Vasogen









                                                             Second Quarter 2006









Management's Discussion and Analysis ....................1
Financial Statements ...................................18
Notes to Consolidated Financial Statements .............22

<PAGE>



                      Management's Discussion and Analysis
                                  May 31, 2006


The following discussion and analysis should be read in conjunction with our
unaudited interim consolidated financial statements and the accompanying notes.
The unaudited consolidated financial statements have been prepared in accordance
with generally accepted accounting principles ("GAAP") in Canada, which, except
as described in note 13, conform in all material respects with generally
accepted accounting principles in the United States. All amounts are expressed
in Canadian dollars unless otherwise noted. Annual references are to our fiscal
years, which end on November 30. In this report, "we", "us", and "our" refer to
Vasogen Inc. This document is current in all material respects as of July 12,
2006.

Certain statements contained in this document constitute "forward-looking
statements" within the meaning of the United States Private Securities
Litigation Reform Act of 1995. These statements include, without limitation,
summary statements relating to initial results of the ACCLAIM trial in patients
with chronic heart failure, plans to advance the development of Celacade,
statements concerning our partnering activities, strategy, future operations,
future financial position, future revenues, projected costs, prospects, plans
and objectives of management. Except for results on the primary endpoint,
initial results disclosed are based on initial data analyzed and may not be
confirmed upon full analysis of the detailed results of the ACCLAIM trial and
additional information relating to safety and efficacy of Celacade may be
discovered upon further analysis of trial data and upon further review and
analysis of additional trial data. In some cases, you can identify
forward-looking statements by terminology such as "may", "will", "should",
"expects", "plans", "anticipates", "believes", "estimated", "predicts",
"potential", "continue", "intends", "could", or the negative of such terms or
other comparable terminology. You should not place undue reliance on our
forward-looking statements which are subject to a multitude of risks and
uncertainties that could cause actual results, future circumstances or events to
differ materially from those projected in the forward-looking statements. These
risks include, but are not limited to, the outcome of further analysis of the
ACCLAIM trial results, the requirement or election to conduct additional
clinical trials, risks associated with the outcome of our research and
development programs, the adequacy, timing and results of our clinical trials,
the need for additional capital and the effect of capital market conditions and
other factors on capital availability, the potential dilutive effects of any
financing, including the convertible notes we issued in October 2005, the
regulatory approval process, competition, securing and maintaining corporate
alliances, market acceptance of our products, the availability of government and
insurance reimbursements for our products, the strength of intellectual
property, reliance on subcontractors and key personnel, losses due to
fluctuations in the U.S.-Canadian exchange rate, and other risks detailed from
time to time in our public disclosure documents or other filings with the
Canadian and U.S. securities commissions or other securities regulatory bodies.
Additional risks and uncertainties relating to our Company and our business can
be found in the "Risk Factors" section of our Annual Information Form and Form
40F for the year ended November 30, 2005 as well as in our later public filings.
The forward-looking statements are made as of the date hereof, and we disclaim
any intention and have no obligation or responsibility, except as required by
law, to update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise. Unless otherwise indicated,
numerical values indicating the statistical significance ("p-values") of results
included in this document are based on analyses that do not account for endpoint
multiplicity.


Highlights

   o  On June 26, 2006 we announced the initial results from the 2,414-patient
      phase III ACCLAIM trial of Celacade in advanced chronic HF. While the
      ACCLAIM study did not reach the primary endpoint of significantly reducing
      the risk of death and cardiovascular hospitalization in the total patient
      population, this endpoint was met for a large pre-specified subgroup of
      692 patients with New York Heart Association (NYHA) Class II chronic heart
      failure. In the study, NYHA Class II

                                                                               1
<PAGE>

      heart failure patients receiving Celacade therapy had a 39.1% reduction
      (p=0.0003) in their risk of death and cardiovascular hospitalization,
      compared to placebo. The Class II heart failure patients comprised 29% of
      the trial's total population and experienced 26%, or 216 primary endpoint
      events, indicating a similar event risk profile to the NYHA Class III & IV
      patients in the study.

   o  We are continuing our analysis of the ACCLAIM data and, based on progress
      to date, we expect additional findings to be presented at the World
      Congress of Cardiology (WCC) 2006, being held from September 2 to 6 in
      Barcelona, Spain, and at the 10th Annual Scientific Meeting of the Heart
      Failure Society of America (HFSA) being held in Seattle, Washington from
      September 10 to 13, 2006. The WCC 2006 brings together the XVth World
      Congress of Cardiology of the World Heart Federation and the 2006 Congress
      of the European Society of Cardiology and is the largest medical meeting
      in Europe. The Annual Scientific Meeting of the HFSA is the largest
      meeting in North America of scientists and healthcare professionals
      devoted to heart failure research.

   o  On May 2, 2006, we announced that preclinical findings from our VP025 drug
      development program demonstrated a significant reduction of several
      pro-inflammatory cytokines in a preclinical model of diabetes with
      diabetic retinopathy, a common complication of diabetes that eventually
      results in the loss of vision. Dr. Kyle Krady, Assistant Professor of
      Neural and Behavioral Sciences, Penn State College of Medicine, presented
      the findings on May 1 at the Scientific Sessions of the Association for
      Research in Vision and Ophthalmology (ARVO) Annual Meeting in Florida.


OVERVIEW

Our goal is to develop and commercialize new technologies targeting the chronic
inflammation underlying cardiovascular and neurological diseases.

Our lead product, Celacade, was assessed in the 2,414-patient ACCLAIM trial in
patients with advanced chronic heart failure. The 176-center ACCLAIM trial,
designed to further investigate the use of Celacade to reduce the risk of death
and hospitalization in heart failure patients, did not meet its primary
endpoint; however, based on initial data analysis, positive results were
observed in a large subgroup of patients. We are currently completing the
analysis of the ACCLAIM data and, based on progress to date, expect to be in a
position to provide additional results from the study at the World Congress of
Cardiology 2006, being held from September 2 to 6 in Barcelona, Spain, and at
the 10th Annual Scientific Meeting of the Heart Failure Society of America
(HFSA) being held in Seattle, Washington, from September 10 to 13, 2006, and,
based on these additional results, to provide an update on our plans for the
commercial development of Celacade shortly thereafter.

We are also developing a new class of drugs for the treatment of
neuro-inflammatory disorders. VP025 is the lead product candidate from this new
class of drugs and, based on phase I results, we are preparing to enter this
product candidate into phase II development. During the second quarter, we
announced that preclinical findings from our VP025 drug development program
demonstrated a significant reduction of several pro-inflammatory cytokines in a
preclinical model of diabetes and diabetic retinopathy, a common complication of
diabetes that eventually results in the loss of vision.

The following table sets out the stage of development for each of our programs:

Product    Indications                     Clinical Development Status
-------    -----------                     ---------------------------

Celacade   Chronic heart failure           Phase III* top-line results announced
VP025      Neuro-inflammatory conditions   Phase I completed

*Phase III clinical trials are multi-center studies undertaken to confirm safety
and efficacy in large patient groups.

                                                                               2
<PAGE>

WE PLAN TO ACHIEVE OUR GOAL BY PURSUING THE FOLLOWING STRATEGIES:

Develop products that address unmet medical needs

Based on certain observations from the ACCLAIM trial, which are still subject to
further analysis and validation, we believe that our Celacade technology has the
potential to be used as a first-in-class therapy targeting chronic inflammation
in cardiovascular disease, providing a safe and effective addition to the
current standard of care. We also believe that chronic heart failure is a
condition with considerable unmet medical needs, and subject to further
consultations with regulators and potential partners in light of the ACCLAIM
results, we believe that it may represent a significant commercial opportunity
for us.

Form strategic alliances with companies to support the commercialization of our
products

Subject to negotiating acceptable terms, we intend to establish corporate
alliances to support the commercialization of our products. Following completion
of the analysis of the ACCLAIM results and subject to final conclusions, we
expect to continue discussions with potential partners for the commercialization
of Celacade for chronic heart failure.

Continue to build a portfolio of new technologies targeting inflammatory
disorders

Subject to the outcomes of the ongoing analysis of the ACCLAIM trial results and
consultations with outside experts, we are planning to continue to advance the
development of our lead product, Celacade, to target chronic inflammation in
cardiovascular disease. VP025 is the first product candidate from a new class of
drugs that we are developing to target the chronic inflammation in the central
nervous system. We have tested VP025 across a number of preclinical models of
neuro-inflammatory disorders and have completed a successful phase I clinical
trial. Based on the phase I results, we are now preparing to initiate a phase II
program. Based on our preclinical results to date, we believe that this new
class of drugs may represent a platform technology from which we may potentially
derive other product candidates for clinical development.

RESULTS OF OPERATIONS

We are a development-stage enterprise that dedicates our cash resources mainly
to research and development ("R&D") activities. Our products have not yet been
approved by regulatory authorities in all relevant jurisdictions and we have not
yet marketed products commercially; as such, we do not currently generate any
revenues from operations.

Research and Development

The changes in R&D expenditures, and their key components, for the three months
and six months ended May 31, 2006 and 2005, are reflected in the following
table:

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
                                 Three Months Ended Six       Months Ended
----------------------------------------------------------------------------------------
R&D Expenditures (in millions                    Increase                     Increase
of dollars, except percentages)  2006    2005    (Decrease)   2006    2005    (Decrease)
----------------------------------------------------------------------------------------
<S>                              <C>     <C>     <C>          <C>     <C>     <C>
----------------------------------------------------------------------------------------
Clinical costs:
----------------------------------------------------------------------------------------
  Direct                         $5.5    $14.5   ($9.0)       $11.2   $25.5   ($14.3)
----------------------------------------------------------------------------------------
  Indirect                       $3.9    $4.6    ($0.7)       $7.8    $8.9    ($1.1)
----------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------
Preclinical costs                $1.0    $1.0    $0.0         $1.9    $2.0    ($0.1)
----------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------
Intellectual property costs      $0.5    $0.6    ($0.1)       $1.0    $1.0    $0.0
----------------------------------------------------------------------------------------

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----------------------------------------------------------------------------------------
Other costs                      $0.1    $0.0    $0.1         $0.5    $0.1    $0.4
----------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------
Total R&D                        $11.0   $20.7   ($9.7)       $22.4   $37.5   ($15.1)
----------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------
R&D expenditures as a            66%     78%     (12%)        68%     77%     (9%)
percentage of the sum of R&D
and General and Administration
Expenditures
----------------------------------------------------------------------------------------
</TABLE>

Clinical Costs

The expenditures related to our phase III Celacade programs are expensed for
accounting purposes and are the key driver of our losses.

The majority of the decrease in our R&D expense for the three months and six
months ended May 31, 2006, when compared with the same period in 2005, resulted
from a significant reduction in the clinical trial activities relating to our
phase III programs.

Direct costs to support these trials include expenses for clinical site fees,
study monitoring, and technology support. During the three months and six months
ended May 31, 2005, the number of clinical sites participating in these programs
and the number of patients enrolled in these programs were a significant driver
of the direct costs; however, for the comparable period in 2006, these costs
were reduced substantially, as our phase III trials were nearing completion,
resulting in the reduction of our direct costs. Indirect costs to support these
programs consist of salaries, professional fees, and other support costs.
Indirect costs are comparable to the prior period.

A more detailed summary of our phase III clinical trial is provided below.

CELACADE

We have announced initial results from the ACCLAIM trial of Celacade in chronic
heart failure (HF).

The double-blind, placebo-controlled pivotal phase III ACCLAIM trial was
designed to evaluate the use of Celacade to reduce mortality and morbidity risk
in patients with advanced chronic HF. The primary outcome measure for ACCLAIM
was the composite endpoint of all-cause mortality or cardiovascular
hospitalization (time to first event). The Global Principal Investigator and
Chairman of the Steering Committee for the ACCLAIM trial is Dr. James Young,
Chairman, Division of Medicine, The Cleveland Clinic Foundation, and Medical
Director of the Kaufman Center for Heart Failure in Cleveland.

The ACCLAIM trial completed the enrollment of patients in May 2005, with 2,414
patients randomized at 176 clinical centers in North America, Europe, and
Israel. ACCLAIM was designed to conclude when at least 701 patients sustained a
primary endpoint event, defined as either death or first cardiovascular
hospitalization, and all patients had been in the study for a minimum of six
months. In November 2005, the trial reached the pre-specified objective of 701
primary endpoint events, and all patients had been in the study for a minimum of
six months. The final patient assessments were completed in January 2006 and the
initial results were announced on June 26, 2006.

The placebo (n=1,207) and Celacade (n=1,207) groups were well balanced for all
important baseline characteristics, including demographics, ejection fraction,
NYHA classification, concomitant medical conditions and medications, automatic
implantable cardioverter defibrillators (AICDs), and use of cardiac
resynchronization therapy (CRT).

The time to death or first cardiovascular hospitalization (the primary endpoint)
was not significantly different between the Celacade and placebo groups in the
intention to treat (ITT) population (p=0.24), nor

                                                                               4
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was there any significant difference between treatment groups for either of the
components of the primary endpoint.

In the pre-specified subgroup of patients with NYHA Class II chronic HF (n=692),
the time to death or first cardiovascular hospitalization was significantly
improved in the Celacade group (n=360) compared to the placebo group (n=332) by
39.1% (p=0.0003). In addition to a number of secondary endpoints in the study,
changes in high-sensitivity C-reactive protein (hs-CRP) were measured at
baseline and 26 weeks. While changes in hs-CRP directionally favored the
Celacade group, the between-group differences did not reach statistical
significance in the ITT population. Celacade was shown to be well tolerated in
this patient population, who were receiving standard-of-care medications for
heart failure, including diuretics, beta-blockers, and ACE-inhibitors. There
were no statistically significant between-group differences for any serious
adverse events.

We are continuing to analyze the ACCLAIM trial results. Full analysis of the
data may produce results different from the initial results, and additional
information relating to the efficacy or safety of Celacade in the entire patient
population or in subgroups of the patient population may also be discovered.

Complete results for the ACCLAIM study are scheduled to be presented at the
World Congress of Cardiology (WCC) 2006, being held from September 2 to 6 in
Barcelona, Spain, and at the 10th Annual Scientific Meeting of the Heart Failure
Society of America (HFSA) being held in Seattle, Washington, from September 10
to 13, 2006. We expect research and development costs to decrease significantly
as a result of the ACCLAIM trial ending. Subject to the outcomes of the ongoing
analysis of the ACCLAIM trial results and consultations with outside experts and
regulators, we are planning to advance development of our lead product,
Celacade, to target chronic inflammation in cardiovascular disease.

