SECURITIES
        AND EXCHANGE COMMISSION
 Washington,
        D.C. 20549
  FORM
          10-K/A
  AMENDMENT
            NO. 1
 [X]
        ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 SECURITIES
        EXCHANGE ACT OF 1934
  FOR
        THE
        FISCAL YEAR ENDED DECEMBER 31, 2006
  [
        ]
        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
                
                (State
                  or other jurisdiction of
                
                incorporation
                  or organization)
              59 343 4771
                
                (I.R.S.
                  Employer
                
                Identification
                  No.)2600
                  Skymark Avenue, Unit 9, Suite 201
                
                Mississauga,
                  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:
 COMMON
        STOCK, $0.001 PAR VALUE
 (Title
        of
        Class)
  SECURITIES
        REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
   Indicate
        by check mark if the registrant is a well-known seasoned issuer, as defined
        in
        Rule 405 of the Securities Act. Yes [ ] 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 [ ] 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 [ ]
  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. [ ]
  Indicate by check mark whether the Registrant is an accelerated filer (as
        defined in Rule 12b-2 of the Exchange Act). Yes [ X] No [ ]
  Indicate by check mark if the Registrant is a shell company (as defined in
        Rule
        12b-2 of the Exchange Act). Yes [ ] 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, 2006:
        $42,348,498. The Registrant has no non-voting common stock.
 As
        of
        March 8, 2007, there were 57,303,895 shares of the Registrant’s Common Stock
        outstanding.
  EXPLANATORY
              NOTE
  This Amendment No. 1 to the Annual Report on Form 10-K filed on March
              15, 2007
              (the “Original Annual Report”) is being filed in order to replace Exhibits 31.1
              and 31.2 to the Original Annual Report.
  DOCUMENTS
        INCORPORATED BY REFERENCE
  Portions of the Registrant’s Proxy Statement for the 2007 Annual Meeting of
        Stockholders of the Registrant to be held June 29, 2007 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
        100F 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 in the business of commercializing
        innovative treatments for age-related 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 for Dry AMD, 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%.
  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:
  Treatment
                  Group
                (n=69)
              Placebo
                  Group
                (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%
  3
 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 support 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 the MIRA-1 study results, we re-evaluated our PMA submission
        strategy and then met with representatives of the FDA on June 8, 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. As expected,
        in light of MIRA-1’s failure to meet its primary efficacy endpoint, the FDA
        advised us that it would require an additional study of the RHEOTM System to be
        performed.
  At that meeting, the FDA confirmed its willingness to allow the substitution,
        in
        the new study, of the new polysulfone RheofilterTM filter for the older cellulose
        acetate filter which currently forms part of the RHEOTM System. The immediate
        replacement of the filter avoids the regulatory uncertainties that would
        arise,
        were the replacement to take place following receipt of FDA approval.
        Furthermore, due to manufacturing constraints on the number of cellulose
        acetate
        filters that can be produced by their manufacturer, Asahi Kasei Medical Co.,
        Ltd. (formerly Asahi Medical Co., Ltd.), or Asahi Medical, the replacement
        of
        the filter in the new trial eliminates the need to continue to build and
        maintain adequate inventories of the older cellulose acetate filter that
        the
        Company had been building and maintaining in preparation for commercial
        launch.
  On January 29, 2007, the Company announced that it had obtained Investigational
        Device Exemption clearance from the FDA to commence the new pivotal clinical
        trial of the RHEOTM System, called RHEO-AMD, or Safety and Effectiveness in a
        Multi-center, Randomized, Sham-controlled Investigation for Dry, Non-exudative
        Age-Related Macular Degeneration (AMD) Using Rheopheresis.  The company has
        been actively preparing a protocol, putting in place the required resources
        and
        obtaining clinical trial site commitments for RHEO-AMD.
  We cannot begin commercialization in the United States until we receive FDA
        approval. Until we commence patient enrollment in RHEO-AMD and gain a clear
        understanding of the progress of that clinical trial, we will not be able
        to
        anticipate when, if ever, we will receive FDA approval for the RHEOTM System.
        Accordingly, at this time, we do not know when we can expect to begin to
        generate revenues in the United States from the commercialization of the
        RHEOTM
System.
  In
        2003,
        we received licenses from Health Canada for the components of the RHEOTM System.
        These licenses allow 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 licenses,
        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 and the Company’s sole commercial customer, 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. During
        2006, the Company continued to sell treatment sets to Veris at the discounted
        price of $200 per treatment set, which is lower than the Company’s cost. On
        November 6, 2006, the Company amended its agreement with Veris and forgave
        a
        certain amount receivable which had been owing to the Company for the sale
        of
        treatment sets and pumps, and the provision of related services, to Veris
        during
        the period from September 14, 2005 to December 31, 2005. In consideration
        of the
        forgiveness of this debt, Veris agreed that the Company did not owe Veris
        certain specified amounts. In January 2007, the Company further agreed to
        forgive an amount receivable owing by Veris for the purchase of 348 treatment
        sets which had been delivered to Veris in November 2006. We have been notified
        that Veris has initiated restructuring proceedings under the *Bankruptcy
        and Insolvency Act* (Canada)
        but that it is continuing to carry on its operations in the normal course
        during
        its restructuring proceedings.
  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.
  Until
        our
        announcement on February 3, 2006 of the preliminary analysis of the data
        from
        MIRA-1, our primary activities 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. Since
        February 3, 2006, in addition to conducting a full analysis of the MIRA-1
        study
        data, our primary activities have included negotiating the parameters of
        RHEO-AMD with the FDA, designing the protocol for RHEO-AMD, recruiting clinical
        trial sites and otherwise preparing for the launch of RHEO-AMD.
  In
        anticipation of the delay in commercialization of the RHEOTM System in the United
        States, the Company accelerated its diversification plans by acquiring Solx,
        Inc., or SOLX, a Boston University Photonics Center-incubated company that
        has
        developed a system for the treatment of glaucoma, called the SOLX Glaucoma
        System, and by acquiring 50.1% of the capital stock, on a fully diluted basis,
        of OcuSense, Inc., or OcuSense, a San Diego-based company that is in the
        process
        of developing technologies that will enable eye care practitioners to test,
        at
        the point-of-care, for highly sensitive and specific biomarkers using nanoliters
        of tear film.
  The
        SOLX
        Glaucoma System is a next-generation glaucoma treatment platform designed
        to
        reduce intra-ocular pressure, or IOP, without a bleb (which is a surgically
        created flap that serves as a drainage pocket underneath the surface of the
        eye), thus avoiding its related complications. The SOLX Glaucoma System consists
        of the SOLX 790 Laser, a titanium sapphire laser used in laser trabeculoplasty
        procedures, and the SOLX Gold Shunt, a 24-karat gold, ultra-thin drainage
        device
        designed to bridge the anterior chamber and the suprachoroidal space in the
        eye,
        using the pressure differential that exists naturally in the eye in order
        to
        reduce IOP.
  The
        SOLX
        790 Laser received CE Mark approval in December 2004, and the SOLX Gold Shunt
        received CE Mark approval in October 2005. The SOLX 790 Laser has a Health
        Canada license, and we will be seeking the corresponding approval for the
        SOLX
        Gold Shunt.
  We
        are in
        the process of actively training and certifying physicians in the use of
        the
        SOLX Gold Shunt, for commercial purposes, in various European and Asian
        jurisdictions, including Spain, Italy, Germany, Poland, France, the United
        Kingdom and Thailand. In addition, in order to establish and maintain a reliable
        distribution network for SOLX’s products, we are continuing to maintain our
        relationships with distributors in France, Germany, Spain, the United Kingdom
        and Canada and are engaged actively in pursuing relationships with other
        distributors in Europe.
  Both
        the
        SOLX 790 Laser and the SOLX Gold Shunt are currently the subject of randomized,
        multi-center clinical trials, the purposes of which are to demonstrate
        equivalency to the argon laser, in the case of the SOLX 790 Laser, and to
        the
        Ahmed Glaucoma Valve manufactured by New World Medical, Inc., in the case
        of the
        SOLX Gold Shunt. The results of these clinical trials will be used in support
        of
        applications to the FDA for a 510(k) clearance for each of the SOLX 790 Laser
        and the SOLX Gold Shunt, the receipt of which, if any, will enable the Company
        to market and sell these products in the United States.
  OcuSense’s
        first product, which is currently under development, is a hand-held tear
        film
        osmolarity test for the diagnosis and management of dry eye syndrome, or
        DES,
        known as the TearLabTM test for DES. The anticipated innovation of the TearLabTM
test for DES will be its ability to measure precisely and rapidly certain
        biomarkers in nanoliter volumes of tear samples, using inexpensive hardware.
        Historically, eye care researchers have relied on expensive instruments to
        perform tear biomarker analysis. In addition to their cost, these conventional
        systems are slow, highly variable in their measurement readings and not waived
        by the FDA under the Clinical Laboratory Improvement Amendments, or CLIA.
  The
        TearLabTM test for DES will require the development of the following three
        components: (1) the TearLabTM disposable, which is a single-use microfluidic
        cartridge; (2) the TearLabTM pen, which is a hand-held interface with the
        TearLabTM disposable; and (3) the TearLabTM reader, which is a physical housing
        for the TearLabTM pen connections and measurement circuitry. OcuSense is
        currently engaged actively in industrial, electrical and software design
        efforts
        for the three components of the TearLabTM test for DES and, to these ends, is
        working with two expert partners, both based in Melbourne, Australia, one
        of
        which is a leader in biomedical instrument development and the other of which
        is
        a leader in customized microfluidics.
  OcuSense’s
        intention is to seek a 510(k) clearance and a CLIA waiver from the FDA for
        the
        TearLabTM test for DES, following its development and subsequent clinical
        trials.
 4
  **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 Corporation*
  TLC Vision Corporation, or TLC Vision, beneficially owns approximately 36.08%
        of
        our outstanding common stock, or 33.79% on a fully diluted basis. Elias
        Vamvakas, a director of TLC Vision (and formerly its Chairman and CEO), 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 2,827,589 common shares of TLC
        Vision, representing approximately 4.09% of TLC Vision’s outstanding shares. Mr.
        Davidson beneficially owns 71,954 common shares of TLC Vision, representing
        approximately 0.10% 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.
  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 then
        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
        with respect to the RHEOTM System 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 as at
        December 31, 2005. 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. On
        May 1,
        2006, the Company paid RHEO Clinic C$31,859, which amount included the amount
        owing for losses incurred for assets that RHEO Clinic was not able to dispose
        of
        as at December 31, 2005.
  *Other
        Major Relationships*
  The components of the RHEOTM
        System were
        developed by our suppliers, Diamed Medizintechnik GmbH, or Diamed, and Asahi
        Kasei 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. On
        April
        1, 2005, the Company and Mr. Cornish entered into an employment agreement,
        which
        has been amended several times. Effective April 13, 2006, Mr. Cornish is
        paid an
        annual base salary of $68,660, representing compensation to him for devoting
        50%
        of his time to the business and affairs of the Company. Mr. Cornish participates
        in the Company’s bonus plan and is entitled to receive, and has received, stock
        options pursuant to the Company’s stock option plan.
  Prior
        to
        the Company’s acquisition of SOLX, Doug P. Adams served as the President and
        Chief Executive Officer of SOLX and was a significant stockholder of SOLX.
        As of
        September 1, 2006, the closing date of the acquisition, Mr. Adams became
        an
        executive officer of the Company. The Company paid Mr. Adams a total of
        $1,005,791 and issued to him 1,309,329 shares of our common stock in
        consideration of his proportionate share of the purchase price of SOLX. Mr.
        Adams is owed an additional amount of up to $2,663,084 by the Company in
        consideration of his proportionate share of the outstanding balance of the
        purchase price of SOLX.
  In
        addition, the Company paid Peter M. Adams, Doug P. Adams’ brother, a total of
        $229,967 **** and
        issued to him and his spouse an aggregate of 300,452 shares of our common
        stock
        in consideration of his proportionate share of the purchase price of SOLX.
        The
        Company owes Mr. Adams an additional amount of up to $615,983 in consideration
        of his proportionate share of the outstanding balance of the purchase price
        of
        SOLX.
  On
        November 30, 2006, Mr. Vamvakas agreed to provide the Company with a standby
        commitment to purchase convertible debentures of the Company in an aggregate
        maximum principal amount of up to $8 million. When the Company raised gross
        proceeds in the amount of $10,016,000 on February 6, 2007 in a private placement
        of shares of its common stock and warrants, the commitment amount under Mr.
        Vamvakas’ standby commitment was reduced to zero, thus effectively terminating
        the standby commitment. No portion of the standby commitment was ever drawn
        down
        by the Company, and the Company has paid Mr. Vamvakas a total of $29,808
        in
        commitment fees.
  5
 **Industry
        (Retina)**
  ***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.
  
  ***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:
 
 **Category**
              **Risk
                  of Wet AMD**
                **in
                  Five Years**
              
              **Key
                  Characteristics**Category
                  1
              No
                  Risk
              
              • no
                    pigment changes and less than five small drusen•BCVAbetter
                    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 abnormalitiesin one
                    or both eyes•BCVA
                    better than 20/32 in each eye•neither
                    eye with Wet AMDCategory
                  3(1)
              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(1)
              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)  Categories
        3 and 4 are commonly referred to as “Advanced Dry AMD”.
 6
  ***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 a 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.  ·
            ***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. Genentech, Inc.’s Lucentis
                received FDA approval in June 2006 and appears to be gaining significant
                momentum in the ophthalmic community. Lucentis, as well as other
                drug
                therapies in clinical trials for Wet AMD, including ones sponsored
                by
                Regeneron Pharmaceuticals, Inc., Sirna Therapeutics, Inc. and Acuity
                Pharmaceuticals, is 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.
                Avastin, a cancer drug of Genentech, Inc. which is molecularly similar
                to
                Lucentis, is reported to be the subject of much off-label use by
                physicians for the treatment of Wet AMD. 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. is owned by OSI
                Pharmaceuticals, Inc. Sirna Therapeutics, Inc. was recently acquired
                by
                Merck & Co., 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.  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 (Retina)**
  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.   7
  ·
            ***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.  ·
            ***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 (Retina)**
  Our
        goal
        is to establish RHEOTM
        Therapy as
        the
        leading treatment for Dry AMD in North America. To
        date,
        key elements of our strategy have included creating a plan to develop market
        awareness of RHEOTM Therapy by educating eye care professionals and patients,
        establishing third-party reimbursement for RHEOTM Therapy, securing relationships
        with key multi-facility health care service providers, ensuring sufficient
        manufacturing capacity and inventory to support our commercialization plan
        and
        maintaining our intellectual property portfolio and other barriers to entry.
        However, as a result of our discussions with the FDA following the full analysis
        of the MIRA-1 study results and the FDA’s requirement that a follow-up clinical
        trial of the RHEOTM System be conducted, the timetable for the achievement of our
        goal to establish RHEOTM Therapy as the leading treatment for Dry AMD in North
        America and the implementation of our strategy for achieving this goal have
        been
        delayed for at least the duration of the RHEO-AMD clinical trial. To the
        extent
        that it makes sound business sense, we will continue to lay the foundation
        for
        the achievement of our goal and the implementation of our strategy.
  **Our
        Product (Retina)**
  ***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 will be seeking FDA approval of the OctoNova pump as
                part of
                theRHEOTM
                SystemPMA.  ·
            ***Disposable
                Treatment Sets.***Disposable
                treatment sets consist of the tubing and two filters, the Plasmaflo
                filter
                and the Rheofilter filter. 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
                filter 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
                filter was developed in the early 1980s by Asahi Medical. We will
                be
                seeking FDA approval of the tubing and two filters as part of theRHEOTM
                SystemPMA
                and will be working with Asahi Medical on preparing the PMA following
                the
                completion of RHEO-AMD. Upon FDA approval of the PMA, we have an
                agreement
                to transfer this FDA approval to a special purpose corporation which
                will
                be owned as to 51% by Asahi Medical and as to 49% by us. In that
                same
                agreement, Asahi Medical agreed to us being the exclusive distributor
                of
                the Plasmaflo filter and the Rheofilter filter in North America,
                certain
                countries in the Caribbean, Australia, New Zealand, Colombia and
                Venezuela
                and a non-exclusive distributor in Italy. With respect to the United
                States, subject to early termination under certain circumstances,
                this
                agreement has a term which will end ten years following the date
                on which
                the FDA approval is received, if ever, and contemplates successive
                one-year renewal terms thereafter. The Rheofilter filter is currently
                made
                of a cellulose acetate filter material. We had been working with
                Asahi
                Medical to develop a new filter made of polysulfone to replace the
                older
                cellulose acetate filter, and the FDA has confirmed its willingness
                to
                allow the substitution, in RHEO-AMD, of the new polysulfone filter.  The disposable treatment sets received Health Canada regulatory approval
        in
        2002. The OctoNova pump received a Health Canada license 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.
        Although we had been conducting clinical studies with the goal of obtaining
        FDA
        approval as well as with a view to gaining widespread physician acceptance
        of RHEOTM
        Therapy, our clinical study efforts with respect to the RHEOTM System, in the
        near future, will be focused principally on RHEO-AMD .
  8
  ***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 filter, 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.
  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 (Retina)**
  In 2006, we completed our FDA clinical trial, MIRA-1, or Multicenter
        Investigation of Rheopheresis for AMD, which, if successful, was expected
        to
        support our application to the 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. 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.
  As
        expected, in light of MIRA-1’s failure to meet its primary efficacy endpoint,
        the FDA advised us that it would require an additional study of the RHEOTM System
        to be performed. On January 29, 2007, the Company announced that it had obtained
        Investigational Device Exemption clearance from the FDA to commence the new
        pivotal clinical trial of the RHEOTM System, called RHEO-AMD, or Safety and
        Effectiveness in a Multi-center, Randomized, Sham-controlled Investigation
        for
        Dry, Non-exudative Age-Related Macular Degeneration (AMD) Using Rheopheresis.
  ***RHEO-AMD***
  RHEO-AMD
        is 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 (as defined in the AREDS Report), Dry AMD.
  To
        be
        included in RHEO-AMD, a patient’s study eye must demonstrate
        intermediate-to-late stage Dry AMD, with three or more large, or ten or more
        intermediate, drusen. Primary eyes in the study must show no signs of active
        Wet
        AMD and must have demonstrated best corrected visual acuity, or BCVA, between
        20/40 and 20/100 inclusive. Potential study subjects who demonstrate central
        geographic atrophy within 250 μm of the fovea of the eye being studied or with
        any serious pigment epithelium detachments within 500 μm of the fovea will not
        qualify to participate in the study. Other ophthalmic exclusion criteria
        of
        RHEO-AMD, among others, will require potential study subjects to not require
        cataract surgery, to not have had cataract surgery during the three-month
        period
        prior to screening and to not have had a Yag capsulotomy during the six-week
        period prior to screening. RHEO-AMD will not apply any inclusion or exclusion
        criteria based on blood factors.
  Two
        out
        of every three patients will be treated in the trial, while the third will
        be a
        placebo, or control, patient. Patients will receive eye exams prior to treatment
        and at three-, six-, nine- and 12-month follow-up intervals. Patients in
        the
        placebo-control group will be made to believe that they are receiving RHEOTM
Therapy. All subjects, including those randomized to the placebo group, will
        be
        shrouded from the neck down to prevent them from observing their treatment
        and
        will receive actual needle sticks in both arms. Additionally, a partition
        will
        be positioned in front of the OctoNova pump in order to prevent the patient
        from
        seeing the system. The machine will be activated so that patients can hear
        the
        background noise of the machine, but those patients in the placebo group
        will
        not be connected to the tubing circuit. In addition, all subjects, including
        those randomized to the placebo group, will be 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.
  Vision
        research typically uses a “standard measurement” called the “change in BCVA”,
        which is measured using the Early Treatment Diabetic Retinopathy Study, or
        ETDRS, eye chart, which is the standard eye chart used in ophthalmic trials
        and
        which 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.
 
