SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K





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


SECURITIES
EXCHANGE ACT OF 1934





FOR THE
FISCAL YEAR ENDED DECEMBER 31, 2007





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


SECURITIES
EXCHANGE ACT OF 1934





FOR THE
TRANSITION PERIOD FROM ______ TO _____












COMMISSION
FILE NUMBER 000-551030





OccuLogix,
Inc.





(Exact
name of Registrant as specified in its charter)






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








2600
Skymark Avenue, Unit 9, Suite 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


1




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 a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
 
 Large
      accelerated filer   ̈
              Accelerated
      filer  xNon-accelerated
      filer   ̈  (Do
      not check if a smaller reporting company)
              Smaller
      reporting company  ̈
 
 Indicate
by check mark if the Registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).  Yes   ̈  No  x


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, 2007: $36,025,308. The
Registrant has no non-voting common stock.
 
 As of
March 13, 2008, there were 57,306,145 shares of the Registrant’s Common Stock
outstanding.
 
 DOCUMENTS
INCORPORATED BY REFERENCE
 
 Portions
of the Registrant’s Proxy Statement for the 2008 Annual Meeting of Stockholders
of the Registrant to be held on June 20, 2008 are incorporated by reference into
Part III of this Form 10-K.
 
 The
Registrant makes available free of charge on or through its website
(http://www.occulogix.com) its Annual Report on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K and any amendments to those reports filed
or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act
of 1934. The material is made available through the Registrant’s website as soon
as reasonably practicable after the material is electronically filed with or
furnished to the U.S. Securities and Exchange Commission, or SEC. All of the
Registrant’s filings may be read or copied at the SEC’s Public Reference Room at
100 F Street, N.E., Room 1580, Washington D.C. 20549. Information on the hours
of operation of the SEC’s Public Reference Room can be obtained by calling the
SEC at 1-800-SEC-0330. The SEC maintains a website (http://www.sec.gov)
that contains reports and proxy and information statements of issuers that file
electronically.




2




PART
I





SPECIAL
NOTE REGARDING FORWARD LOOKING STATEMENTS





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





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





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





ITEM
      1.
            BUSINESS.





Overview





We are an
ophthalmic therapeutic company founded to commercialize innovative treatments
for age-related eye diseases. Until recently, the Company operated two
business divisions, being Retina and Glaucoma.





Retina
Division





Until
recently, the Company’s Retina division was in the business of developing and
commercializing a treatment for dry age-related macular degeneration, or Dry
AMD. Age-related macular degeneration, or 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.





3





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.





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 light
of the MIRA-1 study results, we also 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 on our PMA submission
strategy of the MIRA-1 study results. 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.





However,
on November 1, 2007, the Company announced the indefinite suspension of its
RHEOTM System clinical development program. This decision was made following a
comprehensive review of the respective costs and development timelines
associated with the products in the Company’s portfolio and in light of the
Company’s financial position. Between January 29, 2007 and November 1, 2007, the
Company had prepared the RHEO-AMD protocol and had been putting into place all
of the resources required for the conduct for the RHEO-AMD study, including the
securing of clinical trial site commitments. The Company is in the process of
winding down the RHEO-AMD study as there is no reasonable prospect that the
RHEOTM System clinical development program will be relaunched in the foreseeable
future. Subsequent to our  fiscal 2007 year-end, as of February 25,
2008, we have terminated our relationship with Asahi Kasei Kuraray Medical Co.,
Ltd. (formerly Asahi Kasei Medical Co., Ltd.), or Asahi Medical. Asahi Medical
manufactures, and supplied us with, the Rheofilter filter and the Plasmaflo
filter, both of which are key components of the RHEOTM System. We also are
engaged in discussions with Diamed Medizintechnik GmbH, or Diamed, and MeSys
GmbH, or MeSys, regarding the termination of our relationship with each of
them.  Diamed is the designer, and MeSys is the manufacturer, of the
OctoNova pump, another key component of the RHEOTM System.





4




Glaucoma
Division





In
anticipation of the delay in the commercialization of the RHEOTM System in the
United States as a result of the MIRA-1 study’s failure to meet its primary
efficacy endpoint and the FDA’s requirement of us to conduct an additional study
of the RHEOTM System, the Company accelerated its diversification plans and, on
September 1, 2006, acquired 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.





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.





On
December 20, 2007, we announced the sale of SOLX to Solx Acquisition, Inc., or
Solx Acquisition, a company wholly owned by Doug P. Adams, the founder of SOLX
and who, until the closing of the sale, had been serving as an executive officer
of the Company in the capacity of President & Founder, Glaucoma
Division.





The
consideration for the purchase and sale of all of the issued and outstanding
shares of the capital stock of SOLX consisted of:  (i) on December 19,
2007, the closing date of the sale, the assumption by Solx Acquisition of all of
the liabilities of OccuLogix, as they related to SOLX’s business, incurred on or
after December 1, 2007, and OccuLogix’s obligation to make a $5,000,000 payment
to the former stockholders of SOLX due on September 1, 2008 in satisfaction of
the outstanding balance of the purchase price of SOLX; (ii) on or prior to
February 15, 2008, the payment by Solx Acquisition of all of the expenses that
OccuLogix had paid to the closing date, as they related to SOLX’s business
during the period commencing on December 1, 2007; (iii) during the period
commencing on the closing date and ending on the date on which SOLX achieves a
positive cash flow, the payment by Solx Acquisition of a royalty equal to 3% of
the worldwide net sales of the SOLX 790 Laser and the SOLX Gold Shunt, including
next-generation or future models or versions of these products; and (iv)
following the date on which Solx achieves a positive cash flow, the payment by
Solx Acquisition of a royalty equal to 5% of the worldwide net sales of these
products. In order to secure the obligation of Solx Acquisition to make these
royalty payments, SOLX granted to OccuLogix a subordinated security interest in
certain of its intellectual property. In connection with the sale of SOLX, those
employees of the Company, whose roles and responsibilities related mainly to
SOLX’s business, ceased to be employees of the Company and became employees of
Solx Acquisition or SOLX.





Prior to
the sale of SOLX, we had been in the process of 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
had been continuing to maintain our relationships with distributors in France,
Germany, Spain, the United Kingdom and Canada and had been engaged 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 marketing
and sale of these products in the United States.





5





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, prior to the sale of SOLX, we had been seeking the
corresponding approval for the SOLX Gold Shunt.





OcuSense,
Inc.





As part
of its accelerated diversification plans, on November 30, 2006, OccuLogix
acquired 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.





OcuSense’s
first product, which is currently under development, is a hand-held tear film
test for the measurement of osmolarity, a quantitative and highly specific
biomarker that has shown to correlate with dry eye disease, or DED, The test is
known as the TearLabTM test for DED. The anticipated innovation of the TearLabTM
test for DED 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 categorized as waived by the FDA under regulations promulgated under the
Clinical Laboratory Improvement Amendments, or CLIA.





The
TearLabTM test for DED will require the development of the following three
components:  (1) the TearLabTM disposable, which is a single-use
microfluidic labcard; (2) the TearLabTM pen, which is a hand-held device that
interfaces with the TearLabTM disposable; and (3) the TearLabTM reader, which is a
small desktop unit that allows for the docking of the TearLabTM disposable and
the TearLabTM pen and provides a quantitative reading for the
operator.  OcuSense is currently engaged in industrial, electrical and
software design efforts for the three components of the TearLabTM test for DED
and, to these ends, is working with two engineering 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
objective is to complete product development of the TearLabTM test for DED during
the first half of 2008. 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 DED. Currently, it
anticipates seeking the 510(k) clearance during the latter half of 2008 and the
CLIA waiver during the latter half of 2009. In addition, OcuSense intends to
seek CE Mark approval for the TearLabTM test for DED during the latter half of
2008.





OccuLogix
acquired its 50.1% ownership stake, on a fully diluted basis, in OcuSense for an
aggregate purchase price of up to $8,000,000. Pursuant to the Series A Preferred
Stock Purchase Agreement, dated as of November 30, 2006, by and among OcuSense
and the Company (which agreement was amended subsequently on October 29, 2007),
or the OcuSense Stock Purchase Agreement, the Company purchased 1,754,589 shares
of OcuSense’s Series A Preferred Stock, par value $0.001 per share. The Company
paid $2,000,000 of the purchase price on the closing of the purchase and made
another $2,000,000 payment on January 3, 2007. A third $2,000,000 payment was
made in June 2007 upon the attainment by OcuSense of the first of two
pre-defined milestones, and the last $2,000,000 installment of the purchase
price will become due and payable upon the attainment by OcuSense of the second
of these two pre-defined milestones, being the successful production and testing
of Beta Lab Cards for Osmolarity and the Beta Reader for Osmolarity, or the
TearLabTM disposable and the TearLabTM reader, respectively. We anticipate that
OcuSense will attain this second milestone during the first half of
2008.





6





The
OcuSense Stock Purchase Agreement provides 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 OcuSense Stock Purchase Agreement, the Company has
agreed to purchase $3,000,000 of shares of OcuSense’s Series B Preferred Stock
upon OcuSense’s receipt from the FDA, if any, of 510(k) clearance for the
TearLabTM test for DED and to purchase another $3,000,000 of shares of OcuSense’s
Series B Preferred Stock upon OcuSense’s receipt from the FDA, if any, of a CLIA
waiver for the TearLabTM test for DED.





Current
Situation





With the
suspension of the Company’s RHEOTM System clinical development program, and the
consequent winding-down of the RHEO-AMD study, and the Company’s disposition of
SOLX, the Company no longer has any operating business. Its major asset is its
50.1% ownership stake, on a fully diluted basis, in OcuSense.





On
October 9, 2007, we announced that our Board of Directors, or the Board, had
authorized management and the Company’s advisors to explore the full range of
strategic alternatives available to enhance shareholder value. These
alternatives may include, but are not limited to, the raising of capital through
the sale of securities, one or more strategic alliances and the combination,
sale or merger of all or part of OccuLogix. In making the announcement, the
Company stated that there can be no assurance that the exploration of strategic
alternatives will result in a transaction. To date, we have not disclosed, nor
do we intend to disclose, developments with respect to our exploration of
strategic alternatives unless and until the Board, has approved a specific
transaction.





For some
time prior to the October 9, 2007 announcement, the Company had been seeking to
raise additional capital, with the objective of securing funding sufficient to
sustain its operations as it has been clear that, unless we were able to raise
additional capital, the Company would not have had sufficient cash to support
its operations beyond early 2008. The Board’s decisions to suspend the Company’s
RHEOTM System clinical development program and to dispose of SOLX were made and
implemented in order to conserve as much cash as possible while the Company
continues its capital-raising efforts.





On
January 9, 2008, we announced the departure, or pending departure, of seven
members of our executive team and, commencing on February 1, 2008, a 50%
reduction in the salary of each of Elias Vamvakas, our Chairman and Chief
Executive Officer, and Tom Reeves, our President and Chief Operating Officer. By
January 31, 2008, a total of 12 non-executive employees of the Company left the
Company’s employment.





On
February 19, 2008, we announced that the Company secured a bridge loan in an
aggregate principal amount of $3,000,000 from a number of private parties. The
loan bears interest at a rate of 12% per annum and has a 180-day term, which may
be extended to 270 days under certain circumstances. The repayment of the loan
is secured by a pledge by the Company of its shares of the capital stock of
OcuSense.





Under the
terms of the loan agreement, the Company has two pre-payment options available
to it, should it decide to not wait until the maturity date to repay the loan.
Under the first pre-payment option, the Company may repay the loan in full by
paying the lenders, in cash, the amount of outstanding principal and accrued
interest and issuing to the lenders five-year warrants in an aggregate amount
equal to approximately 19.9% of the issued and outstanding shares of the
Company’s common stock (but not to exceed 20% of the issued and outstanding
shares of the Company’s common stock). The warrants would be exercisable into
shares of the Company’s common stock at an exercise price of $0.10 per share and
would not become exercisable until the 180th day
following their issuance. Under the second pre-payment option, provided that the
Company has closed a private placement of shares of its common stock for
aggregate gross proceeds of at least $4,000,000, the Company may repay the loan
in full by issuing to the lenders shares of its common stock, in an aggregate
amount equal to the amount of outstanding principal and accrued interest, at a
15% discount to the price paid by the private placement investors. Any exercise
by the Company of the second pre-payment option would be subject to stockholder
and regulatory approval.





7





Currently,
we anticipate that the net proceeds of the loan, together with the Company’s
other cash and cash-equivalents, will be sufficient to sustain the Company’s
operations only until approximately the end of April 2008 (assuming that the
outstanding obligation of OccuLogix to pay $2,000,000 to OcuSense becomes due
and payable prior to the end of April 2008).





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 32.8% of
our outstanding common stock, or 28.9% on a fully diluted basis.
Elias Vamvakas, formerly a director of TLC Vision and its past Chairman and
CEO, became our Chairman in 2003 and is also our CEO. In addition, one of our
other directors, Richard L. Lindstrom, is also a director of TLC
Vision. One of our other directors, Thomas N. Davidson, also was a
director of TLC Vision until December 2007. Mr. Vamvakas beneficially
owns 1,041,795 common shares of TLC Vision, representing approximately
2.08% of TLC Vision’s outstanding shares. Mr. Davidson beneficially
owns 67,127 common shares of TLC Vision, representing
approximately 0.14% of TLC Vision’s outstanding shares, and
Dr. Lindstrom beneficially owns 29,500 common shares of TLC Vision,
representing approximately 0.06% of TLC Vision’s outstanding
shares.





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.





8





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. Whatever residual value exists with
respect to the RHEOTM System resides solely in OccuLogix Canada
Corp.





On June
22, 2007, TLC Vision sold 1,904,762 shares of OccuLogix’s common stock to JEGC
OCC Corp., or JEGC. JEGC is owned by Greybrook Corporation, a private equity
firm controlled by Mr. Vamvakas, and by Jefferson Equicorp Ltd., a private
equity firm controlled by David Folk, Managing General Partner of Jefferson
Partners.





Other
Major Relationships





The
components of the RHEOTM System were developed by our suppliers, Diamed and Asahi
Medical.





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.
Between September 1, 2006, the closing date of the acquisition, and December 19,
2007, the closing date of OccuLogix’s sale of SOLX to Solx Acquisition, Mr.
Adams served as an executive officer of the OccuLogix. OccuLogix paid Mr. Adams
a total of $1,615,930 and issued to him 1,309,329 shares of our common stock in
consideration of his proportionate share of the purchase price of SOLX. Until
the assumption, on December 19, 2007, by Solx Acquisition of OccuLogix’s
obligation to pay $5,000,000 to the former stockholders of SOLX on September 1,
2008 in satisfaction of the outstanding balance of the purchase price of SOLX,
Mr. Adams was owed $1,024,263by OccuLogix in
consideration of his proportionate share of the outstanding balance of the
purchase price of SOLX.





In
addition, in connection with the Company’s acquisition of SOLX, OccuLogix paid
Peter M. Adams, Doug P. Adams’ brother, a total of $371,095and 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. Until the assumption,
on December 19, 2007, by Solx Acquisition of OccuLogix’s obligation to pay
$5,000,000 to the former stockholders of SOLX on September 1, 2008 in
satisfaction of the outstanding balance of the purchase price of SOLX, OccuLogix
owed Mr. Adams $236,917 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.





On
December 19, 2007, we sold SOLX to Solx Acquisition, Inc., a company wholly
owned by Doug P. Adams. The consideration for the purchase and sale of all of
the issued and outstanding shares of the capital stock of SOLX consisted
of:  (i) on December 19, 2007, the closing date of the sale, the
assumption by Solx Acquisition of all of the liabilities of OccuLogix, as they
related to SOLX’s business, incurred on or after December 1, 2007, and
OccuLogix’s obligation to make a $5,000,000 payment to the former stockholders
of SOLX due on September 1, 2008 in satisfaction of the outstanding balance of
the purchase price of SOLX; (ii) on or prior to February 15, 2008, the payment
by Solx Acquisition of all of the expenses that OccuLogix had paid to the
closing date, as they related to SOLX’s business during the period commencing on
December 1, 2007; (iii) during the period commencing on the closing date and
ending on the date on which SOLX achieves a positive cash flow, the payment by
Solx Acquisition of a royalty equal to 3% of the worldwide net sales of the SOLX
790 Laser and the SOLX Gold Shunt, including next-generation or future models or
versions of these products; and (iv) following the date on which Solx achieves a
positive cash flow, the payment by Solx Acquisition of a royalty equal to 5% of
the worldwide net sales of these products. In order to secure the obligation of
Solx Acquisition to make these royalty payments, SOLX granted to OccuLogix a
subordinated security interest in certain of its intellectual
property.





9





Marchant
Securities Inc., or Marchant, a firm indirectly beneficially owned as to
approximately 32% by Mr. Vamvakas and members of his family, introduced the
Company to the lenders of the $3,000,000 aggregate principal amount bridge loan
that the Company secured and announced on February 19, 2008. For such service,
Marchant will be paid a commission of $180,000, being 6% of the aggregate
principal amount of the loan. Subject to obtaining any and all requisite
stockholder and regulatory approvals, half of the commission will be paid to
Marchant in the form of equity securities of the Company.





Industry
(OcuSense)





Point-of-care
Testing and Dry Eye Disease, or DED





The
global market for point-of-care testing is currently $4.5 billion annually or
15% of the $30 billion global market for in-vitro diagnostic products.
Approximately 75% of all laboratory tests today are performed at centralized
clinical laboratories. However, there is an increasing frequency of diagnostic
testing being performed at the point-of-care due to several factors, including a
need for rapid testing in acute care situations, the benefits of patient
monitoring and disease management, streamlining therapeutic decision making and
the overall trend toward personalized medicine. Advances in biodetection
technologies that can simplify and accelerate the rate of performing complex
diagnostic tests at the point-of-care, and that are reimbursed, will drive
utilization and overall point-of-care testing market growth.





OcuSense’s
first product, currently under development, is the TearLabTM test for DED which
is a test that can be performed at the point-of-care for the measurement of
osmolarity, a quantitative and highly specific biomarker that has shown to
correlate with DED. There are estimated to be more than 30 million people with
DED in the U.S. alone, and this condition is estimated to account for up to
one-third of all visits to U.S. doctors.





Each time
a person blinks, his or her eyes are resurfaced with a thin layer of a complex
fluid known as the tear film. The tear film works to protect eyes from the
outside world. Bacteria, viruses, sand, freezing winds and salt water will not
damage eyes when the tear film is intact. However, when compromised, a deficient
tear film can be an exceedingly painful and disruptive experience. The tear film
consists of three components:  (i) an innermost mucin layer (produced
by the surface cells); (ii) the aqueous layer (the water in tears, produced by
the lacrimal gland); and (iii) an oily lipid layer which limits evaporation of
the tears (produced by the meibomian glands, located at the margins of the
eyelids). The apparatus of the ocular surface forms an integrated unit. When
working correctly, the tear film presents a smooth optical surface essential for
clear vision and proper immunity. However, when the tear film is disrupted, it
leads to the condition known as DED.





DED is
often seen as a result of aging, diabetes, prostate cancer therapy, HIV,
autoimmune diseases such as Sjögren’s syndrome and rheumatoid arthritis, LASIK
surgery, contact lens wear and menopause and as a side effect of hormone
replacement therapy. Numerous commonly prescribed and over-the-counter
medications also can cause, or contribute to, the manifestation of
DED.





As an
individual’s lacrimal glands deteriorate with age or disease, the quantity of
tears is drastically reduced, resulting in an aqueous deficiency. Other forms of
DED are linked to meibomian gland (lid) dysfunction, where a patient’s tears
evaporate so quickly that he or she is unable to retain any moisture on the
surface of his or her eye. The end effect in both cases, aqueous deficiency and
evaporative dry eye, is a very debilitating condition that results in pain,
decreased vision and, in severe cases, even blindness. Consequently, DED has a
significant negative impact on one’s quality of life.





10





There are
approximately 15 million Americans who suffer from contact lens-induced DED, and
10-15% of these patients revert to frame wear annually due to dryness and
discomfort. There are approximately 1.2 million LASIK procedures performed in
the U.S each year, and about 50% of patients experience DED post-operatively.
Osmolarity testing could provide optometrists with a tool to identify patients
at risk for dropping out of contact lens wear early in disease progression so
that they may be treated, and osmolarity testing could be an invaluable
pre-operative screen used to determine which LASIK patients should be treated
prior to surgery in order to improve post-operative outcomes.





Diagnostic
Alternatives for DED





Existing
diagnostic assays are highly subjective, do not correlate well with symptoms,
are invasive for patients and may require up to an hour of operator time to
perform. All of these factors have constrained the diagnosis and treatment of
the DED patient population. As physicians have not had access to objective,
quantitative diagnostic assays that correlate well with symptoms and disease
pathogenesis, it has been difficult for them to differentiate DED symptoms from
other eye diseases that present with very similar symptoms, such as
non-infectious ocular allergies or infectious bacterial or viral diseases. To
treat DED effectively and to mitigate the emotional and physical effects of this
disease, it will be critical to equip physicians with objective, quantitative
measurements of disease pathogenesis so they can determine more accurately the
most efficacious treatments for their patients.





DED
presents itself as an increase in the salt concentration of the tear film. For
approximately 50 years, studies have shown that tear film osmolarity is an ideal
clinical marker for diagnosing DED, because it provides an objective,
quantitative measurement of disease pathogenesis. Moreover, measuring osmolarity
could serve as an effective disease management tool by providing physicians with
an ability to personalize therapeutic intervention and to track patient outcomes
quantitatively. However, measuring tear biomarkers, such as osmolarity, at the
point-of-care requires a reduction in sample volume to the nanoliter scale in
order to mitigate the risk of reflex tearing, which results in a dilution of the
tear sample and a variability in the test results. Moreover, a point-of-care
system in the U.S. market most likely would require a CLIA waiver classification
in order to gain broad market adoption since most U.S. eye care practitioners do
not possess CLIA certification for their offices. In order to be given CLIA
waiver classification, the user interface of the test would have to be extremely
simple in order to minimize the likelihood of operator error and the risk of
harm to the patient. Conventional technologies for the measurement of osmolarity
are not suitable for the point-of-care market as they are too expensive, too
complex for CLIA waiver classification and unable to measure precisely tear film
osmolarity in nanoliter sample volumes. OcuSense is striving to meet the needs
of the point-of-care market with the TearLabTM test for DED.





Existing
osmometry technologies have proven unable to measure consistently tear samples
in the low nanoliter range, which has presented a critical barrier to their
entry into the DED diagnostic markets. In addition, these instruments are not
particularly suitable for use in a physician’s office, since they require
continual calibration, cleaning and maintenance. Existing osmometers currently
are marketed primarily to reference and hospital laboratories for the
measurement of osmolarity in blood, urine and other serum samples.




11





OcuSense’s
Product





OcuSense’s
first product, the TearLabTM test for DED, which is currently under development,
is an integrated testing system comprised of:  (1) the TearLabTM
disposable, which is a single-use microfluidic labcard; (2) the TearLabTM pen,
which is a hand-held device that interfaces with the TearLabTM disposable; and
(3) the TearLabTM reader, which is a small desktop unit that allows for the
docking of the TearLabTM disposable and the TearLabTM pen and provides a
quantitative reading for the operator. The anticipated innovation of the
TearLabTM test for DED will be its ability to measure precisely and rapidly, and
inexpensively, certain biomarkers in nanoliter volumes of tear samples. Current
in-lab testing technologies require a minimum of one microliter volume tear film
sample, or approximately 10 to 100 times more than the tear film volume
typically available before reflex tearing occurs.





The
operator of the TearLabTM test for DED, most likely a technician, will collect
the tear sample from the patient’s eye in the TearLabTM disposable, using the
TearLabTM pen, and then place the TearLabTM disposable into the TearLabTM reader.
The TearLabTM reader then will display an osmolarity reading to the operator.
Following the completion of the test, the TearLabTM disposable will be discarded
and a new TearLabTM disposable will be readied for the next test. The entire
process, from sample to answer, should require approximately two minutes or less
to complete.





OcuSense
is currently engaged in industrial, electrical and software design efforts for
the three components of the TearLabTM test for DED and, to these ends, is working
with two engineering 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. In June 2007, OcuSense successfully produced
and tested Alpha prototypes of the TearLabTM disposable, pen and reader in order
to demonstrate the viability of the integrated system. OcuSense is working to
achieve the successful production and testing of Beta prototypes of the TearLabTM
disposable, pen and reader in order to validate system performance further and
to prepare for commercial manufacturing. We anticipate that this milestone will
be attained during the first half 2008.





OcuSense’s
objective is to complete product development of the TearLabTM test for DED during
the first half of 2008. 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 DED. Currently, it
anticipates seeking the 510(k) clearance during the latter half of 2008 and the
CLIA waiver during the latter half of 2009.In addition, OcuSense
intends to seek CE Mark approval for the TearLabTM test for DED during the latter
half of 2008.





In
December 2007, OcuSense entered into a research agreement with a large
ophthalmic company, pursuant to which that company is sponsoring OcuSense’s
clinical studies of the TearLabTM test for DED. Pursuant to this research
agreement, that company has paid for the future acquisition of a number of units
of the beta version of the TearLabTM test for DED and has secured limited
exclusive access to the beta version of the TearLabTM test for DED until OcuSense
obtains a 510(k) clearance for it from the FDA.





Competition
(OcuSense)





To date,
OcuSense has identified one emerging technology that claims to be able to
measure the osmolarity of nanoliter tear samples. This technology is being
developed at the Aborn Eye Clinic in New York. Based on patent claims, it would
appear that this technology uses surface plasmon resonance, an optical
technology, to measure tear film osmolarity.





As there
are no commercially available instruments to measure tear film osmolarity at the
point-of-care, OcuSense views existing DED diagnostic tests, such as the
Schirmer Test and ocular surface staining, as its primary source of
competition.





12





Tear film
break-up time, or TBUT, is another assay meant as an indication of tear film
stability.  However, it is subjective, requires a physician to instill
a carefully controlled amount of fluorescein dye into the eye and requires a
stopwatch to determine the endpoint. TBUT has been shown to be unreliable as a
determinant of DED since shortened TBUT doesn’t always correlate well with other
signs or symptoms.





Tests
like impression cytology and corneal staining, although indicative of relatively
late stage phenomena in DED, are subjective, qualitative and generally don’t
correlate to disease pathogenesis.  The Schirmer Test is an imprecise
marker of tear function since its diagnostic results vary
significantly.





Although,
at the present time, there does not appear to be a direct competitor to the
TearLabTM test for DED, many industry participants have much greater resources
than OcuSense has, thus enabling them, among other things, to make greater
research and development investments, and to make more significant investments
in marketing, promotion and sales, than OcuSense is capable of right now or will
be capable of during the foreseeable future.





Patents
and Proprietary Rights (OcuSense)





OcuSense
owns or has exclusive licenses to five U.S. patents relating to the TearLabTM
test for DED and related technology and processes and has applied for a number
of other patents in the United States and other jurisdictions.





OcuSense
intends to rely on know-how, continuing technological innovation and
in-licensing opportunities to develop further its proprietary position.
OcuSense’s ability to obtain intellectual property protection for the TearLabTM
test for DED and related technology and processes, and its ability to operate
without infringing the intellectual property rights of others and to prevent
others from infringing its intellectual property rights, will have a substantial
impact on its ability to succeed in its business. Although OcuSense intends to
seek to protect its proprietary position by, among other methods, continuing to
file patent applications, the patent position of companies like OcuSense is
generally uncertain and involves complex legal and factual questions. OcuSense’s
ability to maintain and solidify a proprietary position for its technology will
depend on its success in obtaining effective claims and enforcing those claims
once granted. Neither OcuSense nor we know whether any part of its patent
applications will result in the issuance of any patents. Its issued patents or
those that may issue in the future, or those licensed to OcuSense, may be
challenged, invalidated or circumvented, which could limit OcuSense’s ability to
stop would-be competitors from marketing tests identical to the TearLabTM test
for DED.





In
addition to patent protection, OcuSense has registered the TearLabTM trademark in
the U.S.





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 OcuSense’s product, which
is a medical device. In the United States, the FDA regulates medical devices
under the Federal Food, Drug, and Cosmetic Act and implementing regulations.
Failure to comply with the applicable FDA requirements, both before and after
approval, may subject us to administrative and judicial sanctions, such as a
delay in approving or refusal by the FDA to approve pending applications,
warning letters, product recalls, product seizures, total or partial suspension
of production or distribution, injunctions, administrative fines and/or criminal
prosecution.





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





13





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 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
TearLabTM test for DED is a Class I, non-exempt device and qualifies for the
510(k) procedure.





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 of the user other than the requirement to
follow the manufacturer’s labeling and directions for use.





We cannot
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 DED.





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.





14




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





On
December 31, 2007, we had 24 full-time employees. Of our full-time workforce at
that time, 12 employees were engaged in clinical trial activities and 12 were
engaged in business development, finance and administration. With the suspension
of the Company’s RHEO System clinical development program, and the consequent
winding-down of the RHEO-AMD study, and the Company’s disposition of SOLX, the
Company has reduced its workforce considerably. At the present time, we have 7
full-time employees. However, we continue to retain outside consultants, some of
whom are our former employees. None of our employees are covered by collective
bargaining arrangements, and our management considers its relationship with our
employees to be good.





We
continue to rely on the resources of one of our major stockholders, TLC Vision,
to provide us with infrastructure support.





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, 2007, 2006 and 2005. The
Company’s working capital deficiency at December 31, 2007 is $996,862, which
represents a $14,535,888 reduction in its working capital of $13,539,026 at
December 31, 2006. As a result of the Company’s history of losses and current
financial condition, there is substantial doubt about the Company’s ability to
continue as a going concern.





The
Company realized gross proceeds of $10,016,000 (less transaction costs of
$871,215) on February 6, 2007 from the private placement of shares of its common
stock and warrants. Management believed that these proceeds, together with the
Company’s then existing cash, would be only sufficient to cover its operating
activity and other demands until early 2008. On February 19, 2008, the Company
secured a bridge loan in an aggregate principal amount of $3,000,000 from a
number of private parties and, taking into account transactions costs of
approximately $200,000, realized net proceeds of approximately $2,800,000. The
loan bears interest at a rate of 12% per annum and has a 180-day term, which may
be extended to 270 days under certain circumstances. The repayment of the loan
is secured by a pledge by OccuLogix of its shares of the capital stock of
OcuSense. Management believes that these net proceeds, together with the
Company’s existing cash and cash-equivalents, will be sufficient to cover its
operating activities and other demands only until approximately the end of April
2008 (assuming that the outstanding obligation of OccuLogix to pay $2,000,000 to
OcuSense becomes due and payable prior to the end of April 2008).





15





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, 2007, 2006, 2005, 2004 and 2003 was $68.1
million, $82.2 million, $162.8 million, $21.8 million and $2.5 million,
respectively. The losses in 2007, 2006 and 2005 include a charge for impairment
of goodwill of $14.4 million, $65.9 million and $147.5 million, respectively. As
of December 31, 2007, we had an accumulated deficit of $356.6 million. These
losses, among other things, have had and will continue to have an adverse effect
on our stockholders’ equity and working capital. We remain indebted to OcuSense
in an aggregate amount of $2 million for the outstanding portion of the purchase
price of the capital stock of OcuSense that we acquired on November 30, 2006.
Currently, we anticipate that that amount will become due and payable during the
first half of 2008. 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 DED and another additional equity investment
of $3 million upon receipt, if any, from the FDA of a CLIA waiver for the
TearLabTM test for DED. Because of the numerous risks and uncertainties facing
us, we are unable to predict the extent of any future losses or when we will
become profitable, if ever, or even if we will be able to continue as a going
concern.





We
may not be able to raise the capital 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, a private placement of shares of our common stock and warrants
on February 6, 2007 and, most recently, on February 19, 2008, a bridge loan.
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. On
October 9, 2007, we announced that the Board had authorized management and the
Company’s advisors to explore the full range of strategic alternatives available
to enhance shareholder value, including, but not limited to, the raising of
capital through the sale of securities, one or more strategic alliances and the
combination, sale or merger of all or part of the Company. For some time prior
to the October 9, 2007 announcement, the Company had been seeking to raise
additional capital, with the objective of securing funding sufficient to sustain
its operations as it had been clear that, unless we were able to raise
additional capital, the Company would not have had sufficient cash to support
its operations beyond early 2008. Although the Company secured a bridge loan in
an aggregate principal amount of $3,000,000 from a number of private parties on
February 19, 2008, management believes that these net proceeds, together with
the Company’s existing cash and cash-equivalents, will be sufficient to cover
its operating activities and other demands only until approximately the end of
April 2008 (assuming that the outstanding obligation of OccuLogix to pay
$2,000,000 to OcuSense becomes due and payable prior to the end of April 2008).
Additional capital may not be available on terms favorable to us, or at all. In
addition, future financings could result in significant dilution of existing
stockholders. However, unless we succeed in raising additional capital, we will
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.”





16




We
no longer operate any business.





With the
suspension of the Company’s RHEOTM System clinical development program, and the
consequent winding-down of the RHEO-AMD study, and the Company’s disposition of
SOLX, the Company no longer has any operating business. Its major asset is its
50.1% ownership stake, on a fully diluted basis, in OcuSense. Accordingly,
unless we acquire other businesses (which, in light of the Company’s financial
condition, is unlikely to occur), our ability to generate any revenues will be
dependent almost entirely upon the success of OcuSense.