Our phase III SIMPADICO trial was designed to further investigate the use of our
Celacade technology to improve intermittent claudication (leg pain on walking),
a debilitation symptom associated with peripheral arterial disease. In March
2006, we announced that the SIMPADICO trial did not reach its primary endpoint
of change in absolute claudication distance. Based on these results, at this
time we have discontinued funding the development of Celacade for the treatment
of peripheral arterial disease.

VP025

VP025, our lead product from a new class of drugs, is being developed to target
the chronic inflammation within the central nervous system that is associated
with a number of neurological diseases. In July 2005, we announced the
successful completion of a phase I clinical trial of VP025. This double-blind,
placebo-controlled, dose-escalation trial examined the safety and tolerability
of three doses of VP025 in 24 healthy volunteers. Multiple administrations of
either low, mid, or high doses of VP025 were shown to be safe and well tolerated
when compared to placebo, and no drug-related serious adverse events were
reported.

In May 2006, we announced that preclinical findings from our VP025 drug
development program demonstrated a significant reduction of several
pro-inflammatory cytokines in a preclinical model of diabetes with diabetic
retinopathy, a common complication of diabetes that eventually results in the
loss of vision. Dr. Kyle Krady, Assistant Professor of Neural and Behavioral
Sciences, Penn State College of Medicine, presented the findings on May 1 at the
Scientific Sessions of the Association for Research in Vision and Ophthalmology
(ARVO) Annual Meeting in Florida. Inflammation has been implicated in the
pathogenesis of diabetic retinopathy. In a preclinical model designed to develop
diabetes, VP025 was shown to have a significant effect (p<0.05) on reducing the
expression, in the retina, of several pro-inflammatory cytokines including IL-1,
IL-6, and MCP-1, which are associated with the initiation stages of diabetic
retinopathy. Concurrently, the intramuscular administration of VP025 resulted in
the increased expression of both IL-10 and TGF-beta, two potent
anti-inflammatory cytokines. Based on information in the scientific literature
and current research observations, we believe this effect is mediated via the
regulation of microglial cell activation. Microglial cells are inflammatory
cells found within the central nervous system and in the retina.

                                                                               5
<PAGE>

Results from a number of experimental models have demonstrated the ability of
VP025 to reduce inflammation across the blood-brain barrier and improve
correlates of memory and learning function. Preclinical research carried out by
Dr. Marina Lynch's team from the Trinity College Institute of Neuroscience in
Ireland demonstrated the ability of VP025 to reverse detrimental neurological
effects of chronic beta-amyloid exposure. These results were presented at
Neuroscience 2005, the 35th Annual Meeting of the Society for Neuroscience.
Beta-amyloid is the major component of the plaques found in the brains of
Alzheimer's disease patients and is implicated in the development and
progression of this condition. Beta-amyloid has also been linked to increased
activation of microglial cells (inflammatory immune cells in the brain and
central nervous system) and reduced memory and learning function. Dr. Lynch's
research demonstrated that VP025 both prevented microglial activation and
preserved memory and learning function.

Dr. Marina Lynch's team also presented results at Neuroscience 2005 showing the
ability of VP025 to reverse age-related inflammation in the brain. The process
of aging is associated with increased inflammation in the brain resulting from
activation of microglial cells, as evidenced by increases in inflammatory
cytokines and a reduction in memory and learning function (measured as long-term
potentiation). CD200, a protein that controls inflammation and maintains
microglial cells in an unactivated state, decreases with aging. Treatment with
VP025 reversed age-related decreases in CD200 levels in the brain, reduced
levels of microglial cell activation, and restored memory and learning function.

Dr. Yvonne Nolan's team from the Department of Anatomy/Neuroscience, University
College, Cork, Ireland, also presented data at Neuroscience 2005 demonstrating
the ability of VP025 to prevent increases in levels of p38 MAP kinase, a key
component of the inflammation-signaling pathway, regulating IL-1beta, TNF-alpha,
and other immune system responses associated with many inflammatory conditions.
In a preclinical model of Parkinson's disease, pre-treatment with VP025 was
shown to prevent both the increase in p38 levels and the associated death of
dopaminergic neurons. The death of dopaminergic neurons in this model system
leads to the onset of movement abnormalities that mimic those seen in
Parkinson's disease.

Many neurological conditions are associated with an inflammatory response in the
nervous system, including Alzheimer's disease, Parkinson's disease, and
amyotrophic lateral sclerosis (ALS, also known as Lou Gehrig's disease). These
conditions are characterized by increased levels of inflammatory mediators,
including cytokines, leading to the death of nerve cells and the eventual loss
of functional activity. Due to the prevalence, morbidity, and mortality
associated with neuro-inflammatory diseases, they represent a significant
medical, social, and financial burden.

Based on the successful phase I clinical trial, we are now preparing to initiate
a phase II program. The expenditures associated with the phase II trial are
expected to be similar to the costs incurred with the phase I trial.

Preclinical Costs

Our preclinical research programs are focused on developing a new class of
drugs, the main candidate being VP025. During 2005, VP025 was moved into
clinical development; however, preclinical studies are still necessary to
continue the advancement of VP025 for various indications.

The R&D expenditures associated with preclinical research activities during the
three months and six months ended May 31, 2006 and 2005 were primarily the
result of the above studies, as well as other preclinical studies necessary to
support the advancement of VP025 into clinical development. Preclinical costs
for the three months and six months ended May 31, 2006, are comparable to the
same periods in 2005.

                                                                               6
<PAGE>

Intellectual Property

Our research and development initiatives have resulted in the filing of numerous
patent applications. We own patents and pending patent applications relating to
our products and technologies in the United States and other jurisdictions
around the world. Our intellectual property expenditures primarily consist of
fees paid to patent offices worldwide and to external patent counsel. These
costs are included in R&D expenditures and are expensed as incurred. This
expenditure is a result of advancing our patent protection into additional
countries through international patent grants, and additional patent and
trademark activities associated with protecting our existing technologies, as
well as new discoveries and developments resulting from our research and
development programs. Based on a similar level of ongoing activity, these costs
for the three months and six months ended May 31, 2006, are comparable to the
costs for the same periods in 2005.

Nature and Treatment of Expenses

We expense all R&D costs. The majority of our research is outsourced to medical
institutions, under contractual agreements, for which expenditures are settled
with cash payments that are aligned with the achievement of pre-defined
activities. The costs of our prepaid clinical supplies are deferred, on the
basis that these supplies have future alternative uses related to the various
clinical applications of our Celacade technology, and are expensed as they are
shipped to outsourced research centers or clinical sites.

The cost of our acquired technology, representing part of our platform medical
device technology, is amortized straight-line over 20 years in recognition of
the term of the acquired patent.

Our ability to recover the carrying value of our acquired technology and
clinical supplies is impacted by several factors, including, but not limited to,
the progress of clinical trials, our ongoing ability to fund clinical trials,
feedback and decisions from health regulators regarding clinical trial results
and reimbursement, ongoing technological improvements, technological
obsolescence, the timing of product launch, the development of our patent
portfolio, the ability to defend any claims made by third parties against our
intellectual property, and our financial ability to challenge those third
parties who may infringe our intellectual property. In the event the final
results of the phase III ACCLAIM trial do not warrant efforts to proceed with
the development of Celacade at the present time, the value of our acquired
technology and the clinical supplies would need to be reduced or written off.
The majority of our direct clinical R&D expenditures is related to our phase III
ACCLAIM trial and is payable in U.S. dollars. In addition, a significant
component of the direct costs of our ACCLAIM trial is payable in euros. The
majority of general and administration costs are payable in Canadian dollars.

General and Administration

The changes in general and administration expenditures, and their key
components, for the three months and six months ended May 31, 2006 and 2005, are
reflected in the following table:

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
                                    Three Months Ended          Six Months Ended
---------------------------------------------------------------------------------------------
<S>                                 <C>    <C>    <C>           <C>     <C>    <C>
---------------------------------------------------------------------------------------------
General and Administration                        Increase                     Increase
Expenditures (in millions of        2006   2005   (Decrease)    2006    2005   (Decrease)
dollars)
---------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------
Infrastructure and other support    $4.8   $5.2   ($0.4)        $9.0    $9.8   ($0.8)
costs
---------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------
Insurance                           $0.4   $0.4   $0.0          $0.9    $0.8   $0.1
---------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------
Professional fees                   $0.4   $0.4   $(0.0)        $0.6    $0.8   $(0.2)
---------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------
Total General and Administration    $5.6   $6.0   ($0.4)        $10.5   $11.4  ($0.9)
Expenditures
---------------------------------------------------------------------------------------------
</TABLE>

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<PAGE>

Infrastructure and other support costs include salaries and related employee
costs for those employees not directly involved in research and development, as
well as facility-related and information technology expenditures for all
employees. These costs have decreased moderately for the three and six months
ended May 31, 2006 as a result of a relatively stable level of activity required
to support the current operations Professional fees include expenditures for
legal, tax, accounting, and other specialized services. These costs are
comparable for the three months ended May 31, 2006 and have decreased moderately
for the six months ended May 31, 2006, from the costs for the same period in
2005, as a result of the relatively stable level of activity required to support
current operations. Insurance fees are comparable as a result of fees for our
overall insurance program being comparable based on a relatively stable level of
activity required to support the current operations.


Foreign Exchange

The foreign exchange gain or loss for the three months and six months ended May
31, 2006 and 2005, is reflected in the following table:

<TABLE>
<CAPTION>

----------------------------------------------------------------------------------------------
                                     Three Months Ended            Six Months Ended
----------------------------------------------------------------------------------------------
          Foreign Exchange                          Increase                    Increase
      (in millions of dollars)       2006   2005    (Decrease)   2006   2005    (Decrease)
----------------------------------------------------------------------------------------------
<S>                                  <C>    <C>     <C>          <C>    <C>     <C>
----------------------------------------------------------------------------------------------
Foreign exchange loss (gain)         $0.2   ($0.9)  $1.1         $0.2   ($2.8)  $3.0
----------------------------------------------------------------------------------------------
</TABLE>

We are holding a significant amount of U.S. dollar cash and cash equivalents and
restricted cash in anticipation of the significant R&D expenses denominated in
U.S. dollars that we expect to pay as a result of the completion of our clinical
trials. U.S. dollar holdings amounted to approximately US$24.7 million and
US$57.3 million at May 31, 2006, and May 31, 2005, respectively. As our
functional or measurement currency is the Canadian dollar, U.S. dollar exchange
rate fluctuations may have a significant impact from an accounting perspective,
but they do not impair or enhance our ability to pay these U.S. dollar
denominated R&D expenses.

Our statement of operations includes a small foreign exchange loss for the three
months and six months ended May 31, 2006, as a result of the strengthening of
the Canadian dollar, our functional currency, relative to the U.S. dollar,
during this period. The period-end conversion rate from U.S. dollar to Canadian
dollar for May 31, 2006, was 1.1015, compared to the conversion rate for
February 28, 2006 of 1.1366 and the conversion rate for November 30, 2005 of
1.1669. Any losses resulting from cash being held in U.S. dollars have been
partially offset by gains on liabilities that are denominated in U.S. dollars.
The period-end conversion rate from U.S. dollar to Canadian dollar for May 31,
2005, was 1.2552, compared to the conversion rate for February 28, 2005, of
1.2314, and the conversion rate for November 30, 2004 of 1.1858, which resulted
in the foreign exchange gain in 2005.

Investment Income

Investment income for the three months and six months ended May 31, 2006 and
2005, is reflected in the following table:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
                                     Three Months Ended         Six Months Ended
--------------------------------------------------------------------------------------------
         Investment Income                         Increase                    Increase
      (in millions of dollars)       2006   2005   (Decrease)   2006   2005    (Decrease)
--------------------------------------------------------------------------------------------
<S>                                  <C>    <C>    <C>          <C>    <C>     <C>
--------------------------------------------------------------------------------------------
Investment income                    $0.6   $0.6   $0.0         $1.3   $1.1    $0.2
--------------------------------------------------------------------------------------------
</TABLE>

Investment income for the three months ended May 31, 2006 was comparable to that
of the same period in 2005 with higher interest rates compensating for the
decreased amount of cash and cash equivalents, marketable securities and
restricted cash on hand. Investment income for the six months ended May 31,

                                                                               8
<PAGE>

2006 was higher when compared with the same period in 2005, again as a result of
the rise in interest rates, which offset the lower amount of cash and cash
equivalents, marketable securities and restricted cash on hand. Interest rates
on one-month commercial paper denominated in Canadian dollars rose to an average
of 4.31% in May 2006, compared with 2.55% in May 2005. Similarly, one-month US
dollar-denominated commercial paper rose to an average of 5.06% in May 2006,
from the May 2005 average of 3.02%.

Other costs

Other costs for the three months and six months ended May 31, 2006 and 2005, are
reflected in the following table:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
                                     Three Months Ended         Six Months Ended
-----------------------------------------------------------------------------------------
            Other Costs                            Increase                    Increase
      (in millions of dollars)       2006   2005   (Decrease)   2006    2005   (Decrease)
-----------------------------------------------------------------------------------------
<S>                                  <C>    <C>    <C>          <C>     <C>    <C>
-----------------------------------------------------------------------------------------
Interest expense on senior           $0.3   $0.0   $0.3         $0.8    $0.0   $0.8
convertible notes payable
-----------------------------------------------------------------------------------------

-----------------------------------------------------------------------------------------
Accretion in carrying value of       $2.3   $0.0   $2.3         $4.9    $0.0   $4.9
senior convertible notes payable
-----------------------------------------------------------------------------------------

-----------------------------------------------------------------------------------------
Amortization of deferred financing   $1.0   $0.0   $1.0         $1.6    $0.0   $1.6
costs
-----------------------------------------------------------------------------------------

-----------------------------------------------------------------------------------------
Loss on debt extinguishment          $2.7   $0.0   $2.7         $2.7    $0.0   $2.7
-----------------------------------------------------------------------------------------

-----------------------------------------------------------------------------------------
Total                                $6.3   $0.0   $6.3         $10.0   $0.0   $10.0
-----------------------------------------------------------------------------------------
</TABLE>

Except for interest expense, other costs associated with the senior convertible
notes are non-cash expenditures. These costs are higher for the three months and
six months ended May 31, 2006, when compared to the same period in 2005, as the
senior convertible notes were issued during Q4 2005.

