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 THESECURITIES
      EXCHANGE ACT OF 1934




For the quarterly period
ended:                                 June 30,
2008





o
            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.YesxNoo





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 filero
            Accelerated
      filerx
            Non-accelerated
      filero


Indicate by check mark whether the
registrant is a shell company as defined in Rule 12b-2 of the Exchange Act.
(Check one):YesoNox





State the number of shares outstanding
of each of the registrant’s classes of common equity, as of the latest practical
date:57,306,145
as ofAugust
7,
2008







1





Special Note Regarding Forward-Looking Statements











PART
      I.
            FINANCIAL
      INFORMATIONItem
      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 ProceduresPART
      II.
            OTHER
      INFORMATIONItem
      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
 Table of Contents





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
 Table of Contents





OccuLogix, Inc.







PART
      I.
            FINANCIAL
      INFORMATIONITEM
      1.
            CONSOLIDATED
      FINANCIAL STATEMENTS




4
 Table of Contents




OccuLogix , Inc.


CONSOLIDATED
BALANCE SHEETS


(expressed
in U.S. dollars)


(Unaudited)


(Going Concern Uncertainty – See Note
1)





June
      30,
              2008
            
            
            December
      31,
              2007$
            
            
            $As
      restatedASSETSCurrentCash
      and cash equivalents
            
            
            920,191
            
            
            
            2,235,832Amounts
      receivable, net
            
            
            116,850
            
            
            
            374,815Prepaid
      expenses
            
            
            294,573
            
            
            
            481,121Prepaid
      finance costs
            
            
            48,000
            
            
            
            ―Deposits
            
            
            16,993
            
            
            
            10,442Other
      current assets
            
            
            128,796
            
            
            
            ―Total
      current assets
            
            
            1,525,403
            
            
            
            3,102,210Fixed
      assets, net
            
            
            106,224
            
            
            
            122,286Patents
      and trademarks, net
            
            
            201,340
            
            
            
            139,437Investments
            
            
            413,678
            
            
            
            863,750Intangible
      assets, net
            
            
            10,292,363
            
            
            
            11,085,054Total
      assets
            
            
            12,539,008
            
            
            
            15,312,737LIABILITIES
      AND STOCKHOLDERS’ EQUITY (DEFICIENCY)CurrentAccounts
      payable
            
            
            425,216
            
            
            
            1,192,807Accrued
      liabilities
            
            
            3,910,303
            
            
            
            2,873,451Due
      to stockholders
            
            
            89,526
            
            
            
            32,814Deferred
      revenue
            
            
            106,700
            
            
            
            ―Short
      term liabilities and accrued interest
            
            
            3,435,715
            
            
            
            ―Total
      current liabilities
            
            
            7,967,460
            
            
            
            4,099,072Deferred
      income tax liability
            
            
            833,515
            
            
            
            2,259,348Total
      liabilities
            
            
            8,800,975
            
            
            
            6,358,420Minority
      interest
            
            
            4,474,154
            
            
            
            4,953,960Stockholders’
      equity (deficiency)Capital
      stockCommon
      stock
            
            
            57,306
            
            
            
            57,306Par
      value of $0.001 per shareAuthorized:
      75,000,000; Issued and outstanding:June
      30, 2008 – 57,306,145; December 31, 2007 – 57,306,145Additional
      paid-in capital
            
            
            362,309,603
            
            
            
            362,232,031Accumulated
      deficit
            
            
            (363,103,030
            )
            
            
            (358,288,980
            )Total
      stockholders’ equity (deficiency)
            
            
            (736,121
            )
            
            
            4,000,357Total
      liabilities and stockholders’ equity (deficiency)
            
            
            12,539,008
            
            
            
            15,312,737





See
accompanying notes to interim consolidated financial statements


5
 Table of Contents




OccuLogix , Inc.


CONSOLIDATED
STATEMENTS OF OPERATIONS


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


(Unaudited)





Three
      months endedJune
      30,2008
            
            
            2007$
            
            
            $As
      restatedRevenueRetina
            
            
            127,200
            
            
            
            —Total
      revenue
            
            
            127,200
            
            
            
            —Cost
      of goods soldRetinaCost
      of goods sold, net of goods recovered
            
            
            —
            
            
            
            8,297Royalty
      costs
            
            
            —
            
            
            
            25,000Total
      cost of goods sold
            
            
            —
            
            
            
            33,297127,200
            
            
            
            (33,297
            )Operating
      expensesGeneral
      and administrative
            
            
            1,343,980
            
            
            
            2,559,837Clinical
      and regulatory
            
            
            808,193
            
            
            
            1,958,432Sales
      and marketing
            
            
            233,915
            
            
            
            526,492Restructuring
      charges
            
            
            955,517
            
            
            
            —3,341,605
            
            
            
            5,044,761Loss
      from operations
            
            
            (3,214,405
            )
            
            
            (5,078,058
            )Other
      income (expense)Interest
      income
            
            
            20,691
            
            
            
            215,919Changes
      in fair value of warrant obligation
            
            
            —
            
            
            
            1,500,710Interest
      expense
            
            
            (95,706
            )
            
            
            —Amortization
      of finance costs
            
            
            (91,000
            )
            
            
            —Impairment
      of investments
            
            
            (122,586
            )
            
            
            —Other
            
            
            2,747
            
            
            
            (14,511
            )Minority
      interest
            
            
            363,595
            
            
            
            201,33277,741
            
            
            
            1,903,450Loss
      from continuing operations before income taxes
            
            
            (3,136,664
            )
            
            
            (3,174,608
            )Recovery
      of income taxes
            
            
            599,687
            
            
            
            1,265,841Loss
      from continuing operations
            
            
            (2,536,977
            )
            
            
            (1,908,767
            )Loss
      from discontinued operations
            
            
            —
            
            
            
            (1,081,559
            )Net
      loss for the period
            
            
            (2,536,977
            )
            
            
            (2,990,326
            )Weighted
      average number of shares outstanding-
      basic and diluted
            
            
            57,306,145
            
            
            
            57,304,020Net
      loss per share – basic and diluted
            
            
            (0.04
            )
            
            
            (0.05
            )





See accompanying notes to interim
consolidated financial statements




6
 Table of Contents




OccuLogix , Inc.


CONSOLIDATED
STATEMENTS OF OPERATIONS


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


(Unaudited)








Six
      months endedJune
      30,2008
            
            
            2007$
            
            
            $As
      restatedRevenueRetina
            
            
            134,400
            
            
            
            90,000Total
      revenue
            
            
            134,400
            
            
            
            90,000Cost
      of goods soldRetinaCost
      of goods sold, net of goods recovered
            
            
            (444
            )
            
            
            15,396Royalty
      costs
            
            
            25,000
            
            
            
            50,000Total
      cost of goods sold
            
            
            24,556
            
            
            
            65,396109,844
            
            
            
            24,604Operating
      expensesGeneral
      and administrative
            
            
            2,870,055
            
            
            
            5,214,679Clinical
      and regulatory
            
            
            1,831,180
            
            
            
            4,128,171Sales
      and marketing
            
            
            410,443
            
            
            
            997,975Restructuring
      charges
            
            
            955,517
            
            
            
            —6,067,195
            
            
            
            10,340,825Loss
      from operations
            
            
            (5,957,351
            )
            
            
            (10,316,221
            )Other
      income (expense)Interest
      income
            
            
            57,143
            
            
            
            431,357Changes
      in fair value of warrant obligation
            
            
            —
            
            
            
            776,730Interest
      expense
            
            
            (142,309
            )
            
            
            (16,640
            )Amortization
      of finance costs
            
            
            (132,000
            )
            
            
            —Impairment
      of investments
            
            
            (450,072
            )
            
            
            —Other
            
            
            20,243
            
            
            
            1,363Minority
      interest
            
            
            571,130
            
            
            
            566,011(75,865
            )
            
            
            1,758,821Loss
      from continuing operations before income taxes
            
            
            (6,033,216
            )
            
            
            (8,557,400
            )Recovery
      of income taxes
            
            
            1,219,166
            
            
            
            3,166,361Loss
      from continuing operations
            
            
            (4,814,050
            )
            
            
            (5,391,039
            )Loss
      from discontinued operations
            
            
            —
            
            
            
            (2,185,049
            )Net
      loss for the period
            
            
            (4,814,050
            )
            
            
            (7,576,088
            )Weighted
      average number of shares outstanding - basic and diluted
            
            
            57,306,145
            
            
            
            55,931,395Net
      loss per share – basic and diluted
            
            
            (0.08
            )
            
            
            (0.14
            )





See
accompanying notes to interim consolidated financial statements





7
 Table of Contents




OccuLogix , Inc.


CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY / (DEFICIENCY)


(expressed
in U.S. dollars)


(Unaudited)


Voting
      common stock at
                par
      value
              
              
              Additional
      paid-in capital
              
              
              Accumulated
      deficit
              
              
              Net
      stockholders’ equity /shares
      issued
              
              
              
              
              
              
              
              
              (deficiency)#
              
              
              $
              
              
              $
              
              
              $
              
              
              $Balance,
      December 31, 2007 - restated
              
              
              57,306,145
              
              
              
              57,306
              
              
              
              362,232,031
              
              
              
              (358,288,980
              )
              
              
              4,000,357Stock-based
      compensation
              
              
              ―
              
              
              
              ―
              
              
              
              77,572
              
              
              
              ―
              
              
              
              77,572Net
      loss for the six month period
              
              
              ―
              
              
              
              ―
              
              
              
              ―
              
              
              
              (4,814,050
              )
              
              
              (4,814,050
              )Balance,
      June 30, 2008
              
              
              57,306,145
              
              
              
              57,306
              
              
              
              362,309,603
              
              
              
              (363,103,030
              )
              
              
              (736,121
              )


See
accompanying notes to interim consolidated financial statements




8
 Table of Contents




CONSOLIDATED
STATEMENTS OF CASH FLOWS


(expressed
in U.S. dollars)


(Unaudited)








Six
      months ended
              June
      30,2008
            
            
            2007$
            
            
            $As
      restatedOPERATING
      ACTIVITIESNet
      loss for the period
            
            
            (4,814,050
            )
            
            
            (7,576,088
            )Adjustments
      to reconcile net loss to cash used in operating
activities:Stock-based
      compensation
            
            
            77,572
            
            
            
            931,058Stock-based
      compensation – minority interest
            
            
            91,324
            
            
            
            93,371Amortization
      of fixed assets
            
            
            30,635
            
            
            
            195,623Amortization
      of patents and trademarks
            
            
            10,002
            
            
            
            2,816Amortization
      of intangible asset
            
            
            586,022
            
            
            
            2,993,103Amortization
      of prepaid finance costs
            
            
            132,000
            
            
            
            —Accretion
      expense
            
            
            —
            
            
            
            409,791Changes
      in fair value of warrant obligation
            
            
            —
            
            
            
            (776,730
            )Impairment
      of investments
            
            
            450,072
            
            
            
            —Deferred
      income tax liability, net
            
            
            (1,219,166
            )
            
            
            (5,265,651
            )Minority
      interest
            
            
            (571,130
            )
            
            
            (566,012
            )Net
      change in non-cash working capital balances related to
      operations
            
            
            877,555
            
            
            
            629,302Cash
      used in operating activities
            
            
            (4,349,164
            )
            
            
            (8,929,417
            )INVESTING
      ACTIVITIESPurchase
      sale of short-term investments
            
            
            —
            
            
            
            (190,000
            )Additions
      to fixed assets
            
            
            (14,572
            )
            
            
            (131,286
            )Additions
      to patents and trademarks
            
            
            (71,905
            )
            
            
            (62,813
            )Cash
      used in investing activities
            
            
            (86,477
            )
            
            
            (384,099
            )FINANCING
      ACTIVITIESProceeds
      from the exercise of common stock options
            
            
            —
            
            
            
            2,228Proceeds
      from the issuance of common stock
            
            
            —
            
            
            
            10,016,000Share
      issuance costs
            
            
            —
            
            
            
            (816,493
            )Proceeds
      of bridge financing
            
            
            3,300,000
            
            
            
            —Loan
      issuance costs
            
            
            (180,000
            )
            
            
            —Cash
      provided by financing activities
            
            
            3,120,000
            
            
            
            9,201,735Net
      decrease in cash and cash equivalents during the period
            
            
            (1,315,641
            )
            
            
            (111,781
            )Cash
      and cash equivalents, beginning of period
            
            
            2,235,832
            
            
            
            5,740,697Cash
      and cash equivalents, end of period
            
            
            920,191
            
            
            
            5,628,916





See
accompanying notes to interim consolidated financial statements.





9
 Table of Contents




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(expressed
in U.S. dollars except as otherwise stated)


June 30,
2008


(Unaudited)






1.
            BASIS
      OF PRESENTATION, GOING CONCERN UNCERTAINTY AND SIGNIFICANT ACCOUNTING
      POLICIES




Basis
of presentation




The
accompanying unaudited interim consolidated financial statements have been
prepared in accordance with United States generally accepted accounting
principles (“U.S. GAAP”). These unaudited interim consolidated financial
statements contain all normal recurring adjustments and estimates necessary to
present fairly the financial position of OccuLogix, Inc. (“OccuLogix” or the
“Company”) as at June 30, 2008 and the results of its operations for the three
and six months then ended. These unaudited interim consolidated financial
statements should be read in conjunction with the restated consolidated
financial statements and notes included in the Company’s latest Annual Report on
Form 10K/A filed with the U.S. Securities and Exchange Commission (the “SEC”) on
July 21, 2008. Interim results are not necessarily indicative of results for a
full year.





Going
concern uncertainty




The
consolidated financial statements have been prepared on the basis that the
Company will continue as a going concern. However, the Company has sustained
substantial losses of $69,829,983 for the year ended December 31, 2007 and
$4,814,050 and $7,576,088 for the six months ended June 30, 2008 and 2007,
respectively. The Company’s working capital deficiency at June 30, 2008 is
$6,442,057, which represents a $5,455,195 increase in its working capital
deficiency from $996,862 at December 31, 2007.  As a result of the
Company’s history of losses and financial condition, there is substantial doubt
about the ability of the Company to continue as a going concern.




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




On May 5,
2008, the Company announced that it had secured a bridge loan in an aggregate
principal amount of $300,000 from a number of private parties (“Additional
Bridge Loan I”). The Additional Bridge Loan I constitutes an increase to the
principal amount of the $3,000,000 principal amount bridge loan that the Company
announced on February 19, 2008 (the “Original Bridge Loan”) and was advanced on
substantially the same terms and conditions as the Original Bridge Loan,
pursuant to an amendment of the loan agreement for the Original Bridge Loan. The
Additional Bridge Loan I bears interest at a rate of 12% per annum and will have
the same maturity date as the Original Bridge Loan. The Company has pledged its
shares of the capital stock of OcuSense as collateral for the loan.




On July
28, 2008, the Company announced that it has secured an additional bridge loan in
an aggregate principal amount of $3,403,500from a number of private
parties (the “Additional Bridge Loan II”). $2,893,500 of the principal amount of
the Additional Bridge Loan II will be advanced by certain of the investors who
had agreed to purchase shares of the Company’s common stock in the proposed
private placement of $5,076,500 of the Company’s common stock, first announced
on May 20, 2008.  The Company has agreed to reduce the dollar amounts
of these investors’ respective commitments in the private placement by the
principal amount of the Additional Bridge Loan II that each of them will be
advancing to the Company. OccuLogix now expects the gross aggregate proceeds of
the private placement to be $2,173,000.





10
 Table of Contents





The
proceeds of the Additional Bridge Loan II will be used for general corporate
purposes of the Company and OcuSense, in which OccuLogix currently holds a
majority ownership interest (50.1% on a fully diluted basis and 57.62% on an
issued and outstanding basis).





The
Additional Bridge Loan II will constitute an increase to the principal amount of
the $3,300,000 principal amount bridge loan of the Company that is currently
outstanding, The Original Bridge Loan of $3,000,000 was advanced on February 19,
2008, and the Additional Bridge Loan I of $300,000 was advanced on May 5,
2008.  The Additional Bridge Loan II will be advanced on substantially
the same terms and conditions as the Original Bridge Loan, pursuant to a further
amendment to the amended loan agreement governing the Original Bridge
Loan.





The
Additional Bridge Loan II will bear interest at a rate of 12% per annum and will
have the same maturity date as the Original Bridge Loan.  Like the
repayment of the Original Bridge Loan, the repayment of the Additional Bridge
Loan II will be secured by a pledge by the Company of its majority ownership
interest in OcuSense.





Under the
terms of the loan agreement that governs the Original Bridge Loan, OccuLogix has
two pre-payment options available to it, should it decide to not wait until the
maturity date to repay the loan.  The Company has declared its
intention to exercise one of these pre-payment options and proposes to repay the
Original Bridge Loan in full by issuing to the lenders shares of its common
stock, in an aggregate amount equal to the amount of outstanding principal and
accrued interest, at a 15% discount to the price paid by the private placement
investors.  The Company will be obligated to, and intends to, pre-pay
the Additional Bridge Loans I and II in the same manner.  The
pre-payment of the Original Bridge Loan and the Additional Loan Agreements will
entail the issuance of a minimum of 78,864,705 shares of OccuLogix’s common
stock, for which stockholder and regulatory approval will be
required.





Management
believes that these proceeds, together with the Company’s existing cash, will be
sufficient to cover its operating activities and other demands only until
approximately the middle of November 2008.  The Company currently is
not generating cash from operations, and most of its cash has been, and is
being, utilized to fund its operations and to fund deferred acquisition
payments. The Company’s operating expenses in the six months ended June 30, 2008
have consisted mostly of expenses relating to the completion of the product
development of the TearLabTM test for dry eye disease, or DED.  Unless
the Company raises additional capital, it will not have sufficient cash to
support its operations beyond approximately the middle of November
2008.




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




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




On
January 9, 2008, the Company announced the departure, or pending departure, of
seven members of its executive team and, commencing on February 1, 2008, a 50%
reduction in the salary of each of Elias Vamvakas, its Chairman and Chief
Executive Officer, and Tom Reeves, its former President and Chief Operating
Officer.  By January 31, 2008, a total of 12 non-executive employees
of the Company left the Company’s employment. On June 30, 2008, Tom
Reeves, also left the Company.




As at
June 30, 2008, the Company had investments in the aggregate principal amount of
$1,900,000 which consist of investments in four separate asset-backed auction
rate securities yielding an average return of 3.26% per
annum.  However, as a result of market conditions, all of these
investments have recently failed to settle on their respective settlement dates
and have been reset to be settled at future dates with an average maturity of 12
days.  Due to the current lack of liquidity for asset-backed
securities of this type, the Company has concluded that the carrying value of
these investments was higher than its fair value as of June 30, 2008.
Accordingly, these auction rate securities have been recorded at their estimated
fair value of $413,678, which represents a decline of $1,486,322 in the carrying
value of these auction rate securities. The Company considers this to be an
other-than-temporary reduction in the value. Accordingly, the loss associated
with these auction rate securities of $450,072 has been included as an
impairment of investments in the Company’s consolidated statement of operations
for the six months ended June 30, 2008. Although the Company continues to
receive payment of interest earned on these securities, the Company does not
know at the present time when it will be able to convert these investments into
cash.  Accordingly, management has classified these investments as a
non-current asset on its consolidated balance sheet as of June 30, 2008.
Management will continue to monitor these investments closely for future
indications of further impairment. The illiquidity of these investments may have
an adverse impact on the length of time during which the Company currently
expects to be able to sustain its operations in the absence of an additional
capital raise by the Company as the Company does not have the cash reserves to
hold these auction rate securities until the market recovers nor can the Company
hold these securities until their contractual maturity dates.





11
 Table of Contents





The
unaudited interim consolidated financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or the amounts and classification of liabilities that might be necessary
if the Company were not able to continue in existence as a going
concern.





Significant
accounting policies




These
unaudited interim consolidated financial statements have been prepared using
significant accounting policies that are consistent with the policies used in
preparing the Company’s audited consolidated financial statements for the year
ended December 31, 2007.





Management
believes that all adjustments necessary for the fair presentation of results,
consisting of normally recurring items, have been included in the unaudited
consolidated financial statements for the interim periods presented. The
preparation of financial statements, in conformity with U.S. GAAP, requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. The principal areas of judgment relate to the impairment of
long-lived and intangible assets, valuation of investments in marketable
securities and the value of stock option and warrant
programs.





Recent accounting
pronouncements





In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value
Measurements.” This standard defines fair value, establishes a framework for
measuring fair value in U.S. GAAP and expands disclosure about fair value
measurements. This pronouncement applies to other accounting standards that
require or permit fair value measurements. Accordingly, this statement does not
require any new fair value measurement. This statement is effective for fiscal
years beginning after November 15, 2007, and interim periods within those
fiscal years. In December 2007, FASB agreed to a one year deferral of SFAS No.
157’s fair value measurement requirements for non-financial assets and
liabilities that are not required or permitted to be measured at fair value on a
recurring basis. The Company adopted SFAS No. 157 on January 1, 2008,
which had no effect on the Company’s consolidated financial statements. Refer to
Note 9, “Fair value measurements” for additional information related to the
adoption of SFAS No. 157.





