UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549







FORM 10-K


(Mark
One)




x
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934




For the fiscal year ended
December 31, 2008




Or




o
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934




For the transition period from
_________________ to _________________




Commission
file number: 000-551030




OccuLogix,
Inc.


(Exact
name of registrant as specified in its charter)




Delaware
              59-3434771(State
      or other jurisdiction of incorporation or organization)
              (I.R.S.
      Employer Identification Number)12707
      High Bluff Drive, Suite 200San
      Diego, California
              92130(Address
      of principal executive offices)
              (Zip
      Code)




Registrant's
telephone number, including area code: (858) 350-4270




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




Title of Class
              Name of each exchange on which
      registeredCOMMON
      STOCK, $0.001 PAR VALUE
              The
      Nasdaq Stock Market LLC(The
      Nasdaq Capital Market)




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 o   No
x




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




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




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




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 o
                Accelerated
      filer o
                Non-accelerated
      filer o
                Smaller
      reporting company x


(Do not
check if a 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 o  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, 2008:
$3,861,815.  The Registrant has no non-voting common
stock.




As of
March 12, 2009, there were 9,828,409 shares of the Registrant's common
stock outstanding.




DOCUMENTS
INCORPORATED BY REFERENCE




Portions
of the Registrant's Proxy Statement for the 2009 Annual Meeting of Stockholders
of the Registrant to be held on June 18, 2009 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.













OCCULOGIX, INC.




Form
10-K – ANNUAL REPORT




For
the Fiscal Year Ended December 31, 2008




Table
of Contents


PagePART
      IItem
      1.
                                          Business
                                          2Item
      1A.
                                          Risk Factors
                                          12Item
      2.
                                          Properties
                                          20Item
      3.
                                          Legal Proceedings
                                          21Item
      4.
                                          Submission of Matters to a Vote of Security
      Holders
                                          21PART
      IIItem
      5.
                                          Market for Registrant's Common Equity, Related Stockholder
      Matters and Issuer Purchases of Equity Securities
                                          22Item
      6.
                                          Selected Financial Data
                                          24Item
      7.
                                          Management's Discussion and Analysis of Financial Condition and
      Results of Operations
                                          26Item
      7A.
                                          Quantitative and Qualitative Disclosures about Market
      Risk
                                          47Item
      8.
                                          Financial Statements and Supplementary Data
                                          49Item
      9.
                                          Changes in and Disagreements With Accountants on Accounting and
      Financial Disclosure
                                          92Item
      9A.
                                          Controls and Procedures
                                          92Item
      9B.
                                          Other Information
                                          93PART
      IIIItem
      10.
                                          Directors, Executive Officers and Corporate
      Governance
                                          94Item
      11.
                                          Executive Compensation
                                          94Item
      12.
                                          Security Ownership of Certain Beneficial Owners and Management
      and Related Stockholder Matters
                                          94Item
      13.
                                          Certain Relationships and Related Transactions, and Director
      Independence
                                          94Item
      14.
                                          Principal Accountant Fees and Services
                                          94PART
      IVItem
      15.
                                          Exhibits and Financial Statement Schedules
                                          95





i
 Table of Contents





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", “hope”, "expects", "plans", "intends", "anticipates",
"believes", "estimates", "projects", "predicts", "potential" and similar
expressions intended to identify forward-looking statements.  These
forward-looking statements include, without limitation, statements relating to
future events, future results, and future economic conditions in general and
statements about:




·
            Our future strategy,
      structure, and business
prospects;


·
            The planned commercialization
      of our current product;


·
            The size and growth of the
      potential markets for our product and
  technology;


·
            The adequacy of current, and
      the development of new distributor, reseller, and supplier relationships,
      and our efforts to expand relationships with distributors and resellers in
      European, Asian and Latin American
  countries;


·
            Our anticipated expansion of
      United Stated and international sales and
    operations;


·
            Our ability to obtain and
      protect our intellectual property and proprietary
      rights;


·
            Our efforts to obtain certain
      FDA approvals;


·
            Our anticipated launch of
      customers in the United
States;


·
            The anticipated sufficiency of
      our current office space, and our ability to find additional space as
      needed; and


·
            Use of cash, cash needs and
      ability to raise capital.




These statements involve known and
unknown risks, uncertainties and other factors, including the risks described in
Part I, Item 1A.  of this Annual Report on Form 10-K,
which 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.





-1-
 Table of Contents





Corporate
Information




OccuLogix,
Inc. was incorporated in Delaware in 2002.  Unless the context
requires otherwise, in this report the terms "the Company," "we," "us" and "our"
refer OccuLogix, Inc. and our subsidiaries.  References to "$" or
"dollars" shall mean U.S. dollars unless otherwise
indicated.  References to "C$" shall mean Canadian
dollars.




On
October 6, 2008, we effected a 1-for-25 reverse split of our common
stock.  Historical share numbers and prices throughout this annual
report of Form 10-K are split-adjusted.




ITEM1.           Business.




Overview




We are an
in-vitro diagnostic
company based in San Diego, California.  We are commercializing a
proprietary tear testing platform, the TearLabTM Osmolarity System that enables
eye care practitioners to test for highly sensitive and specific biomarkers
using nanoliters of tear film at the point-of-care.  Our first product
measures tear film osmolarity for the diagnosis of Dry Eye Disease, or
DED.  Until recently, we were also seeking to commercialize treatments
for age-related eye diseases through our Retina and Glaucoma business
divisions.  Our results by segment are included in our financial
statements, which are included under Item 8 to this Annual Report on Form
10-K.




TearLab,
Inc. (formerly OcuSense, Inc.)




On
November 30, 2006, we acquired a majority interest in TearLab,
Inc.  On October 6, 2008, we acquired the remaining minority
interest in TearLab.  Prior to becoming our wholly-owned subsidiary,
TearLab was a San Diego-based company in the process of developing technologies
to enable eye care practitioners to test, at the point-of-care, for highly
sensitive and specific biomarkers using nanoliters of tear
film.  Commercializing that tear testing platform is now the focus of
our business.




The
TearLab Osmolarity System enables the rapid measurement of tear osmolarity in
the doctor's office, a quantitative and highly specific biomarker that has been
shown to correlate with DED.  There are estimated to be between 20
million and 40 million DED patients in the United States, and less than 5% of
those patients are currently diagnosed and treated.  The innovation of
the TearLab Osmolarity System is its ability to precisely and rapidly measure
osmolarity in nanoliter volumes of tear samples, using a highly efficient and
novel tear collection system.  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 United States Food and Drug Administration, or FDA, under
regulations promulgated under the Clinical Laboratory Improvement Amendments, or
CLIA.




The
TearLab Osmolarity System consists of the following three
components:  (1) the TearLab disposable, which is a single-use
microfluidic labcard; (2) the TearLab pen, which is a hand-held device that
interfaces with the TearLab disposable; and (3) the TearLab reader, which
is a small desktop unit that allows for the docking of the TearLab disposable
and the TearLab pen and provides a quantitative reading for the
operator.




In
October 2008, the TearLab Osmolarity System received CE mark approval,
clearing the way for sales in the European Union and all countries recognizing
the CE mark.  In connection with the CE mark clearance, we have
entered into multi-year agreements with eight distributors for exclusive
distribution of the TearLab Osmolarity System in the United Kingdom, the
Republic of Ireland, Germany, Spain, Switzerland, France, Turkey, Belgium,
Holland, Luxemburg and Italy.  We intend to expand our distribution
network to include additional European, Asian and Latin American countries in
the future.





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We have
filed a 510(k) with the FDA.  A 510(k) clearance will allow us to
market the TearLab Osmolarity System to those reference and physician operated
laboratories with CLIA certifications allowing them to perform moderate and high
complexity tests.  Considering that most of our target customers are
eye care practitioners without such certifications, we intend to seek a CLIA
waiver from the FDA for the TearLab Osmolarity System.  We anticipate
receiving the CLIA waiver during the latter half of 2009.  A CLIA
waiver would greatly reduce the regulatory compliance for our future customers
and permit them to perform the TearLab Osmolarity test in their
offices.  If we receive a CLIA waiver, we will be able to market our
product to the approximately 50,000 eye care practitioners in the United States
that do not operate with CLIA certifications allowing them to perform moderate
and high complexity tests.




Retina
Division




Until
recently, our 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.  Our product for Dry AMD, the
RHEOTM System, was designed to improve microcirculation in the eye by filtering
high molecular weight proteins and other macromolecules from the patient's
plasma, which was intended to increase the supply of oxygen and nutrients to the
compromised retina and facilitates the removal of cellular waste material from
the retina.




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, we 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.





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On
January 29, 2007, we announced that we 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
AMD Using Rheopheresis.




However,
on November 1, 2007, we announced the indefinite suspension of our 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 our portfolio and in light of our financial
position.  There is no reasonable prospect that the RHEOTM System
clinical development program will be relaunched in the foreseeable
future.




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, on September 1, 2006, we 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.




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 sale of all of the issued and
outstanding shares of the capital stock of SOLX consisted of: (i) the
assumption by Solx Acquisition of all of our liabilities, as they related to
SOLX's business, incurred on or after December 1, 2007, and our obligation
to make a $5,000,000 payment to the former stockholders of SOLX; (ii) the
reimbursement by Solx Acquisition of all of the expenses that we had paid
related to SOLX's business during the period commencing on December 1,
2007; (iii) the payment by Solx Acquisition of a royalty on 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.  Prior
to the date on which SOLX achieves a positive cash flow, the royalty is equal to
3% of worldwide net sales of the specified products.  After SOLX
achieves a positive cash flow the royalty rate increases to 5%.  In
order to secure the obligation of Solx Acquisition to make these royalty
payments, SOLX granted to us a subordinated security interest in certain of its
intellectual property.  In connection with the sale of SOLX, our
employees whose roles and responsibilities related mainly to SOLX's business
became employees of Solx Acquisition or SOLX.  Royalty revenue due to
the Company from SOLX for 2008 was minimal and has not been included in revenues
for the year as collectability is in doubt.




Current
Status and 2008 Financing




Following
the suspension of our RHEOTM System clinical development program and the
consequent winding-down of the RHEO-AMD study, and our disposition of SOLX, we
no longer had any operating business.  Our major asset was our
ownership stake in TearLab.




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 December 31, 2008, a total of 14 employees of
the Company had left the Company's employment in 2008.





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On
October 6, 2008, we closed the private placement of $2,173,000 worth of
common stock pursuant to the Securities Purchase Agreement, dated as of
May 19, 2008, by and among us, Marchant Securities Inc., or Marchant, and
the investors listed on the Schedule of Investors attached thereto as
Exhibit A, as amended by the Amending Agreements, dated as of
August 29, 2008, and as further amended by the Second Amending Agreement,
dated as of October 1, 2008, or the Securities Purchase
Agreement.  Pursuant to the Securities Purchase Agreement, we sold an
aggregate of 869,200 shares of common stock at a per share purchase price of
$2.50.




Also on
October 6, 2008, we prepaid our then outstanding $6,703,500 aggregate
principal amount bridge loan, or the Bridge Loan, and accrued interest by
issuing 3,304,511 shares of common stock to the lenders at a per share
price of $2.125.  The Bridge Loan had been advanced pursuant to the
Loan Agreement, dated as of February 19, 2008, by and among us, the lenders
listed on the Schedule of Lenders attached thereto as Exhibit A and
Marchant, as amended by the Amending Agreement, dated as of May 5, 2008,
and as further amended by the Second Amending Agreement, dated as of
July 28, 2008.  At the time of the prepayment, the Company also
paid $481,200 of the commission remaining owed for placement agency services
rendered by Marchant through the issuance of 192,480 shares of common stock
at a per share price of $2.50.




Industry




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.  We believe that 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.




TearLab's
first product is the TearLab Osmolarity System.  This test 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 between 20 and 40 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 condition.  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.





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DED is
often seen as a result of aging, diabetes, prostate cancer therapy, HIV,
autoimmune diseases
such as Sjцgren's syndrome and rheumatoid arthritis, LASIK surgery,
contact lens wear, 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.




There are
millions Americans who suffer from contact lens-induced DED, and 10% to 15% of
these patients revert to frame wear annually due to dryness and
discomfort.  There are between 500,000 and 1.5 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 Dry Eye Disease




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 United States 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.  We are
striving to meet the needs of the point-of-care market with the TearLab
Osmolarity System.




Existing
osmometry technologies have proven unable to consistently measure 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.





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TearLab's
Product




The
TearLab Osmolarity System is an integrated testing system comprised of:
(1) the TearLab disposable, which is a single-use microfluidic labcard;
(2) the TearLab pen, which is a hand-held device that interfaces with the
TearLab disposable; and (3) the TearLab reader, which is a small desktop
unit that allows for the docking of the TearLab disposable and the TearLab pen
and provides a quantitative reading for the operator.  The innovation
of the TearLab Osmolarity System is its ability to measure precisely and
rapidly, and inexpensively, certain biomarkers in nanoliter volumes of tear
samples.  Other in-lab testing technologies require a minimum of one
microliter volume tear film sample, or approximately ten to 100 times more than
the tear film volume typically available before reflex tearing
occurs.




The
operator of the TearLab Osmolarity System, most likely a technician, collects
the tear sample from the patient's eye in the TearLab disposable, using the
TearLab pen.  After the tear has been collected, the operator places
the pen into the reader.  The TearLab reader then will display an
osmolarity reading to the operator.  Following the completion of the
test, the TearLab disposable will be discarded and a new TearLab disposable will
be readied for the next test.  The entire process, from sample to
answer, should require approximately two minutes or less to
complete.




We are
currently engaged in commercial manufacturing of the TearLab Osmolarity
System.  In October 2008, TearLab Osmolarity System received CE
mark approval, which allows us to sell the TearLab Osmolarity System in the
European Union and all countries recognizing the CE mark.  In
connection with the CE mark clearance, we have entered into multi-year
agreements with eight distributors for exclusive distribution of TearLab
Osmolarity System in the United Kingdom, the Republic of Ireland, Germany,
Spain, Switzerland, France, Turkey, Belgium, Holland, Luxemburg and
Italy.  We intend to expand our distribution network to include
additional European, Asian and Latin American countries in the
future.




We have
filed a 510(k) with the FDA and we hope to launch to 50,000 customers in the
United States during 2009.  We intend to seek a CLIA waiver from the
FDA for the TearLab Osmolarity System, which is anticipated to occur during the
latter half of 2009.  In addition, we have been awarded ISO 13485
certification for our quality management system.  ISO 13485 is an
internationally-accepted standard of quality management for medical device
manufacturers.




In
December 2007, we entered into a research agreement with a large ophthalmic
company, pursuant to which that company is sponsoring our clinical studies of
the TearLab Osmolarity System.  Subject to the terms of the research
agreement, that company has received an exclusive use of the TearLab osmolarity
product in the United States for the development of new drugs indicated for DED
until such time as TearLab receives its first 510(k) clearance from the
FDA.




Competition




To date,
we have 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.





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




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 does not 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 do
not 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
TearLab Osmolarity System, many industry participants have much greater
resources than us.  This means that those industry participants may be
able to make greater investments in research and development, marketing,
promotion and sales, than we are capable of right now or will be capable of
during the foreseeable future.




Patents
and Proprietary Rights




We own or
have exclusive licenses to five U.S. patents relating to the TearLab Osmolarity
System and related technology and processes and have applied for a number of
other patents in the United States and other jurisdictions.




The
following is a list of our issued patents:





-
      United States Patent 7017394 (licensed)
                  Filed
      March 25, 2003, expires 2023.-
      United States Patent 7204122 (licensed)
                  Filed
      January 1, 2006, expires 2023.-
      United States Patent 7051569 (licensed)
                  Filed
      February 3, 2004, expires 2023.-
      United States Patent 7111502 (licensed)
                  Filed
      March 25, 2004, expires 2023.-
      United States Patent 7129717
                  Filed
      November 19, 2003, expires 2023.14
      Patent Applications in countries other than the United States, twelve of
      which are licensed by us.3
      Patent Cooperation Treaty Patent Applications, one of which is licensed by
      us.5
      U.S. Applications are pending;-
      United States Patent Application 20060137435 (licensed)-
      United States Patent Application 20080264152 (licensed)-
      United States Patent Application 20080148821-
      United States Patent Application 20080264151-
      United States Patent Application 20050176029
  (licensed)





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We intend
to rely on know-how, continuing technological innovation and in-licensing
opportunities to further develop our proprietary position.  Our
ability to obtain intellectual property protection for the TearLab Osmolarity
System and related technology and processes, and our ability to operate without
infringing the intellectual property rights of others and to prevent others from
infringing our intellectual property rights, will have a substantial impact on
our ability to succeed in our business.  Although we intend to seek to
protect our proprietary position by, among other methods, continuing to file
patent applications, the patent position of companies like TearLab is generally
uncertain and involves complex legal and factual questions.  Our
ability to maintain and solidify a proprietary position for our technology will
depend on our success in obtaining effective claims and enforcing those claims
once granted.  We do not know whether any part of our patent
applications will result in the issuance of any patents.  Our issued
patents or those that may issue in the future, or those licensed to us, may be
challenged, invalidated or circumvented, which could limit our ability to stop
would-be competitors from marketing tests identical to the TearLab Osmolarity
System.




In
addition to patent protection, we have registered the TearLab trademark in the
U.S., Canada, the European Union, Japan, Korea and Mexico.  Our
TearLab trademark applications are pending in China, Turkey and the Russian
Federation.




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 our product, which is a
medical device.  In the United States, the Food and Drug
Administration, or 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 or criminal
prosecution.




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




There are
two review procedures by which medical devices can receive clearance or
approval.  Some products may qualify for clearance under a
Section 510(k) procedure, in which the manufacturer provides a pre-market
notification that it intends to begin marketing the product, and shows that the
product is substantially equivalent to another legally marketed product, that 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.





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The
TearLab Osmolarity System 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 intend to seek a
waiver for the TearLab Osmolarity System.




We cannot
be sure of when, or whether, TearLab will be successful in obtaining a 510(k)
clearance or a CLIA waiver for the TearLab Osmolarity System.




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.




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.





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Research
and Development Expenditure




Our
research and development expense was $2.2 million and $4.2 million in
the years ended December 31, 2008 and 2007, respectively.




Employees




On
December 31, 2008, we had 15 full-time employees.




Available
Information




Our
corporate Internet address is www.occulogix.com.  At the Investor
Relations section of this website, we make available free of charge our Annual
Report on Form 10-K, our Annual Proxy statement, our quarterly reports on
Form 10-Q, any Current Reports on Form 8-K, and any amendments to
these reports, as soon as reasonably practicable after we electronically file
them with, or furnish them to, the Securities and Exchange Commission, or the
SEC.  The information found on our website is not part of this Annual
Report on Form 10-K.  In addition to our website, the Securities
and Exchange Commission, or the SEC, maintains an Internet site at www.sec.gov
that contains reports, proxy and information statements, and other information
regarding us and other issuers that file electronically with the
SEC.





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ITEM1A.           RISK
FACTORS




This
Annual Report contains forward-looking statements that involve risks and
uncertainties that could cause our actual results to differ materially from
those discussed in this Annual Report.  These risks and uncertainties
include the following:




Risks
Relating to our Business




Our
near-term success is highly dependent on the success of the TearLab Osmolarity
System, and we cannot be certain that it will receive regulatory approval or be
successfully commercialized in the United States.




The
TearLab Osmolarity System is currently our only product.  Our product
is currently sold outside of the United States pursuant to CE mark approval;
however, we have not received regulatory approval to sell our product in the
United States.  We have filed a 510(k) clearance, and we intend to
seek a CLIA waiver, from the U.S. Food and Drug Administration, or the
FDA.  Even if the TearLab Osmolarity System receives regulatory
approval in the United States, it may never be successfully
commercialized.  If the TearLab Osmolarity System does not receive
regulatory approval or is not successfully commercialized, we may not be able to
generate revenue, become profitable or continue our operations.  Any
failure of the TearLab Osmolarity System to receive regulatory approval or to be
successfully commercialized in the United States would have a material adverse
effect on our business, operating results, financial condition and cash flows
and could result in a substantial decline in the price of our common
stock.




Our
near-term success is highly dependent on increasing sales of the TearLab
Osmolarity System outside the United States, and we cannot be certain that we
will successfully increase such sales.




Our
product is currently sold outside of the United States pursuant to CE mark
approval.  Our near-term success is highly dependent on increasing our
international sales.  If we do not receive a 510(k) certification from
the FDA it may negatively affect our international sales efforts.  We
may also be required to register our product with health departments in our
foreign market countries.  A failure to successfully register in such
markets would negatively affect our sales in any such markets.  In
addition, import taxes are levied on our product in certain foreign
markets.  These foreign markets include Turkey, Spain, Italy and
France.  Other countries may adopt taxation codes on imported
products.  Increases in such taxes or other restrictions on our
product could negatively affect our ability to import, distribute and price our
product.




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, we have sustained substantial
losses for each of the years ended December 31, 2005, 2006, 2007 and
2008.  Our net working capital balance at December 31, 2008 was
$1,549,581, which represents a $2,546,443 increase from our working capital
deficiency of $996,862 at December 31, 2007.  As a result of our
history of losses and current financial condition, there is substantial doubt
about our ability to continue as a going concern.




On
October 6, 2008, we completed a private placement of 869,200 shares of our
common stock for gross aggregate proceeds of $2,173,000, pre-paid in full our
$6,703,500 aggregate principal amount bridge loan plus outstanding accrued
interest by issuing to the lenders thereof an aggregate of 3,304,511 shares of
our common stock, at a per share price of $2.125, and paid $481,200 of the
commission remaining owing for placement agency services by issuing aggregate of
192,480 shares of our common stock.  As a result of these
transactions, and having received the principal of, and the accrued interest on,
our asset-backed auction rate securities, we believe that our cash and cash
equivalents will be sufficient to meet our operating activities and other
demands only until approximately May 2009.





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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 we 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.  Our net losses for
the fiscal years ended December 31, 2004, 2005, 2006, 2007 and 2008 were
$21.8 million, $162.8 million, $82.2 million, $69.8 million and $9.4 million,
respectively.  The losses in 2005, 2006 and 2007 include a charge for
impairment of goodwill of $147.5 million, $65.9 million and $14.4 million,
respectively.  As of December 31, 2008, we had an accumulated
deficit of $367.7 million.  Our losses have resulted primarily from
expenses incurred in research and development of our product candidates from our
discontinued businesses.  We do not know when or if we will receive
regulatory approval for the TearLab Osmolarity System or successfully
commercialize it in the United States.  As a result, and because of
the numerous risks and uncertainties facing us, it is difficult to provide the
extent of any future losses or the time required to achieve profitability, if at
all.  Any failure of our product candidate to obtain regulatory
approval and any failure to become and remain profitable would adversely affect
the price of our common stock and our ability to raise capital and continue
operations.




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, a private placement of shares of our common stock and warrants and, in
2008, bridge financing and another private placement of our common
stock.  We will need additional capital in approximately May 2009, and
our prospects for obtaining it are uncertain.  Our most recent
capital-raising efforts, which culminated in the bridge financing and private
placement of 2008, took an amount of time, consumed our resources and required
an effort on the part of management that was disproportionately large, relative
to the total amount of the capital raise.




Additional
capital may not be available on terms favorable to us, or at all.  If
financing is available, it may be on terms that adversely affect the interest of
our existing stockholders.  In addition, future financings could
result in significant dilution of existing stockholders and adversely affect the
economic interests of existing stockholders.  However, unless we
succeed in raising additional capital, we anticipate that we will be unable to
continue our operations beyond approximately May 2009.  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.





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We
will face challenges in bringing the TearLab Osmolarity System to market in the
United States and may not succeed in executing our business plan.




There are
numerous risks and uncertainties inherent in the development of new medical
technologies.  In addition to our eventual requirement for additional
capital, our ability to bring the TearLab Osmolarity System to market in the
United States and to execute our business plan successfully is subject to the
following risks, among others:




·
            Our
      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.  We could encounter unexpected problems, which
      could result in a delay in the submission of our application for the
      sought-after CLIA waiver from the FDA or prevent its submission
      altogether.




·
            We
      may not receive either the 510(k) clearance or the CLIA waiver for the
      TearLab Osmolarity System from the FDA, in which case our ability to
      market the TearLab Osmolarity System in the United States will be hindered
      severely, if not eliminated
altogether.




·
            Our
      suppliers and we will be subject to numerous FDA requirements covering the
      design, testing, manufacturing, quality control, labeling, advertising,
      promotion and export of the TearLab Osmolarity System and other
      matters.  If our suppliers or we fail to comply with these
      regulatory requirements, the TearLab Osmolarity System could be subject to
      restrictions or withdrawals from the market and we could become subject to
      penalties.




·
            Even
      if we succeed in obtaining the sought-after FDA approvals, we may be
      unable to commercialize the TearLab Osmolarity System successfully in the
      United States.  Successful commercialization will depend on a
      number of factors, including, among other things, achieving widespread
      acceptance of the TearLab Osmolarity System 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.




If
we fail to obtain FDA clearance for the TearLab Osmolarity System, or are
subject to regulatory enforcement action as a result of our failure to comply
with regulatory requirements, our commercial operations would be
harmed.




We may
not obtain 510(k) clearance for the TearLab Osmolarity System in a timely
fashion, or at all.  Furthermore, any clearance of the TearLab
Osmolarity System that we do receive may be conditioned upon certain limitations
and restrictions as to the product's use or upon the completion of further
studies.  If we do receive the 510(k) clearance that we are seeking,
we will be subject to significant ongoing regulatory requirements, and if we
fail to comply with these requirements, we could be subject to enforcement
action by the FDA or state agencies, including:




·
            adverse
      publicity, warning letters, fines, injunctions, consent decrees and civil
      penalties;




·
            repair,
      replacement, refunds, recall or seizure of our
  product;




·
            operating
      restrictions or partial suspension or total shutdown of
      production;




·
            delay
      or refusal of our requests for 510(k) clearance or premarket approval of
      new products or of new intended uses or modifications to our existing
      product;




·
            refusal
      to grant export approval for our
products;




·
            withdrawing
      510(k) clearances or premarket approvals that have already been granted;
      and




·
            criminal
      prosecution.





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If any of
these enforcement actions were to be taken by the government, our business could
be harmed.




In
addition to receiving 510(k) clearance of the TearLab Osmolarity System, we will
required to demonstrate and maintain compliance with the FDA's Quality System
Regulation, or the QSR, prior to marketing the product in the United
States.  The QSR is a complex regulatory scheme that covers the
methods and documentation of the design, testing, control, manufacturing,
labeling, quality assurance, packaging, storage and shipping of our
products.  The FDA must determine that the facilities which
manufacture and assemble our products that are intended for sale in the United
States, as well as the manufacturing controls and specifications for these
products, are compliant with applicable regulatory requirements, including the
QSR.  The FDA enforces the QSR through periodic unannounced
inspections.  Our facilities have not yet been inspected by the FDA,
and we cannot assure you that we will pass any future FDA
inspection.  Our failure, or the failure of our suppliers, to take
satisfactory corrective action in response to an adverse QSR inspection could
result in enforcement actions, including a public warning letter, a shutdown of
our manufacturing operations, a recall of our product, civil or criminal
penalties or other sanctions, which would significantly harm our available
inventory and sales and cause our business to suffer.




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




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




We have
applied for, and intend to continue to apply for, patents relating to the
TearLab Osmolarity System 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 us may be challenged successfully.  In that event, if we
have a preferred competitive position because of any such patents, any preferred
position would be lost.  If we are unable to secure or to continue to
maintain a preferred position, the TearLab Osmolarity System could become
subject to competition from the sale of generic products.




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




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





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




It is
possible that a court may find us to be infringing upon validly issued patents
of third parties.  In that event, in addition to the cost of defending
the underlying suit for infringement, we may have to pay license fees and/or
damages and 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.




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.  Our use
of the TearLab Osmolarity System and its commercial sale could also expose us to
liability claims.  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
$2,000,000 in the aggregate annually.  Such coverage, and any coverage
obtained in the future, may be inadequate to protect us in the event of
successful product liability claims, and we may not be able to increase the
amount of such insurance coverage or even renew it.  A successful
product liability claim could materially harm our business.  In
addition, substantial, complex or extended litigation could result in the
incurrence of large expenditures and the diversion of significant
resources.




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.




