INC.**




**Notes
      to Consolidated Financial Statements**


*[expressed
      in U.S. dollars except as otherwise noted]*







**[c]**
            **Share
                conversion**





On
      November 30, 2003, the Company converted $500,000 [less issuance costs of
      $18,985] of the principal amount of a note payable to Asahi Medical, issued
      on
      February 21, 2001, into 507,604 shares of common stock at a conversion price
      of
      $0.98502 per share *.*





**[d]**
            **Convertible
                preferred stock**





Convertible
      preferred stockholders were entitled to one vote per share, on an “as-converted
      to common stock” basis. Each share of Series A and Series B Convertible
      Preferred Stock was entitled to receive a non-cumulative dividend of $0.411216
      and $0.34698, respectively, prior to the payment of any dividend on common
      stock. Each share of Series A and Series B Convertible Preferred Stock was
      entitled to a liquidation preference of $4.836 and $3.5183, respectively, plus
      any declared but unpaid dividend before any payment could be made to holders
      of
      common stock.





After
      giving effect to the anti-dilution adjustment resulting from the issuance of
      the
      June 25, 2003 related party secured grid debentures *[note
      12]* ,
      each
      share of Series A and Series B Convertible Preferred Stock was convertible
      into
      1.678323 and 1.643683 shares of common stock, respectively, at the option of
      the
      holder. Each share of Series A and B Convertible Preferred Stock would
      automatically convert into shares of common stock at the conversion rate
      previously described if the Company obtained a firm underwriting commitment
      for
      an initial public offering. The conversion rate would be adjusted for stock
      dividends, stock splits and other dilutive events. Shares of Series A and B
      Convertible Preferred Stock would automatically convert in the event of sale
      of
      all or substantially all of the assets or capital stock of the
      Company.





**[i]**
            **Series
                A Convertible Preferred
                Stock**





On
      July
      19, 2002, the Company and the holders of its Series B convertible debentures,
      with a carrying value of $7,119,111, ** agreed
      to
      convert such Series B convertible debentures into 1,089,172 shares of Series
      A
      Convertible Preferred Stock immediately following the consummation of the merger
      as described in note 16[b][i]. As a result of this conversion, an additional
      97,243 shares of Series A Convertible Preferred Stock were issued to the holders
      of the Series A Convertible Preferred Stock in conjunction with anti-dilution
      provisions included in the terms of the respective debentures.





**[ii]**
            **Series
                B Convertible Preferred
                Stock**





On
      July
      25, 2002, the Company issued 345,843 shares of Series B Convertible Preferred
      Stock for gross cash proceeds of $2,000,000 [less issuance costs of
      $725,941].





Simultaneously,
      Series B convertible debentures and accrued interest with a carrying value
      of $1,030,684 were
      converted into 178,227 shares
      of
      Series B Convertible Preferred Stock.





In
      addition, a previously issued subordinated convertible promissory note and
      accrued interest with a carrying value of $499,921 was
      converted into 96,042 shares
      of
      Series B Convertible Preferred Stock.





**[e]**
            **Common
                stock**





On
      April
      17, 2003, the Company issued 17,375 shares of common stock to two consultants
      in
      exchange for services valued at $22,588. The common stock was issued at what
      management believed to be the fair value of the services received.





93





**OCCULOGIX,
      INC.**




**Notes
      to Consolidated Financial Statements**


*[expressed
      in U.S. dollars except as otherwise noted]*







In
      connection with the conversion of a portion of the Asahi Medical Note described
      in note 16[c] and pursuant to the June 25, 2003 Amended and Restated Investors’
Rights Agreement, the existing common stockholders were allowed to exercise
      pre-emptive rights to purchase additional common stock. In connection therewith,
      on December 31, 2003, the Company issued 613,292 shares of common stock at
      $0.98502 per share for gross cash proceeds of $604,092.





In
      December 2004, 5,600,000 shares of common stock of the Company at $12.00 per
      share were issued in connection with the initial public offering for gross
      cash
      proceeds of $67,200,000 [less issuance costs of $7,858,789].





As
      at
      December 31, 2005, the number of shares of common stock of the Company reserved
      for issuance is as follows:





**Range
                of exercise prices**
              **$**
            **Expiry
                date**
            **#**4.00
            2008
            25,0002.00
                - 4.00
            2009
            217,6252.00
                - 4.00
            2010
            119,3750.80
                - 2.00
            2012
            113,3900.13
                - 1.30
            2013
            1,155,47412.00
            2014
            728,0006.28
                - 8.65
            2015
            1,748,750**4,107,614**




**[f]**
            **Stock
                Option Plan**





Under
      the
      2002 Stock Option Plan [the “Stock Option Plan”], up to 4,456,000 options are
      available for grant to employees, directors and consultants.





Options
      granted under the Stock Option Plan may be either incentive stock options or
      non-statutory stock options. Under the terms of the Stock Option Plan, the
      exercise price per share for an incentive stock option shall not be less than
      the fair market value of a share of stock on the effective date of grant and
      the
      exercise price per share for non-statutory stock options shall not be less
      than
      85% of the fair market value of a share of stock on the date of grant. No option
      granted to a holder of more than 10% of the Company’s common stock shall have an
      exercise price per share less than 110% of the fair market value of a share
      of
      stock on the effective date of grant. Included in the total options outstanding
      as at December 31, 2005 are 3,473,114 options issued within the Stock Option
      Plan, of which 174,508 are incentive stock options and 3,298,606 are
      non-statutory stock options.





Generally,
      options expire 10 years after the grant. No incentive stock options granted
      to a
      10% owner optionee shall be exercisable after the expiration of five years
      after
      the effective date of grant of such option, no option granted to a prospective
      employee, prospective consultant or prospective director may become exercisable
      prior to the date on which such person commences service, and with the exception
      of an option granted to an officer, director or a consultant, no option shall
      become exercisable at a rate less than 20% per annum over a period of five
      years
      from the effective date of grant of such option unless otherwise approved by
      the
      Board of Directors.





