**U.S.
        SECURITIES AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
 
 **FORM
        10-Q**
  (Mark
        One)
 (X)
              **QUARTERLY
                  REPORT UNDER
                  SECTION 13 OR 15(d) OF THE****SECURITIES
                  EXCHANGE ACT
                  OF 1934**
 
 For
        the quarterly period
        ended:                                                                **September
        30,
        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 November 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
                  I.
              FINANCIAL
                  INFORMATIONITEM
                  1.
              CONSOLIDATED
                  FINANCIAL STATEMENTS
 
 
 
  4
 **OccuLogix,
              Inc.**
  **CONSOLIDATED
        BALANCE SHEETS**
 (expressed
        in U.S. dollars**)**
 (Unaudited)
 **(Going
        Concern Uncertainty – See Note 1)**
 **September
                  30,**
                **2007**
              
              **December
                  31,**
                **2006****$**
              
              **$****ASSETS****Current**Cash
                  and cash equivalents
              
              
              6,144,946
              
              
              5,740,697Short-term
                  investments
              
              
              75,000
              
              
              9,785,000Amounts
                  receivable, net
              
              
              364,193
              
              
              166,209Inventory,
                  net
              
              
              413,330
              
              
              2,715,737Prepaid
                  expenses
              
              
              727,263
              
              
              680,476Deposit
              
              
              21,042
              
              
              10,442Other
                  current assets
              
              
              61,600
              
              
              79,200**Total
                  current assets**
              
              
              7,807,374
              
              
              19,177,761Fixed
                  assets, net
              
              
              320,857
              
              
              860,717Patents
                  and trademarks, net
              
              
              130,356
              
              
              234,841Investments
              
              
              1,278,750
              
              
              —Intangible
                  assets, net
              
              
              32,504,138
              
              
              55,683,399Goodwill
              
              
              14,446,977
              
              
              14,446,977**Total
                  assets**
              
              
              56,488,452
              
              
              90,403,695**LIABILITIES
                  AND STOCKHOLDERS’ EQUITY****Current**Accounts
                  payable
              
              
              638,489
              
              
              395,392Accrued
                  liabilities
              
              
              3,029,621
              
              
              2,090,937Due
                  to stockholders
              
              
              236,052
              
              
              152,406Obligation
                  under warrants
              
              
              248,797
              
              
              —Current
                  portion of other long-term liability
              
              
              4,053,081
              
              
              3,000,000**Total
                  current liabilities**
              
              
              8,206,040
              
              
              5,638,735Deferred
                  tax liability, net
              
              
              —
              
              
              18,939,417Other
                  long-term liability
              
              
              —
              
              
              3,420,609**Total
                  liabilities**
              
              
              8,206,040
              
              
              27,998,761**Minority
                  interest**
              
              
              435,020
              
              
              1,184,844**Stockholders’
                  equity**Capital
                  stockCommon
                  stock
              
              
              57,306
              
              
              50,627Par
                  value of $0.001 per shareAuthorized:
                  75,000,000; Issued and outstanding:September
                  30, 2007 – 57,306,145; December 31, 2006 – 50,626,562Additional
                  paid-in capital
              
              
              363,498,629
              
              
              354,320,116Accumulated
                  deficit
              
              
              (315,062,293
              )
              
              (293,150,653
              )Accumulated
                  other comprehensive loss
              
              
              (646,250
              )
              
              —**Total
                  stockholders’ equity**
              
              
              47,847,392
              
              
              61,220,090**Total
                  liabilities and stockholders’ equity**
              
              
              56,488,452
              
              
              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****September
                  30,****2007**
              
              **2006****$**
              
              **$****Revenue**Retina
              
              
              —
              
              
              53,144Glaucoma
              
              
              15,225
              
              
              32,300**Total
                  revenue**
              
              
              15,225
              
              
              85,444**Cost
                  of goods sold**RetinaCost
                  of goods sold, net of goods recovered
              
              
              2,262,411
              
              
              80,358Royalty
                  costs
              
              
              25,000
              
              
              25,000GlaucomaCost
                  of goods sold
              
              
              13,424
              
              
              9,964Royalty
                  costs
              
              
              6,250
              
              
              2,083**Total
                  cost of goods sold**
              
              
              2,307,085
              
              
              117,405(2,291,860
              )
              
              (31,961
              )**Operating
                  expenses**General
                  and administrative
              
              
              3,276,981
              
              
              2,314,344Clinical
                  and regulatory
              
              
              3,852,115
              
              
              1,071,380Sales
                  and marketing
              
              
              687,429
              
              
              505,088Impairment
                  of intangible asset
              
              
              20,923,028
              
              
              —28,739,553
              
              
              3,890,812Loss
                  from operations
              
              
              (31,031,413
              )
              
              (3,922,773
              )**Other
                  income (expense)**Interest
                  income
              
              
              137,444
              
              
              368,585Changes
                  in fair value of warrant obligation
              
              
              856,969
              
              
              —Interest
                  and accretion expense
              
              
              (223,268
              )
              
              (77,191
              )Other
              
              
              (5,693
              )
              
              20,704Minority
                  interest
              
              
              703,038
              
              
              —1,468,490
              
              
              312,098Loss
                  before income taxes
              
              
              (29,562,923
              )
              
              (3,610,675
              )Recovery
                  of income taxes
              
              
              9,902,899
              
              
              26,867**Net
                  loss for the period**
              
              
              (19,660,024
              )
              
              (3,583,808
              )**Weighted
                  average number of shares outstanding**
                **-
                  basic and diluted**
              
              
              57,306,145
              
              
              44,911,018**Net
                  loss per share – basic and diluted**
              
              
              (0.34
              )
              
              (0.08
              )
 
 *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)
 
 **Nine
                  months ended****September
                  30,****2007**
              
              **2006****$**
              
              **$****Revenue**Retina
              
              
              90,000
              
              
              135,859Glaucoma
              
              
              176,125
              
              
              32,300**Total
                  revenue**
              
              
              266,125
              
              
              168,159**Cost
                  of goods sold**RetinaCost
                  of goods sold, net of goods recovered
              
              
              2,277,807
              
              
              1,684,675Royalty
                  costs
              
              
              75,000
              
              
              75,000GlaucomaCost
                  of goods sold
              
              
              111,397
              
              
              9,964Royalty
                  costs
              
              
              21,233
              
              
              2,083**Total
                  cost of goods sold**
              
              
              2,485,437
              
              
              1,771,722(2,219,312
              )
              
              (1,603,563
              )**Operating
                  expenses**General
                  and administrative
              
              
              10,120,119
              
              
              7,064,709Clinical
                  and regulatory
              
              
              9,345,536
              
              
              4,018,240Sales
                  and marketing
              
              
              2,195,392
              
              
              1,396,422Impairment
                  of intangible asset
              
              
              20,923,028
              
              
              —Impairment
                  of goodwill
              
              
              —
              
              
              65,945,686Restructuring
                  charges
              
              
              —
              
              
              819,64242,584,075
              
              
              79,244,699Loss
                  from operations
              
              
              (44,803,387
              )
              
              (80,848,262
              )**Other
                  income (expense)**Interest
                  income
              
              
              568,808
              
              
              1,149,739Changes
                  in fair value of warrant obligation
              
              
              1,633,700
              
              
              —Interest
                  and accretion expense
              
              
              (649,701
              )
              
              (77,191
              )Other
              
              
              (13,633
              )
              
              13,599Minority
                  interest
              
              
              1,747,823
              
              
              —3,286,997
              
              
              1,086,147Loss
                  before income taxes and cumulative effect of a change in accounting
                  principle
              
              
              (41,516,390
              )
              
              (79,762,115
              )Recovery
                  of income taxes
              
              
              15,004,750
              
              
              343,717Loss
                  before cumulative effect of a change in accounting
                  principle
              
              
              (26,511,640
              )
              
              (79,418,398
              )Cumulative
                  effect of a change in accounting principle
              
              
              —
              
              
              107,045**Net
                  loss for the period**
              
              
              (26,511,640
              )
              
              (79,311,353
              )**Weighted
                  average number of shares outstanding**
                **-
                  basic and diluted**
              
              
              56,420,941
              
              
              43,081,795Loss
                  before cumulative effect of a change in accounting principle per
                  share –
                  basic and diluted
              
              
              (0.47
              )
              
              (1.84
              )Cumulative
                  effect of a change in accounting principle per share – basic and
                  diluted
              
              
              —
              
              
              —**Net
                  loss per share – basic and diluted**
              
              
              (0.47
              )
              
              (1.84
              )
 
 *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**
              **Accumulated
                  comprehensive loss**
              **Net
                  stockholders’ equity**shares
                  issued**#**
              **$**
              **$**
              **$**
              **$**
              **$****Balance,
                  December 31, 2006**
              50,626,562
              50,627
              354,320,116
              (293,150,653)
              —
              61,220,090Net
                  loss for the period
              ―
              ―
              ―
              (26,511,640)
              —
              (26,511,640)Unrealized
                  loss on investments
              ―
              ―
              ―
              ―
              (646,250)
              (646,250)Comprehensive
                  loss
              
              
              
              
              
              (27,157,890)Stock-based
                  compensation
              ―
              ―
              1,362,813
              ―
              ―
              1,362,813Shares
                  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
              ―
              ―
              384,660
              ―
              ―
              384,660Change
                  in OcuSense, Inc.’s stockholders’ equity, stock-based
                  compensation
              ―
              ―
              84,838
              ―
              ―
              84,838Contribution
                  of inventory from unrelated party
              ―
              ―
              33,643
              ―
              ―
              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
              —
              4,600,000**Balance,
                  September 30, 2007**
              57,306,145
              57,306
              363,498,629
              (315,062,293)
              (646,250)
              47,847,392
 
 *See
        accompanying notes to interim consolidated financial
        statements*
  8
 **OccuLogix,
              Inc.**
  **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 (expressed
        in U.S. dollars)
 (Unaudited)
 **Nine
                    months ended**
                  **September
                    30,****2007**
                
                **2006****$**
                
                **$****OPERATING
                    ACTIVITIES**Net
                    loss for the period
                
                
                (26,511,640
                )
                
                (79,311,353
                )Adjustments
                    to reconcile net loss to cash used in operating
                    activities:Write-down
                    of inventory
                
                
                2,782,494
                
                
                1,625,000Stock-based
                    compensation
                
                
                1,447,651
                
                
                1,838,025Amortization
                    and write-down of fixed assets
                
                
                730,201
                
                
                120,311Amortization
                    and write-down of patents and trademarks
                
                
                195,495
                
                
                3,671Amortization
                    of intangible asset
                
                
                3,919,566
                
                
                1,538,333Impairment
                    of  intangible asset
                
                
                20,923,028
                
                
                —Impairment
                    of goodwill
                
                
                —
                
                
                65,945,686Accretion
                    expense
                
                
                632,471
                
                
                77,191Amortization
                    of premiums/discounts on short-term investments
                
                
                —
                
                
                35,824Changes
                    in fair value of warrant obligation
                
                
                (1,633,700
                )
                
                —Deferred
                    tax liability, net
                
                
                (15,004,750
                )
                
                (339,183
                )Cumulative
                    effect of a change in accounting principle
                
                
                —
                
                
                (107,045
                )Minority
                    interest
                
                
                (1,747,823
                )
                
                —Net
                    change in non-cash working capital balances related to
                    operations
                
                
                965,872
                
                
                (2,279,666
                )**Cash
                    used in operating activities**
                
                
                (13,301,135
                )
                
                (10,853,206
                )**INVESTING
                    ACTIVITIES**Sale
                    of short-term investments
                
                
                7,785,000
                
                
                17,722,021Additions
                    to fixed assets
                
                
                (190,341
                )
                
                (244,292
                )Additions
                    to patents and trademarks
                
                
                (91,010
                )
                
                (102,137
                )Advance
                    to Solx, Inc., pre-acquisition
                
                
                —
                
                
                (2,265,085
                )Acquisition
                    costs
                
                
                —
                
                
                (861,630
                )Payment
                    for acquisition of Solx, Inc. net of cash acquired
                
                
                (3,000,000
                )
                
                (6,965,312
                )**Cash
                    provided by investing activities**
                
                
                4,503,649
                
                
                7,283,565**FINANCING
                    ACTIVITIES**Proceeds
                    from the exercise of common stock options
                
                
                2,228
                
                
                251,135Proceeds
                    from the issuance of common stock
                
                
                10,016,000
                
                
                ―Share
                    issuance costs
                
                
                (816,493
                )
                
                ―**Cash
                    provided by financing activities**
                
                
                9,201,735
                
                
                251,135**Net
                    increase (decrease) in cash and cash equivalents during the
                    period**
                
                
                404,249
                
                
                (3,318,506
                )Cash
                    and cash equivalents, beginning of period
                
                
                5,740,697
                
                
                9,599,950**Cash
                    and cash equivalents, end of period**
                
                
                6,144,946
                
                
                6,281,444
 *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)
 September
        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
          September 30, 2007 and the results of its operations for the three- and
          nine-month periods 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 the effect
          of the
          changes of control is performed, a portion of the income tax benefits recognized
          to date may be affected.
 
