**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:   **March
        31, 2006**
 
 (
                  )
              **TRANSITION
                  REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
                  ACT**
 
 For
        the
        transition period from _______________ to _______________
 
 Commission
        file number: 000-51030
 
 
 **OccuLogix,
        Inc.**
 (Exact
        name of registrant as
 specified
        in its charter)
 **Delaware**
              
              **59
                  343 4771**(State
                  or other jurisdiction of incorporation or organization)
              
              (IRS
                  Employer Identification No.)
 
 **2600
        Skymark Avenue, Unit 9, Suite 201, Mississauga, Ontario L4W
        5B2**
 (Address
        of principal executive offices)
 
 **(905)
        602-0887**
 (Registrant’s
        telephone number)
 
 Check
        whether the registrant (1) filed all reports required to be filed by Section
        13
        or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
        (or for such shorter period that the registrant was required to file such
        reports), and (2) has been subject to such filing requirements for the past
        90
        days.  Yes **X**   No
 
 Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer. See definition of “accelerated
        filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
        one):
 
 Large
                  accelerated filer
              Accelerated
                  filerX
              Non-accelerated
                  filer
 Indicate
        by check mark whether the registrant is a shell company as defined in Rule
        12b-2
        of the Exchange Act. (Check one):  Yes  No  X
 
 State
        the
        number of shares outstanding of each of the registrant’s classes of common
        equity, as of the latest practical date: 42,186,579
        as of May 9, 2006
 
 
  1
   Special
        Note Regarding Forward-Looking Statements
 
 
 
 **PART
                  I.**
              **FINANCIAL
                  INFORMATION**Item
                  1.
              Consolidated
                  Financial StatementsItem
                  2.
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  OperationsItem
                  3.
              Quantitative
                  and Qualitative Disclosures about Market RiskItem
                  4.
              Controls
                  and Procedures**PART
                  II.**
              **OTHER
                  INFORMATION**Item
                  1.
              Legal
                  ProceedingsItem
                  2.
              Unregistered
                  Sales of Equity Securities and Use of ProceedsItem
                  3.
              Defaults
                  upon Senior SecuritiesItem
                  4.
              Submission
                  of Matters to a Vote of Security HoldersItem
                  5.
              Other
                  InformationItem
                  6.
              Exhibits
 
  2
  
 
 **SPECIAL
        NOTE REGARDING FORWARD-LOOKING STATEMENTS**
 
 This
        Quarterly Report on Form 10-Q contains forward-looking statements relating
        to
        future events and our future performance within the meaning of Section 27A
        of
        the Securities Act of 1933, as amended, and Section 21E of the Securities
        Exchange Act of 1934, as amended. In some cases, you can identify
        forward-looking statements by terms such as “may”, “will”, “should”, “could”,
“would”, “expects”, “plans”, “intends”, “anticipates”, “believes”, “estimates”,
“projects”, “predicts”, “potential” and similar expressions intended to identify
        forward-looking statements. These statements involve known and unknown risks,
        uncertainties and other factors that may cause our actual results, performance
        or achievements to be materially different from any future results,
        performances, 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.**
   PART1.
                FINANCIAL
                    INFORMATIONITEM
                    1.
                CONSOLIDATED
                    FINANCIAL STATEMENTS
 
 
 
 
 
  4
 **OccuLogix,
              Inc.**
   **CONSOLIDATED
        BALANCE SHEETS**
 (expressed
        in U.S. dollars **)**
 (Unaudited)
 
 **March
                  31,**
                **2006**
              
              **December
                  31,**
                **2005****ASSETS****Current**Cash
                  and cash equivalents
              
              $
              14,814,326
              
              $
              9,599,950Short-term
                  investments
              
              
              21,711,346
              
              
              31,662,845Amounts
                  receivable, net
              
              
              528,929
              
              
              554,966Inventory,
                  net
              
              
              4,059,234
              
              
              4,701,464Prepaid
                  expenses
              
              
              789,736
              
              
              803,268Deposit
              
              
              11,314
              
              
              4,891Total
                  current assets
              
              
              41,914,885
              
              
              47,327,384Fixed
                  assets, net
              
              
              438,205
              
              
              470,561Patents
                  and trademarks, net
              
              
              205,231
              
              
              135,232Intangible
                  asset, net
              
              
              23,498,028
              
              
              23,927,195Goodwill
              
              
              65,945,686
              
              
              65,945,686**Total
                  assets**
              
              $
              132,002,035
              
              $
              137,806,058**LIABILITIES
                  AND STOCKHOLDERS’ EQUITY****Current**Accounts
                  payable
              
              $
              100,497
              
              $
              522,520Accrued
                  liabilities
              
              
              2,241,098
              
              
              2,226,619Due
                  to related party
              
              
              26,926
              
              
              5,065Due
                  to stockholders
              
              
              185,565
              
              
              158,233Total
                  current liabilities
              
              
              2,554,086
              
              
              2,912,437Deferred
                  tax liability
              
              
              8,694,271
              
              
              8,853,062Total
                  liabilities
              
              
              11,248,357
              
              
              11,765,499**Stockholders’
                  equity**Capital
                  stockCommon
                  stock
              
              
              42,187
              
              
              42,086Par
                  value of $0.001 per shareAuthorized:
                  75,000,000; Issued and outstanding:March
                  31, 2006 - 42,186,579; December 31, 2005 - 42,085,853Additional
                  paid-in capital
              
              
              337,422,548
              
              
              336,977,578Accumulated
                  deficit
              
              
              (216,711,057
              )
              
              (210,979,105
              )Total
                  stockholders’ equity
              
              
              120,753,678
              
              
              126,040,559**Total
                  liabilities and stockholders’ equity**
              
              $
              132,002,035
              
              $
              137,806,058
 *See
        accompanying notes to interim consolidated financial
        statements*
 
  5
 **OccuLogix,
              Inc.**
   
 
 **CONSOLIDATED
        STATEMENTS OF OPERATIONS**
 (expressed
        in U.S. dollars)
 (Unaudited)
 **Three
                  months ended,****March
                  31,****2006**
              
              **2005**RevenuesSales
                  to unrelated parties
              
              $
              —
              
              $
              340,200Sales
                  to related parties
              
              
              —
              
              
              63,539Total
                  revenues
              
              
              —
              
              
              403,739Cost
                  of goods soldCost
                  of goods sold to unrelated parties
              
              
              1,625,000
              
              
              242,455Cost
                  of goods sold to related parties
              
              
              —
              
              
              32,479Royalty
                  costs
              
              
              25,000
              
              
              25,000Total
                  cost of goods sold
              
              
              1,650,000
              
              
              299,934Gross
                  (loss) margin
              
              
              (1,650,000
              )
              
              103,805Operating
                  expensesGeneral
                  and administrative
              
              
              1,996,585
              
              
              2,180,713Clinical
                  and regulatory
              
              
              1,475,387
              
              
              1,344,026Sales
                  and marketing
              
              
              425,986
              
              
              385,846Restructuring
                  charges
              
              
              819,642
              
              
              —4,717,600
              
              
              3,910,585Loss
                  from operations
              
              
              (6,367,600
              )
              
              (3,806,780
              )Other
                  income (expense)Interest
                  income
              
              
              370,926
              
              
              355,043Other
              
              
              (381
              )
              
              11,581370,545
              
              
              366,624Loss
                  before income taxes and cumulative effect of a change in accounting
                  principle
              
              
              (5,997,055
              )
              
              (3,440,156
              )Recovery
                  of income taxes
              
              
              158,058
              
              
              158,792Loss
                  before cumulative effect of a change in accounting
                  principle
              
              
              (5,838,997
              )
              
              (3,281,364)Cumulative
                  effect of a change in accounting principle
              
              
              107,045
              
              
              —**Net
                  loss for the period**
              
              $
              (5,731,952
              )
              $
              (3,281,364
              )**Weighted
                  average number of shares outstanding**
                **-
                  basic and diluted**
              
              
              42,166,561
              
              
              41,810,679Loss
                  before cumulative effect of a change in accounting principle per
                  share -
                  basic and diluted
              
              $
              (0.14
              )
              $
              (0.08
              )Cumulative
                  effect of a change in accounting principle per share - basic and
                  diluted
              
              
              —
              
              
              —Basic
                  and diluted net loss per share
              
              $
              (0.14
              )
              $
              (0.08
              )
 *See
        accompanying notes to interim consolidated financial
        statements*
 
  6
 **OccuLogix,
              Inc.**
   
 
 
 **CONSOLIDATED
        STATEMENTS OF CHANGES**
 **IN
        STOCKHOLDERS’ EQUITY**
 (expressed
        in U.S. dollars)
 (Unaudited)
 
 
 **Voting
                  common stock**
                **at
                  par value****Number
                  of shares issued**
              **Value**
              **Additional
                  paid-in capital**
              **Accumulated
                  deficit**
              **Net
                  stockholders’ equity****December
                  31, 2005**
              42,085,853
              $
                  42,086
              $
                  336,977,578
              $
                  (210,979,105)
              $
                  126,040,559Stock-based
                  compensation
              ―
              ―
              185,861
              ―
              185,861Common
                  stock issued on exercise of options
              100,726
              101
              233,609
              ―
              233,710Contribution
                  of inventory from related party
              ―
              ―
              25,500
              ―
              25,500Net
                  loss for the period
              ―
              ―
              ―
              (5,731,952)
              (5,731,952)**March
                  31, 2006**
              42,186,579
              $
                  42,187
              $
                  337,422,548
              $
                  (216,711,057)
              $
                  120,753,678
 *See
        accompanying notes to interim consolidated financial
        statements*
 
  7
 **OccuLogix,
              Inc.**
   
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 (expressed
        in U.S. dollars)
 (Unaudited)
 **Three
                  months ended**
                **March
                  31,****2006**
              
              **2005****OPERATING
                  ACTIVITIES**Net
                  loss for the period
              
              $
              (5,731,952
              )
              $
              (3,281,364
              )Adjustments
                  to reconcile net loss tocash
                  used in operating activities:Write-down
                  of inventory
              
              
              1,625,000
              
              
              —Stock-based
                  compensation
              
              
              292,906
              
              
              41,638Amortization
                  of fixed assets
              
              
              32,356
              
              
              18,309Amortization
                  of patents and trademarks
              
              
              1,488
              
              
              1,385Amortization
                  of intangible asset
              
              
              429,167
              
              
              429,167Amortization
                  of premiums/discounts on short-term investments
              