If
we do not introduce new commercially successful products in a timely manner, our
products may become obsolete over time, customers may not buy our products and
our revenue and profitability may decline.




·
            Demand
      for our products may change in ways we may not anticipate because
      of:




·
            evolving
      customer needs;




·
            the
      introduction of new products and technologies;
  and




·
            evolving
      industry standards.





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Without
the timely introduction of new commercially successful products and
enhancements, our products may become obsolete over time, in which case our
sales and operating results would suffer.  The success of our new
product offerings will depend on several factors, including our ability
to:




·
            properly
      identify and anticipate customer
needs;




·
            commercialize
      new products in a cost-effective and timely
  manner;




·
            manufacture
      and deliver products in sufficient volumes on
  time;




·
            obtain
      and maintain regulatory approval for such new
  products;




·
            differentiate
      our offerings from competitors'
offerings;




·
            achieve
      positive clinical outcomes; and




·
            provide
      adequate medical and/or consumer education relating to new
      products.




Moreover,
innovations generally will require a substantial investment in research and
development before we can determine the commercial viability of these
innovations and we may not have the financial resources necessary to fund these
innovations.  In addition, even if we are able to successfully develop
enhancements or new generations of our products, these enhancements or new
generations of products may not produce revenue in excess of the costs of
development and they may be quickly rendered obsolete by changing customer
preferences or the introduction by our competitors of products embodying new
technologies or features.




We
rely on a single supplier of each of the key components of the TearLab
Osmolarity System and are vulnerable to fluctuations in the availability and
price of our suppliers' products and services.




We
purchase each of the key components of the TearLab Osmolarity System from a
single third-party supplier.  Our suppliers may not provide the
components or other products needed by us in the quantities requested, in a
timely manner or at a price we are willing to pay.  In the event we
were unable to renew our agreements with our suppliers or they were to become
unable or unwilling to continue to provide important components in the required
volumes and quality levels or in a timely manner, or if regulations affecting
the components were to change, we would be required to identify and obtain
acceptable replacement supply sources.  We may not be able to obtain
alternative suppliers or vendors on a timely basis, or at all, which could
disrupt or delay, or halt altogether, our ability to manufacture or deliver the
TearLab Osmolarity System.  If any of these events should occur, our
business, financial condition, cash flows and results of operations could be
materially adversely affected.




We
face intense competition, and our failure to compete effectively could have a
material adverse effect on our results of operations.




We face
intense competition in the markets for ophthalmic products and these markets are
subject to rapid and significant technological change.  Although we
have no direct competitors, we have numerous potential competitors in the United
States and abroad.  We face potential competition from industry
participants marketing conventional technologies for the measurement of
osmolarity and other in-lab testing technologies, as well as industry
participants developing and marketing point-of-care tests, such as the
technology being developed by the Aborn Eye Clinic, which is reported able to
measure the osmolarity of nanoliter tear samples, and commercially available
methods, such as the Schirmer Test and ocular surface staining.  Many
of our potential competitors have substantially more resources and a greater
marketing scale than we do.  If we are unable to develop and produce
or market our products to effectively compete against our competitors, our
operating results will materially suffer.





-17-
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If
we lose key personnel, or we are unable to attract and retain highly qualified
personnel on a cost-effective basis, it would be more difficult for us to manage
our existing business operations and to identify and pursue new growth
opportunities.




Our
success depends, in large part, upon our ability to attract and retain highly
qualified scientific, clinical, manufacturing and management
personnel.  In addition, any difficulties retaining key personnel or
managing this growth could disrupt our operations.  Future growth will
require us to continue to implement and improve our managerial, operational and
financial systems, and to continue to recruit, train and retain, additional
qualified personnel, which may impose a strain on our administrative and
operational infrastructure.  The competition for qualified personnel
in the medical technology field is intense.  We are highly dependent
on our continued ability to attract, motivate and retain highly-qualified
management, clinical and scientific personnel.




Due to
our limited resources, we may not be able to effectively recruit, train and
retain additional qualified personnel.  If we are unable to retain key
personnel or manage our growth effectively, we may not be able to implement our
business plan.




Furthermore,
we have not entered into non-competition agreements with our key
employees.  In addition, we do not maintain "key person" life
insurance on any of our officers, employees or consultants.  The loss
of the services of existing personnel, the failure to recruit additional key
scientific, technical and managerial personnel in a timely manner, and the loss
of our employees to our competitors would harm our research and development
programs and our business.




If
we fail to establish and maintain proper and effective internal controls, our
ability to produce accurate financial statements on a timely basis could be
impaired, which would adversely affect our consolidated operating results, our
ability to operate our business and our stock price.




Ensuring
that we have adequate internal financial and accounting controls and procedures
in place to produce accurate financial statements on a timely basis is a costly
and time-consuming effort that needs to be re-evaluated
frequently.  Failure on our part to maintain effective internal
financial and accounting controls would cause our financial reporting to be
unreliable, could have a material adverse effect on our business, operating
results, financial condition and cash flows, and could cause the trading price
of our common stock to fall dramatically.  Due to the failure to
account for the consolidation of TearLab, Inc. under the variable interest
entity model since our acquisition of a majority interest in TearLab, Inc. on
November 30, 2006, there was a material weakness in our internal control
over financial reporting as of December 31, 2007.  As a result of
this material weakness, our former chief executive officer and our chief
financial officer determined that, as of December 31, 2007, our internal
controls over financial reporting were not effective to provide reasonable
assurance regarding the reliability of our financial reporting and the
preparation of financial statements for external reporting in accordance with
U.S. GAAP.




Maintaining
proper and effective internal controls will require substantial management time
and attention and may result in our incurring substantial incremental expenses,
including with respect to increasing the breadth and depth of our finance
organization to ensure that we have personnel with the appropriate
qualifications and training in certain key accounting roles and adherence to
certain control disciplines within the accounting and reporting
function.  Any failure in internal controls or any additional errors
or delays in our financial reporting would have a material adverse effect on our
business and results of operations and could have a substantial adverse impact
on the trading price of our common stock.




Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting to provide reasonable assurance regarding the
reliability of our financial reporting and the preparation of financial
statements for external purposes in accordance with U.S. GAAP.  Our
management does not expect that our internal control over financial reporting
will prevent or detect all errors and all fraud.  A control system, no
matter how well designed and operated, can provide only reasonable, not
absolute, assurance that the control system's objectives will be
met.  As discussed in this Annual Report on Form 10-K, our
management has identified a control deficiency in the past and may identify
additional deficiencies in the future.





-18-
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We cannot
be certain that the actions we are taking to improve our internal controls over
financial reporting will be sufficient or that we will be able to implement our
planned processes and procedures in a timely manner.  In future
periods, if the process required by Section 404 of the Sarbanes-Oxley Act
of 2002 reveals further material weaknesses or significant deficiencies, the
correction of any such material weaknesses or significant deficiencies could
require additional remedial measures which could be costly and
time-consuming.  In addition, we may be unable to produce accurate
financial statements on a timely basis.  Any of the foregoing could
cause investors to lose confidence in the reliability of our consolidated
financial statements, which could cause the market price of our common stock to
decline and make it more difficult for us to finance our operations and
growth.




The
trading price of our common stock may be volatile.




The
market prices for, and the trading volumes of, securities of medical device
companies, such as ours, have been historically volatile.  The market
has experienced, from time to time, significant price and volume fluctuations
unrelated to the operating performance of particular companies.  The
market price of our common shares may fluctuate significantly due to a variety
of factors, including:




·
            the
      results of pre-clinical testing and clinical trials by us, our
      collaborators and/or our
competitors;




·
            technological
      innovations or new diagnostic
products;




·
            governmental
      regulations;




·
            developments
      in patent or other proprietary
rights;




·
            litigation;




·
            public
      concern regarding the safety of products developed by us or
      others;




·
            comments
      by securities analysts;




·
            the
      issuance of additional shares to obtain financing or for
      acquisitions;




·
            general
      market conditions in our industry or in the economy as a whole;
      and




·
            political
      instability, natural disasters, war and/or events of
      terrorism.




In
addition, the stock market has experienced extreme price and volume fluctuations
that have often been unrelated or disproportionate to the operating performance
of individual companies.  Broad market and industry factors may
seriously affect the market price of companies' stock, including ours,
regardless of actual operating performance.  In the past, following
periods of volatility in the overall market and the market price of a particular
company's securities, securities class action litigation has often been
instituted against these companies.  This litigation, if instituted
against us, could result in substantial costs and a diversion of our
management's attention and resources.





-19-
 Table of Contents





Because
we do not expect to pay dividends on our common stock, stockholders will benefit
from an investment in our common stock only if it appreciates in
value.




We have
never paid cash dividends on our common stock and have no present intention to
pay any dividends in the future.  We are not profitable and do not
expect to earn any material revenues for at least several years, if at
all.  As a result, we intend to use all available cash and liquid
assets in the development of our business.  Any future determination
about the payment of dividends will be made at the discretion of our board of
directors and will depend upon our earnings, if any, our capital requirements,
our operating and financial conditions and on such other factors as our board of
directors may deem relevant.  As a result, the success of an
investment in our common stock will depend upon any future appreciation in its
value.  There is no guarantee that our common stock will appreciate in
value or even maintain the price at which stockholders have purchased their
shares.




We
can issue shares of preferred stock that may adversely affect the rights of
holders of our common stock.




Our
certificate of incorporation authorizes us to issue up to 10,000,000 shares of
preferred stock with designations, rights, and preferences determined from time
to time by our board of directors.  Accordingly, our board of
directors is empowered, without stockholder approval, to issue preferred stock
with dividend, liquidation, conversion, voting or other rights superior to those
of holders of our common stock.  For example, an issuance of shares of
preferred stock could:




·
            adversely
      affect the voting power of the holders of our common
  stock;




·
            make
      it more difficult for a third party to gain control of
  us;




·
            discourage
      bids for our common stock at a
premium;




·
            limit
      or eliminate any payments that the holders of our common stock could
      expect to receive upon our liquidation;
or




·
            otherwise
      adversely affect the market price or our common
  stock.




We may
issue shares of authorized preferred stock at any time in the
future.




ITEM2.           Properties.




Our
world-wide headquarters, occupying approximately 1,300 square feet and used
for administrative, sales, marketing, research and development, and finance
activities, is located in San Diego, California.  The total future
minimum obligation under these leases is $86,940 for 2009.  We have
found new space that is better suited to our operation in San Diego, and we
expect to move into that space in July 2009.  We are currently
negotiating the lease terms.




Our
facility in Mississauga, Ontario consists of approximately 1,363 square
feet of office space that, until recently, was utilized for finance personnel
and storage of records.  Our current arrangement expires on
July 31, 2010.  Our current monthly lease obligation for rent for
this facility is approximately C$2,916.  The future minimum obligation
under this lease is C$55,406 through lease termination.  This facility
has been sublet for an amount equal to the monthly rental obligation and is no
longer used for our business.





-20-
 Table of Contents





Our sales
office in Alpharetta, Georgia consists of approximately 180 square feet and is
used for sales and marketing activities.  Our current lease obligation
ends on March 31, 2009.  We are in the process of renegotiating
the lease agreement.




We
believe that the San Diego, California and Alpharetta, Georgia facilities are
sufficient to support our current operations.  We believe that if our
existing facilities are not adequate to meet our business requirements
long-term, additional space will be available on commercially reasonable
terms.




ITEM3.           Legal
Proceedings.




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




ITEM4.           Submission
of Matters to a Vote of Security Holders.




None.





-21-
 Table of Contents





PART
II




ITEM5.           Market
for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities.




Market
for Common Equity




Our
common stock trades on the NASDAQ Global Market ("NASDAQ") under the symbol
"TEAR" and the Toronto Stock Exchange ("TSX") under the symbol
"TLB".




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
      2008
              
              
              Fiscal
      2007High
              
              
              Low
              
              
              High
              
              
              LowNASDAQ
      Capital MarketFirst
      Quarter
              
              $
              3.50
              
              
              $
              1.25
              
              
              $
              1.98
              
              
              $
              1.48Second
      Quarter
              
              
              14.00
              
              
              
              1.50
              
              
              
              1.68
              
              
              
              0.76Third
      Quarter
              
              
              4.50
              
              
              
              1.50
              
              
              
              1.20
              
              
              
              0.57Fourth
      Quarter
              
              
              6.43
              
              
              
              1.18
              
              
              
              0.62
              
              
              
              0.08TSXFirst
      Quarter
              
              C$
              3.25
              
              
              C$
              1.50
              
              
              C$
              2.35
              
              
              C$
              1.75Second
      Quarter
              
              
              14.50
              
              
              
              1.25
              
              
              
              1.82
              
              
              
              0.90Third
      Quarter
              
              
              5.00
              
              
              
              1.75
              
              
              
              1.25
              
              
              
              0.57Fourth
      Quarter
              
              
              7.74
              
              
              
              1.01
              
              
              
              0.57
              
              
              
              0.07




The
closing share price for our common stock on March 12, 2009 as reported by
NASDAQ, was $1.40.  The closing share price for our common stock on
March 12, 2009, as reported by TSX was C$1.50.




As of
March 12, 2009, there were approximately 160 stockholders of record of
our common stock.




Dividend
Policy




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.




Sales
of Unregistered Securities




On
November 25, 2008, we agreed to issue 38,276 shares of common stock to
Dr. Thomas G. Hirose and his designee in connection with a settlement
agreement dated as of December 4, 2008.  When the shares are
issued, the issuance will be exempt from registration under Section 3(a)(10) of
the Securities Act because the court approved the fairness of the terms and
conditions of the issuance in connection with the settlement.




Repurchases
of Equity Securities




None.





-22-
 Table of Contents





Equity
Compensation Plans Information




The
information required by this item will be contained in our definitive proxy
statement to be filed with the Securities and Exchange Commission in connection
with the Annual Meeting of our Stockholders, which is expected to be filed not
later than 120 days after the end of our fiscal year ended
December 31, 2008.




Stock
Performance Graph




The
following graph compares the cumulative total stockholder return data for our
common stock to the cumulative return of (i) the NASDAQ Composite Index and
(ii) the NASDAQ Medical Equipment Index for the period beginning
December 9, 2004, and ending on December 31, 2008.  The
graph assumes that $100 was invested on January 1, 2004, and assumes
reinvestment of dividends.  The stock price performance on the
following graph is not necessarily indicative of future stock price
performance.









-23-
 Table of Contents





ITEM6.           Selected
Financial Data.




The
following selected financial data should be read in conjunction with our
consolidated 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 31,2004
              
              
              2005
              
              
              2006(i)
              
              
              2007
              
              
              2008(in
      thousands, except per share data)Consolidated Statements of
      Operations Data:RevenueRevenue
      from related parties
              
              $
              732
              
              
              $
              81
              
              
              $
              —
              
              
              $
              —
              
              
              $
              —Revenue
      from unrelated parties
              
              
              238
              
              
              
              1,759
              
              
              
              174
              
              
              
              92
              
              
              
              458Total
      revenue
              
              
              970
              
              
              
              1,840
              
              
              
              174
              
              
              
              92
              
              
              
              458Cost
      of goods soldCost
      of goods sold to related parties
              
              
              689
              
              
              
              43
              
              
              
              —
              
              
              
              —
              
              
              
              —Cost
      of goods sold to unrelated parties
              
              
              134
              
              
              
              3,251
              
              
              
              3,429
              
              
              
              2,298
              
              
              
              128Royalty
      costs
              
              
              135
              
              
              
              100
              
              
              
              100
              
              
              
              100
              
              
              
              35Gross
      margin (loss)
              
              
              12
              
              
              
              (1,554
              )
              
              
              (3,355
              )
              
              
              (2,306
              )
              
              
              295Operating
      expensesGeneral
      and administrative
              
              
              17,530
              
              
              
              8,670
              
              
              
              8,476
              
              
              
              8,104
              
              
              
              5,439Clinical,
      regulatory and research and development
              
              
              3,995
              
              
              
              5,168
              
              
              
              4,922
              
              
              
              8,675
              
              
              
              2,965Sales
      and marketing
              
              
              220
              
              
              
              2,165
              
              
              
              1,625
              
              
              
              1,413
              
              
              
              820Impairment
      of goodwill
              
              
              —
              
              
              
              147,452
              
              
              
              65,946
              
              
              
              —
              
              
              
              —Impairment
      of intangible asset
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              20,923
              
              
              
              —Restructuring
      charges
              
              
              —
              
              
              
              —
              
              
              
              820
              
              
              
              1,313
              
              
              
              2,44121,745
              
              
              
              163,455
              
              
              
              81,788
              
              
              
              40,429
              
              
              
              11,665Other
      income (expense)
              
              
              (110
              )
              
              
              1,536
              
              
              
              1,547
              
              
              
              2,769
              
              
              
              1,664Loss
      from continuing operations before income taxes
              
              
              (21,843
              )
              
              
              (163,473
              )
              
              
              (83,595
              )
              
              
              (39,967
              )
              
              
              (9,706
              )Recovery
      of income taxes
              
              
              24
              
              
              
              643
              
              
              
              2,916
              
              
              
              5,566
              
              
              
              338Loss
      from continuing operations
              
              
              (21,819
              )
              
              
              (162,830
              )
              
              
              (80,680
              )
              
              
              (34,401
              )
              
              
              (9,368
              )Loss
      from discontinued operations
              
              
              —
              
              
              
              —
              
              
              
              (1,542
              )
              
              
              (35,429
              )
              
              
              —Net
      loss for the year
              
              $
              (21,819
              )
              
              $
              (162,830
              )
              
              $
              (82,222
              )
              
              $
              (69,830
              )
              
              $
              (9,368
              )Per Share
      Data:Loss
      from continuing operations per share — basic and diluted
              
              $
              (73.96
              )
              
              $
              (97.10
              )
              
              $
              (44.84
              )
              
              $
              (15.19
              )
              
              $
              (2.29
              )Loss
      from discontinued operations per share — basic and diluted
              
              
              —
              
              
              
              —
              
              
              
              (0.86
              )
              
              
              (15.64
              )
              
              
              —Net
      loss per share — basic and diluted
              
              $
              (73.96
              )
              
              $
              (97.10
              )
              
              $
              (45.70
              )
              
              $
              (30.83
              )
              
              $
              (2.29
              )Weighted
      average number of shares used in per share calculations — basic and
      diluted
              
              
              295
              
              
              
              1,677
              
              
              
              1,799
              
              
              
              2,265
              
              
              
              4,084





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





-24-
 Table of Contents




As
      at December 31,2004
              
              
              2005
              
              
              2006(i)
              
              
              2007
              
              
              2008(in
      thousands)Consolidated Balance Sheet
      Data:Cash
      and cash equivalents of continuing operations
              
              $
              17,531
              
              
              $
              9,600
              
              
              $
              5,705
              
              
              $
              2,236
              
              
              $
              2,565Cash
      and cash equivalents of discontinued operations
              
              
              —
              
              
              
              —
              
              
              
              36
              
              
              
              —
              
              
              
              —Short-term
      investments
              
              
              42,500
              
              
              
              31,663
              
              
              
              9,785
              
              
              
              —
              
              
              
              —Working
      capital (deficiency) of continuing operations
              
              
              58,073
              
              
              
              44,415
              
              
              
              13,407
              
              
              
              (997
              )
              
              
              1,550Working
      capital (deficiency) of discontinued operations
              
              
              —
              
              
              
              —
              
              
              
              132
              
              
              
              —
              
              
              
              —Total
      assets of continuing operations
              
              
              301,601
              
              
              
              137,806
              
              
              
              54,367
              
              
              
              15,313
              
              
              
              13,405Total
      assets of discontinued operations
              
              
              —
              
              
              
              —
              
              
              
              44,158
              
              
              
              —
              
              
              
              —Long-term
      debt (including current portion due to stockholders)
              
              
              517
              
              
              
              158
              
              
              
              152
              
              
              
              33
              
              
              
              23Other
      long-term obligations (including amount classified as current portion of
      other liability)
              
              
              ―
              
              
              
              ―
              
              
              
              6,421
              
              
              
              —
              
              
              
              ―Total
      liabilities of continuing operations
              
              
              13,502
              
              
              
              11,765
              
              
              
              19,673
              
              
              
              6,358
              
              
              
              3,446Total
      liabilities of discontinued operations
              
              
              —
              
              
              
              —
              
              
              
              11,574
              
              
              
              —
              
              
              
              —Minority
      interest
              
              
              ―
              
              
              
              ―
              
              
              
              6,111
              
              
              
              4,954
              
              
              
              ―Contingently
      redeemable stock
              
              
              ―
              
              
              
              ―
              
              
              
              ―
              
              
              
              ―
              
              
              
              250Common
      stock
              
              
              2
              
              
              
              2
              
              
              
              
              
              
              
              2
              
              
              
              10Additional
      paid-in capital
              
              
              336,104
              
              
              
              336,876
              
              
              
              354,224
              
              
              
              362,287
              
              
              
              377,356Accumulated
      deficit
              
              
              (48,007
              )
              
              
              (210,837
              )
              
              
              (293,059
              )
              
              
              (358,289
              )
              
              
              (367,657
              )Total
      stockholders' equity
              
              
              288,098
              
              
              
              126,041
              
              
              
              61,167
              
              
              
              4,000
              
              
              
              9,709







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





-25-
 Table of Contents





ITEM7.           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 restated consolidated
financial statements and related notes, included in Item 8 of this Amended
Report.  Unless otherwise specified, all dollar amounts are U.S.
dollars.




Overview




We are an
in vitro diagnostic
company that has developed a proprietary tear testing platform, the TearLabTM
Osmolarity System.  The TearLab test measures tear film osmolarity for
diagnosis of Dry Eye Disease, or DED.  Tear osmolarity is a
quantitative and highly specific biomarker that has been shown to correlate with
DED.  The TearLab test enables the rapid measurement of tear
osmolarity in a doctor's office.  We refer to the results of our
TearLab testing platform as our Point-of-Care business division in the
discussion of our operating results below.  Commercializing our
Point-of-Care tear testing platform is now the focus of our
business.




In the
fourth quarter of 2008, we began to generate revenue from the sales of the
TearLab point-of-care testing platform in Europe.  In October 2008,
our testing platform received CE mark approval which allowed us to begin sales
efforts in the European Union and other countries recognizing the CE
mark.  We subsequently entered into exclusive distribution agreements
with distributors in ten European countries and Turkey.




We have
filed a 510(k) with the United States Food and Drug Administration, or
FDA.  The 510(k) will allow us to market our TearLab Osmolarity System
to those reference and physician operated laboratories with certifications under
the regulations of the Clinical Laboratory Improvement Amendments, or CLIA,
allowing them to perform moderate and high complexity
tests.  Considering that most of our target customers are eye care
practitioners without such certifications, we intend to seek a CLIA waiver from
the FDA for the TearLab Osmolarity System.  We anticipate receiving
the CLIA waiver during the latter half of 2009.  A CLIA waiver would
greatly reduce the regulatory compliance for our future customers and permit
them to perform the TearLab Osmolarity test in their offices.  If we
receive a CLIA waiver, we will be able to market our product to the
approximately 50,000 eye care practitioners that do not operate with CLIA
certifications allowing them to perform moderate and high complexity
tests.




Our
success is highly dependent on our ability to increase sales of our testing
platform in European and other countries recognizing the CE mark and on our
receipt of the 510(k) approval and a CLIA waiver will enable us to begin full
commercialization efforts in the United States.  Meeting either of
these objectives requires that we raise additional capital to fund our
operations.  We have sufficient cash to fund our operations at current
levels through approximately May 2009.  We are actively evaluating and
pursuing various financing possibilities at this time.




Restructuring
and Other




In 2006,
due to unfavorable product trial results and other factors, we recognized a
goodwill impairment of $65.9 million.  At that time, we began to
restructure our operations, which were then focused on the commercialization of
our RHEOTM System for treatment for age-related eye disease (our Retina business
division), the SOLX Glaucoma System glaucoma treatment platform and the TearLab,
Inc. (formerly known as OcuSense, Inc.) testing platform.  During
2007, we indefinitely suspended our RHEO System clinical development program and
disposed of our SOLX subsidiary.  We recognized restructuring charges
of $2.4 million, $1.3 million and $820,000 in 2008, 2007 and 2006,
respectively, primarily resulting from the cost of severance and benefits paid
to terminated employees.  Also during 2007, we recognized an
impairment of an intangible asset related to RHEO distribution agreements of
$20.9 million.





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We do not
expect to realize any revenue related to RHEO in the future.  The
operating results of SOLX, referred to as our Glaucoma business division, are
reflected as discontinued operations for all periods prior to its disposition in
December 2007.




During
2008, we completed a number of restructuring transactions, collectively referred
to as the Restructuring Transactions, including a private placement, or PIPE,
the receipt and conversion of bridge loans, or the Bridge Loans, the acquisition
of the minority shareholdings of TearLab, Inc. (formerly known as OcuSense,
Inc.) that we did not already own, and a reverse stock split of
25:1.  The successful completion of these Restructuring Transactions
enabled us to focus our ongoing efforts on the commercialization and continued
development of the TearLab testing platform.




Recent
Developments




On
January 16, 2009, we announced that we would begin to conduct business as
TearLab Corporation.  We also changed our ticker symbols on the NASDAQ
and Toronto Stock Exchange to TEAR and TLB, respectively.  We
anticipate that the official name change will be effective after stockholder
approval is received.




On
February 11, 2009, we filed with the Securities and Exchange Commission, or
the SEC, a prospectus as part of a registration statement on Form S-3 using
a "shelf" registration process.  Under the shelf process, if the
registration statement is declared effective by the SEC, we may from time to
time offer or sell any combination of common stock, preferred stock, debt
securities, depository shares or warrants in one or more offering up to a total
dollar value of $30,000,000.  The registration statement has not been
declared effective by the SEC.




RESULTS
OF OPERATIONS




Continuing
Operations




Revenues,
Cost of Goods Sold and Gross Margin




For the
years ended December 31,


(in
thousands)





2008
              
              
              Change
              
              
              2007
              
              
              Change
              
              
              2006RevenueRetina
              
              $
              158
              
              
              
              72
              %
              
              $
              92
              
              
              
              (47
              )%
              
              $
              174Point-of-care
              
              
              300
              
              
              
              N/M
              *
              
              
              —
              
              
              
              N/M
              *
              
              
              —Total
      revenues
              
              $
              458
              
              
              
              398
              %
              
              $
              92
              
              
              
              (47
              )%
              
              $
              174Cost
      of goods soldRetina
              
              $
              2
              
              
              
              (100
              )%
              
              $
              2,298
              
              
              
              (33
              )%
              
              $
              3,429Retina
      royalties
              
              
              25
              
              
              
              (75
              )%
              
              
              100
              
              
              
              0
              %
              
              
              100Point-of-care
              
              
              126
              
              
              
              N/M
              *
              
              
              —
              
              
              
              N/M
              *
              
              
              —Point-of-care
      royalties
              
              
              10
              
              
              
              N/M
              *
              
              
              —
              
              
              
              N/M
              *
              
              
              —Total
      cost of goods sold
              
              $
              163
              
              
              
              (93
              %)
              
              $
              2,398
              
              
              
              (32
              )%
              
              $
              3,529Gross
      margin
              
              $
              295
              
              
              
              
              
              
              $
              (2,306
              )
              
              
              
              
              
              $
              (3,355
              )Percentage
      of total revenues
              
              
              64
              %
              
              
              
              
              
              
              (2,507
              )%
              
              
              
              
              
              
              (1,928
              )%





*N/M –
Not meaningful





-27-
 Table of Contents





Revenues




Retina




Retina
revenue consists of revenue generated from the sale of components of the RHEO
System which consists of (1) a Rheofilter filter, a Plasmaflo filter, and
tubing which, together, comprise a disposable treatment set, and (2) an
Octo Nova pump.




We owned
consignment inventory of 400 disposable treatment sets held by Macumed
AG.  During the year ended December 31, 2008, Macumed consumed a
total of 123 treatment sets at a negotiated price of $150 per treatment set,
resulting in revenue of $18,500.  In addition, Macumed purchased two
Octo Nova pumps at $1,500 per pump, resulting in $3,000 in revenue in the year
ended December 31, 2008.  In the third quarter of 2008, we
completed an agreement with Diamed Medizintechnik GmbH, or Diamed, in which we
agreed to sell to Diamed 113 Octo Nova pumps which had been purchased for
commercial use and never used and four Octo Nova pumps previously used for
training purposes.  The sale of these pumps resulted in revenues of
$136,800 in the year ended December 31, 2008.  All pumps and
disposable treatment sets had previously been fully reserved in the fourth
quarter of 2007 when we suspended all RHEO System-related
activities.