 All
          federal income tax returns for the Company and its subsidiaries remain
          open
          since their respective dates of incorporation due to the existence of net
          operating losses.  The Company and its subsidiaries have not
          been, nor are they currently, under examination by the Internal Revenue
          Service or the Canada Revenue Agency.
 
 State
          and
          provincial income tax returns are generally subject to examination for
          a period
          of between three and five years after their filing.  However, due to
          the existence of net operating losses, all state income tax returns of
          the
          Company and its subsidiaries since their respective dates of incorporation
          are
          subject to re-assessment.  The state impact of any federal changes
          remains subject to examination by various states for a period of up to
          one year
          after formal notification to the states.  The Company and its
          subsidiaries have not been, nor are they currently, under examination by
          any state tax authority.
  **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 nine months ended September 30, 2007, the Company sustained
          losses of $26,511,640 and used cash of $13,301,135 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
          sufficient to cover its operating activities and other demands only until
          early
          2008.  The Company currently is not generating cash from operations,
          and most of its cash has been, and is being, utilized to fund its operations
          and
          to fund deferred acquisition payments.   The Company’s operating
          expenses have consisted, and will continue to consist, mostly of expenses
          relating to the furtherance of its clinical trial activities, the
          commercialization of the SOLX Glaucoma System in Europe and the completion
          of
          the product development of the TearLabTM test for dry eye syndrome, or
          DES.  Unless the Company raises additional capital, it will not have
          sufficient cash to support its operations beyond early 2008.
 
 For
          some
          time, the Company has been seeking to raise additional capital, with the
          objective of securing funding sufficient to sustain its operations, and
          is
          continuing its capital raising efforts.  On October 9, 2007, the
          Company announced that its Board of Directors has authorized management
          and the
          Company’s advisors to explore the full range of strategic alternatives available
          to enhance shareholder value.  These alternatives may include, but are
          not limited to, the raising of capital through the sale of securities,
          one or
          more strategic alliances and the combination, sale or merger of all or
          part of
          the Company.  There can be no assurance that this ongoing exploration
          of strategic alternatives will result in a transaction.
 
 In
          light
          of both the Company’s financial position as at September 30, 2007 and the
          Company’s current financial position, on November 1, 2007, the Company announced
          an indefinite suspension of the RHEOTM System clinical development program for
          the dry form of age-related macular degeneration, or AMD.  That
          decision was made following a comprehensive review of the respective costs
          and
          development timelines associated with the products in the Company’s portfolio
          and, in particular, the fact that, if the Company is unable to raise additional
          capital, it will not have sufficient cash to support its operations beyond
          early
          2008. As a result of this review, the Company’s Board of Directors determined
          that it would be advisable to suspend indefinitely the RHEOTM System clinical
          development program in order to conserve as much cash as possible while
          the
          Company continues its capital-raising efforts.
 11
 As
          at
          September 30, 2007, the Company had investments in the aggregate principal
          amount of $1,925,000 which consist of investments in four separate asset-backed
          auction rate securities yielding an average return of 6.054% per
          annum.  However, as a result of market conditions, all of these
          investments have recently failed to settle on their respective settlement
          dates
          and have been reset to be settled at a future date with an average maturity
          of
          46 days.  Based on discussions with the Company’s advisors and the
          current lack of liquidity for asset-backed securities of this type, the
          Company
          has concluded that the carrying value of these investments was higher than
          its
          fair value as of September 30, 2007. Accordingly, these auction rate securities
          have been recorded at their estimated fair value of $1,278,750. The Company
          considers this to be a temporary reduction in the value, accordingly, the
          unrealized loss associated with these auction rate securities of $646,250
          has
          been reported in other comprehensive loss for the nine months ended September
          30, 2007. Although the Company continues to receive payment of interest
          earned
          on these securities, the Company does not know at the present time when
          it will
          be able to convert these investments into cash.  Accordingly, management
          has classified these investments as a non-current asset on its consolidated
          balance sheet as of September 30, 2007. Management will
          continue to
          closely monitor these investments for future indications of further
          impairment.The
          illiquidity
          of these investments may have an adverse impact on the length of time during
          which the Company currently expects to be able to sustain its operations
          in the
          absence of an additional capital raise by the Company.
 
 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
                September
                  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.
 
 **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.
 
  12
  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 second quarter of 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 September 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 nine months ended September 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
          nine months ended September 30, 2007 and 2006 was $1,335,961, $3,919,566,
          $680,000 and $1,538,333, respectively.
 
 As
          of
          September 30, 2007, the remaining weighted average amortization period
          for the
          distribution agreements is nil and 8.96 years for the other acquisition-related
          intangibleassets.
 
 Intangible
          assets subject to amortization consist of the following:
 
 **September
                  30, 2007**
              
              **December
                  31, 2006****Gross
                  Carrying Amount**
              
              **Accumulated
                  Amortization**
              
              **Gross
                  Carrying Amount**
              
              **Accumulated
                  Amortization****$**
              
              **$**
              
              **$**
              
              **$**Distribution
                  agreements
              
              —
              
              —
              
              25,750,000
              
              3,539,472Shunt
                  and laser technology
              
              27,000,000
              
              2,925,000
              
              27,000,000
              
              900,000Regulatory
                  and other
              
              2,800,000
              
              303,333
              
              2,800,000
              
              93,333TearLabTM
                  technology
              
              6,368,749
              
              436,278
              
              4,705,416
              
              39,21236,168,749
              
              3,664,611
              
              60,255,416
              
              4,572,017
 
  13
  Estimated
          amortization expense for the intangible assets for each of the fiscal years
          ending December 31 is as follows:
 
 **$**Balance
                  of 2007
              
              
              906,7952008
              
              
              3,627,1802009
              
              
              3,627,1802010
              
              
              3,627,1802011
              
              
              3,627,180Balance,
                  thereafter
              
              
              17,088,623
 
 The
        Company’s intangible assets consist of the value of the exclusive distribution
        agreements the Company has with Asahi Kasei Kuraray Medical Co., Ltd. (“Asahi
        Medical”) (formerly Asahi Kasei Medical Co., Ltd.), the manufacturer of the
        Rheofilter filter and the Plasmaflo filter, and Diamed Medizintechnik GmbH
        (“Diamed”) and MeSys GmbH, the designer and the manufacturer, respectively, of
        the OctoNova pump. The Rheofilter filter, the Plasmaflo filter and the OctoNova
        pump are components of the RHEOTM System, the Company’s product for the treatment
        of Dry AMD. In light of both the Company’s financial position as at September
        30, 2007 and the Company’s current financial position, on November 1, 2007, the
        Company announced an indefinite suspension of the RHEOTM System clinical
        development program for Dry AMD.  That decision was made following a
        comprehensive review of the respective costs and development timelines
        associated with the products in the Company’s portfolio and, in particular, the
        fact that, if the Company is unable to raise additional capital, it will
        not
        have sufficient cash to support its operations beyond early 2008. In accordance
        with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived
        Assets” (“SFAS No. 144”), the Company concluded that its indefinite
        suspension of the RHEOTM System clinical development program for Dry AMD was
        a significant event which may affect the carrying value of its distribution
        agreements. Accordingly, management was required to re-assess whether
        the carrying value of the Company’s distribution agreements was recoverable
        as of September 30, 2007. Based on management’s estimates of undiscounted cash
        flows associated with the distribution agreements, the Company concluded
        that
        the carrying value of the distribution agreements was not recoverable as
        of
        September 30, 2007. Accordingly, the Company recorded an impairment charge
        of
        $20,923,028 during the three months ended September 30, 2007 to record the
        distribution agreements at their fair value as of September 30,
        2007.
 
 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 September 30, 2007, there have been no
        significant changes in the methods used to determine the fair market value
        of
        its other acquisition-related intangible assets. However, the Company’s prior
        history of losses and losses incurred during the nine months ended September
        30,
        2007 reflects a potential indication of impairment, thus requiring management
        to
        assess whether the Company’s other acquisition-related intangible assets were
        impaired as of September 30, 2007. Based on management’s estimates of forecasted
        undiscounted cash flows as of September 30, 2007, the Company concluded that
        there is no indication of an impairment of the Company’s other
        acquisition-related intangible assets. Therefore, no impairment charge was
        recorded during the three and nine months ended September 30,
        2007.
 
  14
  **4.**
              **FIXED
                  ASSETS**
  **September
                  30, 2007**
              
              **December
                  31, 2006****Cost**
              
              **Accumulated
                  Amortization**
              
              **Cost**
              
              **Accumulated
                  Amortization****$**
              
              **$**
              
              **$**
              
              **$**Furniture
                  and office equipment
              
              130,585
              
              62,170
              
              119,776
              
              49,566Computer
                  equipment and software
              
              287,524
              
              204,252
              
              268,955
              
              145,001Leasehold
                  improvements
              
              6,335
              
              176
              
              —
              
              —Medical
                  equipment
              
              1,959,856
              
              1,796,845
              
              1,805,228
              
              1,138,6752,384,300
              
              2,063,443
              
              2,193,959
              
              1,333,242Less
                  accumulated amortization
              
              2,063,443
              
              
              
              1,333,242320,857
              
              
              
              860,717
 
 Amortization
          expense was $534,578, $730,201, $52,011, $120,311 during the three and
          nine
          months ended September 30, 2007 and 2006, respectively, and $213,488 during
          the
          year ended December 31, 2006.
 
 In
          light
          of both the Company’s financial position as at September 30, 2007 and the
          Company’s current financial position, on November 1, 2007, the Company announced
          an indefinite suspension of the RHEOTM System clinical development program for
          Dry AMD.  That decision was made following a comprehensive review of
          the respective costs and development timelines associated with the products
          in
          the Company’s portfolio and, in particular, the fact that, if the Company is
          unable to raise additional capital, it will not have sufficient cash to
          support
          its operations beyond early 2008. In accordance with SFAS No. 144, the
          Company
          determined that the carrying value of certain of the Company’s medical
          equipments was not recoverable as of September 30, 2007. Accordingly, during
          the
          three and nine months ended September 30, 2007, the Company recorded a
          reduction
          to the carrying value of certain of its medical equipments of $431,683
          which
          reflects a write-down of the value of these medical equipments to nil as
          of
          September 30, 2007. The assets written down were being used in the clinical
          trials of the RHEOTM System. The Company did not write down the carrying value of
          any of its fixed assets during the three and nine months ended September
          30,
          2006 or during the year ended December 31, 2006.
 
 **5.**
              **PATENTS
                  AND TRADEMARKS**
  **September
                  30, 2007**
              
              **December
                  31, 2006****Cost**
              
              **Accumulated
                  Amortization**
              
              **Cost**
              
              **Accumulated
                  Amortization****$**
              
              **$**
              
              **$**
              
              **$**Patents
              
              233,370
              
              113,013
              
              139,461
              
              14,909Trademarks
              
              114,614
              
              104,615
              
              117,513
              
              7,224347,984
              
              217,628
              
              256,974
              
              22,133Less
                  accumulated amortization
              
              217,628
              
              
              
              22,133130,356
              
              
              
              234,841
 
 In
          light
          of both the Company’s financial position as at September 30, 2007 and the
          Company’s current financial position, on November 1, 2007, the Company announced
          an indefinite suspension of the RHEOTM System clinical development program for
          Dry AMD.  That decision was made following a comprehensive review of
          the respective costs and development timelines associated with the products
          in
          the Company’s portfolio and, in particular, the fact that, if the Company is
          unable to raise additional capital, it will not have sufficient cash to
          support
          its operations beyond early 2008. In accordance with SFAS No. 144, the
          Company
          determined that the carrying value of certain of the Company’s patents and
          trademarks was not recoverable as of September 30, 2007. Accordingly, during
          the
          three and nine months ended September 30, 2007, the Company recorded a
          $190,873
          reduction to the carrying value of its patents and trademarks related to
          the
          RHEOTM System which reflects a write-down of these patents and trademarks to a
          value of nil as of September 30, 2007. The Company did not write down the
          carrying value of any of its patents and trademarks during the three and
          nine
          months ended September 30, 2006 or during the year ended December 31,
          2006.
 15
 The
          Company’s recorded patents and trademarks as of September 30, 2007 relate to the
          cost of pending applications for patents and trademarks for components
          of the
          SOLX Glaucoma System and the TearLabTM technology. These patents and trademarks
          will be amortized, using the straight-line method, over an estimated useful
          life
          of 10 years from the date of approval of the patents and
          trademarks.
 