 RHEO-AMD’s
        primary endpoint will be the mean change in BCVA and will be achieved if
        there
        is demonstrated a statistically significant difference in the proportion
        of
        study eyes achieving a ten-letter (two-line) or greater improvement in BCVA
        between actively treated patients and placebo patients. RHEO-AMD will have
        various secondary and tertiary endpoints.
 9
 The
        protocol for RHEO-AMD was designed with the input of members of our Scientific
        Advisory Board, and the protocol design specifically takes into account the
        learnings derived from MIRA-1.
  It
        is
        anticipated that up to 25 ophthalmic clinical trial sites and up to 20 apheresis
        clinical trial sites will participate in RHEO-AMD. The initiation of clinical
        trial sites has been underway and is continuing.
  ***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 (as
        defined in the AREDS Report), 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.
 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 contained 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, 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 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 to 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
        ETDRS eye chart. 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;  ·
            the
                National Eye Institute visual functioning questionnaire;
                and  ·
            progression
                to legal blindness.  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.
  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
                (n=69)
              Placebo
                  Group
                (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%
 10
 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 support 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 enrolled 50 subjects who were treated
        in the MIRA-1 study. At nine investigational sites, subjects were randomized
        in
        a 1:1 fashion to receive either two or four RHEOTM 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 enrolled 29 subjects who had been
        placebo patients in the MIRA-1 study. At nine investigational sites, subjects
        received eight RHEO Therapy procedures and will have a three-, six-, nine-
        and
        12-month follow-up from baseline evaluation.
  The
        screening and treatment phases of both LEARN-1 and LEARN-2 have been completed,
        and both clinical trials are currently in the follow-up phase.
  ***OMER***
  We have been conducting a small clinical study, called OMER, or Objective
        Measurement of the Effect of Rheopheresis, with the assistance of Columbia
        University, New York Presbyterian Hospital **** and
        New
        York Blood Center. OMER is an open-label study of ten patients, the objective
        of
        which is to evaluate any change, from baseline evaluation to post-treatment,
        in
        the multi-focal electrophysiological activity of their macula and in the
        thickness of their retina. Each patient participating in the study has been,
        or
        will be, receiving 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. Although a number of patients
        have
        already been treated or will commence treatment shortly, OMER is still in
        the
        enrollment phase and is recruiting patients.
  Among other things, 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 the Rheopheresis TM procedure 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 in RHEO-AMD and 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. 18 of the patients in the study had signs of Wet AMD and would be
        excluded from RHEO-AMD under the RHEO-AMD protocol and also 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 were 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.
  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 will continue to be
        conducted.
  11
  ***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
        January 2007, a total of 6,726 Rheopheresis TM procedures (5,272 in Germany and 1,454 in Canada) on 1,005 patients were
        registered, including 739 patients with AMD. Ophthalmological data of 322
        eyes
        of 218 patients with Dry AMD could be analyzed from the registry as of January
        2007. Results of RHEONET Registry analyses will be presented, when available,
        at
        scientific meetings in 2007.
  **Supplier
        Relationships (Retina)**
  We have three key supplier arrangements — with Asahi Medical, who manufactures
        the treatment sets, including the Rheofilter filter and the Plasmaflo filter,
        and with Diamed and MeSys GmbH, or MeSys, the designer and the manufacturer,
        respectively, of the OctoNova pump. The Rheofilter filter, the Plasmaflo
        filter
        and the OctoNova pump are all key components of the RHEOTM
        System .
  ***Rheofilter Filter and Plasmaflo Filter.*** We
        purchase the Rheofilter filter and the 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 filter and the Plasmaflo
        filter for use in treating AMD in North America, 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 filter and the Plasmaflo filter
        in
        Italy where we are also obligated 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;  ·
            we
                must use our best efforts to support providers in their efforts to
                secure
                reimbursement from public and private health insurers, in those
                territories where we have exclusive distribution rights, on behalf
                of
                patients whose Dry AMD treatment involves utilization of these
                filters;  ·
            for
                the United States and the Caribbean, we must purchase a minimum of
                9,000
                filter sets during the one-year period commencing six months following
                FDA
                approval, 15,000 filter sets in the succeeding one-year period and
                22,500
                filter sets 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
                Canada, we must purchase a minimum of 900 filter sets during the
                one-year
                period commencing upon the earlier to occur of the sale of our current
                inventory of Rheofilter filters or their expiry, 1,500 filter sets
                in the
                succeeding one-year period and 2,250 filter sets in the next succeeding
                one-year period; 
 ·
            for
                Australia, New Zealand, Colombia, Venezuela and Italy, we have committed
                to purchase an aggregate of 300 filter sets and 500 filter sets in
                2009
                and 2010, respectively;  ·
            we
                must transfer the whole ownership of the FDA approval, if obtained
                and
                upon receipt, to a special purpose corporation which will be owned
                as to
                51% by Asahi Medical and as to 49% by us;  ·
            regulatory
                approvals obtained, if any, in Australia, New Zealand, Colombia,
                Venezuela
                or Italy will be held by Asahi Medical;  ·
            the
                clinical trial data from RHEO-AMD will be jointly owned by Asahi
                Medical
                and us, and we will have the ability to use such clinical trial data
                in
                those territories where we have exclusive distribution rights;
                and 
 ·
            provided
                that certain conditions are met, Asahi Medical will be obligated
                to
                contribute $3,000,000 toward the cost of
                RHEO-AMD.  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 Rheofilter filters
        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 filters on terms and conditions
        satisfactory to Asahi Medical and to us.
  With respect to the United States, 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;  ·
            if
                we are unable to obtain FDA approval and other necessary approvals
                in the
                territories for which we have distribution rights by the respective
                deadlines provided for in the agreement which, in the case of FDA
                approval, is December 31, 2010;  ·
            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
                a competitor of Asahi Medical acquires a majority of the voting stock
                of
                the Company or substantially takes control of the Company’s management
                which, in either case, would adversely affect the sale of filters
                in the
                territories in which we have distribution
                rights.  Our
        distribution agreement with Asahi covers the newer polysulfone Rheofilter
        filter
        which will form part of the RHEOTM System that will be the subject of RHEO-AMD
        and which will replace the older cellulose acetate filter which currently
        forms
        part of the RHEOTM System.
  ***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.  12
 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.  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:
  ·
            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 (Retina)**
  We
        currently have limited sales and marketing capabilities and no distribution
        capabilities. We had 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, as
        a
        result of our discussions with the FDA following the full analysis of the
        MIRA-1
        study results and the FDA’s requirement for a follow-up clinical
        trial, we have
        limited all sales and marketing activities that were being conducted in
        anticipation of commercialization in the United States. However,
        we will continue to develop and execute our conference and podium strategy
        to
        ensure the visibility, and the “evidence-based” positioning, of the RHEOTM System
        within the ophthalmic community.
  In
        Canada, we previously had been marketing and selling the RHEOTM
        System through
        a small, dedicated Canadian sales force. During
        2006, our sales and marketing activities in Canada diminished significantly.
        Currently, Veris is the Company’s sole commercial customer for the RHEOTM System.
        During 2006, the Company sold treatment sets to Veris at the discounted price
        of
        $200 per treatment set, which is lower than the Company’s cost. On November 6,
        2006, the Company amended its agreement with Veris and forgave a certain
        amount
        receivable which had been owing to the Company for the sale of treatment
        sets
        and pumps, and the provision of related services, to Veris during the period
        from September 14, 2005 to December 31, 2005. In consideration of the
        forgiveness of this debt, Veris agreed that the Company did not owe Veris
        certain specified amounts. In January 2007, the Company further agreed to
        forgive an amount receivable owing by Veris for the purchase of 348 treatment
        sets which had been delivered to Veris in November 2006. We have been notified
        that Veris has initiated restructuring proceedings under the *Bankruptcy
        and Insolvency Act* (Canada)
        but that it is continuing to carry on its operations in the normal course
        during
        its restructuring proceedings. Our agreement with Veris continues to remain
        in
        place.
  **Competition
        (Retina)**
  The pharmaceutical, biotechnology and medical industries are intensely
        competitive. The RHEOTM System specifically targets people 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,
        Regeneron Pharmaceuticals, Inc./Bayer HealthCare, Sirna Therapeutics, Inc.,
        Acuity Pharmaceuticals, Alcon Laboratories, Inc., Iridex Corporation and
        QLT
        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 Medical’s Rheofilter filter, 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 (Retina)**
  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.
  13
 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;  ·
            RHEO
                CLINIC;  ·
            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.
  **Industry
        (Glaucoma)**
  ***Glaucoma***
  Glaucoma
        is a leading cause of irreversible blindness and is largely related to aging.
        Approximately 2.2 million people in the United States aged 40 and older suffer
        from this disease, and the U.S. National Eye Institute estimates that at
        least
        3.3 million people in the United States will suffer from this disease by
        the
        year 2020. The worldwide incidence of glaucoma is approximately 67 million
        people. Although largely related to aging, glaucoma still afflicts people
        of all
        ages. For example, it is estimated that one out of every 10,000 babies born
        in
        the United States will suffer from glaucoma.
  Although
        the mechanisms of glaucoma are not completely understood, it is known that
        abnormally high pressure in the eye eventually leads to optic nerve damage
        and
        that the resultant vision loss is never regained. Glaucoma is a disease in
        which
        the aqueous humor, the watery fluid that fills the eye, builds up. In a healthy
        eye, aqueous humor is secreted by the ciliary processes and passes through
        the
        angle between the cornea and the iris. There, a spongy, self-cleaning filter
        known as the trabecular meshwork is designed to filter fluid into a passageway
        known as Schlemm’s canal, where it is reabsorbed into the venous system.
        Glaucoma is thought to be the result of the trabecular meshwork clogging,
        by the
        exfoliation of cells or other debris, or by its deformation for other reasons.
        When the fluid doesn’t drain properly from the clogged meshwork, it builds up in
        the eye and causes increased pressure. Medical treatment strategies for glaucoma
        focus on keeping intra-ocular pressure, or IOP, down for the remainder of
        a
        glaucoma patient’s life in an effort to preserve his or her remaining
        vision.
  ***Treatment
        Alternatives for Glaucoma***
  Pharmaceuticals
        have become the front-line therapy for glaucoma. All of them are designed
        to
        lower IOP through a variety of mechanisms. Prostaglandin agonists do so by
        increasing the outflow of fluid. Examples of such prostaglandin agonists
        include
        Pfizer Inc.’s Xalatan, Alcon, Inc.’s Travatan and Allergan, Inc.’s Lumigan. Beta
        blockers, such as Merck & Co., Inc.’s Timoptic, and alpha adrenergic
        receptor agonists, such as Allergan, Inc.’s Alphagan, lower pressure by
        decreasing the production of aqueous humor. Another class of drugs, the
        muscarinic agonists, increase outflow by contracting the pupil and stimulating
        ciliary muscles.
  Although
        glaucoma drugs operate in a $2 billion market today, they are plagued by
        low
        patient compliance and limited long-term efficacy. Drugs may cause unacceptable
        side effects in many patients or fail to control IOP adequately. Drugs also
        often eventually stop working as the disease progresses, and patients ultimately
        find themselves on daily regimens of as many as three drugs in eyedrop form
        that
        must be administered three times a day. As a result, lack of compliance is
        a big
        problem. The high cost of chronic medications (approximately $700 to $3,000
        per
        year) exacerbates this problem further.
  Device
        interventions for glaucoma today are focused on improving drainage, or
        compensating for blockages, in the trabecular meshwork. There are two types
        of
        non-invasive laser procedures—argon laser trabeculoplasty, or ALT, and a newer,
        gentler approach known as selective laser trabeculoplasty, or SLT. In ALT,
        the
        cornea is anesthetized, and burns are applied to the junction of the
        non-pigmented and pigmented trabeculum. Although the mechanism of effect
        is
        unknown, it appears to cause coagulative damage that results in collagen
        shrinkage and scarring in the trabecular meshwork. The laser may also be
        inducing macrophages to clear debris from the trabecular meshwork. SLT uses
        an
        (ND):YAG laser to target pigmented trabecular meshwork cells selectively,
        without producing collateral thermal damage to non-pigmented cells or
        structures. Coherent Inc., HGM Medical Lasers Inc., Nidek Incorporated, Iridex
        Corporation and Lightmed Corporation are among the companies competing in
        the
        argon laser space. Laserex Technologies Pty. Ltd., Lumenis Ltd. and Coherent
        Inc. are among the companies competing in the selective laser
        space.
  14
 If
        laser
        trabeculoplasty fails, a glaucoma patient could have an incisional or filtering
        surgery, the most common of which is trabeculectomy. Trabeculectomy has a
        20%
        chance of failure at five years and high morbidity. Known negative effects
        of
        trabeculectomy include dangerously low pressure, or hypotony, inflammation,
        scarring and a foreign body sensation in the eye. In trabeculectomy, a piece
        of
        tissue in the drainage angle of the eye is removed, thus creating an opening.
        The opening is partially covered with a flap of tissue from the sclera (the
        white part of the eye) and the conjunctiva (its clear covering) to protect
        it
        from infection from the outside. The surgically created flap is known as
        a
“bleb”, and it serves as a drainage pocket underneath the surface of the eye. As
        an adjunct or an alternative, surgeons may implant a tube or a shunt that
        connects the anterior chamber to the sclera or, rather, the inside of the
        eye to
        the outside of the eye. The bleb causes many complications. Manufacturers
        of
        shunts used in trabeculectomy include Optonol Ltd., Advanced Medical Optics,
        Inc., Pfizer Inc., New World Medical, Inc., Staar Surgical Company and Molteno
        Ophthalmic Limited.
  **Our
        Product (Glaucoma)**
  The
        SOLX
        Glaucoma System is a next-generation glaucoma treatment platform designed
        to
        reduce IOP without a bleb, thus avoiding its related complications. The SOLX
        Glaucoma System consists of the SOLX 790 Laser, a titanium sapphire laser
        used
        in laser trabeculoplasty, and the SOLX Gold Shunt, a 24-karat gold, ultra-thin
        drainage device designed to bridge the anterior chamber and the suprachoroidal
        space in the eye, using the pressure differential that exists naturally in
        the
        eye in order to reduce IOP.
  We
        believe that the SOLX 790 Laser achieves deeper penetration than other lasers
        that are currently being used in trabeculoplasty and causes less thermal
        damage
        to the trabecular meshwork than other lasers. We believe that the SOLX Gold
        Shunt’s main comparative advantages are its ability to reduce IOP without a
        bleb, the relative ease and speed with which surgeries using the SOLX Gold
        Shunt
        can be performed and the low incidence of post-surgical complications relative
        to incisional surgeries and surgeries involving the implantation of other
        shunts.
  **Clinical
        Trials (Glaucoma)**
  Both
        the
        SOLX 790 Laser and the SOLX Gold Shunt are currently the subject of randomized,
        multi-center clinical trials, the purposes of which are to demonstrate
        equivalency to the argon laser, in the case of the SOLX 790 Laser, and to
        the
        Ahmed Glaucoma Valve manufactured by New World Medical, Inc., in the case
        of the
        SOLX Gold Shunt.
  Both
        clinical trials are currently in enrollment phase and involve the participation
        of clinical trial sites in the United States, Canada, Spain and Israel. Our
        objectives are to complete enrollment in the SOLX 790 Laser clinical trial
        by
        the end of the second quarter of 2007 and to complete enrollment in the SOLX
        Gold Shunt clinical trial by the end of 2007. The results of these clinical
        trials will be used in support of applications to the FDA for a 510(k) clearance
        for each of the SOLX 790 Laser and the SOLX Gold Shunt, the receipt of which,
        if
        any, will enable the Company to market and sell these products in the United
        States. Currently, our intention is to file the application for a 510(k)
        clearance for the SOLX 790 Laser by the end of 2007 and to file the application
        for a 510(k) clearance for the SOLX Gold Shunt by the end of the second quarter
        of 2008.
  **Sales
        and Marketing (Glaucoma)**
  The
        SOLX
        790 Laser received CE Mark approval in December 2004, and the SOLX Gold Shunt
        received CE Mark approval in October 2005. We are in the process of actively
        training and certifying physicians in the use of the SOLX Gold Shunt, for
        commercial purposes, in various European and Asian jurisdictions, including
        Spain, Italy, Germany, Poland, the United Kingdom and Thailand. In addition,
        we
        are engaged actively in pursuing relationships with distributors in Europe
        in
        order to establish a reliable distribution network for these
        products.
  In
        order
        to ensure the visibility and awareness of the SOLX Glaucoma System within
        the
        ophthalmic community, we have been arranging to have a presence at most,
        if not
        all, of the major ophthalmology conferences in North America and Europe.
        We will
        continue to develop and execute our conference and podium strategy in order
        to
        ensure continued visibility and awareness of the SOLX Glaucoma
        System.
  **Supplier
        and Distribution Relationships (Glaucoma)**
  Cynosure,
        Inc., or Cynosure, a former stockholder of SOLX, is currently the exclusive
        manufacturer and supplier of the SOLX 790 Laser. In accordance with the terms
        of
        our agreement with Cynosure, Cynosure has designed and developed the SOLX
        790
        Laser in accordance with SOLX’s specifications and is supplying lasers to
        SOLX.
  To
        date,
        we have relied on a single source of supply and manufacturing for the SOLX
        Gold
        Shunt which produces it in accordance with our specifications. Although it
        is
        our current intention to continue working with our existing supply and
        manufacturing partners, we are concurrently seeking to establish relationships
        with other manufacturers, both to ensure ourselves a cost-effective, scalable
        manufacturing capability and a back-up supply of any new products that we
        may
        develop in the future.
  In
        order
        to establish and maintain a reliable distribution network for the SOLX Glaucoma
        System, we are continuing to maintain our relationships with our distributors
        in
        France, Germany, Spain and Canada and are engaged actively in pursuing
        relationships with other distributors in Europe.
  **Competition
        (Glaucoma)**
  The
        pharmaceutical, biotechnology and medical industries are intensely competitive.
        At the present time, there are many treatment alternatives for glaucoma.
        Numerous companies are engaged in the development, manufacture and marketing
        of
        drugs and devices for the treatment of glaucoma that are competitive with
        our
        products. Although we believe that the SOLX Glaucoma System offers notable
        improvements in connection with trabeculoplasty procedures and invasive glaucoma
        surgery, many of our competitors in this space have much greater resources
        than
        we have, thus enabling them, among other things, to make greater research
        and
        development investments, and to make much more significant investments in
        marketing, promotion and sales, than we are capable of at the present time
        or
        will be capable of during the foreseeable future.
  **Patents
        and Proprietary Rights (Glaucoma)**
  We
        own or
        have licenses to four U.S. patents relating to the SOLX Glaucoma System and
        related processes and have applied for a number of other patents in the United
        States, Canada, Europe, Australia and Japan.
  We
        will
        rely on know-how, continuing technological innovation and in-licensing
        opportunities to develop further our proprietary position. Our ability to
        obtain
        intellectual property protection for the SOLX Glaucoma 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 have a substantial impact on our ability to succeed
        in the
        glaucoma business. We will seek to protect our proprietary position by, among
        other methods, continuing to file patent applications related to our technology,
        inventions and improvements that are important to the development of our
        glaucoma business. However, 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 or 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 glaucoma products or the lengths of term of patent protection that we
        may
        have for our glaucoma products and processes.
  15
 In
        addition to patent protection, we have registered the following U.S.
        trademarks:
  ·
            DEEPLIGHT;  ·
            SOLX;
                and  ****·
            THE
                MODERN SYMBOL OF GLAUCOMA THERAPY  **OcuSense,
        Inc.**
  In
        anticipation of the delay in commercialization of the RHEOTM System in the United
        States, the Company accelerated its diversification plans which, in addition
        to
        the Company’s acquisition of SOLX, resulted in the Company’s acquisition of
        50.1% of the capital stock, on a fully diluted basis, of OcuSense, Inc.,
        or
        OcuSense. OcuSense is a San Diego-based company that is in the process of
        developing technologies that will enable eye care practitioners to test,
        at the
        point-of-care, for highly sensitive and specific biomarkers in tears using
        nanoliters of tear film.
  OcuSense’s
        first product, which is currently under development, is a hand-held tear
        film
        osmolarity test for the diagnosis and management of dry eye syndrome, or
        DES,
        known as the TearLabTM test for DES. It is estimated that over 90 million people
        in the United States suffer from DES. The anticipated innovation of the TearLabTM
test for DES will be its ability to measure precisely and rapidly certain
        biomarkers in nanoliter volumes of tear samples, using inexpensive hardware.
        Historically, eye care researchers have relied on expensive instruments to
        perform tear biomarker analysis. In addition to their cost, these conventional
        systems are slow, highly variable in their measurement readings and not
        CLIA-waived by the FDA.
  The
        TearLabTM test for DES will require the development of the following three
        components: (1) the TearLabTM disposable, which is a single-use microfluidic
        cartridge; (2) the TearLabTM pen, which is a hand-held interface with the
        TearLabTM disposable; and (3) the TearLabTM reader, which is a physical housing
        for the TearLabTM pen connections and measurement circuitry. OcuSense is
        currently engaged actively in industrial, electrical and software design
        efforts
        for the three components of the TearLabTM test for DES and, to these ends, is
        working with two expert partners, both based in Melbourne, Australia, one
        of
        which is a leader in biomedical instrument development and the other of which
        is
        a leader of customized microfluidics.
  OcuSense’s
        objective is to complete product development of the TearLabTM test for DES by the
        end of 2007. Following the completion of product development and subsequent
        clinical trials, OcuSense intends to seek a 510(k) clearance and a CLIA waiver
        from the FDA for the TearLabTM test for DES.
  **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 Company’s
        products, all of which are medical
        devices. 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.
  By
        statute and regulation, the FDA is required to clear, deny or request additional
        information on a 510(k) pre-market notification within 90 days of its
        submission. However, as a practical matter, 510(k) clearance often takes
        significantly longer. The FDA may require additional information, including
        clinical data, to make a determination regarding substantial equivalence.
        In
        addition, after a device receives 510(k) clearance, any modification to the
        device that could significantly affect its safety or effectiveness, or that
        would constitute a major change in its intended use, would require a new
        510(k)
        clearance or an approval of a PMA. Although the FDA requires the manufacturer
        to
        make the initial determination regarding the effect of a modification to
        the
        device that is subject to 510(k) clearance, the FDA can review the
        manufacturer’s determination at any time and require the manufacturer to seek
        another 510(k) clearance or an approval of a PMA.
  The
        components of the SOLX Glaucoma System and the TearLabTM test for DES are all
        Class II devices and qualify for the 510(k) procedure.
  The
        Clinical Laboratory Improvement Amendments, or CLIA, is intended to ensure
        the
        quality and reliability of clinical laboratories in the United States by
        mandating specific standards in the areas of personnel qualifications,
        administration, participation in proficiency testing, patient test management,
        quality control, quality assurance and inspections. The regulations promulgated
        under CLIA establish three levels of in vitro diagnostic tests: (1) waiver;
        (2)
        moderately complex; and (3) highly complex. The standards applicable to a
        clinical laboratory depend on the level of diagnostic tests it performs.
        A CLIA
        waiver is available to clinical laboratory test systems if they meet certain
        requirements established by the statute. Waived tests are simple laboratory
        examinations and procedures employing methodologies that are so simple and
        accurate as to render the likelihood of erroneous results negligible or to
        pose
        no reasonable risk of harm to patients if the examinations or procedures
        are
        performed incorrectly. These tests are waived from regulatory
        oversight.
  We cannot be sure of when, or whether, we will be successful in obtaining
        a
        510(k) clearance for the components of the SOLX Glaucoma System, nor can
        we be
        sure of when, or whether, OcuSense will be successful in obtaining a 510(k)
        clearance or a CLIA waiver for the TearLabTM test for DES.
  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.
  16
 The RHEOTM
        System is
        a
        Class III device and will require approval of a PMA. Until we commence patient
        enrollment in RHEO-AMD and gain a clear understanding of the progress of
        that
        clinical trial, 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.
  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 commencing RHEO-AMD or completing our ongoing
        studies 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, 2006, we had 34 full-time employees. Of our full-time workforce,
        16
        employees are engaged in clinical trial activities and 18 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. Although
        we are, and will continue to be, actively engaged in the oversight of RHEO-AMD
        and the clinical trials of the components of the SOLX Glaucoma System, their
        day-to-day management has been outsourced to our contract research organization,
        The Emmes Corporation. We
        also
        rely on the resources of one of our major stockholders, TLC Vision, to provide
        us with infrastructure support.
  17
 **Risk
        Factors**
  **Risks
        Relating to Our Business**
  ***Our
        financial condition and history of losses have caused our auditors to express
        doubt as to whether we will be able to continue as a going
        concern.***
  We have prepared our consolidated financial statements on the basis that
        we will
        continue as a going concern. However, the Company has sustained substantial
        losses for each of the years ended December 31, 2006, 2005 and 2004. The
        Company’s working capital at December 31, 2006 is $13,539,026, which represents
        a $30,875,921 reduction of its working capital of $44,414,947 at December
        31,
        2005. As indicated in their audit report dated March 2, 2007, our auditors
        have
        expressed substantial doubt as to whether we will be able to continue as
        a going
        concern because of the losses that we have sustained during the past three
        years
        and our current cash position.
  Although the Company realized gross proceeds of $10,016,000 (less transaction
        costs of approximately $750,000) on February 6, 2007 from the private placement
        of shares of its common stock and warrants, management believes that these
        proceeds, together with the Company’s existing cash, will be only be sufficient
        to cover its operating activity and other demands until early 2008.
  Our consolidated financial statements do not include any adjustments relating
        to
        the recoverability and classification of recorded asset amounts or the amounts
        and classification of liabilities that might be necessary if the Company
        were
        not able to continue as a going concern.
  ***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, 2006, 2005, 2004, 2003 and 2002 was
        $82.2 million, $163.0 million, $21.8 million, $2.5 million and $2.9 million,
        respectively. The losses in 2006 and 2005 include a charge for impairment
        of
        goodwill of $65.9 million and $147.5 million, respectively. As of December
        31,
        2006, we had an accumulated deficit of $293.2 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 RHEO-AMD, the clinical
        trials of the components of the SOLX Glaucoma System and other clinical trials
        that we may initiate. In connection with the acquisition of SOLX on September
        1,
        2006, we remain indebted to the former stockholders of SOLX in an aggregate
        amount of up to $13 million for the outstanding portion of the purchase price
        of
        SOLX. We also remain indebted to OcuSense in an aggregate amount of up to
        $4
        million for the outstanding portion of the purchase price of the capital
        stock
        of OcuSense that we acquired on November 30, 2006. Furthermore, we are legally
        committed to make an additional equity investment of $3 million upon receipt,
        if
        any, from the FDA of a 510(k) clearance for the TearLabTM test for DES and
        another additional equity investment of $3 million upon receipt, if any,
        from
        the FDA of a CLIA waiver for the TearLabTM test for DES. In addition, subject to
        FDA approval of any of the RHEOTM System and the components of the SOLX Glaucoma
        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.
  ***Our
        business may not generate the cash necessary to fund our
        operations.***
  Since
        inception, we have funded our operations through early private placements
        of our
        equity and debt securities, early stage revenues, a successful initial public
        offering, or IPO, and, most recently on February 6, 2007, a private placement
        of
        shares of our common stock and warrants. Prior to the IPO, our cash resources
        were limited. We will 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 in view of the requirement to conduct RHEO-AMD, in support of
        our PMA
        application to the FDA, and to support the clinical trials of the SOLX Glaucoma
        System, in support of our applications to the FDA for 510(k) clearance, and
        as a
        consequence of our planned subsequent commercialization of the RHEOTM System and
        the components of the SOLX Glaucoma System. Sources of additional funds may
        include product licensing, joint development and other financing arrangements,
        or a combination of these sources. In addition, we may issue debt or additional
        equity securities. Future financings could result in significant dilution
        of
        existing stockholders. 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
        and/or the SOLX Glaucoma System will be delayed and we may be unable to continue
        our operations. See “Risk Factors—Risks Relating to Our Business—Our financial
        condition and history of losses have caused our auditors to express doubt
        as to
        whether we will be able to continue as a going concern.”
  ***We
        do not know whether we will be able to increase our revenues or become
        profitable in the future.***
  We were founded in 1996, but the principal focus of our operations since
        2000
        has been directed towards our pivotal trials for the RHEOTM System—MIRA-1
        initially and now RHEO-AMD. 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
        year
        ended December 31, 2006, we had revenues of $205,884, of which $174,259 was
        derived from sales of the RHEOTM System and $31,625 was derived from sales of
        components of the SOLX Glaucoma System. 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 approvals to market the RHEOTM System and the components of the SOLX
                  Glaucoma System in the United States which will require their respective
                  clinical trials to have successful
                  outcomes;
  •
              successfully
                  building the infrastructure and manufacturing capacity to market
                  and sell
                  the RHEOTM System and the components of the SOLX Glaucoma
                  System;
  •
              achieving
                  widespread acceptance of RHEOTM Therapy among physicians and patients, as
                  well as the widespread acceptance by physicians and patients of
                  the
                  components of the SOLX Glaucoma System;
                  and
  •
              agreement
                  of governmental and third-party payors to reimburse for RHEOTM Therapy and
                  for procedures involving the components of the SOLX Glaucoma
                  System.
  We cannot begin commercialization in the United States until we receive FDA
        approval. 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 approvals and are
        required to focus our efforts on marketing the RHEOTM System to clinics solely in
        Canada and on marketing the components of the SOLX Glaucoma System in Canada
        and
        Europe, 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.
  ***The
        business prospects and financial condition of our sole commercial customer,
        Veris, is uncertain.***
  We have been notified that Veris has initiated restructuring proceedings
        under
        the *Bankruptcy
        and Insolvency Act* (Canada)
        but that it is continuing to carry on its operations in the normal course
        during
        its restructuring proceedings. A failure on the part of Veris to restructure
        its
        business successfully may 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.
  18
  During the year ended December 31, 2005, the Company had recorded an allowance
        for doubtful accounts of $1,047,622 against the amount due from Veris. In
        June
        2006, Veris returned four OctoNova pumps which had been sold to it in December
        2005. Accordingly, during fiscal year 2006, amounts receivable, net and the
        allowance for doubtful account recorded against the amount due from Veris
        were
        reduced by $143,520, the invoiced amount for the four pumps that were returned
        to the Company in June 2006. In addition, in November 2006, the Company forgave
        an amount receivable of $904,101 (for which an allowance for doubtful account
        had been recorded previously) which had been owing to the Company for the
        sale
        of treatment sets and pumps, and the provision of related services, to Veris
        during the period from September 14, 2005 to December 31, 2005.
  In November 2006, the Company sold 348 treatment sets to Veris for $73,776,
        including applicable taxes, the revenues for which were not recognized by
        the
        Company for the year ended December 31, 2006 as the Company believed that
        Veris
        would not be able to meet its financial obligations to the Company. In January
        2007, the Company agreed to forgive this outstanding amount receivable of
        $73,776, and the Company has recorded an inventory loss of $60,987 in the
        year
        ended December 31, 2006 for the sale of these 348 treatment sets since these
        treatment sets had been delivered to Veris already.
  As of April 2006, the Company has been selling treatment sets to Veris at
        the
        negotiated discounted price of $200 per treatment set, which is lower than
        the
        Company’s cost. That price continues to remain in effect at the present
        time.
  ***MIRA-1
        did not meet its primary efficacy endpoint, and we are required to conduct
        a
        follow-up clinical trial of the RHEOTM System,
        RHEO-AMD,***  ***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 we are required to
        conduct a follow-up clinical trial to support our PMA application, RHEO-AMD.
        The
        outcome of RHEO-AMD is 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, RHEO-AMD that could delay or
        prevent
        us altogether 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
        for
        RHEO-AMD;
  · the
        costs
        of RHEO-AMD may be greater than we anticipate;
  · we,
        or
        the regulators, may suspend or terminate RHEO-AMD 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.
  ***The
        clinical trials of the components of the SOLX Glaucoma System may not
        succeed.***
  We are required to obtain FDA approval to market the components of the SOLX
        Glaucoma System in the United States. In order to support our 510(k) clearance
        pre-market notifications, we are conducting, at our own expense, two randomized,
        multi-center clinical trials to demonstrate substantial equivalency to the
        argon
        laser, in the case of the SOLX 790 Laser, and to the Ahmed Glaucoma Valve,
        in
        the case of the SOLX Gold Shunt. The outcomes of these clinical trials is
        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, these clinical trials that could delay us or prevent us
        altogether from completing them and receiving the sought-after FDA approvals,
        including:
 ·
              we
                  may be unable to obtain the complete number of data sets required
                  by the
                  respective protocols for these clinical
                  trials;
 ·
              the
                  costs of these clinical trials may be greater than we
                  anticipate; 
 ·
              we,
                  or the regulators, may suspend or terminate either or both of these
                  clinical trials if the participating patients are being exposed
                  to
                  unacceptable health risks; 
 ·
              negative
                  or inconclusive results may arise, and we may decide, or regulators
                  may
                  require us, to conduct additional clinical and/or preclinical testing;
                  and 
 ·
              one
                  or both of these clinical trials may fail to demonstrate the substantial
                  equivalency, to its predicate device, of the device being
                  tested.
  ***We
        may not receive the necessary FDA approvals to market, in the United States,
        the
        RHEOTM System or the components of the SOLX Glaucoma
        System.***
  We may not receive the necessary FDA approvals to market, in the United States,
        the RHEOTM System or the components of the SOLX Glaucoma System. Obtaining FDA
        approval is a lengthy and expensive process, and approval is uncertain. We
        may
        be delayed in receiving, or may never receive, the necessary FDA approvals
        for
        the RHEOTM System or the components of the SOLX Glaucoma System. One or more
        delays in obtaining or failure to obtain such FDA approvals would delay or
        prevent the successful commercialization of the RHEOTM System and/or one or both
        components of the SOLX Glaucoma System, diminish our competitive advantage
        and/or defer or decrease our receipt of revenues.
  Even if we eventually obtain FDA approval for the RHEOTM System, 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.
  In addition, changes to the RHEOTM System or the components of the SOLX Glaucoma
        System can require additional FDA approvals.
  ***Our
        purchase commitments may adversely affect our
        liquidity.***
  We currently have commitments to purchase approximately $21.9 million of
        OctoNova pumps (based on current exchange rates) within five years after
        FDA
        approval, $13.3 million of Rheofilter filters and Plasmaflo filters over
        a
        three-year period beginning six months after FDA approval with respect to
        the
        United States, $1.3 million of Rheofilter filters and Plasmaflo filters over
        a
        three-year period commencing upon the earlier to occur of the sale of our
        current inventory of Rheofilter filters or their expiry with respect to Canada
        and $0.4 million of Rheofilter filters and Plasmaflo filters in 2009 and
        2010
        with respect to Australia, New Zealand, Colombia, Venezuela and Italy. We
        expect
        to fund our purchase commitments with cash generated from operations following
        receipt of the FDA approvals being sought 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.
  19
  ***We
        currently depend on single sources for key components of the RHEOTM System and
        the components of the SOLX Glaucoma System. The loss of any of these sources
        could delay our clinical trials or prevent or delay commercialization of
        the
        RHEOTM System or the components of the SOLX Glaucoma
        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 approximately $21.9 million of OctoNova pumps
        (based on current exchange rates) within five years after FDA approval, $13.3
        million of Rheofilter filters and Plasmaflo filters over a three-year period
        beginning six months after FDA approval with respect to the United States,
        $1.3
        million of Rheofilter filters and Plasmaflo filters over a three-year period
        commencing upon the earlier to occur of the sale of our current inventory
        of
        Rheofilter filters or their expiry with respect to Canada and $0.4 million
        of
        Rheofilter filters and Plasmaflo filters in 2009 and 2010 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 applicable deadlines (which, under our
        agreement with Asahi Medical, are February 28, 2009 for Canada and December
        31,
        2010 for the United States and all of the other territories where we have
        distribution rights under this agreement), Asahi Medical can terminate the
        supply agreement for the filters and Diamed can terminate the supply agreement
        for the pumps. Our agreement with Asahi Medical as it relates to the United
        States and our agreement with Diamed each has 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 down the commercialization of RHEOTM Therapy and adversely impact
        our financial condition and results of operations.
  We currently depend on single sources for the manufacture and supply of the
        SOLX
        790 Laser and the SOLX Gold Shunt. If any of our suppliers ceases to supply
        products to us or does not supply them in adequate quantities, the clinical
        trials of the components of the SOLX Glaucoma System could be delayed and
        our
        sales and growth in the glaucoma business could be restricted, potentially
        materially. The establishment of a cost-effective, scalable manufacturing
        capability for the SOLX Gold Shunt will be critical to the success of our
        glaucoma business. Although, at the present time, we are not aware of any
        reason
        why additional or replacement suppliers of the components of the SOLX Glaucoma
        System cannot be found, including the SOLX Gold Shunt, there is a risk that
        trade secrets, patents and other intellectual property of our current suppliers
        may prevent a third party from manufacturing suitable replacement products.
        Even
        if no such intellectual property barriers exist, we may face additional
        regulatory delays and the distribution of the components of the SOLX Glaucoma
        System could be interrupted for an extended period of time, which may delay
        or
        slow down their commercialization and adversely impact our financial condition
        and results of operations.
  ***Our
        supply agreement with Asahi Medical requires us to transfer the FDA approval
        of
        the RHEOTM System, upon its receipt, to a special purpose corporation, to be
        majority-owned by Asahi Medical, which will limit our control of the FDA
        approval.***
  Under our supply agreement with Asahi Medical for the filters that are used
        in
        the RHEOTM System, we agreed to obtain FDA approval of the RHEOTM System and to
        transfer it upon receipt, if any, to a special purpose corporation which
        will be
        owned as to 51% by Asahi Medical and as to 49% by us. This transfer of the
        FDA
        approval to this special purpose corporation 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. Regulatory approvals obtained for the RHEOTM System, if any, in
        Canada, 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 our products are subject, the RHEOTM System and the components of
        the SOLX Glaucoma System could be subject to restrictions or withdrawals
        from
        the market and we could be subject to penalties.***
  We, our suppliers and all of our products are subject to numerous FDA
        requirements covering the design, testing, manufacturing, quality control,
        labeling, advertising, promotion and export of our products 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 our products;
  •  product
        recall or seizure;
  •  interruption
        of production;
  •  operating
        restrictions;
  •  border
        stops;
  •  injunctions;
        and
  •  criminal
        prosecution.
  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 by
        us or
        our manufacturers to comply with such requirements or the adoption of new
        requirements could materially harm our business.
  20
  ***We
        may be unable to commercialize the RHEOTM System or the components of the SOLX
        Glaucoma 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.
  Other than the ability to identify and make sales to key multi-facility health
        care providers, all of the above-listed factors (substituting the above-noted
        references to the RHEOTM System and RHEOTM Therapy with references to the SOLX
        Glaucoma System and procedures using the SOLX Glaucoma System, respectively)
        will be equally influential in the success or failure of our efforts to
        commercialize the SOLX Glaucoma System in the United States. In addition
        to such
        factors, the establishment of a cost-effective, scalable manufacturing
        capability for the SOLX Gold Shunt will be critical to the success of our
        glaucoma business.
  ***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.
  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, after which time we received an
        Investigational Device Exemption and subsequently completed MIRA-1. 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, although he no longer serves us in any capacity. 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 and the procedures involving the components of the SOLX Glaucoma
        System are not reimbursed by governmental and other third-party payors, or
        are
        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.
        The
        cost of procedures involving the components of the SOLX Glaucoma System are
        not
        anticipated to be insubstantial either. 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 and the components of the SOLX
        Glaucoma System. Our ability to commercialize our products 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.
  21
  We have applied for and will continue to apply for patents for certain processes
        used in the RHEOTM System and for patents important to the development of our
        glaucoma business. 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.
  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 our products, 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 our products is eventually approved
        by
        the FDA, our plan will be to establish our own sales force to market them
        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.
  ***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 our products. In particular,
        the establishment of a cost-effective, scalable manufacturing capability
        for the
        SOLX Gold Shunt will be critical to the success of our glaucoma business.
        We
        have not achieved such capability.
  Our ability to conduct our clinical trials and commercialize our products
        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.
  To date, we have used $4.8 million to stockpile an inventory of the older
        cellulose acetate Rheofilter filters that currently form part of the RHEOTM
System in anticipation of manufacturing constraints to which such filters
        are
        subject. With the FDA’s confirmation of its willingness to allow the
        substitution of the older Rheofilter filter with the new polysulfone Rheofilter
        filter in RHEO-AMD, such manufacturing constraints are no longer of immediate
        concern. However, each of the older Rheofilter filters that we’ve accumulated in
        inventory has a shelf life of approximately three years, and it is possible
        that
        some or all of these filters will expire before they are used. Holding inventory
        in this manner decreases our short term liquidity.
  ***Our
        success in the commercialization of the RHEOTM System 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.
  ***RHEOTM
        Therapy and the procedures involving the components of the SOLX Glaucoma
        System
        may produce adverse side effects in patients that prevent its adoption or
        that
        necessitate withdrawal from the market.***
  RHEOTM Therapy may produce undesirable, unexpected and unintended side effects
        not previously observed during clinical trials. These 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. The procedures involving the components of the
        SOLX
        Glaucoma System may also produce undesirable, unexpected and unintended side
        effects not previously observed during clinical trials. Should that occur,
        the
        commercial adoption and use of the components of the SOLX Glaucoma System
        may be
        limited or may be prevented altogether.
  Even after approval by the FDA and other regulatory authorities, the RHEOTM
System and/or the components of the SOLX Glaucoma 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.
  22
  ***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 the commercial sale of our products may expose
        us to liability claims. These claims might be made directly by patients,
        health
        care providers or others selling our products. We carry clinical trials and
        product liability insurance to cover certain claims that could arise during
        our
        clinical trials or during the commercial use of our products. We currently
        maintain clinical trials and product liability insurance with coverage limits
        of
        $5,000,000 **** in
        the
        aggregate annually. We also maintain some separate clinical trials insurance
        for
        clinical trial activities in Spain and Israel. 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 and the components of the SOLX
        Glaucoma 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 our products in the United States,
        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 our products 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.
  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., Regeneron Pharmaceuticals, Inc./Bayer HealthCare, Sirna Therapeutics,
        Inc., Acuity Pharmaceuticals, Iridex Corporation and QLT Inc. Some of these
        treatments are in late-stage clinical development or have been approved by
        the
        FDA already. 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.
  At the present time, there are many treatment alternatives for glaucoma.
        Numerous companies are engaged in the development, manufacture and marketing
        of
        drugs and devices for the treatment of glaucoma, including, but not limited
        to,
        Optonol Ltd., Advanced Medical Optics, Inc., Pfizer Inc., New World Medical,
        Inc., Allergan, Inc. and Alcon, Inc. Although we believe that the SOLX Glaucoma
        System offers notable improvements in connection with trabeculoplasty procedures
        and glaucoma surgery, many of our competitors in this space have much greater
        resources than we have, thus enabling them, among other things, to make greater
        research and development investments, and to make much more significant
        investments in marketing, promotion and sales, than we are capable of at
        the
        present time or may ever become capable of in the future.
  ***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, and possibly other areas of expertise, 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.
  ***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 36.08% **** of
        our
        outstanding common stock, or 33.79% **** on
        a
        fully diluted basis. Accordingly, TLC Vision, in conjunction with other
        stockholders, 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 could
        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.
  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.
  23
  ***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 served as
        Chairman until June 2006.***
  TLC Vision beneficially owns approximately 36.08% of our outstanding common
        stock, or 33.79% on a fully diluted basis. Our directors, Elias Vamvakas,
        Thomas
        Davidson and Richard Lindstrom, are also directors of TLC Vision. Mr.
        Vamvakas beneficially owns 2,827,589 common shares of TLC Vision, representing
        approximately 4.09% of TLC Vision’s outstanding shares. Mr. Davidson
        beneficially owns 71,954 common shares of TLC Vision, representing approximately
        0.10% 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.
  ***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.***
  Nozhait Chaudry-Rao, 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 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.
   24
  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 monthly lease
        obligation for rent for this facility is C$11,512. The future minimum obligation
        under this lease is C$80,581 for 2007. 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 certain members of our clinical trial personnel and John Cornish,
        who
        is our Vice President, Operations, 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, 2006 and has been renewed
        until December 31, 2007. Our current monthly lease obligation for rent for
        this
        facility is approximately $2,168. 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.
  In
        addition,
        Solx, Inc. and OcuSense, Inc. lease office space in facilities owned by parties
        unrelated to us. The total future minimum obligation under these leases is
        $30,000 for 2007.
 
 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 material 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 2006 fiscal year to a vote
        of security holders, through the solicitation of proxies or
        otherwise.
  