              
              26,499
              
              
              9,037Deferred
                  income taxes
              
              
              (158,792
              )
              
              (158,792
              )Cumulative
                  effect of a change in accounting principle
              
              
              (107,045
              )
              
              —Net
                  change in non-cash working capitalbalances
                  related to operations
              
              
              (1,282,475
              )
              
              (2,841,444
              )**Cash
                  used in operating activities**
              
              
              (4,872,848
              )
              
              (5,782,064
              )**INVESTING
                  ACTIVITIES**Sale
                  of (purchase of) short-term investments
              
              
              9,925,000
              
              
              (5,169,982
              )Additions
                  to fixed assets
              
              
              ―
              
              
              (49,215
              )Additions
                  to patents and trademarks
              
              
              (71,486
              )
              
              ―**Cash
                  provided by (used in) investing activities**
              
              
              9,853,514
              
              
              (5,219,197
              )**FINANCING
                  ACTIVITIES**Proceeds
                  from the exercise of common stock options
              
              
              233,710
              
              
              3,980Proceeds
                  from the exercise of Series A convertible preferred stock
                  warrants
              
              
              ―
              
              
              171,016Fractional
                  payout of converted shares due to preferred stockholders
              
              
              ―
              
              
              (792
              )Share
                  issuance costs
              
              
              ―
              
              
              (83,234
              )**Cash
                  provided by financing activities**
              
              
              233,710
              
              
              90,970**Net
                  increase (decrease) in cash and cash equivalents**
                **during
                  the period**
              
              
              5,214,376
              
              
              (10,910,291
              )Cash
                  and cash equivalents, beginning of period
              
              
              9,599,950
              
              
              17,530,552**Cash
                  and cash equivalents, end of period**
              
              $
              14,814,326
              
              $
              6,620,261
 *See
        accompanying notes to interim consolidated financial
        statements*
 
  8
 **OccuLogix,
              Inc.**
   **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 (expressed
        in U.S. dollars unless otherwise stated)
 March
        31,
        2006 (Unaudited)
   **1.**  **BASIS
        OF PRESENTATION AND ACCOUNTING POLICIES**
 
 The
        accompanying unaudited consolidated financial statements have been prepared
        in
        accordance with United States generally accepted accounting principles (“US
        GAAP”). These consolidated financial statements contain all normal recurring
        adjustments and estimates necessary to present fairly the financial position
        of
        OccuLogix, Inc. (the “Company”) as of March 31, 2006 and the results of its
        operations for the three-month period then ended. These interim unaudited
        consolidated financial statements should be read in conjunction with the
        consolidated financial statements and notes included in the Company’s latest
        annual report on Form 10-K filed with the U.S. Securities and Exchange
        Commission (the “SEC”). Interim results are not necessarily indicative of
        results for a full year.
 
 These
        interim consolidated financial statements have been prepared using accounting
        policies that are consistent with the policies used in preparing the Company’s
        audited consolidated financial statements for the year ended December 31,
        2005.
  **2.**  **RESTRUCTURING
        CHARGES**
 
 In
        March
        2006, the Company implemented a number of structural and management changes
        designed to support both the continued development of its RHEOTM System to treat
        the dry form of age-related macular degeneration and to execute its accelerated
        diversification strategy within ophthalmology. In accordance with Statement
        of
        Financial Accounting Standards (“SFAS”) No. 146, “Accounting for Costs
        Associated with Exit or Disposal Activities” (“SFAS No. 146”), the Company
        recognized a total of $819,642 in restructuring charges in the three months
        ended March 31, 2006.
 
 The
        restructuring charge of $819,642 recorded in the three months ended March
        31,
        2006, of which $398,923 was paid out by April 28, 2006, consists solely of
        severance and benefit costs related to the termination of a total of 12
        employees at both the Company’s Mississauga, Ontario and Palm Harbor, Florida
        offices. The severance and benefit costs are expected to be fully paid by
        November 30, 2006.
 
 **3.**  **INVENTORY**
 
 The
        Company evaluates its ending inventories 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 its only customer, Veris Health
        Sciences Inc. (“Veris”) *(see
        note 7)* ,
        at a
        price lower than the Company’s cost. Accordingly, Company wrote down the value
        of its treatment sets to reflect this current net realizable value as at
        March
        31, 2006.
 
 As
        at
        March 31, 2006 and December 31, 2005, the Company had inventory reserves of
        $3,615,830 and $1,990,830, respectively. During the three months ended March
        31,
        2006, the Company recognized a provision related to inventory of $1,625,000
        related to inventory based on the above analysis (2005 - nil).
 
  9
  **4.**  **RECENT
        ACCOUNTING PRONOUNCEMENTS**
 
 In
        December 2004, the Financial Accounting Standards Board (the “FASB”) issued SFAS
        No. 123R, “Share-Based Payments”, which revised SFAS No. 123, “Accounting for
        Stock-Based Compensation”, and supersedes Accounting Principles Board Opinion
        No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”). SFAS No.
        123R requires all share-based payments to employees, including grants of
        employee stock options, to be recognized in the consolidated financial
        statements based on their fair values. The pro forma disclosures previously
        permitted under SFAS No. 123 will no longer be an alternative to financial
        statement recognition. SFAS No. 123R is effective at the beginning of the
        first
        interim or annual period beginning after June 15, 2005. In April 2005, the
        SEC
        announced the adoption of a new rule that amends the compliance dates for
        SFAS
        No. 123R. The SEC’s new rule allows companies to implement SFAS No. 123R at the
        beginning of their next fiscal year, instead of the next reporting period
        that
        begins after June 15, 2005. Accordingly, the Company has adopted SFAS No.
        123R
        beginning January 1, 2006. The Company has selected the Black-Scholes
        option-pricing model as its method of determining the fair value for its
        awards
        and will recognize compensation cost on a straight-line basis over the awards’
vesting periods *(see
        note 5).*
 
 Prior
        to
        the adoption of SFAS No. 123R, the Company  applied
        the provisions of SFAS No. 123, which allowed companies either to expense
        the
        estimated fair value of employee stock options or to follow the intrinsic
        value
        method as set forth in APB No. 25 but required companies to disclose the
        pro
        forma effects on net loss as if the fair value of the options had been expensed.
        The Company elected to apply APB No. 25
        in accounting for employee stock options. Therefore, as required by SFAS
        No.123,
        prior to the adoption of SFAS No. 123R, the Company provided pro forma net
        loss
        and pro forma net loss per share disclosures for stock-based awards as if
        the
        fair value of
        the options had been expensed.
 
 The
        adoption of the following recent accounting pronouncements in the first quarter
        of fiscal 2006 did not have a material impact on the Company’s results of
        operations and financial condition:
 
 ·
            SFAS
                No. 151, “Inventory Costs — An Amendment of ARB No. 43, Chapter 4”; ·
            SFAS
                No. 153, “Exchanges of Nonmonetary Assets — An Amendment of APB Opinion
                No. 29”; and ·
            SFAS
                No. 154, “Accounting Changes and Error Corrections” which replaces APB No.
                20, “Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes in
                Interim Financial Statements — An Amendment of APB Opinion No.
                28” 
 In
        November 2005, the FASB issued FASB Staff Position FAS 115-1 and FAS 124-1,
“The
        Meaning of Other-Than-Temporary Impairment and Its Application to Certain
        Investments” (“FSP 115-1”), which provides guidance on determining when
        investments in certain debt and equity securities are considered impaired,
        on
        whether that impairment is other-than-temporary and on measuring such impairment
        loss. FSP 115-1 also includes accounting considerations subsequent to the
        recognition of an other-than-temporary impairment and requires certain
        disclosures about unrealized losses that have not been recognized as
        other-than-temporary impairments. FSP 115-1 is required to be applied to
        reporting periods beginning after December 15, 2005. The adoption of FSP
        115-1
        in the first quarter of fiscal 2006 did not have a material impact on the
        Company’s results of operations and financial condition.
 
 **5.**  **STOCK-BASED
        COMPENSATION**
 
 The
        Company has a stock option plan, the 2002 Stock Option Plan (the “Stock Option
        Plan”). Under
        the
        Stock Option Plan, up to 4,456,000 options are available for grant to
        employees, directors and consultants. Options
        granted under the Stock Option Plan may be either incentive stock options
        or
        non-statutory stock options. Under the terms of the Stock Option Plan, the
        exercise price per share for an incentive stock option shall not be less
        than
        the fair market value of a share of stock on the effective date of grant
        and the
        exercise price per share for non-statutory stock options shall not be less
        than
        85% of the fair market value of a share of stock on the date of grant. No
        option
        granted to a holder of more than 10% of the Company’s common stock shall have an
        exercise price per share less than 110% of the fair market value of a share
        of
        stock on the effective date of grant.
 
  10
  Options
        granted may be time-based or performance-based options. The vesting of
        performance-based options is contingent upon meeting company-wide goals,
        including obtaining FDA approval of the Company’s RHEOTM System and the
        achievement of a minimum amount of sales over a specified period. Generally,
        options expire 10 years after the date of grant. No incentive stock options
        granted to a 10% owner optionee shall be exercisable after the expiration
        of
        five years after the effective date of grant of such option, no option granted
        to a prospective employee, prospective consultant or prospective director
        may
        become exercisable prior to the date on which such person commences service,
        and
        with the exception of an option granted to an officer, director or a consultant,
        no option shall become exercisable at a rate less than 20% per annum over
        a
        period of five years from the effective date of grant of such option unless
        otherwise approved by the board of directors of the Company (the “Board of
        Directors”).
 
 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 were approved
        by
        the Board of Directors and were granted on terms and conditions similar to
        those
        options issued under the Stock Option Plan.
 
 On
        January 1, 2006, the Company adopted the provisions of SFAS No. 123R, requiring
        the recognition of expense related to the fair value of its stock-based
        compensation awards. The Company elected to use the modified prospective
        transition method as permitted by SFAS No. 123R and therefore has not restated
        its financial results for prior periods. Under this transition method,
        stock-based compensation expense for the three months ended March 31, 2006
        includes compensation expense for all stock-based compensation awards granted
        prior to, but not yet vested as of, January 1, 2006 based on the grant date
        fair
        value estimated in accordance with the original provisions of SFAS No. 123.
        Stock-based compensation expense for all stock-based compensation awards
        granted
        subsequent to January 1, 2006 was based on the grant date fair value estimated
        in accordance with the provisions of SFAS No. 123R. The Company recognizes
        compensation expense for stock option awards on a straight-line basis over
        the
        requisite service period of the award.
 