 **6.**
              **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
          Dry 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 nine months ended September 30,
          2006.
 
 The
          restructuring charges of $819,642 recorded in the nine months ended September
          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
          were
          fully paid as at December 31, 2006.
 
 **7.**
              **INVENTORY**
  The
          Company evaluates its ending inventory for estimated excess quantities
          and
          obsolescence, based on expected future sales levels and projections of
          future
          demand, with the excess inventory provided for. In addition, the Company
          assesses the impact of changing technology and market conditions.  In
          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 September 30, 2006. In light of both the Company’s
          financial position as at September 30, 2007 and the Company’s current financial
          position, on November 1, 2007, the Company announced an indefinite suspension
          of
          the RHEOTM System clinical development program for Dry AMD.  That
          decision was made following a comprehensive review of the respective costs
          and
          development timelines associated with the products in the Company’s portfolio
          and, in particular, the fact that, if the Company is unable to raise additional
          capital, it will not have sufficient cash to support its operations beyond
          early
          2008.Accordingly,
          the Company has
          written down the value of its treatment sets and OctoNova pumps, the components
          of theRHEOTM
          System, to nil
          as of September 30, 2007 since the Company is not expected to be able to
          sell or
          utilize these treatment sets and OctoNova pumps prior to their expiration
          dates,
          in the case of the treatment sets, or before the technologies become outdated.During the nine months ended September 30, 2007 and 2006, the Company
          recognized a provision related to inventory of $2,782,494 and $1,625,000,
          respectively, based on the above analysis.
 
 As
          of September 30, 2007 and December 31, 2006, the Company had inventory
          reserves of $7,485,273 and $5,101,394, respectively.
 
 **8.**
              **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.
 
  16
  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.
 
 **9.**
              **STOCKHOLDERS’
                  EQUITY**
  **(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 became exercisable on August 6,
          2007. Pursuant to the Securities Purchase Agreement, on February 6, 2007,
          the
          Company issued the Shares and the Warrants. The gross proceeds of the sale
          of
          the Shares and 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 9(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.
 17
 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 nine
          months ended September 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” (“SFAS No. 123”). Stock-based compensation expense for all
          stock-based compensation awards granted subsequent to January 1, 2006 was
          based
          on the grant date fair value estimated in accordance with the provisions
          of SFAS
          No. 123R. The Company recognizes compensation expense for stock option
          awards on
          a straight-line basis over the requisite service period of the
          award.
 
 The
          following table sets forth the total stock-based compensation expense resulting
          from stock options included in the Company’s unaudited interim consolidated
          statements of operations:
 
 **Three
                  months ended**
                **September
                  30,**
              
              **Nine
                  months ended**
                **September
                  30,****2007**
              
              **2006**
              
              **2007**
              
              **2006****$**
              
              **$**
              
              **$**
              
              **$**General
                  and administrative
              
              
              224,258
              
              
              683,174
              
              
              784,567
              
              
              1,266,801Clinical
                  and regulatory
              
              
              55,066
              
              
              54,807
              
              
              264,484
              
              
              165,631Sales
                  and marketing
              
              
              143,898
              
              
              140,092
              
              
              398,600
              
              
              405,593Stock-based
                  compensation expense before income taxes (i)
              
              
              423,222
              
              
              878,073
              
              
              1,447,651
              
              
              1,838,025
 
 (i)
                The
                    tax benefit associated with the Company’s stock-based compensation expense
                    for the three and nine months ended September 30, 2007 and 2006
                    is
                    $152,019, $524,547,
                    $324,888and $680,070,
                    respectively.
 18
 Net
          cash
          proceeds from the exercise of stock options were nil and $17,425 for the
          three months ended September 30, 2007 and 2006, respectively, and $2,228
          and
          $251,135 for the nine months ended September 30, 2007 and 2006,
          respectively.
 
 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 theninemonths endedSeptember
          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.
 
 The
          weighted-average fair value of stock options granted during the three and
          nine
          months ended September 30, 2007 and 2006 was $0.78, $0.90, $1.57 and $1.88,
          respectively. The estimated fair value was determined using the Black-Scholes
          option-pricing model with the following weighted-average
          assumptions:
 
 **Three
                  months ended**
                **September
                  30,**
              **Nine
                  months ended**
                **September
                  30,****2007**
              
              **2006**
              **2007**
              
              **2006**Volatility
              
              
              76.3%
              
              
              96.8%
              
              76.5%
              
              
              97.1%Expected
                  life of options
              
              
              6
                  years
              
              
              6
                  years
              
              5.85
                  years
              
              
              5.99
                  yearsRisk-free
                  interest rate
              
              
              4.99%
              
              
              4.84%
              
              4.87%
              
              
              4.84%Dividend
                  yield
              
              
              0%
              
              
              0%
              
              0%
              
              
              0%
 
 The
          Company’s computation of expected volatility for the three and nine months ended
          September 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.
 
  19
  A
          summary
          of the options issued during the nine months ended September 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
              1,077,500
              1.31Exercised
              (2,250)
              0.99Forfeited
              (229,083)
              2.05**Outstanding,
                  September 30, 2007**
              **5,083,388**
              **1.64**
              **7.75**
              **—****Vested
                  or expected to vest, September 30, 2007**
              **3,586,964**
              **1.67**
              **6.79**
              **—****Exercisable,
                  September 30, 2007**
              **2,906,221**
              **1.60**
              **6.52**
              **—**
 
 The
          aggregate intrinsic value in the table above represents the total pre-tax
          intrinsic value (i.e., the difference between the Company’s closing stock price
          on the last trading day of the third quarter of 2007 of $0.599 and the
          exercise
          price, multiplied by the number of shares that would have been received
          by the
          option holders if the options had been exercised on September 30, 2007).
          This
          amount changes according to the fair market value of the Company’s stock. As of
          September 30, 2007, the aggregate intrinsic value of the outstanding, vested
          or
          expected to vest and exercisable options was nil as the Company’s closing stock
          price on the last trading day of the third quarter of 2007 of $0.599 was
          lower
          than the exercise price of the Company’s least priced option as of that
          date.
 
 As
          of
          September 30, 2007, $2,762,105 of total unrecognized compensation cost
          related
          to stock options is expected to be recognized over a weighted-average period
          of
          2.24 years.
 
 **(c)**
                **Warrants**
 
 On
          February 6, 2007, pursuant to the Securities Purchase Agreement between
          the
          Company and certain institutional investors (note 9(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 became exercisable on August 6, 2007. All of the terms
          and
          conditions of the Cowen Warrant (other than the number of shares of the
          Company's common stock into which it is exercisable) are identical to those
          of
          the Warrants.
 
 The
          Company accounts for the Warrants and the Cowen Warrant in accordance with
          the provisions of SFAS No. 133, “Accounting for Derivative Instruments and
          Hedging Activities” (“SFAS No. 133”) along with related interpretation EITF No.
          00-19 “Accounting for Derivative Financial Instruments Indexed to, and
          Potentially Settled in, a Company’s Own Stock” (“EITF No. 00-19”). SFAS No. 133
          requires every derivative instrument within its scope (including certain
          derivative instruments embedded in other contracts) to be recorded on the
          balance sheet as either an asset or liability measured at its fair value,
          with
          changes in the derivative’s fair value recognized currently in earnings unless
          specific hedge accounting criteria are met. Based on the provisions of
          EITF No.
          00-19, the Company determined that the Warrants and the Cowen
          Warrant do not meet the criteria for classification as
          equity. Accordingly, the Company has classified the Warrants and the Cowen
          Warrant as a current liability at September 30, 2007.
 
  20
  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 June
          30,
          and September 30, 2007 and determined the aggregate fair value to be $1,105,766
          and $248,797, a decrease of $946,812 and $1,803,781, 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
          $856,969 and $1,803,781 in its consolidated statements of operations for
          the
          three and nine months ended September 30, 2007, respectively, which reflect
          the
          decrease in the Company’s obligation to its warrant holders at September 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 nine months ended September 30, 2007.
 
 A
          summary
          of the warrants issued during the nine months ended September 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,
                  September 30, 2007**
              **2,764,416**
              **2.20**
 
 **(d)**
                **Comprehensive
                    loss**
 
 The
          components of comprehensive loss are as follows:
 
 **Three
                  months ended**
                **September
                  30,**
              
              **Nine
                  months ended**
                **September
                  30,****2007**
              
              **2006**
              
              **2007**
              
              **2006****$**
              
              **$**
              
              **$**
              
              **$**Net
                  loss for the period
              
              (19,660,024)
              
              (3,583,808)
              
              (26,511,640)
              
              (79,311,353)Unrealized
                  loss on investments
              
              (646,250)
              
              —
              
              (646,250)
              
              —(20,306,274)
              
              (3,583,808)
              
              (27,157,890)
              
              (79,311,353)
 
  21
  The
          component of accumulated other comprehensive loss is as
          follows:
 
 **September
                  30,**
                **2007**
              **December
                  31, 2006****$**
              **$**Unrealized
                  loss on investments
              646,250
              —
 
 **10.**
              **LOSS
                  PER SHARE**
  Loss
          per
          share, basic and diluted, is computed using the treasury method. Potentially
          dilutive shares have not been used in the calculation of loss per share
          as their
          inclusion would be anti-dilutive.
 
 **Three
                  months ended**
                **September
                  30,**
              **Nine
                  months ended**
                **September
                  30,****2007**
              
              **2006**
              
              **2007**
              
              **2006**Weighted
                  average number of shares outstanding – basic
              
              
              57,306,145
              
              
              44,911,018
              
              56,420,941
              
              43,081,795Effect
                  of dilutive security:Stock
                  options
              
              
              —
              
              
              358,415
              
              219,683
              
              2,079,335Weighted
                  average number of shares - fully diluted
              
              
              57,306,145
              
              
              45,269,433
              
              56,640,624
              
              45,161,130
 
 The
          warrants outstanding at September 30, 2007 have not been included in the
          calculation of the diluted number of shares outstanding at September 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 nine months ended September 30, 2007 of $0.92 and $1.26,
          respectively.
 
 **11.**
              **RELATED
                  PARTY TRANSACTIONS**
  The
          following are the Company’s related party transactions:
 
 **TLC
        Vision Corporation and Diamed**
  On
          June
          25, 2003, the Company entered into agreements with TLC Vision Corporation
          (“TLC
          Vision”) and Diamed to issue grid debentures in the maximum aggregate principal
          amount of $12,000,000 in connection with the funding of the Company’s MIRA-1 and
          related clinical trials. $7,000,000 of the aggregate principal amount was
          convertible into shares of the Company’s common stock at a price of $0.98502 per
          share, and $5,000,000 of the aggregate principal amount was
          non-convertible.
 
 The
          $5,000,000 portion of the $12,000,000 commitment which was not convertible
          into
          the Company’s common stock was not advanced and the commitment was terminated
          prior to the completion of the Company’s initial public offering of shares of
          its common stock. During the years ended December 31, 2004 and 2003, the
          Company
          issued grid debentures in an aggregate principal amount of $4,350,000 and
          $2,650,000 to TLC Vision and Diamed, respectively, under the convertible
          portion
          of the grid debentures. On December 8, 2004, as part of the corporate
          reorganization relating to the Company’s initial public offering, the Company
          issued 7,106,454 shares of its common stock to TLC Vision and Diamed, upon
          conversion of $7,000,000 of aggregate principal amount of convertible debentures
          at a conversion price of $0.98502 per share. Collectively, at September
          30,
          2007, the two companies have a combined 35.46% equity interest in the Company
          on
          a fully diluted basis.
 
