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


**Washington,
      D.C. 20549**





**FORM
      10-Q**




(Mark
      One)


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





For
      the quarterly period
      ended:                                                                **June 30,
      2007**





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





For
      the
      transition period from _______________ to _______________





Commission
      file number: 000-51030







**OccuLogix,
      Inc.**


(Exact
      name of registrant as


specified
      in its charter)


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





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


(Address
      of principal executive offices)





**(905)
      602-0887**


(Registrant’s
      telephone number)





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





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




Large
                  accelerated filer
              Accelerated
                  filerX
              Non-accelerated
                  filer




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





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 of
      August 7,
      2007





1


Special
      Note Regarding Forward-Looking Statements











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





2








**SPECIAL
      NOTE REGARDING FORWARD-LOOKING STATEMENTS**





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




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




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












3


**OccuLogix,
      Inc.**









PART
                1.
            FINANCIAL
                INFORMATIONITEM
                1.
            CONSOLIDATED
                FINANCIAL STATEMENTS











4
 **OccuLogix,
            Inc.**


**CONSOLIDATED
      BALANCE SHEETS**


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


(Unaudited)


**(Going
      Concern Uncertainty – See Note 1)**


**June
                30,**
              **2007**
            
            **December
                31,**
              **2006****$**
            
            **$****ASSETS****Current**Cash
                and cash equivalents
            
            
            5,628,916
            
            
            5,740,697Short-term
                investments
            
            
            9,975,000
            
            
            9,785,000Amounts
                receivable, net
            
            
            461,400
            
            
            166,209Inventory,
                net
            
            
            2,784,841
            
            
            2,715,737Prepaid
                expenses
            
            
            927,004
            
            
            680,476Deposit
            
            
            10,442
            
            
            10,442Other
                current assets
            
            
            81,000
            
            
            79,200**Total
                current assets**
            
            
            19,868,603
            
            
            19,177,761Fixed
                assets, net
            
            
            796,380
            
            
            860,717Patents
                and trademarks, net
            
            
            294,838
            
            
            234,841Intangible
                assets, net
            
            
            54,763,128
            
            
            55,683,399Goodwill
            
            
            14,446,977
            
            
            14,446,977**Total
                assets**
            
            
            90,169,926
            
            
            90,403,695**LIABILITIES
                AND STOCKHOLDERS’ EQUITY****Current**Accounts
                payable
            
            
            600,215
            
            
            395,392Accrued
                liabilities
            
            
            2,896,407
            
            
            2,081,352Deferred
                revenue and rent inducement
            
            
            111,473
            
            
            9,585Due
                to stockholders
            
            
            156,933
            
            
            152,406Obligation
                under warrants
            
            
            1,105,766
            
            
            —Current
                portion of other long-term liability
            
            
            3,000,000
            
            
            3,000,000**Total
                current liabilities**
            
            
            7,870,794
            
            
            5,638,735Deferred
                tax liability, net
            
            
            9,902,898
            
            
            18,939,417Other
                long-term liability
            
            
            3,830,400
            
            
            3,420,609**Total
                liabilities**
            
            
            21,604,092
            
            
            27,998,761**Minority
                interest**
            
            
            1,138,059
            
            
            1,184,844**Stockholders’
                equity**Capital
                stockCommon
                stock
            
            
            57,306
            
            
            50,627Par
                value of $0.001 per shareAuthorized:
                75,000,000; Issued and outstanding:June
                30, 2007 – 57,306,145; December 31, 2006 – 50,626,562Additional
                paid-in capital
            
            
            362,772,737
            
            
            354,320,116Accumulated
                deficit
            
            
            (295,402,268
            )
            
            (293,150,653
            )**Total
                stockholders’ equity**
            
            
            67,427,775
            
            
            61,220,090**Total
                liabilities and stockholders’ equity**
            
            
            90,169,926
            
            
            90,403,695





*See
      accompanying notes to interim consolidated financial
      statements*


5
 **OccuLogix,
            Inc.**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


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


(Unaudited)





**Three
                months ended****June
                30,****2007**
            
            **2006****$**
            
            **$****Revenue**Retina
            
            
            —
            
            
            82,715Glaucoma
            
            
            121,275
            
            
            —**Total
                revenue**
            
            
            121,275
            
            
            82,715**Cost
                of goods sold**RetinaCost
                of goods sold, net of goods recovered
            
            
            8,297
            
            
            (20,683
            )Royalty
                costs
            
            
            25,000
            
            
            25,000GlaucomaCost
                of goods sold
            
            
            42,464
            
            
            —Royalty
                costs
            
            
            6,250
            
            
            —**Total
                cost of goods sold**
            
            
            82,011
            
            
            4,31739,264
            
            
            78,398**Operating
                expenses**General
                and administrative
            
            
            3,367,770
            
            
            2,753,780Clinical
                and regulatory
            
            
            2,695,584
            
            
            1,471,473Sales
                and marketing
            
            
            755,176
            
            
            465,347Impairment
                of goodwill
            
            
            —
            
            
            65,945,6866,818,530
            
            
            70,636,286Loss
                from operations
            
            
            (6,779,266
            )
            
            (70,557,888
            )**Other
                income (expense)**Interest
                income
            
            
            215,927
            
            
            410,228Changes
                in fair value of warrant obligation
            
            
            1,500,710
            
            
            —Interest
                and accretion expense
            
            
            (204,896
            )
            
            —Other
            
            
            (23,785
            )
            
            (6,724
            )Minority
                interest
            
            
            489,937
            
            
            —1,977,893
            
            
            403,504Loss
                before income taxes
            
            
            (4,801,373
            )
            
            (70,154,384
            )Recovery
                of income taxes
            
            
            2,222,502
            
            
            158,792**Net
                loss for the period**
            
            
            (2,578,871
            )
            
            (69,995,592
            )**Weighted
                average number of shares outstanding**
              **-
                basic and diluted**
            
            
            57,304,020
            
            
            42,186,579**Net
                loss per share – basic and diluted**
            
            
            (0.05
            )
            
            (1.66
            )





*See
      accompanying notes to interim consolidated financial
      statements*


6
 **OccuLogix,
            Inc.**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


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


(Unaudited)





**Six
                months ended****June
                30,****2007**
            
            **2006****$**
            
            **$****Revenue**Retina
            
            
            90,000
            
            
            82,715Glaucoma
            
            
            160,900
            
            
            —**Total
                revenue**
            
            
            250,900
            
            
            82,715**Cost
                of goods sold**RetinaCost
                of goods sold, net of goods recovered
            
            
            15,397
            
            
            1,604,317Royalty
                costs
            
            
            50,000
            
            
            50,000GlaucomaCost
                of goods sold
            
            
            97,973
            
            
            —Royalty
                costs
            
            
            14,983
            
            
            —**Total
                cost of goods sold**
            
            
            178,353
            
            
            1,654,31772,547
            
            
            (1,571,602
            )**Operating
                expenses**General
                and administrative
            
            
            6,843,138
            
            
            4,750,365Clinical
                and regulatory
            
            
            5,493,421
            
            
            2,946,860Sales
                and marketing
            
            
            1,507,962
            
            
            891,334Impairment
                of goodwill
            
            
            —
            
            
            65,945,686Restructuring
                charges
            
            
            —
            
            
            819,64213,844,521
            
            
            75,353,887Loss
                from operations
            
            
            (13,771,974
            )
            
            (76,925,489
            )**Other
                income (expense)**Interest
                income
            
            
            431,364
            
            
            781,153Changes
                in fair value of warrant obligation
            
            
            776,730
            
            
            —Interest
                and accretion expense
            
            
            (426,432
            )
            
            —Other
            
            
            (7,940
            )
            
            (7,105
            )Minority
                interest
            
            
            1,044,785
            
            
            —1,818,507
            
            
            774,048Loss
                before income taxes and cumulative effect of a change in accounting
                principle
            
            
            (11,953,467
            )
            
            (76,151,441
            )Recovery
                of income taxes
            
            
            5,101,852
            
            
            316,850Loss
                before cumulative effect of a change in accounting
                principle
            
            
            (6,851,615
            )
            
            (75,834,591
            )Cumulative
                effect of a change in accounting principle
            
            
            —
            
            
            107,045**Net
                loss for the period**
            
            
            (6,851,615
            )
            
            (75,727,546
            )**Weighted
                average number of shares outstanding**
              **-
                basic and diluted**
            
            
            55,931,395
            
            
            42,177,130Loss
                before cumulative effect of a change in accounting principle per
                share –
                basic and diluted
            
            
            (0.12
            )
            
            (1.80
            )Cumulative
                effect of a change in accounting principle per share – basic and
                diluted
            
            
            —
            
            
            —**Net
                loss per share – basic and diluted**
            
            
            (0.12
            )
            
            (1.80
            )





*See
      accompanying notes to interim consolidated financial
      statements*


7
 **OccuLogix,
            Inc.**











**CONSOLIDATED
      STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY**


(expressed
      in U.S. dollars)


(Unaudited)




**Voting
                  common stock at par value**
              **Additional
                  paid-in capital**
              **Accumulated
                  deficit**
              **Net
                  stockholders' equity****shares**
              **issued****#**
              **$**
              **$**
              **$**
              **$****Balance,
                  December 31, 2006**
              50,626,562
              50,627
              354,320,116
              (293,150,653)
              61,220,090Stock-based
                  compensation
              ―
              ―
              931,058
              ―
              931,058Shares
                  issued on private placement of common stock
              6,677,333
              6,677
              8,053,967
              ―
              8,060,644Share
                  issue costs
              ―
              ―
              (743,634)
              ―
              (743,634)Shares
                  issued on exercise of options
              2,250
              2
              2,226
              ―
              2,228Contribution
                  of inventory from related party
              ―
              ―
              81,990
              ―
              81,990Change
                  in OcuSense, Inc.’s stockholders’ equity, stock-based
                  compensation
              ―
              ―
              93,371
              ―
              93,371Contribution
                  of inventory from unrelated party
              ―
              ―
              33,642
              ―
              33,643Cumulative
                  effect of adoption of Financial Accounting Standards Board Interpretation
                  No. 48 “Accounting for Uncertainty in Income Taxes – An Interpretation of
                  FASB Statement No. 109”
              ―
              ―
              ―
              4,600,000
              4,600,000Net
                  loss for the period
              ―
              ―
              ―
              (6,851,615)
              (6,851,615)**Balance,
                  June 30, 2007**
              **57,306,145**
              **57,306**
              **362,772,737**
              **295,402,268**
              **67,427,775**


*See
      accompanying notes to interim consolidated financial
      statements*


8
 **OccuLogix,
            Inc.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


(expressed
      in U.S. dollars)


(Unaudited)


**Six
                  months ended**
                **June
                  30,****2007**
              
              **2006****$**
              
              **$****OPERATING
                  ACTIVITIES**Net
                  loss for the period
              
              
              (6,851,615
              )
              
              (75,727,546
              )Adjustments
                  to reconcile net loss to cash used in operating
                  activities:Write-down
                  of inventory
              
              
              —
              
              
              1,625,000Stock-based
                  compensation
              
              
              1,024,429
              
              
              959,953Amortization
                  of fixed assets
              
              
              195,623
              
              
              68,300Amortization
                  of patents and trademarks
              
              
              2,816
              
              
              3,081Amortization
                  of intangible asset
              
              
              2,583,604
              
              
              858,333Impairment
                  of goodwill
              
              
              —
              
              
              65,945,686Accretion
                  expense
              
              
              409,791
              
              
              —Amortization
                  of premiums/discounts on short-term investments
              
              
              —
              
              
              37,845Changes
                  in fair value of warrant obligation
              
              
              (776,730
              )
              
              —Deferred
                  tax liability, net
              
              
              (5,101,852
              )
              
              (317,583
              )Cumulative
                  effect of a change in accounting principle
              
              
              —
              
              
              (107,045
              )Minority
                  interest
              
              
              (1,044,785
              )
              
              —Net
                  change in non-cash working capital balances related to
                  operations
              
              
              629,302
              
              
              (1,685,838
              )**Cash
                  used in operating activities**
              
              
              (8,929,417
              )
              
              (8,339,814
              )**INVESTING
                  ACTIVITIES**(Purchase)
                  sale of short-term investments
              
              
              (190,000
              )
              
              19,070,000Additions
                  to fixed assets
              
              
              (131,286
              )
              
              (231,030
              )Additions
                  to patents and trademarks
              
              
              (62,813
              )
              
              (101,903
              )Other
                  asset
              
              
              —
              
              
              (2,000,000
              )Deferred
                  acquisition costs
              
              
              —
              
              
              (50,527
              )**Cash
                  provided by (used in) investing activities**
              
              
              (384,099
              )
              
              16,686,540**FINANCING
                  ACTIVITIES**Proceeds
                  from the exercise of common stock options
              
              
              2,228
              
              
              233,710Proceeds
                  from the issuance of common stock
              
              
              10,016,000
              
              
              ―Share
                  issuance costs
              
              
              (816,493
              )
              
              ―**Cash
                  provided by financing activities**
              
              
              9,201,735
              
              
              233,710**Net
                  (decrease) increase in cash and cash equivalents**
                **during
                  the period**
              
              
              (111,781
              )
              
              8,580,436Cash
                  and cash equivalents, beginning of period
              
              
              5,740,697
              
              
              9,599,950**Cash
                  and cash equivalents, end of period**
              
              
              5,628,916
              
              
              18,180,386


*See
      accompanying notes to interim consolidated financial
      statements*


9


**OccuLogix,
      Inc.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


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


June
      30,
      2007 (Unaudited)




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




**Basis
      of presentation**




The
        accompanying unaudited interim consolidated financial statements have been
        prepared in accordance with United States generally accepted accounting
        principles (“US GAAP”). These unaudited interim consolidated financial
        statements contain all normal recurring adjustments and estimates necessary
        to
        present fairly the financial position of OccuLogix, Inc. (the “Company”) as of
        June 30, 2007 and the results of its operations for the three- and six-month
        period then ended. These unaudited interim consolidated financial statements
        should be read in conjunction with the consolidated financial statements
        and
        notes included in the Company’s latest Annual Report on Form 10-K/A filed with
        the U.S. Securities and Exchange Commission (the “SEC”) on March 29, 2007.
        Interim results are not necessarily indicative of results for a full
        year.