The
Company’s major asset is encumbered.





The
repayment of the bridge loan, in the aggregate principal amount of $3,000,000,
which the Company secured on February 19, 2008 from a number of private parties,
is secured by a pledge by OccuLogix of its shares of the capital stock of
OcuSense. If the Company fails to repay this loan and accrued interest by the
loan’s maturity date, which will occur on the 180th day
following February 19, 2008 or, under certain circumstances, the 270th day
following February 19, 2008, the lenders may realize upon their collateral and
seize OccuLogix’s shares of the capital of OcuSense, thus causing the Company to
lose its major asset. Accordingly, the Company may lose its major asset unless
it succeeds in raising additional capital in an amount sufficient to repay the
loan and accrued interest by the loan’s maturity date—which the Company is
permitted to do through a sale of the collateral, provided that the sale
generates proceeds in an amount sufficient to repay the loan and accrued
interest if full.





The
$3,000,000 aggregate principal amount bridge loan represents a significant
dilution risk for existing stockholders.





Under the
terms of the loan agreement pursuant to which the Company secured a bridge loan,
in the aggregate principal amount of $3,000,000, on February 19, 2008 from a
number of private parties, the Company has two pre-payment options available to
it, should it decide to not wait until the maturity date to repay the loan.
Under the first pre-payment option, the Company may repay the loan in full by
paying the lenders, in cash, the amount of outstanding principal and accrued
interest and issuing to the lenders five-year warrants in an aggregate amount
equal to approximately 19.9% of the issued and outstanding shares of the
Company’s common stock (but not to exceed 20% of the issued and outstanding
shares of the Company’s common stock). The warrants would be exercisable into
shares of the Company’s common stock at an exercise price of $0.10 per share and
would not become exercisable until the 180th day
following their issuance. Under the second pre-payment option, provided that the
Company has closed a private placement of shares of its common stock for
aggregate gross proceeds of at least $4,000,000, the Company may repay the loan
in full by issuing to the lenders shares of its common stock, in an aggregate
amount equal to the amount of outstanding principal and accrued interest, at a
15% discount to the price paid by the private placement investors. An exercise
by the Company of either pre-payment option will result in significant dilution
of the holdings of existing stockholders. Any exercise by the Company of the
second pre-payment option would be subject to stockholder and regulatory
approval.





OcuSense
will face challenges in bringing the TearLabTM test for DED to market and may not
succeed in executing its business plan.





At the
present time, OcuSense is relying almost entirely on OccuLogix to fund its
business. Following the payment by OccuLogix of $2,000,000 upon OcuSense’s
successful production and testing of the beta version of the TearLabTM test for
DED, there can be no assurance that OccuLogix will be a reliable source of
future funding for OcuSense, notwithstanding its agreement to purchase
$3,000,000 of shares of OcuSense’s Series B Preferred Stock upon OcuSense’s
receipt from the FDA, if any, of 510(k) clearance for the TearLabTM test for DED
and to purchase another $3,000,000 of shares of OcuSense’s Series B Preferred
Stock upon OcuSense’s receipt from the FDA, if any, of a CLIA waiver for the
TearLabTM test for DED.





17





There are
numerous risks and uncertainties inherent in the development of new medical
technologies. In addition to OcuSense’s eventual requirement for additional
capital, OcuSense’s ability to bring the TearLabTM test for DED to market and to
execute its business plan successfully is subject to the following risks, among
others:





·
            OcuSense’s
      clinical trials may not succeed. Clinical testing is expensive and can
      take longer than originally anticipated. The outcomes of clinical trials
      are uncertain, and failure can occur at any stage of the testing. OcuSense
      could encounter unexpected problems, which could result in a delay in the
      submission of its applications for the sought-after FDA approvals or
      prevent their submission
altogether.





·
            OcuSense
      may not receive either the 510(k) clearance or the CLIA waiver for the
      TearLabTM test for DED that it will be seeking from the FDA, in which case
      OcuSense’s ability to market the TearLabTM test for DED in the United
      States will be hindered severely, if not eliminated
      altogether.





·
            OcuSense
      and its suppliers will be subject to numerous FDA requirements covering
      the design, testing, manufacturing, quality control, labeling,
      advertising, promotion and export of the TearLabTM test for DED and other
      matters. If OcuSense or its suppliers fail to comply with these regulatory
      requirements, the TearLabTM System could be subject to restrictions or
      withdrawals from the market and OcuSense could become subject to
      penalties.





·
            Even
      if it succeeds in obtaining the sought-after FDA approvals, OcuSense may
      be unable to commercialize the TearLabTM test for DED successfully in the
      United States. Successful commercialization will depend on a number of
      factors, including, among other things, achieving widespread acceptance of
      the TearLabTM test for DED among physicians, establishing adequate sales
      and marketing capabilities, addressing competition effectively, the
      ability to obtain and enforce patents to protect proprietary rights from
      use by would-be competitors, key personnel retention and ensuring
      sufficient manufacturing capacity and inventory to support
      commercialization plans.





OcuSense’s
patents may not be valid, and OcuSense may not be able to obtain and enforce
patents to protect its proprietary rights from use by would-be competitors.
Patents of other companies could require OcuSense to stop using or pay to use
required technology.





OcuSense’s
owned and licensed patents may not be valid, and it may not be able to obtain
and enforce patents and to maintain trade secret protection for its technology.
The extent to which OcuSense is unable to do so could materially harm its
business.





OcuSense
has applied for, and intends to continue to apply for, patents relating to the
TearLabTM test for DED and related technology and processes. Such applications
may not result in the issuance of any patents, and any patents now held or that
may be issued may not provide adequate protection from competition. Furthermore,
it is possible that patents issued or licensed to OcuSense may be challenged
successfully. In that event, if OcuSense has a preferred competitive position
because of any such patents, any preferred position held by OcuSense would be
lost. If OcuSense is unable to secure or to continue to maintain a preferred
position, the TearLabTM test for DED could become subject to competition from the
sale of generic products.





Patents
issued or licensed to OcuSense may be infringed by the products or processes of
others. The cost of enforcing patent rights against infringers, if such
enforcement is required, could be significant and the time demands could
interfere with OcuSense’s 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. OcuSense could become a party to patent litigation and other
proceedings. The cost to it of any patent litigation, even if resolved in its
favor, could be substantial. Some of OcuSense’s would-be competitors may be able
to sustain the costs of such litigation more effectively than it can because of
their substantially greater financial resources. Litigation may also absorb
significant management time.





18





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





Certain
of OcuSense’s patent rights are licensed to it by third parties. If OcuSense
fails to comply with the terms of these license agreements, its rights to those
patents may be terminated, and OcuSense will be unable to conduct its
business.





It is
possible that a court may find OcuSense 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, OcuSense may have to pay license fees
and/or damages and 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.





Our
common stock may be delisted from The Nasdaq Global Market.





On
September 18, 2007, OccuLogix received a letter from The Nasdaq Stock Market, or
Nasdaq, indicating that, for the previous 30 consecutive business days, the bid
price of the Company’s common stock closed below the minimum $1.00 per share
requirement for continued inclusion under Marketplace Rule 4450(e)(5), or the
Minimum Bid Price Rule. Therefore, in accordance with Marketplace Rule
4450(e)(2), the Company was provided 180 calendar days, or until March 17, 2008,
to regain compliance. The Nasdaq letter stated that, if, at any time before
March 17, 2008, the bid price of the Company’s common stock closes at $1.00 per
share or more for a minimum of 10 consecutive business days, Nasdaq staff will
provide written notification that it has achieved compliance with the Minimum
Bid Price Rule. The Nasdaq letter also stated that, if the Company does not
regain compliance with the Minimum Bid Price Rule by March 17, 2008, Nasdaq
staff will provide written notification that the Company’s securities will be
delisted, at which time the Company may appeal the Nasdaq staff’s determination
to delist its securities to a Nasdaq Listing Qualifications Panel.





On
February 1, 2008, OccuLogix received a letter from Nasdaq indicating that, for
the previous 30 consecutive trading days, the Company’s common stock did not
maintain a minimum market value of publicly held shares of $5,000,000 as
required for continued inclusion by Marketplace Rule 4450(a)(2), or the MVPHS
Rule. Therefore, in accordance with Marketplace Rule 4450(e)(1), the Company was
provided 90 calendar days, or until May 1, 2008, to regain compliance. The
Nasdaq letter stated that, if at any time before May 1, 2008, the minimum market
value of publicly held shares of the Company’s common stock is $5,000,000 or
greater for a minimum of ten consecutive trading days, Nasdaq staff will provide
written notification that the Company complies with the MVPHS Rule. The Nasdaq
letter also stated that, if the Company does not regain compliance with the
MVPHS Rule by May 1, 2008, Nasdaq staff will provide written notification that
the Company’s securities will be delisted, at which time the Company may appeal
the Nasdaq staff’s determination to delist its securities to a Nasdaq Listing
Qualifications Panel.





The
Company will not have become compliant with the Minimum Bid Price Rule by March
17, 2008. Although we intend to appeal any determination by Nasdaq staff to
delist our common stock to a Nasdaq Listing Qualifications Panel, we may not be
successful in our appeal, in which case our common stock may be transferred to
The Nasdaq Capital Market or be delisted altogether. Should either occur,
existing stockholders will suffer decreased liquidity.





19




OcuSense
and we may face future product liability claims.





The
testing, manufacturing, marketing and sale of therapeutic and diagnostic
products entail significant inherent risks of allegations of product liability.
Our past use of the RHEOTM System and the components of the SOLX Glaucoma System
in clinical trials and the commercial sale of those products may have exposed us
to potential liability claims. OcuSense’s future use of the TearLabTM test for
DED and its commercial sale could expose it to liability claims also. All of
such claims might be made directly by patients, health care providers or others
selling the products. We carry clinical trials and product liability insurance
to cover certain claims that could arise, or that could have arisen, 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. Such coverage, and any coverage obtained
in the future, may be inadequate to protect OcuSense or us in the event of
successful product liability claims, and neither OcuSense nor we may 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 result in the incurrence of
large expenditures and the diversion of significant resources.





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 32.8%of our outstanding
common stock, or 28.9%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.





Conflicts
of interest may arise between us and TLC Vision, which, until December 2007, had
two directors on our board and currently has one director on our board. Our
Chief Executive Officer and Chairman served as Chairman of TLC Vision until June
2006.





TLC
Vision beneficially owns approximately 32.8% of our outstanding common stock, or
28.9% on a fully diluted basis. Our director, Richard Lindstrom, is also a
director of TLC Vision. Until June 2007 and December 2007, respectively, our
directors, Elias Vamvakas and Thomas Davidson, also served as directors of TLC
Vision. Mr. Vamvakas beneficially owns 1,041,795 common shares of TLC
Vision, representing approximately 2.08% of TLC Vision’s outstanding
shares. Mr. Davidson beneficially owns 67,127 common shares of TLC Vision,
representing approximately 0.14% of TLC Vision’s outstanding shares, and
Dr. Lindstrom beneficially owns 29,500 common shares of TLC Vision,
representing approximately 0.06% of TLC Vision’s outstanding shares. Because Dr.
Lindstrom is a director 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.





20




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.





21





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, between February 1, 2006 to July 31, 2007, leased them from
Penyork Properties III Inc. Since August 1, 2007, we have been leasing them from
2600 Skymark Investments Inc., the successor in interest to Penyork Properties
III Inc. The facility presently consists of approximately 6,600 square feet of
office space utilized for management personnel. Our current arrangement expires
on July 31, 2010. Our current monthly lease obligation for rent for this
facility is approximately C$13,283. The future minimum obligation under this
lease is C$159,390 for 2008. TLC Vision has advised us that it does not have any
ownership interest in our current headquarters.





We also
leased 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 was formerly our Vice President, Operations, and records. The
facility consisted 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,
2007 and has not been renewed. Our monthly lease obligation for rent for this
facility was approximately $2,168. The future minimum obligation under this
lease is therefore nil for 2008. The landlord under this lease was Cornish
Properties, which is owned by Mr. Cornish. Mr. Cornish was also one of our
directors from April 1997 to September 2004.





In
addition, OcuSense leases office space in facilities owned by parties unrelated
to us. The total future minimum obligation under these leases is $40,851 for
2008.





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 2007 fiscal year to a
vote of security holders, through the solicitation of proxies or
otherwise.





22





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 (“NASDAQ”) under the symbol
“OCCX” and the Toronto Stock Exchange (“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
      2007
            
            
            Fiscal
      2006High
            
            
            Low
            
            
            High
            
            
            LowNASDAQFirst
      Quarter
            
            $
            1.98
            
            
            $
            1.48
            
            
            $
            12.85
            
            
            $
            3.25Second
      Quarter
            
            
            1.68
            
            
            
            0.76
            
            
            
            3.70
            
            
            
            1.86Third
      Quarter
            
            
            1.20
            
            
            
            0.57
            
            
            
            2.90
            
            
            
            1.56Fourth
      Quarter
            
            
            0.62
            
            
            
            0.08
            
            
            
            2.68
            
            
            
            1.55TSXFirst
      Quarter
            
            $
            C2.35
            
            
            $
            C1.75
            
            
            $
            C14.99
            
            
            $
            C3.76Second
      Quarter
            
            
            1.82
            
            
            
            0.90
            
            
            
            4.33
            
            
            
            2.12Third
      Quarter
            
            
            1.25
            
            
            
            0.57
            
            
            
            3.00
            
            
            
            1.69Fourth
      Quarter
            
            
            0.57
            
            
            
            0.07
            
            
            
            3.00
            
            
            
            1.80





The
closing share price for our Common Stock on March 13, 2008 as reported by
NASDAQ, was $0.07. The closing share price for our Common Stock on March 13,
2008, as reported by TSX was C$0.08.





As of
March 13, 2008, there were approximately 92 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
February 6, 2007, we issued an aggregate of 6,677,333 shares of Common Stock and
2,670,933 five-year stock purchase warrants to certain institutional investors
for gross cash proceeds of $10,016,000 (less transaction costs of $871,215). 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
aforementioned issuances of securities, on February 6, 2007, we also issued
93,483 five-year stock purchase warrants to Cowen and Company, LLC.





On June
25, 2007, we issued an aggregate of 2,250 shares of Common Stock to
Carol Jones 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”), and Rule 506 of Regulation
D promulgated thereunder.





23





ITEM
      6.
            SELECTED
      FINANCIAL DATA.





The
following tables set forth our selected historical consolidated financial data
for the years ended December 31, 2007, 2006, 2005, 2004 and 2003 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, 2004 and 2003. 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 31,2003
            
            
            2004
            
            
            2005(ii)
            
            
            2006(i)(ii)
            
            
            2007(in
      thousands except per share amounts)Consolidated
      Statements of Operations Data:RevenueRevenue
      from related parties
            
            $
            390
            
            
            $
            732
            
            
            $
            81
            
            
            $
            —
            
            
            $
            —Revenue
      from unrelated parties
            
            
            —
            
            
            
            238
            
            
            
            1,759
            
            
            
            174
            
            
            
            92Total
      revenue
            
            
            390
            
            
            
            970
            
            
            
            1,840
            
            
            
            174
            
            
            
            92Cost
      of goods soldCost
      of goods sold to related parties
            
            
            373
            
            
            
            689
            
            
            
            43
            
            
            
            —
            
            
            
            —Cost
      of goods sold to unrelated parties
            
            
            —
            
            
            
            134
            
            
            
            3,251
            
            
            
            3,429
            
            
            
            2,298Royalty
      costs
            
            
            109
            
            
            
            135
            
            
            
            100
            
            
            
            100
            
            
            
            100Gross
      margin (loss)
            
            
            (92
            )
            
            
            12
            
            
            
            (1,554
            )
            
            
            (3,355
            )
            
            
            (2,306
            )Operating
      expensesGeneral
      and administrative
            
            
            1,565
            
            
            
            17,530
            
            
            
            8,670
            
            
            
            8,407
            
            
            
            7,374Clinical
      and regulatory
            
            
            731
            
            
            
            3,995
            
            
            
            5,168
            
            
            
            4,922
            
            
            
            8,676Sales
      and marketing
            
            
            —
            
            
            
            220
            
            
            
            2,165
            
            
            
            1,625
            
            
            
            1,413Impairment
      of goodwill
            
            
            —
            
            
            
            —
            
            
            
            147,452
            
            
            
            65,946
            
            
            
            —Impairment
      of intangible asset
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            20,923Restructuring
      charges
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            820
            
            
            
            1,3132,296
            
            
            
            21,745
            
            
            
            163,455
            
            
            
            81,720
            
            
            
            39,699Other
      income (expense)
            
            
            (82
            )
            
            
            (110
            )
            
            
            1,536
            
            
            
            1,544
            
            
            
            3,640Loss
      from continuing operations before income taxes
            
            
            (2,470
            )
            
            
            (21,843
            )
            
            
            (163,473
            )
            
            
            (83,531
            )
            
            
            (38,365
            )Recovery
      of income taxes
            
            
            —
            
            
            
            24
            
            
            
            643
            
            
            
            2,888
            
            
            
            5,655Loss
      from continuing operations
            
            
            (2,470
            )
            
            
            (21,819
            )
            
            
            (162,830
            )
            
            
            (80,643
            )
            
            
            (32,710
            )Loss
      from discontinued operations
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (1,542
            )
            
            
            (35,429
            )Net
      loss for the year
            
            $
            (2,470
            )
            
            $
            (21,819
            )
            
            $
            (162,830
            )
            
            $
            (82,185
            )
            
            $
            (68,139
            )Per
      Share Data:Loss
      from continuing operations per share — basic and diluted
            
            $
            (0.62
            )
            
            $
            (2.96
            )
            
            $
            (3.88
            )
            
            $
            (1.79
            )
            
            $
            (0.58
            )Loss
      from discontinued operations per share — basic and diluted
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (0.04
            )
            
            
            (0.62
            )Net
      loss per share — basic and diluted
            
            $
            (0.62
            )
            
            $
            (2.96
            )
            
            $
            (3.88
            )
            
            $
            (1.83
            )
            
            $
            (1.20
            )Weighted
      average number of shares used in per share calculations — basic and
      diluted
            
            
            3,977
            
            
            
            7,370
            
            
            
            41,931
            
            
            
            44,980
            
            
            
            56,628








(i)
            The
      comparative figures for the year ended December 31, 2006 have been
      reclassified to reflect the effect of discontinued
    operations.





(ii)
            The
      comparative figures for the years ended December 31, 2006 and 2005 have
      been corrected to reflect the Company’s accounting for stock options
      issued to non-employees that were subject to performance
      conditions.





24




As at December 31,2003
            
            
            2004
            
            
            2005(ii)
            
            
            2006(i)(ii)
            
            
            2007(in
      thousands)Consolidated
      Balance Sheet Data:Cash
      and cash equivalents of
      continuing operations
            
            $
            1,237
            
            
            $
            17,531
            
            
            $
            9,600
            
            
            $
            5,705
            
            
            $
            2,236Cash
      and cash equivalents of discontinued operations
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            36
            
            
            
            —Short-term
      investments
            
            
            —
            
            
            
            42,500
            
            
            
            31,663
            
            
            
            9,785
            
            
            
            —Working
      capital (deficiency) of
      continuing operations
            
            
            (2,538
            )
            
            
            58,073
            
            
            
            44,415
            
            
            
            13,407
            
            
            
            (997
            )Working
      capital (deficiency) of discontinued operations
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            132
            
            
            
            —Totalassets of continuing
      operations
            
            
            1,868
            
            
            
            301,601
            
            
            
            137,806
            
            
            
            46,246
            
            
            
            9,998Total
      assets of discontinued operations
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            44,158
            
            
            
            —Long-term
      debt (including current portion due to stockholders)
            
            
            3,694
            
            
            
            517
            
            
            
            158
            
            
            
            152
            
            
            
            33Other
      long-term obligations (including amount classified as current portion of
      other liability)
            
            
            ―
            
            
            
            ―
            
            
            
            ―
            
            
            
            6,421
            
            
            
            —Total
      liabilities of
      continuing operations
            
            
            4,134
            
            
            
            13,502
            
            
            
            11,765
            
            
            
            16,425
            
            
            
            4,099Total
      liabilities of discontinued operations
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            11,574Minority
      interest
            
            
            ―
            
            
            
            ―
            
            
            
            ―
            
            
            
            1,185
            
            
            
            —Common
      stock
            
            
            5
            
            
            
            42
            
            
            
            42
            
            
            
            51
            
            
            
            57Series
      A Convertible Preferred Stock
            
            
            2
            
            
            
            ―
            
            
            
            ―
            
            
            
            ―
            
            
            
            ―Series
      B Convertible Preferred Stock
            
            
            1
            
            
            
            ―
            
            
            
            ―
            
            
            
            ―
            
            
            
            ―Additional
      paid-in capital
            
            
            23,915
            
            
            
            336,064
            
            
            
            336,836
            
            
            
            354,191
            
            
            
            362,403Accumulated
      deficit
            
            
            (26,188
            )
            
            
            (48,007
            )
            
            
            (210,837
            )
            
            
            (293,022
            )
            
            
            (356,561
            )Total
      stockholders’ equity (deficiency)
            
            
            (2,266
            )
            
            
            288,098
            
            
            
            126,041
            
            
            
            61,220
            
            
            
            5,899








(i)
            The
      balance sheet as at December 31, 2006 has been reclassified to reflect the
      assets and liabilities of discontinued
  operations.





(ii)
            The
      comparative figures as at December 31, 2006 and 2005 have been corrected
      to reflect the Company’s accounting for stock options issued to
      non-employees that were subject to performance
  conditions.





25





ITEM
      7.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS





The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and related notes, included in Item 8 of this Form 10-K. Unless
otherwise specified, all dollar amounts are U.S. dollars.





Overview





We are an
ophthalmic therapeutic company founded to commercialize innovative treatments
for age-related eye diseases. Until recently, the Company operated two business
divisions, being Retina and Glaucoma. Until recently, the Company’s Retina
division was in the business of developing and commercializing a treatment for
dry age-related macular degeneration, or Dry AMD. 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 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 light
of the MIRA-1 study results, we also 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.  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.





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.





However,
on November 1, 2007, the Company announced the indefinite suspension of its
RHEOTM System clinical development program. This decision was made following a
comprehensive review of the respective costs and development timelines
associated with the products in the Company’s portfolio and in light of the
Company’s financial position. Between January 29, 2007 and November 1, 2007, the
Company had prepared the RHEO-AMD protocol and had been putting into place all
of the resources required for the conduct for the RHEO-AMD study, including the
securing of clinical trial site commitments. The Company is in the process of
winding down the RHEO-AMD study as there is no reasonable prospect that the
RHEOTM System clinical development program will be relaunched in the foreseeable
future. Subsequent to our fiscal 2007 year-end, as of February 25, 2008, we have
terminated our relationship with Asahi Kasei Kuraray Medical Co., Ltd. (formerly
Asahi Kasei Medical Co., Ltd.), or Asahi Medical. Asahi Medical manufactures,
and supplied us with, the Rheofilter filter and the Plasmaflo filter, both of
which are key components of the RHEOTM System. We also are engaged in discussions
with Diamed Medizintechnik GmbH, or Diamed, and MeSys GmbH, or MeSys, regarding
the termination of our relationship with each of them.  Diamed is the
designer, and MeSys is the manufacturer, of the OctoNova pump, another key
component of the RHEOTM System.





26





As a
result of the announcement on February 3, 2006, the per share price of our
common stock as traded on the NASDAQ Global 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.





We
considered our announcement of the indefinite suspension of the Company’s RHEOTM
System clinical development program for Dry AMD to be a significant event which
may affect the carrying value of our intangible assets. This led to an analysis
of our intangible assets and resulted in our reporting an impairment charge to
intangible assets of $20,923,028 during the third quarter of 2007. We also
believe that we may not be able to sell or utilize the components of the RHEOTM
System prior to their expiration dates or before the technologies become
outdated, as the case may be. Accordingly, we set up a provision for
obsolescence of $2,782,494 for treatment sets and OctoNova pumps that are
unlikely to be utilized prior to their expiration dates, in the case of
treatment sets, or before the technologies become outdated. In addition, we have
recorded a reduction to the carrying values of (i) certain of our medical
equipment used in the clinical trials of the RHEOTM System of $431,683 and
(ii) certain of our patents and trademarks related to the RHEOTM System of
$190,873. No other adjustments were made as a result of the November 1, 2007
announcement that impacts the financial results as of December 31,
2007.





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.





27





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. In addition, based on our
November 1, 2007 announcement of the indefinite suspension of our RHEOTM System
clinical development program, we wrote down the value of our pumps and clinical
inventory by $2,790,209 to reflect their current net realizable value as at
December 31, 2007.





As at
December 31, 2007 and 2006, we had combined inventory reserves of $7,295,545 and
$5,101,394, 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.





28





We
entered into a distributorship agreement (the “Distribution Agreement”),
effective October 20, 2006, with Asahi Medical. The Distribution 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
Distribution Agreement, we had 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, on an exclusive basis in Canada, on an exclusive basis in Colombia,
Venezuela, New Zealand, Australia and on a non-exclusive basis in
Italy.





On
January 28, 2008, the Company disclosed that it was engaged in discussions with
Asahi Medical to terminate the Distribution Agreement. Subsequent to our 2007
fiscal year end, the Company and Asahi Medical have entered into a termination
agreement to terminate substantially all of their obligations under the
Distribution Agreement on and as of February 25, 2008 (the “Termination
Agreement”).  Pursuant to the Termination Agreement, the Company and
Asahi Medical have agreed to a mutual release of claims relating to the
Distribution Agreement, other than any claims relating to certain provisions of
the Distribution Agreement which survived its termination.





In
anticipation of the delay in the commercialization of the RHEOTM System in the
United States as a result of the MIRA-1 study’s failure to meet its primary
efficacy endpoint and the FDA’s requirement of us to conduct an additional study
of the RHEOTM System, the Company accelerated its diversification plans and, on
September 1, 2006, acquired Solx, Inc., or SOLX, for a total purchase price
of $29,068,443 which included 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 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.





On
December 20, 2007, we announced the sale of SOLX to Solx Acquisition, Inc., or
Solx Acquisition, a company wholly owned by Doug P. Adams, the founder of SOLX
and who, until the closing of the sale, had been serving as an executive officer
of the Company in the capacity of President & Founder, Glaucoma
Division.  The results of operations of SOLX have been included in
discontinued operations in the Company’s consolidated statements of
operations.





The
consideration for the purchase and sale of all of the issued and outstanding
shares of the capital stock of SOLX consisted of:  (i) on December 19,
2007, the closing date of the sale, the assumption by Solx Acquisition of all of
the liabilities of the Company, as they related to SOLX’s business, incurred on
or after December 1, 2007, and OccuLogix’s obligation to make a $5,000,000
payment to the former stockholders of SOLX due on September 1, 2008 in
satisfaction of the outstanding balance of the purchase price of SOLX; (ii) on
or prior to February 15, 2008, the payment by Solx Acquisition of all of the
expenses that the Company had paid to the closing date, as they related to
SOLX’s business during the period commencing on December 1, 2007; (iii) during
the period commencing on the closing date and ending on the date on which SOLX
achieves a positive cash flow, the payment by Solx Acquisition of a royalty
equal to 3% of the worldwide net sales of the SOLX 790 Laser and the SOLX Gold
Shunt, including next-generation or future models or versions of these products;
and (iv) following the date on which SOLX achieves a positive cash flow, the
payment by Solx Acquisition of a royalty equal to 5% of the worldwide net sales
of these products. In order to secure the obligation of Solx Acquisition to make
these royalty payments, SOLX granted to OccuLogix a subordinated security
interest in certain of its intellectual property. In connection with the sale of
SOLX, those employees of the Company, whose roles and responsibilities related
mainly to SOLX’s business, ceased to be employees of the Company and became
employees of Solx Acquisition or SOLX.





29





The sale
transaction established fair values for the Company’s recorded goodwill and the
Company’s shunt and laser technology and regulatory and other intangible assets
that had been acquired by the Company upon its acquisition of SOLX on September
1, 2006. Accordingly, management was required to re-assess whether
the carrying value of the Company’s shunt and laser technology and
regulatory and other intangible assets was recoverable as of December 1, 2007.
Based on management’s estimates of undiscounted cash flows associated with these
intangible assets, we concluded that the carrying value of these intangible
assets was not recoverable as of December 1, 2007. Accordingly, we recorded an
impairment charge of $22,286,383 during the year ended December 31, 2007 to
record the shunt and laser technology and regulatory and other intangible
assets at their fair value as of December 31, 2007





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 the 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
marketing and sale of these products in the United States.





As part
of our diversification plan, 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 agreed to make additional payments
totaling $4,000,000 upon the attainment of two pre-defined milestones by
OcuSense prior to May 1, 2009. In June 2007, we paid OcuSense a total of
$2,000,000 upon the attainment of the first of the two pre-defined milestones.
The carrying value of the intangible asset acquired upon the acquisition of
OcuSense was increased by $1,663,333 which reflects the minority interest
portion of the $2,000,000 paid to OcuSense in the amount of $998,000 and the
additional deferred tax liability of $665,333 recorded based on the difference
between the increase in the carrying value of the intangible asset and its tax
basis. The balance of the contingent payment of $2,000,000 will be paid upon the
attainment of the second pre-determined milestone, which currently is expected
to occur during the first half of 2008.





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 test for the measurement
of osmolarity, a quantitative and highly specific biomarker that has shown to
correlate with dry eye disease, or DED. The test is known as the TearLabTM test
for DED. The anticipated innovation of the TearLabTM test for DED 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 categorized as waived by the FDA under the
regulations promulgated under the Clinical Laboratory Improvement Amendments, or
CLIA.





The
TearLabTM test for DED will require the development of the following three
components:  (1) the TearLabTM disposable, which is a single-use
microfluidic labcard; (2) the TearLabTM pen, which is a hand-held device that
interfaces with the TearLabTM disposable; and (3) the TearLabTM reader, which is a
small desktop unit that allows for the docking of the TearLabTM disposable and
the TearLabTM pen and provides a quantitative reading for the operator. OcuSense
is currently engaged in industrial, electrical and software design efforts for
the three components of the TearLabTM test for DED and, to these ends, is working
with two engineering 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.





30





OcuSense’s
objective is to complete product development of the TearLabTM test for DED during
the first half of 2008. 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 DED. Currently, it
anticipates seeking the 510(k) clearance during the latter half of 2008 and the
CLIA waiver during the latter half of 2009. In addition, OcuSense intends to
seek CE Mark approval for the TearLabTM test for DED during the latter half of
2008.





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 years ended December 31, 2007 and 2006 were
impacted by our adoption of Statement of Financial Accounting Standards (“SFAS”)
No. 123R (revised 2004), “Share-Based Payments” (“SFAS No. 123R”), on January 1,
2006 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 $480,971, $2,127,043 and $224,776 stock-based
compensation expense recognized during the years ended December 31, 2007, 2006
and 2005, $65,660, $1,396,609 and $170,576 is included in general and
administrative expenses, $216,246, $203,131 and $53,700 in clinical and
regulatory expenses and $199,065, $527,303 and $500 in sales and marketing
expenses, respectively.





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.





31





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, 2007, $3,870,931 of total unrecognized compensation cost related to
stock options is expected to be recognized over a weighted-average period of
1.85 years.





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 became 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 and the
Warrants totaled $10,016,000 (less transaction costs of $871,215). On February
6, 2007, we also issued to Cowen and Company, LLC a five-year 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 it
is exercisable) are identical to those of the Warrants. The estimated grant
date fair value of the Cowen Warrant of $97,222 is included in the transaction
cost of $871,215.





We
account for the Warrants and the Cowen Warrant in accordance with the
provisions of SFAS No. 133, “Accounting for Derivative Instruments and Hedging
Activities” (“SFAS No. 133”) along with related interpretation Emerging Issues Task Force
(“EITF”) 00-19 “Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Company’s Own Stock” (“EITF 00-19”). SFAS No.
133 requires every derivative instrument within its scope (including certain
derivative instruments embedded in other contracts) to be recorded on the
balance sheet as either an asset or liability measured at its fair value, with
changes in the derivative’s fair value recognized currently in earnings unless
specific hedge accounting criteria are met. Based on the provisions of EITF
00-19, we determined that the Warrants and the Cowen Warrant do not meet
the criteria for classification as equity. Accordingly, we have classified
the Warrants and the Cowen Warrant as a current liability as of December 31,
2007. The estimated fair value of the Warrants and the Cowen Warrant was
determined using the Black-Scholes options pricing model. We initially allocated
the total proceeds received, pursuant to the Securities Purchase Agreement, to
the Shares and the Warrants based on their relative fair values. This resulted
in an allocation of $2,052,578 to the obligation under warrants which includes
the fair value of the Cowen Warrant of $97,222. SFAS No. 133 also requires the
Company to record the outstanding derivatives at fair value at the end of each
reporting period resulting in an adjustment to the recorded liability of the
derivative, with any gain or loss recorded in earnings of the applicable
reporting period. The Company therefore estimated the fair value of the Warrants
and the Cowen Warrant as at December 31, 2007 and determined the aggregate fair
value to be a nominal amount, a decrease of approximately $2,052,578 over the
initial measurement of the aggregate fair value of the Warrants and the Cowen
Warrant on the date of issuance. Accordingly, we recognized a gain of $2,052,578
in our consolidated statements of operations for the year ended December 31,
2007 to reflect the decrease in the Company’s obligation to its warrant holders
to a nominal amount at December 31, 2007. Transaction costs associated with the
issuance of the Warrants of $170,081 was recorded as an expense in the Company’s
consolidated statement of operations for the year ended December 31,
2007.