Loss

The loss for the three months and six months ended May 31, 2006 and 2005 is
reflected in the following table:

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
                                 Three Months Ended             Six Months Ended
---------------------------------------------------------------------------------------
Loss (in millions of dollars,                   Increase                     Increase
except per-share amounts)        2006   2005    (Decrease)    2006    2005   (Decrease)
---------------------------------------------------------------------------------------
<S>                              <C>    <C>     <C>           <C>     <C>    <C>
---------------------------------------------------------------------------------------
Loss                             $22.4  $25.1   ($2.7)        $41.8   45.0   ($3.2)
---------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------
Loss per share                   $0.26  $0.31   ($0.05)       $0.49   $0.57  ($0.08)
---------------------------------------------------------------------------------------
</TABLE>

The loss during the three months and six months ended May 31, 2006 has decreased
when compared with the similar period in 2005. The reduction in the costs
associated with our phase III clinical programs and the corporate costs
associated with supporting these programs have been partially offset by costs
associated with the senior convertible notes.

                                                                               9
<PAGE>

TREND INFORMATION

It is important to note that historical patterns of expenditures cannot be taken
as an indication of future expenditures. The amount and timing of expenditures
and availability of capital resources vary substantially from period to period,
depending on the level of research and development activity being undertaken at
any one time and the availability of funding from investors and prospective
commercial partners.

The following table presents unaudited selected financial data for each of the
last eight quarters ended May 31, 2006:

<TABLE>
<CAPTION>

                           Loss for the period       Basic and diluted     Foreign exchange
                           (000's)                   loss per share        gain/(loss) (000's)
<S>                        <C>                          <C>                      <C>

May 31, 2006               ($22,438)                    ($0.26)                 ($169)
February 28, 2006          ($19,332)                    ($0.23)                 ($3)
November 30, 2005          ($24,010)                    ($0.29)                  $146
August 31, 2005            ($24,069)                    ($0.30)                 ($2,243)
May 31, 2005               ($25,071)                    ($0.31)                  $924
February 28, 2005          ($19,898)                    ($0.27)                  $1,892

November 30, 2004          ($28,739)                    ($0.41)                 ($8,798)
August 31, 2004            ($19,647)                    ($0.27)                 ($2,127)

</TABLE>

Our quarterly losses have increased significantly over the past two years as a
result of the expansion of our phase III clinical programs and the corporate
costs associated with supporting these programs. However, for the most recent
quarters, our costs have decreased mainly as a result of the gradual ramping
down of clinical activity leading up to the database lock and subsequent
analysis of our two phase III clinical programs. The other significant factor
impacting our quarterly losses is the change in the U.S. dollar relative to our
functional currency, the Canadian dollar, particularly in 2004. Both of these
factors are discussed in greater detail elsewhere in this document. The
operations of our Company are not subject to any material seasonality or
cyclicality factors.

The quarterly losses for fiscal 2004 described above do not include any
adjustment to reflect the adoption of the subsequent amendment to CICA Handbook
Section 3870, "Stock-based Compensation and Other Stock-based Payments", which
requires the use of the fair value based method to account for all stock-based
transactions with employees granted or modified since December 1, 2002. We
adopted this amendment on a retroactive basis, without restatement.

Second Quarter

The loss in the second quarter of 2006 increased when compared to that in the
first quarter of 2006 as a result of the $2.7 million loss on debt
extinguishment, which occurred with the acceleration payments that were made
during the second quarter. Our R&D and general and administration expenditures
for the second quarter were $16.6 million, compared with $16.3 million in the
first quarter, which also contributed to the higher loss.

LIQUIDITY AND CAPITAL RESOURCES

Since our inception, we have financed our operations primarily from public and
private sales of equity, the issuance of senior convertible notes, the exercise
of warrants and stock options, and interest on funds held for future
investments.

                                                                              10
<PAGE>

On October 7, 2005, our wholly owned subsidiary, Vasogen Ireland Limited, raised
gross proceeds of US$40 million through the issuance of senior convertible notes
("the notes"). The notes have a maturity date of two years from issuance, which
may be extended to five years upon the receipt of pre-market approval granted by
the U.S. Food and Drug Administration for the marketing of Celacade for use in
the treatment of chronic heart failure, and bear interest at a rate of 6.45%.
The notes are convertible at the investors' option into our common shares at a
conversion price of US$3.00 subject to anti-dilution and other adjustments as
provided in the notes. We are required to repay the notes in equal monthly
installments and we may elect to repay principal in any combination of cash or
common shares at our option, provided certain conditions are met. We also have
the option to accelerate payments of outstanding principal of up to US$8.0
million each installment date if our share price is greater than US$1.00 per
share, or up to 40% of the principal outstanding each calendar year if our share
price is greater than US $4.00 per share, and subject to issuance of additional
warrants in connection with exercising this option. For the March, April, and
May 2006 installment payments, we elected to make a US$1.8 million acceleration
payment with each installment to the debt holders and a US$2.8 million
acceleration payment for the June 2006 installment. In respect of the March 1,
2006, acceleration payment, we issued an additional 390,000 warrants exercisable
at US$3.11 for a term of five years from the date of issue, and in respect of
each of the April 1 and May 1, 2006 acceleration payments, we issued an
additional 390,000 warrants exercisable at US$3.00 for a term of five years from
the date of issue. In respect of the June 1, 2006, acceleration payment, we
issued an additional 606,666 warrants exercisable at US$3.00 for a term of five
years from the date of issue.

On February 2, 2006, one of the note holders exercised their option to convert
US $300,000 of the senior convertible notes, which resulted in 100,000 shares
being issued to the debt holder.

Under the terms of the notes, beginning on September 1, 2006, and until the
notes are no longer outstanding, we must maintain a net cash balance of 110% of
the principal outstanding under the notes. As of July 1, 2006, the principal
amount outstanding under the convertible notes was US$16.4 million. Costs of
this transaction, including agency and legal fees and other expenses, were
US$3.6 million. We are required to maintain a letter of credit in connection
with these senior convertible notes payable in the amount of US$10 million,
which is fully secured by cash on hand.

If an event of default or a change of control should occur, note holders will be
entitled to require the redemption of their notes, in whole or in part, at a
price determined according to a formula under the notes. The holders have the
right to demand repayment in cash or in common shares at 125% of the face amount
of principal outstanding in the event of default, or at 115% of the face amount
of principal outstanding in the event of a change in control or the value of the
common shares the holder would otherwise have received on conversion of the
shares prior to the event of default or the change in control.

During the three months and six months ended May 31, 2006, we did not receive
funds from the exercise of options and warrants, compared with $0.1 million and
$0.5 million in the comparable periods in 2005. The total number of common
shares outstanding at May 31, 2006, increased to 90.7 million from 82.3 million
at November 30, 2005. The number of options and warrants outstanding at May 31,
2006, is 11.3 million.

As at July 11, 2006, we have 95.1 million common shares outstanding; 6.5 million
options to purchase common shares outstanding; and 5.7 million warrants to
purchase common shares. The conversion rate of the options and warrants is on a
one-to-one basis for common shares. It is our present intent to issue common
shares on repayment of the notes as described above, provided certain conditions
are met.

At May 31, 2006, our cash and cash equivalents, and marketable securities held
to maturity totaled $31.5 million, compared with $73.5 million at November 30,
2005. In addition to the $31.5 million, we have $11.0 million of restricted cash
pledged as security for the letter of credit. The decrease is a result of the
cash used in operations during the six months ended May 31, 2006. In addition,
one installment payment under the convertible notes in the amount of $2.1
million (US$1.8 million) was paid in cash. We invest our cash resources in
liquid government and corporate debt instruments having a single "A" credit
rating or greater. We do not believe that the results of operations or cash
flows would be affected to any

                                                                              11
<PAGE>

significant degree by a sudden change in market interest rates relative to
interest rates on our investments, owing to the relative short-term nature of
the investments.

We are exposed to market-rate risk related to changes in interest rates and
foreign exchange rates between the Canadian and U.S. dollars, which could affect
the value of our marketable securities or our cash and cash equivalents. At May
31, 2006, we held U.S. dollar denominated securities in the amount of US$12.6
million.

In November 2005, we entered into contracts to purchase Canadian dollars
totaling $59.0 million (US$50.0 million), and concurrently entered into forward
contracts to purchase the U.S. dollars back at specific future dates. These
forward contracts matured in December 2005 and February 2006. The Canadian
dollars were acquired to enable us to invest our cash resources in Canadian
investments; however, these forward contracts enabled us to preserve our U.S.
funds, even when converted to Canadian dollars. Our U.S. funds will be used to
cover U.S. expenditures associated with our phase III clinical trials.

In November 2005, we entered into contracts to sell Canadian dollars, totaling
$30.1 million (US$25.3 million), at specific times, and concurrently entered
into forward contracts to purchase the Canadian dollars back at specific future
dates. These forward contracts matured in December 2005. These Canadian funds
will be used to fund Canadian dollar expenditures during fiscal 2006.

Our net cash used in operating activities for the three months and six months
ended May 31, 2006, was $17.3 million and $38.6 million, respectively, compared
with $19.1 million and $34.2 million for the comparable period in 2005. Changes
in our working capital had the most significant impact on our cash used in
operations. Our working capital is affected by the increase or decrease in our
accrued liabilities that is a result of certain expenses incurred in our phase
III clinical trials that will not be paid out until certain trial milestones are
reached, such as the receipt of final study reports from clinical sites at the
end of the trials. For the three months and six months ended May 31, 2006,
various milestones were achieved which resulted in the payment of cash related
to expenditures incurred in a prior period.

We intend to continue to use our capital resources to fund our research and
development activities, as warranted by results. We intend to raise additional
financing, as required, through strategic alliance arrangements, the exercise of
options and warrants, and the issuance of new share capital, as well as through
other financing opportunities. There can be no assurance that additional
financing will be available and, if available, will be on terms acceptable to
us. The availability of financing will be affected by the results of our
scientific and clinical research, including the ACCLAIM trial which failed to
reach its primary endpoint, our ability to advance the development of Celacade
and obtain regulatory approvals, the market acceptance of our products, the
state of the capital markets generally (with particular reference to
biotechnology and medical device companies), the status of strategic alliance
agreements, and other relevant commercial considerations. The terms of the notes
may limit our ability to incur additional secured or unsecured debt while the
notes are outstanding. As long as the notes are outstanding, we and our
subsidiaries are prohibited from incurring or guaranteeing any indebtedness
other than the indebtedness under the notes and certain other permitted
indebtedness, which includes indebtedness that is pari passu with or subordinate
to the indebtedness under the notes and that does not provide for any payments
of principal or premium until at least 91 days after the maturity date of the
notes; indebtedness to trade creditors incurred in the ordinary course of
business; intercompany indebtedness which is subordinate in right of payment to
the indebtedness under the notes; and indebtedness the proceeds of which are
used to redeem, repay, or otherwise retire the notes. In addition, the notes
contain anti-dilution provisions, which could require the adjustment of the
conversion price of the notes in the event of certain types of share issuances
below the current conversion price of US$3.00.

CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements, and the reported amount of revenue and

                                                                              12
<PAGE>

expenses during the reporting period. Significant accounting policies and
methods used in preparation of the financial statements are described in note 2
to the Annual Consolidated Financial Statements. Critical accounting estimates
include the amount of development expenditures expensed as opposed to
capitalized; the fair value of options and common share purchase warrants; the
testing for recoverability of long-lived assets; the allocation of proceeds on
the issuance of senior convertible notes; and the income tax valuation
allowance.

We expense research costs as they are incurred. Development costs are expensed
as incurred unless they meet the criteria under Canadian generally accepted
accounting principles for deferral and amortization. We have not capitalized any
such development costs to date.

We periodically review the useful lives and the carrying values of our
long-lived assets. We review for impairment in long-lived assets whenever events
or changes in circumstances indicate that the carrying amount of the assets may
not be recoverable. If the sum of the undiscounted expected future cash flows
expected to result from the use and eventual disposition of an asset is less
than its carrying amount, it is considered to be impaired. An impairment loss is
measured as the amount by which the carrying amount of the asset exceeds its
fair value, which is estimated as the expected future cash flows discounted at a
rate commensurate with the risks associated with the recovery of the asset.

The convertible notes contain both a liability and an equity component, the
latter represented by the conversion option. In accordance with Canadian GAAP,
the components of the convertible notes must be bifurcated and accounted for
separately as debt and equity instruments. The warrants are separable from the
notes and are accounted for as an equity instrument. The proceeds received are
allocated to the debt and equity components of the convertible notes and to the
initial warrants on a relative fair value basis. Each reporting period, the
Company is required to accrete the carrying value of the convertible notes such
that at maturity the carrying value of the notes will be their face value.

We have a net tax benefit resulting from non-capital losses carried forward, and
pools of scientific research and experimental development expenditures and
investment tax credits. In view of the recent net losses and expected future
losses, we are of the opinion that it is unlikely that these tax assets will be
realized in the foreseeable future and hence, a full valuation allowance has
been recorded against these income tax assets. Accordingly, no future income tax
assets or liabilities are recorded on the balance sheets.

ACCOUNTING POLICY CHANGES UNDER CANADIAN GAAP

Our unaudited interim consolidated financial statements follow the same
accounting policies and methods of their application as the most recent annual
consolidated financial statements.

RECENT ACCOUNTING PRONOUNCEMENTS ISSUED BUT NOT YET ADOPTED

Financial Instruments - Recognition and Measurement

In January 2005, the CICA released new Handbook Section 3855, "Financial
Instruments - Recognition and Measurement," effective for annual and interim
periods beginning on or after October 1, 2006. This new section establishes
standards for the recognition and measurement of all financial instruments,
provides a characteristics-based definition of a derivative financial
instrument, provides criteria to be used to determine when a financial
instrument should be recognized, and provides criteria to be used when a
financial instrument is to be extinguished. The Company has not yet determined
the effect that these new standards will have on its consolidated financial
position and results of operations.

Comprehensive Income and Equity

In January 2005, the CICA released new Handbook Section 1530, "Comprehensive
Income," and Section 3251, "Equity," effective for annual and interim periods
beginning on or after October 1, 2006. Section 1530 establishes standards for
reporting comprehensive income. These standards require that an enterprise
present comprehensive income and its components in a separate financial
statement that is

                                                                              13
<PAGE>

displayed with the same prominence as other financial statements. Section 3251
establishes standards for the presentation of equity and changes in equity
during the reporting period in addition to the requirements in Section 1530. We
have not yet determined the effect these new standards will have on our
consolidated financial position and results of operations.