94





**OCCULOGIX,
      INC.**




**Notes
      to Consolidated Financial Statements**


*[expressed
      in U.S. dollars except as otherwise noted]*







The
      Company has also issued options outside of the Stock Option Plan. These options
      were issued before the establishment of the Stock Option Plan, when the
      authorized limit of the Stock Option Plan was exceeded or as permitted under
      stock exchange rules when the Company was recruiting executives. In addition,
      options issued to companies for the purpose of settling amounts owing were
      issued outside of the Stock Option Plan, as the Stock Option Plan prohibited
      the
      granting of options to companies. The issuance of such options were approved
      by
      the Board of Directors and were granted on terms and conditions similar to
      those
      options issued under the Stock Option Plan. Included in the total options
      outstanding as at December 31, 2005 are 634,500 options issued outside the
      Stock
      Option Plan.





On
      December 11, 2005, the Company’s Board of Directors approved accelerating the
      vesting of unvested stock options granted prior to December 31, 2004 to
      employees, officers and directors. As a result of the vesting acceleration,
      options to purchase 438,561 shares of the Company’s common stock became
      exercisable immediately, including 308,611 held by executive officers, 48,958
      held by non-employee directors and 80,992 held by other employees. These
      accelerated stock options represent approximately 30% of the total employee
      stock options of the Company that would not have been vested as at December
      31,
      2005. The weighted average exercise price of the options that were accelerated
      was $11.78. The purpose of the acceleration was to enable the Company to avoid
      recognizing compensation expense associated with these options of $1,532,203
      and
      $1,466,253 during the years ending December 31, 2006 and 2007, respectively,
      in
      its consolidated statements of operations upon the adoption of SFAS 123R on
      January 1, 2006. In accordance with APB No. 25, the Company recorded a
      compensation expense of $53,295 for the year ended December 31, 2005 as 9,033
      of
      the total options of which the vesting was accelerated were “in-the-money” as at
      the date of the accelerated vesting. With respect to SFAS No. 123, the Company
      recognized, for purposes of pro forma disclosures, the incremental increase
      in
      fair value and the remaining balance of unrecognized compensation cost for
      the
      affected options at the time of acceleration.





In
      accordance with APB No. 25, the Company also recorded a compensation expense
      of
      $4,431 for the year ended December 31, 2005 as certain performance-based options
      granted to an employee and two directors were “in-the-money” as at December 31,
      2005.





A
      summary
      of the options issued under the Stock Option Plan and outside of the Stock
      Option Plan outstanding at December 31, 2005 and the changes since December
      31,
      2002 are as follows:





95





**OCCULOGIX,
      INC.**




**Notes
      to Consolidated Financial Statements**


*[expressed
      in U.S. dollars except as otherwise noted]*







**Weighted
                average exercise price****#**
            
            **$****Outstanding,
                December 31, 2002**
            
            
            1,130,453
            
            
            1.95Granted
            
            
            1,420,676
            
            
            0.96Forfeited
            
            
            (161,168
            )
            
            0.82**Outstanding,
                December 31, 20****0****3**
            
            
            2,389,961
            
            
            1.45Granted
            
            
            828,000
            
            
            12.00Exercised
            
            
            (272,200
            )
            
            0.48Forfeited
            
            
            (196,562
            )
            
            2.48**Outstanding,
                December 31, 2004**
            
            
            2,749,199
            
            
            4.64Granted
            
            
            1,823,750
            
            
            8.10Exercised
            
            
            (279,085
            )
            
            0.83Forfeited
            
            
            (186,250
            )
            
            9.99**Outstanding,
                December 31, 2005**
            
            
            **4,107,614**
            
            
            **6.19**





Included
      in the total options outstanding as at December 31, 2005 of 4,107,614 are
      1,124,548 options issued to employees, directors and certain executives in
      December 2003 which were issued into a voting trust. Upon the exercise of these
      options, the Board of Directors controls the voting privileges associated with
      the common stock underlying these options. Upon the completion of the Company’s
      initial public offering, the voting trust was dissolved with all options
      returning to each respective individual.





The
      Company estimated the intrinsic value of 1,352,500 stock options granted in
      December 2003 to employees, directors and certain executives to be $15,905,400,
      of which $15,392,323 and $513,077 has been expensed for the years ended December
      31, 2004 and 2003, respectively. All of these options became fully vested upon
      the Company’s initial public offering and therefore the remaining $15,392,323 of
      stock-based compensation charge as at December 31, 2003 was expensed during
      the
      year ended December 31, 2004. Management estimated the fair value of these
      options retrospectively based on a range of then expected offering prices of
      the
      Company’s initial public offering.





Compensation
      expense associated with non-employee stock options was $309,055, $47,637 and
      $196,685 for the years ended December 31, 2005, 2004 and 2003, respectively.
      The
      fair value of these options was determined using the Black-Scholes option
      pricing model using the same assumptions described above and is included in
      general and administrative expenses within the consolidated statements of
      operations.





96





**OCCULOGIX,
      INC.**




**Notes
      to Consolidated Financial Statements**


*[expressed
      in U.S. dollars except as otherwise noted]*







The
      following table summarizes information relating to stock options outstanding
      at
      December 31, 2005:





