**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, 2007**





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





For
      the
      transition period from _______________ to _______________





Commission
      file number: 000-51030







**OccuLogix,
      Inc.**


(Exact
      name of registrant as


specified
      in its charter)


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





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


(Address
      of principal executive offices)





**(905)
      602-0887**


(Registrant’s
      telephone number)





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





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





Large
                accelerated filer
            Accelerated
                filerX
            Non-accelerated
                filer


Indicate
      by check mark whether the registrant is a shell company as defined in Rule
      12b-2
      of the Exchange Act. (Check one):  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: 57,303,895
      as of May 9, 2007








1


Special
      Note Regarding Forward-Looking Statements











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





2








**SPECIAL
      NOTE REGARDING FORWARD-LOOKING STATEMENTS**





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




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




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












3


**OccuLogix,
      Inc.**









PART1.
            FINANCIAL
                INFORMATIONITEM1.
            CONSOLIDATED
                FINANCIAL STATEMENTS














4
 **OccuLogix,
              Inc.**


**CONSOLIDATED
      BALANCE SHEETS**


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


(Unaudited)


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





**March
                  31,**
                **2007**
              
              **December
                  31,**
                **2006****$**
              
              **$****ASSETS****Current**Cash
                  and cash equivalents
              
              
              5,266,398
              
              
              5,740,697Short-term
                  investments
              
              
              14,810,000
              
              
              9,785,000Amounts
                  receivable, net
              
              
              333,015
              
              
              166,209Inventory,
                  net
              
              
              2,742,225
              
              
              2,715,737Prepaid
                  expenses
              
              
              670,834
              
              
              680,476Deposit
              
              
              10,442
              
              
              10,442Other
                  current assets
              
              
              89,800
              
              
              79,200**Total
                  current assets**
              
              
              23,922,714
              
              
              19,177,761Fixed
                  assets, net
              
              
              837,585
              
              
              860,717Patents
                  and trademarks, net
              
              
              265,875
              
              
              234,841Intangible
                  asset, net
              
              
              54,391,597
              
              
              55,683,399Goodwill
              
              
              14,446,977
              
              
              14,446,977**Total
                  assets**
              
              
              93,864,748
              
              
              90,403,695**LIABILITIES
                  AND STOCKHOLDERS’ EQUITY****Current**Accounts
                  payable
              
              
              438,757
              
              
              395,392Accrued
                  liabilities
              
              
              2,343,563
              
              
              2,090,937Due
                  to stockholders
              
              
              103,777
              
              
              152,406Obligation
                  under warrants
              
              
              2,626,195
              
              
              —Current
                  portion of other long-term liability
              
              
              3,000,000
              
              
              3,000,000**Total
                  current liabilities**
              
              
              8,512,292
              
              
              5,638,735Deferred
                  tax liability, net
              
              
              11,460,067
              
              
              18,939,417Other
                  long-term liability
              
              
              3,625,505
              
              
              3,420,609**Total
                  liabilities**
              
              
              23,597,864
              
              
              27,998,761**Minority
                  interest**
              
              
              629,996
              
              
              1,184,844**Stockholders’
                  equity**Capital
                  stockCommon
                  stock
              
              
              57,304
              
              
              50,627Par
                  value of $0.001 per shareAuthorized:
                  75,000,000; Issued and outstanding:March
                  31, 2007 - 57,303,895; December 31, 2006 - 50,626,562Additional
                  paid-in capital
              
              
              362,402,981
              
              
              354,320,116Accumulated
                  deficit
              
              
              (292,823,397
              )
              
              (293,150,653
              )**Total
                  stockholders’ equity**
              
              
              69,636,888
              
              
              61,220,090**Total
                  liabilities and stockholders’ equity**
              
              
              93,864,748
              
              
              90,403,695
  *See
        accompanying notes to interim consolidated financial
        statements*





5
 **OccuLogix,
            Inc.**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


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


(Unaudited)


**Three
                  months ended,****March
                  31,****2007**
              
              **2006****$**
              
              **$****Revenue**Retina
              
              
              90,000
              
              
              —Glaucoma
              
              
              39,625
              
              
              —**Total
                  revenue**
              
              
              129,625
              
              
              —**Cost
                  of goods sold**RetinaCost
                  of goods sold
              
              
              7,100
              
              
              1,625,000Royalty
                  costs
              
              
              25,000
              
              
              25,000GlaucomaCost
                  of goods sold
              
              
              55,508
              
              
              —Royalty
                  costs
              
              
              8,733
              
              
              —**Total
                  cost of goods sold**
              
              
              96,341
              
              
              1,650,00033,284
              
              
              (1,650,000
              )**Operating
                  expenses**General
                  and administrative
              
              
              3,475,368
              
              
              1,996,585Clinical
                  and regulatory
              
              
              2,797,837
              
              
              1,475,387Sales
                  and marketing
              
              
              752,787
              
              
              425,986Restructuring
                  charges
              
              
              —
              
              
              819,6427,025,992
              
              
              4,717,600Loss
                  from operations
              
              
              (6,992,708
              )
              
              (6,367,600
              )**Other
                  income (expense)**Interest
                  income
              
              
              215,438
              
              
              370,926Changes
                  in fair value of obligation under warrants and warrant
                  expense
              
              
              (723,980
              )
              
              —Interest
                  and amortization of discount on future payment expense
              
              
              (221,537
              )
              
              —Other
              
              
              15,845
              
              
              (381
              )Minority
                  interest
              
              
              554,848
              
              
              —(159,386
              )
              
              370,545Loss
                  before income taxes and cumulative effect of a change in accounting
                  principle
              
              
              (7,152,094
              )
              
              (5,997,055
              )Recovery
                  of income taxes
              
              
              2,879,350
              
              
              158,058Loss
                  before cumulative effect of a change in accounting
                  principle
              
              
              (4,272,744
              )
              
              (5,838,997
              )Cumulative
                  effect of a change in accounting principle
              
              
              —
              
              
              107,045**Net
                  loss for the period**
              
              
              (4,272,744
              )
              
              (5,731,952
              )**Weighted
                  average number of shares outstanding**
                **-
                  basic and diluted**
              
              
              54,558,769
              
              
              42,166,561Loss
                  before cumulative effect of a change in accounting principle per
                  share -
                  basic and diluted
              
              
              (0.08
              )
              
              (0.14
              )Cumulative
                  effect of a change in accounting principle per share - basic and
                  diluted
              
              
              —
              
              
              —Net
                  loss per share - basic and diluted
              
              
              (0.08
              )
              
              (0.14
              )


*See
      accompanying notes to interim consolidated financial
      statements*





6
 **OccuLogix,
            Inc.**





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


(expressed
      in U.S. dollars)


(Unaudited)





**Voting
                common stock at**
              **par
                value**
            **Additional
                paid-in capital**
            **Accumulated
                deficit**
            **Net
                stockholders’ equity****shares
                issued****#**
            **$**
            **$**
            **$**
            **$****Balance,
                December 31, 2006**
            50,626,562
            50,627
            354,320,116
            (293,150,653)
            61,220,090Stock-based
                compensation
            ―
            ―
            562,817
            ―
            562,817Shares
                issued on private placement of common stock
            6,677,333
            6,677
            8,053,967
            ―
            8,060,644Share
                issue costs
            ―
            ―
            (619,845)
            ―
            (619,845)Contribution
                of inventory from related party
            ―
            ―
            39,240
            ―
            39,240Change
                in OcuSense, Inc.’s stockholders’ equity, stock-based
                compensation
            ―
            ―
            46,686
            ―
            46,686Cumulative
                effect of adoption of Financial Accounting Standards Board Interpretation
                No. 48 "Accounting for Uncertainty in Income Taxes - An Interpretation
                of
                FASB Statement No. 109"
            —
            —
            —
            4,600,000
            4,600,000Net
                loss for the period
            ―
            ―
            ―
            (4,272,744)
            (4,272,744)**Balance,
                March 31, 2007**
            57,303,895
            57,304
            362,402,981
            (292,823,397)
            69,636,888





*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,****2007**
              
              **2006****$**
              
              **$****OPERATING
                  ACTIVITIES**Net
                  loss for the period
              
              
              (4,272,744
              )
              
              (5,731,952
              )Adjustments
                  to reconcile net loss to cash used in operating
                  activities:Write-down
                  of inventory
              
              
              —
              
              
              1,625,000Stock-based
                  compensation
              
              
              609,503
              
              
              292,906Amortization
                  of fixed assets
              
              
              94,321
              
              
              32,356Amortization
                  of patents and trademarks
              
              
              520
              
              
              1,488Amortization
                  of intangible asset
              
              
              1,291,802
              
              
              429,167Amortization
                  of discount on future cash payments
              
              
              204,896
              
              
              —Amortization
                  of premiums/discounts on short-term investments
              
              
              —
              
              
              26,499Changes
                  in fair value of obligation under warrants and warrant
                  expense
              
