**U.S.
      SECURITIES AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-Q**






(Mark
      One)


(X)
            **QUARTERLY
                REPORT UNDER SECTION 13 OR 15(d) OF THE****SECURITIES
                EXCHANGE ACT OF 1934**





For
      the
      quarterly period ended:     **September
      30** **,
      2006**





(
                )
            **TRANSITION
                REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
                ACT**





For
      the
      transition period from _______________ to _______________





Commission
      file number: 000-51030








**OccuLogix,
      Inc.**


(Exact
      name of registrant as


specified
      in its charter)


**Delaware**
            
            **59
                343 4771**(State
                or other jurisdiction of incorporation or organization)
            
            (IRS
                Employer Identification No.)





**2600
      Skymark Avenue, Unit 9, Suite 201, Mississauga, Ontario L4W
      5B2**


(Address
      of principal executive offices)





**(905)
      602-0887**


(Registrant’s
      telephone number)





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





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one):





Large
                accelerated filer
            Accelerated
                filerX
            Non-accelerated
                filer


Indicate
      by check mark whether the registrant is a shell company as defined in Rule
      12b-2
      of the Exchange Act. (Check one):   Yes   No   X





State
      the
      number of shares outstanding of each of the registrant’s classes of common
      equity, as of the latest practical date: 50,626,562 as
      of
      November 6, 2006














1







Special
      Note Regarding Forward-Looking Statements











**PART
                I.**
            **FINANCIAL
                INFORMATION**Item
                1.
            Consolidated
                Financial StatementsItem
                2.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                OperationsItem
                3.
            Quantitative
                and Qualitative Disclosures about Market RiskItem
                4.
            Controls
                and Procedures**PART
                II.**
            **OTHER
                INFORMATION**Item
                1.
            Legal
                ProceedingsItem
                2.
            Unregistered
                Sales of Equity Securities and Use of ProceedsItem
                3.
            Defaults
                upon Senior SecuritiesItem
                4.
            Submission
                of Matters to a Vote of Security HoldersItem
                5.
            Other
                InformationItem
                6.
            Exhibits











2








**SPECIAL
      NOTE REGARDING FORWARD-LOOKING STATEMENTS**





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




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




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















3





**OccuLogix,
      Inc.**








PART
                1.
            FINANCIAL
                INFORMATIONITEM1.
            CONSOLIDATED
                FINANCIAL STATEMENTS



























4





**OccuLogix,
      Inc.**





**CONSOLIDATED
      BALANCE SHEETS**


(expressed
      in U.S. dollars **)**


(Unaudited)





**September
                30,**
              **2006**
            
            **December
                31,**
              **2005****ASSETS****Current**Cash
                and cash equivalents
            
            $
            6,281,444
            
            $
            9,599,950Short-term
                investments
            
            
            13,905,000
            
            
            31,662,845Amounts
                receivable, net
            
            
            259,667
            
            
            554,966Inventory,
                net
            
            
            4,484,145
            
            
            4,701,464Prepaid
                expenses
            
            
            712,100
            
            
            803,268Deposit
            
            
            10,442
            
            
            4,891Total
                current assets
            
            
            25,652,798
            
            
            47,327,384Fixed
                assets, net
            
            
            925,561
            
            
            470,561Patents
                and trademarks, net
            
            
            233,698
            
            
            135,232Intangible
                assets, net
            
            
            52,488,862
            
            
            23,927,195Goodwill
            
            
            14,225,912
            
            
            65,945,686**Total
                assets**
            
            $
            93,526,831
            
            $
            137,806,058**LIABILITIES
                AND STOCKHOLDERS’ EQUITY****Current**Accounts
                payable
            
            $
            690,262
            
            $
            522,520Accrued
                liabilities
            
            
            1,858,970
            
            
            2,226,619Deferred
                revenue
            
            
            38,400
            
            
            —Due
                to related party
            
            
            —
            
            
            5,065Due
                to stockholders
            
            
            121,238
            
            
            158,233Current
                portion of other liability
            
            
            3,000,000
            
            
            —Total
                current liabilities
            
            
            5,708,870
            
            
            2,912,437Deferred
                tax liability
            
            
            20,913,879
            
            
            8,853,062Other
                long-term liability
            
            
            3,224,606
            
            
            —Total
                liabilities
            
            
            29,847,355
            
            
            11,765,499**Stockholders’
                equity**Capital
                stockCommon
                stock
            
            
            50,607
            
            
            42,086Par
                value of $0.001 per shareAuthorized:
                75,000,000; Issued and outstanding:September
                30, 2006 - 50,606,562; December 31, 2005 - 42,085,853Additional
                paid-in capital
            
            
            353,919,327
            
            
            336,977,578Accumulated
                deficit
            
            
            (290,290,458
            )
            
            (210,979,105
            )Total
                stockholders’ equity
            
            
            63,679,476
            
            
            126,040,559**Total
                liabilities and stockholders’ equity**
            
            $
            93,526,831
            
            $
            137,806,058


*See
      accompanying notes to interim consolidated financial
      statements*











5





**OccuLogix,
      Inc.**








**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


(expressed
      in U.S. dollars)


(Unaudited)


**Three
                months ended,****September
                30,****2006**
            
            
            **2005**RevenuesRetinaSales
                to unrelated parties
            
            $
            53,144
            
            $
            629,001Sales
                to related parties
            
            
            —
            
            
            3,329Glaucoma
            
            
            32,300
            
            
            —Total
                revenues
            
            
            85,444
            
            
            632,330Cost
                of goods soldRetinaCost
                of goods sold to unrelated parties
            
            
            80,358
            
            
            312,210Cost
                of goods sold to related parties
            
            
            —
            
            
            —Royalty
                costs
            
            
            25,000
            
            
            25,000Glaucoma
            
            
            12,047
            
            
            —Total
                cost of goods sold
            
            
            117,405
            
            
            337,210(31,961
            )
            
            295,120Operating
                expensesGeneral
                and administrative
            
            
            2,314,344
            
            
            2,225,136Clinical
                and regulatory
            
            
            1,071,380
            
            
            1,140,273Sales
                and marketing
            
            
            505,088
            
            
            324,6963,890,812
            
            
            3,690,105Loss
                from operations
            
            
            (3,922,773
            )
            
            (3,394,985
            )Other
                income (expense)Interest
                income, net
            
            
            291,394
            
            
            411,370Other
            
            
            20,704
            
            
            (25,996
            )312,098
            
            
            385,374Loss
                before income taxes
            
            
            (3,610,675
            )
            
            (3,009,611
            )Recovery
                of income taxes
            
            
            26,867
            
            
            155,697**Net
                loss for the period**
            
            $
            (3,583,808
            )
            $
            (2,853,914
            )**Weighted
                average number of shares outstanding**
              **-
                basic and diluted**
            
            
            44,911,018
            
            
            41,982,057Basic
                and diluted net loss per share
            
            $
            (0.08
            )
            $
            (0.07
            )


*See
      accompanying notes to interim consolidated financial
      statements*











6





**OccuLogix,
      Inc.**





**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


(expressed
      in U.S. dollars)


(Unaudited)


**Nine
                months ended,****September
                30,****2006**
            
            
            **2005**RevenuesRetinaSales
                to unrelated parties
            
            $
            135,859
            
            $
            1,552,316Sales
                to related parties
            
            
            —
            
            
            81,593Glaucoma
            
            
            32,300
            
            
            —Total
                revenues
            
            
            168,159
            
            
            1,633,909Cost
                of goods soldRetinaCost
                of goods sold to unrelated parties, net of goods recovered
            
            
            1,684,675
            
            
            922,764Cost
                of goods sold to related parties
            
            
            —
            
            
            43,236Royalty
                costs
            
            
            75,000
            
            
            75,000Glaucoma
            
            
            12,047
            
            
            —Total
                cost of goods sold
            
            
            1,771,722
            
            
            1,041,000(1,603,563
            )
            
            592,909Operating
                expensesGeneral
                and administrative
            
            
            7,064,709
            
            
            6,605,222Clinical
                and regulatory
            
            
            4,018,240
            
            
            3,794,287Sales
                and marketing
            
            
            1,396,422
            
            
            1,090,603Impairment
                of goodwill
            
            
            65,945,686
            
            
            —Restructuring
                charges
            
            
            819,642
            
            
            —79,244,699
            
            
            11,490,112Loss
                from operations
            
            
            (80,848,262
            )
            
            (10,897,203
            )Other
                income (expense)Interest
                income, net
            
            
            1,072,548
            
            
            1,187,392Other
            
            
            13,599
            
            
            (58,471
            )1,086,147
            
            
            1,128,921Loss
                before income taxes and cumulative effect of a change in accounting
                principle
            
            
            (79,762,115
            )
            
            (9,768,282
            )Recovery
                of income taxes
            
            
            343,717
            
            
            473,280Loss
                before cumulative effect of a change in accounting
                principle
            
            
            (79,418,398
            )
            
            (9,295,002
            )Cumulative
                effect of a change in accounting principle
            
            
            107,045
            
            
            —**Net
                loss for the period**
            
            $
            (79,311,353
            )
            $
            (9,295,002
            )**Weighted
                average number of shares outstanding**
              **-
                basic and diluted**
            
            
            43,081,795
            
            
            41,884,829Loss
                before cumulative effect of a change in accounting principle per
                share -
                basic and diluted
            
            $
            (1.84
            )
            $
            (0.22
            )Cumulative
                effect of a change in accounting principle per share - basic and
                diluted
            
            
            —
            
            
            —Basic
                and diluted net loss per share
            
            $
            (1.84
            )
            $
            (0.22
            )


*See
      accompanying notes to interim consolidated financial
      statements*


7








**OccuLogix,
      Inc.**








**CONSOLIDATED
      STATEMENTS OF CHANGES**


**IN
      STOCKHOLDERS’ EQUITY**


(expressed
      in U.S. dollars)


(Unaudited)








**Voting
                common stock**
              **at
                par value****Number
                of shares issued**
            
            **Value**
            
            **Additional
                paid-in capital**
            
            **Accumulated
                deficit**
            
            **Net
                stockholders’ equity****December
                31, 2005**
            
            
            42,085,853
            
            $
            42,086
            
            $
            336,977,578
            
            $
            (210,979,105
            )
            $
            126,040,559Stock-based
                compensation
            
            
            ―
            
            
            ―
            
            
            1,730,980
            
            
            ―
            
            
            1,730,980Common
                stock issued on exercise of options
            
            
            120,726
            
            
            121
            
            
            251,014
            
            
            ―
            
            
            251,135Return
                of inventory to related party, net of inventory
                contributed
            
            
            ―
            
            
            ―
            
            
            (34,500
            )
            
            ―
            
            
            (34,500
            )Contribution
                of inventory from unrelated party
            
            
            ―
            
            
            ―
            
            
            11,994
            
            
            ―
            
            
            11,994Shares
                issued on acquisition of Solx, Inc.
            
            
            8,399,983
            
            
            8,400
            
            
            15,027,569
            
            
            —
            
            
            15,035,969Share
                issue costs
            
            
            —
            
            
            —
            
            
            (45,308
            )
            
            —
            
            
            (45,308
            )Net
                loss for the period
            
            
            ―
            
            
            ―
            
            
            ―
            
            
            (79,311,353
            )
            
            (79,311,353
            )**September
                30, 2006**
            
            
            50,606,562
            
            $
            50,607
            
            $
            353,919,327
            
            $
            (290,290,458
            )
            $
            63,679,476


*See
      accompanying notes to interim consolidated financial
      statements*











8








**OccuLogix,
      Inc.**





**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


(expressed
      in U.S. dollars)


(Unaudited)


**Nine
                  months ended**
                **September
                  30,****2006**
              
              **2005****OPERATING
                  ACTIVITIES**Net
                  loss for the period
              
              $
              (79,311,353
              )
              $
              (9,295,002
              )Adjustments
                  to reconcile net loss tocash
                  used in operating activities:Write-down
                  of inventory
              
              
              1,625,000
              
              
              —Stock-based
                  compensation
              
              
              1,838,025
              
              
              216,239Amortization
                  of fixed assets
              
              
              120,311
              
              
              68,923Amortization
                  of patents and trademarks
              
              
              3,671
              
              
              4,224Amortization
                  of intangible assets
              
              
              1,538,333
              
              
              1,287,500Impairment
                  of goodwill
              
              
              65,945,686
              
              
              —Amortization
                  of discount on future cash payments
              
              
              77,191
              
              
              —Amortization
                  of premiums/discounts on short-term investments
              
              
              35,824
              
              
              100,126Subscription
                  receivable - provision for doubtful amount
              
              
              —
              
              
              34,927Deferred
                  income taxes
              
              
              (339,183)
              
              
              (476,375
              )Cumulative
                  effect of a change in accounting principle
              
              
              (107,045
              )
              
              —Net
                  change in non-cash working capitalbalances
                  related to operations
              
              
              (2,279,666
              )
              
              (6,160,969
              )**Cash
                  used in operating activities**
              
              
              (10,853,206
              )
              
              (14,220,407
              )**INVESTING
                  ACTIVITIES**Sale
                  of short-term investments
              
              
              17,722,021
              
              
              9,964,818Additions
                  to fixed assets
              
              
              (244,292
              )
              
              (153,724
              )Additions
                  to patents and trademarks
              
              
              (102,137
              )
              
              (15,176
              )Advance
                  to Solx, Inc., pre-acquisition
              
              
              (2,265,085
              )
              
              —Acquisition
                  costs
              
              
              (861,630
              )
              
              —Payment
                  for acquisition of Solx, Inc., net of cash acquired
              
              
              (6,965,312
              )
              
              —**Cash
                  provided by investing activities**
              
              
              7,283,565
              
              
              9,795,918**FINANCING
                  ACTIVITIES**Proceeds
                  from the exercise of common stock options
              
              
              251,135
              
              
              186,486Proceeds
                  from the exercise of Series A convertible preferred stock
                  warrants
              
              
              —
              
              
              186,734Fractional
                  payout of converted shares due to preferred stockholders
              
              
              —
              
              
              (792
              )Share
                  issuance costs
              
              
              —
              
              
              (88,714
              )**Cash
                  provided by financing activities**
              
              
              251,135
              
              
              283,714**Net
                  decrease in cash and cash equivalents during the
                  period**
              
              
              (3,318,506
              )
              
              (4,140,775
              )Cash
                  and cash equivalents, beginning of period
              
              
              9,599,950
              
              
              17,530,552**Cash
                  and cash equivalents, end of period**
              
              $
              6,281,444
              
              $
              13,389,777
 *See
        accompanying notes to interim consolidated financial
        statements*


9








**OccuLogix,
      Inc.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


(expressed
      in U.S. dollars unless otherwise stated)


September
      30, 2006 (Unaudited)






**1.**   **BASIS
      OF PRESENTATION AND ACCOUNTING POLICIES**





The
      accompanying unaudited consolidated financial statements have been prepared
      in
      accordance with United States generally accepted accounting principles (“US
      GAAP”). These consolidated financial statements contain all normal recurring
      adjustments and estimates necessary to present fairly the financial position
      of
      OccuLogix, Inc. (the “Company”) as of September 30, 2006 and the results of its
      operations for the three- and nine-month periods then ended. These interim
      unaudited consolidated financial statements should be read in conjunction with
      the consolidated financial statements and notes included in the Company’s latest
      annual report on Form 10-K filed with the U.S. Securities and Exchange
      Commission (the “SEC”). Interim results are not necessarily indicative of
      results for a full year.