   25
  PART
        II
  ITEM
                  5.
              MARKET
                  FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER
                  MATTERS.
  **Market
        for Common Equity**
  Our Common Stock trades on the NASDAQ Global Market (the “NASDAQ”) under the
        symbol “OCCX” and the Toronto Stock Exchange (the “TSX”) under the symbol “OC”.
  The following table sets forth the range of high and low sales prices per
        share
        of our Common Stock on both the NASDAQ and the TSX for the fiscal periods
        indicated.
  Common
                  Stock PricesFiscal
                  2006
              Fiscal
                  2005High
              Low
              High
              LowNASDAQFirst
                  Quarter
              $12.85
              $3.25
              $10.68
              $7.06Second
                  Quarter
              3.70
              1.86
              9.35
              5.92Third
                  Quarter
              2.90
              1.56
              9.78
              6.05Fourth
                  Quarter
              2.68
              1.55
              8.78
              5.88TSXFirst
                  Quarter
              C$14.99
              C$3.76
              C$12.90
              C$8.75Second
                  Quarter
              4.33
              2.12
              11.17
              7.57Third
                  Quarter
              3.00
              1.69
              11.70
              7.00Fourth
                  Quarter
              3.00
              1.80
              10.49
              6.94
 
 The closing share price for our Common Stock on March 14, 2007 as reported
        by
        the NASDAQ, was $1.66. The closing share price for our Common Stock on March
        14,
        2007, as reported by the TSX was C$2.05.
  As of March 12, 2007, there were approximately 117 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,
        if any.
  **Unregistered
        Issuances of Capital Stock**
  On October 6, 2006, we issued an aggregate of 10,000 shares of Common Stock
        to
        Irving Siegel as a result of the exercise of options to purchase common shares
        at an exercise price per share of $0.99 in consideration for cash.
  On November 2, 2006, we issued an aggregate of 10,000 shares of Common Stock
        to
        Irving Siegel as a result of the exercise of options to purchase common shares
        at an exercise price per share of $0.99 in consideration for cash.
  Each of the above issuances was exempt from registration under the Securities
        Act of 1933, as amended (the “Securities Act”), pursuant to Rule 701 thereunder.
   26
  ITEM
                  6.
              SELECTED
                  FINANCIAL DATA.
  The following tables set forth our selected historical consolidated financial
        data for the years ended December 31, 2006, 2005, 2004, 2003 and 2002 which
        have
        been derived from our consolidated financial statements included elsewhere
        in
        this Annual Report on Form 10-K and our consolidated financial statements
        included on Form S-1 for the years ended December 31, 2003 and 2002. 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,****2002**
              **2003**
              **2004**
              **2005**
              **2006**(in
                  thousands except per share amounts)**Consolidated
                  Statements**
                **of
                  Operations Data:**RevenueRetinaRevenue
                  from related parties
              $94
              $390
              $732
              $81
              **$****—**Revenue
                  from unrelated parties
              —
              —
              238
              1,759
              **174**Glaucoma
              —
              —
              —
              —
              **32**Total
                  revenue
              94
              390
              970
              1,840
              **206**Cost
                  of goods soldRetinaCost
                  of goods sold to related parties
              81
              373
              689
              43
              —Cost
                  of goods sold to unrelated parties
              —
              —
              134
              3,251
              **3,429**Royalty
                  costs
              78
              109
              135
              100
              **100**Glaucoma
              —
              —
              —
              —
              **19**Gross
                  margin (loss)
              (65)
              (92)
              12
              (1,554)
              **(3,342)**Operating
                  expensesGeneral
                  and
                administrative
              449
              1,565
              17,530
              8,729
              **9,831**Clinical
                  and regulatory
              1,447
              731
              3,995
              5,251
              **5,711**Sales
                  and marketing
              —
              —
              220
              2,165
              **1,970**Impairment
                  of goodwill
              —
              —
              —
              147,452
              **65,946**Restructuring
                  charges
              —
              —
              —
              —
              **820**1,896
              2,296
              21,745
              163,597
              **84,278**Other
                  (expenses) income
              (921)
              (82)
              (110)
              1,536
              **1,271**Loss
                  before income taxes and
                cumulative
                  effect of a change
                in
                  accounting principle
              (2,882)
              (2,470)
              (21,843)
              (163,615)
              **(86,349)**Recovery
                  of income taxes
              —
              —
              24
              643
              **4,070**Loss
                  before cumulative effect
                of
                  a change in accounting
                principle
              (2,882)
              (2,470)
              (21,819)
              (162,972)
              **(82,279)**Cumulative
                  effect of a change in
                accounting
                  principle
              —
              —
              —
              —
              **107**Net
                  loss for the year
              $(2,882)
              $(2,470)
              $(21,819)
              $(162,972)
              **$****(82,172)****Per
                  Share Data:**Loss
                  before cumulative effect
                of
                  a change in accounting
                principle
                  per share —
                basic
                  and diluted
              $(0.77)
              $(0.62)
              $(2.96)
              $(3.89)
              **$****(1.83)**Cumulative
                  effect of a change
                in
                  accounting principle per share —
                basic
                  and diluted
              —
              —
              —
              —
              **—**Net
                  loss per share —
                basic
                  and diluted
              $(0.77)
              $(0.62)
              $(2.96)
              $(3.89)
              **$****(1.83)**Weighted
                  average number of
                shares
                  used in per share
                calculations
                  — basic
                and
                  diluted
              3,735
              3,977
              7,370
              41,931
              **44,980**
 
   27
  
  **As
                  at December 31,****2002**
              **2003**
              **2004**
              **2005**
              **2006**(in
                  thousands)**Consolidated
                  Balance**
                **Sheet
                  Data:**Cash
                  and cash equivalents
              $602
              $1,237
              $17,531
              $9,600
              **$****5,741**Short-term
                  investments
              —
              —
              42,500
              31,663
              **9,785**Working
                  capital
                (deficiency)
              (1,780)
              (2,538)
              58,073
              44,415
              **13,539**Total
                  assets
              1,038
              1,868
              301,601
              137,806
              **90,404**Long-term
                  debt (including
                current
                  portion due to
                stockholders)
              1,507
              3,694
              517
              158
              **152**Other
                  long-term obligations
                (including
                  amount classified
                as
                  current portion of other
                liability)
              ―
              ―
              ―
              ―
              **6,421**Total
                  liabilities
              2,693
              4,134
              13,502
              11,765
              **27,999**Minority
                  interest
              ―
              ―
              ―
              ―
              **1,185**Common
                  stock
              4
              5
              42
              42
              **51**Series
                  A Convertible Preferred
                Stock
              2
              2
              ―
              ―
              **―**Series
                  B Convertible Preferred
                Stock
              1
              1
              ―
              ―
              **―**Additional
                  paid-in
                capital
              22,057
              23,915
              336,064
              336,978
              **354,320**Accumulated
                  deficit
              (23,718)
              (26,188)
              (48,007)
              (210,979)
              **(293,151)**Total
                  stockholders’ equity
                (deficiency)
              (1,655)
              (2,266)
              288,098
              126,041
              **61,220**
  28
  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 in the business of commercializing
        innovative treatments for age-related eye diseases, including age-related
        macular degeneration, or AMD, and glaucoma. We also hold a majority interest
        in
        a company that is in the process of developing ocular diagnostic technologies.
        Our core purpose is to improve life through evidence-based medical therapies.
  Our product for Dry AMD, 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 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.
  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
                (n=69)
              Placebo
                  Group
                (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% of RHEOTM Therapy-treated eyes improved, after treatment, to 20/40 or
        better (which is the required visual acuity to qualify for a driver’s license)
        12 months post-baseline, compared to 20% of placebo eyes.
  MIRA-1
        data support 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 the MIRA-1 study results, we re-evaluated our Pre-market Approval
        Application, or PMA, submission strategy and then met with representatives
        of
        the FDA on June 8, 2006 in order to discuss the impact the MIRA-1 results
        would
        have on our PMA to market the RHEOTM System in the United States. As expected, in
        light of MIRA-1’s failure to meet its primary efficacy endpoint, the FDA advised
        us that it will require an additional study of the RHEOTM System to be performed. At
        that
        meeting, the FDA confirmed its willingness to allow the substitution, in
        the new
        study, of the new polysulfone RheofilterTM filter for the older cellulose acetate
        filter which currently forms part of the RHEOTM System. The immediate replacement
        of the filter avoids the regulatory uncertainties that would arise, were
        the
        replacement to take place following receipt of FDA approval. Furthermore,
        due to
        manufacturing constraints on the number of cellulose acetate filters that
        can be
        produced by their manufacturer, Asahi Kasei Medical Co., Ltd. (formerly Asahi
        Medical Co., Ltd.), or Asahi Medical, the replacement of the filter in the
        new
        trial eliminates the need to continue to build and maintain adequate inventories
        of the older cellulose acetate filter that the Company had been building
        and
        maintaining in preparation for commercial launch. On January 29, 2007, the
        Company announced that it had obtained Investigational Device Exemption
        clearance from the FDA to commence the new pivotal clinical trial of the
        RHEOTM
System, called RHEO-AMD, or Safety and Effectiveness in a Multi-center,
        Randomized, Sham-controlled Investigation for Dry, Non-exudative Age-Related
        Macular Degeneration (AMD) Using Rheopheresis.
  As a result of the announcement on February 3, 2006, the per share price
        of our
        common stock as traded on the NASDAQ National Market, or NASDAQ, 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. On June 12, 2006, we announced that the FDA
        will
        require us to perform an additional study of the RHEOTM System. In addition, on
        June 30, 2006, we announced that we had terminated negotiations with Sowood
        Capital Management LP (“Sowood”) in connection with a proposed private purchase
        of approximately $30,000,000 of zero-coupon convertible notes of the Company.
        The per share price of our common stock decreased subsequent to the June
        12,
        2006 announcement and again after the June 30, 2006 announcement. Based on
        the
        result of the analysis of the data from MIRA-1 and the events that occurred
        during the second quarter of fiscal 2006, we concluded that there were
        sufficient indicators of impairment leading to an analysis of our intangible
        assets and goodwill and resulting in our reporting an impairment charge to
        goodwill of $65,945,686 and $147,451,758 in the second quarter of 2006 and
        in
        the fourth quarter of 2005, respectively.
  On September 29, 2004, we signed a product purchase agreement with Veris
        Health
        Sciences Inc. (formerly RHEO Therapeutics, Inc.), or Veris, for the purchase
        and
        sale 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.
        We
        agreed to the original pricing for the reduced number of treatment sets required
        in the period. 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. As at December 31, 2005, the Company had
        received a total of $1,779,566 from Veris. Included in amounts receivable,
        net
        as at December 31, 2005 was $1,049,297 due from Veris for the purchase of
        additional pumps and treatment sets.
  29
  We believed that the announcement on February 3, 2006 made it unlikely that
        we
        would be able to collect on amounts outstanding from Veris as at December
        31,
        2005. This resulted in a provision for bad debts of $1,049,297 during the
        year
        ended December 31, 2005, of which $518,852 related to revenue recognized
        prior
        to December 31, 2005 and $530,445 related to goods shipped to Veris in December
        2005, for which revenue was not recognized. We also recognized an inventory
        loss
        of $252,071 during the year ended December 31, 2005, representing the cost
        of
        goods shipped to Veris in December 2005 which we do not anticipate will be
        returned by Veris. **** During
        the year ended December 31, 2005, we also fully expensed the C$195,000 advance
        paid to Veris in connection with clinical trial services to be provided by
        Veris
        for MIRA-PS, one of our clinical trials which we have suspended. In addition,
        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 set up a provision for obsolescence
        of
        $1,990,830 during the year ended December 31, 2005 for treatment sets that
        will
        unlikely be utilized prior to their expiration dates.
  During the year ended December 31, 2006, we sold a number of treatment sets,
        with a negotiated discount, to Veris at a price lower than our cost.
        Accordingly, the price which we charged to Veris, net of a negotiated discount,
        represents the current net realizable value; therefore, we wrote down the
        value
        of our treatment sets by $1,625,000 to reflect their current net realizable
        value as at December 31, 2006. We also set up an additional provision for
        obsolescence of $1,679,124 during the year ended December 31, 2006 for treatment
        sets that will unlikely be utilized prior to their expiration
        dates.
  As at December 31, 2006 and 2005, we had combined inventory reserves of
        $5,101,394 and $1,990,830, respectively.
  In June 2006, Veris returned four pumps which had been sold to it in December
        2005. In fiscal 2005, we did not recognize revenue on sales made to Veris
        in
        December 2005 and had recorded an inventory loss associated with all sales
        made
        to Veris in December 2005. Accordingly, as at December 31, 2006, amounts
        receivable and the allowance for doubtful account recorded against the amount
        due from Veris have been reduced by the invoiced amount for the four pumps
        of
        $143,520. In addition, the cost of the four pumps returned by Veris, valued
        at
        $85,058, was used to reduce the cost of sales in the period.
  On November 6, 2006, we amended the product purchase agreement with Veris
        and
        agreed to forgive the outstanding amount receivable of $904,101 from Veris
        which
        had been owing for the purchase of treatment sets and pumps and for related
        services delivered or provided to Veris from September 14, 2005 to December
        31,
        2006. In consideration of the forgiveness of this debt, Veris agreed that
        we do
        not owe any amounts whatsoever in connection with (i) our use of the leasehold
        premises located at 5280 Solar Drive in Mississauga, Ontario or (ii) legal
        fees
        and expenses incurred by Veris prior to February 14, 2006 with respect to
        those
        trademarks of Veris that were assigned to us on February 14, 2006.
  In November 2006, we sold a total of 348 treatment sets to Veris for $73,776,
        including applicable taxes, payment for which was not received by the Company
        within the agreed credit period. The sale of these treatment sets was not
        recognized as revenue during the year ended December 31, 2006 as we believe
        that
        Veris would not be able to meet its financial obligations to the Company.
        In
        January 2007, we met with the management of Veris and agreed to forgive the
        outstanding amount receivable of $73,776 which was owing for the purchase
        of the
        348 treatment sets delivered to Veris in November 2006. We also recognized
        an
        inventory loss of $60,987 during the year ended December 31, 2006, representing
        the cost of the 348 treatment sets shipped to Veris in November
        2006.
  We
        entered
        into a new distributorship agreement (the “2006 Distributorship Agreement”),
        effective October 20, 2006, with Asahi Medical. The 2006 Distributorship
        Agreement replaced the 2001 distributorship agreement between Asahi Medical
        and
        us, as supplemented and amended by the 2003, 2004 and 2005 Memoranda. Pursuant
        to the 2006 Distributorship Agreement, we have distributorship rights to
        Asahi
        Medical's Plasmaflo filter and Asahi Medical's second generation polysulfone
        Rheofilter filter on an exclusive basis in the United States, Mexico and
        certain
        Caribbean countries (collectively, “Territory 1-a”), on an exclusive basis in
        Canada, on an exclusive basis in Colombia, Venezuela, New Zealand, Australia
        (collectively, “Territory 2”) and on a non-exclusive basis in Italy.
  Pursuant to the 2006 Distributorship Agreement, we will be responsible for
        obtaining regulatory approvals for the Plasmaflo filter and Rheofilter filter
        for use in the treatment of AMD in Territory 1-a, Territory 2 and Italy by
        December 31, 2010 and in Canada by February 28, 2009. With the exception
        of the
        FDA approval of the RHEOTM System in the United States, all of such regulatory
        approvals, when and if obtained, will be held in Asahi Medical’s name. The FDA
        approval of the RHEOTM System will be held by a special purpose corporation, to
        be owned as to 51% by Asahi Medical and as to 49% by the Company. Under the
        2006
        Distributorship Agreement, the Company will be responsible for covering costs
        relating to the pursuit of regulatory approvals in Territory 1-a, Canada
        and
        Territory 2, and the Company and Asahi Medical will share the costs relating
        to
        the pursuit of regulatory approval in Italy. In addition, provided that certain
        conditions are met, Asahi Medical will be obligated to contribute $3,000,000
        toward the cost of RHEO-AMD, our new pivotal clinical trial of the RHEOTM System
        which is intended to support our PMA.
  With respect to the United States, subject to early termination under certain
        circumstances, the 2006 Distributorship Agreement has a term which will end
        10
        years following the date on which FDA approval to
        market
        the RHEOTM System in the United States is
        received and contemplates successive one-year renewal terms
        thereafter.
  We are subject to certain minimum purchase requirements in each of the
        territories covered by the 2006 Distributorship Agreement.
  On September 1, 2006, we completed the acquisition of Solx, Inc. (“SOLX”) for a
        total purchase price of $29,068,443 which includes acquisition-related
        transaction costs of $851,279. SOLX is a Boston University Photonics
        Center-incubated company that has developed a system for the treatment of
        glaucoma called the SOLX Glaucoma System. The results of SOLX’s operations have
        been included in our consolidated financial statements since September 1,
        2006.
        The SOLX Glaucoma Treatment System is a next-generation treatment platform
        designed to reduce intra-ocular pressure, or IOP, without a bleb, thus avoiding
        its related complications. The SOLX Glaucoma System consists of the SOLX
        790
        Laser, a titanium sapphire laser used in laser trabeculoplasty procedures,
        and
        the SOLX Gold
        Shunt, a 24-karat gold, ultra-thin drainage device designed to bridge the
        anterior chamber and the suprachoroidal space in the eye, using the pressure
        differential that exists naturally in the eye in order to reduce IOP.
  Both the SOLX 790 Laser and the SOLX Gold Shunt are currently the subject
        of
        randomized, multi-center clinical trials. The results of these clinical trials
        will be used in support of applications to the FDA for a 510(k) clearance
        for
        each of the SOLX 790 Laser and the SOLX Gold Shunt, the receipt of which,
        if
        any, will enable the Company to market and sell these products in the United
        States. Currently, our intention is to file the application for a 510(k)
        clearance for the SOLX 790 Laser by the end of 2007 and to file the application
        for a 510(k) clearance for the SOLX Gold Shunt by the end of the second quarter
        of 2008.
  The
        acquisition of SOLX represents an expansion of the Company’s ophthalmic product
        portfolio beyond the RHEOTM procedure for Dry AMD. This expansion or
        diversification has become a corporate objective, and in light of the delay
        in
        the U.S. commercial launch of the RHEOTM System, we accelerated these plans. Our
        focus is on age-related eye diseases like AMD and glaucoma as they are expected
        to be the fastest growing segments of eye care over the next 10
        years.
  On
        November 30, 2006, we acquired 50.1% of the capital stock of OcuSense, Inc.,
        or
        OcuSense, measured on a fully diluted basis, for a total purchase price of
        $4,171,098 which includes acquisition-related transaction costs of $171,098.
        The
        Company will make additional payments totaling $4,000,000 upon the attainment
        of
        two pre-defined milestones by OcuSense prior to May 1, 2009, The contingent
        payments totaling $4,000,000 were not included in the determination of the
        purchase price or recorded as a liability as the achievement of the two
        pre-defined milestones prior to May 1, 2009 is not guaranteed.
  OcuSense
        is a San Diego-based company that is in the process of developing technologies
        that will enable eye care practitioners to test, at the point-of-care, for
        highly sensitive and specific biomarkers using nanoliters of tear film. The
        results of OcuSense’s operations have been included in our consolidated
        financial statements since November 30, 2006. OcuSense’s first product, which is
        currently under development, is a hand-held tear film osmolarity test for
        the
        diagnosis and management of dry eye syndrome, or DES, known as the TearLabTM test
        for DES. It
        is
        estimated that over 90 million people in the United States suffer from DES.
        The
        anticipated innovation of the TearLabTM test for DES will be its ability to
        measure precisely and rapidly certain biomarkers in nanoliter volumes of
        tear
        samples, using inexpensive hardware. Historically, eye care researchers have
        relied on expensive instruments to perform tear biomarker analysis. In addition
        to their cost, these conventional systems are slow, highly variable in their
        measurement readings and not waived by the FDA under the Clinical Laboratory
        Improvement Amendments, or CLIA.
  30
  The
        TearLabTM test for DES will require the development of the following three
        components: (1) the TearLabTM disposable, which is a single-use microfluidic
        cartridge; (2) the TearLabTM pen, which is a hand-held interface with the
        TearLabTM disposable; and (3) the TearLabTM reader, which is a physical housing
        for the TearLabTM pen connections and measurement circuitry. OcuSense is
        currently engaged actively in industrial, electrical and software design
        efforts
        for the three components of the TearLabTM test for DES and, to these ends, is
        working with two expert partners, both based in Melbourne, Australia, one
        of
        which is a leader in biomedical instrument development and the other of which
        is
        a leader of customized microfluidics.
  OcuSense’s
        objective is to complete product development of the TearLabTM test for DES by the
        end of 2007. Following the completion of product development and subsequent
        clinical trials, OcuSense intends to seek a 510(k) clearance and a CLIA waiver
        from the FDA for the TearLabTM test for DES.
  On November 30, 2006, we announced that Elias Vamvakas, our Chairman and
        Chief
        Executive Officer, had agreed to provide us with a standby commitment to
        purchase convertible debentures of the Company (“Convertible Debentures”) in an
        aggregate maximum amount of $8,000,000 (the “Total Commitment Amount”). Pursuant
        to the Summary of Terms and Conditions, executed and delivered as of November
        30, 2006 by the Company and Mr. Vamvakas, during the 12-month commitment
        term
        commencing on November 30, 2006, upon no less than 45 days’ written notice by
        the Company to Mr. Vamvakas, Mr. Vamvakas was obligated to purchase Convertible
        Debentures in the aggregate principal amount specified in such written notice.
        A
        commitment fee of 200 basis points was payable by the Company on the undrawn
        portion of the total $8,000,000 commitment amount. Any Convertible Debentures
        purchased by Mr. Vamvakas would have carried an interest rate of 10% per
        annum
        and would have been convertible, at Mr. Vamvakas’ option, into shares of the
        Company’s common stock at a conversion price of $2.70 per share. The Summary of
        Terms and Conditions of the standby commitment further provided that if the
        Company closed a financing with a third party, whether by way of debt, equity
        or
        otherwise and there are no Convertible Debentures outstanding, then, the
        Total
        Commitment Amount was to be reduced automatically upon the closing of the
        financing by the lesser of: (i) the Total Commitment Amount; and (ii) the
        net
        proceeds of the financing. On February 6, 2007, the Company raised gross
        proceeds in the amount of $10,016,000 in a private placement of shares of
        its
        common stock and warrants. The Total Commitment Amount was therefore reduced
        to
        zero, thus effectively terminating Mr. Vamvakas’ standby commitment. No portion
        of the standby commitment was ever drawn down by the Company, and the Company
        paid Mr. Vamvakas a total of $29,808 in commitment fees in February
        2007.
  Our results of operations for the year ended December 31, 2006 were impacted
        by
        our adoption of Statement of Financial Accounting Standards (“SFAS”) No. 123R
        (revised 2004), “Share-Based Payments” (“SFAS No. 123R”), which requires us to
        recognize a non-cash expense related to the fair value of our stock-based
        compensation awards. We elected to use the modified prospective transition
        method of adoption requiring us to include this stock-based compensation
        charge
        in our results of operations beginning on January 1, 2006 without restating
        prior periods to include stock-based compensation expense. Of the $2,221,133
        stock-based compensation expense recognized during the year ended December
        31,
        2006, $1,442,023 is included in general and administrative expenses, $237,567
        in
        clinical and regulatory expenses and $541,543 in sales and marketing expenses.
        This method also required us to estimate forfeitures as of the effective
        date of
        adoption of SFAS No. 123R and to eliminate any compensation cost previously
        recognized in income for periods before the effective date of adoption. This
        compensation cost previously recognized in income should be recognized as
        the
        cumulative effect of a change in accounting principle as of the required
        effective date. We also recognized $107,045 as the cumulative effect of a
        change
        in accounting principle reflecting the impact of our estimated forfeitures
        of
        outstanding awards as of January 1, 2006.
  At the annual meeting of stockholders of the Company held on June 23, 2006,
        our
        stockholders approved the re-pricing of all then out-of-the-money stock options
        of the Company. Consequently, the exercise price of all outstanding stock
        options that, on June 23, 2006, was greater than $2.05, being the weighted
        average trading price of our common stock on NASDAQ during the five-trading
        day
        period immediately preceding June 23, 2006, was adjusted downward to $2.05.
        2,585,000 of the outstanding stock options with a weighted average exercise
        price of $8.42 were affected by the re-pricing. SFAS No. 123R treats the
        re-pricing of equity awards as a modification of the original award and provides
        that such a modification is an exchange of the original award for a new award.
        SFAS No. 123R considers the modification to be the repurchase of the old
        award
        for a new award of equal or greater value, incurring additional compensation
        cost for any incremental value. This incremental difference in value is measured
        as the excess, if any, of the fair value of the modified award determined
        in
        accordance with the provisions of SFAS No. 123R over the fair value of the
        original award immediately before its terms are modified, measured based
        on the
        share price and other pertinent factors at that date. SFAS No. 123R 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. Of the 2,585,000 options affected
        by the re-pricing, 1,401,073 were vested as at December 31, 2006. Therefore,
        additional compensation cost of $423,338 for the 1,401,073 options was
        recognized and is included in the stock-based compensation expense for the
        year
        ended December 31, 2006. The remaining unrecognized incremental fair value
        of
        $169,057 plus the compensation cost from the original measurement of the
        fair
        value of the old options of $2,607,496, which totaled $2,776,553 in unrecognized
        compensation expense as at December 31, 2006, is expected to be amortized
        over a
        weighted average vesting period of 2.3 years.
  In accordance with SFAS No. 123R, we also recorded a compensation expense
        of
        $3,363 in the second quarter of fiscal 2006 as our board of directors approved
        accelerating the vesting of 1,250 unvested stock options granted to a terminated
        employee on April 28, 2006. SFAS No. 123R treats such a modification as a
        cancellation of the original unvested award and the grant of a new fully
        vested
        award as of that date.
  Prior to the adoption of SFAS No. 123R, we applied the provisions of SFAS
        No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”), which
        allowed companies either to 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 No. 25”), but required companies to disclose the pro forma effects on net
        loss as if the fair value of the options had been expensed. We elected to
        apply
        APB No. 25 in accounting for employee stock options. As required by SFAS
        No.
        123, prior to the adoption of SFAS No. 123R, we provided pro forma net loss
        and
        pro forma net loss per share disclosures for stock-based awards as if the
        fair
        value of the options had been expensed.
  As at December 31, 2006, $3,978,530 of total unrecognized compensation cost
        related to stock options is expected to be recognized over a weighted-average
        period of 2.53 years.
  **Recent
        Development**
  On February 1, 2007, we entered into a Securities Purchase Agreement (the
        “Securities Purchase Agreement”) with certain institutional investors, pursuant
        to which we agreed to issue to the investors an aggregate of 6,677,333 shares
        of
        our common stock (the “Shares”) and five-year warrants exercisable into an
        aggregate of 2,670,933 shares of our common stock (the “Warrants”). The per
        share purchase price of the Shares is $1.50, and the per share exercise price
        of
        the Warrants is $2.20, subject to adjustment. The Warrants will become
        exercisable on August 6, 2007. Pursuant to the Securities Purchase Agreement,
        on
        February 6, 2007, we issued the Shares and the Warrants. The gross proceeds
        of
        sale of the Shares totaled $10,016,000 (less transaction costs of approximately
        $750,000). On February 6, 2007, we also issued to Cowen and Company, LLC
        a
        warrant exercisable into an aggregate of 93,483 shares of our common stock (the
        “Cowen Warrant”) in part payment of the placement fee payable to Cowen and
        Company, LLC for the services it had rendered as the placement agent in
        connection with the sale of the Shares and the Warrants. All of the terms
        and
        conditions of the Cowen Warrant (other than the number of shares of our common
        stock into which the Cowen Warrant is exercisable) are identical to those
        of the
        Warrants.
   31
  **RESULTS
        OF OPERATIONS**
  **Revenues,
        Cost of Sales and Gross Margin**
 For
        the
        years ended December 31,
 (in
        thousands)
  **2006**
              
              **Change**
              
              **2005**
              
              **Change**
              
              **2004**Retina
                  revenueSales
                  to related parties
              **$**
              **—**
              
              N/M*
              $
              81
              
              (89)%
              $
              732Sales
                  to unrelated parties
              
              **174**
              
              (90)%
              
              1,759
              
              639%
              
              238Glaucoma
                  revenue
              
              **32**
              
              N/M*
              
              —
              
              —
              
              —Total
                  revenues
              **$**
              **206**
              
              (89)%
              $
              1,840
              
              90%
              $
              970Retina
                  cost of salesCost
                  of sales to related parties
              **$**
              **—**
              
              N/M*
              $
              43
              
              (94)%
              $
              689Cost
                  of sales to unrelated parties
              
              **3,429**
              
              5%
              
              3,251
              
              2,326%
              
              134Royalty
                  costs
              
              **100**
              
              —
              
              100
              
              (26)%
              
              135Glaucoma
                  cost of sales
              
              **19**
              
              N/M*
              
              —
              
              —
              
              —Total
                  cost of sales
              **$**
              **3,548**
              
              5%
              $
              3,394
              
              254%
              $
              958Retina
                  gross margin (loss)
              **$**
              **(3,355)**
              
              (116)%
              $
              (1,554)
              
              (13,050)%
              $
              12Percentage
                  of retina revenue
              
              **(1,928)%**
              
              (1,844)
                  pts
              
              (84)%
              
              (85)
                  pts
              
              1%Glaucoma
                  gross margin
              
              **13**
              
              N/M*
              
              —
              
              —
              
              —Percentage
                  of glaucoma revenue
              
              **41%**
              
              N/M*
              
              —
              
              —
              
              —Total
                  gross margin
              
              **(3,342)**
              
              (115)%
              
              (1,554)
              
              (13,050)%
              
              12Percentage
                  of total revenue
              
              **(1,622)%**
              
              (1,538)
                  pts
              
              (84)%
              
              (85)
                  pts
              
              1%*N/M
                  - Not meaningful
 
 *Revenues*
  Retina
        Revenue
  Retina revenue consists of revenue generated from the sale of components
        of the
        RHEOTM System which consists of the OctoNova pump and the disposable treatment
        sets, which include two disposable filters and applicable tubing.
  Subsequent to the Company’s February 3, 2006 announcement that MIRA-1 had not
        met its primary efficacy endpoint, our sole customer, Veris, halted purchases
        while the Company completed its in-depth analysis of the MIRA-1 study data.
        The
        modified per-protocol analysis of the MIRA-1 data support 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. Based on the results of the analysis and in line with our
        continued support of Veris in Canada, we agreed that all sales of treatment
        sets
        made to Veris in fiscal 2006 will be sold at a negotiated discounted price
        of
        $200 per treatment set, which is lower than our cost. We also agreed that
        payment for the treatment sets sold subsequent to June 2006 must be received
        by
        the Company within 60 days of shipment. In November 2006, we sold a total
        of 348
        treatment sets to Veris, payment for which was not received by the Company
        within the agreed credit period. The sale of these treatment sets has not
        been
        included in revenue for the year ended December 31, 2006 as we do not expect
        to
        receive payment from Veris for these treatment sets.
  During fiscal 2006, as compared with fiscal 2005, revenues decreased
        significantly primarily due to reduced sales of components of the RHEOTM System
        to Veris as a result of our February 3, 2006 announcement that MIRA-1 did
        not
        meet its primary efficacy endpoint. In addition, included in revenues in
        fiscal
        2005 are sales made to RHEO Clinic Inc., a subsidiary of TLC Vision Corporation
        (“TLC Vision”) and a related party, for which we reported revenues of $81,593 in
        the period. RHEO Clinic Inc. has since ceased the treatment of commercial
        patients and is therefore no longer a source of revenue for us.
  During fiscal 2005, as compared with fiscal 2004, revenues increased, due
        primarily to increased sales of treatment sets, pumps and services to Veris,
        and
        reflect the impact of the acquisition of TLC Vision’s 50% ownership interest in
        OccuLogix, L.P.
  Glaucoma
        Revenue
  Glaucoma revenue consists of revenue generated from the sale of components
        of
        the SOLX Glaucoma System.
  On September 1, 2006, the Company completed the acquisition of SOLX, and
        the
        results of SOLX’s operations have been included in our consolidated financial
        statements since that date. Revenue therefore includes the sale of SOLX Gold
        Shunts from September 1, 2006. There was no comparative revenue during the
        years
        ended December 31, 2005 and 2004.
  *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 and the
        SOLX Glaucoma 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 and ISO certification.
  Retina
        Cost of Sales
  During fiscal 2006, we sold a total of 1,207 treatment sets to Veris at a
        price,
        net of negotiated discounts, which was lower than our cost. As Veris is
        currently our sole customer for the RHEOTM System treatment sets, the price at
        which we sold the treatment sets to Veris represents our inventory’s current net
        realizable value, and therefore, we have written down the value of the treatment
        sets to reflect this net realizable value. Included in cost of sales is
        $1,625,000 which reflects the write-down of the treatment sets to their net
        realizable value. In addition, we evaluated our ending inventories as at
        December 31, 2006 and 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 set up a provision for obsolescence of $1,990,830 during
        the
        year ended December 31, 2005, and an additional provision for obsolescence
        of
        $1,679,124 during the year ended December 31, 2006 for treatment sets that
        will
        unlikely be utilized prior to their expiration dates.
  32
  During the year ended December 31, 2006, as compared with the corresponding
        period in fiscal 2005, cost of sales increased due primarily to the charge
        of
        $1,625,000 which reflects the write-down of our inventory of treatment sets
        to
        its net realizable value. There was no comparative expense in fiscal 2005. Cost
        of sales for the years ended December 31, 2006 and 2005 includes a provision
        for
        obsolescence of $1,679,124 and 1,990,830, respectively, for treatment sets
        that
        will unlikely be utilized prior to their expiration dates.
  Cost of sales increased during the year ended December 31, 2005, as
        compared with the corresponding period in 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. Based on
        our evaluation of our ending inventories as at December 31, 2005 we 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. There
        was no comparative expense in fiscal 2004.
  Glaucoma
        Cost of Sales
  Cost of sales includes the cost of SOLX Gold Shunts sold during the four-month
        period ended December 31, 2006. There
        was no comparative expense during the years ended December 31, 2005 and 2004
        as
        we completed the acquisition of SOLX on September 1, 2006.
  *Gross
        Margin*
  Retina
        Gross Margin
  During fiscal 2006 as compared with fiscal 2005, our retina gross margin
        decreased 1,844 percentage points due to reduced sales in fiscal 2006 and
        increased cost of sales due to the inventory write-down and the provision
        for
        obsolescence recorded in the period.
  Retina gross margin on sales for the year ended December 31, 2005, as compared
        with the corresponding period in 2004, decreased by 85 percentage points
        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.
  Glaucoma
        Gross Margin
  Gross margin on the sale of SOLX Gold Shunts was 40% during the four months
        ended December 31, 2006.
  **Operating
        Expenses**
 For
        the
        years ended December 31,
 (in
        thousands)
  **2006**
              
              **Change**
              
              **2005**
              
              **Change**
              
              **2004**General
                  and administrative
              **$**
              **9,831**
              
              13%
              $
              8,729
              
              (50)%
              $
              17,530Clinical
                  and regulatory
              
              **5,711**
              
              9%
              
              5,251
              
              31%
              
              3,995Sales
                  and marketing
              
              **1,970**
              
              (9)%
              
              2,165
              
              884%
              
              220Impairment
                  of goodwill
              
              **65,946**
              
              (55)%
              
              147,452
              
              N/M*
              
              —Restructuring
                  charges
              
              **820**
              
              N/M*
              
              —
              
              —
              
              —Total
                  operating expenses
              **$**
              **84,278**
              