              
              723,980
              
              
              —Deferred
                  income taxes
              
              
              (2,879,350
              )
              
              (158,792
              )Cumulative
                  effect of a change in accounting principle
              
              
              —
              
              
              (107,045
              )Minority
                  interest
              
              
              (554,848
              )
              
              —Net
                  change in non-cash working capital balances related to
                  operations
              
              
              92,350
              
              
              (1,282,475
              )**Cash
                  used in operating activities**
              
              
              (4,689,570
              )
              
              (4,872,848
              )**INVESTING
                  ACTIVITIES**Sale
                  of (purchase of) short-term investments
              
              
              (5,025,000
              )
              
              9,925,000Additions
                  to fixed assets
              
              
              (71,189
              )
              
              ―Additions
                  to patents and trademarks
              
              
              (31,554
              )
              
              (71,486
              )**Cash
                  (used in) provided by investing activities**
              
              
              (5,127,743
              )
              
              9,853,514**FINANCING
                  ACTIVITIES**Proceeds
                  from the exercise of common stock options
              
              
              —
              
              
              233,710Proceeds
                  from the issuance of common stock
              
              
              10,016,000
              
              
              ―Share
                  issuance costs
              
              
              (672,986
              )
              
              ―**Cash
                  provided by financing activities**
              
              
              9,343,014
              
              
              233,710**Net
                  (decrease) increase in cash and cash equivalents**
                **during
                  the period**
              
              
              (474,299
              )
              
              5,214,376Cash
                  and cash equivalents, beginning of period
              
              
              5,740,697
              
              
              9,599,950**Cash
                  and cash equivalents, end of period**
              
              
              5,266,398
              
              
              14,814,326


*See
      accompanying notes to interim consolidated financial
      statements*





8


**OccuLogix,
      Inc.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


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


March
      31,
      2007 (Unaudited)






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




**Basis
      of** **presentation**




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, 2007 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 /A
      filed
      with the U.S. Securities and Exchange Commission (the “SEC”) on March 29, 2007.
      Interim results are not necessarily indicative of results for a full
      year.





**Accounting** **policies**




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





*Income
      taxes*





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





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





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





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





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





**Going
      concern uncertainty**




The
      accompanying consolidated financial statements have been prepared on the basis
      that the Company will continue as a going concern. However, during the three
      months ended March 31, 2007, the Company sustained losses of $ 4,272,744
      and used cash of $4,689,570 to fund its operations. The Company’s history of
      losses and financial condition raise substantial doubt about the ability of
      the
      Company to continue as a going concern.





On
      February 6, 2007, the Company completed a private placement of shares of its
      common stock and warrants for total gross proceeds of $10,016,000 (less
      transaction costs of $770,208).





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





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





2.RESTRUCTURING
      CHARGES




In
      March
      2006, the Company implemented a number of structural and management changes
      designed to support both the continued development of its RHEOTM System to treat
      the dry form of age-related macular degeneration ,
      or AMD,
      and to execute its accelerated diversification strategy within ophthalmology.
      In
      accordance with Statement of Financial Accounting Standards (“SFAS”) No. 146,
“Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS No.
      146”), the Company recognized $819,642 in restructuring charges in the three
      months ended March 31, 2006.





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





9


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 Veris Health Sciences Inc.
      (“Veris”) at a price lower than the Company’s cost. Accordingly, the Company
      wrote down the value of its treatment sets to reflect this current net
      realizable value as at March 31, 2006. During the three months ended March 31,
      2007 and 2006, the Company recognized a provision related to inventory of nil
      and $1,625,000, respectively, based on the above analysis.





As
      at
      March 31, 2007 and December 31, 2006, the Company had inventory reserves of
      $4,902,620 and $5,101,394, respectively. The decrease in the inventory reserve
      is due to the sale of inventory during the three-month period ended March 31,
      2007 that had previously been provided for.


4.RECENT
      ACCOUNTING PRONOUNCEMENTS




In
      June
      2006, FASB issued FIN No. 48, which clarifies the accounting for uncertainty
      in
      tax positions. FIN No. 48 requires that the Company recognize, in its financial
      statements, the impact of a tax position, if that position is more likely than
      not of being sustained on audit, based on the technical merits of the position.
      FIN No. 48 is effective for fiscal years beginning after December 15, 2006. As
      a
      result of the adoption of FIN No. 48 in the first quarter of fiscal 2007, the
      Company recognized a deferred tax asset in the amount of $4.6 million resulting
      in the reduction of the January 1, 2007 deferred tax liability balance with
      a
      corresponding reduction to accumulated deficit as at January 1,
      2007.





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





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


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





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





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





5.CAPITAL
      STOCK




**(a)**
            **Common
                stock**





On
      February 1, 2007, the Company entered into a Securities Purchase Agreement
      (the
“Securities Purchase Agreement”) with certain institutional investors, pursuant
      to which the Company agreed to issue to those investors an aggregate of
      6,677,333 shares of the Company’s common stock (the “Shares”) and five-year
      warrants exercisable into an aggregate of 2,670,933 shares of the Company’s
      common stock (the “Warrants”). The per share purchase price of the Shares was
      $1.50, and the per share exercise price of the Warrants is $2.20, subject to
      adjustment. The Warrants will become exercisable on August 6, 2007. Pursuant
      to
      the Securities Purchase Agreement, on February 6, 2007, the Company issued
      the
      Shares and the Warrants. The gross proceeds of the sale of the Shares and
      Warrants totaled $10,016,000 (less transaction costs of $770,208). On February
      6, 2007, the Company also issued to Cowen and Company, LLC a warrant exercisable
      into an aggregate of 93,483 shares of the Company’s common stock (the “Cowen
      Warrant”) in part payment of the placement fee payable to Cowen and Company, LLC
      for the services it had rendered as the placement agent in connection with
      the
      sale of the Shares and the Warrants. All of the terms and conditions of the
      Cowen Warrant (other than the number of shares of the Company's common stock
      into which the Cowen Warrant is exercisable) are identical to those of the
      Warrants. The estimated grant date fair value of the Cowen Warrant of $97,222
      is
      included in the transaction cost of $770,208 (note 5(c)).





**(b)**
            **Stock-based
                compensation**





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





Options
      granted may be time-based or performance-based options. The vesting of
      performance-based options is contingent upon meeting company-wide goals,
      including obtaining U.S. Food and Drug Administration, or 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,
“Share-Based Payments”, requiring the recognition of expense related to the fair
      value of its stock-based compensation awards. The Company elected to use the
      modified prospective transition method as permitted by SFAS No. 123R and
      therefore has not restated its financial results for prior periods. Under this
      transition method, stock-based compensation expense for the three months ended
      March 31, 2007 and 2006 includes compensation expense for all stock-based
      compensation awards granted prior to, but not yet vested as of, January 1,
      2006
      based on the grant date fair value estimated in accordance with the original
      provisions of SFAS No. 123, “Accounting for Stock-Based Compensation”.
      Stock-based compensation expense for all stock-based compensation awards granted
      subsequent to January 1, 2006 was based on the grant date fair value estimated
      in accordance with the provisions of SFAS No. 123R. The Company recognizes
      compensation expense for stock option awards on a straight-line basis over
      the
      requisite service period of the award.


10


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,****2007**
              
              **2006****$**
              
              **$**General
                  and administrative
              
              
              373,188
              
              
              169,349Clinical
                  and regulatory
              
              
              103,188
              
              
              27,433Sales
                  and marketing
              
              
              133,127
              
              
              96,124Stock-based
                  compensation expense before income taxes (i)
              
              
              609,503
              
              
              292,906


(i)
            The
                tax benefit associated with the Company’s stock-based compensation expense
                for the three months ended March 31, 2007 and 2006 is $219,421 and
                $108,375, respectively. These amounts have not been recognized in
                the
                Company’s financial statements for these
                three-month periods as it is more likely than not that the Company
                will
                not realize these benefits.





Net
      cash
      proceeds from the exercise of stock options were nil and $233,710 for the three
      months ended March 31, 2007 and 2006, respectively. No income tax benefit was
      realized from stock option exercises during the three months ended March 31,
      2007 and 2006. In accordance with SFAS No. 123R, the Company presents excess
      tax
      benefits from the exercise of stock options, if any, as financing cash flows
      rather than operating cash flows.





As
      a
      result of adopting SFAS No. 123R on January 1, 2006, the Company’s net loss for
      the three months ended March 31, 2007 and 2006 is $476,089 and $100,842,
      respectively, higher than if it had continued to account for share-based
      compensation under Accounting Principles Board Opinion No. 25, “Accounting for
      Stock Issued to Employees” (“APB No. 25”). Basic and diluted loss per share for
      the three months ended March 31, 2007 and 2006 will be $0.01 and nil lower
      than
      the reported basic and diluted loss per share of $0.08 and $0.14, respectively,
      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.