These
      interim consolidated financial statements have been prepared using accounting
      policies that are consistent with the policies used in preparing the Company’s
      audited consolidated financial statements for the year ended December 31,
      2005, except as noted below.





*Goodwill*





Effective
      January 1, 2002, goodwill is no longer amortized and is subject to an annual
      impairment test. Goodwill impairment is evaluated between annual tests upon
      the
      occurrence of certain events or circumstances. Goodwill impairment is assessed
      based on a comparison of the fair value of the reporting unit to the underlying
      carrying value of the reporting unit's net assets, including goodwill. When
      the
      carrying amount of the reporting unit exceeds its fair value, the fair value
      of
      the reporting unit's goodwill is compared with its carrying amount to measure
      the amount of impairment loss, if any.





Prior
      to
      the acquisition of Solx, Inc. (“SOLX”), the Company was a single reporting unit.
      Therefore, management determined the fair value of the Company's goodwill using
      its market capitalization as opposed to the fair value of its assets and
      liabilities.




**2.**
            **ACQUISITIONS**





On
      September 1, 2006, the Company acquired SOLX, a privately held company that
      has
      developed a system for the treatment of glaucoma. The SOLX DeepLight® Glaucoma
      Treatment System (“SOLX Glaucoma System”) developed by SOLX includes the SOLX
      DeepLight® 790 Titanium Sapphire Laser (“SOLX DeepLight® 790”) and the SOLX
      Gold
      Micro-Shunt (“SOLX GMSTM”) which can
      be
      used separately or together to provide physicians with multiple options to
      manage intraocular pressure. The acquisition of SOLX represents an expansion
      of
      the Company’s ophthalmic product portfolio beyond the RHEOTM procedure for dry
      age-related macular degeneration, or Dry AMD. The results of SOLX’s operations
      have been included in the Company’s consolidated financial statements since
      September 1, 2006.





The
      Company acquired SOLX by way of a merger, in connection with which the Company
      issued an aggregate of 8,399,983 shares of its common stock and paid $7,000,000
      in cash to the stockholders of SOLX. The Company will make additional payments
      of $3,000,000 and $5,000,000 in cash on the first and second anniversaries
      of
      the September 1, 2006 closing, respectively. In addition, if SOLX receives
      final
      U.S. Food and Drug Administration, or FDA, approval for the marketing and sale
      of the SOLX GMSTM on or prior to December 31, 2007, the Company will pay an
      additional $5,000,000 in cash to the former stockholders of SOLX. The stock
      consideration was valued based on a per share price of $1.79, being the
      weighted-average closing sale price of the Company’s
      common stock as traded on the NASDAQ National Market (“NASDAQ”) over the two-day
      trading period before and after August 1, 2006, being the date the terms of
      the
      acquisition of SOLX were agreed to and announced. The Company has recorded
      the
      cash payments expected to be paid on the first
      and
      second anniversaries of the closing date as a liability as of September 30,
      2006. In accordance with Statement
      of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations”,
      t he
      contingent payment of $5,000,000 was not included in the determination of the
      purchase price or recorded as a liability as the receipt of FDA approval for
      the
      marketing and sale of the SOLX GMSTM on or prior to December 31, 2007 is subject
      to many variables and is not guaranteed.





10


The
      total
      purchase price of $29,186,980, which includes estimated transaction costs of
      approximately $970,000, has been allocated as follows:





Net
                tangible assets
            
            $
            (2,738,932
            )Deferred
                tax liability
            
            
            (12,400,000
            )Intangible
                assets:Shunt
                and laser technology
            
            
            27,000,000Regulatory
                and others
            
            
            3,100,00014,961,068Goodwill
            
            
            14,225,912$
            29,186,980





The
      value
      of the intangible assets acquired is based on a preliminary valuation analysis
      provided by a third-party valuator that used the income approach to value SOLX’s
      shunt and laser technology (being the SOLX
      GMSTM
and the SOLX
      DeepLight® 790, respectively) and the cost approach to value the regulatory and
      other intangible assets acquired. These estimates are based on a preliminary
      valuation and are subject to change upon management’s review of the final
      valuation.





The
      unaudited financial information below summarizes the consolidated results of
      operations of the Company and SOLX, on a pro forma basis, as though the
      acquisition of SOLX had been completed on January 1, 2005. The unaudited pro
      forma information presented below is for information purposes only and may
      not
      be indicative of the results of operations as they would have been if the
      acquisition had occurred on January 1, 2005, nor is it necessarily indicative
      of
      the results of operations which may occur in the future.





**Three
                months ended**
              **September
                30,**
            
            **Nine
                months ended**
              **September
                30,****2006**
            
            **2005**
            
            **2006**
            
            **2005**Revenues
            
            $
            138,994
            
            $
            632,330
            
            $
            264,640
            
            $
            1,633,909Net
                loss before cumulative effect of a change in accounting
                principle
            
            
            (4,488,774
            )
            
            (4,502,073
            )
            
            (83,316,611
            )
            
            (13,842,581
            )Net
                loss
            
            
            (4,488,774
            )
            
            (4,502,073
            )
            
            (83,209,566
            )
            
            (13,842,581
            )Net
                loss per share - basic and diluted
            
            
            (0.09
            )
            
            (0.09
            )
            
            (1.64
            )
            
            (0.28
            )





**3.**
            **GOODWILL**





The
      Company follows the provisions of SFAS No. 142, “Goodwill and Other Intangible
      Assets”, which requires that goodwill not be amortized but instead tested for
      impairment at least annually and more frequently if circumstances indicate
      possible impairment.





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





**RETINA**
            
            **GLAUCOMA**
            
            **TOTAL**Balance,
                December 31, 2005
            
            $
            65,945,686
            
            $
            —
            
            $
            65,945,686Acquired
                during the period*(note
                2)*
            
            
            —
            
            
            14,225,912
            
            
            14,225,912Impairment
                loss recognized
            
            
            (65,945,686
            )
            
            —
            
            
            (65,945,686
            )Balance,
                September 30, 2006
            
            $
            —
            
            $
            14,225,912
            
            $
            14,225,912





The
      Company performs its annual goodwill impairment analysis on its acquired
      goodwill on October 1 of each year.





*Retina*





The
      Company conducted a pivotal clinical trial, called MIRA-1, or Multicenter
      Investigation of Rheopheresis for AMD, which, if successful, was expected to
      support its application to the FDA to obtain approval to market the RHEOTM System
      in the United States. On February 3, 2006, the Company announced that, based
      on
      a preliminary analysis of the data from MIRA-1, MIRA-1 did not meet its primary
      efficacy endpoint as it did not demonstrate a statistically significant
      difference in the mean change of Best Spectacle-Corrected Visual Acuity applying
      the Early Treatment Diabetic Retinopathy Scale, or ETDRS BCVA, between the
      treated and placebo groups in MIRA-1 at 12 months post-baseline. The Company
      recorded a goodwill impairment charge of $147,451,758 during the year ended
      December 31, 2005 as a result of a goodwill impairment re-assessment performed
      subsequent to the February 3, 2006 announcement.


11


On
      June
      12, 2006, the Company announced that it met with the FDA to discuss the results
      of MIRA-1 and confirmed that the FDA will require the Company to perform an
      additional study of the RHEOTM System to obtain approval to market the RHEOTM
System in the United States. In addition, on June 30, 2006, the Company
      announced that it had terminated negotiations with Sowood Capital Management
      LP
      in connection with a proposed private purchase of approximately $30,000,000
      of
      zero-coupon convertible notes of the Company. In accordance with SFAS No. 142,
      the Company concluded that, based on the price of the Company’s common stock
      subsequent to the June 12, 2006 announcement and again after the June 30, 2006
      announcement, there were sufficient indicators to require management to
      re-assess whether the Company’s recorded goodwill was impaired as at June 30,
      2006. Based on the goodwill impairment analysis performed, the Company concluded
      that a further goodwill impairment charge of $65,945,686 should be recorded
      during the second quarter of 2006.





*Glaucoma*





On
      September 1, 2006, the Company acquired SOLX by way of a merger for a total
      purchase price of $29,186,980 *(see
      note 2)* .
      Of this
      amount, $14,225,912 has been allocated to goodwill. The Company is currently
      assessing the valuation of its acquired goodwill as this is based on a
      preliminary valuation analysis conducted by a third party valuator and is
      subject to change upon management’s review of the final valuation.





**4.**
            **INTANGIBLE
                ASSETS**





The
      Company’s intangible assets consist of the value of the exclusive distribution
      agreements that the Company has with its major suppliers and other
      acquisition-related intangibles. The Company has no indefinite-lived intangible
      assets. The distribution agreements and other acquisition-related intangible
      assets are amortized using the straight-line method over an estimated useful
      life of 15 and 10 years, respectively. Amortization expense for the three and
      nine months ended September 30, 2006 and 2005 was $680,000, $1,538,333, $429,167
      and $1,287,500, respectively.





As
      of
      September 1, 2006, the remaining weighted average amortization period for the
      distribution agreements is 13.2 years and for other acquisition-related
      intangible assets is 9.9 years.





Intangible
      assets subject to amortization consist of the following:





September
                30, 2006
            
            December
                31, 2005Gross
                Carrying Amount
            
            Accumulated
                Amortization
            
            Gross
                Carrying Amount
            
            Accumulated
                AmortizationDistribution
                agreements
            
            $
            25,750,000
            
            $
            3,110,305
            
            $
            25,750,000
            
            $
            1,822,805Shunt
                and laser technology
            
            
            27,000,000
            
            
            225,000
            
            
            —
            
            
            —Regulatory
                and other
            
            
            3,100,000
            
            
            25,833
            
            
            —
            
            
            —Total
            
            $
            55,850,000
            
            $
            3,361,138
            
            $
            25,750,000
            
            $
            1,822,805





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





Remainder
                of 2006
            
            $
            1,181,6662007
            
            
            4,726,6672008
            
            
            4,726,6672009
            
            
            4,726,6672010
            
            
            4,726,667Thereafter
            
            
            32,400,528





As
      a
      result of the analysis of the data from MIRA-1 and the result of the meeting
      held with the FDA in June 2006, the Company concluded that there were sufficient
      indications that the carrying value of the distribution intangible may no longer
      be recoverable, thus requiring management to assess whether the Company’s
      distribution intangible was impaired as of June 30, 2006. Based on management’s
      estimates of forecasted undiscounted cash flows as of June 30, 2006, the Company
      concluded that there is no indication of an impairment of the Company’s
      distribution intangible.





The
      Company determined that, as at September 30, 2006, there have
      been no significant events which may affect the carrying value of its
      distribution intangible and no significant changes in the methods used to determine the fair market value
      of other
      acquisition-related intangible assets .
      Therefore, no impairment charge was recorded during the quarter ended September
      30, 2006.





12


**5.**
            **RESTRUCTURING
                CHARGES**





In
      March
      2006, the Company implemented a number of structural and management changes
      designed to support both the continued development of its RHEOTM System and to
      execute its accelerated diversification strategy within ophthalmology. In
      accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or
      Disposal Activities”, the Company recognized a total of $819,642 in
      restructuring charges in the nine months ended September 30, 2006.





The
      restructuring charge of $819,642 recorded in the nine months ended September
      30,
      2006 consists solely of severance and benefit costs related to the termination
      of a total of 12 employees at both the Company’s Mississauga, Ontario and Palm
      Harbor, Florida offices. All severance and benefit costs have been fully paid
      as
      at September 30, 2006.





**6.**  **INVENTORY**





The
      Company evaluates its ending inventories for estimated excess quantities and
      obsolescence, based on expected future sales levels and estimates of future
      demand, with the excess inventory provided for. In addition, the Company
      assesses the impact of changing technology and market conditions in determining
      its inventory provision. During the second and third quarters of 2006, the
      Company sold a total of 859 treatment sets to its only customer, Veris Health
      Sciences Inc. (“Veris”) *(see
      note 10)* ,
      at a
      price lower than the Company’s cost. Accordingly, in its results of operations
      for the first quarter of 2006, the Company had written down the value of its
      treatment sets by $1,625,000 to reflect the current net realizable value of
      the
      treatment sets.





As
      at
      September 30, 2006 and December 31, 2005, the Company had inventory
      reserves of $3,474,870 and $1,990,830, respectively.





**7.**   **RECENT
      ACCOUNTING PRONOUNCEMENTS**





In
      December 2004, the Financial Accounting Standards Board (the “FASB”) issued SFAS
      No. 123R, “Share-Based Payments”, which revised SFAS No. 123, “Accounting for
      Stock-Based Compensation”, and supersedes Accounting Principles Board Opinion
      No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”). SFAS No. 123R
      requires all share-based payments to employees, including grants of employee
      stock options, to be recognized in the consolidated financial statements based
      on their fair values. The pro forma disclosures previously permitted under
      SFAS
      No. 123 are no longer an alternative to financial statement recognition. SFAS
      No. 123R is effective at the beginning of the first fiscal year beginning after
      June 15, 2005. Accordingly, the Company has adopted SFAS No. 123R beginning
      January 1, 2006. The Company has selected the Black-Scholes option-pricing
      model
      as its method of determining the fair value for its awards and will recognize
      compensation cost on a straight-line basis over the awards’ vesting periods *(see
      note 8).*





Prior
      to
      the adoption of SFAS No. 123R, the Company applied the provisions of SFAS
      No. 123, which allowed companies either to expense the estimated fair value
      of
      employee stock options or to follow the intrinsic value method as set forth
      in
      APB No. 25 but required companies to disclose the pro forma effects on net
      loss
      as if the fair value of the options had been expensed. The Company elected
      to
      apply APB No. 25 in accounting for employee stock options. Therefore, as
      required by SFAS No.123, prior to the adoption of SFAS No. 123R, the Company
      provided pro forma net loss and pro forma net loss per share disclosures for
      stock-based awards as if the fair value of the options had been
      expensed.





The
      adoption of the following recent accounting pronouncements in the first nine
      months of fiscal 2006 did not have a material impact on the Company’s results of
      operations and financial condition:





·
            SFAS
                No. 151, “Inventory Costs — An Amendment of ARB No. 43, Chapter 4”;


·
            SFAS
                No. 153, “Exchanges of Nonmonetary Assets — An Amendment of APB Opinion
                No. 29”;


·
            SFAS
                No. 154, “Accounting Changes and Error Corrections”, which replaces APB
                No. 20, “Accounting Changes”;


·
            SFAS
                No. 3, “Reporting Accounting Changes in Interim Financial Statements — An
                Amendment of APB Opinion No. 28”;
                and


·
            FASB
                Staff Position FAS 115-1 and FAS 124-1, “The Meaning of
                Other-Than-Temporary Impairment and Its Application to Certain
                Investments”








In
      February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
      Financial Instruments — An Amendment of FASB Statements No. 133 and 140”. SFAS
      No. 155 simplifies accounting for certain hybrid instruments currently governed
      by SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”,
      by allowing fair value re-measurement of hybrid instruments that contain an
      embedded derivative that otherwise would require bifurcation. SFAS No. 155
      also
      eliminates the guidance in SFAS No. 133 Implementation Issue No. D1,
“Application of Statement 133 to Beneficial Interests in Securitized Financial
      Assets”, which provides that such beneficial interests are not subject to SFAS
      No. 133. SFAS No. 155 amends SFAS No. 140, “Accounting for Transfers and
      Servicing of Financial Assets and Extinguishments of Liabilities — A Replacement
      of FASB Statement No. 125”, by eliminating the restriction on passive derivative
      instruments that a qualifying special-purpose entity may hold. SFAS No. 155
      is
      effective for financial instruments acquired or issued after the beginning
      of
      fiscal years beginning after September 15, 2006. The Company does not expect
      the
      adoption of this statement to have a material impact on its results of
      operations and financial condition.