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





12
 Table of Contents





Subsequent
to the adoption of SFAS No. 159, changes in fair value are recognized in
earnings. SFAS No. 159 is effective for fiscal years beginning on or after
November 15, 2007 and is required to be adopted by the Company in the first
quarter of fiscal 2008. The adoption of SFAS No. 159 has not had a material
impact on the Company’s results of operations and financial
position.




On June
14, 2007, FASB ratified Emerging Issues Task Force (“EITF”), EITF 07-3,
“Accounting for Non-Refundable Advance Payments for Goods or Services to Be Used
in Future Research and Development Activities” (“EITF 07-3”). EITF 07-3 requires
that all non-refundable advance payments for research and development activities
that will be used in future periods be capitalized until used. In addition, the
deferred research and development costs need to be assessed for recoverability.
EITF 07-3 is applicable for fiscal years beginning after December 15, 2007 and
is to be applied prospectively without the option of early application. The
adoption of  EITF 07-3  has not had a material impact on the Company’s
results of operations and financial position.




On
December 4, 2007, FASB issued SFAS No. 141R (revised 2007), “Business
Combinations”, and SFAS No. 160, “Non-controlling Interests in Consolidated
Financial Statements”. Effective for fiscal years beginning after December 15,
2008, the standards will improve, simplify and converge internationally the
accounting for business combinations and the reporting of non-controlling
interests in consolidated financial statements.




SFAS No.
141(R) improves reporting by creating greater consistency in the accounting and
financial reporting of business combinations, resulting in more complete,
comparable and relevant information for investors and other users of financial
statements. To achieve this goal, the new standard requires the acquiring entity
in a business combination to recognize all (and only) the assets acquired and
liabilities assumed in the transaction; establishes the acquisition-date fair
value as the measurement objective for all assets acquired and liabilities
assumed; and requires the acquirer to disclose to investors and other users all
of the information they need to evaluate and understand the nature and financial
effect of the business combination.




SFAS No.
160 improves the relevance, comparability and transparency of financial
information provided to investors by requiring all entities to report
non-controlling (minority) interests in subsidiaries in the same way—as equity
in the consolidated financial statements. Moreover, SFAS No.160 eliminates the
diversity that currently exists in accounting for transactions between an entity
and non-controlling interests by requiring they be treated as equity
transactions.




Early
adoption of SFAS No. 141R and SFAS No. 160 is prohibited. Management is
currently evaluating the requirements of these standards and has not yet
determined the impact, if any, on the Company’s consolidated financial
statements.




In
March 2008, FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities — An Amendment of FASB Statement
No. 133.” SFAS No. 161 enhances the required disclosures regarding
derivatives and hedging activities, including disclosures regarding how an
entity uses derivative instruments, how derivative instruments and related
hedged items are accounted for under SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities,” and how derivative instruments
and related hedged items affect an entity’s financial position, financial
performance and cash flows. SFAS No. 161 is effective for fiscal years
beginning after November 15, 2008. Management is currently evaluating the
requirements of SFAS No. 161 and has not yet determined the impact, if any,
on the Company’s consolidated financial statements.





13
 Table of Contents





2.
            RESTATEMENT
      OF CONSOLIDATED FINANCIAL
STATEMENTS





Correction
of an error in comparative periods related to the method of consolidation of
OcuSense Inc.




Background
Information




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




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





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




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





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





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





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





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




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




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




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




14
 Table of Contents




Interpretation and Related
Accounting Treatment




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




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





In
addition to the above consideration, the Company determined that OcuSense is a
variable interest entity (“VIE”) and that OccuLogix is the primary beneficiary
based on the following:




·
            OcuSense
      is a development stage enterprise (as defined under SFAS No. 7,
      “Accounting and Reporting by Development Stage Enterprises”) and therefore
      is not considered to be a business under U.S.
      GAAP.  Accordingly, OcuSense is not subject to the business
      scope exception.





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





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





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




The
Company has noted that the initial measurement of assets, liabilities and
non-controlling interests under FIN 46(R) differs from that which is required
under SFAS No.141, “Business Combinations”.  In particular, under FIN
46(R), assets, liabilities and non-controlling interest shall be measured
initially at their fair value. The Company previously recorded non-controlling
interest based on the historical carrying values of OcuSense’s assets and
liabilities, and as a result consolidation under FIN 46(R) resulted in material
revisions to the amounts previously reported in the Company’s consolidated
financial statements.




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




15
 Table of Contents




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




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


-
              The
      Company determined the fair value of the milestone payments on the date of
      acquisition by incorporating the probability that the milestone payments
      will be made, as well as the time value associated with the planned
      settlement date of the payments.
 
 -
              Upon
      payment of the milestone payments, the Company recorded the minority
      interest portion of the change in fair value of the milestone payment
      (i.e., the minority interest portion of the ultimate value of the
      milestone payment less the initial fair value determination) as an
      expense, with a corresponding increase to minority interest, to reflect
      the additional value provided to the minority interest in excess of that
      contemplated on the acquisition
date.
 
 The
following is a summary of the significant effects of the restatements on the
Company’s consolidated balance sheets as of , December 31, 2007 and its
consolidated statements of operations for the three months ended June
30,  2008 and 2007 and its consolidated statements of operations and
consolidated statements of cash flows for the six months ended June 30, 2008 and
2007.





As
      at June 30,
            
            
            As
      at December 31,2008
            
            
            
            
            
            2007As
      previously reported
            
            
            Adjustment
            
            
            As
      restated$
            
            
            $
            
            
            $
            
            
            $Consolidated
      Balance SheetsIntangible
      assets
            
            
            10,292,363
            
            
            
            5,770,677
            
            
            
            5,314,377
            
            
            
            11,085,054Deferred
      income tax liabilities
            
            
            833,515
            
            
            
            —
            
            
            
            2,259,348
            
            
            
            2,259,348Minority
      interest
            
            
            4,474,154
            
            
            
            —
            
            
            
            4,953,960
            
            
            
            4,953,960Additional
      paid-in capital
            
            
            362,309,603
            
            
            
            362,402,899
            
            
            
            (170,868
            )
            
            
            362,232,031Accumulated
      deficit
            
            
            (363,103,030
            )
            
            
            (356,560,917
            )
            
            
            (1,728,063
            )
            
            
            (358,288,980
            )Three
      months ended June 30,2008
            
            
            
            
            
            
            2007As
      previously reported
            
            
            Adjustment
            
            
            As
      restated$
            
            
            $
            
            
            $
            
            
            $Consolidated
      Statements of OperationsGeneral
      and administrative
            
            
            1,343,980
            
            
            
            2,355,088
            
            
            
            204,749
            
            
            
            2,559,837Minority
      interest
            
            
            363,595
            
            
            
            489,937
            
            
            
            (288,605
            )
            
            
            201,332Recovery
      of income taxes
            
            
            599,687
            
            
            
            1,183,941
            
            
            
            81,900
            
            
            
            1,265,841Loss
      from continuing operations
            
            
            (2,536,977
            )
            
            
            (1,497,312
            )
            
            
            (411,455
            )
            
            
            (1,908,767
            )Loss
      from discontinued operations
            
            
            —
            
            
            
            (1,081,559
            )
            
            
            —
            
            
            
            (1,081,559
            )Net
      loss for the period
            
            
            (2,536,977
            )
            
            
            (2,578,871
            )
            
            
            (411,455
            )
            
            
            (2,990,326
            )Loss
      per share
            
            
            (0.04
            )
            
            
            (0.05
            )
            
            
            
            
            
            
            (0.05
            )





16
 Table of Contents




Six
      months ended June 302008
            
            
            
            
            
            2007As
      previously reported
            
            
            Adjustment
            
            
            As
      restated$
            
            
            $
            
            
            $
            
            
            $Consolidated
      Statements of OperationsGeneral
      and administrative
            
            
            2,870,055
            
            
            
            4,805,180
            
            
            
            409,499
            
            
            
            5,214,679Minority
      interest
            
            
            571,130
            
            
            
            1,044,784
            
            
            
            (478,773
            )
            
            
            566,011Recovery
      of income taxes
            
            
            1,219,166
            
            
            
            3,002,562
            
            
            
            163,799
            
            
            
            3,166,361Loss
      from continuing operations
            
            
            (4,814,050
            )
            
            
            (4,666,566
            )
            
            
            (724,473
            )
            
            
            (5,391,039
            )Loss
      from discontinued operations
            
            
            —
            
            
            
            (2,185,049
            )
            
            
            —
            
            
            
            (2,185,049
            )Net
      loss for the period
            
            
            (4,814,050
            )
            
            
            (6,851,615
            )
            
            
            (724,473
            )
            
            
            (7,576,088
            )Loss
      per share
            
            
            (0.08
            )
            
            
            (0.12
            )
            
            
            
            
            
            
            (0.14
            )Six
      months ended June 302008
            
            
            
            
            
            
            2007As
      previously reported
            
            
            Adjustment
            
            
            As
      restated$
            
            
            $
            
            
            $
            
            
            $Consolidated
      Statements of Cash FlowsCash
      used in operating activities
            
            
            (4,349,164
            )
            
            
            (8,929,417
            )
            
            
            —
            
            
            
            (8,929,417
            )Net
      loss for the period
            
            
            (4,814,050
            )
            
            
            (6,851,615
            )
            
            
            (724,473
            )
            
            
            (7,576,088
            )Amortization
      of intangible assets
            
            
            586,022
            
            
            
            2,583,604
            
            
            
            409,499
            
            
            
            2,993,103Deferred
      tax liability, net
            
            
            (1,219,166
            )
            
            
            (5,101,852
            )
            
            
            (163,799
            )
            
            
            (5,265,651
            )Minority
      interest
            
            
            (571,130
            )
            
            
            (1,044,785
            )
            
            
            478,773
            
            
            
            (566,012
            )





17
 Table of Contents




3.
            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 intangible assets. 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.





The
Company’s other intangible assets consisted of the value of the exclusive
distribution agreements the Company had with Asahi Medical, the manufacturer of
the Rheofilter filters and the Plasmaflo filters, and Diamed and MeSys, the
designer and the manufacturer, respectively, of the OctoNova pumps. The
Rheofilter filter, the Plasmaflo filter and the OctoNova pump are components of
the RHEOTM System, the Company’s product for the treatment of Dry AMD. On
November 1, 2007, the Company announced an indefinite suspension of the RHEOTM
System clinical development program for Dry AMD and is in the process of winding
down the RHEO-AMD study as there is no reasonable prospect that the RHEOTM System
clinical development program will be relaunched in the foreseeable
future.  In accordance with SFAS No. 144, “Accounting
for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”),the Company concluded that its indefinite suspension of the RHEOTM System
clinical development program for Dry AMD was a significant event which may
affect the carrying value of its distribution agreements. Accordingly,
management was required to re-assess whether the carrying value of the Company’s
distribution agreements was recoverable as at December 31, 2007. Based on
management’s estimates of undiscounted cash flows associated with the
distribution agreements, the Company concluded that the carrying value of the
distribution agreements was not recoverable as at December 31, 2007.
Accordingly, the Company recorded an impairment charge of $20,923,028 during the
year ended December 31, 2007 to record the distribution agreements at their fair
value as at December 31, 2007, bringing the net balance to nil. As a result,
amortization expense from continuing operations for the six months ended June
30, 2008 in connection with the distribution agreements is nil.




On
December 19, 2007, the Company sold to SOLX Acquisition all of the issued and
outstanding shares of the capital stock of SOLX, which had been the Glaucoma
division of the Company prior to the completion of the transactions provided for
in the stock purchase agreement. The sale transaction established fair values
for the Company’s recorded goodwill and the Company’s shunt and laser technology
and regulatory and other intangible assets acquired upon the acquisition of SOLX
on September 1, 2006. Accordingly, management was required to re-assess whether
the carrying value of the Company’s shunt and laser technology and regulatory
and other intangible assets was recoverable as at December 1, 2007. Based on
management’s estimates of undiscounted cash flows associated with these
intangible assets, the Company concluded that the carrying value of these
intangible assets was not recoverable as at December 1, 2007. Accordingly, the
Company recorded an impairment charge of $22,286,383 during the year ended
December 31, 2007 to record the shunt and laser technology and regulatory and
other intangible assets at their fair value as at December 31, 2007, bringing
the net balance to nil. The results of operations of SOLX for the three months
and six months ended June 30, 2007 are classified as results of discontinued
operations in these consolidated financial statements.




As at
June 30, 2008 and 2007, the remaining weighted average amortization period for
the distribution agreements intangible assets is nil and 8.21 years,
respectively.





On
November 30, 2006, the Company acquired 50.1% of the capital stock of OcuSense,
measured on a fully diluted basis, and 57.62% of the capital stock of OcuSense,
measured on an issued and outstanding basis. OcuSense’s first product, which is
currently under development, is a hand-held tear film test for the measurement
of osmolarity, a quantitative and highly specific biomarker that has shown to
correlate with dry eye disease, or DED. The test is known as the TearLabTM test
for DED. The results of OcuSense’s operations have been included in the
Company’s consolidated financial statements since November 30,
2006.




Under FIN
46(R), assets, liabilities and non-controlling interest shall be measured at
their fair value. The Company previously recorded non-controlling interest at
their historical carrying values. As a result, consolidation under FIN 46(R)
results in material revisions to the amounts previously reported in the
Company’s consolidated financial statements.





18
 Table of Contents





Assets
acquired and liabilities assumed consisted solely of working capital and of a
technology intangible asset relating to patents owned by
OcuSense.  The Company anticipates that before consideration of
deferred tax, the fair value of the assets acquired will be greater than the
fair value of the liabilities assumed and the non-controlling interest. Because
OcuSense does not comprise a business, as defined in EITF 98-3, the Company
applied the simultaneous equation method as per EITF 98-11, “Accounting for
Acquired Temporary Differences in Certain Purchase Transactions That Are Not
Accounted for as Business Combinations” and adjusted the assigned value of the
non-monetary assets acquired (consisting solely of the technology asset) to
include the deferred tax liability.





In
estimating the fair value of the intangible assets acquired, the Company
considered a number of factors, including discussions with OcuSense management,
review of historic financial information, future revenue and expense estimates
and a review of the economic and competitive environment. As a result, the
Company used the income approach to value OcuSense’s TearLabTM technology and the
cost approach to value the intangible assets acquired.





Intangible
assets subject to amortization consist of the following:





As
      at June 30, 2008Cost
      less tax loss benefited
            
            
            Accumulated
              amortization$
            
            
            $TearLabTM
      technology
            
            
            12,275,387
            
            
            
            1,983,024Less
      accumulated amortization
            
            
            1,983,02410,292,363Intangible
      assets were reduced by $206,666 in the six months ended June 30, 2008 to
      reflect the effect of acquired tax losses benefited which became
      unrestricted in the period.





As
      at December 31, 2007Cost
      less tax loss benefited
            
            
            Accumulated
              amortization$
            
            
            $TearLabTM
      technology
            
            
            12,482,054
            
            
            
            1,397,000Less
      accumulated amortization
            
            
            1,397,00011,085,054Intangible
      assets were reduced by $413,333 in the year ended Decenber 31, 2007 to
      reflect the effect of acquired tax losses benefited which became
      unrestricted in the year.





Estimated
amortization expense for the intangible assets for each of the next four years
and thereafter is as follows:





Amortization
      of intangible assets$Remainder
      of  2008
            
            
            610,4072009
            
            
            1,220,8142010
            
            
            1,220,8142011
            
            
            1,220,8142012
      and thereafter
            
            
            6,019,51410,292,363





Amortization
expense of $586,022 from continuing operations for the six months ended June 30,
2008 is attributable to OcuSense. Amortization expense from continuing
operations for the six months ended June 30, 2007 of $1,503,103 was derived from
OcuSense and the RHEOTMSystem
distribution agreements.  Amortization expense from discontinued
operations for the six months ended June 30, 2008 and 2007 was nil and
$1,490,000, respectively.





19
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The
Company determined that, as of June 30, 2008, there have been no significant
events which may affect the carrying value of OcuSense's TearLabTM
technology. However, the Company’s prior history of losses and losses incurred
during the current fiscal year reflects a potential indication of impairment,
thus requiring management to assess whether the TearLabTM technology was
impaired as at June 30, 2008. Based on management’s estimates of forecasted
undiscounted cash flows as at June 30, 2008, the Company concluded that there is
no indication of an impairment of the OcuSense's TearLabTM technology.
Therefore, no impairment charge was recorded during the six months ended June
30, 2008.




4.
            DISCONTINUED
      OPERATIONS





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




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




The
Company’s results of operations related to discontinued operations for the six
months ended June 30, 2008 and 2007 are as follows:





Three
      months ended June 30
            
            
            Six
      months ended June 302008
            
            
            2007
            
            
            2008
            
            
            2007$
            
            
            $
            
            
            $
            
            
            $Revenue
            
            
            ―
            
            
            
            121,275
            
            
            
            ―
            
            
            
            160,900Cost
      of goods soldCost
      of goods sold
            
            
            ―
            
            
            
            42,464
            
            
            
            ―
            
            
            
            97,973Royalty
      costs
            
            
            ―
            
            
            
            6,250
            
            
            
            ―
            
            
            
            14,983Total
      cost of goods sold
            
            
            ―
            
            
            
            48,714
            
            
            
            ―
            
            
            
            112,956―
            
            
            
            72,561
            
            
            
            ―
            
            
            
            47,944Operating
      expensesGeneral
      and administrative
            
            
            ―
            
            
            
            1,012,682
            
            
            
            ―
            
            
            
            2,037,958Clinical
      and regulatory
            
            
            ―
            
            
            
            737,152
            
            
            
            ―
            
            
            
            1,365,250Sales
      and marketing
            
            
            ―
            
            
            
            228,684
            
            
            
            ―
            
            
            
            509,988―
            
            
            
            1,978,518
            
            
            
            ―
            
            
            
            3,913,196―
            
            
            
            (1,905,957
            )
            
            
            ―
            
            
            
            (3,865,252
            )Other
      income (expenses)Interest
      and accretion expense
            
            
            ―
            
            
            
            (204,888
            )
            
            
            ―
            
            
            
            (409,784
            )Other
            
            
            ―
            
            
            
            (9,274
            )
            
            
            ―
            
            
            
            (9,302
            )―
            
            
            
            (214,162
            )
            
            
            ―
            
            
            
            (419,086
            )Loss
      from discontinued operations before income taxes
            
            
            ―
            
            
            
            (2,120,119
            )
            
            
            ―
            
            
            
            (4,284,338
            )Recovery
      of income taxes
            
            
            ―
            
            
            
            1,038,560
            
            
            
            ―
            
            
            
            2,099,289Loss
      from discontinued operations
            
            
            ―
            
            
            
            (1,081,559
            )
            
            
            ―
            
            
            
            (2,185,049
            )





20
 Table of Contents




5.
            FIXED
      ASSETS




June
      30, 2008
            
            
            December
      31, 2007Cost
            
            
            Accumulated
      amortization
            
            
            Cost
            
            
            Accumulated
      amortization$
            
            
            $
            
            
            $
            
            
            $Furniture
      and office equipment
            
            
            61,025
            
            
            
            26,930
            
            
            
            101,903
            
            
            
            50,854Computer
      equipment and software
            
            
            174,126
            
            
            
            141,510
            
            
            
            197,317
            
            
            
            155,928Leasehold
      improvements
            
            
            6,335
            
            
            
            1,734
            
            
            
            6,335
            
            
            
            704Medical
      equipment
            
            
            59,607
            
            
            
            24,695
            
            
            
            1,163,135
            
            
            
            1,138,918301,093
            
            
            
            194,869
            
            
            
            1,468,690
            
            
            
            1,346,404Less
      accumulated amortization
            
            
            194,869
            
            
            
            
            
            
            
            1,346,404106,224
            
            
            
            
            
            
            
            122,286





Amortization
expense was $30,635, and $195,623 during the six months ended June 30, 2008 and
2007, respectively, of which nil and $118,765 is included as amortization
expense of discontinued operations for the six months ended June 30, 2008 and
2007, respectively.




On
November 1, 2007, the Company announced an indefinite suspension of the RHEOTM
System clinical development program for Dry AMD and is in the process of winding
down the RHEO-AMD study as there is no reasonable prospect that the RHEOTM System
clinical development program will be relaunched in the foreseeable future. In
accordance with SFAS No. 144, the Company determined that the carrying value of
certain of the Company’s medical equipment was not recoverable as at December
31, 2007. Accordingly, during the year ended December 31, 2007, the Company
recorded a reduction to the carrying value of certain of its medical equipment
of $431,683 which reflects a write-down of the value of this medical equipment
to nil as at December 31, 2007 and June 30, 2008. The assets written down had
been used in the clinical trials of the RHEOTM System.




6.
              PATENTS
      AND TRADEMARKS




June
      30, 2008
            
            
            December
      31, 2007Cost
            
            
            Accumulated
              amortization
            
            
            Cost
            
            
            Accumulated
              amortization$
            
            
            $
            
            
            $
            
            
            $Patents
            
            
            299,353
            
            
            
            122,014
            
            
            
            236,854
            
            
            
            113,013Trademarks
            
            
            129,618
            
            
            
            105,617
            
            
            
            120,211
            
            
            
            104,615428,971
            
            
            
            227,631
            
            
            
            357,065
            
            
            
            217,628Less
      accumulated amortization
            
            
            227,631
            
            
            
            
            
            
            
            217,628201,340
            
            
            
            
            
            
            
            139,437





Amortization
expense was $10,002 and $2,816 during the six months ended June 30, 2008 and
2007, respectively.