 The
        following table sets forth the total stock-based compensation expense resulting
        from stock options included in the Company’s Consolidated Statements of
        Operations:
 
 **Three
                  months ended**
                **March
                  31,****2006**
              
              **2005
                  (i)**General
                  and administrative
              
              $
              169,349
              
              $
              26,100Clinical
                  and regulatory
              
              
              27,433
              
              
              15,538Sales
                  and marketing
              
              
              96,124
              
              
              —Stock-based
                  compensation expense before income taxes (ii)
              
              $
              292,906
              
              $
              41,638
 
 (i)
            Stock-based
                compensation expense for the three months ended March 31, 2005 relates
                to
                compensation expense associated with non-employee stock options.
                The fair
                value of these options was determined using the Black-Scholes fair
                value
                options model and was recorded in the Company’s Consolidated Statements of
                Operations in accordance with the provisions of SFAS No. 123. 
 (ii)
            The
                tax benefit associated with the Company’s stock-based compensation expense
                for the three months ended March 31, 2006 is $108,375. This amount
                has not
                been recognized in the Company’s financial statements for the three-month
                period as it is more likely than not that the Company will not realize
                this benefit. 
  11
  Net
        cash
        proceeds from the exercise of stock options were $233,710 and $3,980 for
        the
        three months ended March 31, 2006 and 2005, respectively. No income tax benefit
        was realized from stock option exercises during the three months ended March
        31,
        2006 and 2005. In accordance with SFAS No. 123R, the Company presents excess
        tax
        benefits from the exercise of stock options, if any, as financing cash flows
        rather than operating cash flows.
 
 As
        a
        result of adopting SFAS No. 123R on January 1, 2006, the Company’s net loss for
        the three months ended March 31, 2006 is $100,842 higher than if it had
        continued to account for share-based compensation under APB No. 25. Basic
        and
        diluted loss per share for the three months ended March 31, 2006 will be
        the
        same as the reported basic and diluted loss per share of $0.14 if the Company
        had not adopted SFAS No. 123R.
 
 The
        Company did not estimate forfeitures, resulting from the failure to satisfy
        performance conditions, on its outstanding awards prior to the adoption of
        SFAS
        No. 123R. Under SFAS No. 123, the Company could assume all awards will vest
        and
        reverse recognized compensation cost or adjust its disclosure for forfeited
        awards when the awards are actually forfeited. SFAS No. 123R requires a company
        to estimate the number of awards that are expected to vest and revise the
        estimate as actual forfeitures differ from the estimate. On January 1, 2006,
        the
        effective date of adopting SFAS No. 123R, the Company was required to estimate
        the number of forfeitures of its outstanding awards as of the effective date.
        Consolidated balance sheet amounts related to any compensation cost for these
        estimated forfeitures previously recognized in prior periods before the adoption
        of SFAS No. 123R have to be eliminated and recognized in income as the
        cumulative effect of a change in accounting principle as of the effective
        date.
        During the three months ended March 31, 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 as at January
        1,
        2006. The compensation cost previously recognized in prior periods before
        the
        adoption of SFAS No. 123R relates to compensation expense associated with
        non-employee stock options.
 
 Prior
        to
        the adoption of SFAS No. 123R, the Company  applied
        the provisions of SFAS No. 123, which allowed companies either to expense the
        estimated fair value of employee stock options or to follow the intrinsic
        value
        method as set forth in APB No. 25 but required companies to disclose the
        pro
        forma effects on net loss as if the fair value of the options had been expensed.
        The Company elected to apply APB No. 25
        in accounting for employee stock options. Therefore, as required by SFAS
        No.123,
        prior to the adoption of SFAS No. 123R, the Company provided pro forma net
        loss
        and pro forma net loss per share disclosures for stock-based awards as if
        the
        fair value of
        the options had been expensed.
 
 The
        following table illustrates the pro forma net loss and net loss per share
        of
        common stock as if the fair value method had been applied to all awards during
        the three-month period ended March 31, 2005:
 
 **Three
                  months ended****March
                  31, 2005**Net
                  loss, as reported
              
              $
              (3,281,364
              )Adjustment
                  for APB No. 25
              
              
              —Adjustment
                  for SFAS No. 123
              
              
              (442,412
              )Pro
                  forma net loss
              
              
              (3,723,776
              )Pro
                  forma net loss per share - basic and diluted
              
              $
              (0.09
              )
 
  12
  The
        fair
        value of stock options granted during the three months ended March 31, 2006
        and
        2005 was $3.22 and $3.80, respectively. The estimated fair value was determined
        using the Black-Scholes option-pricing model with the following weighted-average
        assumptions:
 
 **Three
                  months ended**
                **March
                  31,****2006**
              
              **2005**Volatility
              
              
              98.7%
              
              
              78.2%Expected
                  life of options
              
              
              5.9
                  years
              
              
              2
                  yearsRisk-free
                  interest rate
              
              
              4.65%
              
              
              3.86%Dividend
                  yield
              
              
              0%
              
              
              0%
 
 The
        Company’s computation of expected volatility for the three months ended March
        31, 2006 and 2005 is based on a comparable company’s historical stock prices as
        the Company did not have sufficient historical data. The Company’s computation
        of expected life has been estimated using the “short-cut approach” as provided
        in Staff Accounting Bulletin No. 107. Under this approach, estimated life
        is
        calculated to be the mid-point between the vesting date and the end of the
        contractual period. The risk-free interest rate for an award is based on
        the
        U.S. Treasury yield curve with a term equal to the expected life of the award
        on
        the date of grant.
 
 Prior
        to
        the adoption of SFAS No. 123R, the Board
        of
        Directors approved accelerating the vesting of unvested stock options granted
        prior to December 31, 2004 to employees, officers and directors. As a result
        of
        the vesting acceleration, options to purchase 438,561 shares of the Company’s
        common stock became exercisable immediately, including 308,611 held by executive
        officers, 48,958 held by non-employee directors and 80,992 held by other
        employees. These accelerated stock options represent approximately 30% of
        the
        total employee stock options of the Company that would not have been vested
        as
        at December 31, 2005. The weighted average exercise price of the options
        that
        were accelerated was $11.78. The purpose of the acceleration was to enable
        the
        Company to avoid recognizing compensation expense associated with these options
        of $1,532,203 and $1,466,253 during the years ending December 31, 2006 and
        2007,
        respectively, in its consolidated statements of operations as a result of
        the
        adoption of SFAS No. 123R on January 1, 2006. In accordance with APB No.
        25, the
        Company recorded a compensation expense of $53,295 for the year ended December
        31, 2005 as 9,033 of the total options, of which the vesting was accelerated,
        were “in-the-money” as at the date of the accelerated vesting. With respect to
        SFAS No. 123, the Company recognized, for purposes of pro forma disclosures,
        the
        incremental increase in fair value and the remaining balance of unrecognized
        compensation cost for the affected options at the time of
        acceleration.
 
 A
        summary
        of the options issued during the three months ended March 31, 2006 and 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 ValueOutstanding,
                  December 31, 2005
              4,107,614
              $6.19Granted
              130,000
              4.32Exercised
              (100,726)
              2.32
              
              $141,294Forfeited
              (1,250)
              8.03**Outstanding,
                  March 31, 2006**
              **4,135,638**
              **5.90******
              **8.09******
              **3,072,357****Vested
                  or expected to vest, March 31, 2006**
              **2,418,046**
              **5.08******
              **7.36******
              **3,069,043****Exercisable,
                  March 31, 2006**
              **2,197,719**
              **4.78******
              **7.18******
              **3,069,043**
 
  13
  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 first quarter of 2006 of $3.45 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 March 31, 2006). This
        amount
        changes based on the fair market value of the Company’s stock. The total
        intrinsic value of options exercised during the three months ended March
        31,
        2006 is $141,294. The total intrinsic value of options outstanding, vested
        or
        expected to vest, and exercisable as at March 31, 2006 is $3,072,357, $3,069,043
        and $3,069,043, respectively.
 
 As
        at
        March 31, 2006, $3,365,821 of total unrecognized compensation cost related
        to
        stock options is expected to be recognized over a weighted-average period
        of
        2.97 years.
  **6.**  **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**
                **March
                  31,****2006**
              
              **2005**Weighted
                  average number of shares outstanding - basic
              
              
              42,166,561
              
              
              41,810,679Effect
                  of dilutive securities:Stock
                  options
              
              
              1,080,422
              
              
              1,154,674Weighted
                  average number of shares - fully diluted
              
              
              43,246,983
              
              
              42,965,353
 
 **7.**  **RELATED
        PARTY TRANSACTIONS**
 
 The
        following are the Company’s related party transactions:
 
 **RHEO
        Clinic Inc.**
 
 **March
                  31,**
              
              **December
                  31,****2006**
              
              
              **2005**Due
                  to:RHEO
                  Clinic Inc.
              
              $
              26,926
              
              $
              5,065$
              26,926
              
              $
              5,065
 
 One
        of
        the Company’s primary customers had
        been
        RHEO Clinic Inc., a subsidiary of TLC Vision Corporation (“TLC Vision”). RHEO
        Clinic Inc. used the RHEOTM System to treat patients for which it charged its
        customers (the patients) a per-treatment fee. During the third quarter of
        2005,
        RHEO Clinic Inc. determined that it will no longer treat patients and
        subsequently sold certain of its assets to the Company at a purchase price
        of
        C$61,812, including all applicable taxes. In connection with that sale, the
        Company agreed to share equally in losses incurred by RHEO Clinic Inc., to
        a
        maximum of C$28,952, for assets that RHEO Clinic Inc. is not able to dispose
        of
        as at the agreed date, being December 31, 2005. Included in the balance due
        to
        RHEO Clinic Inc. as at March 31, 2006 is C$28,952 owing to RHEO Clinic Inc.
        for
        losses incurred for assets that it was not able to dispose of, and included
        in
        the balance owing to RHEO Clinic Inc. as at December 31, 2005 is the amount
        owing to the Company for the purchase of the components of the RHEOTM System net
        of the amount owing to RHEO Clinic Inc. for clinical and administrative support
        provided by RHEO Clinic Inc. for the Company’s MIRA-1 and related clinical
        trials.
  14
  
 **TLC
        Vision and Diamed Medizintechnik GmbH**
 
 On
        June
        25, 2003, the Company entered into agreements with TLC Vision and
        Diamed **** Medizintechnik
        GmbH (“Diamed”) to issue grid debentures in the maximum aggregate principal
        amount of $12,000,000 in connection with the funding of the Company’s MIRA-1 and
        related clinical trials. $7,000,000 of the aggregate principal amount was
        convertible into shares of common stock of the Company 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' initial public offering of shares
        of its
        common stock. During the years ended December 31, 2004 and 2003, the Company
        issued an aggregate of $4,350,000 and $2,650,000 to TLC Vision and Diamed,
        respectively, under the convertible portion of the grid debentures. On December
        8, 2004, as part of the corporate reorganization relating to the Company’s
        initial public offering, the Company issued 7,106,454 shares of common stock
        to
        TLC Vision and Diamed, upon conversion of $7,000,000 of aggregate principal
        amount of convertible debentures at a conversion price of $0.98502 per share.
        Collectively, as at March 31, 2006, the two companies have a combined 54.8%
        equity interest in the Company on a fully diluted basis.
 