Hedges

In January 2005, the CICA released new Handbook Section 3865, "Hedges,"
effective for annual and interim periods beginning on or after October 1, 2006.
This new section establishes standards for when and how hedge accounting may be
applied. Hedge accounting is optional. We do not expect the adoption of this
standard to have a material impact on our consolidated financial position and
results of operations.

Non-monetary Transactions

In June 2005, the CICA released a new Handbook Section 3831, "Non-monetary
Transactions," effective for fiscal periods beginning on or after January 1,
2006. This standard requires all non-monetary transactions to be measured at
fair value unless they meet one of four very specific criteria. Commercial
substance replaces culmination of the earnings process as the test for fair
value measurement. A transaction has commercial substance if it causes an
identifiable and measurable change in the economic circumstances of the entity.
Commercial substance is a function of the cash flows expected by the reporting
entity. The Company does not expect the adoption of this standard to have a
material impact on its consolidated financial position and results of
operations.

OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

We have no debt, guarantees, off-balance sheet arrangements, or capital lease
obligations other than those associated with the senior convertible note
financing that was completed October 7, 2005, which is discussed elsewhere in
this document. Other long-term obligations are discussed below.

Contractual Obligations

Our contractual obligations as of May 31, 2006 are as follows:

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------

       Contractual Obligations                    Less than 1  1 - 3 years  4 - 5 years  More than 5
       (in millions of dollars)        Total      year                                   years
------------------------------------------------------------------------------------------------------
<S>                                    <C>        <C>          <C>          <C>       <C>
------------------------------------------------------------------------------------------------------
Operating lease obligations            $2.6       $0.7         $1.6         $0.3         nil
------------------------------------------------------------------------------------------------------

------------------------------------------------------------------------------------------------------
Senior convertible notes               US$22.8    US$21.5      US$1.3       nil          nil
------------------------------------------------------------------------------------------------------

------------------------------------------------------------------------------------------------------
</TABLE>

We have entered into Clinical Research Services Agreements with a number of
Contract Research Organizations ("CROs") to conduct the phase III clinical
trials of our Celacade technology and our phase I clinical trial for VP025. The
contracts with these CROs are payable over the terms of the trials, and the
timing of payments is largely dependent on various milestones being met, such as
the number of patients recruited, number of monitoring visits conducted,
completion of certain data management activities, trial completion, and other
trial-related activities. We are also liable for the payment of certain
pass-through costs. As part of phase III trials, we also enter into agreements
with the clinical sites participating in the trials. These agreements require
payments over the course of the study based on various activities being
completed by the site, such as patient visits and various testing and
measurement activities required per the study protocol. A significant portion of
the amounts due to the sites for these activities is not payable until after the
completion of the trial. This "holdback" results in a significant accrual of
trial-related

                                                                              14
<PAGE>

expenses during the course of the study, as the expense is recognized for
accounting purposes but the cash payment is not made until the trial is
completed.

We have granted royalties to arm's-length third parties based on gross amounts
receivable by us from future commercial sales of our Celacade technology,
aggregating 1.5% on all sales, to a maximum royalty of $1.3 million per annum
and an additional 2% with respect to revenue derived from certain applications
of this technology, to a maximum royalty of $5.0 million per annum. To date, no
royalties are due and/or payable. In October 2005, we issued the notes described
above under "Liquidity and Capital Resources." These notes required that the
outstanding face value of the notes be paid monthly. Under the current terms and
conditions this obligation requires a payment of approximately US$1.8 million
per month payable in shares or cash at our discretion.


RELATED PARTY TRANSACTIONS AND INTERESTS OF MANAGEMENT IN MATERIAL TRANSACTIONS

Strategic Alliance with Quest Diagnostics Incorporated in the United States

To develop a potential secondary point of care for integration of our Celacade
technology, we have a strategic alliance with Quest Diagnostics in the United
States on an exclusive basis. The purpose of this alliance is to establish an
outpatient delivery model to accommodate patient referrals outside hospital
clinics and cardiology practices. The final terms of this alliance are not yet
established and are the subject of continued discussion between the two
companies. In connection with this strategic alliance, Quest Diagnostics made an
equity investment in our common shares of US$7.5 million in 2001 at a price of
$8.49 per share, resulting in the issuance of 1,406,783 common shares. Quest
Diagnostics also received warrants to acquire 625,237 common shares at an
exercise price of $12.73 per share. These warrants are exercisable on or before
November 6, 2006. Quest Diagnostics owns 3,056,783, or approximately 3.4 %, of
our common shares. We intend to establish additional alliances to support the
commercialization of our products.

As of March 22, 2006, the Chairman of the Board and CEO of Quest Diagnostics
retired as a member of the Board of Directors of our Company and therefore Quest
Diagnostics ceased to be a related party.

Clinical Trial Services Agreements with Quest Diagnostics Incorporated

We have entered into clinical trial services agreements with Quest Diagnostics
to provide central laboratory testing and related services in connection with
our phase III trials. The agreements are on terms customary for agreements of
this nature.


RISKS AND UNCERTAINTIES

Our products are in development, have not yet been approved by regulatory
authorities in all relevant jurisdictions, and have not yet been marketed
commercially. Our business entails significant risks, including the adequacy,
timing, and results of our clinical trials, possible requirements for additional
trials, the costs and time involved in obtaining the required regulatory
approvals, our current reliance on primarily one product, the adequacy of our
patent protection, the uncertainties involved in clinical testing, the
availability of capital to continue development and commercialization of our
products, and competition from pharmaceutical, biotechnology, and medical device
companies. There can be no assurance that our ongoing preclinical or clinical
research activities will provide positive outcomes or that the results of our
clinical trials will meet the desired clinical endpoints established in the
clinical study protocols. For example, the initial results of the ACCLAIM trial
announced on June 26, 2006, indicated that Celacade had not met its primary
endpoint in the treatment of chronic heart failure. Except for results on the
primary endpoint, results disclosed were based on initial analysis and may not
be confirmed upon full analysis of the data from ACCLAIM; additional information
relating to safety and efficacy of Celacade may be discovered upon further
analysis of trial data and upon further review and analysis of additional trial
data. Even if the clinical studies are successful, there can be no assurance
that we will be successful in

                                       15
<PAGE>

obtaining necessary regulatory approvals or, once having obtained them, in
maintaining these approvals. There can also be no assurance that we will be
successful in marketing and distributing our products, or achieving appropriate
reimbursement from government or private health authorities. We have also not
yet demonstrated the ability to manufacture a product commercially in large
volumes.

We set goals for and make public statements regarding timing for the completion
of objectives material to our success, such as the commencement and completion
of clinical trials and the completion of analysis of the trials, anticipated
regulatory approval dates, plans for continued development and time of product
launch. The actual timing and outcome of these events can vary dramatically as a
result of factors such as delays or failures in our clinical trials,
requirements for additional trials, the uncertainties inherent in the regulatory
approval process, and delays in achieving product development, manufacturing, or
marketing milestones necessary to commercialize our products. There can be no
assurance that our clinical trials will be completed as planned, that we will
make regulatory submissions or receive regulatory approvals as planned, or that
we will be able to adhere to our current schedule for the scale-up of
manufacturing and launch of any of our products. If we fail to achieve one or
more of these planned milestones, the price of our common shares could decline.

We intend to raise additional financing, as required, through strategic alliance
arrangements, the exercise of options and warrants, and the issuance of new
share capital, as well as through other financing opportunities. However, there
can be no assurance that these financing efforts will be successful or that we
will continue to be able to meet our ongoing cash requirements. It is possible
that financing may not be available or, if available, will not be on acceptable
terms. The availability of financing will be affected by the results of our
scientific and clinical research, including the ACCLAIM trial which failed to
reach its primary endpoint, our ability to obtain regulatory approvals, the
market acceptance of our products, the state of the capital markets generally
(with particular reference to biotechnology and medical device companies), the
status of strategic alliance agreements, and other relevant commercial
considerations. The terms of the notes may limit our ability to incur additional
secured or unsecured debt while the notes are outstanding. Under the terms of
the notes, in the event that we are unable to issue common shares at the
conversion price stipulated by the notes owing to failure to meet certain
conditions, we must make cash payments to the noteholders. Additional
substantial cash payments may be required under the notes upon an event of
default or change of control. Such cash payments may leave us with little or no
working capital in our business or make us insolvent. Repayment of the
outstanding principal under the Notes in shares of the Company may result in
significant dilution to the shareholders.

A detailed list of the risks and uncertainties affecting us can be found in our
Annual Information Form.


OUTLOOK


Our future operations are highly dependent upon the final results from our phase
III ACCLAIM trial of our lead product, Celacade. Subject to the outcomes on the
ongoing analysis of the ACCLAIM trial and our consultations with outside experts
and regulators, we may pursue regulatory approval and/or commercialization of
the Celacade technology. Based on progress to date, we expect additional data
analysis to be completed by September 2006. Our commercialization efforts are
dependent upon our ability to raise additional financing through a combination
of equity or debt financing, or payments from strategic partners, or upon
strategic partners funding directly some or all of the costs of
commercialization. Our cash outflows in this case are expected to consist
primarily of external expenses related to pursuing regulatory approval and/or
commercialization and research and development programs as well as payroll
costs. Should our ability to raise additional financing and/or secure financial
support from partners be delayed, management would adjust its commercialization
plans and reduce its cash expenditures in order to ensure that we have
sufficient cash and cash equivalents to fund planned expenditures for the next
12 months. Should the results of the ongoing analysis of the ACCLAIM trial data
not be sufficiently robust to support the continued development of Celacade,
management believes that our current level of cash and cash equivalents is
sufficient to fund the planned expenditures for the next 12 months. Our cash
outflows in this case are expected to consist primarily of external expenses
related to our research and development program for VP025, as well as payroll.
However, our forecast of the

                                                                              16
<PAGE>

period of time for which our financial resources will be adequate to support our
operations is a forward-looking statement that involves risks and uncertainties,
and actual results could vary materially. Although we expect that our existing
resources could be adequate to support our operations for a longer period of
time under certain scenarios, there can be no assurance that this can, in fact,
be accomplished.

We have CE Mark regulatory approval for our Celacade medical device technology
in Europe. This regulatory approval enables us to place this technology on the
market in the 25 member countries of the European Union. Subject to the outcomes
of the ongoing analysis of the ACCLAIM trial results, consultations with outside
experts and negotiation of acceptable terms, we intend to enter into additional
strategic alliances with established healthcare companies that have the
commercial infrastructure necessary to support successful market introduction in
various geographical jurisdictions. However, there can be no assurance that our
partnering efforts will be successful or, if we enter into a form of strategic
alliance, that a commercial launch with a partner will be successful.

Depending upon the results of our research and development programs and the
availability of financial resources, we could decide to accelerate, terminate,
or reduce certain areas of research and development, or commence new areas of
research and development. These are complex decisions with the goal of
optimizing investment returns and managing the cash burn rate.




Additional information relating to us, including our Annual Information Form, is
on SEDAR at www.sedar.com.
            -------------


                                                                              17
<PAGE>

                      Interim Consolidated Financial Statements
                      (Expressed in Canadian dollars)

                      VASOGEN INC.
                      (A DEVELOPMENT STAGE COMPANY)

                      Three months and six months ended May 31, 2006
                      (Unaudited)


                                                                              18
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Interim Consolidated Balance Sheets
(In thousands of Canadian dollars)

<TABLE>
<CAPTION>

---------------------------------------------------------------------------------------------------
                                                                         May 31,      November 30,
                                                                            2006              2005
---------------------------------------------------------------------------------------------------
<S>                                                                        <C>               <C>
                                                                     (Unaudited)

Assets

Current assets:
     Cash and cash equivalents (note 3)                             $     31,476      $     50,521
     Marketable securities (note 4)                                           --            22,999
     Clinical supplies                                                     1,663             1,862
     Tax credits recoverable                                               1,217             1,130
     Prepaid expenses and deposits                                         1,147             1,623
     Accrued gain on forward exchange contracts                               --               703
---------------------------------------------------------------------------------------------------
                                                                          35,503            78,838

Restricted cash (note 5)                                                  11,015            11,701
Property and equipment                                                       963             1,121
Acquired technology                                                          380               506
Deferred financing costs                                                   1,066             2,645

---------------------------------------------------------------------------------------------------
                                                                    $     48,927      $     94,811
---------------------------------------------------------------------------------------------------

Liabilities and Shareholders' Equity

Current liabilities:
     Accounts payable                                               $      4,649      $      5,733
     Accrued liabilities                                                  12,462            20,554
     Current portion of senior convertible notes payable (note 6)         19,436            16,659
     Accrued loss on forward exchange contracts                               --               763
---------------------------------------------------------------------------------------------------
                                                                          36,547            43,709

Senior convertible notes payable (note 6)                                  1,380            18,795

Shareholders' equity (note 7):
     Share capital:
         Authorized:
              Unlimited common shares, without par value
         Issued and outstanding:
              90,701,523 common shares
                (November 30, 2005 - 82,255,374)                         313,112           295,007
     Stock options                                                        10,021             8,466
     Equity component of senior convertible notes payable (note 6)         4,546             7,985
     Warrants                                                              7,002             5,345
     Contributed surplus                                                   3,103               223
     Deficit                                                            (326,784)         (284,719)
---------------------------------------------------------------------------------------------------
                                                                          11,000            32,307

Basis of presentation (note 1)
Subsequent events (notes 6 and 14)

---------------------------------------------------------------------------------------------------
                                                                    $     48,927      $     94,811
---------------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to interim consolidated financial statements.