Patents
and trademarks are recorded at historical cost and amortized over a period not
exceeding 15 years.




Based on
the November 1, 2007 announcement and in accordance with SFAS No. 144, the
Company determined that the carrying value of certain of the Company’s patents
and trademarks was not recoverable as at December 31, 2007. Accordingly, during
the year ended December 31, 2007, the Company recorded a $190,873 reduction to
the carrying value of its patents and trademarks related to the RHEOTM System
which reflects a write-down of these patents and trademarks to a value of nil as
at June 30, 2008 and December 31, 2007.





21
 Table of Contents





7.
            INVENTORY




The
Company evaluates its ending inventory for estimated excess quantities and
obsolescence, based on expected future sales levels and projections of future
demand, with the excess inventory provided for. In addition, the Company
assesses the impact of changing technology and market
conditions.





In light
of the Company’s financial position as at September 30, 2007 and November 1,
2007, the Company announced an indefinite suspension of the RHEOTM System
clinical development program for Dry AMD.  That decision was made
following a comprehensive review of the respective costs and development
timelines associated with the products in the Company’s portfolio and, in
particular, the fact that, if the Company was unable to raise additional
capital, it would not have had sufficient cash to support its
operations beyond early 2008.Accordingly, the Company
wrote down the value of its treatment sets and OctoNova pumps, the components of
the RHEOTM System, to nil as at December 31, 2007 since the Company is not
expected to be able to sell or utilize these treatment sets and OctoNova pumps
prior to their expiration dates, in the case of the treatment sets, or before
the technologies become outdated.





As at
June 30, 2008 and December 31, 2007, the Company had inventories of
$165,012 and $7,295,545, respectively, reduced by inventory reserves of $165,012
and $7,295,545, respectively. During the six months ended June 30, 2008 and
2007, the Company recognized a provision related to inventory of nil and nil,
respectively, based on the above analysis.




8.
            INVESTMENTS





As at
June 30, 2008 and December 31, 2007, the Company had investments in the
aggregate principal amount of $1,900,000 which consist of investments in four
separate asset-backed auction rate securities currently yielding an average
return of 3.26% per annum. Contractual maturities for these auction rate
securities are greater than eight years with an interest reset date
approximately every 12 days. Historically, the carrying value of auction
rate securities approximated fair value due to the frequent resetting of the
interest rates. With the liquidity issues experienced in the global credit and
capital markets, the Company’s auction rate securities have experienced multiple
failed auctions. While the Company continues to earn and receive interest on
these investments at the maximum contractual rate, the estimated fair value of
these auction rate securities no longer approximates par value. Refer to Note 9
for discussion on how the Company determines the fair value of its investment in
auction rate securities.





Although
the Company continues to receive payment of interest earned on these securities,
the Company does not know at the present time when it will be able to convert
these investments into cash.  Accordingly, management has classified
these investments as a non-current asset on its consolidated balance sheets as
at December 31, 2007 and June 30, 2008. Management will continue to closely
monitor these investments for future indications of further impairment. The
illiquidity of these investments may have an adverse impact on the length of
time during which the Company currently expects to be able to sustain its
operations in the absence of an additional capital raise by the Company as the
Company does not have the cash reserves to hold these auction rate securities
until the market recovers nor can the Company hold these securities until their
contractual maturity dates.




The
Company concluded that the fair value of these auction rate securities at June
30, 2008 was $413,678, a decline of $1,486,322 from par value and
$450,072 from the fair value as at December 31, 2007. The Company
considers this to be an other-than-temporary reduction in the value.
Accordingly, the loss associated with these auction rate securities of $450,072
for the six months ended June 30, 2008 has been included as an impairment of
investments in the Company’s consolidated statement of operations for the six
months ended June 30, 2008.





22
 Table of Contents





9.
            FAIR
      VALUE MEASUREMENTS





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





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


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


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





Assets
measured at fair value on a recurring basis are as follows:





Quoted
      prices in
            
            Significant
      other
            
            SignificantFair
      value
            
            
            active
      markets for
            
            observable
            
            unobservableJune
      30,
            
            
            identical
      assets
            
            inputs
            
            inputs
            
            Valuation2008
            
            
            (Level
      1)
            
            (Level
      2)
            
            (Level
      3)
            
            techniqueInvestments
      in marketable securities (non-current)
            
            $
            413,678
            
            
            $
            —
            
            
            $
            —
            
            
            $
            413,678
            
            
            
            (1
            )




(1)
            The
      Company estimated the fair value of these auction rate securities based on
      the following: (i) the underlying structure of each security;
      (ii) the present value of future principal and interest payments
      discounted at rates considered to reflect current market conditions;
      (iii) consideration of the probabilities of default, auction failure
      or repurchase at par for each period; and (iv) estimates of the recovery
      rates in the event of default for each security. These estimated fair
      values could change significantly based on future market conditions. Refer
      to Note 8 for further discussion of the Company’s investments in auction
      rate securities.




Assets
measured at fair value on a recurring basis using significant unobservable
inputs (Level 3):





Investments
      inmarketablesecurities(non-current)Balance
      as at December 31, 2007
            
            $
            863,750Losses
      deemed to be other than temporary charged to other non-operating expense,
      net
            
            
            450,072Balance
      as at June 30, 2008
            
            $
            413,678





23
 Table of Contents





10.
            SHORT
      TERM  LIABILITIES AND ACCRUED
INTEREST




On
February 19, 2008, the Company announced that it had secured a bridge loan in an
aggregate principal amount of $3,000,000 from a number of private
parties.  Transaction costs, funded separately, were
$180,000  paid to Marchant Securities Inc. (“Marchant”), a related
party (see Note 14) for introducing the Company to the bridge loan lenders. The
loan bears interest at a rate of 12% per annum and has a 180-day term, which has
been extended to 270 days.





On May 5,
2008, the Company announced that it had secured a bridge loan in an aggregate
principal amount of $300,000 from a number of private parties. The Additional
Bridge Loan I constitutes an increase to the principal amount of the $3,000,000
principal amount bridge loan that the Company announced on February 19, 2008 and
was advanced on substantially the same terms and conditions as the Original
Bridge Loan, pursuant to an amendment of the loan agreement for the Original
Bridge Loan. The Additional Bridge Loan I bears interest at a rate of 12% per
annum and will have the same maturity date as the Original Bridge
Loan.




The
repayment of the loans is secured by a pledge by the Company of its shares of
the capital stock of OcuSense. Under the terms of the loan agreement, the
Company has two pre-payment options available to it, should it
decide  not to wait until the maturity date to repay the loan. Under
the first pre-payment option, the Company may repay the loan in full by paying
the lenders, in cash, the amount of outstanding principal and accrued interest
and issuing to the lenders five-year warrants in an aggregate amount equal to
approximately 19.9% of the issued and outstanding shares of the Company’s common
stock (but not to exceed 20% of the issued and outstanding shares of the
Company’s common stock). The warrants would be exercisable into shares of the
Company’s common stock at an exercise price of $0.10 per share and would not
become exercisable until the 180th day
following their issuance. Under the second pre-payment option, provided that the
Company has closed a private placement of shares of its common stock for
aggregate gross proceeds of at least $1,000,000, the Company may repay the loan
in full by issuing to the lenders shares of its common stock, in an aggregate
amount equal to the amount of outstanding principal and accrued interest, at a
15% discount to the price paid by the private placement investors. Any exercise
by the Company of the second pre-payment option would be subject to stockholder
and regulatory approval.





Of the
$3,435,715 outstanding as at June 30, 2008, the principal portion of the loan
was $3,300,000 and the accrued interest was $135,715.





11.
              MINORITY
      INTEREST





As
previously discussed in Note 2, OcuSense was determined to be a VIE and
OccuLogix was the primary beneficiary.





On
acquisition of OcuSense, FIN 46(R) requires that the non-controlling interest be
measured initially at fair value. Minority
interest reflects the initial fair value of the minority’s 42.38% interest in
OcuSense’s net assets which are comprised of working capital and intangible
assets as at the November 30, 2006 acquisition date, less the minority’s
proportionate interest in losses incurred to date, plus the fair value of all
vested options and warrants issued to parties other than OccuLogix as of the
date of acquisition, as well as the value of options and warrants vested and
issued after the acquisition date.




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





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


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





24
 Table of Contents








Six
      months ended June 30,2008
            
            
            2007$
            
            
            $Minority
      interest – beginning of period
            
            
            4,953,960
            
            
            
            6,110,834Minority
      share of net loss from operations
            
            
            (571,130
            )
            
            
            (566,011
            )Fair
      value of OcuSense stock-based compensation
            
            
            91,324
            
            
            
            93,371Minority
      interest – end of period
            
            
            4,474,154
            
            
            
            5,638,194





Minority
stockholder’s share of net losses from operation for the six months ended June
30, 2008 of $774,949 was offset by $203,819 to reflect a minority increment for
the Beta milestone payment.  Minority share of net loss from operation
for six months ended June 30, 2007 of $696,302 was offset by $130,291 to reflect
a minority increment for the Alpha milestone payment.  These
transactions are specific to the acquisition of OcuSense. The increment
represents the minority stockholders’ ownership percentage of the variance
between the actual milestone payments made and the original fair value of the
milestone payments reported when the Company acquired its ownership interest in
OcuSense. No future milestone payments remain to be paid.





12.
            CAPITAL
      STOCK




(a)
              Common
      stock





On
February 1, 2007, the Company entered into a Securities Purchase Agreement (the
“Securities Purchase Agreement”) with certain institutional investors, pursuant
to which the Company agreed to issue to those investors an aggregate of
6,677,333 shares of the Company’s common stock (the “Shares”) and five-year
warrants exercisable into an aggregate of 2,670,933 shares of the Company’s
common stock (the “Warrants”).  The per share purchase price of the
units was $1.50, and the per share exercise price of the Warrants is $2.20,
subject to adjustment.  The Warrants became exercisable on August 6,
2007. Pursuant to the Securities Purchase Agreement, on February 6, 2007, the
Company issued the Shares and the Warrants. The gross proceeds of the sale of
the Shares and Warrants totaled $10,016,000 (less transaction costs of
$871,215). On February 6, 2007, the Company also issued to Cowen and Company,
LLC a warrant exercisable into an aggregate of 93,483 shares of the Company’s
common stock (the “Cowen Warrant”) in part payment of the placement fee payable
to Cowen and Company, LLC for the services it had rendered as the placement
agent in connection with the sale of the Shares and the Warrants. All of the
terms and conditions of the Cowen Warrant (other than the number of shares of
the Company's common stock into which the Cowen Warrant is exercisable) are
identical to those of the Warrants. The estimated grant date fair value of the
Cowen Warrant of $97,222 is included in the transaction cost of
$871,215.





(b)   
Stock-based compensation




The
Company has a stock option plan, the 2002 Stock Option Plan (the “Stock Option
Plan”), which was most recently amended in June 2007 in order to, among other
things, increase the share reserve under the Stock Option Plan by 2,000,000.
Under the Stock Option Plan, up to 6,456,000 options are available for grant to
employees, directors and consultants. Options granted under the Stock Option
Plan may be either incentive stock options or non-statutory stock options. Under
the terms of the Stock Option Plan, the exercise price per share for an
incentive stock option shall not be less than the fair market value of a share
of stock on the effective date of grant and the exercise price per share for
non-statutory stock options shall not be less than 85% of the fair market value
of a share of stock on the date of grant. No option granted to a holder of more
than 10% of the Company’s common stock shall have an exercise price per share
less than 110% of the fair market value of a share of stock on the effective
date of grant.




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





25
 Table of Contents





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




On
January 1, 2006, the Company adopted the provisions of SFAS No. 123R,
“Share-Based Payments”, requiring the recognition of expense related to the fair
value of its stock-based compensation awards. The Company elected to use the
modified prospective transition method as permitted by SFAS No. 123R and
therefore has not restated its financial results for prior periods. Under this
transition method, stock-based compensation expense for each of the years ended
December 31, 2007 and 2006 includes compensation expense for all stock-based
compensation awards granted prior to, but not yet vested as of January 1, 2006
based on the grant date fair value estimated in accordance with the original
provisions of SFAS No. 123. Stock-based compensation expense for all stock-based
compensation awards granted subsequent to January 1, 2006 was based on the grant
date fair value estimated in accordance with the provisions of SFAS No. 123R.
The Company recognizes compensation expense for stock option awards on a
straight-line basis over the requisite service period of the award.




The
following table sets forth the total stock-based compensation expense resulting
from stock options included in the Company’s consolidated statements of
operations and changes in stockholder’s equity:





Three
      months ended
              June
      30,
            
            
            Six
      months ended
              June
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007As
      restated
            
            
            
            
            
            As
      restatedGeneral
      and administrative
            
            $
            43,432
            
            
            $
            171,021
            
            
            $
            87,221
            
            
            $
            528,109Clinical
      and regulatory
            
            
            27,718
            
            
            
            97,130
            
            
            
            53,754
            
            
            
            191,218Sales
      and marketing
            
            
            13,871
            
            
            
            119,475
            
            
            
            27,921
            
            
            
            250,502Total
      expense from continuing operations
            
            
            85,021
            
            
            
            387,626
            
            
            
            168,896
            
            
            
            969,829Expense
      from discontinued operations
            
            
            ―
            
            
            
            27,300
            
            
            
            ―
            
            
            
            54,600Stock-based
      compensation expense before income taxes (i)
            
            $
            85,021
            
            
            $
            414,926
            
            
            $
            168,896
            
            
            $
            1,024,429




(i) The
tax benefit associated with the Company’s stock-based compensation expense for
the six months ended June 30, 2008 and 2007 is $63,905 and $405,924,
respectively. Neither amount has been recognized in the Company’s consolidated
financial statements for the six months ended June 30, 2008 and 2007 as there is
a low probability that the Company will realize this benefit.




Net cash
proceeds from the exercise of common stock options were nil and nil for the six
months ended June 30, 2008 and 2007, respectively. No income tax benefit was
realized from stock option exercises during the six months ended June 30, 2008
and 2007. 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.





26
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During
the six months ended June 30, 2008, there were no new stock options granted. The
weighted average fair value of stock options granted during the six months ended
June 30 2007 was $1.22. The estimated fair value was determined using the
Black-Scholes option-pricing model with the following weighted average
assumptions:




2008
            
            
            2007Volatility
            n.a.
            
            
            76.9%Expected
      life of options
            n.a.
            
            
            5.44
      yearsRisk-free
      interest rate
            n.a.
            
            
            4.55%Dividend
      yield
            n.a.
            
            
            0%





The
Company’s computation of expected volatility for the six months ended June 30,
2007 was 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 was estimated using the “short-cut approach” as provided in Staff
Accounting Bulletin No. 110 (“SAB No. 110”) as options granted by the Company
meet the criteria of “plain vanilla” options as defined in SAB No. 110. Under
this approach, estimated life is calculated to be the mid-point between the
vesting date and the end of the contractual period. The risk-free interest rate
for an award is based on the U.S. Treasury yield curve with a term equal to the
expected life of the award on the date of grant. If options are granted in the
future, the Company’s computation of expected life will be based on either one
of the following: a modeling or simulating exercise behavior based on a variety
of stock price paths, estimating the expected term based on the period that
previous options were outstanding, or an estimated term based on the expected
terms of options granted by other, similar companies and similarly structured
awards.




A summary
of the option transactions during the six months ended June 30, 2008 is set
forth below:





Number
      of options outstanding
            
            
            Weighted
      average exercise price
              $
            
            
            Weighted
      average remaining contractual life (years)
            
            
            Aggregate
      intrinsic value
              $Outstanding,
      December 31, 2007
            
            
            4,787,387
            
            
            
            1.64
            
            
            
            7.41
            
            
            
            —Granted
            
            
            —Exercised
            
            
            —Forfeited
            
            
            588,999Outstanding,  June
      30, 2008
            
            
            4,198,388
            
            
            
            1.59
            
            
            
            6.86
            
            
            
            —Vested
      or expected to vest June 30, 2008
            
            
            3,103,288
            
            
            
            1.57
            
            
            
            6.06
            
            
            
            —Exercisable,
      June 30, 2008
            
            
            2,872,887
            
            
            
            1.59
            
            
            
            5.83
            
            
            
            —





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 June 30, 2008 of $0.12 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 June 30, 2008). This amount is nil
for all the periods presented as the exercise price of all options outstanding
as at June 30, 2008 and December 31, 2007 is higher than $0.12, the Company’s
closing stock price on the last trading day prior to June 30, 2008.




As at
June 30, 2008, $2,407,900 of total unrecognized compensation cost related to
stock options is expected to be recognized over a weighted average period of
1.60 years.




(c)  
Warrants




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





27
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The
Company accounts for the Warrants  and the Cowen Warrant in accordance
with the provisions of SFAS No. 133, “Accounting for Derivative Instruments and
Hedging Activities” (“SFAS No. 133”), along with related interpretation EITF No.
00-19, “Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company’s Own Stock” (“EITF No. 00-19”). SFAS No. 133
requires every derivative instrument within its scope (including certain
derivative instruments embedded in other contracts) to be recorded on the
balance sheet as either an asset or liability measured at its fair value, with
changes in the derivative’s fair value recognized currently in earnings unless
specific hedge accounting criteria are met. Based on the provisions of EITF No.
00-19, the Company determined that the Warrants and the Cowen Warrant do not
meet the criteria for classification as equity. Accordingly, the Company has
classified the Warrants and the Cowen Warrant as a current liability at December
31, 2007 and June 30, 2008.




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




Volatility
            
            61.9%Expected
      life of Warrants
            
            3.58
      yearsRisk-free
      interest rate
            
            2.91%Dividend
      yield
            
            0%





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




In
addition, SFAS No. 133 requires the Company to record the outstanding warrants
at fair value at the end of each reporting period, resulting in an adjustment to
the recorded liability of the derivative, with any gain or loss recorded in
earnings of the applicable reporting period. The Company, therefore, estimated
the fair value of the Warrants and the Cowen Warrant as at December 31, 2007 and
determined the aggregate fair value to be a nominal amount, a decrease of
approximately $2,052,578 over the initial measurement of the aggregate fair
value of the Warrants and the Cowen Warrant on the date of issuance.
Accordingly, the Company recognized a gain of $2,052,578 in its consolidated
statement of operations for the year ended December 31, 2007 which reflects the
decrease in the Company’s obligation to its warrant holders to its nominal
amount at December 31, 2007.  The Company revalued the Warrants and
the Cowan Warrant as at June 30, 2008 and determined the aggregate fair value to
be a nominal amount.




Transaction
costs associated with the issuance of the Warrants recorded as a warrant expense
in the Company’s consolidated statements of operations for the six months ended
June 30, 2008 and 2007 were nil and $170,081, respectively.




A summary
of the Warrants issued during the six months ended June 30, 2008 and the total
number of warrants outstanding as of that date are set forth below:




Number
      of warrants outstanding
            
            
            Weighted
      average exercise priceOutstanding,
      December 31, 2007
            
            
            2,764,416
            
            
            $
            2.20Granted
            
            
            —
            
            
            
            —Forfeited
            
            
            —
            
            
            
            —Outstanding,
      June 30, 2008
            
            
            2,764,416
            
            
            $
            2.20





28
 Table of Contents





13.
            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.


14.
            RELATED
      PARTY TRANSACTIONS




The
following are the Company’s related party transactions:




TLC
Vision and Diamed




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




The
$5,000,000 portion of the $12,000,000 commitment which was not convertible into
the Company’s common stock was not advanced and the commitment was terminated
prior to the completion of the Company’s initial public offering of shares of
its common stock. During the years ended December 31, 2004 and 2003, the Company
issued grid debentures in an aggregate principal amount of $4,350,000 and
$2,650,000 to TLC Vision and Diamed, respectively, under the convertible portion
of the grid debentures. On December 8, 2004, as part of the corporate
reorganization relating to the Company’s initial public offering, the Company
issued 7,106,454 shares of its common stock to TLC Vision and Diamed, upon
conversion of $7,000,000 of aggregate principal amount of convertible debentures
at a conversion price of $0.98502 per share. Collectively, at June 30, 2008, the
two companies have a combined 35.6% equity interest in the Company on a fully
diluted basis.




Asahi
Medical




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




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




The
Company received free inventory from Asahi Medical for purposes of the RHEO-AMD
trial, the LEARN, or Long-term Efficacy in AMD from Rheopheresis in North
America, trials and related clinical studies. The Company has accounted for this
inventory at a value equivalent to the cost the Company has paid for the same
filters purchased from Asahi Medical for purposes of commercial sales to the
Company’s customers. The value of the free inventory received from Asahi Medical
was nil and $81,990 for the six months ended June 30, 2008 and 2007,
respectively.