In
      March
      2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial
      Assets — An Amendment of FASB Statement No. 140”. SFAS No.156 requires an entity
      to recognize a servicing asset or servicing liability each time it undertakes
      an
      obligation to service a financial asset by entering into a servicing contract
      in
      specific situations. Additionally, the servicing asset or servicing liability
      shall be initially measured at fair value; however, an entity may elect the
      “amortization method” or “fair value method” for subsequent balance sheet
      reporting periods. SFAS No.156 is effective for fiscal years beginning after
      September 15, 2006. The Company does not expect the adoption of this statement
      to have a material impact on its results of operations and financial
      condition.





In
      June
      2006, the FASB issued FASB Interpretation (“FIN”) No. 48, “Accounting for
      Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109”,
      which clarifies the accounting for uncertainty in tax positions. FIN No. 48
      requires the Company to recognize, in its financial statements, the impact
      of a
      tax position, if that position is more likely than


not
      of
      being sustained on audit, based on the technical merits of the position. FIN
      No.
      48 is effective for fiscal years beginning after December 15, 2006. The Company
      is currently evaluating the effect that the adoption of FIN No. 48 will have
      on
      its consolidated results of operations and financial position.





**8.**   **STOCK-BASED
      COMPENSATION**





The
      Company has a stock option plan, the 2002 Stock Option Plan (the “Stock Option
      Plan”). Under the Stock Option Plan, up to 4,456,000 options are available for
      grant to employees, directors and consultants. Options granted under the Stock
      Option Plan may be either incentive stock options or non-statutory stock
      options. Under the terms of the Stock Option Plan, the exercise price per share
      for an incentive stock option shall not be less than the fair market value
      of a
      share of stock on the effective date of grant and the exercise price per share
      for non-statutory stock options shall not be less than 85% of the fair market
      value of a share of stock on the date of grant. No option granted to a holder
      of
      more than 10% of the Company’s common stock shall have an exercise price per
      share less than 110% of the fair market value of a share of stock on the
      effective date of grant.





Options
      granted may be time-based or performance-based options. The vesting of
      performance-based options is contingent upon meeting company-wide goals,
      including obtaining FDA approval of the Company’s RHEOTM System and the
      achievement of a minimum amount of sales over a specified period. Generally,
      options expire 10 years after the date of grant. No incentive stock options
      granted to a 10% owner optionee shall be exercisable after the expiration of
      five years after the effective date of grant of such option, no option granted
      to a prospective employee, prospective consultant or prospective director may
      become exercisable prior to the date on which such person commences service,
      and
      with the exception of an option granted to an officer, director or a consultant,
      no option shall become exercisable at a rate less than 20% per annum over a
      period of five years from the effective date of grant of such option unless
      otherwise approved by the board of directors of the Company (the “Board of
      Directors”).




13




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





On
      January 1, 2006, the Company adopted the provisions of SFAS No. 123R, requiring
      the recognition of expense related to the fair value of its stock-based
      compensation awards. The Company elected to use the modified prospective
      transition method as permitted by SFAS No. 123R and therefore has not restated
      its financial results for prior periods. Under this transition method, the
      stock-based compensation expense for the three and nine months ended September
      30, 2006 includes compensation expense for all stock-based compensation awards
      granted prior to, but not yet vested as of, January 1, 2006 based on the grant
      date fair value estimated in accordance with the original provisions of SFAS
      No.
      123. Stock-based compensation expense for all stock-based compensation awards
      granted subsequent to January 1, 2006 is based on the grant date fair value
      estimated in accordance with the provisions of SFAS No. 123R. The Company
      recognizes compensation expense for stock option awards on a straight-line
      basis
      over the requisite service period of the award.





14


The
      following table sets forth the total stock-based compensation expense resulting
      from stock options included in the Company’s Consolidated Statements of
      Operations:





**Three
                months ended**
              **September
                30,**
            
            **Nine
                months ended**
              **September
                30,****2006****(i)**
            
            **2005****(ii)**
            
            **2006****(i)**
            
            **2005****(ii)**General
                and administrative
            
            $
            683,174
            
            $
            47,114
            
            $
            1,266,801
            
            $
            111,212Clinical
                and regulatory
            
            
            54,807
            
            
            32,038
            
            
            165,631
            
            
            105,027Sales
                and marketing
            
            
            140,092
            
            
            —
            
            
            405,593
            
            
            —Stock-based
                compensation expense before income taxes(iii)
            
            $
            878,073
            
            $
            79,152
            
            $
            1,838,025
            
            $
            216,239





(i)  At
      the
      annual meeting of stockholders of the Company held on June 23, 2006, the
      stockholders of the Company approved the re-pricing of all then out-of-the-money
      stock options of the Company. Consequently, the exercise price of all
      outstanding stock options of the Company that, on June 23, 2006, was greater
      than $2.05, being the weighted average trading price of the Company’s common
      stock on NASDAQ during the five-trading day period immediately preceding June
      23, 2006, was adjusted downward to $2.05. 2,585,000 of the Company’s outstanding
      stock options with a weighted average exercise price of $8.42 were affected
      by
      the re-pricing. SFAS No. 123R requires the re-pricing of equity awards to be
      treated as a modification of the original award and provides that such a
      modification is an exchange of the original award for a new award. SFAS No.
      123R
      considers the modification to be the repurchase of the old award for a new
      award
      of equal or greater value, incurring additional compensation cost for any
      incremental value. This incremental difference in value is measured as the
      excess, if any, of the fair value of the modified award determined in accordance
      with the provisions of SFAS No. 123R over the fair value of the original award
      immediately before its terms are modified, measured based on the share price
      and
      other pertinent factors at that date. SFAS No. 123R provides that this
      incremental fair value, plus the remaining unrecognized compensation cost from
      the original measurement of the fair value of the old option, must be recognized
      over the remaining vesting period. Of the 2,585,000 options affected by the
      re-pricing, 1,196,857 were vested as at June 23, 2006. Therefore, additional
      compensation cost of $383,801 for the 1,196,857 stock options that were vested
      was recognized immediately and is included in the stock-based compensation
      expense for the nine months ended September 30, 2006. The remaining unrecognized
      incremental fair value of $188,826 plus the compensation cost from the original
      measurement of the fair value of the old options of $2,918,184, which totaled
      $3,107,010 in unrecognized compensation expense as at September 30, 2006, is
      expected to be amortized over a weighted average vesting period of 2.8
      years.





In
      accordance with SFAS No. 123R, the Company also recorded a compensation expense
      of $3,363 in the nine months ended September 30, 2006 as the Board of Directors
      approved accelerating the vesting of 1,250 unvested stock options granted to
      a
      terminated employee on April 28, 2006. SFAS No. 123R treats such a modification
      as a cancellation of the original unvested award and the grant of a new fully
      vested award as of that date.





(ii)  Stock-based
      compensation expense for the three and nine months ended September 30, 2005
      relates primarily to compensation expense associated with non-employee stock
      options. The fair value of these options was determined using the Black-Scholes
      fair value options model and was recorded in the Company’s Consolidated
      Statements of Operations in accordance with the provisions of SFAS No. 123.





(iii)  The
      tax
      benefit associated with the Company’s stock-based compensation expense for the
      three and nine months ended September 30, 2006 was $324,888 and $680,070,
      respectively. These amounts have not been recognized in the Company’s
      consolidated financial statements for the three- and nine-month periods as
      it is
      more likely than not that the Company will not realize this
      benefit.





Net
      cash
      proceeds from the exercise of stock options were $17,425 and $174,041 for the
      three months ended September 30, 2006 and 2005 respectively, and $251,135 and
      $186,486 for the nine months ended September 30, 2006 and 2005, respectively.
      No
      income tax benefit was realized from stock option exercises during the three
      and
      nine months ended September 30, 2006 and 2005. In accordance with SFAS No.
      123R,
      the Company presents excess tax benefits from the exercise of stock options,
      if
      any, as financing cash flows rather than operating cash flows.





As
      a
      result of adopting SFAS No. 123R on January 1, 2006, the Company’s net loss for
      the three and nine months ended September 30, 2006 was $729,611 and $1,284,930,
      respectively, higher than if it had continued to account for share-based
      compensation under APB No. 25. Basic and diluted loss per share for the three
      and nine months ended September 30, 2006 increased by $0.02 and $0.03,
      respectively, with the adoption of SFAS No. 123R.





15


The
      Company did not estimate forfeitures, resulting from the failure to satisfy
      performance conditions, on its outstanding awards prior to the adoption of
      SFAS
      No. 123R. Under SFAS No. 123, the Company could assume all awards will vest
      and
      reverse recognized compensation cost or adjust its disclosure for forfeited
      awards when the awards are actually forfeited. SFAS No. 123R requires a company
      to estimate the number of awards that are expected to vest and revise the
      estimate as actual forfeitures differ from the estimate. On January 1, 2006,
      the
      effective date of adopting SFAS No. 123R, the Company was required to estimate
      the number of forfeitures of its outstanding awards as of the effective date.
      Consolidated balance sheet amounts related to any compensation cost for these
      estimated forfeitures previously recognized in prior periods before the adoption
      of SFAS No. 123R have to be eliminated and recognized in income as the
      cumulative effect of a change in accounting principle as of the effective date.
      During the three and nine months ended September 30, 2006, the Company
      recognized nil and $107,045, respectively, as the cumulative effect of a change
      in accounting principle resulting from the requirement to estimate forfeitures
      on its outstanding awards as at January 1, 2006. The compensation cost
      previously recognized in prior periods before the adoption of SFAS No. 123R
      relates to compensation expense associated with non-employee stock
      options.





Prior
      to
      the adoption of SFAS No. 123R, the Company applied the provisions of SFAS
      No. 123, which allowed companies either to expense the estimated fair value
      of
      employee stock options or to follow the intrinsic value method as set forth
      in
      APB No. 25 but required companies to disclose the pro forma effects on net
      loss
      as if the fair value of the options had been expensed. The Company elected
      to
      apply APB No. 25 in accounting for employee stock options. Therefore, as
      required by SFAS No.123, prior to the adoption of SFAS No. 123R, the Company
      provided pro forma net loss and pro forma net loss per share disclosures for
      stock-based awards as if the fair value of the options had been
      expensed.





The
      following table illustrates the pro forma net loss and net loss per share of
      common stock as if the fair value method had been applied to all awards during
      the three and nine months ended September 30, 2005:





**Three
                months ended**
            
            
            **Nine
                months ended****September
                30, 2005**
            
            
            **September
                30, 2005**Net
                loss, as reported
            
            $
            (2,853,914
            )
            $
            (9,295,002)Adjustment
                for APB No. 25
            
            
            (11,899
            )
            
            —Adjustment
                for SFAS No. 123
            
            
            (1,100,686
            )
            
            (2,695,051)Pro
                forma net loss
            
            
            (3,966,499
            )
            
            (11,990,053)Pro
                forma net loss per share - basic and diluted
            
            $
            (0.09
            )
            $
            (0.29)





The
      fair
      value of stock options granted during the three months ended September 30,
      2006
      was $1.57. The fair value of stock options granted during the nine months ended
      September 30, 2006 and 2005 was $1.88 and $3.49, respectively. There were no
      options granted during the three months ended September 30, 2005. The estimated
      fair value was determined using the Black-Scholes option-pricing model with
      the
      following weighted-average assumptions:





**Three
                months ended**
              **September
                30,**
            **Nine
                months ended**
              **September
                30,****2006**
            
            **2005**
            **2006**
            
            **2005**Volatility
            
            
            96.8%
            
            
            —
            
            97.1%
            
            
            70.6%Expected
                life of options
            
            
            6
                years
            
            
            —
            
            5.99
                years
            
            
            2.07
                yearsRisk-free
                interest rate
            
            
            4.84%
            
            
            —
            
            4.84%
            
            
            3.80%Dividend
                yield
            
            
            0%
            
            
            —
            
            0%
            
            
            0%





The
      Company’s computation of expected volatility for the three months ended
      September 30, 2006 and the nine months ended September 30, 2006 and 2005 is
      based on a comparable company’s historical stock prices as the Company did not
      have sufficient historical data. The Company’s computation of expected life has
      been estimated using the “short-cut approach” as provided in Staff Accounting
      Bulletin No. 107. Under this approach, estimated life is calculated to be the
      mid-point between the vesting date and the end of the contractual period. The
      risk-free interest rate for an award is based on the U.S. Treasury yield curve
      with a term equal to the expected life of the award on the date of
      grant.





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





A
      summary
      of the options issued during the nine months ended September 30, 2006 and the
      total number of options outstanding as of that date are set forth
      below:





Number
                of Options Outstanding
            Weighted-Average
                Exercise Price(i)
            Weighted-Average
                Remaining Contractual Life (years)
            Aggregate
                Intrinsic ValueOutstanding,
                December 31, 2005
            4,107,614
            $1.75Granted
            858,750
            2.00Exercised
            (120,726)
            2.08
            
            $95,975Forfeited
            (393,000)
            2.05**Outstanding,
                September 30, 2006**
            **4,452,638**
            **1.76**
            **7.88**
            **1,424,093****Vested
                or expected to vest, September 30, 2006**
            **2,915,913**
            **1.61**
            **7.36**
            **1,383,107****Exercisable,
                September 30, 2006**
            **2,528,471**
            **1.53**
            **7.13**
            **1,395,192**





(i)  At
      the
      annual meeting of stockholders of the Company held on June 23, 2006, the
      stockholders of the Company approved the re-pricing of all then out-of-the-money
      stock options of the Company. Consequently, the exercise price of all
      outstanding stock options of the Company that, on June 23, 2006, was greater
      than $2.05, being the weighted average trading price of the Company’s common
      stock on NASDAQ during the five-trading day period immediately preceding June
      23, 2006, was adjusted downward to $2.05.






16





The
      aggregate intrinsic value in the table above represents the total pre-tax
      intrinsic value (i.e., the difference between the Company’s closing stock price
      on the last trading day of the third quarter of 2006 of $2.08 and the exercise
      price, multiplied by the number of shares that would have been received by
      the
      option holders if the options had been exercised on September 30, 2006). This
      amount changes according to the fair market value of the Company’s stock.





As
      at
      September 30, 2006, $3,523,181 of total unrecognized compensation cost related
      to stock options is expected to be recognized over a weighted-average period
      of
      2.8 years.




**9.**   **LOSS
      PER SHARE**





Loss
      per
      share, basic and diluted, is computed using the treasury method. Potentially
      dilutive shares have not been used in the calculation of loss per share as
      their
      inclusion would be anti-dilutive.