 If
          and
          when the Company receives FDA approval to market the RHEOTM System in the United
          States, assuming the Company is able to resume its RHEOTM System clinical
          development program, 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.
 22
  **Asahi
        Medical**
  Since
          2001, the Company has been party to a distributorship agreement with Asahi
          Medical 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, assuming the Company is able to resume its RHEOTM System clinical
          development program, 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.
 
 Although,
          on November 1, 2007, the Company suspended indefinitely its RHEOTM System
          clinical development program for Dry AMD, including the RHEO-AMD trial,
          the
          Company has not terminated the 2006 Distribution Agreement.
 
 The
          Company received free inventory from Asahi Medical for purposes of the
          RHEO-AMD
          trial, the LEARN, or Long-term Efficacy in AMD from Rheopheresis in North
          America, trials and related clinical studies. The Company has accounted
          for this
          inventory at a value equivalent to the cost the Company has paid for the
          same
          filters purchased from Asahi Medical for purposes of commercial sales to
          the
          Company’s customers. The value of the free inventory received from Asahi Medical
          was $384,660 and $25,500 for the nine months ended September 30, 2007 and
          2006,
          respectively.
 
  23
  **Mr.
        Hans Stock (Note 12)**
  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 nine months ended
          September 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
          September
          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 nine months ended September 30,
          2007 and
          2006 and the year ended December 31, 2006, the Company paid $12,500, $37,500,
          $12,500, $37,500 and $50,000, respectively, to Mr. Stock as royalty fees.
          Included in due to stockholders at September 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 nine months ended September 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 nine months ended September 30,
          2007, the Company paid ATI $17,036 and $63,692, respectively, under this
          arrangement (2006 – nil). Included in accounts payable and accrued liabilities
          at September 30, 2007 and December 31, 2006 is $29,088 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.
 24
 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 nine months ended September 30, 2007 and 2006, of $6,594, $29,781,
          $36,813 and $141,263, respectively.
 
 On
          September 29, 2004, the Company signed a product purchase agreement with
          Veris
          for its purchase from the Company of 8,004 treatment sets over the period
          from
          October 2004 to December 2005, a transaction valued at $6,003,000, after
          introductory rebates. However, due to delays in opening its planned number
          of
          clinics throughout Canada, Veris no longer required the contracted-for
          number of
          treatment sets in the period. The Company agreed to the original pricing
          for the
          reduced number of treatment sets required in the period. Dr. 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 $1,049,297 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
          $1,049,297 against the amount due from Veris and did not accrue additional
          interest on the amount outstanding during the year ended December 31,
          2006.
 25
 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. During the nine months ended September
          30,
          2007, the Company sold a total of 612 treatment sets to Veris, for a total
          amount of $129,744, plus applicable taxes. The
          sale of these
          treatment sets was not recognized as revenue during thenine-month
          period based on Veris’ payment history with the Company and the new 180-day
          payment terms agreed by Veris and the Company. In October 2007, the Company
          met
          with the management of Veris and based on discussions with Veris, the Company
          believes that Veris will not be able to meet its financial obligations
          to the
          Company. Therefore, during the nine months ended September 30, 2007, the
          Company recorded an allowance for doubtful accounts of $129,744 against
          the
          total amount due from Veris for the purchase of these treatment
          sets.
 26
 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 nine months ended September 30, 2007 and 2006 and
          the year
          ended December 31, 2006, the Company paid Innovasium Inc. C$10,320, C$69,460,
          C$1,885, C$33,230 and C$44,219, respectively. Included in accounts payable
          and
          accrued liabilities at September 30, 2007 and December 31, 2006 is C$2,668
          and
          nil, respectively, due to Innovasium Inc. These amounts are expensed in
          the
          period incurred and paid when due.
 
 **12.**
              **DUE
                  TO STOCKHOLDERS**
  **September
                  30,**
              
              **December
                  31,****2007**
              
              **2006****$**
              
              **$****Due
                  to:**TLC
                  Vision Corporation
              
              
              175,530
              
              
              91,884Other
                  stockholder
              
              
              60,522
              
              
              60,522236,052
              
              
              152,406
 
 Included
          in amounts due to stockholders as of September 30, 2007 and December 31,
          2006 is $175,530 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 September 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 11).
 
 **13.**
              **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. On September 1, 2007, the Company paid a total
          of
          $3,000,000 to the former stockholders of SOLX, thereby reducing the maximum
          aggregate amount of the purchase price remaining payable to the former
          stockholders of SOLX to $10,000,000 as of that date.
 
  27
  **14.**
              **ACCRUED
                  LIABILITIES**
  Accrued
          liabilities consist of the following:
 
 **September
                  30,**
                **2007**
              **December
                  31, 2006****$**
              **$**Due
                  to professionals
              408,508
              709,047Due
                  to clinical trial sites
              245,416
              195,074Due
                  to clinical trial specialists
              269,838
              206,642Product
                  development costs
              618,735
              124,312Due
                  to employees and directors
              1,046,825
              464,146Sales
                  tax and capital tax payable
              22,476
              12,394Due
                  to MeSys GmbH for pump parts
              7,422
              —Corporate
                  compliance
              221,801
              227,475Interest
                  payable
              —
              10,758Miscellaneous
              188,600
              141,0893,029,621
              2,090,937
 
 **15.**
              **CONSOLIDATED
                  STATEMENTS OF CASH FLOWS**
  The
          net
          change in non-cash working capital balances related to operations consists
          of
          the following:
 
 **Nine
                  months ended**
                **September
                  30,****2007**
              
              
              **2006****$**
              
              
              **$**Due
                  to related party
              
              
              —
              
              
              (5,065
              )Amounts
                  receivable, net
              
              
              (197,984
              )
              
              297,176Inventory
              
              
              (61,784
              )
              
              (1,117,354
              )Prepaid
                  expenses
              
              
              (46,787
              )
              
              313,269Deposit
              
              
              (10,600
              )
              
              (5,551
              )Other
                  current assets
              
              
              17,600
              
              
              —Accounts
                  payable
              
              
              243,097
              
              
              (930,706
              )Accrued
                  liabilities
              
              
              938,684
              
              
              (832,840
              )Deferred
                  revenue
              
              
              —
              
              
              38,400Due
                  to stockholders
              
              
              83,646
              
              
              (36,995
              )965,872
              
              
              (2,279,666
              )
 
  28
  The
          following table lists (i) those items that have been excluded from the
          unaudited
          interim consolidated statements of cash flows as they relate to non-cash
          transactions and (ii) additional cash flow information:
 
 **Nine
                  months ended****September
                  30,****2007**
              
              **2006****$**
              
              **$**Non-cash
                  investing and financing activitiesWarrant
                  issued in part payment of placement fee
              
              
              97,222
              
              
              —Common
                  stock issued on acquisition
              
              
              —
              
              
              15,035,969Free
                  inventory
              
              
              418,303
              
              
              (22,506
              )Additional
                  cash flow informationIncome
                  taxes recovered, net
              
              
              —
              
              
              4,534Interest
                  paid
              
              
              11,180
              
              
              —
 
 **16.**
              **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. RHEO-AMD was suspended indefinitely on November 1, 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, 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.
 
  29
  The
          Company’s business units were as follows:
 
 **Retina**
              **Glaucoma**
              **Other**
              **Total****$**
              
              **$**
              
              **$**
              
              **$****Three
                  months ended September 30, 2007**Revenue
              
              —
              
              15,225
              
              —
              
              15,225Expenses:Cost
                  of goods sold
              
              2,287,411
              
              19,674
              
              —
              
              2,307,085Operating
              
              2,555,466
              
              1,771,726
              
              1,426,117
              
              5,753,309Amortization
              
              1,094,151
              
              806,657
              
              162,408
              
              2,063,216Impairment
                  of intangible asset
              
              20,923,028
              
              —
              
              —
              
              20,923,028Loss
                  from operations
              
              (26,860,056)
              
              (2,582,832)
              
              (1,588,525)
              
              (31,031,413)Interest
                  income
              
              113,733
              
              307
              
              23,404
              
              137,444Interest
                  and accretion expense
              
              (222,906)
              
              —
              
              (362)
              
              (223,268)Changes
                  in fair value of warrant obligation
              
              856,969
              
              —
              
              —
              
              856,969Other
                  income (expense), net
              
              (23,653)
              
              —
              
              17,960
              
              (5,693)Minority
                  interest
              
              —
              
              —
              
              703,038
              
              703,038Recovery
                  of income taxes
              
              8,202,963
              
              1,071,631
              
              628,305
              
              9,902,899Net
                  loss
              
              (17,932,950)
              
              (1,510,894)
              
              (216,180)
              
              (19,660,024)**Nine
                  months ended September 30, 2007**Revenue
              
              90,000
              
              176,125
              
              —
              
              266,125Expenses:Cost
                  of goods sold
              
              2,352,807
              
              132,630
              
              —
              
              2,485,437Operating
              
              8,003,207
              
              5,266,157
              
              3,546,421
              
              16,815,785Amortization
              
              2,029,588
              
              2,415,691
              
              399,983
              
              4,845,262Impairment
                  of intangible asset
              
              20,923,028
              
              —
              
              —
              
              20,923,028Loss
                  from operations
              
              (33,218,630)
              
              (7,638,353)
              
              (3,946,404)
              
              (44,803,387)Interest
                  income
              
              519,467
              
              315
              
              49,026
              
              568,808Interest
                  and accretion expense
              
              (648,917)
              
              —
              
              (784)
              
              (649,701)Changes
                  in fair value of warrant obligation
              
              1,633,700
              
              —
              
              —
              
              1,633,700Other
                  income (expense), net
              
              (26,013)
              
              (9,302)
              
              21,682
              
              (13,633)Minority
                  interest
              
              —
              
              —
              
              1,747,823
              
              1,747,823Recovery
                  of income taxes
              
              10,273,943
              
              3,170,920
              
              1,559,887
              
              15,004,750Net
                  loss
              
              (21,466,450)
              
              (4,476,420)
              
              (568,770)
              
              (26,511,640)Total
                  assets as at
                September
                  30, 2007
              
              17,493,302
              
              31,417,560
              
              7,577,590
              
              56.488,452
  30
  
 **Retina**
              **Glaucoma**
              **Other**
              **Total****$**
              
              **$**
              
              **$**
              
              **$****Three
                  months ended September 30, 2006**Revenue
              
              53,144
              
              32,300
              
              **—**
              
              85,444Expenses:Cost
                  of goods sold
              
              105,358
              
              12,047
              
              —
              
              117,405Operating
              
              2,858,898
              
              298,064
              
              —
              
              3,156,962Amortization
              
              464,464
              
              269,386
              
              —
              
              733,850Loss
                  from operations
              
              (3,375,576)
              
              (547,197)
              
              —
              
              (3,922,773)Interest
                  income
              
              368,582
              
              3
              
              —
              
              368,585Interest
                  and accretion expense
              
              (77,191)
              
              —
              
              —
              
              (77,191)Other
                  income (expense), net
              
              20,898
              
              (194)
              
              —
              
              20,704Recovery
                  of income taxes
              
              (65,941)
              
              92,808
              
              —
              
              26,867Net
                  loss
              
              (3,129,228)
              
              (454,580)
              
              —
              
              (3,583,808)**Nine
                  months ended September 30, 2006**Revenue
              
              135,859
              
              32,300
              
              **—**
              
              168,159Expenses:Cost
                  of goods sold
              
              1,759,675
              
              12,047
              
              —
              
              1,771,722Operating
              
              10,517,744
              
              298,064
              
              —
              
              10,815,808Amortization
              
              1,394,177
              
              269,386
              
              —
              
              1,663,563Restructuring
                  charges
              
              819,642
              
              —
              
              —
              
              819,642Impairment
                  of goodwill
              
              65,945,686
              
              —
              
              —
              
              65,945,686Loss
                  from operations
              
              (80,301,065)
              
              (547,197)
              
              —
              
              (80,848,262)Interest
                  income
              
              1,149,736
              
              3
              
              —
              
              1,149,739Interest
                  and accretion expense
              
              (77,191)
              
              —
              
              —
              
              (77,191)Other
                  income (expense), net
              
              13,793
              
              (194)
              
              —
              
              13,599Recovery
                  of income taxes
              
              250,909
              
              92,808
              
              —
              
              343,717Cumulative
                  effect of a change in accounting principle
              
              107,045
              
              —
              
              —
              
              107,045Net
                  loss
              
              (78,856,773)
              
              (454,580)
              
              —
              
              (79,311,353)Total
                  assets as at
                December
                  31, 2006
              
              43,899,110
              
              39,021,868
              
              7,482,717
              
              90,403,695
 
 **17.**
              **COMPARATIVE
                  FIGURES**
  Certain
          comparative figures have been reclassified to conform to the current period’s
          presentation.
 