Mr.
Hans Stock




On
February 21, 2002, the Company entered into an agreement with Mr. Stock as a
result of his assistance in procuring a distributorship agreement for the filter
products used in the RHEOTM System from Asahi Medical. Mr. Stock agreed to
further assist the Company in procuring new product lines from Asahi Medical for
marketing and distribution by the Company. The agreement will remain effective
for a term consistent with the term of the distributorship agreement with Asahi
Medical, and Mr. Stock will receive a 5% royalty payment on the purchase of the
filters from Asahi Medical. The Company has not paid any amount to Mr. Stock as
royalty fees. Included in due to stockholders at June 30, 2008 and December 31,
2007 are $48,022 and $48,022, respectively, due to Mr. Stock for filter
products.





29
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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. On May 19, 2008, the patent license and royalty agreement with
Mr. Stock was terminated by Mr. Stock as a result of  non-payment of
minimum license fees due at March 31, 2008 and December 31, 2007 of $25,000 and
$12,500, respectively. As such, no amounts were accrued for license fees for Mr.
Stock in the three months ended June 30, 2008. Included in due to stockholders
at June 30, 2008 and December 31, 2007 are $25,000 and $12,500, respectively,
due to Mr. Stock for royalties.




Other




On June
25, 2003, the Company entered into a reimbursement agreement with Apheresis
Technologies, Inc. (“ATI”), pursuant to which employees of ATI, including Mr.
John Cornish, one of the Company’s stockholders and its former Vice President,
Operations, provided services to the Company and ATI is reimbursed for the
applicable percentage of time the employees spend working for the Company.
Effective April 1, 2005, the Company terminated its reimbursement agreement with
ATI, as a result of which termination the Company no longer compensated ATI in
respect of any salary paid to, or benefits provided to, Mr. Cornish by ATI.
Until April 1, 2005, Mr. Cornish did not have an employment contract with the
Company and received no direct compensation from the Company. On April 1, 2005,
Mr. Cornish entered into an employment agreement with the Company under which he
received an annual base salary of $106,450, representing compensation to him for
devoting 80% of his time to the business and affairs of the Company. Effective
June 1, 2005, the Company amended its employment agreement with Mr. Cornish such
that he began to receive an annual base salary of $116,723, representing
compensation to him for devoting 85% of his time to the business and affairs of
the Company. Effective April 13, 2006, the Company further amended its
employment agreement with Mr. Cornish such that his annual base salary was
decreased to $68,660 in consideration of his devoting 50% of his time to the
business and affairs of the Company. In light of the Company's current financial
situation, and in connection with the indefinite suspension of its RHEOTM System
clinical development program and the sale of SOLX, the Company terminated the
employment of Mr. Cornish effective January 4, 2008.




During
the three and six months ended June 30, 2008 and 2007, ATI made available to the
Company, upon request, the services of certain of ATI’s employees and
consultants on a per diem basis.  During the three and six months
ended June 30, 2008, the Company paid ATI nil and $21,666 under this arrangement
(2007 – $28,550 and 46,656,  respectively). Included in accounts
payable and in accrued liabilities as at June 30, 2008 and December 31, 2007 are
nil and $20,004, respectively, due to ATI.




In March
2008, the Company sold substantially all of its fixed assets located in Florida
to ATI for their book value of $8,000. Included in amounts receivable at June
30, 2008 is $5,193 due from ATI; the balance of $2,807 has been expensed with
ATI and applied to the amount due from ATI.




Effective
January 1, 2004, the Company entered into a rental agreement with Cornish
Properties Corporation, a company owned and managed by Mr. Cornish, pursuant to
which the Company leases space from Cornish Properties Corporation at $2,745 per
month. The original term of the lease extended to December 31, 2005. On November
8, 2005, as provided for in the rental agreement, the Company extended the term
of the rental agreement with Cornish Properties Corporation for another year,
ending December 31, 2006. On December 19, 2006, the Company extended the term of
the rental agreement with Cornish Properties Corporation for another year,
ending December 31, 2007, at a lease payment of $2,168 per month. During the six
months ended June 30, 2008 and 2007, the Company paid Cornish Properties
Corporation an amount of nil and $13,008, respectively, as rent.





30
 Table of Contents





On
November 30, 2006, the Company announced that Mr. Elias Vamvakas, the Chairman,
Chief Executive Officer and Secretary of the Company, had agreed to provide the
Company with a standby commitment to purchase convertible debentures of the
Company (“Convertible Debentures”) in an aggregate maximum amount of $8,000,000
(the “Total Commitment Amount”).  Pursuant to the Summary of Terms and
Conditions, executed and delivered as of November 30, 2006 by the Company and
Mr. Vamvakas, during the 12-month commitment term commencing on November 30,
2006, upon no less than 45 days’ written notice by the Company to Mr. Vamvakas,
Mr. Vamvakas was obligated to purchase Convertible Debentures in the aggregate
principal amount specified in such written notice. A commitment fee of 200 basis
points was payable by the Company on the undrawn portion of the Total Commitment
Amount. Any Convertible Debentures purchased by Mr. Vamvakas would have carried
an interest rate of 10% per annum and would have been convertible, at Mr.
Vamvakas’ option, into shares of the Company’s common stock at a conversion
price of $2.70 per share. The Summary of Terms and Conditions further provided
that if the Company closes a financing with a third party, whether by way of
debt, equity or otherwise, and there are no Convertible Debentures outstanding,
then the Total Commitment Amount was to be reduced automatically upon the
closing of the financing by the lesser of: (i) the Total Commitment Amount; and
(ii) the net proceeds of the financing. On February 6, 2007, the Company raised
gross proceeds in the amount of $10,016,000 in a private placement of shares of
its common stock and warrants. The Total Commitment Amount was therefore reduced
to zero, thus effectively terminating Mr. Vamvakas’ standby commitment. No
portion of the standby commitment was ever drawn down by the Company, and the
Company paid Mr. Vamvakas a total of $29,808 in commitment fees in February
2007.




Marchant,
a firm indirectly beneficially owned as to approximately 32% by Mr. Vamvakas and
members of his family, introduced the Company to the lenders of the (i)
$3,000,000 aggregate principal amount Original Bridge Loan that the Company
secured and announced on February 19, 2008 (ii) the $300,000 aggregate principal
amount Additional Bridge Loan I secured and announced on May 5, 2008, and (iii)
the $3,403,500 aggregate principal amount Additional Bridge Loan II secured and
announced on July 28, 2008. The Company also has retained Marchant in
connection with the proposed private placement of $2,173,000 of OccuLogix’s
common stock, announced by the Company on July 28, 2008, for which Marchant will
be paid 6% of the gross aggregate proceeds of such private placement and bridge
loans by Canadian investors.  Marchant has been paid $180,000
and subject to obtaining any and all requisite stockholder and regulatory
approvals, $84,480 of the commissions, will be paid to Marchant in the form of
equity securities of the Company.





The
Company entered into a consultancy and non-competition agreement on July 1, 2003
with the Center for Clinical Research (“CCR”), then a significant stockholder of
the Company, which requires the Company to pay a fee of $5,000 per month. For
the year ended December 31, 2003, CCR agreed to forego the payment of $75,250
due to it in exchange for options to purchase 20,926 shares of the Company’s
common stock at an exercise price of $0.13 per share. In addition, CCR agreed to
the repayment of the balance of $150,500 due to it at a rate of $7,500 per month
beginning in July 2003. On August 22, 2005, the Company amended the consultancy
and non-competition agreement with CCR such that the fee payable to it was
increased from $5,000 to $15,000 per month effective January 1, 2005. The
monthly fee is fixed regardless of actual time incurred by CCR in performance of
the services rendered to the Company. The agreement allows either party to
convert the payment arrangement to a fee of $2,500 daily. In the event of such
conversion, CCR shall provide services on a daily basis as required by the
Company and will invoice the Company for the total number of days that services
were provided in that month. The amended consultancy and non-competition
agreement provides for the payment of a one-time bonus of $200,000 upon receipt
by the Company of FDA approval of the RHEOTM System and the grant of 60,000
options to CCR at an exercise price of $7.15 per share. The stockholders of the
Company approved the adjustment of the exercise price of these options to $2.05
per share on June 23, 2006. These options were scheduled to vest as to 100% when
and if the Company receives FDA approval of the RHEOTM System on or before
November 30, 2006, as to 80% when and if the Company receives FDA approval after
November 30, 2006 but on or before January 31, 2007 and as to 60% when and if
the Company receives FDA approval after January 31, 2007. In August 2006, by
letter agreement between the Company and CCR, it was agreed that the monthly fee
of $15,000 would be suspended at the end of August 2006 until CCR’s services are
required by the Company in the future. This resulted in a consulting expense,
included within clinical and regulatory expense for the six months ended June
30, 2008 and 2007, of nil and $53,379, respectively.




In March
2007, Veris Health
Sciences Inc. (“Veris”) negotiated new payment terms with the Company,
and it was agreed that payment for treatment sets shipped subsequent to March
2007 must be received within 180 days of shipment. From April 2007 to December
31, 2007, the Company sold a total of 816 treatment sets to Veris, for a total
amount of $172,992, plus applicable taxes. The sale of these treatment sets was
not recognized as revenue during the year ended December 31, 2007 based on
Veris’ payment history with the Company and the new 180-day payment terms agreed
by Veris and the Company. In October 2007, the Company met with the management
of Veris and, based on discussions with Veris, the Company believes that Veris
will not be able to meet its financial obligations to the Company. Therefore,
during the year ended December 31, 2007, the Company recorded an allowance for
doubtful accounts of $172,992 against the total amount due from Veris for the
purchase of these treatment sets.  As at June 30, 2008 and December
31, 2007, the allowance for doubtful accounts was $172,992.





31
 Table of Contents





During
the fourth quarter of 2004, the Company began a business relationship with
Innovasium Inc. Innovasium Inc. designed and built some of the Company’s
websites and also created some of the sales and marketing materials to reflect
the look of the Company’s websites. Daniel Hageman, who is the President and one
of the owners of Innovasium Inc., is the spouse of a former officer of the
Company. During the six months ended June 30, 2008 and 2007, the Company paid
Innovasium Inc. C$2,910 and C$59,140, respectively. Included in accounts payable
and / or accrued liabilities at June 30, 2008 and December 31, 2007 are nil and
nil, respectively, due to Innovasium Inc. These amounts are expensed in the
period incurred and paid when due.




On
January 25, 2007, the Company entered into a consulting agreement with Dr.
Michael Lemp for the purpose of procuring consulting services as OcuSense’s
Chief Medical Officer. Dr. Lemp is entitled to $100,000 per annum to be paid at
the end of each month and a $99 monthly expense reimbursement
stipend.  Dr. Lemp will be available to OcuSense on an average of 20
hours a week or 1,000 hours per year. Dr. Lemp also serves as a member of the
board of directors of OcuSense.




15.
              INCOME
      TAXES


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


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





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





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





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





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





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





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





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16.
            DUE
      TO STOCKHOLDERS





June
      30, 2008
              $
            
            
            December 31,
      2007
              $Due
      (from)/toTLC
      Vision Corporation
            
            
            16,504
            
            
            
            (2,708
            )Other
      stockholders
            
            
            73,022
            
            
            
            35,52289,526
            
            
            
            32,814





The
balance due from TLC Vision is related to computer and administrative support
provided by TLC Vision. All amounts have been expensed during the six months
ended June 30, 2008 and 2007 and included in general and administrative
expenses. The balance due to other stockholders includes outstanding royalty
fees payable to Mr. Hans Stock.




17.
  (a)  PREPAID EXPENSES





June
      30, 2008
              $
            
            
            December 31,
      2007
              $Prepaid
      insurance
            
            
            174,380
            
            
            
            427,063Tear
      samples and lab cards
            
            
            50,411
            
            
            
            —Prepaid
      regulatory fees
            
            
            33,771
            
            
            
            —Other
      fees and services
            
            
            36,011
            
            
            
            54,058294,573
            
            
            
            481,121





17.  
(b)  PREPAID FINANCE COSTS





June
      30, 2008
              $
            
            
            December 31,
      2007
              $Marchant
      Securities Inc - financing fees
            
            
            48,000
            
            
            
            —





Financing
fees are being amortized over the 180 day term of the February 19, 2008 Original
Bridge Loan. The amount paid to Marchant to introduce to the Company the lenders
of the $3,000,000 aggregate principal amount of the Original Bridge Loan was
$180,000.




18.
            OTHER
      CURRENT ASSETS




June
      30, 2008
              $
            
            
            December 31,
      2007
              $Other
      current assets
            
            
            128,796
            
            
            
            —





Other
current assets represent professional fees that will become capital costs of
future financial transactions expected to be completed prior to the end of the
year.





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19.
            ACCRUED
      LIABILITIES





June
      30, 2008
              $
            
            
            December 31,
      2007
              $Due
      to professionals
            
            
            477,825
            
            
            
            475,044Due
      to clinical trial sites
            
            
            106,617
            
            
            
            136,681Due
      to clinical trial specialists
            
            
            105,896
            
            
            
            116,359Product
      development costs
            
            
            566,765
            
            
            
            277,521Due
      to employees and directors
            
            
            73,996
            
            
            
            66,804Sales
      tax and capital tax payable
            
            
            37,914
            
            
            
            26,820Corporate
      compliance
            
            
            345,561
            
            
            
            246,675Obligation
      to repay advances received
            
            
            185,332
            
            
            
            —Severances
      (restructuring costs)
            
            
            1,954,011
            
            
            
            1,312,721Miscellaneous
            
            
            56,386
            
            
            
            214,8263,910,303
            
            
            
            2,873,451





The
following sets out a continuity of the Company’s liability for restructuring
costs for the six months ended June 30, 2008 and 2007:




Six
      months ended June 30,2008
            
            
            2007$
            
            
            $Accrued
      liability for severances - beginning of  period
            
            
            1,312,721
            
            
            
            ―Restructuring
      costs incurred in the period
            
            
            955,517
            
            
            
            ―Paid
      in the period
            
            
            (314,227
            )
            
            
            ―Accrued
      liability for severances - end of period
            
            
            1,954,011
            
            
            
            ―





In
accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or
Disposal Activities” (“SFAS No. 146”), the Company recognized a total of
$955,517 and nil in restructuring charges during the six months ended June 30,
2008 and 2007, respectively, reflecting the termination of employment on
June 30, 2008 of Tom Reeves, formerly the Company's President and Chief
Operating Officer. With the suspension of the Company’s RHEOTM System clinical
development program, and the resulting winding down of the RHEO-AMD study,
and the Company’s disposition of SOLX on December 19, 2007, the Company has
reduced its workforce considerably. During 2007, the Company implemented a
number of structural and management changes consistent with the termination of
its focus on the RHEOTM System. The restructuring charges of $1,312,721 recorded
in the fourth quarter of 2007, consist solely of severance and benefit costs
related to the termination of certain of the Company’s employees at the
Company’s Palm Harbor and Mississauga offices.


20.
            CONSOLIDATED
      STATEMENTS OF CASH FLOWS




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


Six
      months ended June 30,2008
            
            
            2007$
            
            
            $Amounts
      receivable
            
            
            257,965
            
            
            
            (295,191
            )Inventory
            
            
            —
            
            
            
            46,528Prepaid
      expenses
            
            
            186,548
            
            
            
            (246,528
            )Deposits
            
            
            (6,551
            )
            
            
            —Other
      current assets
            
            
            (128,796
            )
            
            
            (1,800
            )Accounts
      payable
            
            
            (767,590
            )
            
            
            204,823Accrued
      liabilities
            
            
            1,036,852
            
            
            
            815,055Deferred
      revenue
            
            
            106,700
            
            
            
            101,888Due
      to stockholders
            
            
            56,712
            
            
            
            4,527Short
      term liabilities and accrued interest
            
            
            135,715
            
            
            
            —877,555
            
            
            
            629,302





34
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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:





Six
      months ended June 30,2008
            
            
            2007$
            
            
            $Non-cash
      financing activitiesWarrant
      issued in part payment of placement fee
            
            
            —
            
            
            
            97,222Free
      inventory
            
            
            —
            
            
            
            115,633Additional
      cash flow informationInterest
      paid
            
            
            —
            
            
            
            11,180





21.
            SEGMENTED
      INFORMATION





As a
result of the acquisition of SOLX and OcuSense during 2006,the Company had three
reportable segments: retina, glaucoma and point-of-care. The retina segment was
in the business of commercializing the RHEOTM System which was used to perform
the RheopheresisTM procedure, a procedure that selectively removes molecules from
plasma, which is designed to treat Dry AMD. The Company began limited
commercialization of the RHEOTM System in Canada in 2003 and provided support to
its sole customer in Canada, Veris, in its commercial activities in Canada. The
Company obtained investigational device exemption clearance from the FDA to
commence RHEO-AMD, its clinical study of the RHEOTM System. On November 1, 2007,
the Company announced an indefinite suspension of the RHEOTM System clinical
development program for Dry AMD following a comprehensive review of the
respective costs and development timelines associated with the products in the
Company’s portfolio and, in particular, the impact if the Company is unable to
raise additional capital,





The
glaucoma segment of the Company was in the business of providing treatment for
glaucoma with the use of the components of the SOLX Glaucoma System which are
used to provide physicians with multiple options to manage intraocular pressure.
The Company was seeking to obtain 510(k) approval to market the components of
the SOLX Glaucoma System in the United States. The Company acquired the glaucoma
segment in the acquisition of SOLX on September 1, 2006; therefore, no amounts
are shown for the segment in periods prior to September 1, 2006. On December 19,
2007, the Company sold all of the issued and outstanding shares of the capital
stock of SOLX. All revenue and expenses related to the Company’s glaucoma
segment, prior to the December 19, 2007 closing date, has therefore been
included in discontinued operations on its consolidated statements of operations
for the six months ended June 30, 2008 and 2007.





The
point-of-care segment is made up of the TearLabTM business which is currently
developing technologies that enable eye care practitioners to test, at the
point-of-care, for highly sensitive and specific biomarkers in tears using
nanoliters of tear film.





The
accounting policies of the segments are the same as those described in
significant accounting policies. Inter-segment 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 business units’
managements were acquired or developed individually. OcuSense’s management was
retained at the time of acquisition.





35
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The
Company’s business units are as follows:




Retina
              
              
              Point-of-care
              
              
              Total$
              
              
              $
              
              
              $Three
      months ended June 30, 2008Revenue
              
              
              127,200
              
              
              
              —
              
              
              
              127,200Expenses:Cost
      of goods sold
              
              
              —
              
              
              
              —
              
              
              
              —Operating
              
              
              909,001
              
              
              
              1,195,440
              
              
              
              2,104,441Restructuring
      charges
              
              
              955,517
              
              
              
              —
              
              
              
              955,517Amortization
              
              
              4,671
              
              
              
              276,976
              
              
              
              281,647Loss
      from operations
              
              
              (1,741,989
              )
              
              
              (1,472,416
              )
              
              
              (3,214,405
              )Interest
      income
              
              
              18,894
              
              
              
              1,797
              
              
              
              20,691Interest
      expense
              
              
              (95,277
              )
              
              
              (429
              )
              
              
              (95,706
              )Amortization
      of finance costs
              
              
              (91,000
              )
              
              
              —
              
              
              
              (91,000
              )Impairment
      of investments
              
              
              (122,586
              )
              
              
              —
              
              
              
              (122,586
              )Other
      income (expense), net
              
              
              2,747
              
              
              
              —
              
              
              
              2,747Minority
      interest
              
              
              —
              
              
              
              363,595
              
              
              
              363,595Recovery
      of income taxes
              
              
              —
              
              
              
              599,687
              
              
              
              599,687Net
      loss
              
              
              (2,029,211
              )
              
              
              (507,766
              )
              
              
              (2,536,977
              )Six
      months ended June 30, 2008Revenue
              
              
              134,400
              
              
              
              —
              
              
              
              134,400Expenses:Cost
      of goods sold
              
              
              24,556
              
              
              
              —
              
              
              
              24,556Operating
              
              
              2,051,882
              
              
              
              2,433,137
              
              
              
              4,485,019Restructuring
      charges
              
              
              955,517
              
              
              
              —
              
              
              
              955,517Amortization
              
              
              14,449
              
              
              
              612,210
              
              
              
              626,659Loss
      from operations
              
              
              (2,912,004
              )
              
              
              (3,045,347
              )
              
              
              (5,957,351
              )Interest
      income
              
              
              54,176
              
              
              
              2,967
              
              
              
              57,143Interest
      expense
              
              
              (135,715
              )
              
              
              (6,594
              )
              
              
              (142,309
              )Amortization
      of finance costs
              
              
              (132,000
              )
              
              
              —
              
              
              
              (132,000
              )Impairment
      of investments
              
              
              (450,072
              )
              
              
              —
              
              
              
              (450,072
              )Other
      income (expense), net
              
              
              19,186
              
              
              
              1,057
              
              
              
              20,243Minority
      interest
              
              
              —
              
              
              
              571,130
              
              
              
              571,130Recovery
      of income taxes
              
              
              —
              
              
              
              1,219,166
              
              
              
              1,219,166Net
      loss
              
              
              (3,556,429
              )
              
              
              (1,257,621
              )
              
              
              (4,814,050
              )Total
      assets as at June 30, 2008
              
              
              1,205,162
              
              
              
              11,333,846
              
              
              