The
      fair
      value of stock options granted during the three months ended March 31, 2007
      and
      2006 was $1.22 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,****2007**
              
              **2006**Volatility
              
              
              77.0%
              
              
              98.7%Expected
                  life of options
              
              
              5.4
                  years
              
              
              5.9
                  yearsRisk-free
                  interest rate
              
              
              4.55%
              
              
              4.65%Dividend
                  yield
              
              
              0%
              
              
              0%


The
      Company’s computation of expected volatility for the three months ended March
      31, 2007 and 2006 is based on a comparable company’s historical stock prices as
      the Company did not have sufficient historical data. The Company’s computation
      of expected life has been estimated using the “short-cut approach” as provided
      in SAB No. 107 as options granted by the Company meet the criteria of “plain
      vanilla” options as defined in SAB No. 107. Under this approach, estimated life
      is calculated to be the mid-point between the vesting date and the end of the
      contractual period. The risk-free interest rate for an award is based on the
      U.S. Treasury yield curve with a term equal to the expected life of the award
      on
      the date of grant.





A
      summary
      of the options issued during the three months ended March 31, 2007 and the
      total
      number of options outstanding as of that date are set forth below:





Number
                of Options Outstanding
              #
            Weighted-Average
                Exercise Price
              $
            Weighted-Average
                Remaining Contractual Life
              (years)
            Aggregate
                Intrinsic Value
              $Outstanding,
                December 31, 2006
            4,237,221
            1.75Granted
            296,250
            1.82Exercised
            —
            —Forfeited
            (225,750)
            2.05**Outstanding,
                March 31, 2007**
            **4,307,721**
            **1.74**
            **7.92**
            **711,589****Vested
                or expected to vest, March 31, 2007**
            **3,283,396**
            **1.65**
            **7.13**
            **711,589****Exercisable,
                March 31, 2007**
            **2,798,470**
            **1.58**
            **6.93**
            **711,589**





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 2007 of $1.62 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, 2007). This amount
      changes according to the fair market value of the Company’s stock.






11




As
      at
      March 31, 2007, $2,965,459 of total unrecognized compensation cost related
      to
      stock options is expected to be recognized over a weighted-average period of
      2.44 years.





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





On
      February 6, 2007, pursuant to the Securities Purchase Agreement between the
      Company and certain institutional investors (the “Securities Purchase
      Agreement”) (note 5(a)), the Company issued five-year warrants exercisable into
      an aggregate of 2,670,933 shares of the Company’s common stock to these
      investors. On February 6, 2007, the Company also issued a five-year warrant
      exercisable into an aggregate of 93,483 shares of the Company’s common stock to
      Cowen and Company, LLC in part payment of the placement fee payable to Cowen
      and
      Company, LLC for the services it had rendered as the placement agent in
      connection with the private placement of the Company’s shares of common stock
      and warrants pursuant to the Securities Purchase Agreement. The per share
      exercise price of the warrants is $2.20, subject to adjustment, and the warrants
      will become exercisable on August 6, 2007. All of the terms and conditions
      of
      the warrants issued to Cowen and Company, LLC (other than the number of shares
      of the Company's common stock into which the warrant is exercisable) are
      identical to those of the warrants issued to the institutional investors.





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





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





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





The
      Company initially allocated the total proceeds received, pursuant to the
      Securities Purchase Agreement, to the shares of common stock and warrants issued
      based on their relative fair values. This resulted in an allocation of
      $2,052,578 to warrant liability which includes the fair value of the warrant
      issued in part payment of the placement fee payable to Cowen and Company, LLC
      of
      $97,222.





In
      addition, SFAS No. 133 requires the Company to record the outstanding
      derivatives at fair value at the end of each reporting period resulting in
      an
      adjustment to the recorded liability of the derivative, with any gain or loss
      recorded in earnings of the applicable reporting period. The Company therefore
      estimated the fair value of the warrants as at March 31, 2007 and determined
      the
      aggregate fair value to be $2,626,195, an increase of $573,617 over the initial
      measurement of the fair value of the warrants on the date of issuance.
      Accordingly, the Company recognized a loss of $573,617 in its consolidated
      statement of operations for the three months ended March 31, 2007 which reflect
      the increase in the Company’s obligation to its warrant holders as at March 31,
      2007.





Transaction
      costs associated with the issuance of the warrants of $150,363 has been recorded
      as a warrant expense in the Company’s consolidated statements of operations for
      the three months ended March 31, 2007.





A
      summary
      of the warrants issued during the three months ended March 31, 2007 and the
      total number of warrants outstanding as of that date are set forth
      below:


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


**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,****2007**
              
              **2006**Weighted
                  average number of shares outstanding - basic
              
              
              54,558,769
              
              
              42,166,561Effect
                  of dilutive securities:Stock
                  options
              
              
              442,152
              
              
              1,080,422Weighted
                  average number of shares - diluted
              
              
              55,000,921
              
              
              43,246,983


The
      warrants outstanding as at March 31, 2007 have not been included in the
      calculation of the diluted number of shares outstanding as at March 31, 2007
      since the per share exercise price of the warrants of $2.20 is higher than
      the
      average per share price of the Company’s common stock for the three months ended
      March 31, 2007 of $1.63.





**7.**
            **RELATED
                PARTY TRANSACTIONS**




The
      following are the Company’s related party transactions:





**TLC
      Vision Corporation and Diamed Medizintechnik GmbH**




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





12


The
      $5,000,000 portion of the $12,000,000 commitment which was not convertible
      into
      the Company’s common stock was not advanced and the commitment was terminated
      prior to the completion of the Company’s initial public offering of shares of
      its common stock. During the years ended December 31, 2004 and 2003, the Company
      issued an aggregate of $4,350,000 and $2,650,000 to TLC Vision and Diamed,
      respectively, under the convertible portion of the grid debentures. On December
      8, 2004, as part of the corporate reorganization relating to the Company’s
      initial public offering, the Company issued 7,106,454 shares of its common
      stock
      to TLC Vision and Diamed, upon conversion of $7,000,000 of aggregate principal
      amount of convertible debentures at a conversion price of $0.98502 per share.
      Collectively, as at March 31, 2007, the two companies have a combined 38.9%
      equity interest in the Company on a fully diluted basis.





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





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




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





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





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





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





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





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





The
      Company receives free inventory from Asahi Medical for the purpose of the
      RHEO-AMD trial, the LEARN, or Long-term Efficacy in AMD from Rheopheresis in
      North America, trials and related clinical studies. The Company has accounted
      for this inventory at a value equivalent to the cost the Company has paid for
      the same filters purchased from Asahi Medical for purposes of commercial sales
      to the Company’s customers. The value of the free inventory received from Asahi
      Medical was $39,240 and $25,500 for the three months ended March 31, 2007 and
      2006, 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 each of the three months ended March 31,
      2007
      and 2006 and the year ended December 31, 2006, the Company paid Mr. Stock nil
      as
      royalty fees. Included in due to stockholders as at March 31, 2007 and December
      31, 2006 is $48,022 and $48,022, respectively, due to Mr. Stock.





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





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





**Other**




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





During
      the three months ended March 31, 2007, ATI made available to the Company, upon
      request, the services of certain of ATI’s employees and consultants on a per
      diem basis. During the three months ended March 31, 2007, the Company paid
      ATI
      $18,107 under this arrangement (2006 - nil). Included in accounts payable as
      at
      March 31, 2007 and December 31, 2006 is $18,535 and $9,629, respectively, due
      to
      ATI.





13


Effective
      January 1, 2004, the Company entered into a rental agreement with Cornish
      Properties Corporation, a company owned and managed by Mr. Cornish, pursuant
      to
      which the Company leases space from Cornish Properties Corporation at $2,745
      per
      month. The original term of the lease extended to December 31, 2005. On November
      8, 2005, as provided for in the rental agreement, the Company extended the
      term
      of the rental agreement with Cornish Properties Corporation for another year,
      ending December 31, 2006. In each of the years ended December 31, 2006 and
      2005,
      the Company paid Cornish Properties Corporation an amount of $32,940 as rent.
      On
      December 19, 2006, the Company extended the term of the rental agreement with
      Cornish Properties Corporation for another year, ending December 31, 2007,
      at a
      lease payment of $2,168 per month.