Revenues
for the year ended December 31, 2007 consist of revenue from the sale of a
total of 600 treatment sets at a negotiated price of $150 per treatment set to
Macumed AG.  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 us in advance of shipment of the
treatment sets.




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




Point-of-Care




Point-of-Care
revenue consists of sales of the TearLab Osmolarity System, which is a hand-held
tear film test for the measurement of tear osmolarity, a quantitative and highly
specific biomarker that has shown to correlate with DED.




The
TearLab Osmolarity System consists of the following three components:
(1) the TearLab disposable, which is a single-use microfluidic labcard;
(2) the TearLab pen, which is a hand-held device that interfaces with the
TearLab disposable; and (3) the TearLab reader, which is a small desktop
unit that allows for the docking of the TearLab disposable and the TearLab pen
and provides a quantitative reading for the operator.




In
October 2008, the TearLab Osmolarity System received CE mark approval, clearing
the way for sales in the European Union and all countries recognizing the CE
mark.  In connection with the CE mark clearance, we have entered into
multi-year agreements with eleven distributors for exclusive distribution of
TearLab Osmolarity System in the United Kingdom, the Republic of Ireland,
Germany, Spain, Switzerland, France, Turkey, Belgium, Holland, Luxemburg and
Italy.  We intend to expand our distribution network to include
additional European, Asian and Latin American countries in the
future.  We recognized our first revenue from the sales of TearLab in
October 2008 and recognized a total of $300,000 of revenue during the year ended
December 31, 2008.





-28-
 Table of Contents





Cost
of Sales




Retina




Cost of
sales includes costs of goods sold and royalty costs.  Our cost of
goods sold typically consists primarily of costs for the manufacture of the RHEO
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 RHEO 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 wrote 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.  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 RHEO System
clinical development program for Dry AMD, and we are engaged in the process of
winding down the RHEO-AMD and other RHEO related clinical
studies.  Accordingly, we have written down the value of our
commercial inventory of OctoNova pumps to $0 as of December 31, 2007
since we 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 $0 as of December 31,
2007.




Cost of
sales for the year ended December 31, 2008 consisted of $1,500 of shipping
in handling costs, $25,000 of royalty fees payable and did not contain any
inventory charges since the inventory had already been fully written off in
2007.  Cost of sales for the year ended December 31, 2007
includes $100,000 of 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 $0 as of December 31,
2007.  Included in cost of sales for the year ended December 31,
2006 are $100,000 of royalty fees payable and a total charge of $3,304,124 which
reflect the write-down of our commercial inventory of treatment sets to $0
as at December 31, 2006.




Point-of-Care




Point-of-Care
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
TearLab test, including the costs we incur for the purchase of component parts
from our suppliers, applicable freight and shipping costs, fees related to
warehousing and logistics inventory management.




Gross
Margin




During
fiscal 2008 as compared with fiscal 2007, our combined gross margin increased
2,571% due to the introduction of TearLab in 2008 and inventory write-downs in
the Retina product in 2007 that did not recur in 2008.




During
fiscal 2007 as compared with fiscal 2006, our Retina gross margin decreased 579%
due to reduced sales in fiscal 2007 and the write down previously
noted.





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Operating
Expenses




For the
years ended December 31,


(in
thousands)





2008
              
              
              Change
              
              
              2007
              
              
              Change
              
              
              2006General
      and administrative
              
              $
              5,439
              
              
              
              (33
              )%
              
              $
              8,104
              
              
              
              (4
              )%
              
              $
              8,476Clinical,
      regulatory and research and development
              
              
              2,965
              
              
              
              (66
              )%
              
              
              8,676
              
              
              
              76
              %
              
              
              4,922Sales
      and marketing
              
              
              820
              
              
              
              (42
              )%
              
              
              1,413
              
              
              
              (13
              )%
              
              
              1,625Impairment
      of goodwill
              
              
              —
              
              
              
              N/M
              *
              
              
              —
              
              
              
              (100
              %)
              
              
              65,946Impairment
      of intangible assets
              
              
              —
              
              
              
              N/M
              *
              
              
              20,923
              
              
              
              N/M
              *
              
              
              —Restructuring
      charges
              
              
              2,441
              
              
              
              85
              %
              
              
              1,313
              
              
              
              60
              %
              
              
              820Total
      operating expenses
              
              $
              11,665
              
              
              
              (71
              )%
              
              $
              40,429
              
              
              
              (51
              )%
              
              $
              81,789





*N/M –
Not meaningful




General
and Administrative Expenses




General
and administrative expenses decreased by $2,664,582 or 33% during the year ended
December 31, 2008, as compared with the corresponding period in fiscal
2007, primarily due to the indefinite suspension of our RHEO System clinical
development program.  Employee salary, benefits, travel and related
costs (including stock-based compensation) decreased by $1,149,477 reflecting
the impact of the restructuring activities in the latter part of 2007 which in
turn reduced employee costs in 2008.  In addition, amortization of
intangible assets expense decreased by $1,370,007, from $2,577,038 for the year
ended December 31, 2007 to $1,207,031 for the year ended December 31,
2008, and was primarily due to the impairment of RHEO System intangible assets
during 2007.  We are continuing to focus our efforts on achieving an
orderly refocus on ongoing activities by reviewing and improving upon our
existing business processes and cost structure.




General
and administrative expenses decreased by $371,346 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 of our
employees, directors and consultants.  The vesting of these options
was contingent upon meeting company-wide goals which include the attainment of
FDA approval of the RHEO System and the achievement of a minimum amount of sales
over a specified period.  In light of the indefinite suspension of the
RHEO 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.




Included
within general and administrative expense are professional fees which 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 TearLab, Inc. employees during the period as well as the
increase in amortization expense of $1,182,077 associated with the intangible
asset acquired upon the acquisition of TearLab, Inc. 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 our patents and trademarks related
to the RHEO System as a result of our indefinite suspension of the RHEO System
clinical development program for Dry AMD.  There was no comparative
charge during the year ended December 31, 2006.  As previously
discussed, the increase in amortization expense is attributed to a higher
intangible asset value arising from the fair value adjustments associated with
consolidating TearLab, Inc. as a variable interest entity on the date of
acquisition.





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Clinical,
Regulatory and Research and Development




Clinical,
regulatory and research and development expenses decreased by $5,710,544 or 66%
during the year ended December 31, 2008, as compared with the corresponding
prior year period, due to the indefinite suspension of our RHEO System clinical
development program.  Clinical expense for Retina activity of $206,966
for the year ended December 31, 2008 represents expenses incurred to close
clinics and to support ongoing obligations for patient
support.  Clinical expense for Retina activity during the year ended
December 31, 2007 was $4,971,408.




TearLab,
Inc. expenditures for the year ended December 31, 2008 and 2007 were
$2,758,042 and $3,704,144, respectively.  The decrease of $964,102 or
26% reflects the maturing stage of TearLab, Inc. technological development in
that the development in the year ended December 31, 2008 was of a nature
that could be carried out in-house, whereas the development in the corresponding
period was completed primarily in contracted facilities capable of prototyping
activities.




In March
2008, we announced that TearLab, Inc. had validated the prototype of the TearLab
Osmolarity System and received company-wide certification to ISO
13485:2003.  These achievements allowed us to move forward with
clinical trials and attain the CE mark in Europe, in advance of
commercialization.




Clinical,
regulatory and research and development 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 TearLab, Inc. product development and
regulatory costs of $2,564,703.  TearLab, Inc. 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, 57.62% on an
issued and outstanding basis, of TearLab, Inc. on November 30,
2006.  Therefore, clinical, regulatory and research and development
expenses for the year ended December 31, 2006 include TearLab, Inc.'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 abandoned RHEO-AMD trial.  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
we 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.




We are
currently awaiting response from the FDA regarding our submission for 510(k)
clearance for the diagnostic use of the TearLab test.  A positive
response from the FDA will allow us to market the TearLab test in the United
States to sites that have a CLIA license to perform Moderate or High complexity
testing under CLIA.  Subsequent to the receipt of a 510(k) clearance
from the FDA, we intend to complete and submit the results of additional
clinical trials in order to seek a CLIA waiver from the FDA for the TearLab test
which would allow us to sell to all eye care professionals who hold a CLIA
waiver license in the United States.





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 Table of Contents





Sales
and Marketing Expenses




Sales and
marketing expenses decreased by $593,737 or 42% during the year ended
December 31, 2008, as compared with the prior period in fiscal
2007.




Retina
sales and marketing expense for the year ended December 31, 2008 was a
recovery of $155,635 compared to an expense of $1,166,922 during the previous
year, a decline of $1,322,557.  This decline is due in general to the
indefinite suspension of our RHEO System clinical development program and, in
particular, to declines in compensation and benefits of $492,826, stock-based
compensation of $310,202 and other internal and external marketing costs of
$319,067.  As a result of the reversal of option expenses of $137,905
related to options modified as to terms related to life of the options after an
employee’s termination and the reversal of marketing accruals of $20,845, sales
and marketing costs in the year ended December 31, 2008 for Retina activities
reflected a recovery of expenses.




Sales and
marketing expense for TearLab, Inc. increased by $728,820 in the year ended
December 31, 2008 when compared with fiscal 2007.  This increase
reflects an increased focus on building awareness of the TearLab Osmolarity
System prior to commercialization with specific increases of $390,410 of
internal and external marketing costs and $183,186 of compensation and
benefits.




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 RHEO 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 of our employees, directors and
consultants.  The vesting of these options was contingent upon meeting
company-wide goals which include the attainment of FDA approval of the RHEO
System and the achievement of a minimum amount of sales over a specified
period.  In light of the indefinite suspension of the RHEO 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 TearLab, Inc. employee and related travel costs of $146,504 and professional
fees of $61,559.  During 2007, TearLab, Inc. hired a new employee and
retained the use of some outside consultants to begin establishing sales and
marketing efforts to increase awareness of the TearLab Osmolarity System, and
upon receipt of FDA approval, to promote the use of the TearLab Osmolarity
System in the United States.




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 leadership within the eye care industry.  We will continue
to develop and execute our conference and podium strategy to ensure visibility
and evidence-based positioning of the TearLab Osmolarity System among eye care
professionals.  This strategy encompasses our utilization of specific
conferences and podium forums for communicating key messages about our product
platform, TearLab and our first product, specifically the TearLab Osmolarity
System.  Messaging will be tailored to our targeted physician
audiences; refractive surgeons, general ophthalmologists and
optometrists.  Data generated from clinical trials will be presented
by key opinion leaders from the podium at conferences in order to validate key
clinical assumptions, i.e., the clinical advantages
of osmolarity as a disease marker or biomarker for diagnosing and managing DED,
how the TearLab Osmolarity System integrates into the clinical routine, how eye
care professionals can improve their DED practice/franchise, how the TearLab
Osmolarity System can be utilized for refractive surgery, fitting and dispensing
contact lenses, and how to prescribe therapy.





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 Table of Contents





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.  We have not recorded
any goodwill or goodwill impairment charges from continuing operations during
the years ended December 31, 2008 or 2007.




Impairment
of Intangible Assets




Prior to
the termination of the Distribution Agreement on February 25, 2008, our
intangible assets consisted of the value of the distribution agreement with
Asahi Medical and the distribution agreement we had 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 RHEO System.  On November 1, 2007, we
announced the indefinite suspension of the RHEO System clinical development
program for Dry AMD, and we are in the process of winding down the RHEO-AMD and
related RHEO related clinical studies.  There is no reasonable
prospect that the RHEO System clinical development program will be relaunched in
the foreseeable future.  In accordance with Statement of Financial
Accounting Standard, or SFAS, No. 144, we concluded that the indefinite
suspension of the RHEO System clinical development program for Dry AMD was a
significant event which may have affected the carrying value of our distribution
agreements.  Accordingly, management was required to re-assess whether
the carrying value of our 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.  There was no comparable expense during the years ended
December 31, 2008 and 2006.




Restructuring
Charges




In
accordance with SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities," we recognized a total of $2,440,820, $1,312,721 and
$819,642 in restructuring charges during the years ended December 31, 2008,
2007 and 2006, respectively.  With the suspension of our RHEO System
clinical development program, and the consequent winding-down of the RHEO-AMD
study, and our disposition of SOLX during the year ended December 31, 2007,
we reduced our workforce considerably.  During 2006, we implemented a
number of structural and management changes designed both to support the
continued development of the RHEO System and to execute our 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 our employees at our Palm
Harbor and Mississauga offices.  The total restructuring charges of
$2,440,820 recorded in the year ended December 31, 2008 consists solely of
severance and benefit costs related to the termination of a total of
13 employees at our Mississauga office.





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 Table of Contents





The table
below details the activity affecting our restructuring liability during the
three years ended December 31, 2008, 2007 and 2006.





Years
      ended December 31,2008
              
              
              2007
              
              
              2006(in
      thousands)Accrued
      restructuring liability – beginning of period
              
              $
              1,313
              
              
              $
              —
              
              
              $
              —Restructuring
      charges during the period
              
              
              2,441
              
              
              
              1,313
              
              
              
              820Restructuring
      charges settled by issuance of stock options
              
              
              (2,278
              )
              
              
              —
              
              
              
              —Foreign
      exchange adjustment
              
              
              (78
              )
              
              
              —
              
              
              
              —Restructuring
      charges settled in cash
              
              
              (1,385
              )
              
              
              —
              
              
              
              (820
              )Accrued
      restructuring liability – end of period
              
              $
              13
              
              
              $
              1,313
              
              
              $
              —




Other
Income, Net




For the
years ended December 31,


(in
thousands)




2008
              
              
              Change
              
              
              2007
              
              
              Change
              
              
              2006Interest
      income
              
              $
              76
              
              
              
              (88
              )%
              
              $
              610
              
              
              
              (55
              )%
              
              $
              1,370Changes
      in fair value of warrant obligation
              
              
              (58
              )
              
              
              (103
              )%
              
              
              1,882
              
              
              
              N/M
              *
              
              
              —Gain
      on sale/(impairment) of investments
              
              
              1,036
              
              
              
              (200
              )%
              
              
              (1,036
              )
              
              
              N/M
              *
              
              
              —Interest
      expense
              
              
              (318
              )
              
              
              N/M
              *
              
              
              (17
              )
              
              
              13
              %
              
              
              (15
              )Amortization
      of financing costs
              
              
              (180
              )
              
              
              N/M
              *
              
              
              —
              
              
              
              N/M
              *
              
              
              —Other
      income
              
              
              369
              
              
              
              1,950
              %
              
              
              18
              
              
              
              (42
              )%
              
              
              31Discount
      on shares issued
              
              
              (1,239
              )
              
              
              N/M
              *
              
              
              —
              
              
              
              N/M
              *
              
              
              —Minority
      interest
              
              
              1,978
              
              
              
              51
              %
              
              
              1,312
              
              
              
              715
              %
              
              
              161$
              1,664
              
              
              
              (40
              )%
              
              $
              2,769
              
              
              
              79
              %
              
              $
              1,547








*N/M –
Not meaningful




Interest
Income




Interest
income consists of interest income earned on our cash, cash equivalent and
investment positions.  The continued decrease in interest income
during years ended December 31, 2008 and 2007, when compared to the
corresponding period in fiscal 2006, is due to lower average cash and investment
balances in 2007 as compared to 2006 and declining average interest rates
experienced in 2008 compared to 2007.




Changes
in Fair Value of Warrant Obligation




On
February 6, 2007, pursuant to the Securities Purchase Agreement, or the
SPA, between us and certain institutional investors, we issued warrants to these
investors, which are referred to as the Warrants.  The Warrants are
five-year warrants exercisable into an aggregate of 106,838 shares of our common
stock at a price of $46.25 per share.  On February 6, 2007, we
also issued warrants to Cowen and Company, LLC, or the Cowen Warrant, in partial
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 under the SPA and the Warrants.  The Cowen Warrant is a
five-year warrant convertible into 3,740 shares of our common
stock.  The per share exercise price of the Warrants is $46.25, and
the Warrants became exercisable on August 6, 2007.  We account
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, 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 at December 31, 2007.  The
estimated fair value was determined using the Black-Scholes option-pricing
model.  In addition, SFAS No. 133 requires us 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.  We 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 ($1,882,497
net of costs associated with the issuance of the warrants of $170,081) over the
initial measurement of the aggregate fair value of the Warrants and the Cowen
Warrant on the date of issuance.  We estimated the fair value of the
warrants at December 31, 2008 and determined the aggregate fair value to be
$57,666, an increase of $57,666 from the nominal value calculated at
December 31, 2007.  There was no comparable net gain or loss
recorded in the year ended December 31, 2006.





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 Table of Contents





Gain
on Sale/(Impairment) of Investments




As at
December 31, 2007, we had investments in the aggregate principal amount of
$1,900,000 which consisted of investments in four separate asset-backed auction
rate securities, or ARS, yielding an average return of 5.865% per
annum.  However, as a result of market conditions, all of these
investments have 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 our advisors and the lack of
liquidity for ARS 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 ARS were recorded at their estimated fair
value of $863,750.  We considered this to be another-than-temporary
reduction in the value of these ARS.  Accordingly, the impairment
associated with these ARS 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.  In the fourth quarter of 2008, Credit Suisse
purchased our outstanding ARS for an aggregate amount of
$1,900,000.  As a result of the realization of the original principal
amount of the ARS, we have reversed the 2007 impairment charge of $1,036,250 in
our 2008 consolidated statement of operations.




Interest
Expense




Interest
expense for the year ended December 31, 2008 consists of accrued interest
on Bridge Loans that were converted into our common stock in October
2008.




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.




Amortization
of Finance Costs




Amortization
of finance costs for the year ended December 31, 2008 consists of $180,000
paid to Marchant Securities Inc., or Marchant, a related party, for introducing
us to the bridge loan lenders who participated in the February 19, 2008
bridge financing.  The finance costs had been fully expensed at the
time of the conversion of the Bridge Loans in October 2008.




Other
Income (Expense)




Other
income for the years ended December 31, 2008, 2007 and 2006 consists
primarily of foreign exchange gain of $325,483, $22,889 and $37,229,
respectively, due to exchange rate fluctuations on our foreign currency
transactions.





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 Table of Contents





Discount
on Shares Issued - Beneficial Conversion Feature on Sale of Common
Stock




Under the
terms of certain Bridge Loans, the conversion price was set at $2.125 per share,
a 15% discount to the $2.50 per share paid by PIPE
investors.  Accordingly, pursuant to EITF Issue No. 98-5,
("Accounting for Convertible Securities with Beneficial Conversion Features"),
we recorded a beneficial conversion on the sale of common stock of $1,239,163 in
October 2008, which is equal to the number of shares of common stock issued upon
conversion of the Bridge Loans multiplied by the difference between the
estimated fair value of the common stock and the bridge loan conversion price
per share.  The beneficial conversion resulted in a charge to the
statement of operations and a credit to additional paid-in capital in the same
amount.




Minority
Interest




On
October 6, 2008 we acquired the remaining ownership interest of TearLab,
Inc. in exchange for the issuance of 3,169,938 shares of common
stock.  Subsequent to October 6, 2008, no further amounts were
reported as minority interest.




The
amount of losses allocated to minority interest increased by $665,544 to
$1,977,722 in the year ended December 31, 2008 from $1,312,721 in the year
ended December 31, 2007.




The
increase in the year ended December 31, 2008 was primarily related
to:




·
            a
      substantial reduction in the minority interest share of tax losses
      benefited in the year of $1,152,061 resulting from the application of
      Section 382 of the Internal Revenue Code, or Section 382,
      restrictions upon the change of control in the Company with the successful
      completion of the PIPE, conversion of the Bridge Loans and acquisition of
      the minority interest of TearLab,
Inc.




This
increase was partially offset by the following decreases in the share of losses
allocated to minority interest:




·
            a
      decrease in the share of operating losses in the year of $314,819 as a
      result of only 9 months of losses being reported in 2008 prior to the
      acquisition of the minority interest of TearLab,
  Inc.;




·
            a
      decrease in the share of non-operating losses from the net amortization of
      intangibles and deferred tax liabilities of $98,170 as a result of only
      9 months of amortization in 2008 prior to the acquisition of the
      minority interest of TearLab, Inc.;
and




·
            an
      increase in the share of profit in the year of $73,528 arising from the
      excess of the milestone payment due in 2008 over the estimate recorded in
      2006 when we acquired our interest in TearLab, Inc. being greater than the
      excess of the milestone payment due in 2007 over the recorded
      estimate.




The
minority interest share of losses in the year ended December 31, 2007
increased by $1,150,999 from the share of losses reported in the year ended
December 31, 2006 which is consistent with the fact that our 2006 results
reflect only one month's share of losses subsequent to our November 30,
2006 acquisition of a majority interest in TearLab, Inc.





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 Table of Contents





Recovery
of Income Taxes




For the
years ended December 31,


(in
thousands)





2008
              
              
              Change
              
              
              2007
              
              
              Change
              
              
              2006Recovery
      of income taxes for continuing operations
              
              $
              338
              
              
              
              (94
              %)
              
              $
              5,566
              
              
              
              91
              %
              
              $
              2,916




The
closing of the PIPE, the acquisition of the remaining ownership interest in
TearLab, Inc. and the conversion of the Bridge Loans combined to result in a
change of control for tax purposes causing Section 382 restrictions on the
use of tax losses to apply.  We record the tax benefit related to tax
losses as deferred income tax assets to offset deferred income tax liabilities
arising from our intangible assets.  As a result of the change of
control, all previously recorded deferred tax assets were reversed, and we will
only be able to recognize the benefit of losses incurred subsequent to the
change of control and those losses prior to the change of control permitted
under Section 382.




The
recovery of income taxes decreased by $5,227,696 in the year ended
December 31, 2008 to $337,846 from $5,565,542 in the year ended
December 31, 2007.




This
decrease in the year ended December 31, 2008 arose because:




·
            In
      the year ended December 31, 2007, the recovery of income taxes
      included net benefits of $4,291,773 arising from the reversal of the
      deferred tax liability associated with RHEO related intangibles against
      which a full impairment was recorded.  No comparable benefit was
      reported in the year ended December 31,
  2008.




·
            In
      the year ended December 31, 2008, issuance of shares in association
      with the PIPE, conversion of Bridge Loans and acquisition of the minority
      shareholding of TearLab, Inc., resulted in a change of control for tax
      purposes and a Section 382 restriction on the amount of tax losses
      prior to these transactions that can be recovered.  As a result
      of the Section 382 restrictions, a net reversal of benefits (i.e. a tax expense) of
      $2,304,938 occurred in the year ended December 31,
      2008.  This reversal was offset by an increase of $1,402,018 in
      losses benefited in the year ended December 31, 2008 over losses
      benefited in the year ended December 31,
2007.




·
            In
      the year ended December 31, 2008, amortization of deferred tax
      liabilities decreased by $33,003 as compared to the year ended
      December 31, 2007.




The
recovery of income taxes increased by $2,649,751 in the year ended
December 31, 2007 to $5,565,541 from $2,915,790 in the year ended
December 31, 2006.




This
increase in the year ended December 31, 2007 arose because:




·
            In
      the year ended December 31, 2007, an increase in the recovery of
      income taxes included net benefits of $2,344,450 arose from the reversal
      of $4,291,773 deferred tax liabilities associated with RHEO related
      intangibles against which a full impairment was recorded.  In
      comparison the net benefits in the year ended December 31, 2006 were
      $1,947,323.




·
            In
      the year ended December 31, 2007, TearLab, Inc. tax losses benefited
      increased by $694,671 to $757,953 from $63,282 in the year ended
      December 31, 2006 reflecting the full year of losses benefited in the
      year ended December 31, 2007 as compared to only one month of tax
      losses benefited in the year ended December 31, 2006 consistent with
      the acquisition of a majority interest in TearLab, Inc. on
      December 1, 2006.




·
            In
      the year ended December 31, 2007, TearLab, Inc. amortization of
      deferred tax liabilities increased by $461,216 to $515,816 from $54,600 in
      the year ended December 31, 2006 reflecting a full year of
      amortization in the year ended December 31, 2007 as compared to only
      one month of amortization in the year ended December 31, 2006
      consistent with the acquisition of a majority interest in TearLab, Inc. on
      December 1, 2006.





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 Table of Contents





These
increases were partially offset by a decrease in the year ended
December 31, 2007 in which RHEO related amortization of deferred tax
liabilities decreased by $845,657 to $0 from $845,657 in the year ended
December 31, 2006 reflecting a full year of amortization in the year ended
December 31, 2006 while in the year ended December 31, 2007 all
amortization was reversed in the year as a result of a full impairment recorded
against RHEO related intangibles.




To date,
we have recognized income tax benefits in the aggregate amount of $2.2 million
net of any reversals 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, 2008 and 2007 also
includes the amortization of the deferred tax liability of $482,813 and
$515,816, respectively, which was recorded based on the difference between the
fair value of intangible asset acquired upon the acquisition of a majority
interest in TearLab, Inc. on November 30, 2006 and its tax
base.  The deferred tax liability has been reduced by the recording of
Section 382 losses in 2007 and 2008 resulting in a decrease in the
amortization year over year of $33,003.  The deferred tax liability
totaling $4,868,822 is being amortized over a period of approximately 10 years,
the estimated useful life of the intangible asset.




Discontinued
Operations




On
December 19, 2007, we sold to Solx Acquisition, and Solx Acquisition
purchased from us, all of the issued and outstanding shares of the capital stock
of SOLX, which had been our Glaucoma subsidiary prior to the completion of this
transaction.  The results of operations for SOLX have been reflected
as discontinued operations in our statements of operations for the years ended
December 31, 2008, 2007 and 2006.




Liquidity
and Capital Resources




As at
December 31,


($ in
thousands)





2008
              
              
              2007
              
              
              ChangeCash
      and cash equivalents
              
              $
              2,565
              
              
              $
              2,236
              
              
              
              15
              %Percentage
      of total assets
              
              
              19
              %
              
              
              15
              %Working
      capital (deficiency)
              
              $
              1,550
              
              
              $
              (997
              )








*N/M -
Not meaningful





-38-
 Table of Contents





Financial
Condition




Management
believes that our cash, cash equivalents and short-term investments will be
sufficient to meet our operating activities and other demands until
approximately May 2009.




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 continuing development of TearLab, Inc.'s TearLab
      Osmolarity System;




·
            the
      cost and results, and the rate of progress, of the clinical trials of the
      TearLab Osmolarity System that will be required to support TearLab, Inc.'s
      application to obtain a CLIA waiver from the
  FDA;




·
            TearLab,
      Inc.'s ability to obtain 510(k) approval and a CLIA waiver from the FDA
      for the TearLab Osmolarity System and the timing of such approval, if
      any;




·
            whether
      government and third-party payers agree to reimburse the TearLab
      Osmolarity System;




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




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




·
            the
      effect of competing technological and market
  developments.




At the
present time, our only product is the TearLab Osmolarity System, and we cannot
begin commercialization of our product in the United States until we receive
510(k) approval from the FDA.  At this time, we do not know when we
can expect to begin to generate revenues from the TearLab Osmolarity System in
the United States.




We will
need additional capital in approximately May 2009, and our prospects for
obtaining that capital are uncertain.  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 anticipate that we will be unable to continue our operations beyond
approximately May 2009.




In
December 2004, we 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 our
liquidity was cash raised through the issuance of debentures.




On
February 6, 2007, we raised gross proceeds in the amount of $10,016,000
(less issuance costs of approximately $816,493) in a private placement of shares
of our common stock and warrants.




On
October 6, 2008, we raised $2,173,000 in a private placement, or PIPE,
transaction in which we issued 869,200 of our common shares at a per share price
of $2.50.





-39-
 Table of Contents





During
2008, we entered into a series of bridge loan transactions that resulted in the
receipt of an aggregate of $6,703,500.  The Bridge Loans accrued
interest at 12% per annum through the date of their conversion.  On
October 6, 2008, the $6,703,500 of outstanding Bridge Loan's principal and
$318,478 of accrued interest converted into 3,304,511 shares of our common
stock.  Under the terms of the Bridge Loans, the conversion price was
set at $2.125 per share, a 15% discount to the $2.50 per share paid by the PIPE
investors.