              12,539,008




36
 Table of Contents




Retina
            
            
            Glaucoma
            
            
            Point-of-care
            
            
            Total$
            
            
            $
            
            
            $
            
            
            $Three
      months ended June 30, 2007Revenue
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Expenses:Cost
      of goods sold
            
            
            33,297
            
            
            
            —
            
            
            
            —
            
            
            
            33,297Operating
            
            
            3,276,462
            
            
            
            —
            
            
            
            996,985
            
            
            
            4,273,447Amortization
            
            
            447,651
            
            
            
            —
            
            
            
            323,663
            
            
            
            771,314Loss
      from operations
            
            
            (3,757,410
            )
            
            
            —
            
            
            
            (1,320,648
            )
            
            
            (5,078,058
            )Interest
      income
            
            
            201,865
            
            
            
            —
            
            
            
            14,054
            
            
            
            215,919Interest
      expense
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Changes
      in fair value of warrant    obligation
            
            
            1,500,710
            
            
            
            —
            
            
            
            —
            
            
            
            1,500,710Other
      income (expense), net
            
            
            (18,233
            )
            
            
            —
            
            
            
            3,722
            
            
            
            (14,511
            )Minority
      interest
            
            
            —
            
            
            
            —
            
            
            
            201,332
            
            
            
            201,332Recovery
      of income taxes
            
            
            744,180
            
            
            
            —
            
            
            
            521,661
            
            
            
            1,265,841Loss
      from continuing operations
            
            
            (1,328,888
            )
            
            
            —
            
            
            
            (579,879
            )
            
            
            (1,908,767
            )Loss
      from discontinued operations
            
            
            —
            
            
            
            (1,081,559
            )
            
            
            —
            
            
            
            (1,081,559
            )Net
      loss
            
            
            (1,328,888
            )
            
            
            (1,081,559
            )
            
            
            (579,879
            )
            
            
            (2,990,326
            )Six
      months ended June 30, 2007Revenue
            
            
            90,000
            
            
            
            —
            
            
            
            —
            
            
            
            90,000Expenses:Cost
      of goods sold
            
            
            65,396
            
            
            
            —
            
            
            
            —
            
            
            
            65,396Operating
            
            
            6,678,530
            
            
            
            —
            
            
            
            2,120,306
            
            
            
            8,798,836Amortization
            
            
            894,913
            
            
            
            
            
            
            
            647,076
            
            
            
            1,541,989Loss
      from operations
            
            
            (7,548,839
            )
            
            
            —
            
            
            
            (2,767,382
            )
            
            
            (10,316,221
            )Interest
      income
            
            
            405,725
            
            
            
            —
            
            
            
            25,632
            
            
            
            431,357Interest
      expense
            
            
            (16,219
            )
            
            
            —
            
            
            
            (421
            )
            
            
            (16,640
            )Changes
      in fair value of warrant obligation
            
            
            776,730
            
            
            
            —
            
            
            
            —
            
            
            
            776,730Other
      income (expense), net
            
            
            (2,359
            )
            
            
            —
            
            
            
            3,722
            
            
            
            1,363Minority
      interest
            
            
            —
            
            
            
            —
            
            
            
            566,011
            
            
            
            566,011Recovery
      of income taxes
            
            
            2,070,980
            
            
            
            —
            
            
            
            1,095,381
            
            
            
            3,166,361Loss
      from continuing operations
            
            
            (4,313,982
            )
            
            
            —
            
            
            
            (1,077,057
            )
            
            
            (5,391,039
            )Loss
      from discontinued operations
            
            
            —
            
            
            
            (2,185,049
            )
            
            
            —
            
            
            
            (2,185,049
            )Net
      loss
            
            
            (4,313,982
            )
            
            
            (2,185,049
            )
            
            
            (1,077,057
            )
            
            
            (7,576,088
            )Total
      assets as at June 30, 2007
            
            
            39,905,286
            
            
            
            41,479,104
            
            
            
            14,627,760
            
            
            
            96,012,150




22.
            SUBSEQUENT
      EVENTS




(i)           On
July 28, 2008, the Company announced that it has secured an additional bridge
loan in an aggregate principal amount of $3,403,500from a number of private
parties (the “Additional Bridge Loan II”). $2,893,500 of the principal amount of
the Additional Bridge Loan II will be advanced by certain of the investors who
had agreed to purchase shares of the Company’s common stock in the proposed
private placement of $5,076,500 of the Company’s common stock, first announced
on May 20, 2008.  The Company has agreed to reduce the dollar amounts
of these investors’ respective commitments in the private placement by the
principal amount of the Additional Bridge Loan II that each of them will be
advancing to the Company.  OccuLogix now expects the gross aggregate
proceeds of the private placement to be $2,173,000.





37
 Table of Contents





The
Company anticipates the funding of the Additional Bridge Loan II to be complete
in early August 2008.  The proceeds of the Additional Bridge Loan II
will be used for general corporate purposes of the Company and OcuSense, in
which OccuLogix currently holds a majority ownership interest (50.1% on a fully
diluted basis and 57.62% on an issued and outstanding basis).





The
Additional Bridge Loan II will constitute an increase to the principal amount of
the $3,300,000 principal amount bridge loan of the Company that is currently
outstanding (the “Original Bridge Loan”).  The Original Bridge Loan
was advanced in two tranches— $3,000,000 of the principal amount was advanced on
February 19, 2008 and $300,000 of the principal amount was advanced on May 5,
2008.  The Additional Bridge Loan II will be advanced on substantially
the same terms and conditions as the Original Bridge Loan, pursuant to a further
amendment to the amended loan agreement governing the Original Bridge
Loan.





The
Additional Bridge Loan II will bear interest at a rate of 12% per annum and will
have the same maturity date as the Original Bridge Loan.  Like the
repayment of the Original Bridge Loan, the repayment of the Additional Bridge
Loan II will be secured by a pledge by the Company of its majority ownership
interest in OcuSense.





Under the
terms of the loan agreement that governs the Original Bridge Loan, OccuLogix has
two pre-payment options available to it, should it decide to not wait until the
maturity date to repay the loan.  The Company has declared its
intention to exercise one of these pre-payment options and proposes to repay the
Original Bridge Loan in full by issuing to the lenders shares of its common
stock, in an aggregate amount equal to the amount of outstanding principal and
accrued interest, at a 15% discount to the price paid by the private placement
investors.  The Company will be obligated to, and intends to, pre-pay
the Additional Bridge Loans in the same manner.  The pre-payment of
the Original Bridge Loan and the Additional Bridge Loans will entail the
issuance of a minimum of 78,864,705 shares of OccuLogix’s common stock, for
which stockholder and regulatory approval will be required.





As
previously announced, on May 20, 2008, OccuLogix filed a preliminary proxy
statement to solicit the proxies of its stockholders for a number of proposed
transactions, including, among others, the pre-payment of the Original Bridge
Loan in the above-described manner, the acquisition by OccuLogix of the minority
ownership interest in OcuSense that it does not already own and the private
placement.  The Company’s preliminary proxy statement is currently the
subject of review by the U.S. Securities and Exchange Commission (the
“SEC”).  The Company has filed a revised preliminary proxy statement
with the SEC on August 1, 2008 in order to address SEC comments.  In
addition, the revised preliminary proxy statement will reflect the consequences
of the Additional Bridge Loan II and the resulting changes to the terms of the
proposed private placement, and certain other consequential changes, as well as
modifications resulting from the Company’s recent restatements of certain of its
historical financial statements.  Following the completion of the
SEC’s review, the Company will file and mail its proxy
statement.





(ii) On
September 18, 2007, OccuLogix received a letter from NASDAQ, indicating that,
for the previous 30 consecutive business days, the bid price of the Company’s
common stock closed below the minimum $1.00 per share requirement for continued
inclusion under Marketplace Rule 4450(e)(5) (the “Minimum Bid Price
Rule”).  Therefore, in accordance with Marketplace Rule 4450(e)(2),
the Company was provided 180 calendar days, or until March 17, 2008, to regain
compliance with the Minimum Bid Price Rule.  On March 18, 2008, the
Company received a letter from NASDAQ, indicating that the Company had not
regained compliance with the Minimum Bid Price Rule and that the Company’s
securities are, therefore, subject to delisting from The NASDAQ Global
Market.





At that
time, OccuLogix confirmed its intention to appeal this delisting determination
to a NASDAQ Listing Qualifications Panel.  On April 24, 2008, members
of management appeared before a NASDAQ Listing Qualifications Panel (the
“Panel”) and submitted a detailed compliance plan.  The Company
described its intention to effect a reverse split of the issued and outstanding
shares of the Company’s common stock in a ratio of up to 1:25.  In its
letter of March 18, 2008, NASDAQ indicated that, historically, NASDAQ Listing
Qualifications Panels generally have viewed a near-term reverse stock split as
the only definitive plan acceptable to resolve a bid price
deficiency.





On May
29, 2008, the Company received a letter from NASDAQ informing it that the Panel
has determined to grant the Company’s request for continued
listing.  The Panel’s determination is subject to the conditions that,
on or before July 24, 2008, the Company inform the Panel that it has obtained
stockholder approval for, and implemented, the reverse stock split and that the
Company’s stock evidence a closing bid price of at least $1.00 for a minimum of
ten consecutive trading days.  The Panel’s determination is subject to
the further condition that, on or before July 24, 2008, the Company disclose, in
a Current Report on Form 8-K, pro forma financial statements evidencing
stockholders’ equity of at least $10,000,000 or demonstrate compliance with one
of NASDAQ’s alternative listing criteria.





38
 Table of Contents





On June
27, 2008, the Company sent a letter to the Panel, requesting the transfer of its
listing to The NASDAQ Capital Market and an extension of the Panel’s July 24,
2008 deadline through August 29, 2008. On July
28, 2008, the Company received a letter from the Panel in which it received
approval from the Panel to transfer the listing of its common stock from The
NASDAQ Global Market to The NASDAQ Capital Market.  The transfer was
effective at the opening of business on July 30, 2008, and the Company’s common
stock will continue to trade under the symbol “OCCX”.





The
Panel’s grant of OccuLogix’s request for the transfer of its listing to The
NASDAQ Capital Market is subject to the condition that, on or before August 29,
2008, the Company disclose, in a Current Report on Form 8-K, pro forma financial
statements evidencing stockholders’ equity of at least $2,500,000 or demonstrate
compliance with one of NASDAQ’s alternative listing criteria and the further
condition that, on or before September 16, 2008, the Company inform the Panel
that the Company’s common stock has evidenced a closing bid price of $1.00 or
more for a minimum of ten consecutive trading days.  The Company’s
listing on The NASDAQ Capital Market is also contingent upon the successful
completion of an application and review process. OccuLogix submitted its
transfer application to NASDAQ on August 4, 2008.





39
 Table of Contents





ITEM2.
            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 age-related eye diseases. Until recently, the Company operated three
business divisions, being Retina, Glaucoma and Point-of-care. Until recently,
the Company’s Retina division was in the business of developing and
commercializing a treatment for dry age-related macular degeneration, or Dry
AMD. The Company’s product for Dry AMD, the RHEOTM System contains a pump that
circulates blood through two filters and is used to perform the RheopheresisTM
procedure, which is referred to under the Company’s trade name RHEOTM Therapy.
The RheopheresisTM procedure is a blood filtration procedure that selectively
removes molecules from plasma, which is designed to treat Dry AMD, the most
common form of the disease.




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





Subsequent
to the February 3, 2006 announcement, the Company completed an in-depth analysis
of the MIRA-1 study data identifying subjects that were included in the
intent-to-treat, or ITT, population but who deviated from the MIRA-1 protocol as
well as those patients who had documented losses or gains in vision for reasons
not related to retinal disease such as cataracts. Those subjects in the ITT
population who met the protocol requirements, and who did not exhibit ophthalmic
changes unrelated to retinal disease, comprised the modified per-protocol
population.





In light
of the MIRA-1 study results, we also re-evaluated our Pre-market Approval
Application, or PMA, submission strategy and then met with representatives of
the FDA on June 8, 2006 in order to discuss the impact the MIRA-1 results would
have on our PMA to market the RHEOTM System in the United States.  In
light of MIRA-1’s failure to meet its primary efficacy endpoint, the FDA advised
us that it will require an additional study of the RHEOTM System to be
performed.





On
January 29, 2007, the Company announced that it had obtained Investigational
Device Exemption clearance from the FDA to commence the new pivotal clinical
trial of the RHEOTM System, called RHEO-AMD, or Safety and Effectiveness in a
Multi-center, Randomized, Sham-controlled Investigation for Dry, Non-exudative
Age-Related Macular Degeneration (AMD) Using Rheopheresis.





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





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





We
considered our announcement of the indefinite suspension of the Company’s RHEOTM
System clinical development program for Dry AMD to be a significant event which
may affect the carrying value of our intangible assets. This led to an analysis
of our intangible assets and resulted in our reporting an impairment charge to
intangible assets of $20,923,028 during the third quarter of 2007. We also
believe that we may not be able to sell or utilize the components of the RHEOTM
System prior to their expiration dates or before the technologies become
outdated, as the case may be. Accordingly, we set up a provision for
obsolescence of $2,782,494 for treatment sets and OctoNova pumps that are
unlikely to be utilized prior to their expiration dates, in the case of
treatment sets, or before the technologies become outdated. In addition, we have
recorded a reduction to the carrying values of (i) certain of our medical
equipment used in the clinical trials of the RHEOTM System of $431,683 and (ii)
certain of our patents and trademarks related to the RHEOTM System of
$190,873.





Based on
our November 1, 2007 announcement of the indefinite suspension of our RHEOTM
System clinical development program, we wrote down the value of our pumps and
clinical inventory by $2,790,209 to reflect their current nil net realizable
value as at December 31, 2007 and in the six months ended June 30, 2008 have
disposed of virtually all of the RHEOTM System
inventory. The net value of our pumps and clinical inventory as at June 30, 2008
and December 31, 2007 was nil.  As at June 30, 2008 and
December 31, 2007, we had combined inventory reserves of
$165,012  and $7,295,545 respectively. No other adjustments to
inventory were made as a result of the November 1, 2007 announcement that
impacts the financial results as of December 31, 2007 or June 30,
2008.





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





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




In
anticipation of the delay in the commercialization of the RHEOTM System in the
United States as a result of the MIRA-1 study’s failure to meet its primary
efficacy endpoint and the FDA’s requirement of us to conduct an additional study
of the RHEOTM System, the Company accelerated its diversification plans and, on
September 1, 2006, acquired SOLX, Inc., or SOLX, for a total purchase price of
$29,068,443 which included acquisition-related transaction costs of $851,279.
SOLX is a Boston University Photonics Center-incubated company that has
developed a system for the treatment of glaucoma, called the SOLX Glaucoma
System. The SOLX Glaucoma Treatment System is a next-generation treatment
platform designed to reduce intra-ocular pressure, or IOP, without a bleb, thus
avoiding its related complications. The SOLX Glaucoma System consists of the
SOLX 790 Laser, a titanium sapphire laser used in laser trabeculoplasty
procedures, and the SOLX Gold Shunt, a 24-karat gold, ultra-thin drainage device
designed to bridge the anterior chamber and the suprachoroidal space in the eye,
using the pressure differential that exists naturally in the eye in order to
reduce IOP.





41
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On
December 20, 2007, we announced the sale of SOLX to SOLX Acquisition, Inc., or
SOLX Acquisition, a company wholly owned by Doug P. Adams, the founder of SOLX
and who, until the closing of the sale, had been serving as an executive officer
of the Company in the capacity of President & Founder, Glaucoma
Division.  The results of operations of SOLX have been included in
discontinued operations in the Company’s consolidated statements of
operations.





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





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




As at
June 30, 2008 and December 31, 2007, the value of these intangible assets
associated with SOLX was nil and nil, respectively.As well, the Company
performed an impairment test of its recorded goodwill to re-assess whether its
recorded goodwill was impaired as at December 1, 2007. Based on the goodwill
impairment analysis performed, the Company concluded that a goodwill impairment
charge of $14,446,977 should be recorded during the year ended December 31, 2007
to write down the value of its recorded goodwill to its fair value of nil. As at
June 30, 2008 and December 31, 2007, the value of the goodwill associated with
SOLX was nil and nil, respectively.





Both the
SOLX 790 Laser and the SOLX Gold Shunt are currently the subject of randomized,
multi-center clinical trials, the purposes of which are to demonstrate
equivalency to the argon laser, in the case of the SOLX 790 Laser, and to the
Ahmed Glaucoma Valve manufactured by the New World Medical, Inc., in the case of
the SOLX Gold Shunt. The results of these clinical trials will be used in
support of applications to the FDA for a 510(k) clearance for each of the SOLX
790 Laser and the SOLX Gold Shunt, the receipt of which, if any, will enable the
marketing and sale of these products in the United States.





As part
of our diversification plan, on November 30, 2006, we acquired 50.1% of the
capital stock of OcuSense, Inc., or OcuSense, measured on a fully diluted basis,
57.62% on an issued and outstanding basis for an initial purchase price of
$4,171,098 which includes acquisition-related transaction costs of $171,098. The
Company agreed to make additional payments totaling $4,000,000 upon the
attainment of two pre-defined milestones by OcuSense prior to May 1, 2009. In
June 2007 and March 2008, we paid OcuSense a total of $4,000,000 upon the
attainment of the the two pre-defined milestones.





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OcuSense
is a San Diego-based company that is in the process of developing technologies
that will enable eye care practitioners to test, at the point-of-care, for
highly sensitive and specific biomarkers using nanoliters of tear film. The
results of OcuSense’s operations have been included in our consolidated
financial statements since November 30, 2006. OcuSense’s first product, which is
currently under development, is a hand-held tear film test for the measurement
of osmolarity, a quantitative and highly specific biomarker that has shown to
correlate with dry eye disease, or DED. The test is known as the TearLabTM test
for DED. The anticipated innovation of the TearLabTM test for DED will be its
ability to measure precisely and rapidly certain biomarkers in nanoliter volumes
of tear samples, using inexpensive hardware. Historically, eye care researchers
have relied on expensive instruments to perform tear biomarker analysis. In
addition to their cost, these conventional systems are slow, highly variable in
their measurement readings and not categorized as waived by the FDA under the
regulations promulgated under the Clinical Laboratory Improvement Amendments, or
CLIA.





The
TearLabTM test for DED will require the development of the following three
components:  (1) the TearLabTM disposable, which is a single-use
microfluidic labcard; (2) the TearLabTM pen, which is a hand-held device that
interfaces with the TearLabTM disposable; and (3) the TearLabTM reader, which is a
small desktop unit that allows for the docking of the TearLabTM disposable and
the TearLabTM pen and provides a quantitative reading for the operator. OcuSense
is currently engaged in industrial, electrical and software design efforts for
the three components of the TearLabTM test for DED and, to these ends, is working
with two engineering partners, both based in Melbourne, Australia, one of which
is a leader in biomedical instrument development and the other of which is a
leader of customized microfluidics as well as a company in the United
States, which will manufacture the TearLabTM pen and
TearLabTMreader and provide logistics support.





OcuSense
is currently finalizing product development of the TearLabTM test for DED and
following completion of this product development and subsequent clinical trials,
OcuSense intends to seek a 510(k) clearance and a CLIA waiver from the FDA for
the TearLabTM test for DED. Currently, it anticipates seeking the 510(k)
clearance during the latter half of 2008 and the CLIA waiver during the latter
half of 2009. In addition, OcuSense intends to seek CE Mark approval for the
TearLabTM test for DED during the latter half of 2008.





On
November 30, 2006, we announced that Elias Vamvakas, our Chairman and Chief
Executive Officer, had agreed to provide us with a standby commitment to
purchase convertible debentures of the Company (“Convertible Debentures”) in an
aggregate maximum amount of $8,000,000 (the “Total Commitment
Amount”).  Pursuant to the Summary of Terms and Conditions, executed
and delivered as of November 30, 2006 by the Company and Mr. Vamvakas, during
the 12-month commitment term commencing on November 30, 2006, upon no less than
45 days’ written notice by the Company to Mr. Vamvakas, Mr. Vamvakas was
obligated to purchase Convertible Debentures in the aggregate principal amount
specified in such written notice. A commitment fee of 200 basis points was
payable by the Company on the undrawn portion of the total $8,000,000 commitment
amount. Any Convertible Debentures purchased by Mr. Vamvakas would have carried
an interest rate of 10% per annum and would have been convertible, at Mr.
Vamvakas’ option, into shares of the Company’s common stock at a conversion
price of $2.70 per share. The Summary of Terms and Conditions of the standby
commitment further provided that if the Company closed a financing with a third
party, whether by way of debt, equity or otherwise and there are no Convertible
Debentures outstanding, then, the Total Commitment Amount was to be reduced
automatically upon the closing of the financing by the lesser of: (i) the Total
Commitment Amount; and (ii) the net proceeds of the financing. On February 6,
2007, the Company raised gross proceeds in the amount of $10,016,000 in a
private placement of shares of its common stock and warrants. The Total
Commitment Amount was therefore reduced to zero, thus effectively terminating
Mr. Vamvakas’ standby commitment. No portion of the standby commitment was ever
drawn down by the Company, and the Company paid Mr. Vamvakas a total of $29,808
in commitment fees in February 2007.