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





The
      Company entered into a consultancy and non-competition agreement on July 1,
      2003
      with the Center for Clinical Research (“CCR”), then a significant shareholder of
      the Company, which requires the Company to pay a fee of $5,000 per month. For
      the year ended December 31, 2003, CCR agreed to forego the payment of $75,250
      due to it in exchange for options to purchase 20,926 shares of the Company’s
      common stock at an exercise price of $0.13 per share. In addition, CCR agreed
      to
      the repayment of the balance of $150,500 due to it at a rate of $7,500 per
      month
      beginning in July 2003. On August 22, 2005, the Company amended the consultancy
      and non-competition agreement with CCR such that the fee payable to it was
      increased from $5,000 to $15,000 per month effective January 1, 2005. The
      monthly fee is fixed regardless of actual time incurred by CCR in performance
      of
      the services rendered to the Company. The agreement allows either party to
      convert the payment arrangement to a fee of $2,500 daily. In the event of such
      conversion, CCR shall provide services on a daily basis as required by the
      Company and will invoice the Company for the total number of days that services
      were provided in that month. The amended consultancy and non-competition
      agreement provides for the payment of a one-time bonus of $200,000 upon receipt
      by the Company of FDA approval of the RHEOTM System and the grant of 60,000
      options to CCR at an exercise price of $7.15 per share. The stockholders of
      the
      Company approved the adjustment of the exercise price of these options to $2.05
      per share on June 23, 2006. These options were scheduled to vest as to 100%
      when
      and if the Company receives FDA approval of the RHEOTM System on or before
      November 30, 2006, as to 80% when and if the Company receives FDA approval
      after
      November 30, 2006 but on or before January 31, 2007 and as to 60% when and
      if
      the Company receives FDA approval after January 31, 2007. In August 2006, by
      letter agreement between the Company and CCR, it was agreed that the monthly
      fee
      of $15,000 would be suspended at the end of August 2006 until CCR’s services
      will be required by the Company in the future. This resulted in a combined
      consulting expense, included within clinical and regulatory expense for the
      three months ended March 31, 2007 and 2006, of $11,594 and $51,071,
      respectively.





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





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





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





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





In
      March
      2007, Veris negotiated new payment terms with the Company, and it was agreed
      that payment for treatment sets shipped subsequent to March 2007 must be
      received within 180 days of shipment.





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





During
      the fourth quarter of 2004, the Company began a business relationship with
      Innovasium Inc. Innovasium Inc. designed and built some of the Company’s
      websites and also created some of the sales and marketing materials to reflect
      the look of the Company’s websites. Daniel Hageman, who is the President and one
      of the owners of Innovasium Inc., is the spouse of an officer of the Company.
      During the three months ended March 31, 2007 and 2006 and the year ended
      December 31, 2006, the Company paid Innovasium Inc. C$13,737, C$27,636 and
      C$44,219, respectively. Included in accounts payable and accrued liabilities
      as
      at March 31, 2007 and December 31, 2006 is C$17,341 and nil, respectively,
      due
      to Innovasium Inc. These amounts are expensed in the period incurred and paid
      when due.





14


8.DUE
      TO
      STOCKHOLDERS




**March
                31,**
            
            **December
                31,****2007**
            
            **2006****$**
            
            **$****Due
                to:**TLC
                Vision Corporation
            
            
            43,255
            
            
            91,884Other
                stockholder
            
            
            60,522
            
            
            60,522103,777
            
            
            152,406





Included
      in amounts due to stockholders as at March 31, 2007 and December 31, 2006 is
      $43,255 and $91,884, respectively, owing to TLC Vision for its payment of
      benefits of certain employees of the Company and for computer and administrative
      support.





The
      balances due to other stockholder as of March 31, 2007 and December 31, 2006
      is
      $60,522 and $60,522, respectively, and is for amounts due to Mr. Hans Stock
      for
      royalty fees (note 7).





9.GUARANTY




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





**10.**
            **ACCRUED
                LIABILITIES**




Accrued
      liabilities consist of the following:





**March
                31, 2007**
            **December
                31, 2006****$**
            **$**Due
                to professionals
            478,276
            709,047Due
                to clinical trial sites
            229,562
            195,074Due
                to clinical trial specialists
            323,777
            206,642Product
                development costs
            297,075
            124,312Due
                to employees and directors
            542,889
            464,146Sales
                tax and capital tax payable
            12,394
            12,394Due
                to MeSys GmbH for pump parts
            15,981
            —Corporate
                compliance
            265,219
            227,475Interest
                payable
            —
            10,758Miscellaneous
            178,390
            141,0892,343,563
            2,090,937




11.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,****2007**
                
                
                **2006****$**
                
                
                **$**Due
                    to related party
                
                
                —
                
                
                21,861Amounts
                    receivable
                
                
                (166,806
                )
                
                26,037Inventory
                
                
                12,752
                
                
                (957,270
                )Prepaid
                    expenses
                
                
                9,642
                
                
                13,532Deposit
                
                
                —
                
                
                (6,423
                )Accounts
                    payable
                
                
                43,365
                
                
                (422,023
                )Accrued
                    liabilities
                
                
                252,626
                
                
                14,479Due
                    to stockholders
                
                
                (48,629
                )
                
                27,332Other
                    current assets
                
                
                (10,600
                )
                
                —92,350
                
                
                (1,282,475
                )
  
 15


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,****2007**
              
              **2006****$**
              
              **$**Non-cash
                  financing activitiesWarrant
                  issued in part payment of placement fee
              
              
              97,222
              
              
              —Free
                  inventory
              
              
              39,240
              
              
              25,500Additional
                  cash flow informationInterest
                  paid
              
              
              11,180
              
              
              —


12.SEGMENTED
      INFORMATION




The
      Company has two reportable segments: retina and glaucoma. The retina segment
      is
      in the business of commercializing the RHEOTM System which is used to perform the
      RheopheresisTM procedure, a procedure that selectively removes molecules from
      plasma, which is designed to treat Dry AMD. The Company began limited
      commercialization of the RHEOTM System in Canada in 2003 and continues to support
      its sole customer, Veris, in its commercial activities in Canada. On January
      26,
      2007, the FDA issued an IDE number for RHEO-AMD, the Company’s new clinical
      study of the RHEOTM System ,
      allowing patient enrollment to commence within the first quarter of 2007. The
      glaucoma segment is in the business of providing treatment for glaucoma with
      the
      use of the components of the SOLX Glaucoma System which are used to provide
      physicians with multiple options to manage intraocular pressure. The Company
      is
      seeking to obtain 510(k) approval to market the components of the SOLX Glaucoma
      System in the United States. The Company acquired the glaucoma segment in the
      acquisition of SOLX on September 1, 2006; therefore, no amounts are shown for
      the segment in periods prior to September 1, 2006. Other is made up of the
      TearLabTM business which is currently developing technologies that enable eye
      care practitioners to test, at the point-of-care, for highly sensitive and
      specific biomarkers in tears using nanoliters of tear film. The Company acquired
      the TearLabTM business in the acquisition of 50.1% of the capital stock of
      OcuSense, Inc. (“OcuSense”) on a fully diluted basis, on November 30, 2006;
      therefore, no amounts are shown in periods prior to November 30, 2006. The
      TearLabTM business does not meet the quantitative criteria to be disclosed
      separately as a reportable segment.





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





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





The
      Company’s business units were as follows:





**Retina**
            **Glaucoma**
            **Other**
            **Total****$**
            
            **$**
            
            **$**
            
            **$****Three
                months ended March 31, 2007**Revenue
            
            90,000
            
            39,625
            
            —
            
            129,625Expenses:Cost
                of goods sold
            
            32,100
            
            64,241
            
            —
            
            96,341Operating
            
            2,831,167
            
            1,686,143
            
            1,122,039
            
            5,639,349Depreciation
                and amortization
            
            464,897
            
            803,084
            
            118,662
            
            1,386,643Loss
                from operations
            
            (3,238,164)
            
            (2,513,843)
            
            (1,240,701)
            
            (6,992,708)Interest
                income
            
            203,868
            
            —
            
            11,570
            
            215,438Interest
                expense
            
            (221,115)
            
            —
            
            (422)
            
            (221,537)Other
                income (expense), net
            
            (708,135)
            
            —
            
            —
            
            (708,135)Minority
                interest
            
            —
            
            —
            
            554,848
            
            554,848Recovery
                of income taxes
            
            1,326,800
            
            1,060,729
            
            491,821
            
            2,879,350Net
                loss
            
            (2,636,746)
            
            (1,453,114)
            
            (182,884)
            
            (4,272,744)Total
                assets
            
            44,292,290
            
            43,368,144
            
            6,204,314
            
            93,864,748**Three
                months ended March 31, 2006**Revenue
            
            —
            
            —
            
            —
            
            —Expenses:Cost
                of goods sold
            
            1,650,000
            
            —
            
            —
            
            1,650,000Operating
            
            3,434,947
            
            —
            
            —
            
            3,434,947Depreciation
                and amortization
            
            463,011
            
            —
            
            —
            
            463,011Restructuring
                charges
            
            819,642
            
            —
            
            —
            
            819,642Loss
                from operations
            
            (6,367,600)
            
            —
            
            —
            
            (6,367,600)Interest
                income
            
            370,926
            
            —
            
            —
            
            370,926Other
                expense, net
            
            (381)
            
            —
            
            —
            
            (381)Recovery
                of income taxes
            
            158,058
            
            —
            
            —
            
            158,058Cumulative
                effect of a change in accounting principle
            
            107,045
            
            —
            
            —
            
            107,045Net
                loss
            
            (5,731,952)
            
            —
            
            —
            
            (5,731,952)**Year
                ended December 31, 2006**Total
                assets
            
            40,762,771
            
            44,158,205
            
            5,482,719
            
            90,403,695




16


ITEM2.
            MANAGEMENT’S
                DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                OPERATIONS





**OVERVIEW**




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





Our
      product for Dry AMD, the RHEOTM System, is used to perform the RheopheresisTM
procedure, which we refer to under our trade name RHEOTM Therapy. The
      RheopheresisTM procedure is a blood filtration procedure that selectively removes
      molecules from plasma, which is designed to treat Dry AMD, the most common
      form
      of the disease.