Ongoing
Sources and Uses of Cash




We
anticipate that our cash and cash equivalents will only be sufficient to sustain
our operations until approximately May 2009.  We are actively
evaluating and pursuing various financing possibilities at this
time.  We typically expect our primary sources of cash will be related
to the collection of accounts receivable and, to a lesser degree, interest
income on our cash and investment balances.  Our accounts receivable
collections will be impacted by our ability to grow our point-of-care revenue,
any bad debts we experience and our overall collection rates on the related
accounts receivable.




We expect
our primary uses of cash will be to fund our operating expenses and pursuing and
maintaining our patents and trademarks.  In addition, dependent on
available funds, we expect to expend cash to improve production capability of
the TearLab test, to further improve the performance of the TearLab test, and to
pursue additional applications for the lab-on-a-chip technology.




Changes
in Cash Flows




Years
ended December 31,


(in
thousands)




2008
              
              
              Change
              
              
              2007
              
              
              Change
              
              
              2006Cash
      used in operating activities
              
              $
              (9,435
              )
              
              $
              7,782
              
              
              $
              (17,217
              )
              
              $
              (2,669
              )
              
              $
              (14,548
              )Cash
      used in investing activities
              
              
              1,614
              
              
              
              (2,896
              )
              
              
              4,510
              
              
              
              (5,908
              )
              
              
              10,418Cash
      provided by financing activities
              
              
              8,150
              
              
              
              (1,052
              )
              
              
              9,202
              
              
              
              8,931
              
              
              
              271Net
      (decrease) increase in cash and cash equivalents during the
      year
              
              $
              329
              
              
              $
              3,834
              
              
              $
              (3,505
              )
              
              $
              354
              
              
              $
              (3,859
              )




Cash
Used in Operating Activities




Net cash
used to fund our operating activities during the year ended December 31,
2008 was $9,434,310 which approximates our loss from continuing operations of
$9,368,391.  The non-cash items which comprise a portion of the net
loss during that period consist primarily of the amortization of intangible
assets, fixed assets, patents and trademarks, the provision for obligation under
warrants, accrued interest on the Bridge Loans converted into equity, discount
on share issued, stock-based compensation expense, and stock-based compensation
expense as a result of severance obligations in the aggregate total of
$5,380,562.  The non-cash items which comprise a portion of the net
loss during that period include the realized gain on investments previously
impaired of $1,036,250, deferred tax charges of $337,846 and minority interest
share of losses of $1,977,722.  Additionally financing fees paid of
$180,000 have been re-allocated to financing 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
$69,829,983.  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 $7,206,548 netted
by applicable deferred income taxes of $14,915,425 and minority interest of
$1,312,178.  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.





-40-
 Table of Contents




The net
change in non-cash working capital balances related to operations for the years
ended December 31, 2008, 2007 and 2006 consists of the
following:





2008
              
              
              2007
              
              
              2006Due
      to related party
              
              $
              —
              
              
              $
              —
              
              
              $
              (5,065
              )Accounts
      receivable
              
              
              41,759
              
              
              
              (58,782
              )
              
              
              390,634Inventory
              
              
              (148,201
              )
              
              
              2,756,759
              
              
              
              2,250,554Prepaid
      expenses
              
              
              165,063
              
              
              
              37,951
              
              
              
              247,361Accounts
      payable
              
              
              (878,127
              )
              
              
              797,415
              
              
              
              (1,225,575
              )Accrued
      liabilities
              
              
              (1,671,658
              )
              
              
              911,987
              
              
              
              (1,155,335
              )Deferred
      revenue and rent inducements
              
              
              237,400
              
              
              
              —
              
              
              
              —Due
      to stockholders
              
              
              (9,662
              )
              
              
              (109,842
              )
              
              
              (5,827
              )Other
      current assets
              
              
              (11,239
              )
              
              
              7,000
              
              
              
              12,781$
              (2,274,665
              )
              
              $
              4,342,488
              
              
              $
              509,528




Explanations
of the more significant net changes in non-cash working capital balances are as
follows:




·
            Accounts
      receivable decreased due to the net impact of the collection of
      outstanding receivables related to RHEO activities offset by an increase
      in receivable balances related to the first sales of TearLab test in the
      fourth quarter of 2008.




·
            Inventory
      increased due to the commercialization of TearLab test in the fourth
      quarter of 2008.




·
            The
      decline in prepaid expenses resulted primarily from a decline in prepaid
      insurance costs attributable to a reduction in insurance premiums and the
      elimination of advances related to the RHEO System clinical
      trials.




·
            Accounts
      payable decreased due primarily to the wind-down of RHEO related
      activities, specifically, payment for clinical trial services which were
      suspended in the fourth quarter of
2007.




·
            Accrued
      liabilities decreased primarily due to a decrease to the accrual of
      $1,299,786 in restructuring charges and as a result of the overall decline
      in operational spending as a result of our
  restructuring.




·
            Increase
      in deferred revenue reflects advance payment for products that will be
      shipped in 2009 and for sub-licensing fees that will be amortized over the
      acquisition of 300 TearLab units from the
  sub-licensee.




Cash
Provided by Investing Activities




Net cash
provided by investing activities for the year ended December 31, 2008 is
$1,613,834 and consists of the net sale of short-term investments of $1,900,000
offset by $133,104 used to acquire fixed assets and $153,062 used to protect and
maintain patents and trademarks.




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 a portion of the purchase price negotiated for
the acquisition of SOLX in September 2006, 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.





-41-
 Table of Contents





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 us, including costs
of acquisition, to acquire SOLX net of cash acquired from SOLX of
$34,719.  In addition, we advanced a total of $2,434,537 to SOLX to
support its operations prior to the acquisition.  We also invested
$2,076,312 to acquire 50.1% of the capital stock of TearLab, Inc., on a fully
diluted basis, 57.62% on an issued and outstanding basis, including acquisition
costs of $76,312.  Cash acquired upon the acquisition of TearLab, Inc.
was $1,320,497.  The $2,076,312 invested by us in TearLab, Inc. has
been utilized to fund the operations of TearLab, Inc.




Cash
Provided by Financing Activities




Net cash
provided by financing activities for the year ended December 31, 2008 was
$8,149,921 and is made up of $6,703,500 raised during 2008 from the issuance of
Bridge Loans (converted to common stock in October 2008) and $2,173,000 from the
sale of common stock in a PIPE transaction, offset by $268,800 in financing fees
and fees for services related to the Bridge Loans and $457,777 in share issuance
costs related to the PIPE, Bridge Loans and acquisition of the minority
shareholding of TearLab, Inc. transactions.




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 shares and 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 our common stock, 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 our common stock.




Borrowings




As of
December 31, 2008, we have no outstanding long-term debt or balances
available under credit agreements.




Contractual
Obligations and Contingencies




The
following table summarizes our contractual commitments as of December 31, 2008
and the effect those commitments are expected to have on liquidity and cash flow
in future periods.





Payments
      Due by PeriodTotal
              
              
              Less
      than
                  1
      year
              
              
              1
      to 3
                  years
              
              
              More
      than
                  3
      yearsOperating
      leases
              
              $
              131
              
              
              $
              114
              
              
              $
              17
              
              
              $
              —Royalty
      payments
              
              
              385
              
              
              
              35
              
              
              
              105
              
              
              
              245Total
              
              $
              516
              
              
              $
              149
              
              
              $
              122
              
              
              $
              245





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Off-Balance-Sheet
Arrangements




As of
December 31, 2008, we did not have any significant off-balance-sheet
arrangements as defined in Item 303(a)(4)(ii) of SEC
Regulation S-K.




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




We
recognize revenue when all four of the following criteria are met:
(i) persuasive evidence that an arrangement exists; (ii) delivery of
the products has occurred; (iii) the selling price is fixed or
determinable; and (iv) collectability is reasonably assured.  In
addition, we comply with Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition," which
sets forth guidelines in the timing of revenue recognition based upon factors
such as passage of title, installation, payments and customer
acceptance.  Amounts received in excess of revenue recognizable under
SAB No. 104 are deferred.




Subsequent
to its launch in the fourth quarter of 2008, all of our revenues have been
derived from sales of the TearLab Osmolarity System which consists of hardware
and related disposables.  Our sales are currently to countries in
Europe and are generally transacted through distributors.  We record
revenue when all of our obligations are completed.




We have
recognized revenue from the sale of the RHEO System, prior to our announcement
of the indefinite suspension of its RHEO System clinical development program,
and, from the sale of the components of the SOLX Glaucoma System which includes
the SOLX 790 Titanium Sapphire Laser ("SOLX 790 Laser") and the SOLX Gold Shunt,
prior to our disposition of SOLX on December 19, 2007.  We sold
the components of the SOLX Glaucoma System directly to physicians and also
through distributors and reported our revenues net of distributors'
commissions.  Since we had the obligation to train our customers and
to calibrate the OctoNova pumps delivered to them, we deferred and recognized
the related revenue only upon the completion of these services.




Bad
Debt Reserves




We
evaluate the collectability of our 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 us, a
specific allowance against amounts due to us is recorded, which reduces the net
recognized receivable to the amount management reasonably believes will be
collected.  For all other customers, we recognize allowances for
doubtful accounts based on the length of time the receivables are past due, the
current business environment, and historical experience.  The
provision for doubtful accounts is charged to general and administrative expense
and accounts receivable are written off as uncollectible and deducted from the
allowance after appropriate collection efforts have been exhausted.





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As of
December 31, 2008 and 2007, we had bad debt reserves of $0 and $172,992,
respectively.  We did not write-off any uncollectible accounts
receivable during the years ended December 31, 2008, 2007 and 2006, and set
up a provision for $0, $172,992, and $0 during the years ended December 31,
2008, 2007 and 2006, respectively.




Inventory
Valuation




Inventory
is recorded at the lower of cost (first-in, first-out) or net realizable value
and consists of finished goods.  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.  Inventory
is periodically reviewed for evidence of slow-moving or obsolete parts, and the
estimated reserve is based on management's reviews of inventories on hand,
compared to estimated future usage and sales, reviewing product shelf-life, and
assumptions about the likelihood of obsolescence.




In April
2006, we sold a number of RHEO treatment sets at a price lower than our
cost.  As a result, we wrote down the carrying value of our treatment
sets to reflect this current net realizable value during the year ended
December 31, 2006.  As a result of the indefinite suspension of
the RHEO System clinical development program for Dry AMD, we wrote down the
value of our treatment sets and OctoNova pumps, the components of the RHEO
System, to zero as of December 31, 2007 since we did not expect 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 of
December 31, 2008 and 2007, we had inventory reserves of $68,062 and
$7,295,545, respectively.  During the years ended December 31,
2008, 2007 and 2006, we recognized a provision for excess and obsolete inventory
of $68,062, $2,790,209, and $3,304,124, respectively, and wrote-off $7,295,545,
$0 and $0, respectively.




Valuation
of Intangible and other Long-lived Assets.




We
periodically assess the carrying value of intangible and other long-lived
assets, which requires us to make assumptions and judgments regarding the future
cash flows of these assets.  The assets are considered to be impaired
if we determine that the carrying value may not be recoverable based upon our
assessment of the following events or changes in circumstances:




·
            the
      asset's ability to continue to generate income from operations and
      positive cash flow in future
periods;




·
            loss
      of legal ownership or title to the
asset;




·
            significant
      changes in our strategic business objectives and utilization of the
      asset(s); and




·
            the
      impact of significant negative industry or economic
  trends.




If the
assets are considered to be impaired, the impairment we recognize is the amount
by which the carrying value of the assets exceeds the fair value of the
assets.  Fair value is determined by a combination of third party
sources and discontinued cash flows.  In addition, we base the useful
lives and related amortization or depreciation expense on our estimate of the
period that the assets will generate revenues or otherwise be used by
us.  We also periodically review the lives assigned to our intangible
assets to ensure that our initial estimates do not exceed any revised estimated
periods from which we expect to realize cash flows from the
technologies.  If a change were to occur in any of the above-mentioned
factors or estimates, the likelihood of a material change in our reported
results would increase.





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At
December 31, 2008, the net book value of identifiable intangible assets
that are subject to amortization totaled $9,568,023 and the net book value of
fixed assets totaled $183,384.




We
determined that, as of December 31, 2007 and 2008, there have been no
significant events which may have affected the carrying value of its TearLab
technology.  However, our 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 TearLab, Inc.'s technology was
impaired as of December 31, 2007 and 2008.  Based on management's
estimates of forecasted undiscounted cash flows as of December 31, 2007 and
2008, we concluded that there was no indication of an impairment of the TearLab
technology in either fiscal period.  In addition, in conjunction with
the acquisition of the remaining minority interest in TearLab, Inc., management,
in consultation with an outside valuation firm, prepared an analysis of the fair
value of the TearLab technology.  The conclusion of management’s
analysis was that the related intangible assets were not impaired as of the date
of the acquisition or as of December 31, 2007 or 2008.  Therefore, no
impairment charge was recorded during the years ended December 31, 2007 and
2008 with regard to the TearLab technology.




Valuation
of Financial Instruments




We
account for our financial instruments at fair value based on various accounting
literatures, including SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities, SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, and SFAS No. 157, Fair Value
Measurements.  In determining fair value, we consider both the
credit risk of our counterparties and our own creditworthiness.  SFAS
No. 157, which defines fair value, establishes a framework for measuring fair
value and expands disclosures about fair value measurements for financial
instruments effective January 1, 2008.  The framework requires
the valuation of investments using a three tiered approach in the valuation of
investments.  For details on the assets and liabilities subject to
fair value measurements and the related valuation techniques used, refer to
Footnote 17 - Fair Value Measurements of the accompanying financial
statements.




Stock-based
Compensation




On
January 1, 2006, we adopted the provisions of SFAS No. 123R, "Share-Based Payments",
requiring the recognition of expense related to the fair value of our
stock-based compensation awards.  We elected to use the modified
prospective transition method as permitted by SFAS No. 123R and therefore have
not restated our financial results for prior periods.  Under this
transition method, stock-based compensation expense for each of the years ended
December 31, 2008, 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.  We recognize
compensation expense for stock option awards on a straight-line basis over the
requisite service period of the award.




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 RHEO System and the achievement of a
minimum amount of sales over a specified period.  Generally, options
expire 10 years after the date of grant.





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Our
computation of expected volatility for the years ended December 31, 2008,
2007 and 2006 is based on a comparable company's historical stock prices as we
did not have sufficient historical data.  Our computation of expected
life has been estimated using the "short-cut approach" as provided in SAB No.
110 as options granted by us 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.




As of
December 31, 2008, $2.3 million of total unrecognized compensation cost
related to stock options is expected to be recognized over a weighted-average
period of 2.68 years.




Income
Taxes




On
January 1, 2007, we adopted the provisions of Financial Accounting
Standards Board ("FASB") Interpretation No. (“FIN”) 48, "Accounting for
Uncertainty in Income Taxes – An Interpretation of FASB Statement No.
109."  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, we 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, we recognized a
reduction to the January 1, 2007 deferred tax liability balance in the
amount of $4,600,000 with a corresponding reduction to accumulated
deficit.




As of
January 1, 2007, we had unrecognized tax benefits of $24.8 million which,
if recognized, would favorably affect our effective tax rate.




When
applicable, we recognize 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, we did not have any liability
for the payment of interest and penalties.




We do 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 our unrecognized tax benefits will have a significant impact on our
results of operations or financial position.




However,
the completion of the reorganization transactions on October 6, 2008 makes
it more likely than not that we incurred a change of control for purposes of
Section 382 for US Income Taxes.  (See Note 13 Income Taxes
in the notes to the financial statements.)  Rules under
Section 382 of the U.S. Income Tax Code substantially reduce our ability to
utilize prior tax losses.  Accordingly, income tax benefits of
$2,304,938, representing the excess of income tax benefits previously recognized
and the income tax benefit applicable to the equivalent of one year's losses
deductible in accordance with Section 382 and benefits related to
unrestricted losses under Section 382(h) of the U.S. Income Tax Code, were
reversed in 2008 and reported as an income tax expense.





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All of
our federal income tax returns and those of our subsidiaries remain open since
their respective dates of incorporation due to the existence of net operating
losses.  We and our 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 of our state income tax returns and
those of our 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.  We and our subsidiaries have
not been, nor are they currently, under examination by any state tax
authority.




In
accordance with SFAS No. 109, "Accounting for Income Taxes,"
income taxes are accounted for under the asset and liability
method.  Deferred tax assets and liabilities are recognized for the
expected future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit
carryforwards.  We measure deferred tax assets and liabilities using
the enacted tax rates expected to apply to taxable income in the years in which
we expect to recover or settle those temporary differences.  We
recognize the effect of a change in tax rates on deferred tax assets and
liabilities in income in the period that includes the enactment
date.  A valuation allowance is established when it is "more likely
than not" the future realization of all or some of the deferred tax assets will
not be achieved.




As of
December 31, 2008, we had net operating losses potentially available for
carry forwards for federal income taxes of $18.5 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, 2008, 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 2008 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.




Recent
Accounting Pronouncements




For
information on the recent accounting pronouncements impacting our business, see
Note 3 of the Notes to Consolidated Financial Statements included in
Item 8.




ITEM7A.           Quantitative
and Qualitative Disclosures about Market Risk.




Currency
Fluctuations and Exchange Risk




All of
our sales are in U.S. dollars, while a portion of our expenses are in Canadian
dollars and Australian dollars.  We cannot predict any future trends
in the exchange rate of the Canadian dollar or Australian dollar against the
U.S. dollar.  Any strengthening of the Canadian dollar or Australian
dollar 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 maintain bank accounts in both Canadian dollars and
Australian dollars to meet short term operational operating
requirements.  Based on the balances in the Canadian dollar and
Australian dollar denominated bank accounts at December 31, 2008, hypothetical
increases of $0.01 in the value of the Canadian dollar and the Australian dollar
in relation to the U.S. dollar would not have a material impact on the results
of our 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.





-47-
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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.  We do
not use interest rate derivative transactions to manage our interest rate
risk.  We reduce our exposure to interest rate risk by investing in
investment grade securities or money market accounts.  Declines in
interest rates over an extended period of time will reduce our interest income
while an increase over an extended period of time will increase our interest
income.  A reduction of interest rate by 100 basis points over the
year ended 2008 would reduce interest income by under $25,000.





-48-
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ITEM8.           Financial
Statements and Supplementary Data.




Consolidated
Financial Statements




REPORT
OF INDEPENDENT REGISTERED


PUBLIC
ACCOUNTING FIRM




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




We have
audited the accompanying consolidated balance sheet of OccuLogix, Inc. as of
December 31, 2008 and the related consolidated statements of operations,
stockholders' equity and cash flows of the year ended December 31,
2008.  Our audit also included the financial statement schedule listed
in the Index at Item 15(a) for the year ended December 31,
2008.  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
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
the financial statements are free of material misstatement.  We were
not engaged to perform an audit of the Company’s internal control over financial
reporting.  Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting.  Accordingly, we express no such opinion.  An
audit also includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation.  We believe that our audit provides
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 OccuLogix, Inc. as of
December 31, 2008 and the consolidated results of its operations and its cash
flows for the year ended December 31, 2008 in conformity with U.S. generally
accepted accounting principles.  Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic 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
minimal working capital.  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 2 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.





/s/
      Ernst & Young LLP




San
Diego, California


March 25,
2009





-49-
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REPORT
OF INDEPENDENT REGISTERED


PUBLIC
ACCOUNTING FIRM




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




We have
audited the accompanying consolidated balance sheet of OccuLogix, Inc. (the
“Company”) as of December 31, 2007 and the related consolidated statements
of operations, changes in stockholders’ equity and cash flows for each of the
two 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 the consolidated result of its operations and its
cash flows for each of the two 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 2 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.






Toronto,
      Canada,
                /s/
      Ernst & Young LLPMarch
      14, 2008 (except for note 23,
                Chartered
      Accountantsas
      to which the date is July 18, 2008)
                Licensed
      Public Accountants





-50-
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OccuLogix,
Inc.




CONSOLIDATED
BALANCE SHEETS





As
      of December 31,2008
              
              
              2007ASSETSCurrent
      assetsCash
      and cash equivalents
              
              $
              2,565,277
              
              
              $
              2,235,832Accounts
      receivable, net of bad debt reserves of $0 in 2008 and $172,992 in
      2007
              
              
              333,056
              
              
              
              374,815Inventory,
      net of provision for inventory obsolescence of $68,062 in 2008 and
      $7,295,545 in 2007
              
              
              148,201
              
              
              
              —Prepaid
      expenses
              
              
              316,058
              
              
              
              481,121Other
      current assets
              
              
              21,680
              
              
              
              10,442Total current
      assets
              
              
              3,384,272
              
              
              
              3,102,210Fixed
      assets, net
              
              
              183,384
              
              
              
              122,286Patents
      and trademarks, net
              
              
              269,398
              
              
              
              139,437Investments
              
              
              —
              
              
              
              863,750Intangible
      assets, net
              
              
              9,568,023
              
              
              
              11,085,054Total
      assets
              
              $
              13,405,077
              
              
              $
              15,312,737LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilitiesAccounts
      payable
              
              $
              314,680
              
              
              $
              1,192,807Accrued
      liabilities
              
              
              1,201,793
              
              
              
              2,873,451Due
      to stockholders
              
              
              23,152
              
              
              
              32,814Deferred
      revenue
              
              
              237,400
              
              
              
              —Obligations
      under warrants
              
              
              57,666
              
              
              
              —Total
      current liabilities
              
              
              1,834,691
              
              
              
              4,099,072Deferred
      tax liability, net
              
              
              1,611,502
              
              
              
              2,259,348Commitments
      and contingenciesMinority
      interest
              
              
              —
              
              
              
              4,953,960Contingently
      redeemable common stock, 119,629 shares outstanding
              
              
              250,000
              
              
              
              —Stockholders'
      equityCapital
      stockPreferred
      Stock, par value $0.001, authorized 10,000,000, zero issued and
      outstanding at both December 31, 2008 & 2007
              
              
              —
              
              
              
              —Common
      stock
              
              
              9,708
              
              
              
              2,292Par
      value of $0.001 per share;Authorized:
      40,000,000;Issued
      and outstanding:  December 31, 2008 – 9,708,780;
                December 31, 2007 – 2,292,280Additional
      paid-in capital
              
              
              377,356,547
              
              
              
              362,287,045Accumulated
      deficit
              
              
              (367,657,371
              )
              
              
              (358,288,980
              )Total
      stockholders' equity
              
              
              9,708,884
              
              
              
              4,000,357Total
      liabilities and stockholders’ equity
              
              $
              13,405,077
              
              
              $
              15,312,737








See
accompanying notes





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OccuLogix,
Inc.




CONSOLIDATED
STATEMENTS OF OPERATIONS


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





Years
      ended December 31,2008
              
              
              2007
              
              
              2006RevenueRetina
      – to related parties
              
              $
              136,800
              
              
              $
              —
              
              
              $
              —Retina
      – to unrelated parties
              
              
              21,500
              
              
              
              91,500
              
              
              
              174,259TearLab
      – to unrelated parties
              
              
              299,902
              
              
              
              —
              
              
              
              —Total
      revenue
              
              
              458,202
              
              
              
              91,500
              
              
              
              174,259Cost
      of goods soldRetina -
      product cost
              
              
              26,500
              
              
              
              2,398,103
              
              
              
              3,528,951TearLab -
      product cost
              
              
              136,848
              
              
              
              —
              
              
              
              —Total
      cost of goods sold
              
              
              163,348
              
              
              
              (2,398,103
              )
              
              
              3,528,951Gross
      profit
              
              
              294,854
              
              
              
              (2,306,603
              )
              
              
              (3,354,692
              )Operating
      expensesGeneral
      and administrative
              
              
              5,439,823
              
              
              
              8,104,405
              
              
              
              8,475,751Clinical,
      regulatory and research & development
              
              
              2,965,009
              
              
              
              8,675,552
              
              
              
              4,921,771Sales
      and marketing
              
              
              819,722
              
              
              
              1,413,459
              
              
              
              1,625,187Impairment
      of goodwill
              
              
              —
              
              
              
              —
              
              
              
              65,945,686Impairment
      of intangible asset
              
              
              —
              
              
              
              20,923,028
              
              
              
              —Restructuring
      charges
              
              
              2,440,820
              
              
              
              1,312,721
              
              
              
              819,642Total
      operating expenses
              
              
              11,665,374
              
              
              
              40,429,165
              
              
              
              81,788,037Loss
      from continuing operations
              
              
              (11,370,520
              )
              
              
              (42,735,768
              )
              
              
              (85,142,729
              )Other
      income (expenses)Interest
      income
              
              
              76,533
              
              
              
              609,933
              
              
              
              1,370,208Changes
      in fair value of warrant obligation
              
              
              (57,666
              )
              
              
              1,882,497
              
              
              
              —Gain
      (impairment) of investments
              
              
              1,036,250
              
              
              
              (1,036,250
              )
              
              
              —Interest
      expense
              
              
              (318,478
              )
              
              
              (17,228
              )
              
              
              (14,896
              )Amortization
      of finance costs
              
              
              (180,000
              )
              
              
              —
              
              
              
              —Other,
      net
              
              
              369,085
              
              
              
              18,011
              
              
              
              30,935Beneficial
      conversion on bridge loan shares issued
              
              
              (1,239,163
              )
              
              
              —
              
              
              
              —Minority
      interest
              
              
              1,977,722
              
              
              
              1,312,178
              
              
              
              161,179Total
      other income
              
              
              1,664,283
              
              
              
              2,769,141
              
              
              
              1,547,426Loss
      from continuing operations before income taxes
              
              
              (9,706,237
              )
              
              
              (39,966,627
              )
              
              
              (83,595,303
              )Recovery
      of income taxes
              
              
              337,846
              
              
              
              5,565,542
              
              
              
              2,915,790Loss
      from continuing operations
              
              
              (9,368,391
              )
              
              
              (34,401,085
              )
              
              
              (80,679,513
              )Loss
      from discontinued operations
              
              
              —
              
              
              
              (35,428,898
              )
              
              
              (1,542,384
              )Net
      loss for the year
              
              
              (9,368,391
              )
              
              
              (69,829,983
              )
              
              
              (82,221,897
              )Excess
      of purchase price over the carrying value of the non-controlling interest
      in OcuSense, Inc.
              
              
              (4,813,042
              )
              
              
              —
              
              
              
              —Net
      loss available to common stockholders
              
              $
              (14,181,433
              )
              
              $
              (69,829,983
              )
              
              $
              (82,221,897
              )Weighted
      average number of shares outstanding – basic and diluted
              
              
              4,083,655
              
              
              
              2,265,127
              
              
              
              1,799,188Loss
      from continuing operations per common share – basic and
      diluted
              
              $
              (2.29
              )
              
              $
              (15.19
              )
              
              $
              (44.84
              )Loss
      from discontinued operations per common share – basic and
      diluted
              
              
              —
              
              
              
              (15.64
              )
              
              
              (0.86
              )Net
      loss per common share – basic and diluted
              
              $
              (2.29
              )
              
              $
              (30.83
              )
              
              $
              (45.70
              )Net
      loss available to common stockholders per common share – basic and
      diluted
              
              $
              (3.47
              )
              
              $
              (30.83
              )
              
              $
              (45.70
              )








See
accompanying notes





-52-
 Table of Contents





OccuLogix,
Inc.




CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY


(expressed
in U.S. dollars)





Common
      stock
              
              
              Additional
      paid-in capital
              
              
              Accumulated
      deficit
              
              
              Accumulated
      other comprehensive loss
              
              
              Stockholders'
      equityShares
              
              
              AmountBalance,
      December 31, 2005
              
              
              1,683,466
              
              
              $
              1,683
              
              
              $
              336,875,976
              
              
              $
              (210,837,100
              )
              
              $
              —
              
              
              $
              126,040,559Stock-based
      compensation
              
              
              —
              
              
              
              —
              
              
              
              2,111,481
              
              
              
              —
              
              
              
              —
              
              
              
              2,111,481Stock
      issued on exercise of options
              
              
              5,630
              
              
              
              6
              
              
              
              270,929
              
              
              
              —
              
              
              
              —
              
              
              
              270,935Free
      inventory returned to related party
              
              
              —
              
              
              
              —
              
              
              
              (60,000
              )
              
              
              —
              
              
              
              —
              
              
              
              (60,000
              )Contribution
      of inventory from unrelated party
              
              
              —
              
              
              
              —
              
              
              
              11,994
              
              
              
              —
              
              
              
              —
              
              
              
              11,994Shares
      issued on acquisition of Solx, Inc.
              