 The
        Company is economically dependent on Diamed to control the supply of the
        OctoNova pumps used in the RHEOTM System. The Company believes that the OctoNova
        pumps are a critical component in the RHEOTM System.
 
 **Asahi
        Medical Co., Ltd.**
 
 The
        Company is 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. In the event the Company is not able to
        obtain regulatory approval for the RHEOTM System from the FDA and other necessary
        approvals in the territories for which the Company has distribution rights
        by
        the end of December 2006, Asahi Medical can terminate the distributorship
        agreement.
 
 The
        Company receives free inventory from Asahi Medical for the purpose of the
        MIRA-1
        and related clinical studies. The Company has accounted for this inventory
        at a
        value equivalent to the cost the Company has paid for the same filters purchased
        from Asahi Medical for commercial sales to its customers. The value of the
        free
        inventory received was $25,500, nil and $167,730 for the three months ended
        March 31, 2006 and 2005 and the year ended December 31, 2005,
        respectively.
 
 **Mr.
        Hans Stock** ***(Note
        8)***
 
 On
        February 21, 2002, the Company entered into an agreement with Mr. Stock as
        a
        result of his assistance in procuring a distributor agreement for the filter
        products used in the RHEOTM System from Asahi Medical. Mr. Stock agreed to
        further assist the Company in procuring new product lines from Asahi Medical
        for
        marketing and distribution by the Company. The agreement will remain effective
        for a term consistent with the term of the distributorship agreement with
        Asahi
        Medical and Mr. Stock will receive a 5% royalty payment on the purchase of
        the
        filters from Asahi Medical. During the three months ended March 31, 2006
        and
        2005 and the year ended December 31, 2005, the Company paid Mr. Stock nil,
        $35,654 and $240,657, respectively, as royalty fees. Included in due to
        stockholders as at March 31, 2006 and December 31, 2005 is $48,023 and $29,663,
        respectively, due to Mr. Stock.
 
 On
        June
        25, 2002, the Company entered into a consulting agreement with Mr. Stock
        for the
        purpose of procuring a patent license for the extracorporeal applications
        in
        ophthalmic diseases for that period of time in which the patent was effective.
        Mr. Stock was entitled to 1.0% of total net revenue from the Company’s
        commercial sales of products
  15
  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 months ended March 31, 2006 and 2005 and the year ended December
        31,
        2005, the Company paid $12,500, $12,500 and $50,000, respectively, to Mr.
        Stock
        as royalty fees. Included in due to stockholders as at March 31, 2006 and
        December 31, 2005 is $12,500 and $12,500, respectively, due to Mr.
        Stock.
 
 **Apheresis
        Technologies, Inc.**
 
 On
        May 1,
        2002, the Company entered into an exclusive distribution services agreement
        with
        Apheresis Technologies, Inc. (“ATI”), a company controlled by certain
        stockholders of the Company pursuant to which the Company pays ATI 5% of
        the
        Company’s cost of components of the RHEOTM System. Under this agreement, ATI was
        the exclusive provider of warehousing, order fulfillment, shipping, billing
        services and customer service related to shipping and billing to the
        Company.
 
 On
        July
        30, 2004, the Company amended its distribution services agreement with ATI
        such
        that the Company would have the sole discretion as to when the agreement
        would
        terminate. In consideration of this amendment, the Company agreed to pay
        ATI
        $100,000 on the successful completion of its initial public offering. On
        January
        18, 2005, the Company paid ATI $100,000 as provided for in the amended
        distribution services agreement. On March 28, 2005, the Company terminated
        its
        distribution services agreement with ATI.
 
 **Other**
 
 On
        June
        25, 2003, the Company entered into a reimbursement agreement with ATI, pursuant
        to which employees of ATI, including John Cornish, one of the Company’s
        stockholders and its Vice President, Operations, provide services to the
        Company
        and ATI is reimbursed for the applicable percentage of time the employees
        spend
        working for the Company. Effective April 1, 2005, the Company terminated
        its
        reimbursement agreement with ATI such that the Company no longer compensates
        ATI
        in respect of any salary paid to, or benefits provided to, Mr. Cornish by
        ATI.
        Until April 1, 2005, Mr. Cornish did not have an employment contract with
        the
        Company and received no direct compensation from the Company. On April 1,
        2005,
        Mr. Cornish entered into an employment agreement with the Company under which
        he
        will receive 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.
 
 Effective
        January 1, 2004, the Company entered into a rental agreement with Cornish
        Properties Corporation, a company owned and managed by Mr. Cornish, whereby
        the
        Company will lease space from Cornish Properties Corporation at $2,745 per
        month. The term of the lease extended to December 31, 2005. On November 8,
        2005,
        as provided for in the rental agreement, the Company extended the term of
        the
        rental agreement with Cornish Properties Corporation for another year, ending
        December 31, 2006. In the three months ended March 31, 2006 and 2005 and
        the
        year ended December 31, 2005, the Company paid Cornish Properties Corporation
        an
        amount of $8,235, $8,235 and $32,940, respectively.
 
 Effective
        June 25, 2003, Elias Vamvakas, the Chairman of TLC Vision, became the Chairman
        and Secretary of both the Company and the General Partner of the Partnership.
        500,000 stock options issued to Mr. Vamvakas in December 2003 were accounted
        for
        in accordance with APB No. 25. The Company estimated the intrinsic value
        of
  16
  these
        options granted to Mr. Vamvakas to be approximately $5,880,000. Management
        estimated the fair value of the underlying common stock based on management’s
        estimate of the Company’s value. The intrinsic value of the options is being
        amortized over the vesting period. However, upon the successful completion
        of
        the Company’s initial public offering in December 2004, the options vested
        immediately, and therefore, any unvested compensation expense was expensed
        immediately.
 
 In
        addition, the Company entered into a consultancy and non-competition agreement
        on July 1, 2003 with the Center for Clinical Research (“CCR”), then a
        significant shareholder, 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 common
        stock of the Company at an exercise price of $0.13 per share. In addition,
        CCR
        also agreed to the repayment of the balance of $150,500 due to it at $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
        payment of a one-time bonus of $200,000 upon successful U.S. Food and Drug
        Administration, or FDA, approval of the RHEOTM System and the grant of 60,000
        options to CCR at an exercise price of $7.15 per share. These options are
        expected to fully vest on successful FDA approval of the RHEOTM System. This
        resulted in a combined consulting expense, included within clinical and
        regulatory expense for the three months ended March 31, 2006, of
        $51,071.
 
 On
        September 29, 2004, OccuLogix, L.P. (the “Partnership”), a wholly-owned
        subsidiary of the Company, signed a product purchase agreement with Veris
        for
        the purchase from the Partnership of 8,004 treatment sets over the period
        from
        October 2004 to December 2005, a transaction valued at $6,003,000, after
        introductory rebates. However, due to delays in opening its planned number
        of
        clinics throughout Canada, Veris no longer required the contracted-for number
        of
        treatment sets in the period. The Company agreed to the original pricing
        for the
        reduced number of treatment sets required in the period. Dr. Machat, who
        is an
        investor in and one of the directors of Veris, was a co-founder and former
        director of TLC Vision. In December 2005, by letter agreement, the Company
        agreed to the volume and other terms for the purchase and sale of treatment
        sets
        and pumps for the period ending February 28, 2006. As at March 31, 2006,
        the
        Partnership had received a total of $1,779,566 from Veris. Included in amounts
        receivable as at March 31, 2006 and December 31, 2005 is $1,047,622 and
        $1,047,622, respectively, due from Veris for the purchase of additional pumps
        and treatment sets. Veris has agreed to the payment of interest at the rate
        of
        8% per annum on all amounts outstanding for more than 45 days up to March
        31,
        2006, the expected date of final payment. In January 2006, the Partnership
        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 endpoint
        and
        that it is more likely than not that the Company will be required to conduct
        a
        follow-up clinical trial of the RHEOTM System in order to support its Pre-Market
        Approval application to the FDA. Because of this delay in being able to pursue
        commercialization of the RHEOTM System in the U.S. and the resulting market
        reaction to this news and based on discussions with Veris, the Company believes
        that Veris will not be able to meet its financial obligations to the Company.
        Therefore, during the year ended December 31, 2005, the Company recorded
        an
        allowance for doubtful accounts of $1,047,622 against the amount due from
        Veris
        and did not accrue additional interest on the amount outstanding in the three
        months ended March 31, 2006.
 
 In
        addition, the Company entered into a clinical trial agreement on November
        22,
        2005 with Veris which requires Veris to provide certain clinical trial services
        to the Company. The agreement provides 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 for the time being.
 
 On
        March
        28, 2005, the Company entered into a supply and co-marketing agreement with
        Rheogenx Biosciences Corporation (“Rheogenx”) for the supply of pumps and
        disposable treatment sets to Rheogenx and its affiliates, including PhereSys
        Therapeutics Corporation (“PhereSys”), Rheogenx’s wholly-owned subsidiary. Under
        this agreement, the Company will provide marketing support for PhereSys’s mobile
        apheresis business upon obtaining FDA approval to market the RHEOTM System in the
        United States. In connection with entering into this agreement, the Company
        also
        entered into an asset purchase agreement with Rheogenx on March 28, 2005
        to
        effectively terminate the patent, know-how and trademark rights to
        non-ophthalmic indications for the RHEOTM System in
  17
  North
        America which the Company had previously licensed to Rheogenx. The purchase
        price of the assets under the asset purchase agreement was $10 and has been
        included within accrued liabilities.
 