**Accounting
      policies**




These
        unaudited interim consolidated financial statements have been prepared using
        accounting policies that are consistent with the policies used in preparing
        the
        Company’s audited consolidated financial statements for the year ended
        December 31, 2006, except as noted below.





*Income
        taxes*





On
        January 1, 2007, the Company adopted the provisions of Financial Accounting
        Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in
        Income Taxes – An Interpretation of FASB Statement No. 109” (“FIN No. 48”). FIN
        No. 48 addresses the determination of whether tax benefits claimed or expected
        to be claimed on a tax return should be recorded in the financial
        statements.  Under FIN No. 48, the Company may recognize the tax
        benefit from an uncertain tax position only if it is more likely than not
        that
        the tax position will be sustained on examination by the taxing authorities,
        based on the technical merits of the position.  The tax benefits
        recognized in the 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.


10


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 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.




**Going
      concern uncertainty**




The
        accompanying unaudited interim consolidated financial statements have been
        prepared on the basis that the Company will continue as a going concern.
        However, during the six months ended June 30, 2007, the Company sustained
        losses
        of $6,815,615 and used cash of $8,929,417 to fund its operating activities.
        The
        Company’s history of losses and financial condition raise substantial doubt
        about the ability of the Company to continue as a going
        concern.





On
        February 6, 2007, the Company completed a private placement of shares of
        its
        common stock and warrants for total gross proceeds of $10,016,000 (less
        transaction costs of $871,215).





Management
        believes that these proceeds, together with the Company’s existing cash, will be
        only sufficient to cover its operating activities and other demands until
        early
        2008. The Company currently is not generating cash from operations, and most
        of
        its cash will be utilized to fund its operations and to fund deferred
        acquisition payments. The Company’s operating expenses will consist mostly of
        expenses relating to the furtherance of its clinical trial activities and
        the
        commercialization of the SOLX Glaucoma System in Europe. Unless the Company
        is
        able to generate revenues, decrease its expenses substantially or raise
        additional capital, the Company will not have sufficient cash to support
        its
        operations for the next 12 months. The Company is currently seeking to raise
        additional capital, with the objective of securing funding sufficient to
        sustain
        its operations.  There can be no assurance that the Company will achieve
        this objective.





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.




**2.
      GOODWILL**




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





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





**Retina**
            
            **Glaucoma**
            
            **Total****$**
            
            **$**
            
            **$**Balance,
                December 31, 2006 and June 30, 2007
            
            
            —
            
            
            14,446,977
            
            
            14,446,977





The
        Company performs its annual goodwill impairment analysis on its acquired
        goodwill on October 1 of each year and evaluates the carrying value of its
        goodwill between annual tests upon the occurrence of certain events and
        circumstances.




11




**Retina**





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





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





**Glaucoma**





On
        September 1, 2006, the Company acquired Solx, Inc. (“SOLX”) by way of a merger
        for a total purchase price of $29,068,443. Of this amount, $14,446,977 has
        been
        allocated to goodwill. The Company determined that, as of June 30, 2007,
        no
        significant event or circumstance has occurred that may lead to an impairment
        of
        its acquired goodwill. The Company further determined that there have not
        been
        any significant changes in the methods used to value the net tangible and
        intangible assets acquired. Therefore, no impairment charge was required
        to be
        recorded during the three and six months ended June 30, 2007.


**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 intangibles. The Company has no indefinite-lived intangible
        assets. The distribution agreements and other acquisition-related intangible
        assets are amortized using the straight-line method over an estimated useful
        life of 15 and 10 years, respectively. Amortization expense for the three
        and
        six months ended June 30, 2007 and 2006 was $1,291,802, $429,167, $2,583,604
        and
        $858,333, respectively.





As
        of
        June 30, 2006, the remaining weighted average amortization period for the
        distribution agreements is 12.4 years and 9.2 years for the other
        acquisition-related intangibleassets.





12


Intangible
        assets subject to amortization consist of the following:





**June
                30, 2007**
            
            **December
                31, 2006****Gross
                Carrying Amount**
            
            **Accumulated
                Amortization**
            
            **Gross
                Carrying Amount**
            
            **Accumulated
                Amortization****$**
            
            **$**
            
            **$**
            
            **$**Distribution
                agreements
            
            25,750,000
            
            4,397,805
            
            25,750,000
            
            3,539,472Shunt
                and laser technology
            
            27,000,000
            
            2,250,000
            
            27,000,000
            
            900,000Regulatory
                and other
            
            2,800,000
            
            233,333
            
            2,800,000
            
            93,333TearLabTM
                technology
            
            6,368,749
            
            274,483
            
            4,705,416
            
            39,21261,918,749
            
            7,155,621
            
            60,255,416
            
            4,572,017





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





**$**Balance
                of 2007
            
            
            2,671,9222008
            
            
            5,343,8452009
            
            
            5,343,8452010
            
            
            5,343,8452011
            
            
            5,343,84530,715,826





On
      November 30, 2006, the Company acquired 50.1% of the capital stock of OcuSense,
      Inc., (“OcuSense”) measured on a fully diluted basis, for a total purchase
      price of $4,171,098 which includes acquisition-related transaction costs of
      $171,098. The Company agreed to make additional payments totaling $4,000,000
      upon the attainment of two pre-defined milestones by OcuSense prior to May
      1,
      2009. In June 2007, the Company paid OcuSense a total of $2,000,000 upon the
      attainment of the first of the two pre-defined milestones. The carrying value
      of
      the TearLabTM technology acquired upon the acquisition of OcuSense was increased
      by $1,663,333 which reflects the minority interest portion of the $2,000,000
      paid to OcuSense in the amount of $998,000 and the additional deferred tax
      liability of $665,333 recorded based on the difference between the increase
      in
      the carrying value of the TearLabTM technology and its tax basis. The balance of
      the contingent payment of $2,000,000 will be paid upon the attainment of the
      second pre-determined milestone.





The
      Company determined that, as of June 30, 2007, there have been no
      significant events which may affect the carrying value of its distribution
      intangible and no significant changes in the methods used to determine the
      fair
      market value of other acquisition-related intangible assets. However, the
      Company’s prior history of losses and losses incurred during the six months
      ended June 30, 2007 reflects a potential indication of impairment, thus
      requiring management to assess whether the Company’s intangible assets were
      impaired as of June 30, 2007. Based on management’s estimates of forecasted
      undiscounted cash flows as of June 30, 2007, the Company concluded that there
      is
      no indication of an impairment of the Company’s intangible assets. Therefore, no
      impairment charge was recorded during the six months ended June 30,
      2007.




**4.
      RESTRUCTURING CHARGES**




In
        March
        2006, the Company implemented a number of structural and management changes
        designed to support both the continued development of its RHEOTM System to treat
        the dry form of age-related macular degeneration, or AMD, and to execute
        its
        accelerated diversification strategy within ophthalmology. In accordance
        with
        SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”
(“SFAS No. 146”), the Company recognized $819,642 in restructuring charges in
        the six months ended June 30, 2006.


13


The
        restructuring charges of $819,642 recorded in the six months ended June 30,
        2006
        consist solely of severance and benefit costs related to the termination
        of a
        total of 12 employees at both the Company’s Mississauga, Ontario and Palm
        Harbor, Florida offices. All severance and benefit costs have been fully
        paid at
        December 31, 2006.




**5.
      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
        April 2006, the Company sold a number of treatment sets to Veris Health Sciences
        Inc. (“Veris”) at a price lower than the Company’s cost.  Accordingly,
        the Company wrote down the value of its treatment sets to reflect this current
        net realizable value at June 30, 2006. During the six months ended June 30,
        2007
        and 2006, the Company recognized a provision related to inventory of nil
        and
        $1,625,000, respectively, based on the above analysis.





As
        of June 30, 2007 and December 31, 2006, the Company had inventory
        reserves of $4,769,365 and $5,101,394, respectively.  The decrease in
        the inventory reserve is due to the sale of inventory during the six-month
        period ended June 30, 2007 that had previously been provided
        for.


**6.
        RECENT ACCOUNTING PRONOUNCEMENTS**




In
        June
        2006, FASB issued FIN No. 48, which clarifies the accounting for uncertainty
        in
        tax positions. FIN No. 48 requires that the Company recognize, in its financial
        statements, the impact of a tax position, if that position is more likely
        than
        not of being sustained on audit, based on the technical merits of the position.
        FIN No. 48 is effective for fiscal years beginning after December 15, 2006.
        As a
        result of the adoption of FIN No. 48 in the first quarter of fiscal
        2007, 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.





The
        adoption of the following recent pronouncements during the first quarter
        of
        fiscal 2007 did not have a material impact on the Company’s consolidated results
        of operations and financial position:





·
              Staff
                  Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior
                  Year Misstatements when Quantifying Misstatements in Current Year
                  Financial Statements”; and


·
              SFAS
                  No. 158, “Employers’ Accounting for Defined Benefit Pension and Other
                  Postretirement Plans, an amendment of FASB Statements Nos. 87,
                  88, 106 and
                  132(R)”.





In
        September 2006, FASB issued Statement No. 157, “Fair Value Measurements” (“SFAS
        No. 157”). SFAS No. 157 defines fair value, establishes a framework and gives
        guidance regarding the methods used for measuring fair value, and expands
        disclosures about fair value measurements. SFAS No. 157 is effective for
        financial statements issued for fiscal years beginning after November 15,
        2007
        and for interim periods within those fiscal years. The Company is currently
        evaluating the impact the adoption of SFAS No. 157 would have on its results
        of
        operations and financial position.





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




14




**7.
      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
        Shares was $1.50, and the per share exercise price of the Warrants is $2.20,
        subject to adjustment.  The Warrants will become exercisable on August
        6, 2007. Pursuant to the Securities Purchase Agreement, on February 6, 2007,
        the
        Company issued the Shares and the Warrants. The gross proceeds of the sale
        of
        the Shares and the Warrants totaled $10,016,000 (less transaction costs of
        $871,215). On February 6, 2007, the Company also issued to Cowen and Company,
        LLC a five-year warrant exercisable into an aggregate of 93,483 shares of
        the
        Company’s common stock (the “Cowen Warrant”) in part payment of the placement
        fee payable to Cowen and Company, LLC for the services it had rendered as
        the
        placement agent in connection with the sale of the Shares and the Warrants.
        All
        of the terms and conditions of the Cowen Warrant (other than the number of
        shares of the Company's common stock into which the Cowen Warrant is
        exercisable) are identical to those of the Warrants. The estimated grant
        date
        fair value of the Cowen Warrant of $97,222 is included in the transaction
        costs
        of $871,215 (note 7(c)).





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





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





On
        January 1, 2006, the Company adopted the provisions of SFAS No. 123R,
“Share-Based Payments”, requiring the recognition of expense related to the fair
        value of its stock-based compensation awards. The Company elected to use
        the
        modified prospective transition method as permitted by SFAS No. 123R and
        therefore has not restated its financial results for prior periods. Under
        this
        transition method, stock-based compensation expense for the three and six
        months
        ended June 30, 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, “Accounting for Stock-Based Compensation”.
        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.


15


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





**Three
                months ended**
              **June
                30,**
            
            **Six
                months ended**
              **June
                30,****2007**
            
            **2006**
            
            **2007**
            
            **2006**General
                and administrative
            
            $
            187,121
            
            $
            414,279
            
            $
            560,309
            
            $
            583,628Clinical
                and regulatory
            
            
            106,230
            
            
            83,390
            
            
            209,418
            
            
            110,823Sales
                and marketing
            
            
            121,575
            
            
            169,378
            
            
            254,702
            
            
            265,502Stock-based
                compensation expense before income taxes (i)
            
            $
            414,926
            
            $
            667,047
            
            $
            1,024,429
            
            $
            959,953





(i)
              The
                  tax benefit associated with the Company’s stock-based compensation expense
                  for the three and six months ended June 30, 2007 and 2006 is $149,373,
                  $246,807,
                  $368,794and $335,182,
                  respectively. These amounts have not been recognized in the
                  Company’s unaudited interim consolidated financial statements for these
                  three- and six-month periods as it is more likely than not that
                  the
                  Company will not realize these
                  benefits.





Net
        cash
        proceeds from the exercise of stock options were $2,228 and nil for the
        three months ended June 30, 2007 and 2006 and $2,228 and $233,710 for the
        six
        months ended June 30, 2007 and 2006, respectively. No income tax benefit
        was
        realized from stock option exercises during the three and six months ended
        June
        30, 2007 and 2006. In accordance with SFAS No. 123R, the Company presents
        excess
        tax benefits from the exercise of stock options, if any, as financing cash
        flows
        rather than operating cash flows.