              (48)%
              $
              163,597
              
              652%
              $
              21,745*N/M
                  - Not meaningful
 
 *General
        and Administrative Expenses*
  General and administrative expenses increased by $1,101,996 during the year
        ended December 31, 2006, as compared with the corresponding period of fiscal
        2005, due to an increase of $1,212,385 in stock-based compensation expense
        associated with the adoption of SFAS No. 123R beginning January 1, 2006 which
        requires us to recognize a non-cash expense related to the fair value of
        our
        stock-based compensation awards. General and administrative expenses also
        include a charge for $1,032,545 which represents the amortization of the
        intangible assets acquired during fiscal 2006 upon the acquisition of SOLX
        and
        OcuSense. These increases were partially offset by the decrease in employee
        and
        travel costs of $366,472 due in part to the grant of options to an employee
        in
        lieu of salary. Professional fees and fees associated with compliance with
        Section 404 of the Sarbanes-Oxley Act of 2002 also decreased by $819,468
        while
        directors’ fees decreased by $50,207 due to the grant of options to directors in
        lieu of their annual fees payable for board and committee
        memberships.
  General and administrative expenses decreased by $8,800,563 during the year
        ended December 31, 2005, as compared with the corresponding period of fiscal
        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.
  We are continuing to focus our efforts on achieving additional operating
        efficiencies by reviewing and improving upon our existing business processes
        and
        cost structure.
  *Clinical
        and Regulatory Expenses*
  Clinical and regulatory expenses increased by $460,338 during the year ended
        December 31, 2006, as compared with the corresponding prior year period,
        due to
        an increase in clinical trial expenses associated with the LEARN trials,
        or
        Long-term Efficacy in AMD from Rheopheresis in North America trials, other
        clinical trials and the cost of SOLX’s clinical and regulatory expenses during
        the period. Stock-based compensation expense also increased by $100,924 during
        the year ended December 31, 2006 as a result of the adoption of SFAS No.
        123R
        beginning January 1, 2006.
  During the year ended December 31, 2005, clinical and regulatory expenses
        increased by $ 1,255,525, as
        compared with the corresponding period in fiscal 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 which we have suspended. This unrecoverable amount has been fully expensed
        in the year ended December 31, 2005. **** No
        other
        adjustments were made as a result of the announcement.
  33
  Our goal is to establish the RHEOTM Therapy as the leading treatment for Dry AMD
        in North America and to establish the SOLX Glaucoma System as a unique, new
        surgery of choice for glaucoma. Accordingly, we expect clinical and regulatory
        expenses to increase in the future as we are required to conduct RHEO-AMD,
        an
        additional study of the RHEOTM System in order to support our PMA application to
        the FDA. We also have to complete ongoing studies of the SOLX 790 Laser and
        the
        SOLX Gold Shunt in order to obtain 510(k) approval to market them in the
        United
        States. In addition, we have to complete product development of OcuSense’s
        TearLabTM test for DES. Following the completion of product development, OcuSense
        will have to conduct clinical trials in order to seek a 510(k) clearance
        and a
        CLIA waiver from the FDA for the TearLabTM test for DES.
  *Sales
        and Marketing Expenses*
  Sales and marketing expenses decreased by $195,699 during the year ended
        December 31, 2006, as compared with the prior period in fiscal 2005, due
        to
        reduced employee and travel costs during the period of $371,976 and a decrease
        in marketing expenses of $344,067 due to reduced marketing efforts in the
        year
        following the announcement of MIRA-1 results. Bad debt expense also decreased
        during the year ended December 31, 2006 by $510,913 as the Company only
        recognized revenue on sale of treatment sets sold to its sole customer, Veris,
        on receipt of payment. These decreases in costs were offset by increased
        stock-based compensation expense of $541,043 associated with the adoption
        of
        SFAS No. 123R beginning January 1, 2006 and increased fees and expenses of
        the
        Company’s Scientific Advisory Board members of $210,456. Sales and marketing
        expenses also include SOLX’s sales and marketing expenses of $269,114 for trade
        shows and other marketing public relations during the four-month period ended
        December 31, 2006. There were no comparable expenses in the prior year period.
  Sales and marketing expenses increased by $1,945,781 during the year ended
        December 31, 2005, as compared with the corresponding prior year period,
        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.
  The cornerstone of our sales and marketing strategy to date has been to increase
        awareness of our products among eye care professionals and, in particular,
        the
        key opinion leaders in the eye care professions. We will continue to develop
        and
        execute our conference and podium strategy to ensure visibility and
        evidence-based positioning of the RHEOTM System, the SOLX Glaucoma System and the
        TearLabTM test for DES among eye care professionals.
  *Impairment
        of Goodwill*
  The decrease in our stock price subsequent to the February 3, 2006 announcement
        of the MIRA-1 trial's failure to meet its primary efficacy endpoint, the
        June
        12, 2006 announcement of the outcome of our meeting with the FDA and the
        June
        30, 2006 announcement of the termination of negotiations with Sowood were
        identified as indicators of impairment which led to an analysis of our
        intangible assets and goodwill which, in turn, resulted in the reporting
        of an
        impairment charge of $65,946,686 and $147,451,758 during the years ended
        December 31, 2006 and 2005, respectively. The impairment of goodwill charge
        represents the write-down of the value of goodwill acquired on the purchase
        of
        TLC Vision's 50% interest in OccuLogix, L.P. on December 8, 2004 to nil as
        at
        December 31, 2006. There was no comparable charge in the year ended December
        31,
        2004.
  *Restructuring
        Charges*
  In accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or
        Disposal Activities” (“SFAS No. 146”), we recognized a total of $819,642 in
        restructuring charges during the year ended December 31, 2006. The Company
        implemented a number of structural and management changes designed both to
        support the continued development of the RHEOTM System and to execute the
        Company’s accelerated diversification strategy within ophthalmology. The
        restructuring charge of $819,642, recorded in the year ended December 31,
        2006,
        consists solely of severance and benefit costs related to the termination
        of a
        total of 12 employees at both the Company’s Mississauga and Palm Harbor offices.
        The severance and benefit costs were fully paid by December 31, 2006. There
        was
        no comparable expense in the years ended December 31, 2005 and
        2004.
  **Other
        Income, Net**
 For
        the
        years ended December 31,
 (in
        thousands)
  **2006**
              
              **Change**
              
              **2005**
              
              **Change**
              
              **2004**Interest
                  income
              **$**
              **1,370**
              
              (27)%
              $
              1,593
              
              2,555%
              $
              60Interest
                  and amortization of discount on future payment expense
              
              **(288)**
              
              N/M*
              
              —
              
              N/M*
              
              (24)Other
                  income (expense)
              
              **31**
              
              154%
              
              (57)
              
              61%
              
              (146)Minority
                  interests
              
              **158**
              
              N/M*
              
              —
              
              —
              
              —**$**
              **1,271**
              
              (17)%
              $
              1,536
              
              1,496%
              $
              (110)*
                  N/M - Not meaningful
 
 *Interest
        Income*
  Interest income consists of interest income earned in the current period
        and the
        corresponding prior periods 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.
  *Interest
        and Amortization of Discount on Future Payment Expense*
  In connection with the acquisition of SOLX on September 1, 2006, we remain
        indebted to the former stockholders of SOLX in an aggregate amount of up
        to
        $13,000,000 for the outstanding portion of the purchase price of SOLX.
        $5,000,000 of this amount is payable in cash on the second anniversary of
        the
        September 1, 2006 closing. The $5,000,000 has been recorded as a long-term
        liability at its present value, discounted at the incremental borrowing rate
        of
        the Company as at August 1, 2006. The difference between the discounted value
        and the $5,000,000 payable is being amortized using the effective yield method
        over the two-year period with the monthly expense being charged as an interest
        expense in the Company’s consolidated statement of operations. Interest
        and amortization of discount on future payment expense for the year ended
        December 31, 2006 consists primarily of the amortization expense for the
        four
        months from September to December 2006.  There
        was
        no comparable expense in the years ended December 31, 2005 and
        2004.
  Interest and amortization of discount on future payment expense for the year
        ended December 31, 2004 consists of interest expense on certain debt prior
        to
        its repayment by the Company on December 22, 2004.
  34
  *Other
        Income (Expense)*
  Other income for the year ended December 31, 2006 consists primarily of foreign
        exchange gain of $37,316 due to exchange rate fluctuations on the Company’s
        foreign currency transactions. This gain was offset by miscellaneous tax
        expense
        of $6,449 during the year ended December 31, 2006. Other expense was $57,025
        for
        the year ended December 31, 2005 and consists of a provision for subscription
        receivable of $34,927 and miscellaneous tax expense of $23,021.
  Other expense was $145,925 for the year ended December 31, 2004 due to the
        expense of the $100,000 owed to Apheresis Technologies, Inc. in accordance
        with
        the amended distribution services agreement. The agreement has since been
        terminated. Also included in other expense for the year ended December 31,
        2004
        is foreign exchange loss of $43,548.
  *Minority
        Interest*
  Minority interest is from our acquisition of 50.1% of the capital stock of
        OcuSense, on a fully diluted basis, on November 30, 2006. The results of
        OcuSense’s operations have been included in our consolidated financial
        statements since that date. Income from minority interest of $157,624 for
        the
        year ended December 31, 2006 relates to the loss reported by OcuSense in
        which
        the Company has a shared interest with minority partners.
  **Recovery
        of Income Taxes**
 For
        the
        years ended December 31,
 (in
        thousands)
  **2006**
              
              **Change**
              
              
              **2005**
              
              **Change**
              
              **2004**Recovery
                  of income taxes
              **$**
              **4,070**
              
              534%
              
              $
              642
              
              2,575%
              $
              24
 
 *Recovery
        of Income Taxes*
  Recovery of income taxes increased by $3,427,966 during the year ended December
        31, 2006, as compared with the prior period in 2005. This increase is due
        primarily to a deferred tax recovery amount of $2,784,000 associated with
        the
        recognition of a deferred tax asset from the availability of 2006 net operating
        losses in the United States which may be utilized to reduce taxes in future
        years.
  Recovery of income taxes for the years ended December 31, 2006, 2005 and
        2004
        also includes the amortization of the deferred tax liability which was recorded
        based on the difference between the fair value of intangible assets acquired
        and
        their tax bases. The increase in the amount recorded during the year ended
        December 31, 2006 as compared with the corresponding period in fiscal 2005
        is
        due to the additional deferred tax liability recorded upon the acquisition
        of
        SOLX and OcuSense, being the difference between the fair value of the intangible
        assets acquired by the Company upon its acquisition of SOLX and OcuSense
        and
        their tax bases. The deferred tax liability totaling $23,462,064 is being
        amortized over an average period of 11.98 years, the estimated weighted-average
        useful life of the intangible assets.
  **Cumulative
        Effect of a Change in Accounting Principle**
 For
        the
        years ended December 31,
 (in
        thousands)
  **2006**
              
              **Change**
              
              
              **2005**
              
              **Change**
              
              
              **2004**Cumulative
                  effect of a change in accounting principle
              **$**
              **107**
              
              N/M*
              
              $
              —
              
              —
              
              $
              —*N/M
                  - Not meaningful
 
 *Cumulative
        Effect of a Change in Accounting Principle*
  The cumulative effect of a change in accounting principle reflects the impact
        of
        our estimated forfeitures of outstanding stock option awards as of January
        1,
        2006. On January 1, 2006, the effective date of adopting SFAS No. 123R, we
        were required to estimate the number of forfeitures of our outstanding awards
        as
        of the effective date. Consolidated balance sheet amounts related to any
        compensation cost for these estimated forfeitures previously recognized in
        prior
        periods before the adoption of SFAS No. 123R have to be eliminated and
        recognized in income as the cumulative effect of a change in accounting
        principle as of the effective date. The compensation cost previously recognized
        in prior periods before the adoption of SFAS No. 123R relates to compensation
        expense associated with non-employee stock options.
  **LIQUIDITY
        AND CAPITAL RESOURCES**
 As
        at
        December 31,
 (in
        thousands)
  **2006**
              
              **2005**
              
              **Change**Cash
                  and cash equivalents
              **$**
              **5,741**
              $
              9,600
              $
              (3,859)Short-term
                  investments
              
              **9,785**
              
              31,663
              
              (21,878)Total
                  cash and cash equivalents and short-term investments
              **$**
              **15,526**
              $
              41,263
              $
              (25,737)Percentage
                  of total assets
              
              **17%**
              
              30%
              
              (13)
                  ptsWorking
                  capital
              **$**
              **13,539**
              $
              44,415
              $
              (30,876)
 
 35
  In December 2004, the Company raised $67,200,000 of gross cash proceeds (less
        issuance costs of $7,858,789) in an initial public offering of shares of
        its
        common stock. Immediately prior to the offering, the primary source of the
        Company’s liquidity was cash raised through the issuance of
        debentures.
  On February 6, 2007, the Company raised gross proceeds in the amount of
        $10,016,000 (less
        issuance costs of approximately $750,000) in a
        private placement of shares of its common stock and warrants.
  To date, cash has been primarily utilized to finance increased infrastructure
        costs, to accumulate inventory and to fund costs of the MIRA-1, LEARN, RHEO-AMD
        and other clinical trials and, more recently to acquire SOLX and OcuSense
        in
        line with our diversification strategy. We expect that, in the future, we
        will
        use our cash resources to continue to fund our diversification strategy,
        the
        development of our infrastructure and to conduct RHEO-AMD and complete on-going
        clinical trials. In addition, we will use our cash resources to fund the
        ongoing
        clinical trials of the SOLX Glaucoma System, the completion of product
        development of OcuSense’s TearLabTM test for DES and clinical trials that will be
        required for the TearLabTM test for DES. In
        addition, in connection with the acquisition of SOLX on September 1, 2006,
        we
        remain indebted to the former stockholders of SOLX in an aggregate amount
        of up
        to $13,000,000 for the outstanding portion of the purchase price of SOLX.
        We
        also remain indebted to OcuSense in an aggregate amount of up to $4,000,000
        for
        the outstanding portion of the purchase price of the capital stock of OcuSense
        that we acquired on November 30, 2006. Furthermore, we are legally committed
        to
        make an additional equity investment of $3,000,000 upon receipt, if any,
        from
        the FDA of a 510(k) clearance for the TearLabTM test for DES and another
        additional equity investment of $3,000,000 upon receipt, if any, from the
        FDA of
        a CLIA waiver for the TearLabTM test for DES.
   36
  **Changes
        in Cash Flows**
 Years
        ended December 31,
 (in
        thousands)
  **2006**
              
              **Change**
              
              
              **2005**
              
              **Change**
              
              
              **2004**Cash
                  used in operating activities
              **$**
              **(14,548)**
              **$**
              4,162
              
              $
              (18,710)
              $
              (13,328)
              
              $
              (5,382)Cash
                  provided by (used in) investing activities
              
              **10,418**
              
              (33)
              
              
              10,451
              
              53,879
              
              
              (43,428)Cash
                  provided by financing activities
              
              **271**
              
              (57)
              
              
              328
              
              (64,776)
              
              
              65,104Net
                  (decrease) increase in cash and cash equivalents during the
                  year
              **$**
              **(3,859)**
              **$**
              4,072
              
              $
              (7,931)
              $
              (24,225)
              
              $
              16,294
 
 *Cash
        Used in Operating Activities*
  Net cash used to fund our operating activities during the year ended December
        31, 2006 was $14,548,344. Net loss during the year was $82,171,548. The non-cash
        charges which comprise a portion of the net loss during that period consisted
        primarily of the goodwill impairment of $65,945,686 and the amortization
        of
        intangible assets, fixed assets, patents and trademarks, discounts on future
        cash payments and premium/discounts on investments of $3,277,488 netted by
        applicable deferred income taxes of $4,065,962 and minority interest of
        $157,624. Additional non-cash charges consist of $2,221,133 in stock-based
        compensation charges netted by the cumulative effect of a change in accounting
        principle of $107,045.
  The
        net
        change in non-cash working capital balances related to operations for the
        years
        ended December 31, 2006, 2005 and 2004 consists of the following:
  **Years
                  ended December 31,****2006**
                **$**
              **2005**
                **$**
              **2004**
                **$**Due
                  to related party
              **(5,065)**
              13,291
              110,749Amounts
                  receivable
              **390,634**
              (82,810)
              (222,218)Inventory
              **2,250,554**
              (3,431,743)
              (136,527)Prepaid
                  expenses
              **247,361**
              (322,455)
              (324,353)Deposit
              **(5,551)**
              4,105
              (8,996)Accounts
                  payable
              **(1,225,575)**
              301,457
              26,548Accrued
                  liabilities
              **(1,155,335)**
              (563,925)
              2,511,897Deferred
                  revenue and rent inducement
              **—**
              (485,047)
              (152,153)Due
                  to stockholders
              **(5,827)**
              (358,523)
              (931,652)Other
                  current assets
              **18,332**
              —
              —**509,528**
              (4,925,650)
              873,295
 
 ·
            Amounts
                receivable decreased due primarily to the receipt of accrued interest
                receivable on investments and the refund of sales taxes received
                in
                2006. ·
            Decrease
                in inventory balance reflects the write-down of inventory and the
                provision for obsolescence offset by the purchase of additional OctoNova
                pumps during the first quarter of fiscal 2006 to complete outstanding
                purchase obligations in line with supplier
                expectations. ·
            Decrease
                in prepaid expenses is primarily due to the utilization of advances
                paid
                to various organizations involved in the MIRA-1 and related clinical
                trials. ·
            Accounts
                payable and accrued liabilities decreased as payments are being made
                for
                costs associated with the Company’s
                activities. ·
            The
                decrease in amounts due to stockholders is due to payments made to
                TLC
                Vision during the year ended December 31,
                2006.  *Cash
        Provided by (Used in) Investing Activities*
  Net cash provided by (used in) investing activities for the year ended December
        31, 2006 was $10,418,156 and resulted from cash provided from the net sale
        of
        short-term investments of $21,841,860. Cash used in investing activities
        during
        the period consists of $255,886 used to acquire fixed assets and $105,217
        used
        to protect and maintain patents and trademarks. Additional cash used in
        investing activities includes cash of $7,906,968 paid by the Company, including
        costs of acquisition, to acquire SOLX net of cash acquired from SOLX of $34,719.
        In addition, the Company advanced a total of $2,434,537 to SOLX to support
        its
        operations prior to the acquisition. The Company also invested $2,076,312
        to
        acquire 50.1% of the capital stock of OcuSense, on a fully diluted basis,
        including acquisition costs of $76,312. Cash acquired upon the acquisition
        of
        OcuSense was $1,320,497. The $2,000,000 invested by the Company in OcuSense
        is
        being utilized to fund the operations of OcuSense.
  Cash provided by (used in) investing activities was $10,451,255 and
        ($43,428,156) for the years ended December 31, 2005 and 2004, 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)
        offset by cash used to protect and maintain patents and trademarks in the
        amount
        of $36,290 (2004 - $28,990) and the purchase of fixed assets of $202,273
        (2004 -
        $192,281).
  *Cash
        Provided by Financing Activities*
  Net cash provided by financing activities for the year ended December 31,
        2006
        was $270,935 and reflects cash received from the exercise of options to purchase
        shares of common stock of the Company.
  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 in the year ended December 31, 2004 and primarily
        reflects the issuances of common stock and convertible debentures as well
        as the
        issuance of convertible preferred stock.
  37
  *Borrowings*
  On November 30, 2006, we announced that Elias Vamvakas, our Chairman and
        Chief
        Executive Officer, had agreed to provide us with a standby commitment to
        purchase convertible debentures of the Company (“Convertible Debentures”) in an
        aggregate maximum amount of $8,000,000 (the “Total Commitment Amount”). Pursuant
        to the Summary of Terms and Conditions, executed and delivered as of November
        30, 2006 by the Company and Mr. Vamvakas, during the 12-month commitment
        term
        commencing on November 30, 2006, upon no less than 45 days’ written notice by
        the Company to Mr. Vamvakas, Mr. Vamvakas was obligated to purchase Convertible
        Debentures in the aggregate principal amount specified in such written notice.
        A
        commitment fee of 200 basis points was payable by the Company on the undrawn
        portion of the total $8,000,000 commitment amount. Any Convertible Debentures
        purchased by Mr. Vamvakas would have carried an interest rate of 10% per
        annum
        and would have been convertible, at Mr. Vamvakas’ option, into shares of the
        Company’s common stock at a conversion price of $2.70 per share. The Summary of
        Terms and Conditions of the standby commitment further provided that if the
        Company closed a financing with a third party, whether by way of debt, equity
        or
        otherwise and there are no Convertible Debentures outstanding, then, the
        Total
        Commitment Amount was to be reduced automatically upon the closing of the
        financing by the lesser of: (i) the Total Commitment Amount; and (ii) the
        net
        proceeds of the financing. On February 6, 2007, the Company raised gross
        proceeds in the amount of $10,016,000 in a private placement of shares of
        its
        common stock and warrants. The Total Commitment Amount was therefore reduced
        to
        zero, thus effectively terminating Mr. Vamvakas’ standby commitment. No portion
        of the standby commitment was ever drawn down by the Company, and the Company
        paid Mr. Vamvakas a total of $29,808 in commitment fees in February
        2007.
  *Contractual
        Obligations and Contingencies*
  The following table summarizes our contractual commitments as of December
        31,
        2006 and the effect those commitments are expected to have on liquidity and
        cash
        flow in future periods.
  **Payments
                  Due by Period****Contractual
                  Commitments**
              **Total**
              **Less
                  than**
                **1
                  year**
              **1
                  to 3 years**
              **More
                  than**
                **3
                  years****$**
              **$**
              **$**
              **$**Operating
                  leases
              **142,379**
              130,418
              11,961
              —Royalty
                  payments
              **1,325,000**
              125,000
              375,000
              825,000Consulting
                  and non-competition agreements
              **1,058,991**
              630,180
              428,811
              —
 
 On November 30, 2006, pursuant to the Series A Preferred Stock Purchase
        Agreement between us and OcuSense, we purchased 1,744,223 shares of OcuSense’s
        Series A Preferred Stock representing 50.1% of OcuSense’s capital stock on a
        fully diluted basis for an aggregate purchase price of up to $8,000,000 (the
        “Purchase Price”). On the closing of the purchase which took place on November
        30, 2006, we paid $2,000,000 of the Purchase Price. We paid another $2,000,000
        installment of the Purchase Price on January 3, 2007. We will pay the third
        $2,000,000 installment of the Purchase Price upon the attainment by OcuSense
        of
        the first of two pre-defined milestones and the last $2,000,000 installment
        of
        the Purchase Price upon the attainment by OcuSense of the second of such
        milestones, provided that both milestones are achieved prior to May 1, 2009.
        The
        Series A Preferred Stock Purchase Agreement also makes provision for an ability
        on our part to increase our ownership interest in OcuSense for nominal
        consideration if OcuSense fails to meet certain milestones by specified dates.
        In addition, pursuant to the Series A Preferred Stock Purchase Agreement,
        we
        have agreed to purchase $3,000,000 of shares of OcuSense’s Series B Preferred
        Stock, which shall constitute 10% of OcuSense’s capital stock on a fully diluted
        basis at the time of purchase, upon OcuSense’s receipt from the FDA of 510(k)
        clearance for the DES Test and to purchase another $3,000,000 of shares of
        OcuSense’s Series B Preferred Stock, which shall constitute an additional 10% of
        OcuSense’s capital stock on a fully diluted basis at the time of purchase, upon
        OcuSense’s receipt from the FDA of CLIA waiver for the DES Test.
  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 $534,900. 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 the end of the five-year period following receipt of FDA
        approval, representing an aggregate commitment of €16,219,000, or approximately
        $21,397,727, based on exchange rates as of December 31, 2006.
  Pursuant to the terms of the 2006 Distribution Agreement with Asahi Medical,
        dated October 20, 2006, we undertook a commitment to purchase a minimum of
        9,000, 15,000, and 22,500 of each of the Plasmaflo filters and the Rheofilter
        filters 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 United States, Mexico and certain Caribbean
        countries, 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 2006 Distribution Agreement with Asahi Medical,
        in
        respect of Canada, we undertook a commitment to purchase a minimum of 900,
        1,500
        and 2,250 of each of the Plasmaflo filters and the Rheofilter filters in
        years
        1, 2 and 3, respectively, beginning upon the earlier to occur of (a) the
        sale by
        the Company of its current inventory of Rheofilter filters and (b) the
        expiration of the Company’s current inventory of Rheofilter filters. 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
        Canada are approximately as follows:
  Year
                  1
              ...............................................................................................................................................................................
              $256,500Year
                  2
              ...............................................................................................................................................................................
              $427,500Year
                  3
              ...............................................................................................................................................................................
              $641,250
 
 In respect of Colombia, Venezuela, New Zealand and Australia, we undertook
        a
        commitment to purchase a minimum of 300 and 500 of each of the Plasmaflo
        filters
        and the Rheofilter filters in 2009 and 2010, respectively. In respect of
        Italy,
        we undertook a commitment to purchase a minimum of 200 and 500 of each of
        the
        Plasmaflo filters and the Rheofilter filters in 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.
  38
  Future minimum annual commitments, in respect of Colombia, Venezuela, New
        Zealand, Australia and Italy, are approximately as follows:
 
 2007
              ...............................................................................................................................................................................
              $57,0002008
              ...............................................................................................................................................................................
              $142,5002009
              ...............................................................................................................................................................................
              $85,5002010
              ...............................................................................................................................................................................
              $142,500
 
 As of September 1, 2006, SOLX granted a security interest in all of its
        intellectual property to Doug P. Adams, John Sullivan and Peter M. Adams,
        in
        their capacity as members of the Stockholder Representative Committee acting
        on
        behalf of the former stockholders of SOLX, in order to secure SOLX’s obligations
        under the Guaranty, dated as of September 1, 2006, by SOLX in favor of Doug
        P.
        Adams, John Sullivan and Peter M. Adams, in their capacity as members of
        the
        Stockholder Representative Committee (the “Guaranty”). Pursuant to the Guaranty,
        SOLX guaranteed the Company’s obligation to pay the Stockholder Representative
        Committee, acting on behalf of the former stockholders of SOLX, an aggregate
        amount of up to $13,000,000, being the maximum aggregate amount of the purchase
        price remaining payable to the former stockholders of SOLX.
  *Off-Balance-Sheet
        Arrangements*
  As of December 31, 2006, we did not have any significant off-balance-sheet
        arrangements as defined in Item 303(a)(4)(ii) of SEC Regulation S-K. **
  *Financial
        Condition*
  Management believes that the existing cash and cash equivalents and short-term
        investments, together with funds expected to be generated from operations
        and
        funds generated from the private placement of the Company’s shares, will be
        sufficient to fund the Company’s anticipated level of operations and other
        demands and commitments until early 2008.
  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
                costs of operating the businesses that have been acquired in the
                implementation of the Company’s diversification
                strategy; ·
            the
                cost and results RHEO-AMD; ·
            the
                rate of progress, cost and results of the LEARN and other clinical
                trials
                of the RHEOTM System; ·
            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; ·
            the
                cost and results, and the rate of progress, of the clinical trials
                of the
                components of the SOLX Glaucoma System to support SOLX’s application to
                obtain 510(k) approval from the FDA to market and sell the components
                of
                the SOLX Glaucoma System in the United
                States; ·
            SOLX’s
                ability to obtain 510(k) approval to market and sell the components
                of the
                SOLX Glaucoma System in the United States and the timing of such
                approval,
                if any; ·
            the
                cost and results of the product development of OcuSense’s TearLabTM test
                for DES; ·
            the
                cost and results of the clinical trials that will be required of
                the
                TearLabTM test for DES that will support OcuSense’s application to obtain
                510(k) clearance and a CLIA waiver from the FDA to market and sell
                the
                TearLabTM test for DES in the United
                States; ·
            OcuSense’s
                ability to obtain 510(k) approval to market and sell the TearLabTM test for
                DES in the United States and the timing of such approval, if
                any; ·
            whether
                government and third-party payors agree to reimburse treatments using
                the
                RHEOTM System and the components of the SOLX Glaucoma
                System; ·
            the
                costs and timing of building the infrastructure to market and sell
                the
                RHEOTM System and the components of the SOLX Glaucoma
                System; ·
            the
                costs of filing, prosecuting, defending and enforcing any patent
                claims
                and other intellectual property rights;
                and ·
            the
                effect of competing technological and market
                developments.  We cannot begin commercialization of the RHEOTM System, the components of the
        SOLX Glaucoma System and the TearLabTM test for DES in the United States until we
        receive FDA approval. At this time, we do not know when we can expect to
        begin
        to generate revenues from the RHEOTM System, the components of the SOLX Glaucoma
        System or the TearLabTM test for DES in the United States. We expect that the
        funding requirements of our operating activities will continue to increase
        substantially in the future. 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 significant 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, or we may
        even be
        unable to continue our operations.
  **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 assets, 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.
  39
  ***Revenue
        Recognition***
  We recognize revenue from the sale of the RHEOTM System which
        is
        comprised of OctoNova pumps and the related disposable treatment sets and
        from
        the sale of the components of the SOLX Glaucoma System which is comprised
        of the SOLX
        790
        Laser and the SOLX Gold
        Shunt. We receive a signed binding purchase order from our customers. The
        pricing is a negotiated amount between our customers and us. The Company
        sells
        the components of the SOLX Glaucoma System directly to physicians and also
        through distributors. Revenue is reported net of distributors’
commissions.
  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
        and the components of the SOLX Glaucoma System do not require any additional
        servicing and revenue is recognized upon passage of title. However, our revenue
        recognition policy requires an assessment as to whether collectibility is
        reasonably assured, which requires us to evaluate the credit worthiness of
        our
        customers. The result of our assessment could materially impact the timing
        of
        revenue recognition.
  ***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, 2006 and 2005, we had bad debt
        reserves of nil and $1,049,297, respectively. We expensed amounts related
        to bad
        debt reserves of nil, $518,852 and nil during the years ended December 31,
        2006,
        2005 and 2004, 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.
  Management must make estimates about future customer demand for our products
        when establishing the appropriate provisions for inventory and also determine
        whether market demand has had any impact on our inventory’s net realizable
        value. When making these estimates, we consider general economic conditions
        and
        growth prospects, including the impact of us receiving FDA approval for the
        RHEOTM System.
  We received free inventory from Asahi Medical for the purpose of the MIRA-1
        and
        related clinical trials. We accounted for this inventory at a value equivalent
        to the cost we pay for the same filters purchased for commercial sales to
        third
        parties.
  With respect to our provisioning policy, in general, we fully reserve for
        surplus inventory in excess of our demand forecast, taking into consideration
        the expiry date of our inventory. In addition, we assess whether recent
        transactions provide indicators as to whether the net realizable value of
        our
        inventory is below our cost.
  As at December 31, 2006 and 2005, we had inventory reserves of $5,101,394
        and $1,990,830, respectively. During the years ended December 31, 2006, 2005
        and
        2004 we recognized a provision related to inventory of $3,304,124, $1,990,830
        and nil, respectively, based on the above analysis.
  ***Impairment*** **** ***of
        long-lived assets***
  We review our fixed assets and intangible assets 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 assets consist of the value of the exclusive distribution
        agreements we have with Asahi Medical and MeSys and other acquisition-related
        intangibles arising from our acquisition of SOLX and OcuSense during fiscal
        2006. The distribution agreements and other acquisition-related intangible
        assets are amortized using the straight-line method over an estimated useful
        life of 15 and 10 years, respectively.
  As a result of the analysis of the data from MIRA-1 and the result of our
        subsequent meeting with the FDA, we concluded that there were sufficient
        indications that the carrying value of the distribution intangible may no
        longer
        be recoverable, thus requiring us to assess whether the Company’s distribution
        intangible was impaired as of June 30, 2006. Based on management’s estimates of
        forecasted undiscounted cash flows as of June 30, 2006, we concluded that
        there
        is no indication of an impairment of the Company’s distribution intangible.
        Accordingly, we did not perform the second step of this analysis which would
        have required us to compare the carrying value of our intangible asset to
        the
        present value of future cash flows of the Company.
  We determined that, as at December 31, 2006, there have
        been no significant events which may affect the carrying value of our
        distribution intangible and no significant changes in the methods used to determine the fair market value
        of other
        acquisition-related intangible assets .
        However, our prior history of losses and losses incurred during the current
        fiscal year reflects a potential indication of impairment, thus requiring
        us to
        assess whether the Company’s intangible assets were impaired as of December 31,
        2006. Based on management’s estimates of forecasted undiscounted cash flows as
        of December 31, 2006, we concluded that there is no indication of an impairment
        of the Company’s intangible assets. Therefore, no impairment charge was recorded
        during the year ended December 31, 2006.
  ***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.
  Prior to the acquisition of SOLX and OcuSense during the second half of fiscal
        2006, the Company was a single reporting unit. Therefore, management determined
        the fair value of the Company’s goodwill using the Company’s market
        capitalization as opposed to the fair value of its assets and liabilities.
        As a
        result of the announcement on February 3, 2006, the per share price of our
        common stock as traded on NASDAQ 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. On
        June
        12, 2006, we announced that the FDA will require us to perform an additional
        study of the RHEOTM System. In addition, on June 30, 2006, we announced that we
        had terminated negotiations with Sowood in connection with a proposed private
        purchase of approximately $30,000,000 of zero-coupon convertible notes of
        the
        Company. The per share price of our common stock decreased subsequent to
        the
        June 12, 2006 announcement and again after the June 30, 2006 announcement.
        Based
        on the result of the preliminary analysis of the data from MIRA-1 and the
        events
        that occurred during the second quarter of fiscal 2006, we concluded that
        there
        were sufficient indicators of impairment leading to an analysis of our
        intangible assets and goodwill and resulting in our reporting an impairment
        charge to goodwill of $65,945,686 and $147,451,758 during the years ended
        December 31, 2006 and 2005, respectively.
 40
 Subsequent
        to the acquisition of SOLX and OcuSense, the Company will determine the fair
        value of its acquired goodwill 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.
  The
        Company determined that, as at December 31, 2006, no significant event or
        circumstance has occurred that may lead to an impairment of its acquired
        goodwill. The Company further determined that there have not been any
        significant changes in the methods used to value the net tangible and intangible
        assets acquired. Therefore, no impairment charge was recorded during the
        year
        ended December 31, 2006.
  ***Stock-based
        Compensation***
  We account for stock-based compensation in accordance with the provisions
        of
        SFAS 123R. Under the fair value recognition provision of SFAS 123R, stock-based
        compensation cost is estimated at the grant date based on the fair value
        of the
        award and is recognized as an expense ratably over the requisite service
        period
        of the award. We
        have
        selected the Black-Scholes option-pricing model as our method of determining
        the
        fair value for all our awards and will recognize compensation cost on a
        straight-line basis over the awards’ vesting periods.
  At the annual meeting of stockholders of the Company held on June 23, 2006,
        our
        stockholders approved the re-pricing of all then out-of-the-money stock options
        of the Company. Consequently, the exercise price of all outstanding stock
        options that, on June 23, 2006, was greater than $2.05, being the weighted
        average trading price of our common stock on NASDAQ during the five-trading
        day
        period immediately preceding June 23, 2006, was adjusted downward to $2.05.
        2,585,000 of the outstanding stock options with a weighted average exercise
        price of $8.42 were affected by the re-pricing. SFAS No. 123R treats the
        re-pricing of equity awards as a modification of the original award and provides
        that such a modification is an exchange of the original award for a new award.
        SFAS No. 123R considers the modification to be the repurchase of the old
        award
        for a new award of equal or greater value, incurring additional compensation
        cost for any incremental value. This incremental difference in value is measured
        as the excess, if any, of the fair value of the modified award determined
        in
        accordance with the provisions of SFAS No. 123R over the fair value of the
        original award immediately before its terms are modified, measured based
        on the
        share price and other pertinent factors at that date. SFAS No. 123R 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. Of the 2,585,000 options affected
        by the re-pricing, 1,401,073 were vested as at December 31, 2006. Therefore,
        additional compensation cost of $423,338 for the 1,401,073 options was
        recognized and is included in the stock-based compensation expense for the
        year
        ended December 31, 2006. The remaining unrecognized incremental fair value
        of
        $169,057 plus the compensation cost from the original measurement of the
        fair
        value of the old options of $2,607,496, which totaled $2,776,553 in unrecognized
        compensation expense as at December 31, 2006, is expected to be amortized
        over a
        weighted average vesting period of 2.3 years.
  In accordance with SFAS No. 123R, we also recorded a compensation expense
        of
        $3,363 in the second quarter of fiscal 2006 as our board of directors approved
        accelerating the vesting of 1,250 unvested stock options granted to a terminated
        employee on April 28, 2006. SFAS No. 123R treats such a modification as a
        cancellation of the original unvested award and the grant of a new fully
        vested
        award as of that date.
  **Effective
        Corporate Tax Rate**
  ***Income
        Taxes***
  As of December 31, 2006, we had net operating loss carry forwards for federal
        income taxes of $24 million. Our utilization of the net operating loss and
        tax
        credit carry forwards may be subject to annual limitations pursuant to Section
        382 of the Internal Revenue Code, and similar state provisions, as a result
        of
        changes in our ownership structure. The annual limitations may result in
        the
        expiration of net operating losses and credits prior to
        utilization.
  At December 31, 2006, we had recorded a deferred tax liability due to the
        difference between the fair value of our intangible assets and their tax
        bases.
        We also recorded
        a deferred tax asset, netted off against the deferred tax liability, from
        the
        availability of 2006 net operating losses in the United States which may
        be
        utilized to reduce taxes in future years. In addition, we
        also
        had additional deferred tax asset representing the benefit of net operating
        loss
        carry forwards and certain stock issuance costs capitalized for tax purposes.
        We
        did not record a benefit for this deferred tax asset because realization
        of the
        benefit was uncertain, and, accordingly, a valuation allowance is provided
        to
        offset the deferred tax asset.
  The Company and its subsidiaries have current and prior year losses available
        to
        reduce taxable income and taxes payable in future years which, if not utilized,
        will expire as follows:
  **$**2012
              3,455,0292018
              4,500,4012019
              2,420,6812020
              5,241,9172021
              3,855,0092022
              3,313,0312023
              3,188,7082024
              7,849,6432025
              15,690,4732026
              13,877,166
 