 During
        the fourth quarter of 2004, the Company began a business relationship with
        Innovasium Inc., an Ontario corporation. 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 months ended March 31, 2006 and
        2005
        and the year ended December 31, 2005, the Company paid Innovasium Inc. C$27,636,
        C$34,635 and C$123,967, respectively. Included in accounts payable and accrued
        liabilities as at March 31, 2006 and December 31, 2005 is C$541 and C$15,798,
        respectively, due to Innovasium Inc. These amounts are expensed in the period
        incurred and paid when due.
  **8.**  **DUE
        TO STOCKHOLDERS**
 
 **March
                  31,**
              
              **December
                  31,****2006**
              
              **2005****Due
                  to:**TLC
                  Vision Corporation
              
              $
              125,042
              
              $
              116,070Other
                  stockholder
              
              
              60,523
              
              
              42,163$
              185,565
              
              $
              158,233
 
 Included
        in amounts due to stockholders as at March 31, 2006 and December 31, 2005
        is
        $125,042 and $116,070, respectively, owing to TLC Vision for its payment
        of
        benefits of certain employees of the Company and for computer and administrative
        support.
 
 The
        balances due to other stockholders as of March 31, 2006 and December 31,
        2005
        are $60,523 and $42,163, respectively, and are for amounts due to Mr. Hans
        Stock
        for royalty fees *(see
        note 7).*
  **9.**  **CONSOLIDATED
        STATEMENTS OF CASHFLOW**
 
 The
        net
        change in non-cash working capital balances related to operations consists
        of
        the following:
 
 **Three
                  months ended**
                **March
                  31,****2006**
              
              
              **2005**Due
                  to related party
              
              $
              21,861
              
              $
              (4,908
              )Amounts
                  receivable
              
              
              26,037
              
              
              (189,318
              )Inventory
              
              
              (957,270
              )
              
              (1,864,404
              )Prepaid
                  expenses
              
              
              13,532
              
              
              (51,217
              )Deposit
              
              
              (6,423
              )
              
              4,105Accounts
                  payable
              
              
              (422,023
              )
              
              353,460Accrued
                  liabilities
              
              
              14,479
              
              
              (379,548
              )Deferred
                  revenue and rent inducement
              
              
              —
              
              
              (352,004
              )Due
                  to stockholders
              
              
              27,332
              
              
              (357,610
              )$
              (1,282,475
              )
              $
              (2,841,444
              )
 
  18
  The
        following table lists those items that have been excluded from the consolidated
        statements of cash flows as they relate to non-cash transactions and additional
        cash flow information:
 
 **Three
                  months ended****March
                  31,****2006**
              
              **2005**Non-cash
                  financing activitiesFree
                  inventory
              
              $
              25,500
              
              $
              —
 
 **10.**  **SUBSEQUENT
        EVENTS**
 
 a.
            On
                April 4, 2006, the Company announced that it has initiated its expansion
                into the glaucoma space by signing a non-binding Letter of Intent,
                subject
                to the Company completing its due diligence satisfactorily, to acquire
                SOLX, Inc. (“SOLX”), a privately held company based at the Boston
                University Photonics Center that has developed a system for the treatment
                of glaucoma. The DeepLight® Glaucoma Treatment System ("DeepLight®
                System") includes the DeepLight® 790 Titanium Sapphire Laser, the
                DeepLight® Gold Micro-Shunt and the DeepLight® Gold Micro-Shunt Plus which
                can be used to provide physicians with multiple options to manage
                intraocular pressure. The components of SOLX's DeepLight® System have
                received approval from Intertek Certification Services, a European
                agency
                for the evaluation of medicinal products, and are currently the subject
                of
                two randomized, multi-center studies in the U.S. SOLX is seeking
                to obtain
                510K approval to market the components of the DeepLight® System in the
                U.S. before the end of 2007. 
 The
        Company anticipates that the consideration for the acquisition of SOLX, which
        is
        yet to be determined, will be primarily in common stock of the Company. In
        connection with the proposed acquisition, the Company has advanced to SOLX
        a
        convertible unsecured loan in the principal amount of $2,000,000 at an annual
        interest rate equal to the prime rate, as announced from time to time by
        Bank of
        America, N.A. or its successor, plus 2%, to be accrued on a daily basis from
        the
        date of advance. The Convertible Unsecured Promissory Note of SOLX dated
        April
        4, 2006 (the “Note”), governing the terms of the loan, provides that the
        principal amount of the loan, and accrued but unpaid interest thereon, are
        to be
        repaid in one payment on October 2, 2006 (the “Maturity Date”). The Note further
        provides the Company with the right to acquire 10% of the issued and outstanding
        capital stock of SOLX on a fully diluted basis under certain conditions,
        including if the principal amount of the loan remains outstanding and owing
        after the Maturity Date.
 
 Based
        on
        the current stage of this acquisition, the fair value of the acquired assets
        and
        liabilities is not determinable.
 
 b.
            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*(see
                note 7).* 
  19
  **ITEM
        2.**  **MANAGEMENT’S
        DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
        OPERATIONS**
 
 **OVERVIEW**
 
 We
        are an
        ophthalmic therapeutic company founded to commercialize innovative treatments
        for eye diseases, including age-related macular degeneration, or AMD. The
        RHEOTM
System is used to perform the RheopheresisTM procedure, a procedure that
        selectively removes molecules from plasma, which is designed to treat Dry
        AMD,
        the most common form of the disease.
 
 We
        conducted a pivotal clinical trial, called MIRA-1, or Multicenter Investigation
        of Rheopheresis for AMD, which, if successful, was expected to support our
        application to the U.S. Food and Drug Administration, or FDA, to obtain approval
        to market the RHEOTM System in the United States. On February 3, 2006, we
        announced that, based on a preliminary analysis of the data from MIRA-1,
        MIRA-1
        did not meet its primary efficacy endpoint as it did not demonstrate a
        statistically significant difference in the mean change of Best
        Spectacle-Corrected Visual Acuity applying the Early Treatment Diabetic
        Retinopathy Scale, or ETDRS BCVA, between the treated and placebo groups
        in
        MIRA-1 at 12 months post-baseline. As expected, the treated group demonstrated
        a
        positive result. An anomalous response of the control group is the principal
        reason why the primary efficacy endpoint was not met.
 
 Subsequent
        to the February 3, 2006 announcement, the Company completed an in-depth analysis
        of the MIRA-1 study data identifying subjects that were included in the
        intent-to-treat, or ITT, population but who deviated from the MIRA-1 protocol
        as
        well as those patients who had documented losses or gains in vision for reasons
        not related to retinal disease such as cataracts that were not specifically
        excluded by the protocol. Those subjects in the ITT population who met the
        protocol requirements, and who did not exhibit opthalmic changes unrelated
        to
        retinal disease, comprised the modified per-protocol population. In the modified
        per-protocol analysis, eyes treated with RHEOTM Therapy demonstrated a mean
        vision gain of 0.8 lines of ETDRS BCVA at 12 months post-baseline, compared
        to a
        mean vision loss of 0.1 lines of ETDRS BCVA in the eyes in the placebo group.
        The result was statistically significant (repeated measure p value = 0.0099).
        The following table presents a summary of the ETDRS BCVA changes observed
        12
        months post-baseline in the modified per-protocol analysis of
        MIRA-1:
 
 Treatment
                  Group
                (n=69)
              Placebo
                  Group
                (n=46)Vision
                  improvement greater or equal to:1
                  line
              47%
              18%2
                  lines
              28%
              9%3
                  lines
              9%
              2%Vision
                  loss greater or equal to:1
                  line
              10%
              24%2
                  lines
              6%
              7%3
                  lines
              3%
              2%
 
 Within
        the modified per-protocol population with pre-treatment vision worse than
        20/40,
        47% of RHEOTM Therapy-treated eyes improved, after treatment, to 20/40 or better
        and would be able to qualify for a driver’s license 12 months post-baseline,
        compared to 12% of placebo eyes.
 
 MIRA-1
        data supports historical clinical and commercial experience with respect
        to the
        safety of RHEOTM Therapy, with observed treatment side effects generally being
        mild, transient and self-limiting.
 
 In
        light
        of MIRA-1’s failure to meet its primary efficacy endpoint, it is more likely
        than not that we will be required to conduct a follow-up clinical trial of
        the
        RHEOTM System in order to support our Pre-Market Approval, or PMA, application to
        the FDA. However, until we have discussions with the FDA, we will not know
        the
        nature, size, scope or duration of any follow-up clinical trial. Nor, until
        such
        time, will we be able to anticipate when we will receive
  20
  FDA
        approval, if ever, or when we can expect to commercialize the RHEOTM System in
        the United States and to begin to generate revenues there. Currently, we
        are
        planning to have discussions with the FDA during the second quarter of
        2006.
 
 As
        a
        result of the announcement on February 3, 2006, the share price of our stock
        as
        traded on the NASDAQ National Market System 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.
        The resulting decrease in the share price was identified as an indicator
        of
        impairment leading to an analysis of our intangible assets and goodwill and
        resulting in our reporting an impairment charge to goodwill of $147,451,758
        in
        the fourth quarter of 2005. We believe that the announcement 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 $165,661 advance paid to Veris in connection with
        clinical trial services to be provided by Veris for MIRA-PS, one of our clinical
        trials. We evaluated our ending inventories as at December 31, 2005 on the
        basis
        that Veris may not be able to increase its commercial activities in Canada
        in
        line with our initial expectations. Accordingly, we have set up a provision
        for
        obsolescence of $1,990,830 for treatment sets that will unlikely be utilized
        prior to their expiration dates.
 
 In
        April
        2006, we sold a number of treatment sets, with a negotiated discount, to
        Veris at a
        price lower than our cost. Accordingly, the price which we charged to Veris,
        net
        of a negotiated discount, represents the current net realizable value; therefore
        we wrote down the value of our treatment sets to reflect this current net
        realizable value as at March 31, 2006.
 
 As
        at
        March 31, 2006 and December 31, 2005, we had inventory reserves of
        $3,615,830 and $1,990,830, respectively. During the three months ended March
        31,
        2006, we recognized a provision related to inventory of $1,625,000 related
        to
        inventory based on the above analysis (2005 - nil).
 