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





16


The
        fair
        value of stock options granted during the three months ended June 30, 2006
        and
        six months ended June 30, 2007 and 2006 was $2.00, $1.22 and $2.82,
        respectively. There were no options granted during the three months ended
        June
        30, 2007. The estimated fair value was determined using the Black-Scholes
        option-pricing model with the following weighted-average
        assumptions:





**Three
                months ended**
              **June
                30,**
            **Six
                months ended**
              **June
                30,****2007**
            
            **2006**
            **2007**
            
            **2006**Volatility
            
            
            —
            
            
            99.2%
            
            76.9%
            
            
            99%Expected
                life of options
            
            
            —
            
            
            6
                years
            
            5.44
                years
            
            
            5.95
                yearsRisk-free
                interest rate
            
            
            —
            
            
            5.04%
            
            4.55%
            
            
            4.86%Dividend
                yield
            
            
            —
            
            
            0%
            
            0%
            
            
            0%





The
        Company’s computation of expected volatility for the three and six months ended
        June 30, 2007 and 2006 is based on a comparable company’s historical stock
        prices as the Company did not have sufficient historical data. The Company’s
        computation of expected life has been estimated using the “short-cut approach”
as provided in SAB No. 107 as options granted by the Company meet the criteria
        of “plain vanilla” options as defined in SAB No. 107. Under this approach,
        estimated life is calculated to be the mid-point between the vesting date
        and
        the end of the contractual period. The risk-free interest rate for an award
        is
        based on the U.S. Treasury yield curve with a term equal to the expected
        life of
        the award on the date of grant.





A
        summary
        of the options issued during the six months ended June 30, 2007 and the total
        number of options outstanding as of that date are set forth
        below:





Number
                of Options Outstanding
              #
            Weighted-Average
                Exercise Price
              $
            Weighted-Average
                Remaining Contractual Life
              (years)
            Aggregate
                Intrinsic Value
              $Outstanding,
                December 31, 2006
            4,237,221
            1.75Granted
            296,250
            1.82Exercised
            (2,250)
            0.99Forfeited
            (229,083)
            2.05**Outstanding,
                June 30, 2007**
            **4,302,138**
            **1.74**
            **7.65**
            **45,667****Vested
                or expected to vest, June 30, 2007**
            **3,399,836**
            **1.66**
            **6.94**
            **45,667****Exercisable,
                June 30, 2007**
            **2,837,887**
            **1.59**
            **6.72**
            **45,667**





The
        aggregate intrinsic value in the table above represents the total pre-tax
        intrinsic value (i.e., the difference between the Company’s closing stock price
        on the last trading day of the second quarter of 2007 of $1.03 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, 2007). This
        amount
        changes according to the fair market value of the Company’s
        stock.





As
        of June 30, 2007, $2,584,485 of total unrecognized compensation cost
        related to stock options is expected to be recognized over a weighted-average
        period of 2.26 years.





17


**(c)**
              **Warrants**





On
        February 6, 2007, pursuant to the Securities Purchase Agreement between the
        Company and certain institutional investors (note 7(a)), 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 will become exercisable on August 6, 2007. All of the terms
        and
        conditions of the Cowen Warrant (other than the number of shares of the
        Company's common stock into which it is exercisable) are identical to those
        of
        the Warrants.





The
        Company accounts for the Warrants and the Cowen Warrant in accordance with
        the provisions of SFAS No. 133, “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 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, 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 June 30, 2007.





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





Volatility
            
            79.8%Expected
                life of warrants
            
            5
                yearsRisk-free
                interest rate
            
            4.76%Dividend
                yield
            
            0%





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





In
        addition, SFAS No. 133 requires the Company to record the outstanding
        derivatives at fair value at the end of each reporting period, resulting
        in an
        adjustment to the recorded liability of the derivative, with any gain or
        loss
        recorded in earnings of the applicable reporting period. The Company therefore
        estimated the fair value of the Warrants and the Cowen Warrant as at March
        31,
        and June 30, 2007 and determined the aggregate fair value to be $2,626,195
        and
        $1,105,766, an increase of $573,617 and a decrease of $946,812, respectively,
        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 $1,520,429 and $946,812 in its consolidated statement of operations
        for
        the three and six months ended June 30, 2007, respectively, which reflect
        the
        decrease in the Company’s obligation to its warrant holders at June 30,
        2007.





Transaction
        costs associated with the issuance of the Warrants of $170,081 has been recorded
        as a warrant expense in the Company’s unaudited interim consolidated statement
        of operations for the six months ended June 30, 2007.





18


A
        summary
        of the warrants issued during the six months ended June 30, 2007 and the
        total
        number of warrants outstanding as of that date are set forth
        below:




Number
                  of Warrants Outstanding
              Weighted-Average
                  Exercise Price
                $Outstanding,
                  December 31, 2006
              —
              —Granted
              2,764,416
              2.20**Outstanding,
                  June 30, 2007**
              **2,764,416**
              **2.20**


**8.
      LOSS PER SHARE**




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





**Three
                months ended**
              **June
                30,**
            **Six
                months ended**
              **June
                30,****2007**
            
            **2006**
            
            **2007**
            
            **2006**Weighted
                average number of shares outstanding - basic
            
            
            57,304,020
            
            
            42,186,579
            
            55,931,395
            
            42,177,130Effect
                of dilutive security:Stock
                options
            
            
            216,899
            
            
            1,293,936
            
            329,525
            
            2,432,544Weighted
                average number of shares - fully diluted
            
            
            57,520,919
            
            
            43,480,515
            
            56,260,920
            
            44,609,674





The
        warrants outstanding at June 30, 2007 have not been included in the calculation
        of the diluted number of shares outstanding at June 30, 2007 since the per
        share
        exercise price of the Warrants and the Cowen Warrant of $2.20 is higher than
        the
        average per share price of the Company’s common stock for the three and six
        months ended June 30, 2007 of $1.24 and $1.43, respectively.




**9.
      RELATED PARTY TRANSACTIONS**




The
        following are the Company’s related party transactions:





**TLC
      Vision Corporation and Diamed Medizintechnik GmbH**




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





The
        $5,000,000 portion of the $12,000,000 commitment which was not convertible
        into
        the Company’s common stock was not advanced and the commitment was terminated
        prior to the completion of the Company’s initial public offering of shares of
        its common stock. During the years ended December 31, 2004 and 2003, the
        Company
        issued 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, 2007,
        the
        two companies have a combined 35.9% equity interest in the Company on a fully
        diluted basis.


19


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





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




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





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





The
        Company entered into a new distributorship agreement (the “2006 Distributorship
        Agreement”), effective October 20, 2006, with Asahi Medical. The 2006
        Distributorship Agreement replaced the 2001 distributorship agreement between
        the Company and Asahi Medical, as supplemented and amended by the 2003, 2004
        and
        2005 Memoranda. Pursuant to the 2006 Distributorship Agreement, the Company
        has
        distributorship rights to Asahi Medical's Plasmaflo filter and Asahi Medical's
        second generation polysulfone Rheofilter 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.





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





With
        respect to the United States, subject to early termination under certain
        circumstances, the 2006 Distributorship Agreement has a term which will end
        10
        years following the date on which FDA approval to market the RHEOTM System in the
        United States is received and contemplates successive one-year renewal terms
        thereafter.





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





The
        Company receives 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 $81,990 and $25,500 for the six months ended June 30, 2007 and 2006,
        respectively.


20


**Mr.
      Hans Stock (Note 10)**




On
        February 21, 2002, the Company entered into an agreement with Mr. Stock as
        a
        result of his assistance in procuring a distributor agreement for the filter
        products used in the RHEOTM System from Asahi Medical. Mr. Stock agreed to
        further assist the Company in procuring new product lines from Asahi Medical
        for
        marketing and distribution by the Company. The agreement will remain effective
        for a term consistent with the term of the distributorship agreement with
        Asahi
        Medical and Mr. Stock will receive a 5% royalty payment on the purchase of
        the
        filters from Asahi Medical. During each of the three and six months ended
        June
        30, 2007 and 2006 and the year ended December 31, 2006, the Company paid
        Mr.
        Stock nil as royalty fees. Included in due to stockholders at June 30, 2007
        and
        December 31, 2006 is $48,022 and $48,022, respectively, due to Mr.
        Stock.





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





On
        August
        6, 2004, the Company entered into a patent license and royalty agreement
        with
        Mr. Stock to obtain an exclusive license to U.S. Patent No. 6,245,038. The
        Company is required to make royalty payments totaling 1.5% of product sales
        to
        Mr. Stock, subject to minimum advance royalty payments of $12,500 per quarter.
        The advance payments are credited against future royalty payments to be made
        in
        accordance with the agreement. This agreement replaces the June 25, 2002
        consulting agreement with Mr. Stock which provided for a royalty payment
        of 1%
        of product sales. During the three and six months ended June 30, 2007 and
        2006
        and the year ended December 31, 2006, the Company paid $12,500, $25,000,
        $12,500, $25,000 and $50,000, respectively, to Mr. Stock as royalty fees.
        Included in due to stockholders at June 30, 2007 and December 31, 2006 is
        $12,500 and $12,500, respectively, due to Mr. Stock.





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





During
        the six months ended June 30, 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,
        2007, the Company paid ATI $28,550 and $46,656, respectively, under this
        arrangement (2006 – nil). Included in accounts payable and accrued liabilities
        at June 30, 2007 and December 31, 2006 is $17,036 and $9,629, respectively,
        due
        to ATI.





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


21


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.





The
        Company entered into a consultancy and non-competition agreement on July
        1, 2003
        with the Center for Clinical Research (“CCR”), then a significant shareholder of
        the Company, which requires the Company to pay a fee of $5,000 per month.
        For
        the year ended December 31, 2003, CCR agreed to forego the payment of $75,250
        due to it in exchange for options to purchase 20,926 shares of the Company’s
        common stock at an exercise price of $0.13 per share. In addition, CCR agreed
        to
        the repayment of the balance of $150,500 due to it at a rate of $7,500 per
        month
        beginning in July 2003. On August 22, 2005, the Company amended the consultancy
        and non-competition agreement with CCR such that the fee payable to it was
        increased from $5,000 to $15,000 per month effective January 1, 2005. The
        monthly fee is fixed regardless of actual time incurred by CCR in performance
        of
        the services rendered to the Company. The agreement allows either party to
        convert the payment arrangement to a fee of $2,500 daily. In the event of
        such
        conversion, CCR shall provide services on a daily basis as required by the
        Company and will invoice the Company for the total number of days that services
        were provided in that month. The amended consultancy and non-competition
        agreement provides for the payment of a one-time bonus of $200,000 upon receipt
        by the Company of FDA approval of the RHEOTM System and the grant of 60,000
        options to CCR at an exercise price of $7.15 per share. The stockholders
        of the
        Company approved the adjustment of the exercise price of these options to
        $2.05
        per share on June 23, 2006. These options were scheduled to vest as to 100%
        when
        and if the Company receives FDA approval of the RHEOTM System on or before
        November 30, 2006, as to 80% when and if the Company receives FDA approval
        after
        November 30, 2006 but on or before January 31, 2007 and as to 60% when and
        if
        the Company receives FDA approval after January 31, 2007. In August 2006,
        by
        letter agreement between the Company and CCR, it was agreed that the monthly
        fee
        of $15,000 would be suspended at the end of August 2006 until CCR’s services
        will be required by the Company in the future. This resulted in a combined
        consulting expense, included within clinical and regulatory expense for the
        three and six months ended June 30, 2007 and 2006, of $11,594, $53,379, $23,187
        and $104,450, respectively.





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


22


In
        April
        2006, the Company agreed to sell a total of 1,000 treatment sets, with a
        negotiated discount, to Veris at a price of $200 per treatment set, which
        is
        lower than the Company’s cost. It was also agreed that payment for the treatment
        sets must be received by the Company in advance of shipment.  In July
        2006, Veris negotiated new payment terms with the Company, and it was agreed
        that payment for treatment sets shipped subsequent to June 2006 must be received
        within 60 days of shipment. The Company also agreed that all sales of treatment
        sets made to Veris to the end of 2006 will remain at the discounted price
        of
        $200 per treatment set. During the year ended December 31, 2006, the Company
        received a total of $171,800 from Veris for the purchase of 1,207 treatment
        sets. The sale of the treatment sets was included in revenue for the year
        ended
        December 31, 2006 as all the treatment sets had been delivered to Veris.
        In
        November 2006, the Company sold 348 treatment sets to Veris for $73,776,
        including applicable taxes, payment for which was not received by the Company
        within the agreed 60-day credit period. The sale of these treatment sets
        was not
        recognized as revenue during the year ended December 31, 2006 as the Company
        believed that Veris would not be able to meet its financial obligations to
        the
        Company. In January 2007, the Company met with the management of Veris and
        agreed to forgive the outstanding amount receivable of $73,776 for the purchase
        of 348 treatment sets delivered to Veris in November 2006. This amount was
        therefore not included in amounts receivable, net as of December 31, 2006.
        In
        addition, the Company recorded an inventory loss of $60,987 in the year ended
        December 31, 2006 for the sale of these 348 treatment sets since these treatment
        sets had been delivered to Veris already.





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





On
        November 6, 2006, the Company amended its product purchase agreement with
        Veris
        and agreed to forgive the outstanding amount receivable of $904,101 from
        Veris
        which had been owing for the purchase of treatment sets and pumps and for
        related services delivered or provided to Veris during the period from September
        14, 2005 to December 31, 2005. In consideration of the forgiveness of this
        debt,
        Veris agreed that the Company did not owe Veris any amounts whatsoever in
        connection with (i) the use by the Company of the leasehold premises located
        at
        5280 Solar Drive in Mississauga, Ontario or (ii) legal fees and expenses
        incurred by Veris prior to February 14, 2006 with respect to certain of Veris’
trademarks that had been assigned to the Company, and licensed back to Veris,
        on
        February 14, 2006.