 **Recent
        Accounting Pronouncements**
  In December 2004, the FASB issued 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
        consolidated financial statements based on their fair values. The pro forma
        disclosure previously permitted under SFAS No. 123 is no longer an alternative
        to financial statement recognition. SFAS No. 123R is effective at the beginning
        of the first annual period beginning after June 15, 2005. Accordingly, we
        adopted SFAS No. 123R beginning January 1, 2006. We have selected the
        Black-Scholes option-pricing model as our method of determining the fair
        value
        for our awards and will recognize compensation cost on a straight-line basis
        over the awards’ vesting periods.
  The adoption of the following recent accounting pronouncements in fiscal
        2006
        did not have a material impact on our results of operations and financial
        condition:
  ·
            SFAS
                No. 151, “Inventory Costs — An Amendment of ARB No. 43, Chapter
                4”; ·
            SFAS
                No. 153, “Exchanges of Nonmonetary Assets — An Amendment of APB Opinion
                No. 29”; ·
            SFAS
                No. 154, “Accounting Changes and Error Corrections”, which replaces APB
                No. 20, “Accounting Changes”; ·
            SFAS
                No. 3, “Reporting Accounting Changes in Interim Financial Statements — An
                Amendment of APB Opinion No. 28”; and ·
            FASB
                Staff Position FAS 115-1 and FAS 124-1, “The Meaning of
                Other-Than-Temporary Impairment and Its Application to Certain
                Investments”. 
 41
 In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
        Financial Instruments — An Amendment of FASB Statements No. 133 and 140”. SFAS
        No. 155 simplifies accounting for certain hybrid instruments currently governed
        by SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”,
        by allowing fair value re-measurement of hybrid instruments that contain
        an
        embedded derivative that otherwise would require bifurcation. SFAS No. 155
        also
        eliminates the guidance in SFAS No. 133 Implementation Issue No. D1,
“Application of Statement 133 to Beneficial Interests in Securitized Financial
        Assets”, which provides that such beneficial interests are not subject to SFAS
        No. 133. SFAS No. 155 amends SFAS No. 140, “Accounting for Transfers and
        Servicing of Financial Assets and Extinguishments of Liabilities — A Replacement
        of FASB Statement No. 125”, by eliminating the restriction on passive derivative
        instruments that a qualifying special-purpose entity may hold. SFAS No. 155
        is
        effective for financial instruments acquired or issued after the beginning
        of
        fiscal years beginning after September 15, 2006. We do not expect the adoption
        of this statement to have a material impact on our results of operations
        and
        financial condition.
  In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of
        Financial Assets — An Amendment of FASB Statement No. 140”. SFAS No.156 requires
        an entity to recognize a servicing asset or servicing liability each time
        it
        undertakes an obligation to service a financial asset by entering into a
        servicing contract in specific situations. Additionally, the servicing asset
        or
        servicing liability shall be initially measured at fair value; however, an
        entity may elect the “amortization method” or “fair value method” for subsequent
        balance sheet reporting periods. SFAS No.156 is effective for fiscal years
        beginning after September 15, 2006. We do not expect the adoption of this
        statement to have a material impact on our results of operations and financial
        condition.
 
 In June 2006, the FASB issued FASB Interpretation (“FIN”) No. 48, “Accounting
        for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109”,
        which clarifies the accounting for uncertainty in tax positions. FIN No.
        48
        requires that we recognize, in our financial statements, the impact of a
        tax
        position, if that position is more likely than not of being sustained on
        audit,
        based on the technical merits of the position. FIN No. 48 is effective for
        fiscal years beginning after December 15, 2006. We do not expect the adoption
        of
        FIN No. 48 to have a material effect on our consolidated results of operations
        and financial position.
  In September 2006, the SEC released Staff Accounting Bulletin (“SAB”) No. 108,
“Considering the Effects of Prior Year Misstatements when Quantifying
        Misstatements in Current Year Financial Statements”. SAB No. 108 provides
        interpretive guidance on the SEC’s views regarding the process of quantifying
        materiality of financial statement misstatements. SAB No. 108 is effective
        for
        fiscal years ending after November 15, 2006, and early application for the
        first
        interim period of the same fiscal year is encouraged. The application of
        SAB No.
        108 in fiscal 2006 did not have a material effect on our results of operations
        or financial position.
  In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. SFAS
        No. 157 defines fair value, establishes a framework and gives guidance regarding
        the methods used for measuring fair value, and expands disclosures about
        fair
        value measurements. SFAS No. 157 is effective for financial statements issued
        for fiscal years beginning after November 15, 2007, and interim periods within
        those fiscal years. We are currently evaluating the impact the adoption of
        SFAS
        No. 157 would have on our consolidated financial statements.
  In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for
        Defined Benefit Pension and Other Post-retirement Plans, an amendment of
        FASB
        Statements No. 87, 88, 106, and 132(R)” *.* SFAS
        No.158 requires companies to recognize the overfunded or underfunded status
        of a
        defined benefit post-retirement plan as an asset or liability on their balance
        sheet and to recognize changes in that funded status in the year in which
        the
        changes occur through comprehensive income, effective for fiscal years ending
        after December 15, 2006. SFAS No. 158 also requires companies to measure
        the
        funded status of the plan as of the date of its fiscal year-end, with limited
        exceptions, effective for fiscal years ending after December 15, 2008. The
        adoption of SFAS No. 158 did not have a material effect on our consolidated
        results of operations and financial position.
   42
  
  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.
   43
  
  ITEM
        8.  FINANCIAL
        STATEMENTS AND SUPPLEMENTARY DATA.
  Consolidated
        Financial Statements
  **OccuLogix,
        Inc.**
  December
        31, 2006 and 2005
   44
  
 **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, 2006 and 2005, 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, 2006.  Our audits
        also included the financial statement schedule listed in the in the index
        at
        Item 15(a).  These financial statements are the responsibility of **OccuLogix,
        Inc.’s** management. Our responsibility is to express an opinion on these financial
        statements and schedule 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 consolidated financial statements referred to above present
        fairly,
        in all material respects, the consolidated financial position of **OccuLogix,
        Inc.** at
        December 31, 2006 and 2005, and the consolidated results of its operations
        and
        its cash flows for each of the years in the three-year period ended December
        31,
        2006, in conformity with U.S. generally accepted accounting principles. 
Also,
        in
        our opinion, the related financial statement schedule, when considered in
        relation to the financial statements taken as a whole, presents fairly, in
        all
        material respects, the information set forth therein.
 The
        accompanying consolidated financial statements have been prepared assuming
        that **OccuLogix,
        Inc.** will
        continue as a going concern. As more fully described in Note 1 to the
        consolidated financial statements, **OccuLogix,
        Inc.** has
        incurred recurring operating losses and its working capital at December 31,
        2006
        is $13,539,026, which represents a $30,875,921 reduction of its working capital
        during 2006. **OccuLogix,
        Inc.’s** history
        of losses and financial condition raises substantial doubt about its ability
        to
        continue as a going concern, such as those described in Note 1 to the
        accompanying consolidated financial statements. The consolidated financial
        statements do not include any adjustments that might result from the outcome
        of
        this uncertainty.
  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, 2006, 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 2, 2007 expressed an unqualified opinion thereon.
  As
        described in Notes 2 & 14 to these consolidated financial statements, **OccuLogix,
        Inc.** changed
        its accounting policy in regards to the fair value recognition provisions
        of
        accounting for stock-based compensation.
  
  
  Toronto,
        Canada, /s/
        Ernst
& Young LLP
 March
        2,
        2007. Chartered
        Accountants
  45
  **OccuLogix,
        Inc.**
  **CONSOLIDATED
        BALANCE SHEETS**
 *(expressed
        in U.S. dollars)*
 **(Going
        Concern Uncertainty - See Note 1)**
 
 **As
                  of December 31,****2006**
                **$**
              **2005**
                **$****ASSETS****Current**Cash
                  and cash equivalents
              **5,740,697**
              9,599,950Short-term
                  investments
              **9,785,000**
              31,662,845Amounts
                  receivable, net of bad debt reserves of nil in 2006 and $518,852
                  in 2005*(note
                  10(f))*
              **166,209**
              554,966Inventory,
                  net of provision for inventory obsolescence of $5,101,394 in 2006
                  and
                  $1,990,830 in 2005
              **2,715,737**
              4,701,464Prepaid
                  expenses
              **680,476**
              803,268Deposit
              **10,442**
              4,891Other
                  current assets
              **79,200**
              —**Total
                  current assets**
              **19,177,761**
              47,327,384Fixed
                  assets, net*(note
                  5)*
              **860,717**
              470,561Patents
                  and trademarks, net*(note
                  6)*
              **234,841**
              135,232Intangible
                  assets, net*(note
                  7)*
              **55,683,399**
              23,927,195Goodwill*(note
                  4)*
              **14,446,977**
              65,945,686**90,403,695**
              137,806,058**LIABILITIES
                  AND STOCKHOLDERS’ EQUITY****Current**Accounts
                  payable*(note
                  10(f))*
              **395,392**
              522,520Accrued
                  liabilities*(notes 10(f) and 12)*
              **2,090,937**
              2,226,619Due
                  to related party*(note
                  10)*
              **—**
              5,065Due
                  to stockholders*(note
                  9)*
              **152,406**
              158,233Current
                  portion of other long-term liability*(note
                  3)*
              **3,000,000**
              —**Total
                  current liabilities**
              **5,638,735**
              2,912,437Deferred
                  tax liability, net*(note
                  11)*
              **18,939,417**
              8,853,062Other
                  long-term liability*(note
                  3)*
              **3,420,609**
              —**Total
                  liabilities**
              **27,998,761**
              11,765,499Commitments
                  and contingencies*(notes
                  10 and 13)***Minority
                  interest**
              **1,184,844**
              —**Stockholders’
                  equity**Capital
                  stock*(note
                  14)*Common
                  stock
              **50,627**
              42,086Par
                  value of $0.001 per share;Authorized:
                  75,000,000; Issued and outstanding:December
                  31, 2006 - 50,626,562;
                December
                  31, 2005 - 42,085,853Additional
                  paid-in capital
              **354,320,116**
              336,977,578Accumulated
                  deficit
              **(293,150,653)**
              (210,979,105)**Total
                  stockholders’ equity**
              **61,220,090**
              126,040,559**90,403,695**
              137,806,058*See
                  accompanying notes*
  46
  **OccuLogix,
        Inc.**
  **CONSOLIDATED
        STATEMENTS OF OPERATIONS**
 *(expressed
        in U.S. dollars except number of shares)*
 
 **Years
                  ended December 31,****2006**
              **2005**
              **2004****$**
              **$**
              **$****Revenue**RetinaSales
                  to related parties*(note
                  10)*
              **—**
              81,593
              731,757Sales
                  to unrelated parties
              **174,259**
              1,758,696
              237,600Glaucoma
              **31,625**
              —
              —**Total
                  revenue**
              **205,884**
              1,840,289
              969,357**Cost
                  of goods sold**RetinaCost
                  of goods sold to related parties*(note
                  10)*
              **—**
              43,236
              688,102Cost
                  of goods sold to unrelated parties
              **3,428,951**
              3,250,866
              133,710Royalty
                  costs*(note
                  10)*
              **100,000**
              100,000
              135,457GlaucomaCost
                  of goods sold
              **11,053**
              —
              —Royalty
                  costs*(note
                  10)*
              **8,332**
              —
              —**Total
                  cost of goods sold**
              **3,548,336**
              3,394,102
              957,269**Gross
                  (loss) profit**
              **(3,342,452)**
              (1,553,813)
              12,088**Operating
                  expenses**General
                  and administrative*(notes
                  9, 10 and 14)*
              **9,831,452**
              8,729,456
              17,530,019Clinical
                  and regulatory*(notes
                  10 and 14)*
              **5,710,830**
              5,250,492
              3,994,967Sales
                  and marketing*(notes
                  10 and 14)*
              **1,969,638**
              2,165,337
              219,556Impairment
                  of goodwill*(note
                  4)*
              **65,945,686**
              147,451,758
              —Restructuring
                  charges*(note 8)*
              **819,642**
              —
              —**84,277,248**
              163,597,043
              21,744,542Loss
                  from operations
              **(87,619,700)**
              (165,150,856)
              (21,732,454)**Other
                  income (expenses)**Interest
                  income
              **1,370,208**
              1,593,366
              60,227Interest
                  and amortization of discount on future payment expense
              **(288,088)**
              —
              (24,492)Other
              **30,868**
              (57,025)
              (145,925)Minority
                  interest
              **157,624**
              —
              —**1,270,612**
              1,536,341
              (110,190)Loss
                  before income taxes and cumulative effect of a change in accounting
                  principle
              **(86,349,088)**
              (163,614,515)
              (21,842,644)Recovery
                  of income taxes*(note
                  11)*
              **4,070,495**
              642,529
              23,771Loss
                  before cumulative effect of a change in accounting
                  principle
              **(82,278,593)**
              (162,971,986)
              (21,818,873)Cumulative
                  effect of a change in accounting principle
              **107,045**
              —
              —**Net
                  loss for the year**
              **(82,171,548)**
              (162,971,986)
              (21,818,873)**Weighted
                  average number of shares outstanding - basic and
                  diluted**
              **44,979,692**
              41,931,240
              7,369,827Loss
                  before cumulative effect of a change in accounting principle per
                  share -
                  basic and diluted
              **$(1.83)**
              $(3.89)
              $(2.96)Cumulative
                  effect of a change in accounting principle per share - basic and
                  diluted
              **—**
              —
              —**Net
                  loss per share - basic and diluted**
              **$(1.83)**
              $(3.89)
              $(2.96)*See
                  accompanying notes*
 
   47
   **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, 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
                  14(e))*
              —
              —
              —
              —
              —
              —
              15,439,960
              —
              15,439,960Stock
                  issued on exercise of options
                *(note
                  14(e))*
              272,200
              273
              —
              —
              —
              —
              129,147
              —
              129,420Stock
                  issued on exercise of warrants
                *(note
                  14(f))*
              102,369
              102
              379,284
              379
              —
              —
              1,415,840
              —
              1,416,321Subscription
                  receivable*(note
                  14(f))*
              —
              —
              —
              —
              —
              —
              (221,661)
              —
              (221,661)Contribution
                  of inventory from related party*(note
                  10)*
              —
              —
              —
              —
              —
              —
              146,905
              —
              146,905Conversion
                  of Series A convertible preferred
                stock
                  into common stock*(note
                  14(b))*
              3,603,350
              3,603
              (2,147,024)
              (2,147)
              —
              —
              (1,456)
              —
              —Conversion
                  of Series B convertible preferred
                stock
                  into common stock*(note
                  14(b)*
              1,019,255
              1,019
              —
              —
              (620,112)
              (620)
              (399)
              —
              —Conversion
                  of convertible grid debentures into
                common
                  stock*(note
                  14(b))*
              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.
                *(notes
                  3 and 14(b))*
              19,070,234
              19,070
              —
              —
              —
              —
              228,823,738
              —
              228,842,808Initial
                  public offering, net of issue costs*(note
                  14(d))*
              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)
              288,098,245Stock-based
                  compensation*(note
                  14(e))*
              —
              —
              —
              —
              —
              —
              366,781
              —
              366,781Stock
                  issued on exercise of options*(note
                  14(e))*
              279,085
              279
              —
              —
              —
              —
              230,956
              —
              231,235Subscription
                  receivable*(note
                  14(f))*
              —
              —
              —
              —
              —
              —
              221,661
              —
              221,661Contribution
                  of inventory from related party*(note
                  10)*
              —
              —
              —
              —
              —
              —
              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
                  14(d))*
              —
              —
              —
              —
              —
              —
              (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
  48
  **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, 2005 (balance forward)**
                42,085,853
                42,086
                —
                —
                —
                —
                336,977,578
                (210,979,105)
                126,040,559Stock-based
                    compensation*(note
                    14(e))*
                —
                —
                —
                —
                —
                —
                2,098,526
                —
                2,098,526Stock
                    issued on exercise of options*(note
                    14(e))*
                140,726
                141
                —
                —
                —
                —
                270,794
                —
                270,935Free
                    inventory returned to related party*(note
                    10)*
                —
                —
                —
                —
                —
                —
                (60,000)
                —
                (60,000)Contribution
                    of inventory from unrelated party
                —
                —
                —
                —
                —
                —
                11,994
                —
                11,994Shares
                    issued on acquisition of Solx, Inc.*(notes
                    3 and 14(d))*
                8,399,983
                8,400
                —
                —
                —
                —
                15,027,570
                —
                15,035,970Shares
                    issue costs
                —
                —
                —
                —
                —
                —
                (21,908)
                —
                (21,908)Change
                    in OcuSense, Inc.’s stockholders’ equity,
                  stock-based
                    compensation
                —
                —
                —
                —
                —
                —
                15,562
                —
                15,562Net
                    loss for the year
                —
                —
                —
                —
                —
                —
                —
                (82,171,548)
                (82,171,548)**Balance,
                    December 31, 2006**
                **50,626,562**
                **50,627**
                —
                —
                —
                —
                **354,320,116**
                **(293,150,653)**
                **61,220,090***See
                    accompanying notes*
 
   49
   **OccuLogix,
        Inc.**
  **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 *(expressed
        in U.S. dollars)*
 
 **Years
                  ended December 31,****2006**
                **$**
              **2005**
                **$**
              **2004**
                **$****OPERATING
                  ACTIVITIES**Net
                  loss for the year
              **(82,171,548)**
              (162,971,986)
              (21,818,873)Adjustments
                  to reconcile net loss to cash used in operating
                  activities:Stock-based
                  compensation*(note
                  14(e))*
              **2,221,133**
              366,781
              15,439,960Amortization
                  of fixed assets
              **213,488**
              99,301
              42,956Amortization
                  of patents and trademarks
              **5,608**
              5,712
              5,480Amortization
                  of intangible assets
              **2,749,212**
              1,716,667
              106,138Impairment
                  of goodwill*(note
                  4)*
              **65,945,686**
              147,451,758
              —Amortization
                  of discount on future cash payments*(note
                  3)*
              **273,195**
              —
              —Amortization
                  of premiums/discounts on short-term investments
              **35,985**
              147,337
              —Subscription
                  receivable - provision for doubtful amount*(note
                  14(f))*
              **—**
              34,927
              —Deferred
                  income taxes*(note
                  11)*
              **(4,065,962)**
              (635,167)
              (39,271)Gain
                  on sale of fixed assets
              **—**
              —
              (6,000)Impairment
                  of fixed assets
              **—**
              —
              13,850Cumulative
                  effect of a change in accounting principle
              **(107,045)**
              —
              —Minority
                  interests
              **(157,624)**
              —
              —Net
                  change in non-cash working capital balances related to operations*(note
                  15)*
              **509,528**
              (4,925,650)
              873,295**Cash
                  used in operating activities**
              **(14,548,344)**
              (18,710,320)
              (5,382,465)**INVESTING
                  ACTIVITIES**Proceeds
                  on sale of fixed assets
              **—**
              —
              6,000Sale
                  of (purchase of) short-term investments
              **21,841,860**
              10,689,818
              (42,500,000)Additions
                  to fixed assets
              **(255,886)**
              (202,273)
              (192,281)Additions
                  to patents and trademarks
              **(105,217)**
              (36,290)
              (28,990)Acquisition
                  costs*(note
                  3)*
              **(949,499)**
              —
              (768,808)Advance
                  to Solx, Inc., pre-acquisition
              **(2,434,537)**
              —
              —Payments
                  for acquisitions, net of cash
                acquired*(note
                  3)*
              **(7,678,565)**
              —
              55,923**Cash
                  provided by (used in) investing activities**
              **10,418,156**
              10,451,255
              (43,428,156)**FINANCING
                  ACTIVITIES**Increase
                  in long-term convertible debentures*(note
                  10)*
              **—**
              —
              4,350,000Share
                  issuance costs
              **—**
              (88,714)
              (7,770,075)Proceeds
                  from exercise of common stock options and
                warrants*(notes 14(e) and 14(f))*
              **270,935**
              231,235
              263,900Proceeds
                  from exercise of Series A convertible preferred stock warrants*(note 14(f))*
              **—**
              186,734
              1,060,180Fractional
                  payout of converted shares due to preferred
                stockholders
              **—**
              (792)
              —Proceeds
                  from issuance of common stock*(note
                  14(d))*
              **—**
              —
              67,200,000**Cash
                  provided by financing activities**
              **270,935**
              328,463
              65,104,005**Net
                  (decrease) increase in cash and cash equivalents during the
                  year**
              **(3,859,253)**
              (7,930,602)
              16,293,384Cash
                  and cash equivalents, beginning of year
              **9,599,950**
              17,530,552
              1,237,168**Cash
                  and cash equivalents, end of year**
              **5,740,697**
              9,599,950
              17,530,552*See
                  accompanying notes*
 
  50
 **OCCULOGIX,
            INC.**
  **Notes
            to Consolidated Financial Statements**
 *(expressed
            in U.S. dollars except as otherwise noted)*
  1.
        NATURE
        OF OPERATIONS AND GOING CONCERN UNCERTAINTY
  **Nature
        of Operations**
  OccuLogix,
        Inc. (the “Company”) is an ophthalmic therapeutic company in the business of
        commercializing innovative treatments for age-related eye diseases, including
        age-related macular degeneration, or AMD, and glaucoma. The Company also
        holds a
        majority interest in a company that is in the process of developing ocular
        diagnostic technologies. The Company’s core purpose is to improve life through
        evidence-based medical therapies.
  The
        Company’s product for Dry AMD, the RHEOTM System contains a pump that circulates
        blood through two filters and is used to perform the RheopheresisTM procedure,
        which is referred to under the Company’s trade name as RHEOTM Therapy. The
        RheopheresisTM procedure is a blood filtration procedure that selectively removes
        molecules from plasma, which is designed to treat Dry AMD, the most common
        form
        of the disease.
  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 conducted a clinical trial, called MIRA-1, or Multicenter Investigation
        of Rheopheresis for AMD, which, if successful, was expected to support its
        application with the U.S. Food and Drug Administration (the “FDA”) to obtain
        approval to market the RHEOTM System in the United States. On
        February 3, 2006, the Company 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.
  On
        June
        8, 2006, the Company met with the FDA to discuss the results of MIRA-1 and
        the
        impact the results will have on our application to market the RHEOTM System in
        the United States. In light of MIRA-1’s failure to meet its primary efficacy
        endpoint, the FDA advised that it will require an additional study of the
        RHEOTM
System to be performed. On December 28, 2006, the Company submitted its
        Investigational Device Exemption, or IDE, package to the FDA together with
        the
        proposed protocol for the additional study of the RHEOTM System called RHEO-AMD,
        or Safety and Effectiveness in a Multi-Center, Randomized, Sham-Controlled
        Investigation for Dry Non-exudative Age-Related Macular Degeneration (AMD)
        using
        Rheopheresis. On January 26, 2007, the FDA issued an IDE number for RHEO-AMD
        allowing patient enrollment to commence within the first quarter of
        2007.
  During
        the second half of fiscal 2006, the Company completed the acquisition of
        Solx,
        Inc (“SOLX”) and acquired 50.1% of the capital stock of OcuSense, Inc.
        (“OcuSense”) on a fully diluted basis. The acquisition of SOLX and the
        significant investment in OcuSense represent an expansion of the Company’s
        ophthalmic product portfolio beyond the RHEOTM procedure for Dry AMD *(note
        3)* .
  **Going
        concern uncertainty**
  The
        consolidated financial statements have been prepared on the basis that the
        Company will continue as a going concern. However, the Company has sustained
        substantial losses for each of the years ended December 31, 2006, 2005 and
        2004.
        The Company’s working capital at December 31, 2006 is $13,539,026, which
        represents a $30,875,921 reduction of its working capital of $44,414,947
        at
        December 31, 2005. As a result of the Company’s history of losses and financial
        condition, there is substantial doubt about the ability of the Company to
        continue as a going concern.
  Although
        the Company realized gross proceeds of $10,016,000 (less transaction costs
        of
        approximately $750,000) on February 7, 2007 from the private placement of
        shares
        of its common stock and warrants, management believes that these proceeds,
        together with the Company’s existing cash, will be only sufficient to cover its
        operating activity and other demands until early 2008.
  The
        consolidated financial statements do not include any adjustments relating
        to the
        recoverability and classification of recorded asset amounts or the amounts
        and
        classification of liabilities that might be necessary if the Company were
        not
        able to continue in existence as a going concern.
  Historically,
        the Company has obtained financing from its initial public offering of shares
        of
        its common stock, the private placement of its shares of common stock and
        from
        certain of its significant stockholders.
  **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 the Company and
        its
        subsidiaries. All significant intercompany transactions and balances have
        been
        eliminated on consolidation. The Company’s consolidated financial statements
        also include the results of the companies acquired from the date of each
        acquisition. The Company completed the acquisition of SOLX on September 1,
        2006
        and acquired 50.1% of the capital stock of OcuSense, on a fully diluted basis,
        on November 30, 2006 ( *note
        3)* .
  **Use
        of estimates**
  The
        preparation of 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 assets.
        Actual
        results could differ from those estimates.
  51
  **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 and from the
        sale of
        the components of the SOLX Glaucoma System which includes the SOLX
        790
        Titanium Sapphire Laser (“SOLX 790 Laser”) and the SOLX Gold Shunt .
        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
        sells
        the components of the SOLX Glaucoma System directly to physicians and also
        through distributors. Revenue is reported net of distributors’
commissions.
  The
        Company has the obligation to train its customers and to calibrate the OctoNova
        pumps delivered to them. 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 on the OctoNova pumps, and the estimated cost
        of
        providing this service is accrued at the time revenue is recognized. The
        treatment sets and the components of the SOLX Glaucoma System do not require
        any
        additional servicing and revenue is recognized upon passage of title. However,
        the Company’s revenue recognition policy requires an assessment as to whether
        collectibility is reasonably assured, which requires the Company to evaluate
        the
        creditworthiness of its customers. The result of the assessment could materially
        impact the timing of revenue recognition.
  During
        the years ended December 31, 2006, 2005 and 2004, the Company did not recognize
        as revenue $69,600, $530,445 and nil, respectively, in sales of products
        that
        were shipped during the last quarter of each of the fiscal years 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
        and the SOLX Glaucoma 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 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
        9 and 10)* .
  **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 consist of investments in 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.
  **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, 2006 and 2005, the Company had bad debt reserves
        of nil and $1,049,297, respectively. The Company expensed amounts related
        to bad
        debt reserves of nil, $518,852 and nil during the years ended December 31,
        2006,
        2005 and 2004, respectively, and set up a provision for $530,445 representing
        invoices for products shipped, plus related taxes, to a customer 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**
  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.
  Management
        must make estimates about future customer demand for the Company’s products when
        establishing the appropriate provisions for inventory and also determine
        whether
        market demand has had any impact on the Company’s inventory’s net realizable
        value. When making these estimates, management considers general economic
        conditions and growth prospects, including the impact of the Company receiving
        FDA approval for the RHEOTM System.
  The
        Company received free inventory from Asahi Kasai Medical Co., Ltd. (“Asahi
        Medical”) (formerly Asahi Medical Co., Ltd.) for the purpose of the MIRA-1 and
        related clinical trials. The free inventory received from Asahi Medical was
        accounted for at a value equivalent to the cost the Company pays for the
        same
        filters purchased for commercial sales to third parties. Of the total inventory
        value of $2,642,249 and $4,701,464 as at December 31, 2006 and 2005,
        respectively, $85,590 and $264,615 relate to free inventory received by the
        Company from Asahi Medical. In addition, the Company received free vitamins
        from
        a certain supplier for the purpose of the MIRA-1 and related clinical trials.
        Included in inventory as at December 31, 2006 and 2005 are $7,316 and $6,397,
        respectively, which relate to free vitamins received by the
        Company.
  With
        respect to the Company’s provisioning policy, in general, the Company fully
        reserves for surplus inventory in excess of its demand forecast, taking into
        consideration the expiry date of its inventory. In addition, the Company
        assesses whether recent transactions provide indicators as to whether the
        net
        realizable value of its inventory is below its recorded cost.
  As
        at
        December 31, 2006 and 2005, the Company had inventory reserves of
        $5,101,394 and $1,990,830, respectively. During the years ended December
        31,
        2006, 2005 and 2004, the Company recognized a provision related to inventory
        of
        $3,304,124, $1,990,830 and nil, respectively, based on the above
        analysis.
  **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 related party, accounts payable, accrued liabilities,
        due to stockholders and other long-term liability approximate their carrying
        values due to the short-term maturities of these instruments.
  52
  **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
              2
                  -
                  7 yearsComputer
                  equipment and software
              3
                  yearsMedical
                  equipment
              1
                  -
                  5 years
 
 **Impairment
        of long-lived assets**
  The
        Company reviews its fixed assets and intangible assets 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.
  The
        Company’s intangible assets are comprised of the value of the exclusive
        distribution agreements the Company has with Asahi Medical, the manufacturer
        of
        the Rheofilter filters and the Plasmaflo filters, and Diamed Medizintechnik
        GmbH
        (“Diamed”) and MeSys GmbH, the designer and manufacturer, respectively, of the
        OctoNova pumps and other acquisition-related intangibles. The distribution
        agreements and other acquisition-related intangible assets are amortized
        using
        the straight-line method over an estimated useful life of 15 and 10 years,
        respectively.
  **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. Prior to the acquisition of SOLX and OcuSense during the second half
        of
        fiscal 2006, the Company was a single reporting unit. Therefore, management
        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 bases 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 more likely than not that some portion or all of the deferred
        tax assets will not be realized.
  **Stock-based
        compensation**
  The
        Company accounts for stock-based compensation in accordance with the provisions
        of Statement of Financial Accounting Standard (“SFAS”) No. 123R (revised 2004),
“Stock-Based Compensation” (“SFAS No. 123R”). Under the fair value recognition
        provision of SFAS 123R, stock-based compensation cost is estimated at the
        grant
        date based on the fair value of the award and is recognized as an expense
        ratably over the requisite service period of the award. The
        Company has selected the Black-Scholes option-pricing model as its method
        of
        determining the fair value for all its awards and will recognize compensation
        cost on a straight-line basis over the awards’ vesting periods ( *note* *14(e))* .
  **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.
  53
  The
        following table presents the potentially dilutive effects of outstanding
        securities:
  **Years
                  ended December 31,****2006**
                **#**
              **2005**
                **#**
              **2004**
                **#****Weighted
                  average number of shares outstanding - basic**
              **44,979,692**
              41,931,240
              7,369,827Effect
                  of dilutive securities:Stock
                  options
              **934,591**
              1,246,809
              1,498,950**Weighted
                  average number of shares outstanding - diluted**
              **45,914,283**
              43,178,049
              8,868,777
 
 Potentially
        dilutive securities have not been used in the calculation of diluted loss
        per
        share as they are anti-dilutive.
  **Comprehensive
        income**
  The
        Company follows SFAS No. 130, “Reporting Comprehensive Income” (“SFAS No. 130”).
        SFAS No. 130 establishes standards for reporting and the presentation of
        comprehensive income and its components in a full set of financial statements.
        SFAS No. 130 requires only additional disclosures in the financial statements
        and does not affect the Company’s financial position or results of operations.
        For each of the periods presented, comprehensive income (loss) is consistent
        with the reported loss.
  **Recent
        accounting pronouncements**
  In
        December 2004, the Financial
        Accounting Standards Board (“FASB”) issued
        SFAS No. 123R which revised SFAS No. 123 and supersedes Accounting Principles
        Board Opinion (“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 disclosure
        previously permitted under SFAS No. 123 is no longer an alternative to financial
        statement recognition. SFAS No. 123R is effective at the beginning of the
        first
        annual period beginning after June 15, 2005. Accordingly, the Company adopted
        SFAS No. 123R beginning January 1, 2006. The Company has selected the
        Black-Scholes option-pricing model as the 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
        adoption of the following recent accounting pronouncements in fiscal 2006
        did
        not have a material impact on the Company’s results of operations and financial
        condition:
  ·
            SFAS
                No. 151, “Inventory Costs - An Amendment of ARB No. 43, Chapter
                4”; ·
            SFAS
                No. 153, “Exchanges of Nonmonetary Assets - An Amendment of APB Opinion
                No. 29”; ·
            SFAS
                No. 154, “Accounting Changes and Error Corrections” which replaces APB No.
                20, “Accounting Changes”; ·
            SFAS
                No. 3, “Reporting Accounting Changes in Interim Financial Statements - An
                Amendment of APB Opinion No. 28”; and ·
            FASB
                Staff Position FAS 115-1 and FAS 124-1, “The Meaning of
                Other-Than-Temporary Impairment and Its Application to Certain
                Investments” 
 In
        February 2006, FASB issued SFAS No. 155, "Accounting for Certain Hybrid
        Financial Instruments - An Amendment of FASB Statements No. 133 and 140"
        (“SFAS
        No. 155”). SFAS No. 155 simplifies accounting for certain hybrid instruments
        currently governed by SFAS No. 133, "Accounting for Derivative Instruments
        and
        Hedging Activities" (“SFAS No. 133”), by allowing fair value re-measurement of
        hybrid instruments that contain an embedded derivative that otherwise would
        require bifurcation. SFAS No. 155 also eliminates the guidance in SFAS No.
        133
        Implementation Issue No. D1, "Application of Statement 133 to Beneficial
        Interests in Securitized Financial Assets", which provides that such beneficial
        interests are not subject to SFAS No. 133. SFAS No. 155 amends SFAS No. 140,
        "Accounting for Transfers and Servicing of Financial Assets and Extinguishments
        of Liabilities - A Replacement of FASB Statement No. 125", by eliminating
        the
        restriction on passive derivative instruments that a qualifying special-purpose
        entity may hold. SFAS No. 155 is effective for financial instruments acquired
        or
        issued for fiscal years beginning after September 15, 2006. The Company does
        not
        expect the adoption of this statement to have a material impact on its results
        of operations and financial condition.
 