 Our
        results of operations for the three months ended March 31, 2006 were impacted
        by
        our adoption of Statement of Financial Accounting Standards (“SFAS”) No. 123R
        (revised 2004), “Share-Based Payments” (“SFAS No. 123R”), which requires us to
        recognize a non-cash expense related to the fair value of our stock-based
        compensation awards. We elected to use the modified prospective transition
        method of adoption requiring us to include this stock-compensation charge
        in our
        results of operations beginning on January 1, 2006 without restating prior
        periods to include stock-based compensation expense. This method also requires
        us to estimate forfeitures as of the effective date of adoption of SFAS No.
        123R
        and to eliminate any compensation cost previously recognized in income for
        periods before the effective date of adoption. This income should be recognized
        as the cumulative effect of a change in accounting principle as of the required
        effective date. Of the $292,906 stock-based compensation expense recognized
        in
        the first quarter of 2006, $169,349 is included in general and administrative
        expenses, $27,433 in clinical and regulatory expenses and $96,124 in sales
        and
        marketing expenses. We also recognized $107,045
        as the cumulative effect of a change in accounting principle reflecting the
        impact of our estimated forfeitures of outstanding awards as of January 1,
        2006.
 
 Prior
        to
        the adoption of SFAS No. 123R we  applied
        the provisions of SFAS No. 123, “Accounting
        for Stock-Based Compensation” (“SFAS No. 123”), which
        allowed companies either to expense the estimated fair value of employee
        stock
        options or to follow the intrinsic value method set forth in Accounting
        Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”
(“APB No. 25”), but
        required companies to disclose the pro forma effects on net loss as if the
        fair
        value of the options had been expensed. We elected to apply APB No. 25
        in accounting for employee stock options. As required by SFAS No.123, prior
        to
        the adoption of SFAS No. 123R, we provided pro forma net loss and pro forma
        net
        loss per share disclosures for stock-based awards as if the fair value of
        the options had been expensed.
 
  21
  In
        December 2005, our Board of
        Directors approved accelerating the vesting of unvested stock options granted
        prior to December 31, 2004 to employees, officers and directors. As a result
        of
        the vesting acceleration, options to purchase 438,561 shares of our common
        stock
        became exercisable immediately, including 308,611 held by executive officers,
        48,958 held by non-employee directors and 80,992 held by other employees.
        These
        accelerated stock options represent approximately 30% of the total employee
        stock options that would not have been vested as at December 31, 2005. The
        weighted average per share exercise price of the options that were accelerated
        was $11.78. The purpose of the acceleration was to avoid recognizing
        compensation expense associated with these options of $1,532,203 and $1,466,253
        during the years ending December 31, 2006 and 2007, respectively, in our
        consolidated statements of operations resulting from the adoption of SFAS
        No.
        123R on January 1, 2006. In accordance with APB No. 25, we recorded a
        compensation expense of $53,295 for the year ended December 31, 2005 as 9,033
        of
        the total options, of which the vesting was accelerated, were “in-the-money” as
        at the date of the accelerated vesting. With respect to SFAS No. 123, we
        recognized, for purposes of pro forma disclosures, the incremental increase
        in
        fair value and the remaining balance of unrecognized compensation cost for
        the
        affected options at the time of acceleration.
 
 As
        at
        March 31, 2006, $3,365,821 of total unrecognized compensation cost related
        to
        stock options is expected to be recognized over a weighted-average period
        of
        2.97 years.
 
 **RECENT
        DEVELOPMENTS**
 
 On
        April
        4, 2006 ,
        we
        announced our planned acquisition of SOLX, Inc. (“SOLX”), subject
        to the Company completing its due diligence satisfactorily. If
        successfully consummated, the acquisition would represent an expansion of
        the
        Company’s ophthalmic product portfolio beyond the RHEOTM procedure for Dry AMD.
        This expansion or diversification has been a long-term corporate objective,
        and
        in light of the possible delay in the U.S. commercial launch of the RHEOTM
System, we have accelerated these plans, focusing 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.
  Based
        at
        the Boston University Photonics Center, SOLX is a privately held company
        that
        has developed a system for the treatment of glaucoma. The DeepLight® Glaucoma
        Treatment System ("DeepLight® System") includes the DeepLight® 790 Titanium
        Sapphire Laser, the DeepLight® Gold Micro-Shunt and the DeepLight® Gold
        Micro-Shunt Plus, which can be used to provide physicians with multiple options
        to manage intraocular pressure. The components of SOLX's DeepLight® System have
        received approval from Intertek Certification Services, a European agency
        for
        the evaluation of medicinal products, and are currently the subject of two
        randomized, multi-center studies in the United States. SOLX is seeking to
        obtain
        510K approval to market the components of the DeepLight® System in the United
        States before the end of 2007.
 
 The
        Company anticipates that the consideration for the acquisition of SOLX, which
        is
        yet to be determined, will be primarily in common stock of the Company. Based
        on
        the current stage of this acquisition, the fair value of the acquired assets
        and
        liabilities is not determinable.
 
 In
        connection with the proposed acquisition of SOLX, we have advanced to it
        a
        convertible unsecured loan in the principal amount of $2,000,000 at an annual
        interest rate equal to the prime rate, as announced from time to time by
        Bank of
        America, N.A. or its successor, plus 2%, to be accrued on a daily basis from
        the
        date of advance. The Convertible Unsecured Promissory Note of SOLX dated
        April
        4, 2006 (the “Note”), governing the terms of the loan, provides that the
        principal amount of the loan, and accrued but unpaid interest thereon, are
        to be
        repaid in one payment on October 2, 2006 (the “Maturity Date”). The Note further
        provides us with the right to acquire 10% of the issued and outstanding capital
        stock of SOLX on a fully diluted basis under certain conditions, including
        if
        the principal amount of the loan remains outstanding and owing after the
        Maturity Date.
 
 In
        connection with our new strategic direction, we have made a number of structural
        and management changes designed both to support the continued development
        of our
        existing Dry AMD program and to execute our accelerated diversification strategy
        within ophthalmology.
   22
  Nozhat
        Choudry, Ph.D., recently joined us as Vice President, Clinical Research.
        Dr.
        Choudry joined the Company from Boehringer Ingelheim, where she worked for
        the
        past nine years, most recently as Director of the National Medicine Department.
        From March 1993 to August 1996, Dr. Choudry worked at Ciba-Geigy (now Novartis
        Corporation) where she held increasingly senior roles in drug development
        and
        clinical trial management. Dr. Choudry earned her Ph.D. in Clinical Pharmacology
        at the Royal Postgraduate Medical School in London, England and has done
        extensive post-graduate research and publishing in both pharmacology and
        medicine. She has served on several committees in the National Science and
        Engineering Research Committee of Canada and has an appointment at the
        University of Toronto as lecturer.
  Steve
        Westing, Ph.D., has been appointed our Vice President, Medical & Scientific
        Development. Dr. Westing will be primarily responsible for identifying and
        developing relationships with key opinion leaders within ophthalmology and
        for
        managing the recruitment of trial sites and patients to participate in our
        clinical studies. Dr. Westing has joined us from Genentech, Inc, where he
        most
        recently served as Associate Director - Advisory and Thought Leader Services.
        In
        that role, Dr. Westing helped establish the thought leader development program
        for Genentech's Lucentis franchise, and he served as a member of Genentech's
        ophthalmology commercial strategy team. Before joining Genentech in May 1996,
        Dr. Westing worked at Loredan Biomedical, Inc. since May 1990 where he held
        increasingly senior roles in product sales and development. Dr. Westing earned
        his Ph.D. in Muscle Physiology at The Karolinska Institute, Stockholm, Sweden.
  Mr.
        William (Bill) G. Dumencu, CA, has been appointed as our interim Chief Financial
        Officer and Treasurer, effective April 10, 2006. Mr. Dumencu had been serving
        as
        our Vice President, Finance since June 2005 and had been previously our Chief
        Financial Officer and Treasurer from September 2003 until June 2005.
 
 **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 there have been no significant changes during the three months
        ended March 31, 2006 to the items disclosed as our critical accounting policies
        and estimates in our discussion and analysis of financial condition and results
        of operations in our 2005 Form 10-K, except as noted below.
 
 *Inventory
        valuation*
 
 Management
        must make estimates about future customer demand for our products when
        establishing the appropriate provisions for inventory and also determine
        whether
        market demand has had any impact on our inventory’s net realizable value. When
        making these estimates, we consider general economic conditions and growth
        prospects, including the impact of us receiving FDA approval for the RHEOTM
System.
 
 With
        respect to our provisioning policy, in general, we fully reserve for surplus
        inventory in excess of our demand forecast, taking into consideration the
        expiry
        date of our filters. In addition, we assess whether recent transactions provide
        indicators as to whether the net realizable value of our inventory is below
        our
        cost.
 
 As
        at
        March 31, 2006 and December 31, 2005, we had inventory reserves of
        $3,615,830 and $1,990,830, respectively. During the three months ended March
        31,
        2006, we recognized a provision related to inventory of $1,625,000 related
        to
        inventory based on the above analysis (2005 - nil).
 
  23
  *Stock
        based compensation*
 
 In
        December 2004, the Financial Accounting Standards Board (the “FASB”) issued SFAS
        No. 123R, which revised SFAS No. 123 and APB No. 25. SFAS No. 123R requires
        all
        share-based payments to employees, including grants of employee stock
        options to be
        recognized in the consolidated financial statements based on their fair values.
        The pro forma disclosures previously permitted under SFAS No. 123 is no longer
        an alternative to financial statement recognition. SFAS No. 123R is effective
        at
        the beginning of the first interim or annual period beginning after June
        15,
        2005. In April 2005, the SEC announced the adoption of a new rule that amends
        the compliance dates for SFAS No. 123R. The SEC’s new rule allows companies to
        implement SFAS No. 123R at the beginning of their next fiscal year, instead
        of
        the next reporting period that begins after June 15, 2005. Accordingly, we
        adopted SFAS No. 123R beginning January 1, 2006. We have selected the
        Black-Scholes option-pricing model as our method of determining the fair
        value
        for all our awards and will recognize compensation cost on a straight-line
        basis
        over the awards’ vesting periods.
 