**Three
                months ended September 30,**
            
            **Nine
                months ended September 30,****2006**
            
            **2005**
            
            **2006**
            
            **2005**Weighted
                average number of shares outstanding - basic
            
            
            44,911,018
            
            
            41,982,057
            
            43,081,795
            
            41,884,829Effect
                of dilutive security:Stock
                options
            
            
            358,415
            
            
            1,415,542
            
            2,079,335
            
            1,498,728Weighted
                average number of shares - fully diluted
            
            
            45,269,433
            
            
            43,397,599
            
            45,161,130
            
            43,383,557





17


**10.**  **RELATED
      PARTY TRANSACTIONS**





The
      following are the Company’s related party transactions:





**RHEO
      Clinic Inc.**





**September
                30,**
            
            **December
                31,****2006**
            
            **2005**Due
                to:RHEO
                Clinic Inc.
            
            $
            —
            
            $
            5,065





One
      of
      the Company’s primary customers had been RHEO Clinic Inc., a subsidiary of TLC
      Vision Corporation (“TLC Vision”). RHEO Clinic Inc. used the RHEOTM System to
      treat patients for which it charged its customers (the patients) a per-treatment
      fee. During the third quarter of 2005, RHEO Clinic Inc. determined that it
      will
      no longer treat patients and subsequently sold certain of its assets to the
      Company at a purchase price of C$61,812, including all applicable taxes. In
      connection with that sale, the Company agreed to share equally in losses
      incurred by RHEO Clinic Inc., to a maximum of C$28,952, for assets that RHEO
      Clinic Inc. is not able to dispose of as at the agreed date, being December
      31,
      2005. On May 1, 2006, the Company paid RHEO Clinic Inc. C$31,859 which included
      the amount owing for losses incurred for assets that RHEO Clinic Inc. was not
      able to dispose of as at the agreed date. Included in the balance due to RHEO
      Clinic Inc. as at December 31, 2005 is the amount owing to the Company for
      the
      purchase of the components of the RHEOTM System net of the amount owing to RHEO
      Clinic Inc. for clinical and administrative support provided by RHEO Clinic
      Inc.
      for the Company’s MIRA-1 and related clinical trials.





**TLC
      Vision and Diamed Medizintechnik GmbH**





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





The
      $5,000,000 portion of the $12,000,000 commitment which was not convertible
      into
      the Company’s common stock was not advanced and the commitment was terminated
      prior to the completion of the Company’s initial public offering of shares of
      its common stock. During the years ended December 31, 2004 and 2003, the Company
      issued an aggregate of $4,350,000 and $2,650,000 to TLC Vision and Diamed,
      respectively, under the convertible portion of the grid debentures. On December
      8, 2004, as part of the corporate reorganization relating to the Company’s
      initial public offering, the Company issued 7,106,454 shares of its common
      stock
      to TLC Vision and Diamed, upon conversion of $7,000,000 of aggregate principal
      amount of convertible debentures at a conversion price of $0.98502 per share.
      Collectively, as at September 30, 2006, the two companies have a combined 45.4%
      equity interest in the Company on a fully diluted basis.





When
      the
      Company receives FDA approval to market the RHEOTM System in the United States,
      it will be economically dependent on Diamed to control the supply of the Octo
      Nova pumps used in the RHEOTM System. The Company believes that the Octo Nova
      pump is a critical component of the RHEOTM System.





**Asahi
      Kasei Medical Co., Ltd.**





Since
      2001, the Company has been party to a distributorship agreement with Asahi
      Kasei
      Medical Co., Ltd. (“Asahi Medical”) (formerly Asahi Medical Co., Ltd.) pursuant
      to which Asahi Medical supplies the filter products used in the RHEOTM
System.





The
      Company is economically dependent on Asahi Medical to continuously provide
      filters and believes that the filter products provided by Asahi Medical are
      a
      critical component in the RHEOTM System.





The
      Company entered into a new distributorship agreement (the “2006 Distributorship
      Agreement”), effective October 20, 2006, with Asahi Medical. The 2006
      Distributorship Agreement replaced the 2001 distributorship agreement between
      the Company and Asahi Medical as supplemented and amended by the 2003, 2004
      and
      2005 Memoranda. Pursuant to the 2006 Distributorship Agreement, the Company
      has
      distributorship rights to Asahi Medical's Plasmaflo filter and Asahi Medical's
      second generation polysulfone Rheofilter on an exclusive basis in the United
      States, Mexico and certain Caribbean countries (collectively, “Territory 1-a”),
      on an exclusive basis in Canada, on an exclusive basis in Colombia, Venezuela,
      New Zealand, Australia (collectively, “Territory 2”) and on a non-exclusive
      basis in Italy.


18


Pursuant
      to the 2006 Distributorship Agreement, the Company will be responsible for
      obtaining regulatory approvals for the Plasmaflo and Rheofilter for use in
      the
      treatment of AMD in Territory 1-a, Territory 2 and Italy by December 31, 2010
      and in Canada by February 28, 2009. With the exception of the FDA approval
      of
      the RHEOTM System, all of such regulatory approvals, when and if obtained, will
      be held in Asahi Medical’s name. The FDA approval of the RHEOTM System will be
      held by a special purpose corporation, to be owned as to 51% by Asahi Medical
      and as to 49% by the Company. Under the 2006 Distributorship Agreement, the
      Company will be responsible for covering costs relating to the pursuit of
      regulatory approvals in Territory 1-a, Canada and Territory 2, and the Company
      and Asahi Medical will share the costs relating to the pursuit of regulatory
      approval in Italy. In addition, provided that certain conditions are met, Asahi
      Medical will be obligated to contribute $3,000,000 toward the cost of the
      Company's new pivotal clinical trial of the RHEOTM System which is intended to
      support the Company's Pre-Market Approval application to the FDA.





With
      respect to the United States, subject to early termination under certain
      circumstances, the 2006 Distributorship Agreement has a term which will end
      ten
      years following the date on which FDA approval to
      market
      the RHEOTM System in the United States is
      received and contemplates successive one-year renewal terms
      thereafter.





The
      Company is subject to certain minimum purchase requirements in each of the
      territories covered by the 2006 Distributorship Agreement.





The
      Company received free inventory from Asahi Medical for the purpose of the MIRA-1
      and related clinical studies. The Company has accounted for this inventory
      at a
      value equivalent to the cost the Company has paid for the same filters purchased
      from Asahi Medical for purposes of commercial sales to the Company’s customers.
      During the second quarter of fiscal 2006, the Company returned 300 filters,
      valued at $60,000, to Asahi Medical as the filters were labeled for commercial
      use and cannot be utilized for the clinical trials. The value of the free
      inventory received from Asahi Medical was $25,500, $173,388 and $167,730 for
      the
      nine months ended September 30, 2006 and 2005 and the year ended December 31,
      2005, respectively.





**Mr.
      Hans Stock** ***(Note
      11)***





On
      February 21, 2002, the Company entered into an agreement with Mr. Stock as
      a
      result of his assistance in procuring a distributor agreement for the filter
      products used in the RHEOTM System from Asahi Medical. Mr. Stock agreed to
      further assist the Company in procuring new product lines from Asahi Medical
      for
      marketing and distribution by the Company. The agreement will remain effective
      for a term consistent with the term of the distributorship agreement with Asahi
      Medical, and Mr. Stock will receive a 5% royalty payment on the purchase of
      the
      filters from Asahi Medical. During the three and nine months ended September
      30,
      2006 and 2005 and the year ended December 31, 2005, the Company paid Mr. Stock
      nil, nil, $67,716, $210,330 and $240,657, respectively, as royalty fees.
      Included in due to stockholders as at September 30, 2006 and December 31, 2005
      is $48,022 and $29,663, respectively, due to Mr. Stock.





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





On
      August
      6, 2004, the Company entered into a patent license and royalty agreement with
      Mr. Stock to obtain an exclusive license to U.S. Patent No. 6,245,038. The
      Company is required to make royalty payments totaling 1.5% of product sales
      to
      Mr. Stock, subject to minimum advance royalty payments of $12,500 per quarter.
      The advance payments are credited against future royalty payments to be made
      in
      accordance with the agreement. This agreement replaces the June 25, 2002
      consulting agreement with Mr. Stock which provided for a royalty payment of
      1%
      of product sales *.* During
      the three and nine months ended September 30, 2006 and 2005 and the year ended
      December 31, 2005, the Company paid $12,500, $37,500, $12,500, $37,500 and
      $50,000, respectively, to Mr. Stock as royalty fees. Included in due to
      stockholders as at September 30, 2006 and December 31, 2005 is $12,500 and
      $12,500, respectively, due to Mr. Stock.





**Apheresis
      Technologies, Inc.**





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





19


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





**Other**





On
      June
      25, 2003, the Company entered into a reimbursement agreement with ATI, pursuant
      to which employees of ATI, including John Cornish, one of the Company’s
      stockholders and its Vice President, Operations, provide services to the Company
      and ATI is reimbursed for the applicable percentage of time the employees spend
      working for the Company. Effective April 1, 2005, the Company terminated its
      reimbursement agreement with ATI such that the Company no longer compensates
      ATI
      in respect of any salary paid to, or benefits provided to, Mr. Cornish by ATI.
      Until April 1, 2005, Mr. Cornish did not have an employment contract with the
      Company and received no direct compensation from the Company. On April 1, 2005,
      Mr. Cornish entered into an employment agreement with the Company under which
      he
      received an annual base salary of $106,450, representing compensation to him
      for
      devoting 80% of his time to the business and affairs of the Company. Effective
      June 1, 2005, the Company amended its employment agreement with Mr. Cornish
      such
      that he began to receive an annual base salary of $116,723, representing
      compensation to him for devoting 85% of his time to the business and affairs
      of
      the Company. Effective April 13, 2006, the Company further amended its
      employment agreement with Mr. Cornish such that his annual base salary was
      decreased to $68,660 in consideration of his devoting 50% of his time to the
      business and affairs of the Company. Mr. Cornish continues to participate in
      the
      Company’s bonus plan and is entitled to receive, and has received, stock options
      pursuant to the Stock Option Plan.





Effective
      January 1, 2004, the Company entered into a rental agreement with Cornish
      Properties Corporation, a company owned and managed by Mr. Cornish, pursuant
      to
      which the Company leases space from Cornish Properties Corporation at $2,745
      per
      month. The original term of the lease extended to December 31, 2005. On November
      8, 2005, as provided for in the rental agreement, the Company extended the
      term
      of the rental agreement with Cornish Properties Corporation for another year,
      ending December 31, 2006. In the three and nine months ended September 30,
      2006
      and 2005 and the year ended December 31, 2005, the Company paid Cornish
      Properties Corporation an amount of $8,235, $24,705, $8,235, $24,705 and
      $32,940, respectively.





Effective
      June 25, 2003, Elias Vamvakas, then the Chairman of TLC Vision, became the
      Chairman and Secretary of the Company. 500,000 stock options issued to Mr.
      Vamvakas in December 2003 were accounted for in accordance with APB No. 25.
      The
      Company estimated the intrinsic value of these options granted to Mr. Vamvakas
      to be approximately $5,880,000. Management estimated the fair value of the
      underlying common stock based on management’s estimate of the Company’s value.
      The intrinsic value of the options is being amortized over the vesting period.
      However, upon the successful completion of the Company’s initial public offering
      in December 2004, the options vested immediately, and therefore, any unvested
      compensation expense was expensed immediately.





In
      addition, the Company entered into a consultancy and non-competition agreement
      on July 1, 2003 with the Center for Clinical Research (“CCR”), then a
      significant shareholder of the Company, which requires the Company to pay a
      fee
      of $5,000 per month. For the year ended December 31, 2003, CCR agreed to forego
      the payment of $75,250 due to it in exchange for options to purchase 20,926
      shares of the Company’s common stock at an exercise price of $0.13 per share. In
      addition, CCR agreed to the repayment of the balance of $150,500 due to it
      at a
      rate of $7,500 per month beginning in July 2003. On August 22, 2005, the Company
      amended the consultancy and non-competition agreement with CCR such that the
      fee
      payable to it was increased from $5,000 to $15,000 per month effective January
      1, 2005. The amended consultancy and non-competition agreement provides for
      the
      payment of a one-time bonus of $200,000 upon receipt by the Company of FDA
      approval of the RHEOTM System and the grant of 60,000 options to CCR at an
      exercise price of $7.15 per share. The stockholders of the Company approved
      the
      adjustment of the exercise price of these options to $2.05 per share on June
      23,
      2006 *(see
      note 8)* .
      These
      options are expected to fully vest on receipt by the Company of FDA approval
      of
      the RHEOTM System. This resulted in a combined consulting expense, included
      within clinical and regulatory expense for the three and nine months ended
      September 30, 2006, of $36,813 and $141,263, respectively.





On
      September 29, 2004, the Company signed a product purchase agreement with Veris
      for its purchase from the Company of 8,004 treatment sets over the period from
      October 2004 to December 2005, a transaction valued at $6,003,000, after
      introductory rebates. However, due to delays in opening its planned number
      of
      clinics throughout Canada, Veris no longer required the contracted-for number
      of
      treatment sets in the period. The Company agreed to the original pricing for
      the
      reduced number of treatment sets required in the period. Dr. Machat, who is
      an
      investor in, and one of the directors of, Veris, was a co-founder and former
      director of TLC Vision. In December 2005, by letter agreement, the Company
      agreed to the volume and other terms for the purchase and sale of treatment
      sets
      and pumps for the period ending February 28, 2006. As at September 30, 2006,
      the
      Company had received a total of $1,779,566 from Veris. Included in amounts
      receivable, net as at September 30, 2006 and December 31, 2005 is $904,101
      and
      $1,047,622, respectively, due from Veris for the purchase of additional pumps
      and treatment sets. Veris has agreed to the payment of interest at the rate
      of
      8% per annum on all amounts outstanding for more than 45 days up to March 31,
      2006, the expected date of final payment. In January 2006, the Company received
      from Veris an interest payment of $4,495 on amounts outstanding for more than
      45
      days to December 31, 2005. On February 3, 2006, the Company announced that
      the
      MIRA-1 clinical trial had not met its primary efficacy endpoint and that it
      would be more likely than not that the Company will be required to conduct
      a
      follow-up clinical trial of the RHEOTM System in order to support its Pre-Market
      Approval application to the FDA. Because of this delay in being able to pursue
      commercialization of the RHEOTM System in the U.S. and the resulting market
      reaction to this news and based on discussions with Veris, the Company believed
      that Veris would not be able to meet its financial obligations to the Company.
      Therefore, during the year ended December 31, 2005, the Company recorded an
      allowance for doubtful accounts of $1,047,622 against the amount due from Veris
      and did not accrue additional interest on the amount outstanding in the nine
      months ended September 30, 2006.





In
      April
      2006, the Company agreed to sell a total of 1,000 treatment sets, with
      negotiated discount, to Veris at a price of $200 per treatment set which is
      lower than the Company’s cost. It was also agreed that payment for the treatment
      sets must be received by the Company in advance of shipment. In July 2006,
      Veris
      negotiated new payment terms for the treatment sets with the Company, and it
      was
      agreed that payment for the treatment sets shipped subsequent to June 2006
      must
      be received within 60 days of shipment. The Company also agreed that all sales
      of treatment sets made to Veris to the end of 2006 will be at the discounted
      price of $200 per treatment set. During the three and nine months ended
      September 30, 2006, the Company received a total of $54,908 and $142,220 from
      Veris for the purchase of 259 and 667 treatment sets, respectively. The sale
      of
      the treatment sets is included in revenue for the three and nine months ended
      September 30, 2006 as all the treatment sets have been delivered to Veris.
      Included in amounts receivable as at September 30, 2006 is $40,704 due from
      Veris for the purchase of 192 treatment sets, payment for which is expected
      to
      be received by the Company on or before November 22, 2006. The sale of these
      treatment sets is included in deferred revenue as at September 30, 2006. Revenue
      will be recognized when the Company receives payment for the treatment sets.
      However, the Company has recorded an inventory loss in the three months ended
      September 30, 2006 for the sale of the 192 treatment sets as these treatment
      sets have been delivered to Veris.