 In
        March
        2006, FASB issued SFAS No. 156, "Accounting for Servicing of Financial Assets
        -
        An Amendment of FASB Statement No. 140" (“SFAS No. 156”). SFAS No. 156 requires
        an entity to recognize a servicing asset or servicing liability each time
        it
        undertakes an obligation to service a financial asset by entering into a
        servicing contract in specific situations. Additionally, the servicing asset
        or
        servicing liability shall be initially measured at fair value; however, an
        entity may elect the "amortization method" or "fair value method" for subsequent
        balance sheet reporting periods. SFAS No. 156 is effective for fiscal years
        beginning after September 15, 2006. The Company does not expect the adoption
        of
        this statement to have a material impact on its results of operations and
        financial condition.
 
 In
        June
        2006, FASB issued FASB Interpretation (“FIN”) No. 48, "Accounting for
        Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109"
        (“FIN
        No. 48”), which clarifies the accounting for uncertainty in tax positions. FIN
        No. 48 requires that we recognize, in our financial statements, the impact
        of a
        tax position, if that position is more likely than not of being sustained
        on
        audit, based on the technical merits of the position. FIN No. 48 is effective
        for fiscal years beginning after December 15, 2006. The Company does not
        expect
        the adoption of FIN No. 48 to have a material effect on the Company’s results of
        operations and financial position.
  In
        September 2006, the U.S. Securities and Exchange Commission (the “SEC”) released
        Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year
        Misstatements when Quantifying Misstatements in Current Year Financial
        Statements” (“SAB No. 108”). SAB No. 108 provides interpretive guidance on the
        SEC’s views regarding the process of quantifying materiality of financial
        statement misstatements. SAB No. 108 is effective for fiscal years ending
        after
        November 15, 2006, and early application for the first interim period of
        the
        same fiscal year is encouraged. The application of SAB No. 108 in fiscal
        2006
        did not have a material effect on the Company’s results of operations and
        financial position.
  In
        September 2006, FASB issued Statement No. 157, “Fair Value Measurements” (“SFAS
        No. 157”). SFAS No. 157 defines fair value, establishes a framework and gives
        guidance regarding the methods used for measuring fair value, and expands
        disclosures about fair value measurements. SFAS No. 157 is effective for
        financial statements issued for fiscal years beginning after November 15,
        2007
        and for interim periods within those fiscal years. The Company is currently
        evaluating the impact the adoption of SFAS No. 157 would have on its results
        of
        operations and financial position.
  In
        September 2006, FASB issued Statement No. 158, “Employers’ Accounting for
        Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
        Statements Nos. 87, 88, 106 and 132(R)” (“SFAS No. 158”) *.* SFAS
        No.
        158 requires companies to recognize the overfunded or underfunded status
        of a
        defined benefit post-retirement plan as an asset or liability in their balance
        sheet and to recognize changes in that funded status in the year in which
        the
        changes occur through comprehensive income, effective for fiscal years ending
        after December 15, 2006. SFAS No. 158 also requires companies to measure
        the
        funded status of the plan as of the date of its fiscal year end, with limited
        exceptions, effective for fiscal years ending after December 15, 2008. The
        adoption of SFAS No. 158 did not have a material effect on the Company’s results
        of operations and financial position.
  54
  **3.
        ACQUISITIONS**
  During
        the two fiscal years ended December 31, 2006 and 2004, the Company completed
        three acquisitions. The results of each purchase acquisition are included
        in the
        Company’s consolidated statements of operations from the date of each
        acquisition. There were no acquisitions made during fiscal 2005.
  The
        Company’s acquisitions during fiscal 2006 are described below.
  **SOLX**
  On
        September 1, 2006, the Company acquired SOLX, a privately held company that
        has
        developed a system for the treatment of glaucoma. The SOLX Glaucoma System
        developed by SOLX includes the SOLX 790 Laser and the SOLX
        Gold
        Shunt which can
        be
        used separately or together to provide physicians with multiple options to
        manage intraocular pressure. The acquisition of SOLX represents an expansion
        of
        the Company’s ophthalmic product portfolio beyond the RHEOTM procedure for Dry
        AMD. The results of SOLX’s operations have been included in the Company’s
        consolidated financial statements since September 1, 2006.
  The
        Company acquired SOLX by way of a merger, in connection with which the Company
        issued an aggregate of 8,399,983 shares of its common stock and paid $7,000,000
        in cash to the stockholders of SOLX. The Company will make additional payments
        of $3,000,000 and $5,000,000 in cash on the first and second anniversaries
        of
        the September 1, 2006 closing, respectively. In addition, if SOLX receives
        final
        FDA approval for the marketing and sale of the SOLX Gold Shunt on or prior
        to
        December 31, 2007, the Company will pay an additional $5,000,000 in cash
        to the
        former stockholders of SOLX. The stock consideration was valued based on
        a per
        share price of $1.79, being the weighted-average closing sale price of the Company’s
        common stock as traded on the NASDAQ Global Market (“NASDAQ”) over the two-day
        trading period before and after August 1, 2006, being the date the terms
        of the
        acquisition of SOLX were agreed to and announced. The Company has recorded
        the
        cash payment expected to be paid on the first
        anniversary of the closing date as a current liability as of December 31,
        2006.
        The $5,000,000 due on the second anniversary of the closing date has been
        recorded as a long-term liability at its present value, discounted at the
        incremental borrowing rate of the Company as at August 1, 2006. The difference
        between the discounted value and the $5,000,000 payable is being amortized
        using
        the effective yield method over the two-year period with the monthly expense
        being charged as an interest expense in the Company’s consolidated statement of
        operations. In accordance with SFAS
        No.
        141, “Business Combinations”, t he
        contingent payment of $5,000,000 was not included in the determination of
        the
        purchase price or recorded as a liability as the receipt of FDA approval
        for the
        marketing and sale of the SOLX Gold Shunt on or prior to December 31, 2007
        is
        subject to many variables, the outcome of which is not determinable beyond
        reasonable doubt.
  The
        total
        purchase price of $29,068,443, which includes acquisition-related transaction
        costs of $851,279, has been allocated as follows:
  **$**Net
                  tangible assets
              
              
              (2,908,384)Deferred
                  tax liability
              
              
              (12,270,150)Intangible
                  assets:Shunt
                  and laser technology
              
              
              27,000,000Regulatory
                  and other
              
              
              2,800,00014,621,466Goodwill
              
              
              14,446,97729,068,443
 
 Acquisition-related
        transaction costs include investment banking, legal and accounting fees and
        other third party costs directly related to the acquisition.
  In
        estimating the fair value of the intangible assets acquired, the Company
        considered a number of factors, including the valuation performed by an
        independent third-party valuator that used the income approach to value SOLX’s
        shunt and laser technology (consisting of the SOLX
        Gold
        Shunt and the SOLX 790
        Laser) and the cost approach to value the regulatory and other intangible
        assets
        acquired *(note
        7)* .
  The
        unaudited financial information below summarizes the consolidated results
        of
        operations of the Company and SOLX, on a pro forma basis, as though the
        acquisition of SOLX had been completed on January 1, 2005. The unaudited
        pro
        forma information presented below is for information purposes only and may
        not
        be indicative of the results of operations as they would have been if the
        acquisition had occurred on January 1, 2005, nor is it necessarily indicative
        of
        future results of operations.
  **December
                  31,****2006**
              
              **2005****$**
              
              **$**Revenue
              
              
              251,763
              
              
              1,931,590Loss
                  before cumulative effect of a change in accounting
                  principle
              
              
              (86,412,413)
              
              
              (169,117,548)Net
                  loss for the year
              
              
              (86,305,368)
              
              
              (169,117,548)Net
                  loss per share - basic and diluted
              
              
              (1.71)
              
              
              (3.36)
 
 **OcuSense**
  On
        November 30, 2006, the Company acquired 50.1% of the capital stock of OcuSense,
        measured on a fully diluted basis. OcuSense’s first product under development is
        a hand-held tear film osmolarity test for the diagnosis and management of
        dry
        eye syndrome, or DES, known as the TearLabTM test for DES. The
        results of OcuSense’s operations have been included in the Company’s
        consolidated financial statements since November 30, 2006.
  Pursuant
        to the terms of the Series A Preferred Stock Purchase Agreement (the “Series A
        Preferred Stock Purchase Agreement”), dated as of November 30, 2006, between
        OcuSense and the Company, the Company purchased 1,744,223 shares of OcuSense’s
        Series A Preferred Stock, par value $0.001 per share, representing 50.1%
        of
        OcuSense’s capital stock on a fully diluted basis for an aggregate purchase
        price of up to $8,000,000 (the “Purchase Price”). On the closing of the purchase
        which took place on November 30, 2006, the Company paid $2,000,000 of the
        Purchase Price. The Company paid another $2,000,000 installment of the Purchase
        Price on January 3, 2007. The Company will pay the third $2,000,000 installment
        of the Purchase Price upon the attainment by OcuSense of the first of two
        pre-defined milestones and the last $2,000,000 installment of the Purchase
        Price
        upon the attainment by OcuSense of the second of such milestones, provided
        that
        both milestones are achieved prior to May 1, 2009. The contingent payments
        totaling $4,000,000 were not included in the determination of the purchase
        price
        or recorded as a liability as the attainment by OcuSense of the two
        pre-determined milestones prior to May 1, 2009 is subject to many variables,
        the
        outcome of which is not determinable beyond reasonable doubt.
  55
  The
        Series A Preferred Stock Purchase Agreement also makes provision for an ability
        on the part of the Company to increase its ownership interest in OcuSense
        for
        nominal consideration if OcuSense fails to meet certain other milestones
        by
        specified dates. In addition, pursuant to the Series A Preferred Stock Purchase
        Agreement, the Company has agreed to purchase $3,000,000 of shares of OcuSense’s
        Series B Preferred Stock, which shall constitute 10% of OcuSense’s capital stock
        on a fully diluted basis at the time of purchase, upon OcuSense’s receipt from
        the FDA of 510(k) clearance for the TearLabTM test for DES and to purchase
        another $3,000,000 of shares of OcuSense’s Series B Preferred Stock, which shall
        constitute an additional 10% of OcuSense’s capital stock on a fully diluted
        basis at the time of purchase, upon OcuSense’s receipt from the FDA of Clinical
        Laboratory Improvement Amendments, or CLIA, waiver for the TearLabTM test for
        DES.
  The
        total
        purchase price of $4,171,098 includes acquisition-related transaction costs
        of
        $171,098. Acquisition-related transaction costs include legal fees and other
        third party costs directly related to the acquisition.
  The
        purchase price of $4,171,098 has been allocated as follows:
  **$**Net
                  tangible assets
              
              
              1,347,848Deferred
                  tax liability
              
              
              (1,882,166)Intangible
                  asset
              
              
              4,705,4164,171,098
 
 In
        estimating the fair value of the intangible assets acquired, the Company
        considered a number of factors, including the valuation performed by an
        independent third-party valuator that used the income approach to value
        OcuSense’s TearLabTM technology *(note
        7)* .
  If
        the
        Company’s acquisition of 50.1% of the capital stock of OcuSense, measured on a
        fully diluted basis, had been completed on January 1, 2005, the effect on
        the
        pro forma statements of operations would have been to increase net loss by
        $1,320,036 and $378,224 for the years ended December 31, 2006 and 2005,
        respectively. Net loss per share would have increased by $0.03 and $0.01
        for the
        years ended December 31, 2006 and 2005, respectively. There is no pro forma
        effect on the Company’s revenue for each of the years ended December 31, 2006
        and 2005.
  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, 2005, nor is it necessarily indicative of future results
        of operations.
  The
        Company’s acquisition during fiscal 2004 is described below.
  **OccuLogix,
        L.P.**
  On
        December 8, 2004, as part of the Company’s reorganization transactions
        ( *note
        14(b)),* the
        Company acquired 50% interest in OccuLogix, L.P. (the “Partnership”) then held
        by TLC Vision Corporation (“TLC Vision”) in exchange for the issuance to TLC
        Vision of 19,070,234 shares of the Company’s 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 the
        Company’s common stock valued at $228,842,808, plus acquisition costs of
        $768,808 for a total acquisition cost of $229,611,616. The purchase price
        was
        allocated as follows:
  **$**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, 2004, the unaudited pro forma effects on the consolidated statements
        of operations for the year ended December 31, 2004 would have been to decrease
        revenue by $166,634 and to increase net loss by $1,008,371. As a result of
        the
        impact of the above pro forma change to net loss, combined with the dilutive
        effect from the increased number of shares, the unaudited net loss per share
        for
        the year ended December 31, 2004 would have been reduced by $2.06. There
        is no
        pro forma effect on the consolidated statements of operations and the net
        loss
        per share for the years ended December 31, 2006 and 2005 as the results of
        the
        Partnership’s operations are included in the Company’s 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, 2004, nor is it necessarily indicative of future results
        of operations.
  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 then newly incorporated subsidiary, OccuLogix Canada Corp. The Company
        completed the wind-up of the Partnership on February 6, 2006 *(note
        14(b))* .
  **4.
        GOODWILL**
  The
        Company follows the provisions of SFAS No. 142, “Goodwill and Other Intangible
        Assets” (“SFAS No. 142”), which requires that goodwill not be amortized but
        instead be tested for impairment at least annually and more frequently if
        circumstances indicate possible impairment.
  56
  The
        Company’s goodwill amount by reporting unit is as follows:
  **Retina**
              
              **Glaucoma**
              
              **Total****$**
              
              **$**
              
              **$**Balance,
                  December 31, 2004
              
              
              213,397,444
              
              
              —
              
              
              213,397,444Impairment
                  loss recognized
              
              
              (147,451,758
              )
              
              —
              
              
              (147,451,758
              )Balance,
                  December 31, 2005
              
              
              65,945,686
              
              
              —
              
              
              65,945,686Acquired
                  during the period
              
              
              —
              
              
              14,446,977
              
              
              14,446,977Impairment
                  loss recognized
              
              
              (65,945,686
              )
              
              —
              
              
              (65,945,686
              )Balance,
                  December 31, 2006
              
              
              —
              
              
              14,446,977
              
              
              14,446,977
 
 The
        Company performs its annual goodwill impairment analysis on its acquired
        goodwill on October 1 of each year and evaluates the carrying value of its
        goodwill between annual tests upon the occurrence of certain events and
        circumstances.
  **Retina**
  The
        Company conducted a pivotal clinical trial, called MIRA-1, which, if successful,
        was expected to support its application to the FDA to obtain approval to
        market
        the RHEOTM System in the United States. On February 3, 2006, the Company
        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 a
        result
        of the announcement on February 3, 2006, the per share price of the Company’s
        common stock as traded on NASDAQ 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 the
        Company’s 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. Based on this, 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. Prior to the acquisition of
        SOLX
        and OcuSense during the second half of fiscal 2006, the Company was a single
        reporting unit. Therefore, management determined the fair value of the Company's
        goodwill using the Company’s market capitalization as opposed to the fair value
        of its assets and liabilities. The Company recorded a goodwill impairment
        charge
        of $147,451,758 during the year ended December 31, 2005 as a result of a
        goodwill impairment re-assessment performed subsequent to the February 3,
        2006
        announcement.
  On
        June
        12, 2006, the Company announced that it met with the FDA to discuss the results
        of MIRA-1 and confirmed that the FDA will require the Company to perform
        an
        additional study of the RHEOTM System to obtain approval to market the RHEOTM
System in the United States. In addition, on June 30, 2006, the Company
        announced that it had terminated negotiations with Sowood Capital Management
        LP
        in connection with a proposed private purchase of approximately $30,000,000
        of
        zero-coupon convertible notes of the Company. In accordance with SFAS No.
        142,
        the Company concluded that, based on the price of the Company’s common stock
        subsequent to the June 12, 2006 announcement and again after the June 30,
        2006
        announcement, there were sufficient indicators to require management to
        re-assess whether the Company’s recorded goodwill was impaired as at June 30,
        2006. Based on the goodwill impairment analysis performed, the Company concluded
        that a further goodwill impairment charge of $65,945,686 should be recorded
        during the second quarter of 2006.
  **Glaucoma**
  On
        September 1, 2006, the Company acquired SOLX by way of a merger for a total
        purchase price of $29,068,443 *(note
        3)* .
        Of this
        amount, $14,446,977 has been allocated to goodwill. The Company determined
        that,
        as of December 31, 2006, no significant event or circumstance has occurred
        that
        may lead to an impairment of its acquired goodwill. The Company further
        determined that there have not been any significant changes in the methods
        used
        to value the net tangible and intangible assets acquired. Therefore, no
        impairment charge was required to be recorded during the year ended December
        31,
        2006.
  **5.
        FIXED ASSETS**
  **2006**
              **2005****Cost**
              **Accumulated**
                **Amortization**
              **Cost**
              **Accumulated**
                **Amortization****$**
              **$**
              **$**
              **$**Furniture
                  and office equipment
              **119,776**
              **49,566**
              52,077
              23,924Computer
                  equipment and software
              **268,955**
              **145,001**
              155,194
              53,345Medical
                  equipment
              **1,805,228**
              **1,138,675**
              846,555
              505,996**2,193,959**
              **1,333,242**
              1,053,826
              583,265Less
                  accumulated amortization
              **1,333,242**
              
              583,265**860,717**
              
              470,561
  Amortization
        expense was $213,488, $99,301 and $42,956 during the years ended December
        31,
        2006, 2005 and 2004, respectively.
   57
 **OCCULOGIX,
            INC.**
  **Notes
            to Consolidated Financial Statements**
 *(expressed
            in U.S. dollars except as otherwise noted)*
  **6.
        PATENTS AND TRADEMARKS**
  **2006**
              **2005****Cost**
              **Accumulated**
                **Amortization**
              **Cost**
              **Accumulated**
                **Amortization****$**
              **$**
              **$**
              **$**Patents
              **139,461**
              **14,909**
              95,289
              10,843Trademarks
              **117,513**
              **7,224**
              56,468
              5,682**256,974**
              **22,133**
              151,757
              16,525Less
                  accumulated amortization
              **22,133**
              
              16,525**234,841**
              
              135,232
 
 Estimated
        amortization expense for patents and trademarks for each of the next five
        years
        is as follows:
  **Patents**
                **$**
              **Trademarks**
                **$**
              **Total**
                **$**2007
              4,066
              3,760
              7,8262008
              4,066
              3,760
              7,8262009
              4,066
              3,760
              7,8262010
              4,066
              3,760
              7,8262011
              4,066
              3,760
              7,82620,330
              18,800
              39,130
 
 **7.
        INTANGIBLE ASSETS**
  The
        Company’s intangible assets consist of the value of the exclusive distribution
        agreements that the Company has with its major suppliers and other
        acquisition-related intangibles. The Company has no indefinite-lived intangible
        assets. The distribution agreements and other acquisition-related intangible
        assets are amortized using the straight-line method over an estimated useful
        life of 15 and 10 years, respectively. Amortization expense for the years
        ended
        December 31, 2006, 2005 and 2004 was $2,749,212, $1,716,667 and $106,138,
        respectively.
  As
        of
        December 31, 2006, the remaining weighted average amortization period for
        the
        distribution agreements is 13 years and 9.7 years for the other
        acquisition-related intangible assets.
  Intangible
        assets subject to amortization consist of the following:
  **December
                  31,****2006**
              
              **2005****Gross
                  Carrying Amount**
              
              **Accumulated
                  Amortization**
              
              **Gross
                  Carrying Amount**
              
              **Accumulated
                  Amortization****$**
              
              
              **$**
              
              
              **$**
              
              
              **$**Distribution
                  agreements
              
              
              **25,750,000**
              
              
              **3,539,472**
              
              
              25,750,000
              
              
              1,822,805Shunt
                  and laser technology
              
              
              **27,000,000**
              
              
              **900,000**
              
              
              —
              
              
              —Regulatory
                  and other
              
              
              **2,800,000**
              
              
              **93,333**
              
              
              —
              
              
              —TearLabTM
                  technology
              
              
              **4,705,416**
              
              
              **39,212**
              
              
              —
              
              
              —**60,255,416**
              
              
              **4,572,017**
              
              
              25,750,000
              
              
              1,822,805
 
  58
 **OCCULOGIX,
            INC.**
  **Notes
            to Consolidated Financial Statements**
 *(expressed
            in U.S. dollars except as otherwise noted)*
  Estimated
        amortization expense for the intangible assets for each of the below-listed
        fiscal years ending December 31 is as follows:
  **$**2007
              
              
              5,167,2082008
              
              
              5,167,2082009
              
              
              5,167,2082010
              
              
              5,167,2082011
              
              
              5,167,20829,847,359
 
 As
        a
        result of the analysis of the data from MIRA-1 and the result of the meeting
        held with the FDA in June 2006, the Company concluded that there were sufficient
        indications that the carrying value of the distribution intangible may no
        longer
        be recoverable, thus requiring management to assess whether the Company’s
        distribution intangible was impaired as of June 30, 2006. Based on management’s
        estimates of forecasted undiscounted cash flows as of June 30, 2006, the
        Company
        concluded that there is no impairment of the Company’s distribution intangible.
  The
        Company determined that, as at December 31, 2006, there have
        been no significant events which may affect the carrying value of its
        distribution intangible and no significant changes in the methods used to determine the fair market value
        of other
        acquisition-related intangible assets .
        However, the Company’s prior history of losses and losses incurred during the
        current fiscal year reflects a potential indication of impairment, thus
        requiring management to assess whether the Company’s intangible assets were
        impaired as of December 31, 2006. Based on management’s estimates of forecasted
        undiscounted cash flows as of December 31, 2006, the Company concluded that
        there is no indication of an impairment of the Company’s intangible assets.
        Therefore, no impairment charge was recorded during the year ended December
        31,
        2006.
  **8.
        RESTRUCTURING CHARGES**
  In
        March
        2006, the Company implemented a number of structural and management changes
        designed to support both the continued development of its RHEOTM System and to
        execute its accelerated diversification strategy within ophthalmology. In
        accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or
        Disposal Activities”, the Company recognized a total of $819,642 in
        restructuring charges in the year ended December 31, 2006.
  The
        restructuring charges of $819,642 recorded in the year ended December 31,
        2006
        consist solely of severance and benefit costs related to the termination
        of a
        total of 12 employees at both the Company’s Mississauga, Ontario and Palm
        Harbor, Florida offices. All severance and benefit costs have been fully
        paid as
        at December 31, 2006.
  **9.
        DUE TO STOCKHOLDERS**
  **December
                  31,****2006**
                **$**
              **2005**
                **$****Due
                  to**TLC
                  Vision Corporation*(note
                  10)*
              **91,884**
              116,070Other
                  stockholders*(note
                  10)*
              **60,522**
              42,163**152,406**
              158,233
 
 The
        balance owing to TLC Vision of $91,884 and $116,070 as of December 31, 2006
        and
        2005, respectively, is related to computer and administrative support provided
        by TLC Vision, all of which has been expensed during the years ended December
        31, 2006 and 2005, respectively, and included in general and administrative
        expenses.
  **10.
        RELATED PARTY TRANSACTIONS**
  The
        following are the Company’s related party transactions in addition to those
        disclosed in notes 9 and 13.
  **(** **a)** **RHEO
        Clinic Inc.**
  **December
                  31,****2006**
              