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





Subsequent
      to the February 3, 2006 announcement, the Company completed an in-depth analysis
      of the MIRA-1 study data identifying subjects that were included in the
      intent-to-treat, or ITT, population but who deviated from the MIRA-1 protocol
      as
      well as those patients who had documented losses or gains in vision for reasons
      not related to retinal disease such as cataracts. Those subjects in the ITT
      population who met the protocol requirements, and who did not exhibit ophthalmic
      changes unrelated to retinal disease, comprised the modified per-protocol
      population. In the modified per-protocol analysis, eyes treated with RHEOTM
Therapy demonstrated a mean vision gain of 0.8 lines of ETDRS BCVA at 12 months
      post-baseline, compared to a mean vision loss of 0.1 lines of ETDRS BCVA in
      the
      eyes in the placebo group. The result was statistically significant (repeated
      measure p value = 0.0147). The following table presents a summary of the ETDRS
      BCVA changes observed 12 months post-baseline in the modified per-protocol
      analysis of MIRA-1:





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





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





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


In
      light
      of the MIRA-1 study results, we re-evaluated our Pre-market Approval
      Application, or PMA, submission strategy and then met with representatives
      of
      the FDA on June 8, 2006 in order to discuss the impact the MIRA-1 results would
      have on our PMA to market the RHEOTM System in the United States. As expected, in
      light of MIRA-1’s failure to meet its primary efficacy endpoint, the FDA advised
      us that it will require an additional study of the RHEOTM System to be performed.
      At that meeting, the FDA confirmed its willingness to allow the substitution,
      in
      the new study, of the new polysulfone RheofilterTM filter for the older cellulose
      acetate filter which currently forms part of the RHEOTM System. The immediate
      replacement of the filter avoids the regulatory uncertainties that would arise,
      were the replacement to take place following receipt of FDA approval.
      Furthermore, due to manufacturing constraints on the number of cellulose acetate
      filters that can be produced by their manufacturer, Asahi Kasei Medical Co.,
      Ltd. (formerly Asahi Medical Co., Ltd.), or Asahi Medical, the replacement
      of
      the filter in the new trial eliminates the need to continue to build and
      maintain adequate inventories of the older cellulose acetate filter that the
      Company had been building and maintaining in preparation for commercial launch.
      On January 29, 2007, the Company announced that it had obtained Investigational
      Device Exemption clearance from the FDA to commence the new pivotal clinical
      trial of the RHEOTM System, called RHEO-AMD, or Safety and Effectiveness in a
      Multi-center, Randomized, Sham-controlled Investigation for Dry, Non-exudative
      Age-Related Macular Degeneration (AMD) Using Rheopheresis. We enrolled our
      first
      patient in the screening phase of the RHEO-AMD trial in March 2007.





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





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





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





17


As
      at
      March 31, 2007 and December 31, 2006, the Company had inventory reserves of
      $4,902,620 and $5,101,394, respectively. The decrease in the inventory reserve
      is due to the sale of inventory during the three-month period ended March 31,
      2007 that had previously been provided for.





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





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





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





In
      March
      2007, Veris negotiated new payment terms with the Company, and it was agreed
      that payment for treatment sets shipped subsequent to March 2007 must be
      received within 180 days of shipment.





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





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





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





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





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





Both
      the
      SOLX 790 Laser and the SOLX Gold Shunt are currently the subject of randomized,
      multi-center clinical trials. The results of these clinical trials will be
      used
      in support of applications to the FDA for a 510(k) clearance for each of the
      SOLX 790 Laser and the SOLX Gold Shunt, the receipt of which, if any, will
      enable the Company to market and sell these products in the United States.
      Currently, our intention is to file the application for a 510(k) clearance
      for
      the SOLX 790 Laser by the end of 2007 and to file the application for a 510(k)
      clearance for the SOLX Gold Shunt by the end of the second quarter of
      2008.





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





On
      November 30, 2006, we acquired 50.1% of the capital stock of OcuSense, Inc.,
      or
      OcuSense, measured on a fully diluted basis, for a total purchase price of
      $4,171,098 which includes acquisition-related transaction costs of $171,098.
      The
      Company will make additional payments totaling $4,000,000 upon the attainment
      of
      two pre-defined milestones by OcuSense prior to May 1, 2009. The contingent
      payments totaling $4,000,000 were not included in the determination of the
      purchase price or recorded as a liability since the achievement of the two
      pre-defined milestones prior to May 1, 2009 is not guaranteed.





OcuSense
      is a San Diego-based company that is in the process of developing technologies
      that will enable eye care practitioners to test, at the point-of-care, for
      highly sensitive and specific biomarkers using nanoliters of tear film. The
      results of OcuSense’s operations have been included in our consolidated
      financial statements since November 30, 2006. OcuSense’s first product, which is
      currently under development, is a hand-held tear film osmolarity test for the
      diagnosis and management of dry eye syndrome, or DES, known as the TearLabTM test
      for DES. It is estimated that over 90 million people in the United States suffer
      from DES. The anticipated innovation of the TearLabTM test for DES will be its
      ability to measure precisely and rapidly certain biomarkers in nanoliter volumes
      of tear samples, using inexpensive hardware. Historically, eye care researchers
      have relied on expensive instruments to perform tear biomarker analysis. In
      addition to their cost, these conventional systems are slow, highly variable
      in
      their measurement readings and not waived by the FDA under the Clinical
      Laboratory Improvement Amendments, or CLIA.





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





18


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





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





Our
      results of operations for the three months ended March 31, 2007 and 2006 were
      impacted by our adoption of Statement of Financial Accounting Standards (“SFAS”)
      No. 123R (revised 2004), “Share-Based Payments” (“SFAS No. 123R”), which
      requires us to recognize a non-cash expense related to the fair value of our
      stock-based compensation awards. We elected to use the modified prospective
      transition method of adoption requiring us to include this stock-based
      compensation charge in our results of operations beginning on January 1, 2006
      without restating prior periods to include stock-based compensation expense.
      Stock-based compensation expense was $609,503 and $292,906 during the three
      months ended March 31, 2007 and 2006, respectively. This method also required
      us
      to estimate forfeitures as of the effective date of adoption of SFAS No. 123R
      and to eliminate any compensation cost previously recognized in income for
      periods before the effective date of adoption. This compensation cost previously
      recognized in income should be recognized as the cumulative effect of a change
      in accounting principle as of the required effective date. We also recognized
      $107,045 as the cumulative effect of a change in accounting principle reflecting
      the impact of our estimated forfeitures of outstanding awards as of January
      1,
      2006.





As
      at
      March 31, 2007, $2,965,459 of total unrecognized compensation cost related
      to
      stock options is expected to be recognized over a weighted-average period of
      2.44 years.





On
      February 1, 2007, we entered into a Securities Purchase Agreement (the
“Securities Purchase Agreement”) with certain institutional investors, pursuant
      to which we agreed to issue to the investors an aggregate of 6,677,333 shares
      of
      our common stock (the “Shares”) and five-year warrants exercisable into an
      aggregate of 2,670,933 shares of our common stock (the “Warrants”). The per
      share purchase price of the Shares is $1.50, and the per share exercise price
      of
      the Warrants is $2.20, subject to adjustment. The Warrants will become
      exercisable on August 6, 2007. Pursuant to the Securities Purchase Agreement,
      on
      February 6, 2007, we issued the Shares and the Warrants. The gross proceeds
      of
      sale of the Shares totaled $10,016,000 (less transaction costs of $770,208).
      On
      February 6, 2007, we also issued to Cowen and Company, LLC a warrant exercisable
      into an aggregate of 93,483 shares of our common stock (the “Cowen Warrant”) in
      part payment of the placement fee payable to Cowen and Company, LLC for the
      services it had rendered as the placement agent in connection with the sale
      of
      the Shares and the Warrants. All of the terms and conditions of the Cowen
      Warrant (other than the number of shares of our common stock into which the
      Cowen Warrant is exercisable) are identical to those of the Warrants. The
      estimated grant date fair value of the Cowen Warrant of $97,222 is included
      in
      the transaction cost of $770,208.