32





On March
11, 2007, our Board of Directors approved the grant to the directors of the
Company, other than Mr. Vamvakas, of a total of 165,000 options under the
2002 Stock Option Plan. In exchange for these options, each of the directors of
the Company will forego the cash remuneration which he or she would have been
entitled to receive from us during the financial year ending December 31,
2007 in respect of (i) his or her annual director's fee of $15,000, (ii) in the
case of those directors who chair a committee of the board of directors of the
Company, his or her fee of $5,000 per annum for chairing such committee and
(iii) his or her fee of $2,500 per fiscal quarter for the quarterly in-person
meetings of the board of directors of the Company. The number of options granted
to each of the directors was determined to be 8% higher in value than the cash
remuneration to which the directors would have been entitled during the
financial year ending December 31, 2007 and was determined using the
Black-Scholes option-pricing model. The number of options granted to each
director, calculated using this methodology, was then rounded up to the nearest
1,000. These options are exercisable immediately and will remain exercisable
until the tenth anniversary of the date of their grant, notwithstanding any
earlier disability or death of the holder thereof or any earlier termination of
his or her service to the Company. The exercise price of each option is set
at $1.82, which was the per share closing price of the Company's common
stock on NASDAQ on March 9, 2007, the last trading day prior to the date of
grant.





On May
30, 2007, TLC Vision Corporation (“TLC Vision”) and JEGC OCC Corp. (“JEGC”)
announced that JEGC had agreed to purchase TLC Vision’s ownership stake in the
Company, subject to certain minimum prices and regulatory limitations and
further subject to JEGC obtaining satisfactory financing and other customary
closing conditions. On June 22, 2007, JEGC purchased a portion of TLC Vision’s
ownership stake in the Company, consisting of 1,904,762 shares, at a price of
$1.05 per share. On July 3, 2007, we announced that we had entered into
discussions with JEGC for the private placement of approximately $30,000,000 of
shares of the Company’s common stock at a price based upon the average trading
price at the time of purchase, subject to compliance with regulatory
requirements and to a minimum purchase price of $1.05 per share. On October 15,
2007, TLC Vision announced that JEGC was not able to complete the purchase of
TLC Vision’s remaining ownership stake in the Company by October 12, 2007, being
the deadline previously agreed by TLC Vision and JEGC.  In making that
announcement, TLC Vision also stated that JEGC retains a non-exclusive right to
purchase TLC Vision’s remaining ownership stake in the Company, subject to the
right of each of TLC Vision and JEGC to terminate the agreement between
them.  It was anticipated that JEGC would have gained a control
position in the Company, if both of these transactions had been completed. Our
discussions with JEGC have not resulted in any agreement. JEGC is owned by
Jefferson EquiCorp Ltd. and by Greybrook Corporation, a firm controlled by
Mr. Vamvakas.





As at
December 31, 2007, we had investments in the aggregate principal amount of
$1,900,000 which consist of investments in four separate asset-backed auction
rate securities yielding an average return of 5.865% per
annum.  However, as a result of market conditions, all of these
investments have recently failed to settle on their respective settlement dates
and have been reset to be settled at a future date with an average maturity of
46 days.  Due to the current lack of liquidity for asset-backed
securities of this type, we concluded that the carrying value of these
investments was higher than its fair value as of December 31, 2007. Accordingly,
these auction rate securities have been recorded at their estimated fair value
of $863,750. We consider this to be an other-than-temporary reduction in the
fair value of these auction rate securities. Accordingly, the loss
associated with these auction rate securities of $1,036,250 has been included as
an impairment of investments in our consolidated statement of operations for the
year ended December 31, 2007. Although we continue to receive payment of
interest earned on these securities, we do not know at the present time when it
will be able to convert these investments into cash.  Accordingly,
management has classified these investments as a non-current asset on its
consolidated balance sheet as of December 31, 2007. Management will continue to
closely monitor these investments for future indications of further impairment.
The illiquidity of these investments may have an adverse impact on the length of
time during which we currently expect to be able to sustain its operations in
the absence of an additional capital raise by the Company.





33





On
September 18, 2007, OccuLogix received a letter from The Nasdaq Stock Market, or
Nasdaq, indicating that, for the previous 30 consecutive business days, the bid
price of the Company’s common stock closed below the minimum $1.00 per share
requirement for continued inclusion under Marketplace Rule 4450(e)(5), or the
Minimum Bid Price Rule. Therefore, in accordance with Marketplace Rule
4450(e)(2), the Company was provided 180 calendar days, or until March 17, 2008,
to regain compliance. The Nasdaq letter stated that, if, at any time before
March 17, 2008, the bid price of the Company’s common stock closes at $1.00 per
share or more for a minimum of 10 consecutive business days, Nasdaq staff will
provide written notification that it has achieved compliance with the Minimum
Bid Price Rule. The Nasdaq letter also stated that, if the Company does not
regain compliance with the Minimum Bid Price Rule by March 17, 2008, Nasdaq
staff will provide written notification that the Company’s securities will be
delisted, at which time the Company may appeal the Nasdaq staff’s determination
to delist its securities to a Nasdaq Listing Qualifications Panel.





On
February 1, 2008, OccuLogix received a letter from Nasdaq indicating that, for
the previous 30 consecutive trading days, the Company’s common stock did not
maintain a minimum market value of publicly held shares of $5,000,000 as
required for continued inclusion by Marketplace Rule 4450(a)(2), or the MVPHS
Rule. Therefore, in accordance with Marketplace Rule 4450(e)(1), the Company was
provided 90 calendar days, or until May 1, 2008, to regain compliance. The
Nasdaq letter stated that, if at any time before May 1, 2008, the minimum market
value of publicly held shares of the Company’s common stock is $5,000,000 or
greater for a minimum of ten consecutive trading days, Nasdaq staff will provide
written notification that the Company complies with the MVPHS Rule. The Nasdaq
letter also stated that, if the Company does not regain compliance with the
MVPHS Rule by May 1, 2008, Nasdaq staff will provide written notification that
the Company’s securities will be delisted, at which time the Company may appeal
the Nasdaq staff’s determination to delist its securities to a Nasdaq Listing
Qualifications Panel.





The
Company will not have become compliant with the Minimum Bid Price Rule by March
17, 2008. Although we intend to appeal any determination by Nasdaq staff to
delist our common stock to a Nasdaq Listing Qualifications Panel, we may not be
successful in our appeal, in which case our common stock may be transferred to
The Nasdaq Capital Market or be delisted altogether. Should either occur,
existing stockholders will suffer decreased liquidity.





These
Nasdaq notices have no effect on the listing of the Company's common stock on
the Toronto Stock Exchange.





34





Recent
Developments





On
January 9, 2008, we announced the departure, or pending departure, of seven
members of our executive team and, commencing on February 1, 2008, a 50%
reduction in the salary of each of Elias Vamvakas, our Chairman and Chief
Executive Officer, and Tom Reeves, our President and Chief Operating Officer. By
January 31, 2008, a total of 12 non-executive employees of the Company left the
Company’s employment.





On
February 19, 2008, we announced that the Company secured a bridge loan in an
aggregate principal amount of $3,000,000, less transaction costs of
approximately $200,000, from a number of private parties. The loan bears
interest at a rate of 12% per annum and has a 180-day term, which may be
extended to 270 days under certain circumstances. The repayment of the loan is
secured by a pledge by the Company of its shares of the capital stock of
OcuSense. Under the terms of the loan agreement, the Company has two pre-payment
options available to it, should it decide to not wait until the maturity date to
repay the loan. Under the first pre-payment option, the Company may repay the
loan in full by paying the lenders, in cash, the amount of outstanding principal
and accrued interest and issuing to the lenders five-year warrants in an
aggregate amount equal to approximately 19.9% of the issued and outstanding
shares of the Company’s common stock (but not to exceed 20% of the issued and
outstanding shares of the Company’s common stock). The warrants would be
exercisable into shares of the Company’s common stock at an exercise price of
$0.10 per share and would not become exercisable until the 180th day
following their issuance. Under the second pre-payment option, provided that the
Company has closed a private placement of shares of its common stock for
aggregate gross proceeds of at least $4,000,000, the Company may repay the loan
in full by issuing to the lenders shares of its common stock, in an aggregate
amount equal to the amount of outstanding principal and accrued interest, at a
15% discount to the price paid by the private placement investors. Any exercise
by the Company of the second pre-payment option would be subject to stockholder
and regulatory approval.





Currently,
we anticipate that the net proceeds of the loan, together with the Company’s
other cash and cash equivalents, will be sufficient to sustain the Company’s
operations only until approximately the end of April 2008 (assuming that the
outstanding obligation of OccuLogix to pay $2,000,000 to OcuSense becomes due
and payable prior to the end of April 2008).





RESULTS
OF OPERATIONS





Correction
of prior years’ comparative amounts





In
accordance with the Securities and Exchange Commission (the “SEC”) Staff
Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements”, the following discussion on the Company’s results of operations
have been corrected to reflect the Company’s accounting for stock options
granted during fiscal 2005 to certain consultants that were subject to
performance conditions.  The vesting of these options was contingent
upon the attainment of FDA approval of the RHEOTM System.  These stock
options were accounted for in accordance with SFAS No. 123 and subsequently in
accordance with SFAS No. 123(R) upon the Company’s adoption of SFAS No. 123(R)
on January 1, 2006. The total fair value of these options was estimated at the
date of grant and was being amortized, over the Company’s estimate of the
expected vesting period, as stock-based compensation expense in the Company
consolidated statements of operations.  In preparing the financial
statements for the year ended December 31, 2007, the Company noted that these
options should have been accounted for in accordance with EITF 96-18, Accounting
for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or
in Conjunction with Selling, Goods or Services, (“EITF 96-18”) which requires
that if, on the measurement date of the award, the quantity or any of the terms
of the equity instruments are dependent on the achievement of performance
conditions which result in a range of fair values, the lowest aggregate amount
should be used.





35





Based on
the provisions of EITF 96-18, the Company concluded that no stock-based
compensation expense should have been recorded for these options. Since the
effect of the error on the individual prior periods’ consolidated financial
statements was immaterial, the Company has adjusted the comparative consolidated
financial statements of prior years to reflect the correction of this error
without undertaking a restatement of the prior periods’ consolidated financial
statements. The following financial statement line items for fiscal 2006 and
2005 were affected by the correction of the error.





Previously
      reported
            
            
            Corrected
      amount
            
            
            Effect
      of error$’000
            
            
            
            $’000
            
            
            
            $’000Balance
      SheetsAs of December 31,
      2006Additional
      paid-in capital
            
            
            354,320
            
            
            
            354,191
            
            
            
            (129
            )Accumulated
      deficit
            
            
            (293,151
            )
            
            
            (293,022
            )
            
            
            129As of December 31,
      2005Additional
      paid-in capital
            
            
            336,978
            
            
            
            336,836
            
            
            
            (142
            )Accumulated
      deficit
            
            
            (210,979
            )
            
            
            (210,837
            )
            
            
            142Statements
      of OperationsYear ended December
      31, 2006General
      and administrative(i)
            
            
            8,452
            
            
            
            8,407
            
            
            
            45Clinical
      and regulatory(i)
            
            
            4,957
            
            
            
            4,922
            
            
            
            35Sales
      and marketing(i)
            
            
            1,639
            
            
            
            1,625
            
            
            
            14Loss
      from continuing operations
            
            
            (80,736
            )
            
            
            (80,642
            )
            
            
            94Cumulative
      effect of a change in accounting principle
            
            
            107
            
            
            
            —
            
            
            
            (107
            )Net
      loss for the year
            
            
            (82,171
            )
            
            
            (82,184
            )
            
            
            (13
            )Year ended December
      31, 2005General
      and administrative expenses
            
            
            8,729
            
            
            
            8,670
            
            
            
            59Clinical
      and regulatory expenses
            
            
            5,251
            
            
            
            5,168
            
            
            
            83Loss
      from continuing operations
            
            
            (162,972
            )
            
            
            (162,830
            )
            
            
            142Net
      loss for the year
            
            
            (162,972
            )
            
            
            (162,830
            )
            
            
            142





36




Previously
      reported
            
            
            Corrected
      amount
            
            
            Effect
      of error$’000
            
            
            
            $’000
            
            
            
            $’000Statements
      of Cash FlowsYear ended December
      31, 2006Operating
      ActivitiesAdjustments
      to reconcile net loss to cash used in operationsStock-based
      compensation(i)
            
            
            2,221
            
            
            
            2,127
            
            
            
            94Cumulative
      effect of a change in accounting principle
            
            
            (107
            )
            
            
            —
            
            
            
            (107
            )Year ended December
      31, 2005Operating
      ActivitiesAdjustments
      to reconcile net loss to cash used in operationsStock-based
      compensation
            
            
            367
            
            
            
            225
            
            
            
            142





(i)
            The
      comparative figures for the year ended December 31, 2006 have been
      reclassified to reflect the effect of discontinued
    operations.





Continuing
Operations





Revenues,
Cost of Goods Sold and Gross Margin


For the
years ended December 31,


(in
thousands)





2007
            
            
            Change
            
            
            2006
            
            
            Change
            
            
            2005Sales
      to related parties
            
            $
            —
            
            
            
            N/M
            *
            
            $
            —
            
            
            
            N/M
            *
            
            $
            81Sales
      to unrelated parties
            
            
            92
            
            
            
            (47
            )%
            
            
            174
            
            
            
            (90
            )%
            
            
            1,759Total
      revenues
            
            $
            92
            
            
            
            (47
            )%
            
            $
            174
            
            
            
            (91
            )%
            
            $
            1,840Cost
      of goods sold to related parties
            
            $
            —
            
            
            
            N/M
            *
            
            $
            —
            
            
            
            N/M
            *
            
            $
            43Cost
      of goods sold to unrelated parties
            
            
            2,298
            
            
            
            (33
            )%
            
            
            3,429
            
            
            
            5
            %
            
            
            3,251Royalty
      costs
            
            
            100
            
            
            
            —
            
            
            
            100
            
            
            
            —
            
            
            
            100Total
      cost of goods sold
            
            $
            2,398
            
            
            
            (32
            )%
            
            $
            3,529
            
            
            
            4
            %
            
            $
            3,394Gross
      loss
            
            
            (2,306
            )
            
            
            31
            %
            
            
            (3,355
            )
            
            
            (116
            )%
            
            
            (1,554
            )Percentage
      of total revenue
            
            
            (2,507
            )%
            
            (579)
      pts
            
            
            
            (1,928
            )%
            
            (1,844)
      pts
            
            
            
            (84
            )%*N/M
      – Not meaningful





Revenues





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.





During
the year ended December 31, 2007, we sold a total of 816 treatment sets, at a
price of $200 per treatment set, to Veris. The sale of these treatment sets was
not recognized as revenue during the year based on Veris’ payment history with
the Company and the 180-day payment terms agreed by Veris and us in March 2007.
In October 2007, we met with the management of Veris and based on discussions
with Veris, we believe that Veris will not be able to meet its financial
obligations to the Company. Therefore, during the year ended December 31, 2007,
the Company recorded an allowance for doubtful accounts against the total amount
due from Veris for the purchase of the treatment sets.





37





Revenues
for the year ended December 31, 2007 is made up of revenue from the sale of
a total of 600 treatment sets at a negotiated price of $150 per treatment set to
Macumed AG, a company based in Germany. Revenues for the year ended December 31,
2006 include the sale of 859 treatment sets to Veris at a negotiated price of
$200 per treatment set as payment was received by the Company in advance of
shipment of the 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.





On
November 1, 2007, we announced an indefinite suspension of the RHEOTM System
clinical development program for Dry AMD and are in the process of winding down
the RHEO-AMD study. Accordingly, we do not expect to be able to continue to
generate revenue from the sale of the components of the RHEOTM System in the
future.





Cost
of Sales





Cost of
sales includes costs of goods sold and royalty costs. Our cost of goods sold
consists primarily of costs for the manufacture of the RHEOTM System, including
the costs we incur for the purchase of component parts from our suppliers,
applicable freight and shipping costs, fees related to warehousing, logistics
inventory management and recurring regulatory costs associated with conducting
business and ISO certification.





During
fiscal 2006, we sold a number of treatment sets to Veris at a price, net of
negotiated discounts, which was lower than our cost. As Veris was then our sole
customer for the RHEOTM System treatment sets, the price at which we sold the
treatment sets to Veris represented our inventory’s then 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 for the year ended
December 31, 2006, is $1,625,000 which reflects the write-down of the treatment
sets to its net realizable value. In addition, we evaluated our ending
inventories as at December 31, 2006 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 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 (2005 - $1,990,830). As at
December 31, 2006, the value of our commercial inventory of treatment sets was
nil. On November 1, 2007, we announced an indefinite suspension of the RHEOTM
System clinical development program for Dry AMD, and we are engaged in the
process of winding down the RHEO-AMD study. Accordingly, we have written
down the value of our commercial inventory of OctoNova pumps to nil as of
December 31, 2007 since the Company may not be able to sell or utilize these
pumps before their technologies become outdated. Included in cost of sales for
the year ended December 31, 2007, is a charge of $2,190,666 which reflects the
write-down of the value of these pumps to nil as of December 31,
2007.





38





Cost of
sales for the year ended December 31, 2007 includes royalty fees payable to Dr.
Brunner and Mr. Stock and a charge of $2,190,666 which reflects the write-down
of the value of our commercial inventory of pumps to nil as of December 31,
2007. Included in cost of sales for the year ended December 31, 2006 are royalty
fees payable to Dr. Brunner and Mr. Stock and a total charge of $3,304,124 which
reflect the write-down of our commercial inventory of treatment sets to nil as
at December 31, 2006.





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.





Gross
Margin





During
fiscal 2007 as compared with fiscal 2006, our retina gross margin decreased 579
percentage points due to reduced sales in fiscal 2007.





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.





Operating
Expenses


For the
years ended December 31,


(in
thousands)





2007
            
            
            Change
            
            
            2006
            
            
            Change
            
            
            2005General
      and administrative
            
            $
            7,374
            
            
            
            (12
            )%
            
            $
            8,407
            
            
            
            (3
            )%
            
            $
            8,670Clinical
      and regulatory
            
            
            8,676
            
            
            
            76
            %
            
            
            4,922
            
            
            
            (5
            )%
            
            
            5,168Sales
      and marketing
            
            
            1,413
            
            
            
            (13
            )%
            
            
            1,625
            
            
            
            (25
            )%
            
            
            2,165Impairment
      of goodwill
            
            
            —
            
            
            
            (100
            )%
            
            
            65,946
            
            
            
            (55
            )%
            
            
            147,452Impairment
      of intangible asset
            
            
            20,923
            
            
            
            N/M
            *
            
            
            —
            
            
            
            —
            
            
            
            —Restructuring
      charges
            
            
            1,313
            
            
            
            60
            %
            
            
            820
            
            
            
            N/M
            *
            
            
            —Total
      operating expenses
            
            $
            39,699
            
            
            
            (51
            )%
            
            $
            81,720
            
            
            
            (50
            )%
            
            $
            163,455*N/M
      – Not meaningful





General
and Administrative Expenses





General
and administrative expenses decreased by $1,033,775 during the year ended
December 31, 2007, as compared with the corresponding period of fiscal 2006 due
to a decrease of $1,352,416 in stock-based compensation expense which reflects
the reversal of the stock-based compensation expense recorded in prior periods
associated with performance-based options granted to certain employees,
directors and consultants of the Company. The vesting of these options was
contingent upon meeting company-wide goals which include the attainment of FDA
approval of the RHEOTM System and the achievement of a minimum amount of sales
over a specified period. In light of the indefinite suspension of the RHEOTM
System clinical development program and the sale of SOLX, management concluded
that these goals were no longer achievable and accordingly has reversed the
option expense recorded in prior periods associated with these performance-based
options. Professional fees also decreased by $352,634 during the year ended
December 31, 2007 as compared with the corresponding period of fiscal 2006.
These decreases were partially offset by the increase in employee and related
travel costs of $383,859 due to the additional cost of OcuSense employees during
the period as well as the increase in amortization expense of $90,482 associated
with the intangible asset acquired upon the acquisition of 50.1% of the capital
stock, on a fully diluted basis, of OcuSense on November 30, 2006. General and
administrative expenses for the year ended December 31, 2007 also include a
charge of $190,873 which reflects the reduction to the carrying value of certain
of the Company’s patents and trademarks related to the RHEOTM System as a result
of our indefinite suspension of the RHEOTM System clinical development program
for Dry AMD. There was no comparative charge during the year ended December 31,
2006.





39





General
and administrative expenses decreased by $262,893 during the year ended December
31, 2006, as compared with the corresponding period of fiscal 2005. This
decrease is due to the decrease in employee and related travel costs of $537,274
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 $917,318 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. These decreases in cost
were partially offset by an increase of $1,262,292 in stock-based compensation
expense associated with the adoption of SFAS No. 123R on January 1, 2006 which
requires us to recognize a non-cash expense related to the fair value of our
stock-based compensation awards.





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 $3,753,781 during the year ended December
31, 2007, as compared with the corresponding prior year period, due to the
increase in OcuSense product development and regulatory costs of $2,564,703.
OcuSense employee and related travel costs, professional fees and options
expense also increased by $494,458, $328,713 and $112,360, respectively, during
the year ended December 31, 2007 as compared with the corresponding period in
fiscal 2006. We acquired 50.1% of the capital stock, on a fully diluted basis,
of OcuSense on November 30, 2006. Therefore, clinical and regulatory expenses
for the year ended December 31, 2006 include OcuSense’s cost for the month of
December 2006. Clinical trial expenses associated with the RHEO-AMD trial also
increased by $1,101,074. The RHEO-AMD trial was abandoned on November 1, 2007.
Accordingly, we have recorded a write-down to the value of our inventory of
treatment sets used for the trial and also written down the carrying value of
certain of our medical equipment used in the trial. Clinical and regulatory
expenses for the year ended December 31, 2007 therefore include a charge of
$942,309 which reflects the write-down of our inventory and certain of our
medical equipment as of December 31, 2007. Also included in clinical trial
expenses for the year ended December 31, 2006 are advance payments totaling
$243,644 made to various clinical trial sites for the provision of clinical
trial services in connection with our RHEO-AMD trial which we have abandoned.
This unrecoverable amount has been fully expensed in the year ended December 31,
2007. There was no comparative expense during the year ended December 31, 2006.
These increases in cost during the year ended December 31, 2007 were offset in
part by the decrease in costs associated with the MIRA-1 trial, the LEARN, or
Long-term Efficacy in AMD from Rheopheresis in North America, trials and other
related clinical trials of $2,200,131 since the Company completed the
analysis of the MIRA-1 data during the first half of fiscal 2006 and the
treatment phase of the LEARN trials was completed in December 2006.





During
the year ended December 31, 2006, clinical and regulatory expenses decreased by
$245,778, as compared with the corresponding period in fiscal 2005, as a result
of decreased professional fees associated with the MIRA-1 clinical trial of
$233,920.





Our goal
is to complete product development of OcuSense’s TearLabTM test for DED.
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 DED.





40




Sales
and Marketing Expenses





Sales and
marketing expenses decreased by $211,729 during the year ended December 31,
2007, as compared with the prior period in fiscal 2006, due to the decrease
in the RHEOTM System marketing expenses of $128,420. Stock-based compensation
expense also decreased by $331,038 which reflects the reversal of the
stock-based compensation expense recorded in prior periods associated with
performance-based options granted to certain employees, directors and
consultants of the Company. The vesting of these options was contingent upon
meeting company-wide goals which include the attainment of FDA approval of the
RHEOTM System and the achievement of a minimum amount of sales over a specified
period. In light of the indefinite suspension of the RHEOTM System clinical
development program and the sale of SOLX, management concluded that these goals
were no longer achievable and accordingly has reversed the option expense
recorded in prior periods associated with these performance-based options. These
decreases in cost were offset in part by the increase in OcuSense employee and
related travel costs of $146,504 and professional fees of $61,559. During 2007,
OcuSense hired a new employee and retained the use of some outside consultants
to begin establishing sales and marketing efforts to increase awareness of the
TearLabTM test for DED, and upon receipt of FDA approval, to promote the use of
the TearLabTM test for DED in the United States.





Sales and
marketing expenses decreased by $540,149 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 $422,423 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 then sole customer,
Veris, on receipt of payment. These decreases in costs were offset by increased
stock-based compensation expense of $524,003 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.





The
cornerstone of our sales and marketing strategy to date has been to increase
awareness of our product among eye care professionals and, in particular, the
key opinion leaders in the eye care professions. OcuSense will continue to
develop and execute our conference and podium strategy to ensure visibility and
evidence-based positioning of the TearLabTM test for DED 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.





Impairment
of Intangible Assets





Prior to
the termination of the Distribution Agreement on February 25, 2008, the
Company’s intangible assets consisted of the value of that distribution
agreement with Asahi Medical and the distribution agreement the Company has
with Diamed and MeSys, the designer and the manufacturer, respectively, of the
OctoNova pumps. The Rheofilter filter, the Plasmaflo filter and the OctoNova
pump are components of the RHEOTM System. On November 1, 2007, the Company
announced an indefinite suspension of the RHEOTM System clinical development
program for Dry AMD and is in the process of winding down the RHEO-AMD
study as there is no reasonable prospect that the RHEOTM System clinical
development program will be relaunched in the foreseeable future.  In
accordance with SFAS No. 144, the Company concluded that its indefinite
suspension of the RHEOTM System clinical development program for Dry AMD was
a significant event which may affect the carrying value of its distribution
agreements. Accordingly, management was required to re-assess whether
the carrying value of the Company’s distribution agreements was recoverable
as of December 31, 2007. Based on management’s estimates of undiscounted cash
flows associated with the distribution agreements, the Company concluded that
the carrying value of the distribution agreements was not recoverable as of
December 31, 2007. Accordingly, the Company recorded an impairment charge of
$20,923,028 during the year ended December 31, 2007 to record the distribution
agreements at their fair value as of December 31, 2007. There was no comparable
expense during the years ended December 31, 2006 and 2005.





41




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 $1,312,721 and
$819,642 in restructuring charges during the years ended December 31, 2007 and
2006, respectively. With the suspension of the Company’s RHEOTM System clinical
development program, and the consequent winding-down of the RHEO-AMD study, and
the Company’s disposition of SOLX during the year ended December 31, 2007, the
Company has reduced its workforce considerably. During 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 charges of $1,312,721 and $819,642, recorded in the years ended
December 31, 2007 and 2006, respectively, consist solely of severance and
benefit costs related to the termination of certain of the Company’s employees
at the Company’s Palm Harbor and Mississauga offices. The severance and
benefit costs recorded during the year ended December 31, 2007 were yet to be
paid by December 31, 2007. There was no comparable expense in the year ended
December 31, 2005.





Other
Income, Net


For the
years ended December 31,


(in
thousands)





2007
            
            
            Change
            
            
            2006
            
            
            Change
            
            
            2005Interest
      income
            
            $
            610
            
            
            
            (55
            )%
            
            $
            1,370
            
            
            
            (14
            )%
            
            $
            1,593Changes
      in fair value of warrant obligation
            
            
            1,882
            
            
            
            N/M
            *
            
            
            —
            
            
            
            N/M
            *
            
            
            —Impairment
      of investments
            
            
            (1,036
            )
            
            
            N/M
            *
            
            
            —
            
            
            
            N/M
            *
            
            
            —Interest
      expense
            
            
            (17
            )
            
            
            (13
            )%
            
            
            (15
            )
            
            
            N/M
            *
            
            
            —Other
      income (expense)
            
            
            18
            
            
            
            (42
            )%
            
            
            31
            
            
            
            154
            %
            
            
            (57
            )Minority
      interest
            
            
            2,183
            
            
            
            1,282
            %
            
            
            158
            
            
            
            N/M
            *
            
            
            —$
            3,640
            
            
            
            136
            %
            
            $
            1,544
            
            
            
            1
            %
            
            $
            1,536*
      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 and in the private placement of the Shares and
Warrants in February 2007.





42





The
continued decrease in interest income during years ended December 31, 2007 and
2006, when compared to the corresponding period in fiscal 2005, is due to the
utilization of the funds raised in order to finance infrastructure costs, to
accumulate inventory and to fund costs of the MIRA-1 and RHEO-AMD trials
and other clinical trials and, more recently, to acquire SOLX and OcuSense in
line with our diversification strategy.





Changes
in Fair Value of Warrant Obligation





On
February 6, 2007, pursuant to the Securities Purchase Agreement between the
Company and certain institutional investors, the Company issued the Warrants to
these investors. The Warrants are five-year warrants exercisable into an
aggregate of 2,670,933 shares of the Company’s common stock. On February 6,
2007, the Company also issued the Cowen Warrant to Cowen and Company, LLC 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 private
placement of the Shares and the Warrants. The Cowen Warrant is a five-year
warrant exercisable into an aggregate of 93,483 shares of the Company’s common
stock. The per share exercise price of the Warrants is $2.20, subject to
adjustment, and the Warrants became exercisable on August 6, 2007. All of the
terms and conditions of the Cowen Warrant (other than the number of shares of
the Company's common stock into which it is exercisable) are identical to those
of the Warrants. The Company accounts for the Warrants and the Cowen Warrant in
accordance with the provisions of SFAS No. 133 along with related interpretation
EITF 00-19. Based on the provisions of EITF 00-19, the Company determined that
the Warrants and the Cowen Warrant do not meet the criteria for classification
as equity. Accordingly, the Company has classified the Warrants and the Cowen
Warrant as a current liability as at December 31, 2007. The estimated fair value
was determined using the Black-Scholes option-pricing model. In addition, SFAS
No. 133 requires the Company to record the outstanding derivatives at fair value
at the end of each reporting period resulting in an adjustment to the recorded
liability of the derivative, with any gain or loss recorded in earnings of the
applicable reporting period. The Company therefore estimated the fair value of
the Warrants and the Cowen Warrant as at December 31, 2007 and determined the
aggregate fair value to be a nominal amount, a decrease of approximately
$2,052,578 over the initial measurement of the aggregate fair value of the
Warrants and the Cowen Warrant on the date of issuance.





Changes
in fair value of warrant obligation for the year ended December 31, 2007
includes a gain of $2,052,578 which reflect the decrease in the fair value of
the Warrants and the Cowen Warrant at December 31, 2007 over their fair value on
the date of issuance. Transaction costs associated with the issuance of the
Warrants of $170,081 have also been recorded as a warrant expense in the
Company’s consolidated statement of operations for the year ended December 31,
2007. There was no comparable net gain recorded in the years ended December 31,
2006 and 2005.





Impairment
of  investments





As at
December 31, 2007, we had investments in the aggregate principal amount of
$1,900,000 which consist of investments in four separate asset-backed auction
rate securities yielding an average return of 5.865% per
annum.  However, as a result of market conditions, all of these
investments have recently failed to settle on their respective settlement dates
and have been reset to be settled at a future date with an average maturity of
46 days.  Based on discussions with the Company’s advisors and the
current lack of liquidity for asset-backed securities of this type, we concluded
that the carrying value of these investments was higher than its fair value as
of December 31, 2007. Accordingly, these auction rate securities have been
recorded at their estimated fair value of $863,750. We consider this to be an
other-than-temporary reduction in the value of these auction rate
securities. Accordingly, the impairment associated with these auction rate
securities of $1,036,250 has been included as an impairment of investments in
our consolidated statement of operations for the year ended December 31,
2007.





43





Impairment
of investments for the year ended December 31, 2007 reflect the decrease in the
fair value of the Company’s investments in asset-backed auction rate securities
as at December 31, 2007. There was no comparable expense recorded in the years
ended December 31, 2006 and 2005.





Interest
Expense





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 for a Total Commitment Amount of
$8,000,000.  Pursuant to the Summary of Terms and Conditions, 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.





Interest
expense for the years ended December 31, 2007 and 2006 consists primarily of the
commitment fee due to Mr. Vamvakas on the undrawn portion of the Total
Commitment Amount during the periods. There was no comparable expense during the
year ended December 31, 2005.





Other
Income (Expense)





Other
income for the years ended December 31, 2007 and 2006 consists primarily of
foreign exchange gain of $22,889 and $37,229, respectively, due to exchange rate
fluctuations on the Company’s foreign currency transactions. This gain was
offset by miscellaneous tax expense of $4,879 and $6,120 during the years ended
December 31, 2007 and 2006, respectively. 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.





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 $2,182,843 and $157,624 for the years ended
December 31, 2007 and 2006, respectively, relate to the loss reported by
OcuSense in which the Company has a shared interest with minority
partners.