Our
results of operations for the six months ended June 30, 2008 and 2007 were
impacted by our adoption of Statement of Financial Accounting Standards (“SFAS”)
No. 123R (revised 2004), “Share-Based Payments” (“SFAS No. 123R”), on January 1,
2006 which requires us to recognize a non-cash expense related to the fair value
of our stock-based compensation awards. We elected to use the modified
prospective transition method of adoption requiring us to include this
stock-based compensation charge in our results of operations beginning on
January 1, 2006 without restating prior periods to include stock-based
compensation expense. The following table sets out the total stock based
compensation expense reflected in the consolidated statement of operations for
the six months ended June 30, 2008 and 2007.





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Three
      months ended
              June
      30,
            
            
            Six
      months ended
              June
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007General
      and administrative
            
            $
            43,432
            
            
            $
            171,021
            
            
            $
            87,221
            
            
            $
            528,109Clinical
      and regulatory
            
            
            27,718
            
            
            
            97,130
            
            
            
            53,754
            
            
            
            191,218Sales
      and marketing
            
            
            13,871
            
            
            
            119,475
            
            
            
            27,921
            
            
            
            250,502Total
      expense from continuing operations
            
            
            85,021
            
            
            
            387,626
            
            
            
            168,896
            
            
            
            969,829Expense
      from discontinued operations
            
            
            —
            
            
            
            27,300
            
            
            
            —
            
            
            
            54,600Stock-based
      compensation expense before income taxes
            
            $
            85,021
            
            
            $
            414,926
            
            
            $
            168,896
            
            
            $
            1,024,429





As at
June 30, 2008, $2,407,900 of total unrecognized compensation cost related to
stock options is expected to be recognized over a weighted-average period of
1.60 years.




On
February 1, 2007, we entered into a Securities Purchase Agreement (the
“Securities Purchase Agreement”) with certain institutional investors, pursuant
to which we agreed to issue to the investors an aggregate of 6,677,333 shares of
our common stock (the “Shares”) and five-year warrants exercisable into an
aggregate of 2,670,933 shares of our common stock (the
“Warrants”).  The per share purchase price of the Shares is $1.50, and
the per share exercise price of the Warrants is $2.20, subject to
adjustment.  The Warrants became exercisable on August 6, 2007.
Pursuant to the Securities Purchase Agreement, on February 6, 2007, we issued
the Shares and the Warrants. The gross proceeds of sale of the Shares and the
Warrants totaled $10,016,000 (less transaction costs of $871,215). On February
6, 2007, we also issued to Cowen and Company, LLC a five-year warrant
exercisable into an aggregate of 93,483 shares of our common stock (the “Cowen
Warrant”) in part payment of the placement fee payable to Cowen and Company, LLC
for the services it had rendered as the placement agent in connection with the
sale of the Shares and the Warrants. All of the terms and conditions of the
Cowen Warrant (other than the number of shares of our common stock into which it
is exercisable) are identical to those of the Warrants. The estimated grant date
fair value of the Cowen Warrant of $97,222 is included in the transaction cost
of $871,215.





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





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As at
June 30, 2008, the Company estimated the fair value of the Warrants and the
Cowen Warrant and determined the aggregate fair value to be a nominal amount.
The carrying value of these Warrants as at June 30, 2008 and December 31, 2007
was nil and nil, respectively.





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





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





As at
June 30, 2008 and December 31, 2007, we had investments in the aggregate
principal amount of $1,900,000 which consist of investments in four separate
asset-backed auction rate securities currently yielding an average return of
3.26% per annum.  However, as a result of market conditions, all of
these investments have recently failed to settle on their respective settlement
dates and have been reset to be settled at a future date with an average
maturity of 12 days.  Due to the current lack of liquidity for
asset-backed securities of this type, we concluded that the carrying value of
these investments was higher than its fair value as of June 30, 2008 and
December 31, 2007. Accordingly, these auction rate securities have been recorded
at their estimated fair value of $413,678. We consider this to be an
other-than-temporary reduction in the fair value of these auction rate
securities. Accordingly, the loss associated with these auction rate securities
of $450,072 for the six months ended June 30, 2008 has been included as an
impairment of investments in our consolidated statement of operations for the
six months ended June 30, 2008.  The auction rate securities were
liquid as at June 30, 2007. As a result, the loss associated with these auction
rate securities for the six months ended June 30, 2007 was nil.





Although
we continue to receive interest earned on these securities, we do not know at
the present time when we will be able to convert these investments into
cash.  Accordingly, management has classified these investments as a
non-current asset on its consolidated balance sheet as of June 30, 2008.
Management will continue to monitor these investments closely for future
indications of further impairment. The illiquidity of these investments may have
an adverse impact on the length of time during which we currently expect to be
able to sustain our operations in the absence of an additional capital raise by
the Company as we do not have the cash reserves to hold these auction rate
securities until the market recovers nor can we hold these securities until
their contractual maturity dates.





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On
September 18, 2007, OccuLogix received a letter from NASDAQ, indicating that,
for the previous 30 consecutive business days, the bid price of the Company’s
common stock closed below the minimum $1.00 per share requirement for continued
inclusion under Marketplace Rule 4450(e)(5) (the “Minimum Bid Price
Rule”).  Therefore, in accordance with Marketplace Rule 4450(e)(2),
the Company was provided 180 calendar days, or until March 17, 2008, to regain
compliance with the Minimum Bid Price Rule.  On March 18, 2008, the
Company received a letter from NASDAQ, indicating that the Company had not
regained compliance with the Minimum Bid Price Rule and that the Company’s
securities are, therefore, subject to delisting from The NASDAQ Global
Market.





At that
time, OccuLogix confirmed its intention to appeal this delisting determination
to a NASDAQ Listing Qualifications Panel.  On April 24, 2008, members
of management appeared before a NASDAQ Listing Qualifications Panel (the
“Panel”) and submitted a detailed compliance plan.  The Company
described its intention to effect a reverse split of the issued and outstanding
shares of the Company’s common stock in a ratio of up to 1:25.  In its
letter of March 18, 2008, NASDAQ indicated that, historically, NASDAQ Listing
Qualifications Panels generally have viewed a near-term reverse stock split as
the only definitive plan acceptable to resolve a bid price
deficiency.





On May
29, 2008, the Company received a letter from NASDAQ informing it that the Panel
has determined to grant the Company’s request for continued
listing.  The Panel’s determination is subject to the conditions that,
on or before July 24, 2008, the Company inform the Panel that it has obtained
stockholder approval for, and implemented, the reverse stock split and that the
Company’s stock evidence a closing bid price of at least $1.00 for a minimum of
ten consecutive trading days.  The Panel’s determination is subject to
the further condition that, on or before July 24, 2008, the Company disclose, in
a Current Report on Form 8-K, pro forma financial statements evidencing
stockholders’ equity of at least $10,000,000 or demonstrate compliance with one
of NASDAQ’s alternative listing criteria.





On June
27, 2008, the Company sent a letter to the Panel, requesting the transfer of its
listing to The NASDAQ Capital Market and an extension of the Panel’s July 24,
2008 deadline through August 29, 2008. On July
28, 2008, the Company received a letter  from the Panel in which
it received approval from the Panel to transfer the listing of its common stock
from The NASDAQ Global Market to The NASDAQ Capital Market.  The
transfer was effective at the opening of business on July 30, 2008, and the
Company’s common stock will continue to trade under the symbol
“OCCX”.





The
Panel’s grant of OccuLogix’s request for the transfer of its listing to The
NASDAQ Capital Market is subject to
the condition that, on or before August 29, 2008, the Company disclose, in a
Current Report on Form 8-K, pro forma financial statements evidencing
stockholders’ equity of at least $2,500,000 or demonstrate compliance with one
of NASDAQ’s alternative listing criteria and the further condition that, on or
before September 16, 2008, the Company inform the Panel that the Company’s
common stock has evidenced a closing bid price of $1.00 or more for a minimum of
ten consecutive trading days.  The Company’s listing on The NASDAQ
Capital Market is also contingent upon the successful completion of an
application and review process. OccuLogix submitted its transfer application to
NASDAQ on August 4, 2008.





46
 Table of Contents





Recent
Developments





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





On
February 19, 2008, we announced that the Company secured a bridge loan in an
aggregate principal amount of $3,000,000, less transaction costs of
approximately $180,000, from a number of private parties. The loan bears
interest at a rate of 12% per annum and has a 180-day term, which has been
extended to 270 days. The repayment of the loan is secured by a pledge by the
Company of its shares of the capital stock of OcuSense. Under the terms of the
loan agreement, the Company has two pre-payment options available to it, should
it decide to not wait until the maturity date to repay the loan. Under the first
pre-payment option, the Company may repay the loan in full by paying the
lenders, in cash, the amount of outstanding principal and accrued interest and
issuing to the lenders five-year warrants in an aggregate amount equal to
approximately 19.9% of the issued and outstanding shares of the Company’s common
stock (but not to exceed 20% of the issued and outstanding shares of the
Company’s common stock). The warrants would be exercisable into shares of the
Company’s common stock at an exercise price of $0.10 per share and would not
become exercisable until the 180th day
following their issuance. Under the second pre-payment option, provided that the
Company has closed a private placement of shares of its common stock for
aggregate gross proceeds of at least $1,000,000, the Company may repay the loan
in full by issuing to the lenders shares of its common stock, in an aggregate
amount equal to the amount of outstanding principal and accrued interest, at a
15% discount to the price paid by the private placement investors. Any exercise
by the Company of the second pre-payment option would be subject to stockholder
and regulatory approval.





On May 5,
2008, the Company announced that it had secured a bridge loan in an aggregate
principal amount of $300,000 from a number of private parties. This additional
bridge loan constitutes an increase to the principal amount of the $3,000,000
principal amount bridge loan that the Company announced on February 19, 2008 and
was advanced on substantially the same terms and conditions as the February 19,
2008 bridge loan, pursuant to an amendment of the loan agreement for the
February 19, 2008 bridge loan. The $300,000 bridge loan bears interest at a rate
of 12% per annum and will have the same maturity date as the February 19, 2008
bridge loan. and is secured by the same collateral as secures the February 19,
2008 bridge loan.




On July
28, 2008, the Company announced that it has secured an additional bridge loan in
an aggregate principal amount of $3,403,500from a number of private
parties (the “Additional Bridge Loan II”). $2,893,500 of the principal amount of
the Additional Bridge Loan II will be advanced by certain of the investors who
had agreed to purchase shares of the Company’s common stock in the proposed
private placement of $5,076,500 of the Company’s common stock, first announced
on May 20, 2008.  The Company has agreed to reduce the dollar amounts
of these investors’ respective commitments in the private placement by the
principal amount of the Additional Bridge Loan II that each of them will be
advancing to the Company.  OccuLogix now expects the gross aggregate
proceeds of the private placement to be $2,173,000.




If the Company is
successful in completing a private placement of up to $2,373,000 of common stock
as announced on July 28, 2008, management believes that it will have sufficient
funds to meet its operating activities and other demands until approximately the
second quarter of 2009.


The
proceeds of the Additional Bridge Loan II will be used for general corporate
purposes of the Company and OcuSense, in which OccuLogix currently holds a
majority ownership interest (50.1% on a fully diluted basis and 57.62% on an
issued and outstanding basis).




The
Additional Bridge Loan II will constitute an increase to the principal amount of
the $3,300,000 principal amount bridge loan of the Company that is currently
outstanding (the “Original Bridge Loan”).  The Original Bridge Loan
was advanced in two tranches—$3,000,000 of the principal amount was advanced on
February 19, 2008, and $300,000 of the principal amount was advanced on May 5,
2008.  The Additional Bridge Loan will be advanced on substantially
the same terms and conditions as the Original Bridge Loan, pursuant to a further
amendment to the amended loan agreement governing the Original Bridge
Loan.





47
 Table of Contents





The
Additional Bridge Loan will bear interest at a rate of 12% per annum and will
have the same maturity date as the Original Bridge Loan.  Like the
repayment of the Original Bridge Loan, the repayment of the Additional Bridge
Loan will be secured by a pledge by the Company of its majority ownership
interest in OcuSense.





Under the
terms of the loan agreement that governs the Original Bridge Loan, OccuLogix has
two pre-payment options available to it, should it decide to not wait until the
maturity date to repay the loan.  The Company has declared its
intention to exercise one of these pre-payment options and proposes to repay the
Original Bridge Loan in full by issuing to the lenders shares of its common
stock, in an aggregate amount equal to the amount of outstanding principal and
accrued interest, at a 15% discount to the price paid by the private placement
investors.  The Company will be obligated to, and intends to, pre-pay
the Additional Bridge Loan in the same manner.  The pre-payment of the
Original Bridge Loan and the Additional Loan Agreement will entail the issuance
of a minimum of 78,864,705 shares of OccuLogix’s common stock, for which
stockholder and regulatory approval will be required.





Currently,
we anticipate that the net proceeds of the bridge loans, together with the
Company’s other cash and cash equivalents, will be sufficient to sustain the
Company’s operations only until approximately the middle of November
2008.





RESULTS
OF OPERATIONS





Continuing
and discontinued operations





On
December 20, 2007, we announced the sale of SOLX to SOLX Acquisition, Inc., or
SOLX Acquisition, a company wholly owned by Doug P. Adams, the founder of SOLX
and who, until the closing of the sale, had been serving as an executive officer
of the Company in the capacity of President & Founder, Glaucoma
Division.  The results of operations of SOLX have been included in
discontinued operations in the Company’s consolidated statements of operations
for the six months ended June 30, 2008 and 2007.





Revenues,
Cost of sales and Gross margin from continuing operations




Three
      Months Ended June 30,
            
            
            Six
      Months Ended June 30,2008
            
            
            2007
            
            
            Change
            
            
            2008
            
            
            2007
            
            
            Change$
            
            
            $
            
            
            
            
            
            $
            
            
            $Retina
      revenue
            
            
            127,200
            
            
            
            —
            
            
            
            N/M
            *
            
            
            134,400
            
            
            
            90,000
            
            
            
            49
            %Retina
      cost of sales
            
            
            —
            
            
            
            33,297
            
            
            
            N/M
            *
            
            
            24,556
            
            
            
            65,396
            
            
            
            (62
            %)Retina
      gross margin (loss)
            
            
            127,200
            
            
            
            (33,297
            )
            
            
            N/M
            *
            
            
            109,844
            
            
            
            24,604
            
            
            
            346
            %Percentage
      of retina revenue
            
            
            100
            %
            
            
            N/M
            *
            
            
            
            
            
            
            82
            %
            
            
            27
            %
            
            
            55
            %*N/M
      – Not meaningful





Revenues




Retina
Revenue




The
Company owns a consignment inventory of 400 disposable treatment sets, in the
keeping of Macumed AG, a company based in Switzerland. During the six months
ended June 30, 2008, Macumed consumed a total of 48 treatment sets at a
negotiated price of $150 per treatment set, resulting in $7,200 in revenue. In
addition, Macumed purchased 106 Octo Nova Pumps at $1,200 per pump, resulting in
$127,200 in revenue.  In the six months ended June 30, 2007, we sold a
total of 600 treatment sets at a negotiated price of $150 per treatment to
Macumed AG, resulting in $90,000 of revenue.





48
 Table of Contents





Retina Cost of
Sales




Cost of
sales includes costs of goods sold and royalty costs. Our cost of goods sold for
the six months ended June 30, 2007 consists primarily of costs for the
manufacture of the RHEOTM System, including the costs we incur for the purchase
of component parts from our suppliers, applicable freight and shipping costs,
logistics inventory management and recurring regulatory costs associated with
conducting business and ISO certification.





Cost of
sales for the six months ended June 30, 2008 and June 30, 2007 includes royalty
fees of $25,000 and $50,000 payable to Dr. Brunner and Mr. Stock,
respectively.  Cost of sales for the three months ended June 30, 2008
related to Octo Nova Pumps  which were supplied from an inventory that
had been written down to nil net realizable value for the nine months ended
September 30, 2007 as a result of the decision taken to suspend all RHEOTM System
related activities.  Accordingly, there was no additional cost of
sales recorded in the period. In addition, the Company recovered $444 of the
freight costs that had been expensed in prior periods.





Cost of
sales for the six months ended June 30, 2007 includes freight charges on the
treatment sets sold and delivered to Macumed AG during the period.





Retina Gross
Margin




During
the there months and six months ended June 30, 2008, gross margin was $127,200
and  $109,844 respectively, reflecting low sales, nil-value items sold
and fixed royalty fees of $25,000.





During
the three and six months ended June 30, 2007, gross margin (loss) was ($33,297)
and $24,604 respectively reflecting low sales and fixed royalty fees of
$50,000.





Operating
Expenses – continuing operations





Three
      months ended June 30
            
            
            Six
      months ended June 302008
            
            
            2007
            
            
            Change
            
            
            2008
            
            
            2007
            
            
            Change$
            
            
            $
            
            
            
            
            
            $
            
            
            $As
      restated
            
            
            
            
            
            
            
            
            As
      restatedGeneral
      and administrative
            
            
            1,343,980
            
            
            
            2,559,837
            
            
            
            (47
            %)
            
            
            2,870,055
            
            
            
            5,214,679
            
            
            
            (45
            %)Clinical
      and regulatory
            
            
            808,193
            
            
            
            1,958,432
            
            
            
            (59
            %)
            
            
            1,831,180
            
            
            
            4,128,171
            
            
            
            (56
            %)Sales
      and marketing
            
            
            233,915
            
            
            
            526,492
            
            
            
            (56
            %)
            
            
            410,443
            
            
            
            997,975
            
            
            
            (59
            %)Restructuring
      charges
            
            
            955,517
            
            
            
            —
            
            
            
            —
            
            
            
            955,517
            
            
            
            —
            
            
            
            —3,341,605
            
            
            
            5,044,761
            
            
            
            (34
            %)
            
            
            6,067,195
            
            
            
            10,340,825
            
            
            
            (41
            %)





General
and Administrative Expenses





General
and administrative expenses decreased by $2,344,624 or 45% during the six months
ended June 30, 2008, as compared with the corresponding period in fiscal 2007,
due to the indefinite suspension of our RHEOTM System clinical development
program. Employee costs, other than stock-based compensation, decreased by
$1,206,116 reflecting the impact of the restructuring activities in the latter
part of 2007.  Stock-based compensation expense also declined by
$440,888 from $528,109 for the six months ended June 30, 2007 to $87,221 for the
six months ended June 30, 2008 which reflects the forfeiture of unvested stock
options previously granted to terminated employees. In addition, amortization
expense decreased by $917,081 from $1,503,103 for the six months ended June 30,
2007 to $586,022 for the six months ended June 30, 2008 primarily due to the
impairment of RHEOTMSystem
intangible assets at September 30, 2007.





We are
continuing to focus our efforts on achieving an orderly refocus on ongoing
activities by reviewing and improving upon our existing business processes and
cost structure.





49
 Table of Contents





Clinical
and Regulatory Expenses




Clinical
and regulatory expenses decreased by $2,296,991 or 56% during the six months
ended June 30, 2008, as compared with the corresponding prior year period, due
to the indefinite suspension of our RHEOTM System clinical development program.
Clinical expense for retina activity of $187,885 for the six months ended June
30, 2008 represents expenses to close clinics and support ongoing obligations
for patient support. Clinical expense for retina activity the six months ended
June 30, 2007 was $2,400,070.





OcuSense
clinical expenditures for the six months ended June 30, 2008 and 2007 were
$1,643,295 and $1,728,101, respectively. The decline of $84,806 or 4.9% reflects
the maturing stage of OcuSense technological development in that the development
in the six months ended June 30, 2008 was of a nature that could be carried out
in-house, whereas the development in the corresponding period was completed
primarily in contracted facilities.





In March
2008, we announced that OcuSense had validated the prototype of the
TearLabTM test
for DED and received company-wide certification to ISO 13485:2003. These
achievements allow the Company to move forward with clinical trials and the
attainment of the CE Mark in Europe, in advance of
commercialization.





Sales
and Marketing Expense




Sales and
marketing expenses decreased by $587,532 or 59% during the six months ended June
30, 2008, as compared with the prior period in fiscal 2007.





Retina
sales and marketing expense for the six months ended June 30, 2008 was a
recovery of $17,701 compared to an expense of $931,853 the previous year, a
decline of $945,354. This decline is due in general to the indefinite
suspension of our RHEOTM System clinical development program and, in particular,
to a decline in ordinary compensation paid of nil in the six months ended
June 2008 as compared to $414,135 paid in the six months ended June 30, 2007,
and  to stock-based compensation expense which declined by $222,850
from $250,502 for the six months ended June 30, 2007 to $27,921 for the six
months ended June 30, 2008.





Sales and
marketing expense for OcuSense increased by $362,022 in the six months ended
June 30, 2008 when compared with the prior year period in fiscal 2007. This
increase reflects an increased focus on building awareness of the TearLabTMtest
for DED prior to commercialization.





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 are presently primarily
focused on commercialization in Europe and developing plans to do the same in
North America. We will continue to develop and execute our conference and podium
strategy to ensure visibility and evidence-based positioning of the TearLabTM
test for DED among eye care professionals.