In
        March 2007,
        Veris negotiated new payment terms with the Company, and it was agreed that
        payment for treatment sets shipped subsequent to March 2007 must be received
        within 180 days of shipment.Included in amounts receivable, net at June
        30, 2007 is $86,496 due from Veris for the purchase of 408 treatment sets,
        plus
        applicable taxes, payment for which is expected to be received by the Company
        on
        or before December 11, 2007. The sale of these treatment sets is included
        in
        deferred revenue and rent inducement as at June 30, 2007. Revenue will be
        recognized when the Company receives payment for the treatment
        sets.


23


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





During
        the fourth quarter of 2004, the Company began a business relationship with
        Innovasium Inc. Innovasium Inc. designed and built some of the Company’s
        websites and also created some of the sales and marketing materials to reflect
        the look of the Company’s websites. Daniel Hageman, who is the President and one
        of the owners of Innovasium Inc., is the spouse of an officer of the Company.
        During the three and six months ended June 30, 2007 and 2006 and the year
        ended
        December 31, 2006, the Company paid Innovasium Inc. C$45,403, C$3,709, C$59,140,
        C$31,345 and C$44,219, respectively. Included in accounts payable and accrued
        liabilities at June 30, 2007 and December 31, 2006 is C$8,899 and nil,
        respectively, due to Innovasium Inc. These amounts are expensed in the period
        incurred and paid when due.




**10.
      DUE TO STOCKHOLDERS**




**June
                30,**
            
            **December
                31,****2007**
            
            **2006****$**
            
            **$****Due
                to:**TLC
                Vision Corporation
            
            
            96,411
            
            
            91,884Other
                stockholder
            
            
            60,522
            
            
            60,522156,933
            
            
            152,406





Included
        in amounts due to stockholders as of June 30, 2007 and December 31, 2006 is
        $96,411 and $91,884, respectively, owing to TLC Vision for its payment of
        benefits of certain employees of the Company and for computer and administrative
        support.





The
        balance due to other stockholder as of June 30, 2007 and December 31, 2006
        is
        $60,522 and $60,522, respectively, and is for amounts due to Mr. Hans Stock
        for
        royalty fees (note 9).




**11.
      GUARANTY**




As
        of
        September 1, 2006, SOLX, a wholly-owned subsidiary of the Company, granted
        a
        security interest in all of its intellectual property to Doug P. Adams, John
        Sullivan and Peter M. Adams, in their capacity as members of the Stockholder
        Representative Committee acting on behalf of the former stockholders of SOLX,
        in
        order to secure SOLX’s obligations under the Guaranty, dated as of September 1,
        2006, by SOLX in favor of Doug P. Adams, John Sullivan and Peter M. Adams,
        in
        their capacity as members of the Stockholder Representative Committee (the
        “Guaranty”).  Pursuant to the Guaranty, SOLX guaranteed the Company’s
        obligation to pay the Stockholder Representative Committee, acting on behalf
        of
        the former stockholders of SOLX, an aggregate amount of up to $13,000,000,
        being
        the maximum aggregate amount of the purchase price remaining payable to the
        former stockholders of SOLX.





24


**12.
        ACCRUED LIABILITIES**


Accrued
        liabilities consist of the following:





**June
                30,**
              **2007**
            **December
                31, 2006****$**
            **$**Due
                to professionals
            400,905
            709,047Due
                to clinical trial sites
            286,202
            195,074Due
                to clinical trial specialists
            406,030
            206,642Product
                development costs
            272,293
            124,312Due
                to employees and directors
            968,410
            464,146Sales
                tax and capital tax payable
            12,654
            12,394Due
                to MeSys GmbH for pump parts
            14,541
            —Corporate
                compliance
            317,622
            227,475Interest
                payable
            —
            10,758Miscellaneous
            217,750
            131,5042,896,407
            2,081,352




**13.
      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,****2007**
            
            
            **2006****$**
            
            
            **$**Due
                to related party
            
            
            —
            
            
            (5,957
            )Amounts
                receivable, net
            
            
            (295,191
            )
            
            43,359Inventory
            
            
            46,528
            
            
            (1,152,288
            )Prepaid
                expenses
            
            
            (246,528
            )
            
            503,163Deposit
            
            
            —
            
            
            (5,551
            )Accounts
                payable
            
            
            204,823
            
            
            (363,275
            )Accrued
                liabilities
            
            
            815,055
            
            
            (655,350
            )Deferred
                revenue and rent inducement
            
            
            101,888
            
            
            17,330Due
                to stockholders
            
            
            4,527
            
            
            (67,269
            )Other
                current assets
            
            
            (1,800
            )
            
            —629,302
            
            
            (1,685,838
            )





25


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





**Six
                months ended****June
                30,****2007**
            
            **2006****$**
            
            **$**Non-cash
                financing activitiesWarrant
                issued in part payment of placement fee
            
            
            97,222
            
            
            —Deferred
                acquisition costs
            
            
            —
            
            
            91,189Free
                inventory
            
            
            115,633
            
            
            (22,506
            )Additional
                cash flow informationIncome
                taxes paid
            
            
            —
            
            
            733Interest
                paid
            
            
            11,180
            
            
            —




**14.
      SEGMENTED INFORMATION**




The
        Company has two reportable segments: retina and glaucoma. The retina segment
        is
        in the business of commercializing the RHEOTM System which is used to perform the
        RheopheresisTM procedure, a procedure that selectively removes molecules from
        plasma, which is designed to treat Dry AMD. The Company began limited
        commercialization of the RHEOTM System in Canada in 2003 and continues to support
        Veris, in its commercial activities in Canada. On January 26, 2007, the FDA
        issued an IDE number for RHEO-AMD, the Company’s new clinical study of the RHEOTM
System, allowing patient enrollment to commence within the first quarter
        of
        2007. The glaucoma segment is in the business of providing treatment for
        glaucoma with the use of the components of the SOLX Glaucoma System which
        are
        used to provide physicians with multiple options to manage intraocular pressure.
        The Company is seeking to obtain 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. Other is
        made
        up of the TearLabTM business which is currently developing technologies that
        enable eye care practitioners to test, at the point-of-care, for highly
        sensitive and specific biomarkers in tears using nanoliters of tear film.
        The
        Company acquired the TearLabTM business in the acquisition of 50.1% of the
        capital stock of OcuSense, Inc. (“OcuSense”), on a fully diluted basis, on
        November 30, 2006; therefore, no amounts are shown in periods prior to November
        30, 2006. The TearLabTM business does not meet the quantitative criteria to be
        disclosed separately as a reportable segment.





The
        accounting policies of the segments are consistent with the accounting policies
        used in preparing the Company’s audited consolidated financial statements for
        the year ended December 31, 2006. Intersegment sales and transfers are minimal
        and are accounted for at current market prices, as if the sales or transfers
        were to third parties.





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





26


The
        Company’s business units were as follows:


**Retina**
              **Glaucoma**
              **Other**
              **Total****$**
              
              **$**
              
              **$**
              
              **$****Three
                  months ended June 30, 2007**Revenue
              
              —
              
              121,275
              
              —
              
              121,275Expenses:Cost
                  of goods sold
              
              33,297
              
              48,714
              
              —
              
              82,011Operating
              
              2,706,765
              
              1,718,100
              
              998,264
              
              5,423,129Amortization
              
              470,538
              
              805,950
              
              118,913
              
              1,395,401Loss
                  from operations
              
              (3,210,600)
              
              (2,451,489)
              
              (1,117,177)
              
              (6,779,266)Interest
                  income
              
              201,865
              
              8
              
              14,054
              
              215,927Interest
                  and accretion expense
              
              (204,896)
              
              —
              
              —
              
              (204,896)Changes
                  in fair value of warrant obligation
              
              1,500,710
              
              —
              
              —
              
              1,500,710Other
                  income (expense), net
              
              (18,233)
              
              (9,274)
              
              3,722
              
              (23,785)Minority
                  interest
              
              —
              
              —
              
              489,937
              
              489,937Recovery
                  of income taxes
              
              744,180
              
              1,038,561
              
              439,761
              
              2,222,502Net
                  loss
              
              (986,974)
              
              (1,422,194)
              
              (169,703)
              
              (2,578,871)**Six
                  months ended June 30, 2007**Revenue
              
              90,000
              
              160,900
              
              —
              
              250,900Expenses:Cost
                  of goods sold
              
              65,397
              
              112,956
              
              —
              
              178,353Operating
              
              5,537,961
              
              3,404,213
              
              2,120,304
              
              11,062,478Amortization
              
              935,434
              
              1,609,034
              
              237,575
              
              2,782,043Loss
                  from operations
              
              (6,448,792)
              
              (4,965,303)
              
              (2,357,879)
              
              (13,771,974)Interest
                  income
              
              405,733
              
              8
              
              25,623
              
              431,364Interest
                  and accretion expense
              
              (426,010)
              
              —
              
              (422)
              
              (426,432)Changes
                  in fair value of warrant obligation
              
              776,730
              
              —
              
              —
              
              776,730Other
                  income (expense), net
              
              (2,388)
              
              (9,274)
              
              3,722
              
              (7,940)Minority
                  interest
              
              —
              
              —
              
              1,044,785
              
              1,044,785Recovery
                  of income taxes
              
              2,070,980
              
              2,099,290
              
              931,582
              
              5,101,852Net
                  loss
              
              (3,623,747)
              
              (2,875,279)
              
              (352,589)
              
              6,851,615Total
                  assets as at June 30, 2007
              
              39,905,286
              
              41,479,104
              
              8,785,536
              
              90,169,926




27





**Retina**
            **Glaucoma**
            **Others**
            **Total****$**
            
            **$**
            
            **$**
            
            **$****Three
                months ended June 30, 2006**Revenue
            
            82,715
            
            **—**
            
            **—**
            
            82,715Expenses:Cost
                of goods sold
            
            4,317
            
            —
            
            —
            
            4,317Operating
            
            4,223,896
            
            —
            
            —
            
            4,223,896Amortization
            
            466,704
            
            —
            
            —
            
            466,704Impairment
                of goodwill
            
            65,945,686
            
            —
            
            —
            
            65,945,686Loss
                from operations
            
            (70,557,888)
            
            —
            
            —
            
            (70,557,888)Interest
                income
            
            410,228
            
            —
            
            —
            
            410,228Other
                expense, net
            
            (6,724)
            
            —
            
            —
            
            (6,724)Recovery
                of income taxes
            
            158,792
            
            —
            
            —
            
            158,792Net
                loss
            
            (69,995,592)
            
            —
            
            —
            
            (69,995,592)**Six
                months ended June 30, 2006**Revenue
            
            82,715
            
            **—**
            
            **—**
            
            82,715Expenses:Cost
                of goods sold
            
            1,654,317
            
            —
            
            —
            
            1,654,317Operating
            
            7,658,845
            
            —
            
            —
            
            7,658,845Amortization
            
            929,714
            
            —
            
            —
            
            929,714Restructuring
                charges
            
            65,945,686
            
            —
            
            —
            
            65,945,686Impairment
                of goodwill
            
            819,642
            
            —
            
            —
            
            819,642Loss
                from operations
            
            (76,925,489)
            
            —
            
            —
            
            (76,925,489)Interest
                income
            
            781,153
            
            —
            
            —
            
            781,153Other
                expense, net
            
            (7,105)
            
            —
            
            —
            
            (7,105)Recovery
                of income taxes
            
            316,850
            
            —
            
            —
            
            316,850Cumulative
                effect of a change in accounting principle
            
            107,045
            
            —
            
            —
            
            107,045Net
                loss
            
            (75,727,546)
            
            —
            
            —
            
            (75,727,546)Total
                assets as at December 31, 2006
            
            40,762,771
            
            44,158,205
            
            5,482,719
            
            90,403,695





28





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


**OVERVIEW**




We
      are an
      ophthalmic therapeutic company in the business of commercializing innovative
      treatments for age-related eye diseases, including age-related macular
      degeneration, or AMD, and glaucoma. We also hold a majority interest in a
      company that is in the process of developing ocular diagnostic technologies.
      Our
      core purpose is to improve life through evidence-based medical
      therapies.





Our
      product for Dry AMD, the RHEOTM System, is used to perform the RheopheresisTM
procedure, which we refer to under our trade name RHEOTM Therapy. The
      RheopheresisTM procedure is a blood filtration procedure that selectively removes
      molecules from plasma and 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, we completed an in-depth analysis of
      the
      MIRA-1 study data identifying subjects that were included in the
      intent-to-treat, or ITT, population but who deviated from the MIRA-1 protocol
      as
      well as those patients who had documented losses or gains in vision for reasons
      not related to retinal disease such as cataracts. Those subjects in the ITT
      population who met the protocol requirements, and who did not exhibit ophthalmic
      changes unrelated to retinal disease, comprised the modified per-protocol
      population. In the modified per-protocol analysis, eyes treated with RHEOTM
Therapy demonstrated a mean vision gain of 0.8 lines of ETDRS BCVA at 12 months
      post-baseline, compared to a mean vision loss of 0.1 lines of ETDRS BCVA in
      the
      eyes in the placebo group. The result was statistically significant (repeated
      measure p value = 0.0147). The following table presents a summary of the ETDRS
      BCVA changes observed 12 months post-baseline in the modified per-protocol
      analysis of MIRA-1:





Treatment
                Group
              (n=69)
            Placebo
                Group
              (n=46)Vision
                improvement greater or equal to:1
                line
            46.4%
            19.6%2
                lines
            27.5%
            8.7%3
                lines
            8.7%
            2.2%Vision
                loss greater or equal to:1
                line
            11.6%
            23.9%2
                lines
            5.8%
            6.5%3
                lines
            2.9%
            2.2%





Within
      the modified per-protocol population with pre-treatment vision worse than 20/40,
      50% of RHEOTM Therapy-treated eyes improved, after treatment, to 20/40 or better
      (which is the required visual acuity to qualify for a driver’s license) 12
      months post-baseline, compared to 20% of placebo eyes.