44





Recovery
of Income Taxes


For the
years ended December 31,


(in
thousands)





2007
            
            
            
            Change
            
            
            
            2006
            
            
            
            Change
            
            
            
            2005Recovery
      of income taxes
            $
            
            5,655
            
            
            
            96
            %
            
            $
            2,888
            
            
            
            349
            %
            
            $
            643





Recovery
of Income Taxes





Recovery
of income taxes increased by $2,766,378 during the year ended December 31, 2007,
as compared with the prior period in 2006. The increase is due to the
elimination of the deferred tax liability of $7,995,790 associated with the
Company’s distribution intangible which was fully impaired as at December 31,
2007. In addition, we recorded a deferred tax recovery in the amount of
$2,244,990 associated with the recognition of the deferred tax asset from the
availability of net operating losses in the United States of OcuSense during the
2007 fiscal year which may be utilized to reduce taxes in future years. These
increases in recovery of income taxes were offset in part by a valuation
allowance increase of $4,809,456 associated with the Company’s Retina division.
A deferred tax asset was recognized in prior years as the asset was believed to
be more likely than not to be realized based on existing taxable temporary
differences.





Recovery
of income taxes increased by $2,245,961 during the year ended December 31,
2006, as compared with the prior period in 2005 due primarily to the recognition
of deferred tax asset from the availability of fiscal 2006 net operating losses
in the United States which may be utilized to reduce taxes in future years.
There was no comparable benefit recorded during the year ended December 31,
2005.





To date,
the Company has recognized income tax benefits in the aggregate amount of $2.3
million associated with the recognition of the deferred tax asset from the
availability of net operating losses in the United States which may be utilized
to reduce taxes in future years. The benefits associated with the balance of the
net operating losses are subject to a full valuation allowance since it is not
more likely than not that these losses can be utilized in future
years.





Recovery
of income taxes for the years ended December 31, 2007 and 2006 also includes the
amortization of the deferred tax liability of $223,544 and $15,684,
respectively, which was recorded based on the difference between the fair value
of intangible asset acquired upon the acquisition of OcuSense on November 30,
2006 and its tax bases. The increase in the amount recorded during the year
ended December 31, 2007 as compared with the corresponding period in fiscal 2006
is due to the additional deferred tax liability recorded by the Company upon the
payment of $2,000,000 to OcuSense in June 2007 upon the attainment by OcuSense
of one of the two pre-determined milestones. In addition, the acquisition of
50.1% of the capital stock of OcuSense, on a fully diluted basis, was completed
by the Company on November 30, 2006. Therefore, recovery of income taxes for the
year ended December 31, 2006 only included one month’s amortization of the
deferred tax liability recorded upon the acquisition of OcuSense, The deferred
tax liability totaling $2,547,499 is being amortized over an average period of
10 years, the estimated useful life of the intangible asset. There was no
comparable income tax benefit recorded during the year ended December 31,
2005.





45





Discontinued
Operations





On
December 19, 2007, the Company sold to Solx Acquisition, and Solx Acquisition
purchased from the Company, all of the issued and outstanding shares of the
capital stock of SOLX, which had been the glaucoma subsidiary of the Company
prior to the completion of this transaction. The consideration for the purchase
and sale of all of the issued and outstanding shares of the capital stock of
SOLX consisted of:  (i) on the closing date of the sale, the
assumption by Solx Acquisition of all of the liabilities of the Company related
to SOLX’s business, incurred on or after December 1, 2007, and the Company’s
obligation to make a $5,000,000 payment to the former stockholders of SOLX due
on September 1, 2008 in satisfaction of the outstanding balance of the purchase
price of SOLX; (ii) on or prior to February 15, 2008, the payment by Solx
Acquisition of all of the expenses that the Company had paid to the closing
date, as they related to SOLX’s business during the period commencing on
December 1, 2007; (iii) during the period commencing on the closing date and
ending on the date on which SOLX achieves a positive cash flow, the payment by
Solx Acquisition of a royalty equal to 3% of the worldwide net sales of the SOLX
790 Laser and the SOLX Gold Shunt, including next-generation or future models or
versions of these products; and (iv) following the date on which SOLX achieves a
positive cash flow, the payment by Solx Acquisition of a royalty equal to 5% of
the worldwide net sales of these products. In order to secure the obligation of
Solx Acquisition to make these royalty payments, SOLX granted to the Company a
subordinated security interest in certain of its intellectual property. No value
was assigned to the royalty payments as the determination of worldwide net sales
of SOLX’s products is subject to significant uncertainty.





The
Company’s results of operations related to discontinued operations for the years
ended December 31, 2007 and 2006 are as follows:





December
      31,2007
              $
            
            
            
            2006
              $Revenue
            
            
            244,150
            
            
            
            31,625Cost
      of goods soldCost
      of goods sold
            
            
            119,147
            
            
            
            11,053Royalty
      costs
            
            
            26,277
            
            
            
            8,332Total
      cost of goods sold
            
            
            145,424
            
            
            
            19,385Gross
      profit
            
            
            98,726
            
            
            
            12,240Operating
      expensesGeneral
      and administrative
            
            
            3,630,943
            
            
            
            1,378,536Clinical
      and regulatory
            
            
            2,828,686
            
            
            
            754,624Sales
      and marketing
            
            
            818,301
            
            
            
            330,210Impairment
      of goodwill
            
            
            14,446,977
            
            
            
            —Impairment
      of intangible assets
            
            
            22,286,383
            
            
            
            —44,011,290
            
            
            
            2,463,370(43,912,564
            )
            
            
            (2,451,130
            )Other
      income (expenses)Interest
      income
            
            
            486
            
            
            
            —Accretion
      expense
            
            
            (857,400
            )
            
            
            (273,192
            )Other
            
            
            (9,302
            )
            
            
            (67
            )(866,216
            )
            
            
            (273,259
            )Loss
      from discontinued operations before income taxes
            
            
            (44,778,780
            )
            
            
            (2,724,389
            )Recovery
      of income taxes
            
            
            9,349,882
            
            
            
            1,182,005Loss
      from discontinued operations
            
            
            (35,428,898
            )
            
            
            (1,542,384
            )




46





Revenues,
Cost of Goods Sold and Gross Margin of Discontinued Operations


For the
years ended December 31,


(in
thousands)





2007
            
            
            Change
            
            
            2006Revenue
            
            $
            244
            
            
            
            663
            %
            
            $
            32Cost
      of goods soldCost
      of goods sold
            
            $
            119
            
            
            
            982
            %
            
            $
            11Royalty
      costs
            
            
            26
            
            
            
            225
            %
            
            
            8Total
      cost of sales
            
            $
            145
            
            
            
            663
            %
            
            $
            19Gross
      margin
            
            
            99
            
            
            
            662
            %
            
            
            13Percentage
      of revenue
            
            
            41
            %
            
            
            —
            
            
            
            41
            %





Revenues





Revenue
consists of revenue generated from the sale of components of the SOLX Glaucoma
System.





The
Company completed the acquisition of SOLX on September 1, 2006. On December 20,
2007, we announced the sale of SOLX to Solx Acquisition. The results of SOLX’s
operations have therefore been included in our consolidated financial statements
from September 1, 2006 to December 19, 2007, the closing date of the sale of
SOLX.





Revenue
therefore includes the sale of SOLX Gold Shunts from September 1, 2006 to
December 19, 2007. There was no comparative revenue during the year ended
December 31, 2005.





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 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.





Cost of
sales includes the cost of the components of the SOLX Glaucoma System sold
during the years ended December 31, 2007 and 2006.





Gross
Margin





Gross
margin on the sale of SOLX Gold Shunts was 41% during each of the years ended
December 31, 2007 and 2006.





47





Operating
Expenses of Discontinued Operations


For the
years ended December 31,


(in
thousands)





2007
                  
                  
                  Change
                  
                  
                  2006General
      and administrative
                  
                  $
                  3,631
                  
                  
                  
                  163
                  %
                  
                  $
                  1,378Clinical
      and regulatory
                  
                  
                  2,829
                  
                  
                  
                  275
                  %
                  
                  
                  755Sales
      and marketing
                  
                  
                  818
                  
                  
                  
                  148
                  %
                  
                  
                  330Impairment
      of goodwill
                  
                  
                  14,447
                  
                  
                  
                  N/M
                  *
                  
                  
                  —Impairment
      of intangible assets
                  
                  
                  22,286
                  
                  
                  
                  N/M
                  *
                  
                  
                  —Total
      operating expenses
                  
                  $
                  44,011
                  
                  
                  
                  1,687
                  %
                  
                  $
                  2,463*N/M
      – Not meaningful





General
and Administrative Expenses





General
and administrative expenses increased by $2,252,407 during the year ended
December 31, 2007, as compared with the corresponding period of fiscal 2006, due
to an increase of $1,738,334 in the amortization of the intangible assets
acquired during fiscal 2006 upon the acquisition of SOLX on September 1, 2006.
SOLX employee and related travel costs and administrative expenses also
increased by $311,886 and $183,575, respectively, during the year ended December
31, 2007 as compared with the corresponding period in fiscal 2006. We acquired
SOLX on September 1, 2006. Therefore, general and administrative expenses for
the year ended December 31, 2006 include SOLX’s cost for four months to December
2006.





Clinical
and Regulatory Expenses





SOLX’s
clinical and regulatory expenses increased by $2,074,062 during the year ended
December 31, 2007 as compared with the comparative period in 2006. We acquired
SOLX on September 1, 2006. Therefore, clinical and regulatory expenses for the
year ended December 31, 2006 include SOLX’s cost for the four months ended
December 31 2006.





Sales
and Marketing Expenses





Sales and
marketing expenses increased by $488,091 due to the increase in SOLX’s sales and
marketing expenses of $315,581 and increased employee and related travel
costs and administrative expenses of $107,935 and $28,686,
respectively.





Impairment
of Goodwill





On
September 1, 2006, the Company acquired SOLX by way of a merger for a total
purchase price of $29,068,443. Of this amount, $14,446,977 was allocated to
goodwill. On December 19, 2007, the Company sold all of the issued and
outstanding shares of the capital stock of SOLX to Solx Acquisition. The sale
transaction established fair values for the Company’s recorded goodwill and
certain of the Company’s intangible assets. Accordingly, the Company performed
an impairment test of its recorded goodwill to re-assess whether its recorded
goodwill was impaired as at December 1, 2007. Based on the goodwill impairment
analysis performed, the Company concluded that a goodwill impairment charge of
$14,446,977 should be recorded during the year ended December 31, 2007 to write
down the value of its recorded goodwill to its fair value of nil as at December
31, 2007.





Impairment
of Intangible Assets





The SOLX
sale transaction established fair values for the Company’s recorded goodwill and
the Company’s shunt and laser technology and regulatory and other intangible
assets acquired upon the acquisition of SOLX on September 1, 2006. Accordingly,
management was required to re-assess whether the carrying value of the Company’s
shunt and laser technology and regulatory and other intangible assets was
recoverable as of December 1, 2007. Based on management’s estimates of
undiscounted cash flows associated with these intangible assets, the Company
concluded that the carrying value of these intangible assets was not recoverable
as of December 1, 2007. Accordingly, the Company recorded an impairment charge
of $22,286,383 during the year ended December 31, 2007 to record the shunt and
laser technology and regulatory and other intangible assets at their fair value
as of December 31, 2007.





48








Other
Expense of Discontinued Operations


For the
years ended December 31,


(in
thousands)





2007
            
            
            Change
            
            
            2006Accretion
      expense
            
            $
            (857
            )
            
            
            (214
            )%
            
            $
            (273
            )Other
      expense
            
            
            (9
            )
            
            
            N/M
            *
            
            
            —$
            (866
            )
            
            
            (217
            )%
            
            $
            (273
            )*
      N/M – Not meaningful





Accretion Expense





In
connection with the acquisition of SOLX on September 1, 2006, we remained
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 was payable in cash on the second anniversary of the
September 1, 2006 closing.  The $5,000,000 was 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 was 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. Accretion expense
for the year ended December 31, 2007 and 2006 consists primarily of the
accretion expense for the years ended December 2007 and 2006.





Recovery
of Income Taxes of Discontinued Operations


For the
years ended December 31,


(in
thousands)





2007
            
            
            Change
            
            
            2006Recovery
      of income taxes
            
            $
            9,350
            
            
            
            691
            %
            
            $
            1,182





Recovery
of Income Taxes





Recovery
of income taxes increased by $8,167,877 during the year ended December 31, 2007,
as compared with the prior period in 2006. The increase is primarily due to the
elimination of the deferred tax liability of $11,861,145 associated with the
intangible assets acquired upon the acquisition of SOLX on September 1, 2006 as
these intangible assets were impaired as at December 31, 2007. This increase in
recovery of income taxes were offset in part by a valuation allowance increase
of $2,511,263 associated with the Company’s Glaucoma division. A deferred tax
asset was recognized in prior years as the asset was believed to be more likely
than not to be realized based on existing taxable temporary
differences.





The
recovery of income taxes was $1,182,450 during the year ended December 31, 2006
primarily due to the recognition of the deferred tax asset of $773,395 from the
availability of fiscal 2006 net operating losses in the United States which may
be utilized to reduce taxes in future years. Also impacting the recovery of
income taxes was the amortization of the deferred tax liability of $409,055
which was recorded based on the difference between the fair value of intangible
assets acquired and its tax bases.





49




LIQUIDITY
AND CAPITAL RESOURCES


As at
December 31,


(in
thousands)





2007
            
            
            2006
            
            
            ChangeCash
      and cash equivalents
            
            $
            2,236
            
            
            $
            5,741
            
            
            $
            (3,505
            )Short-term
      investments
            
            
            —
            
            
            
            9,785
            
            
            
            (9,785
            )Total
      cash and cash equivalents and short-term investments
            
            $
            2,236
            
            
            $
            15,526
            
            
            $
            (13,290
            )Percentage
      of total assets
            
            
            23
            %
            
            
            17
            %
            
            6
      ptsWorking
      capital (deficiency)
            
            $
            (997
            )
            
            $
            13,539
            
            
            $
            (30,876
            )





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.





On
February 19, 2008, we announced that the Company secured a bridge loan in an
aggregate principal amount of $3,000,000 (less transaction costs of
approximately $200,000) from a number of private parties. The loan bears
interest at a rate of 12% per annum and has a 180-day term, which may be
extended to 270 days under certain circumstances. The repayment of the loan is
secured by a pledge by the Company of its shares of the capital stock of
OcuSense.





To date,
cash has been primarily utilized to finance increased infrastructure costs, to
accumulate inventory and to fund costs of the MIRA-1, LEARN and RHEO-AMD trials
and other clinical trials and to acquire SOLX and OcuSense in line with our
diversification strategy. With the suspension of the Company’s RHEOTM System
clinical trial development program, and the consequent winding-down of the
RHEO-AMD study, and the Company’s disposition of SOLX, we expect that, in the
future, we will use our cash resources to complete the product development of
OcuSense’s TearLabTM test for DED and conduct the clinical trials that will be
required for the TearLabTM test for DED. In addition, we remain indebted to
OcuSense in an aggregate amount of up to $2,000,000 for the outstanding portion
of the purchase price of the capital stock of OcuSense that we acquired on
November 30, 2006. We currently expect this amount to become due and payable
during the first half of 2008. 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 DED 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 DED.





Currently,
we anticipate that the net proceeds of the loan, together with the Company’s
other cash and cash-equivalents, will be sufficient to sustain the Company’s
operations only until approximately the end of April 2008 (assuming that the
outstanding obligation of OccuLogix to pay $2,000,000 to OcuSense becomes due
and payable prior to the end of April 2008).





As at
December 31, 2007, we had investments in the aggregate principal amount of
$1,900,000 which consist of investments in four separate asset-backed auction
rate securities yielding an average return of 5.865% per
annum.  Contractual maturities for these auction rate securities range
from 33 to 39 years, with an average interest reset date of approximately 46
days. Historically, the carrying value of auction rate securities approximated
their fair value due to the frequent resetting of interest rates. However, as a
result of market conditions associated with the liquidity issues experienced in
the global credit and capital markets, all of these investments have recently
failed to settle on their respective settlement dates and have been reset to be
settled at a future date with an average maturity of 46 days.





50





Due to
the current lack of liquidity for asset-backed securities of this type, we
concluded that the carrying value of these investments was higher than its fair
value as of December 31, 2007. Accordingly, these auction rate securities have
been recorded at their estimated fair value of $863,750, which represents a
decline of $1,036,250 in the carrying value of these auction rate securities. We
estimated the fair value of these auction rate securities based on the
following: (i) the underlying structure of each security; (ii) the present value
of future principal and interest payments discounted at rates considered to
reflect current market conditions; (iii) consideration of the probabilities of
default, auction failure, or repurchase at par for each period; and (iv)
estimates of the recovery rates in the event of default for each
security.  This estimated fair value could change significantly based
on future market conditions.





We determined the
reduction in the value of these auction rate securities to be an
other-than-temporary reduction in value. Accordingly, the impairment
associated with these auction rate securities of $1,036,250 has been included as
an impairment of investments in our consolidated statement of operations for the
year ended December 31, 2007. Our conclusion for the other-than-temporary
impairment is based on the Company’s current liquidity position. Although we
continue to receive payment of interest earned on these securities, we do not
know at the present time when we will be able to convert these investments into
cash.  Accordingly, management has classified these investments as a
non-current asset on its consolidated balance sheet as of December 31, 2007.
Management will continue to closely monitor these investments for future
indications of further impairment. If the current market conditions deteriorate
further, or the anticipated recovery in market values does not occur, we may be
required to record additional impairment charges in fiscal 2008.





The
illiquidity of these investments may have an adverse impact on the length of
time during which we currently expect to be able to sustain our operations in
the absence of an additional capital raise by the Company as we do not have the
ability to hold these auction rate securities until the market recovers nor can
we hold these securities until their contractual maturity dates.





Changes
in Cash Flows


Years
ended December 31,


(in
thousands)





2007
            
            
            Change
            
            
            2006
            
            
            Change
            
            
            2005Cash
      used in operating activities
            
            $
            (17,217
            )
            
            $
            (2,669
            )
            
            $
            (14,548
            )
            
            $
            4,162
            
            
            $
            (18,710
            )Cash
      provided by investing activities
            
            
            4,510
            
            
            
            (5,908
            )
            
            
            10,418
            
            
            
            (33
            )
            
            
            10,451Cash
      provided by financing activities
            
            
            9,202
            
            
            
            8,931
            
            
            
            271
            
            
            
            (57
            )
            
            
            328Net
      (decrease) increase in cash and cash equivalents during the
      year
            
            $
            (3,505
            )
            
            $
            354
            
            
            $
            (3,859
            )
            
            $
            4,072
            
            
            $
            (7,931
            )





51





Cash
Used in Operating Activities





Net cash
used to fund our operating activities during the year ended December 31, 2007
was $17,217,438.  Net loss during the year was $68,139,314. The
non-cash charges which comprise a portion of the net loss during that period
consisted primarily of the intangible assets and goodwill impairment of
$57,656,388 and the amortization of intangible assets, fixed assets, patents and
trademarks and accretion expense of $6,475,869 netted by applicable deferred
income taxes of $15,004,750 and minority interest of $2,182,843. Additional
non-cash charges consist of $480,971 in stock-based compensation charges and
impairment of investments of $1,036,250 netted by the change in the fair value
of warrant obligation of $1,882,497.





The net
change in non-cash working capital balances related to operations for the
years ended December 31, 2007, 2006 and 2005 consists of the
following:





Years
      ended December 31,2007
              $
            
            
            
            2006
              $
            
            
            
            2005
              $Due
      to related party
            
            
            —
            
            
            
            (5,065
            )
            
            
            13,291Amounts
      receivable
            
            
            (58,782
            )
            
            
            390,634
            
            
            
            (82,810
            )Inventory
            
            
            2,756,759
            
            
            
            2,250,554
            
            
            
            (3,431,743
            )Prepaid
      expenses
            
            
            37,951
            
            
            
            247,361
            
            
            
            (322,455
            )Accounts
      payable
            
            
            797,415
            
            
            
            (1,225,575
            )
            
            
            301,457Accrued
      liabilities
            
            
            911,987
            
            
            
            (1,155,335
            )
            
            
            (563,925
            )Deferred
      revenue and rent inducement
            
            
            —
            
            
            
            —
            
            
            
            (485,047
            )Due
      to stockholders
            
            
            (109,842
            )
            
            
            (5,827
            )
            
            
            (358,523
            )Other
      current assets
            
            
            7,000
            
            
            
            12,781
            
            
            
            4,1054,342,488
            
            
            
            509,528
            
            
            
            (4,925,650
            )





·
            Amounts
      receivable increased due primarily to the expected repayment by Solx
      Acquisition, on or prior to February 15, 2008, in accordance with the
      stock purchase agreement between the Company and Solx Acquisition, of all
      the expenses relating to the SOLX business that the Company had
      paid.


·
            Decrease
      in inventory balance reflects the write-down of inventory and the
      provision for obsolescence for inventory the Company is not expected to be
      able to sell prior to their expiration
dates.


·
            Decrease
      in prepaid expenses is primarily due to the expensing of advance payments
      made to various organizations involved in the RHEO-AMD trial due to our
      suspension of the trial, offset in part by prepaid insurance
      premiums.


·
            Accounts
      payable and accrued liabilities increased and reflect amounts owed 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, 2007 for its payment of benefits
      of certain employees of the Company and for computer and administrative
      support.





Cash
Provided by Investing Activities





Net cash
provided by investing activities for the year ended December 31, 2007 is
$4,510,838 and consists of the net sale of short-term investments of
$7,885,000 offset in part by the payment of $3,000,000 to the former
stockholders of SOLX in connection with the payment of the purchase price, cash
in the amount of $267,934 used to acquire fixed assets and cash in the amount of
$106,228 used to protect and maintain patents and trademarks.





52


Net cash
provided by investing activities for the year ended December 31, 2006 was
$10,418,156 and resulted from cash generated from the 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 $2,076,312 invested by the Company in OcuSense has
been utilized to fund the operations of OcuSense.


Cash
Provided by Financing Activities





Net cash
provided by financing activities for the year ended December 31, 2007 was
$9,201,735 and is made up of gross proceeds in the amount of $10,016,000 raised
in the February 2007 private placement of the Shares and the Warrants, less
issuance costs of $871,215 which includes the fair value of the Cowen Warrant of
$97,222 issued in part payment of the placement fee owed to Cowen and Company,
LLC. Cash provided by financing activities also includes cash received in the
amount of $2,228 from the exercise of options to purchase shares of common stock
of the Company, offset by additional share issuance costs of $42,500 in respect
of the shares issued to the former stockholders of SOLX in part payment of the
purchase price of SOLX.





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.





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 for a Total Commitment Amount of
$8,000,000.  Pursuant to the Summary of Terms and Conditions, 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.





53





Contractual
Obligations and Contingencies





The
following table summarizes our contractual commitments as of December 31, 2007
and the effect those commitments are expected to have on liquidity and cash flow
in future periods.





Payments
      Due by PeriodContractual
      Commitments
            
            Total
            
            
            Less
      than
              1
      year
            
            
            1
      to 3 years
            
            
            More
      than
              3
      years$
            
            
            
            $
            
            
            
            $
            
            
            
            $Operating
      leases
            
            
            445,202
            
            
            
            197,374
            
            
            
            247,828
            
            
            
            —Royalty
      payments
            
            
            1,517,000
            
            
            
            135,000
            
            
            
            405,000
            
            
            
            977,000Consulting
      and non-competition agreements
            
            
            206,286
            
            
            
            153,286
            
            
            
            56,000





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. 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. The Company agreed to make additional
payments totaling $4,000,000 upon the attainment of two pre-defined milestones
by OcuSense prior to May 1, 2009. In June 2007, we paid OcuSense a total of
$2,000,000 upon the attainment of the first of the two pre-defined milestones.
We will pay the last $2,000,000 installment of the purchase price upon the
attainment by OcuSense of the second of such milestones, provided that the
milestone is 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
DED 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 DED 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
$23,871,935, based on exchange rates as of December 31, 2007.





Off-Balance-Sheet
Arrangements





As of
December 31, 2007, we did not have any significant off-balance-sheet
arrangements as defined in Item 303(a)(4)(ii) of SEC Regulation
S-K.





54





Financial
Condition





Management
believes that the existing cash and cash equivalents and short-term investments,
together with the net proceeds of the bridge loan, will be sufficient to fund
the Company’s anticipated level of operations and other demands and commitments
until approximately the end of April 2008 (assuming that the outstanding
obligation of OccuLogix to pay $2,000,000 to OcuSense becomes due and payable
prior to the end of April 2008).





As at
December 31, 2007, we had investments in the aggregate principal amount of
$1,900,000 which consist of investments in four separate asset-backed auction
rate securities yielding an average return of 5.865% per
annum.  However, as a result of market conditions, all of these
investments have recently failed to settle on their respective settlement dates
and have been reset to be settled at a future date with an average maturity of
46 days.  Based on discussions with the Company’s advisors and the
current lack of liquidity for asset-backed securities of this type, we concluded
that the carrying value of these investments was higher than its fair value as
of December 31, 2007. Accordingly, these auction rate securities have been
recorded at their estimated fair value of $863,750. We consider this to be an
other-than-temporary reduction in the value, accordingly, the impairment
associated with these auction rate securities of $1,036,250 has been included as
an impairment of investments in our consolidated statement of operations for the
year ended December 31, 2007. Although we continue to receive payment of
interest earned on these securities, we do not know at the present time when it
will be able to convert these investments into cash.  Accordingly,
management has classified these investments as a non-current asset on its
consolidated balance sheet as of December 31, 2007. Management will continue to
closely monitor these investments for future indications of further impairment.
The illiquidity of these investments may have an adverse impact on the length of
time during which we currently expect to be able to sustain its operations in
the absence of an additional capital raise by the Company.





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





·
            the
      cost and results of development of OcuSense’s TearLabTM test for
      DED;


·
            the
      cost and results, and the rate of progress, of the clinical trials of the
      TearLabTM test for DED that will be required to support OcuSense’s
      application to obtain 510(k) clearance and a CLIA waiver from the FDA to
      market and sell the TearLabTM test for DED in the United
      States;


·
            OcuSense’s
      ability to obtain 510(k) approval and a CLIA waiver from the FDA for the
      TearLabTM test for DED and the timing of such approval, if
    any;


·
            whether
      government and third-party payors agree to reimburse treatments using the
      TearLabTM test for DED;


·
            the
      costs and timing of building the infrastructure to market and sell the
      TearLabTM test for DED;


·
            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.





With the
suspension of the Company’s RHEOTM System clinical development program, and the
consequent winding-down of the RHEO-AMD study, and the Company’s disposition of
SOLX, the Company no longer has any operating business. Its major asset is its
50.1% ownership stake, on a fully diluted basis, in OcuSense. Accordingly,
unless we acquire other businesses (which, in light of the Company’s financial
condition, is unlikely to occur), our ability to generate any revenues will be
dependent almost entirely upon the success of OcuSense.





55





We cannot
begin commercialization of the TearLabTM test for DED 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 TearLabTM test for DED in the United
States.





We will
need additional capital in the future, and our prospects for obtaining it are
uncertain. On October 9, 2007, we announced that the Board had authorized
management and the Company’s advisors to explore the full range of strategic
alternatives available to enhance shareholder value, including, but not limited
to, the raising of capital through the sale of securities, one or more strategic
alliances and the combination, sale or merger of all or part of the Company. For
some time prior to the October 9, 2007 announcement, the Company had been
seeking to raise additional capital, with the objective of securing funding
sufficient to sustain its operations as it had been clear that, unless we were
able to raise additional capital, the Company would not have had sufficient cash
to support its operations beyond early 2008. Although the Company secured a
bridge loan in an aggregate principal amount of $3,000,000 from a number of
private parties on February 19, 2008, management believes that these net
proceeds, together with the Company’s existing cash and cash-equivalents, will
be sufficient to cover its operating activities and other demands only until
approximately the end of April 2008 (assuming that the outstanding obligation of
OccuLogix to pay $2,000,000 to OcuSense becomes due and payable prior to the end
of April 2008). Additional capital may not be available on terms favorable to
us, or at all. In addition, future financings could result in significant
dilution of existing stockholders. However, unless we succeed in raising
additional capital, we will 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.”





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.





Revenue
Recognition





The
Company recognized revenue from the sale of the RHEOTM System, prior to the
Company’s announcement of the indefinite suspension of its RHEOTM System clinical
development program, which is comprised of OctoNova pumps and the related
disposable treatment sets and, prior to the Company’s disposition of SOLX on
December 19, 2007, 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 received a signed binding purchase order from its
customers. The pricing was a negotiated amount between the Company and its
customers. The Company sold the components of the SOLX Glaucoma System directly
to physicians and also through distributors. Revenue has been reported net of
distributors’ commissions.





56





The
Company had the obligation to train its customers and to calibrate the OctoNova
pumps delivered to them. Only upon the completion of these services did the
Company recognize revenue for the pumps. The Company was also responsible for
providing a one-year warranty on the OctoNova pumps, and the estimated cost of
providing this service was accrued at the time revenue is recognized. The
treatment sets and the components of the SOLX Glaucoma System did not require
any additional servicing and revenue was 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.





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, 2007 and 2006, the Company had bad debt reserves
of $172,992 and nil, respectively. The Company expensed amounts related to bad
debt reserves of nil, nil and $518,852 during the years ended December 31, 2007,
2006 and 2005, respectively, and set up a provision for $172,992, nil and
$530,445 representing invoices for products shipped, plus related taxes, to a
customer during the years ended December 31, 2007, 2006 and 2005, respectively,
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.





The
Company evaluates its ending inventory for estimated excess quantities and
obsolescence, based on expected future sales levels and projections of future
demand, with the excess inventory provided for. In addition, the Company
assesses the impact of changing technology and market conditions.  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.
In April 2006, the Company sold a number of treatment sets to Veris Health
Sciences Inc. (“Veris”) at a price lower than the Company’s
cost.  Accordingly, the Company wrote down the value of its treatment
sets to reflect this current net realizable value during the year ended December
31, 2006. In light of the Company’s current financial position, on November 1,
2007, the Company announced an indefinite suspension of the RHEOTM System
clinical development program for Dry AMD.  That decision was made
following a comprehensive review of the respective costs and development
timelines associated with the products in the Company’s portfolio and, in
particular, the fact that, if the Company is unable to raise additional capital,
it will not have sufficient cash to support its operations beyond early 2008.
Accordingly, the Company has written down the value of its treatment sets and
OctoNova pumps, the components of the RHEOTM System, to nil as of December 31,
2007 since the Company is not expected to be able to sell or utilize these
treatment sets and OctoNova pumps prior to their expiration dates, in the case
of the treatment sets, or before the technologies become outdated.





57





As at
December 31, 2007 and 2006, the Company had inventory reserves of $7,295,545 and
$5,101,394, respectively. During the years ended December 31, 2007, 2006 and
2005, the Company recognized a provision related to inventory of $2,790,209,
$3,304,124 and $1,990,830, 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 prior to
the sale of SOLX on December 19, 2007. 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.





On
November 1, 2007, we announced an indefinite suspension of the RHEOTM System
clinical development program for Dry AMD and are in the process of winding down
the RHEO-AMD study as there is no reasonable prospect that the RHEOTM System
clinical development program will be relaunched in the foreseeable
future.  In accordance with SFAS No. 144, we concluded that its
indefinite suspension of the RHEOTM System clinical development program for Dry
AMD was a significant event which may affect the carrying value of our
distribution agreements. Accordingly, management was required to re-assess
whether the carrying value of the Company’s distribution agreements was
recoverable as of December 31, 2007. Based on management’s estimates of
undiscounted cash flows associated with the distribution agreements, we
concluded that the carrying value of the distribution agreements was not
recoverable as of December 31, 2007. Accordingly, we recorded an impairment
charge of $20,923,028 during the year ended December 31, 2007 to record the
distribution agreements at their fair value as of December 31,
2007.





On
December 19, 2007, we sold to Solx Acquisition, all of the issued and
outstanding shares of the capital stock of SOLX. The sale transaction
established fair values for the Company’s recorded goodwill and the Company’s
shunt and laser technology and regulatory and other intangible assets acquired
upon the acquisition of SOLX on September 1, 2006. Accordingly, management was
required to re-assess whether the carrying value of the Company’s shunt and
laser technology and regulatory and other intangible assets was recoverable as
of December 1, 2007. Based on management’s estimates of undiscounted cash flows
associated with these intangible assets, we concluded that the carrying value of
these intangible assets was not recoverable as of December 1, 2007. Accordingly,
we recorded an impairment charge of $22,286,383 during the year ended December
31, 2007 to record the shunt and laser technology and regulatory and other
intangible assets at their fair value as of December 31, 2007.





The
Company determined that, as at December 31, 2007, there have been no significant
events which may affect the carrying value of its TearLabTM technology. 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 OcuSense’s TearLabTM technology was impaired as
of December 31, 2007. Based on management’s estimates of forecasted undiscounted
cash flows as of December 31, 2007, the Company concluded that there is no
indication of an impairment of the OcuSense’s TearLabTM technology. Therefore, no
impairment charge was recorded during the year ended December 31,
2007.





58




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.





Subsequent
to the acquisition of SOLX and OcuSense, the Company determined 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.





On
December 19, 2007, the Company sold to Solx Acquisition, all of the issued and
outstanding shares of the capital stock of SOLX, which had been the glaucoma
subsidiary of the Company prior to the completion of this sale. The sale
transaction established fair values for the Company’s recorded goodwill and
certain of the Company’s intangible assets. Accordingly, the Company performed
an impairment test of its recorded goodwill to re-assess whether its recorded
goodwill was impaired as at December 1, 2007. Based on the goodwill impairment
analysis performed, the Company concluded that a goodwill impairment charge of
$14,446,977 should be recorded during the year ended December 31, 2007 to write
down the value of its recorded goodwill to its fair value of nil as at December
31, 2007.