              **2005****$**
              
              **$****Due
                  to**RHEO
                  Clinic Inc.
              
              
              —
              
              
              5,065
 
 One
        of
        the Company’s primary customers had been RHEO Clinic Inc., a subsidiary of TLC
        Vision. 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 treat
        patients and subsequently sold certain of its assets to the Company at a
        purchase price of C$61,812, including all applicable taxes. In connection
        with
        that sale, 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 Inc. is not able
        to
        dispose of as at the agreed date, being December 31, 2005. On May 1, 2006,
        the
        Company paid RHEO Clinic Inc. C$31,859 which included the amount owing for
        losses incurred for assets that RHEO Clinic Inc. was not able to dispose
        of as
        at the agreed date. Included in the balance due to RHEO Clinic Inc. as at
        December 31, 2005 is the amount owing to the Company 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.
  59
  **(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 the
        Company’s common stock 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 Company’s initial public offering of shares of
        its common stock. During the years ended December 31, 2004 and 2003, the
        Company
        issued an aggregate of $4,350,000 and $2,650,000 to TLC Vision and Diamed,
        respectively, under the convertible portion of the grid debentures. On December
        8, 2004, as part of the corporate reorganization relating to the Company’s
        initial public offering, the Company issued 7,106,454 shares of its 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, 2006, the two companies have a combined
        48.6%
        equity interest in the Company on a fully diluted basis.
  If
        and
        when the Company receives FDA approval to market the RHEOTM System in the United
        States, it will be economically dependent on Diamed to control the supply
        of the
        OctoNova pumps used in the RHEOTM System. The Company believes that the OctoNova
        pump is a critical component of the RHEOTM System.
  **(c)** **Asahi
        Medical**
  Since
        2001, the Company has been 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.
  The
        Company entered into a new distributorship agreement (the “2006 Distributorship
        Agreement”), effective October 20, 2006, with Asahi Medical. The 2006
        Distributorship Agreement replaced the 2001 distributorship agreement between
        the Company and Asahi Medical, as supplemented and amended by the 2003, 2004
        and
        2005 Memoranda. Pursuant to the 2006 Distributorship Agreement, the Company
        has
        distributorship rights to Asahi Medical's Plasmaflo filter and Asahi Medical's
        second generation polysulfone Rheofilter filter on an exclusive basis in
        the
        United States, Mexico and certain Caribbean countries (collectively, “Territory
        1-a”), on an exclusive basis in Canada, on an exclusive basis in Colombia,
        Venezuela, New Zealand and Australia (collectively, “Territory 2”) and on a
        non-exclusive basis in Italy.
  Pursuant
        to the 2006 Distributorship Agreement, the Company will be responsible for
        obtaining regulatory approvals for the Rheofilter filters and Plasmaflo filters
        for use in the treatment of AMD in Territory 1-a, Territory 2 and Italy by
        December 31, 2010 and in Canada by February 28, 2009. With the exception
        of the
        FDA approval of the RHEOTM System, all of such regulatory approvals, when and if
        obtained, will be held in Asahi Medical’s name. The FDA approval of the RHEOTM
System will be held by a special purpose corporation, to be owned as to 51%
        by
        Asahi Medical and as to 49% by the Company. Under the 2006 Distributorship
        Agreement, the Company will be responsible for covering costs relating to
        the
        pursuit of regulatory approvals in Territory 1-a, Canada and Territory 2,
        and
        the Company and Asahi Medical will share the costs relating to the pursuit
        of
        regulatory approval in Italy. In addition, provided that certain conditions
        are
        met, Asahi Medical will be obligated to contribute $3,000,000 toward the
        cost of
        RHEO-AMD, the Company's new pivotal clinical trial of the RHEOTM System which is
        intended to support the Company's Pre-Market Approval application to the
        FDA.
  With
        respect to the United States, subject to early termination under certain
        circumstances, the 2006 Distributorship Agreement has a term which will end
        ten
        years following the date on which FDA approval to
        market
        the RHEOTM System in the United States is
        received and contemplates successive one-year renewal terms
        thereafter.
  The
        Company is subject to certain minimum purchase requirements in each of the
        territories covered by the 2006 Distributorship Agreement.
  The
        Company received free inventory from Asahi Medical for the purpose of the
        MIRA-1, LEARN or Long-term Efficacy in AMD from Rheopheresis in North America
        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 purchased
        from Asahi Medical for purposes of commercial sales to the Company’s customers.
        During fiscal 2006, the Company returned 300 filters, valued at $60,000,
        to
        Asahi Medical as the filters were labeled for commercial use and cannot be
        utilized for clinical trials. The value of the free inventory received from
        Asahi Medical was nil and $167,730 for the years ended December 31, 2006
        and
        2005, respectively .
  **** **(d)** **Mr.
        Hans Stock** *(note
        9)*
  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, 2006 and
        2005,
        the Company paid Mr. Stock nil and $240,657, respectively, as royalty fees.
        Included in due to stockholders as at December 31, 2006 and 2005 is $48,022
        and
        $29,663, 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 totaling 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, 2006 and 2005, the Company paid $50,000 to
        Mr.
        Stock as royalty fees. Included in due to stockholders as at December 31,
        2006
        and 2005 is $12,500 and $12,500, respectively, due to Mr. Stock .
  **(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 paid ATI 5% of
        the
        Company’s cost of components of the RHEOTM System. Under this agreement, ATI was
        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 Company’s 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 .
  60
  **(f)** **Other**
  On
        June
        25, 2003, the Company entered into a reimbursement agreement with ATI, pursuant
        to which employees of ATI, including John Cornish, one of the Company’s
        stockholders and its Vice President, Operations, 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
        received 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 began to receive an annual base salary of $116,723, representing
        compensation to him for devoting 85% of his time to the business and affairs
        of
        the Company. Effective April 13, 2006, the Company further amended its
        employment agreement with Mr. Cornish such that his annual base salary was
        decreased to $68,660 in consideration of his devoting 50% of his time to
        the
        business and affairs of the Company. Mr. Cornish continues to participate
        in the
        Company’s bonus plan and is entitled to receive, and has received, stock options
        pursuant to the Stock Option Plan .
  Effective
        January 1, 2004, the Company entered into a rental agreement with Cornish
        Properties Corporation, a company owned and managed by Mr. Cornish, pursuant
        to
        which the Company leases space from Cornish Properties Corporation at $2,745
        per
        month. The original term of the lease extended to December 31, 2005. 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. In each of the years ended December 31, 2006 and
        2005,
        the Company paid Cornish Properties Corporation an amount of $32,940 as
        rent. ****** On
        December 19, 2006, the Company extended the term of the rental agreement
        with
        Cornish Properties Corporation for another year, ending December 31, 2007,
        at a
        lease payment of $2,168 per month.
  Effective
        June 25, 2003, Elias Vamvakas, then the Chairman of TLC Vision, became the
        Chairman and Secretary of the Company. 500,000 stock options issued to Mr.
        Vamvakas in December 2003 were accounted for in accordance with APB No. 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
        in December 2004, the options vested immediately, and therefore, any unvested
        compensation expense was expensed immediately .
  On
        November 30, 2006, the Company announced that Mr. Vamvakas had agreed to
        provide
        the Company with a standby commitment to purchase convertible debentures
        of the
        Company (“Convertible Debentures”) in an aggregate maximum amount of $8,000,000
        (the “Total Commitment Amount”). Pursuant to the Summary of Terms and
        Conditions, executed and delivered as of November 30, 2006 by the Company
        and
        Mr. Vamvakas, during the 12-month commitment term commencing on November
        30,
        2006, upon no less than 45 days’ written notice by the Company to Mr. Vamvakas,
        Mr. Vamvakas was obligated to purchase Convertible Debentures in the aggregate
        principal amount specified in such written notice. A commitment fee of 200
        basis
        points was payable by the Company on the undrawn portion of the total $8,000,000
        commitment amount. Any Convertible Debentures purchased by Mr. Vamvakas would
        have carried an interest rate of 10% per annum and would have been convertible,
        at Mr. Vamvakas’ option, into shares of the Company’s common stock at a
        conversion price of $2.70 per share. The Summary of Terms and Conditions
        of the
        standby commitment further provided that if the Company closes a financing
        with
        a third party, whether by way of debt, equity or otherwise and there are
        no
        Convertible Debentures outstanding, then, the Total Commitment Amount was
        to be
        reduced automatically upon the closing of the financing by the lesser of:
        (i)
        the Total Commitment Amount; and (ii) the net proceeds of the financing.
        On
        February 6, 2007, the Company raised gross proceeds in the amount of $10,016,000
        in a private placement of shares of its common stock and warrants. The Total
        Commitment Amount was therefore reduced to zero, thus effectively terminating
        Mr. Vamvakas’ standby commitment. No portion of the standby commitment was ever
        drawn down by the Company, and the Company paid Mr. Vamvakas a total of $29,808
        in commitment fees in February 2007. *(note
        18)* .
  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 of
        the Company, 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 the Company’s
        common stock at an exercise price of $0.13 per share. In addition, CCR agreed
        to
        the repayment of the balance of $150,500 due to it at a rate of $7,500 per
        month
        beginning in July 2003. 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
        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
        amended consultancy and non-competition agreement provides for the payment
        of a
        one-time bonus of $200,000 upon receipt by the Company of FDA approval of
        the
        RHEOTM System and the grant of 60,000 options to CCR at an exercise price of
        $7.15 per share. The stockholders of the Company approved the adjustment
        of the
        exercise price of these options to $2.05 per share on June 23, 2006 *(note
        14(e))* .
        These
        options were scheduled to vest as to 100% when and if the Company receives
        FDA
        approval of the RHEOTM System on or before November 30, 2006, as to 80% when and
        if the Company receives FDA approval after November 30, 2006 but on or before
        January 31, 2007 and as to 60% when and if the Company receives FDA approval
        after January 31, 2007. In August 2006, by letter agreement between the Company
        and CCR, it was agreed that the monthly fee of $15,000 would be suspended
        at the
        end of August 2006 until CCR’s services will be required by the Company in the
        future. This resulted in a combined consulting expense, included within clinical
        and regulatory expense for the years ended December 31, 2006 and 2005, of
        $147,857 and $249,831, respectively .
  On
        September 29, 2004, the Company signed a product purchase agreement with
        Veris
        Health Sciences Inc. (“Veris”) (formerly RHEO Therapeutics, Inc.) for its
        purchase from the Company 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. Jeffrey 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 Company had received a total of $1,779,566 from Veris. Included
        in
        amounts receivable, net as at December 31, 2005, was $1,047,622 due from
        Veris
        for the purchase of additional pumps and treatment sets. Veris agreed to
        the
        payment of interest at the rate of 8% per annum on all amounts outstanding
        for
        more than 45 days up to March 31, 2006, the expected date of final payment.
        In
        January 2006, the Company received from Veris an interest payment of $4,495
        on
        amounts outstanding for more than 45 days to December 31, 2005. On February
        3,
        2006, the Company announced that the MIRA-1 clinical trial had not met its
        primary efficacy endpoint and that it would be more likely than not that
        the
        Company will be required to conduct a follow-up clinical trial of the RHEOTM
System in order to support its Pre-Market Approval application to the FDA.
        Because of this delay in being able to pursue commercialization of the RHEOTM
System in the United States and the resulting market reaction to this news
        and
        based on discussions with Veris, the Company believed that Veris would not
        be
        able to meet its financial obligations to the Company. Therefore, during
        the
        year ended December 31, 2005, the Company recorded an allowance for doubtful
        accounts of $1,047,622 against the amount due from Veris and did not accrue
        additional interest on the amount outstanding during the year ended December
        31,
        2006.
  In
        April
        2006, the Company agreed to sell a total of 1,000 treatment sets, with a
        negotiated discount, to Veris at a price of $200 per treatment set, which
        is
        lower than the Company’s cost. It was also agreed that payment for the treatment
        sets must be received by the Company in advance of shipment. In July 2006,
        Veris
        negotiated new payment terms with the Company, and it was agreed that payment
        for treatment sets shipped subsequent to June 2006 must be received within
        60
        days of shipment. The Company also agreed that all sales of treatment sets
        made
        to Veris to the end of 2006 will remain at the discounted price of $200 per
        treatment set. During the year ended December 31, 2006, the Company received
        a
        total of $171,800 from Veris for the purchase of 1,207 treatment sets. The
        sale
        of the treatment sets is included in revenue for the year ended December
        31,
        2006 as all the treatment sets have been delivered to Veris. In November
        2006,
        the Company sold 348 treatment sets to Veris for $73,776, including applicable
        taxes, payment for which was not received by the Company within the agreed
        60-day credit period. The sale of these treatment sets was not recognized
        as
        revenue for the year ended December 31, 2006 as the Company believed that
        Veris
        would not be able to meet its financial obligations to the Company. In January
        2007, the Company met with the management of Veris and agreed to forgive
        the
        outstanding amount receivable of $73,776 for the purchase of 348 treatment
        sets
        delivered to Veris in November 2006. This amount is therefore not included
        in
        amounts receivable as of December 31, 2006. In addition, the Company has
        recorded an inventory loss of $60,987 in the year ended December 31, 2006
        for
        the sale of these 348 treatment sets since these treatment sets have been
        delivered to Veris already.
   61
 **OCCULOGIX,
            INC.**
  **Notes
            to Consolidated Financial Statements**
 *(expressed
            in U.S. dollars except as otherwise noted)*
  In
        June
        2006, Veris returned four pumps which had been sold to it in December 2005.
        In
        fiscal 2005, the Company had recorded an inventory loss associated with all
        sales made to Veris in December 2005 and did not recognize revenue due to
        the
        Company’s anticipation that Veris may not return the products shipped to it and
        would not be able to pay for the amounts invoiced. Accordingly, during fiscal
        2006, amounts receivable, net and the allowance for doubtful account recorded
        against the amount due from Veris have been reduced by the invoiced amount
        for
        the four pumps of $143,520. In addition, the cost of the four pumps returned
        by
        Veris, valued at $85,058, was used to reduce the cost of goods sold in the
        period.
  On
        November 6, 2006, the Company amended its product purchase agreement with
        Veris
        and agreed to forgive the outstanding amount receivable of $904,101 from
        Veris
        which had been owing for the purchase of treatment sets and pumps and for
        related services delivered or provided to Veris during the period from September
        14, 2005 to December 31, 2005. In consideration of the forgiveness of this
        debt,
        Veris agreed that the Company did not owe Veris any amounts whatsoever in
        connection with (i) the use by the Company of the leasehold premises located
        at
        5280 Solar Drive in Mississauga, Ontario or (ii) legal fees and expenses
        incurred by Veris prior to February 14, 2006 with respect to certain of Veris’
trademarks that had been assigned to the Company, and licensed back to Veris,
        on
        February 14, 2006.
  The
        Company also entered into a clinical trial agreement on November 22, 2005
        with
        Veris which required Veris to provide certain clinical trial services to
        the
        Company. The agreement provided 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.
  In
        October 2003, the Company’s stockholders created a new company called Rheogenx
        BioSciences Corporation (“Rheogenx”) to further develop the use of the current
        components of the RHEOTM
        System for
        non-ophthalmic uses. On March 28, 2005, the Company entered into a supply
        and
        co-marketing agreement with 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. 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 spouse of an officer of the Company.
        During the years ended December 31, 2006 and 2005, the Company paid Innovasium
        Inc. C$44,219 and C$123,967, respectively. Included in accounts payable and
        accrued liabilities as at December 31, 2006 and 2005 is nil and C$15,798,
        respectively, due to Innovasium Inc. These amounts are expensed in the period
        incurred and paid when due.
   62
 **OCCULOGIX,
            INC.**
  **Notes
            to Consolidated Financial Statements**
 *(expressed
            in U.S. dollars except as otherwise noted)*
  **11.
        INCOME TAXES**
  Significant
        components of the Company’s deferred tax assets and liabilities are as
        follows:
  **December
                  31,****2006**
                **$**
              **2005**
                **$****Deferred
                  tax assets**Intangibles
              1,547,214
              ―Fixed
                  assets
              3,457
              (52,219)Stock
                  options
              4,845,559
              4,191,762Accruals
                  and other
              2,244,941
              1,332,602Research
                  tax credit
              215,719
              ―Net
                  operating loss carryforwards
              23,355,282
              15,251,74432,212,172
              20,723,889Valuation
                  allowance
              (29,428,172)
              (20,723,889)**Deferred
                  tax asset**
              2,784,000
              ―**Deferred
                  tax liability**Intangible
                  assets (other than goodwill)
              (21,723,417)
              (8,853,062)**Deferred
                  tax liability**
              (21,723,417)
              (8,853,062)**Deferred
                  tax liability, net**
              (18,939,417)
              (8,853,062)
 
 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:
  **December
                  31,****2006**
                **$**
              **2005**
                **$**
              **2004**
                **$****Loss
                  for the year before income taxes**
              **(86,242,043)**
              (163,614,515)
              (21,803,373)Expected
                  recovery of income taxes
              **(31,189,248)**
              (60,537,371)
              (8,067,250)Goodwill
                  impairment (permanent difference basis)
              **23,740,447**
              54,557,150
              —Stock-based
                  compensation
              **55,117**
              38,628
              312,292Rate
                  change
              **322,321**
              12,923
              ―Tax
                  free income
              **(864)**
              (46,979)
              —Return
                  to provision
              **(180,455)**
              1,252,842
              ―Non-deductible
                  expenses
              **89,360**
              19,656
              3,700Change
                  in valuation allowance
              **3,092,827**
              4,060,622
              7,727,487**Recovery
                  of income taxes**
              **(4,070,495)**
              (642,529)
              (23,771)
 
  63
 **OCCULOGIX,
            INC.**
  **Notes
            to Consolidated Financial Statements**
 *(expressed
            in U.S. dollars except as otherwise noted)*
 The
        Company and its subsidiaries have current and prior year losses available
        to
        reduce taxable income and taxes payable in future years, and, if these losses
        are not utilized, they will expire as follows:
  **$**2012
              3,455,0292018
              4,500,4012019
              2,420,6812020
              5,241,9172021
              3,855,0092022
              3,313,0312023
              3,188,7082024
              7,849,6432025
              15,690,4732026
              13,877,166
 
 **12.
        ACCRUED LIABILITIES**
  **December
                  31,****2006**
                **$**
              **2005**
                **$**Due
                  to professionals
              **709,047**
              348,044Due
                  to clinical trial sites
              **195,074**
              32,936Due
                  to clinical trial specialists
              **206,642**
              227,009Product
                  development costs
              **124,312**
              —Due
                  to ATI
              **—**
              7,490Due
                  to employees and directors
              **464,146**
              993,177Sales
                  tax and capital tax payable
              **12,394**
              155,604Due
                  to MeSys GmbH for pumps
              **—**
              191,692Corporate
                  compliance
              **227,475**
              141,667Interest
                  payable
              **10,758**
              —Miscellaneous
              **141,089**
              129,000**2,090,937**
              2,226,619
 
 **13.
        COMMITMENTS AND CONTINGENCIES**
  **Commitments**
  The
        Company leases office space from a related party under a lease agreement
        expiring December 31, 2007 *(* *note
        10)* .
        The
        Company may terminate the lease with three months’ notice. The future minimum
        obligation under the lease is $26,016 for 2007. Rent paid amounted to $32,940
        for each of the years ended December 31, 2006, 2005 and 2004,
        respectively.
  The
        Company also has commitments relating to operating leases for rental of office
        space and equipment from unrelated parties. The total future minimum obligation
        under the various leases is $104,402 for 2007. Rent paid under these leases
        was
        $80,329, $60,207 and $10,188 for the years ended December 31, 2006, 2005
        and
        2004, respectively. All Canadian dollar amounts have been converted at the
        respective year-end exchange rate.
  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 totaling
        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:
  (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 totaling 1.5% of product sales
        to
        Mr. Stock, subject to minimum advance royalty payments of $12,500 per quarter.
        The advance payments are credited against future royalty payments to be made
        in
        accordance with the agreement. This agreement replaces the June 2002
        consulting agreement with Mr. Stock, which provided for a royalty payment
        of 1%
        of product sales. This agreement effectively increases the total royalty
        payments required to be made in respect of U.S. Patent No. 6,245,038 to 2%
        of
        product sales *(note
        10).*
  64
  Future
        minimum royalty payments under the agreements as at December 31, 2006 are
        approximately as follows:
  **$**2007
              100,0002008
              100,0002009
              100,0002010
              100,0002011
                  and thereafter
              650,0001,050,000
  In
        June
        2000, SOLX entered into a Patent License Agreement with Candela Corporation
        (“Candela”) to obtain the exclusive license to U.S. Patent No. 08/781,504 and
        No. 6,059,772. In accordance with the terms of this agreement, the Company
        is
        required to make royalty payments to Candela of 2% of SOLX 790 Laser sales
        worldwide and an annual royalty payment of $25,000 and to make a royalty
        payment
        to Dr. Shlomo Melamed of 1.5% of SOLX 790 Laser sales in the United States.
        The
        annual royalty payment to Candela is payable by January 31 of each
        year. **** The
        term
        of the agreement is for the legal life of the patents which will end in June
        2017.
  Future
        minimum royalty payments under the agreement as at December 31, 2006 are
        approximately as follows:
  **$**2007
              25,0002008
              25,0002009
              25,0002010
              25,0002011
                  and thereafter
              175,000275,000
 
  65
 **OCCULOGIX,
            INC.**
  **Notes
            to Consolidated Financial Statements**
 *(expressed
            in U.S. dollars except as otherwise noted)*
  In
        addition, the Company entered into a consultancy and non-competition agreement
        on July 1, 2003 with CCR *(note
        10)* ,
        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
        amended consultancy and non-competition agreement provides for the payment
        of a
        one-time bonus of $200,000 upon receipt by the Company of FDA approval of
        the
        RHEOTM System and the grant of 60,000 options to CCR at an exercise price of
        $7.15 per share. The stockholders of the Company approved the adjustment
        of the
        exercise price of these options to $2.05 per share on June 23, 2006 *(note
        14(e))* .
        These
        options were scheduled to vest as to 100% when and if the Company receives
        FDA
        approval of the RHEOTM System on or before November 30, 2006, as to 80% when and
        if the Company receives FDA approval after November 30, 2006 but on or before
        January 31, 2007 and as to 60% when and if the Company receives FDA approval
        after January 31, 2007. In August 2006, by letter agreement between the Company
        and CCR, it was agreed that the monthly fee of $15,000 would be suspended
        at the
        end of August 2006 until CCR’s services will be required by the Company in the
        future. The
        future minimum obligation under the consultancy and non-competition agreement
        for 2007 is therefore nil.
  The
        Company entered into consulting agreements with individual members of its
        Scientific Advisory Board (“SAB”). The SAB was established in fiscal 2005 to
        advise the Company on its continuing research and development activities.
        The
        future minimum obligation under the various consulting agreements is $258,930
        for 2007. Consulting fees paid amounted to $244,165 for the year ended December
        31, 2006 and nil for each of the years ended December 31, 2005 and
        2004.
  SOLX
        entered into consulting agreements with various physicians, hospitals and
        principal investigators for the purposes of its clinical trials and other
        medical consulting services. The future minimum obligation under the various
        consulting agreements is $191,250 for 2007.
  On
        January 1, 2006, OcuSense entered into a consulting agreement with Benjamin
        David Sullivan which requires the Company to pay a consulting fee of $15,000
        per
        month. The future minimum obligation under the consulting agreement is $180,000
        for 2007.
  On
        November 30, 2006, pursuant to the Series A Preferred Stock Purchase Agreement
        between the Company and OcuSense, the Company purchased 1,744,223 shares
        of
        OcuSense’s Series A Preferred Stock representing 50.1% of OcuSense’s capital
        stock on a fully diluted basis for an aggregate purchase price of up to
        $8,000,000 (the “Purchase Price”). On the closing of the purchase which took
        place on November 30, 2006, we paid $2,000,000 of the Purchase Price. We
        paid
        another $2,000,000 installment of the Purchase Price on January 3, 2007.
        We will
        pay the third $2,000,000 installment of the Purchase Price upon the attainment
        by OcuSense of the first of two pre-defined milestones and the last $2,000,000
        installment of the Purchase Price upon the attainment by OcuSense of the
        second
        of such milestones, provided that both milestones are achieved prior to May
        1,
        2009.. The Series A Preferred Stock Purchase Agreement also makes provision
        for
        an ability on the part of the Company to increase its ownership interest
        in
        OcuSense for nominal consideration if OcuSense fails to meet certain milestones
        by specified dates. In addition, pursuant to the Series A Preferred Stock
        Purchase Agreement, the Company has agreed to purchase $3,000,000 of shares
        of
        OcuSense’s Series B Preferred Stock, which shall constitute 10% of OcuSense’s
        capital stock on a fully diluted basis at the time of purchase, upon OcuSense’s
        receipt from the FDA of 510(k) clearance for the DES Test and to purchase
        another $3,000,000 of shares of OcuSense’s Series B Preferred Stock, which shall
        constitute an additional 10% of OcuSense’s capital stock on a fully diluted
        basis at the time of purchase, upon OcuSense’s receipt from the FDA of CLIA
        waiver for the DES Test *(note
        3)* .
   66
 **OCCULOGIX,
            INC.**
  **Notes
            to Consolidated Financial Statements**
 *(expressed
            in U.S. dollars except as otherwise noted)*
  **Guaranty**
  As
        of
        September 1, 2006, SOLX granted a security interest in all of its intellectual
        property to Doug P. Adams, John Sullivan and Peter M. Adams, in their capacity
        as members of the Stockholder Representative Committee acting on behalf of
        the
        former stockholders of SOLX, in order to secure SOLX’s obligations under the
        Guaranty, dated as of September 1, 2006, by SOLX in favor of Doug P. Adams,
        John
        Sullivan and Peter M. Adams, in their capacity as members of the Stockholder
        Representative Committee (the “Guaranty”). Pursuant to the Guaranty, SOLX
        guaranteed the Company’s obligation to pay the Stockholder Representative
        Committee, acting on behalf of the former stockholders of SOLX, an aggregate
        amount of up to $13,000,000, being the maximum aggregate amount of the purchase
        price remaining payable to the former stockholders of SOLX.
  **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 receipt of FDA approval of the RHEOTM System,
        representing an annual commitment of approximately $534,900. 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 the
        end of
        the five-year period following receipt of FDA approval, representing an
        aggregate commitment of €16,219,000, or approximately $21,397,727, based on
        exchange rates as of December 31, 2006.
  Pursuant
        to the terms of the 2006 Distributorship Agreement with Asahi Medical, dated
        October 20, 2006, the Company undertook a commitment to purchase a minimum
        of
        9,000, 15,000, and 22,500 of each of the Plasmaflo filters and the Rheofilter
        filters in years 1, 2 and 3, respectively, beginning six months after receipt
        of
        FDA approval of the RHEOTM System. Minimum purchase orders for the fourth year
        shall be determined immediately after the term of the first year by mutual
        consent but shall not be less than that of the previous year. This same method
        shall be used in subsequent years to determine future minimum purchase
        quantities such that minimum purchase quantities are always fixed for three
        years. Future minimum annual commitments in respect of Territory 1-a, after
        receipt of FDA approval, are approximately as follows:
  **$**Year
                  1
              2,565,000Year
                  2
              4,275,000Year
                  3
              6,412,500
 
  67
 **OCCULOGIX,
            INC.**
  **Notes
            to Consolidated Financial Statements**
 *(expressed
            in U.S. dollars except as otherwise noted)*
  In
        respect of Canada, the Company undertook a commitment to purchase a minimum
        of
        900, 1,500 and 2,250 of each of the Plasmaflo filters and the Rheofilter
        filters
        in years 1, 2 and 3, respectively, beginning upon the earlier to occur of
        (a)
        the sale by the Company of its current inventory of Rheofilter filters and
        (b)
        the expiration of the Company’s current inventory of Rheofilter filters. 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
        Canada, are approximately as follows:
  **$**Year
                  1
              256,500Year
                  2
              427,500Year
                  3
              641,250
 
 In
        respect of Territory 2, the Company undertook a commitment to purchase a
        minimum
        of 300 and 500 of each of the Plasmaflo filters and the Rheofilter filters
        in
        2009 and 2010, respectively. In respect of Italy, the Company undertook a
        commitment to purchase a minimum of 200 and 500 of each of the Plasmaflo
        filters
        and the Rheofilter filters in 2007 and 2008, respectively. Minimum purchase
        orders for the years 2009 and 2010 shall be discussed and determined at the
        beginning of calendar year 2008 by mutual consent. Future minimum annual
        commitments, in respect of Territory 2 and Italy, are approximately as
        follows:
  **$**2007
              57,0002008
              142,5002009
              85,5002010
              142,500
 
 **14.
        CAPITAL STOCK**
  **(** **a)** **Authorized
        share capital**
  The total number of authorized shares of common stock of the Company 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 of the Company 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 are collectively referred to as the “Reorganization” and 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 grid 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 included 1,281,858 shares of common stock which were
                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 Company’s purchase of TLC Vision’s interest in 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 have subsequently been
        wound up.
  **(c)** **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.
  68
  After
        giving effect to the anti-dilution adjustment resulting from the issuance
        of the
        June 25, 2003 related party secured grid debentures *(note
        10)* ,
        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 Series 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
        Series
        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.
  **(d)** **Common
        stock**
  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).
  On
        September 1, 2006, the Company issued 8,399,983 shares of its common stock
        to
        the former stockholders of SOLX in connection with the acquisition of SOLX.
        The
        stock consideration was valued based on a per share price of $1.79, being
        the
        weighted-average closing sale price of the Company’s
        common stock as traded on NASDAQ over the two-day trading period before and
        after August 1, 2006, being the date the terms of the acquisition of SOLX
        were
        agreed to and announced *(note
        3)* .
  As
        at
        December 31, 2006, the number of shares of common stock of the Company reserved
        for issuance upon the exercise of stock options is as follows:
  **Range
                  of exercise prices**
                **$**
              **Expiry
                  date**
              **#**2.05
              2008
              25,0002.00
                  - 2.05
              2009
              167,6252.00
                  - 2.05
              2010
              119,3750.80
                  - 2.00
              2012
              96,0900.99
                  - 1.30
              2013
              1,082,0482.05
              2014
              675,0002.05
              2015
              1,183,3331.77
                  - 2.14
              2016
              888,750**4,237,221**
 
 **(e)**
              **Stock
                  Option Plan**
  The
        Company has a stock option plan, the 2002 Stock Option Plan (the “Stock Option
        Plan”). Under 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.
  Options
        granted may be time-based or performance-based options. The vesting of
        performance-based options is contingent upon meeting company-wide goals,
        including obtaining FDA approval of the Company’s RHEOTM System and the
        achievement of a minimum amount of sales over a specified period. Generally,
        options expire 10 years after the date of 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 of the Company (the “Board of
        Directors”).
  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 was approved
        by
        the Board of Directors, and such options were granted on terms and conditions
        similar to those options issued under the Stock Option Plan.
  On
        January 1, 2006, the Company adopted the provisions of SFAS No. 123R, requiring
        the recognition of expense related to the fair value of its stock-based
        compensation awards. The Company elected to use the modified prospective
        transition method as permitted by SFAS No. 123R and therefore has not restated
        its financial results for prior periods. Under this transition method, the
        stock-based compensation expense for the year ended December 31, 2006 includes
        compensation expense for all stock-based compensation awards granted prior
        to,
        but not yet vested as of, January 1, 2006 based on the grant date fair value
        estimated in accordance with the original provisions of SFAS No. 123.
        Stock-based compensation expense for all stock-based compensation awards
        granted
        subsequent to January 1, 2006 is based on the grant date fair value estimated
        in
        accordance with the provisions of SFAS No. 123R. The Company recognizes
        compensation expense for stock option awards on a straight-line basis over
        the
        requisite service period of the award.
  The
        following table sets forth the total stock-based compensation expense resulting
        from stock options included in the Company’s consolidated statements of
        operations:
  **December
                  31,****2006****(i)**
              
              **2005****(ii)**
              
              **2004****(iii)****$**
              
              **$**
              
              **$**General
                  and administrative
              
              
              **1,442,023**
              
              
              229,638
              
              
              15,403,242Clinical
                  and regulatory
              
              
              **237,567**
              
              
              136,643
              
              
              36,718Sales
                  and marketing
              
              
              **541,543**
              
              
              500
              
              
              —Stock-based
                  compensation expense before income taxes(iv)
              
              
              **2,221,133**
              
              
              366,781
              
              
              15,439,960
 
 69
  (i)  At
        the
        annual meeting of stockholders of the Company held on June 23, 2006, the
        stockholders of the Company approved the re-pricing of all then out-of-the-money
        stock options of the Company. Consequently, the exercise price of all
        outstanding stock options of the Company that, on June 23, 2006, was greater
        than $2.05, being the weighted average trading price of the Company’s common
        stock on NASDAQ during the five-trading day period immediately preceding
        June
        23, 2006, was adjusted downward to $2.05. 2,585,000 of the Company’s outstanding
        stock options with a weighted average exercise price of $8.42 were affected
        by
        the re-pricing. SFAS No. 123R requires the re-pricing of equity awards to
        be
        treated as a modification of the original award and provides that such a
        modification is an exchange of the original award for a new award. SFAS No.
        123R
        considers the modification to be the repurchase of the old award for a new
        award
        of equal or greater value, incurring additional compensation cost for any
        incremental value. This incremental difference in value is measured as the
        excess, if any, of the fair value of the modified award determined in accordance
        with the provisions of SFAS No. 123R over the fair value of the original
        award
        immediately before its terms are modified, measured based on the share price
        and
        other pertinent factors at that date. SFAS No. 123R 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. Of the 2,585,000 options affected by the
        re-pricing, 1,401,073 were vested as at December 31, 2006. Therefore, additional
        compensation cost of $423,338 for the 1,401,073 stock options that were vested
        has been recognized and is included in the stock-based compensation expense
        for
        the year ended December 31, 2006. The remaining unrecognized incremental
        fair
        value of $169,057 plus the compensation cost from the original measurement
        of
        the fair value of the old options of $2,607,496, which totaled $2,776,553
        in
        unrecognized compensation expense as at December 31, 2006, is expected to
        be
        amortized over a weighted average vesting period of 2.3 years.
 
 In accordance with SFAS No. 123R, the Company also recorded a compensation
        expense of $3,363 in the year ended December 31, 2006 as the Board of Directors
        approved accelerating the vesting of 1,250 unvested stock options granted
        to a
        terminated employee on April 28, 2006. SFAS No. 123R treats such a modification
        as a cancellation of the original unvested award and the grant of a new fully
        vested award as of that date.
  (ii)
            Stock-based
                compensation expense for the year ended December 31, 2005 relates
                primarily to compensation expense associated with non-employee stock
                options. The fair value of these options was determined using the
                Black-Scholes option-pricing model and was recorded in the Company’s
                consolidated statements of operations in accordance with the provisions
                of
                SFAS No. 123.  On
        December 11, 2005, the 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 as a result of the adoption of SFAS No. 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.
  (iii)
            In
                December 2003, the
                Company granted a total of 1,352,500 stock options to its employees,
                directors and certain executives. The Company estimated the intrinsic
                value of these options to be $15,905,400. 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 was being amortized
                over the vesting period. However, upon the successful completion
                of the
                Company’s initial public offering in December 2004, the options vested
                immediately, and therefore the remaining $15,392,323 of stock-based
                compensation expense as at December 31, 2003 was expensed during
                the year
                ended December 31, 2004.  (iv)
            The
                tax benefit associated with the Company’s stock-based compensation expense
                for the year ended December 31, 2006 was $781,527. This amount has
                not
                been recognized in the Company’s consolidated financial statements for the
                year ended December 31, 2006 as it is more likely than not that the
                Company will not realize this benefit.  Net
        cash
        proceeds from the exercise of common stock options were $270,935, $231,235
        and
        $129,420 for the years ended December 31, 2006, 2005 and 2004, respectively.
        No
        income tax benefit was realized from stock option exercises during the years
        ended December 31, 2006, 2005 and 2004. In accordance with SFAS No. 123R,
        the
        Company presents excess tax benefits from the exercise of stock options,
        if any,
        as financing cash flows rather than operating cash flows.
   70
 **OCCULOGIX,
            INC.**
  **Notes
            to Consolidated Financial Statements**
 *(expressed
            in U.S. dollars except as otherwise noted)*
  As
        a
        result of adopting SFAS No. 123R on January 1, 2006, the Company’s net loss for
        the year ended December 31, 2006 was $1,547,926 higher than if it had continued
        to account for share-based compensation under APB No. 25. Basic and diluted
        loss
        per share for the year ended December 31, 2006 increased by $0.04 with the
        adoption of SFAS No. 123R.
  The
        Company did not estimate forfeitures, resulting from the failure to satisfy
        performance conditions, on its outstanding awards prior to the adoption of
        SFAS
        No. 123R. Under SFAS No. 123, the Company could assume all awards will vest
        and
        reverse recognized compensation cost or adjust its disclosure for forfeited
        awards when the awards are actually forfeited. SFAS No. 123R requires a company
        to estimate the number of awards that are expected to vest and revise the
        estimate as actual forfeitures differ from the estimate. On January 1, 2006,
        the
        effective date of adopting SFAS No. 123R, the Company was required to estimate
        the number of forfeitures of its outstanding awards as of the effective date.
        Consolidated balance sheet amounts related to any compensation cost for these
        estimated forfeitures previously recognized in prior periods before the adoption
        of SFAS No. 123R have to be eliminated and recognized in income as the
        cumulative effect of a change in accounting principle as of the effective
        date.
        During the year ended December 31, 2006, the Company recognized $107,045
        as the
        cumulative effect of a change in accounting principle resulting from the
        requirement to estimate forfeitures on its outstanding awards as at January
        1,
        2006. The compensation cost previously recognized in prior periods before
        the
        adoption of SFAS No. 123R relates to compensation expense associated with
        non-employee stock options.
  Prior
        to
        the adoption of SFAS No. 123R, the Company applied the provisions of SFAS
        No. 123, which allowed companies either to expense the estimated fair value
        of
        employee stock options or to follow the intrinsic value method as set forth
        in
        APB No. 25 but required companies to disclose the pro forma effects on net
        loss
        as if the fair value of the options had been expensed. The Company elected
        to
        apply APB No. 25 in accounting for employee stock options. Therefore, as
        required by SFAS No. 123, prior to the adoption of SFAS No. 123R, the Company
        provided pro forma net loss and pro forma net loss per share disclosures
        for
        stock-based awards as if the fair value of the options had been
        expensed.
  The
        following table illustrates the pro forma net loss and net loss per share
        of
        common stock as if the fair value method had been applied to all awards during
        the years ended December 31, 2005 and 2004:
  **Years
                  ended December 31,****2005**
              
              
              **2004****$**
              
              
              **$**Net
                  loss, as reported
              
              
              (162,971,986
              )
              
              (21,818,873
              )Adjustment
                  for APB No. 25
              
              
              57,726
              
              
              15,392,323Adjustment
                  for SFAS No. 123
              
              
              (6,664,395
              )
              
              (15,673,031
              )Pro
                  forma net loss
              
              
              (169,578,655
              )
              
              (22,099,581
              )Pro
                  forma net loss per share - basic and diluted
              
              
              (4.04
              )
              
              (3.00)
 
 The
        weighted average fair value of stock options granted during the years ended
        December 31, 2006, 2005 and 2004 was $1.77, $3.54 and $6.96, respectively.
        The
        estimated fair value was determined using the Black-Scholes option-pricing
        model
        with the following weighted-average assumptions:
  **Years
                  ended December 31,****2006**
              