 **18.**
              **SUBSEQUENT
                  EVENT**
  In
          light
          of both the Company’s financial position as at September 30, 2007 and the
          Company’s current financial position, on November 1, 2007, the Company announced
          an indefinite suspension of the RHEOTM System clinical development program
          for Dry AMD.  That decision was made following a comprehensive
          review of the respective costs and development timelines associated with
          the
          products in the Company’s portfolio and, in particular, the fact that, if the
          Company is unable to raise additional capital, it will not have sufficient
          cash
          to support its operations beyond early 2008.
 
 The
          Company considered itsindefinite
          suspension
          ofthe
          RHEOTM
System
          clinical
          developmentprogramfor
          Dry AMDa significant
          eventleading to an analysis of the Company’s intangible assets. As a result of
          this analysis, the Company reported an impairment charge to intangible
          assets of
          $20,923,028.
 31
 In
          addition, the Company evaluated its ending inventories as at September
          30, 2007
          on the basis that it is not expected that the Company will be able to sell
          or
          utilize the components of the RHEOTM System prior to their expiration dates or
          before the technologies become outdated, as the case may be. Accordingly,
          the
          Company has set up a provision for obsolescence of $2,782,494 for treatment
          sets
          and OctoNova pumps that are unlikely to be utilized prior to their expiration
          dates, in the case of treatment sets, or before the technologies become
          outdated.
 
 Lastly,
          as a result of the Company’s indefinite suspension
          ofthe
          RHEOTM
System
          clinical
          developmentprogramfor
          Dry AMD, the
          Company recorded a
          reduction to the carrying value of (i) certain of its medical
          equipment used in the clinical trials of the RHEOTM System of
          $431,683 and (ii) certain of its patents and trademarks related to the
          RHEOTM
System of $190,873.
  32
  
 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.
 
 In
        light
        of both the Company’s financial position as at September 30, 2007 and the
        Company’s current financial position, on November 1, 2007, we announced an
        indefinite suspension of the RHEOTM System clinical development program for the
        dry form of age-related macular degeneration, or AMD.  That decision
        was made following a comprehensive review of the respective costs and
        development timelines associated with the products in the Company’s portfolio
        and, in particular, the fact that, if the Company is unable to raise additional
        capital, it will not have sufficient cash to support its operations beyond
        early
        2008. The Company currently is not generating cash from operations, and most
        of
        its cash has been, and is being, utilized to fund its operations and to fund
        deferred acquisition payments.  Unless we are able to raise additional
        capital, the Company will not have sufficient cash to support its operations
        beyond early 2008.  For some time, the Company has been seeking to
        raise additional capital, with the objective of securing funding sufficient
        to
        sustain its operations.  To date, other than the February 6, 2007
        private placement of shares of its common stock and warrants for total gross
        proceeds of $10,016,000, the Company’s capital-seeking efforts have not
        culminated in a successful transaction.  As a result of this review,
        our Board of Directors determined that it would be advisable to suspend
        indefinitely the RHEOTM System clinical development program in order to conserve
        as much cash as possible while the Company continues its capital-raising
        efforts.
 
 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:
 33
 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.
 
 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 Kuraray Medical Co., Ltd. (formerly Asahi Kasei 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.RHEO-AMD was suspended
        indefinitely on November 1, 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.
 
 34
  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 September 30, 2006. During
        the
        nine months ended September 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
        September 30, 2007 and December 31, 2006, the Company had inventory
        reserves of $7,485,273 and $5,101,394, respectively.
 
 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. During the nine months ended September
          30,
          2007, we sold a total of 612 treatment sets to Veris, for a total amount
          of
          $129,744, plus applicable taxes. The
          sale of these
          treatment sets was not recognized as revenue during thenine-month
          period based on Veris’ payment history with the Company and the new 180-day
          payment terms agreed by Veris and us. In October 2007, we met with the
          management of Veris and based on discussions with Veris, we believe that
          Veris
          will not be able to meet its financial obligations to the
          Company. Therefore, during the nine months ended September 30, 2007, the
          Company recorded an allowance for doubtful accounts of $129,744 against
          the
          total amount due from Veris for the purchase of the treatment sets.
 
 35
  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, assuming the Company is able to resume its RHEOTM System
        clinical development program, 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 have
        not terminated the 2006 Distributorship Agreement in connection with the
        indefinite suspension of the Company’s RHEOTM System clinical development program
        on November 1, 2007.
 
 We
        are
        subject to certain minimum purchase requirements in each of the territories
        covered by the 2006 Distributorship Agreement.
 
 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. On September
        1,
        2007, the first anniversary of the September 1, 2006 closing date, the Company
        made an additional payment of $3,000,000 to the former stockholders of
        SOLX. The Company remains indebted to the former stockholders of SOLX
        in an aggregate amount of up to $10,000,000 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 2008. Our currently anticipated
        timeline for the filing of the application for a 510(k) clearance for the
        SOLX
        Gold Shunt is based on an assumption that the FDA will permit us to submit
        6-month post-treatment data. If the FDA requires the submission of 12-month
        post-treatment data, then the application for 510(k) clearance for the SOLX
        Gold
        Shunt will likely be filed during the second half of 2009.
 
 36
  The
        acquisition of SOLX represented 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, which currently is expected to occur in early 2008.
 
 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.
 
 OcuSense’s
        objective is to complete product development of the TearLabTM test for DES by
        early 2008. 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 and currently anticipates
        seeking the 510(k) clearance during the latter half of 2008 and the CLIA
        waiver
        during the latter half of 2009.
 
 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.
 
 37
  Our
        results of operations for the three and nine months ended September 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 $423,222, $1,447,651,
        $878,073 and $1,838,025 during the three and nine months ended September
        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 September 30, 2007, $2,762,105of total unrecognized
        compensation cost related to stock options is expected to be recognized over
        a
        weighted-average period of 2.24 years.
 
 On
        February 1, 2007, we entered into a Securities Purchase Agreement (the
“Securities Purchase Agreement”) with certain institutional investors, pursuant
        to which we agreed to issue to the investors an aggregate of 6,677,333 shares
        of
        our common stock (the “Shares”) and five-year warrants exercisable into an
        aggregate of 2,670,933 shares of our common stock (the
“Warrants”).  The per share purchase price of the Shares is $1.50, and
        the per share exercise price of the Warrants is $2.20, subject to
        adjustment.  The Warrants became exercisable on August 6, 2007.
        Pursuant to the Securities Purchase Agreement, on February 6, 2007, we issued
        the Shares and the Warrants. The gross proceeds of sale of the Shares and
        the
        Warrants totaled $10,016,000 (less transaction costs of $871,215). On February
        6, 2007, we also issued to Cowen and Company, LLC a five-year warrant
        exercisable into an aggregate of 93,483 shares of our common stock (the “Cowen
        Warrant”) in part payment of the placement fee payable to Cowen and Company, LLC
        for the services it had rendered as the placement agent in connection with
        the
        sale of the Shares and the Warrants. All of the terms and conditions of the
        Cowen Warrant (other than the number of shares of our common stock into which
        it
        is exercisable) are identical to those of the Warrants. The estimated grant
        date fair value of the Cowen Warrant of $97,222 is included in the transaction
        cost of $871,215.
 
 We
          account for the Warrants and the Cowen Warrant in accordance with the
          provisions of SFAS No. 133, “Accounting for Derivative Instruments and Hedging
          Activities” (“SFAS No. 133”) along with related interpretation 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 September 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 September 30, 2007 and determined the aggregate fair value to be
          $248,797,
          a decrease of $1,803,781 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 $1,803,781 in our consolidated statements
          of operations for the nine months ended September 30, 2007 to reflect the
          decrease in the fair value of the Warrants and the Cowen Warrant at September
          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 nine months ended September 30, 2007.
 
  38
  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.
 
 On
          May
          30, 2007, TLC Vision Corporation (“TLC Vision”) and JEGC OCC Corp. (“JEGC”)
          announced that JEGC had agreed to purchase TLC Vision’s ownership stake in the
          Company, subject to certain minimum prices and regulatory limitations and
          further subject to JEGC obtaining satisfactory financing and other customary
          closing conditions. On
          June 22, 2007, JEGC purchased a portion of TLC Vision’s ownership stake in the
          Company, consisting of 1,904,762 shares, at a price of $1.05 per share.On July 3, 2007, we announced that we had entered into discussions
          with
          JEGC for the private placement of approximately $30,000,000 of shares of
          the
          Company’s common stock at a price based upon the average trading price at the
          time of purchase, subject to compliance with regulatory requirements and
          to a
          minimum purchase price of $1.05 per share. On October 15, 2007, TLC Vision
          announced that JEGC was not able to complete the purchase of TLC Vision’s
          remaining ownership stake in the Company by October 12, 2007, being the
          deadline
          previously agreed by TLC Vision and JEGC.  In making that
          announcement, TLC Vision also stated that JEGC retains a non-exclusive
          right to
          purchase TLC Vision’s remaining ownership stake in the Company, subject to the
          right of each of TLC Vision and JEGC to terminate the agreement between
          them.  It is anticipated that JEGC will gain a control position in the
          Company, if both of these transactions are completed.To date,
          our
          discussions with JEGC have not resulted in any agreement, and there can
          be no
          assurance that such discussions will result in an agreement and a successful
          transaction or that JEGC will become a source of financing for the
          Company. JEGC is
          owned by Jefferson EquiCorp Ltd. and by Greybrook Corporation, a firm controlled
          by Mr. Vamvakas.
 
 Asat
          September 30, 2007, we had
          investmentsin the aggregate principal amount of $1,925,000
          which consist
          of investments in four separate asset-backed auction rate securities yielding
          an
          average return of 6.054% per annum. However, as a result of market conditions,
          all of these investments have recently failed to settle on their respective
          settlement dates and have been reset to be settled at a future date with
          an
          average maturity of 46 days.Based on discussions with the Company’s
          advisors and the current lack of liquidity for asset-backed securities
          of this
          type, the Company has concluded that the carrying value of these investments
          was
          higher than its fair value as of September 30, 2007. Accordingly, these
          auction
          rate securities have been recorded at their estimated fair value of $1,278,750.
          The Company considers this to be a temporary reduction in value, accordingly,
          the unrealized loss associated with these auction rate securities of $646,250
          has been reported in other comprehensive loss for the nine months ended
          September 30, 2007. Although the Company continues to receive payment of
          interest earned on these securities, the Company does not know at the present
          time when it will be able to convert these investments into cash.
 Accordingly, management has classified these investments as a non-current
          asset on its consolidated balance sheet as of September 30, 2007. Management will
          continue to
          closely monitor these investments for future indications of further impairment.The illiquidity
          of these investments may have an adverse impact on the length of time during
          which the Company currently expects to be able to sustain its operations
          in the
          absence of an additional capital raise by the Company.
 
 We
          considered our announcement of the indefinite suspension of the Company’s RHEOTM
System clinical development program for Dry AMD to be a significant event
          which
          may affect the carrying value of our intangible assets. This led to an
          analysis
          of our intangible assets and resulted in our reporting an impairment charge
          to
          intangible assets of $20,923,028 during the third quarter of 2007. We also
          believe that we may not be able to sell or utilize the components of the
          RHEOTM
System prior to their expiration dates or before the technologies become
          outdated, as the case may be. Accordingly, we set up a provision for
          obsolescence of $2,782,494 for treatment sets and OctoNova pumps that are
          unlikely to be utilized prior to their expiration dates, in the case of
          treatment sets, or before the technologies become outdated. In addition,
          wehave recorded
          a reduction to
          the carrying values of (i) certain of our medical equipment used in
          the clinical trials of the RHEOTM System of $431,683 and (ii) certain of our
          patents and trademarks related to the RHEOTM System of $190,873. No other
          adjustments were made as a result of the November 1, 2007 announcement
          that
          impacts the financial results as of September 30, 2007.
 