29




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


In
      light
      of the MIRA-1 study results, we 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.  As
      expected, 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. At that meeting, the FDA confirmed its willingness to allow
      the
      substitution, in the new study, of the new polysulfone RheofilterTM filter for
      the older cellulose acetate filter which currently forms part of the RHEOTM
System. The immediate replacement of the filter avoids the regulatory
      uncertainties that would arise, were the replacement to take place following
      receipt of FDA approval. Furthermore, due to manufacturing constraints on the
      number of cellulose acetate filters that can be produced by their manufacturer,
      Asahi Kasei Medical Co., Ltd. (formerly Asahi Medical Co., Ltd.), or Asahi
      Medical, the replacement of the filter in the new trial eliminates the need
      to
      continue to build and maintain adequate inventories of the older cellulose
      acetate filter that the Company had been building and maintaining in preparation
      for commercial launch. 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,
      allowing the enrollment of patients in RHEO-AMD to commence during the
      first quarter of 2007.





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





In
      April
      2006, we sold a number of treatment sets, with a negotiated discount, to Veris
      at a price lower than our cost.  Accordingly, the price which we
      charged to Veris, net of a negotiated discount, represents the current net
      realizable value; therefore, we wrote down the value of our treatment sets
      to
      reflect their current net realizable value as at June 30, 2006. During the
      six
      months ended June 30, 2006, we recognized a provision related to inventory
      of
      $1,625,000 based on the above analysis (2007 - nil). We also set up an
      additional provision for obsolescence of $1,679,124 during the year ended
      December 31, 2006 for treatment sets that will unlikely be utilized prior to
      their expiration dates.





As
      at
      June 30, 2007 and December 31, 2006, the Company had inventory reserves of
      $4,769,365 and $5,101,394, respectively.  The decrease in the
      inventory reserve is due to the sale of inventory during the six-month period
      ended June 30, 2007 that had previously been provided for.





30




In
      June
      2006, Veris returned four pumps which had been sold to it in December 2005.
      In
      fiscal 2005, we did not recognize revenue on sales made to Veris in December
      2005 and had recorded an inventory loss associated with all sales made to Veris
      in December 2005. Accordingly, as at December 31, 2006, amounts receivable
      and
      the allowance for doubtful account recorded against the amount due from Veris
      has been reduced by the invoiced amount for the four pumps of $143,520. In
      addition, the cost of the four pumps returned by Veris, valued at $85,058,
      was
      used to reduce the cost of sales in the period.





On
      November 6, 2006, we amended the product purchase agreement with Veris and
      agreed to forgive the outstanding amount receivable of $904,101 from Veris
      which
      had been owing for the purchase of treatment sets and pumps and for related
      services delivered or provided to Veris from September 14, 2005 to December
      31,
      2006. In consideration of the forgiveness of this debt, Veris agreed that we
      do
      not owe any amounts whatsoever in connection with (i) our use of the leasehold
      premises located at 5280 Solar Drive in Mississauga, Ontario or (ii) legal
      fees
      and expenses incurred by Veris prior to February 14, 2006 with respect to those
      trademarks of Veris that were assigned to us on February 14, 2006.





In
      November 2006, we sold a total of 348 treatment sets to Veris for $73,776,
      including applicable taxes, payment for which was not received by the Company
      within the agreed credit period. The sale of these treatment sets was not
      recognized as revenue during the year ended December 31, 2006 as we believed
      that Veris would not be able to meet its financial obligations to the Company.
      In January 2007, we met with the management of Veris and agreed to forgive
      the
      outstanding amount receivable of $73,776 which was owing for the purchase of
      the
      348 treatment sets delivered to Veris in November 2006. We also recognized
      an
      inventory loss of $60,987 during the year ended December 31, 2006, representing
      the cost of the 348 treatment sets shipped to Veris in November
      2006.





In
        March 2007,
        Veris negotiated new payment terms with the Company, and it was agreed that
        payment for treatment sets shipped subsequent to March 2007 must be received
        within 180 days of shipment.Included in amounts receivable, net as at
        June 30, 2007 is $86,496 due from Veris for the purchase of 408 treatment
        sets,
        plus applicable taxes, payment for which is expected to be received by the
        Company on or before December 11, 2007. The sale of these treatment sets
        is
        included in deferred revenue as at June 30, 2007. Revenue will be recognized
        when we receive payment for the treatment sets.





We
      entered into a new distributorship agreement (the “2006 Distributorship
      Agreement”), effective October 20, 2006, with Asahi Medical. The 2006
      Distributorship Agreement replaced the 2001 distributorship agreement between
      Asahi Medical and us, as supplemented and amended by the 2003, 2004 and 2005
      Memoranda. Pursuant to the 2006 Distributorship Agreement, we have
      distributorship rights to Asahi Medical's Plasmaflo filter and Asahi Medical's
      second generation polysulfone Rheofilter 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.





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





With
      respect to the United States, subject to early termination under certain
      circumstances, the 2006 Distributorship Agreement has a term which will end
      10
      years following the date on which FDA approval to market the RHEOTM System in the
      United States is received and contemplates successive one-year renewal terms
      thereafter.





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





31




On
      September 1, 2006, we completed the acquisition of Solx, Inc. (“SOLX”) for a
      total purchase price of $29,068,443 which includes acquisition-related
      transaction costs of $851,279. In connection with the payment of the purchase
      price, the Company issued an aggregate of 8,399,983 shares of its common stock
      and paid $7,000,000 in cash to the former stockholders of SOLX. The Company
      remains indebted to the former stockholders of SOLX in an aggregate amount
      of up
      to $13,000,000 for the outstanding portion of the purchase price of
      SOLX. 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 results of SOLX’s operations have been included in our consolidated
      financial statements since September 1, 2006. The SOLX Glaucoma System is a
      next-generation treatment platform designed to reduce intra-ocular pressure,
      or
      IOP, without a bleb (which is a surgically created flap that serves as a
      drainage pocket underneath the surface of the eye), thus avoiding its related
      complications. The SOLX Glaucoma System consists of the SOLX 790 Laser, a
      titanium sapphire laser used in laser trabeculoplasty procedures, and the SOLX
      Gold Shunt, a 24-karat gold, ultra-thin drainage device designed to bridge
      the
      anterior chamber and the suprachoroidal space in the eye, using the pressure
      differential that exists naturally in the eye in order to reduce
      IOP.





Both
      the
      SOLX 790 Laser and the SOLX Gold Shunt are currently the subject of randomized,
      multi-center clinical trials. 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 Company to market and sell these products in the United States.
      Currently, our intention is to file the application for a 510(k) clearance
      for
      the SOLX 790 Laser by the end of 2007 and to file the application for a 510(k)
      clearance for the SOLX Gold Shunt by the end of the second half of
      2008.





The
      acquisition of SOLX represents an expansion of the Company’s ophthalmic product
      portfolio beyond the RHEOTM procedure for Dry AMD. In anticipation of the delay
      in the U.S. commercial launch of the RHEOTM System, we accelerated our expansion
      plans. Our focus is on age-related eye diseases like AMD and glaucoma as they
      are expected to be the fastest growing segments of eye care over the next 10
      years.





On
      November 30, 2006, we acquired 50.1% of the capital stock of OcuSense, Inc.,
      or
      OcuSense, measured on a fully diluted basis, for a total purchase price of
      $4,171,098 which includes acquisition-related transaction costs of $171,098.
      The
      Company agreed to make additional payments totaling $4,000,000 upon the
      attainment of two pre-defined milestones by OcuSense prior to May 1, 2009.
      In
      June 2007, we paid OcuSense a total of $2,000,000 upon the attainment of the
      first of the two pre-defined milestones. The carrying value of the intangible
      asset acquired upon the acquisition of OcuSense was increased by $1,663,333
      which reflects the minority interest portion of the $2,000,000 paid to OcuSense
      in the amount of $998,000 and the additional deferred tax liability of $665,333
      recorded based on the difference between the increase in the carrying value
      of
      the intangible asset and its tax basis. The balance of the contingent payment
      of
      $2,000,000 will be paid upon the attainment of the second pre-determined
      milestone.





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 osmolarity test for the
      diagnosis and management of dry eye syndrome, or DES, known as the TearLabTM test
      for DES. It is estimated that over 90 million people in the United States suffer
      from DES. The anticipated innovation of the TearLabTM test for DES 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 waived by the FDA under the Clinical
      Laboratory Improvement Amendments, or CLIA.





The
      TearLabTM test for DES will require the development of the following three
      components:  (1) the TearLabTM disposable, which is a single-use
      microfluidic cartridge; (2) the TearLabTM pen, which is a hand-held interface
      with the TearLabTM disposable; and (3) the TearLabTM reader, which is a physical
      housing for the TearLabTM pen connections and measurement circuitry. OcuSense is
      currently engaged actively in industrial, electrical and software design efforts
      for the three components of the TearLabTM test for DES and, to these ends, is
      working with two expert 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.





32




OcuSense’s
      objective is to complete product development of the TearLabTM test for DES by the
      end of 2007. Following the completion of product development and subsequent
      clinical trials, OcuSense intends to seek a 510(k) clearance and a CLIA waiver
      from the FDA for the TearLabTM test for DES.





On
      November 30, 2006, we announced that Mr. 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 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 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 three and six months ended June 30, 2007 and
      2006
      were impacted by our adoption of Statement of Financial Accounting Standards
      (“SFAS”) No. 123R (revised 2004), “Share-Based Payments” (“SFAS No. 123R”),
      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.
      Stock-based compensation expense was $414,926, $667,047, $1,024,429 and
      $959,953 during the three and six months ended June 30, 2007 and 2006,
      respectively. This method also required us to estimate forfeitures as of the
      effective date of adoption of SFAS No. 123R and to eliminate any compensation
      cost previously recognized in income for periods before the effective date
      of
      adoption. This compensation cost previously recognized in income should be
      recognized as the cumulative effect of a change in accounting principle as
      of
      the required effective date. We also recognized $107,045 as the cumulative
      effect of a change in accounting principle reflecting the impact of our
      estimated forfeitures of outstanding awards as of January 1, 2006.





As
      of June 30, 2007, $2,584,485 of total unrecognized compensation cost
      related to stock options is expected to be recognized over a weighted-average
      period of 2.26 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 will become 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.





33


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 EITF No. 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 June 30, 2007. The estimated fair
        value of the Warrants and the Cowen Warrant was determined using the
        Black-Scholes options pricing model. We initially allocated the total proceeds
        received, pursuant to the Securities Purchase Agreement, to the Shares and
        the
        Warrants based on their relative fair values. This resulted in an allocation
        of
        $2,052,578 to the obligation under warrants which includes the fair value
        of the
        Cowen Warrant of $97,222. SFAS No. 133 also requires the Company to record
        the
        outstanding derivatives at fair value at the end of each reporting period
        resulting in an adjustment to the recorded liability of the derivative, with
        any
        gain or loss recorded in earnings of the applicable reporting period. The
        Company therefore estimated the fair value of the Warrants and the Cowen
        Warrant
        as at June 30, 2007 and determined the aggregate fair value to be $1,105,766,
        a
        decrease of $946,812 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 $946,812 in our consolidated statements of operations
        for
        the six months ended June 30, 2007 to reflect the decrease in the fair value
        of
        the Warrants and the Cowen Warrant at June 30, 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 six months
        ended June 30, 2007.





On
      March
      11, 2007, our board of directors approved the grant to the directors of the
      Company, other than Mr. Vamvakas, of a total of 165,000 options under the 2002
      Stock Option Plan. In exchange for these options, each of the directors of
      the
      Company will forego the cash remuneration which he or she would have been
      entitled to receive from us during the financial year ending December 31, 2007
      in respect of (i) his or her annual director's fee of U.S.$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 U.S.$5,000 per annum for chairing such committee
      and
      (iii) his or her fee of U.S.$2,500 per fiscal quarter for the quarterly
      in-person meetings of the board of directors of the Company. The number of
      options granted to each of the directors was determined to be 8% higher in
      value
      than the cash remuneration to which the directors would have been entitled
      during the financial year ending December 31, 2007 andwas determined using
      the
      Black-Scholes option-pricing model, based on an attributed value of $1.64 per
      share of the Company's common stock underlying such options. 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.




**RECENT
      DEVELOPMENTS**




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 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.  It
        is anticipated that JEGC will gain a control position in the Company, if
        both of
        these transactions are completed.





JEGC
        is
        owned by Jefferson EquiCorp Ltd. and by Greybrook Corporation, a firm controlled
        by Mr. Vamvakas.





34


**CRITICAL
        ACCOUNTING POLICIES**




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





We
        believe that, except as stated below, there have been no significant changes
        during the six months ended June 30, 2007 to the items disclosed as our critical
        accounting policies and estimates in our discussion and analysis of financial
        condition and results of operations in our 2006 Annual Report on Form 10-K/A
        filed with the U.S. Securities and Exchange Commission on March 29,
        2007.