                                                                              19
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Interim Consolidated Statements of Operations and Deficit (In thousands of
Canadian dollars, except per share amounts) (Unaudited)

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
                                                                                                   Period from
                                                                                                   December 1,
                                              Three months ended             Six months ended          1987 to
                                                     May 31,                       May 31,             May 31,
                                               2006          2005            2006          2005           2006
---------------------------------------------------------------------------------------------------------------
<S>                                           <C>           <C>            <C>           <C>            <C>
Expenses:
     Research and development           $    11,029  $     20,665    $     22,413  $     37,481   $    218,362
     General and administration               5,598         5,974          10,490        11,372         96,411
     Foreign exchange loss (gain)               169          (924)            172        (2,816)         9,061
---------------------------------------------------------------------------------------------------------------

Loss before the undernoted                  (16,796)      (25,715)        (33,075)      (46,037)      (323,834)

Interest expense on senior convertible
   notes payable                               (304)           --            (787)           --         (1,131)

Accretion in carrying value of senior
   convertible notes payable                 (2,280)           --          (4,906)           --         (6,648)

Amortization of deferred financing costs       (950)           --          (1,580)           --         (1,988)

Loss on debt extinguishment                  (2,701)           --          (2,694)           --         (2,694)

Investment income                               593           644           1,272         1,068         11,316
---------------------------------------------------------------------------------------------------------------

Loss for the period                         (22,438)      (25,071)        (41,770)      (44,969)      (324,979)

Deficit, beginning of period:
     As originally reported                (304,051)     (211,569)       (284,719)     (187,665)        (1,510)
     Change in accounting for
       stock-based compensation                  --            --              --        (4,006)            --
---------------------------------------------------------------------------------------------------------------
     As restated                           (304,051)     (211,569)       (284,719)     (191,671)        (1,510)

     Charge for acceleration payments
       on equity component of senior
       convertible notes payable               (295)           --            (295)           --           (295)

---------------------------------------------------------------------------------------------------------------
Deficit, end of period                  $  (326,784) $   (236,640)   $   (326,784) $   (236,640)  $   (326,784)
---------------------------------------------------------------------------------------------------------------

Basic and diluted loss per share
   (note 8)                             $     (0.26) $      (0.31)   $     (0.49)  $      (0.57)

---------------------------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to interim consolidated financial statements.

                                                                              20
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Interim Consolidated Statements of Cash Flows
(In thousands of Canadian dollars)
(Unaudited)

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
                                                                                                   Period from
                                                                                                   December 1,
                                              Three months ended             Six months ended          1987 to
                                                    May 31,                       May 31,              May 31,
                                               2006          2005            2006          2005           2006
---------------------------------------------------------------------------------------------------------------
<S>                                           <C>            <C>           <C>            <C>           <C>

Cash provided by (used in):

Operations:
     Loss for the period               $  (22,438)    $  (25,071)     $  (41,770)    $  (44,969)   $  (324,979)
     Items not involving cash:
         Amortization                         149            151             298            289          5,173
         Accretion in carrying value of
           senior convertible notes
           payable                          2,280             --           4,906             --          6,648
         Amortization of deferred
           financing costs                    950             --           1,580             --          1,988
         Loss on debt extinguishment        2,701             --           2,694             --          2,694
         Stock-based compensation             918            932           1,682          1,467         10,189
         Services provided for
           common shares                       --             --              --             --          2,449
         Foreign exchange loss (gain)         676           (951)            706         (2,872)         9,748
         Other                                 --             --              --             --            (35)
     Change in non-cash operating
       working capital                     (2,504)         5,818          (8,648)        11,905         12,996
---------------------------------------------------------------------------------------------------------------
                                          (17,268)       (19,121)        (38,552)       (34,180)      (273,129)

Financing:
     Shares issued for cash                    --             --              --         52,502        285,907
     Warrants and options exercised
       for cash                                --             55              --            467         24,610
     Share issue costs                         --             (1)             --         (3,720)       (20,985)
     Issue (repayment) on convertible
       debt, net                               --             --          (2,115)            --         41,297
     Restricted cash                          382             --             686             --        (11,015)
     Cash payment on acceleration
       warrants exercise price                (49)            --             (49)            --            (49)
     Payable to related parties                --             --              --             --           (234)
---------------------------------------------------------------------------------------------------------------
                                              333             54          (1,478)        49,249        319,531

Investments:
     Increase in property and equipment       (14)           (77)            (14)          (314)        (2,407)
     Increase in acquired technology           --             --              --             --         (1,283)
     Purchases of marketable
       securities                              --             --             (80)            --       (244,846)
     Settlement of forward exchange
       contracts                               --             --            (259)            --         (4,991)
     Maturities of marketable securities    7,653         20,444          22,877         62,621        240,475
---------------------------------------------------------------------------------------------------------------
                                            7,639         20,367          22,524         62,307        (13,052)

Foreign exchange gain (loss) on cash
   and cash equivalents held in foreign
   currency                                (1,221)         2,826          (1,539)         2,872         (1,874)
---------------------------------------------------------------------------------------------------------------

Increase (decrease) in cash
   and cash equivalents                   (10,517)         4,126         (19,045)        80,248         31,476

Cash and cash equivalents,
   beginning of period                     41,993         81,458          50,521          5,336             --

---------------------------------------------------------------------------------------------------------------
Cash and cash equivalents,
   end of period                       $   31,476     $   85,584      $   31,476     $   85,584    $    31,476
---------------------------------------------------------------------------------------------------------------
</TABLE>

Non-cash financing and investing activities (note 9)

See accompanying notes to interim consolidated financial statements.

                                                                              21
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Interim Consolidated Financial Statements
(Tabular figures in thousands, except per share amounts)

Three months and six months ended May 31, 2006
(Unaudited)

--------------------------------------------------------------------------------


1.     Basis of presentation:

       Since its inception, the Company has been engaged in the research and
       commercial development of product candidates for the treatment of disease
       and has had no commercial operations. The operations of the Company are
       not subject to any seasonality or cyclicality factors.

       The consolidated financial statements presented have been prepared on the
       basis that the Company is considered a development stage enterprise and,
       accordingly, the unaudited interim consolidated statements of operations
       and deficit and cash flows also reflect the cumulative amounts from
       December 1, 1987 (the date development operations commenced) to May 31,
       2006.

       While the Company's Phase III trial of its lead product CelacadeTM did
       not reach the primary endpoint of significantly reducing the risk of
       death and cardiovascular hospitalization in the total population, this
       endpoint was met for the subgroup of patients with New York Heart
       Association (NYHA) Class II chronic heart failure. Senior management is
       in the process of analyzing these results in order to finalize their
       assessment of the commercial potential of CelacadeTM.

       The Company's commercialization efforts are dependent upon its ability to
       raise additional financing through a combination of equity or debt
       financing, or payments from strategic partners. Should the Company's
       ability to raise additional financial support be delayed, management
       would adjust its commercialization plans and reduce its cash expenditures
       in order to ensure that the Company has sufficient cash and cash
       equivalents to fund planned expenditures for the next 12 months.

       In the event the final results of the Phase III trial do not warrant
       efforts to proceed with the continued development of CelacadeTM at the
       present time, the Company will be required to re-evaluate its business
       operations and to reduce expenditures. Should the development of
       CelacadeTM not proceed, management believes that the Company's current
       level of cash and cash equivalents is sufficient to fund the planned
       expenditures for the next 12 months.


                                                                              22
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Interim Consolidated Financial Statements (continued)
(Tabular figures in thousands, except per share amounts)

Three months and six months ended May 31, 2006
(Unaudited)

--------------------------------------------------------------------------------

2.     Significant accounting policies:

       The accompanying unaudited interim consolidated financial statements are
       prepared in accordance with accounting principles generally accepted in
       Canada ("Canadian GAAP") for interim financial statements, which, except
       as described in note 14, conform, in all material respects with
       accounting principles generally accepted in the United States ("United
       States GAAP").

       The accompanying unaudited interim consolidated financial statements are
       prepared in accordance with Canadian GAAP for interim financial
       statements. Certain information and note disclosures normally included in
       the annual financial statements prepared in accordance with Canadian GAAP
       have been condensed or excluded. As a result, these unaudited interim
       consolidated financial statements do not contain all disclosures required
       to be included in the annual financial statements and should be read in
       conjunction with the most recent audited annual consolidated financial
       statements and notes thereto for the year ended November 30, 2005.

       These unaudited interim consolidated financial statements are prepared
       following accounting policies consistent with the Company's audited
       annual consolidated financial statements and notes thereto for the year
       ended November 30, 2005. The financial information included herein
       reflects all adjustments (consisting only of normal recurring
       adjustments), which, in the opinion of management, are necessary for a
       fair presentation of the results for the interim periods presented. The
       results of operations for the three months and six months ended May 31,
       2006 are not necessarily indicative of the results to be expected for the
       full year.

3.     Cash and cash equivalents:

       At May 31, 2006, $26.3 million (November 30, 2005 - $47.6 million) of
       corporate bonds, commercial paper and medium-term notes are included in
       cash and cash equivalents, which include U.S. dollar-denominated
       investments aggregating $13.8 million (U.S. $12.6 million) (November 30,
       2005 - nil).

       At May 31, 2006, the carrying values of corporate bonds, commercial paper
       and medium-term notes approximated their quoted market values. Marketable
       securities held at May 31, 2006 have varying original terms to maturity
       of less than three months.

                                                                              23
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Interim Consolidated Financial Statements (continued)
(Tabular figures in thousands, except per share amounts)

Three months and six months ended May 31, 2006
(Unaudited)

--------------------------------------------------------------------------------

4.     Marketable securities:

       Marketable securities are stated at amortized cost plus accrued interest.
       The fair value of marketable securities approximates the carrying amount.
       The Company regularly reviews the carrying value of its investments.
       Should there be a decline in value that is other than a temporary
       decline, the Company measures the amount of the write-down based on the
       quoted market value of the investments and charges such write-down to the
       consolidated statements of operations and deficit. Interest income is
       recognized on an effective yield basis.

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
                                     Less than   Greater than
                                      one year       one year                        Yield to
May 31, 2006                        maturities     maturities          Total         maturity
------------------------------------------------------------------------------------------------
<S>                                <C>                 <C>        <C>            <C>

Corporate bonds, commercial
  paper and medium-term notes      $        --         $   --     $       --              n/a

------------------------------------------------------------------------------------------------

<CAPTION>

------------------------------------------------------------------------------------------------
                                     Less than   Greater than
                                      one year       one year                        Yield to
November 30, 2005                   maturities     maturities          Total         maturity
------------------------------------------------------------------------------------------------
<S>                                <C>                 <C>        <C>            <C>

Corporate bonds, commercial
  paper and medium-term notes      $    22,999         $   --     $   22,999    3.04% - 4.25%

------------------------------------------------------------------------------------------------
</TABLE>

       At May 31, 2006, no (November 30, 2005 - $7.8 million) marketable
       securities were held in U.S. dollar-denominated investments (November 30,
       2005 - U.S. $6.7 million). Marketable securities held at November 30,
       2005 had varying maturities of less than one month.

5.     Restricted cash:

       The Company has U.S. $10.0 million in restricted cash, which represents
       cash on deposit to secure the letter of credit provided as security to
       the holders of the senior convertible notes payable, which were issued on
       October 7, 2005. The letter of credit automatically renews every year and
       shall not expire earlier than 91 days after the maturity date of the
       convertible notes. The letter of credit may be reduced at the option of
       the Company, when the principal outstanding of the convertible notes is
       less than U.S. $17.0 million.

                                                                              24
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Interim Consolidated Financial Statements (continued)
(Tabular figures in thousands, except per share amounts)

Three months and six months ended May 31, 2006
(Unaudited)

--------------------------------------------------------------------------------

6.     Senior convertible notes payable:

       On October 7, 2005, the Company, through its wholly owned subsidiary,
       Vasogen Ireland Limited, issued 6.45% U.S. $40.0 million senior
       convertible notes payable and 3,333,334 common share purchase warrants,
       as disclosed in note 7(c), for net proceeds of $42.8 million (gross
       proceeds of $47.0 million (U.S. $40.0 million) less issuance costs of
       $4.2 million). The notes mature on October 7, 2007, which shall be
       extended to October 7, 2010 upon the occurrence of pre-market approval
       granted by the U.S. Food and Drug Administration for the marketing of
       CelacadeTM for use in the treatment of chronic heart failure.

       The notes are guaranteed by Vasogen Inc. and are secured by an
       irrevocable U.S. $10.0 million letter of credit issued in favour of the
       note holders and which is fully secured by cash on hand (note 5).

       The notes are convertible by the holders at any time into common shares
       of the Company at a conversion price of U.S. $3.00 per share, adjusted
       for anti-dilution and other downward adjustments (including if the
       Company issues or sells common stock at a price of less than U.S. $3.00
       unless the offering is in excess of U.S. $50.0 million in total or in
       connection with terms permitted under the agreement, issues options or
       warrants to third parties with an exercise price of less than U.S. $3.00
       or issues convertible securities with a conversion price of less than
       U.S. $3.00, unless the issuance is in connection with an approved share
       plan) (collectively, the "conversion price").

       The Company is required to repay the notes in 22 equal monthly
       instalments commencing December 1, 2005 of U.S. $1.8 million. While
       interest is always payable in cash, the Company, at its option, may pay
       the instalment in cash at the face amount of the instalment principal or
       in freely tradeable common shares, or any combination thereof. If settled
       in common shares, the number of common shares is based on the face amount
       of the instalment principal divided by the lesser of (i) the conversion
       price and (ii) 90% of the five-day weighted average price of the
       Company's common shares, as defined in the agreement, if the stock price
       is less than U.S. $1.00, or 95% of the five-day weighted average price of
       the Company's common shares, as defined in the agreement, if the stock
       price is greater than U.S. $1.00. The Company is obligated to provide
       additional common shares at no consideration if, subsequent to the
       instalment date, the number of shares is greater, then the subsequent
       12-day weighted average share price is used in the formula. Additional
       principal is deemed to be extinguished if the number of shares issued is
       in excess of the number of shares otherwise determined using the
       subsequent 12-day weighted average share price in the formula. The
       Company accounts for this 12-day post instalment settlement mechanism as
       an adjustment to share capital.

                                                                              25
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Interim Consolidated Financial Statements (continued)
(Tabular figures in thousands, except per share amounts)

Three months and six months ended May 31, 2006
(Unaudited)

--------------------------------------------------------------------------------

6.     Senior convertible notes payable (continued):

       Common shares issued in advance of the instalment due date are recorded
       at fair value at the date of issue as share capital and as a subscription
       receivable pending extinguishment of the senior convertible notes. The
       subscription receivable is presented as a reduction of share capital.

       The Company has the right to accelerate payments of outstanding principal
       of up to U.S. $8.0 million on each instalment date if the Company's
       common share price is greater than U.S. $1.00 per share or up to 40% of
       the principal outstanding each calendar year if the Company's common
       share price is greater than U.S. $4.00 per share. The acceleration
       repayment terms are similar to the monthly instalment redemption terms
       described above. In addition, the Company is obliged to issue additional
       common share purchase warrants with terms similar to those warrants
       issued initially with the maturity date being five years from the date of
       issuance and the exercise price of U.S. $3.00 per common share (subject
       to adjustment similar to the conversion price).