**Options
                Outstanding**
            
            **Options
                Exercisable****Range
                of exercise prices**
            
            **Outstanding**
            
            **Weighted
                average remaining contractual Life**
            
            **Weighted
                average exercise price**
            
            **Exercisable**
            
            **Weighted
                average exercise price****$**
            
            #
            
            **[years]**
            
            **$**
            
            #
            
            **$**0.13
            
            
            20,926
            
            
            7.25
            
            
            0.13
            
            
            20,926
            
            
            0.130.80
                - 0.99
            
            
            1,149,548
            
            
            7.50
            
            
            0.99
            
            
            1,147,986
            
            
            0.991.30
            
            
            85,890
            
            
            6.73
            
            
            1.30
            
            
            85,057
            
            
            1.302.00
            
            
            87,500
            
            
            3.82
            
            
            2.00
            
            
            87,500
            
            
            2.004.00
            
            
            287,000
            
            
            3.92
            
            
            4.00
            
            
            274,500
            
            
            4.006.25
                - 6.40
            
            
            337,500
            
            
            9.71
            
            
            6.29
            
            
            -
            
            
            -7.15
                - 7.35
            
            
            107,500
            
            
            9.36
            
            
            7.17
            
            
            -
            
            
            -8.03
                - 8.65
            
            
            1,303,750
            
            
            9.27
            
            
            8.62
            
            
            -
            
            
            -12.00
            
            
            728,000
            
            
            8.96
            
            
            12.00
            
            
            682,304
            
            
            12.00**4,107,614**
            
            
            **8.20**
            
            
            **6.19**
            
            
            **2,298,273**
            
            
            **4.66**




**[g]**
            **Warrants**





Purchasers
      of Series A convertible preferred stock received warrants to purchase shares
      of
      common stock at an exercise price of $1.00 per share. The warrants were
      exercisable for the purchase of one share of common stock for each share of
      Series A convertible preferred stock owned. In February 1998, an additional
      voluntary warrant was granted to each Series A convertible preferred stockholder
      to purchase an equal number of voting common stock at an exercise price of
      $2.00
      per share. Additionally, warrants to purchase 50,000 shares of voting common
      stock at an exercise price of $1.00 per share were granted to an officer and
      certain directors and stockholders of the Company in exchange for providing
      certain private credit guarantees.





97





**OCCULOGIX,
      INC.**




**Notes
      to Consolidated Financial Statements**


*[expressed
      in U.S. dollars except as otherwise noted]*







**Weighted
                average exercise price****Common
                stock warrants**
            
            **#**
            
            **$****Outstanding,
                December 31, 2002 and 2003***[i]*
            
            
            150,000
            
            
            2.83Exercised*[ii]*
            
            
            (102,369
            )
            
            2.29Expired
            
            
            (47,631
            )
            
            4.00**Outstanding,
                December 31, 2004 and 2005**
            
            
            -
            
            
            -





**Weighted
                average exercise price****Series
                A convertible preferred stock warrants**
            
            **#**
            
            **$****Outstanding,
                December 31, 2002**
            
            
            288,437
            
            
            6.80Granted
                on adjustment for anti-dilution provision
            
            
            195,097
            
            
            -Cancelled
            
            
            (824
            )
            
            7.83**Outstanding,
                December 31, 2003***[i]*
            
            
            482,710
            
            
            6.80Exercised*[ii]*
            
            
            (379,284
            )
            
            6.73Expired
            
            
            (103,426
            )
            
            7.04**Outstanding,
                December 31, 2004 and 2005**
            
            
            -
            
            
            -




[i]
            As
                a result of the issuance of Series B convertible preferred stock
                on July
                25, 2002 at a price lower than the exercise price of the Series A
                convertible preferred stock warrants, anti-dilution adjustments were
                applied to reduce the exercise price of the Series A convertible
                preferred
                stock warrants and to increase the number of shares issuable upon
                the
                exercise of the Series A convertible preferred stock
                warrants.





As
      a
      result of the TLC Vision and Diamed convertible grid note debenture agreements
      entered into on June 25, 2003 at a conversion price lower than the exercise
      price of the Series A convertible preferred stock warrants, further
      anti-dilution adjustments were applied to reduce the exercise price of the
      Series A convertible preferred stock warrants and to increase the number of
      shares issuable upon the exercise of the Series A convertible preferred stock
      warrants.





Of
      the
      102,369 warrants exercised to purchase shares of common stock, 24,999 shares
      of
      common stock were issued on a cashless basis *[note* *17]* .
      The
      remaining 77,370 shares of common stock were issued for total cash proceeds
      of
      $134,480.





98





**OCCULOGIX,
      INC.**




**Notes
      to Consolidated Financial Statements**


*[expressed
      in U.S. dollars except as otherwise noted]*




[ii]
              Of
                  the 379,284 warrants exercised to purchase shares of Series A convertible
                  preferred stock, 165,189 shares of Series A convertible preferred
                  stock
                  were issued on a cashless basis*[note**17]*.
                  The remaining 214,095 shares of Series A convertible preferred
                  stock were
                  issued for total cash proceeds of $1,281,841 of which $34,927 has
                  yet to
                  be received as at December 31, 2005. This amount is included as
                  a
                  subscription receivable within paid-in capital and has been fully
                  provided
                  for.


All
      warrants to purchase shares of common stock and Series A convertible preferred
      stock at exercise prices between $1.20 per share and $7.83 per share expired
      on
      July 17, 2004, other than 379,284 warrants to purchase shares of Series A
      convertible preferred stock and
      102,369 warrants to purchase shares of common stock which were exercised prior
      to the expiration of the warrants. As at December 31, 2005 and 2004, no common
      stock warrants and no Series A convertible preferred stock warrants remained
      outstanding.





**17.
      CONSOLIDATED STATEMENTS OF CASH FLOWS**





The
      net
      change in non-cash working capital balances related to operations consists
      of
      the following:





**Years
                ended**
              **December
                31,****2005**
              **$**
            
            **2004**
              **$**
            
            **2003**
              **$**Due
                from related party
            
            
            **13,291**
            
            
            110,749
            
            
            52,034Amounts
                receivable
            
            
            **(82,810**
            **)**
            
            (222,218
            )
            
            39,746Inventory
            
            
            **(3,431,743**
            **)**
            
            (136,527
            )
            
            24,399Prepaid
                expenses
            
            
            **(322,455**
            **)**
            
            (324,353
            )
            
            (134,844
            )Deposit
            
            
            **4,105**
            
            
            (8,996
            )
            
            4,326Accounts
                payable
            
            
            **301,457**
            
            
            26,548
            
            
            (888,251
            )Accrued
                liabilities
            
            
            **(563,925**
            **)**
            
            2,511,897
            
            
            207,070Deferred
                revenue and rent inducement
            
            
            **(485,047**
            **)**
            
            (152,153
            )
            