*Income
      taxes*




On
        January 1, 2007, the Company adopted the provisions of Financial Accounting
        Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in
        Income Taxes – An Interpretation of FASB Statement No. 109” (“FIN No. 48”). FIN
        No. 48 addresses the determination of whether tax benefits claimed or expected
        to be claimed on a tax return should be recorded in the financial
        statements.  Under FIN No. 48, the Company may recognize the tax
        benefit from an uncertain tax position only if it is more likely than not that
        the tax position will be sustained on examination by the taxing authorities,
        based on the technical merits of the position.  The tax benefits
        recognized in the 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 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 reassessment.  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.


35




**RESULTS
      OF OPERATIONS**




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




**Three
                Months Ended June 30,**
            
            **Six
                Months Ended June 30,****2007**
            
            **2006**
            
            **Change**
            
            
            **2007**
            
            **2006**
            
            **Change****$**
            
            **$**
            
            
            
            
            **$**
            
            **$**RevenuesRetina
                revenue
            
            —
            
            82,715
            
            (100)%
            
            
            90,000
            
            82,715
            
            9%Glaucoma
                revenue
            
            121,275
            
            —
            
            N/M*
            
            
            160,900
            
            —
            
            N/M*121,275
            
            82,715
            
            47%
            
            
            250,900
            
            82,715
            
            203%Cost
                of salesRetina
                cost of sales
            
            33,297
            
            4,317
            
            671%
            
            
            65,397
            
            1,654,317
            
            (96)%Glaucoma
                cost of sales
            
            48,714
            
            —
            
            N/M*
            
            
            112,956
            
            —
            
            N/M*82,011
            
            4,317
            
            1,800%
            
            
            178,353
            
            1,654,317
            
            (89)%Gross
                marginRetina
                gross margin (loss)
            
            (33,297)
            
            78,398
            
            (142)%
            
            
            24,603
            
            (1,571,602)
            
            102%Percentage
                of retina revenue
            
            N/M*
            
            95%
            
            N/M*
            
            
            27%
            
            (1,900)%
            
            1,927
                ptsGlaucoma
                gross margin
            
            72,561
            
            —
            
            N/M*
            
            
            47,944
            
            —
            
            N/M*Percentage
                of glaucoma revenue
            
            60%
            
            —
            
            N/M*
            
            
            30%
            
            —
            
            N/M*Total
                gross margin (loss)
            
            39,264
            
            78,398
            
            (50)%
            
            
            72,547
            
            (1,571,602)
            
            105%Percentage
                of total revenue
            
            32%
            
            95%
            
            (63)
                pts
            
            
            29%
            
            (1,900)%
            
            1,929
                pts*N/M
                – Not meaningful





***Revenues***




**Retina
      Revenue**




Retina
      revenue consists of revenue generated from the sale of components of the RHEOTM
System.





During
      each of the second quarter of 2007 and the corresponding period in fiscal 2006,
      we sold a total of 408 treatment sets at a price of $200 per treatment set
      to Veris. However, during the second quarter of 2007, the sale of these
      treatment sets was not recognized as revenue, based on Veris’ payment history
      with the Company and the new 180-day payment terms agreed by Veris and us in
      March 2007. Instead, the sale of the treatment sets has been included in
      deferred revenue as at June 30, 2007. Revenue will be recognized when the
      Company receives payment for these treatment sets, which is expected to be
      received on or before December 11, 2007. The sale of the 408 treatment sets
      during the second quarter of 2006 was recognized in revenue as payment was
      received by the Company in advance of shipment of the treatment
      sets.





Revenues
      for the six months ended June 30, 2007 is made up of revenue from the sale
      of a
      total of 600 treatment sets at a negotiated price of $150 per treatment set
      to
      Macumed AG, a company based in Germany. Revenues for the six months ended June
      30, 2006 includes the sale of 408 treatment sets to Veris at a negotiated price
      of $200 per treatment set.





36


**Glaucoma
      Revenue**




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





On
      September 1, 2006, the Company completed the acquisition of SOLX, and the
      results of SOLX’s operations have been included in our consolidated financial
      statements since that date. Revenue for the three and six months ended June
      30,
      2007 therefore includes the sale of components of the SOLX Glaucoma System
      during the three- and six-month period. There was no comparative revenue during
      the three and six months ended June 30, 2006.





***Cost
      of Sales***




Cost
      of
      sales includes costs of goods sold and royalty costs. Our cost of goods sold
      consists primarily of costs for the manufacture of the RHEOTM System and the SOLX
      Glaucoma 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.





**Retina
      Cost of Sales**




During
      fiscal 2006, we sold a number of treatment sets to Veris at a price, net of
      negotiated discounts, which was lower than our cost. As Veris was then our
      sole
      customer for the RHEOTM System treatment sets, the price at which we sold the
      treatment sets to Veris represented our inventory’s then current net realizable
      value, and therefore, we have written down the value of the treatment sets
      to
      reflect this net realizable value. Included in cost of sales for the three
      months ended March 31, 2006, is $1,625,000 which reflects the write-down of
      the
      treatment sets to its net realizable value. In addition, we evaluated our ending
      inventories as at December 31, 2006 on the basis that Veris may not be able
      to
      increase its commercial activities in Canada in line with our initial
      expectations. Accordingly, we set up an additional provision for obsolescence
      of
      $1,679,124 during the year ended December 31, 2006 for treatment sets that
      will
      unlikely be utilized prior to their expiration dates (2005 - $1,990,830). As
      at
      December 31, 2006, the value of our commercial inventory of treatment sets
      was
      nil.





Cost
      of
      sales for the three months ended June 30, 2007 includes royalty fees payable
      to
      Dr. Brunner and Mr. Stock and additional freight charges on the treatment sets
      sold and delivered to Macumed AG during the first quarter of 2007. Included
      in
      cost of sales for the three months ended June 30, 2006 are royalty fees payable
      to Dr. Brunner and Mr. Stock and the cost of sale of the treatment sets sold
      during the three-month period. In addition, during the three-month period ended
      June 30, 2006, Veris returned four pumps which had been sold to it in December
      2005. In fiscal 2005, we had recorded an inventory loss associated with all
      sales made to Veris in December 2005 and did not recognize revenue due to our
      anticipation that Veris may not return the products shipped to it and would
      not
      be able to pay for the amounts invoiced. Accordingly, the cost of the four
      pumps
      returned by Veris, valued at $85,058, was used to reduce the cost of sales
      in
      the period. There was no comparable reduction of expense in the three months
      ended June 30, 2007.





Cost
      of
      sales for the six months ended June 30, 2007 includes royalty fees payable
      to
      Dr. Brunner and Mr. Stock and freight charges on the treatment sets sold and
      delivered to Macumed AG during the six-month period. Included in cost of sales
      for the six months ended June 30, 2006 are royalty fees payable to Dr. Brunner
      and Mr. Stock and a charge of $1,625,000 which reflects the write-down of the
      treatment sets to its then net realizable value. There was no comparable expense
      in the six months ended June 30, 2007.





**Glaucoma
      Cost of Sales**




Cost
      of
      sales includes the cost of the components of the SOLX Glaucoma System sold
      during the three- and six-month period ended June 30, 2007. There was no
      comparative expense during the three and six months ended June 30, 2006 as
      we
      completed the acquisition of SOLX on September 1, 2006.





37


***Gross
      Margin***




**Retina
      Gross Margin (Loss)**




During
      the three months ended June 30, 2007, as compared with the three months ended
      June 30, 2007, our retina gross margin decreased by 142% due mainly to the
      value
      of the four pumps returned by Veris during the three months ended June 30,
      2006.
      In addition, the sale of 408 treatment sets to Veris during the three months
      ended June 30, 2007 was not recognized as revenue during the three-month period.
      Revenue will be recognized when payment is received by the Company.





Gross
      margin on sales was a profit of $24,603 for the six months ended June 30, 2007
      as compared with a loss of $1,571,602 during the comparative prior year period
      due primarily to the write-down of our inventory to its net realizable value
      offset by the value of the four pumps returned by Veris during the six months
      ended June 30, 2006.





**Glaucoma
      Gross Margin**




Gross
      margin on the sale of the components of the SOLX Glaucoma System was $72,561
      and
      $47,944 during the three and six months ended June 30, 2007. Gross margins
      are
      affected by product mix. Upon receipt of 510(k) clearance for the SOLX Gold
      Shunt, if any, we expect that we will sell more SOLX Gold Shunts for which
      the
      margins are much higher than the SOLX 790 Laser.





**Operating
      Expenses**




**Three
                Months Ended June 30,**
            
            **Six
                Months Ended June 30,****2007**
            
            **2006**
            
            **Change**
            
            
            **2007**
            
            **2006**
            
            **Change****$**
            
            **$**
            
            
            
            
            **$**
            
            **$**General
                and administrative
            
            3,367,770
            
            2,753,780
            
            22%
            
            
            6,843,138
            
            4,750,365
            
            44%Clinical
                and regulatory
            
            2,695,584
            
            1,471,473
            
            83%
            
            
            5,493,421
            
            2,946,860
            
            86%Sales
                and marketing
            
            755,176
            
            465,347
            
            62%
            
            
            1,507,962
            
            891,334
            
            69%Impairment
                of goodwill
            
            —
            
            65,945,686
            
            N/M*
            
            
            —
            
            65,945,686
            
            N/M*Restructuring
                charges
            
            —
            
            —
            
            —
            
            
            —
            
            819,642
            
            N/M***6,818,530**
            
            **70,636,286**
            
            **(90)%**
            
            
            **13,844,521**
            
            **75,353,887**
            
            **(82)%***N/M
                – Not meaningful





***General
      and Administrative Expenses***




General
      and administrative expenses increased by $613,990 during the second quarter
      of
      2007, as compared with the corresponding period in fiscal 2006, due to an
      increase of $862,635 in amortization of intangible assets expense associated
      with the intangible assets acquired upon the acquisition of SOLX and OcuSense
      on
      September 1, 2006 and November 30, 2006, respectively. Employee and related
      travel and administrative costs also increased by $464,446 during the three
      months ended June 30, 2007 as these costs include the cost of SOLX and
      OcuSense’s employee and related travel and other administrative costs for
      the three-month period. There was no comparative expense during the three months
      ended June 30, 2006 as we completed the acquisition of SOLX and OcuSense during
      the second half of fiscal 2006. These increases in cost were partially offset
      by
      the decrease in stock-based compensation expense of $227,158 due to the
      stock-based compensation expense associated with the re-pricing of then
      out-of-the-money stock options of the Company during the three months ended
      June
      30, 2006. There was no comparable expense during the three months ended June
      30,
      2007. Public company costs, fees associated with the use of consultants and
      professional fees to establish agreements and to review and amend existing
      contracts also decreased by $469,713 during the three months ended June 30,
      2007
      as compared with the three months ended June 30, 2006.





General
      and administrative expenses increased by $2,092,773 during the six months ended
      June 30, 2007, as compared with the corresponding prior year period due to
      an
      increase of $1,725,271 in amortization of intangible asset
      expense. Employee and related travel and administrative costs also
      increased by $753,548 during the six months ended June 30, 2007. These increases
      were partially offset by a decrease in professional fees of $331,440. Directors’
fees also decreased by $80,386 due to the grant of options to directors in
      lieu
      of cash payment of their annual fees for board and committee
      memberships.





38




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





***Clinical
      and Regulatory Expenses***




Clinical
      and regulatory expenses increased by $1,224,111 during the three months ended
      June 30, 2007, as compared with the corresponding prior year period, due to
      clinical trial expenses associated with the RHEO-AMD trial of $572,371, SOLX’s
      clinical and regulatory expenses of $728,402 and OcuSense’s product development
      and regulatory costs of $696,648 during the period. There was no comparable
      expense during the three months ended June 30, 2007. These increases in cost
      during the three months ended June 30, 2007 were offset in part by the decrease
      in costs associated with the MIRA-1 trial, the LEARN, or Long-term Efficacy
      in
      AMD from Rheopheresis in North America, trials and other related clinical trials
      of $778,881 as the Company completed the analysis of the MIRA-1 data during
      the
      first half of fiscal 2006 and the treatment phase of the LEARN trials was
      completed in December 2006.





During
      the six months ended June 30, 2007, as compared with the six months ended June
      30, 2007, the increase in clinical and regulatory expenses of $2,546,561 is
      due to increased clinical trial expenses associated with the RHEO-AMD trial
      of $1,107,237, SOLX’s clinical and regulatory expenses of $1,347,750 and
      OcuSense’s product development and regulatory costs of $1,634,730 during the
      period. Stock-based compensation expense also increased by $97,895 during the
      six months ended June 30, 2007 as a result of the expense related to the grant
      of stock options to certain of SOLX’s employees and stock-based compensation
      expense associated with OcuSense’s outstanding options. These options had been
      granted to certain of OcuSense’s consultants prior to our acquisition of
      OcuSense on November 1, 2006. There was no comparable expense during the six
      months ended June 30, 2006. However, costs associated with the MIRA-1 trial,
      the
      LEARN trials and other related clinical trials decreased by $1,712,817 as
      the Company completed the analysis of the MIRA-1 data during the first half
      of
      fiscal 2006 and the treatment phase of the LEARN trials was completed in
      December 2006.





Our
      goal
      is to establish the RHEOTM Therapy as the leading treatment for Dry AMD in North
      America and to establish the SOLX Glaucoma System as a unique, new surgery
      of
      choice for glaucoma. Accordingly, we expect clinical and regulatory expenses
      to
      increase in the future as we continue the RHEO-AMD trial. We also have to
      complete ongoing studies of the SOLX 790 Laser and the SOLX Gold Shunt in order
      to obtain 510(k) approval to market them in the United States. In addition,
      we
      have to complete product development of OcuSense’s TearLabTM test for DES.
      Following the completion of product development, OcuSense will have to conduct
      clinical trials in order to seek a 510(k) clearance and a CLIA waiver from
      the
      FDA for the TearLabTM test for DES.