 **RESULTS
        OF OPERATIONS**
 
 **Three
        Months Ended March 31, 2006 and 2005**
 
 ***Revenues.*** There
        were no sales in the three months ended March 31, 2006. Our sole customer,
        Veris, halted purchases while the Company completed its in-depth analysis
        of the
        MIRA-1 study data subsequent to the Company’s February 3, 2006 announcement that
        MIRA-1 had not met its primary efficacy endpoint. Revenues for the three
        months
        ended March 31, 2005 were $403,739 due to the sales of treatment sets and
        pumps
        to Veris under the product purchase agreement that we had entered into with
        Veris in September 2004. Included in revenues for the three months ended
        March
        31, 2005 are sales made to RHEO Clinic Inc., a subsidiary of TLC Vision
        Corporation and a related party, for which we reported revenues of $63,539
        in
        the period. RHEO
        Clinic Inc. has since ceased the treatment of commercial patients and is
        therefore no longer a source of revenue.
 
 ***Cost
        of Sales and Gross Margin.*** Cost
        of
        sales increased by 450% to $1,650,000 for the three months ended March 31,
        2006
        from $299,934 for the three months ended March 31, 2005. In
        April
        2006, we sold treatment sets to Veris at a price, net of negotiated discounts,
        which was lower than our cost. Currently, Veris is our sole customer.
        Accordingly, we believe that the price at which we sold the treatment sets
        to
        Veris represents our inventory’s current net realizable value, and therefore, we
        have written down the value of the treatment sets to reflect this net realizable
        value. Included in cost of sales for the three months ended March 31, 2006
        is
        $1,625,000 which reflects the write-down of the treatment sets to its net
        realizable value. There was no comparable expense in the three months ended
        March 31, 2005.
 
 Gross
        margin on sales was a loss of $1,650,000 for the three months ended March
        31,
        2006 from a profit of $103,805 during the comparative prior year period due
        to
        the write-down of our inventory to its net realizable value. In addition,
        there
        were no sales in the three months ended March 31, 2006.
 
 ***General
        and Administrative Expenses.*** General
        and administrative expenses were $1,996,585 for the three months ended March
        31,
        2006, a decrease of 8% from $2,180,713 for the comparative prior year
        period. This decrease is
 due
        primarily to a decrease in professional fees and a decrease in fees associated
        with compliance with Section 404 of the Sarbanes-Oxley Act of 2002. These
        decreases were partially offset by stock-based compensation expense recorded
        in
        the period in accordance with SFAS No. 123R. We adopted SFAS No. 123R beginning
        January 1, 2006.
 
 ***Clinical
        and Regulatory Expenses.*** Clinical
        and regulatory expenses were $1,475,387 for the three months ended March
        31,
        2006, an increase of 10% from $1,344,026 for the three months ended March
        31,
        2005, as a result of increased activities associated with the LEARN, or
        Long-term Efficacy in AMD from Rheopheresis in North America, and other clinical
        trials.
 
  24
  ***Sales
        and Marketing Expenses.*** Sales
        and
        marketing expenses were $425,986 for the three months ended March 31, 2006,
        an
        increase of 10% from $385,846 for the three months ended March 31, 2005.
        This
        increase is due mainly to stock-based compensation expense recorded in the
        period in accordance with SFAS No. 123R. This increase in cost was partially
        offset by reduced employee travel costs during the three months ended March
        31,
        2006.
 
 ***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 and nil
        in restructuring charges in the three months ended March 31, 2006 and 2005,
        respectively. 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 three
        months
        ended March 31, 2006, of which $398,923 was paid by April 28, 2006, consists
        solely of severance and benefit costs related to the termination of a total
        of
        12 employees at both the Company’s Mississauga and Palm Harbor offices. The
        severance and benefit costs are expected to be fully paid by November 30,
        2006.
 
 ***Other
        Income (Expenses).*** Other
        income was $370,545 for the three months ended March 31, 2006, an increase
        of 1%
        from $366,624 for the three months ended March 31, 2005. Other income consists
        primarily of interest income earned in the current period and the corresponding
        prior period as a result of the Company’s cash and short-term investment
        position following the raising of capital in the Company’s initial public
        offering.
 
 ***Income
        Tax Recovery.*** Income
        tax recovery of $158,058 and $158,792 for the three months ended March 31,
        2006
        and 2005, respectively, represents the amortization of the deferred tax
        liability which was recorded based on the difference between the fair value
        of
        the intangible asset acquired in December 2004 and its tax basis. The deferred
        tax liability of $9,527,500 is being amortized over 15 years, the estimated
        useful life of the intangible asset.
 
 ***Cumulative
        Effect of a Change in Accounting Principle.*** The
        cumulative effect of a change in accounting principle for the three months
        ended
        March 31, 2006 of $107,045 reflects the impact
        of
        our estimated forfeitures of outstanding stock option awards as of January
        1,
        2006.  On
        January 1, 2006, the effective date of adopting SFAS No. 123R, we were required
        to estimate the number of forfeitures of our outstanding awards as of the
        effective date. Consolidated balance sheet amounts related to any compensation
        cost for these estimated forfeitures previously recognized in prior periods
        before the adoption of SFAS No. 123R have to be eliminated and recognized
        in
        income as the cumulative effect of a change in accounting principle as of
        the
        effective date. The compensation cost previously recognized in prior periods
        before the adoption of SFAS No. 123R relates to compensation expense associated
        with non-employee stock options.
 
 **LIQUIDITY
        AND CAPITAL RESOURCES**
 
 In
        December 2004, the Company raised $67,200,000 of gross cash proceeds (less
        issuance costs of $7,858,789) in an initial public offering of shares of
        its
        common stock. Immediately prior to the offering, the primary source of the
        Company’s liquidity was cash raised through the issuance of
        debentures.
 
 To
        date,
        cash has been primarily utilized to finance increased infrastructure costs,
        to
        accumulate inventory and to fund costs of the MIRA-1 clinical trial and,
        more
        recently, the LEARN and other
        clinical trials. We expect that, in the future, we will use our cash resources
        to fund our diversification strategy, the development of our infrastructure
        and
        to conduct clinical trials. It is possible that we will be required to conduct
        a
        clinical trial of the RHEOTM System, following up MIRA-1, in order to support our
        PMA application to the FDA. Cash and cash equivalents and short-term investments
        as at March 31, 2006 were $36,525,672, compared to $41,262,795 as at December
        31, 2005. Working capital as of March 31, 2006 was $39,360,799, a decrease
        of
        $5,054,148 from $44,414,947 as at December 31, 2005.
 
 Management
        believes that the existing cash and cash equivalents and short term investments,
        together with funds expected to be generated from operations, will be sufficient
        to fund the Company’s anticipated level of operations and other demands and
        commitments until the latter half of 2007.
 
  25
  Our
        forecast of the period of time through which our financial resources will
        be
        adequate to support our operations is a forward-looking statement and involves
        risks and uncertainties. Actual results could vary as a result of a number
        of
        factors. We have based this estimate on assumptions that may prove to be
        wrong,
        and we could utilize our available capital resources sooner than we currently
        expect. Our future funding requirements will depend on many factors, including
        but not limited to:
 
 ·
            the
                costs of acquiring and operating businesses that are in line with
                the
                Company’s diversification strategy; ·
            the
                cost and results of any follow-up clinical trial of the RHEOTM System to
                support our PMA application to the FDA; ·
            the
                rate of progress, cost and results of the LEARN and other clinical
                trials; ·
            our
                ability to obtain FDA approval to market and sell the RHEOTM System in the
                United States and the timing of such approval, if
                any; ·
            our
                ability to continue to sell the RHEOTM System in
                Canada; ·
            whether
                government and third-party payors agree to reimburse treatments using
                the
                RHEOTM System; ·
            the
                costs and timing of building the infrastructure to market and sell
                the
                RHEOTM System; ·
            the
                costs of filing, prosecuting, defending and enforcing any patent
                claims
                and other intellectual property rights; ·
            the
                costs of establishing sales, marketing and distribution capabilities;
                and ·
            the
                effect of competing technological and market
                developments. 
 We
        cannot
        begin commercialization in the United States until we receive FDA approval
        for
        the RHEOTM System. Until we have discussions with the FDA, we will not be able to
        anticipate when, if ever, we will receive FDA approval. Accordingly, at this
        time, we do not know when we can expect to begin to generate revenues from
        the
        RHEOTM System in the United States. Until we can generate a sufficient amount of
        revenue, we expect to finance future cash needs through public or private
        equity
        offerings, debt financings, corporate collaboration or licensing or other
        arrangements. We cannot be certain that additional funding will be available
        on
        acceptable terms, or at all. To the extent that we raise additional funds
        by
        issuing equity securities, our stockholders may experience dilution. In
        addition, future debt financing, if available, may involve restrictive
        covenants. To the extent that we raise additional funds through collaboration
        and licensing arrangements, it may be necessary to relinquish some rights
        to our
        technologies, or grant licenses on terms that are not favorable to us. If
        adequate funds are not available, we may be required to delay or reduce the
        scope of, or eliminate, some of our commercialization efforts.
 
 **Cash
        Used in Operating Activities**
 
 Net
        cash
        used in operating activities was $4,872,848 for the three months ended March
        31,
        2006. Changes in net cash provided by operating activities in the period
        reflect
        a net loss of $5,731,952, adjusted for non-cash items of $2,141,579 and netted
        against changes in working capital of $1,282,475. Non-cash items are made
        up
        primarily of the write-down of inventory, the amortization of intangible
        assets,
        fixed assets, patents and trademarks and the premium/discounts on short-term
        investments of $2,114,510, netted by applicable deferred income taxes of
        $158,792. Additional non-cash items result from stock-based compensation
        expense
        in the period of $292,906, netted by the cumulative effect of a change in
        accounting principle of $107,045. Changes in working capital in the period
        reflect a $26,037 decrease in amounts receivable primarily from the receipt
        of
        accrued interest receivable on investments, a $957,270 increase in inventory
        as
        we maintain our order level in line with supplier expectations and a $13,532
        decrease in prepaid expenses. Amounts due to related parties increased by
        $21,861 primarily due to the amount owed to RHEO Clinic Inc. for
        50%
        of the losses incurred for assets that it was not able to dispose of as at
        the
        agreed date, being December 31, 2005 .
        Amounts
        due to stockholders also increased by $27,332 and are made up of royalty
        fees
        payable to Mr. Stock. Accounts payable and accrued liabilities decreased
        by
        $407,544 as payments are being made for costs associated with the Company’s
        activities.
 