       Under the terms of the notes, if the ACCLAIM trial fails to meet its
       primary endpoint, then beginning on September 1, 2006, the Company must
       maintain a net cash balance of 110% of the outstanding principal amount
       on the notes.

       The interest rate increases to 12% upon and during an event of default.
       The Company is required to pay 2% of the purchase price of the notes and
       warrants each month if the Company's common shares are not freely
       tradeable under applicable Ontario and U.S. securities laws and
       regulations.

       The holders also have the right to demand repayment in cash or in common
       shares at 125% of the face amount of principal outstanding in the event
       of default or at 115% in the event of a change in control or the value of
       the common shares the holder would otherwise have received on conversion
       of the shares prior to the event of default or the change in control. No
       accounting consideration has been given to these holders' contingent put
       rights since it is management's view that these contingent events are not
       probable of occurrence.


                                                                              26
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Interim Consolidated Financial Statements (continued)
(Tabular figures in thousands, except per share amounts)

Three months and six months ended May 31, 2006
(Unaudited)

--------------------------------------------------------------------------------

6.     Senior convertible notes payable (continued):

       In accordance with Canadian GAAP, the convertible notes were bifurcated
       into a liability component and an equity conversion component which are
       presented separately in the consolidated balance sheets. The senior
       convertible notes payable carry an effective interest rate of 40%. The
       Company recorded accretion expense of $4.9 million and amortized deferred
       financing costs of $1.6 million during the six months ended May 31, 2006,
       such that at the redemption date of the notes, the carrying amount of the
       notes will be their face amount. The Company recorded accretion expense
       of $2.3 million and amortized deferred financing costs of $1.0 million
       during the three months ended May 31, 2006.

       During the three months ended May 31, 2006, the Company issued 923,356
       common shares at a fair value of $2.1 million (U.S. $1.9 million), issued
       855,899 common shares at a fair value of $2.2 million (U.S. $1.9 million)
       and applied the February 24, 2006 issuance of 613,906 shares at a fair
       value of $2.2 million (U.S. $1.9 million) to make scheduled instalment
       payments on May 1, 2006, April 1, 2006 and March 1, 2006, respectively.
       In accordance with the Company's policy, the fair value of the payment is
       recorded as share capital and the face value of the debt is reduced with
       any difference being charged as a loss on debt extinguishment.

       During the three months ended May 31, 2006, the Company issued 914,123
       common shares at a fair value of $2.1 million (U.S. $1.9 million), issued
       847,340 common shares at a fair value of $2.2 million (U.S. $1.9 million)
       and applied the February 24, 2006 issuance of 607,767 common shares at a
       fair value of $2.2 million (U.S. $1.9 million) to make acceleration
       payments on May 1, 2006, April 1, 2006 and March 1, 2006, respectively,
       with a face value of U.S. $1.8 million each. Pursuant to the terms of the
       notes, in conjunction with the issuance of the payment of the accelerated
       amounts, the Company granted 1.2 million common share purchase warrants
       with terms as disclosed in note 7(c) and a fair value of $1.7 million.
       The fair value of the warrants was determined using the Black-Scholes
       option pricing model with volatility of 62.5%, a risk-free rate of 4.9%
       and an expected life of five years. In accordance with the Company's
       accounting policy, the acceleration payment is accounted for as an early
       extinguishment of the outstanding principal. Accordingly, the fair value
       of the consideration given is allocated between the debt and equity
       components of the notes with any difference between the carrying value
       and allocated fair value being accounted for as a capital transaction for
       the equity component and a loss on debt extinguishment for the debt
       component.

                                       27
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Interim Consolidated Financial Statements (continued)
(Tabular figures in thousands, except per share amounts)

Three months and six months ended May 31, 2006
(Unaudited)

--------------------------------------------------------------------------------

6.     Senior convertible notes payable (continued):

       On March 20, 2006, the Company issued 193,148 common shares related to
       the 12-day post instalment settlement mechanism for the March 1, 2006
       instalment payment for no additional consideration. On April 21, 2006,
       the Company issued 178,945 common shares related to the 12-day post
       instalment settlement mechanism for the April 1, 2006 instalment payment
       for no additional consideration. In accordance with the Company's
       accounting policy, no accounting recognition was given to the issuance of
       these common shares.

       On May 18, 2006, the Company applied $0.2 million principal payment
       related to the 12-day post instalment mechanism for the May 1, 2006
       instalment payment with no additional consideration. In accordance with
       Company's accounting policy, the Company recorded a reduction in
       long-term debt and an increase in shareholders' equity.

       On May 26, 2006, in connection with the June 1, 2006 scheduled instalment
       payment of U.S. $1.8 million, the Company gave notice of an accelerated
       repayment of additional outstanding face value of U.S. $2.8 million. The
       Company issued 2,318,480 common shares at a fair value of $5.2 million to
       the note holders in advance of the June 1, 2006 due date for the
       repayments. In addition, upon settlement of the senior convertible notes
       on June 1, 2006, the Company issued 606,666 warrants to note holders at a
       fair value of $0.7 million (U.S. $0.6 million). The warrants have an
       exercise price of U.S. $3.00 and expire on May 31, 2011.

--------------------------------------------------------------------------------

Par value of senior convertible notes payable                     $    25,082
Balance remaining to be accreted                                        4,266
--------------------------------------------------------------------------------

Senior convertible notes payable                                       20,816

Current portion of senior convertible notes payable                    19,436

--------------------------------------------------------------------------------
Senior convertible notes payable, long-term                       $     1,380
--------------------------------------------------------------------------------

       On May 31, 2006, $19.4 million has been presented as a current liability
       since the Company is obligated to settle that portion of the carrying
       amount of the convertible notes in cash or in common shares in the next
       12 months.

                                                                              28
<PAGE>
<TABLE>
<CAPTION>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

 Notes to Interim Consolidated Financial Statements (continued) (Tabular figures
in thousands, except per share amounts)

Three months and six months ended May 31, 2006
(Unaudited)

-----------------------------------------------------------------------------------------------------------------------------------


7.     Shareholders' equity:

       (a) Consolidated statements of shareholders' equity:

-----------------------------------------------------------------------------------------------------------------------------------
                                                                                 Equity
                                                 Common                    component of                                 Period from
                                                shares'                          senior                                 December 1,
                                                average                     convertible                                     1987 to
                                       Number     share     Share      Stock      notes         Contributed            February 28,
                                    of shares     price   capital    options    payable   Warrants   surplus     Deficit       2006
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                   <C>      <C>      <C>        <C>        <C>        <C>       <C>        <C>         <C>
Balance, November 30, 2005             82,255  $     --  $295,007   $  8,466   $  7,985   $  5,345  $    223   $(284,719)  $ 32,307
Fair value of stock options granted        --        --        --        764         --         --        --          --        764
Shares issued for instalment
   payments on senior
   convertible notes payable            1,507      3.16     4,769         --       (814)        --       814          --      4,769
Shares issued for acceleration
   payments on senior
   convertible notes payable              608      3.59     2,184         --         --         --        --          --      2,184
Shares issued for debtholders
   conversion of senior
   convertible notes payable              100      3.22       322         --        (59)        --        --          --        263
March 1, 2006, payment in
   advance of due date                     --        --    (4,332)        --         --         --        --          --     (4,332)
December 1, 2005, instalment
   payment in advance applied              --        --     2,032         --       (363)        --       363          --      2,032
Fair value of vested options
   forfeited and expired                   --        --        --        (26)        --         --        26          --         --
Loss for the period                        --        --        --         --         --         --        --     (19,332)   (19,332)

-----------------------------------------------------------------------------------------------------------------------------------
Balance, February 28, 2006             84,470            $299,982   $  9,204   $  6,749   $  5,345  $  1,426   $(304,051)  $ 18,655
===================================================================================================================================


                                                                                                                                 29
</TABLE>


<PAGE>
<TABLE>
<CAPTION>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

 Notes to Interim Consolidated Financial Statements (continued) (Tabular figures
in thousands, except per share amounts)

Three months and six months ended May 31, 2006
(Unaudited)

-----------------------------------------------------------------------------------------------------------------------------------
7.     Shareholders' equity (continued):

-----------------------------------------------------------------------------------------------------------------------------------
                                                                                 Equity
                                                 Common                    component of                                 Period from
                                                shares'                          senior                                 December 1,
                                                average                     convertible                                     1987 to
                                       Number     share     Share      Stock      notes         Contributed            February 28,
                                    of shares     price   capital    options    payable   Warrants   surplus     Deficit       2006
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                   <C>      <C>      <C>        <C>        <C>        <C>       <C>        <C>         <C>

Balance, February 28, 2006             84,470  $     --  $299,982   $  9,204   $  6,749   $  5,345  $  1,426   $(304,051)  $ 18,655
Fair value of stock options granted        --        --        --        940         --         --        --          --        940
Shares issued for instalment
   payments on senior
   convertible notes payable            2,879      2.25     6,469         --       (744)        --       744          --      6,469
Shares issued for acceleration
   payments on senior
   convertible notes payable            3,352      2.25     7,539         --       (737)        --       468          --      7,270
June 1, 2006, payment in
   advance of due date                     --        --    (5,210)        --         --         --        --          --     (5,210)
March 1, 2006, instalment payment
   in advance applied                      --        --     4,332         --       (722)        --       363        (295)     3,678
Fair value of vested options
   forfeited and expired                   --        --        --       (102)        --         --       102          --         --
Fair value of unvested
   options forfeited                       --        --        --        (21)        --         --        --          --        (21)
Fair value of acceleration
   warrants issued                         --        --        --         --         --      1,657        --          --      1,657
Loss for the period                        --        --        --         --         --         --        --     (22,438)   (22,438)


Balance, May 31, 2006                  90,701            $313,112   $ 10,021   $  4,546   $  7,002  $  3,103   $(326,784)  $ 11,000

===================================================================================================================================


                                                                                                                                 30
</TABLE>

<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Interim Consolidated Financial Statements (continued)
(Tabular figures in thousands, except per share amounts)

Three months and six months ended May 31, 2006
(Unaudited)

--------------------------------------------------------------------------------

7.     Shareholders' equity (continued):

       (b) Stock-based compensation:


       As at May 31, 2006, there were 4,039,380 (November 30, 2005 - 2,506,634)
       options available for grant.

--------------------------------------------------------------------------------
                                                                       Weighted
                                                                        average
                                                     Number of         exercise
                                                       options            price
--------------------------------------------------------------------------------

Outstanding, November 30, 2005                           4,311        $    5.60
Issued                                                   1,839             2.67
Cancelled                                                 (303)            7.18

--------------------------------------------------------------------------------
 Outstanding, May 31, 2006                               5,847             4.60
--------------------------------------------------------------------------------

Exercisable, May 31, 2006                                3,190        $    5.40

--------------------------------------------------------------------------------

           The table above includes 84,965 options granted to non-employees
           during the six months ended May 31, 2006 for a fair value of $0.1
           million, of which $50,000 was recorded as an expense during the six
           months ended May 31, 2006.


                                                                              31
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Interim Consolidated Financial Statements (continued)
(Tabular figures in thousands, except per share amounts)

Three months and six months ended May 31, 2006
(Unaudited)

--------------------------------------------------------------------------------

7.     Shareholders' equity (continued):

       The following table provides information on options outstanding and
       exercisable as of May 31, 2006:

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
                                 Options outstanding                  Options exercisable
----------------------------------------------------------------------------------------------
                                                       Weighted
                                       Weighted         average                      Weighted
                                        average       remaining                       average
Exercise                  Number       exercise     contractual         Number       exercise
price                outstanding          price    life (years)    exercisable          price
----------------------------------------------------------------------------------------------
<C>                         <C>           <C>              <C>            <C>           <C>
$2.59 - $  3.39            2,526       $   2.77             7.7            629        $  2.92
$3.40 - $  5.65            2,113           4.84             4.4          1,573           4.72
$5.66 - $  9.04              839           7.25             3.2            708           7.36
$9.05 - $11.30               369           9.66             2.1            280           9.81

----------------------------------------------------------------------------------------------
                           5,847           4.60             5.5          3,190           5.40
----------------------------------------------------------------------------------------------
</TABLE>

       The fair value of stock-based compensation has been estimated at the
       grant date under the following assumptions:

--------------------------------------------------------------------------------
                                                            Six months ended
--------------------------------------------------------------------------------
                                                                 May 31,
--------------------------------------------------------------------------------
                                                           2006             2005
--------------------------------------------------------------------------------

Weighted average risk-free interest rate                  4.02%            3.83%
Volatility factor of the expected market
   price of the Company's common shares                   73.7%           67.56%
Weighted average expected life of the options         5.7 years        4.8 years

--------------------------------------------------------------------------------

       The resulting weighted average fair value per share at the grant date of
       the employee and non-employee stock-based compensation issued in fiscal
       2006 was $1.78.


                                                                              32
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Interim Consolidated Financial Statements (continued)
(Tabular figures in thousands, except per share amounts)

Three months and six months ended May 31, 2006
(Unaudited)

--------------------------------------------------------------------------------
7.     Shareholders' equity (continued):


       (c) Warrants:


       As at May 31, 2006, the warrants which are outstanding and exercisable
       are as follows:

--------------------------------------------------------------------------------

Outstanding, November 30, 2005                                            4,319
Issued                                                                    1,170
Exercised                                                                    --
Expired or cancelled                                                         --

--------------------------------------------------------------------------------
Outstanding, May 31, 2006                                                 5,489
--------------------------------------------------------------------------------

Exercisable, May 31, 2006                                                 5,489

--------------------------------------------------------------------------------

       Of the warrants outstanding at May 31, 2006, 360,000 are exercisable at a
       price of U.S. $4.69 per share and expire on July 2, 2006, 625,237 are
       exercisable at a price of Cdn. $12.73 per share and expire on November 6,
       2006, 3,333,334 are exercisable at a price of U.S. $3.00 per share and
       expire on October 7, 2010, 390,000 are exercisable at a price of U.S.
       $3.11 and expire on February 28, 2011, 390,000 are exercisable at a price
       of U.S. $3.00 and expire on March 31, 2011 and 390,000 are exercisable at
       a price of U.S. $3.00 and expire on April 30, 2011.