***Sales
      and Marketing Expense***




Sales
      and
      marketing expenses increased by $289,829 during the three months ended June
      30,
      2007, as compared with the prior period in fiscal 2006, due to SOLX’s sales and
      marketing expenses of $152,226 for trade shows, physician education and training
      and other marketing public relations during the three-month period ended June
      30, 2007. There were no comparable expenses in the prior year period as the
      Company completed the acquisition of SOLX on September 1, 2006. Employee and
      travel costs also increased by $179,061 during the three months ended June,
      2007
      due to SOLX’s commercialization activities in Europe and the additional cost of
      a new employee of OcuSense who was hired to begin establishing sales and
      marketing efforts to promote the use of the TearLabTM test for DES in North
      America and Europe. These increases in cost during the three months ended June
      30, 2007 were offset in part by the decrease in marketing expenses of $49,458
      due to reduced marketing efforts for the RHEOTM System in the
      period.





Sales
      and
      marketing expenses increased by $616,628 during the six months ended June 30,
      2007, as compared with the prior period in fiscal 2006, due to SOLX’s sales and
      marketing expenses of $386,418 and increased employee and related and
      travel and administrative costs of $328,350. These increases in cost during
      the
      six months ended June 30, 2007 were offset in part by the decrease in the RHEOTM
System marketing expenses of $122,925 due to reduced marketing efforts in the
      period following the announcement of MIRA-1 results.





39




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





***Impairment
      of Goowill***




The
      continued decrease in our stock price subsequent to the February 3, 2006
      announcement of MIRA-1's failure to meet its primary endpoint, the June 12,
      2006
      announcement of the outcome of our meeting with the FDA and the June 30, 2006
      announcement of the termination of negotiations with Sowood were identified
      as
      indicators of impairment which led to an analysis of our intangible assets
      and
      goodwill which, in turn, resulted in the reporting of an impairment charge
      of
      $65,946,686. The impairment of goodwill charge of $65,946,686 in the three
      and
      six months ended June 30, 2006 represents the write-down of the value of
      goodwill acquired on the purchase of TLC Vision's 50% interest in OccuLogix,
      L.P. on December 8, 2004 to its fair value as at June 30, 2006. There was no
      comparable charge in the three- and six-month period ended June 30,
      2007.





***Restructuring
      Charges***




In
      accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or
      Disposal Activities” (“SFAS No. 146”), we recognized a total of $819,642 in
      restructuring charges during the six months ended June 30, 2006. The Company
      implemented a number of structural and management changes designed both to
      support the continued development of the RHEOTM System and to execute the
      Company’s accelerated diversification strategy within ophthalmology. The
      restructuring charge of $819,642, recorded in the six months ended June 30,
      2006, consists solely of severance and benefit costs related to the termination
      of a total of 12 employees at both the Company’s Mississauga and Palm Harbor
      offices. The severance and benefit costs were fully paid by December 31, 2006.
      There was no comparable expense during the three months and six months ended
      June 30, 2007 and the three months ended June 30, 2006.





**Other
      Income (Expenses)**




**Three
                Months Ended June 30,**
            
            **Six
                Months Ended June 30,****2007**
            
            **2006**
            
            **Change**
            
            
            **2007**
            
            **2006**
            
            **Change****$**
            
            **$**
            
            
            
            
            **$**
            
            **$**Interest
                income
            
            215,927
            
            410,228
            
            (47)%
            
            
            431,364
            
            781,153
            
            (45)%Changes
                in fair value of warrant obligation
            
            1,500,710
            
            —
            
            N/M*
            
            
            776,730
            
            —
            
            N/M*Interest
                and accretion expense
            
            (204,896)
            
            —
            
            N/M*
            
            
            (426,432)
            
            —
            
            N/M*Other
            
            (23,785)
            
            (6,724)
            
            (254)%
            
            
            (7,940)
            
            (7,105)
            
            (12)%Minority
                interest
            
            489,937
            
            —
            
            N/M*
            
            
            1,044,785
            
            —
            
            N/M***1,977,893**
            
            **403,504**
            
            **390%**
            
            
            **1,818,507**
            
            **774,048**
            
            **135%***N/M
                – Not meaningful





***Interest
      Income***




Interest
      income consists of interest income earned, in the current period and the
      corresponding prior period, on the cash raised by the Company in its
      initial public offering in December 2004 and in the private placement of the
      Shares and the Warrants in February 2007.





The
      decrease in interest income during the three and six months ended June 30,
      2007,
      when compared to the corresponding periods in fiscal 2006, is due to the
      utilization of the funds raised in order to finance infrastructure costs, to
      accumulate inventory and to fund costs of the MIRA-1, LEARN and RHEO-AMD trials
      and other clinical trials and, more recently, to acquire SOLX and OcuSense
      in
      line with our diversification strategy.





40




***Changes
      in Fair Value of Warrant Obligation***




On
        February 6, 2007, pursuant to the Securities Purchase Agreement between the
        Company and certain institutional investors, the Company issued the
        Warrants to these investors. The Warrants are five-year warrants exercisable
        into an aggregate of 2,670,933 shares of the Company’s common stock. On February
        6, 2007, the Company also issued the Cowen Warrant to Cowen and Company,
        LLC in part payment of the placement fee payable to Cowen and Company,
        LLC for the services it had rendered as the placement agent in connection
        with the private placement of the Shares and the Warrants. The Cowen Warrant
        is
        a five-year warrant exercisable into an aggregate of 93,483 shares of the
        Company’s common stock. The per share exercise price of the Warrants is $2.20,
        subject to adjustment, and the Warrants will become exercisable on August
        6,
        2007. All of the terms and conditions of the Cowen Warrant (other than the
        number of shares of the Company's common stock into which it is exercisable)
        are
        identical to those of the Warrants. The Company accounts for the Warrants
        and the Cowen Warrant in accordance with the provisions of SFAS No. 133 along
        with related interpretation EITF 00-19. Based on the provisions of EITF 00-19,
        the Company determined that the Warrants and the Cowen Warrant do not meet
        the criteria for classification as equity. Accordingly, the Company has
        classified the Warrants and the Cowen Warrant as a current liability as at
        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 derivatives at fair value at the end of each reporting
        period resulting in an adjustment to the recorded liability of the derivative,
        with any gain or loss recorded in earnings of the applicable reporting period.
        The Company therefore estimated the fair value of the Warrants and the Cowen
        Warrant as at March 31, and June 30, 2007 and determined the aggregate fair
        value to be $2,626,195 and $1,105,766, an increase of $573,617 and a decrease
        of
        $946,812, respectively, over the initial measurement of the aggregate fair
        value
        of the Warrants and the Cowen Warrant on the date of
        issuance.





Changes
        in fair value of warrant obligation for the three months ended June 30, 2007
        includes a gain of $1,520,429 which reflect the decrease in the fair value
        of the Warrants and the Cowen Warrant at June 30, 2007 over their fair value
        at
        March 31, 2007, the end of the Company’s previous reporting period. There was no
        comparable gain recorded in the three months ended June 30,
        2006





Changes
        in fair value of warrant obligation for the six months ended June 30, 2007
        includes the net gain of $946,812 recorded by the Company during the six-month
        period which reflect the decrease in the fair value of the Warrants and Cowen
        Warrant at June 30, 2007 over the initial measurement of their fair value
        on the
        date of issuance. Transaction costs associated with the issuance of the Warrants
        of $170,081 have also been recorded as a warrant expense in the Company’s
        consolidated statement of operations for the six months ended June 30, 2007.
        There was no comparable net gain recorded during the six months ended June
        30,
        2006.





***Interest
      and Accretion Expense***




In
      connection with the acquisition of SOLX on September 1, 2006, we remain indebted
      to the former stockholders of SOLX in an aggregate amount of up to $13,000,000
      for the outstanding portion of the purchase price of SOLX. $5,000,000 of this
      amount is payable in cash on the second anniversary of the September 1, 2006
      closing.  This $5,000,000 amount has been recorded as a long-term
      liability at its present value, discounted at the incremental borrowing rate
      of
      the Company at August 1, 2006. The difference between the discounted value
      and
      the $5,000,000 payable is being amortized using the effective yield method
      over
      the two-year period, with the monthly expense being charged as an interest
      expense in the Company’s consolidated statements of operations. Interest and
      accretion expense for the three and six months ended June 30, 2007 consists
      primarily of the amortization of the discount on the future payment to the
      former stockholders of SOLX for the three- and six-month
      periods.  There was no comparable expense in the three and six months
      ended June 30, 2006.





***Other
      Income (Expense)***




Other
      expenses for the three and six months ended June 30, 2007 consists of a one-time
      charge of $9,274 paid to one of our suppliers for carrying excess inventory
      on
      our behalf. Other expenses also include foreign exchange gains and losses
      resulting from exchange rate fluctuations on the Company’s foreign currency
      transactions and miscellaneous tax expenses during the three- and six-month
      periods. Other expenses for the three and six months ended June 30, 2006
      consists primarily of foreign exchange gains and losses resulting from exchange
      rate fluctuations on the Company’s foreign currency transactions and
      miscellaneous tax expenses during the periods.





41




***Minority
      Interest***




Minority
      interest is from our acquisition of 50.1% of the capital stock of OcuSense,
      on a
      fully diluted basis, on November 30, 2006. The results of OcuSense’s operations
      have been included in our consolidated financial statements since that date.
      Income from minority interest of $489,937 and $1,044,785 for the three and
      six
      months ended June 30, 2007, respectively, relates to the loss reported by
      OcuSense in which the Company has a shared interest with the minority
      stockholders of OcuSense.





**Recovery
      of Income Taxes**




**Three
                Months Ended June 30,**
            
            **Six
                Months Ended June 30,****2007**
            
            **2006**
            
            **Change**
            
            
            **2007**
            
            **2006**
            
            **Change****$**
            
            **$**
            
            
            
            
            **$**
            
            **$**Recovery
                of income taxes
            
            2,222,502
            
            158,792
            
            1,300%
            
            
            5,101,852
            
            316,850
            
            1,510%





***Recovery
      of Income Taxes***




Recovery
      of income taxes increased by $2,063,710 and $4,785,002 during the three and
      six
      months ended June 30, 2007, respectively, as compared with the prior periods
      in
      2006. The increase is due primarily to deferred tax recovery amounts of
      $1,714,187 and $4,082,343 associated with the recognition of the deferred tax
      asset from the availability of fiscal 2007 net operating losses in the United
      States which may be utilized to reduce taxes in future years.





To
      date,
      the Company has recognized income tax benefits in the aggregate amount of $11.5
      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, 2007 and 2006 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 increase in the amount recorded during the three and six months
      ended June 30, 2007, as compared with the corresponding periods in fiscal 2006,
      is due to the additional deferred tax liability recorded upon the acquisition
      of
      SOLX and OcuSense, being the difference between the fair value of the intangible
      assets acquired by the Company upon its acquisition of SOLX and OcuSense and
      their respective tax bases. The deferred tax liability totaling $24,127,397
      is
      being amortized over an average period of 11.93 years, the estimated
      weighted-average useful life of the intangible assets.





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




**Three
                Months Ended June 30,**
            
            **Six
                Months Ended June 30,****2007**
            
            **2006**
            
            **Change**
            
            
            **2007**
            
            **2006**
            
            **Change****$**
            
            **$**
            
            
            
            
            **$**
            
            **$**Cumulative
                effect of a change in accounting principle
            
            —
            
            —
            
            —
            
            
            —
            
            107,045
            
            *N/M*N/M
                – Not meaningful





42


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




The
      cumulative effect of a change in accounting principle reflects the impact of
      our
      estimated forfeitures of outstanding stock option awards as of January 1,
      2006. On January 1, 2006, the effective date of adopting SFAS No. 123R, we
      were required to estimate the number of forfeitures of our outstanding awards
      as
      of the effective date. Consolidated balance sheet amounts related to any
      compensation cost for these estimated forfeitures previously recognized in
      prior
      periods before the adoption of SFAS No. 123R have to be eliminated and
      recognized in income as the cumulative effect of a change in accounting
      principle as of the effective date. There was no comparable expense in the
      six
      months ended June 30, 2007.





**LIQUIDITY
      AND CAPITAL RESOURCES**





**June
                30,  2007**
            
            **December
                31, 2006**
            
            **Change****$**
            
            **$**
            
            **$**Cash
                and cash equivalents
            
            5,628,916
            
            5,740,697
            
            (111,781)Short-term
                investments
            
            9,975,000
            
            9,785,000
            
            190,00015,603,916
            
            15,525,697
            
            78,219Percentage
                of total assets
            
            17%
            
            17%
            
            —Working
                capital
            
            11,997,809
            
            13,539,026
            
            (1,541,217)





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 the private placement of the Shares and
      the
      Warrants.





To
      date,
      cash has been primarily utilized to finance increased infrastructure costs,
      to
      accumulate inventory and to fund costs of the MIRA-1, LEARN and RHEO-AMD trials
      and other clinical trials and, more recently, to acquire SOLX and OcuSense
      in
      line with our diversification strategy. We expect that, in the future, we will
      use our cash resources to continue to develop our infrastructure and to complete
      ongoing clinical trials, including the RHEO-AMD trial and the ongoing clinical
      trials of the SOLX Glaucoma System, and to complete the product development
      of
      OcuSense’s TearLabTM test for DES and conduct the clinical trials that will be
      required for the TearLabTM test for DES. In addition, in connection with the
      acquisition of SOLX on September 1, 2006, we remain indebted to the former
      stockholders of SOLX in an aggregate amount of up to $13,000,000 for the
      outstanding portion of the purchase price of SOLX. We also remain indebted
      to
      OcuSense in an aggregate amount of up to $2,000,000 for the outstanding portion
      of the purchase price of the capital stock of OcuSense that we acquired on
      November 30, 2006. Furthermore, we are legally committed to make an additional
      equity investment of $3,000,000 upon receipt, if any, from the FDA of a 510(k)
      clearance for the TearLabTM test for DES and another additional equity investment
      of $3,000,000 upon receipt, if any, from the FDA of a CLIA waiver for the
      TearLabTM test for DES.