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 $955,517 and nil
in restructuring charges during the six months ended June 30, 2008 and 2007,
respectively, reflecting the termination of employment on June 30, 2008 of Tom
Reeves, the Company's former President and Chief Operating Officer. With
the suspension of the Company’s RHEOTM System clinical development program, and
the consequent winding-down of the RHEO-AMD study, and the Company’s disposition
of SOLX during the year ended December 31, 2007, the Company has reduced its
workforce considerably. During 2006, the Company implemented a number of
structural and management changes designed both to support the continued
development of the RHEOTM System and to execute the Company’s accelerated
diversification strategy within ophthalmology. The restructuring charges of
$1,312,721 and $819,642, recorded in the years ended December 31, 2007 and 2006,
respectively, consist solely of severance and benefit costs related to the
termination of certain of the Company’s employees at the Company’s
Palm Harbor and Mississauga offices.





50
 Table of Contents





The
following sets out a continuity of the Company’s liability for restructure costs
for the six months ended June 30, 2008 and 2007.





Six
      months ended June 30,2008
            
            
            2007$
            
            
            $Liability
      for restructure costs - beginning of the period
            
            
            1,312,721
            
            
            
            ―Restructure
      costs incurred in the period
            
            
            955,517
            
            
            
            ―Funded
      in the period
            
            
            (314,227
            )
            
            
            ―Liability
      for restructure costs - end of period
            
            
            1,954,011
            
            
            
            ―





Other
Income (Expenses) of continuing operations





Three
      Months Ended June 30,
            
            
            Six
      Months Ended June 30,2008
            
            
            2007
            
            
            Change
            
            
            2008
            
            
            2007
            
            
            Change$
            
            
            $
            
            
            
            
            
            $
            
            
            $As
      restated
            
            
            
            
            
            
            
            
            As
      restatedInterest
      income
            
            
            20,691
            
            
            
            215,919
            
            
            
            (90
            %)
            
            
            57,143
            
            
            
            431,357
            
            
            
            (87
            %)Changes
      in fair value of warrant obligation
            
            
            ―
            
            
            
            1,500,710
            
            
            
            N/M
            
            
            
            ―
            
            
            
            776,730
            
            
            
            N/MInterest
      expense
            
            
            (95,706
            )
            
            
            ―
            
            
            
            N/M
            
            
            
            (142,309
            )
            
            
            (16,640
            )
            
            
            N/MAmortization
      of finance costs
            
            
            (91,000
            )
            
            
            ―
            
            
            
            N/M
            
            
            
            (132,000
            )
            
            
            ―
            
            
            
            N/MImpairment
      of investments
            
            
            (122,586
            )
            
            
            ―
            
            
            
            N/M
            
            
            
            (450,072
            )
            
            
            ―
            
            
            
            N/MOther
            
            
            2,747
            
            
            
            (14,511
            )
            
            
            N/M
            
            
            
            20,243
            
            
            
            1,363
            
            
            
            N/MMinority
      interest
            
            
            363,595
            
            
            
            201,332
            
            
            
            81
            %
            
            
            571,130
            
            
            
            566,011
            
            
            
            1
            %77,741
            
            
            
            1,903,450
            
            
            
            N/M
            
            
            
            (75,865
            )
            
            
            1,758,8211
            
            
            
            N/M*N/M
      – Not meaningful





Interest
Income




Interest
income consists of interest income earned in the current period and the
corresponding prior period as a result of the Company’s cash and short-term
investment position following the raising of capital and debt.





Changes
in fair value of obligation under warrants and warrant expense




On
February 6, 2007, pursuant to the Securities Purchase Agreement between the
Company and certain institutional investors, the Company issued five-year
warrants exercisable into an aggregate of 2,670,933 shares of the Company’s
common stock to these investors. On February 6, 2007, the Company also issued a
five-year warrant exercisable into an aggregate of 93,483 shares of the
Company’s common stock to Cowen and Company, LLC in part payment of the
placement fee payable to Cowen and Company, LLC for the services it had rendered
as the placement agent in connection with the private placement of the Company’s
shares of common stock and warrants. The per share exercise price of the
warrants is $2.20, subject to adjustment, and the warrants will become
exercisable on August 6, 2007. All of the terms and conditions of the warrants
issued to Cowen and Company, LLC (other than the number of shares of the
Company's common stock into which the warrant is exercisable) are identical to
those of the warrants issued to the institutional investors. The Company
accounts for the warrants in accordance with the provisions of SFAS No. 133
along with related interpretation EITF 00-19. Based on the provisions of EITF
00-19, the Company determined that the warrants issued during the six months
ended June 30, 2007 do not meet the criteria for classification as equity.
Accordingly, the Company has classified the warrants as a current liability as
at June 30, 2007. The estimated fair value was determined using the
Black-Scholes option-pricing model. In addition, SFAS No. 133 requires the
Company to record the outstanding warrants at fair value at the end of each
reporting period resulting in an adjustment to the recorded liability of the
derivative, with any gain or loss recorded in earnings of the applicable
reporting period. The Company therefore estimated the fair value of the warrants
as at June 30, 2007 and determined the aggregate fair value to be $1,105,766, a
decrease of $946,812 from the initial measurement of the fair value of the
warrants on the date of issuance.





51
 Table of Contents





Changes
in fair value of obligation under warrants and warrant expense of $776,730 for
the six months ended June 30, 2007 includes transaction costs associated with
the issuance of the warrants of $170,082 and a gain of $946,812 which reflects
the increase in the fair value of the warrants as at June 30, 2007 over the
initial measurement of the fair value of the warrants on the date of issuance.
There was no comparable expense in the six months ended June 30,
2008.





Interest
expense




On
February 19, 2008 and May 5, 2008, the Company announced that it has secured
bridge loans in an aggregate principal amount of $3,300,000 (less transaction
costs of approximately $180,000) from a number of private parties. The loan
bears interest at a rate of 12% per annum and has a 180-day term, which has been
extended to 270 days. The Company has pledged its shares of the capital stock of
OcuSense as collateral for the loan. Interest expense for the six months ended
June 30, 2008 of $135,715 is due to the lenders.




On
November 30, 2006, the Company announced that Mr. Elias Vamvakas, the Chairman,
Chief Executive Officer and Secretary of the Company, had agreed to provide the
Company with a standby commitment to purchase convertible debentures of the
Company (“Convertible Debentures”) in an aggregate maximum amount of $8,000,000
(the “Total Commitment Amount”).  On February 6, 2007, the Total
Commitment Amount was reduced to zero, thus effectively terminating Mr.
Vamvakas’ standby commitment. No portion of the standby commitment was ever
drawn down by the Company, and the Company recognized as interest expense a
total of $16,685 in commitment fees during the six months ended June 30,
2007.




Amortization
of finance costs




Finance
costs for the six months ended June 30, 2008 reflect a $132,000 amortization of
the $180,000 paid to Marchant Securities Inc. (Marchant”), a related party (see
note 14) for introducing the Company to the bridge loan lenders who participated
in the February 19, 2008 bridge financing.




Impairment
of investments


As at
June 30, 2008 and December 31, 2007, the Company had investments in the
aggregate principal amount of $1,900,000 which consist of investments in four
separate asset-backed auction rate securities yielding an average return of
3.26% per annum.  However, as a result of market conditions, all of
these investments have recently failed to settle on their respective settlement
dates and have been reset to be settled at a future date with an average
maturity of 46 days.  Due to the current lack of liquidity for
asset-backed securities of this type, the Company has concluded that the
carrying value of these investments was higher than its fair value as of
December 31, 2007 and June 30, 2008. Accordingly, these auction rate securities
have been recorded at their estimated fair value of $863,750 as at December 31,
2007 and $413,678 as at June 30, 2008.




The
Company considers this to be an other-than-temporary reduction in the value.
Accordingly, the loss associated with these auction rate securities of $450,072
for six months ended June 30, 2008 has been included as an impairment of
investments in the Company’s consolidated statement of operations for the six
months ended June 30, 2008. The investments were liquid as at June 30, 2007.
Accordingly, the corresponding charge for the six months ended June 30, 2007 is
nil.




Although
the Company continues to receive payment of interest earned on these securities,
the Company does not know at the present time when it will be able to convert
these investments into cash.  Accordingly, management has classified
these investments as a non-current asset on its consolidated balance sheet as of
December 31, 2007 and June 30, 2008. Management will continue to monitor these
investments closely for future indications of further impairment. The
illiquidity of these investments may have an adverse impact on the length of
time during which the Company currently expects to be able to sustain its
operations in the absence of an additional capital raise by the Company as we do
not have the cash reserves to hold these auction rate securities until the
market recovers nor can we hold these securities until their contractual
maturity dates.





52
 Table of Contents





Other




Other
income for the six months ended June 30, 2008 of $20,243 include a foreign
exchange gain of $16,69 and amounts realized in connection with the disposal of
SOLX in excess of the amounts recorded in fiscal 2007 of $3,355.




Other
income for the six months ended June 30, 2007 of $1,363 is foreign exchange
gain.




Minority
interest




Three
      months ended June 30
            
            
            Six
      months ended June 302008
            
            
            2007
            
            
            Variance
            
            
            2008
            
            
            2007
            
            
            Variancerestated
            
            
            
            
            
            
            
            
            restatedMinority
      share of results from operation
            
            
            363,595
            
            
            
            331,623
            
            
            
            31,972
            
            
            
            774,949
            
            
            
            696,302
            
            
            
            78,647Increment
      on completion of the Alpha milestone
            
            
            ―
            
            
            
            (130,291
            )
            
            
            130,291
            
            
            
            ―
            
            
            
            (130,291
            )
            
            
            130,291Increment
      on completion of the Beta milestone
            
            
            ―
            
            
            
            ―
            
            
            
            ―
            
            
            
            (203,819
            )
            
            
            ―
            
            
            
            (203,819
            )Total
      for the period
            
            
            363,595
            
            
            
            201,332
            
            
            
            162,263
            
            
            
            571,130
            
            
            
            566,011
            
            
            
            5,119





Minority
stockholder’s share of net losses from operation for the six months ended June
30, 2008 of $774,949 was offset by $203,819 to reflect a minority increment for
the Beta milestone payment.  Minority share of net loss from operation
for six months ended June 30, 2007 of $696,302 was offset by $130,291 to reflect
a minority increment for the Alpha milestone payment.  These
transactions are specific to the acquisition of OcuSense. The increment
represents the minority stockholders’ ownership percentage of the variance
between the actual milestone payments made and the original fair value of the
milestone payments reported when the Company acquired its ownership interest in
OcuSense. No future milestone payments remain to be paid.




Discontinued
Operations




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




The sale
transaction described above established fair values for certain of the Company’s
acquisition-related intangible assets and goodwill. Accordingly, the Company
performed an impairment test of these assets at December 1, 2007. Based on this
analysis, during the year ended December 31, 2007, the Company recognized a
non-cash goodwill impairment charge of $14,446,977 and an impairment charge of
$22,286,383 to record its acquisition-related intangible assets at their fair
value as of December 31, 2007. As at June 30, 2008 and December 31, 2007, the
value of both of these assets associated with SOLX was nil and nil,
respectively.





53
 Table of Contents





The
Company’s results of operations related to discontinued operations for the six
months ended June 30, 2008 and 2007 are as follows:





Three
      months ended June 30
            
            
            Six
      months ended June 302008
            
            
            2007
            
            
            2008
            
            
            2007$
            
            
            $
            
            
            $
            
            
            $Revenue
            
            
            ―
            
            
            
            121,275
            
            
            
            ―
            
            
            
            160,900Cost
      of goods soldCost
      of goods sold
            
            
            ―
            
            
            
            42,464
            
            
            
            ―
            
            
            
            97,973Royalty
      costs
            
            
            ―
            
            
            
            6,250
            
            
            
            ―
            
            
            
            14,983Total
      cost of goods sold
            
            
            ―
            
            
            
            48,714
            
            
            
            ―
            
            
            
            112,95672,561
            
            
            
            
            
            
            
            47,944Operating
      expensesGeneral
      and administrative
            
            
            ―
            
            
            
            1,012,682
            
            
            
            ―
            
            
            
            2,037,958Clinical
      and regulatory
            
            
            ―
            
            
            
            737,152
            
            
            
            ―
            
            
            
            1,365,250Sales
      and marketing
            
            
            ―
            
            
            
            228,684
            
            
            
            ―
            
            
            
            509,988―
            
            
            
            1,978,518
            
            
            
            ―
            
            
            
            3,913,196―
            
            
            
            (1,905,957
            )
            
            
            ―
            
            
            
            (3,865,252
            )Other
      income (expenses)Interest
      and accretion expense
            
            
            
            
            
            
            (204,888
            )
            
            
            ―
            
            
            
            (409,784
            )Other
            
            
            ―
            
            
            
            (9,274
            )
            
            
            ―
            
            
            
            (9,302
            )―
            
            
            
            (214,162
            )
            
            
            ―
            
            
            
            (419,086
            )Loss
      from discontinued operations before income taxes
            
            
            
            
            
            
            (2,120,119
            )
            
            
            ―
            
            
            
            (4,284,338
            )Recovery
      of income taxes
            
            
            ―
            
            
            
            1,038,560
            
            
            
            ―
            
            
            
            2,099,289Loss
      from discontinued operations
            
            
            ―
            
            
            
            (1,081,559
            )
            
            
            ―
            
            
            
            (2,185,049
            )





Recovery
of income taxes





Three
      months ended June 30,
            
            
            Six
      months ended June 30,2008
            
            
            2007
            
            
            Change
            
            
            2008
            
            
            2007
            
            
            Change$
            
            
            $
            
            
            
            
            
            $
            
            
            $As
      restated
            
            
            
            
            
            
            
            
            As
      restatedRecovery
      of income taxes  from continuing operations
            
            
            599,687
            
            
            
            1,265,841
            
            
            
            (53
            %)
            
            
            1,219,166
            
            
            
            3,166,361
            
            
            
            (61
            %)Recovery
      of income taxes from discontinued operations
            
            
            ―
            
            
            
            1,038,560
            
            
            
            N/M
            
            
            
            ―
            
            
            
            2,099,289
            
            
            
            N/MRecovery
      of income taxes
            
            
            599,687
            
            
            
            2,304,401
            
            
            
            (74
            %)
            
            
            1,219,166
            
            
            
            5,265,650
            
            
            
            (77
            %)





Recovery
of income taxes from continuing operations decreased by $666,154 and $1,947,195
during the three and six months ended June 30, 2008, respectively, as compared
with the prior periods in 2007. The decreases are due primarily to the impact of
the impairment of all RHEOTM intangible assets in the nine months ended September
30, 2007 resulting in the elimination of all related deferred tax liabilities.
The elimination of RHEOTM related deferred tax liabilities reduces to $0 and $0
the amortization of RHEOTM related deferred tax liabilities during the three and
six months ended June 30, 2008, respectively, as compared to amortization of
RHEOTM related deferred tax liabilities of $154,507 and $311,893 during the three
and six months ended June 30, 2007, respectively. In addition, due to the
elimination of RHEOTM related deferred tax liabilities, the amount of losses
benefited related to RHEOTM activities were $0 and $0 during the three and
six months ended June 30, 2008, respectively, as compared to a benefit for
applicable tax losses of $589,673 and $1,759,087 reported relating to RHEOTM
activities during the three and six months ended June 30, 2007, respectively.
Offsetting these decreases are increases in the recovery of income taxes of
$101,525 and $147,284 relating to increased OcuSense losses benefited during the
three and six months ended June 30, 2008, respectively, representing increased
costs incurred as OcuSense incurred increased losses in its efforts to achieve
its beta milestone and its focus on commercialization and clinical trial
activities.





54
 Table of Contents





To date,
the Company has recognized income tax benefits in the aggregate amount of $3.3
million associated with the recognition of the deferred tax asset from the
availability of net operating losses in the United States which may be utilized
to reduce taxes in future years. The benefits associated with the balance of the
net operating losses are subject to a full valuation allowance since it is not
more likely than not that these losses can be utilized in future years. A
portion of the Company’s net operating losses may however be subject to annual
limitations as a result of the Company’s initial public offering and prior
changes of control. Accordingly, until a formal analysis of the effect of the
changes of control is performed, a portion of the income tax benefits recognized
to date may be affected.





Recovery
of income taxes for the three and six months ended June 30, 2008 and 2007 also
includes the amortization of the deferred tax liability which was recorded based
on the difference between the fair value of intangible assets acquired and their
tax bases. The amounts recorded during the three and six months ended June 30,
2008, as compared with the corresponding periods in fiscal 2007 did not change.
The deferred tax recorded upon the acquisition of OcuSense of $5,158,155
represents the difference between the fair value of the intangible assets
acquired by the Company upon its acquisition of OcuSense and their respective
tax bases. The deferred tax liability is being amortized over an average
period of 10 years, the estimated weighted-average useful life of the intangible
assets.





LIQUIDITY
AND CAPITAL RESOURCES


(in
thousands)


June
      30
            
            
            December
      312008
            
            
            2007
            
            
            ChangeCash
      and cash equivalents
            
            $
            920
            
            
            $
            2,236
            
            
            $
            (1,316
            )Short-term
      investments
            
            
            —
            
            
            
            —
            
            
            
            —Total
      cash and cash equivalents and short-term investments
            
            $
            920
            
            
            $
            2,236
            
            
            $
            (1,316
            )Percentage
      of total assets
            
            
            7.3
            %
            
            
            14.6
            %
            
            
            (7.3
            %)Working
      capital (deficiency)
            
            $
            (6,442
            )
            
            $
            (997
            )
            
            $
            (5,445
            )





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





On
February 6, 2007, the Company raised gross proceeds in the amount of $10,016,000
(less issuance costs of $871,215) in a private placement of shares of its common
stock and warrants.




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




On May 5,
2008 we announced that the Company secured an additional bridge loan in an
aggregate principal amount of $300,000 from a number of private parties. The
terms of the additional bridge loan are substantially the same as those of the
$3,000,000 bridge loan announced February 19, 2008.




Including
prior periods, cumulatively to the end of the second quarter of 2008, cash has
been primarily utilized to finance increased infrastructure costs, to accumulate
inventory and to fund costs of the MIRA-1, LEARN and RHEO-AMD trials and other
clinical trials and to acquire SOLX and OcuSense in line with our
diversification strategy. With the suspension of the Company’s RHEOTM System
clinical trial development program, and the consequent winding-down of the
RHEO-AMD study, and the Company’s disposition of SOLX, we expect that, in the
future, we will use our cash resources to complete the product development of
OcuSense’s TearLabTM test for DED and to conduct the clinical trials that will be
required for the TearLabTM test for DED.





55
 Table of Contents





Currently,
we anticipate that the net proceeds of the bridge loans, together with the
Company’s other cash and cash-equivalents, will be sufficient to sustain the
Company’s operations only until approximately the middle of July
2008.




As at
June 30, 2008 and December 31, 2007, we had investments in the aggregate
principal amount of $1,900,000 which consist of investments in four separate
asset-backed auction rate securities yielding an average return
of  3.26% per annum.  Contractual maturities for these
auction rate securities range from 33 to 39 years, with an average interest
reset date of approximately 12 days. Historically, the carrying value of auction
rate securities approximated their fair value due to the frequent resetting of
interest rates. However, as a result of market conditions associated with the
liquidity issues experienced in the global credit and capital markets, all of
these investments have recently failed to settle on their respective settlement
dates and have been reset to be settled at a future date with an average
maturity of 12 days.




Due to
the current lack of liquidity for asset-backed securities of this type, we
concluded that the carrying value of these investments was higher than its fair
value as of June 30, 2008 and December 31, 2007. Accordingly, these auction rate
securities have been recorded at their estimated fair value of $413,678, which
represents a decline of $1,486,322 in the carrying value of these auction rate
securities. We estimated the fair value of these auction rate securities based
on the following: (i) the underlying structure of each security;
(ii) the present value of future principal and interest payments discounted
at rates considered to reflect current market conditions;
(iii) consideration of the probabilities of default, auction failure or
repurchase at par for each period; and (iv) estimates of the recovery rates
in the event of default for each security.  This estimated fair value
could change significantly based on future market conditions.




We
determined the reduction in the value of these auction rate securities to be an
other-than-temporary reduction in value. Accordingly, the impairment associated
with these auction rate securities of $1,036,250 has been included as an
impairment of investments in our consolidated statement of operations for the
year ended December 31, 2007 and $450,072 has been included as an impairment of
investments in our consolidated statement of operations for the six months ended
June 30, 2008. Our conclusion for the other-than-temporary impairment is based
on the Company’s current liquidity position. Although we continue to receive
interest earned on these securities, we do not know at the present time when we
will be able to convert these investments into cash.  Accordingly,
management has classified these investments as a non-current asset on its
consolidated balance sheet as at June 30, 2008 and December 31, 2007. Management
will continue to monitor these investments closely for future indications of
further impairment. If the current market conditions deteriorate further, or the
anticipated recovery in market values does not occur, we may be required to
record additional impairment charges in the remainder of fiscal
2008.