       As disclosed in note 6, the Company issued 606,666 additional warrants
       subsequent to May 31, 2006.


                                                                              33
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Interim Consolidated Financial Statements (continued)
(Tabular figures in thousands, except per share amounts)

Three months and six months ended May 31, 2006
(Unaudited)

--------------------------------------------------------------------------------

7.     Shareholders' equity (continued):

       (d) Deferred share units:

           Effective January 1, 2004, the Company established a plan to grant
           deferred share units ("DSUs") to its non-management directors and
           reserved a maximum of 250,000 common shares for issuance under the
           plan. Under this plan, the directors will defer any cash remuneration
           that they would have otherwise received for services rendered and, in
           lieu thereof, will receive the number of DSUs which is equivalent in
           value to the remuneration deferred. A DSU is a unit equivalent in
           value to one common share of the Company based on the trading price
           of the Company's common shares on The Toronto Stock Exchange. Upon
           termination of board service, the DSUs will be redeemed based upon
           the then market price of the Company's common shares on the date of
           redemption in exchange for any combination of cash or common shares
           as the Company may determine.

           As of the date of the grant, the fair value of the DSU, being the
           fair market value of the Company's common shares at that date, is
           recorded as a liability on the Company's balance sheets. The value of
           the DSU liability is adjusted to reflect changes in the market value
           of the Company's common shares at each period end.

           The Company recorded $0.2 million in compensation expense relating to
           84,542 DSUs granted during the three months ended May 31, 2006 for
           services rendered during the period.

           As at May 31, 2006, 166,790 (November 30, 2005 - 78,285) DSUs are
           issued and outstanding with a value of $0.4 million, based upon the
           market value of the Company's common shares at May 31, 2006.

                                                                              34
<PAGE>
<TABLE>
<CAPTION>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Interim Consolidated Financial Statements (continued)
(Tabular figures in thousands, except per share amounts)

Three months and six months ended May 31, 2006
(Unaudited)

-------------------------------------------------------------------------------------------------------

8.     Loss per share:

Basic and diluted loss per share:

--------------------------------------------------------------------------------------------------------
                                               Three months ended                  Six months ended
                                                     May 31,                            May 31,
                                               2006             2005              2006             2005
--------------------------------------------------------------------------------------------------------
<S>                                   <C>               <C>               <C>              <C>
Loss for the period                   $     (22,438)    $    (25,071)     $    (41,770)    $    (44,969)

Weighted average number of
 common shares outstanding:
    Basic and diluted                        86,701           81,418            84,729           78,232

--------------------------------------------------------------------------------------------------------

Loss per share:
    Basic and diluted                 $      (0.26)     $      (0.31)     $     (0.49)     $      (0.57)

--------------------------------------------------------------------------------------------------------

<CAPTION>

9.     Non-cash financing and investing activities:

--------------------------------------------------------------------------------------------------------
                                                                                            Period from
                                                                                            December 1,
                                      Three months ended               Six months ended         1987 to
                                            May 31,                          May 31,            May 31,
                                      2006           2005            2006           2005           2006
--------------------------------------------------------------------------------------------------------
<S>                                <C>               <C>           <C>              <C>            <C>

Non-cash financing activities:
    Warrants and options
       issued as share
       issue costs              $       --         $   --      $       --        $    --     $    1,769
    Shares issued for services          --             --              --             --          2,449
    Debt conversion                (10,248)            --         (15,090)                       17,864
    Shares issued on debt
       conversion                   11,492             --          16,071             --         18,845
    Acceleration warrants
       issued in connection
       with debt                     1,657             --           1,657             --          1,657
    Shares issued on debt
       conversion by noteholder         --             --             263             --            263
    Shares issued for technology        --             --              --             --          2,799
    Deferred share issue costs          --             --              --             --            503

Non-cash investing activities:
    Technology acquired for
       shares issued.                   --             --              --             --         (2,799)

--------------------------------------------------------------------------------------------------------

                                                                                                      35
</TABLE>

<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Interim Consolidated Financial Statements (continued)
(Tabular figures in thousands, except per share amounts)

Three months and six months ended May 31, 2006
(Unaudited)

--------------------------------------------------------------------------------

10.    Fair values of financial instruments:

       The carrying values of cash and cash equivalents, marketable securities,
       tax credits recoverable, deposits, accounts payable and accrued
       liabilities approximate their fair values due to the relatively short
       periods to maturity of these instruments.

       In November 2005, the Company entered into forward exchange contracts to
       sell, in aggregate, U.S. $25.3 million to acquire $30.1 million, which
       matured in December 2005.

       In November 2005, the Company entered into forward exchange contracts to
       purchase, in aggregate, U.S. $50.0 million for $59.0 million, which
       matured in December 2005 and February 2006.

       The fair value of the senior convertible notes payable at May 31, 2006 is
       $24.6 million.

11.    Segment information:

       The Company operates in one business segment: the development of
       treatments and related products addressing chronic inflammatory disease.
       The primary property and equipment are located in Canada and the acquired
       technology is primarily located in Ireland.

12.    Related party transactions:

       During the three months ended May 31, 2006, Quest Diagnostics, a company
       that owns 3.4% of the Company's common shares, provided central
       laboratory testing and related services to the Company under the terms of
       a Clinical Trial Services agreement. The cost of these services,
       aggregating $0.3 million (three months ended May 31, 2005 - $0.5 million;
       December 1, 1987 to May 31, 2006 - $2.9 million) was charged to research
       and development expense. These transactions are measured at the exchange
       amount of consideration established and agreed to by the related parties.
       At May 31, 2006, the Company owed Quest Diagnostics $1.2 million
       (November 30, 2005 - $0.3 million) for such fees, which is included in
       accounts payable and accrued liabilities.

                                                                              36
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Interim Consolidated Financial Statements (continued)
(Tabular figures in thousands, except per share amounts)

Three months and six months ended May 31, 2006
(Unaudited)

--------------------------------------------------------------------------------

12.    Related party transactions (continued):

       As at March 22, 2006, the Chairman of the Board and CEO of Quest
       Diagnostics is no longer on the Board of Directors of the Company and,
       therefore, Quest Diagnostics ceased to be a related party.

13.    Differences between generally accepted accounting principles in Canada
       and the United States:

       The interim consolidated financial statements of the Company as at May
       31, 2006 and for the three months and six months ended May 31, 2006 and
       2005 and the period from December 1, 1987 to May 31, 2006 are prepared in
       accordance with Canadian GAAP for interim financial reporting, which
       differ in certain respects from United States GAAP.

       The following tables present the impact of material differences between
       Canadian GAAP and United States GAAP on the Company's interim
       consolidated financial statements as at May 31, 2006 and for the six
       months ended May 31, 2006 and 2005 and for the period from December 1,
       1987 to May 31, 2006.


                                                                              37
<PAGE>
<TABLE>
<CAPTION>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Interim Consolidated Financial Statements (continued)
(Tabular figures in thousands, except per share amounts)

Three months and six months ended May 31, 2006
(Unaudited)

----------------------------------------------------------------------------------------------------

13.    Differences between generally accepted accounting principles in Canada
       and the United States (continued):

       (a) Consolidated statements of operations and deficit:

----------------------------------------------------------------------------------------------------
                                                                                        Period from
                                                                                        December 1,
                                                          Six months ended                  1987 to
                                                              May 31,                       May 31,
                                                      2006                2005                 2006
----------------------------------------------------------------------------------------------------
<S>                                          <C>                  <C>                 <C>
Loss per Canadian GAAP                       $     (41,770)       $    (44,969)       $    (324,979)
Adjustments:
     Acquired technology costs (b)(i)                   --                  --               (4,081)
     Technology amortization (b)(i))                   127                 127                3,702
     Non-employee stock options (b)(ii)                (29)                (51)              (3,447)
     Employee stock options (b)(iii)                    --               1,251                6,885
     Performance-based options (b)(iii)                 --                  32                 (278)
     Warrants issued to acquire
       technology (b)(iv)                               --                  --                  (61)
     Accretion of senior convertible
       notes payable (b)(v)                         (1,422)                 --               (1,703)
     Amortization of deferred financing
       costs (b)(v)                                   (638)                 --                 (783)
     Loss on debt extinguishment (b)(v)             (1,894)                 --               (1,894)
     Fair market value adjustment on
       embedded derivatives and
       warrants (b)(v)                               5,250                  --                8,282

----------------------------------------------------------------------------------------------------
Loss and comprehensive loss
   per United States GAAP                    $     (40,376)       $    (43,610)       $    (318,357)
----------------------------------------------------------------------------------------------------

Weighted average number of
   common shares under
   United States GAAP, basic
   and diluted                                      84,729              78,232

----------------------------------------------------------------------------------------------------

Basic and diluted loss per share under
   United States GAAP                        $      (0.48)        $     (0.56)

----------------------------------------------------------------------------------------------------


                                                                                                  38
</TABLE>

<PAGE>
<TABLE>
<CAPTION>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Interim Consolidated Financial Statements (continued)
(Tabular figures in thousands, except per share amounts)

Three months and six months ended May 31, 2006
(Unaudited)

----------------------------------------------------------------------------------------------------

13.    Differences between generally accepted accounting principles in Canada
       and the United States (continued):

       (b) Consolidated balance sheets:

----------------------------------------------------------------------------------------------------
                                                  May 31, 2006                 November 30, 2005
----------------------------------------------------------------------------------------------------
                                                               United                        United
----------------------------------------------------------------------------------------------------
                                             Canadian          States       Canadian         States
                                                 GAAP            GAAP           GAAP           GAAP
----------------------------------------------------------------------------------------------------
<S>                                            <C>             <C>            <C>            <C>

Assets:
     Acquired technology (i)             $        380   $          --   $        506   $         --
     Deferred financing costs (v)               1,066           1,456          2,645          3,674
Liabilities:
     Current portion of senior
       convertible notes payable (v)           19,436          18,706         16,659         15,047
     Senior convertible notes
       payable                                  1,380           1,380         18,795         18,268
     Embedded derivatives (v)                      --           2,563             --          8,324
     Warrants (v)                                  --           4,641             --          4,129
Shareholders' equity:
     Share capital (iv)                       313,112         313,602        295,007        294,937
     Stock options, warrants and
       contributed surplus (ii), (iii)         20,126           8,799         14,034          7,087
     Equity component of senior
       convertible notes payable (v)            4,546              --          7,985             --
     Deficit, end of period (i), (ii), (iii)
       (iv), (v)                             (326,784)       (319,867)      (284,719)      (279,491)
     Deficit accumulated during
       development stage (i), (ii), (iii),
       (iv), (v)                             (325,274)       (318,357)      (283,209)      (277,981)

----------------------------------------------------------------------------------------------------
</TABLE>

            (i) Canadian GAAP requires the capitalization and amortization of
                acquired technology costs. Under United States GAAP, such
                acquired technology costs are charged to expense when incurred
                if, at the acquisition date, the technological feasibility of
                this technology has not yet been established and no future
                alternative uses existed. Accordingly, for United States GAAP
                purposes, the costs of acquired technology would have been
                expensed at the date of acquisition and the amortization
                recorded under Canadian GAAP would be reversed.

                                                                              39
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Interim Consolidated Financial Statements (continued)
(Tabular figures in thousands, except per share amounts)

Three months and six months ended May 31, 2006
(Unaudited)

--------------------------------------------------------------------------------

13.    Differences between generally accepted accounting principles in Canada
       and the United States (continued):

           (ii) Prior to December 1, 2005, the Company followed Financial
                Accounting Standards Board ("FASB") Statement of Financial
                Accounting Standards 123, Accounting for Stock-based
                Compensation ("SFAS No. 123"), which requires the recognition of
                compensation costs for stock options and warrants issued after
                December 15, 1995 to non-employees, such as members of the
                Scientific Advisory Board and other consultants and advisors, at
                fair value.

                The fair value of the non-employee stock options and warrants
                granted after December 15, 1995 has been estimated using the
                Black-Scholes option pricing model based on the assumptions set
                out in note 7(b).

                Under Canadian GAAP, all stock-based compensation granted to
                non-employees on or after December 1, 2002 is also accounted for
                at fair value. The value of any options granted prior to
                December 1, 2002 is not required to be recorded or presented
                under Canadian GAAP.

                As a result, the fair value of any options granted prior to
                December 1, 2002 and subsequent to December 15, 1995 has not
                been recorded under Canadian GAAP. Under United States GAAP, the
                value of these options is recorded in accordance with SFAS No.
                123.

                Effective December 1, 2005, the Company adopted FASB Statement
                of Accounting Standards No. 123 (Revised 2004), Share-Based
                Payment ("SFAS No. 123R"), however, there was no impact as a
                result of the change in the accounting for stock-based awards
                issued to non-employees in exchange for services under United
                States GAAP.

                                                                              40
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Interim Consolidated Financial Statements (continued)
(Tabular figures in thousands, except per share amounts)

Three months and six months ended May 31, 2006
(Unaudited)

--------------------------------------------------------------------------------

13.    Differences between generally accepted accounting principles in Canada
       and the United States (continued):

           (iii) As disclosed in the consolidated financial statements as at and
                for the year ended November 30, 2005, under Canadian GAAP and
                effective December 1, 2004, the Company adopted the amendment to
                CICA Handbook Section 3870. Prior to December 1, 2004, the
                Company used the settlement method to account for stock-based
                compensation awards to employees, officers and directors. Under
                this method, no compensation expense was recognized under the
                stock option plan when stock options were issued to these
                individuals. Adoption of Section 3870 requires the Company to
                expense over the vesting period, the fair value of all employee
                stock-based awards granted or modified since December 1, 2002.
                Fair value is determined using the Black-Scholes option pricing
                model. Pursuant to the transitional provisions of Section 3870,
                the Company applied this change retroactively, without
                restatement of prior periods.

                For United States GAAP, prior to December 1, 2005, the Company
                elected to account for employee share-based compensation using
                the intrinsic value method based upon Accounting Principles
                Board Opinion No. 25, Accounting for Stock Issued to Employees
                ("APB 25"). In most cases the application of the intrinsic value
                method by the Company did not result in compensation expense
                under United States GAAP.

                The Company also granted performance-based options to employees.
                In accordance with APB 25, these options were accounted for
                using variable plan accounting. At each reporting date,
                compensation cost was measured based on an estimate of the
                number of options that will vest considering the performance
                criteria and the difference between the market price of the
                underlying stock and the exercise price at such dates. The
                compensation cost was recognized over the estimated performance
                period.