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.





Impairment
of Investments





As at
December 31, 2007, we had investments in the aggregate principal amount of
$1,900,000 which consist of investments in four separate asset-backed auction
rate securities yielding an average return of 5.865% per
annum.  However, as a result of market conditions, all of these
investments have recently failed to settle on their respective settlement dates
and have been reset to be settled at a future date with an average maturity of
46 days.  Due to the current lack of liquidity for asset-backed
securities of this type, the Company has concluded that the carrying value of
these investments was higher than its fair value as of December 31, 2007.
Accordingly, these auction rate securities have been recorded at their estimated
fair value of $863,750. We consider this to be an other-than-temporary reduction
in the value. Accordingly, the loss associated with these auction rate
securities of $1,036,250 has been included as an impairment of investments in
the Company’s consolidated statement of operations for the year ended December
31, 2007. Although we continue to receive payment of interest earned on these
securities, we do not know at the present time when we will be able to convert
these investments into cash.  Accordingly, management has classified
these investments as a non-current asset on its consolidated balance sheet as of
December 31, 2007. We will continue to closely monitor these investments for
future indications of further impairment. The illiquidity of these investments
may have an adverse impact on the length of time during which we currently
expect to be able to sustain our operations in the absence of an additional
capital raise by the Company.





59




Fair
Value of Warrants





On
February 6, 2007, pursuant to the Securities Purchase Agreement between the
Company and certain institutional investors, the Company issued the Warrants to
these investors. The Warrants are five-year warrants exercisable into an
aggregate of 2,670,933 shares of the Company’s common stock. On February 6,
2007, the Company also issued the Cowen Warrant to Cowen and Company, LLC 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 private
placement of the Shares and the Warrants. The Cowen Warrant is a five-year
warrant exercisable into an aggregate of 93,483 shares of the Company’s common
stock. The per share exercise price of the Warrants is $2.20, subject to
adjustment, and the Warrants became exercisable on August 6, 2007. All of the
terms and conditions of the Cowen Warrant (other than the number of shares of
the Company's common stock into which it is exercisable) are identical to those
of the Warrants. The Company accounts for the Warrants and the Cowen Warrant in
accordance with the provisions of SFAS No. 133 along with related interpretation
EITF 00-19. Based on the provisions of EITF 00-19, the Company determined that
the Warrants and the Cowen Warrant do not meet the criteria for classification
as equity. Accordingly, the Company has classified the Warrants and the Cowen
Warrant as a current liability as at December 31, 2007. The estimated fair value
was determined using the Black-Scholes option-pricing model. In addition, SFAS
No. 133 requires the Company to record the outstanding derivatives at fair value
at the end of each reporting period resulting in an adjustment to the recorded
liability of the derivative, with any gain or loss recorded in earnings of the
applicable reporting period. The Company therefore estimated the fair value of
the Warrants and the Cowen Warrant as at December 31, 2007 and determined the
aggregate fair value to be a nominal amount, a decrease of approximately
$2,052,578 over the initial measurement of the aggregate fair value of the
Warrants and the Cowen Warrant on the date of issuance.





Effective
Corporate Tax Rate





Income
Taxes





As of
December 31, 2007, we had net operating loss carry forwards for federal income
taxes of $75 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, 2007, 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 2007 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.





60





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
            
            
            1,893,7002020
            
            
            4,488,3612021
            
            
            3,356,9922022
            
            
            2,497,6022023
            
            
            1,901,3992024
            
            
            6,494,4792025
            
            
            12,985,6772026
            
            
            12,339,1312027
            
            
            21,451,150





Recent
Accounting Pronouncements





The
adoption of Staff
Accounting BulletinNo. 110, “Share-based
payments”during fiscal
2007 did not have a material impact on our 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 on or after November 15,
2007 and for interim periods within those fiscal years.





On
February 12, 2008, FASB issued FASB Staff Position No. 157-2, “Effective Date of
FASB Statement No 157” (FSP No. 157”). FSP No. 157-2 amends SFAS No. 157 to
delay the effective date of SFAS No. 157 for non-financial  assets and
non-financial liabilities, except for items that are recognized or disclosed at
fair value in the financial statements on a recurring basis (at least annually)
for fiscal years beginning after November 15, 2008.





On
February 14, 2008, FASB issued FSP No. 157-1, “Application of FASB Statement No.
157 to FASB Statement No. 13 and Other Accounting Pronouncements that Address
Fair Value Measurements for Purposes of Lease Classification or Measurement
under Statement 13” (“FSP No. 157-1”).  FSP No. 157-1 amends SFAS No.
157 to exclude SFAS No. 13, “Accounting for Leases” (“SFAS No. 13”), and other
accounting pronouncements that address fair value measurements for purposes of
lease classification or measurement under SFAS No. 13.





We are
currently evaluating the impact that the adoption of SFAS No. 157, FSP No. 157-2
and FSP No. 157-1 will have on our results of operations and financial
position.





In
February 2007, FASB issued Statement No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities—Including an amendment of FASB
Statement No. 115” (“SFAS No. 159”). SFAS No. 159 expands the use of fair value
accounting but does not affect existing standards which require assets or
liabilities to be carried at fair value. Under SFAS No. 159, a company may elect
to use fair value to measure accounts and loans receivable, available-for-sale
and held-to-maturity securities, equity method investments, accounts payable,
guarantees and issued debt. Other eligible items include firm commitments for
financial instruments that otherwise would not be recognized at inception and
non-cash warranty obligations where a warrantor is permitted to pay a third
party to provide the warranty goods or services. If the use of fair value is
elected, any upfront costs and fees related to the item must be recognized in
earnings and cannot be deferred (e.g., debt issue costs). The fair value
election is irrevocable and generally made on an instrument-by-instrument basis,
even if a company has similar instruments that it elects not to measure based on
fair value. At the adoption date, unrealized gains and losses on existing items
for which fair value has been elected are reported as a cumulative adjustment to
beginning retained earnings. Subsequent to the adoption of SFAS No. 159, changes
in fair value are recognized in earnings. SFAS No. 159 is effective for fiscal
years beginning on or after November 15, 2007 and is required to be adopted by
the Company in the first quarter of fiscal 2008. The adoption of SFAS No. 159
will not have a material impact on our results of operations and financial
position.





61





In June
2007, FASB’s Emerging Issues Task Force (“EITF”) issued EITF Issue No. 06-11,
“Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards”
(“EITF No. 06-11”). EITF No. 06-11 requires that the tax benefits related to
dividend equivalents paid on restricted stock units, which are expected to vest,
be recorded as an increase to additional paid-in capital. EITF No. 06-11 is
effective prospectively to the income tax benefits on dividends declared in
fiscal years beginning on or after December 15, 2007. We are currently
evaluating the impact the adoption of EITF No. 06-11 will have on our results of
operations and financial position.





In
December 2007, FASB issued Statement No. 141R (revised 2007), “Business
Combinations (a revision of Statement No. 141)” (“SFAS No. 141R”). SFAS No. 141R
applies to all transactions or other events in which an entity obtains control
of one or more businesses, including those business combinations achieved
without the transfer of consideration. SFAS No. 141R retains the fundamental
requirements in Statement No. 141 that the acquisition method of accounting be
used for all business combinations. SFAS No. 141R expands the scope to include
all business combinations and requires an acquirer to recognize the assets
acquired, the liabilities assumed, and any non-controlling interest in the
acquiree at their fair values as of the acquisition date. In addition, SFAS No.
141R changes the way entities account for business combinations achieved in
stages by requiring the identifiable assets and liabilities to be measured at
their full fair values. Also, contractual contingencies and contingent
consideration shall be measured at fair value at the acquisition date. SFAS No.
141R is effective on a prospective basis to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. We are currently evaluating the
impact, if any, that the adoption of SFAS No. 141R will have on our results of
operations and financial position.





In
December 2007, FASB issued Statement No. 160, “Noncontrolling Interests in
Consolidated Financial Statements - an amendment of ARB No. 51” (“SFAS No.
160”). SFAS No. 160 amends ARB No. 51 to establish accounting and reporting
standards for the non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary. SFAS No. 160 clarifies that a non-controlling
interest in a subsidiary is an ownership interest in the consolidated entity
that should be reported as equity in the consolidated financial statements.
Additionally, SFAS No. 160 requires that consolidated net income include the
amounts attributable to both the parent and the non-controlling interest. SFAS
No. 160 is effective for interim periods beginning on or after December 15,
2008. We are currently evaluating the impact, if any, that the adoption of SFAS
No. 160 will have on our results of operations and financial
position.





62




ITEM
      7A.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





Quantitative
and Qualitative Disclosure of Market Risk





Currency
Fluctuations and Exchange Risk





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





Interest
Rate Risk





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





As at
December 31, 2007, we had investments in the aggregate principal amount of
$1,900,000 which consist of investments in four separate asset-backed auction
rate securities yielding an average return of 5.865% per
annum.  However, as a result of market conditions, all of these
investments have recently failed to settle on their respective settlement dates
and have been reset to be settled at a future date with an average maturity of
46 days.  Due to the current lack of liquidity for asset-backed
securities of this type, the Company has concluded that the carrying value of
these investments was higher than its fair value as of December 31, 2007.
Accordingly, these auction rate securities have been recorded at their estimated
fair value of $863,750. We consider this to be an other-than-temporary reduction
in the value. Accordingly, the loss associated with these auction rate
securities of $1,036,250 has been included as an impairment of investments in
the Company’s consolidated statement of operations for the year ended December
31, 2007. Although we continue to receive payment of interest earned on these
securities, we do not know at the present time when we will be able to convert
these investments into cash.  Accordingly, management has classified
these investments as a non-current asset on its consolidated balance sheet as of
December 31, 2007. We will continue to closely monitor these investments for
future indications of further impairment. The illiquidity of these investments
may have an adverse impact on the length of time during which we currently
expect to be able to sustain our operations in the absence of an additional
capital raise by the Company.





63




ITEM
      8.
            FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA.





Consolidated
Financial Statements





OccuLogix,
Inc.





December
31, 2007 and 2006





64





REPORT OF INDEPENDENT REGISTERED


PUBLIC
ACCOUNTING FIRM





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





We have
audited the accompanying consolidated balance sheets of OccuLogix, Inc. (the
“Company”) as of December 31, 2007 and 2006 and the related consolidated
statements of operations, changes in stockholders’ equity and cash flows for
each of the three years in the period ended December 31, 2007.  Our
audits also included the financial statement schedule listed in the index at
Item 15(a). These financial statements and schedule are the responsibility of
the Company’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 financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company as of
December 31, 2007 and 2006 and the consolidated result of its operations and its
cash flows for each of the three years in the period ended December 31, 2007 in
conformity with U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the consolidated 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, the
Company has incurred recurring operating losses and has a working capital
deficiency.  These conditions raise substantial doubt about the
Company’s ability to continue as a going concern. Management’s plans in regard
to these matters also are described in Note 1.  The financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.





As
discussed in Note 3 to these consolidated financial statements, the Company
changed its accounting policy in regards to the accounting for income taxes for
the year ended December 31, 2007. Additionally, as discussed in Note 16(e), the
Company changed its accounting policy in regards to the accounting for
stock-based compensation during the year ended December 31, 2006.





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, 2007, 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 14, 2008 expressed an unqualified opinion thereon.








Toronto,
      Canada,
            Chartered
      AccountantsMarch
      14, 2008.
            Licensed
      Public Accountants





65





OccuLogix,
Inc.





CONSOLIDATED BALANCE SHEETS


(expressed
in U.S. dollars)


(Going
Concern Uncertainty – See Note 1)





As
      of December 31,2007

                $
            
            
            2006
              (restated
      – note 10)
              $ASSETSCurrentCash
      and cash equivalents
            
            
            2,235,832
            
            
            
            5,705,235Short-term
      investments
            
            
            —
            
            
            
            9,785,000Amounts
      receivable, net of bad debt reserves of $172,992 in 2007 and nil in 2006
      (note
      12(e))
            
            
            374,815
            
            
            
            165,409Inventory,
      net of provision for inventory obsolescence of  $7,295,545 in
      2007 and $5,101,394 in 2006
            
            
            —
            
            
            
            2,344,638Prepaid
      expenses
            
            
            481,121
            
            
            
            548,883Other
      current assets
            
            
            10,442
            
            
            
            10,442Current
      assets relating to discontinued operations (note
    10)
            
            
            —
            
            
            
            618,154Total
      current assets
            
            
            3,102,210
            
            
            
            19,177,761Fixed
      assets, net (note
      6)
            
            
            122,286
            
            
            
            574,310Patents
      and trademarks, net (note
7)
            
            
            139,437
            
            
            
            234,841Investments
      (note
      1)
            
            
            863,750
            
            
            
            —Intangible
      assets, net (note
      8)
            
            
            5,770,677
            
            
            
            26,876,732Goodwill
      (note
      5)
            
            
            —
            
            
            
            —Other
      assets relating to discontinued operations (note
    10)
            
            
            —
            
            
            
            43,540,0519,998,360
            
            
            
            90,403,695LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrentAccounts
      payable (note
      12)
            
            
            1,192,807
            
            
            
            162,705Accrued
      liabilities(notes 12
      and 14)
            
            
            2,873,451
            
            
            
            1,837,158Due
      to stockholders (note
      11)
            
            
            32,814
            
            
            
            152,406Current
      portion of other long-term liability (note
4)
            
            
            —
            
            
            
            3,000,000Current
      liabilities relating to discontinued operations (note
    10)
            
            
            —
            
            
            
            486,466Total
      current liabilities
            
            
            4,099,072
            
            
            
            5,638,735Deferred
      tax liability, net (note
      13)
            
            
            —
            
            
            
            7,851,667Other
      long-term liability (note
4)
            
            
            —
            
            
            
            3,420,609Other
      liabilities relating to discontinued operations (note
    10)
            
            
            —
            
            
            
            11,087,750Total
      liabilities
            
            
            4,099,072
            
            
            
            27,998,761Commitments
      and contingencies (note
      15)Minority
      interest
            
            
            —
            
            
            
            1,184,844Stockholders’
      equityCapital
      stock  (note
      16)Common
      stock
            
            
            57,306
            
            
            
            50,627Par
      value of $0.001 per share;Authorized:
      75,000,000; Issued and outstanding:December
      31, 2007 – 57,306,145; December 31, 2006 – 50,626,562Additional
      paid-in capital
            
            
            362,402,899
            
            
            
            354,191,066Accumulated
      deficit
            
            
            (356,560,917
            )
            
            
            (293,021,603
            )Total
      stockholders’ equity
            
            
            5,899,288
            
            
            
            61,220,0909,998,360
            
            
            
            90,403,695





See
accompanying notes





66





OccuLogix,
Inc.





CONSOLIDATED STATEMENTS OF OPERATIONS


(expressed
in U.S. dollars except number of shares)





Years
      ended December 31,2007
            
            
            2006
            
            
            2005(restated
      – note 10)$
            
            
            
            $
            
            
            
            $RevenueSales
      to related parties (note
      12)
            
            
            —
            
            
            
            —
            
            
            
            81,593Sales
      to unrelated parties
            
            
            91,500
            
            
            
            174,259
            
            
            
            1,758,696Total
      revenue
            
            
            91,500
            
            
            
            174,259
            
            
            
            1,840,289Cost
      of goods soldCost
      of goods sold to related parties (note
    12)
            
            
            —
            
            
            
            —
            
            
            
            43,236Cost
      of goods sold to unrelated parties
            
            
            2,298,103
            
            
            
            3,428,951
            
            
            
            3,250,866Royalty
      costs
            
            
            100,000
            
            
            
            100,000
            
            
            
            100,000Total
      cost of goods sold
            
            
            2,398,103
            
            
            
            3,528,951
            
            
            
            3,394,102(2,306,603
            )
            
            
            (3,354,692
            )
            
            
            (1,553,813
            )Operating
      expensesGeneral
      and administrative (notes 11, 12 and
      16)
            
            
            7,373,726
            
            
            
            8,407,501
            
            
            
            8,670,394Clinical
      and regulatory (notes 12
      and 16)
            
            
            8,675,552
            
            
            
            4,921,771
            
            
            
            5,167,549Sales
      and marketing (notes 12
      and 16)
            
            
            1,413,459
            
            
            
            1,625,188
            
            
            
            2,165,337Impairment
      of goodwill (note
      5)
            
            
            —
            
            
            
            65,945,686
            
            
            
            147,451,758Impairment
      of intangible asset (note
8)
            
            
            20,923,028
            
            
            
            —
            
            
            
            —Restructuring
      charges(note
      9)
            
            
            1,312,721
            
            
            
            819,642
            
            
            
            —39,698,486
            
            
            
            81,719,788
            
            
            
            163,455,038Loss
      from continuing operations
            
            
            42,005,089
            
            
            
            (85,074,480
            )
            
            
            (165,008,851
            )Other
      income (expenses)Interest
      income
            
            
            609,933
            
            
            
            1,370,208
            
            
            
            1,593,366Changes
      in fair value of warrant obligation
            
            
            1,882,497
            
            
            
            —
            
            
            
            —Impairment
      of investments (note
      1)
            
            
            (1,036,250
            )
            
            
            —
            
            
            
            —Interest
      expense
            
            
            (17,228
            )
            
            
            (14,896
            )
            
            
            —Other
            
            
            18,010
            
            
            
            30,935
            
            
            
            (57,025
            )Minority
      interest
            
            
            2,182,843
            
            
            
            157,624
            
            
            
            —3,639,805
            
            
            
            1,543,871
            
            
            
            1,536,341Loss
      from continuing operations before income taxes
            
            
            (38,365,284
            )
            
            
            (83,530,609
            )
            
            
            (163,472,510
            )Recovery
      of income taxes (note
      13)
            
            
            5,654,868
            
            
            
            2,888,490
            
            
            
            642,529Loss
      from continuing operations
            
            
            (32,710,416
            )
            
            
            (80,642,119
            )
            
            
            (162,829,981
            )Loss
      from discontinued operations (note
    10)
            
            
            (35,428,898
            )
            
            
            (1,542,384
            )
            
            
            —Net
      loss for the year
            
            
            (68,139,314
            )
            
            
            (82,184,503
            )
            
            
            (162,829,981
            )Weighted
      average number of shares outstanding – basic and diluted
            
            
            56,628,186
            
            
            
            44,979,692
            
            
            
            41,931,240Loss
      from continuing operations per share – basic and diluted
            
            $
            (0.58
            )
            
            $
            (1.79
            )
            
            $
            (3.88
            )Loss
      from discontinued operations per share – basic and diluted
            
            
            (0.62
            )
            
            
            (0.04
            )
            
            
            —Net
      loss per share – basic and diluted
            
            $
            (1.20
            )
            
            $
            (1.83
            )
            
            $
            (3.88
            )





See
accompanying notes





67





OccuLogix,
Inc.





CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’
EQUITY


(expressed
in U.S. dollars)





Voting
              common
      stock
              at
      par value
            
            
            Additional
              paid-in
              capital
            
            
            Accumulated
              deficit
            
            
            Accumulated
      other comprehensive loss
            
            
            Stockholders’
              equityshares
      issued#
            
            
            
            $
            
            
            
            $
            
            
            
            $
            
            
            
            $
            
            
            
            $Balance,
      December 31, 2004
            
            
            41,806,768
            
            
            
            41,807
            
            
            
            336,063,557
            
            
            
            (48,007,119
            )
            
            
            —
            
            
            
            288,098,245Stock-based
      compensation (note
      16(e))
            
            
            —
            
            
            
            —
            
            
            
            224,776
            
            
            
            —
            
            
            
            —
            
            
            
            224,776Stock
      issued on exercise of options (note
      16(e))
            
            
            279,085
            
            
            
            279
            
            
            
            230,956
            
            
            
            —
            
            
            
            —
            
            
            
            231,235Subscription
      receivable
            
            
            —
            
            
            
            —
            
            
            
            221,661
            
            
            
            —
            
            
            
            —
            
            
            
            221,661Contribution
      of inventory from related party (note
    12)
            
            
            —
            
            
            
            —
            
            
            
            167,730
            
            
            
            —
            
            
            
            —
            
            
            
            167,730Contribution
      of inventory from unrelated party
            
            
            —
            
            
            
            —
            
            
            
            15,652
            
            
            
            —
            
            
            
            —
            
            
            
            15,652Fractional
      payout of converted shares due to preferred stockholders
            
            
            —
            
            
            
            —
            
            
            
            (45
            )
            
            
            —
            
            
            
            —
            
            
            
            (45
            )Additional
      share issue costs related to initial public offering (note
      16(d))
            
            
            —
            
            
            
            —
            
            
            
            (88,714
            )
            
            
            —
            
            
            
            —
            
            
            
            (88,714
            )Net
      loss for the year
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (162,829,981
            )
            
            
            —
            
            
            
            (162,829,981
            )Balance,
      December 31, 2005
            
            
            42,085,853
            
            
            
            42,086
            
            
            
            336,835,573
            
            
            
            (210,837,100
            )
            
            
            —
            
            
            
            126,040,559Stock-based
      compensation (note
      16(e))
            
            
            —
            
            
            
            —
            
            
            
            2,111,481
            
            
            
            —
            
            
            
            —
            
            
            
            2,111,481Stock
      issued on exercise of options (note
      16(e))
            
            
            140,726
            
            
            
            141
            
            
            
            270,794
            
            
            
            —
            
            
            
            —
            
            
            
            270,935Free
      inventory returned to related party (note
    12)
            
            
            —
            
            
            
            —
            
            
            
            (60,000
            )
            
            
            —
            
            
            
            —
            
            
            
            (60,000
            )Contribution
      of inventory from unrelated party
            
            
            —
            
            
            
            —
            
            
            
            11,994
            
            
            
            —
            
            
            
            —
            
            
            
            11,994Shares
      issued on acquisition of Solx, Inc. (notes 4 and
      16(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
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (82,184,503
            )
            
            
            —
            
            
            
            (82,184,503
            )Balance,
      December 31, 2006
            
            
            50,626,562
            
            
            
            50,627
            
            
            
            354,191,066
            
            
            
            (293,021,603
            )
            
            
            —
            
            
            
            61,220,090





68





OccuLogix,
Inc.





CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY continued


(expressed
in U.S. dollars)





Voting
              common
      stock
              at
      par value
            
            
            Additional
              paid-in
      capital
            
            
            Accumulated
              deficit
            
            
            Accumulated
      other comprehensive loss
            
            
            Stockholders’
      equityshares
      issued#
            
            
            
            $
            
            
            
            $
            
            
            
            $
            
            
            
            $
            
            
            
            $Balance,
      December 31, 2006  (balance forward)
            
            
            50,626,562
            
            
            
            50,627
            
            
            
            354,191,066
            
            
            
            (293,021,603
            )
            
            
            —
            
            
            
            61,220,090Net
      loss for the year
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (68,139,314
            )
            
            
            —
            
            
            
            (68,139,314
            )Unrealized
      loss on investments
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (1,036,250
            )
            
            
            (1,036,250
            )Impairment
      of investments
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            1,036,250
            
            
            
            1,036,250Comprehensive
      loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (68,139,314
            )Cumulative
      effect of adoption of FIN 48
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            4,600,000
            
            
            
            —
            
            
            
            4,600,000Stock-based
      compensation (note
      16(e))
            
            
            —
            
            
            
            —
            
            
            
            325,666
            
            
            
            —
            
            
            
            —
            
            
            
            325,666Stock
      issued on exercise of options (note
      16(e))
            
            
            2,250
            
            
            
            2
            
            
            
            2,226
            
            
            
            —
            
            
            
            —
            
            
            
            2,228Contribution
      of inventory from related party (note
    12)
            
            
            —
            
            
            
            —
            
            
            
            384,660
            
            
            
            —
            
            
            
            —
            
            
            
            384,660Contribution
      of inventory from unrelated party
            
            
            —
            
            
            
            —
            
            
            
            33,643
            
            
            
            —
            
            
            
            —
            
            
            
            33,643Shares
      issued on private placement of common stock (note
      16(d))
            
            
            6,677,333
            
            
            
            6,677
            
            
            
            8,053,967
            
            
            
            —
            
            
            
            —
            
            
            
            8,060,644Shares
      issue costs
            
            
            —
            
            
            
            —
            
            
            
            (743,634
            )
            
            
            —
            
            
            
            —
            
            
            
            (743,634
            )Change
      in OcuSense, Inc.’s stockholders’ equity, stock-based
      compensation
            
            
            —
            
            
            
            —
            
            
            
            155,305
            
            
            
            —
            
            
            
            —
            
            
            
            155,305Balance,
      December 31, 2007
            
            
            57,306,145
            
            
            
            57,306
            
            
            
            362,402,899
            
            
            
            (356,560,917
            )
            
            
            —
            
            
            
            5,899,288





See
accompanying notes





69





OccuLogix,
Inc.





CONSOLIDATED STATEMENTS OF CASH FLOWS


(expressed
in U.S. dollars)





Years
      ended December 31,2007
            
            
            2006
            
            
            2005$
            
            
            
            $
            
            
            
            $OPERATING
      ACTIVITIESNet
      loss for the year
            
            
            (68,139,314
            )
            
            
            (82,184,503
            )
            
            
            (162,829,981
            )Adjustments
      to reconcile net loss to cash used in operating
activities:Stock-based
      compensation (note
      16(e))
            
            
            480,971
            
            
            
            2,127,043
            
            
            
            224,776Amortization
      of fixed assets
            
            
            844,948
            
            
            
            213,488
            
            
            
            99,301Amortization
      of patents and trademarks
            
            
            195,494
            
            
            
            5,608
            
            
            
            5,712Amortization
      of intangible assets
            
            
            4,578,027
            
            
            
            2,749,212
            
            
            
            1,716,667Impairment
      of goodwill (note
      5)
            
            
            14,446,977
            
            
            
            65,945,686
            
            
            
            147,451,758Impairment
      of intangible assets (note
8)
            
            
            43,209,411
            
            
            
            —
            
            
            
            —Accretion
      expense (note
      4)
            
            
            857,400
            
            
            
            273,195
            
            
            
            —Amortization
      of premiums/discounts on short-term investments
            
            
            —
            
            
            
            35,985
            
            
            
            147,337Subscription
      receivable – provision for doubtful amount
            
            
            —
            
            
            
            —
            
            
            
            34,927Change
      in fair value of warrant obligation (note
      16(f))
            
            
            (1,882,497
            )
            
            
            —
            
            
            
            —Impairment
      of investments
            
            
            1,036,250
            
            
            
            —
            
            
            
            —Deferred
      income taxes (note
      13)
            
            
            (15,004,750
            )
            
            
            (4,065,962
            )
            
            
            (635,167
            )Minority
      interest
            
            
            (2,182,843
            )
            
            
            (157,624
            )
            
            
            —Net
      change in non-cash working capital balances related to operations (note
    17)
            
            
            4,342,488
            
            
            
            509,528
            
            
            
            (4,925,650
            )Cash
      used in operating activities
            
            
            (17,217,438
            )
            
            
            (14,548,344
            )
            
            
            (18,710,320
            )INVESTING
      ACTIVITIESSale
      of short-term investments
            
            
            7,885,000
            
            
            
            21,841,860
            
            
            
            10,689,818Additions
      to fixed assets
            
            
            (267,934
            )
            
            
            (255,886
            )
            
            
            (202,273
            )Additions
      to patents and trademarks
            
            
            (106,228
            )
            
            
            (105,217
            )
            
            
            (36,290
            )Acquisition
      costs (note
      4)
            
            
            —
            
            
            
            (949,499
            )
            
            
            —Advance
      to Solx, Inc., pre-acquisition
            
            
            —
            
            
            
            (2,434,537
            )
            
            
            —Payments
      for acquisitions, net of cash acquired (note
4)
            
            
            (3,000,000
            )
            
            
            (7,678,565
            )
            
            
            —Cash
      provided by investing activities
            
            
            4,510,838
            
            
            
            10,418,156
            
            
            
            10,451,255FINANCING
      ACTIVITIESProceeds
      from exercise of common stock options (note
      16(e))
            
            
            2,228
            
            
            
            270,935
            
            
            
            231,235Proceeds
      from exercise of Series A convertible preferred stock warrants(note
      16(f))
            
            
            —
            
            
            
            —
            
            
            
            186,734Fractional
      payout of converted shares due to preferred stockholders
            
            
            —
            
            
            
            —
            
            
            
            (792
            )Share
      issuance costs
            
            
            (816,493
            )
            
            
            —
            
            
            
            (88,714
            )Proceeds
      from issuance of common stock (note
      16(d))
            
            
            10,016,000
            
            
            
            —
            
            
            
            —Cash
      provided by financing activities
            
            
            9,201,735
            
            
            
            270,935
            
            
            
            328,463Net
      decrease in cash and cash equivalents during the year
            
            
            (3,504,865
            )
            
            
            (3,859,253
            )
            
            
            (7,930,602
            )Cash
      and cash equivalents, beginning of year
            
            
            5,740,697
            
            
            
            9,599,950
            
            
            
            17,530,552Cash
      and cash equivalents, end of year
            
            
            2,235,832
            
            
            
            5,740,697
            (i)
            
            
            9,599,950





See
accompanying notes





(i)
              As
      at December 31, 2006, cash and cash equivalents of $5,740,697 include cash
      and cash equivalents of discontinued operations of
  $35,462.





70





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 founded to
commercialize innovative treatments for age-related eye diseases. Until
recently, the Company operated two business divisions, being Retina and
Glaucoma. Until recently, the Company’s Retina division was in the business of
developing and commercializing a treatment for dry age-related macular
degeneration, or Dry AMD. 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
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 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 its 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 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.





However,
on November 1, 2007, the Company announced the indefinite suspension of its
RHEOTM System clinical development program. This decision was made following a
comprehensive review of the respective costs and development timelines
associated with the products in the Company’s portfolio and in light of the
Company’s financial position. The Company is in the process of winding down the
RHEO-AMD study as there is no reasonable prospect that the RHEOTM System clinical
development program will be relaunched in the foreseeable future. Subsequent to
the Company’s fiscal 2007 year-end, as of February 25, 2008, the Company has
terminated its relationship with Asahi Kasei Kuraray Medical Co., Ltd. (formerly
Asahi Kasei Medical Co., Ltd.), or Asahi Medical. Asahi Medical manufactures,
and supplied the Company with the Rheofilter filter and the Plasmaflo filter,
both of which are key components of the RHEOTM System. The Company is also
engaged in discussions with Diamed Medizintechnik GmbH, or Diamed, and MeSys
GmbH, or MeSys, regarding the termination of its relationship with each of
them.  Diamed is the designer, and MeSys is the manufacturer, of the
OctoNova pump, another key component of the RHEOTM System.





In
anticipation of the delay in the commercialization of the RHEOTM System in the
United States as a result of the MIRA-1 study’s failure to meet its primary
efficacy endpoint and the FDA’s requirement of the Company to conduct an
additional study of the RHEOTM System, the Company accelerated its
diversification plans and, on September 1, 2006, acquired 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. 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 or IOP (note 4). Upon the
acquisition of SOLX, SOLX became the Glaucoma division of the
Company.





71





On
December 20, 2007, the Company announced the sale of all of the issued and
outstanding capital stock of SOLX to Solx Acquisition, Inc., or Solx
Acquisition, a company wholly owned by Doug P. Adams, the founder of SOLX and
who, until the closing of the sale, had been serving as an executive officer of
the Company in the capacity of President & Founder, Glaucoma Division. The
consideration for the purchase and sale of all of the issued and outstanding
shares of the capital stock of SOLX consisted of:  (i) on December 19,
2007, the closing date of the sale, the assumption by Solx Acquisition of all of
the liabilities of the Company, as they related to SOLX’s business, incurred on
or after December 1, 2007, and the Company’s obligation to make a $5,000,000
payment to the former stockholders of SOLX due on September 1, 2008 in
satisfaction of the outstanding balance of the purchase price of SOLX; (ii) on
or prior to February 15, 2008, the payment by Solx Acquisition of all of the
expenses that the Company had paid to the closing date, as they related to
SOLX’s business during the period commencing on December 1, 2007; (iii) during
the period commencing on the closing date and ending on the date on which SOLX
achieves a positive cash flow, the payment by Solx Acquisition of a royalty
equal to 3% of the worldwide net sales of the SOLX 790 Laser and the SOLX Gold
Shunt, including next-generation or future models or versions of these products;
and (iv) following the date on which SOLX achieves a positive cash flow, the
payment by Solx Acquisition of a royalty equal to 5% of the worldwide net sales
of these products. In order to secure the obligation of Solx Acquisition to make
these royalty payments, SOLX granted to the Company a subordinated security
interest in certain of its intellectual property. In connection with the sale of
SOLX, those employees of the Company, whose roles and responsibilities related
mainly to SOLX’s business, ceased to be employees of the Company and became
employees of Solx Acquisition or SOLX.





As part
of its accelerated diversification plans, on November 30, 2006, the Company
acquired 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 (note
4).