            ―Due
                to stockholders
            
            
            **(358,523**
            **)**
            
            (931,652
            )
            
            4,418**(4,925,650**
            **)**
            
            873,295
            
            
            (691,102
            )




99





**OCCULOGIX,
      INC.**




**Notes
      to Consolidated Financial Statements**


*[expressed
      in U.S. dollars except as otherwise noted]*




The
      following table lists those items that have been excluded from the consolidated
      statements of cash flows as they relate to non-cash transactions and additional
      cash flow information:





**Years
                ended**
              **December
                31,****2005**
              **$**
            
            **2004**
              **$**
            
            **2003**
              **$**Non-cash
                investing and financing activitiesConvertible
                preferred stock issued to reduce borrowings from
                stockholder
            
            
            **―**
            
            
            ―
            
            
            500,000Common
                stock issued to pay consulting fees
            
            
            **―**
            
            
            ―
            
            
            22,588Conversion
                of debentures
            
            
            **―**
            
            
            7,000,000
            
            
            ―Conversion
                of debt
            
            
            **―**
            
            
            ―
            
            
            481,015Cashless
                exercise of warrants to purchase shares of Series A convertible preferred
                stock
            
            
            **―**
            
            
            1,269,845
            
            
            ―Cashless
                exercise of warrants to purchaseshares
                of common stock
            
            
            **―**
            
            
            99,996
            
            
            ―Free
                inventory
            
            
            **183,382**
            
            
            146,905
            
            
            66,300Common
                stock issued on acquisition
            
            
            **―**
            
            
            228,842,808
            
            
            ―Additional
                cash flow informationInterest
                paid
            
            
            **―**
            
            
            (26,575
            )
            
            (85,000
            )Income
                taxes paid
            
            
            **(8,138**
            **)**
            
            ―
            
            
            ―





**18.
      FINANCIAL INSTRUMENTS**





**Currency
      risk**





The
      Company’s activities which result in exposure to fluctuations in foreign
      currency exchange rates consist of the purchase of equipment from suppliers
      billing in foreign currencies. The Company does not use derivative financial
      instruments to reduce its currency risk.





**Credit
      risk**





The
      Company’s financial instruments that are exposed to concentration of credit risk
      consist primarily of cash and cash equivalents and amounts receivable. The
      Company maintains its accounts for cash with large low credit risk financial
      institutions in United States and Canada in order to reduce its
      exposure.





During
      2005, the Company derived all of its revenue from three customers, RHEO Clinic
      Inc., which is a subsidiary of TLC Vision, Veris and Canadian Retinal Institute.
      As at December 31, 2005, the Company had, only one customer, Veris. As
      previously discussed in note 2, the Company fully provided for this balance
      due from Veris. Accordingly, no trade receivables due from Veris has been
      recognized as at December 31, 2005.





100





**OCCULOGIX,
      INC.**




**Notes
      to Consolidated Financial Statements**


*[expressed
      in U.S. dollars except as otherwise noted]*







**19.
      SEGMENT INFORMATION**





The
      Company operates in a single reportable segment, the ophthalmic therapeutic
      industry, focused on the treatment of eye diseases, including Dry
      AMD.





For
      all
      years presented, the Company’s revenue was earned in Canada.





Although
      the Company has generated all of its revenue in Canada, the Company’s intangible
      asset, fixed assets and patents and trademarks are primarily located in the
      United States.





**20.
      COMPARATIVE FIGURES**





Certain
      comparative figures have been reclassified to conform with the current year’s
      presentation.





**21.
      SUBSEQUENT EVENTS**





On
      February 3, 2006, the Company announced that it had completed a preliminary
      analysis of the data from MIRA-1, its recently completed pivotal (phase III)
      clinical trial using its RHEOTM
      System .
      The
      data indicated that MIRA-1 did not demonstrate a statistically significant
      mean
      change of Best Spectacle-Corrected Visual Acuity. As a result of this
      announcement, the share price of the Company’s stock as traded on NASDAQ
      decreased from $12.75 on February 2, 2006 to a closing price of $4.10 on
      February 3, 2006 subsequent to the announcement. The 10-day average of the
      stock
      immediately following the announcement was $3.65 and reflected a decrease in
      the
      market capitalization of the Company from $536.6 million on February 2, 2006
      to
      $153.6 million based on the 10-day share price average subsequent to the
      announcement.





The
      Company considered the resulting decrease in the share price as an indicator
      of
      impairment leading to an analysis of the Company’s intangible asset and
      goodwill. As a result of this analysis, the Company reported an impairment
      charge to goodwill of $147,451,758.





The
      Company believes that the announcement made it unlikely that the Company would
      be able to collect on amounts outstanding from Veris, resulting in a provision
      for bad debts of $518,852 related to revenue recognized prior to December 2005.
      In addition, the Company assessed the ability to recognize as revenue $530,445
      in sales of products that were shipped to Veris in December 2005. Based on
      this
      assessment, the Company concluded that the transaction did not meet the
      requirements to recognize revenue based on collectibility not being reasonably
      assured. Accordingly, no revenue was recognized related to this transaction.
      With respect to the related cost associated with the delivered inventory, the
      Company reported an inventory loss of $252,071 which represents the cost of
      the
      goods shipped to Veris in December 2005 which the Company does not anticipate
      will be returned by Veris.





In
      addition, the Company evaluated its ending inventories as at December 31, 2005
      on the basis that Veris may not be able to increase its commercial activities
      in
      Canada in line with our initial expectations. Accordingly, the Company has
      set
      up a provision for obsolescence of $1,990,830 for filter sets that are unlikely
      to be utilized prior to their expiration dates.





Lastly,
      as a result of the announcement, the Company halted a clinical trial, known
      as
“MIRA-PS”, pending further detailed analysis of the MIRA-1 data. The Company
      previously advanced to Veris $165,661 to participate in the MIRA-PS trial.
      This
      amount has been fully expensed by the Company at December 31, 2005.