Management
      believes that the existing cash and cash equivalents and short-term investments,
      together with funds expected to be generated from operations, will be sufficient
      to fund the Company’s anticipated level of operations and other demands and
      commitments until early 2008.





43


**Changes
      in Cash Flows**




**Six
                Months Ended June 30,****2007**
            
            **2006**
            
            **Change****$**
            
            **$**
            
            **$**Cash
                used in operating activities
            
            (8,929,417)
            
            (8,339,814)
            
            (589,603)Cash
                (used in) provided by investing activities
            
            (384,099)
            
            16,686,540
            
            (17,070,639)Cash
                provided by financing activities
            
            9,201,735
            
            233,710
            
            8,968,025Net
                (decrease) increase in cash and cash equivalents during the
                period
            
            (111,781)
            
            8,580,436
            
            (8,692,217)





***Cash
      Used in Operating Activities***




Net
      cash
      used to fund our operating activities during the six months ended June 30,
      2007
      was $8,929,417.  Net loss during the six-month period was $6,851,615.
      The non-cash charges which comprise a portion of the net loss during that period
      consisted primarily of the amortization of intangible assets, fixed assets,
      patents and trademarks and accretion expense of $3,191,834 netted by applicable
      deferred tax liability of $5,101,852 and the change in the fair value of warrant
      obligation net of warrant expense of $776,730. Additional non-cash charges
      consist of $1,024,429 in stock-based compensation charges netted by income
      from
      minority interest of $1,044,785.





The
      net
      change in non-cash working capital balances related to operations for the six
      months ended June 30, 2007 and 2006 consists of the following:





**Six
                months ended**
              **June
                30,****2007**
            
            
            **2006****$**
            
            
            **$**Due
                to related party
            
            
            —
            
            
            (5,957
            )Amounts
                receivable, net
            
            
            (295,191
            )
            
            43,359Inventory
            
            
            46,528
            
            
            (1,152,288
            )Prepaid
                expenses
            
            
            (246,528
            )
            
            503,163Deposit
            
            
            —
            
            
            (5,551
            )Accounts
                payable
            
            
            204,823
            
            
            (363,275
            )Accrued
                liabilities
            
            
            815,055
            
            
            (655,350
            )Deferred
                revenue and rent inducement
            
            
            101,888
            
            
            17,330Due
                to stockholders
            
            
            4,527
            
            
            (67,269
            )Other
                current assets
            
            
            (1,800
            )
            
            —629,302
            
            
            (1,685,838
            )





·
            Amounts
                receivable, net increased due to accrued interest receivable on
                investments, trade receivables and sales taxes
                receivable.


·
            Decrease
                in inventory reflects the sale of the components of the SOLX Glaucoma
                System, offset by the receipt of inventory to be utilized for the
                RHEO-AMD
                and related clinical trials.


·
            Increase
                in prepaid expenses is primarily due to advance payments made to
                various
                organizations involved in the RHEO-AMD trial, offset in part by the
                amortization of prepaid insurance during the six-month
                period.


·
            Accounts
                payable and accrued liabilities increased and reflect an increase
                in
                amounts owed for costs associated with the Company’s activities, including
                clinical trial activities, with respect to some of which the Company
                has
                not yet received invoices.


·
            The
                increase in deferred revenue and rent inducement reflects the sale
                of
                treatment sets to Veris during the six months ended June 30, 2007
                which
                has not been included in the revenue reported for the period. Revenue
                will
                be recognized when payment is received from
                Veris.


44




***Cash
      (Used in) Provided by Investing Activities***




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.





Net
      cash
      provided by investing activities for the six months ended June 30, 2006 was
      from
      the net sale of short-term investments of $19,070,000, offset by cash in the
      amount of $231,030 used to acquire fixed assets and cash in the amount of
      $101,903 used to protect and maintain patents and trademarks. Additional cash
      used in investing activities included the pre-acquisition loan of $2,000,000
      advanced to SOLX and $50,527 paid in legal fees related to the then proposed
      SOLX acquisition.





***Cash
      Provided by Financing Activities***




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.





Net
      cash
      provided by financing activities for the six months ended June 30, 2006 of
      $233,710 was from the exercise of options to purchase shares of common stock
      of
      the Company.





***Financial
      Condition***




Management
      believes that the existing cash and cash equivalents and short-term investments,
      together with funds expected to be generated from operations and the net
      proceeds of the private placement of the Shares and the Warrants completed
      on
      February 6, 2007, will be sufficient to fund the Company’s anticipated level of
      operations and other demands and commitments until early 2008.





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





·
            the
                costs of operating SOLX and
                OcuSense;


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


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


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


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


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


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


·
            the
                cost and results, and the rate of progress, of the clinical trials
                of the
                TearLabTM test for DES 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 DES in the United
                States;


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


·
            whether
                government and third-party payors agree to reimburse treatments using
                the
                RHEOTM System, the components of the SOLX Glaucoma System and the TearLabTM
                test for DES;


·
            the
                costs and timing of building the infrastructure to market and sell
                the
                RHEOTM System, the components of the SOLX Glaucoma System and the TearLabTM
                test for DES;


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


·
            the
                effect of competing technological and market
                developments.





45




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.  These discussions are ongoing, but there
      can be no assurance that they will culminate in a successful
      transaction.





We
      cannot
      begin commercialization of the RHEOTM System, the components of the SOLX Glaucoma
      System and the TearLabTM test for DES in the United States until we receive the
      requisite FDA approvals. At this time, we do not know when we can expect to
      begin to generate revenues from the RHEOTM System, the components of the SOLX
      Glaucoma System or the TearLabTM test for DES in the United States. We expect
      that the funding requirements of our operating activities will continue to
      increase substantially in the future. Until we can generate a sufficient amount
      of revenue, we expect to finance future cash needs through public or private
      equity offerings, debt financings, corporate collaboration or licensing or
      other
      arrangements. We cannot be certain that additional funding will be available
      on
      acceptable terms, or at all. To the extent that we raise additional funds by
      issuing equity securities, our stockholders may experience significant dilution.
      In addition, future debt financing, if available, may involve restrictive
      covenants. To the extent that we raise additional funds through collaboration
      and licensing arrangements, it may be necessary to relinquish some rights to
      our
      technologies, or grant licenses on terms that are not favorable to us. If
      adequate funds are not available, we may be required to delay or reduce the
      scope of, or eliminate, some of our commercialization efforts, or we may even
      be
      unable to continue our operations.





**RECENT
      ACCOUNTING PRONOUNCEMENTS**





In
        June
        2006, FASB issued FIN No. 48, which clarifies the accounting for uncertainty
        in
        tax positions. FIN No. 48 requires that we recognize, in our financial
        statements, the impact of a tax position, if that position is more likely
        than
        not of being sustained on audit, based on the technical merits of the position.
        FIN No. 48 is effective for fiscal years beginning after December 15, 2006.
        As a
        result of the adoption of FIN No. 48 in the first quarter of fiscal
        2007, we 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.





The
        adoption of the following recent pronouncements during the first quarter
        of
        fiscal 2007 did not have a material impact on the Company’s results of
        operations and financial condition:





·
              Staff
                  Accounting Bulletin No. 108, “Considering the Effects of Prior Year
                  Misstatements when Quantifying Misstatements in Current Year Financial
                  Statements”; and


·
              SFAS
                  No. 158, “Employers’ Accounting for Defined Benefit Pension and Other
                  Postretirement Plans, an amendment of FASB Statements Nos. 87,
                  88, 106 and
                  132(R)”.





In
        September 2006, FASB issued Statement No. 157, “Fair Value Measurements” (“SFAS
        No. 157”). SFAS No. 157 defines fair value, establishes a framework and gives
        guidance regarding the methods used for measuring fair value, and expands
        disclosures about fair value measurements. SFAS No. 157 is effective for
        financial statements issued for fiscal years beginning after November 15,
        2007
        and for interim periods within those fiscal years. We are currently evaluating
        the impact the adoption of SFAS No. 157 would have on our results of operations
        and financial position.


46


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 after November 15, 2007 and is required to be adopted by
        the Company in the first quarter of fiscal 2008. We are currently determining
        whether fair value accounting is appropriate for any of our eligible items
        and
        cannot estimate the impact, if any, which the adoption of SFAS No. 159 will
        have
        on our consolidated results of operations and financial
        position.


47


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





All
      of
      our sales are in U.S. dollars or are linked to the U.S. dollar, while a portion
      of our expenses are in Canadian dollars, euros and Australian dollars. We cannot
      predict any future trends in the exchange rate of the Canadian dollar, euro
      or
      Australian dollar against the U.S. dollar. Any strengthening of these currencies
      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 interest rate risk.





**ITEM
                4.**
            **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.
      As
      of the end of the six-month period ended June 30, 2007, 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 thesix-month
      period endedJune 30,
      2007, there were no changes in our
      internal control over financial reporting that has materially affected, or
      is
      reasonably likely to materially affect, our internal control over financial
      reporting. The financial reporting for thesix-month
      period endedJune 30,
      2007 includes the operations of SOLX
      and OcuSense for that fiscal period. SOLX was acquired by the Company on
      September 1, 2006, and the Company acquired 50.1% of the capital stock of
      OcuSense, measured on a fully diluted basis, on November 30,
      2006.  The Company has not yet completed its review of SOLX’s and
      OcuSense’s internal control over financial reporting.





48





PART
                II.
            OTHER
                INFORMATIONITEM
                1.
            LEGAL
                PROCEEDINGS





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





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





On
      June
      25, 2007, we issued an aggregate of 2,250 shares of Common Stock to Carol Jones
      as a result of the exercise of options to purchase common shares at an exercise
      price per share of $0.99 in consideration for cash.





The
      above
      issuance was exempt from registration under the Securities Act of 1933, as
      amended, pursuant to Rule 701 thereunder.





ITEM
                3.
            DEFAULTS
                UPON SENIOR SECURITIES





There
      has
      not been any default upon our senior securities.





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





On
      June
      29, 2007, the Company held its 2007 Annual Meeting of Stockholders. At the
      Annual Meeting, the following matters were submitted to a vote of
      stockholders:





1.
            The
                following seven individuals were nominated and elected to serve as
                directors of the Company:





Elias
                Vamvakas
            FOR:
            41,314,866WITHHOLD
                AUTHORITY:
            3,295,891Thomas
                N. Davidson
            FOR:
            41,326,112WITHHOLD
                AUTHORITY:
            3,284,645Jay
                T. Holmes
            FOR:
            41,325,356WITHHOLD
                AUTHORITY:
            3,285,401Richard
                Lindstrom
            FOR:
            41,314,574WITHHOLD
                AUTHORITY:
            3,296,183Georges
                Noël
            FOR:
            41,320,912WITHHOLD
                AUTHORITY:
            3,289,845Gilbert
                S. Omenn
            FOR:
            41,307,209WITHHOLD
                AUTHORITY:
            3,303,548Adrienne
                L. Graves
            FOR:
            41,326,012WITHHOLD
                AUTHORITY:
            3,284,745





2.
            The
                holders of 43,448,159 shares of the Company’s common stock voted in favor
                of, 118,199 voted against and 11,299 abstained from voting with respect
                to
                the ratification of the selection of Ernst & Young LLP, independent
                certified public accountants, to serve as independent auditors of
                the
                Company for the fiscal year ending December 31,
                2007.





3.
            The
                holders of 32,676,796 shares of the Company’s common stock voted in favor
                of, 2,882,487 voted against and 12,125 abstained from voting with
                respect
                to the approval of the increase of the share reserve under the Company’s
                2002 Stock Option Plan by 2,000,000, from 4,456,000 to
                6,456,000.





However,
      of the number of shares of the Company’s common stock indicated above as having
      been voted by their respective holders in favor of this matter, 1,677,054 was
      subtracted from such number since 1,677,054 shares of the Company’s common stock
      were held by insiders of the Company at the close of business on May 4, 2007,
      the record date for the Annual Meeting. Accordingly, the holders of 30,999,742
      shares of the Company’s common stock were deemed to have voted in favor of this
      matter.




49


4.
            The
                holders of 34,869,079 shares of the Company’s common stock voted in favour
                of, 668,886 voted against and 29,293 abstained from voting with respect
                to
                the approval to effect certain additional amendments to the Company’s 2002
                Stock Option Plan.





However,
      of the number of shares of the Company’s common stock indicated above as having
      been voted by their respective holders in favour of this matter, 1,677,054
      was
      subtracted from such number since 1,677,054 shares of the Company’s common stock
      were held by insiders of the Company at the close of business on May 4, 2007,
      the record date for the Annual Meeting. Accordingly, the holders of 33,192,025
      shares of the Company’s common stock were deemed to have voted in favor of this
      matter.





ITEM
                5.
            OTHER
                INFORMATION





None.


50


ITEM
                6.
            EXHIBITS





Index
      to Exhibits




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.


51


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








**OCCULOGIX,
                  INC.**Date:             August
                  8, 2007
            By:
            /s/ Elias
                  VamvakasChief
                  Executive Officer



























52