In
      June
      2006, Veris returned four pumps which had been sold to it in December 2005.
      In
      fiscal 2005, the Company had recorded an inventory loss associated with all
      sales made to Veris in December 2005 and did not recognize revenue due to the
      Company’s anticipation that Veris may not return the products shipped to it and
      would not be able to pay for the amounts invoiced. Accordingly, as at September
      30, 2006, amounts receivable, net and the allowance for doubtful account
      recorded against the amount due from Veris has been reduced by the invoiced
      amount for the four pumps of $143,520. In addition, the cost of the four pumps
      returned by Veris, valued at $85,058, was used to reduce the cost of goods
      sold
      in the period.





The
      Company also entered into a clinical trial agreement on November 22, 2005 with
      Veris which required Veris to provide certain clinical trial services to the
      Company. The agreement provided for an advance payment of C$195,000 to Veris
      which represents 30% of the total value of the contract. The Company paid Veris
      C$195,000 on November 22, 2005 as provided for in the clinical trial agreement.
      This amount has been expensed during the year ended December 31, 2005 as the
      Company has suspended the clinical trial.





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





During
      the fourth quarter of 2004, the Company began a business relationship with
      Innovasium Inc. Innovasium Inc. designed and built some of the Company’s
      websites and also created some of the sales and marketing materials to reflect
      the look of the Company’s websites. Daniel Hageman, who is the President and one
      of the owners of Innovasium Inc., is the spouse of an officer of the Company.
      During the three and nine months ended September 30, 2006 and 2005 and the
      year
      ended December 31, 2005, the Company paid Innovasium Inc. C$85,079, C$156,197,
      C$1,885, C$33,230 and C$123,967, respectively. Included in accounts payable
      and
      accrued liabilities as at September 30, 2006 and December 31, 2005 is C$6,766
      and C$15,798, respectively, due to Innovasium Inc. These amounts are expensed
      in
      the period incurred and paid when due.  20


**11.**  **DUE
      TO STOCKHOLDERS**





**September
                30,**
            
            **December
                31,****2006**
            
            **2005****Due
                to:**TLC
                Vision Corporation
            
            $
            60,716
            
            $
            116,070Other
                stockholder
            
            
            60,522
            
            
            42,163$
            121,238
            
            $
            158,233





Included
      in amounts due to stockholders as at September 30, 2006 and December 31, 2005
      is
      $60,716 and $116,070, respectively, owing to TLC Vision for its payment of
      benefits of certain employees of the Company and for computer and administrative
      support.





The
      balances due to other stockholder as of September 30, 2006 and December 31,
      2005
      are $60,522 and $42,163, respectively, and are for amounts due to Mr. Hans
      Stock
      for royalty fees *(see
      note 10).*




**12.**  **ACCRUED
      LIABILITIES**





**September
                30, 2006**
            
            **December
                31, 2005**Due
                to professionals
            
            $
            594,341
            
            $
            348,044Due
                to clinical trial sites
            
            
            140,880
            
            
            32,936Due
                to clinical trial specialists
            
            
            171,182
            
            
            227,009Due
                to ATI
            
            
            10,053
            
            
            7,490Due
                to employees and directors
            
            
            582,179
            
            
            993,177Sales
                and capital taxes payable
            
            
            5,956
            
            
            155,604Due
                to MeSys GmbH for pumps and parts
            
            
            3,120
            
            
            191,692Corporate
                compliance
            
            
            189,113
            
            
            141,667Miscellaneous
            
            
            162,146
            
            
            129,000$
            1,858,970
            
            $
            2,226,619





**13.**  **CONSOLIDATED
      STATEMENTS OF CASH FLOWS**





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





**Nine
                months ended**
              **September
                30,****2006**
            
            
            **2005**Due
                to related party
            
            $
            (5,065
            )
            $
            14,944Amounts
                receivable
            
            
            297,176
            
            
            (470,228
            )Inventory
            
            
            (1,117,354
            )
            
            (4,691,825
            )Prepaid
                expenses
            
            
            313,269
            
            
            38,650Deposit
            
            
            (5,551
            )
            
            4,105Accounts
                payable
            
            
            (930,706
            )
            
            (92,743
            )Accrued
                liabilities
            
            
            (832,840
            )
            
            (106,905
            )Deferred
                revenue
            
            
            38,400
            
            
            (483,325
            )Due
                to stockholders
            
            
            (36,995
            )
            
            (373,642
            )$
            (2,279,666
            )
            $
            (6,160,969
            )





21


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





**Nine
                months ended****September
                30,****2006**
            
            **2005**Non-cash
                investing and financing activitiesFree
                inventory
            
            $
            (22,506
            )
            $
            173,388Common
                stock issued on acquisition
            
            
            15,035,969
            
            
            —Additional
                cash flow informationIncome
                taxes recovered, net
            
            $
            4,534
            
            $
            —





**14.**  **SEGMENT
      INFORMATION**





As
      a
      result of the acquisition of SOLX ( *see
      note 2),* the
      Company has two reportable segments: retina and glaucoma. The retina segment
      is
      in the business of commercializing the RHEOTM System which is used to perform the
      RheopheresisTM procedure, a procedure that selectively removes molecules from
      plasma, which is designed to treat Dry AMD. The Company began limited
      commercialization of the RHEOTM System in Canada in 2003 and continues to support
      its sole customer, Veris, in its commercial activities in Canada. The Company
      is
      currently in the process of seeking an investigational device exemption from
      the
      FDA for the purpose of a new clinical trial of the RHEOTM System. The glaucoma
      segment is in the business of providing treatment for glaucoma with the use
      of
      the components of the SOLX Glaucoma System which are used to provide physicians
      with multiple options to manage intraocular pressure. The Company is seeking
      to
      obtain 510K approval to market the components of the SOLX Glaucoma System in
      the
      United States. The Company acquired the glaucoma segment in the acquisition
      of
      SOLX on September 1, 2006; therefore, no amounts are shown for the segment
      in
      periods prior to September 1, 2006





The
      accounting policies of the segments are the same as those described in the
      summary of significant accounting policies. Intersegment sales and transfers
      are
      minimal and are accounted for at current market prices, as if the sales or
      transfers were to third parties.





The
      Company’s reportable units are strategic business units that offer different
      products and services. They are managed separately because each business unit
      requires different technology and marketing strategies. The Company’s business
      units were acquired or developed as a unit, and in the case of SOLX, management
      was retained at the time of acquisition.





The
      Company’s business units were as follows:





**RETINA**
            
            **GLAUCOMA**
            
            **TOTAL****Three
                Months Ended September 30, 2006**Revenues
            
            $
            53,144
            
            $
            32,300
            
            $
            85,444Net
                loss
            
            
            (3,052,037
            )
            
            (531,771
            ))
            
            (3,583,808
            )**Three
                Months Ended September 30, 2005**Revenues
            
            $
            632,330
            
            $
            —
            
            $
            632,330Net
                loss
            
            
            (2,853,914
            )
            
            —
            
            
            (2,853,914
            )**Nine
                Months Ended September 30, 2006**Revenues
            
            $
            135,859
            
            $
            32,300
            
            $
            168,159Net
                loss
            
            
            (78,779,582
            )
            
            (531,771
            )
            
            (79,311,353
            )Total
                assets
            
            
            48,481,689
            
            
            45,045,142
            
            
            93,526,831**Nine
                Months Ended September 30, 2005**Revenues
            
            $
            1,633,909
            
            $
            —
            
            $
            1,633,909Net
                loss
            
            
            (9,295,002
            )
            
            —
            
            
            (9,295,002
            )Total
                assets
            
            
            291,487,624
            
            
            —
            
            
            291,487,624





22


**15.**  **SUBSEQUENT
      EVENT**





The
      Company entered into the 2006 Distributorship Agreement, effective October
      20,
      2006, with Asahi Medical. The 2006 Distributorship Agreement replaced the 2001
      distributorship agreement between the Company and Asahi Medical, as supplemented
      and amended by the 2003, 2004 and 2005 Memoranda. Pursuant to the 2006
      Distributorship Agreement, the Company has distributorship rights to Asahi
      Medical's Plasmaflo filter and Asahi Medical's second generation polysulfone
      Rheofilter on an exclusive basis in the United States, Mexico and certain
      Caribbean countries (collectively, “Territory 1-a”), on an exclusive basis in
      Canada, on an exclusive basis in Colombia, Venezuela, New Zealand, Australia
      (collectively, “Territory 2”) and on a non-exclusive basis in Italy.





Pursuant
      to the 2006 Distributorship Agreement, the Company will be responsible for
      obtaining regulatory approvals for the Plasmaflo and Rheofilter for use in
      the
      treatment of AMD in Territory 1-a, Territory 2 and Italy by December 31, 2010
      and in Canada by February 28, 2009. With the exception of the FDA approval
      of
      the RHEOTM System, all of such regulatory approvals, when and if obtained, will
      be held in Asahi Medical’s name. The FDA approval of the RHEOTM System will be
      held by a special purpose corporation, to be owned as to 51% by Asahi Medical
      and as to 49% by the Company. Under the 2006 Distributorship Agreement, the
      Company will be responsible for covering costs relating to the pursuit of
      regulatory approvals in Territory 1-a, Canada and Territory 2, and the Company
      and Asahi Medical will share the costs relating to the pursuit of regulatory
      approval in Italy. In addition, provided that certain conditions are met, Asahi
      Medical will be obligated to contribute $3,000,000 toward the cost of the
      Company's new pivotal clinical trial of the RHEOTM System which is intended to
      support the Company's Pre-Market Approval application with the FDA.





With
      respect to the United States, subject to early termination under certain
      circumstances, the 2006 Distributorship Agreement has a term which will end
      ten
      years following the date on which FDA approval to
      market
      the RHEOTM System in the United States is
      received and contemplates successive one-year renewal terms
      thereafter.





The Company
      is subject to certain minimum purchase requirements in each of the territories
      covered by the 2006 Distributorship Agreement.





23


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





**OVERVIEW**





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





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





Subsequent
      to the February 3, 2006 announcement, the Company completed an in-depth analysis
      of the MIRA-1 study data identifying subjects that were included in the
      intent-to-treat, or ITT, population but who deviated from the MIRA-1 protocol
      as
      well as those patients who had documented losses or gains in vision for reasons
      not related to retinal disease such as cataracts that were not specifically
      excluded by the protocol. Those subjects in the ITT population who met the
      protocol requirements, and who did not exhibit ophthalmic changes unrelated
      to
      retinal disease, comprised the modified per-protocol population. In the modified
      per-protocol analysis, eyes treated with RHEOTM Therapy demonstrated a mean
      vision gain of 0.8 lines of ETDRS BCVA at 12 months post-baseline, compared
      to a
      mean vision loss of 0.1 lines of ETDRS BCVA in the eyes in the placebo group.
      The result was statistically significant (repeated measure p value = 0.0099).
      The following table presents a summary of the ETDRS BCVA changes observed 12
      months post-baseline in the modified per-protocol analysis of
      MIRA-1:





Treatment
                Group
              (n=69)
            Placebo
                Group
              (n=46)Vision
                improvement greater or equal to:1
                line
            47%
            18%2
                lines
            28%
            9%3
                lines
            9%
            2%Vision
                loss greater or equal to:1
                line
            10%
            24%2
                lines
            6%
            7%3
                lines
            3%
            2%





Within
      the modified per-protocol population with pre-treatment vision worse than 20/40,
      47% of RHEOTM Therapy-treated eyes improved, after treatment, to 20/40 or better
      (which is the required visual acuity to qualify for a driver’s license) 12
      months post-baseline, compared to 12% of placebo eyes.





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





On
      June
      8, 2006, we met with the FDA to discuss the results of MIRA-1 and the impact
      the
      results will have on our application to market the RHEOTM System in the United
      States. In light of MIRA-1’s failure to meet its primary efficacy endpoint, the
      FDA advised that it will require an additional study of the RHEOTM System to be
      performed. The FDA also indicated its willingness to allow the substitution,
      in
      the upcoming study, of the new polysulfone RheofilterTM for the older cellulose
      acetate filter which currently forms part of the RHEOTM System. The replacement
      of the filter removes the regulatory uncertainties presented by making the
      replacement following FDA approval. Furthermore, due to manufacturing
      constraints on the number of cellulose acetate filters that can be produced
      by
      Asahi Kasei Medical Co., Ltd. (“Asahi Medical”) (formerly Asahi Medical Co.,
      Ltd.), the replacement of the filter in the new trial eliminates the need to
      continue to build and maintain adequate inventories of the older cellulose
      acetate filter in preparation for commercial launch. On August 4, 2006, we
      submitted our draft Investigational Device Exemption, or IDE, package to the
      FDA
      together with a draft of the new protocol and are currently awaiting the FDA’s
      feedback which, when received, will enable us to proceed with the formal
      submission to the FDA of our IDE package and protocol.





24


As
      a
      result of the announcement on February 3, 2006, the per share price of our
      common stock as traded on the NASDAQ National Market, or NASDAQ, decreased
      from
      $12.75 on February 2, 2006 to close at $4.10 on February 3, 2006. The 10-day
      average price of the stock immediately following the announcement was $3.65
      and
      reflected a decrease in our market capitalization from $536.6 million on
      February 2, 2006 to $153.6 million based on the 10-day average share price
      subsequent to the announcement. On June 12, 2006, we announced that the FDA
      will
      require us to perform an additional study of the RHEOTM System. In addition, on
      June 30, 2006, we announced that we had terminated negotiations with Sowood
      Capital Management LP (“Sowood”) in connection with a proposed private purchase
      of approximately $30,000,000 of zero-coupon convertible notes of the Company.
      The per share price of our common stock decreased subsequent to the June 12,
      2006 announcement and again after the June 30, 2006 announcement. Based on
      the
      result of the analysis of the data from MIRA-1 and the events that occurred
      during the second quarter of fiscal 2006, we concluded that there were
      sufficient indicators of impairment leading to an analysis of our intangible
      assets and goodwill and resulting in our reporting an impairment charge to
      goodwill of $65,945,686 and $147,451,758 in the second quarter of 2006 and
      in
      the fourth quarter of 2005, respectively.





We
      believed that the announcement on February 3, 2006 made it unlikely that we
      would be able to collect on amounts outstanding from Veris Health Sciences
      Inc.
      (“Veris”), resulting in a provision for bad debts of $1,049,297, of which
      $518,852 related to revenue recognized prior to December 2005 and $530,445
      related to goods shipped to Veris, in December 2005, and for which revenue
      was
      not recognized. We also recognized an inventory loss of $252,071, representing
      the cost of goods shipped to Veris in December 2005 which we do not anticipate
      will be returned by Veris. **** We
      have
      also fully expensed the C$195,000 advance paid to Veris in connection with
      clinical trial services to be provided by Veris for MIRA-PS, one of our clinical
      trials which we have suspended. We evaluated our ending inventories as at
      December 31, 2005 on the basis that Veris may not be able to increase its
      commercial activities in Canada in line with our initial expectations.
      Accordingly, we have set up a provision for obsolescence of $1,990,830 for
      treatment sets that will unlikely be utilized prior to their expiration dates.





During
      the second and third quarters of 2006, we sold a number of treatment sets,
      with
      a negotiated discount, to Veris at a price lower than our cost. Accordingly,
      the
      price which we charged to Veris, net of a negotiated discount, represents the
      current net realizable value; therefore, we wrote down the value of our
      treatment sets to reflect their current net realizable value as at September
      30,
      2006.





As
      at
      September 30, 2006 and December 31, 2005, we had inventory reserves of
      $3,474,870 and $1,990,830, respectively. During the nine months ended September
      30, 2006, we recognized a provision related to inventory of $1,625,000 based
      on
      the above analysis (2005 - nil).