No
      other
      adjustments were made to the financial statements as at December 31, 2005 and
      the year then ended as a result of the announcement.




101





ITEM
                9.
            CHANGES
                IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                DISCLOSURE.





Not
      applicable.





ITEM
                9A.
            CONTROLS
                AND PROCEDURES.





The
      Company maintains disclosure controls and procedures that are designed to ensure
      that information required to be disclosed in the Company’s reports under the
      Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded,
      processed, summarized and reported within the time periods specified in the
      Securities and Exchange Commission’s rules and forms, and that such information
      is accumulated and communicated to the Company’s management, including its Chief
      Executive Officer and Chief Financial Officer, as appropriate, to allow timely
      decisions regarding required disclosure. In designing and evaluating the
      disclosure controls and procedures, management recognizes that any controls
      and
      procedures, no matter how well designed and operated, can provide only
      reasonable assurance of achieving the desired control objectives, and management
      necessarily is required to apply its judgment in evaluating the cost-benefit
      relationship of possible controls and procedures.





As
      of the
      end of the period covered by the report, the Company carried out an evaluation,
      under the supervision and with the participation of the Company’s management,
      including the Company’s Chief Executive Officer and Chief Financial Officer, of
      the effectiveness of the design and operation of the Company’s disclosure
      controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the
      Exchange Act). Based on that evaluation, the Company’s Chief Executive Officer
      and Chief Financial Officer concluded that the Company’s disclosure controls and
      procedures were effective, in all material respects, to ensure that information
      required to be disclosed in the reports the Company files and submits under
      the
      Exchange Act is recorded, processed, summarized and reported within the time
      periods specified in the Securities and Exchange Commission’s rules and
      forms.





There
      have been no significant changes in the Company’s internal controls over
      financial reporting that occurred during the year ended December 31, 2005,
      that
      have materially affected, or are reasonably likely to materially affect, the
      Company’s internal control over financial reporting.





**MANAGEMENT’S
      REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING**





Management
      of the Company is responsible for establishing and maintaining effective
      internal control over financial reporting as defined in Rules 13a-15(f) under
      the Securities Exchange Act of 1934. The Company’s internal control over
      financial reporting is designed to provide reasonable assurance to the Company’s
      management and board of directors regarding the preparation and fair
      presentation of published financial statements.





Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Therefore, even those systems determined to
      be
      effective can provide only reasonable assurance with respect to financial
      statement preparation and presentation.





Management
      assessed the effectiveness of the Company’s internal control over financial
      reporting as of December 31, 2005. In making this assessment, management used
      the criteria set forth by the Committee of Sponsoring Organizations of the
      Treadway Commission (COSO) in *Internal
      Control* - *Integrated
      Framework.* Based
      on
      our assessment, we believe that, as of December 31, 2005, the Company’s internal
      control over financial reporting is effective based on those criteria.





Management’s
      assessment of the effectiveness of internal control over financial reporting
      as
      of December 31, 2005, has been audited by Ernst & Young LLP, an independent
      registered public accounting firm who also audited the Company’s consolidated
      financial statements. Ernst & Young’s attestation report on management’s
      assessment of the Company’s internal control over financial reporting is
      included elsewhere herein.




102





**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





The
      Board
      of Directors and Shareholders of **OccuLogix,
      Inc.**








We
      have
      audited management’s assessment, included in the accompanying Management’s
      Report on Internal Control over Financial Reporting, that OccuLogix, Inc.
      maintained effective internal control over financial reporting as of December
      31, 2005, based on criteria established in Internal Control - Integrated
      Framework issued by the Committee of Sponsoring Organizations of the Treadway
      Commission (the COSO criteria). OccuLogix Inc.’s management is responsible for
      maintaining effective internal control over financial reporting and for its
      assessment of the effectiveness of internal control over financial reporting.
      Our responsibility is to express an opinion on management’s assessment and an
      opinion on the effectiveness of the company’s internal control over financial
      reporting based on our audit.





We
      conducted our audit 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 effective
      internal control over financial reporting was maintained in all material
      respects. Our audit included obtaining an understanding of internal control
      over
      financial reporting, evaluating management’s assessment, testing and evaluating
      the design and operating effectiveness of internal control, and performing
      such
      other procedures as we considered necessary in the circumstances. We believe
      that our audit provides a reasonable basis for our opinion.





A
      company’s internal control over financial reporting is a process designed to
      provide reasonable assurance regarding the reliability of financial reporting
      and the preparation of financial statements for external purposes in accordance
      with generally accepted accounting principles. A company’s internal control over
      financial reporting includes those policies and procedures that (1) pertain
      to
      the maintenance of records that, in reasonable detail, accurately and fairly
      reflect the transactions and dispositions of the assets of the company; (2)
      provide reasonable assurance that transactions are recorded as necessary to
      permit preparation of financial statements in accordance with generally accepted
      accounting principles, and that receipts and expenditures of the company are
      being made only in accordance with authorizations of management and directors
      of
      the company; and (3) provide reasonable assurance regarding prevention or timely
      detection of unauthorized acquisition, use, or disposition of the company’s
      assets that could have a material effect on the financial
      statements.





Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Also, projections of any evaluation of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with the policies or procedures may deteriorate.





In
      our
      opinion, management’s assessment that **OccuLogix,
      Inc.** maintained effective internal control over financial reporting as of December
      31, 2005, is fairly stated, in all material respects, based on the COSO
      criteria. Also, in our opinion, OccuLogix, Inc. maintained, in all material
      respects, effective internal control over financial reporting as of December
      31,
      2005, based on **** the
      COSO
      criteria **.**





We
      also
      have audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the consolidated balance sheets of **OccuLogix,
      Inc.** as of
      December 31, 2005 and 2004, and the related consolidated statements of
      operations, changes in stockholders’ equity (deficiency), and cash flows for
      each of the three years in the period ended December 31, 2005 of **OccuLogix,
      Inc.** and our
      report dated March 1, 2006 expressed an unqualified opinion
      thereon.