              
              336,000
              
              
              
              336
              
              
              
              15,035,634
              
              
              
              —
              
              
              
              —
              
              
              
              15,035,970Shares
      issue costs
              
              
              —
              
              
              
              —
              
              
              
              (21,908
              )
              
              
              —
              
              
              
              —
              
              
              
              (21,908
              )Net
      loss and comprehensive loss
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (82,221,897
              )
              
              
              —
              
              
              
              (82,221,897
              )Balance,
      December 31, 2006
              
              
              2,025,096
              
              
              
              2,025
              
              
              
              354,224,106
              
              
              
              (293,058,997
              )
              
              
              —
              
              
              
              61,167,134Cumulative
      effect of adoption of FIN 48
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              4,600,000
              
              
              
              —
              
              
              
              4,600,000Stock-based
      compensation
              
              
              —
              
              
              
              —
              
              
              
              325,666
              
              
              
              —
              
              
              
              —
              
              
              
              325,666Stock
      issued on exercise of options
              
              
              90
              
              
              
              —
              
              
              
              2,228
              
              
              
              —
              
              
              
              —
              
              
              
              2,228Contribution
      of inventory from related party
              
              
              —
              
              
              
              —
              
              
              
              384,660
              
              
              
              —
              
              
              
              —
              
              
              
              384,660Contribution
      of inventory from unrelated party
              
              
              —
              
              
              
              —
              
              
              
              33,643
              
              
              
              —
              
              
              
              —
              
              
              
              33,643Shares
      issued on private placement of common stock
              
              
              267,094
              
              
              
              267
              
              
              
              8,060,377
              
              
              
              —
              
              
              
              —
              
              
              
              8,060,644Shares
      issue costs
              
              
              —
              
              
              
              —
              
              
              
              (743,635
              )
              
              
              —
              
              
              
              —
              
              
              
              (743,635
              )Net
      loss for the year
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (69,829,983
              )
              
              
              —
              
              
              
              (69,829,983
              )Unrealized
      loss on investments
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (1,036,250
              )
              
              
              (1,036,250
              )Impairment
      of investments
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              1,036,250
              
              
              
              1,036,250Comprehensive
      loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (69,829,983
              )Balance,
      December 31, 2007
              
              
              2,292,280
              
              
              
              2,292
              
              
              
              362,287,045
              
              
              
              (358,288,980
              )
              
              
              —
              
              
              
              4,000,357Stock-based
      compensation
              
              
              —
              
              
              
              —
              
              
              
              190,380
              
              
              
              —
              
              
              
              —
              
              
              
              190,380Stock-based
      compensation, related to severances
              
              
              —
              
              
              
              —
              
              
              
              2,137,198
              
              
              
              —
              
              
              
              —
              
              
              
              2,137,198Shares
      issued on private placement of common stock
              
              
              869,200
              
              
              
              869
              
              
              
              2,302,803
              
              
              
              —
              
              
              
              —
              
              
              
              2,303,672Shares
      issued on conversion of bridge loans principle and accrued
      interest
              
              
              3,304,511
              
              
              
              3,305
              
              
              
              8,608,366
              
              
              
              —
              
              
              
              —
              
              
              
              8,611,671Shares
      issued to Marchant Securities for services provided in the PIPE and bridge
      loan transactions
              
              
              192,480
              
              
              
              192
              
              
              
              (481,392
              )
              
              
              —
              
              
              
              —
              
              
              
              (481,200
              )Costs
      paid to Marchant Securities for services provided in the PIPE and bridge
      loan transactions
              
              
              —
              
              
              
              —
              
              
              
              (88,800
              )
              
              
              —
              
              
              
              —
              
              
              
              (88,800
              )Shares
      issued on acquisition of minority shareholdings of
Ocusense
              
              
              3,050,309
              
              
              
              3,050
              
              
              
              7,671,768
              
              
              
              —
              
              
              
              —
              
              
              
              7,674,818Excess
      of fair value of common shares over fair value of minority interest
      acquired
              
              
              —
              
              
              
              —
              
              
              
              (4,813,042
              )
              
              
              —
              
              
              
              —
              
              
              
              (4,813,042
              )Share
      issue costs
              
              
              —
              
              
              
              —
              
              
              
              (457,779
              )
              
              
              —
              
              
              
              —
              
              
              
              (457,779
              )Net
      loss and comprehensive loss
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (9,368,391
              )
              
              
              —
              
              
              
              (9,368,391
              )Balance,
      December 31, 2008
              
              
              9,708,780
              
              
              $
              9,708
              
              
              $
              377,356,547
              
              
              $
              (367,657,371
              )
              
              $
              —
              
              
              $
              9,708,884








See
accompanying notes





-53-
 Table of Contents





OccuLogix,
Inc.




CONSOLIDATED
STATEMENTS OF CASH FLOWS


(expressed
in U.S. dollars)





Years
      ended December 31,2008
              
              
              2007
              
              
              2006OPERATING
      ACTIVITIESNet
      loss for the year
              
              $
              (9,368,391
              )
              
              $
              (69,829,983
              )
              
              $
              (82,221,897
              )Adjustments
      to reconcile net loss to cash used in operating
activities:Stock-based
      compensation
              
              
              2,463,116
              
              
              
              480,971
              
              
              
              2,127,043Depreciation
      of fixed assets
              
              
              63,082
              
              
              
              844,948
              
              
              
              213,488Amortization
      of patents and trademarks
              
              
              23,101
              
              
              
              195,494
              
              
              
              5,608Amortization
      of intangible assets
              
              
              1,207,031
              
              
              
              5,308,706
              
              
              
              2,817,462Impairment
      of goodwill
              
              
              —
              
              
              
              14,446,977
              
              
              
              65,945,686Impairment
      of intangible assets
              
              
              —
              
              
              
              43,209,411
              
              
              
              —Beneficial
      conversion on bridge loan
              
              
              1,239,163
              
              
              
              —
              
              
              
              —Non-cash
      interest on bridge loans converted to equity
              
              
              318,478
              
              
              
              —
              
              
              
              —Accretion
      expense
              
              
              —
              
              
              
              857,400
              
              
              
              273,195Amortization
      of premiums/discounts on short-term investments
              
              
              —
              
              
              
              —
              
              
              
              35,985Amortization
      of financing fees
              
              
              180,000
              
              
              
              —
              
              
              
              —Loss
      on disposal of fixed assets
              
              
              8,927
              
              
              
              —
              
              
              
              —Change
      in fair value of warrant obligation
              
              
              57,666
              
              
              
              (1,882,497
              )
              
              
              —(Gain)
      Impairment on short term investments
              
              
              (1,036,250
              )
              
              
              1,036,250
              
              
              
              —Deferred
      income taxes
              
              
              (337,846
              )
              
              
              (14,915,425
              )
              
              
              (4,093,262
              )Minority
      interest share of losses
              
              
              (1,977,722
              )
              
              
              (1,312,178
              )
              
              
              (161,179
              )Net
      change in non-cash working capital balances related to
      operations
              
              
              (2,274,665
              )
              
              
              4,342,488
              
              
              
              509,528Cash
      used in operating activities
              
              
              (9,434,310
              )
              
              
              (17,217,438
              )
              
              
              (14,548,344
              )INVESTING
      ACTIVITIESSale
      of investments
              
              
              1,900,000
              
              
              
              7,885,000
              
              
              
              21,841,860Additions
      to fixed assets
              
              
              (133,104
              )
              
              
              (267,934
              )
              
              
              (255,886
              )Additions
      to patents and trademarks
              
              
              (153,062
              )
              
              
              (106,228
              )
              
              
              (105,217
              )Acquisition
      costs
              
              
              —
              
              
              
              —
              
              
              
              (949,499
              )Advance
      to Solx, Inc., pre-acquisition
              
              
              —
              
              
              
              —
              
              
              
              (2,434,537
              )Payments
      for acquisitions, net of cash acquired
              
              
              —
              
              
              
              (3,000,000
              )
              
              
              (7,678,565
              )Cash
      provided by investing activities
              
              
              1,613,834
              
              
              
              4,510,838
              
              
              
              10,418,156FINANCING
      ACTIVITIESProceeds
      from exercise of common stock options
              
              
              —
              
              
              
              2,228
              
              
              
              270,935Proceeds
      from issuance of bridge loans
              
              
              6,703,500
              
              
              
              —
              
              
              
              —Cash
      paid for financing fees
              
              
              (268,800
              )
              
              
              —
              
              
              
              —Share
      issuance costs
              
              
              (457,779
              )
              
              
              (816,493
              )
              
              
              —Proceeds
      from issuance of common stock
              
              
              2,173,000
              
              
              
              10,016,000
              
              
              
              —Cash
      provided by financing activities
              
              
              8,149,921
              
              
              
              9,201,735
              
              
              
              270,935Net
      increase in cash and cash equivalents during the year
              
              
              329,445
              
              
              
              (3,504,865
              )
              
              
              (3,859,253
              )Cash
      and cash equivalents, beginning of year
              
              
              2,235,832
              
              
              
              5,740,697
              
              
              
              9,599,950Cash
      and cash equivalents, end of year
              
              $
              2,565,277
              
              
              $
              2,235,832
              
              
              $
              5,740,697
              (i)







(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.








See
accompanying notes





-54-
 Table of Contents





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. ("OccuLogix"
or the "Company"), a Delaware corporation, is an ophthalmic device company that
is commercializing a proprietary in vitro diagnostic tear testing platform, the
TearLabTM test for dry eye disease, or DED, which enables eye care practitioners
to test for highly sensitive and specific biomarkers using nanoliters of tear
film at the point-of-care.  Until recently, the Company was also
seeking to commercialize treatments for age-related eye diseases through its
Retina and Glaucoma business divisions.




On
November 30, 2006, the Company acquired 50.1% of the capital stock, on a
fully diluted basis, 57.62% on an issued and outstanding basis, of TearLab, Inc.
(formerly OcuSense, Inc.), or TearLab, 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.  On October 6, 2008, the Company
acquired the remaining minority interest in TearLab.




On
September 30, 2008, the Company’s Board of Directors approved a reverse stock
split referred to as the Reverse Stock Split with an effective date of October
7, 2008 of the Company’s Common Stock utilizing a 1:25 consolidation
ratio.  As a result of the Reverse Stock Split, every twenty-five
shares of the Company’s issued and outstanding Common Stock were consolidated
into one share of the Company’s Common Stock.  In addition, the
exercise prices of the Company’s stock options and the conversion prices of the
Company’s outstanding warrants have been adjusted, such that, the number of
shares potentially issuable on the exercise of stock options and/or the exercise
of warrants will reflect the 1:25 consolidation ratio.  Accordingly,
all of the Company’s issued and outstanding Common Stock and all outstanding
stock options to purchase Common Stock and warrants to purchase Common Stock for
all periods presented have been restated to reflect the Reverse Stock
Split.




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 $14,181,433, $69,829,983, and $82,221,897 for
the years ended December 31, 2008, 2007, and 2006,
respectively.  The Company's working capital at December 31, 2008
is $1,549,581.  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.  Management believes the Company’s
existing cash will be sufficient to cover its operating and other cash demands
only until approximately May 2009.




A
successful transition to attaining profitable operations is dependent upon
obtaining additional financing adequate to fund its planned expenses and
achieving a level of revenues adequate to support the Company’s cost
structure.  The Company intends to seek additional debt or equity
financing to support its operations until it becomes cash flow
positive.  There can be no assurances that there will be adequate
financing available to the Company on acceptable terms or at all.  If
the Company is unable to obtain additional financing, the Company would need to
significantly curtail or reorient its operations during 2009, which could have a
material adverse effect on the Company’s ability to achieve its business
objectives and as a result may require the Company to file for bankruptcy
or cease operations.  The consolidated financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts or amounts classified as liabilities that might be
necessary should the Company be forced to take any such actions.





-55-
 Table of Contents





2.  SIGNIFICANT
ACCOUNTING POLICIES




The
consolidated financial statements have been prepared by management in conformity
with 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, equity instruments, investments and its
intangible assets.  Actual results could differ from those
estimates.




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.




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 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.




Revenue
is recognized when all four of the following criteria are met:
(i) persuasive evidence that an arrangement exists; (ii) delivery of
the products has occurred; (iii) the selling price is fixed or
determinable; and (iv) collectability is reasonably assured.  The
Company follows the provisions of the SEC Staff Accounting Bulletin ("SAB")
No. 104, "Revenue Recognition," which sets forth guidelines in the timing
of revenue recognition based upon factors such as passage of title,
installation, payments and customer acceptance.  Amounts received in
excess of revenue recognizable under SAB No. 104 are deferred.




Subsequent
to its launch in the fourth quarter of 2008, the Company’s revenues have been
derived from sales of the TearLabTM Osmolarity System for DED which consists of
hardware and related disposables.  The Company’s sales are currently
to countries in Europe and are generally transacted through
distributors.  The Company records revenue when all of its obligations
are completed which is generally upon shipment of the Company's
products.





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The
Company has a no return policy for its products.




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 to purchase the TearLabTM
Osmolarity System and the RHEO System.  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 the TearLab Osmolarity System and for distributing the RHEOTM System in
Canada.  The Company has minimum royalty obligations for licensing and
selling the TearLab Osmolarity System.  Prior to the termination of
RHEO related distribution agreements earlier in 2008 there were minimum royalty
payments that were only recoverable based on sufficient volume (see notes 11 and
12).




Cash
and cash equivalents




The
Company considers all investments with a maturity of three months or less when
acquired to be cash equivalents.  Cash equivalents primarily represent
funds invested in operating accounts whose carrying value is equal fair market
value.




Investments




In 2007,
investments consisted of investments in auction rate
securities.  These investments were classified as available-for-sale
securities and were recorded at fair value with unrealized gains or losses
reported in accumulated other comprehensive income until the fair value was
determined to be less than the carrying value and that this reduction in value
was other than temporary.  In such circumstances, the reduction in the
carrying value was included in the determination of net loss.  All of
the auction rate securities had contractual maturities of more than three
years.  No auction rate securities are held by the Company at December
31, 2008.




Bad
debt reserves




The
Company evaluates the collectability of its amounts 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, a specific allowance against amounts due 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.  The provision for doubtful accounts is charged to general
and administrative expense and accounts receivable are written off as
uncollectible and deducted from the allowance after appropriate collection
efforts have been exhausted.




Inventory




Inventory
is recorded at the lower of cost or net realizable value and consists of
finished goods.  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.  Inventory is periodically
reviewed for evidence of slow-moving or obsolete parts, and the estimated
reserve is based on management's reviews of inventories on hand, compared to
estimated future usage and sales, reviewing product shelf-life, and assumptions
about the likelihood of obsolescence.





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In April
2006, the Company sold a number of RHEOTM treatment sets at a price lower than
cost.  As a result, the Company wrote down the carrying value of
treatment sets to reflect this current net realizable value during the year
ended December 31, 2006.  As a result of the indefinite
suspension of the RHEOTM System clinical development program for Dry AMD, the
Company wrote down the value of treatment sets and OctoNova pumps, the
components of the RHEOTM System, to zero as of December 31, 2007 since the
Company did not expect 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.




Fair
value of financial instruments




The
Company accounts for financial instruments at fair value based on various
accounting literatures, including SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities, SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, and SFAS No. 157, Fair Value
Measurements.  In determining fair value, the Company considers
both the credit risk of counterparties and the Company’s own
creditworthiness.  SFAS No. 157, which defines fair value,
establishes a framework for measuring fair value and expands disclosures about
fair value measurements for financial instruments effective January 1,
2008.  The framework requires the valuation of investments using a
three tiered approach in the valuation of investments.  For details on
the assets and liabilities subject to fair value measurements and the related
valuation techniques used, refer to Footnote 17 – Fair Value Measurements
of the accompanying financial statements.




Fixed
assets




Fixed
assets are recorded at cost less accumulated
depreciation.  Depreciation is calculated using the straight-line
method, commencing the month after 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 periodically assesses the carrying value of intangible and other
long-lived assets, and whenever events or changes in circumstances indicate that
the carrying amount of an asset might not be recoverable.  The assets
are considered to be impaired if the Company determines that the carrying value
may not be recoverable based upon our assessment, which includes consideration
of the following events or changes in circumstances:




·
            the
      asset's ability to continue to generate income from operations and
      positive cash flow in future
periods;




·
            loss
      of legal ownership or title to the
asset;




·
            significant
      changes in our strategic business objectives and utilization of the
      asset(s); and




·
            the
      impact of significant negative industry or economic
  trends.





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If the
assets are considered to be impaired, the impairment recognized is the amount by
which the carrying value of the assets exceeds the fair value of the
assets.  Fair value is determined by a combination of third party
sources and discounted cash flows.  In addition, the Company bases the
useful lives and related amortization or depreciation expense on an estimate of
the period that the assets will generate revenues or otherwise be
used.  The Company also periodically reviews the lives assigned to
intangible assets to ensure that the initial estimates do not exceed any revised
estimated periods from which the Company expects to realize cash flows from the
technologies.




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.  As
of December 31, 2008 and 2007, the Company had no goodwill in its balance
sheet.




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.




Clinical,
regulatory and research & development 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 FIN No. 48,
"Accounting for Uncertainty in
Income Taxes – An Interpretation of FASB Statement
No. 109".  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.





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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.




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 Company’s results of operations or financial
position.




In
accordance with SFAS No. 109, "Accounting for Income Taxes",
income taxes are accounted for under the asset and liability
method.  Deferred tax assets and liabilities are recognized for the
expected future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit
carryforwards.  The Company measures deferred tax assets and
liabilities using the enacted tax rates expected to apply to taxable income in
the years in which we expect to recover or settle those temporary
differences.  The Company recognizes the effect of a change in tax
rates on deferred tax assets and liabilities in income in the period that
includes the enactment date.  A valuation allowance is established
when it is "more likely than not" the future realization of all or some of the
deferred tax assets will not be achieved.




Stock-based
compensation




The
Company accounts for stock-based compensation expense for its employees in
accordance with the provisions of SFAS No. 123R “Share-Based
Payments”.  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.




Net
loss per share




The
Company follows SFAS No. 128, "Earnings Per
Share".  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 dilutive securities 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.





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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 31,2008
              
              
              2007
              
              
              2006Stock
      options
              
              
              2,278,483
              
              
              
              191,501
              
              
              
              169,491Warrants
              
              
              110,578
              
              
              
              110,578
              
              
              
              —Total
              
              
              2,389,061
              
              
              
              302,079
              
              
              
              169,491




Comprehensive
income




The
Company follows SFAS No. 130, "Reporting Comprehensive
Income".  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.




Recent
accounting pronouncements




Effective
January 1, 2008, the Company adopted SFAS No. 157, "Fair Value Measurements",
which establishes a framework for measuring fair value in generally accepted
accounting principles, clarifies the definition of fair value within that
framework and expands disclosures about the use of fair value
measurements.  SFAS No. 157 is effective for fiscal years
beginning after November 15, 2007.  However, in
February 2008, the Financial Accounting Standards Board (“FASB”) issued
FASB Staff Position (“FSP”) No. 157-2, Effective Date of FASB Statement
No. 157, which deferred the effective date of SFAS No. 157 for
one year for non-financial assets and liabilities, except for certain items,
such as the Company’s cash equivalents and investments, that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at
least annually).  The Company does not expect the adoption of SFAS No
157 for non-financial assets and non-financial liabilities on January 1,
2009 to have a material impact on its consolidated financial
statements.




Effective January 1, 2008, the
Company adopted SFAS No. 159, "The Fair Value
Option for Financial Assets and Financial Liabilities".  SFAS No. 159 permits
companies to elect to measure certain financial instruments and certain other
items at fair value.  The standard requires that unrealized gains and
losses on items for which the fair value option has been elected be reported in
earnings.  The Company did not elect to measure any additional
financial instruments at fair value as a result of this
statement.  Therefore, the adoption of SFAS No. 159 did not have
a material impact on its consolidated financial statements.


In
December 2007, FASB issued SFAS No. 141R, "Business Combinations", which
impacts the accounting for business combinations.  The statement
requires changes in the measurement of assets and liabilities required in favor
of a fair value method consistent with the guidance provided in SFAS 157
(see
below).  Additionally, the statement requires a change in
accounting for certain acquisition related expenses and business adjustments
which no longer are considered part of the purchase price.  Adoption
of this standard is required for fiscal years beginning after December 15,
2008.  Early adoption of this standard is not
permitted.  The statement requires prospective application for all
acquisitions after the date of adoption.  The statement will require
changes in the accounting for acquisition costs, restructuring costs, in process
research and development and the resolution of certain acquired tax
items.  As a result, the adoption of the statement could have a
material impact on the future operations of the Company based on future
acquisitions and changes in estimates and unrecognized tax benefits and
liabilities related to pre-existing business combination
transactions.





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In
December 2007, FASB issued Statement No. 160, "Noncontrolling Interests in
Consolidated Financial Statements - an amendment of ARB
No. 51".  SFAS No. 160 amends ARB 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.




3.    ACQUISITION




OcuSense,
Inc.




On
October 6, 2008, the Company acquired the 42.38% minority shareholdings of
Ocusense, Inc. that it did not already own.  As the Company has fully
consolidated the financial operations of Ocusense, Inc. since it was acquired on
November 30, 2006, the impact of this acquisition was to eliminate the
minority interest and the Company recorded a charge to additional paid-in
capital for the excess of the purchase price over the carrying value of the
non-controlling interest of Ocusense, Inc.  There were no acquisitions
made during fiscal 2007.




A further
discussion of the Company's initial acquisition of a 57.62% ownership interest
of Ocusense, Inc. in 2006 and the subsequent acquisition of the remaining 42.38%
ownership interest in fiscal 2008 is described below.




November
2006 transaction




On
November 30, 2006, the Company acquired 50.1% of the capital stock of
OcuSense, measured on a fully diluted basis, and 57.62% measured on an issued
and outstanding basis.  OcuSense's first product, 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.




The
Company purchased 1,754,589 shares of OcuSense's Series A Preferred
Stock, representing 50.1% of OcuSense's capital stock on a fully diluted basis,
and 57.62% on an issued and outstanding basis, for an initial purchase price of
$4,000,000.  OccuLogix paid $2,000,000 of the initial purchase price
on the closing of the purchase, which took place on November 30, 2006 and
paid the remaining $2,000,000 on January 3, 2007.  In connection
with the purchase, OccuLogix incurred transaction costs of $171,098, thus
establishing the total initial purchase price at $4,171,098.  In
addition, pursuant to the Series A Stock Purchase Agreement, the Company
was obligated to make two additional payments to OcuSense of $2,000,000 each,
subject to OcuSense's achievement of two pre-defined milestones.  In
June 2007, the Company made the first of these $2,000,000 payments to OcuSense
upon its achievement of the first of these two pre-defined
milestones.  The Company made the second of these $2,000,000 payments
upon the achievement by OcuSense of the second of the two pre-defined
milestones, in March 2008.





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OcuSense
was considered to be a variable interest entity or a VIE and OccuLogix was
considered to be the primary beneficiary of OcuSense's
activities.  Accordingly, under FIN 46(R), the assets,
liabilities and non-controlling interest were measured initially at their fair
value.




Assets
acquired and liabilities assumed consisted primarily of working capital and of a
technology intangible asset relating to patents owned by
OcuSense.  Before consideration of deferred taxes, the fair value of
the assets acquired was greater than the fair value of the liabilities assumed
and the non-controlling interest.  Because OcuSense does not comprise
a business, as defined in EITF 98-3, "Determining Whether a Nonmonetary
Transaction Involves Receipt of Productive Assets or of a Business", the
Company applied the simultaneous equation method as per EITF 98-11, "Accounting for Acquired Temporary
Differences in Certain Purchase Transactions That Are Not Accounted for as
Business Combinations", and adjusted the assigned value of the
non-monetary assets acquired (consisting solely of the technology intangible
asset) to include the deferred tax liability.




The fair
values of OcuSense's assets, liabilities and minority interest, at the date of
acquisition, were as follows:





November 30,
                  2006Net
      tangible assets
              
              $
              2,690,316Intangible
      assets
              
              
              12,895,388Deferred
      taxes
              
              
              (5,158,155
              )Minority
      interest
              
              
              (6,256,451
              )$
              4,171,098




In
estimating the fair value of the intangible assets acquired, the Company
considered a number of factors, including the preparation of a valuation that
used the income approach to value OcuSense's TearLabTM technology (note 8).




October
2008 transaction




On
October 6, 2008, the Company acquired the remaining 42.38% interest in
Ocusense, Inc. that it did not previously own by issuance of shares with a fair
value of $7,924,818, which resulted in the elimination of the minority interest
of $3,111,776.  Since the Company has consolidated OcuSense, Inc. as a
VIE.  Therefore the excess of the purchase price over the value of the
minority interest acquired was treated as a capital item and was reported as a
reduction to Additional Paid In Capital.  Such amount is also reported
as part of the net loss available to shareholders in the consolidated statement
of operations.




4.  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 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.  The balance of
$148,201 at December 31, 2008 represents production materials held for the
TearLabTM activities.





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In light
of the Company's financial position at November 1, 2007, the Company
announced an indefinite suspension of the RHEOTM System clinical development
program for 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 was unable to raise additional capital, it would not have had sufficient
cash to support its operations beyond early 2008.  Accordingly, the
Company wrote down the value of its treatment sets and OctoNova pumps, the
components of the RHEOTM System, to zero as at December 31, 2007 since the
Company did not expect 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.  In 2008, the
Company sold Diamed, a related party, 113 Octo Nova pumps.  The sale
of these pumps generated revenues of $136,800.  The Company also sold
2 pumps to a Swiss company generating revenues of $3,000.  All
remaining RHEOTM System inventory was disposed of during 2008.




As of
December 31, 2008 and 2007, the Company had inventories related to RHEOTM
activities of $0 and $7,295,545, respectively, reduced by inventory reserves of
$0 and $7,295,545, respectively.




5.  GOODWILL




The
Company follows the provisions of SFAS No. 142, "Goodwill and Other Intangible
Assets", 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 is as follows:





GlaucomaDecember 31,
      2006
              
              $
              14,446,977Acquired
      during the year
              
              
              —Impairment
      loss recognized in discontinued operations in 2007
              
              
              (14,446,977
              )December 31,
      2007 and 2008
              
              $
              —




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 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.  (See note 10 – discontinued
operations).  SOLX, had been the Glaucoma Division of the
Company prior to the completion of the sale 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 recorded a goodwill
impairment charge of $14,446,977 during the year ended December 31, 2007 to
write down the value of its recorded goodwill to its fair value of
zero.





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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.  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 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.  Based on the goodwill impairment analysis performed, the Company
recorded a goodwill impairment charge of $65,945,686 for the year ended
December 31, 2006.




6.  FIXED
ASSETS





2008
                
                
                2007Furniture
      and office equipment
                
                $
                24,539
                
                
                $
                101,903Computer
      equipment and software
                
                
                254,846
                
                
                
                197,317Leasehold
      improvements
                
                
                —
                
                
                
                6,335Medical
      equipment
                
                
                315,779
                
                
                
                1,163,135595,164
                
                
                
                1,468,690Less
      accumulated depreciation
                
                
                411,780
                
                
                
                1,346,404$
                183,384
                
                
                $
                122,286




Depreciation
expense was $63,082, $844,948, and $213,488 during the years ended
December 31, 2008, 2007 and 2006, respectively, of which $0, $231,542
and  $74,610 is included in discontinued operations for the years
ended December 31, 2008, 2007 and 2006, respectively (note 11).




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", 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 zero 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, 2008
and 2006.





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7.  PATENTS
AND TRADEMARKS





2008
                
                
                2007Patents
                
                $
                373,361
                
                
                $
                236,854Trademarks
                
                
                136,767
                
                
                
                120,211510,128
                
                
                
                357,065Less
      accumulated amortization
                
                
                240,730
                
                
                
                217,628$
                269,398
                
                
                $
                139,437




Amortization
expense was $23,101, $195,494 and  $5,608 during the years ended
December 31, 2008, 2007 and 2006, 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 zero 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, 2008 and
2006.