In
      June
      2006, Veris returned four pumps which had been sold to it in December 2005.
      In
      fiscal 2005, we did not recognize revenue on sales made to Veris in December
      2005 and had recorded an inventory loss associated with all sales made to Veris
      in December 2005. Accordingly, as at September 30, 2006, amounts receivable
      and
      the allowance for doubtful account recorded against the amount due from Veris
      has been reduced by the invoiced amount for the four pumps of $143,520. In
      addition, the cost of the four pumps returned by Veris, valued at $85,058,
      was
      used to reduce the cost of sales in the period.





On
      September 1, 2006, we completed the acquisition of Solx, Inc. (“SOLX”), a
      privately held company based at the Boston University Photonics Center that
      has
      developed a system for the treatment of glaucoma. The results of SOLX’s
      operations have been included in our consolidated financial statements since
      that date. The SOLX Glaucoma Treatment System (“SOLX Glaucoma System”) developed
      by SOLX includes the SOLX DeepLight® 790 Titanium Sapphire Laser (“SOLX
      DeepLight® 790”) and the SOLX Gold
      Micro-Shunt (“SOLX GMSTM”) which can
      be
      used separately or together to provide physicians with multiple options to
      manage intraocular pressure. The acquisition of SOLX represents an expansion
      of
      the Company’s ophthalmic product portfolio beyond the RHEOTM procedure for Dry
      AMD. This expansion or diversification has become a corporate objective, and
      in
      light of the delay in the U.S. commercial launch of the RHEOTM System, we have
      accelerated these plans. Our focus is on age-related eye diseases like AMD
      and
      glaucoma as they are expected to be the fastest growing segments of eye care
      over the next 10 years.




Our
      results of operations for the nine months ended September 30, 2006 were impacted
      by our adoption of Statement of Financial Accounting Standards (“SFAS”) No. 123R
      (revised 2004), “Share-Based Payments” (“SFAS No. 123R”), which requires us to
      recognize a non-cash expense related to the fair value of our stock-based
      compensation awards. We elected to use the modified prospective transition
      method of adoption requiring us to include this stock-compensation charge in
      our
      results of operations beginning on January 1, 2006 without restating prior
      periods to include stock-based compensation expense. This method also required
      us to estimate forfeitures as of the effective date of adoption of SFAS No.
      123R
      and to eliminate any compensation cost previously recognized in income for
      periods before the effective date of adoption. This income should be recognized
      as the cumulative effect of a change in accounting principle as of the required
      effective date. Of the $1,838,025 stock-based compensation expense recognized
      in
      the nine months ended September 30, 2006, $1,266,801 is included in general
      and
      administrative expenses, $165,631 in clinical and regulatory expenses and
      $405,593 in sales and marketing expenses. We also recognized $107,045 as the
      cumulative effect of a change in accounting principle reflecting the impact
      of
      our estimated forfeitures of outstanding awards as of January 1,
      2006.





25


At
      the
      annual meeting of stockholders of the Company held on June 23, 2006, our
      stockholders approved the re-pricing of all then out-of-the-money stock options
      of the Company. Consequently, the exercise price of all outstanding stock
      options that, on June 23, 2006, was greater than $2.05, being the weighted
      average trading price of our common stock on NASDAQ during the five-trading
      day
      period immediately preceding June 23, 2006, was adjusted downward to $2.05.
      2,585,000 of the outstanding stock options with a weighted average exercise
      price of $8.42 were affected by the re-pricing. SFAS No. 123R treats the
      re-pricing of equity awards as a modification of the original award and provides
      that such a modification is an exchange of the original award for a new award.
      SFAS No. 123R considers the modification to be the repurchase of the old award
      for a new award of equal or greater value, incurring additional compensation
      cost for any incremental value. This incremental difference in value is measured
      as the excess, if any, of the fair value of the modified award determined in
      accordance with the provisions of SFAS No. 123R over the fair value of the
      original award immediately before its terms are modified, measured based on
      the
      share price and other pertinent factors at that date. SFAS No. 123R provides
      that this incremental fair value, plus the remaining unrecognized compensation
      cost from the original measurement of the fair value of the old option, must
      be
      recognized over the remaining vesting period. Of the 2,585,000 options affected
      by the re-pricing, 1,196,857 were vested as at June 23, 2006. Therefore,
      additional compensation cost of $383,801 for the 1,196,857 options was
      recognized immediately and is included in the stock-based compensation expense
      for the nine months ended September 30, 2006. The remaining unrecognized
      incremental fair value of $188,826 plus the compensation cost from the original
      measurement of the fair value of the old options of $2,918,184, which totaled
      $3,107,010 in unrecognized compensation expense as at September 30, 2006, is
      expected to be amortized over a weighted average vesting period of 2.8
      years.





In
      accordance with SFAS No. 123R, we also recorded a compensation expense of $3,363
      in the second quarter of fiscal 2006 as our board of directors approved
      accelerating the vesting of 1,250 unvested stock options granted to a terminated
      employee on April 28, 2006. SFAS No. 123R treats such a modification as a
      cancellation of the original unvested award and the grant of a new fully vested
      award as of that date.





Prior
      to
      the adoption of SFAS No. 123R, we applied the provisions of SFAS No. 123,
“Accounting for Stock-Based Compensation” (“SFAS No. 123”), which allowed
      companies either to expense the estimated fair value of employee stock options
      or to follow the intrinsic value method set forth in Accounting Principles
      Board
      Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”), but
      required companies to disclose the pro forma effects on net loss as if the
      fair
      value of the options had been expensed. We elected to apply APB No. 25 in
      accounting for employee stock options. As required by SFAS No. 123, prior to
      the
      adoption of SFAS No. 123R, we provided pro forma net loss and pro forma net
      loss
      per share disclosures for stock-based awards as if the fair value of the options
      had been expensed.





As
      at
      September 30, 2006, $3,523,181 of total unrecognized compensation cost related
      to stock options is expected to be recognized over a weighted-average period
      of
      2.8 years.





**RECENT
      DEVELOPMENTS**





We
      entered into a new distributorship agreement (the “2006 Distributorship
      Agreement”), effective October 20, 2006, with Asahi Medical. The 2006
      Distributorship Agreement replaced the 2001 distributorship agreement between
      Asahi Medical and us, as supplemented and amended by the 2003, 2004 and 2005
      Memoranda. Pursuant to the 2006 Distributorship Agreement, we have
      distributorship rights to Asahi Medical's Plasmaflo filter and Asahi Medical's
      second generation polysulfone Rheofilter on an exclusive basis in the United
      States, Mexico and certain Caribbean countries (collectively, “Territory 1-a”),
      on an exclusive basis in Canada, on an exclusive basis in Colombia, Venezuela,
      New Zealand, Australia (collectively, “Territory 2”) and on a non-exclusive
      basis in Italy.





Pursuant
      to the 2006 Distributorship Agreement, we will be responsible for obtaining
      regulatory approvals for the Plasmaflo and Rheofilter for use in the treatment
      of AMD in Territory 1-a, Territory 2 and Italy by December 31, 2010 and in
      Canada by February 28, 2009. With the exception of the FDA approval of the
      RHEOTM
System, all of such regulatory approvals, when and if obtained, will be held
      in
      Asahi Medical’s name. The FDA approval of the RHEOTM System will be held by a
      special purpose corporation, to be owned as to 51% by Asahi Medical and as
      to
      49% by the Company. Under the 2006 Distributorship Agreement, the Company will
      be responsible for covering costs relating to the pursuit of regulatory
      approvals in Territory 1-a, Canada and Territory 2, and the Company and Asahi
      Medical will share the costs relating to the pursuit of regulatory approval
      in
      Italy. In addition, provided that certain conditions are met, Asahi Medical
      will
      be obligated to contribute $3,000,000 toward the cost of our new pivotal
      clinical trial of the RHEOTM System which is intended to support our Pre-Market
      Approval application to the FDA.





With
      respect to the United States, subject to early termination under certain
      circumstances, the 2006 Distributorship Agreement has a term which will end
      ten
      years following the date on which FDA approval to
      market
      the RHEOTM System in the United States is
      received and contemplates successive one-year renewal terms
      thereafter.





We
      are
      subject to certain minimum purchase requirements in each of the territories
      covered by the 2006 Distributorship Agreement.





26




**CRITICAL
      ACCOUNTING POLICIES**





Our
      consolidated financial statements are prepared in accordance with accounting
      principles generally accepted in the United States. The preparation of these
      consolidated financial statements requires us to make estimates and judgments
      that affect the reported amounts of assets, liabilities, revenues and expenses
      and related disclosure. On an ongoing basis, we evaluate our estimates and
      assumptions. We base our estimates on historical experience and on various
      other
      assumptions that are believed to be reasonable under the circumstances, the
      results of which form the basis for making judgments about the carrying values
      of assets and liabilities that are not readily apparent from other sources.
      Actual results may differ from these estimates under different assumptions
      or
      conditions.





We
      believe that there have been no significant changes during the nine months
      ended
      September 30, 2006 to the items disclosed as our critical accounting policies
      and estimates in our discussion and analysis of financial condition and results
      of operations in our 2005 Form 10-K, except as noted below.





*Inventory
      valuation*





Management
      must make estimates about future customer demand for our products when
      establishing the appropriate provisions for inventory and also determine whether
      market demand has had any impact on our inventory’s net realizable value. When
      making these estimates, we consider general economic conditions and growth
      prospects, including the impact of us receiving FDA approval for the RHEOTM
System.





With
      respect to our provisioning policy, in general, we fully reserve for surplus
      inventory in excess of our demand forecast, taking into consideration the expiry
      date of our filters. In addition, we assess whether recent transactions provide
      indicators as to whether the net realizable value of our inventory is below
      our
      cost.





As
      at
      September 30, 2006 and December 31, 2005, we had inventory reserves of
      $3,474,870 and $1,990,830, respectively. During the nine months ended September
      30, 2006, we recognized a provision related to inventory of $1,625,000 based
      on
      the above analysis (2005 - $1,990,830).





*Stock
      based compensation*





In
      December 2004, the Financial Accounting Standards Board (the “FASB”) issued SFAS
      No. 123R, which revised SFAS No. 123 and APB No. 25. SFAS No. 123R requires
      all
      share-based payments to employees, including grants of employee stock options
      to
      be recognized in the consolidated financial statements based on their fair
      values. The pro forma disclosure previously permitted under SFAS No. 123 is
      no
      longer an alternative to financial statement recognition. SFAS No. 123R is
      effective at the beginning of the first interim or annual period beginning
      after
      June 15, 2005. In April 2005, the SEC announced the adoption of a new rule
      that
      amends the compliance dates for SFAS No. 123R. The SEC’s new rule allows
      companies to implement SFAS No. 123R at the beginning of their next fiscal
      year,
      instead of the next reporting period that begins after June 15, 2005.
      Accordingly, we adopted SFAS No. 123R beginning January 1, 2006. We have
      selected the Black-Scholes option-pricing model as our method of determining
      the
      fair value for all our awards and will recognize compensation cost on a
      straight-line basis over the awards’ vesting periods.





*Goodwill*





Effective
      January 1, 2002, goodwill is no longer amortized and is subject to an annual
      impairment test. Goodwill impairment is evaluated between annual tests upon
      the
      occurrence of certain events or circumstances. Goodwill impairment is assessed
      based on a comparison of the fair value of the reporting unit to the underlying
      carrying value of the reporting unit's net assets, including goodwill. When
      the
      carrying amount of the reporting unit exceeds its fair value, the fair value
      of
      the reporting unit's goodwill is compared with its carrying amount to measure
      the amount of impairment loss, if any.





Prior
      to
      the acquisition of SOLX, the Company was a single reporting unit. Therefore,
      management determined the fair value of the Company's goodwill using the
      Company’s market capitalization as opposed to the fair value of its assets and
      liabilities. As a result of the announcement on February 3, 2006, the per share
      price of our common stock as traded on NASDAQ decreased from $12.75 on February
      2, 2006 to close at $4.10 on February 3, 2006. The 10-day average price of
      the
      stock immediately following the announcement was $3.65 and reflected a decrease
      in our market capitalization from $536.6 million on February 2, 2006 to $153.6
      million based on the 10-day average share price subsequent to the announcement.
      On June 12, 2006, we announced that the FDA will require us to perform an
      additional study of the RHEOTM System. In addition, on June 30, 2006, we
      announced that we had terminated negotiations with Sowood in connection with
      a
      proposed private purchase of approximately $30,000,000 of zero-coupon
      convertible notes of the Company. The per share price of our common stock
      decreased subsequent to the June 12, 2006 announcement and again after the
      June
      30, 2006 announcement. Based on the result of the preliminary analysis of the
      data from MIRA-1 and the events that occurred during the second quarter of
      fiscal 2006, we concluded that there were sufficient indicators of impairment
      leading to an analysis of our intangible assets and goodwill and resulting
      in
      our reporting an impairment charge to goodwill of $65,945,686 and $147,451,758
      in the second quarter of 2006 and in the fourth quarter of 2005,
      respectively.





**RESULTS
      OF OPERATIONS**





**Revenues,
      Cost of Sales and Gross Margin**





**Three
                Months Ended September 30,**
            
            **Nine
                Months Ended September 30,****2006**
            **2005**
            
            **Change**
            
            
            **2006**
            
            **2005**
            
            **Change**Revenues
            $
            85,444
            $
            632,330
            
            (86.5%)
            
            $
            168,159
            $
            1,633,909
            
            (89.7%)Cost
                of sales
            
            117,405
            
            337,210
            
            (65.2%)
            
            
            1,771,722
            
            1,041,000
            
            70.2%Gross
                (loss) margin
            
            (31,961)
            
            295,120
            
            (110.8%)
            
            
            (1,603,563)
            
            592,909
            
            (370.5%)





*Revenues*





Subsequent
      to the Company’s February 3, 2006 announcement that MIRA-1 had not met its
      primary efficacy endpoint, our sole customer, Veris, halted purchases while
      the
      Company completed its in-depth analysis of the MIRA-1 study data. The modified
      per-protocol analysis of the MIRA-1 data supports historical clinical and
      commercial experience with respect to the safety of RHEOTM Therapy, with observed
      treatment side effects generally being mild, transient and self-limiting. Based
      on the result of the analysis and in line with our continued support of Veris
      in
      Canada, we agreed that all sales of treatment sets made to Veris in fiscal
      2006,
      will be sold at a negotiated discounted price of $200 per treatment set which
      is
      lower than our cost. We also agreed that payment for the treatment sets sold
      subsequent to June 2006 must be received by the Company within 60 days of
      shipment. In September 2006, we sold a total of 192 treatment sets to Veris,
      payment for which is expected to be received in November 2006. The sale of
      these
      treatment sets is included in deferred revenue as at September 30, 2006 as
      revenue will not be recognized on the sale of these treatment sets until payment
      is received by the Company.





On
      September 1, 2006, the Company completed the acquisition of SOLX, and the
      results of SOLX’s operations have been included in our consolidated financial
      statements since that date.