              **2005**
              **2004**Volatility
              
              
              **0.901**
              
              
              0.728
              
              0.891Expected
                  life of options
              
              
              **5.56
                  years**
              
              
              2.33
                  years
              
              3
                  yearsRisk-free
                  interest rate
              
              
              **4.83%**
              
              
              3.87%
              
              3.21%Dividend
                  yield
              
              
              **0%**
              
              
              0%
              
              0%
 
 The
        Company’s computation of expected volatility for the years ended December 31,
        2006, 2005 and 2004 is based on a comparable company’s historical stock prices
        as the Company did not have sufficient historical data. The Company’s
        computation of expected life has been estimated using the “short-cut approach”
as provided in SAB No. 107 as options granted by the Company meet the criteria
        of “plain vanilla” options as defined in SAB 107. Under this approach, estimated
        life is calculated to be the mid-point between the vesting date and the end
        of
        the contractual period. The risk-free interest rate for an award is based
        on the
        U.S. Treasury yield curve with a term equal to the expected life of the award
        on
        the date of grant.
  71
  A
        summary
        of the options issued during the year ended December 31, 2006 and the total
        number of options outstanding as of that date and changes since December
        31,
        2003 are set forth below:
  **Number
                  of Options Outstanding**
              **Weighted-Average
                  Exercise Price****(i)**
                **$**
              **Weighted-Average
                  Remaining Contractual Life (years)**
              **Aggregate
                  Intrinsic Value**
                **$**Outstanding,
                  December 31, 2003
              2,389,961
              1.45Granted
              828,000
              12.00Exercised
              (272,200)
              0.48Forfeited
              (196,562)
              2.48Outstanding,
                  December 31, 2004
              2,749,199
              4.64
              8.31
              934,777Granted
              1,823,750
              8.10Exercised
              (279,085)
              0.83Forfeited
              (186,250)
              9.99Outstanding,
                  December 31, 2005(i)
              4,107,614
              1.75
              8.20
              724,812Granted
              890,000
              1.99Exercised
              (140,726)
              1.93Forfeited
              (619,667)
              2.05**Outstanding,
                  December 31, 2006**
              **4,237,221**
              **1.75**
              **7.61**
              **653,307****Vested
                  or expected to vest, December 31, 2006**
              **3,005,956**
              **1.63**
              **7.17**
              **653,307****Exercisable,
                  December 31, 2006**
              **2,581,804**
              **1.56**
              **6.95**
              **653,307**
  (i)  At
        the
        annual meeting of stockholders of the Company held on June 23, 2006, the
        stockholders of the Company approved the re-pricing of all then out-of-the-money
        stock options of the Company. Consequently, the exercise price of all
        outstanding stock options of the Company that, on June 23, 2006, was greater
        than $2.05, being the weighted average trading price of the Company’s common
        stock on NASDAQ during the five-trading day period immediately preceding
        June
        23, 2006, was adjusted downward to $2.05.
  The
        aggregate intrinsic value in the table above represents the total pre-tax
        intrinsic value (i.e., the difference between the Company’s closing stock price
        on the last trading day of fiscal 2006 of $1.57 and the exercise price,
        multiplied by the number of shares that would have been received by the option
        holders if the options had been exercised on December 31, 2006). This amount
        changes according to the fair market value of the Company’s stock.
  As
        at
        December 31, 2006, $3,978,530 of total unrecognized compensation cost related
        to
        stock options is expected to be recognized over a weighted-average period
        of
        2.53 years.
  **** **(f)** **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 shares of common stock at an exercise price
        of
        $2.00 per share. Additionally, warrants to purchase 50,000 shares of common
        stock at an exercise price of $1.00 per share were granted to an officer
        and
        certain directors and stockholders of the Company in exchange for providing
        certain private credit guarantees.
  **Weighted**
                **average**
                **exercise
                  price****Common
                  stock warrants**
              **#**
              **$****Outstanding,
                  December 31, 2003***(i)*
              150,000
              2.83Exercised*(ii)*
              (102,369)
              2.29Expired
              (47,631)
              4.00**Outstanding,
                  December 31, 2004, 2005 and 2006**
              —
              —
 
 **Weighted**
                **average**
                **exercise
                  price****Series
                  A convertible preferred stock warrants**
              **#**
              **$****Outstanding,
                  December 31, 2003***(i)*
              482,710
              6.80Exercised*(ii)*
              (379,284)
              6.73Expired
              (103,426)
              7.04**Outstanding,
                  December 31, 2004, 2005 and 2006**
              —
              —
 
 (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* *15)* .
        The
        remaining 77,370 shares of common stock were issued for total cash proceeds
        of
        $134,480.
  72
  (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* *15)* .
        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, 2006. 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 $7.83 per
        share
        expired on July 17, 2004, other than 379,284 warrants to purchase shares
        of
        Series A convertible preferred stock and
        102,369 warrants to purchase shares of common stock which were exercised
        prior
        to the expiration of the warrants. As at December 31, 2006, 2005 and 2004,
        no
        common stock warrants and no Series A convertible preferred stock warrants
        remained outstanding.
  **15.
        CONSOLIDATED STATEMENTS OF CASH FLOWS**
  The
        net
        change in non-cash working capital balances related to operations consists
        of
        the following:
  **Years
                  ended**
                **December
                  31,****2006**
                **$**
              **2005**
                **$**
              **2004**
                **$**Due
                  to related party
              **(5,065)**
              13,291
              110,749Amounts
                  receivable
              **390,634**
              (82,810)
              (222,218)Inventory
              **2,250,554**
              (3,431,743)
              (136,527)Prepaid
                  expenses
              **247,361**
              (322,455)
              (324,353)Deposit
              **(5,551)**
              4,105
              (8,996)Accounts
                  payable
              **(1,225,575)**
              301,457
              26,548Accrued
                  liabilities
              **(1,155,335)**
              (563,925)
              2,511,897Deferred
                  revenue and rent inducement
              **—**
              (485,047)
              (152,153)Due
                  to stockholders
              **(5,827)**
              (358,523)
              (931,652)Other
                  current assets
              **18,332**
              —
              —**509,528**
              (4,925,650)
              873,295
 
 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,****2006**
                **$**
              **2005**
                **$**
              **2004**
                **$**Non-cash
                  investing and financing activitiesConversion
                  of debentures
              **—**
              ―
              7,000,000Cashless
                  exercise of warrants to purchase
                shares
                  of Series A convertible preferred stock
              **—**
              ―
              1,269,845Cashless
                  exercise of warrants to purchase shares of common stock
              **—**
              ―
              99,996Free
                  inventory
              **(48,006)**
              183,382
              146,905Common
                  stock issued on acquisition
              **15,035,969**
              ―
              228,842,808Additional
                  cash flow informationInterest
                  paid
              **—**
              ―
              (26,575)Income
                  taxes recovered (paid), net
              **4,533**
              (8,138)
              ―
 
  73
 **OCCULOGIX,
            INC.**
  **Notes
            to Consolidated Financial Statements**
 *(expressed
            in U.S. dollars except as otherwise noted)*
  **16.
        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 the United States and Canada in order to reduce its
        exposure.
  During
        fiscal 2006, the Company derived all of its revenue from the sale of the
        components of the RHEOTM System and the SOLX Glaucoma System. The Company sold
        components of the RHEOTM System to only one customer in the year, Veris. As
        previously discussed in note 10, the Company fully provided for the balance
        due from Veris. Accordingly, no trade receivables due from Veris have been
        recognized as at December 31, 2006. There were no trade receivables outstanding
        from the sale of the components of the SOLX Glaucoma System as at December
        31,
        2006 as all amounts were fully paid as of that date.
  **17.
        SEGMENTED INFORMATION**
  As
        a
        result of the acquisition of SOLX and OcuSense ( *note
        3),* the
        Company has two reportable segments: retina and glaucoma. The retina segment
        is
        in the business of commercializing the RHEOTM System which is used to perform the
        RheopheresisTM procedure, a procedure that selectively removes molecules from
        plasma, which is designed to treat Dry AMD. The Company began limited
        commercialization of the RHEOTM System in Canada in 2003 and continues to support
        its sole customer, Veris, in its commercial activities in Canada. The Company
        has recently obtained investigational device exemption clearance from the
        FDA to
        commence RHEO-AMD, its new clinical study of the RHEOTM System. The glaucoma
        segment is in the business of providing treatment for glaucoma with the use
        of
        the components of the SOLX Glaucoma System which are used to provide physicians
        with multiple options to manage intraocular pressure. The Company is seeking
        to
        obtain 510(k) approval to market the components of the SOLX Glaucoma System
        in
        the United States. The Company acquired the glaucoma segment in the acquisition
        of SOLX on September 1, 2006; therefore, no amounts are shown for the segment
        in
        periods prior to September 1, 2006. Other is made up of the TearLabTM business
        which is currently developing technologies that enable eye care practitioners
        to
        test, at the point-of-care, for highly sensitive and specific biomarkers
        in
        tears using nanoliters of tear film. The Company acquired the TearLabTM business
        in the acquisition of 50.1% of the capital stock of OcuSense, on a fully
        diluted
        basis, on November 30, 2006; therefore, no amounts are shown in periods prior
        to
        November 30, 2006. The TearLabTM business does not meet the quantitative criteria
        to be disclosed separately as a reportable segment.
  The
        accounting policies of the segments are the same as those described in
        significant accounting policies *(note
        2)* .
        Intersegment sales and transfers are minimal and are accounted for at current
        market prices, as if the sales or transfers were to third parties.
  The
        Company’s reportable units are strategic business units that offer different
        products and services. They are managed separately, because each business
        unit
        requires different technology and marketing strategies. The Company’s business
        units were acquired or developed as a unit, and in the case of SOLX and
        OcuSense, their respective management was retained at the time of
        acquisition.
   74
 **OCCULOGIX,
            INC.**
  **Notes
            to Consolidated Financial Statements**
 *(expressed
            in U.S. dollars except as otherwise noted)*
  The
        Company’s business units were as follows:
  **Retina**
              **Glaucoma**
              **Other**
              **Total****$**
              
              **$**
              
              **$**
              
              **$****Year
                  ended December 31, 2006**Revenue
              
              **174,259**
              
              **31,625**
              
              **—**
              
              **205,884**Expenses:Cost
                  of goods sold
              
              **3,528,951**
              
              **19,385**
              
              **—**
              
              **3,548,336**Operating
              
              **12,507,953**
              
              **1,723,265**
              
              **312,394**
              
              **14,543,612**Depreciation
                  and amortization
              
              **1,860,849**
              
              **1,067,943**
              
              **39,516**
              
              **2,968,308**Impairment
                  of goodwill
              
              **65,945,686**
              
              **—**
              
              **—**
              
              **65,945,686**Restructuring
                  charges
              
              **819,642**
              
              **—**
              
              **—**
              
              **819,642**Loss
                  from operations
              
              **(84,488,822)**
              
              **(2,778,968)**
              
              **(351,910)**
              
              **(87,619,700)**Interest
                  income
              
              **1,370,205**
              
              **3**
              
              **—**
              
              **1,370,208**Interest
                  expense
              
              **(286,784)**
              
              **—**
              
              **(1,304)**
              
              **(288,088)**Other
                  income (expense), net
              
              **31,108**
              
              **(67)**
              
              **(173)**
              
              **30,868**Minority
                  interest
              
              **—**
              
              **—**
              
              **157,624**
              
              **157,624**Recovery
                  of income taxes
              
              **2,819,805**
              
              **1,182,005**
              
              **68,685**
              
              **4,070,495**Cumulative
                  effect of a change in accounting principle
              
              **107,045**
              
              **—**
              
              **—**
              
              **107,045**Net
                  loss
              
              **(80,447,443)**
              
              **(1,597,027)**
              
              **(127,078)**
              
              **(82,171,548)**Total
                  assets
              
              **40,762,771**
              
              **44,158,205**
              
              **5,482,719**
              
              **90,403,695****Year
                  ended December 31, 2005**Revenue
              
              1,840,289
              
              —
              
              —
              
              1,840,289Expenses:Cost
                  of goods sold
              
              3,394,102
              
              —
              
              —
              
              3,394,102Operating
              
              14,323,605
              
              —
              
              —
              
              14,323,605Depreciation
                  and amortization
              
              1,821,680
              
              —
              
              —
              
              1,821,680Impairment
                  of goodwill
              
              147,451,758
              
              —
              
              —
              
              147,451,758Loss
                  from operations
              
              (165,150,856)
              
              —
              
              —
              
              (165,150,856)Interest
                  income
              
              1,593,366
              
              —
              
              —
              
              1,593,366Other
                  expense, net
              
              (57,025)
              
              —
              
              —
              
              (57,025)Recovery
                  of income taxes
              
              642,529
              
              —
              
              —
              
              642,529Net
                  loss
              
              (162,971,986)
              
              —
              
              —
              
              (162,971,986)Total
                  assets
              
              137,806,058
              
              —
              
              —
              
              137,806,058
  75
 **OCCULOGIX,
            INC.**
  **Notes
            to Consolidated Financial Statements**
 *(expressed
            in U.S. dollars except as otherwise noted)*
  
 **Retina**
              **Glaucoma**
              **Other**
              **Total****$**
              
              **$**
              
              **$**
              
              **$****Year
                  ended December 31, 2004**Revenue
              
              969,357
              
              —
              
              —
              
              969,357Expenses:Cost
                  of goods sold
              
              957,269
              
              —
              
              —
              
              957,269Operating
              
              21,589,968
              
              —
              
              —
              
              21,589,968Depreciation
                  and amortization
              
              154,574
              
              —
              
              —
              
              154,574Loss
                  from operations
              
              (21,732,454)
              
              —
              
              —
              
              (21,732,454)Interest
                  income
              
              60,227
              
              —
              
              —
              
              60,227Interest
                  expense
              
              (24,492)
              
              —
              
              —
              
              (24,492)Other
                  expense, net
              
              (145,925)
              
              —
              
              —
              
              (145,925)Recovery
                  of income taxes
              
              23,771
              
              —
              
              —
              
              23,771Net
                  loss
              
              (21,818,873)
              
              —
              
              —
              
              (21,818,873)Total
                  assets
              
              301,600,631
              
              —
              
              —
              
              301,600,631
 
 The
        Company’s geographic segments are as follows:
  **United
                  States**
              
              **Canada**
              
              **Europe**
              
              **Israel**
              **Total****$**
              
              **$**
              
              **$**
              
              **$**
              
              **$****Year
                  ended December 31, 2006**Revenues
              
              **—**
              
              **174,384**
              
              **31,500**
              
              **—**
              
              **205,884**Fixed
                  assets and intangibles
              
              **70,932,850**
              
              **186,987**
              
              **63,484**
              
              **42,613**
              
              **71,225,934****Year
                  ended December 31, 2005**Revenues
              
              —
              
              1,840,289
              
              —
              
              —
              
              1,840,289Fixed
                  assets and intangibles
              
              90,340,988
              
              137,686
              
              —
              
              —
              
              90,478,674**Year
                  ended December 31, 2004**Revenues
              
              —
              
              969,357
              
              —
              
              —
              
              969,357Fixed
                  assets and intangibles
              
              239,446,055
              
              67,494
              
              —
              
              —
              
              239,513,549
 
 Revenues
        from Veris, of the Company’s retina segment, accounted for approximately 85%,
        96% and 25% of the Company’s revenue for the years ended December 31, 2006, 2005
        and 2004, respectively.
   76
 **OCCULOGIX,
            INC.**
  **Notes
            to Consolidated Financial Statements**
 *(expressed
            in U.S. dollars except as otherwise noted)*
  **18.
        SUBSEQUENT EVENT**
  On
        February 1, 2007, the Company entered into a Securities Purchase Agreement
        (the
“Securities Purchase Agreement”) with certain institutional investors, pursuant
        to which the Company agreed to issue to those investors an aggregate of
        6,677,333 shares of the Company’s common stock (the “Shares”) and five-year
        warrants exercisable into an aggregate of 2,670,933 shares of the Company’s
        common stock (the “Warrants”). The per share purchase price of the Shares is
        $1.50, and the per share exercise price of the Warrants is $2.20, subject
        to
        adjustment. The Warrants will become exercisable on August 6, 2007. Pursuant
        to
        the Securities Purchase Agreement, on February 6, 2007, the Company issued
        the
        Shares and the Warrants. The gross proceeds of sale of the Shares totaled
        $10,016,000 (less transaction costs of approximately $750,000). On February
        6,
        2007, the Company also issued to Cowen and Company, LLC a warrant exercisable
        into an aggregate of 93,483 shares of the Company’s common stock (the
        “Cowen Warrant”) in part payment of the placement fee payable to Cowen and
        Company, LLC for the services it had rendered as the placement agent in
        connection with the sale of the Shares and the Warrants. All of the terms
        and
        conditions of the Cowen Warrant (other than the number of shares of the
        Company's common stock into which the Cowen Warrant is exercisable) are
        identical to those of the Warrants.
  **19.
        QUARTERLY FINANCIAL DATA (UNAUDITED)**
  The
        following tables contain selected unaudited consolidated statement of operations
        data for each quarter of fiscal 2006 and 2005:
  **Fiscal
                  2006 Quarter Ended****March
                  31**
              
              **June
                  30**
              
              **September
                  30**
              
              **December
                  31****$**
              
              **$**
              
              **$**
              
              **$**Revenues
              
              
              **—**
              
              
              **82,715**
              
              
              **85,444**
              
              
              **37,725**Gross
                  profit (loss)(i)
              
              
              **(1,650,000**
              **)**
              
              **78,398**
              
              
              **(31,961**
              **)**
              
              **(1,738,889**
              )Loss
                  from operations(ii)
              
              
              **(6,367,600**
              **)**
              
              **(70,557,888**
              **)**
              
              **(3,922,773**
              **)**
              
              **(6,771,439**
              )Net
                  loss(iii)
              
              
              **(5,731,952**
              **)**
              
              **(69,995,592**
              **)**
              
              **(3,583,808**
              **)**
              
              **(2,860,196**
              )Weighted
                  average number of shares outstanding - basic and diluted
              
              
              **42,166,561**
              
              
              **42,186,579**
              
              
              **44,911,018**
              
              
              **50,622,496**Net
                  loss per share - basic and diluted(iv)
              
              
              **(0.14**
              **)**
              
              **(1.66**
              **)**
              
              **(0.08**
              **)**
              
              **(0.06**
              )
 
 **Fiscal
                  2005 Quarter Ended****March
                  31**
              
              **June
                  30**
              
              **September
                  30**
              
              **December
                  31****$**
              
              **$**
              
              **$**
              
              **$**Revenue
              
              
              403,739
              
              
              597,841
              
              
              632,330
              
              
              206,379Gross
                  profit (loss)(i)
              
              
              103,805
              
              
              193,986
              
              
              295,120
              
              
              (2,146,724
              )Loss
                  from operations(ii)
              
              
              (3,806,780
              )
              
              (3,695,436
              )
              
              (3,394,985
              )
              
              (154,253,655
              )Net
                  loss
              
              
              (3,281,364
              )
              
              (3,159,720
              )
              
              (2,853,914
              )
              
              (153,676,988
              )Weighted
                  average number of shares outstanding - basic and diluted
              
              
              41,810,679
              
              
              41,860,288
              
              
              41,982,057
              
              
              42,070,457Net
                  loss per share - basic and diluted(iv)
              
              
              (0.08
              )
              
              (0.08
              )
              
              (0.07
              )
              
              (3.65
              )
 
 (i)
            Gross
                profit (loss) for the three months ended December 31, 2006, March
                31, 2006
                and December 31, 2005 includes the expense of amounts related to
                inventory
                reserves of $1,679,124, $1,625,000 and $1,990,830,
                respectively.  (ii)
            Loss
                from operations for the three months ended June 30, 2006 and December
                31,
                2005 includes a goodwill impairment charge of $65,945,686 and
                $147,451,758, respectively.  (iii)
            Net
                loss for the three months ended December 31, 2006 includes a deferred
                tax
                recovery of $2,784,000 associated with the recognition of a deferred
                tax
                asset due to the availability of 2006 net operating losses which
                may be
                utilized to reduce taxes in future years.  (iv)
            Net
                loss per share - basic and diluted are computed independently for
                the
                quarters presented. Therefore, the sum of the quarterly per share
                information may not be equal to the annual per share
                information.   77
 **OCCULOGIX,
              INC.**
  **Notes
              to Consolidated Financial Statements**
 *(expressed
              in U.S. dollars except as otherwise noted)*
   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. The Company’s disclosure
        controls and procedures are designed to provide reasonable assurance of
        achieving their desired objectives, and the Company’s Chief Executive Officer
        and Chief Financial Officer have concluded that the Company’s disclosure
        controls and procedures are effective to provide that reasonable
        assurance.
  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 Rule 13a-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 (as defined in Rule 13a-15(e) of the Exchange Act) were effective
        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 control over financial
        reporting that occurred during the year ended December 31, 2006, 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 Rule 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, 2006. 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, 2006, 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, 2006, 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.
   78
  **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, 2006,
        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 at December
        31, 2006, 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 at December 31, 2006, 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 at
        December 31, 2006 and 2005, 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, 2006 and our report dated
        March 2, 2007 expressed an unqualified opinion thereon.  Our
        audits also included the financial statement schedule listed in the index
        at
        Item 15(a).
 Toronto,
                  Canada,
              /s/
                  Ernst & Young LLPMarch
                  2, 2007.
              Chartered
                  Accountants
  79
  ITEM
        9B.  OTHER
        INFORMATION.
  None.
   80
 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
        2007 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 PARTY
                  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.
  PART
        IV
  ITEM
                  15.
              EXHIBITS,
                  FINANCIAL STATEMENT SCHEDULES.
  (a)
              The
                  following documents are filed as part of the
                  report:
  (1)
                  Financial Statements included in PART II of this
                  report:
  Included
                  in PART II of this report:
              PageReport
                  of Independent Auditors
              82Consolidated
                  Balance Sheets as at December 31, 2006 and December 31,
                  2005
              84Consolidated
                  Statements of Operations for the three years ended December 31,
                  2006
              85Consolidated
                  Statements of Changes in Stockholders’ Equity (Deficiency) for the three
                years
                  ended December 31, 2006
              86Consolidated
                  Statements of Cash Flows for the three years ended December 31,
                  2006
              88Notes
                  to Consolidated Financial Statements
              89
 
 (2)
            Financial
                Statement Schedules:  Schedule
        II - Valuation and Qualifying Accounts and Reserves
  Except
        as
        noted above, all financial statement schedules for which provisions have
        been
        made in the applicable accounting regulations of the Commission 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, 10.30 to
        10.37
        inclusive, 10.41 and 10.47 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.
  *
        *
        *
  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.
 81
  **EXPERTS**
  Valuation
        analyses of the fair value of certain of our net assets included in this
        Annual
        Report on Form 10-K have been performed by Peter Ott & Associates Inc., an
        independent appraiser, and have been included in reliance upon such company’s
        authority as an expert in business valuation.
  
   82
 POWER
        OF
        ATTORNEY
  The
        registrant and each person whose signature appears below hereby appoint Elias
        Vamvakas and William G. Dumencu 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 15, 2007
                
                OCCULOGIX,
                    INC.
  By:  /s/ Elias
        Vamvakas
 ____________________________________________
 Elias Vamvakas
 Chief 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.
  Dated:
                    March 15, 2007
                
                By:
                /s/
                    Elias VamvakasElias
                    Vamvakas
                  Chief
                    Executive Officer and
                  Chairman
                    of Board of DirectorsDated:
                    March 15, 2007
                
                By:
                /s/
                    William G. DumencuWilliam
                    G. Dumencu
                  Chief
                    Financial Officer and TreasurerDated:
                    March 15, 2007
                
                By:
                /s/
                    Jay T. HolmesJay
                    T. Holmes
                  DirectorDated:
                    March 15, 2007
                
                By:
                /s/
                    Thomas N. DavidsonThomas
                    N. Davidson
                  DirectorDated:
                    March 15, 2007
                
                By:
                /s/
                    Richard L. LindstromRichard
                    L. Lindstrom, M.D.
                  Director
 Dated:
                      March 15, 2007
                  
                  By:
                  /s/
                      Georges NoëlGeorges
                        Noël
                    Director
 Dated:
                      March 15, 2007
                  
                  By:
                  /s/
                      Adrienne L. GravesAdrienne
                        L. Graves
                      Director
 Dated:
                      March 15, 2007
                  
                  By:
                  /s/
                      Gilbert S. OmennGilbert
                        S. Omenn
                      Director
 83
  SCHEDULE
        II
  VALUATION
        AND QUALIFYING ACCOUNTS AND RESERVES
  **Balance
                  at beginning of period**
              
              **Charged
                  to costs and expenses**
              
              **Charged
                  to other accounts**
              
              **Deductions**
              
              **Balance
                  at end of period****$**
              
              **$**
              
              **$**
              
              **$**
              
              **$**Fiscal
                  2004
              
              —
              
              —
              
              —
              
              —
              
              —Fiscal
                  2005Bad
                  debt reserves
              
              —
              
              518,852
              
              —
              
              —
              
              518,852Inventory
                  reserves
              
              —
              
              1,990,830
              
              —
              
              —
              
              1,990,830**Fiscal
                  2006****Bad
                  debt reserves**
              
              **518,852**
              
              **—**
              
              **—**
              
              **(518,852)**
              **1**
              **—****Inventory
                  reserves**
              
              **1,990,830**
              
              **3,304,124**
              
              **—**
              
              **(193,560)**
              **2**
              **5,101,394**
 
  1.
            During
                fiscal 2006, OccuLogix, Inc. (“the Company”) agreed to forgive the amount
                receivable from Veris Health Services Inc. (“Veris”) which had been owing
                for products and related services delivered or provided to Veris
                during
                the period from September 14, 2005 to December 31,
                2005.  2.
            During
                fiscal 2006, the Company utilized inventory that had previously been
                provided for.  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)).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)).
  84
  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)).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 (incorporated by reference to Exhibit 10.29
                    to the
                    Registrant’s Annual Report on Form 10-K filed with the Commission on March
                    16, 2006 (file no. 0000-51030)).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 (incorporated
                    by reference to Exhibit 10.30 to the Registrant’s Annual Report on Form
                    10-K filed with the Commission on March 16, 2006 (file no.
                    0000-51030)).10.31
                Employment
                    Agreement between Nozhat Choudry and the Registrant dated as
                    of February
                    10, 2006 (incorporated by reference to Exhibit 10.1 to the Registrant’s
                    Quarterly Report on Form 10-Q, filed with the Commission on May
                    10, 2006
                    (file no. 000-51030)).10.32
                Release
                    Agreement between John Caloz and the Registrant, dated as of
                    April 13,
                    2006, terminating the Employment Agreement between the Registrant
                    and John
                    Caloz dated May 18, 2006 (incorporated by reference to Exhibit
                    10.2 to the
                    Registrant’s Quarterly Report on Form 10-Q, filed with the Commission on
                    May 10, 2006 (file no. 000-51030)).10.33
                Release
                    Agreement between Irving Siegel and the Registrant, dated as
                    of April 13,
                    2006, terminating the Employment Agreement between the Registrant
                    and
                    Irving Siegel dated as of August 3, 2003, as amended by the Amending
                    Agreement between the Registrant and Irving Siegel dated as of
                    September
                    1, 2005 (incorporated by reference to Exhibit 10.3 to the Registrant’s
                    Quarterly Report on Form 10-Q, filed with the Commission on May
                    10, 2006
                    (file no. 000-51030)).10.34
                Termination
                    Agreement among the Registrant, AMD Medical Services Inc., Irving
                    Siegel,
                    OccuLogix Canada Corp., Rheo Clinic Inc. and TLC Vision Corporation,
                    dated
                    as of April 13, 2006, terminating, among other things, the Consulting
                    Agreement among the Registrant, AMD Medical Services Inc. and
                    Irving
                    Siegel dated September 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 10, 2006 (file no. 000-51030)).10.35
                Amending
                    Agreement between the Registrant and William G. Dumencu, dated
                    as of April
                    14, 2006, amending the Employment Agreement between the Registrant
                    and
                    William G. Dumencu dated as of August 1, 2003, as amended by
                    the Amendment
                    between the Registrant and William G. Dumencu dated August 1,
                    2003 and
                    effective September 30, 2003 (incorporated by reference to Exhibit
                    10.5 to
                    the Registrant’s Quarterly Report on Form 10-Q, filed with the Commission
                    on May 10, 2006 (file no. 000-51030)).
 85
  10.36
                  Amending
                      Agreement between the Registrant and Nozhat Choudry, dated
                      as of April 1,
                      2006, amending the Employment Agreement between the Registrant
                      and Nozhat
                      Choudry dated as of February 10, 2006 (incorporated by reference
                      to
                      Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-Q, filed with
                      the Commission on May 10, 2006 (file no. 000-51030)).10.37
                  Amending
                      Agreement between the Registrant and John Cornish, dated as
                      of April 13,
                      2006, amending the Employment Agreement between the Registrant
                      and John
                      Cornish dated as of April 1, 2005, as amended by the Amending
                      Agreement
                      between the Registrant and John Cornish dated as of June 1,
                      2005
                      (incorporated by reference to Exhibit 10.7 to the Registrant’s Quarterly
                      Report on Form 10-Q, filed with the Commission on May 10, 2006
                      (file no.
                      000-51030)).10.38
                  Convertible
                      Unsecured Promissory Note of Solx, Inc., dated April 1, 2006,
                      in the
                      principal amount of $2,000,000 (incorporated by reference to
                      Exhibit 10.8
                      to the Registrant’s Quarterly Report on Form 10-Q/A, filed with the
                      Commission on May 25, 2006 (file no. 000-51030)).10.39
                  Agreement
                      and Plan of Merger, dated as of August 1, 2006, by and among
                      the
                      Registrant, OccuLogix Mergeco, Inc., Solx, Inc. and Doug P.
                      Adams, John
                      Sullivan and Peter M. Adams, acting, in each case, in his capacity
                      as a
                      member of the Stockholder Representative Committee referred
                      to therein
                      (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly
                      Report on Form 10-Q, filed with the Commission on August 9,
                      2006 (file no.
                      000-51030)).10.40
                  Convertible
                      Unsecured Promissory Note of Solx, Inc., dated August 1, 2006,
                      in the
                      principal amount of $240,000 (incorporated by reference to
                      Exhibit 10.2 to
                      the Registrant’s Quarterly Report on Form 10-Q, filed with the Commission
                      on August 9, 2006 (file no. 000-51030)).10.41
                  Employment
                      Agreement between the Registrant and Doug P. Adams dated as
                      of September
                      1, 2006.10.42
                  Registration
                      Rights Agreement, dated as of September 1, 2006, among the
                      Registrant,
                      Doug P. Adams, John Sullivan and Peter M. Adams, acting, in
                      each case, in
                      his capacity as a member of the Stockholder Representative
                      Committee
                      referred to in the Agreement and Plan of Merger, dated as of
                      August 1,
                      2006, by and among the Registrant, OccuLogix Mergeco, Inc.,
                      Solx, Inc. and
                      Doug P. Adams, John Sullivan and Peter M. Adams, acting, in
                      each case, in
                      his capacity as a member of the Stockholder Representative
                      Committee
                      referred to therein.10.43
                  2006
                      Distributorship Agreement between Asahi Kasei Medical Co.,
                      Ltd. and the
                      Registrant dated October 20, 2006 (incorporated by reference
                      to Exhibit
                      10.1 to the Registrant’s Quarterly Report on Form 10-Q, filed with the
                      Commission on November 9, 2006 (file no. 000-51030)).10.44
                  Summary
                      of Terms and Conditions between the Registrant and Elias Vamvakas
                      dated
                      November 30, 2006.10.45
                  Series
                      A Stock Purchase Agreement by and among OcuSense, Inc. and
                      the Registrant
                      dated as of November 30, 2006. (Exhibits have been omitted
                      pursuant to
                      Item 601(b)(2) of Regulation S-K and will be provided to the
                      Securities
                      and Exchange Commission upon request.)10.46
                  Securities
                      Purchase Agreement, dated as of February 1, 2007, by and among
                      the
                      Registrant and the investors listed on the Schedule of Investors
                      attached
                      thereto as Exhibit A (incorporated by reference to Exhibit
                      10.1 to the
                      Registrant’s Current Report on Form 8-K, filed with the Commission on
                      February 6, 2007 (file no. 000-51030)).10.47
                  Employment
                      Agreement between the Registrant and Suh Kim dated as of March
                      12,
                      2007.10.48
                  License
                      Agreement between OcuSense, Inc. and The Regents of the University
                      of
                      California dated March 12, 2003. (Portions of this exhibit
                      have been
                      omitted pursuant to a request for confidential treatment.)10.49
                  Amendment
                      No. 1, dated June 9, 2003, to the License Agreement between
                      OcuSense, Inc.
                      and The Regents of the University of California dated March
                      12,
                      2003.10.50
                  Amendment
                      No. 2, dated September 5, 2005, to the License Agreement between
                      OcuSense,
                      Inc. and The Regents of the University of California dated
                      March 12, 2003.
                      (Portions of this exhibit have been omitted pursuant to a request
                      for
                      confidential treatment.)10.51
                  Amendment
                      No. 3, dated July 7, 2006, to the License Agreement between
                      OcuSense, Inc.
                      and The Regents of the University of California dated March
                      12,
                      2003.10.52
                  Amendment
                      No. 4, dated October 9, 2006, to the License Agreement between
                      OcuSense,
                      Inc. and The Regents of the University of California dated
                      March 12,
                      2003.14.1
                  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.23.2
                  Consent
                      of Peter Ott & Associates Inc.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.
 86