The
Company's recorded patents and trademarks as of December 31, 2008 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
aggregate amortization expense for patents and trademarks at December 31, 2008
is as follows:





2009
                  
                  $
                  30,8002010
                  
                  
                  30,8002011
                  
                  
                  30,8002012
                  
                  
                  30,8002013
                  
                  
                  30,800Thereafter
                  
                  
                  115,398Total
                  
                  $
                  269,398




8.  INTANGIBLE
ASSETS




The
Company's intangible assets consist of the value of TearLabTM Technology acquired
in the acquisition of Ocusense, Inc.  The TearLabTM Technology consists
of a disposable lab card and card reader, supported by an array of patents and
patent applications that are either held or in-licensed by the
Company.  The TearLabTM Technology is being amortized using the
straight-line method over an estimated useful life of
10 years.  Amortization expense for the years ended
December 31, 2008, 2007 and 2006 was $1,207,031, $5,308,706
and  $2,817,462, respectively, of which $0, $2,731,667 and $993,333 is
included as amortization expense within discontinued operations for the years
ended December 31, 2008, 2007 and 2006, respectively.  The
Company has no indefinite-lived intangible assets.





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Intangible
assets subject to amortization consist of the following:





December 31,
      2008Cost
              
              
              Accumulated
      AmortizationTearLabTM
      technology
              
              $
              12,172,054
              
              
              $
              2,604,031




Intangible
assets were reduced by $310,000 in the year to reflect the effect of tax losses
benefited which became unrestricted in the year.





December 31,
      2007Cost
              
              
              Accumulated
      AmortizationTearLabTM
      technology
              
              $
              12,482,054
              
              
              $
              1,397,000




Intangible
assets were reduced by $413,333 in the year to reflect the effect of tax losses
benefited which became unrestricted in the year.




Estimated
future amortization expense related to intangible assets with finite lives at
December 31, 2008 is as follows:





Amortization
      of intangible assets2009
                
                $
                1,214,5232010
                
                
                1,214,5232011
                
                
                1,214,5232012
                
                
                1,214,5232013
                
                
                1,214,523Thereafter
                
                
                3,495,408Total
                
                $
                9,568,023




In the
year ended December 31, 2007, the Company’s intangible assets included 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.





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The
Company determined that, as of December 31, 2008, 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 reflect a potential indication of
impairment, thus requiring management to assess whether the Company's TearLabTM
technology was impaired as of December 31, 2008.  Based on
management's estimates of forecasted undiscounted cash flows as of
December 31, 2008, 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,
2008.




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", the Company recognized a total of $819,642
in restructuring charges during the year ended December 31,
2006.  The restructuring charges recorded during the year ended
December 31, 2006 consist solely of severance and benefit costs related to
the termination of 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.




In
December 2007, the Board of Directors, approved a restructuring plan which
included the termination of employment of certain members of its executive team
in light of the Company's 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 recorded in
the year ended December 31, 2007 consist solely of severance and benefit
costs related to the termination of 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, 2008.




During
2008, the Company completed its restructuring plan including obtaining the
agreement of certain former executives and the shareholder approval for portions
of the severance or retention liabilities to be replaced with fully vested
options exercisable into common shares of the Company.  In accordance
with SFAS No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities", the Company recognized a total of
$2,440,820 in restructuring charges during the year ended December 31,
2008.  The total restructuring charges of $2,440,820 recorded in the
year ended December 31, 2008 consists of severance and benefit costs
related to the termination employees at the Company's Mississauga, Ontario
office.  The Company granted to 11 former executives and one current
executive options with an equivalent fair value to $2,212,855 in lieu of cash
severance payments.  In addition, the Company modified the existing
options held by the employees to allow for continued vesting under the original
terms of the options and to remove the provision requiring the options to expire
90 days after they were terminated.  In accordance with SFAS No.
123(R), the Company treated the modification as the grant of a new
award.  Any compensation expense originally recognized for options
that remained unvested was reversed.  As these individuals are no
longer employees or rending further service to the Company after termination,
the fair value of the reissued options on the modification date was then
expensed immediately as no further service is expected from the terminated
employees.  The transaction resulted in a net reduction in
compensation expense of $153,449 for the year ended December 31,
2008.  All severance and benefit costs have been paid as of
December 31, 2008 with the exception of $12,935 which represents the
severance and benefit costs for remaining employees.





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10.  DISCONTINUED
OPERATIONS




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 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 6 and
9).




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
              
              
              2006Revenue
              
              $
              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
              
              
              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
              
              
              
              —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
              
              
              9,349,882
              
              
              
              1,182,005Loss
      from discontinued operations
              
              $
              (35,428,898
              )
              
              $
              (1,542,384
              )




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The
Company did not have any discontinued operations in the year ended December 31,
2008.  Also the Company did not have any assets and liabilities
related to discontinued operations at December 31, 2008 and
2007.




11.  DUE
TO STOCKHOLDERS





December 31,2008
              
              
              2007Due
      (from)/toTLC
      Vision Corporation (note
      12)
              
              $
              23,152
              
              
              $
              (2,708
              )Other
      stockholders (note
      12)
              
              
              —
              
              
              
              35,522$
              23,152
              
              
              $
              32,814




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, 2008 and 2007, respectively, and
included in general and administrative expenses.  The balance due to
other stockholders at December 31, 2007 includes outstanding royalty fees
payable for license agreements terminated in 2008.  No royalty fees
remain due at December 31, 2008.




12.  RELATED
PARTY TRANSACTIONS




The
following are the Company's related party transactions:




TLC
Vision




TLC
Vision Corporation held a 32.8% ownership interest in the Company, on an issued
and outstanding basis, on December 31, 2007.  As at December 31, 2008,
this interest had decreased to 7.6%.




TLC
provided computer and administrative support to the Company in the years ended
December 31, 2008 and 2007 for which the Company recorded expense of $80,091 and
$251,927, respectively.




Diamed




Diamed
Medizintechnik GmBH or Diamed held a 7.56% ownership interest in the Company, on
an issued and outstanding basis, on December 31, 2007.  As at December
31, 2008, this interest had decreased to under 5%.




In the
third quarter of 2008, the Company consummated an agreement with Diamed in which
the Company agreed to sell to Diamed 117 Octo Nova pumps for
$136,800.  These pumps had previously been fully provided for in the
fourth quarter of 2007 when the Company terminated all RHEOTM related
activities.  Diamed paid the Company $86,800 for the pumps purchased
and applied the remaining $50,000 against minimum royalty payments due to
Mr. Hans Stock and Dr. Brunner.





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Mr. Hans
Stock




Mr. Hans
Stock or Mr. Stock was a significant shareholder of Diamed.  The
Company entered into various patent license and royalty agreements with Mr.
Stock.  The Company was 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 were to be
credited against future royalty payments to be made in accordance with the
agreement.  On May 19, 2008, the patent license and royalty
agreement with Mr. Stock was terminated by Mr. Stock as a result
of  non-payment of minimum license fees due at March 31, 2008 and
December 31, 2007 of $25,000 and $12,500, respectively.  As such,
no amounts were accrued for license fees for Mr. Stock during fiscal year
2008.  Included in due to stockholders at December 31, 2008 and
December 31, 2007 are zero and $12,500, respectively, as amounts due to
Mr. Stock for royalties were applied by Diamed against amounts due to the
Company for Octo Nova pumps purchased by Diamed from the Company.




Other




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, a commitment fee of 200 basis points was payable
by the Company on the undrawn portion of the Total Commitment
Amount.  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.




Marchant,
a firm beneficially owned as to approximately 32% by Mr. Vamvakas and
members of his family, introduced the Company to the lenders of the
(i) $3,000,000 aggregate principal amount Original Bridge Loan that the
Company secured and announced on February 19, 2008; (ii) the $300,000
aggregate principal amount Additional Bridge Loan I secured and announced
on May 5, 2008; and (iii) the $3,403,500 aggregate principal amount
Additional Bridge Loan II secured and announced on July 28,
2008.  The Company also has retained Marchant in connection with the
proposed private placement of $2,173,000 of OccuLogix's common stock, announced
by the Company on July 28, 2008, for which Marchant was paid $750,000
representing approximately 17% of the gross aggregate proceeds of such private
placement and bridge loans by Canadian investors.  Marchant has been
paid $268,800 in cash and $481,200 in the form of equity securities of the
Company.  As $570,000 of this balance was payable only upon the
successful completion of the private placement, this amount was recorded as an
offset to proceeds received.  The remaining $180,000 was paid in
conjunction with the bridge loans and was recorded as finance
costs.




On
January 25, 2007, the Company entered into a consulting agreement with
Dr. Michael Lemp, a former member of the board of OcuSense, Inc., for the
purpose of procuring consulting services as OcuSense's Chief Medical
Officer.  Dr. Lemp is entitled to $100,000 per annum to be paid
at the end of each month and a $99 monthly expense reimbursement
stipend.  Dr. Lemp will be available to OcuSense on an average of
20 hours a week or 1,000 hours per year for which the Company recorded
an expense of $117,952 and $67,062 for the years ended December 31, 2008 and
2007, respectively.  There were no outstanding balances due at either
December 31, 2008 or 2007.





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13.  INCOME
TAXES




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





December 31,2008
              
              
              2007Deferred
      tax assetsIntangible
      assets
              
              $
              66,548
              
              
              $
              144,644Fixed
      assets
              
              
              (34,248
              )
              
              
              50,902Stock
      options
              
              
              5,852,241
              
              
              
              4,998,697Accruals
      and other
              
              
              237,882
              
              
              
              2,935,841Capital
      loss carry forward
              
              
              —
              
              
              
              12,801,402Net
      operating loss carry forwards
              
              
              2,215,707
              
              
              
              27,292,2408,338,130
              
              
              
              48,223,726Valuation
      allowance
              
              
              (6,122,423
              )
              
              
              (46,049,052
              )Deferred
      tax asset
              
              
              2,215,707
              
              
              
              2,174,674Deferred
      tax liabilityIntangible
      assets (other than goodwill)
              
              
              (3,827,209
              )
              
              
              (4,434,022
              )Deferred
      tax liability
              
              
              (3,827,209
              )
              
              
              (4,434,022
              )Deferred
      tax liability, net
              
              $
              (1,611,502
              )
              
              $
              (2,259,348
              )




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 31,2008
              
              
              2007
              
              
              2006Loss
      for the year before income taxes
              
              $
              (9,706,237
              )
              
              $
              (39,966,628
              )
              
              $
              (83,595,303
              )Expected
      recovery of income taxes
              
              
              (3,646,187
              )
              
              
              (14,568,150
              )
              
              
              (30,281,154
              )Goodwill
      impairment
              
              
              —
              
              
              
              —
              )
              
              
              23,740,447Non-controlling
      interest
              
              
              (791,089
              )
              
              
              (524,871
              )
              
              
              (64,472
              )Stock-based
      compensation
              
              
              —
              
              
              
              (677,699
              )
              
              
              55,117Section 382
      limitation of deferred assets
              
              
              42,376,546
              
              
              
              —
              
              
              
              —Rate
      change
              
              
              —
              
              
              
              —
              
              
              
              322,321Tax-free
      income
              
              
              —
              
              
              
              —
              
              
              
              (864
              )Return
      to provision
              
              
              1,446,380
              
              
              
              (35,270
              )
              
              
              (180,455
              )Non-deductible
      expenses
              
              
              11,071
              
              
              
              252,519
              
              
              
              89,360Change
      in valuation allowance
              
              
              (39,734,567
              )
              
              
              9,987,929
              
              
              
              3,403,910Recovery
      of income taxes from continued operations
              
              
              (337,846
              )
              
              
              (5,565,542
              )
              
              
              (2,915,790
              )Recovery
      of income taxes from discontinued operations
              
              
              —
              
              
              
              (9,349,882
              )
              
              
              (1,182,005
              )Total
      recovery of income taxes
              
              $
              (337,846
              )
              
              $
              14,915,425
              
              
              $
              (4,097,795
              )




The
Company records tax benefits related to tax losses as deferred income tax assets
to offset deferred income tax liabilities arising from its intangible
assets.




The
October 6, 2008 closing of the private investment by certain investors, the
acquisition of the remaining ownership interest in TearLab, Inc. and the
conversion of the bridge loans combined to result in a change of control for tax
purposes causing Section 382 and 383 restrictions on the use of tax losses
to apply.  Utilization of the net operating loss and capital loss
carryforwards will be subject to a substantial annual limitation under Section
382 and 383 of the Internal Revenue Code of 1986, and similar state provisions
due to ownership change limitations that have occurred. These ownership changes
will limit the amount of net operating loss and capital loss carryforwards that
can be utilized to offset future taxable income and tax, respectively. In
general, an ownership change, as defined by Section 382 and 383, results from
transactions increasing ownership of certain stockholders or public groups in
the stock of the corporation by more than 50 percentage points over a three-year
period. Such limitations will result in approximately $42.3 million of tax
benefits related to net operating loss and capital loss carryforwards that will
expire unused. Accordingly, the related net operating loss and capital loss
carryforwards have been removed from deferred tax assets accompanied by a
corresponding reduction of the valuation allowance. Due to the existence of the
valuation allowance, limitations created by future ownership changes, if any,
related to our operations in the U.S. will not impact our effective tax
rate.





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At
December 31, 2008, we had federal net operating loss carryforwards of
approximately $80.8 million, of which $60.3 million will expire due to the 382
limitation, and California net operating loss carryforwards of approximately
$9.4 million, of which $8.8 millwion will expire due to 382 limitation. The
federal net operating loss carryforwards begin to expire in 2012, and the
California net operating loss carryforwards begin to expire in
2015.




On
January 1, 2007, the Company adopted the provisions of FIN No. 48,
"Accounting for Uncertainty in
Income Taxes – An Interpretation of FASB Statement
No. 109".  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.




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 Company’s results of operations or financial
position.




All of
the 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.





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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.





14.  ACCRUED
LIABILITIES





December 31,2008
              
              
              2007Continuing
      operationsDue
      to professionals
              
              $
              274,206
              
              
              $
              475,044Due
      to clinical trial sites
              
              
              120,247
              
              
              
              136,681Due
      to clinical trial specialists
              
              
              104,133
              
              
              
              116,359Product
      development costs
              
              
              96,359
              
              
              
              277,521Corporate
      compliance
              
              
              102,907
              
              
              
              246,675Obligation
      to repay advances received
              
              
              127,301
              
              
              
              —Restructuring
      severances
              
              
              12,935
              
              
              
              1,312,721Legal
      settlement payable
              
              
              125,000
              
              
              
              —Miscellaneous
              
              
              238,705
              
              
              
              308,450$
              1,201,793
              
              
              $
              2,873,451




15.  MINORITY
INTEREST




OcuSense
was determined to be a VIE and OccuLogix was the primary
beneficiary.  On acquisition of OcuSense, FIN 46(R) required that
the non-controlling interest be measured initially at fair value.




After
initial measurement, the minority interest reflects the initial fair value of
the minority's interest less the minority's proportionate interest in losses
incurred, plus the fair value of all vested options and warrants issued to
parties other than OccuLogix as of the date of acquisition, as well as the value
of options and warrants vested and issued after the acquisition
date.




In
addition, the Company has accounted for the milestone payments, made subsequent
to the acquisition date, as follows:




·
            The
      Company determined the fair value of the milestone payments on the date of
      acquisition by incorporating the probability that the milestone payments
      will be made, as well as the time value associated with the planned
      settlement date of the payments.




·
            Upon
      payment of the milestone payments, the Company recorded the minority
      interest portion of the change in fair value of the milestone payment
      (i.e., the minority interest portion of the ultimate value of the
      milestone payment less the initial fair value determination) as an
      expense, with a corresponding increase to minority interest, to reflect
      the additional value provided to the minority interest in excess of that
      contemplated on the acquisition
date.





Years
      Ended December 312008
              
              
              2007Minority
      interest at the beginning of  period
              
              $
              4,953,960
              
              
              $
              6,110,834Minority
      share of loss from operations in the period
              
              
              (1,977,722
              )
              
              
              (1,312,178
              )Fair
      value of stock-based compensation
              
              
              135,538
              
              
              
              155,304Investment
      to acquire minority interest
              
              
              (3,111,776
              )
              
              
              —Minority
      interest at the end of period
              
              $
              —
              
              
              $
              4,953,960





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Minority
stockholders' share of net losses from operations for the year ended
December 31, 2008 of $2,181,541 was offset by $203,819 to reflect a
minority increment for the second of two milestone payments required under the
original purchase agreement.  Minority share of net loss from
operations for the year ended December 31, 2007 of $1,442,469 was offset by
$130,291 to reflect a minority increment for the first of two milestone payments
required under the original purchase agreement.  These transactions
are specific to the acquisition of OcuSense.  The increment represents
the minority stockholders' ownership percentage of the variance between the
actual milestone payments made and the original fair value of the milestone
payments reported when the Company acquired its ownership interest in
OcuSense.  No future milestone payments remain to be
paid.




16.  COMMITMENTS
AND CONTINGENCIES




Commitments




The
Company has commitments relating to operating leases for rental of office space
and equipment from unrelated parties which expire through 2009.  The
total future minimum obligation under the various leases is $130,830 for
2009.  Rent paid under these leases was $267,193, $90,465 and $80,329
for the years ended December 31, 2008, 2007 and 2006,
respectively.




On
March 12, 2003, OcuSense entered into a patent license and royalty
agreement with University of California San Diego to obtain an exclusive license
to make, use, sell, offer for sale, and import existing TearLabTM
technology.  The Company is required to make royalty payments of
$35,000 or 5.5% of gross sales per year, whichever is
higher.  Additionally, the Company is required to pay a royalty of 30%
of any sublicense fees it receives prior to receiving FDA approval and 25% of
any sub-license fees it receives after FDA approval.




Future
minimum royalty payments under the agreements as at December 31, 2008 are
approximately as follows:





2009
                  
                  $
                  35,0002010
                  
                  
                  35,0002011
                  
                  
                  35,0002012
                  
                  
                  35,0002013
                  
                  
                  35,000Thereafter
                  
                  
                  210,000Total
                  
                  $
                  385,000




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.





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17.  FAIR
VALUE MEASUREMENTS




The
Company adopted SFAS No. 157 on January 1, 2008.  SFAS
No. 157, among other things, defines fair value, establishes a consistent
framework for measuring fair value and expands disclosure for each major asset
and liability category measured at fair value on either a recurring or
non-recurring basis.  SFAS No. 157 clarifies that fair value is
an exit price, representing the amount that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market
participants.  As such, fair value is a market-based measurement that
should be determined based on assumptions that market participants would use in
pricing an asset or liability.  As a basis for considering such
assumptions, SFAS No. 157 establishes a three-tier fair value hierarchy,
which prioritizes the inputs used in measuring fair value as
follows:




Level
1.           Observable
inputs such as quoted prices in active markets;


Level
2.           Inputs,
other than the quoted prices in active markets, that are observable either
directly or indirectly; and


Level
3.           Unobservable
inputs in which there is little or no market data, which require the reporting
entity to develop its own assumptions.




At
December 31, 2008, the Company has a liability for warrants to purchase 110,578
shares of common stock that are valued at $57,666 under the level 3
hierarchy.




Assets
measured at fair value on a recurring basis using significant unobservable
inputs:





Investments
      in marketable securitiesBalance
      as at December 31, 2007
              
              $
              863,750Reversal
      of losses previously deemed to be other than temporary reflected as a
      non-operating income
              
              
              1,036,250Funds
      received upon liquidation
              
              
              (1,900,000
              )Balance
      as at December 31, 2008
              
              $
              —




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, these investments
had failed to settle on their respective settlement dates.  Due to the
 lack of liquidity for asset-backed securities of this type, the Company
concluded that the carrying value of these investments was higher than their
fair value as of December 31, 2007. Accordingly, these auction rate securities
were recorded at their estimated fair value of $863,750. The Company considered
this to be an other-than-temporary reduction in the value. Accordingly, the loss
associated with these auction rate securities of $1,036,250 was included as an
impairment of investments in the Company’s consolidated statement of operations
for the year ended December 31, 2007.




In 2008,
Credit Suisse purchased from the Company, for full value plus accrued interest,
all of the Company's outstanding ARS at the Company's original cost of
$1,900,000, plus accrued interest, when each of these securities came up for
auction.





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18.  CAPITAL
STOCK




(a)  Authorized
share capital




The total
number of authorized shares of common stock of the Company is
40,000,000.  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)  Reverse
Stock Split




On
September 30, 2008, the Company's Board of Director's approved a reverse
stock split referred to as the Reverse Stock Split, with an effective date of
October 7, 2008, of the Company's common stock utilizing a
1:25 consolidation ratio.  As a result of the Reverse Stock
Split, every twenty-five shares of the Company's issued and outstanding common
stock were consolidated into one share of the Company's common
stock.  In addition, the exercise prices of the Company's stock
options and the conversion prices of the Company's outstanding warrants have
been adjusted, such that the number of shares potentially issuable on the
exercise of stock options and/or the exercise of warrants will reflect the
1:25 consolidation ratio.  Accordingly, all the Company's issued
and outstanding common stock and all outstanding stock options to purchase
common stock and warrants to purchase common stock for all periods presented
have been restated to reflect the Reverse Stock Split.




(c)  Common
stock




On
February 1, 2007, the Company entered into a Securities Purchase Agreement
(the "Securities Purchase Agreement 2007") with certain institutional investors,
pursuant to which the Company agreed to issue to those investors an aggregate of
267,094 shares of the Company's common stock (the "Shares 2007") and
five-year warrants exercisable into an aggregate of 106,838 shares of the
Company's common stock (the "Warrants").  The per share purchase price
of the Shares 2007 was $37.50, and the per share exercise price of the Warrants
is $46.25, subject to adjustment.  The Warrants became exercisable on
August 6, 2007.  Pursuant to the Securities Purchase Agreement
2007, on February 6, 2007, the Company issued the Shares 2007 and the
Warrants.  The gross proceeds of the sale of the Shares 2007 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 37,400 shares of the
Company's common stock (the "Cowen Warrant") in partial 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 2007 and the
Warrants.  The estimated grant date fair value of the Cowen Warrant of
$97,222 is included in the transaction costs of $871,215.




On
October 6, 2008, the Company issued 7,536,129 common shares resulting from
the successful closing of a number of related transactions.  These
transactions, a private placement resulting in the issuance of 869,200 common
shares of the Company, the conversion of outstanding bridge loans into 3,304,511
common shares of the Company, the issuance of 3,169,938 common shares of the
Company to acquire the remaining ownership interest in Ocusense, Inc. that it
did not already own and the issuance of 192,480 common shares of the Company to
Marchant Securities Inc. ("Marchant Securities") as payment for services
rendered, (the "Restructuring Transactions") are described in greater detail
below.




On
May 19, 2008 and amended on August 29, 2008, the Company, Marchant
Securities and certain investors entered into a Securities Purchase Agreement
(the "Securities Purchase Agreement 2008"), pursuant to which the Company agreed
to issue to those investors an aggregate of 869,200 shares of the Company's
common stock (the "Shares 2008").  The per share purchase price of the
Shares 2008 was $2.50.  The common shares were issued on
October 6, 2008 subsequent to receiving the approval of shareholders and
the successful completion of the related Restructuring
Transactions.  The gross proceeds of the sale of the Shares totaled
$2,173,000





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On
September 30, 2008, the stockholders of the Company approved the
pre-payment by the Company of the aggregate outstanding bridge loans in the
amount $6,703,500 and accrued interest of $318,478, transacted under the loan
agreement, entered into on February 19, 2008, by the Company, the lenders
and Marchant Securities Inc. (the "Loan Agreement") pursuant to which the
Company agreed to issue to those lendors an aggregate of 3,304,511 shares of the
Company's common stock (the "Loan Shares").  The Company received
funding under the Loan Agreement of $3,000,000 on February 19, 2008
,$300,000 on May 5, 2008 and $3,403,500 on July 28, 2008
..  The date of the pre-payment of the outstanding bridge loans was
October 6, 2008 at which time the accrued interest was
$318,478.  The per share conversion price of the Loan Shares were
$2.125 representing a 15% discount to the purchase price paid by the investors
of the Securities Purchase Agreement 2008.  As a result of the
discount the Company recorded beneficial conversion on bridge loan shares issued
of $1,239,163 in accordance with EITF 98-5, "Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios".




On
September 30, 2008, the shareholders of the Company approved and adopted
the Agreement and Plan of Merger and Reorganization, dated April 22, 2008,
by the Company, OcuSense Acquireco, Inc. and OcuSense, Inc., and as amended by
the Amending Agreement, dated as of July 28, 2008, pursuant to which the
Company acquired all of the issued and outstanding shares of capital stock of
OcuSense, Inc. that the Company did not already own in exchange for the issuance
of an aggregate of 3,169,938 shares of its common stock (the "Merger Shares") to
the minority stockholders of OcuSense, Inc..  The per share purchase
price of the Merger Shares was $2.50.  The common shares were issued
on October 6, 2008 subsequent to receiving the approval of shareholders and
the successful completion of the related Restructuring
Transactions.




Included
in the Merger Shares issued to the minority stockholders were 119,629 common
shares issued to a stockholder who invested in TearLab, Inc. as part of a
licensing agreement between the stockholder and TearLab, Inc.  If the
licensing agreement is terminated in 2009, at the Company's option as a result
of the stockholder not meeting minimum order requirements as agreed between the
stockholder and TearLab, Inc., the Company can be required to redeem the
stockholder’s shares at the original purchase price of $250,000 at the
stockholder’s option.  The value will be reclassified to stockholders'
equity if the contingency is not met.  These shares have been reclassified
and reported separately as contingently redeemable common stock.




On
September 30, 2008, the shareholders of the Company approved the issuance
to Marchant Securities Inc. ("Marchant Securities") of 192,480 shares of the
Company's common stock in payment of part of the commission remaining due for
services rendered by Marchant Securities in connection with the Securities
Purchase Agreement 2008 and the Loan Agreement.  The common shares
were issued on October 6, 2008 subsequent to receiving the approval of
shareholders and the successful completion of the related Restructuring
Transactions.  In addition, Marchant securities was paid cash of
$180,000 upon the completion of the initial bridge loan on February 19,
2008 and paid additional cash of $88,800 upon the successful completion of the
Restructuring Transactions.  In addition to the fees paid to Marchant
Securities, the Company also incurred $457,779 in costs related to the
Restructuring Transactions for professional services.  As the
fees were paid through the issuance of common stock, the financing costs have
been recorded as an increase to additional paid in capital, and $130,672 was
associated to the shares issued on private placement and $350,528 was associated
to shares issued on conversion of the bridge loans based on the respective
proceeds raised. These costs have been recorded as an offset to additional paid
in capital as share issuance costs.


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(d)  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 September 30, 2008 in
order to, among other things, increase the share reserve under the Stock Option
Plan by 2,141,760.  Under the Stock Option Plan, up to
2,400,000 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.  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.




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 and
granted on terms and conditions similar to those options issued under the Stock
Option Plan.




The
Company accounts for stock-based compensation under the provisions of SFAS
No. 123(R). SFAS No. 123(R) requires that share-based payment
transactions with employees be recognized in the financial statements based on
their fair value and recognized as compensation expense over the vesting
period.  The amount of expense recognized during the period is
affected by many complex and subjective assumptions, including: estimates of the
Company’s future volatility, the expected term for its stock options, option
exercise behavior, the number of options expected to ultimately vest, and the
timing of vesting for the Company’s share-based awards.




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 31,2008
              
              
              2007
              
              
              2006General
      and administrative
              
              $
              152,524
              
              
              $
              65,660
              
              
              $
              1,396,609Clinical
      and regulatory
              
              
              108,674
              
              
              
              216,246
              
              
              
              203,131Sales
      and marketing
              
              
              (76,203
              )
              
              
              199,065
              
              
              
              527,303Stock-based
      compensation expense before income taxes (i)
              
              $
              184,995
              
              
              $
              480,971
              
              
              $
              2,127,043








(i)
            Of
      the total stock-based compensation expense of  $184,995,
      $480,971, and $2,127,043 included in the Company's consolidated statements
      of operations for the years ended December 31, 2008, 2007 and 2006,
      respectively, zero, $72,800, and $36,287 is included as stock-based
      compensation expense of discontinued operations for the years ended
      December 31, 2008, 2007 and 2006,
  respectively.





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Net cash
proceeds from the exercise of common stock options were $0, $2,228 and $270,935
for the years ended December 31, 2008, 2007 and 2006,
respectively.  No income tax benefit was realized from stock option
exercises during the years ended December 31, 2008, 2007 and
2006.  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.