27





During
      the third quarter of 2006, as compared with the corresponding period in fiscal
      2005, revenues decreased significantly primarily due to reduced sales of
      components of the RHEOTM System to Veris as a result of our February 3, 2006
      announcement that MIRA-1 did not meet its primary efficacy endpoint. In
      addition, included in revenues for the three months ended September 30, 2005
      are
      sales made to RHEO Clinic Inc., a subsidiary of TLC Vision Corporation (“TLC
      Vision”) and a related party, for which we reported revenues of $3,329 in the
      period. RHEO Clinic Inc. has since ceased the treatment of commercial patients
      and is therefore no longer a source of revenue for us. Included in revenue
      for
      the three months ended September 30, 2006 is SOLX’s revenue from the sale of
      SOLX GMSTM
units in
      the
      month of September 2006 of $32,300. There was no comparative revenue during
      the
      three months ended September 30, 2005.





Revenues
      for the nine months ended September 30, 2005 included revenues generated from
      sales made to Veris and RHEO Clinic Inc. for which we reported revenues of
      $1,552,316 and $81,593, respectively, in the period. The decrease in revenue
      in
      the corresponding period in 2006 is primarily due to reduced sales of the
      Company’s products to Veris offset by the inclusion of SOLX’s revenue during the
      month of September 2006 of $32,300.




28


*Cost
      of Sales*





During
      the second and third quarters of fiscal 2006, we sold a total of 859 treatment
      sets to Veris at a price, net of negotiated discounts, which was lower than
      our
      cost. As Veris is currently our sole customer for the RHEOTM System treatment
      sets, we believe that the price at which we sold the treatment sets to Veris
      represents our inventory’s current net realizable value, and therefore, we have
      written down the value of the treatment sets to reflect this net realizable
      value. Included in cost of sales for the nine months ended September 30, 2006
      is
      $1,625,000 which reflects the write-down of the treatment sets to its net
      realizable value.





During
      the three months ended September 30, 2006, as compared with the corresponding
      period in fiscal 2005, cost of sales reduced significantly and reflects the
      reduced sales in the period. In addition, during the three months ended
      September 30, 2006, we recorded an inventory loss of $33,648 associated with
      the
      sale of 192 treatment sets made to Veris in September 2006 for which payment
      is
      yet to be received by the Company as at September 30, 2006. Revenue will be
      recognized when payment is received. Also included in cost of sales for the
      three-month period ended September 30, 2006 is the cost of sales of
      the SOLX
      GMSTM units sold by SOLX during the period.





29


Cost
      of
      sales for the nine months ended September 30, 2006 includes a charge of
      $1,625,000 which reflects the write-down of our inventory of treatment sets
      to
      its net realizable value. There was no comparable expense in the nine months
      ended September 30, 2005. In addition, during the nine-month period ended
      September 30, 2006, Veris returned four pumps which had been sold to it in
      December 2005. In fiscal 2005, we had recorded an inventory loss associated
      with
      all sales made to Veris in December 2005 and did not recognize revenue due
      to
      our anticipation that Veris may not return the products shipped to it and would
      not be able to pay for the amounts invoiced. Accordingly, the cost of the four
      pumps returned by Veris, valued at $85,058, was used to reduce the cost of
      sales
      in the period.





*Gross
      Margin*





Gross
      margin on sales was lower in the three months ended September 30, 2006 as
      compared with the corresponding period in fiscal 2005 due to reduced sales
      offset by the gross margin on sales made by SOLX during the period.




Gross
      margin on sales was a loss of $1,603,563 for the nine months ended September
      30,
      2006 as compared with a profit of $592,909 during the corresponding period
      in
      2005 due primarily to the write-down of our inventory to its net realizable
      value offset by the value of the four pumps returned by Veris in the period
      and
      the gross margin on sales made by SOLX.





**Operating
      Expenses**





**Three
                Months Ended September 30,**
            
            **Nine
                Months Ended September 30,****2006**
            
            **2005**
            
            **Change**
            
            
            **2006**
            
            **2005**
            
            **Change**General
                and administrative
            $
            2,314,344
            $
            2,225,136
            
            4.0%
            
            $
            7,064,709
            $
            6,605,222
            
            7.0%Clinical
                and regulatory
            
            1,071,380
            
            1,140,273
            
            (6.0%)
            
            
            4,018,240
            
            3,794,287
            
            5.9%Sales
                and marketing
            
            505,088
            
            324,696
            
            55.6%
            
            
            1,396,422
            
            1,090,603
            
            28.0%Impairment
                of goodwill
            
            —
            
            —
            
            —
            
            
            65,945,686
            
            —
            
            100.0%Restructuring
                charges
            
            —
            
            —
            
            —
            
            
            819,642
            
            —
            
            100.0%Total
                operating expenses
            $
            3,890,812
            $
            3,690,105
            
            5.4%
            
            $
            79,244,699
            $
            11,490,112
            
            589.7%





*General
      and Administrative Expenses*





General
      and administrative expenses increased by $89,208 during the third quarter of
      2006, as compared with the corresponding period of fiscal 2005, due to an
      increase of $636,060 in stock-based compensation expense associated with the
      adoption of SFAS No. 123R beginning January 1, 2006 which requires us to
      recognize a non-cash expense related to the fair value of our stock-based
      compensation awards. General and administrative expenses also include a charge
      for $250,833 which represents the amortization of the intangible assets acquired
      on September 1, 2006 upon the acquisition of SOLX. These increases were
      partially offset by the decrease in employee and travel costs of $270,540,
      due
      in part to the grant of options to an employee in lieu of salaried compensation
      and reduced head count during the third quarter of 2006 as compared with the
      prior period in 2005. Professional fees and fees associated with compliance
      with
      Section 404 of the Sarbanes-Oxley Act of 2002 also decreased by $456,590 while
      directors’ fees decreased by $74,858 due to the grant of options to the
      directors in lieu of their annual fees received for board and committee
      memberships.





General
      and administrative expenses increased by $459,487 during the nine months ended
      September 30, 2006, as compared with the corresponding period in fiscal 2005,
      due to an increase of $1,159,589 associated with stock-based compensation
      expense and the additional amortization charge of $250,833 in September 2006.
      These increased costs in the period were partially offset by the decrease in
      employee and travel expenses of $142,650 and the decrease in professional fees
      and fees associated with compliance with Section 404 of the Sarbanes-Oxley
      Act
      of 2002 of $753,506. Public company costs, which includes annual report and
      meeting expenses and regulatory and transfer agent fees, also decreased by
      $71,521 in the nine months ended September 30, 2006, as compared with the
      corresponding period in fiscal 2005.





We
      are
      continuing to focus our efforts on achieving additional operating efficiencies
      by reviewing and improving upon our existing business processes and cost
      structure.





*Clinical
      and Regulatory Expenses*





Clinical
      and regulatory expenses decreased by $68,893 in the three months ended September
      30, 2006 as compared with the corresponding prior year period due to a decrease
      in clinical trial expenses associated with the MIRA-1 trial. This decrease
      was
      offset in part by increased expenses resulting from increased activities
      associated with the LEARN trial, or Long-term Efficacy in AMD from Rheopheresis
      in North America, other clinical trials and the cost of SOLX’s clinical and
      regulatory expenses during the period. Stock-based compensation expense also
      increased by $22,653 in the three-month period ended September 30, 2006 as
      a
      result of the adoption of SFAS No. 123R beginning January 1, 2006.





30


During
      the nine months ended September 30, 2006, clinical and regulatory expenses
      increased by $223,953 as compared with the corresponding period in fiscal 2005
      as a result of increased activities associated with the LEARN and other clinical
      trials and the cost of SOLX’s clinical and regulatory expenses during the
      period. Stock-based compensation expense also increased by $60,487 in the nine
      months ended September 30, 2006 as a result of the re-pricing of
      out-of-the-money stock options of the Company and the adoption of SFAS No.
      123R
      beginning January 1, 2006. These increased costs were partially offset by the
      decrease in clinical trial expenses associated with the MIRA-1 trial during
      the
      nine months ended September 30, 2006.





Our
      goal
      is to establish the RHEOTM Therapy as the leading treatment for Dry AMD in North
      America and to establish the SOLX Glaucoma System as a unique, new surgery
      of
      choice for glaucoma. Accordingly, we expect clinical and regulatory expenses
      to
      increase in the future as we are required to conduct an additional study of
      the
      RHEOTM System in order to support our PMA application to the FDA. We also have to
      complete ongoing studies of the SOLX DeepLight® 790 and the SOLX GMSTM which are
      the components of the SOLX Glaucoma System in order to obtain 510K approval
      to
      market these components of the SOLX Glaucoma System in the United
      States.





*Sales
      and Marketing Expenses*





Sales
      and
      marketing expenses increased by $180,392 in the three months ended September
      30,
      2006, as compared with the three months ended September 30, 2005 due to
      stock-based compensation expense of $140,092 associated with the adoption of
      SFAS No. 123R beginning January 1, 2006. Sales and marketing expenses also
      include fees and expenses of the Company’s Scientific Advisory Board members of
      $43,930 and SOLX’s sales and marketing expenses of $76,544 for trade shows and
      other marketing public relations during the three-month period ended September
      30, 2006. There were no comparable expenses in the prior year period. These
      increases in expenses were partially offset by reduced employee and travel
      costs
      during the period of $12,168 and a decrease in marketing expenses of $73,293
      due
      to reduced marketing efforts in the period following the announcement of MIRA-1
      results.





During
      the nine months ended September 30, 2006, sales and marketing expenses increased
      by $305,819 as compared with the corresponding prior year period due to
      stock-based compensation expense of $405,593 and fees and expenses of the
      Scientific Advisory Board members of $197,370 and SOLX’s sales and marketing
      expenses of $76,544 during the three-month period ended September 30, 2006.
      There were no comparable expenses in the nine months ended September 30, 2005.
      These increases in expenses were partially offset by reduced employee and travel
      costs of $131,330 and a decrease in marketing expenses of $256,863 during the
      nine months ended September 30, 2006.





The
      cornerstone of our sales and marketing strategy to date has been to increase
      awareness of our products among eye care professionals and, in particular,
      the
      key opinion leaders in the eye care professions. We will continue to develop
      and
      execute our conference and podium strategy to ensure visibility and
      evidence-based positioning of the RHEOTM and SOLX Glaucoma Systems among eye care
      professionals.





*Impairment
      of Goodwill*





The
      decrease in our stock price subsequent to the February 3, 2006 announcement
      of
      the MIRA-1 trial's failure to meet its primary efficacy endpoint, the June
      12,
      2006 announcement of the outcome of our meeting with the FDA and the June 30,
      2006 announcement of the termination of negotiations with Sowood were identified
      as indicators of impairment which led to an analysis of our intangible assets
      and goodwill which, in turn, resulted in the reporting of an impairment charge
      of $65,946,686. The impairment of goodwill charge of $65,946,686 in the nine
      months ended September 30, 2006 represents the write-down of the value of
      goodwill acquired on the purchase of TLC Vision's 50% interest in OccuLogix,
      L.P. on December 8, 2004 to its fair value as at September 30, 2006. There
      was
      no comparable charge in the nine-month period ended September 30, 2005.





*Restructuring
      Charges*





In
      accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or
      Disposal Activities” (“SFAS No. 146”), we recognized a total of $819,642 in
      restructuring charges in the nine months ended September 30, 2006. The Company
      implemented a number of structural and management changes designed both to
      support the continued development of the RHEOTM System and to execute the
      Company’s accelerated diversification strategy within ophthalmology. The
      restructuring charge of $819,642, recorded in the nine months ended September
      30, 2006, consists solely of severance and benefit costs related to the
      termination of a total of 12 employees at both the Company’s Mississauga and
      Palm Harbor offices. The severance and benefit costs have been fully paid by
      September 30, 2006. There was no comparable expense in the three months ended
      September 30, 2006 and 2005 and the nine months ended September 30,
      2005.





31


**Interest
      and Other Income, Net**





**Three
                Months Ended September 30,**
            
            **Nine
                Months Ended September 30,****2006**
            
            **2005**
            
            **Change**
            
            
            **2006**
            
            **2005**
            
            **Change**Interest
                and other income, net
            $
            312,098
            $
            385,374
            
            (19.0%)
            
            $
            1,086,147
            $
            1,128,921
            
            (3.4%)





*Interest
      and Other Income, Net*





Interest
      and other income, net consists primarily of interest income earned in the
      current periods and the corresponding prior periods as a result of the Company’s
      cash and short-term investment position following the raising of capital in
      the
      Company’s initial public offering.





**Recovery
      of Income Taxes**





**Three
                Months Ended September 30,**
            
            **Nine
                Months Ended September 30,****2006**
            
            **2005**
            
            **Change**
            
            
            **2006**
            
            **2005**
            
            **Change**Recovery
                of income taxes
            $
            26,867
            $
            155,697
            
            (82.7%)
            
            $
            343,717
            $
            473,280
            
            (27.4%)





*Recovery
      of Income Taxes*





Recovery
      of income taxes represents the amortization of the deferred tax liability which
      was recorded based on the difference between the fair value of intangible assets
      acquired and their tax basis. The decrease in the recovery of income taxes
      in
      the three and nine months ended September 30, 2006 as compared with the
      corresponding periods in fiscal 2005 represent the impact of an increase in
      the
      Company’s effective income tax rate for fiscal 2006 which resulted in an expense
      of $230,000. This decrease was partially offset by an increase in the recovery
      of income taxes in the three and nine months ended September 30, 2006, due
      to
      the additional deferred tax liability recorded in September 2006, being the
      difference between the fair value of the intangible assets acquired by the
      Company upon its acquisition of SOLX and their tax basis.





The
      deferred tax liability totaling $22,157,500 is being amortized over an average
      period of 12.3 years, the estimated average useful life of the intangible
      assets.





**Cumulative
      Effect of a Change in Accounting Principle**





**Three
                Months Ended September 30,**
            
            **Nine
                Months Ended September 30,****2006**
            
            **2005**
            
            **Change**
            
            
            **2006**
            
            **2005**
            
            **Change**Cumulative
                effect of a change in accounting principle
            $
            —
            $
            —
            
            —
            
            $
            107,045
            $
            —
            
            100%





*Cumulative
      Effect of a Change in Accounting Principle*





The
      cumulative effect of a change in accounting principle reflects the impact of
      our
      estimated forfeitures of outstanding stock option awards as of January 1,
      2006. On January 1, 2006, the effective date of adopting SFAS No. 123R, we
      were required to estimate the number of forfeitures of our outstanding awards
      as
      of the effective date. Consolidated balance sheet amounts related to any
      compensation cost for these estimated forfeitures previously recognized in
      prior
      periods before the adoption of SFAS No. 123R have to be eliminated and
      recognized in income as the cumulative effect of a change in accounting
      principle as of the effective date. The compensation cost previously recognized
      in prior periods before the adoption of SFAS No. 123R relates to compensation
      expense associated with non-employee stock options.





32


**LIQUIDITY
      AND CAPITAL RESOURCES**





**September
                30, 2006**
            
            **December
                31, 2005**
            
            **Change**Cash
                and cash equivalents
            $
            6,281,444
            $
            9,599,950
            $
            (3,318,506)Short-term
                investments
            
            13,905,000
            
            31,662,845
            
            (17,757,845)Total
                cash, cash equivalents and short-term investments
            $
            20,186,444
            $
            41,262,795
            $
            (21,076,351)Percentage
                of total assets
            
            21.6%
            
            29.9%
            
            (8.3%)Working
                capital
            $
            19,943,928
            $
            44,414,947
            $
            (24,471,019)





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





To
      date,
      cash has been primarily utilized to finance increased infrastructure costs,
      to
      accumulate inventory and to fund costs of the MIRA-1, LEARN and other clinical
      trials and, more recently to acquire SOLX in line with our diversification
      strategy. We expect that, in the future, we will use our cash resources to
      continue to fund our diversification strategy, the development of our
      infrastructure and to conduct clinical trials as we will be required to conduct
      a new clinical trial of the RHEOTM System, following up MIRA-1, in order to
      support our PMA application to the FDA. In addition, we will use our cash
      resources to fund the ongoing clinical trials of the SOLX Glaucoma System.