                GAAP differences between intrinsic and variable plan measurement
                under United States GAAP for employee and performance based
                options and fair value measurement under Canadian GAAP prior to
                December 1, 2005 are presented in the United States GAAP
                reconciliation.

                                                                              41
<PAGE>


VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Interim Consolidated Financial Statements (continued)
(Tabular figures in thousands, except per share amounts)

Three months and six months ended May 31, 2006
(Unaudited)

--------------------------------------------------------------------------------

13.    Differences between generally accepted accounting principles in Canada
       and the United States (continued):

                On December 1, 2005, the Company adopted the fair value-based
                method for measurement and cost recognition of employee
                share-based compensation arrangements under the provisions of
                SFAS No. 123R, using the modified prospective application
                transition approach.

                Under the modified prospective application transitional
                approach, the fair value of the cost of share-based compensation
                is recognized for awards granted, modified, repurchased or
                cancelled subsequent to the adoption of SFAS No. 123R. In
                addition, share-based compensation is recognized, subsequent to
                the adoption of SFAS No. 123R, for the remaining portion of the
                vesting period, if any, for outstanding awards granted prior to
                the date of adoption. Accordingly, on a modified prospective
                basis, there is no difference in the recognition of stock-based
                compensation awards under Section 3870 and SFAS No. 123R for
                employee and performance-based options. Prior periods have not
                been adjusted and the Company continues to provide pro forma
                disclosures as if it had accounted for employee share-based
                payments in all periods presented under the fair value
                provisions of SFAS No. 123, Accounting for Stock-based
                Compensation, which is presented below:

--------------------------------------------------------------------------------
                                                              Six months ended
                                                                  May 31, 2005
--------------------------------------------------------------------------------

Loss for the period per United States GAAP                        $    (43,610)
Compensation expense related to the
  fair value of stock options granted
  prior to December 1, 2005                                             (1,363)

--------------------------------------------------------------------------------
Pro forma loss for the period                                     $    (44,973)
--------------------------------------------------------------------------------

Pro forma loss per share                                          $      (0.57)

--------------------------------------------------------------------------------

                                                                              42
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Interim Consolidated Financial Statements (continued)
(Tabular figures in thousands, except per share amounts)

Three months and six months ended May 31, 2006
(Unaudited)

--------------------------------------------------------------------------------

13.    Differences between generally accepted accounting principles in Canada
       and the United States (continued):

           (iv) In 1996, 100,000 warrants were issued as part of the technology
                acquisition consideration. United States GAAP requires these
                acquired technology costs to be recorded in an amount
                approximating the fair value of the warrants issued, estimated
                at their grant date using the Black-Scholes option pricing
                model, and expensed as research and development expenses.

           (v) Senior convertible notes payable and warrants:

                Under Canadian GAAP, the common share purchase warrants and the
                equity component of the senior convertible notes payable are
                presented separately as components of shareholders' equity. The
                Company allocated the gross proceeds received on a relative fair
                value basis between the three elements: the equity and debt
                components of the senior convertible notes payable, and the
                warrants. Issuance costs were allocated on a pro rata basis
                among the three elements.

                Under United States GAAP, the 12-day weighted average instalment
                mechanism represents a derivative that will be measured at fair
                value. Under Canadian GAAP, any subsequent adjustment to the
                number of shares issued or debt exchanged as a consequence of
                the 12-day weighted average instalment mechanism is accounted
                for as an adjustment to share capital.

       (c) Consolidated statements of cash flows:

           Cash from operations under United States GAAP includes the
           adjustments to loss for the period outlined in 13(a). Cash used in
           investing activities under United States GAAP excludes amounts
           representing acquired technology (note 13(b)(i)).

                                                                              43
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Interim Consolidated Financial Statements (continued)
(Tabular figures in thousands, except per share amounts)

Three months and six months ended May 31, 2006
(Unaudited)

--------------------------------------------------------------------------------

13.    Differences between generally accepted accounting principles in Canada
       and the United States (continued):

       (d) Income taxes:

            Under Canadian GAAP, investment tax credits and other research and
            development credits are deducted from research and development
            expense for items of a current nature, and deducted from property
            and equipment for items of a capital nature. Under United States
            GAAP, these tax credits would be reclassified as a reduction of
            income tax expense. There have been no investment tax credits and
            other research and development credits deducted from property and
            equipment since December 1, 1987.

       (e) Operating leases:

       Rental expenses under operating leases for the six months ended May 31,
       2006 were $0.4 million.

       (f) Consolidated statement of shareholders' equity in accordance with
       United States GAAP:

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
                       Number        Share                      Contributed
----------------------------------------------------------------------------------------------------
                    of shares      capital     Options   Warrants   surplus      Deficit      Total
----------------------------------------------------------------------------------------------------
<S>                    <C>     <C>          <C>         <C>        <C>       <C>          <C>

Balance,
   November 30,
   2005                82,255  $   294,937  $    5,408  $   1,456  $    223  $  (279,491) $  22,533
Fair value of stock
   options granted         --           --       1,712         --        --           --      1,712
Shares issued for
   instalment
   payments on
   senior convertible
   notes payable        8,446       20,963          --         --        --           --     20,963
Instalment payment
   in advance              --       (5,210)         --         --        --           --     (5,210)
Instalment payment
   in advance
   applied                 --        2,032          --         --        --           --      2,032
Value of embedded
   derivatives
   on conversion           --          880          --         --        --           --        880
Fair value of vested
   options forfeited
   and expired             --           --        (128)        --       128           --         --
Loss and
   comprehensive
   loss                    --           --          --         --        --      (40,376)   (40,376)

----------------------------------------------------------------------------------------------------
 Balance, May 31,
    2006               90,701  $   313,602  $    6,992  $   1,456  $    351  $  (319,867) $   2,534
----------------------------------------------------------------------------------------------------
</TABLE>

                                                                              44
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Interim Consolidated Financial Statements (continued)
(Tabular figures in thousands, except per share amounts)

Three months and six months ended May 31, 2006
(Unaudited)

--------------------------------------------------------------------------------

14.    Subsequent event:

       On June 26, 2006, the Company announced that its Phase III trial of its
       lead product CelacadeTM did not reach the primary endpoint of
       significantly reducing the risk of death and cardiovascular
       hospitalization in the total population. This endpoint was met for the
       subgroup of patients with New York Heart Association (NYHA) Class II
       chronic heart failure. In the event the final results of the Phase III
       trial do not warrant efforts to proceed with the continued development of
       CelacadeTM at the present time, the value of the clinical supplies and
       acquired technology would be written off.

15.    Recent accounting pronouncements:

       (a) Canadian GAAP:

           (i) Financial instruments, recognition and measurement:

                In January 2005, the CICA released new Handbook Section 3855,
                Financial Instruments, Recognition and Measurement, effective
                for annual and interim periods beginning on or after October 1,
                2006. This new section establishes standards for the recognition
                and measurement of all financial instruments, provides a
                characteristics-based definition of a derivative financial
                instrument, provides criteria to be used to determine when a
                financial instrument should be recognized, and provides criteria
                to be used when a financial instrument is to be extinguished.
                The Company has not yet determined the effect of these new
                standards on its consolidated financial position and results of
                operations.

           (ii) Comprehensive income and equity:

                In January 2005, the CICA released new Handbook Section 1530,
                Comprehensive Income, and Section 3251, Equity, effective for
                annual and interim periods beginning on or after October 1,
                2006. Section 1530 establishes standards for reporting
                comprehensive income. The section does not address issues of
                recognition or measurement for comprehensive income and its
                components. Section 3251 establishes standards for the
                presentation of equity and changes in equity during the
                reporting period. The requirements in Section 3251 are in
                addition to Section 1530. The Company has not yet determined the
                effect of these new standards on its consolidated financial
                position and results of operations.

                                                                              45
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Interim Consolidated Financial Statements (continued)
(Tabular figures in thousands, except per share amounts)

Three months and six months ended May 31, 2006
(Unaudited)

--------------------------------------------------------------------------------

15.    Recent accounting pronouncements (continued):

          (iii) Hedges:

                In January 2005, the CICA released new Handbook Section 3865,
                Hedges, effective for annual and interim periods beginning on or
                after October 1, 2006. This new section establishes standards
                from when and how hedge accounting may be applied. Hedge
                accounting is optional. The Company does not expect the adoption
                of this standard to have a material impact on its consolidated
                financial position and results of operations.

           (iv) Non-monetary transactions:

                In June 2005, the CICA released new Handbook Section 3831,
                Non-monetary Transactions, effective for annual periods
                beginning on or after January 1, 2006. This standard requires
                all non-monetary transactions to be measured at fair value
                unless they meet one of four very specific criteria. Commercial
                substance replaces culmination of the earnings process as the
                test for fair value measurement. A transaction has commercial
                substance if it causes an identifiable and measurable change in
                the economic circumstances of the entity. Commercial substance
                is a function of the cash flows expected by the reporting
                entity. The Company does not expect the adoption of this
                standard to have a material impact on its consolidated financial
                position and results of operations.

       (b) United States GAAP:

           (i)  Accounting for non-monetary transactions:

                In December 2004, the FASB issued SFAS No. 153, Exchanges of
                Non-monetary Assets, that amends APB Opinion 29, Accounting for
                Non-monetary Transactions. The new standard requires
                non-monetary exchanges to be accounted for at fair value,
                recognizing any gains or loss, if the transactions meet a
                commercial substance criterion and fair value is determinable.
                The amendment will be effective for non-monetary transactions
                occurring in annual periods beginning after June 15, 2005. The
                adoption of this standard did not have a material impact on the
                consolidated financial position and results of operations.

                                                                              46
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Interim Consolidated Financial Statements (continued)
(Tabular figures in thousands, except per share amounts)

Three months and six months ended May 31, 2006
(Unaudited)

--------------------------------------------------------------------------------

15.    Recent accounting pronouncements (continued):

           (ii) Accounting for inventory costs:

                In November 2004, the FASB issued SFAS No. 151, Inventory Costs
                ("SFAS No. 151"), an amendment to Accounting Research Bulletin
                No. 43, Chapter 4 ("ARB 43"). This statement amends the guidance
                in ARB 43, Inventory Pricing, to clarify the accounting for
                abnormal amounts of idle facility expense, freight, handling
                costs, and wasted material (spoilage). ARB 43 previously stated
                that these expenses may be so abnormal as to require treatment
                as current period charges. SFAS No. 151 requires that those
                items be recognized as current-period charges regardless of
                whether they meet the criterion of "so abnormal". In addition,
                SFAS No. 151 requires that allocation of fixed production
                overheads to the costs of conversion be based on the normal
                capacity of the production facilities. Prospective application
                of this statement is required for the fiscal periods beginning
                after January 1, 2006. The Company does not expect the adoption
                of this standard to have a material impact on its consolidated
                financial position and results of operations.

          (iii) Accounting changes and error corrections:

                In May 2005, the FASB issued SFAS No. 154, Accounting Changes
                and Error Corrections ("SFAS No. 154"), which replaces
                Accounting Principles Board Opinion No. 20, Accounting Changes,
                and SFAS No. 3, Reporting Accounting Changes in Interim
                Financial Statements. SFAS No. 154 provides guidance on the
                accounting for, and reporting of, changes in accounting
                principles and error corrections. SFAS No. 154 requires
                retrospective application to prior period's financial statements
                of voluntary changes in accounting principles and changes
                required by new accounting standards when the standard does not
                include specific transition provisions, unless it is
                impracticable to do so. Certain disclosures are also required
                for restatements due to correction of an error. SFAS No. 154 is
                effective for accounting changes and corrections of errors made
                in fiscal years beginning after December 15, 2005, and will be
                adopted by the Company for the year ending November 30, 2007.
                The impact that the adoption of SFAS No. 154 will have on the
                Company's results of operations and financial condition will
                depend on the nature of future accounting changes and the nature
                of transitional guidance provided in future accounting
                pronouncements.

                                                                              47
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Interim Consolidated Financial Statements (continued)
(Tabular figures in thousands, except per share amounts)

Three months and six months ended May 31, 2006
(Unaudited)

--------------------------------------------------------------------------------

15.    Recent accounting pronouncements (continued):

           (iv) Accounting for certain hybrid financial instruments:

                In February 2006, the FASB issued SFAS No. 155, Accounting for
                Certain Hybrid Financial Instruments ("SFAS No. 155") - an
                amendment of SFAS No. 133 and SFAS No. 140. SFAS No. 155,
                permits fair value remeasurement for any hybrid financial
                instrument that contains an embedded derivative that otherwise
                would require bifurcation, clarifies which interest-only strips
                and principal-only strips are not subject to the requirements of
                SFAS No. 133, establishes a requirement to evaluate interest in
                securitized financial assets to identify interests that are
                freestanding derivatives or that are hybrid financial
                instruments that contain an embedded derivative requiring
                bifurcation, clarifies that concentrations of credit risk in the
                form of subordination are not embedded derivatives, and amends
                SFAS No. 140 to eliminate the prohibition on the qualifying
                special-purpose entity from holding a derivative financial
                instrument that pertains to a beneficial interest other than
                another derivative financial instrument. SFAS No. 155 is
                effective for the Company for all financial instruments acquired
                or issued after December 1, 2006. The adoption of SFAS No. 155
                is not expected to have a material impact on the Company's
                consolidated financial position and results of operations.

           (v)  Accounting for modification to conversion options embedded in
                debt securities and related issues:

                In September 2005, the FASB approved EITF Issue 05-7, Accounting
                for Modifications to Conversion Options Embedded in Debt
                Securities and Related Issues ("EITF 05-7"). EITF 05-7 requires
                that the changes in the fair value of an embedded conversion
                option upon modification should be included in the analysis
                under EITF Issue 96-19, Debtor's Accounting for a Modification
                or Exchange of Debt Instruments, to determine whether a
                modification or extinguishment has occurred and that changes to
                the fair value of a conversion option affects the interest
                expense on the associated debt instrument following a
                modification. Therefore, the change in fair value of the
                conversion option should be recognized upon the modification as
                a discount or premium associated with the debt, and an increase
                or decrease in additional paid-in capital. EITF 05-7 is
                effective for all debt modifications in annual or interim
                periods beginning after December 15, 2005. The effect that the
                adoption of EITF 05-7 will have on the Company's results of
                operations and financial condition will depend on when and if
                the Company modifies the senior convertible notes.


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