The
weighted-average fair value of stock options granted during the years ended
December 31, 2008, 2007 and 2006 was $2.17, $0.90, and $1.77,
respectively.




Under the
terms of SFAS 123(R), options to former Company executives, which were modified
with regard to normal revocation after termination, were deemed to have been
reissued, following the approval by the shareholders at the Annual General
Meeting held on September 30, 2008 of the proposal to modify the options in
question.  The modification resulted in a net reduction of $153,449 to
stock compensation for the year ended December 31, 2008.




The
estimated fair value of stock options for the periods presented was determined
using the Black-Scholes option-pricing model with the following weighted-average
assumptions:





Years
      ended December 31,2008
              
              
              2007
              
              
              2006Volatility
              
              
              115
              %
              
              
              76.5
              %
              
              
              90.1
              %Expected
      life of options
              
              4.22
      years
              
              
              5.85
      years
              
              
              5.56
      yearsRisk-free
      interest rate
              
              
              1.82
              %
              
              
              4.87
              %
              
              
              4.83
              %Dividend
      yield
              
              
              0
              %
              
              
              0
              %
              
              
              0
              %




The
Company's computation of expected volatility for the years ended
December 31, 2008, 2007 and 2006 is based on the Company's historical stock
prices to its initial public offering in December 2004 and for prior periods a
comparable company's historical stock prices were used as the Company did not
have sufficient historical data.  The Company's computation of
expected life was 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.





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A summary
of the options issued during the year ended December 31, 2008 and the total
number of options outstanding as of that date and changes since
December 31, 2005 are set forth below:





Number
      of Options Outstanding
              
              
              Weighted
      Average Exercise Price
              
              
              Weighted
      Average Remaining Contractual Life (years)
              
              
              Aggregate
      Intrinsic ValueOutstanding,
      December 31, 2005
              
              
              164,309
              
              
              $
              43.75
              
              
              
              8.20
              
              
              $
              —Granted
              
              
              35,600
              
              
              
              49.75Exercised
              
              
              (5,629
              )
              
              
              48.25Forfeited
              
              
              (24,787
              )
              
              
              51.25Outstanding,
      December 31, 2006 (i)
              
              
              169,493
              
              
              
              43.75
              
              
              
              7.61
              
              
              
              —Granted
              
              
              43,100
              
              
              
              32.75Exercised
              
              
              (90
              )
              
              
              24.75Forfeited
              
              
              (21,003
              )
              
              
              45.75Outstanding,
      December 31, 2007
              
              
              191,500
              
              
              $
              41.04
              
              
              
              7.41
              
              
              
              —Assumption
      of OcuSense stock options outstanding
              
              
              673,034
              
              
              
              1.35Granted
              
              
              1,452,166
              
              
              
              2.79Exercised
              
              
              —
              
              
              
              —Forfeited
              
              
              (38,217
              )
              
              
              40.30Outstanding,
      December 31, 2008
              
              
              2,278,483
              
              
              $
              4.95
              
              
              
              8.41
              
              
              
              522,547Vested
      or expected to vest, December 31, 2008
              
              
              1,829,456
              
              
              $
              8.52
              
              
              
              8.22
              
              
              $
              522,547Exercisable,
      December 31, 2008
              
              
              1,818,293
              
              
              $
              5.06
              
              
              
              8.27
              
              
              $
              522,547








(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 $51.25, 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 $51.25.




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 2008 of $2.00 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,
2008).




As at
December 31, 2008, $2,304,036 of total unrecognized compensation cost
related to stock options is expected to be recognized over a weighted-average
period of 2.68 years.




As at
December 31, 2008, the Company had 789,734 options remaining in the Stock Option
Plan available for grant.




(e)  Warrants




On
February 6, 2007, pursuant to the Securities Purchase Agreement 2007
between the Company and certain institutional investors, the Company issued
warrants to these investors (the “Warrants”).  The Warrants are
five-year warrants exercisable into an aggregate of 106,838 shares of the
Company's common stock at $46.25 per common share.  On
February 6, 2007, the Company also issued the Cowen Warrant to Cowen and
Company, LLC in partial payment of the placement fee payable 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
2007.  The Cowen Warrant is a five-year warrant exercisable into an
aggregate of 3,740 shares of the Company's common stock.  The per
share exercise price of the Cowen Warrants is $46.25, and the Cowen Warrants
became exercisable on August 6, 2007.




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", along with related interpretation
EITF No. 00-19, "Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock".  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
and 2008, respectively.





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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:





Volatility
                128%Expected
      life of Warrants
                3.08
      yearsRisk-free
      interest rate
                1.02%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
obligations 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
warrants 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 of
December 31, 2008 and determined the aggregate fair value to be $57,666, an
increase of approximately $57,666 over the measurement of the aggregate fair
value of the Warrants and the Cowen Warrant on December 31,
2007.




Accordingly,
the Company recognized a loss of $57,666 in its consolidated statement of
operations for the year ended December 31, 2008 which reflects the increase
in the Company's obligation to its warrant holders to its aggregate fair
value.




Transaction
costs associated with the issuance of the Warrants recorded as a warrant expense
in the Company's consolidated statements of operations for the years ended
December 31, 2008 and 2007 were $0 and $170,081, respectively.




A summary
of the Warrants issued during the year ended December 31, 2008 and the
total number of warrants outstanding since January 1, 2006 are set forth
below:





Number
      of warrants outstanding
              
              
              Weighted
      average exercise price (i)Outstanding,
      December 31, 2006
              
              
              —
              
              
              $
              —Granted
              
              
              110,578
              
              
              
              55.00Outstanding,
      December 31, 2007
              
              
              110,578
              
              
              
              55.00Granted
              
              
              —
              
              
              
              —Forfeited
              
              
              —
              
              
              
              —Outstanding,
      December 31, 2008
              
              
              110,578
              
              
              $
              46.25








(i)
            The
      bridge loan funding in 2008 resulted in a change in exercise price for the
      warrants from $55.00 to $46.25.





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19.  CONSOLIDATED
STATEMENTS OF CASH FLOWS




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





Years
      ended December 31,2008
              
              
              2007
              
              
              2006Due
      to related party
              
              $
              —
              
              
              $
              —
              
              
              $
              (5,065
              )Amounts
      receivable
              
              
              41,759
              
              
              
              (58,782
              )
              
              
              390,634Inventory
              
              
              (148,201
              )
              
              
              2,756,759
              
              
              
              2,250,554Prepaid
      expenses
              
              
              165,063
              
              
              
              37,951
              
              
              
              247,361Accounts
      payable
              
              
              (878,128
              )
              
              
              797,415
              
              
              
              (1,225,575
              )Accrued
      liabilities
              
              
              (1,671,658
              )
              
              
              911,987
              
              
              
              (1,155,335
              )Deferred
      revenue
              
              
              237,400
              
              
              
              —
              
              
              
              —Due
      to stockholders
              
              
              (9,662
              )
              
              
              (109,842
              )
              
              
              (5,827
              )Other
      current assets
              
              
              (11,238
              )
              
              
              7,000
              
              
              
              12,781$
              (2,274,665
              )
              
              $
              4,342,488
              
              
              $
              509,528




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 31,2008
              
              
              2007
              
              
              2006Free
      inventory
              
              $
              —
              
              
              $
              418,303
              
              
              $
              (48,006
              )Warrant
      issued in part payment of placement fee
              
              
              —
              
              
              
              97,222
              
              
              
              —Common
      stock issued on acquisition
              
              
              —
              
              
              
              —
              
              
              
              15,035,969Common
      stock issued on merger
              
              
              7,924,818
              
              
              
              —
              
              
              
              —Minority
      Interest Acquired
              
              
              3,111,776
              
              
              
              —
              
              
              
              —Conversion
      of bridge loans and accrued interest to common stock
              
              
              8,261,143
              
              
              
              —
              
              
              
              —Common
      stock issued to Marchant Securities for services provided in the PIPE and
      bridge loan transaction.
              
              
              481,200
              
              
              
              —
              
              
              
              —Additional
      cash flow informationInterest
      paid
              
              
              —
              
              
              
              11,180
              
              
              
              —Income
      taxes recovered (paid), net
              
              $
              —
              
              
              $
              —
              
              
              $
              4,533




20.  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.





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During
fiscal 2008, the Company derived 65.5% of its revenue from the sale of the new
Tearlab product.  A single distributor represented 49% of this revenue
from the TearLab product while another distributor represented 29% of the
revenue from the TearLab product.  The remaining 34.5% of revenue was
derived from the sale of components of the RHEOTM System, of which all amounts
due were collected as of December 31, 2008.  The Company fully
provided for the all balances due from Veris.  Accordingly, no trade
receivables due from Veris have been recognized as at December 31, 2008 or
2007.




21.  SEGMENTED
INFORMATION




As a
result of the acquisition of SOLX and OcuSense during 2006 (note 4), 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.




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 OcuSense, on November 30, 2006; therefore, no amounts
are shown in periods prior to November 30, 2006.




The
accounting policies of the segments are the same as those described in
significant accounting policies.




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.





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The
Company's business units are as follows:





Year
      ended December 31, 2008Retina
              
              
              Point-of-care
              
              
              TotalRevenue
              
              $
              158,300
              
              
              $
              299,902
              
              
              $
              458,202Expenses:Cost
      of goods sold
              
              
              26,500
              
              
              
              138,848
              
              
              
              163,348Operating
              
              
              3,215,541
              
              
              
              4,715,397
              
              
              
              7,930,938Depreciation
      and amortization
              
              
              26,554
              
              
              
              1,267,062
              
              
              
              1,293,616Restructuring
      charges
              
              
              2,440,820
              
              
              
              —
              
              
              
              2,440,820Loss
      from continuing operations
              
              
              (5,551,115
              )
              
              
              (5,819,405
              )
              
              
              (11,370,520
              )Interest
      income
              
              
              70,566
              
              
              
              5,967
              
              
              
              76,533Interest
      expense and finance fees
              
              
              (498,478
              )
              
              
              —
              
              
              
              (498,478
              )Changes
      in fair value of warrant obligation
              
              
              (57,666
              )
              
              
              —
              
              
              
              (57,666
              )Gain
      (Loss) on short-term investment
              
              
              1,036,250
              
              
              
              —
              
              
              
              1,036,250Beneficial
      conversion on bridge loan shares issued
              
              
              —
              
              
              
              (1,239,163
              )
              
              
              (1,239,163
              )Other
      income (expense), net
              
              
              288,496
              
              
              
              80,589
              
              
              
              369,085Minority
      interest
              
              
              —
              
              
              
              1,977,722
              
              
              
              1,977,722Recovery
      of income taxes
              
              
              —
              
              
              
              337,846
              
              
              
              337,846Net
      loss from continuing operations
              
              $
              (4,711,947
              )
              
              $
              (4,656,444
              )
              
              $
              (9,368,391
              )Total
      assets
              
              $
              2,391,196
              
              
              $
              11,013,881
              
              
              $
              13,405,077




Year
      ended December 31, 2007Retina
              
              
              Point-of-care
              
              
              TotalRevenue
              
              $
              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
              
              
              
              1,320,851
              
              
              
              3,385,939Impairment
      of intangible asset
              
              
              20,923,028
              
              
              
              —
              
              
              
              20,923,028Restructuring
      charges
              
              
              1,312,721
              
              
              
              —
              
              
              
              1,312,721Loss
      from continuing operations
              
              
              (36,837,739
              )
              
              
              (5,898,029
              )
              
              
              (42,735,768
              )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
              
              
              (6,546
              )
              
              
              24,557
              
              
              
              18,011Minority
      interest
              
              
              —
              
              
              
              1,312,178
              
              
              
              1,312,178Recovery
      of income taxes
              
              
              3,186,334
              
              
              
              2,379,208
              
              
              
              5,565,542Loss
      from continuing operations
              
              
              (32,276,200
              )
              
              
              (2,124,885
              )
              
              
              (34,401,085
              )Total
      assets
              
              $
              3,672,542
              
              
              $
              11,640,195
              
              
              $
              15,312,737





Year
      ended December 31, 2006Retina
              
              
              Point-of-care
              
              
              TotalRevenue
              
              $
              174,259
              
              
              $
              —
              
              
              $
              174,259Expenses:Cost
      of goods sold
              
              
              3,528,951
              
              
              
              —
              
              
              
              3,528,951Operating
              
              
              12,741,701
              
              
              
              312,393
              
              
              
              13,054,094Depreciation
      and amortization
              
              
              1,860,849
              
              
              
              107,766
              
              
              
              1,968,615Impairment
      of goodwill
              
              
              65,945,686
              
              
              
              —
              
              
              
              65,945,686Restructuring
      charges
              
              
              819,642
              
              
              
              —
              
              
              
              819,642Loss
      from continuing operations
              
              
              (84,722,570
              )
              
              
              (420,159
              )
              
              
              (85,142,729
              )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
              
              
              —
              
              
              
              161,179
              
              
              
              161,179Recovery
      of income taxes
              
              
              2,814,058
              
              
              
              101,732
              
              
              
              2,915,790Loss
      from continuing operations
              
              
              (80,520,788
              )
              
              
              (158,725
              )
              
              
              (80,679,513
              )Total
      assets
              
              $
              38,762,773
              
              
              $
              15,604,440
              
              
              $
              98,525,418





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The
Company's geographic segments are as follows:





United
      States
              
              
              Canada
              
              
              Europe
              
              
              Israel
              
              
              TotalDecember 31,
      2008Fixed
      assets
              
              $
              179,259
              
              
              $
              4,125
              
              
              $
              —
              
              
              $
              —
              
              
              $
              183,384December 31,
      2007Fixed
      assets
              
              $
              61,984
              
              
              $
              60,302
              
              
              $
              —
              
              
              $
              —
              
              
              $
              122,286December 31,
      2006Fixed
      assets
              
              $
              281,226
              
              
              $
              186,987
              
              
              $
              63,484
              
              
              $
              42,613
              
              
              $
              574,310




22.  SUBSEQUENT
EVENTS




On
January 16, 2009, OccuLogix, Inc. dba TearLab Corporation (NASDAQ: TEAR and
TSX: TLB) announced that the Company will immediately begin conducting business
as TearLab Corporation and has changed its stock ticker symbols on the NASDAQ
and Toronto Stock Exchange to TEAR and TLB, respectively.  The
official name change will be effective once stockholder approval is
received.




On
February 11, 2009, the Company filed with the SEC a prospectus as part of a
registration statement on Form S-3 using a "shelf" registration
process.  Under this shelf process, the Company may from time to time,
offer or sell any combination of common stock, preferred stock, debt securities,
depository shares or warrants in one or more offering up to a total dollar value
of $30,000,000.




23.  RESTATEMENT
OF CONSOLIDATED FINANCIAL STATEMENTS




A.  Correction
of an error related to the method of consolidation of OcuSense Inc.




Background
Information




On
November 30, 2006, OccuLogix acquired 1,754,589 Series A preferred shares of
OcuSense.  The purchase price of these shares was made up of two fixed
payments of $2.0 million each to be made on the date of the closing of the
transaction (i.e. November 30, 2006) and on January 3,
2007.  In addition, subject to OcuSense achieving certain milestones,
the Company was required to pay two additional milestone payments of $2.0
million each.




Upon
acquiring the Series A preferred shares, OccuLogix and the existing common
shareholders entered into a voting agreement.  The voting agreement
provides the founding shareholders of OcuSense, as defined in the voting
agreement, with the right to appoint two board members and OccuLogix with the
right to also appoint two directors.  A selection of a fifth director
is mutually agreed upon by both OccuLogix and the founding stockholders, each
voting as a separate class.  The voting agreement is subject to
termination under the following scenarios: a) a change of control;
b) majority approval of each of OccuLogix and the founding stockholders;
and c) conversion of all outstanding shares of the Company’s preferred
shares to common shares.  OccuLogix has the ability to force the
conversion of all of the preferred shares to common shares and thus has the
ability to effect a termination of the voting agreement, but this would require
conversion of its own preferred shares and the relinquishment of the rights and
obligations associated with the preferred shares.





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The
rights and obligations of the Series A preferred shareholders are as
follows:




·
            Voting
      – Holders of the Series A preferred shares are entitled to vote on an
      as-converted basis.  Each Series A preferred share is entitled
      to one vote per share.




·
            Conversion
      features –  Series A preferred shares are convertible to
      common shares on a one-for-one basis at the option of
      OccuLogix.




·
            Dividends
      – The preferred shares are entitled to non-cumulative dividends at 8%, and
      additional dividends would be shared between common and preferred shares
      on a per-share basis.




·
            Redemption
      features – Subsequent to November 30, 2011, the preferred shares may
      be redeemed at the option of OccuLogix, at the higher of the original
      issue price and the fair market value of the common shares into which the
      preferred shares could be
converted.




·
            Liquidation
      preferences – Series A preferred shares have a liquidation preference
      over common shares up to the original issue price of the preferred shares
      (including the milestone payments).




Immediately
after the OccuLogix investment in OcuSense, OcuSense had the following capital
structure:





Description
              
              NumberCommon
      shares
              
              
              1,222,979Series A
      preferred shares – OccuLogix
              
              
              1,754,589Series A
      preferred shares – Other unrelated parties
              
              
              67,317Total
              
              
              3,044,885Potentially
      dilutive instrumentsWarrants
              
              
              89,965Stock
      options
              
              
              367,311Fully
      diluted
              
              
              3,502,161




Based on
the above capital structure, on a fully diluted basis, OccuLogix’s voting
percentage was determined to be 50.1%. On a current voting basis, OccuLogix’s
voting interest is 57.62%.  We previously consolidated OcuSense based
on an ownership percentage of 50.1%.




Interpretation and Related
Accounting Treatment




Since
November 30, 2006, the date of the acquisition, the Company has
consolidated OcuSense on the basis of a voting control model, as a result of the
fact that it owns more than 50% of the voting stock of OcuSense and that the
Company has the ability to convert its Series A preferred shares into
common shares, which would result in termination of the voting agreement between
the founders and OccuLogix and which would result in OccuLogix gaining control
of the board of directors.





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However,
after further consideration, the Company has now determined that, as a result of
the voting agreement between OccuLogix and certain founding stockholders of
OcuSense, OccuLogix is not able to exercise voting control as contemplated in
ARB 51, “Consolidated Financial Statements” (“ARB 51”) unless the Company
converts its Series A preferred shares.  For purpose of assessing
voting control in accordance with ARB 51, accounting principals generally
accepted in the United States (“U.S. GAAP”) do not take into consideration such
conversion rights. Accordingly OccuLogix does not have the ability to exercise
control of OcuSense, in light of the voting agreement that currently exists
between the founding stockholders and OccuLogix.




In
addition to the above consideration, the Company also determined that OcuSense
is a Variable Interest Entity and that OccuLogix is the primary beneficiary
based on the following:




·
            OcuSense
      is a development stage enterprise (as defined under FAS 7, “Accounting and
      Reporting by Development Stage Enterprises”) and therefore is not
      considered to be a business under U.S. GAAP.  Accordingly,
      OcuSense is not subject to the business scope
  exception.




·
            The
      Company noted that the holders of the Series A preferred shares
      (including OccuLogix) have the ability to redeem their shares at the
      greater of their original subscription price and their fair value on an
      as-converted basis.  As such, their investment is not considered
      to be at-risk equity.




·
            Additionally,
      as a result of the voting agreement between OccuLogix and the founding
      stockholders of OcuSense, voting control of OcuSense is shared between
      OccuLogix and OcuSense.  Accordingly, the common stockholders,
      who represent the sole class of at-risk equity, cannot make decisions
      about an entity’s activities that have a significant effect on the success
      of the entity without the concurrence of
  OccuLogix.




FIN 46(R)
requires that the enterprise which consolidates the VIE be the primary
beneficiary of that entity.  The primary beneficiary is the entity
that will absorb a majority of the VIE’s expected losses, receive a majority of
the entity’s expected returns, or both.  At the time of acquisition,
it was expected that the Company would contribute virtually all of the required
funding until commercialization through the acquisition of the Series A
preferred shares and future milestone payments as described
above.  The common stockholders were expected to make nominal equity
contributions during this period.  Therefore, based primarily on
qualitative considerations, the Company believes that it is the primary
beneficiary of OcuSense and should consolidate OcuSense using the variable
interest model.




The
Company has noted that the initial measurement of assets, liabilities and
non-controlling interests under FIN 46(R) differs from that which is required
under FAS 141, “Business Combinations”.  In particular, under FIN
46(R), assets, liabilities and non-controlling interest shall be measured
initially at their fair value. The Company previously recorded non-controlling
interest based on the historical carrying values of OcuSense’s assets and
liabilities, and as a result consolidation under FIN 46(R) will result in
material revisions to the amounts previously reported in the Company’s
consolidated financial statements.




Assets
acquired and liabilities assumed consisted solely of working capital and of a
technology intangible asset relating to patents owned by
OcuSense.  Before consideration of deferred tax, the fair value of the
assets acquired was greater than the fair value of the liabilities assumed and
the non-controlling interest.  Because OcuSense does not comprise a
business, as defined in Emerging Issues Task Force (“EITF”) 98-3, “Determining
Whether a Nonmonetary Transaction Involves Receipt of Productive Assets or of a
Business”, the Company  applied the simultaneous equation method as
per EITF 98-11, “Accounting for Acquired Temporary Differences in Certain
Purchase Transactions That Are Not Accounted for as Business Combinations”, and
adjusted the assigned value of the non-monetary assets acquired (consisting
solely of the technology asset) to include the deferred tax
liability.





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The
Company also considered the appropriate accounting for the milestone payments,
as a result of the fact that it has determined that it should apply the initial
measurement guidance in FIN 46(R).  The Company notes that subsequent
to initial consolidation, the milestone payment liability represents a
contingent liability to a controlled subsidiary, and as such, the liability will
eliminate on consolidation.  Previously, the Company adjusted the
minority interest at the date of each milestone payment to reflect the
non-controlling interest’s share in the additional cash of the subsidiary, with
an offsetting increase to the non-monetary assets acquired (consisting solely of
the technology intangible asset) reflecting the increased actual cost of
obtaining those non-monetary assets.




The
Company notes that because the non-controlling interest is required to be
measured at fair value on acquisition of OcuSense, the fair value of the
milestone payments as of the date of acquisition will be embedded in the initial
measurement of non-controlling interest.  As such, it would be
inappropriate to record additional minority interest based on the full amount of
the milestone payment applicable to the minority
interest.  Accordingly, the Company has accounted for the milestone
payments as follows:




·
            The
      Company determined the fair value of the milestone payments on the date of
      acquisition, by incorporating the probability that the milestone payments
      will be made, as well as the time value associated with the planned
      settlement date of the payments.




·
            Upon
      payment of the milestone payments, the Company recorded the minority
      interest portion of the change in fair value of the milestone payment
      (i.e. the minority interest portion of the ultimate value of the milestone
      payment less the initial fair value determination) as an expense, with a
      corresponding increase to minority interest, to reflect the additional
      value provided to the minority interest in excess of that contemplated on
      the acquisition date.





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The
following is a summary of the significant effects of the restatements on the
Company’s consolidated balance sheet as of December 31, 2007 and 2006 and
its consolidated statements of operations and cash flows for the fiscal years
ended December 31, 2007:





December 31,
      2007
              
              
              December 31,
      2006As
      Previously Reported (1)
              
              
              Adjustment
              
              
              As
      Restated
              
              
              As
      Previously Reported (1)
              
              
              Adjustment
              
              
              As
      RestatedConsolidated
      Balance SheetsIntangible
      Assets
              
              $
              5,770,677
              
              
              $
              5,314,377
              
              
              $
              11,085,054
              
              
              $
              
              
              $
              
              
              $Deferred
      Tax
              
              
              —
              
              
              
              2,259,348
              
              
              
              2,259,348Minority
      Interest
              
              
              —
              
              
              
              4,953,960
              
              
              
              4,953,960Additional
      paid-in capital
              
              
              362,402,899
              
              
              
              (170,868
              )
              
              
              362,232,031Accumulated
      deficit
              
              
              (356,560,917
              )
              
              
              (1,728,063
              )
              
              
              (358,288,980
              )Consolidated
      Statements of OperationsGeneral
      and administrative
              
              
              7,373,726
              
              
              
              730,679
              
              
              
              8,104,405
              
              
              
              8,407,501
              
              
              
              68,250
              
              
              
              8,475,751Minority
      interest
              
              
              2,182,843
              
              
              
              (870,665
              )
              
              
              1,312,178
              
              
              
              157,624
              
              
              
              3,555
              
              
              
              161,179Recovery
      of income taxes
              
              
              5,654,868
              
              
              
              (89,326
              )
              
              
              5,565,542
              
              
              
              2,888,490
              
              
              
              27,300
              
              
              
              2,915,790Loss
      from continuing operations
              
              
              (32,710,416
              )
              
              
              (1,690,669
              )
              
              
              (34,401,085
              )
              
              
              (80,642,119
              )
              
              
              (37,394
              )
              
              
              (80,679,513
              )Net
      loss for the year
              
              
              (68,139,314
              )
              
              
              (1,690,669
              )
              
              
              (69,829,983
              )
              
              
              (82,184,503
              )
              
              
              (37,394
              )
              
              
              (82,221,897
              )Loss
      from continuing operations per share - basic and diluted
              
              $
              (0.58
              )
              
              
              (0.02
              )
              
              $
              (0.60
              )
              
              $
              (1.79
              )
              
              
              —
              
              
              $
              (1.79
              )Net
      loss per share - basic and diluted
              
              $
              (1.20
              )
              
              $
              (0.03
              )
              
              $
              (1.23
              )
              
              $
              (1.83
              )
              
              
              —
              
              
              $
              (1.83
              )Consolidated
      Statements of Cash FlowsCash
      used in operating activitiesNet
      loss for the year
              
              $
              (68,139,314
              )
              
              $
              (1,690,669
              )
              
              $
              (69,829,983
              )
              
              $
              (82,184,503
              )
              
              $
              (37,394
              )
              
              $
              (82,221,897
              )Amortization
      of intangibles
              
              
              4,578,027
              
              
              
              730,679
              
              
              
              5,308,706
              
              
              
              2,749,212
              
              
              
              68,250
              
              
              
              2,817,462Deferred
      income taxes
              
              
              (15,004,750
              )
              
              
              89,325
              
              
              
              (14,915,425
              )
              
              
              (4,065,962
              )
              
              
              (27,300
              )
              
              
              (4,093,262
              )Minority
      interest
              
              
              (2,182,843
              )
              
              
              870,665
              
              
              
              (1,312,178
              )
              
              
              (157,624
              )
              
              
              (3,555
              )
              
              
              (161,179
              )








(1)
            Amounts
      reflected correction of prior years amounts related to stock options
      granted to consultants.