**Changes
      in Cash Flow**


**


**Nine
                  Months Ended September 30,****2006**
              
              **2005**
              
              **Change**Cash
                  used in operating activities
              $
              (10,853,206)
              $
              (14,220,407)
              $
              3,367,201Cash
                  provided by investing activities
              
              7,283,565
              
              9,795,918
              
              (2,512,353
              )Cash
                  provided by financing activities
              
              251,135
              
              283,714
              
              (32,579
              )Net
                  decrease in cash and cash equivalents during the period
              $
              (3,318,506)
              $
              (4,140,775)
              $
              822,269


*Cash
      Used in Operating Activities*





Net
      cash
      used to fund our operating activities during the nine months ended September
      30,
      2006 was $10,853,206. Net loss during that period was $79,311,353. The non-cash
      charges which comprise a portion of the net loss during that period consisted
      primarily of the goodwill impairment of $65,945,686 and the amortization of
      intangible assets, fixed assets, patents and trademarks, discounts on future
      cash payments and premium/discounts on investments of $1,775,330 netted by
      applicable deferred income taxes of $339,183. Additional non-cash charges
      consist of $1,625,000 in inventory write-down and $1,838,025 in stock-based
      compensation charges netted by the cumulative effect of a change in accounting
      principle of $107,045.





33


The
      net
      change in non-cash working capital balances related to operations for the nine
      months ended September 30, 2006 and 2005 consists of the following:





**Nine
                months ended**
              **September
                30,****2006**
            
            
            **2005**Due
                to related party
            
            $
            (5,065
            )
            $
            14,944Amounts
                receivable
            
            
            297,176
            
            
            (470,228
            )Inventory
            
            
            (1,117,354
            )
            
            (4,691,825
            )Prepaid
                expenses
            
            
            313,269
            
            
            38,650Deposit
            
            
            (5,551
            )
            
            4,105Accounts
                payable
            
            
            (930,706
            )
            
            (92,743
            )Accrued
                liabilities
            
            
            (832,840
            )
            
            (106,905
            )Deferred
                revenue and rent inducement
            
            
            38,400
            
            
            (483,325
            )Due
                to stockholders
            
            
            (36,995
            )
            
            (373,642
            )$
            (2,279,666
            )
            $
            (6.160,969
            )








·
            Amounts
                receivable decreased due primarily to the receipt of accrued interest
                receivable on investments and the refund of sales taxes received
                in
                2006.


·
            Increase
                in inventory balance reflects the completion of purchase obligations
                in
                line with supplier expectations.


·
            Decrease
                in prepaid expenses is primarily from applying outstanding invoices
                to
                retainers paid in prior periods and the amortization of prepaid
                insurance.


·
            Accounts
                payable and accrued liabilities decreased as payments are being made
                for
                costs associated with the Company’s
                activities.


·
            The
                decrease in amounts due to stockholders is due to payments made to
                TLC
                Vision during the nine-month period ended September 30,
                2006.





*Cash
      Provided by Investing Activities*





Net
      cash
      provided by investing activities for the nine months ended September 30, 2006
      was $7,283,565 and resulted from cash provided from the net sale of short-term
      investments of $17,722,021. Cash used in investing activities during the period
      consists of $244,384 used to acquire fixed assets and $102,137 used to protect
      and maintain patents and trademarks. Additional cash used in investing
      activities includes cash of $7,861,661 paid by the Company, including costs
      of
      acquisition, to acquire SOLX net of cash acquired from SOLX of $34,719.  In
      addition, the Company advanced a totalof
      $2,265,085 to SOLX to support its operations prior to the
      acquisition.


*Cash
      Provided by Financing Activities*





Net
      cash
      provided by financing activities for the nine months ended September 30, 2006
      was $251,135 and reflects cash received from the exercise of options to purchase
      shares of common stock of the Company.





*Financial
      Condition*





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





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





·
            the
                costs of acquiring and operating businesses that are in line with
                the
                Company’s diversification strategy;


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


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


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


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


·
            the
                cost and results, and the rate of progress, of the clinical trials
                of the
                components of the SOLX Glaucoma System to support SOLX’s application to
                obtain 510K approval from the FDA to market and sell the components
                of the
                SOLX Glaucoma System in the United
                States;


·
            SOLX’s
                ability to obtain 510K approval to market and sell the components
                of the
                SOLX Glaucoma System in the United States and the timing of such
                approval,
                if any;


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


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


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


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


·
            the
                effect of competing technological and market
                developments.





We
      cannot
      begin commercialization of the RHEOTM System and the components of the SOLX
      Glaucoma System in the United States until we receive FDA approval. In light
      of
      MIRA-1’s failure to meet its primary efficacy endpoint, we are required to
      conduct a follow-up clinical trial of the RHEOTM System in order to support our
      PMA application to the FDA. On August 4, 2006, we submitted our draft IDE
      package to the FDA together with a draft of the protocol and are currently
      awaiting the FDA’s feedback which, when received, will enable us to proceed with
      the formal submission to the FDA of our IDE package and protocol. 510K approval
      is being sought for both the SOLX DeepLight® 790 and the SOLX GMSTM, which are
      components of the SOLX Glaucoma System, under a FDA IDE study. Accordingly,
      at
      this time, we do not know when we can expect to begin to generate revenues
      from
      the RHEOTM System or the components of the SOLX Glaucoma System in the United
      States. Until we can generate a sufficient amount of revenue, we expect to
      finance future cash needs through public or private equity offerings, debt
      financings, corporate collaboration or licensing or other arrangements. We
      cannot be certain that additional funding will be available on acceptable terms,
      or at all. To the extent that we raise additional funds by issuing equity
      securities, our stockholders may experience dilution. In addition, future debt
      financing, if available, may involve restrictive covenants. To the extent that
      we raise additional funds through collaboration and licensing arrangements,
      it
      may be necessary to relinquish some rights to our technologies, or grant
      licenses on terms that are not favorable to us. If adequate funds are not
      available, we may be required to delay or reduce the scope of, or eliminate,
      some of our commercialization efforts.




34


**RECENT
      ACCOUNTING PRONOUNCEMENT**





In
      December 2004, the FASB issued SFAS No. 123R which revised SFAS No. 123 and
      supersedes APB No. 25. SFAS No. 123R requires all share-based payments to
      employees, including grants of employee stock options to be recognized in the
      financial statements based on their fair values. The pro forma disclosure
      previously permitted under SFAS No. 123 is no longer an alternative to financial
      statement recognition. SFAS No. 123R is effective at the beginning of the first
      annual period beginning after June 15, 2005. Accordingly, we adopted SFAS No.
      123R beginning January 1, 2006. We have selected the Black-Scholes
      option-pricing model as our method of determining the fair value for our awards
      and will recognize compensation cost on a straight-line basis over the awards’
vesting periods.





The
      adoption of the following recent accounting pronouncements in the first six
      months of fiscal 2006 did not have a material impact on our results of
      operations and financial condition:





·
            SFAS
                No. 151, “Inventory Costs — An Amendment of ARB No. 43, Chapter
                4”;


·
            SFAS
                No. 153, “Exchanges of Nonmonetary Assets — An Amendment of APB Opinion
                No. 29”;


·
            SFAS
                No. 154, “Accounting Changes and Error Corrections” which replaces APB No.
                20, “Accounting Changes”;


·
            SFAS
                No. 3, “Reporting Accounting Changes in Interim Financial Statements — An
                Amendment of APB Opinion No. 28”;
                and


·
            FASB
                Staff Position FAS 115-1 and FAS 124-1, “The Meaning of
                Other-Than-Temporary Impairment and Its Application to Certain
                Investments”








35


In
      February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
      Financial Instruments — An Amendment of FASB Statements No. 133 and 140". SFAS
      No. 155 simplifies accounting for certain hybrid instruments currently governed
      by SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities",
      by allowing fair value re-measurement of hybrid instruments that contain an
      embedded derivative that otherwise would require bifurcation. SFAS No. 155
      also
      eliminates the guidance in SFAS No. 133 Implementation Issue No. D1,
      "Application of Statement 133 to Beneficial Interests in Securitized Financial
      Assets", which provides that such beneficial interests are not subject to SFAS
      No. 133. SFAS No. 155 amends SFAS No. 140, "Accounting for Transfers and
      Servicing of Financial Assets and Extinguishments of Liabilities — A Replacement
      of FASB Statement No. 125", by eliminating the restriction on passive derivative
      instruments that a qualifying special-purpose entity may hold. SFAS No. 155
      is
      effective for financial instruments acquired or issued after the beginning
      of
      fiscal years beginning after September 15, 2006. We do not expect the adoption
      of this statement to have a material impact on our results of operations and
      financial condition.





In
      March
      2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial
      Assets — An Amendment of FASB Statement No. 140". SFAS No.156 requires an entity
      to recognize a servicing asset or servicing liability each time it undertakes
      an
      obligation to service a financial asset by entering into a servicing contract
      in
      specific situations. Additionally, the servicing asset or servicing liability
      shall be initially measured at fair value; however, an entity may elect the
      "amortization method" or "fair value method" for subsequent balance sheet
      reporting periods. SFAS No.156 is effective for fiscal years beginning after
      September 15, 2006. We do not expect the adoption of this statement to have
      a
      material impact on our results of operations and financial
      condition.





In
      June
      2006, the FASB issued FASB Interpretation (“FIN”) No. 48, "Accounting for
      Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109",
      which clarifies the accounting for uncertainty in tax positions. FIN No. 48
      requires that we recognize, in our financial statements, the impact of a tax
      position, if that position is more likely than


not
      of
      being sustained on audit, based on the technical merits of the
      position.  FIN
      No.
      48 is effective for fiscal years beginning after December 15, 2006. We are
      currently evaluating the effect that the adoption of FIN No. 48 will have on
      our
      consolidated results of operations and financial position.


36





**ITEM
      3.**   **QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**





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





**Interest
      Rate Risk**





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





**ITEM
      4.**   **CONTROLS
      AND PROCEDURES**





(a)   Management’s
      Report on Internal Control over Financial Reporting and Evaluation of Disclosure
      Controls and Procedures .
      As of
      the end of the nine-month period ended September 30, 2006, an evaluation of
      the
      effectiveness of our “disclosure controls and procedures” (as such term is
      defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of
      1934,
      as amended (the “Exchange Act”)) was carried out by our principal executive
      officer (the “CEO”) and our principal financial officer (the “CFO”). Based upon
      that evaluation, the CEO and the CFO have concluded that, as of the end of
      that
      fiscal period, our disclosure controls and procedures are effective to ensure
      that information required to be disclosed by us in reports that we file or
      submit under the Exchange Act is recorded, processed, summarized and reported
      within the time periods specified in SEC rules and forms.





(b)   Limitations
      on the Effectiveness of Controls .
      The
      Company maintains a system of internal accounting controls to provide reasonable
      assurance that assets are safeguarded and that transactions are executed in
      accordance with management’s authorization and recorded properly to permit the
      preparation of financial statements in accordance with accounting principles
      generally accepted in the United States. However, the Company’s management,
      including the CEO and the CFO, does not expect that the Company’s disclosure
      controls or internal controls will prevent all errors and all fraud. A control
      system, no matter how well conceived and operated, can provide only reasonable,
      not absolute, assurance that the objectives of the control system are met.
      Further, the design of a control system must reflect the fact that there are
      resource constraints, and the benefits of more controls must be considered
      relative to their costs. Because of the inherent limitations in all control
      systems, no evaluation of controls can provide absolute assurance that all
      control issues and instances of fraud, if any, within the Company have been
      detected. These inherent limitations include the realities that judgments in
      decision-making can be faulty and that breakdowns can occur because of a simple
      error or mistake. Additionally, controls can be circumvented by the individual
      acts of some persons, by collusion of two or more people or by management
      override of the controls. The design of any system of controls also is based
      in
      part upon certain assumptions about the likelihood of future events, and there
      can be no absolute assurance that any design will succeed in achieving its
      stated goals under all potential future conditions. Over time, controls may
      become inadequate because of changes in conditions, or the degree of compliance
      with the policies or procedures may deteriorate. Because of the inherent
      limitations in a cost-effective control system, misstatement due to error or
      fraud may occur and not be detected.





(c)   Changes
      in Internal Control over Financial Reporting .
      During
      the nine month period ended September 30, 2006, there were no changes in our
      internal control over financial reporting that has materially affected, or
      is
      reasonably likely to materially affect, our internal control over financial
      reporting. The financial reporting for the nine-month period ended September
      30,
      2006 includes one month of operations of SOLX which was acquired by the Company
      on September 1, 2006. The Company has not yet completed its review of the
      internal controls of SOLX.








37











PART
      II.
      OTHER INFORMATION





ITEM
      1.
      LEGAL PROCEEDINGS





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





ITEM
      2.
      UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS





On
      July
      14, 2006, we issued an aggregate of 12,500 shares of Common Stock to Sue Howard
      as a result of the exercise of options to purchase common shares at an exercise
      price per share of $0.80 in consideration for cash.





On
      July
      14, 2006, we issued an aggregate of 5,000 shares of Common Stock to Sue Howard
      as a result of the exercise of options to purchase common shares at an exercise
      price per share of $0.99 in consideration for cash.





On
      July
      14, 2006, we issued an aggregate of 2,500 shares of Common Stock to Stirling
      Smith as a result of the exercise of options to purchase common shares at an
      exercise price per share of $0.99 in consideration for cash.





Each
      of
      the above issuances was exempt from registration under the Securities Act of
      1933, as amended (the “Securities Act”), pursuant to Rule 701 thereunder.





On
      September 1, 2006, we issued an aggregate of 8,399,983 shares of Common Stock
      to
      the former stockholders of SOLX in connection with our acquisition of SOLX.
      All
      of the former stockholders of SOLX receiving shares of Common Stock represented
      that they were “accredited investors” as defined in Rule 501 under the
      Securities Act and such issuance in connection with the acquisition of SOLX
      was
      exempt from registration under the Securities Act pursuant to Rule 506
      thereunder.





ITEM
      3.
      DEFAULTS UPON SENIOR SECURITIES





There
      has
      not been any default upon our senior securities.





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





None





ITEM
      5.
      OTHER INFORMATION





None.














38


ITEM
      6.
      EXHIBITS





Index
      to Exhibits




10.1
            2006
                Distributorship Agreement between Asahi Kasei Medical Co., Ltd. and
                the
                Registrant dated October 20, 2006.31.1
            CEO’s
                Certification required by Rule 13a-14(a) of the Securities Exchange
                Act of
                1934.31.2
            CFO’s
                Certification required by Rule 13a-14(a) of the Securities Exchange
                Act of
                1934.32.1
            CEO’s
                Certification of periodic financial reports pursuant to Section 906
                of the
                Sarbanes-Oxley Act of 2002, U.S.C. Section 1350.32.2
            CFO’s
                Certification of periodic financial reports pursuant to Section 906
                of the
                Sarbanes-Oxley Act of 2002, U.S.C. Section
                1350.











39








In
      accordance with the requirements of the Exchange Act, the Registrant caused
      this
      report to be signed on its behalf by the undersigned, hereunto duly
      authorized.








**OCCULOGIX,
                INC.**Date:November
                9, 2006
            By:
            /s/ Elias
                VamvakasChief
                Executive Officer