 39
 **RECENT
          DEVELOPMENTS**
  On
          September 19, 2007, we announced that we had received a letter from NASDAQ
          on
          September 18, 2007, indicating that, for the last 30 consecutive business
          days,
          the bid price of the Company's common stock had closed below the minimum
          $1.00
          per share requirement for continued inclusion under Marketplace Rule 4450(a)(5)
          (the "Minimum Bid Price Rule"). Therefore, in accordance with Marketplace
          Rule
          4450(e)(2), the Company has been  provided with 180 calendar days, or
          until March 17, 2008, to regain compliance. The NASDAQ letter also stated
          that,
          if the Company does not regain compliance with the Minimum Bid Price Rule
          by
          March 17, 2008, NASDAQ staff will provide written notification that the
          Company's securities will be delisted. At that time, the NASDAQ Marketplace
          Rules would permit the Company to appeal the NASDAQ staff's determination
          to
          delist its securities to a NASDAQ Listing Qualifications Panel. The NASDAQ
          Marketplace Rules would also permit the Company to make an application
          to
          transfer its securities to The NASDAQ Capital Market if the Company's securities
          satisfy the requirements for initial inclusion set forth in Marketplace
          Rule
          4310(c), other than the minimum bid price requirement of Marketplace Rule
          4310(c)(4). If such an application is approved, the NASDAQ Marketplace
          Rules
          would afford the Company an additional 180 calendar days to comply with
          the
          Minimum Bid Price Rule while on The NASDAQ Capital Market. The NASDAQ letter
          of
          September 18, 2007 has no effect on the listing of the Company's common
          stock at
          this time.
 
 On
          October 9, 2007, we announced that our Board of Directors has authorized
          management and the Company’s advisors to explore the full range of strategic
          alternatives available to enhance shareholder value. These alternatives
          may
          include, but are not limited to, the raising of capital through the sale
          of
          securities, one or more strategic alliances and the combination, sale or
          merger
          of all or part of the Company. In making the announcement, the Company
          stated that there can be no assurance that the exploration of strategic
          alternatives will result in a transaction. If we are not
          successful at
          raising additional capital, the Company will not have sufficient cash to
          support
          its operations beyond early 2008.
 
 In
          light
          of both the Company’s financial position as at September 30, 2007 and the
          Company’s current financial position, on November 1, 2007, we announced an
          indefinite suspension of the RHEOTM System clinical development program
          for Dry AMD.  That decision was made following a comprehensive
          review of the respective costs and development timelines associated with
          the
          products in the Company’s portfolio and, in particular, the fact that, if the
          Company is unable to raise additional capital, it will not have sufficient
          cash
          to support its operations beyond early 2008. As a result of
          this review,
          our Board of Directors determined that it would be advisable to suspend
          indefinitely the RHEOTM System clinical development program in order to conserve
          as much cash as possible while the Company continues its capital-raising
          efforts.
 
  **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 nine months ended September 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.
 40
  *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 the effect
          of the
          changes of control is performed, a portion of the income tax benefits recognized
          to date may be affected.
 
 All
          federal income tax returns for the Company and its subsidiaries remain
          open
          since their respective dates of incorporation due to the existence of net
          operating losses.  The Company and its subsidiaries have not
          been, nor are they currently, under examination by the Internal Revenue
          Service or the Canada Revenue Agency.
 
 State
          and
          provincial income tax returns are generally subject to examination for
          a period
          of between three and five years after their filing.  However, due to
          the existence of net operating losses, all state income tax returns of
          the
          Company and its subsidiaries since their respective dates of incorporation
          are
          subject to 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.
 
  41
  **RESULTS
        OF OPERATIONS**
  **Revenues,
        Cost of Sales and Gross Margin**
  **Three
                  Months Ended September 30,**
              
              **Nine
                  Months Ended September 30,****2007**
              
              **2006**
              
              **Change**
              
              
              **2007**
              
              **2006**
              
              **Change****$**
              
              **$**
              
              
              
              
              **$**
              
              **$**RevenuesRetina
                  revenue
              
              —
              
              53,144
              
              (100)%
              
              
              90,000
              
              135,859
              
              (34)%Glaucoma
                  revenue
              
              15,225
              
              32,300
              
              (53)%
              
              
              176,125
              
              32,300
              
              445%15,225
              
              85,444
              
              (82)%
              
              
              266,125
              
              168,159
              
              58%Cost
                  of salesRetina
                  cost of sales
              
              2,287,411
              
              105,358
              
              2,071%
              
              
              2,352,807
              
              1,759,675
              
              34%Glaucoma
                  cost of sales
              
              19,674
              
              12,047
              
              63%
              
              
              132,630
              
              12,047
              
              1,001%2,307,085
              
              117,405
              
              1,865%
              
              
              2,485,437
              
              1,771,722
              
              40%Gross
                  marginRetina
                  gross margin (loss)
              
              (2,287,411)
              
              (52,214)
              
              4,281%
              
              
              (2,262,807)
              
              (1,623,816)
              
              (39)%Percentage
                  of retina revenue
              
              N/M
              
              (98)%
              
              N/M
              
              
              (2,514)%
              
              (1,195)%
              
              (1,319)
                  ptsGlaucoma
                  gross margin (loss)
              
              (4,449)
              
              20,253
              
              (122)%
              
              
              43,495
              
              20,253
              
              115%Percentage
                  of glaucoma revenue
              
              (29)%
              
              63%
              
              (92)
                  pts
              
              
              25%
              
              63%
              
              (38)
                  ptsTotal
                  gross margin (loss)
              
              (2,291,860)
              
              (31,961)
              
              (7,071)%
              
              
              (2,219,312)
              
              (1,603,563)
              
              (38)%Percentage
                  of total revenue
              
              (15,053)%
              
              (37)%
              
              (15,016)
                  pts
              
              
              (834)%
              
              (1,180)%
              
              346
                  pts*N/M
                  – Not meaningful
 
 ***Revenues***
  **Retina
        Revenue**
  Retina
        revenue consists of revenue generated from the sale of components of the
        RHEOTM
System.
 
 During
          the three months ended September 30, 2007, we sold a total of 204 treatment
          sets, at a price of $200 per treatment set, to Veris. The
          sale of these
          treatment sets was not recognized as revenue during thethree-month
          period based on Veris’ payment history with the Company and the new 180-day
          payment terms agreed by Veris and us in March 2007. In October 2007, wemet with the
          management of Verisandbased
          on discussions with Veris, we believe that Veris will not be able to meet
          its
          financial obligations to the Company.Therefore,
          during
          thethree
          months ended
          September 30, 2007,
          the Company
          recorded an allowance for doubtful accountsagainst
          thetotalamount due from Verisfor
          the purchase of
          the treatment sets. During
          the three months ended September 30, 2006, we sold a total of 451 treatment
          sets
          to Veris for a total amount of $90,200. Of this amount, $51,800 was recognized
          in revenue during the three months ended September 30, 2006 as payment
          was
          received by the Company in advance of shipment of the treatment sets. The
          balance of $38,400 was included in deferred revenue as at September 30,
          2006 as
          payment was yet to be received by the Company.
 
 Revenues
        for the nine months ended September 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 nine months ended
        September 30, 2006 includes the sale of 667 treatment sets to Veris at a
        negotiated price of $200 per treatment set as payment was received by the
        Company in advance of shipment of the treatment sets.
 
 On
        November 1, 2007, we announced an indefinite suspension of the RHEOTM System
        clinical development program for Dry AMD. At this time, we do not know if
        we
        will be able to resume the RHEOTM System clinical development program, nor
        at this time, do we know if we will be able to continue to generate revenue
        from
        the sale of the components of the RHEOTM System.
 
  42
  **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 nine months ended
        September 30, 2007 therefore includes the sale of components of the SOLX
        Glaucoma System during the three- and nine-month period. However, revenue
        for
        the three and nine months ended September 30, 2006 includes the sale of
        components of the SOLX Glaucoma System for just the month of September
        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. On November 1, 2007, we announced an indefinite suspension of the RHEOTM
System clinical development program for Dry AMD following a comprehensive
        review
        of the respective costs and development timelines associated with the products
        in the Company’s portfolio and in view of the Company’s current financial
        position. Accordingly, we have written down the value of our commercial
        inventory of OctoNova pumps to nil as of September 30, 2007 since the
        Company may not be able to sell or utilize these pumps before their technologies
        become outdated. Included in cost of sales for the three and nine months
        ended
        September 30, 2007, is a charge of $2,261,705 which reflects the write-down
        of
        the value of these pumps to nil as of September 30, 2007.
 
 Cost
        of
        sales for the three months ended September 30, 2007 includes royalty fees
        payable to Dr. Brunner and Mr. Stock and a charge of $2,261,705 which reflects
        the write-down of the value of our commercial inventory of pumps to nil as
        of
        September 30, 2007. Included in cost of sales for the three months ended
        September 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.
 
 Cost
        of
        sales for the nine months ended September 30, 2007 includes royalty fees
        payable
        to Dr. Brunner and Mr. Stock, freight charges on the treatment sets sold
        and
        delivered to Macumed AG and Veris during the nine-month period and a charge
        of
        $2,261,705 which reflects the write-down of the value of our commercial
        inventory of pumps to nil as of September 30, 2007. Included in cost of sales
        for the nine months ended September 30, 2006 are royalty fees payable to
        Dr.
        Brunner and Mr. Stock, cost of sale of the treatment sets sold during the
        nine-month period and a charge of $1,625,000 which reflects the write-down
        of
        the treatment sets to their then net realizable value. In addition, during
        the
        nine-month period ended September 30, 2006, Veris returned four pumps which
        had
        been sold to it in December 2005. In fiscal 2005, we had recorded an inventory
        loss associated with all sales made to Veris in December 2005 and did not
        recognize revenue due to our anticipation that Veris may not return the products
        shipped to it and would not be able to pay for the amounts invoiced.
        Accordingly, the cost of the four pumps returned by Veris, valued at $85,058,
        was used to reduce the cost of sales in the period. There was no comparable
        reduction of expense during the nine months ended September 30,
        2007.
 
  43
  **Glaucoma
        Cost of Sales**
  Cost
        of
        sales includes the cost of the components of the SOLX Glaucoma System sold
        during the three- and nine-month period ended September 30, 2007. Cost of
        sales
        for the three and nine months ended September 30, 2006 includes the cost
        of the
        components of the SOLX Glaucoma System sold in the month of September 2006
        as we
        completed the acquisition of SOLX on September 1, 2006.
 
 ***Gross
        Margin***
  **Retina
        Gross Margin (Loss)**
  Retina
        gross margin on sales was a loss of $2,287,411 for the three months ended
        September 30, 2007 as compared with a loss of $52,214 during the comparative
        prior year period due primarily to the write-down of our commercial inventory
        of
        pumps to nil as of September 30, 2007.
 
 During
        the nine months ended September 30, 2007 and 2006, gross margin on sales
        was
        also a loss of $2,262,807 and $1,623,816, respectively, due mainly to the
        write-down of the value of our commercial inventory during the comparative
        periods, offset by revenue from the sale of treatment sets to our customers.
        In
        addition, the reported loss for the nine months ended September 30, 2006
        was
        offset in part by the value of the four pumps returned by Veris during the
        period. There was no comparable reduction of cost during the nine months
        ended
        September 30, 2007.
 
 **Glaucoma
        Gross Margin**
  Gross
        margin on the sale of the components of the SOLX Glaucoma System was a loss
        of
        $4,449 and a profit of $43,495 during the three and nine months ended September
        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 September 30,**
              
              **Nine
                  Months Ended September 30,****2007**
              
              **2006**
              
              **Change**
              
              
              **2007**
              
              **2006**
              
              **Change****$**
              
              **$**
              
              
              
              
              **$**
              
              **$**General
                  and administrative
              
              3,276,981
              
              2,314,344
              
              42%
              
              
              10,120,119
              
              7,064,709
              
              43%Clinical
                  and regulatory
              
              3,852,115
              
              1,071,380
              
              260%
              
              
              9,345,536
              
              4,018,240
              
              133%Sales
                  and marketing
              
              687,429
              
              505,088
              
              36%
              
              
              2,195,392
              
              1,396,422
              
              57%Impairment
                  of intangible asset
              
              20,923,028
              
              —
              
              N/M
              
              
              20,923,028
              
              —
              
              N/MImpairment
                  of goodwill
              
              —
              
              —
              
              —
              
              
              —
              
              65,945,686
              
              (100)%Restructuring
                  charges
              
              —
              
              —
              
              —
              
              
              —
              
              819,642
              
              (100)%**28,739,553**
              
              **3,890,812**
              
              **639%**
              
              
              **42,584,075**
              
              **79,244,699**
              
              **(46)%***N/M
                  – Not meaningful
 
 ***General
        and Administrative Expenses***
  General
        and administrative expenses increased by $962,637 during the third quarter
        of
        2007, as compared with the corresponding period in fiscal 2006, due to an
        increase of $655,961 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 $520,761 during the three
        months ended September 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. In addition, professional fees and consultants’ fees
        also increased by $45,509 during the three months ended September 30, 2007
        as
        compared with the three months ended September 30, 2006. General and
        administrative expenses for the three months ended September 30, 2007 also
        include a charge of $190,873 which reflects the reduction to the carrying
        value
        of certain of the Company’s patents and trademarks related to the RHEOTM System
        as a result of our indefinite suspension of the RHEOTM System clinical
        development program for Dry AMD. There was no comparative charge during the
        three months ended September 30, 2006. These increases in cost were partially
        offset by the decrease in stock-based compensation expense of $458,916 due
        to
        the expense associated with the grant of options to an employee in lieu of
        salaried compensation and to directors in lieu of cash payment of their annual
        fees for board and committee memberships during the three months ended September
        30, 2006. There was no comparable expense during the three months ended
        September 30, 2007.
 