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




Changes
in cash flows





Six
      months ended June 30,2008
            
            
            2007
            
            
            Change$
            
            
            $
            
            
            $Cash
      used in operating activities
            
            
            (4,349,164
            )
            
            
            (8,929,417
            )
            
            
            4,580,253Cash
      used in investing activities
            
            
            (86,477
            )
            
            
            (384,099
            )
            
            
            297,622Cash
      provided by financing activities
            
            
            3,120,000
            
            
            
            9,201,735
            
            
            
            (6,081,735
            )Net
      (decrease) increase in cash and cash
      equivalents  period
            
            
            (1,315,641
            )
            
            
            (111,781
            )
            
            
            (1,203,860
            )





Cash
used in operating activities




Net cash
used to fund our operating activities during the six months ended June 30, 2008
was $4,349,164.  Net loss during the six month period was $4,814,050.
The non-cash charges which comprise a portion of the net loss during that
period consist primarily of the amortization of intangible assets, fixed
assets, patents and trademarks and prepaid finance charges of $758,659 and the
impairment of investments netted by applicable deferred tax liability of
$1,219,166 and minority interest of $571,130.





56
 Table of Contents





The net
change in non-cash working capital balances related to operations for the six
months ended June 30, 2008 and 2007 consists of the following:





Cash
      provided (used)
            
            Six
      months ended June 30,2008
            
            
            2007$
            
            
            $Amounts
      receivable
            
            
            257,965
            
            
            
            (295,191
            )Inventory
            
            
            —
            
            
            
            46,528Prepaid
      expenses
            
            
            186,548
            
            
            
            (246,528
            )Deposits
            
            
            (6,551
            )
            
            
            —Other
      current assets
            
            
            (128,796
            )
            
            
            (1,800
            )Accounts
      payable
            
            
            (767,590
            )
            
            
            204,823Accrued
      liabilities
            
            
            1,036,852
            
            
            
            815,055Deferred
      revenue
            
            
            106,700
            
            
            
            101,888Due
      to stockholders
            
            
            56,712
            
            
            
            4,527Short
      term liabilities and accrued interest
            
            
            135,715
            
            
            
            —877,555
            
            
            
            629,302





·
            Amounts
      receivable decrease is due to receipts for matters related to the sale of
      SOLX.


·
            The
      decline in prepaid expenses results primarily from a decline in prepaid
      insurance costs attributable to discontinued activities and the
      elimination of advances related to RHEOTM
      System clinical trials offset by an increase in tear sample and lab card
      stocks used in product development.


·
            Other
      current assets represent finance costs which will be capitalized with
      future finance transactions.


·
            Accounts
      payable decreased due primarily to payment for clinical test services
      which were suspended in the fourth quarter of
  2007.


·
            Accrued
      liabilities increased primarily due to the accrual of $955,517 in
      restructuring charges and the receipt of a $250,000 advance to be utilized
      to offset the cost of certain OcuSense TearLabTM
      tests, net of $64,668 expended to
date.


·
            Increase
      in deferred revenue reflects $14,300 received from a customer for the
      future sale of consignment inventory and $92,400 received as an advance
      payment for products.


·
            Increase
      in amounts due to stockholders is primarily attributable to an increase of
      $18,202 owing to TLC for various administration cross charges, an increase
      of $12,500 in the amount due to Hans Stock and a decrease of an amount due
      from a stockholder on the receipt of $25,000 due from a minority
      shareholder of OcuSense.


·
            Increase
      in short term liabilities reflects interest accrued on the bridge
      financing.





Cash
used in investing activities




Net cash
used in investing activities for the six months ended June 30, 2008 was $86,477.
Cash used in investing activities during the period consists of $14,572 used to
acquire fixed assets and $71,905 used to protect and maintain patents and
trademarks.




Net cash
used in investing activities for the six months ended June 30, 2007 is $384,099
and consists of the net purchase of short-term investments of $190,000, cash in
the amount of $131,286 used to acquire fixed assets and cash in the amount of
$62,813 used to protect and maintain patents and trademarks.





57
 Table of Contents





Cash
provided by financing activities




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




On May 5,
2008, the Company announced that it had secured a bridge loan in an aggregate
principal amount of $300,000 from a number of private parties (“Additional
Bridge Loan”). The Additional Bridge Loan constitutes an increase to the
principal amount of the $3,000,000 principal amount bridge loan that the Company
announced on February 19, 2008 (the “Original Bridge Loan”) and was advanced on
substantially the same terms and conditions as the Original Bridge Loan,
pursuant to an amendment of the loan agreement for the Original Bridge Loan. The
Additional Bridge Loan bears interest at a rate of 12% per annum and will have
the same maturity date as the Original Bridge Loan. The Company has pledged its
shares of the capital stock of OcuSense as collateral for the loan.




Net cash
provided by financing activities for the six months ended June 30, 2007 was
$9,201,735 and is made up of gross proceeds in the amount of $10,016,000 raised
in the February 2007 private placement of the Shares and the Warrants, less
issuance costs of $871,215 which includes the fair value of the Cowen Warrant of
$97,222 issued in part payment of the placement fee owed to Cowen and Company,
LLC. Cash provided by financing activities also includes cash received in the
amount of $2,228 from the exercise of options to purchase shares of common stock
of the Company, offset by additional share issuance costs of $42,500 in respect
of the shares issued to the former stockholders of SOLX in part payment of the
purchase price of SOLX.




Financial
Condition




Management
believes that the existing cash and cash equivalents and short-term investments,
together with the net proceeds of the bridge loans, will be sufficient to fund
the Company’s anticipated level of operations and other demands and commitments
until approximately the middle of November 2008.




As at
December 31, 2007, we had investments in the aggregate principal amount of
$1,900,000 which consist of investments in four separate asset-backed auction
rate securities yielding an average return of 3.26% per
annum.  However, as a result of market conditions, all of these
investments have recently failed to settle on their respective settlement dates
and have been reset to be settled at future dates with an average maturity of 12
days.  Based on discussions with the Company’s advisors and the
current lack of liquidity for asset-backed securities of this type, we concluded
that the carrying value of these investments was higher than its fair value as
of June 30, 2008 and December 31, 2007. Accordingly, these auction rate
securities have been recorded at their estimated fair value of $413,678 as at
June 30, 2008 and $863,750 as at December 31, 2007.




We
consider this to be an other-than-temporary reduction in the value, accordingly,
the impairment associated with these auction rate securities of $1,036,250 for
the year ended December 31, 2007 and $450,072 for the six months ended June 30,
2008 (totaling $1,486,322) has been included as an impairment of investments in
our consolidated statement of operations for the year ended December 31, 2007
and the six months ended June 30, 2008, respectively.




Although
we continue to receive interest earned on these securities, we do not know at
the present time when it will be able to convert these investments into
cash.  Accordingly, management has classified these investments as a
non-current asset on its consolidated balance sheet as of December 31, 2007 and
June 30, 2008. Management will continue to monitor these investments closely for
future indications of further impairment. The illiquidity of these investments
may have an adverse impact on the length of time during which we currently
expect to be able to sustain its operations in the absence of an additional
capital raise by the Company as we do not have the cash reserves to hold these
auction rate securities until the market recovers nor can we hold these
securities until their contractual maturity dates.





58
 Table of Contents





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




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


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


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


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


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


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


·
            the
      effect of competing technological and market developments;
    and


·
            the
      Company's ability to meet the conditions imposed by the NASDAQ listing
      qualifications panel on its approval of the Company's request to transfer
      it listing to the NASDAQ Capital
Market




With the
suspension of the Company’s RHEOTM System clinical development program, and the
consequent winding-down of the RHEO-AMD study, and the Company’s disposition of
SOLX, the Company’s major asset is its 50.1% ownership stake, on a fully diluted
basis, 57.68% on an issued and outstanding basis, in OcuSense. Accordingly,
unless we acquire other businesses (which, in light of the Company’s financial
condition, is unlikely to occur), our ability to generate any revenues will be
dependent almost entirely upon the success of OcuSense.





If the
Company is successful in completing the merger transaction announced on April
22, 2008 in which the Company will acquire the minority ownership interest and
OcuSense will be come a wholly-owned subsidiary of the Company, the dependency
on the success of OcuSense will be increased





We cannot
begin commercialization of the TearLabTM test for DED in the United States until
we receive FDA approval. At this time, we do not know when we can expect to
begin to generate revenues from the TearLabTM test for DED in the United
States.





We will
need additional capital in the future, and our prospects for obtaining it are
uncertain. On October 9, 2007, we announced that the Board had authorized
management and the Company’s advisors to explore the full range of strategic
alternatives available to enhance shareholder value, including, but not limited
to, the raising of capital through the sale of securities, one or more strategic
alliances and the combination, sale or merger of all or part of the Company. For
some time prior to the October 9, 2007 announcement, the Company had been
seeking to raise additional capital, with the objective of securing funding
sufficient to sustain its operations as it had been clear that, unless we were
able to raise additional capital, the Company would not have had sufficient cash
to support its operations beyond early 2008. The Company has secured a bridge
loan in an aggregate principal amount of $3,000,000 from a number of private
parties on February 19, 2008 and an additional bridge loans of $300,000 and
$3,403,500 secured on May 5, 2008 and July 28, 2008, respectively. Management
believes that these net proceeds, together with the Company’s existing cash and
cash-equivalents, will be sufficient to cover its operating activities and other
demands only until approximately the middle of November 2008.





If, in
addition, the Company is successful in completing a private placement of
$2,173,000 of common stock, as recently announced, management believes that it
will have sufficient funds to meet its operating activities and other demands
until approximately some time in Q2 2009.





Additional
capital may not be available on terms favorable to us, or at all. In addition,
future financings could result in significant dilution of existing stockholders.
However, unless we succeed in raising additional capital, we will be unable to
continue our operations.





RECENT
ACCOUNTING PRONOUNCEMENTS





In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value
Measurements.” This standard defines fair value, establishes a framework for
measuring fair value in accounting principles generally accepted in the United
States of America and expands disclosure about fair value measurements. This
pronouncement applies to other accounting standards that require or permit fair
value measurements. Accordingly, this statement does not require any new fair
value measurement. This statement is effective for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal years. In
December of 2007, FASB agreed to a one year deferral of SFAS No. 157’s fair
value measurement requirements for non-financial assets and liabilities that are
not required or permitted to be measured at fair value on a recurring basis. The
Company adopted SFAS No. 157 on January 1, 2008, which had no effect
on the Company’s consolidated financial statements. Refer to Note 8, “Fair value
measurements” for additional information related to the adoption of SFAS
No. 157.





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




Subsequent
to the adoption of SFAS No. 159, changes in fair value are recognized in
earnings. SFAS No. 159 is effective for fiscal years beginning on or after
November 15, 2007 and is required to be adopted by the Company in the first
quarter of fiscal 2008. The adoption of SFAS No. 159 has not had a material
impact on the Company’s results of operations and financial
position.




On June
14, 2007, FASB ratified EITF 07-3, "Accounting for Non-Refundable Advance
Payments for Goods or Services to Be Used in Future Research and Development
Activities". EITF 07-3 requires that all non-refundable advance payments for
R&D activities that will be used in future periods be capitalized until
used. In addition, the deferred research and development costs need to be
assessed for recoverability. EITF 07-3 is applicable for fiscal years beginning
after December 15, 2007 and is to be applied prospectively without the option of
early application. The adoption of  EITF 07-3  has not had a material
impact on the Company’s results of operations and financial
position.




On
December 4, 2007 FASB issued SFAS No. 141(R) (revised 2007), “Business
Combinations”, and SFAS No. 160, “Non-controlling Interests in Consolidated
Financial Statements”. Effective for fiscal years beginning after December 15,
2008, the standards will improve, simplify, and converge internationally the
accounting for business combinations and the reporting of non-controlling
interests in consolidated financial statements.




SFAS No.
141(R) improves reporting by creating greater consistency in the accounting and
financial reporting of business combinations, resulting in more complete,
comparable, and relevant information for investors and other users of financial
statements. To achieve this goal, the new standard requires the acquiring entity
in a business combination to recognize all (and only) the assets acquired and
liabilities assumed in the transaction; establishes the acquisition-date fair
value as the measurement objective for all assets acquired and liabilities
assumed; and requires the acquirer to disclose to investors and other users all
of the information they need to evaluate and understand the nature and financial
effect of the business combination.




SFAS No.
160 improves the relevance, comparability, and transparency of financial
information provided to investors by requiring all entities to report
noncontrolling (minority) interests in subsidiaries in the same way—as equity in
the consolidated financial statements. Moreover, Statement 160 eliminates the
diversity that currently exists in accounting for transactions between an entity
and noncontrolling interests by requiring they be treated as equity
transactions.





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Early
adoption of SFAS No. 141(R) and SFAS No. 160 is prohibited. Management is
currently evaluating the requirements of these standards and has not yet
determined the impact, if any, on the Company’s consolidated financial
statements.




In
March 2008, FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities — An Amendment of FASB Statement
No. 133”. SFAS No. 161 enhances the required disclosures regarding
derivatives and hedging activities, including disclosures regarding how an
entity uses derivative instruments, how derivative instruments and related
hedged items are accounted for under SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities” and how derivative instruments
and related hedged items affect an entity’s financial position, financial
performance and cash flows. SFAS No. 161 is effective for fiscal years
beginning after November 15, 2008. Management is currently evaluating the
requirements of SFAS No. 161 and has not yet determined the impact, if any,
on the Company’s financial statements.





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ITEM3.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





Currency
fluctuation and exchange risk





All of
our sales are in U.S. dollars or are linked to the U.S. dollar, while a portion
of our expenses are in Canadian dollars and euros. We cannot predict any future
trends in the exchange rate of the Canadian dollar or euro against the U.S.
dollar. Any strengthening of the Canadian dollar or euro in relation to the U.S.
dollar would increase the U.S. dollar cost of our operations and 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 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.





As at
June 30, 2008 and December 31, 2007, we had investments in the aggregate
principal amount of $1,900,000 which consist of investments in four separate
asset-backed auction rate securities yielding an average return of 3.26% per
annum.  However, as a result of market conditions, all of these
investments have recently failed to settle on their respective settlement dates
and have been reset to be settled at future dates with an average maturity of 46
days.  Due to the current lack of liquidity for asset-backed
securities of this type, we concluded that the carrying value of these
investments was higher than its fair value as of June 30, 2008 and December 31,
2007. Accordingly, these auction rate securities have been recorded at their
estimated fair value of $413,678. We consider this to be an other-than-temporary
reduction in the fair value of these auction rate securities. Accordingly, the
loss associated with these auction rate securities of $450,072 for the six
months ended June 30, 2008 has been included as an impairment of investments in
our consolidated statement of operations for the six months ended June 30,
2008.  The auction rate securities were liquid as at June 30, 2007. As
a result, the loss associated with these auction rate securities for the six
months ended June 30, 2007 was nil.





ITEM4.
            CONTROLS
      AND PROCEDURES





(a)                   Disclosure
Controls and Procedures. The Company maintains disclosure controls and
procedures that are designed to ensure that information required to be disclosed
in the Company’s reports under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”), is recorded, processed, summarized and reported within the
time reports specified in the SEC’s rules and forms and that such information is
accumulated and communicated to the Company’s management, including our
principal executive officer (the “CEO”) and our principal financial officer (the
“CFO”), as appropriate, to allow timely decisions regarding required disclosure.
In designing and evaluating disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management necessarily is required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
The Company’s disclosure controls and procedures are designed to provide
reasonable assurance of achieving their desired objectives.





In
assessing whether the Company’s disclosure controls and procedures and the
Company’s internal control over financial reporting were effective as at March
31, 2008 and December 31, 2007, management also considered the impact of the
Restatement of its Financial Statements with respect to the method of
consolidation used to account for its investment in OcuSense, Inc., to the
consolidated financial statements for the fiscal years ended December 31, 2007
and 2006 and the three months ended March 31, 2008 as well as the Company’s
control environment.




Management
has concluded that due to the failure to account for the consolidation of
OcuSense , Inc. under the variable interest entity model since the Company’s
acquisition of OcuSense on November 30, 2006, there was a material weakness in
its internal control over financial reporting as of December 31,
2007.




During
the period subsequent to December 31, 2007, the Company underwent significant
changes, including the termination of employment of most of its employees,
including finance department employees and senior executives. Despite the
reduced resources at our disposal, using our remaining internal resources and
engaging the services of outside consultants, we have focused our efforts on
ensuring, to the fullest extent possible, that the Company has and maintains
appropriate design and operating effectiveness of internal control over
financial reporting. However, as is the case for many small companies, the
Company may not have the resources to address fully complex financial accounting
matters.




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 Table of Contents




As of the
end of the three-month period ended June 30, 2008, an evaluation of the
effectiveness of the Company’s disclosure controls and procedures (as defined in
Rule 13a-15(e) of the Exchange Act) was carried out by the CEO and the CFO.
Based on their evaluation, the CEO and the CFO have concluded that, as of the
end of that fiscal period, the Company’s disclosure controls and procedures are
effective to provide reasonable assurance of achieving the desired control
objectives.





(b)                    Changes
in Internal Control over Financial Reporting. During the three-month period
ended June 30, 2008, there were no changes in our internal control over
financial reporting that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.





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 Table of Contents








PART
      II.
            OTHER
      INFORMATION





ITEM1.
            LEGAL
      PROCEEDINGS





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





ITEM2.
            UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS





None





ITEM3.
            DEFAULTS
      UPON SENIOR SECURITIES





There has
not been any default upon our senior securities.





ITEM4.
            SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY
HOLDERS





None.





ITEM5.
            OTHER
      INFORMATION





None.





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ITEM
      6.
                EXHIBITS
 Index to
Exhibits
 
 10.1
              
              Second
      Amending Agreement, dated as of June 16, 2008, between John Cornish and
      the Registrant, amending the Termination Agreement between the Registrant
      and John Cornish dated as of January 4, 2008, as
  amended.10.2
              
              Second
      Amending Agreement, dated as of June 16, 2008, between Julie Fotheringham
      and the Registrant, amending the Termination Agreement between the
      Registrant and Julie Fotheringham dated as of January 4, 2008, as
      amended.10.3
              
              Amending
      Agreement, dated as of June 16, 2008, between Stephen Kilmer and the
      Registrant, amending the Termination Agreement between the Registrant and
      Stephen Kilmer dated as of January 31, 2008.10.4
              
              Second
      Amending Agreement, dated as of June 16, 2008, between David C. Eldridge
      and the Registrant, amending the Termination Agreement between the
      Registrant and David C. Eldridge dated as of January 8, 2008, as
      amended.10.5
              
              Second
      Amending Agreement, dated as of June 16, 2008, between Stephen Parks and
      the Registrant, amending the Termination Agreement between the Registrant
      and Stephen Parks dated as of January 4, 2008, as
  amended.10.6
              
              Second
      Amending Agreement, dated as of June 19, 2008, between Nozhat Choudry and
      the Registrant, amending the Termination Agreement between the Registrant
      and Nozhat Choudry dated as of January 31, 2008, as
    amended.10.7
              
              Termination
      Agreement, dated as of June 30, 2008, between Thomas P. Reeves and the
      Registrant, terminating the Employment Agreement between the Registrant
      and Thomas P. Reeves dated as of August 1, 2004, as
    amended.10.8
              
              Third
      Amending Agreement, dated as of July 25, 2008, between John Cornish and
      the Registrant, amending the Termination Agreement between the Registrant
      and John Cornish dated as of January 4, 2008, as
  amended.10.9
              
              Third
      Amending Agreement, dated as of July 25, 2008, between Julie Fotheringham
      and the Registrant, amending the Termination Agreement between the
      Registrant and Julie Fotheringham dated as of January 4, 2008, as
      amended.10.10
              
              Second
      Amending Agreement, dated as of July 25, 2008, between Stephen Kilmer and
      the Registrant, amending the Termination Agreement between the Registrant
      and Stephen Kilmer dated as of January 31, 2008, as
    amended.10.11
              
              Third
      Amending Agreement, dated as of July 25, 2008, between David C. Eldridge
      and the Registrant, amending the Termination Agreement between the
      Registrant and David C. Eldridge dated as of January 8, 2008, as
      amended.
  65
  10.12
              
              Third
      Amending Agreement, dated as of July 25, 2008, between Stephen Parks and
      the Registrant, amending the Termination Agreement between the Registrant
      and Stephen Parks dated as of January 4, 2008, as
  amended.10.13
              
              Third
      Amending Agreement, dated as of July 25, 2008, between Nozhat Choudry and
      the Registrant, amending the Termination Agreement between the Registrant
      and Nozhat Choudry dated as of January 31, 2008, as
    amended.10.14
              
              Amending
      Agreement, dated as of July 25, 2008, between Thomas P. Reeves and the
      Registrant, amending the Termination Agreement between the Registrant and
      Thomas P. Reeves dated as of June 30, 2008.10.15
              
              Second
      Amending Agreement, dated as of July 28, 2008, by and among the
      Registrant, the lenders listed on the Schedule of Second New Lenders
      attached thereto as Exhibit A, the lenders listed on the Schedule of
      Required Lenders attached thereto as Exhibit B and Marchant Securities
      Inc., amending the Loan Agreement, dated as of February 19, 2008, by and
      among the Registrant, the lenders listed on the Schedule of Lenders
      attached thereto as Exhibit A and Marchant Securities Inc., as amended,
      and amending the Share Pledge Agreement, dated as of February 19, 2008, by
      the Registrant in favor of Marchant Securities Inc., as collateral agent,
      as amended.
 
  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.


66