We
      account for the
      warrants issued in accordance with the provisions of SFAS No. 133, “Accounting
      for Derivative Instruments and Hedging Activities” (“SFAS No. 133”) along with
      related interpretation EITF No. 00-19 “Accounting for Derivative Financial
      Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock”
(“EITF 00-19”). SFAS No. 133 requires every derivative instrument within its
      scope (including certain derivative instruments embedded in other contracts)
      to
      be recorded on the balance sheet as either an asset or liability measured at
      its
      fair value, with changes in the derivative’s fair value recognized currently in
      earnings unless specific hedge accounting criteria are met. Based on the
      provisions of EITF 00-19, we determined that the warrants issued during the
      three months ended March 31, 2007 do not meet the criteria for classification
      as
      equity. Accordingly, we have classified the warrants as a current liability
      as
      at March 31, 2007. The estimated fair value of the warrants was determined
      using
      the Black-Scholes options pricing model. We initially allocated the total
      proceeds received, pursuant to the Securities Purchase Agreement, to the shares
      of common stock and warrants issued based on their relative fair values. This
      resulted in an allocation of $2,052,578 to the warrant liability which includes
      the fair value of the warrant issued in part payment of the placement fee
      payable to Cowen and Company, LLC of $97,222. SFAS No. 133 also requires the
      Company to record the outstanding derivatives at fair value at the end of each
      reporting period resulting in an adjustment to the recorded liability of the
      derivative, with any gain or loss recorded in earnings of the applicable
      reporting period. The Company therefore estimated the fair value of the warrants
      as at March 31, 2007 and determined the aggregate fair value to be $2,626,195,
      an increase of $573,617 over the initial measurement of the fair value of the
      warrants on the date of issuance. Accordingly, we recognized a loss of $573,617
      in our consolidated statements of operations for the three months ended March
      31, 2007 to reflect the increase in the fair value of the warrants as at March
      31, 2007. Transaction costs associated with the issuance of the warrants of
      $150,363 was recorded as a warrant expense in the Company’s consolidated
      statements of operations for the three months ended March 31, 2007.





On
      March
      11, 2007, our board of directors approved the grant to the directors of the
      Company, other than Mr. Vamvakas, of a total of 165,000 options under the 2002
      Stock Option Plan. In exchange for these options, each of the directors of
      the
      Company will forego the cash remuneration which he or she would have been
      entitled to receive from us during the financial year ended December 31, 2007
      in
      respect of (i) his or her annual director's fee of U.S.$15,000, (ii) in the
      case
      of those directors who chair a committee of the board of directors of the
      Company, his or her fee of U.S.$5,000 per annum for chairing such committee
      and
      (iii) his or her fee of U.S.$2,500 per fiscal quarter for the quarterly
      in-person meetings of the board of directors of the Company. The number of
      options granted to each of the directors was determined to be 8% higher in
      value
      than the cash remuneration to which the directors would have been entitled
      during the financial year ended December 31, 2007 and  was
      determined using the Black-Scholes valuation method, based on an attributed
      value of $1.64 per share of the Company's common stock underlying such options.
      The number of options granted to each director, calculated using this
      methodology, was then rounded up to the nearest 1,000. These options are
      exercisable immediately and will remain exercisable until the tenth anniversary
      of the date of their grant, notwithstanding any earlier disability or death
      of
      the holder thereof or any earlier termination of his or her service to the
      Company. The exercise price of each option is set at $1.82, which was the per
      share closing price of the Company's common stock on NASDAQ on March 9, 2007,
      the last trading day prior to the date of grant.





**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, 2007 to the items disclosed as our critical accounting policies
      and estimates in our discussion and analysis of financial condition and results
      of operations in our 2006 Form 10-K, except as noted below.





*Income
      taxes*




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





19


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





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





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





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





**RESULTS
      OF OPERATIONS**




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




**Three
                Months Ended March 31,****2007**
            
            **2006**
            
            **Change****$**
            
            **$**RevenuesRetina
                revenue
            
            90,000
            
            —
            
            N/M*Glaucoma
                revenue
            
            39,625
            
            —
            
            N/M*129,625
            
            —
            
            N/M*Cost
                of salesRetina
                cost of sales
            
            32,100
            
            1,650,000
            
            (98)%Glaucoma
                cost of sales
            
            64,241
            
            —
            
            N/M*96,341
            
            1,650,000
            
            (94)%Gross
                marginRetina
                gross margin
            
            57,900
            
            (1,650,000)
            
            104%Percentage
                of retina revenue
            
            65%
            
            N/M*
            
            N/M*Glaucoma
                gross loss
            
            (24,616)
            
            —
            
            N/M*Percentage
                of glaucoma revenue
            
            (62)%
            
            —
            
            N/M*Total
                gross margin (loss)
            
            33,284
            
            (1,650,000)
            
            102%Percentage
                of total revenue
            
            26%
            
            N/M*
            
            N/M**N/M
                - Not meaningful





***Revenues***




**Retina
      Revenue**




Retina
      revenue consists of revenue generated from the sale of components of the RHEOTM
System which consists of the OctoNova pump and the disposable treatment sets,
      which include two disposable filters and applicable tubing.





During
      the three months ended March 31, 2007, we sold a total of 600 treatment sets
      at
      a negotiated price of $150 per treatment set to Macumed AG, a company based
      in
      Switzerland. There were no sales in the three months ended March 31, 2006 as
      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.





**Glaucoma
      Revenue**




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





On
      September 1, 2006, the Company completed the acquisition of SOLX, and the
      results of SOLX’s operations have been included in our consolidated financial
      statements since that date. Revenue for the three months ended March 31, 2007
      therefore includes the sale of components of the SOLX Glaucoma System during
      the
      three-month period. There was no comparative revenue during the three months
      ended March 31, 2006.





***Cost
      of Sales***




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





**Retina
      Cost of Sales**




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





20


Cost
      of
      sales for the three months ended March 31, 2007 includes royalty fees payable
      to
      Dr. Brunner and Mr. Stock and freight charges on the treatment sets sold and
      delivered to Macumed AG during the three-month period. Included in cost of
      sales
      for the three months ended March 31, 2006 is royalty fees payable to Dr. Brunner
      and Mr. Stock and a charge of $1,625,000 which reflects the write-down of the
      treatment sets to its then net realizable value. There was no comparable expense
      in the three months ended March 31, 2007.





**Glaucoma
      Cost of Sales**




Cost
      of
      sales includes the cost of the components of the SOLX Glaucoma System sold
      during the three-month period ended March 31, 2007. There was no comparative
      expense during the three months ended March 31, 2006 as we completed the
      acquisition of SOLX on September 1, 2006.





***Gross
      Margin***




**Retina
      Gross Margin**




During
      the three months ended March 31, 2007 as compared with the three months ended
      March 31, 2006, our retina gross margin increased by 104% due to sales of
      treatment sets during the three months ended March 31, 2007 and increased cost
      of sales during the three months ended March 31, 2006 due to the inventory
      write-down recorded during the period.




**Glaucoma
      Gross Margin**




Gross
      loss on the sale of the components of the SOLX Glaucoma System was $24,616
      during the three months ended March 31, 2007. Gross margins are affected by
      product mix. Upon receipt of 510(k) clearance for the SOLX Gold Shunt, we expect
      that we will sell more SOLX Gold Shunts for which the margins are much higher
      than the SOLX 790 Laser.





**Operating
      Expenses**




**Three
                Months Ended March 31,****2007**
            
            **2006**
            
            **Change****$**
            
            **$**General
                and administrative
            
            3,475,368
            
            1,996,585
            
            74%Clinical
                and regulatory
            
            2,797,837
            
            1,475,387
            
            90%Sales
                and marketing
            
            752,787
            
            425,986
            
            77%Restructuring
                charges
            
            —
            
            819,642
            
            (100)%7,025,992
            
            4,717,600
            
            49%





***General
      and Administrative Expenses***




General
      and administrative expenses increased by $1,478,783 during the three months
      ended March 31, 2007, as compared with the corresponding period in fiscal 2006,
      due to an increase of $862,635 in amortization of intangible assets expense
      associated with the intangible assets acquired upon the acquisition of SOLX
      and
      OcuSense on September 1, 2006 and November 30, 2006, respectively. Stock-based
      compensation expense also increased by $203,839 and reflects the expense related
      to the fair value of the stock options granted to the directors of the Company
      (other than Mr. Vamvakas) in lieu of fiscal 2007 annual fees payable for board
      and committee memberships. Also included in general and administrative expenses
      for the three months ended March 31, 2007 is the cost of SOLX and OcuSense’s
      employee and related travel costs and other administrative costs which totaled
      $403,630 for the three-month period. There was no comparative expense during
      the
      three months ended March 31, 2006 as we completed the acquisition of SOLX and
      OcuSense during the second half of fiscal 2006.