With the
suspension of the Company’s RHEOTM System clinical development program, and the
consequent winding-down of the RHEO-AMD study, and the Company’s disposition of
SOLX, the Company no longer has any operating business. Its major asset is its
50.1% ownership stake, on a fully diluted basis, in OcuSense.





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 of $68,139,314, $82,184,503 and $162,829,981 for the years
ended December 31, 2007, 2006 and 2005, respectively. The Company’s working
capital deficiency at December 31, 2007 is $996,862, which represents a
$14,535,888 reduction of its working capital of $13,539,026 at December 31,
2006. 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.





On
February 19, 2008, the Company announced that it has secured a bridge loan in an
aggregate principal amount of $3,000,000 (less transaction costs of
approximately $200,000) from a number of private parties. The loan bears
interest at a rate of 12% per annum and has a 180-day term, which may be
extended to 270 days under certain circumstances. The Company has pledged its
shares of the capital stock of OcuSense as collateral for the loan.





Management
believes that these proceeds, together with the Company’s existing cash, will be
sufficient to cover its operating activities and other demands only until
approximately the end of April 2008 (assuming that the outstanding obligation of
OccuLogix to pay $2,000,000 to OcuSense becomes due and payable prior to the end
of April 2008) (note
4).  The Company currently is not generating cash from
operations, and most of its cash has been, and is being, utilized to fund its
operations and to fund deferred acquisition payments. The Company’s operating
expenses have consisted mostly of expenses relating to the furtherance of its
clinical trial activities, the commercialization of the SOLX Glaucoma System in
Europe and the completion of the product development of the TearLabTM test for
dry eye disease, or DED.  Unless the Company raises additional
capital, it will not have sufficient cash to support its operations beyond
approximately the end of April 2008.





72





On
October 9, 2007, the Company announced that its Board of Directors, or the
Board, had authorized management and the Company’s advisors to explore the full
range of strategic alternatives available to enhance shareholder value. These
alternatives may include, but are not limited to, the raising of capital through
the sale of securities, one or more strategic alliances and the combination,
sale or merger of all or part of OccuLogix. In making the announcement, the
Company stated that there can be no assurance that the exploration of strategic
alternatives will result in a transaction. To date, the Company has not
disclosed, nor does it intend to disclose, developments with respect to its
exploration of strategic alternatives unless and until the Board, has approved a
specific transaction.





For some
time prior to the October 9, 2007 announcement, the Company had been seeking to
raise additional capital, with the objective of securing funding sufficient to
sustain its operations as it had been clear that, unless the Company was able to
raise additional capital, the Company would not have had sufficient cash to
support its operations beyond early 2008. The Board’s decisions to suspend the
Company’s RHEOTM System clinical development program and to dispose of SOLX were
made and implemented in order to conserve as much cash as possible while the
Company continued its capital-raising efforts.





On
January 9, 2008, the Company announced the departure, or pending departure, of
seven members of its executive team and, commencing on February 1, 2008, a 50%
reduction in the salary of each of Elias Vamvakas, its Chairman and Chief
Executive Officer, and Tom Reeves, its President and Chief Operating Officer. By
January 31, 2008, a total of 12 non-executive employees of the Company left the
Company’s employment.





As at
December 31, 2007, the Company had investments in the aggregate principal amount
of $1,900,000 which consist of investments in four separate asset-backed auction
rate securities yielding an average return of 5.865% per
annum.  However, as a result of market conditions, all of these
investments have recently failed to settle on their respective settlement dates
and have been reset to be settled at a future date with an average maturity of
46 days.  Due to the current lack of liquidity for asset-backed
securities of this type, the Company has concluded that the carrying value of
these investments was higher than its fair value as of December 31, 2007.
Accordingly, these auction rate securities have been recorded at their estimated
fair value of $863,750. The Company considers this to be an other-than-temporary
reduction in the value. Accordingly, the loss associated with these auction rate
securities of $1,036,250 has been included as an impairment of investments in
the Company’s consolidated statement of operations for the year ended December
31, 2007. Although the Company continues to receive payment of interest earned
on these securities, the Company does not know at the present time when it will
be able to convert these investments into cash.  Accordingly,
management has classified these investments as a non-current asset on its
consolidated balance sheet as of December 31, 2007. Management will continue to
closely monitor these investments for future indications of further impairment.
The illiquidity of these investments may have an adverse impact on the length of
time during which the Company currently expects to be able to sustain its
operations in the absence of an additional capital raise by the
Company.





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.





2.
CORRECTION OF PRIOR YEARS’ COMPARATIVE FINANICAL STATEMENTS





In
accordance with the U.S. Securities and Exchange Commission (the “SEC”) Staff
Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements”, the Company’s comparative consolidated financial statements have
been corrected to reflect the Company’s accounting for stock options granted
during fiscal 2005 to certain consultants that were subject to performance
conditions.  The vesting of these options was contingent upon the
attainment of FDA approval of the RHEOTM System.  These stock options
were accounted for in accordance with Statement of Financial Accounting Standard
(“SFAS”) No. 123 “Accounting for Stock-Based Compensation” (“SFAS No. 123”) and
subsequently in accordance with SFAS No. 123(R) (revised 2004), “Stock-Based
Compensation” (“SFAS No. 123R”) upon the Company’s adoption of SFAS No. 123(R)
on January 1, 2006. The total fair value of these options was estimated at the
date of grant and was being amortized, over the Company’s estimate of the
expected vesting period, as stock-based compensation expense in the Company’s
consolidated statements of operations.  In preparing the consolidated
financial statements for the year ended December 31, 2007, the Company noted
that these options should have been accounted for in accordance with Emerging
Issues Task Force (“EITF”) 96-18, Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services, (“EITF 96-18”) which requires that if, on the measurement
date of the award, the quantity or any of the terms of the equity instruments
are dependent on the achievement of performance conditions which result in a
range of fair values, the lowest aggregate amount should be used.





73





Based on
the provisions of EITF 96-18, the Company concluded that no stock-based
compensation expense should have been recorded for these options. Since the
effect of the error on the individual prior periods’ consolidated financial
statements was immaterial, the Company has adjusted the comparative consolidated
financial statements of prior years to reflect the correction of this error
without undertaking a restatement of the prior periods’ consolidated financial
statements. The following financial statement line items for fiscal 2006 and
2005 were affected by the correction of the error.


Previously
      reported
            
            
            Corrected
      amount
            
            
            Effect
      of error$
            
            
            
            $
            
            
            
            $Balance
      SheetsAs of December 31,
      2006Additional
      paid-in capital
            
            
            354,320,116
            
            
            
            354,191,066
            
            
            
            (129,050
            )Accumulated
      deficit
            
            
            (293,150,653
            )
            
            
            (293,021,603
            )
            
            
            129,050As of December 31,
      2005Additional
      paid-in capital
            
            
            336,977,578
            
            
            
            336,835,573
            
            
            
            (142,005
            )Accumulated
      deficit
            
            
            (210,979,105
            )
            
            
            (210,837,100
            )
            
            
            142,005Statements
      of OperationsYear ended December
      31, 2006General
      and administrative(i)
            
            
            8,452,915
            
            
            
            8,407,501
            
            
            
            45,414Clinical
      and regulatory(i)
            
            
            4,956,207
            
            
            
            4,921,771
            
            
            
            34,436Sales
      and marketing(i)
            
            
            1,639,428
            
            
            
            1,625,188
            
            
            
            14,240Loss
      from continuing operations
            
            
            (80,736,209
            )
            
            
            (80,642,119
            )
            
            
            94,090Cumulative
      effect of a change in accounting principle
            
            
            107,045
            
            
            
            —
            
            
            
            (107,045
            )Net
      loss for the year
            
            
            (82,171,548
            )
            
            
            (82,184,503
            )
            
            
            (12,955
            )Year ended December
      31, 2005General
      and administrative expenses
            
            
            8,729,456
            
            
            
            8,670,394
            
            
            
            59,062Clinical
      and regulatory expenses
            
            
            5,250,492
            
            
            
            5,167,549
            
            
            
            82,943Loss
      from continuing operations
            
            
            (162,971,986
            )
            
            
            (162,829,981
            )Net
      loss for the year
            
            
            (162,971,986
            )
            
            
            (162,829,981
            )
            
            
            142,005





74




Previously
      reported
            
            
            Corrected
      amount
            
            
            Effect
      of error$
            
            
            
            $
            
            
            
            $Statements
      of Cash FlowsYear ended December
      31, 2006Operating
      ActivitiesAdjustments
      to reconcile net loss to cash used in operationsStock-based
      compensation(i)
            
            
            2,221,133
            
            
            
            2,127,043
            
            
            
            94,090Cumulative
      effect of a change in accounting principle
            
            
            (107,045
            )
            
            
            —
            
            
            
            (107,045
            )Year ended December
      31, 2005Operating
      ActivitiesAdjustments
      to reconcile net loss to cash used in operationsStock-based
      compensation
            
            
            366,781
            
            
            
            224,776
            
            
            
            142,005





(i)
              The
      comparative figures for the year ended December 31, 2006 have been
      reclassified to reflect the effect of discontinued
    operations.





The
cumulative effect of the correction for the years ended December 31, 2006 and
2005 on basic and diluted net loss per share was nil.





3.
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.





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,
stock-based compensation, investments and its intangible assets. Actual results
could differ from those estimates.





75




Revenue
recognition





Prior to
the Company’s announcement of the indefinite suspension of its RHEOTM System
clinical development program, the Company recognized revenue from the sale of
the RHEOTM System, which is comprised of OctoNova pumps and the related
disposable treatment sets, and, prior to the Company’s disposition of SOLX on
December 19, 2007, the Company recognized revenue 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 received
a signed binding purchase order from its customers. The pricing was a negotiated
amount between the Company and its customers. The Company sold the components of
the SOLX Glaucoma System directly to physicians and also through distributors.
Revenue has been reported net of distributors’ commissions.





The
Company had the obligation to train its customers and to calibrate the OctoNova
pumps delivered to them. Only upon the completion of these services did the
Company recognize revenue for the pumps. The Company was also responsible for
providing a one-year warranty on the OctoNova pumps, and the estimated cost of
providing this service was accrued at the time revenue was recognized. The
treatment sets and the components of the SOLX Glaucoma System did not require
any additional servicing and revenue was 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.





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,
prior to the Company’s announcement of the indefinite suspension of its RHEOTM
System clinical development program,and, the SOLX Glaucoma
System, prior to the Company’s disposition of SOLX on December 19, 2007.
Cost of sales also includes 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 11 and
12).





Cash
and cash equivalents





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





Investments





Investments
consist of investments in auction rate securities. These investments are
classified as available-for-sale securities and are recorded at fair value with
unrealized gains or losses reported in accumulated other comprehensive income
unless the fair value is determined to be less than the carrying value and that
this reduction in value is other than temporary.  In such
circumstances, the reduction in the carrying value is included in the
determination of net loss. 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, 2007 and 2006, the Company had bad debt reserves
of $172,992 and nil, respectively. The Company expensed amounts related to bad
debt reserves of nil, nil and $518,852 during the years ended December 31, 2007,
2006 and 2005, respectively, and set up a provision for $172,992, nil and
$530,445 representing invoices for products shipped, plus related taxes, to a
customer during the years ended December 31, 2007, 2006 and 2005, respectively,
for which revenue was not recognized due to the likelihood that the customer
would not be able to pay for the amounts invoiced.





76




Inventory





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





The
Company evaluates its ending inventory for estimated excess quantities and
obsolescence, based on expected future sales levels and projections of future
demand, with the excess inventory provided for. In addition, the Company
assesses the impact of changing technology and market conditions.  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.In
April 2006, the Company sold a number of treatment sets to Veris Health Sciences
Inc. (“Veris”) at a price lower than the Company’s cost.  Accordingly,
the Company wrote down the value of its treatment sets to reflect this current
net realizable value during the year ended December 31, 2006. In light of the
Company’s current financial position, on November 1, 2007, the Company announced
an indefinite suspension of the RHEOTM System clinical development program for
Dry AMD.  That decision was made following a comprehensive review of
the respective costs and development timelines associated with the products in
the Company’s portfolio and, in particular, the fact that, if the Company had
been unable to raise additional capital, it would not have had sufficient cash
to support its operations beyond early 2008. Accordingly, the Company has
written down the value of its treatment sets and OctoNova pumps, the components
of the RHEOTM System, to nil as of December 31, 2007 since the Company is not
expected to be able to sell or utilize these treatment sets and OctoNova pumps
prior to their expiration dates, in the case of the treatment sets, or before
the technologies become outdated.





As at
December 31, 2007 and 2006, the Company had inventory reserves of $7,295,545 and
$5,101,394, respectively. During the years ended December 31, 2007, 2006 and
2005, the Company recognized a provision related to inventory of $2,790,209,
$3,304,124 and $1,990,830, 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, amounts receivable, accounts
payable, accrued liabilities and amounts due from and to stockholders
approximate their carrying values due to the short-term maturities of these
instruments.





Fixed
assets





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




Furniture
      and office equipment
            2 –
      7 yearsComputer
      equipment and software
            3
      yearsLeasehold
      improvements
            Shorter
      of useful life or initial term of the leaseMedical
      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.





77





The
Company’s intangible assets as at December 31, 2007 are comprised of the value
of the exclusive distribution agreements the Company had with Asahi Medical,
Diamed and MeSys and the value of the TearLabTM technology acquired upon the
acquisition of 50.1% of the capital stock of OcuSense on a fully diluted basis.
The Company’s intangible assets are being amortized using the straight-line
method over an estimated useful life of 10 years.





Patents
and trademarks





Patents
and trademarks are 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.





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





On
January 1, 2007, the Company adopted the provisions of Financial Accounting
Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes – An Interpretation of FASB Statement No. 109” (“FIN No. 48”). FIN
No. 48 addresses the determination of whether tax benefits claimed or expected
to be claimed on a tax return should be recorded in the financial
statements.  Under FIN No. 48, the Company may recognize the tax
benefit from an uncertain tax position only if it is more likely than not that
the tax position will be sustained on examination by the taxing authorities,
based on the technical merits of the position.  The tax benefits
recognized in the consolidated financial statements from such a position should
be measured based on the largest benefit that has a greater than 50% likelihood
of being realized upon ultimate settlement. FIN No. 48 also provides guidance on
derecognition, classification, interest and penalties on income taxes and
accounting in interim periods and requires increased disclosure.





As a
result of the implementation of the provisions of FIN No. 48, the Company
recognized a reduction to the January 1, 2007 deferred tax liability balance in
the amount of $4.6 million with a corresponding reduction to accumulated
deficit.





As of
January 1, 2007, the Company had unrecognized tax benefits of $24.8 million
which, if recognized, would favorably affect the Company’s effective tax
rate.





78





When
applicable, the Company recognizes accrued interest and penalties related to
unrecognized tax benefits as other expense in its consolidated statements of
operations, which is consistent with the recognition of these items in prior
reporting periods. As of January 1, 2007, the Company did not have any liability
for the payment of interest and penalties.





The
Company does not expect a significant change in the amount of its unrecognized
tax benefits within the next 12 months. Therefore, it is not expected that the
change in the Company’s unrecognized tax benefits will have a significant impact
on the results of operations or financial position of the Company.





However,
a portion of the Company’s net operating losses may be subject to annual
limitations as a result of the Company’s initial public offering and prior
changes of control. Accordingly, until a formal analysis of the effect of the
changes of control is performed, a portion of the income tax benefits recognized
to date may be affected.





All
federal income tax returns for the Company and its subsidiaries remain open
since their respective dates of incorporation due to the existence of net
operating losses.  The Company and its subsidiaries have not been, nor
are they currently, under examination by the Internal Revenue Service or the
Canada Revenue Agency.





State and
provincial income tax returns are generally subject to examination for a period
of between three and five years after their filing.  However, due to
the existence of net operating losses, all state income tax returns of the
Company and its subsidiaries since their respective dates of incorporation are
subject to re-assessment.  The state impact of any federal changes
remains subject to examination by various states for a period of up to one year
after formal notification to the states.  The Company and its
subsidiaries have not been, nor are they currently, under examination by any
state tax authority.





Stock-based
compensation





The
Company accounts for stock-based compensation expense for its employees in
accordance with the provisions of SFAS No. 123R. Under the fair value
recognition provision of SFAS No. 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 (note16(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.





The
following are potentially dilutive securities which have not been used in the
calculation of diluted loss per share as they are anti-dilutive:





Years
      ended December 31,2007
              #
            
            
            
            2006
              #
            
            
            
            2005
              #Stock
      options
            
            
            4,787,387
            
            
            
            4,237,221
            
            
            
            4,107,614Warrants
            
            
            2,764,416
            
            
            
            —
            
            
            
            —





79




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.





Comparative
figures





Certain
of the comparative figures have been reclassified to conform to the current
year’s method of presentation and to reflect the effect of discontinued
operations.





Recent
accounting pronouncements





The
adoption of SABNo. 110, “Share-based
payments”,during fiscal
2007 did not have a material impact 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 on or after November 15,
2007 and for interim periods within those fiscal years.





On
February 12, 2008, FASB issued FASB Staff Position No. 157-2, “Effective Date of
FASB Statement No 157” (FSP No. 157”). FSP No. 157-2 amends SFAS No. 157 to
delay the effective date of SFAS No. 157 for non-financial  assets and
non-financial liabilities, except for items that are recognized or disclosed at
fair value in the financial statements on a recurring basis (at least annually)
for fiscal years beginning after November 15, 2008.





On
February 14, 2008, FASB issued FSP No. 157-1, “Application of FASB Statement No.
157 to FASB Statement No. 13 and Other Accounting Pronouncements that Address
Fair Value Measurements for Purposes of Lease Classification or Measurement
under Statement 13” (“FSP No. 157-1”).  FSP No. 157-1 amends SFAS No.
157 to exclude SFAS No. 13, “Accounting for Leases” (“SFAS No. 13”), and other
accounting pronouncements that address fair value measurements for purposes of
lease classification or measurement under SFAS No. 13.





The
Company is currently evaluating the impact that the adoption of SFAS No. 157,
FSP No. 157-2 and FSP No. 157-1 will have on its results of operations and
financial position.





In
February 2007, FASB issued Statement No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities—Including an amendment of FASB
Statement No. 115” (“SFAS No. 159”). SFAS No. 159 expands the use of fair value
accounting but does not affect existing standards which require assets or
liabilities to be carried at fair value. Under SFAS No. 159, a company may elect
to use fair value to measure accounts and loans receivable, available-for-sale
and held-to-maturity securities, equity method investments, accounts payable,
guarantees and issued debt. Other eligible items include firm commitments for
financial instruments that otherwise would not be recognized at inception and
non-cash warranty obligations where a warrantor is permitted to pay a third
party to provide the warranty goods or services. If the use of fair value is
elected, any upfront costs and fees related to the item must be recognized in
earnings and cannot be deferred (e.g., debt issue costs). The fair value
election is irrevocable and generally made on an instrument-by-instrument basis,
even if a company has similar instruments that it elects not to measure based on
fair value. At the adoption date, unrealized gains and losses on existing items
for which fair value has been elected are reported as a cumulative adjustment to
beginning retained earnings. Subsequent to the adoption of SFAS No. 159, changes
in fair value are recognized in earnings. SFAS No. 159 is effective for fiscal
years beginning on or after November 15, 2007 and is required to be adopted by
the Company in the first quarter of fiscal 2008. The adoption of SFAS No. 159
will not have a material impact on the Company’s results of operations and
financial position.





In June
2007, FASB’s EITF issued EITF Issue No. 06-11, “Accounting for Income Tax
Benefits of Dividends on Share-Based Payment Awards” (“EITF No. 06-11”). EITF
No. 06-11 requires that the tax benefits related to dividend equivalents paid on
restricted stock units, which are expected to vest, be recorded as an increase
to additional paid-in capital. EITF No. 06-11 is effective prospectively to the
income tax benefits on dividends declared in fiscal years beginning on or after
December 15, 2007. The Company is currently evaluating the impact the adoption
of EITF No. 06-11 will have on its results of operations and financial
position.





80





In
December 2007, FASB issued Statement No. 141R (revised 2007), “Business
Combinations (a revision of Statement No. 141)” (“SFAS No. 141R”). SFAS No. 141R
applies to all transactions or other events in which an entity obtains control
of one or more businesses, including those business combinations achieved
without the transfer of consideration. SFAS No. 141R retains the fundamental
requirements in Statement No. 141 that the acquisition method of accounting be
used for all business combinations. SFAS No. 141R expands the scope to include
all business combinations and requires an acquirer to recognize the assets
acquired, the liabilities assumed, and any non-controlling interest in the
acquiree at their fair values as of the acquisition date. In addition, SFAS No.
141R changes the way entities account for business combinations achieved in
stages by requiring the identifiable assets and liabilities to be measured at
their full fair values. Also, contractual contingencies and contingent
consideration shall be measured at fair value at the acquisition date. SFAS No.
141R is effective on a prospective basis to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. The Company is currently
evaluating the impact, if any, that the adoption of SFAS No. 141R will have on
its results of operations and financial position.





In
December 2007, FASB issued Statement No. 160, “Noncontrolling Interests in
Consolidated Financial Statements - an amendment of ARB No. 51” (“SFAS No.
160”). SFAS No. 160 amends ARB No. 51 to establish accounting and reporting
standards for the non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary. SFAS No. 160 clarifies that a non-controlling
interest in a subsidiary is an ownership interest in the consolidated entity
that should be reported as equity in the consolidated financial statements.
Additionally, SFAS No. 160 requires that consolidated net income include the
amounts attributable to both the parent and the non-controlling interest. SFAS
No. 160 is effective for interim periods beginning on or after December 15,
2008. The Company is currently evaluating the impact, if any, that the adoption
of SFAS No. 160 will have on its results of operations and financial
position.





4.
ACQUISITIONS





During
the fiscal year ended December 31, 2006, the Company completed two 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 2007.





The
Company’s acquisitions during fiscal 2006 are described below.





Solx,
Inc.





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 represented 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 made an additional payment of
$3,000,000 in cash on the first anniversary of the September 1, 2006 closing and
was expected to make an additional payment of $5,000,000 in cash to the former
stockholders of SOLX on the second anniversary of the September 1, 2006
closing.  In addition, if SOLX received final FDA approval for the
marketing and sale of the SOLX Gold Shunt on or prior to December 31, 2007, the
Company was expected to make 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
recorded the cash payment 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 was 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 was 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 statements of operations. In accordance with SFAS No.
141, “Business Combinations”, the 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 was subject to many variables, the outcome of
which was not determinable beyond reasonable doubt.





81





The total
purchase price of $29,068,443, which included acquisition-related transaction
costs of $851,279, was 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 included 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
8).





On
December 19, 2007, the Company sold all of the issued and outstanding capital
stock of SOLX to Solx Acquisition. The consideration for the purchase and sale
of all of the issued and outstanding shares of the capital stock of SOLX
consisted of:  (i) on the closing date of the sale, the assumption by
Solx Acquisition of all of the liabilities of the Company related to SOLX’s
business, incurred on or after December 1, 2007, and the Company’s obligation to
make a $5,000,000 payment to the former stockholders of SOLX due on September 1,
2008 in satisfaction of the outstanding balance of the purchase price of SOLX;
(ii) on or prior to February 15, 2008, the payment by Solx Acquisition of all of
the expenses that the Company had paid to the closing date, as they related to
SOLX’s business during the period commencing on December 1, 2007; (iii) during
the period commencing on the closing date and ending on the date on which SOLX
achieves a positive cash flow, the payment by Solx Acquisition of a royalty
equal to 3% of the worldwide net sales of the SOLX 790 Laser and the SOLX Gold
Shunt, including next-generation or future models or versions of these products;
and (iv) following the date on which SOLX achieves a positive cash flow, the
payment by Solx Acquisition of a royalty equal to 5% of the worldwide net sales
of these products. In order to secure the obligation of Solx Acquisition to make
these royalty payments, SOLX granted to the Company a subordinated security
interest in certain of its intellectual property. The results of operations of
SOLX from September 1, 2006, the date the Company acquired SOLX, to December 19,
2007, the closing date of the sale, have been included in discontinued
operations in the Company’s consolidated statements of operations (note 10).





OcuSense,
Inc.





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, which is currently
under development, is a hand-held tear film test for the measurement of
osmolarity, a quantitative and highly specific biomarker that has shown to
correlate with dry eye disease, or DED. The test is known as the TearLabTM test
for DED. The results of OcuSense’s operations have been included in the
Company’s consolidated financial statements since November 30,
2006.





82





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 1,754,589 shares of OcuSense’s
Series A Preferred Stock, par value of $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. In June 2007, the Company paid the third $2,000,000
installment of the Purchase Price upon the attainment by OcuSense of the first
of two pre-defined milestones. The Company is expected to pay the last
$2,000,000 installment of the Purchase Price upon the attainment by OcuSense of
the second of such milestones, provided that the milestone is achieved prior to
May 1, 2009. The contingent payments totaling $4,000,000, $2,000,000 of which
has been paid during fiscal 2007, were not included in the determination of the
Purchase Price or recorded as a liability as at December 31, 2006 as the
attainment by OcuSense of the two pre-determined milestones prior to May 1, 2009
was subject to many variables, the outcome of which is not determinable beyond
reasonable doubt. Upon the payment of the first contingent amount in June 2007,
the carrying value of the TearLabTM technology acquired upon the acquisition of
OcuSense was increased by $1,663,333, which reflects the minority interest
portion of the $2,000,000 paid to OcuSense in the amount of $998,000 and the
additional deferred tax liability of $665,333 recorded based on the difference
between the increase in the carrying value of the TearLabTM technology and its
tax basis (note
8).





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 DED 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
DED.





The
adjusted purchase price of $5,169,098 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
adjusted purchase price of $5,169,098 (2006 - $4,171,098) has been allocated as
follows:





December
      31,2007
            
            
            2006$
            
            
            $Net
      tangible assets
            
            
            1,347,848
            
            
            
            1,347,848Deferred
      tax liability
            
            
            (2,547,499
            )
            
            
            (1,882,166
            )Intangible
      asset
            
            
            6,368,749
            
            
            
            4,705,4165,169,098
            
            
            
            4,171,098





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 8).





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.





83





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.





5.
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.





The
Company’s goodwill amount by reporting unit is as follows:





Retina
                
                
                Glaucoma
                
                
                Total$
                
                
                $
                
                
                $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
                
                
                
                14,446,977Impairment
      loss recognized
                
                
                —
                
                
                
                (14,446,977
                )
                
                
                (14,446,977
                )Balance,
      December 31, 2007
                
                
                —
                
                
                
                —
                
                
                
                —





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.





84





Glaucoma





On
September 1, 2006, the Company acquired SOLX by way of a merger for a total
purchase price of $29,068,443. Of this amount, $14,446,977 has been allocated to
goodwill. On December 19, 2007, the Company sold to Solx Acquisition, and Solx
Acquisition purchased from the Company, all of the issued and outstanding shares
of the capital stock of SOLX, which had been the Glaucoma division of the
Company prior to the completion of the transactions provided for in the stock
purchase agreement. The sale transaction established fair values for the
Company’s recorded goodwill and certain of the Company’s intangible assets.
Accordingly, the Company performed an impairment test of its recorded goodwill
to re-assess whether its recorded goodwill was impaired as at December 1, 2007.
Based on the goodwill impairment analysis performed, the Company concluded that
a goodwill impairment charge of $14,446,977 should be recorded during the year
ended December 31, 2007 to write down the value of its recorded goodwill to its
fair value of nil (note
10).





6.
FIXED ASSETS





2007
            
            
            2006Cost
            
            
            Accumulated
              Amortization
            
            
            Cost
            
            
            Accumulated
              Amortization$
            
            
            $
            
            
            $
            
            
            $Furniture
      and office equipment
            
            
            101,903
            
            
            
            50,854
            
            
            
            119,776
            
            
            
            49,566Computer
      equipment and software
            
            
            197,317
            
            
            
            155,928
            
            
            
            268,955
            
            
            
            145,001Leasehold
      improvements
            
            
            6,335
            
            
            
            704
            
            
            
            —
            
            
            
            —Medical
      equipment
            
            
            1,163,135
            
            
            
            1,138,918
            
            
            
            1,805,228
            
            
            
            1,138,6751,468,690
            
            
            
            1,346,404
            
            
            
            2,193,959
            
            
            
            1,333,242Less
      accumulated amortization
            
            
            1,346,404
            
            
            
            
            
            
            
            1,333,242122,286
            
            
            
            
            
            
            
            860,717





Amortization
expense was $844,948, $213,488 and $99,301 during the years ended December 31,
2007, 2006 and 2005, respectively, of which $231,542, $74,610 and nil is
included as amortization expense of discontinued operations for the years ended
December 31, 2007, 2006 and 2005, respectively (note 10).





On
November 1, 2007, the Company announced an indefinite suspension of the RHEOTM
System clinical development program for Dry AMD and is in the process of winding
down the RHEO-AMD study as there is no reasonable prospect that the RHEOTM System
clinical development program will be relaunched in the foreseeable future. In
accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets” (“SFAS No. 144”), the Company determined that the carrying
value of certain of the Company’s medical equipment was not recoverable as of
December 31, 2007. Accordingly, during the year ended December 31, 2007, the
Company recorded a reduction to the carrying value of certain of its medical
equipment of $431,683 which reflects a write-down of the value of this medical
equipment to nil as of December 31, 2007. The assets written down were being
used in the clinical trials of the RHEOTM System. The Company did not write down
the carrying value of any of its fixed assets during the years ended December
31, 2006 and 2005.





7.
PATENTS AND TRADEMARKS





2007
            
            
            2006Cost
            
            
            Accumulated
              Amortization
            
            
            Cost
            
            
            Accumulated
              Amortization$
            
            
            $
            
            
            $
            
            
            $Patents
            
            
            236,854
            
            
            
            113,013
            
            
            
            139,461
            
            
            
            14,909Trademarks
            
            
            120,211
            
            
            
            104,615
            
            
            
            117,513
            
            
            
            7,224357,065
            
            
            
            217,628
            
            
            
            256,974
            
            
            
            22,133Less
      accumulated amortization
            
            
            217,628
            
            
            
            
            
            
            
            22,133139,437
            
            
            
            
            
            
            
            234,841





85





Amortization
expense was $195,494, $5,608 and $5,712 during the years ended December 31,
2007, 2006 and 2005, respectively.





Based on
the November 1, 2007 announcement and in accordance with SFAS No. 144, the
Company determined that the carrying value of certain of the Company’s patents
and trademarks was not recoverable as of December 31, 2007. Accordingly, during
the year ended December 31, 2007, the Company recorded a $190,873 reduction to
the carrying value of its patents and trademarks related to the RHEOTM System
which reflects a write-down of these patents and trademarks to a value of nil as
of December 31, 2007. The Company did not write down the carrying value of any
of its patents and trademarks during the years ended December 31, 2006 and
2005.





The
Company’s recorded patents and trademarks as of December 31, 2007 relate to the
cost of pending applications for patents and trademarks for the TearLabTM
technology. These patents and trademarks will be amortized, using the
straight-line method, over an estimated useful life of 10 years from the date of
approval of the patents and trademarks.





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


Patents
              $
            
            
            Trademarks
              $
            
            
            Total
              $2008
            
            
            12,384
            
            
            
            1,560
            
            
            
            13,9442009
            
            
            12,384
            
            
            
            1,560
            
            
            
            13,9442010
            
            
            12,384
            
            
            
            1,560
            
            
            
            13,9442011
            
            
            12,384
            
            
            
            1,560
            
            
            
            13,9442012
            
            
            12,384
            
            
            
            1,560
            
            
            
            13,94461,920
            
            
            
            7,800
            
            
            
            69,720





8.
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 were being amortized using the
straight-line method over an estimated useful life of 15 years while the other
acquisition-related intangible assets are amortized using the straight-line
method over an estimated useful life of 10 years, respectively. Amortization
expense for the years ended December 31, 2007, 2006 and 2005 was $4,578,027,
$2,749,212 and $1,716,667, respectively, of which $2,731,667, $993,333 and nil
is included as amortization expense of discontinued operations for the years
ended December 31, 2007, 2006 and 2005, respectively (note 10).





Intangible
assets subject to amortization consist of the following:





2007
            
            
            2006Cost
            
            
            Accumulated
      Amortization
            
            
            Cost
            
            
            Accumulated
      Amortization$
            
            
            $
            
            
            $
            
            
            $Distribution
      agreements
            
            
            —
            
            
            
            —
            
            
            
            25,750,000
            
            
            
            3,539,472Shunt
      and laser technology
            
            
            —
            
            
            
            —
            
            
            
            27,000,000
            
            
            
            900,000Regulatory
      and other
            
            
            —
            
            
            
            —
            
            
            
            2,800,000
            
            
            
            93,333TearLabTM
      technology
            
            
            6,368,749
            
            
            
            598,072
            
            
            
            4,705,416
            
            
            
            39,2126,368,749
            
            
            
            598,072
            
            
            
            60,255,416
            
            
            
            4,572,017





86





Estimated
amortization expense for the intangible assets for each of the fiscal years
ending December 31 is as follows:





$2008
            
            
            647,1792009
            
            
            647,1792010
            
            
            647,1792011
            
            
            647,1792012
      and thereafter
            
            
            3,181,9615,770,677





The
Company’s intangible assets consist 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 and MeSys, the designer
and the manufacturer, respectively, of the OctoNova pumps. The Rheofilter
filter, the Plasmaflo filter and the OctoNova pump are components of the RHEOTM
System, the Company’s product for the treatment of Dry AMD. On November 1,
2007, the Company announced an indefinite suspension of the RHEOTM System
clinical development program for Dry AMD and is in the process of winding
down the RHEO-AMD study as there is no reasonable prospect that the RHEOTM System
clinical development program will be relaunched in the foreseeable
future.  In accordance with SFAS No. 144, the Company concluded that
its indefinite suspension of the RHEOTM System clinical development
program for Dry AMD was a significant event which may affect the carrying value
of its distribution agreements. Accordingly, management was required to
re-assess whether the carrying value of the Company’s distribution
agreements was recoverable as of December 31, 2007. Based on management’s
estimates of undiscounted cash flows associated with the distribution
agreements, the Company concluded that the carrying value of the distribution
agreements was not recoverable as of December 31, 2007. Accordingly, the Company
recorded an impairment charge of $20,923,028 during the year ended December 31,
2007 to record the distribution agreements at their fair value as of December
31, 2007.