24.  QUARTERLY
FINANCIAL DATA (UNAUDITED)




The
following tables contain selected unaudited consolidated statement of operations
data for each quarter of fiscal 2008 and 2007:





Fiscal
      2008 Quarter EndedMarch 31
              
              
              June 30
              
              
              September 30
              
              
              December 31Revenue
              
              $
              7,200
              
              
              $
              127,200
              
              
              $
              23,900
              
              
              $
              299,902Gross
      profit (loss)
              
              
              (17,356
              )
              
              
              127,200
              
              
              
              21,955
              
              
              
              163,055(Loss)
      from continuing operations (ii),
      (iii), (iv)
              
              
              (2,277,075
              )
              
              
              (2,536,977
              )
              
              
              (2,282,952
              )
              
              
              (2,271,387
              )Net
      (loss)
              
              $
              (2,277,075
              )
              
              $
              (2,536,977
              )
              
              $
              (2,282,952
              )
              
              $
              (2,271,387
              )Excess
      of purchase price over non-consolidating interest in OcuSense,
      Inc.
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (4,813,042
              )Net
      loss available to common stockholders
              
              
              (2,277,075
              )
              
              
              (2,536,977
              )
              
              
              (2,282,952
              )
              
              
              (7,084,429
              )Weighted
      average number of shares outstanding basic and diluted
              
              
              2,292,280
              
              
              
              2,292,280
              
              
              
              2,292,280
              
              
              
              9,336,922Net
      (loss) per common share basic and diluted (viii)
              
              $
              (0.99
              )
              
              $
              (1.11
              )
              
              $
              (1.00
              )
              
              $
              (0.24
              )Net
      (loss) available to common stockholders per common share
              
              $
              (0.99
              )
              
              $
              (1.11
              )
              
              $
              (1.00
              )
              
              $
              (0.76
              )





Fiscal
      2007 Quarter EndedMarch 31
              
              
              June 30
              
              
              September 30
              
              
              December 31Revenue
              
              $
              90,000
              
              
              $
              —
              
              
              $
              —
              
              
              $
              1,500Gross
      profit (loss)
              
              
              57,900
              
              
              
              (33,297
              )
              
              
              (2,287,411
              )
              
              
              (43,795
              )(Loss)
      from continuing operations(i), (ii),
      (iii), (iv), (v), (vi), (vii)
              
              
              (3,482,272
              )
              
              
              (1,908,767
              )
              
              
              (19,605,454
              )
              
              
              (9,404,592
              )(Loss)
      from discontinued operations
              
              
              (1,103,490
              )
              
              
              (1,081,559
              )
              
              
              (1,082,842
              )
              
              
              (32,161,007
              )Net
      (loss) as previously reported
              
              $
              (4,585,762
              )
              
              $
              (2,990,326
              )
              
              $
              (20,688,296
              )
              
              $
              (41,565,599
              )Weighted
      average number of shares outstanding basic and diluted
              
              
              2,182,351
              
              
              
              2,292,161
              
              
              
              2,292,280
              
              
              
              2,292,280Net
      (loss) from continuing operations per common share basic and
      diluted
              
              $
              (1.60
              )
              
              $
              (0.83
              )
              
              $
              (8.56
              )
              
              $
              (4.10
              )Net
      (loss) from discontinued operations per common share basic and
      diluted
              
              $
              (0.50
              )
              
              $
              (0.47
              )
              
              $
              (0.47
              )
              
              $
              (14.03
              )Net
      (loss) per common share basic and diluted (viii)
              
              $
              (2.10
              )
              
              $
              (1.30
              )
              
              $
              (9.03
              )
              
              $
              (18.13
              )





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(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.  In
      the comparable periods in the 2008 fiscal period, there was no comparable
      charge in the three months ended June 30, 2008, an charge of $68,281
      in the three months ended September 30, 2008 and income of $10,615
      for the three months ended December 31, 2008 arising from the change
      in fair value of the Company's obligations under
  warrants.


(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.  In the three months ended December 31, 2008,
      the prior year's charge was reversed and income of $1,036,250 was
      recognized as a result of the purchase by Credit Suisse of all of the
      Company's short-term investments.


(iv)
            Loss
      from continuing operations for the three months ended December 31,
      2008 and September 30, 2007 includes the expense of amounts related
      to inventory reserves of $68,062 and $2,782,494,
    respectively.


(v)
            Loss
      from discontinued operations for the three months ended December 31,
      2007 includes a goodwill impairment charge of
  $14,446,977.


(vi)
            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.


(vii)
            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.


(viii)
            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.





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ITEM9.           
 Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure.




Not
applicable.




ITEM9A.           Controls
and Procedures.




Evaluation
of Disclosure Controls and Procedures




We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our reports under the Securities
Exchange Act of 1934, as amended, 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 our management, including our chief executive officer and
chief financial officer, as appropriate, to allow timely decisions regarding
required disclosure.  Further, the design of a control system must
reflect the fact that there are resource constraints, and the benefit of
controls must be considered relative to their costs.  In designing and
evaluating the disclosure controls and procedures, management recognizes that
any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives,
and management necessarily is required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.




As of the
end of the period covered by the report, we carried out an evaluation, under the
supervision and with the participation of our management, including our chief
executive officer and chief financial officer, of the effectiveness of the
design and operation of our disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)).  Based on that
evaluation, our chief executive officer and chief financial officer concluded
that, as at December 31, 2008 our disclosure controls and procedures were
effective at the reasonable assurance level.




Prior
Year Remediation of Material Weakness




In the
prior year, we restated our financial statements for the year ended December 31,
2007 and the quarter ended March 31, 2008.  The restatements were to
correct the consolidation method used to account for our interest in TearLab,
Inc.  Management concluded that due to the failure to properly account
for the consolidation of TearLab, Inc., there was a material weakness in our
internal control over financial reporting as of December 31, 2007.




As a
result of the material weakness in our internal control over financial
reporting, during 2008, we directed our internal resources and engaged outside
consultants to ensure that our reported results are in compliance with
accounting principles generally accepted in the United States.  These
changes have improved the effectiveness of our internal control over financial
reporting.  Management believes we have remediated the aforementioned
material weakness by December 31, 2008.




MANAGEMENT'S
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING




Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act
Rules 13a-15(f) and 15d-15(f).  Because of its inherent
limitations, internal control over financial reporting may not prevent or detect
all misstatements.  Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to financial
statement preparation and presentation.





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We
conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in Internal Control—Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission.  Based on our evaluation under the framework in
Internal Control—Integrated
Framework, our management concluded that our internal control over
financial reporting was effective as of December 31, 2008.




This
report does not include an attestation report of the Company's independent
registered public accounting firm regarding internal control over financial
reporting.  Management's report was not subject to attestation by the
Company's independent registered public accounting firm pursuant to temporary
rules of the Securities and Exchange Commission that permit the Company to
provide only management's report in this annual report.




There has
been no change in our internal control over financial reporting that occurred
during the most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.




ITEM9B.           Other
Information.




None.





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PART
III




ITEM10.           Directors, Executive Officers and
Corporate Governance.




The
information required by this item will be set forth in the Proxy Statement and
is incorporated in this report by reference.




ITEM11.           Executive
Compensation.




The
information required by this item will be set forth in the Proxy Statement and
is incorporated in this report by reference.




ITEM12.           Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder
Matters.




The
information required by this item will be set forth in the Proxy Statement and
is incorporated in this report by reference.




ITEM13.           Certain Relationships and Related
Transactions, and Director Independence.




The
information required by this item will be set forth in the Proxy Statement and
is incorporated in this report by reference.




ITEM14.           Principal Accountant Fees and
Services.




The
information required by this item will be set forth in the Proxy Statement and
is incorporated in this report by reference.





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PARTIV




ITEM
15.           Exhibits and 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:
                PageReports
      of Independent Registered Public Accounting Firms
                49Consolidated
      Balance Sheets as of December 31, 2008 and December 31,
      2007
                51Consolidated
      Statements of Operations for the three years ended December 31,
      2008
                52Consolidated
      Statements of Stockholders’ Equity for the three years ended December
      31, 2008
                53Consolidated
      Statements of Cash Flows for the three years ended December 31,
      2008
                54Notes
      to Consolidated Financial Statements
                55




(2)
            Financial
      Statement Schedules:





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
      2006Bad
      debt reserves
              
              
              518,852
              
              
              
              —
              
              
              
              —
              
              
              
              (518,852
              )
              
              
              —Inventory
      reserves
              
              
              1,990,830
              
              
              
              3,304,124
              
              
              
              —
              
              
              
              (193,560
              )
              
              
              5,101,394Fiscal
      2007Bad
      debt reserves
              
              
              —
              
              
              
              172,992
              
              
              
              —
              
              
              
              —
              
              
              
              172,992Inventory
      reserves
              
              
              5,101,394
              
              
              
              2,790,209
              
              
              
              —
              
              
              
              (596,058
              )
              
              
              7,295,545Fiscal
      2008Bad
      debt reserves
              
              
              172,992
              
              
              
              —
              
              
              
              —
              
              
              
              (172,992
              )
              
              
              —Inventory
      reserves
              
              
              7,295,545
              
              
              
              68,062
              
              
              
              —
              
              
              
              (7,295,545
              )
              
              
              68,062








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.


3.
            During
      2008, the Company disposed of or sold all RHEO related
      inventory.  Product acquired for clinical trial purposes and not
      utilizable due to changes in clinical trial requirements were utilized for
      testing and development purposes.




(3)           List
of exhibits required by Item 601 of Regulation S-K.  See
part (b) below.




(b)           Exhibits:
The following exhibits are filed as a part of this report:





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Exhibit
      Number
              
              Exhibit
      Description
              
              Incorporated
      by Reference2.1
              
              Form
      of Plan of Reorganization.
              
              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
              
              Restated
      Certificate of Incorporation of OccuLogix, Inc., filed with the Secretary
      of State of the State of Delaware on October 7, 2008.
              
              Exhibit
      3.3 to the Registrant's Current Report on Form 8-K filed with the
      Commission on October 9, 2008 (file no. 000-51030)3.2
              
              Amended
      and Restated By-Laws of the Registrant as currently in
    effect.
              
              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)3.3
              
              Certificate
      of Amendment of OccuLogix, Inc., filed with the Secretary of State of the
      State of Delaware on October 7, 2008.
              
              Exhibit
      3.2 to the Registrant's Current Report on Form 8-K filed with the
      Commission on October 9, 2008 (file no. 000-51030)3.4
              
              Restated
      Certificate of Incorporation of OccuLogix, Inc., filed with the Secretary
      of State of the State of Delaware on October 7, 2008.
              
              Restated
      Certificate of Incorporation of OccuLogix, Inc., filed with the Secretary
      of State of the State of Delaware on October 7,
  2008.10.1
              
              Series A
      Stock Purchase Agreement by and among TearLab, Inc. and the Registrant
      dated as of November 30, 2006.
              
              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.)10.2
              
              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.
              
              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)10.3
              
              Employment
      Agreement between the Registrant and Suh Kim dated as of March 12,
      2007.
              
              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)10.4
              
              License
      Agreement between TearLab, Inc. and The Regents of the University of
      California dated March 12, 2003.
              
              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.)10.5
              
              Amendment
      No. 1, dated June 9, 2003, to the License Agreement between TearLab,
      Inc. and The Regents of the University of California dated March 12,
      2003.
              
              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)10.6
              
              Amendment
      No. 2, dated September 5, 2005, to the License Agreement between
      TearLab, Inc. and The Regents of the University of California dated
      March 12, 2003.
              
              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.)10.7
              
              Amendment
      No. 3, dated July 7, 2006, to the License Agreement between TearLab,
      Inc. and The Regents of the University of California dated March 12,
      2003.
              
              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)10.8
              
              Amendment
      No. 4, dated October 9, 2006, to the License Agreement between
      TearLab, Inc. and The Regents of the University of California dated
      March 12, 2003.
              
              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)





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Exhibit
      Number
              
              Exhibit
      Description
              
              Incorporated
      by Reference10.9
              
              Terms
      of Business, dated February 5, 2007, between Invetech Pty Ltd. and
      TearLab, Inc.
              
              Exhibit
      10.30 to the Registrant's Annual Report on Form 10-K, filed with the
      Commission on March 17, 2008 (file no. 000-51030)10.10
              
              Amendment
      No. 5, dated June 29, 2007, to the License Agreement between TearLab,
      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.)
              
              Exhibit
      10.31 to the Registrant's Annual Report on Form 10-K, filed with the
      Commission on March 17, 2008 (file no. 000-51030)10.11
              
              Lease,
      dated October 17, 2005, between Penyork Properties III Inc. and the
      Registrant.
              
              Exhibit
      10.32 to the Registrant's Annual Report on Form 10-K, filed with the
      Commission on March 17, 2008 (file no. 000-51030)10.12
              
              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.
              
              Exhibit
      10.33 to the Registrant's Annual Report on Form 10-K, filed with the
      Commission on March 17, 2008 (file no. 000-51030)10.13
              
              2002
      Stock Option Plan, as amended and restated on June 29,
      2007.
              
              Exhibit
      10.34 to the Registrant's Annual Report on Form 10-K, filed with the
      Commission on March 17, 2008 (file no. 000-51030)10.14
              
              Manufacturing
      and Development Agreement, dated October 25, 2007, between MiniFAB
      (Aust) Pty Ltd and TearLab, Inc.  (Portions of this exhibit have
      been omitted pursuant to a request for confidential
      treatment.)
              
              Exhibit
      10.35 to the Registrant's Annual Report on Form 10-K, filed with the
      Commission on March 17, 2008 (file no. 000-51030)10.15
              
              First
      Amendment to Series A Preferred Stock Purchase Agreement, dated
      October 29, 2007, between TearLab, Inc. and the
      Registrant
              
              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)10.16
              
              Research
      Agreement, dated as of December 13, 2007, between * and TearLab, Inc.
      (Portions of this exhibit have been omitted pursuant to a request for
      confidential treatment.)
              
              Exhibit
      10.37 to the Registrant's Annual Report on Form 10-K, filed with the
      Commission on March 17, 2008 (file no. 000-51030)10.17
              
              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.)
              
              Exhibit
      10.38 to the Registrant's Annual Report on Form 10-K, filed with the
      Commission on March 17, 2008 (file no. 000-51030)10.18
              
              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.
              
              Exhibit
      10.39 to the Registrant's Annual Report on Form 10-K, filed with the
      Commission on March 17, 2008 (file no. 000-51030)10.19
              
              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.
              
              Exhibit
      10.40 to the Registrant's Annual Report on Form 10-K, filed with the
      Commission on March 17, 2008 (file no. 000-51030)10.20
              
              Limited
      Guaranty, dated as of December 19, 2007, by Doug P. Adams for the
      benefit of the Registrant.
              
              Exhibit
      10.41 to the Registrant's Annual Report on Form 10-K, filed with the
      Commission on March 17, 2008 (file no.
  000-51030)





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Exhibit
      Number
              
              Exhibit
      Description
              
              Incorporated
      by Reference10.21
              
              Security
      Agreement, dated as of December 19, 2007, by Solx, Inc. in favor of
      the Registrant.
              
              Exhibit
      10.42 to the Registrant's Annual Report on Form 10-K, filed with the
      Commission on March 17, 2008 (file no. 000-51030)10.22
              
              Letter
      Agreement, dated December 20, 2007, between the Registrant and Solx
      Acquisition, Inc.
              
              Exhibit
      10.43 to the Registrant's Annual Report on Form 10-K, filed with the
      Commission on March 17, 2008 (file no. 000-51030)10.23
              
              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.
              
              Exhibit
      10.44 to the Registrant's Annual Report on Form 10-K, filed with the
      Commission on March 17, 2008 (file no. 000-51030)10.24
              
              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.
              
              Exhibit
      10.45 to the Registrant's Annual Report on Form 10-K, filed with the
      Commission on March 17, 2008 (file no. 000-51030)10.25
              
              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.
              
              Exhibit
      10.46 to the Registrant's Annual Report on Form 10-K, filed with the
      Commission on March 17, 2008 (file no. 000-51030)10.26
              
              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.
              
              Exhibit
      10.47 to the Registrant's Annual Report on Form 10-K, filed with the
      Commission on March 17, 2008 (file no. 000-51030)10.27
              
              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.
              
              Exhibit
      10.48 to the Registrant's Annual Report on Form 10-K, filed with the
      Commission on March 17, 2008 (file no. 000-51030)10.28
              
              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.
              
              Exhibit
      10.49 to the Registrant's Annual Report on Form 10-K, filed with the
      Commission on March 17, 2008 (file no. 000-51030)10.29
              
              Loan
      Agreement, dated as of February 19, 2008, by and among the
      Registrant, the Lenders named therein and Marchant Securities
      Inc.
              
              Exhibit
      10.50 to the Registrant's Annual Report on Form 10-K, filed with the
      Commission on March 17, 2008 (file no. 000-51030)10.30
              
              Share
      Pledge Agreement, dated as of February 19, 2008, by the Registrant in
      favor of Marchant Securities Inc., as collateral agent.
              
              Exhibit
      10.51 to the Registrant's Annual Report on Form 10-K, filed with the
      Commission on March 17, 2008 (file no. 000-51030)10.31
              
              Employment
      Agreement, dated as of February 25, 2008, between the Registrant and
      William G. Dumencu.
              
              Exhibit
      10.52 to the Registrant's Annual Report on Form 10-K, filed with the
      Commission on March 17, 2008 (file no. 000-51030)10.32
              
              Termination
      Agreement, dated as of February 25, 2008, between Asahi Kasei Kuraray
      Medical Co., Ltd. and the registrant.
              
              Exhibit
      10.53 to the Registrant's Annual Report on Form 10-K, filed with the
      Commission on March 17, 2008 (file no. 000-51030)10.33
              
              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.
              
              Exhibit
      10.54 to the Registrant's Annual Report on Form 10-K, filed with the
      Commission on March 17, 2008 (file no.
  000-51030)





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Exhibit
      Number
              
              Exhibit
      Description
              
              Incorporated
      by Reference10.34
              
              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.
              
              Exhibit
      10.55 to the Registrant's Annual Report on Form 10-K, filed with the
      Commission on March 17, 2008 (file no. 000-51030)10.35
              
              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.
              
              Exhibit
      10.56 to the Registrant's Annual Report on Form 10-K, filed with the
      Commission on March 17, 2008 (file no. 000-51030)10.36
              
              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.
              
              Exhibit
      10.57 to the Registrant's Annual Report on Form 10-K, filed with the
      Commission on March 17, 2008 (file no. 000-51030)10.37
              
              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.
              
              Exhibit
      10.58 to the Registrant's Annual Report on Form 10-K, filed with the
      Commission on March 17, 2008 (file no. 000-51030)10.38
              
              Agreement
      and Plan of Merger and Reorganization, dated April 22, 2008, by and
      among the Registrant, OcuSense Acquireco, Inc. and TearLab, Inc. (formerly
      known as OcuSense, Inc.) (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.)
              
              Exhibit
      10.1 to the Registrant's Quarterly Report on Form 10-Q, filed with the
      Commission on May 12, 2008 (file no. 000-51030)10.39
              
              Amending
      Agreement, dated as of May 5, 2008, by and among the Registrant, the
      lenders listed on the Schedule of New Lenders attached there to as Exhibit
      A, the lenders listed the Schedule of Required Lenders attached
      thereto as Exhibit B and Marchant Securities Inc., amending the Loan
      Agreement, dated as of February 19, 2008, by and among the
      Registrant, the Lenders named therein and Marchant Securities Inc. and the
      Share Pledge Agreement, dated as of February 19, 2008, by the
      Registrant in favor of Marchant Securities Inc., as collateral
      agent.
              
              Exhibit
      10.2 to the Registrant's Quarterly Report on Form 10-Q, filed with the
      Commission on May 12, 2008 (file no. 000-51030)10.40
              
              Securities
      Purchase Agreement, dated as of May 19, 2008, by and among OccuLogix,
      Inc., Marchant Securities Inc. and the investors listed on the Schedule of
      Investors attached thereto as Exhibit A.
              
              Exhibit
      10.1 to the Registrant's Current Report on Form 8-K, filed with the
      Commission on May 21, 2008 (file no. 000-51030)10.41
              
              Amending
      Agreement by and among OccuLogix, Inc., Marchant Securities Inc. and the
      investor party thereto.
              
              Exhibit
      10.1 to the Registrant's Current Report on Form 8-K filed with the
      Commission on July 28, 2008 (file no. 000-51030)10.42
              
              Amending
      Agreement, dated as of July 28, 2008, by and among OccuLogix, Inc.,
      OcuSense Acquireco, Inc. and TearLab, Inc. (formerly known as OcuSense,
      Inc.)
              
              Exhibit
      10.2 to the Registrant's Current Report on Form 8-K filed with the
      Commission on July 28, 2008 (file no. 000-51030)10.43
              
              Second
      Amending Agreement, dated as of June 16, 2008, between John Cornish
      and the Registrant, amending the Termination Agreement between the
      Registrant and John Cornish dated as of January 4, 2008, as
      amended.
              
              Exhibit
      10.1 to the Registrant's Quarterly Report on Form 10-Q, filed with the
      Commission on August 11, 2008 (file no. 000-51030)10.44
              
              Second
      Amending Agreement, dated as of June 16, 2008, between Julie
      Fotheringham and the Registrant, amending the Termination Agreement
      between the Registrant and Julie Fotheringham dated as of January 4,
      2008, as amended.
              
              Exhibit
      10.2 to the Registrant's Quarterly Report on Form 10-Q, filed with the
      Commission on August 11, 2008 (file no.
  000-51030)





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Exhibit
      Number
              
              Exhibit
      Description
              
              Incorporated
      by Reference10.45
              
              Amending
      Agreement, dated as of June 16, 2008, between Stephen Kilmer and the
      Registrant, amending the Termination Agreement between the Registrant and
      Stephen Kilmer dated as of January 31, 2008.
              
              Exhibit
      10.3 to the Registrant's Quarterly Report on Form 10-Q, filed with the
      Commission on August 11, 2008 (file no. 000-51030)10.46
              
              Second
      Amending Agreement, dated as of June 16, 2008, between David C.
      Eldridge and the Registrant, amending the Termination Agreement between
      the Registrant and David C. Eldridge dated as of January 8, 2008, as
      amended.
              
              Exhibit
      10.4 to the Registrant's Quarterly Report on Form 10-Q, filed with the
      Commission on August 11, 2008 (file no. 000-51030)10.47
              
              Second
      Amending Agreement, dated as of June 16, 2008, between Stephen Parks
      and the Registrant, amending the Termination Agreement between the
      Registrant and Stephen Parks dated as of January 4, 2008, as
      amended.
              
              Exhibit
      10.5 to the Registrant's Quarterly Report on Form 10-Q, filed with the
      Commission on August 11, 2008 (file no. 000-51030)10.48
              
              Second
      Amending Agreement, dated as of June 19, 2008, between Nozhat Choudry
      and the Registrant, amending the Termination Agreement between the
      Registrant and Nozhat Choudry dated as of January 31, 2008, as
      amended.
              
              Exhibit
      10.6 to the Registrant's Quarterly Report on Form 10-Q, filed with the
      Commission on August 11, 2008 (file no. 000-51030)10.49
              
              Termination
      Agreement, dated as of June 30, 2008, between Thomas P. Reeves and
      the Registrant, terminating the Employment Agreement between the
      Registrant and Thomas P. Reeves dated as of August 1, 2004, as
      amended.
              
              Exhibit
      10.7 to the Registrant's Quarterly Report on Form 10-Q, filed with the
      Commission on August 11, 2008 (file no. 000-51030)10.50
              
              Third
      Amending Agreement, dated as of July 25, 2008, between John Cornish
      and the Registrant, amending the Termination Agreement between the
      Registrant and John Cornish dated as of January 4, 2008, as
      amended.
              
              Exhibit
      10.8 to the Registrant's Quarterly Report on Form 10-Q, filed with the
      Commission on August 11, 2008 (file no. 000-51030)10.51
              
              Third
      Amending Agreement, dated as of July 25, 2008, between Julie
      Fotheringham and the Registrant, amending the Termination Agreement
      between the Registrant and Julie Fotheringham dated as of January 4,
      2008, as amended.
              
              Exhibit
      10.9 to the Registrant's Quarterly Report on Form 10-Q, filed with the
      Commission on August 11, 2008 (file no. 000-51030)10.52
              
              Second
      Amending Agreement, dated as of July 25, 2008, between Stephen Kilmer
      and the Registrant, amending the Termination Agreement between the
      Registrant and Stephen Kilmer dated as of January 31, 2008, as
      amended.
              
              Exhibit
      10.10 to the Registrant's Quarterly Report on Form 10-Q, filed with the
      Commission on August 11, 2008 (file no. 000-51030)10.53
              
              Third
      Amending Agreement, dated as of July 25, 2008, between David C.
      Eldridge and the Registrant, amending the Termination Agreement between
      the Registrant and David C. Eldridge dated as of January 8, 2008, as
      amended.
              
              Exhibit
      10.11 to the Registrant's Quarterly Report on Form 10-Q, filed with the
      Commission on August 11, 2008 (file no. 000-51030)10.54
              
              Third
      Amending Agreement, dated as of July 25, 2008, between Stephen Parks
      and the Registrant, amending the Termination Agreement between the
      Registrant and Stephen Parks dated as of January 4, 2008, as
      amended.
              
              Exhibit
      10.12 to the Registrant's Quarterly Report on Form 10-Q, filed with the
      Commission on August 11, 2008 (file no. 000-51030)10.55
              
              Third
      Amending Agreement, dated as of July 25, 2008, between Nozhat Choudry
      and the Registrant, amending the Termination Agreement between the
      Registrant and Nozhat Choudry dated as of January 31, 2008, as
      amended.
              
              Exhibit
      10.13 to the Registrant's Quarterly Report on Form 10-Q, filed with the
      Commission on August 11, 2008 (file no. 000-51030)10.56
              
              Amending
      Agreement, dated as of July 25, 2008, between Thomas P. Reeves and
      the Registrant, amending the Termination Agreement between the Registrant
      and Thomas P. Reeves dated as of June 30, 2008.
              
              Exhibit
      10.14 to the Registrant's Quarterly Report on Form 10-Q, filed with the
      Commission on August 11, 2008 (file no.
  000-51030)





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Exhibit
      Number
              
              Exhibit
      Description
              
              Incorporated
      by Reference10.57
              
              Second
      Amending Agreement, dated as of July 28, 2008, by and among the
      Registrant, the lenders listed on the Schedule of Second New Lenders
      attached thereto as Exhibit A, the lenders listed on the Schedule of
      Required Lenders attached thereto as Exhibit B and Marchant Securities
      Inc., amending the Loan Agreement, dated as of February 19, 2008, by
      and among the Registrant, the lenders listed on the Schedule of Lenders
      attached thereto as Exhibit A and Marchant Securities Inc., as amended,
      and amending the Share Pledge Agreement, dated as of February 19,
      2008, by the Registrant in favor of Marchant Securities Inc., as
      collateral agent, as amended.
              
              Exhibit
      10.15 to the Registrant's Quarterly Report on Form 10-Q, filed with the
      Commission on August 11, 2008 (file no. 000-51030)10.58
              
              Loan
      Agreement, dated as of August 13, 2008, by and among OccuLogix, Inc.
      and TearLab, Inc. (formerly known as OcuSense, Inc.)
              
              Exhibit
      10.1 to the Registrant's Current Report on Form 8-K filed with the
      Commission on August 15, 2008 (file no. 000-51030)10.59
              
              Second
      Amending Agreement, dated as of October 6, 2008, by and among
      OccuLogix, Inc., OcuSense Acquireco, Inc. and TearLab, Inc. (formerly
      known as OcuSense, Inc.)
              
              Exhibit
      10.1 to the Registrant's Current Report on Form 8-K filed with the
      Commission on October 9, 2008 (file no. 000-51030)10.60
              
              Second
      Amending Agreement, dated as of October 1, 2008, by and among
      OccuLogix, Inc., Marchant Securities Inc. and the investors listed on the
      Schedule of Investors attached thereto as Exhibit A.
              
              Exhibit
      10.2 to the Registrant's Current Report on Form 8-K filed with the
      Commission on October 9, 2008 (file no. 000-51030)14.1
              
              Code
      of Conduct of the Registrant14.2
              
              Complaint
      and Reporting Procedures of the Registrant.
              
              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.23.1
              
              Consent
      of Ernst & Young LLP, San Diego, California, Independent
      Registered Public Accounting Firm.23.2
              
              Consent
      of Ernst & Young LLP, Toronto, Canada, Independent Registered
      Public Accounting Firm.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.




*               *               *




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.





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 Table of Contents





POWER
OF ATTORNEY




The
registrant and each person whose signature appears below hereby appoint Eric
Donsky 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 31, 2009
                OCCULOGIX,
      INCBy:
                /s/ Eric DonskyEric
      DonskyChief
      Executive Officer




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





Dated:  March 31,
      2009
              By:
              /s/Eric
      DonskyEric
      DonskyPresident,
      Chief Executive Officer andDirectorDated:
      March 31, 2009
              By:
              /s/ William G. DumencuWilliam
      G. DumencuChief
      Financial Officer and TreasurerDated:  March 31,
      2009
              By:
              /s/ Elias VamvakasElias
      VamvakasChairman
      of Board of DirectorsDated:  March 31,
      2009
              By:
              /s/Anthony
      AltigAnthony
      AltigDirectorDated:
      March 31, 2009
              By:
              /s/ Thomas N. DavidsonThomas
      N. DavidsonDirectorDated:  March 31,
      2009
              By:
              /s/ Adrienne L. GravesAdrienne
      L. GravesDirectorDated:  March 31,
      2009
              By:
              /s/ Richard L. LindstromRichard
      L. Lindstrom, M.D.DirectorDated:  March 31,
      2009
              By:
              /s/Donald
      RindellDonald
      RindellDirector






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