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





***Clinical
      and Regulatory Expenses***




Clinical
      and regulatory expenses increased by $1,322,450 during the three months ended
      Mach 31, 2007, as compared with the corresponding prior year period, due to
      an
      increase in clinical trial expenses associated with the RHEO-AMD trial of
      $534,866, the cost of SOLX’s clinical and regulatory expenses of $621,448 and
      OcuSense’s product development and regulatory costs of $938,081 during the
      period. Stock-based compensation expense also increased by $75,755 during the
      three months ended March 31, 2007 as a result of the expense related to the
      grant of stock options to certain of SOLX’s employees stock-based compensation
      expense associated with OcuSense’s outstanding options. There was no comparable
      expense during the three months ended March 31, 2006. These increases in cost
      during the three months ended March 31, 2007 were offset in part by the decrease
      in costs associated with the MIRA-1 trial, the LEARN, or Long-term Efficacy
      in
      AMD from Rheopheresis in North America, trials and other related clinical trials
      of $933,937 as the Company completed the analysis of the MIRA-1 data during
      the
      first half of fiscal 2006 and the treatment phase of the LEARN trials was
      completed in December 2006.





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





***Sales
      and Marketing Expense***




Sales
      and
      marketing expenses increased by $326,801 during the three months ended March
      31,
      2007, as compared with the prior period in fiscal 2006, due to SOLX’s sales and
      marketing expenses of $234,192 for trade shows, physician education and training
      and other marketing public relations during the three-month period ended March
      31, 2007. There were no comparable expenses in the prior year period. Employee
      and travel costs also increased by $120,066 during the three months ended March
      31, 2007 due to SOLX’s commercialization activities in Europe.





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





21


***Restructuring
      Charges***




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





**Other
      Income (Expenses)**




**Three
                Months Ended March 31,****2007**
            
            **2006**
            
            **Change****$**
            
            **$**Interest
                income
            
            215,438
            
            370,926
            
            (42)%Changes
                in fair value of obligation under warrants and warrant
                expense
            
            (723,980)
            
            —
            
            N/M*Interest
                and amortization of discount on future payment expense
            
            (221,537)
            
            —
            
            N/M*Other
            
            15,845
            
            (381)
            
            4,259%Minority
                interest
            
            554,848
            
            —
            
            N/M*(159,386)
            
            370,545
            
            (143)%*N/M
                - Not meaningful





***Interest
      Income***




Interest
      income consists of interest income earned in the current period and the
      corresponding prior period as a result of the Company’s cash and short-term
      investment position following the raising of capital in the Company’s initial
      public offering in December 2004 and from the private placement of the Company’s
      shares of common stock and warrants in February 2007.





***Changes
      in fair value of obligation under warrants and warrant
      expense***




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





Changes
      in fair value of obligation under warrants and warrant expense for the three
      months ended March 31, 2007 includes a charge of $573,617 which reflect the
      increase in the fair value of the warrants as at March 31, 2007 over the initial
      measurement of the fair value of the warrants on the date of issuance.
      Transaction costs associated with the issuance of the warrants of $150,363
      has
      also been recorded as a warrant expense in the Company’s consolidated statement
      of operations for the three months ended March 31, 2007. There was no comparable
      expense in the three months ended March 31, 2006.





***Interest
      and Amortization of Discount on Future Payment
      Expense***




In
      connection with the acquisition of SOLX on September 1, 2006, we remain indebted
      to the former stockholders of SOLX in an aggregate amount of up to $13,000,000
      for the outstanding portion of the purchase price of SOLX. $5,000,000 of this
      amount is payable in cash on the second anniversary of the September 1, 2006
      closing. This $5,000,000 amount has been recorded as a long-term liability
      at
      its present value, discounted at the incremental borrowing rate of the Company
      as at August 1, 2006. The difference between the discounted value and the
      $5,000,000 payable is being amortized using the effective yield method over
      the
      two-year period with the monthly expense being charged as an interest expense
      in
      the Company’s consolidated statements of operations. Interest and amortization
      of discount on future payment expense for the three months ended March 31,
      2007
      consists primarily of the amortization expense for the three-month period.
      There
      was no comparable expense in the three months ended March 31, 2006.





***Other
      Income (Expense)***




Other
      income for the three months ended March 31, 2007 consists of foreign exchange
      gain of $15,845 due to exchange rate fluctuations on the Company’s foreign
      currency transactions. Other expense was $381 for the three months ended March
      31, 2006 and consists of miscellaneous tax expense of $5,713 offset in part
      by a
      foreign exchange gain of $5,332 during the period.




***Minority
      Interest***




Minority
      interest is from our acquisition of 50.1% of the capital stock of OcuSense,
      on a
      fully diluted basis, on November 30, 2006. The results of OcuSense’s operations
      have been included in our consolidated financial statements since that date.
      Income from minority interest of $554,848 for the three months ended March
      31,
      2007 relates to the loss reported by OcuSense in which the Company has a shared
      interest with minority stockholders.





22


**Recovery
      of Income Taxes**




**Three
                Months Ended March 31,****2007**
            
            **2006**
            
            **Change****$**
            
            **$**Recovery
                of income taxes
            
            2,879,350
            
            158,058
            
            1,722%





***Recovery
      of Income Taxes***




Recovery
      of income taxes increased by $2,721,292 during the three months ended March
      31,
      2007, as compared with the prior period in 2006. This increase is due primarily
      to a deferred tax recovery amount of $2,368,156 associated with the recognition
      of a deferred tax asset from the availability of fiscal 2007 first quarter
      net
      operating losses in the United States which may be utilized to reduce taxes
      in
      future years.





Recovery
      of income taxes for the three months ended March 31, 2007 and 2006 also includes
      the amortization of the deferred tax liability which was recorded based on
      the
      difference between the fair value of intangible assets acquired and their tax
      bases. The increase in the amount recorded during the three months ended March
      31, 2007 as compared with the corresponding period in fiscal 2006 is due to
      the
      additional deferred tax liability recorded upon the acquisition of SOLX and
      OcuSense, being the difference between the fair value of the intangible assets
      acquired by the Company upon its acquisition of SOLX and OcuSense and their
      tax
      bases. The deferred tax liability totaling $23,462,064 is being amortized over
      an average period of 11.98 years, the estimated weighted-average useful life
      of
      the intangible assets.





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




**Three
                Months Ended March 31,****2007**
            
            **2006**
            
            **Change****$**
            
            **$**Cumulative
                effect of a change in accounting principle
            
            —
            
            107,045
            
            N/M**N/M
                - Not material





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




The
      cumulative effect of a change in accounting principle reflects the impact of
      our
      estimated forfeitures of outstanding stock option awards as of January 1,
      2006. On January 1, 2006, the effective date of adopting SFAS No. 123R, we
      were required to estimate the number of forfeitures of our outstanding awards
      as
      of the effective date. Consolidated balance sheet amounts related to any
      compensation cost for these estimated forfeitures previously recognized in
      prior
      periods before the adoption of SFAS No. 123R have to be eliminated and
      recognized in income as the cumulative effect of a change in accounting
      principle as of the effective date. There was no comparable expense in the
      three
      months ended March 31, 2007.


**LIQUIDITY
      AND CAPITAL RESOURCES**





**March
                31, 2007**
            
            **December
                31, 2006**
            
            **Change****$**
            
            **$**Cash
                and cash equivalents
            
            5,266,398
            
            5,740,697
            
            (474,299)Short-term
                investments
            
            14,810,000
            
            9,785,000
            
            5,025,00020,076,398
            
            15,525,697
            
            4,550,701Percentage
                of total assets
            
            21%
            
            17%
            
            4
                pointsWorking
                capital
            
            15,410,422
            
            13,539,026
            
            1,871,396





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





On
      February 6, 2007, the Company raised gross proceeds in the amount of $10,016,000
      (less issuance costs of $770,208) in a private placement of shares of its common
      stock and warrants.





To
      date,
      cash has been primarily utilized to finance increased infrastructure costs,
      to
      accumulate inventory and to fund costs of the MIRA-1, LEARN and RHEO-AMD trials
      and other clinical trials and, more recently, to acquire SOLX and OcuSense
      in
      line with our diversification strategy. We expect that, in the future, we will
      use our cash resources to continue to fund our diversification strategy, the
      development of our infrastructure and to conduct RHEO-AMD and complete ongoing
      clinical trials. In addition, we will use our cash resources to fund the ongoing
      clinical trials of the SOLX Glaucoma System, the completion of product
      development of OcuSense’s TearLabTM test for DES and clinical trials that will be
      required for the TearLabTM test for DES. In addition, in connection with the
      acquisition of SOLX on September 1, 2006, we remain indebted to the former
      stockholders of SOLX in an aggregate amount of up to $13,000,000 for the
      outstanding portion of the purchase price of SOLX. We also remain indebted
      to
      OcuSense in an aggregate amount of up to $4,000,000 for the outstanding portion
      of the purchase price of the capital stock of OcuSense that we acquired on
      November 30, 2006. Furthermore, we are legally committed to make an additional
      equity investment of $3,000,000 upon receipt, if any, from the FDA of a 510(k)
      clearance for the TearLabTM test for DES and another additional equity investment
      of $3,000,000 upon receipt, if any, from the FDA of a CLIA waiver for the
      TearLabTM test for DES.