 44
  General
        and administrative expenses increased by $3,055,410 during the nine months
        ended
        September 30, 2007, as compared with the corresponding prior year period
        due to
        an increase of $2,381,232 in amortization of intangible asset
        expense. Employee and related travel and administrative costs also
        increased by $1,274,169 during the nine months ended September 30, 2007.
        General
        and administrative expenses for the nine months ended September 30, 2007
        also
        include a charge of $190,873 which reflects the reduction to the carrying
        value
        of certain of the Company’s patents and trademarks related to the RHEOTM System.
        There was no comparative charge during the nine months ended September 30,
        2006.
        These increases were partially offset by a decrease in stock-based compensation
        expense of $482,235 due to the expense associated with the grant of options
        to
        an employee in lieu of salaried compensation and the re-pricing of then
        out-of-the-money stock options of the Company during the nine months ended
        September 30, 2006. There was no comparable expense during the nine months
        ended September 30, 2007.  Professional fees also decreased by
        $285,931 during the nine-month period ended September 30, 2007 as compared
        with
        the corresponding period in fiscal 2006.
 
 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 $2,780,735 during the three months ended
        September 30, 2007, as compared with the corresponding prior year period,
        due to
        increased clinical trial expenses associated with the RHEO-AMD trial of
        $415,697. The RHEO-AMD trial was suspended indefinitely on November 1, 2007.
        Accordingly, we have recorded a write-down to the value of our inventory
        of
        treatment sets used for the trial and also written down the carrying value
        of
        certain of our medical equipment used in the trial. Clinical and regulatory
        expenses for the three months ended September 30, 2007 therefore include
        a
        charge of $942,309 which reflects the write-down of our inventory and certain
        of
        our medical equipment as of September 30, 2007. There was no comparative
        expense
        during the three months ended September 30, 2006. SOLX’s clinical and regulatory
        expenses increased by $663,195 and OcuSense’s product development and regulatory
        costs also increased by $1,166,101 during the three months ended September
        30,
        2007 as compared with the comparative period in 2006. We acquired SOLX and
        50.1%
        of the capital stock of OcuSense, measured on a fully diluted basis, on
        September 1 and November 30, 2006, respectively. Therefore, clinical and
        regulatory expenses for the three months ended September 30, 2006 include
        SOLX’s
        cost for the month of September 2006 and no cost for OcuSense. These increases
        in cost during the three months ended September 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 $408,088 since 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 nine months ended September 30, 2007, as compared with the nine months
        ended
        September 30, 2006, the increase in clinical and regulatory expenses of
        $5,327,296 is due to increased clinical trial expenses associated with
        the RHEO-AMD trial of $1,522,933, an increase in SOLX’s clinical and regulatory
        expenses of $2,028,445 and OcuSense’s product development and regulatory costs
        of $2,894,202 during the period. Clinical and regulatory expenses for the
        nine-month period ended September 30, 2007 also include a charge of $942,309
        which reflects the write-down of our inventory and certain of our medical
        equipment as of September 30, 2007. There was no comparative expense during
        the
        three months ended September 30, 2006. However, costs associated with the
        MIRA-1
        trial, the LEARN trials and other related clinical trials decreased by
        $2,120,906 since 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.
 
 45
  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 if we continue the suspended 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 $182,341 during the three months ended September
        30, 2007, as compared with the prior period in fiscal 2006, due in part to
        an
        increase in employee, travel and related administrative costs of $102,549
        during the three months ended September 30, 2007 necessitated by 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.  Marketing and advertising expenses also increased by $64,885
        due primarily to costs associated with trade shows, physician education and
        training and other marketing public relations in connection with the marketing
        of the SOLX Glaucoma System in Europe during the three-month period ended
        September 30, 2007.
 
 Sales
        and
        marketing expenses increased by $798,970 during the nine months ended September
        30, 2007, as compared with the prior period in fiscal 2006, due to an increase
        in SOLX’s sales and marketing expenses of $455,808 and increased employee
        and related and travel and administrative costs of $430,426. These increases
        in
        cost during the nine months ended September 30, 2007 were offset in part
        by the
        decrease in the RHEOTM System marketing expenses of $127,316.
 
 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 our products among eye care
        professionals.
 
 ***Impairment
        of Intangible Asset***
  In
        light
        of both the Company’s financial position as at September 30, 2007 and the
        Company’s current financial position, on November 1, 2007, the Company announced
        an indefinite suspension of the RHEOTM System clinical development program
        for Dry AMD.  That decision was made following a comprehensive
        review of the respective costs and development timelines associated with
        the
        products in the Company’s portfolio and, in particular, the fact that, if the
        Company is unable to raise additional capital, it will not have sufficient
        cash
        to support its operations beyond early 2008. Accordingly, in accordance
        with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived
        Assets”, management was required to re-assess whether the carrying value
        of the Company’s intangible assets was recoverable as of September 30,
        2007. Based on management’s estimates of undiscounted cash flows associated with
        these intangible assets, the Company concluded that the carrying value of
        the
        intangible assets was not recoverable as of September 30, 2007. Accordingly,
        the
        Company recorded an impairment charge of $20,923,028 during the three months
        ended September 30, 2007 to record the intangible assets at their fair value
        as
        of September 30, 2007. There was no comparable charge in the three- and
        nine-month periods ended September 30, 2006.
 
 ***Impairment
        of Goodwill***
  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 during the nine months ended September 30, 2006. The impairment
        of
        goodwill charge of $65,946,686 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 nine-month period ended September 30,
        2007.
 
  46
  ***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 nine months ended September 30, 2006. The
        Company implemented a number of structural and management changes designed
        both
        to support the continued development of the RHEOTM System and to execute the
        Company’s accelerated diversification strategy within ophthalmology. The
        restructuring charge of $819,642, recorded in the nine months ended September
        30, 2006, consists solely of severance and benefit costs related to the
        termination of a total of 12 employees at 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 nine months ended September
        30,
        2007.
 
 **Other
        Income (Expenses)**
  **Three
                  Months Ended September 30,**
              
              **Nine
                  Months Ended September 30,****2007**
              
              **2006**
              
              **Change**
              
              
              **2007**
              
              **2006**
              
              **Change****$**
              
              **$**
              
              
              
              
              **$**
              
              **$**Interest
                  income
              
              137,444
              
              368,585
              
              (63)%
              
              
              568,808
              
              1,149,739
              
              (51)%Changes
                  in fair value of warrant obligation
              
              856,969
              
              —
              
              *N/M
              
              
              1,633,700
              
              —
              
              *N/MInterest
                  and accretion expense
              
              (223,268)
              
              (77,191)
              
              (189)%
              
              
              (649,701)
              
              (77,191)
              
              (742)%Other
              
              (5,693)
              
              20,704
              
              (128)%
              
              
              (13,633)
              
              13,599
              
              (200)%Minority
                  interest
              
              703,038
              
              —
              
              *N/M
              
              
              1,747,823
              
              —
              
              *N/M**1,468,490**
              
              **312,098**
              
              **371%**
              
              
              **3,286,997**
              
              **1,086,147**
              
              **203%***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 nine months ended September
        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.
 
 ***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 became exercisable on August 6,
          2007.
          All of the terms and conditions of the Cowen Warrant (other than the number
          of
          shares of the Company's common stock into which it is exercisable) are
          identical
          to those of the Warrants. 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 September
          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 June 30, 2007 and September 30, 2007 and determined the aggregate
          fair value to be $1,105,766 and $248,797, a decrease of $946,812 and $1,803,781,
          respectively, over the initial measurement of the aggregate fair value
          of the
          Warrants and the Cowen Warrant on the date of issuance.
 47
 Changes
          in fair value of warrant obligation for the three months ended September
          30,
          2007 includes a gain of $856,969 which reflect the decrease in the fair
          value of the Warrants and the Cowen Warrant at September 30, 2007 over
          their
          fair value at June 30, 2007, the end of the Company’s previous reporting period.
          There was no comparable gain recorded in the three months ended September
          30,
          2006.
 
 Changes
          in fair value of warrant obligation for the nine months ended September
          30, 2007
          includes the net gain of $1,633,700 recorded by the Company during the
          nine-month period which reflect the decrease in the fair value of the Warrants
          and Cowen Warrant at September 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 nine
          months ended September 30, 2007. There was no comparable net gain recorded
          during the nine months ended September 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 $10,000,000
        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 nine months ended September 30, 2007
        consists primarily of the amortization of the discount on the future payment
        to
        the former stockholders of SOLX for the three- and nine-month
        periods.  There was no comparable expense in the three and nine months
        ended September 30, 2006.
 
 ***Other
        Income (Expense)***
  Other
        income (expense) for the three months ended September 30, 2007 and 2006 consists
        of foreign exchange gains and losses resulting from exchange rate fluctuations
        on the Company’s foreign currency transactions and miscellaneous tax expenses
        during the three-month periods.
 
 Other
        expense for the nine months ended September 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 a net foreign exchange loss resulting
        from exchange rate fluctuations on the Company’s foreign currency transactions
        and miscellaneous tax expenses during the nine-month period. Other income
        for
        the nine months ended September 30, 2006 consists primarily of a net foreign
        exchange gain resulting from exchange rate fluctuations on the Company’s foreign
        currency transactions net of miscellaneous tax expenses during the
        period.
 
 ***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 $703,038 and $1,747,823 for the three and
        nine
        months ended September 30, 2007, respectively, relates to the loss reported
        by
        OcuSense in which the Company has a shared interest with the minority
        stockholders of OcuSense.
 
  48
  **Recovery
        of Income Taxes**
  **Three
                  Months Ended September 30,**
              
              **Nine
                  Months Ended September 30,****2007**
              
              **2006**
              
              **Change**
              
              
              **2007**
              
              **2006**
              
              **Change****$**
              
              **$**
              
              
              
              
              **$**
              
              **$**Recovery
                  of income taxes
              
              9,902,899
              
              26,867
              
              36,759%
              
              
              15,004,750
              
              343,717
              
              4,265%
 
 ***Recovery
        of Income Taxes***
  Recovery
        of income taxes increased by $9,876,032 and $14,661,033 during the three
        and
        nine months ended September 30, 2007, respectively, as compared with the
        prior
        periods in 2006. The increase is due in part to deferred tax recovery amounts
        of
        $1,847,527 and $5,929,870 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
        $13.3
        million associated with the recognition of the deferred tax asset from the
        availability of net operating losses in the United States which may be utilized
        to reduce taxes in future years. The benefits associated with the balance
        of the
        net operating losses are subject to a full valuation allowance since it is
        not
        more likely than not that these losses can be utilized in future years. A
        portion of the Company’s net operating losses may however be subject to annual
        limitations as a result of the Company’s initial public offering and prior
        changes of control. Accordingly, until a formal analysis of the effect of
        the
        changes of control is performed, a portion of the income tax benefits recognized
        to date may be affected.
 
 Recovery
        of income taxes for the three and nine months ended September 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
        nine
        months ended September 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. In addition, during the three and
        nine
        months ended September 30, 2007, the Company fully amortized the balance
        of the
        deferred tax liability of $7,529,390 associated with the intangible asset
        which
        was impaired as of September 30, 2007. The deferred tax liability totaling
        $13,313,873 as of September 30, 2007 is being amortized over an average
        period of 8.96 years, the estimated remaining weighted-average useful life
        of
        the intangible assets.
 