Toronto,
                Canada
            /s/
                Ernst & Young LLPMarch
                1, 2006
            Chartered
                Accountants




ITEM
                  9B.
              OTHER
                  INFORMATION.
 
 None.




103





PART
      III





ITEM
                10.
            DIRECTORS
                AND EXECUTIVE OFFICERS OF THE
                REGISTRANT.





The
      information required with respect to directors is incorporated herein by
      reference to the information contained in the General Proxy Information for
      our
      2006 Annual Meeting of Stockholders (the “Proxy Statement”). The information
      with respect to our audit committee financial expert is incorporated herein
      by
      reference to the information contained in the sections captioned “Appointment of
      Auditors” and “Audit Committee Report” of the Proxy Statement.





Information
      about our Code of Ethics appears under the heading “Code of Business Conduct and
      Ethics” in the Proxy Statement. That portion of the Proxy Statement is
      incorporated by reference into this report.





Information
      about compliance with Section 16(a) of the Exchange Act appears under the
      heading “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy
      Statement. That portion of the Proxy Statement is incorporated by reference
      into
      this report.





ITEM
                11.
            EXECUTIVE
                COMPENSATION.





Information
      about compensation of our named executive officers appears under the headings
      “Executive Officers” and “Information on Executive Compensation” in the Proxy
      Statement. Information about compensation of our directors appears under the
      heading “Compensation of Directors” in the Proxy Statement. These portions of
      the Proxy Statement are incorporated by reference into this report.





ITEM
                12.
            SECURITY
                OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
                STOCKHOLDER MATTERS.





Information
      about security ownership of certain beneficial owners and management and
      information regarding securities authorized for issuance under equity
      compensation plans appears under the headings “Information on Executive
      Compensation”, “Employee Benefit Plans” and “Principal Stockholders” in the
      Proxy Statement. These portions of the Proxy Statement are incorporated by
      reference to this report.





ITEM
                13.
            CERTAIN
                RELATIONSHIPS AND RELATED
                TRANSACTIONS.





Information
      about certain relationships and related transactions appears under the heading
      “Certain Relationships and Related Party Transactions” in the Proxy Statement.
      That portion of the Proxy Statement is incorporated by reference into this
      report.





ITEM
                14.
            PRINCIPAL
                ACCOUNTANT FEES AND SERVICES.





Information
      about the principal accountant fees and services as well as related pre-approval
      policies and procedures appears under the headings “Appointment of Auditors” and
“Audit Committee Report” in the Proxy Statement. These portions of the Proxy
      Statement are incorporated by reference into this report.





104





PART
      IV





ITEM
                15.
            EXHIBITS,
                FINANCIAL STATEMENT SCHEDULES.


(a)
              1.
              Financial
                  Statements:




Included
                in PART II of this report:
            PageReports
                of Independent Auditors
            65Consolidated
                Balance Sheets at December 31, 2005and
                December 31, 2004
            66Consolidated
                Statements of Operations for the three yearsin
                the period ended December 31, 2005
            67Consolidated
                Statements of Changes in Stockholders’ Deficiencyfor
                the three years in the period ended December 31, 2005
            68Consolidated
                Statements of Cash Flows for the three years in theperiod
                ended December 31, 2005
            70Notes
                to Consolidated Financial
                Statements
            71




2.
            Financial
                Statement Schedules:





All
      financial statement schedules have been omitted because they are inapplicable,
      not required by the instructions or because the required information is either
      incorporated herein by reference or included in the financial statements or
      notes thereto included in this report.





3.
            Exhibits:





The
      exhibits required to be filed as part of this Annual Report on Form 10-K are
      listed in the attached Index to Exhibits. Items 10.5, 10.7 to 10.11 inclusive,
      10.13, 10.14, 10.20 to 10.28 inclusive and 10.30 in the attached Index to
      Exhibits are management contracts or compensatory plans or
      arrangements.





(b)
            Exhibits





The
      exhibits required to be filed as part of this Annual Report on Form 10-K are
      listed in the attached Index to Exhibits.





(c)
            Financial
                Statement Schedules





All
      financial statement schedules have been omitted because they are inapplicable,
      not required by the instructions or because the required information is either
      incorporated herein by reference or included in the financial statements or
      notes thereto included in this report.





*                 
       *                   *





Copies
      of
      the exhibits filed with this Annual Report on Form 10-K or incorporated by
      reference herein do not accompany copies hereof for distribution to stockholders
      of the Registrant. The Registrant will furnish a copy of any of such exhibits
      to
      any stockholder requesting the same for a nominal charge to cover duplicating
      costs.





105





POWER
      OF
      ATTORNEY





The
      registrant and each person whose signature appears below hereby appoint Elias
      Vamvakas and John Y. Caloz as attorney-in-fact with full power of substitution,
      severally, to execute in the name and on behalf of the registrant and each
      such
      person, individually and in each capacity stated below, one or more amendments
      to this Annual Report on Form 10-K, which amendments may make such changes
      in
      this Annual Report as the attorney-in-fact acting in the premises deems
      appropriate and to file any such amendments to this Annual Report on Form 10-K
      with the Securities and Exchange Commission.





SIGNATURES





Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934, the registrant has duly caused this Annual Report on Form 10-K to be
      signed on its behalf by the undersigned thereunto duly authorized.





Dated:
                March 16, 2006OCCULOGIX,
                INC.By:
            /s/
                Elias VamvakasElias
                VamvakasChief
                Executive Officer





Pursuant
      to the requirements of the Securities Exchange Act of 1934, this Annual Report
      on Form 10-K has been signed below by the following persons on behalf of the
      registrant and in the capacities and on
      the dates indicated.