On
December 19, 2007, the Company sold to Solx Acquisition all of the issued and
outstanding shares of the capital stock of SOLX, which had been the Glaucoma
division of the Company prior to the completion of the transactions provided for
in the stock purchase agreement. The sale transaction established fair values
for the Company’s recorded goodwill and the Company’s shunt and laser technology
and regulatory and other intangible assets acquired upon the acquisition of SOLX
on September 1, 2006. Accordingly, management was required to re-assess
whether the carrying value of the Company’s shunt and laser technology
and regulatory and other intangible assets was recoverable as of December 1,
2007. Based on management’s estimates of undiscounted cash flows associated with
these intangible assets, the Company concluded that the carrying value of these
intangible assets was not recoverable as of December 1, 2007. Accordingly, the
Company recorded an impairment charge of $22,286,383 during the year ended
December 31, 2007 to record the shunt and laser technology and regulatory and
other intangible assets at their fair value as of December 31, 2007(note 10).





The
Company determined that, as of December 31, 2007, there have been no
significant events which may affect the carrying value of its TearLabTM
technology. 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 TearLabTM technology
was impaired as of December 31, 2007. Based on management’s estimates of
forecasted undiscounted cash flows as of December 31, 2007, the Company
concluded that there is no indication of an impairment of the Company’s TearLabTM
technology. Therefore, no impairment charge was recorded during the year ended
December 31, 2007.





9.
RESTRUCTURING CHARGES





In March
2006, the Company implemented a number of structural and management changes
designed to then 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” (“SFAS No. 146”), the Company recognized a total of
$819,642 in restructuring charges during the year ended December 31, 2006.The
restructuring charges of $819,642 recorded during 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 were fully paid as at
December 31, 2006.





87





On
January 9, 2008, the Company announced the termination of employment of certain
members of its executive team in light of the Company's current financial
situation and in connection with the indefinite suspension of its RHEOTM System
clinical development program and the sale of SOLX. In accordance with SFAS No.
146, the Company recognized a total of $1,312,721 in restructuring charges
during the year ended December 31, 2007. The total restructuring charges of
$1,312,721 recorded in the year ended December 31, 2007 consist solely of
severance and benefit costs related to the termination of a total of eight
employees at both the Company’s Mississauga, Ontario and Palm Harbor, Florida
offices. All severance and benefit costs are yet to be paid as at December 31,
2007.





10.
DISCONTINUED OPERATIONS





OnDecember 19,
2007, the
Company sold to Solx Acquisition, and Solx Acquisition purchased from the
Company, all of the issued and outstanding shares of the capital stock of
SOLX, which had been the Glaucoma division of the Company prior to the
completion of this transaction. The consideration for the purchase and sale of
all of the issued and outstanding shares of the capital stock of SOLX consisted
of:  (i) on the closing date of the sale, the assumption by Solx
Acquisition of all of the liabilities of the Company related to SOLX’s business,
incurred on or after December 1, 2007, and the Company’s obligation to make a
$5,000,000 payment to the former stockholders of SOLX due on September 1, 2008
in satisfaction of the outstanding balance of the purchase price of SOLX; (ii)
on or prior to February 15, 2008, the payment by Solx Acquisition of all of the
expenses that the Company had paid to the closing date, as they related to
SOLX’s business during the period commencing on December 1, 2007; (iii) during
the period commencing on the closing date and ending on the date on which SOLX
achieves a positive cash flow, the payment by Solx Acquisition of a royalty
equal to 3% of the worldwide net sales of the SOLX 790 Laser and the SOLX Gold
Shunt, including next-generation or future models or versions of these products;
and (iv) following the date on which SOLX achieves a positive cash flow, the
payment by Solx Acquisition of a royalty equal to 5% of the worldwide net sales
of these products. In order to secure the obligation of Solx Acquisition to make
these royalty payments, SOLX granted to the Company a subordinated security
interest in certain of its intellectual property. No value was assigned to the
royalty payments as the determination of worldwide net sales of SOLX’s products
is subject to significant uncertainty.





The sale
transaction described above established fair values for certain of the Company’s
acquisition-related intangible assets and goodwill. Accordingly, the Company
performed an impairment test of these assets at December 1, 2007. Based on this
analysis, during the year ended December 31, 2007, the Company recognized a
non-cash goodwill impairment charge of $14,446,977 and an impairment charge of
$22,286,383 to record its acquisition-related intangible assets at their fair
value as of December 31, 2007 (notes 5 and 8).




88





The
Company’s results of operations related to discontinued operations for the years
ended December 31, 2007 and 2006 are as follows:





December
      31,2007
              $
            
            
            2006
              $Revenue
            
            
            244,150
            
            
            
            31,625Cost
      of goods soldCost
      of goods sold
            
            
            119,147
            
            
            
            11,053Royalty
      costs
            
            
            26,277
            
            
            
            8,332Total
      cost of goods sold
            
            
            145,424
            
            
            
            19,38598,726
            
            
            
            12,240Operating
      expensesGeneral
      and administrative (notes 11, 12 and
      16)
            
            
            3,630,943
            
            
            
            1,378,536Clinical
      and regulatory (notes 12
      and 16)
            
            
            2,828,686
            
            
            
            754,624Sales
      and marketing (notes 12
      and 16)
            
            
            818,301
            
            
            
            330,210Impairment
      of goodwill (note
      5)
            
            
            14,446,977
            
            
            
            —Impairment
      of intangible assets (note
8)
            
            
            22,286,383
            
            
            
            —44,011,290
            
            
            
            2,463,370(43,912,564
            )
            
            
            (2,451,130
            )Other
      income (expenses)Interest
      income
            
            
            486
            
            
            
            —Interest
      and accretion expense
            
            
            (857,400
            )
            
            
            (273,192
            )Other
            
            
            (9,302
            )
            
            
            (67
            )(866,216
            )
            
            
            (273,259
            )Loss
      from discontinued operations before income taxes
            
            
            (44,778,780
            )
            
            
            (2,724,389
            )Recovery
      of income taxes (note
      13)
            
            
            9,349,882
            
            
            
            1,182,005Loss
      from discontinued operations
            
            
            (35,428,898
            )
            
            
            (1,542,384
            )




89





The
Company’s assets and liabilities related to discontinued operations at December
31, 2006 are shown below. The Company did not have any assets and liabilities
related to discontinued operations at December 31, 2007.





December
      31, 2006
              $ASSETSCurrentCash
      and cash equivalents
            
            
            35,462Amounts
      receivable
            
            
            800Inventory
            
            
            371,099Prepaid
      expenses
            
            
            131,593Other
      current assets
            
            
            79,200Total
      current assets
            
            
            618,154Fixed
      assets, net (note
      6)
            
            
            286,407Intangible
      assets, net (note
      8)
            
            
            28,806,667Goodwill
      (note
      5)
            
            
            14,446,97744,158,205LIABILITESCurrentAccounts
      payable
            
            
            232,687Accrued
      liabilities (notes 12
      and 14)
            
            
            253,779Total
      current liabilities
            
            
            486,466Deferred
      tax liability (note
      13)
            
            
            11,087,75011,574,216





11.
DUE TO STOCKHOLDERS





December
      31,2007
              $
            
            
            
            2006
              $Due
      (from)/toTLC
      Vision Corporation (note
      12)
            
            
            (2,708
            )
            
            
            91,884Other
      stockholders (note
      12)
            
            
            35,522
            
            
            
            60,52232,814
            
            
            
            152,406





The
balance due from and owing to TLC Vision Corporation (“TLC Vision”) is related
to computer and administrative support provided by TLC Vision, net of payments
made by the Company to TLC Vision. All amounts have been expensed during the
years ended December 31, 2007 and 2006, respectively, and included in general
and administrative expenses. The balance due to other stockholders includes
outstanding royalty fees payable to Mr. Hans Stock.





12.
RELATED PARTY TRANSACTIONS





The
following are the Company’s related party transactions in addition to those
disclosed in notes 10, 11 and 15.





(a)
            RHEO
      Clinic Inc.





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 would 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. was not able to
dispose of as of 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 the assets that RHEO Clinic Inc. was not able to dispose of
as of the agreed date.





90




(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 grid debentures in an aggregate principal amount 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, at December 31, 2007,
the two companies have a combined 35.6% equity interest in the Company on a
fully diluted basis.





(c)
            Asahi
      Medical





The
Company entered into a distributorship agreement (the “Distribution Agreement”),
effective October 20, 2006, with Asahi Medical. The Distribution Agreement
replaced the 2001 distributorship agreement between Asahi Medical and the
Company, as supplemented and amended by the 2003, 2004 and 2005 Memoranda.
Pursuant to the Distribution Agreement, the Company had 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.





On
January 28, 2008, the Company disclosed that it was engaged in discussions with
Asahi Medical to terminate the Distribution Agreement. The Company and Asahi
Medical have entered into a termination agreement to terminate substantially all
of their obligations under the Distribution Agreement on and as of February 25,
2008 (the “Termination Agreement”).  Pursuant to the Termination
Agreement, the Company and Asahi Medical have agreed to a mutual release of
claims relating to the Distribution Agreement, other than any claims relating to
certain provisions of the Distribution Agreement which survived its
termination.





The
Company received free inventory from Asahi Medical for purposes of the RHEO-AMD
trial, the LEARN, or Long-term Efficacy in AMD from Rheopheresis in North
America, trials 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. The value of the free inventory received from Asahi Medical
was $384,660 and nil for the years ended December 31, 2007 and 2006,
respectively.





(d)
            Mr. Hans Stock(note
    11)





On
February 21, 2002, the Company entered into an agreement with Mr. Stock as
a result of his assistance in procuring a distributorship 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 each of the years ended
December 31, 2007 and 2006, the Company did not pay any amount
to Mr. Stock as royalty fees. Included in due to stockholders at
December 31, 2007 and 2006 is $48,022 and $48,022, respectively, due to
Mr. Stock.





91





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. During each of the years ended December 31, 2007 and 2006,
the Company paid $50,000 to Mr. Stock as royalty fees. Included in due to
stockholders at December 31, 2007 and 2006 is $12,500 and $12,500, respectively,
due to Mr. Stock.





(e)
            Other





On June
25, 2003, the Company entered into a reimbursement agreement with Apheresis
Technologies, Inc. (“ATI”) pursuant to which employees of ATI, including Mr.
John Cornish, one of the Company’s stockholders and its former Vice President,
Operations, provided 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, as a result of which termination the Company no longer compensated 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. In light of the
Company's current financial situation, and in connection with the indefinite
suspension of its RHEOTM System clinical development program and the sale of
SOLX, the Company terminated the employment of Mr. Cornish effective
January 4, 2008.





During
the year ended December 31, 2007, ATI made available to the Company, upon
request, the services of certain of ATI’s employees and consultants on a per
diem basis.  During the year ended December 31, 2007, the Company paid
ATI $98,769 under this arrangement (2006 – nil). Included in accounts payable
and accrued liabilities at December 31, 2007 and 2006 is $20,004 and $9,629,
respectively, due to ATI.





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. 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. During the years ended December 31, 2007 and 2006, the Company
paid Cornish Properties Corporation an amount of $26,016 and $32,940,
respectively, as rent.





On
November 30, 2006, the Company announced that Mr. Elias Vamvakas, the Chairman,
Chief Executive Officer and Secretary of the Company, 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 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 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.





92





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. 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 are
required by the Company in the future. This resulted in a consulting expense,
included within clinical and regulatory expense for the years ended December 31,
2007 and 2006, of $10,000 and $125,000, respectively.





On
September 29, 2004, the Company signed a product purchase agreement with Veris
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 of December 31, 2005, the Company had received a total of $1,779,566
from Veris. Included in amounts receivable, net at December 31, 2005, was
$1,049,297 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 $1,049,297 against the amount due
from Veris and did not accrue additional interest on the amount outstanding
during the year ended December 31, 2006.





93





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 was included in revenue for the year ended
December 31, 2006 as all the treatment sets had 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 during 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 was
therefore not included in amounts receivable, net as of December 31, 2006. In
addition, the Company 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.





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 accounts 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.





In March
2007, Veris negotiated new payment terms with the Company, and it was agreed
that payment for treatment sets shipped subsequent to March 2007 must be
received within 180 days of shipment. During the year ended December 31, 2007,
the Company sold a total of 816 treatment sets to Veris, for a total amount of
$172,992, plus applicable taxes. The sale of these treatment sets was not
recognized as revenue during the year ended December 31, 2007 based on Veris’
payment history with the Company and the new 180-day payment terms agreed by
Veris and the Company. In October 2007, the Company met with the management of
Veris and, based on discussions with Veris, the Company believes that Veris will
not be able to meet its financial obligations to the Company. Therefore, during
the year ended December 31, 2007, the Company recorded an allowance for doubtful
accounts of $172,992 against the total amount due from Veris for the purchase of
these treatment sets.





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.





94





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 a former officer of
the Company. During the years ended December 31, 2007 and 2006, the Company paid
Innovasium Inc. C$74,932 and C$44,219, respectively. Included in accounts
payable and accrued liabilities at December 31, 2007 and 2006 is nil and
nil, respectively, due to Innovasium Inc. These amounts are expensed in the
period incurred and paid when due.





13.
INCOME TAXES





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





December
      31,2007
              $
            
            
            
            2006
              $Deferred
      tax assetsIntangibles
            
            
            144,644
            
            
            
            1,547,214Fixed
      assets
            
            
            50,902
            
            
            
            3,457Stock
      options
            
            
            4,998,697
            
            
            
            4,845,559Accruals
      and other
            
            
            2,935,841
            
            
            
            2,244,941Research
      tax credit
            
            
            12,801,402
            
            
            
            215,719Net
      operating loss carryforwards
            
            
            27,292,240
            
            
            
            23,355,28248,223,726
            
            
            
            32,212,172Valuation
      allowance
            
            
            (45,915,455
            )
            
            
            (29,428,172
            )Deferred
      tax asset of continuing operations
            
            
            2,308,271
            
            
            
            2,010,605Deferred
      tax asset of discontinued operations
            
            
            —
            
            
            
            773,3952,308,271
            
            
            
            2,784,000Deferred
      tax liabilityIntangible
      assets (other than goodwill)
            
            
            (2,308,271
            )
            
            
            (21,723,417
            )Deferred
      tax liability of continuing operations
            
            
            (2,308,271
            )
            
            
            (9,862,272
            )Deferred
      tax liability of discontinued operations
            
            
            —
            
            
            
            (11,861,145
            )(2,308,271
            )
            
            
            (21,723,417
            )Deferred
      tax liability of continuing operations, net
            
            
            —
            
            
            
            (7,851,667
            )Deferred
      tax liability of discontinued operations, net
            
            
            —
            
            
            
            (11,087,750
            )




95





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
      31,2007
            
            
            2006
            
            
            2005restated
      – notes 2 and 10$
            
            
            
            $
            
            
            
            $Loss
      from continuing operations before income taxes
            
            
            (38,365,284
            )
            
            
            (83,530,609
            )
            
            
            (163,472,510
            )Expected
      recovery of income taxes
            
            
            (13,927,612
            )
            
            
            (30,255,276
            )
            
            
            (60,486,249
            )Non-controlling
      interest
            
            
            (873,137
            )
            
            
            (63,050
            )
            
            
            —Goodwill
      impairment
            
            
            (14,165,305
            )
            
            
            23,740,447
            
            
            
            54,557,150Stock-based
      compensation
            
            
            (677,699
            )
            
            
            55,117
            
            
            
            38,628Rate
      change
            
            
            —
            
            
            
            322,321
            
            
            
            12,923Tax
      free income
            
            
            —
            
            
            
            (864
            )
            
            
            (46,979
            )Return
      to provision
            
            
            (35,270
            )
            
            
            (180,455
            )
            
            
            1,252,842Non-deductible
      expenses
            
            
            252,519
            
            
            
            89,360
            
            
            
            19,656Change
      in valuation allowance
            
            
            22,771,636
            
            
            
            3,404,355
            
            
            
            4,009,500Recovery
      of income taxes from continued operations
            
            
            (5,654,868
            )
            
            
            (2,888,490
            )
            
            
            (642,529
            )Recovery
      of income taxes from discontinued operations
            
            
            (9,349,882
            )
            
            
            (1,182,005
            )
            
            
            —Total
      recovery of income taxes
            
            
            15,004,750
            
            
            
            (4,070,495
            )
            
            
            (642,529
            )





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
            
            
            1,893,7002020
            
            
            4,488,3612021
            
            
            3,356,9922022
            
            
            2,497,6022023
            
            
            1,901,3992024
            
            
            6,494,4792025
            
            
            12,985,6772026
            
            
            12,339,1312027
            
            
            21,451,150





96





14.
ACCRUED LIABILITIES





December
      31,2007
              $
            
            
            2006
              $Continuing
      operationsDue
      to professionals
            
            
            475,044
            
            
            
            688,619Due
      to clinical trial sites
            
            
            136,681
            
            
            
            110,798Due
      to clinical trial specialists
            
            
            116,359
            
            
            
            113,142Product
      development costs
            
            
            277,521
            
            
            
            124,312Due
      to employees and directors
            
            
            66,804
            
            
            
            418,682Sales
      tax and capital tax payable
            
            
            26,820
            
            
            
            12,394Corporate
      compliance
            
            
            246,675
            
            
            
            227,475Interest
      payable
            
            
            —
            
            
            
            10,758Severances
            
            
            1,312,721
            
            
            
            —Miscellaneous
            
            
            214,826
            
            
            
            130,9782,873,451
            
            
            
            1,837,158Discontinued
      operationsDue
      to professionals
            
            
            —
            
            
            
            20,428Due
      to clinical trial sites
            
            
            —
            
            
            
            84,276Due
      to clinical trial specialists
            
            
            —
            
            
            
            93,500Due
      to employees and directors
            
            
            —
            
            
            
            45,464Miscellaneous
            
            
            —
            
            
            
            10,111—
            
            
            
            253,779





15.
COMMITMENTS AND CONTINGENCIES





Commitments





The
Company 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 $197,374 for 2008. Rent paid under these leases was
$90,465, $80,329 and $60,207 for the years ended December 31, 2007, 2006 and
2005, respectively. All Canadian dollar amounts have been converted at the
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 12).





97





Future
minimum royalty payments under the agreements as at December 31, 2007 are
approximately as follows:





$2008
            
            
            100,0002009
            
            
            100,0002010
            
            
            100,0002011
            
            
            100,0002012
      and thereafter
            
            
            550,000950,000





In
addition, the Company entered into a consultancy and non-competition agreement
on July 1, 2003 with CCR (note
12), which requires the Company to pay a fee of $5,000 per month. On
August 22, 2005, the Company amended the consultancy and non-competition
agreement with CCR such that the fee payable was increased from $5,000 to
$15,000 per month effective January 1, 2005. The monthly fee is fixed regardless
of actual time incurred by CCR in performance of the services rendered to the
Company. The agreement allows either party to convert the payment arrangement to
a fee of $2,500 daily. In the event of such conversion, CCR shall provide
services on a daily basis as required by the Company and will invoice the
Company for the total number of days that services were provided in that month.
The 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 (note16(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 2008 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. In
light of the Company’s financial position, on November 1, 2007, the Company
announced an indefinite suspension of the RHEOTM System clinical development
program for Dry AMD.  That decision was made following a comprehensive
review of the respective costs and development timelines associated with the
products in the Company’s portfolio and, in particular, the fact that, if the
Company were unable to raise additional capital, it would not have had
sufficient cash to support its operations beyond early 2008. Accordingly, the
Company terminated its agreements with the individual members of the SAB
effective November 1, 2007. The future minimum obligation under the various
consulting agreements is therefore nil. Consulting fees paid amounted to
$218,929, $244,165 and nil for the years ended December 31, 2007, 2006 and
2005.





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, 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. In June 2007, the Company paid the third $2,000,000 installment of the
Purchase Price upon the attainment by OcuSense of the first of two pre-defined
milestones. The Company is expected to pay the last $2,000,000 installment of
the Purchase Price upon the attainment by OcuSense of the second of such
milestones, provided that the milestone is 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 TearLabTM test for DED 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 TearLabTM test for DED (note 4).





98





On April
4, 2007, the Company entered into an independent contractor services agreement
with Carol Jones for the purpose of providing consulting services for the
Company’s clinical trial activities. The agreement requires the Company to pay a
minimum fee of $1,750 per month during the period from April 4, 2007 to April 4,
2008. Future minimim obligation under the independent contractor services
agreement is $24,500 for 2008.





On
January 25, 2007, OcuSense entered into a consulting agreement with Dr. Michael
Lemp which requires the Company to pay a consulting fee of $8,333 per month.
Future minimim obligation under the consulting agreement is $100,000 for
2008.





On
February 1, 2007, OcuSense entered into a consulting agreement with Nancy Cahill
which requires the Company to pay a consulting fee of $1,000 per month. Future
minimim obligation under the consulting agreement is $12,000 for
2008.





On
September 17, 2007, OcuSense signed a letter of agreement with KAM
Communications for the purpose of providing marketing support for the future
launch of the TearLabTM test for DED which requires the Company to pay a monthly
fee of $2,398. Future minimum obligation under the agreement is $16,786 for
2008.





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, 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 $23,871,935, based on
exchange rates as of December 31, 2007. The Company is currently engaged in
discussions with Diamed and MeSys regarding the termination of its relationship
with each of them.  Diamed is the designer, and MeSys is the
manufacturer, of the OctoNova pump, one of the key components of the RHEOTM
System.





16.
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.





99





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 OccuLogix L.P.
      (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 RHEOTM 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 RHEOTM 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.





After
giving effect to the anti-dilution adjustment resulting from the issuance of the
June 25, 2003 related party secured grid debentures (note 12), each share of
Series A and Series B Convertible Preferred Stock was convertible into 1.678323
and 1.643683 shares of common stock, respectively, at the option of the holder.
Each share of Series A and 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.





100




(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 4).





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 was $1.50, and the per share exercise price of the Warrants is $2.20,
subject to adjustment.  The Warrants became 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 the sale of
the Shares and the Warrants totaled $10,016,000 (less transaction costs of
$871,215). On February 6, 2007, the Company also issued to Cowen and Company,
LLC a five-year 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. The estimated grant date
fair value of the Cowen Warrant of $97,222 is included in the transaction costs
of $871,215 (note
16(f)).





101





As at
December 31, 2007, the number of shares of common stock of the Company reserved
for issuance upon the exercise of stock options is as follows:





Expiry
      date
            
            Range
      of exercise prices
              $
            
            
            
            #2008
            
            
            2.05
            
            
            
            25,0002009
            
            
            2.00
      – 2.05
            
            
            
            167,6252010
            
            
            2.00
      – 2.05
            
            
            
            119,3752012
            
            
            0.80
      – 2.00
            
            
            
            96,0902013
            
            
            0.99
      – 1.30
            
            
            
            1,079,7982014
            
            
            2.05
            
            
            
            675,0002015
            
            
            2.05
            
            
            
            949,5002016
            
            
            1.77
      – 2.14
            
            
            
            728,7492017
            
            
            1.11
      – 1.82
            
            
            
            946,2504,787,387





(e)
            Stock
      Option Plan





The
Company has a stock option plan, the 2002 Stock Option Plan (the “Stock Option
Plan”), which was most recently amended in June 2007 in order to, among other
things, increase the share reserve under the Stock Option Plan by 2,000,000.
Under the Stock Option Plan, up to 6,456,000 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 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 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 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,
“Share-Based Payments”, 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, stock-based compensation expense for each of the years
ended December 31, 2007 and 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 was
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.





102





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
      31,2007
              
              
              2006(i)
              
              
              2005(ii)$
              
              
              $
              
              
              $General
      and administrative
              
              
              65,660
              
              
              
              1,396,609
              
              
              
              170,576Clinical
      and regulatory
              
              
              216,246
              
              
              
              203,131
              
              
              
              53,700Sales
      and marketing
              
              
              199,065
              
              
              
              527,303
              
              
              
              500Stock-based
      compensation expense before income taxes (iii)(iv)
              
              
              480,971
              
              
              
              2,127,043
              
              
              
              224,776





(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.





In
accordance with SFAS No. 123R, the Company also recorded 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 ended 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.





103





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)
            The
      tax benefit associated with the Company’s stock-based compensation expense
      for the years ended December 31, 2007, 2006 and 2005 is $964,644, $781,527
      and nil, respectively. This
      amount has not been recognized in the Company's consolidated financial
      statements for the years ended December 31, 2007 and 2006 as there is a
      low probability that the Company will realize this
      benefit.





(iv)
            Of
      the total stock-based compensation expense of $480,971, $2,127,043 and
      $224,776 included in the Company’s consolidated statements of operations
      for the years ended December 31, 2007, 2006 and 2005, respectively,
      $72,800, $36,287 and nil is included as stock-based compensation expense
      of discontinued operations for the years ended December 31, 2007, 2006 and
      2005, respectively.





Net cash
proceeds from the exercise of common stock options were $2,228, $270,935 and
$231,235 for the years ended December 31, 2007, 2006 and 2005, respectively. No
income tax benefit was realized from stock option exercises during the years
ended December 31, 2007, 2006 and 2005. 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.





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 year ended December 31, 2005:





$Net
      loss, as reported
            
            
            (162,829,981
            )Adjustment
      for APB No. 25
            
            
            57,726Adjustment
      for SFAS No. 123
            
            
            (6,664,395
            )Pro
      forma net loss
            
            
            (169,436,650
            )Pro
      forma net loss per share - basic and diluted
            
            
            (4.04
            )





The
weighted average fair value of stock options granted during the years ended
December 31, 2007, 2006 and 2005 was $0.90, $1.77 and $3.54, respectively. The
estimated fair value was determined using the Black-Scholes option-pricing model
with the following weighted-average assumptions:





Years
      ended December 31,2007
            
            2006
            
            2005Volatility
            
            0.765
            
            
            0.901
            
            
            0.728Expected
      life of options
            
            5.85
      years
            
            
            5.56
      years
            
            
            2.33
      yearsRisk-free
      interest rate
            
            4.87%
            
            
            4.83%
            
            
            3.87%Dividend
      yield
            
            0%
            
            
            0%
            
            
            0%





The
Company’s computation of expected volatility for the years ended December 31,
2007, 2006 and 2005 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. 110 as options granted by the Company meet the criteria
of “plain vanilla” options as defined in SAB No. 110. 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.





104





A summary
of the options issued during the year ended December 31, 2007 and the total
number of options outstanding as of that date and changes since December 31,
2004 are set forth below:





Number
      of Options Outstanding
            
            
            Weighted Average
      Exercise Price
              $
            
            
            Weighted Average
      Remaining Contractual Life (years)
            
            
            Aggregate
      Intrinsic Value
              $Outstanding,
      December 31, 2004
            
            
            2,749,199
            
            
            
            4.64
            
            
            
            8.31
            
            
            
            —Granted
            
            
            1,823,750
            
            
            
            8.10Exercised
            
            
            (279,085
            )
            
            
            0.83Forfeited
            
            
            (186,250
            )
            
            
            9.99Outstanding,
      December 31, 2005
            
            
            4,107,614
            
            
            
            1.75
            
            
            
            8.20
            
            
            
            —Granted
            
            
            890,000
            
            
            
            1.99Exercised
            
            
            (140,726
            )
            
            
            1.93Forfeited
            
            
            (619,667
            )
            
            
            2.05Outstanding,
      December 31, 2006 (i)
            
            
            4,237,221
            
            
            
            1.75
            
            
            
            7.61
            
            
            
            —Granted
            
            
            1,077,500
            
            
            
            1.31Exercised
            
            
            (2,250
            )
            
            
            0.99Forfeited
            
            
            (525,084
            )
            
            
            1.83Outstanding,
      December 31, 2007
            
            
            4,787,387
            
            
            
            1.64
            
            
            
            7.41
            
            
            
            —Vested
      or expected to vest, December 31, 2007
            
            
            3,203,728
            
            
            
            1.61
            
            
            
            6.48
            
            
            
            —Exercisable,
      December 31, 2007
            
            
            3,006,637
            
            
            
            1.61
            
            
            
            6.32
            
            
            
            —





(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 2007 of $0.08 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, 2007). This amount is
nil for all the years presented as the exercise price of all options outstanding
as at December 31, 2007, 2006, 2005 and 2004 is higher than $0.08, the Company’s
closing stock price on the last trading day of fiscal 2007.





As at
December 31, 2007, $3,870,931 of total unrecognized compensation cost related to
stock options is expected to be recognized over a weighted-average period of
1.85 years.





(f)
            Warrants





On
February 6, 2007, pursuant to the Securities Purchase Agreement between the
Company and certain institutional investors (note16(d)), the Company issued the
Warrants to these investors. The Warrants are five-year warrants exercisable
into an aggregate of 2,670,933 shares of the Company’s common stock. On February
6, 2007, the Company also issued the Cowen Warrant to Cowen and Company, LLC 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 private
placement of the Shares and the Warrants pursuant to the Securities Purchase
Agreement. The Cowen Warrant is a five-year warrant exercisable into an
aggregate of 93,483 shares of the Company’s common stock. The per share exercise
price of the Warrants is $2.20, subject to adjustment, and the Warrants became
exercisable on August 6, 2007. All of the terms and conditions of the Cowen
Warrant (other than the number of shares of the Company's common stock into
which it is exercisable) are identical to those of the Warrants.





105





The
Company accounts for the Warrants and the Cowen Warrant in accordance with the
provisions of SFAS No. 133, “Accounting for Derivative Instruments and Hedging
Activities” (“SFAS No. 133”), along with related interpretation EITF No. 00-19,
“Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company’s Own Stock” (“EITF No. 00-19”). SFAS No. 133 requires
every derivative instrument within its scope (including certain derivative
instruments embedded in other contracts) to be recorded on the balance sheet as
either an asset or liability measured at its fair value, with changes in the
derivative’s fair value recognized currently in earnings unless specific hedge
accounting criteria are met. Based on the provisions of EITF No. 00-19, the
Company determined that the Warrants and the Cowen Warrant do not meet the
criteria for classification as equity. Accordingly, the Company has classified
the Warrants and the Cowen Warrant as a current liability at December 31,
2007.





The
estimated fair value of the Warrants and the Cowen Warrant was determined using
the Black-Scholes option-pricing model with the following weighted-average
assumptions:





Volatilit
            
            79.8%Expected
      life of Warrants
            
            5
      yearsRisk-free
      interest rate
            
            4.76%Dividend
      yield
            
            0%





The
Company initially allocated the total proceeds received, pursuant to the
Securities Purchase Agreement, to the Shares and the Warrants based on their
relative fair values. This resulted in an allocation of $2,052,578 to obligation
under warrants which includes the fair value of the Cowen Warrant of
$97,222.





In
addition, SFAS No. 133 requires the Company to record the outstanding
derivatives at fair value at the end of each reporting period, resulting in an
adjustment to the recorded liability of the derivative, with any gain or loss
recorded in earnings of the applicable reporting period. The Company therefore
estimated the fair value of the Warrants and the Cowen Warrant as at December
31, 2007 and determined the aggregate fair value to be a nominal amount, a
decrease of approximately $2,052,578 over the initial measurement of the
aggregate fair value of the Warrants and the Cowen Warrant on the date of
issuance. Accordingly, the Company recognized a gain of $2,052,578 in its
consolidated statement of operations for the year ended December 31,
2007 which reflects the decrease in the Company’s obligation to its warrant
holders to its nominal amount at December 31, 2007.





Transaction
costs associated with the issuance of the Warrants of $170,081 has been recorded
as a warrant expense in the Company’s consolidated statement of operations for
the year ended December 31, 2007.