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





23


**Changes
      in Cash Flows**




**Three
                Months Ended March 31,****2007**
            
            **2006**
            
            **Change****$**
            
            **$**Cash
                used in operating activities
            
            (4,689,570)
            
            (4,872,848)
            
            183,278Cash
                (used in) provided by investing activities
            
            (5,127,743)
            
            9,853,514
            
            (14,981,257)Cash
                provided by financing activities
            
            9,343,014
            
            233,710
            
            9,109,304Net
                (decrease) increase in cash and cash equivalents during the
                period
            
            (474,299)
            
            5,214,376
            
            (5,688,675)





***Cash
      Used in Operating Activities***




Net
      cash
      used to fund our operating activities during the three months ended March 31,
      2007 was $4,689,570. Net loss during the three-month period was $4,707,024.
      The
      non-cash charges which comprise a portion of the net loss during that period
      consisted primarily of the change in the fair value of obligation under warrants
      and warrant expense of $723,980 and the amortization of intangible assets,
      fixed
      assets, patents and trademarks and discount on future cash payments of
      $1,591,539 netted by applicable deferred income taxes of $2,445,070. Additional
      non-cash charges consist of $609,503 in stock-based compensation charges netted
      by minority interest of $554,848.





The
      net
      change in non-cash working capital balances related to operations for the three
      months ended March 31, 2007 and 2006 consists of the following:


**Three
                  months ended**
                **March
                  31,****2007**
              
              
              **2006****$**
              
              
              **$**Due
                  to related party
              
              
              —
              
              
              21,861Amounts
                  receivable
              
              
              (166,806
              )
              
              26,037Inventory
              
              
              12,752
              
              
              (957,270
              )Prepaid
                  expenses
              
              
              9,642
              
              
              13,532Deposit
              
              
              —
              
              
              (6,423
              )Accounts
                  payable
              
              
              43,365
              
              
              (422,023
              )Accrued
                  liabilities
              
              
              252,626
              
              
              14,479Due
                  to stockholders
              
              
              (48,629
              )
              
              27,332Other
                  current assets
              
              
              (10,600
              )
              
              —92,350
              
              
              (1,282,475
              )


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


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


·
            Decrease
                in prepaid expenses is primarily due to the amortization of prepaid
                insurance during the three-month
                period.


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


·
            The
                decrease in amounts due to stockholders is due to payments made to
                TLC
                Vision Corporation during the three months ended March 31,
                2007.





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




Net
      cash
      used in investing activities for the three months ended March 31, 2007 was
      $5,127,743 and resulted from cash provided from the net purchase of short-term
      investments of $5,025,000. Cash used in investing activities during the period
      consists of $71,189 used to acquire fixed assets and $31,554 used to protect
      and
      maintain patents and trademarks. Cash provided by investing activities was
      $9,853,514 for the three months ended March 31, 2006. Net cash provided by
      investing activities for the year ended December 31, 2005 was from the net
      sale
      of short-term investments of $9,925,000 offset by cash used to purchase of
      fixed
      assets of $71,486.





***Cash
      Provided by Financing Activities***




Net
      cash
      provided by financing activities for the three months ended March 31, 2007
      was
      $9,343,014 and is made up of gross proceeds received in the amount of
      $10,016,000 from the private placement of shares of the Company’s common stock
      and warrants less issuance costs of $770,208 which includes the fair value
      of
      the warrant issued in part payment of the placement fee of $97,222. Cash
      provided by financing activities was $233,710 for the three months ended March
      31, 2006 and reflects cash received from the exercise of options to purchase
      shares of common stock of the Company.





***Financial
      Condition***




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





24


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





·
            the
                costs of operating SOLX and
                OcuSense;


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


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


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


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


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


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


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


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


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


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


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


·
            the
                effect of competing technological and market
                developments.





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





**RECENT
      ACCOUNTING PRONOUNCEMENT**





In
      June
      2006, FASB issued FIN
      No.
      48, which clarifies the accounting for uncertainty in tax positions. FIN No.
      48
      requires that we recognize, in our financial statements, the impact of a tax
      position, if that position is more likely than not of being sustained on audit,
      based on the technical merits of the position. FIN No. 48 is effective for
      fiscal years beginning after December 15, 2006. As a result of the adoption
      of
      FIN No. 48 in the first quarter of fiscal 2007 we recognized a deferred tax
      asset in the amount of $4.6 million resulting in the reduction of the January
      1,
      2007 deferred tax liability balance with a corresponding reduction to
      accumulated deficit as at January 1, 2007.





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





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


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





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





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





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**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.





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





(a)   Disclosure
      Controls and Procedures. The Company maintains disclosure controls and
      procedures that are designed to ensure that information required to be disclosed
      in the Company’s reports under the Securities Exchange Act of 1934, as amended
      (the “Exchange Act”), is recorded, processed, summarized and reported within the
      time reports specified in the SEC’s rules and forms and that such information is
      accumulated and communicated to the Company’s management, including our
      principal executive officer (the “CEO”) and our principal financial officer (the
“CFO”), as appropriate, to allow timely decisions regarding required disclosure.
      In designing and evaluating disclosure controls and procedures, management
      recognizes that any controls and procedures, no matter how well designed and
      operated, can provide only reasonable assurance of achieving the desired control
      objectives, and management necessarily is required to apply its judgment in
      evaluating the cost-benefit relationship of possible controls and procedures.
      As
      of the end of the three-month period ended March 31, 2007, an evaluation of
      the
      effectiveness of the Company’s disclosure controls and procedures (as defined in
      Rule 13a-15(e) of the Exchange Act) was carried out by the CEO and the CFO.
      Based on their evaluation, the CEO and the CFO have concluded that, as of the
      end of that fiscal period, the Company’s disclosure controls and procedures are
      effective to provide reasonable assurance of achieving the desired control
      objectives.





(b)   Changes
      in Internal Control over Financial Reporting. During the three-month period
      ended March 31, 2007, there were no changes in our internal control over
      financial reporting that has materially affected, or is reasonably likely to
      materially affect, our internal control over financial reporting. The financial
      reporting for the three-month period ended March 31, 2007 includes the
      operations of SOLX and OcuSense for that fiscal period. SOLX was acquired by
      the
      Company on September 1, 2006, and the Company acquired 50.1% of the capital
      stock of OcuSense, measured on a fully diluted basis, on November 30, 2006.
      The
      Company has not yet completed its review of SOLX’s and OcuSense’s internal
      control over financial reporting.





26





PARTII.
            OTHER
                INFORMATIONITEM1.
            LEGAL
                PROCEEDINGS





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





ITEM2.
            UNREGISTERED
                SALES OF EQUITY SECURITIES AND USE OF PROCEEDS





On
      February 6, 2007, we issued an aggregate of 6,677,333 shares of Common Stock
      and
      2,670,933 five-year stock purchase warrants to certain institutional investors
      for gross cash proceeds of $10,016,000 (less transaction costs of $770,208).
      In
      part payment of the placement fee payable to Cowen and Company, LLC for the
      services it had rendered as the placement agent in connection with the
      aforementioned issuances of securities, on February 6, 2007, we also issued
      93,483 five-year stock purchase warrants to Cowen and Company, LLC. In issuing
      all of these shares of Common Stock and warrants, we relied upon the exemptions
      from registration under the Securities Act of 1933, as amended, and Rule 506
      of
      Regulation D promulgated thereunder.





ITEM3.
            DEFAULTS
                UPON SENIOR SECURITIES





There
      has
      not been any default upon our senior securities.





ITEM4.
            SUBMISSION
                OF MATTERS TO A VOTE OF SECURITY
                HOLDERS





None.





ITEM5.
            OTHER
                INFORMATION





None.





27


ITEM6.
            EXHIBITS





Index
      to Exhibits




31.1
            CEO’s
                Certification required by Rule 13a-14(a) of the Securities Exchange
                Act of
                1934.31.2
            CFO’s
                Certification required by Rule 13a-14(a) of the Securities Exchange
                Act of
                1934.32.1
            CEO’s
                Certification of periodic financial reports pursuant to Section 906
                of the
                Sarbanes-Oxley Act of 2002, U.S.C. Section 1350.32.2
            CFO’s
                Certification of periodic financial reports pursuant to Section 906
                of the
                Sarbanes-Oxley Act of 2002, U.S.C. Section
                1350.





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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
                9, 2007
            By:
            /s/ Elias
                VamvakasChief
                Executive Officer








29