106




Dated:
                March 16, 2006
            
            By:
            /s/
                Elias VamvakasElias
                VamvakasChief
                Executive Officer andChairman
                of Board of DirectorsDated:
                March 16, 2006
            
            By:
            John
                Y. Caloz/s/
                John Y. CalozChief
                Financial Officer and TreasurerDated:
                March 16, 2006
            
            By:
            /s/
                Jay T. HolmesJay
                T. HolmesDirectorDated:
                March 16, 2006
            
            By:
            /s/
                Thomas N. DavidsonThomas
                N. DavidsonDirectorDated:
                March 16, 2006
            
            By:
            /s/
                Richard L. LindstromRichard
                L. Lindstrom, M.D.DirectorDated:
                March 16, 2006
            
            By:
            /s/
                Georges NoëlGeorges
                NoëlDirectorDated:
                March 16, 2006
            
            By:
            /s/
                Adrienne L. GravesAdrienne
                L. GravesDirectorDated:
                March 16, 2006
            
            By:
            /s/
                Gilbert S. OmennGilbert
                S. OmennDirector




107





Index
      to Exhibits




2.1
            Form
                of Plan of Reorganization (incorporated by reference to Exhibit 2.1
                to the
                Registrant’s Registration Statement on Form S-1/A No. 4, filed with the
                Commission on December 6, 2004 (file no. 333-118024)).3.1
            Amended
                and Restated Certificate of Incorporation of the Registrant as currently
                in effect (incorporated by reference to Exhibit 10.4 to the Registrant’s
                Registration Statement on Form S-1/A No. 3, filed with the Commission
                on
                November 16, 2004 (file no. 333-118024)).3.2
            Amended
                and Restated By-Laws of the Registrant as currently in effect
                (incorporated by reference to Exhibit 10.4 to the Registrant’s
                Registration Statement on Form S-1/A No. 3, filed with the Commission
                on
                November 16, 2004 (file no. 333-118024)).10.1
            2004
                Memorandum dated July 18, 2004, by and between Asahi Medical Co.,
                Ltd. and
                the Registrant (incorporated by reference to Exhibit 10.4 to the
                Registrant’s Registration Statement on Form S-1/A No. 1, filed with the
                Commission on October 7, 2004 (file no. 333-118024)).10.2
            Amended
                and Restated Marketing and Distribution Agreement dated October 25,
                2004
                between Diamed Medizintechnik GmbH and the Registrant (incorporated
                by
                reference to Exhibit 10.6 to the Registrant’s Registration Statement on
                Form S-1/A No. 1, filed with the Commission on October 7, 2004 (file
                no.
                333-118024)).10.3
            Amended
                and Restated Patent License and Royalty Agreement dated October 25,
                2004
                between the Registrant and Dr. Richard Brunner (incorporated by reference
                to Exhibit 10.8 to the Registrant’s Registration Statement on Form S-1/A
                No. 1, filed with the Commission on October 7, 2004 (file no.
                333-118024)).10.4
            Amendment
                to the Distribution Services Agreement dated July 30, 2004 between
                the
                Registrant and Apheresis Technologies, Inc. (incorporated by reference
                to
                Exhibit 10.9 to the Registrant’s Registration Statement on Form S-1/A No.
                1, filed with the Commission on October 7, 2004 (file no.
                333-118024)).10.5
            2002
                Stock Option Plan (incorporated by reference to Exhibit 10.22 to
                the
                Registrant’s Registration Statement on Form S-1/A No. 3, filed with the
                Commission on November 16, 2004 (file no. 333-118024)).10.6
            Amended
                and Restated Patent License and Royalty Agreement dated October 25,
                2004
                between the Registrant and Hans Stock (incorporated by reference
                to
                Exhibit 10.12 to the Registrant’s Registration Statement on Form S-1/A No.
                1, filed with the Commission on October 7, 2004 (file no.
                333-118024)).10.7
            Employment
                Agreement between the Registrant and Elias Vamvakas dated September
                1,
                2004 (incorporated by reference to Exhibit 10.13 to the Registrant’s
                Registration Statement on Form S-1/A No. 1, filed with the Commission
                on
                October 7, 2004 (file no. 333-118024)).10.8
            Employment
                Agreement between the Registrant and Thomas P. Reeves dated August
                1, 2004
                (incorporated by reference to Exhibit 10.14 to the Registrant’s
                Registration Statement on Form S-1/A No. 1, filed with the Commission
                on
                October 7, 2004 (file no. 333-118024)).10.9
            Employment
                Agreement between the Registrant and Stephen Kilmer dated July 30,
                2004
                (incorporated by reference to Exhibit 10.17 to the Registrant’s
                Registration Statement on Form S-1/A No. 1, filed with the Commission
                on
                October 7, 2004 (file no. 333-118024)).10.10
            Employment
                Agreement between the Registrant and Julie Fotheringham dated September
                1,
                2004 (incorporated by reference to Exhibit 10.18 to the Registrant’s
                Registration Statement on Form S-1/A No. 1, filed with the Commission
                on
                October 7, 2004 (file no.
                333-118024)).