 **Cumulative
        Effect of a Change in Accounting Principle**
  **Three
                  Months Ended September 30,**
              
              **Nine
                  Months Ended September 30,****2007**
              
              **2006**
              
              **Change**
              
              
              **2007**
              
              **2006**
              
              **Change****$**
              
              **$**
              
              
              
              
              **$**
              
              **$**Cumulative
                  effect of a change in accounting principle
              
              —
              
              —
              
              —
              
              
              —
              
              107,045
              
              (100)%
 
 ***Cumulative
        Effect of a Change in Accounting Principle***
  The
        cumulative effect of a change in accounting principle reflects the impact
        of our
        estimated forfeitures of outstanding stock option awards as of January 1,
        2006. On January 1, 2006, the effective date of adopting SFAS No. 123R, we
        were required to estimate the number of forfeitures of our outstanding awards
        as
        of the effective date. Consolidated balance sheet amounts related to any
        compensation cost for these estimated forfeitures previously recognized in
        prior
        periods before the adoption of SFAS No. 123R have to be eliminated and
        recognized in income as the cumulative effect of a change in accounting
        principle as of the effective date. There was no comparable expense in the
        nine
        months ended September 30, 2007.
 
  49
  **LIQUIDITY
        AND CAPITAL RESOURCES**
 
 **September
                  30,  2007**
              
              **December
                  31, 2006**
              
              **Change****$**
              
              **$**
              
              **$**Cash
                  and cash equivalents
              
              6,144,946
              
              5,740,697
              
              404,249Short-term
                  investments
              
              75,000
              
              9,785,000
              
              (9,710,000)6,219,946
              
              15,525,697
              
              (9,305,751)Percentage
                  of total assets
              
              11%
              
              17%
              
              (6)
                  ptsWorking
                  capital
              
              (398,666)
              
              13,539,026
              
              (13,937,692)
 
 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 if its suspension is
        reversed 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 $10,000,000 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. We currently expect this amount to
        become
        due and payable in early 2008.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 only until early 2008.
 
 **Changes
        in Cash Flows**
  **Nine
                  Months Ended September 30,****2007**
              
              **2006**
              
              **Change****$**
              
              **$**
              
              **$**Cash
                  used in operating activities
              
              (13,301,135)
              
              (10,853,206)
              
              (2,447,929)Cash
                  provided by investing activities
              
              4,503,649
              
              7,283,565
              
              (2,779,916)Cash
                  provided by financing activities
              
              9,201,735
              
              251,135
              
              8,950,600Net
                  increase (decrease) in cash and cash equivalents during the
                  period
              
              404,249
              
              (3,318,506)
              
              3,722,755
 
  50
  ***Cash
        Used in Operating Activities***
  Net
        cash
        used to fund our operating activities during the nine months ended September
        30,
        2007 was $13,301,135.  Net loss during the nine-month period was
        $26,511,640. The non-cash charges which comprise a portion of the net loss
        during that period consisted primarily of the impairment of goodwill and
        other intangible asset of $20,923,028, amortization of intangible assets,
        fixed
        assets, patents and trademarks and accretion expense of $5,477,733 netted
        by
        applicable deferred tax liability of $15,004,750 and the change in the fair
        value of warrant obligation net of warrant expense of $1,633,700. Additional
        non-cash charges consist of the write-down of inventory of $2,782,494 and
        $1,447,651 in stock-based compensation charges netted by income from minority
        interest of $1,747,823.
 
 The
        net
        change in non-cash working capital balances related to operations for the
        nine
        months ended September 30, 2007 and 2006 consists of the following:
 
 **Nine
                  months ended**
                **September
                  30,****2007**
              
              
              **2006****$**
              
              
              **$**Due
                  to related party
              
              
              —
              
              
              (5,065
              )Amounts
                  receivable, net
              
              
              (197,984
              )
              
              297,176Inventory
              
              
              (61,784
              )
              
              (1,117,354
              )Prepaid
                  expenses
              
              
              (46,787
              )
              
              313,269Deposit
              
              
              (10,600
              )
              
              (5,551
              )Other
                  current assets
              
              
              17,600
              
              
              —Accounts
                  payable
              
              
              243,097
              
              
              (930,706
              )Accrued
                  liabilities
              
              
              938,684
              
              
              (832,840
              )Deferred
                  revenue
              
              
              —
              
              
              38,400Due
                  to stockholders
              
              
              83,646
              
              
              (36,995
              )965,872
              
              
              (2,279,666
              )
 
 ·
              Amounts
                  receivable, net increased due to SOLX 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 nine-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.
 ·
              Due
                  to stockholders increased due to additional amounts owed to TLC
                  Vision for
                  its payment of benefits of certain employees of the Company and
                  for
                  computer and administrative
                  support.
 
 ***Cash
        Provided by Investing Activities***
  Net
        cash
        provided by investing activities for the nine months ended September 30,
        2007 is
        $4,503,649 and consists of the net sale of short-term investments of
        $7,785,000 offset in part by the payment of $3,000,000 to the former
        stockholders of SOLX in connection with the payment of the purchase price,
        cash
        in the amount of $190,341 used to acquire fixed assets and cash in the amount
        of
        $91,010 used to protect and maintain patents and trademarks.
 
 Net
        cash
        provided by investing activities for the nine months ended September 30,
        2006
        was $7,283,565 and resulted from cash provided from the net sale of short-term
        investments of $17,722,021. Cash used in investing activities during the
        period
        also consisted of cash in the amount of $244,292 used to acquire fixed assets
        and cash in the amount of $102,137 used to protect and maintain patents and
        trademarks. Additional cash used in investing activities included cash of
        $7,861,661 paid by the Company, including costs of acquisition, to acquire
        SOLX
        net of cash acquired from SOLX of $34,719. In addition, the Company advanced
        a
        total of $2,265,085 to SOLX to support its operations prior to the
        acquisition.
 
 51
  ***Cash
        Provided by Financing Activities***
  Net
        cash
        provided by financing activities for the nine months ended September 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 nine months ended September 30,
        2006 of
        $251,135 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 only until early 2008.
 
 Asat
          September 30, 2007, we had
          investmentsin the aggregate principal amount of $1,925,000
          which consist
          of investments in four separate asset-backed auction rate securities yielding
          an
          average return of 6.054% per annum. However, as a result of market conditions,
          all of these investments have recently failed to settle on their respective
          settlement dates and have been reset to be settled at a future date with
          an
          average maturity of 46 days.Based on discussions with the Company’s
          advisors and the current lack of liquidity for asset-backed securities
          of this
          type, the Company has concluded that the carrying value of these investments
          was
          higher than its fair value as of September 30, 2007. Accordingly, these
          auction
          rate securities have been recorded at their estimated fair value of $1,278,750.
          The Company considers this to be a temporary reduction in value, accordingly,
          the unrealized loss associated with these auction rate securities of $646,250
          has been reported in other comprehensive loss for the nine months ended
          September 30, 2007. Although the Company continues to receive payment of
          interest earned on these securities, the Company does not know at the present
          time when it will be able to convert these investments into cash.
 Accordingly, management has classified these investments as a non-current
          asset on its consolidated balance sheet as of September 30, 2007. Management will
          continue to
          closely monitor these investments for future indications of further
          impairment.The
          illiquidity of these
          investments may have an adverse impact on the length of time during which
          the
          Company currently expects to be able to sustain its operations in the absence
          of
          an additional capital raise by the Company.
 
 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.
 
 52
  Our
        long-term 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, assuming the Company is
                  able to resume the RHEOTM System clinical development
                  program;
 ·
              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, assuming
                  the
                  Company is able to resume the RHEOTM System clinical development
                  program;
 ·
              our
                  ability to continue to sell the RHEOTM System in Canada, assuming the
                  Company is able to resume the RHEOTM System clinical development
                  program;
 ·
              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 (assuming the Company is able to resume the RHEOTM System
                  clinical development program), 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 (assuming the Company is able to resume the RHEOTM System
                  clinical development program), 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.
 
 On
        May
        30, 2007, TLC Vision and JEGC announced that JEGC had agreed to purchase
        TLC
        Vision’s ownership stake in the Company, subject to certain minimum prices and
        regulatory limitations and further subject to JEGC obtaining satisfactory
        financing and other customary closing conditions. On June 22, 2007, JEGC
        purchased a portion of TLC Vision’s ownership stake in the Company, consisting
        of 1,904,762 shares, at a price of $1.05 per share. On July 3, 2007, we
        announced that we had entered into discussions with JEGC for the private
        placement of approximately $30,000,000 of shares of the Company’s common stock
        at a price based upon the average trading price at the time of purchase,
        subject
        to compliance with regulatory requirements and to a minimum purchase price
        of
        $1.05 per share.  On October 15, 2007, TLC Vision announced that JEGC
        was not able to complete the purchase of TLC Vision’s remaining ownership stake
        in the Company by October 12, 2007, being the deadline previously agreed
        by TLC
        Vision and JEGC.  In making that announcement, TLC Vision also stated
        that JEGC retains a non-exclusive right to purchase TLC Vision’s remaining
        ownership stake in the Company, subject to the right of each of TLC Vision
        and
        JEGC to terminate the agreement between them.  To date, our
        discussions with JEGC have not resulted in any agreement, and there can be
        no
        assurance that such discussions will result in an agreement and a successful
        transaction or that JEGC will become a source of financing for the
        Company.
 
 On
          October 9, 2007, we announced that our Board of Directors has authorized
          management and the Company’s advisors to explore the full range of strategic
          alternatives available to enhance shareholder value. These alternatives
          may
          include, but are not limited to, the raising of capital through the sale
          of
          securities, one or more strategic alliances and the combination, sale or
          merger
          of all or part of the Company. In making the announcement, the Company
          stated that there can be no assurance that the exploration of strategic
          alternatives will result in a transaction. If we are not
          successful at
          raising additional capital, the Company will not have sufficient cash to
          support
          its operations beyond early 2008.
 
 In
          light
          of both the Company’s financial position as at September 30, 2007 and the
          Company’s current financial position, on November 1, 2007, we announced an
          indefinite suspension of the RHEOTM System clinical development program
          for Dry AMD.  That decision was made following a comprehensive
          review of the respective costs and development timelines associated with
          the
          products in the Company’s portfolio and, in particular, the fact that, if the
          Company is unable to raise additional capital, it will not have sufficient
          cash
          to support its operations beyond early 2008. As a result of this review,
          our Board of Directors determined that it would be advisable to suspend
          indefinitely the Company’s RHEOTM System clinical development program in order to
          conserve as much cash as possible while the Company continues its
          capital-raising efforts.  There can be no assurance that the Company’s
          capital-raising efforts will be successful.
 
  53
  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 if we will be able
        to
        resume the RHEOTM System clinical development program.  Nor, at this
        time, do we know when, if ever, we can expect to begin to generate revenues
        from
        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. Even assuming
        that we succeed in securing short-term financing to enable us to continue
        our
        operations beyond early 2008, 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.
 
 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.
  54
  **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 nine-month period ended September 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 thenine-month
        period endedSeptember 30,
        2007, there were no changes in our
        internal control over financial reporting that havematerially affected, orarereasonably likely to materially
        affect, our internal control over financial reporting. The financial reporting
        for thenine-month
        period endedSeptember 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.
 
  55
  
 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
 
 None.
 
 ITEM
                  3.
              DEFAULTS
                  UPON SENIOR SECURITIES
 
 There
        has
        not been any default upon our senior securities.
 
 ITEM
                  4.
              SUBMISSION
                  OF MATTERS TO A VOTE OF SECURITY
                  HOLDERS
 
 None.
 
 ITEM
                  5.
              OTHER
                  INFORMATION
 
 None.
  56
  ITEM
                  6.
              EXHIBITS
 
 Index
        to Exhibits
  10.1
              First
                  Amendment to Series A Preferred Stock Purchase Agreement, dated
                  October
                  29, 2007, between OcuSense, Inc. and the Registrant.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.
  57
  In
        accordance with the requirements of the Exchange Act, the registrant caused
        this
        report to be signed on its behalf by the undersigned, hereunto duly
        authorized.
 
 
 **OCCULOGIX,
                    INC.**Date:             November
                    9, 2007
              By:
              /s/ Elias
                    VamvakasChief
                    Executive Officer
 
 
  
 
  
     58