 **Cash
        Provided by Investing Activities**
 
 Net
        cash
        provided by investing activities was $9,853,514 for the three months ended
        March
        31, 2006, resulting from the net sale of short-term investments of $9,925,000,
        offset by cash used to protect and maintain patents and trademarks in the
        amount
        of $71,486.
  26
  
 **Cash
        Provided by Financing Activities**
 
 Net
        cash
        provided by financing activities was $233,710 for the three months ended
        March
        31, 2006 from the exercise of options to purchase shares of common stock
        of the
        Company.
 
 **RECENT
        ACCOUNTING PRONOUNCEMENT**
 
 In
        December 2004, the FASB issued SFAS No. 123R which revised SFAS No. 123 and
        supersedes APB No. 25. SFAS No.
        123R requires all share-based payments to employees, including grants of
        employee stock options to be recognized in the financial statements based
        on
        their fair values. The pro forma disclosures previously permitted under SFAS
        No.
        123 is no longer an alternative to financial statement recognition. SFAS
        No.
        123R is effective at the beginning of the first interim or annual period
        beginning after June 15, 2005. In April 2005, the SEC announced the adoption
        of
        a new rule that amends the compliance dates for SFAS No. 123R. The SEC’s new
        rule allows companies to implement SFAS No. 123R at the beginning of their
        next
        fiscal year, instead of the next reporting period that begins after June
        15,
        2005. Accordingly, we adopted SFAS No. 123R beginning January 1, 2006. We
        have
        selected the Black-Scholes option-pricing model as our method of determining
        the
        fair value for our awards and will recognize compensation cost on a
        straight-line basis over the awards’ vesting periods.
 
 The
        adoption of the following recent accounting pronouncements in the first quarter
        of fiscal 2006 did not have a material impact on our results of operations
        and
        financial condition:
 
 ·
            SFAS
                No. 151, “Inventory Costs — An Amendment of ARB No. 43, Chapter
                4”; ·
            SFAS
                No. 153, “Exchanges of Nonmonetary Assets — An Amendment of APB Opinion
                No. 29”; and ·
            SFAS
                No. 154, “Accounting Changes and Error Corrections” which replaces APB No.
                20, “Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes in
                Interim Financial Statements — An Amendment of APB Opinion No.
                28”. 
 In
        November 2005, the FASB issued FASB Staff Position FAS 115-1 and FAS 124-1,
“The
        Meaning of Other-Than-Temporary Impairment and Its Application to Certain
        Investments” (“FSP 115-1”), which provides guidance on determining when
        investments in certain debt and equity securities are considered impaired,
        on
        whether that impairment is other-than-temporary and on measuring such impairment
        loss. FSP 115-1 also includes accounting considerations subsequent to the
        recognition of an other-than-temporary impairment and requires certain
        disclosures about unrealized losses that have not been recognized as
        other-than-temporary impairments. FSP 115-1 is required to be applied to
        reporting periods beginning after December 15, 2005. The adoption of FSP
        115-1
        in the first quarter of fiscal 2006 did not have a material impact on our
        results of operations and financial condition.
  27
   **ITEM
        3.**  **QUANTITATIVE
        AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**
 
 All
        of
        our sales are in U.S. dollars or are linked to the U.S. dollar, while a portion
        of our expenses are in Canadian dollars and euros. We cannot predict any
        future
        trends in the exchange rate of the Canadian dollar or euro against the U.S.
        dollar. Any strengthening of the Canadian dollar or euro in relation to the
        U.S.
        dollar would increase the U.S. dollar cost of our operations and would affect
        our U.S. dollar measured results of operations. We do not engage in any hedging
        or other transactions intended to manage these risks. In the future, we may
        undertake hedging or other similar transactions or invest in market risk
        sensitive instruments if we determine that would be advisable to offset these
        risks.
 
 **Interest
        Rate Risk**
 
 The
        primary objective of our investment activity is to preserve principal while
        maximizing interest income we receive from our investments, without increasing
        risk. We believe this will minimize our market risk.
 
 I **TEM
        4.**  **CONTROLS
        AND PROCEDURES**
 
 (a)  Management’s
        Report on Internal Control over Financial Reporting and Evaluation of Disclosure
        Controls and Procedures .
        As of
        the end of the three-month period ended March 31, 2006, an evaluation of
        the
        effectiveness of our “disclosure controls and procedures” (as such term is
        defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of
        1934,
        as amended (the “Exchange Act”)) was carried out by our principal executive
        officer (the “CEO”) and principal financial officer (the “CFO”). Based upon that
        evaluation, the CEO and CFO have concluded that, as of the end of that fiscal
        period, our disclosure controls and procedures are effective to ensure that
        information required to be disclosed by us in reports that we file or submit
        under the Exchange Act is recorded, processed, summarized and reported within
        the time periods specified in SEC rules and forms.
 
 (b)  Limitations
        on the Effectiveness of Controls .
        The
        Company maintains a system of internal accounting controls to provide reasonable
        assurance that assets are safeguarded and that transactions are executed
        in
        accordance with management’s authorization and recorded properly to permit the
        preparation of financial statements in accordance with accounting principles
        generally accepted in the United States. However, the Company’s management,
        including the CEO and CFO, does not expect that the Company’s disclosure
        controls or internal controls will prevent all errors and all fraud. A control
        system, no matter how well conceived and operated, can provide only reasonable,
        not absolute, assurance that the objectives of the control system are met.
        Further, the design of a control system must reflect the fact that there
        are
        resource constraints, and the benefits of more controls must be considered
        relative to their costs. Because of the inherent limitations in all control
        systems, no evaluation of controls can provide absolute assurance that all
        control issues and instances of fraud, if any, within the Company have been
        detected. These inherent limitations include the realities that judgments
        in
        decision-making can be faulty and that breakdowns can occur because of a
        simple
        error or mistake. Additionally, controls can be circumvented by the individual
        acts of some persons, by collusion of two or more people or by management
        override of the controls. The design of any system of controls also is based
        in
        part upon certain assumptions about the likelihood of future events, and
        there
        can be no absolute assurance that any design will succeed in achieving its
        stated goals under all potential future conditions. Over time, controls may
        become inadequate because of changes in conditions, or the degree of compliance
        with the policies or procedures may deteriorate. Because of the inherent
        limitations in a cost-effective control system, misstatement due to error
        or
        fraud may occur and not be detected.
 
 (c)  Changes
        in Internal Control over Financial Reporting .
        During
        the three-month period ended March 31, 2006, there were no changes in our
        internal control over financial reporting that has materially affected, or
        is
        reasonably likely to materially affect, our internal control over financial
        reporting.
  28
  
 
 PART
        II.
        OTHER INFORMATION
 
 ITEM
        1.
        LEGAL PROCEEDINGS
 
 We
        are
        not aware of any material litigation involving us that is outstanding,
        threatened or pending.
 
 ITEM
        2.
        UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
 On
        January 3, 2006, we issued an aggregate of 20,926 shares of Common Stock
        to
        Donald Sanders as a result of the exercise of options to purchase common
        shares
        at an exercise price per share of $0.13 in consideration for cash.
 
 On
        January 18, 2006, we issued an aggregate of 25,000 shares of Common Stock
        to
        Ramon Gonzales as a result of the exercise of options to purchase common
        shares
        at an exercise price per share of $0.99 in consideration for cash.
 
 On
        January 18, 2006, we issued an aggregate of 50,000 shares of Common Stock
        to
        Ramon Gonzales as a result of the exercise of options to purchase common
        shares
        at an exercise price per share of $4.00 in consideration for cash.
 
 On
        March
        22, 2006, we issued an aggregate of 4,800 shares of Common Stock to Karen
        Coyle
        as a result of the exercise of options to purchase common shares at an exercise
        price per share of $1.30 in consideration for cash.
 
 Each
        of
        these issuances was exempt from registration under the Securities Act of
        1933,
        as amended, pursuant to Rule 701 thereunder.
 
 ITEM
        3.
        DEFAULTS UPON SENIOR SECURITIES
 
 There
        has
        not been any default upon our senior securities.
 
 ITEM
        4.
        SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
 None.
 
 ITEM
        5.
        OTHER INFORMATION
 
 None.
 
  29
   
 
 ITEM
        6.
        EXHIBITS
 
 Index
        to Exhibits
  10.1
              Employment
                  Agreement between Nozhat Choudry and the Registrant dated as of
                  February
                  10, 2006.10.2
              Release
                  Agreement between John Caloz and the Registrant, dated as of April
                  13,
                  2006, terminating the Employment Agreement between the Registrant
                  and John
                  Caloz dated May 18, 2006.10.3
              Release
                  Agreement between Irving Siegel and the Registrant, dated as of
                  April 13,
                  2006, terminating the Employment Agreement between the Registrant
                  and
                  Irving Siegel dated as of August 3, 2003, as amended by the Amending
                  Agreement between the Registrant and Irving Siegel dated as of
                  September
                  1, 2005.10.4
              Termination
                  Agreement among the Registrant, AMD Medical Services Inc., Irving
                  Siegel,
                  OccuLogix Canada Corp., Rheo Clinic Inc. and TLC Vision Corporation
                  dated
                  as of April 13, 2006, terminating, among other things, the Consulting
                  Agreement among the Registrant, AMD Medical Services Inc. and Irving
                  Siegel dated September 1, 2005.10.5
              Amending
                  Agreement between the Registrant and William G. Dumencu, dated
                  as of April
                  14, 2006, amending the Employment Agreement between the Registrant
                  and
                  William G. Dumencu dated as of August 1, 2003, as amended by the
                  Amendment
                  between the Registrant and William G. Dumencu dated August 1, 2003
                  and
                  effective September 30, 2003.10.6
              Amending
                  Agreement between the Registrant and Nozhat Choudry, dated as of
                  April 1,
                  2006, amending the Employment Agreement between the Registrant
                  and Nozhat
                  Choudry dated as of February 10, 2006.10.7
              Amending
                  Agreement between the Registrant and John Cornish, dated as of
                  April 13,
                  2006, amending the Employment Agreement between the Registrant
                  and John
                  Cornish dated as of April 1, 2005, as amended by the Amending Agreement
                  between the Registrant and John Cornish dated as of June 1,
                  2005.31.1
              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.
 
  30
   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:May
                  10, 2006
              By:
              /s/ Elias
                  VamvakasChief
                  Executive Officer