A summary
of the Warrants issued during the year ended December 31, 2007 and the total
number of warrants outstanding as of that date are set forth below:





Number
      of Warrants Outstanding
              #
            
            
            Weighted Average
      Exercise Price
              $Outstanding,
      December 31, 2006
            
            
            —
            
            
            
            —Granted
            
            
            2,764,416
            
            
            
            2.20Outstanding,
      December 31, 2007
            
            
            2,764,416
            
            
            
            2.20




106




17.
CONSOLIDATED STATEMENTS OF CASH FLOWS





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





Years
      ended
              December
      31,2007
              $
            
            
            2006
              $
            
            
            2005
              $Due
      to related party
            
            
            —
            
            
            
            (5,065
            )
            
            
            13,291Amounts
      receivable
            
            
            (58,782
            )
            
            
            390,634
            
            
            
            (82,810
            )Inventory
            
            
            2,756,759
            
            
            
            2,250,554
            
            
            
            (3,431,743
            )Prepaid
      expenses
            
            
            37,951
            
            
            
            247,361
            
            
            
            (322,455
            )Accounts
      payable
            
            
            797,415
            
            
            
            (1,225,575
            )
            
            
            301,457Accrued
      liabilities
            
            
            911,987
            
            
            
            (1,155,335
            )
            
            
            (563,925
            )Deferred
      revenue and rent inducement
            
            
            —
            
            
            
            —
            
            
            
            (485,047
            )Due
      to stockholders
            
            
            (109,842
            )
            
            
            (5,827
            )
            
            
            (358,523
            )Other
      current assets
            
            
            7,000
            
            
            
            12,781
            
            
            
            4,1054,342,488
            
            
            
            509,528
            
            
            
            (4,925,650
            )





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 31,2007
              $
            
            
            2006
              $
            
            
            2005
              $Free
      inventory
            
            
            418,303
            
            
            
            (48,006
            )
            
            
            183,382Warrant
      issued in part payment of placement fee
            
            
            97,222
            
            
            
            ―
            
            
            
            —Common
      stock issued on acquisition
            
            
            —
            
            
            
            15,035,969
            
            
            
            ―Additional
      cash flow informationInterest
      paid
            
            
            11,180
            
            
            
            ―
            
            
            
            —Income
      taxes recovered (paid), net
            
            
            —
            
            
            
            4,533
            
            
            
            (8,138
            )





18.
FINANCIAL INSTRUMENTS





Currency
risk





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





Credit
risk





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





During
fiscal 2007, the Company derived all of its revenue from the sale of the
components of the RHEOTM System and the SOLX Glaucoma System prior to the sale of
all of the issued and outstanding shares of SOLX on December 19, 2007. During
the year ended December 31, 2007, the Company sold components of the RHEOTM
System to one of its customers, Veris. As previously discussed in note 12, the
Company fully provided for the balance due from Veris. Accordingly, no trade
receivables due from Veris have been recognized as at December 31,
2007.





107




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, amounts receivable, accounts
payable, accrued liabilities and amounts due from and to stockholders
approximate their carrying values due to the short-term maturities of these
instruments.





As at
December 31, 2007, the Company had investments in the aggregate principal amount
of $1,900,000 which consist of investments in four separate asset-backed auction
rate securities yielding an average return of 5.865% per
annum.  However, as a result of market conditions, all of these
investments have recently failed to settle on their respective settlement dates
and have been reset to be settled at a future date with an average maturity of
46 days.  Due to the current lack of liquidity for asset-backed
securities of this type, the Company has concluded that the carrying value of
these investments was higher than its fair value as of December 31, 2007.
Accordingly, these auction rate securities have been recorded at their estimated
fair value of $863,750. The Company considers this to be an other-than-temporary
reduction in the value. Accordingly, the loss associated with these auction rate
securities of $1,036,250 has been included as an impairment of investments in
the Company’s consolidated statement of operations for the year ended December
31, 2007. Although the Company continues to receive payment of interest earned
on these securities, the Company does not know at the present time when it will
be able to convert these investments into cash.  Accordingly,
management has classified these investments as a non-current asset on its
consolidated balance sheet as of December 31, 2007. Management will continue to
closely monitor these investments for future indications of further impairment.
The illiquidity of these investments may have an adverse impact on the length of
time during which the Company currently expects to be able to sustain its
operations in the absence of an additional capital raise by the
Company.





19.
SEGMENTED INFORMATION





As a
result of the acquisition of SOLX and OcuSense during 2006 (note4),the Company had three
reportable segments: retina, glaucoma and point-of-care. The retina segment was
in the business of commercializing the RHEOTM System which was 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 provided support to
its sole customer in Canada, Veris, in its commercial activities in Canada. The
Company obtained investigational device exemption clearance from the FDA to
commence RHEO-AMD, its clinical study of the RHEOTM System. On November 1, 2007,
the Company announced an indefinite suspension of the RHEOTM System clinical
development program for Dry AMD.  That decision was made
following a comprehensive review of the respective costs and development
timelines associated with the products in the Company’s portfolio and, in
particular, the fact that, if the Company is unable to raise additional capital,
it will not have sufficient cash to support its operations beyond approximately
the end of April 2008 (assuming that the outstanding obligation of OccuLogix to
pay $2,000,000 to OcuSense becomes due and payable prior to the end of April
2008) (note
4).





The
glaucoma segment of the Company was 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 was 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. On December 19,
2007, the Company sold all of the issued and outstanding shares of the capital
stock of SOLX, which had been the glaucoma segment of the Company prior to the
completion of this sale. All revenue and expenses related to the Company’s
glaucoma segment, prior to the December 19, 2007 closing date, has therefore
been included in discontinued operations on its consolidated statements of
operations for the years ended December 31, 2007 and 2006.





The
point-of-care segment 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. During the year ended December 31, 2006, the TearLabTM
business did not meet the quantitative criteria to be disclosed separately as a
reportable segment and was included as other.





108





The
accounting policies of the segments are the same as those described in
significant accounting policies (note 3). 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 are acquired or developed as a unit, and in the case of SOLX and OcuSense,
their respective management was retained at the time of
acquisition.





The
Company’s business units are as follows:





Retina
            
            
            Glaucoma
            
            
            Point-of-care
            
            
            Total$
            
            
            $
            
            
            $
            
            
            $Year
      ended December 31, 2007Revenue
            
            
            91,500
            
            
            
            —
            
            
            
            —
            
            
            
            91,500Expenses:Cost
      of goods sold
            
            
            2,398,103
            
            
            
            —
            
            
            
            —
            
            
            
            2,398,103Operating
            
            
            10,230,299
            
            
            
            —
            
            
            
            4,577,178
            
            
            
            14,807,477Depreciation
      and amortization
            
            
            2,065,088
            
            
            
            —
            
            
            
            590,172
            
            
            
            2,655,260Impairment
      of intangible asset
            
            
            20,923,028
            
            
            
            —
            
            
            
            —
            
            
            
            20,923,028Restructuring
      charges
            
            
            1,312,721
            
            
            
            —
            
            
            
            —
            
            
            
            1,312,721Loss
      from continuing operations
            
            
            (36,837,739
            )
            
            
            —
            
            
            
            (5,167,350
            )
            
            
            (42,005,089
            )Interest
      income
            
            
            551,948
            
            
            
            —
            
            
            
            57,985
            
            
            
            609,933Interest
      expense
            
            
            (16,444
            )
            
            
            —
            
            
            
            (784
            )
            
            
            (17,228
            )Changes
      in fair value of warrant obligation
            
            
            1,882,497
            
            
            
            —
            
            
            
            —
            
            
            
            1,882,497Loss
      on short-term investment
            
            
            (1,036,250
            )
            
            
            —
            
            
            
            —
            
            
            
            (1,036,250
            )Other
      income (expense), net
            
            
            (6,547
            )
            
            
            —
            
            
            
            24,557
            
            
            
            18,010Minority
      interest
            
            
            —
            
            
            
            —
            
            
            
            2,182,843
            
            
            
            2,182,843Recovery
      of income taxes
            
            
            3,186,334
            
            
            
            —
            
            
            
            2,468,534
            
            
            
            5,654,868Loss
      from continuing operations
            
            
            (32,276,201
            )
            
            
            —
            
            
            
            (434,215
            )
            
            
            (32,710,416
            )Loss
      from discontinued operations
            
            
            —
            
            
            
            (35,428,898
            )
            
            
            —
            
            
            
            (35,428,898
            )Net
      loss
            
            
            (32,276,201
            )
            
            
            (35,428,898
            )
            
            
            (434,215
            )
            
            
            (68,139,314
            )Total
      assets
            
            
            3,672,542
            
            
            
            —
            
            
            
            6,325,818
            
            
            
            9,998,360





109




Retina
            
            
            Glaucoma
            
            
            Point-of-care
            
            
            Total$
            
            
            $
            
            
            $
            
            
            $Year
      ended December 31, 2006Revenue
            
            
            174,259
            
            
            
            —
            
            
            
            —
            
            
            
            174,259Expenses:Cost
      of goods sold
            
            
            3,528,951
            
            
            
            —
            
            
            
            —
            
            
            
            3,528,951Operating
            
            
            12,741,701
            
            
            
            —
            
            
            
            312,394
            
            
            
            13,054,095Depreciation
      and amortization
            
            
            1,860,849
            
            
            
            —
            
            
            
            39,516
            
            
            
            1,900,365Impairment
      of goodwill
            
            
            65,945,686
            
            
            
            —
            
            
            
            —
            
            
            
            65,945,686Restructuring
      charges
            
            
            819,642
            
            
            
            —
            
            
            
            —
            
            
            
            819,642Loss
      from continuing operations
            
            
            (84,722,570
            )
            
            
            —
            
            
            
            (351,910
            )
            
            
            (85,074,480
            )Interest
      income
            
            
            1,370,208
            
            
            
            —
            
            
            
            —
            
            
            
            1,370,208Interest
      expense
            
            
            (13,592
            )
            
            
            
            
            
            
            (1,304
            )
            
            
            (14,896
            )Other
      income (expense), net
            
            
            31,108
            
            
            
            —
            
            
            
            (173
            )
            
            
            30,935Minority
      interest
            
            
            —
            
            
            
            
            
            
            
            157,624
            
            
            
            157,624Recovery
      of income taxes
            
            
            2,814,058
            
            
            
            —
            
            
            
            74,432
            
            
            
            2,888,490Loss
      from continuing operations
            
            
            (80,520,788
            )
            
            
            —
            
            
            
            (121,331
            )
            
            
            (80,642,119
            )Loss
      from discontinued operations
            
            
            —
            
            
            
            (1,542,384
            )
            
            
            —
            
            
            
            (1,542,384
            )Net
      loss for the year
            
            
            (80,520,788
            )
            
            
            (1,542,384
            )
            
            
            (121,331
            )
            
            
            (82,184,503
            )Total
      assets
            
            
            38,762,773
            
            
            
            44,158,205
            
            
            
            7,482,717
            
            
            
            90,403,695Year
      ended December 31, 2005Revenue
            
            
            1,840,289
            
            
            
            —
            
            
            
            —
            
            
            
            1,840,289Expenses:Cost
      of goods sold
            
            
            3,394,102
            
            
            
            —
            
            
            
            —
            
            
            
            3,394,102Operating
            
            
            14,181,600
            
            
            
            —
            
            
            
            —
            
            
            
            14,181,600Depreciation
      and amortization
            
            
            1,821,680
            
            
            
            —
            
            
            
            —
            
            
            
            1,821,680Impairment
      of goodwill
            
            
            147,451,758
            
            
            
            —
            
            
            
            —
            
            
            
            147,451,758Loss
      from continuing operations
            
            
            (165,008,851
            )
            
            
            —
            
            
            
            —
            
            
            
            (165,008,851
            )Interest
      income
            
            
            1,593,366
            
            
            
            —
            
            
            
            —
            
            
            
            1,593,366Other
      expense, net
            
            
            (57,025
            )
            
            
            —
            
            
            
            —
            
            
            
            (57,025
            )Recovery
      of income taxes
            
            
            642,529
            
            
            
            —
            
            
            
            —
            
            
            
            642,529Net
      loss for the year
            
            
            (162,829,981
            )
            
            
            
            
            
            
            
            
            
            
            (162,829,981
            )Total
      assets
            
            
            137,806,058
            
            
            
            —
            
            
            
            —
            
            
            
            137,806,058




110





The
Company’s geographic segments are as follows:





United
      States
            
            
            Canada
            
            
            Europe
            
            
            Israel
            
            
            Total$
            
            
            $
            
            
            $
            
            
            $
            
            
            $Year
      ended December 31, 2007Fixed
      assets and intangible assets
            
            
            5,972,098
            
            
            
            60,302
            
            
            
            —
            
            
            
            —
            
            
            
            6,032,400Year
      ended December 31, 2006Fixed
      assets and intangible assets
            
            
            70,932,850
            
            
            
            186,987
            
            
            
            63,484
            
            
            
            42,613
            
            
            
            71,225,934Year
      ended December 31, 2005Fixed
      assets and intangible assets
            
            
            90,340,988
            
            
            
            137,686
            
            
            
            —
            
            
            
            —
            
            
            
            90,478,674





20.
SUBSEQUENT EVENT





(i)
            On
      February 19, 2008, the Company announced that it had secured a bridge loan
      in an aggregate principal amount of $3,000,000 (less transaction costs of
      approximately $200,000) from a number of private parties. The loan bears
      interest at a rate of 12% per annum and has a 180-day term, which may be
      extended to 270 days under certain circumstances. The Company has pledged
      its shares of the capital stock of OcuSense as collateral for the
      loan.





Under the
terms of the loan agreement, the Company has two pre-payment options available
to it, should it decide to not wait until the maturity date to repay the loan.
Under the first pre-payment option, the Company may repay the loan in full by
paying the lenders, in cash, the amount of outstanding principal and accrued
interest and issuing to the lenders five-year warrants in an aggregate amount
equal to approximately 19.9% of the issued and outstanding shares of the
Company’s common stock (but not to exceed 20% of the issued and outstanding
shares of the Company’s common stock). The warrants would be exercisable into
shares of the Company’s common stock at an exercise price of $0.10 per share and
would not become exercisable until the 180th day following their issuance. Under
the second pre-payment option, provided that the Company has closed a private
placement of shares of its common stock for aggregate gross proceeds of at least
$4,000,000, the Company may repay the loan in full by issuing to the lenders
shares of its common stock, in an aggregate amount equal to the amount of
outstanding principal and accrued interest, at a 15% discount to the price paid
by the private placement investors. Any exercise by the Company of the second
pre-payment option would be subject to stockholder and regulatory
approval.





(ii)
            On
      September 18, 2007, OccuLogix received a letter from The Nasdaq Stock
      Market, or Nasdaq, indicating that, for the previous 30 consecutive
      business days, the bid price of the Company’s common stock closed below
      the minimum $1.00 per share requirement for continued inclusion under
      Marketplace Rule 4450(e)(5), or the Minimum Bid Price Rule. Therefore, in
      accordance with Marketplace Rule 4450(e)(2), the Company was provided 180
      calendar days, or until March 17, 2008, to regain compliance. The Nasdaq
      letter stated that, if, at any time before March 17, 2008, the bid price
      of the Company’s common stock closes at $1.00 per share or more for a
      minimum of 10 consecutive business days, Nasdaq staff will provide written
      notification that it has achieved compliance with the Minimum Bid Price
      Rule. The Nasdaq letter also stated that, if the Company does not regain
      compliance with the Minimum Bid Price Rule by March 17, 2008, Nasdaq staff
      will provide written notification that the Company’s securities will be
      delisted, at which time the Company may appeal the Nasdaq staff’s
      determination to delist its securities to a Nasdaq Listing Qualifications
      Panel.







111








The
Company will not have become compliant with the Minimum Bid Price Rule by March
17, 2008. Although the Company intends to appeal any determination by Nasdaq
staff to delist its common stock to a Nasdaq Listing Qualifications Panel, the
Company may not be successful in its appeal, in which case its common stock may
be transferred to The Nasdaq Capital Market or be delisted altogether. Should
either occur, existing stockholders will suffer decreased
liquidity.





These
Nasdaq notices have no effect on the listing of the Company's common stock on
the Toronto Stock Exchange.





21.
QUARTERLY FINANCIAL DATA (UNAUDITED)





The
following tables contain selected unaudited consolidated statement of operations
data for each quarter of fiscal 2007 and 2006:





Fiscal
      2007 Quarter EndedMarch
      31
              
              
              June
      30
              
              
              September
      30
              
              
              December
      31$
              
              
              $
              
              
              $
              
              
              $Revenue
              
              
              90,000
              
              
              
              —
              
              
              
              —
              
              
              
              1,500Gross
      profit (loss)
              
              
              57,900
              
              
              
              (33,297
              )
              
              
              (2,287,411
              )
              
              
              (43,795
              )(Loss)
      from continuing operations
              
              
              (3,169,254
              )
              
              
              (1,497,312
              )
              
              
              (18,577,182
              )
              
              
              (9,466,668
              )(Loss)
      from discontinued operations
              
              
              (1,103,490
              )
              
              
              (1,081,559
              )
              
              
              (1,082,842
              )
              
              
              (32,161,007
              )Net
      (loss)
              
              
              (4,272,744
              )
              
              
              (2,578,871
              )
              
              
              (19,660,024
              )
              
              
              (41,627,675
              )Weighted
      average number of shares outstanding – basic and diluted
              
              
              54,558,769
              
              
              
              57,304,020
              
              
              
              57,306,145
              
              
              
              57,306,145Net
      (loss) from continuing operations per share – basic and
      diluted
              
              
              (0.06
              )
              
              
              (0.03
              )
              
              
              (0.32
              )
              
              
              (0.17
              )Net
      (loss) from discontinued operations per share – basic and
      diluted
              
              
              (0.02
              )
              
              
              (0.02
              )
              
              
              (0.02
              )
              
              
              (0.56
              )Net
      (loss) per share – basic and diluted
              
              
              (0.08
              )
              
              
              (0.05
              )
              
              
              (0.34
              )
              
              
              (0.73
              )





112




Fiscal
      2006 Quarter EndedMarch
      31
                
                
                June
      30
                
                
                September
      30
                
                
                December
      31$
                
                
                $
                
                
                $
                
                
                $Revenue
                
                
                —
                
                
                
                82,715
                
                
                
                53,144
                
                
                
                38,400Gross
      profit (loss)
                
                
                (1,650,000
                )
                
                
                78,398
                
                
                
                (52,214
                )
                
                
                (1,730,876
                )(Loss)
      from continuing operations
                
                
                (5,806,868
                )
                
                
                (69,971,237
                )
                
                
                (3,033,234
                )
                
                
                (1,830,780
                )(Loss)
      from discontinued operations
                
                
                —
                
                
                
                —
                
                
                
                (531,771
                )
                
                
                (1,010,613
                )Net
      (loss)
                
                
                (5,806,868
                )
                
                
                (69,971,237
                )
                
                
                (3,565,005
                )
                
                
                (2,841,393
                )Weighted
      average number of shares outstanding – basic and diluted
                
                
                42,166,561
                
                
                
                42,186,579
                
                
                
                44,911,018
                
                
                
                50,622,496Net
      (loss) from continuing operations per share – basic and
      diluted
                
                
                (0.14
                )
                
                
                (1.66
                )
                
                
                (0.07
                )
                
                
                (0.04
                )Net
      (loss) from discontinued operations per share – basic and
      diluted
                
                
                —
                
                
                
                —
                
                
                
                (0.01
                )
                
                
                (0.02
                )Net
      (loss) per share – basic and diluted
                
                
                (0.14
                )
                
                
                (1.66
                )
                
                
                (0.08
                )
                
                
                (0.06
                )




(i)
              Loss
      from continuing operations for the three months ended March 31, 2007
      includes a charge for the change in the fair value of the Company’s
      obligation under warrants and warrant expense of
  $723,980.
 
 (ii)
              Loss
      from continuing operations for the three months ended June 30, September
      30 and December 31, 2007 includes income recognized from the change in the
      fair value of the Company’s obligation under warrants of $1,500,710,
      $856,969 and $248,797,
respectively.
 
 (iii)
              Loss
      from continuing operations for the three months ended December 31, 2007
      includes a charge for the loss on short-term investments of
      $1,036,250.
 
 (iv)
              Loss
      from continuing operations for the three months ended September 30, 2007,
      December 31, 2006 and March 31, 2006 includes the expense of amounts
      related to inventory reserves of $2,782,494, $1,679,124 and $1,625,000,
      respectively.
 
 (v)
              Loss
      from continuing operations for the three months ended June 30, 2006
      includes a goodwill impairment charge of
  $65,945,686.
 
 (vi)
              Loss
      from discontinued operations for the three months ended December 31, 2007
      includes a goodwill impairment charge of
  $14,446,977.
 
 (vii)
              Loss
      from continuing operations for the three months ended September 30, 2007
      includes the charge for the impairment of intangible assets of
      $20,923,028.
 
 (viii)
              Loss
      from discontinued operations for the three months ended December 31, 2007
      includes the charge for the impairment of intangible assets of
      $22,286,383.
 
 (ix)
              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.




113





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, 2007, 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
Exchange Act. 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, 2007. 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, 2007, 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, 2007, 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.





114





REPORT
OF INDEPENDENT REGISTERED


PUBLIC
ACCOUNTING FIRM








The Board
of Directors and Shareholders of OccuLogix, Inc.








We have
audited OccuLogix, Inc.’s internal control over financial reporting as of
December 31, 2007, 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 included in the accompanying Management’s annual report on internal
control over financial reporting.  Our responsibility is to express an
opinion on 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, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk 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, OccuLogix, Inc.
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2007, based on the COSO criteria.





We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of OccuLogix, Inc. as of December
31, 2007 and 2006, and the related consolidated statements of operations,
changes in stockholders’ equity and cash flows for each of the three years ended
December 31, 2007 and our report dated 14, 2008 expressed an unqualified opinion
thereon in the period.






Toronto,
      Canada,
            Chartered
      AccountantsMarch
      14, 2008.
            Licensed
      Public Accountants





115





ITEM
      9B.
            OTHER
      INFORMATION.





None.





116




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
2008 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.





117





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
            65Consolidated Balance Sheets as at December 31, 2007 and
      December 31, 2006
            66Consolidated Statements of Operations for the three years ended
      December 31, 2007
            67Consolidated Statements of Changes in Stockholders’ Equity for
      the three years ended December 31, 2007
            68Consolidated Statements of Cash Flows for the three years ended
      December 31, 2007
            70Notes to Consolidated Financial Statements
            71





(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 10.4, 10.5, 10.8 to 10.14
inclusive, 10.18, 10.24, 10.40, 10.44 to 10.49 inclusive and 10.52 to 10.57
inclusive 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.





118





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 17, 2008
            OCCULOGIX,
      INC.By:
            /s/
      Elias VamvakasElias VamvakasChief
      Executive Officer





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





119








Dated:  March
      17, 2008
              
              By:
              /s/
      Elias VamvakasElias VamvakasChief
      Executive Officer andChairman
      of Board of DirectorsDated:
      March 17, 2008
              
              By:
              /s/
      William G. DumencuWilliam G. DumencuChief
      Financial Officer and TreasurerDated:  March
      17, 2008
              
              By:
              /s/
      Jay T. HolmesJay T. HolmesDirectorDated:
      March 17, 2008
              
              By:
              /s/
      Thomas N. DavidsonThomas N. DavidsonDirectorDated:  March
      17, 2008
              
              By:
              /s/
      Richard L. LindstromRichard
      L. Lindstrom, M.D.DirectorDated:  March
      17, 2008
              
              By:
              /s/
      Georges NoëlGeorges NoëlDirectorDated:  March
      17, 2008
              
              By:
              /s/
      Adrienne L. GravesAdrienne
      L. GravesDirectorDated:  March
      17, 2008
              
              By:
              /s/
      Gilbert S. OmennGilbert S. OmennDirector





120





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
      2005Bad
      debt reserves
              
              
              —
              
              
              
              518,852
              
              
              
              —
              
              
              
              —
              
              
              
              518,852Inventory
      reserves
              
              
              —
              
              
              
              1,990,830
              
              
              
              —
              
              
              
              —
              
              
              
              1,990,830Fiscal
      2006Bad
      debt reserves
              
              
              518,852
              
              
              
              —
              
              
              
              —
              
              
              
              (518,852
              )1
              
              
              —Inventory
      reserves
              
              
              1,990,830
              
              
              
              3,304,124
              
              
              
              —
              
              
              
              (193,560
              )2
              
              
              5,101,394Fiscal
      2007Bad
      debt reserves
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Inventory
      reserves
              
              
              5,101,394
              
              
              
              2,790,209
              
              
              
              —
              
              
              
              (596,058
              )2
              
              
              7,295,545





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 2007 and 2006, the Company utilized inventory that had previously
      been provided for.





121




3.
            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
            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)).10.2
            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)).10.3
            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)).10.4
            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)).10.5
            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)).10.6
            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)).10.7
            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)).10.8
            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)).10.9
            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)).10.10
            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)).





122




10.11
            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)).10.12
            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)).10.13
            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)).10.14
            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)).10.15
            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)).10.16
            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)).10.17
            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)).10.18
            Employment
      Agreement between the Registrant and Doug P. Adams dated as of September
      1, 2006 (incorporated by reference to Exhibit 10.41 to the Registrant’s
      Annual Report on Form 10-K/A, filed with the Commission on March 29, 2007
      (file no. 000-51030)).10.19
            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 (incorporated by reference to Exhibit 10.42 to the
      Registrant’s Annual Report on Form 10-K/A, filed with the Commission on
      March 29, 2007 (file no. 000-51030)).10.20
            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)).





123




10.21
            Summary
      of Terms and Conditions between the Registrant and Elias Vamvakas dated
      November 30, 2006 (incorporated by reference to Exhibit 10.44 to the
      Registrant’s Annual Report on Form 10-K/A, filed with the Commission on
      March 29, 2007 (file no. 000-51030)).10.22
            Series
      A Stock Purchase Agreement by and among OcuSense, Inc. and the Registrant
      dated as of November 30, 2006 (incorporated by reference to Exhibit 10.45
      to the Registrant’s Annual Report on Form 10-K/A, filed with the
      Commission on March 29, 2007 (file no. 000-51030)).  (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.)10.23
            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)).10.24
            Employment
      Agreement between the Registrant and Suh Kim dated as of March 12, 2007
      (incorporated by reference to Exhibit 10.47 to the Registrant’s Annual
      Report on Form 10-K/A, filed with the Commission on March 29, 2007 (file
      no. 000-51030)).10.25
            License
      Agreement between OcuSense, Inc. and The Regents of the University of
      California dated March 12, 2003 (incorporated by reference to Exhibit
      10.48 to the Registrant’s Annual Report on Form 10-K/A, filed with the
      Commission on March 29, 2007 (file no. 000-51030)).  (Portions
      of this exhibit have been omitted pursuant to a request for confidential
      treatment.)10.26
            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
      (incorporated by reference to Exhibit 10.49 to the Registrant’s Annual
      Report on Form 10-K/A, filed with the Commission on March 29, 2007 (file
      no. 000-51030)).10.27
            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
      (incorporated by reference to Exhibit 10.50 to the Registrant’s Annual
      Report on Form 10-K/A, filed with the Commission on March 29, 2007 (file
      no. 000-51030)).  (Portions of this exhibit have been omitted
      pursuant to a request for confidential treatment.)10.28
            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
      (incorporated by reference to Exhibit 10.51 to the Registrant’s Annual
      Report on Form 10-K/A, filed with the Commission on March 29, 2007 (file
      no. 000-51030)).10.29
            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
      (incorporated by reference to Exhibit 10.52 to the Registrant’s Annual
      Report on Form 10-K/A, filed with the Commission on March 29, 2007 (file
      no. 000-51030)).10.30
            Terms
      of Business, dated February 5, 2007, between Invetech Pty Ltd and
      OcuSense, Inc.10.31
            Amendment
      No. 5, dated June 29, 2007, 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.)10.32
            Lease,
      dated October 17, 2005, between Penyork Properties III Inc. and the
      Registrant.10.33
            Lease
      Amending Agreement, dated as of March 9, 2007, between the Registrant and
      2600 Skymark Investments Inc., amending the Lease between Penyork
      Properties III Inc. and the Registrant dated October 17,
    2005.





124




10.34
            2002
      Stock Option Plan, as amended and restated on June 29,
    2007.10.35
            Manufacturing
      and Development Agreement, dated October 25, 2007, between MiniFAB (Aust)
      Pty Ltd and OcuSense, Inc.  (Portions of this exhibit have been
      omitted pursuant to a request for confidential
  treatment.)10.36
            First
      Amendment to Series A Preferred Stock Purchase Agreement, dated October
      29, 2007, between OcuSense, Inc. and the Registrant (incorporated by
      reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form
      10-Q, filed with the Commission on November 9, 2007 (file no.
      000-51030)).10.37
            Research
      Agreement, dated as of December 13, 2007, between * and OcuSense, Inc.
      (Portions of this exhibit have been omitted pursuant to a request for
      confidential treatment.)10.38
            Stock
      Purchase Agreement, dated as of December 19, 2007, between the Registrant
      and Solx Acquisition, Inc.  (Exhibits have been omitted pursuant
      to Item 601(b)(2) of Regulation S-K and will be provided to the Commission
      upon request.)10.39
            Amending
      Agreement, dated as of December 19, 2007, by and among the Registrant,
      Solx, Inc. and Peter M. Adams, acting for and on behalf of the Stockholder
      Representative Committee, amending 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.10.40
            Termination
      Agreement, dated as of December 19, 2007, between Doug P. Adams and the
      Registrant, terminating the Employment Agreement between the Registrant
      and Doug P. Adams dated as of September 1, 2006.10.41
            Limited
      Guaranty, dated as of December 19, 2007, by Doug P. Adams for the benefit
      of the Registrant.10.42
            Security
      Agreement, dated as of December 19, 2007, by Solx, Inc. in favor of the
      Registrant.10.43
            Letter
      Agreement, dated December 20, 2007, between the Registrant and Solx
      Acquisition, Inc.10.44
            Termination
      Agreement, dated as of January 4, 2008, between John Cornish and the
      Registrant, terminating the Employment Agreement between the Registrant
      and John Cornish dated as of April 1, 2005, as amended.10.45
            Termination
      Agreement, dated as of January 4, 2008, between Julie Fotheringham and the
      Registrant, terminating the Employment Agreement between the Registrant
      and Julie Fotheringham dated September 1, 2004.10.46
            Termination
      Agreement, dated as of January 4, 2008, between Stephen Parks and the
      Registrant, terminating the Employment Agreement between Stephen Parks and
      the Registrant dated as of October 4, 2005.10.47
            Termination
      Agreement, dated as of January 8, 2008, between David C. Eldridge and the
      Registrant, terminating the Employment Agreement between the Registrant
      and Dr. David Eldridge dated November 9, 2004.10.48
            Termination
      Agreement, dated as of January 31, 2008, between Nozhat Choudry and the
      Registrant, terminating the Employment Agreement between Nozhat Choudry
      and the Registrant, as amended.





125




10.49
            Termination
      Agreement, dated as of January 31, 2008, between Stephen Kilmer and the
      Registrant, terminating the Employment Agreement between the Registrant
      and Stephen Kilmer dated July 30, 2004.10.50
            Loan
      Agreement, dated as of February 19, 2008, by and among the Registrant, the
      Lenders named therein and Marchant Securities Inc.10.51
            Share
      Pledge Agreement, dated as of February 19, 2008, by the Registrant in
      favor of Marchant Securities Inc., as collateral agent.10.52
            Employment
      Agreement, dated as of February 25, 2008, between the Registrant and
      William G. Dumencu.10.53
            Termination
      Agreement, dated as of February 25, 2008, between Asahi Kasei Kuraray
      Medical Co., Ltd and the Registrant10.54
            Amending
      Agreement, dated as of March 3, 2008, between Nozhat Choudry and the
      Registrant, amending the Termination Agreement between Nozhat Choudry and
      the Registrant dated as of January 31, 2008.10.55
            Amending
      Agreement, dated as of March 3, 2008, between John Cornish and the
      Registrant, amending the Termination Agreement between John Cornish and
      the Registrant dated as of January 4, 2008.10.56
            Amending
      Agreement, dated as of March 3, 2008, between David C. Eldridge and the
      Registrant, amending the Termination Agreement between David C. Eldridge
      and the Registrant dated as of January 8, 2008.10.57
            Amending
      Agreement, dated as of March 3, 2008, between Julie Fotheringham and the
      Registrant, amending the Termination Agreement between Julie Fotheringham
      and the Registrant dated as of January 4, 2008.10.58
            Amending
      Agreement, dated as of March 3, 2008, between Stephen Parks and the
      Registrant, amending the Termination Agreement between Stephen Parks and
      the Registrant dated as of January 4, 2008.14.1
            Code
      of Conduct of the Registrant (incorporated by reference to Exhibit 14.1 to
      the Registrant’s Quarterly Report on Form 10-Q, filed with the Commission
      on November 10, 2005 (file no. 000-51030)).14.2
            Complaint
      and Reporting Procedures of the Registrant (incorporated by reference to
      Exhibit 14.2 to the Registrant’s Quarterly Report on Form 10-Q, filed with
      the Commission on August 8, 2005 (file no. 000-51030)).21.1
            Subsidiaries
      of Registrant (incorporated by reference to Exhibit 21.1 to the
      Registrant’s Registration Statement on Form S-1/A No. 1, filed with the
      Commission on October 7, 2004 (file no. 333-118024)).23.1
            Consent
      of Ernst & Young LLP.24.1
            Power
      of Attorney (included on signature page).31.1
            CEO’s
      Certification required by Rule 13A-14(a) of the Securities Exchange Act of
      1934.31.2
            CFO’s
      Certification required by Rule 13A-14(a) of the Securities Exchange Act of
      1934.32.1
            CEO’s
      Certification of periodic financial reports pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002, U.S.C. Section 1350.32.2
            CFO’s
      Certification of periodic financial reports pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002, U.S.C. Section
1350.






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