108




10.11
            Employment
                Agreement between the Registrant and Zayed (Joe) Zawaideh dated September
                7, 2004 (incorporated by reference to Exhibit 10.19 to the Registrant’s
                Registration Statement on Form S-1/A No. 1, filed with the Commission
                on
                October 7, 2004 (file no. 333-118024)).10.12
            Product
                Purchase Agreement dated September 29, 2004 between the Registrant
                and
                Promedica International (incorporated by reference to Exhibit 10.20
                to the
                Registrant’s Registration Statement on Form S-1/A No. 2, filed with the
                Commission on November 2, 2004(file no. 333-118024)).10.13
            Employment
                Agreement between the Registrant and Dr. David Eldridge dated November
                9,
                2004 ((incorporated by reference to Exhibit 10.23 to the Registrant’s
                Registration Statement on Form S-1/A No. 3, filed with the Commission
                on
                November 16, 2004 (file no. 333-118024)).10.14
            Consulting
                Agreement between the Registrant and Richard Davis dated May 1, 2004
                (incorporated by reference to Exhibit 10.24 to the Registrant’s
                Registration Statement on Form S-1/A No. 4, filed with the Commission
                on
                December 6, 2004 (file no. 333-118024)).10.15
            Rental
                Agreement between the Registrant and Cornish Properties Corporation
                dated
                January 1, 2004 (incorporated by reference to Exhibit 10.27 to the
                Registrant’s Registration Statement on Form S-1/A No. 4, filed with the
                Commission on December 6, 2004 (file no. 333-118024)).10.16
            Sub-sublease
                between Echo Online Internet, Inc. and the Registrant dated September
                29,
                2004 (incorporated by reference to Exhibit 10.28 to the Registrant’s
                Registration Statement on Form S-1/A No. 4, filed with the Commission
                on
                December 6, 2004 (file no. 333-118024)).10.17
            Asset
                Purchase Agreement between Rheogenx Biosciences Corporation and the
                Registrant dated as of March 28, 2005 (incorporated by reference
                to
                Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q, filed with
                the Commission on May 6, 2005 (file no. 000-51030)).10.18
            Agreement
                between the Registrant and Rheogenx Biosciences Corporation dated
                March
                28, 2005 (incorporated by reference to Exhibit 10.2 to the Registrant’s
                Quarterly Report on Form 10-Q, filed with the Commission on May 6,
                2005
                (file no. 000-51030)).10.19
            Termination
                Agreement between the Registrant and Apheresis Technologies, Inc.
                dated as
                of March 28, 2005 (incorporated by reference to Exhibit 10.3 to the
                Registrant’s Quarterly Report on Form 10-Q, filed with the Commission on
                May 6, 2005 (file no. 000-51030)).10.20
            Employment
                Agreement between the Registrant and John Cornish dated as of April
                1,
                2005 (incorporated by reference to Exhibit 10.4 to the Registrant’s
                Quarterly Report on Form 10-Q, filed with the Commission on May 6,
                2005
                (file no. 000-51030)).10.21
            Settlement
                Agreement among the Registrant, David Craig Eldridge and David C.
                Eldridge
                O.D., P.C. dated as of May 20, 2005 (incorporated by reference to
                Exhibit
                10.1 to the Registrant’s Quarterly Report on Form 10-Q, filed with the
                Commission on August 8, 2005 (file no. 000-51030)).10.22
            Employment
                Agreement between John Caloz and the Registrant dated as of May 18,
                2005
                incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly
                Report on Form 10-Q, filed with the Commission on August 8, 2005
                (file no.
                000-51030)).10.23
            Amending
                Agreement between the Registrant and John Cornish, dated as of June
                1,
                2005, amending the Employment Agreement between the Registrant and
                John
                Cornish dated as of April 1, 2005 (incorporated by reference to Exhibit
                10.3 to the Registrant’s Quarterly Report on Form 10-Q, filed with the
                Commission on August 8, 2005 (file no. 000-51030)).10.24
            Amending
                Agreement between the Registrant and Thomas P. Reeves, dated as of
                July 1,
                2005, amending the Employment Agreement between the Registrant and
                Thomas
                P. Reeves dated August 2004 (incorporated by reference to Exhibit
                10.4 to
                the Registrant’s Quarterly Report on Form 10-Q, filed with the Commission
                on August 8, 2005 (file no.
                000-51030)).




109




10.25
            Amending
                Agreement between the Registrant and Irving Siegel, dated as of September
                1, 2005, amending the Employment Agreement between the Registrant
                and
                Irving Siegel dated as of August 1, 2003 (incorporated by reference
                to
                Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q, filed with
                the Commission on November 10, 2005 (file no.
                000-51030)).10.26
            Consulting
                Agreement among the Registrant, AMD Medical Services Inc. and Irving
                Siegel dated as of September 1, 2005 (incorporated by reference to
                Exhibit
                10.2 to the Registrant’s Quarterly Report on Form 10-Q, filed with the
                Commission on November 10, 2005 (file no. 000-51030)).10.27
            Employment
                Agreement between Steve Parks and the Registrant dated as of October
                4,
                2005 (incorporated by reference to Exhibit 10.3 to the Registrant’s
                Quarterly Report on Form 10-Q filed with the Commission on November
                10,
                2005 (file no. 000-51030)).10.28
            Option
                Agreement between Steve Parks and the Registrant dated as of October
                4,
                2005 (incorporated by reference to Exhibit 10.4 to the Registrant’s
                Quarterly Report on Form 10-Q, filed with the Commission on November
                10,
                2005 (file no. 000-51030)).10.29
            2005
                Memorandum between Asahi Kasei Medical Co., Ltd. and the Registrant
                dated
                October 17, 2005.10.30
            Release
                Agreement between Zayed (Joe) Zawaideh and the Registrant, dated
                as of
                November 22, 2005, terminating the Employment Agreement between the
                Registrant and Zayed (Joe) Zawaideh dated September 7,
                2004.14.1
            Code
                of Conduct of the Registrant (incorporated by reference to Exhibit
                14.1 to
                the Registrant’s Quarterly Report on Form 10-Q, filed with the Commission
                on November 10, 2005 (file no. 000-51030)).14.2
            Complaint
                and Reporting Procedures of the Registrant (incorporated by reference
                to
                Exhibit 14.2 to the Registrant’s Quarterly Report on Form 10-Q, filed with
                the Commission on August 8, 2005 (file no. 000-51030)).21.1
            Subsidiaries
                of Registrant (incorporated by reference to Exhibit 21.1 to the
                Registrant’s Registration Statement on Form S-1/A No. 1, filed with the
                Commission on October 7, 2004 (file no. 333-118024)).23.1
            Consent
                of Ernst & Young LLP.24.1
            Power
                of Attorney (included on signature page).31.1
            CEO’s
                Certification required by Rule 13A-14(a) of the Securities Exchange
                Act of
                1934.31.2
            CFO’s
                Certification required by Rule 13A-14(a) of the Securities Exchange
                Act of
                1934.32.1
            CEO’s
                Certification of periodic financial reports pursuant to Section 906
                of the
                Sarbanes-Oxley Act of 2002, U.S.C. Section 1350.32.2
            CFO’s
                Certification of periodic financial reports pursuant to Section 906
                of the
                Sarbanes-Oxley Act of 2002, U.S.C. Section
                1350.




110