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


**Washington,
      D.C. 20549**





**FORM
      10-Q**


VERSION
      6A




(Mark
      One)


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





For
      the
      quarterly period ended:     **June
      30** **,
      2006**





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





For
      the
      transition period from _______________ to _______________





Commission
      file number: 000-51030








**OccuLogix,
      Inc.**


(Exact
      name of registrant as


specified
      in its charter)


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





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


(Address
      of principal executive offices)





**(905)
      602-0887**


(Registrant’s
      telephone number)





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





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





Large
                accelerated filer
            Accelerated
                filerX
            Non-accelerated
                filer


Indicate
      by check mark whether the registrant is a shell company as defined in Rule
      12b-2
      of the Exchange Act. (Check one):   Yes   No   X





State
      the
      number of shares outstanding of each of the registrant’s classes of common
      equity, as of the latest practical date: 42,206,579 as
      of
      August 8, 2006














1







Special
      Note Regarding Forward-Looking Statements











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











2








**SPECIAL
      NOTE REGARDING FORWARD-LOOKING STATEMENTS**





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




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




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















3





**OccuLogix,
      Inc.**








PART
                1.
            FINANCIAL
                INFORMATIONITEM1.
            CONSOLIDATED
                FINANCIAL STATEMENTS











4





**OccuLogix,
      Inc.**





**CONSOLIDATED
      BALANCE SHEETS**


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


(Unaudited)





**June
                30,**
              **2006**
            
            **December
                31,**
              **2005****ASSETS****Current**Cash
                and cash equivalents
            
            $
            18,180,386
            
            $
            9,599,950Short-term
                investments
            
            
            12,555,000
            
            
            31,662,845Amounts
                receivable, net
            
            
            511,607
            
            
            554,966Due
                from related party
            
            
            892
            
            
            —Inventory,
                net
            
            
            4,206,246
            
            
            4,701,464Prepaid
                expenses
            
            
            300,105
            
            
            803,268Deposit
            
            
            10,442
            
            
            4,891Total
                current assets
            
            
            35,764,678
            
            
            47,327,384Fixed
                assets, net
            
            
            633,291
            
            
            470,561Patents
                and trademarks, net
            
            
            234,054
            
            
            135,232Deferred
                acquisition costs
            
            
            141,716
            
            
            —Intangible
                asset, net
            
            
            23,068,862
            
            
            23,927,195Goodwill
            
            
            —
            
            
            65,945,686Other
                asset
            
            
            2,000,000
            
            
            —**Total
                assets**
            
            $
            61,842,601
            
            $
            137,806,058**LIABILITIES
                AND STOCKHOLDERS’ EQUITY****Current**Accounts
                payable
            
            $
            159,245
            
            $
            522,520Accrued
                liabilities
            
            
            1,679,788
            
            
            2,226,619Due
                to related party
            
            
            —
            
            
            5,065Due
                to stockholders
            
            
            90,964
            
            
            158,233Total
                current liabilities
            
            
            1,929,997
            
            
            2,912,437Deferred
                tax liability
            
            
            8,535,479
            
            
            8,853,062Total
                liabilities
            
            
            10,465,476
            
            
            11,765,499**Stockholders’
                equity**Capital
                stockCommon
                stock
            
            
            42,187
            
            
            42,086Par
                value of $0.001 per shareAuthorized:
                75,000,000; Issued and outstanding:June
                30, 2006 - 42,186,579; December 31, 2005 - 42,085,853Additional
                paid-in capital
            
            
            338,041,589
            
            
            336,977,578Accumulated
                deficit
            
            
            (286,706,651
            )
            
            (210,979,105
            )Total
                stockholders’ equity
            
            
            51,377,125
            
            
            126,040,559**Total
                liabilities and stockholders’ equity**
            
            $
            61,842,601
            
            $
            137,806,058


*See
      accompanying notes to interim consolidated financial
      statements*











5





**OccuLogix,
      Inc.**








**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


(expressed
      in U.S. dollars)


(Unaudited)


**Three
                months ended,****June
                30,****2006**
            
            **2005**RevenuesSales
                to unrelated parties
            
            $
            82,715
            
            $
            583,115Sales
                to related parties
            
            
            —
            
            
            14,726Total
                revenues
            
            
            82,715
            
            
            597,841Cost
                of goods soldCost
                of goods sold to unrelated parties, net of goods recovered
            
            
            (20,683
            )
            
            368,098Cost
                of goods sold to related parties
            
            
            —
            
            
            10,757Royalty
                costs
            
            
            25,000
            
            
            25,000Total
                cost of goods sold
            
            
            4,317
            
            
            403,855Gross
                margin
            
            
            78,398
            
            
            193,986Operating
                expensesGeneral
                and administrative
            
            
            2,753,780
            
            
            2,199,372Clinical
                and regulatory
            
            
            1,471,473
            
            
            1,309,989Sales
                and marketing
            
            
            465,347
            
            
            380,061Impairment
                of goodwill
            
            
            65,945,686
            
            
            —70,636,286
            
            
            3,889,422Loss
                from operations
            
            
            (70,557,888
            )
            
            (3,695,436
            )Other
                income (expense)Interest
                income
            
            
            410,228
            
            
            420,980Other
            
            
            (6,724
            )
            
            (44,056
            )403,504
            
            
            376,924Loss
                before income taxes
            
            
            (70,154,384
            )
            
            (3,318,512
            )Recovery
                of income taxes
            
            
            158,792
            
            
            158,792**Net
                loss for the period**
            
            $
            (69,995,592
            )
            $
            (3,159,720
            )**Weighted
                average number of shares outstanding**
              **-
                basic and diluted**
            
            
            42,186,579
            
            
            41,860,288Basic
                and diluted net loss per share
            
            $
            (1.66
            )
            $
            (0.08
            )


*See
      accompanying notes to interim consolidated financial
      statements*











6





**OccuLogix,
      Inc.**





**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


(expressed
      in U.S. dollars)


(Unaudited)


**Six
                months ended,****June
                30,****2006**
            
            **2005**RevenuesSales
                to unrelated parties
            
            $
            82,715
            
            $
            923,315Sales
                to related parties
            
            
            —
            
            
            78,264Total
                revenues
            
            
            82,715
            
            
            1,001,579Cost
                of goods soldCost
                of goods sold to unrelated parties, net of goods recovered
            
            
            1,604,317
            
            
            610,554Cost
                of goods sold to related parties
            
            
            —
            
            
            43,236Royalty
                costs
            
            
            50,000
            
            
            50,000Total
                cost of goods sold
            
            
            1,654,317
            
            
            703,790Gross
                (loss) margin
            
            
            (1,571,602
            )
            
            297,789Operating
                expensesGeneral
                and administrative
            
            
            4,750,365
            
            
            4,380,086Clinical
                and regulatory
            
            
            2,946,860
            
            
            2,654,014Sales
                and marketing
            
            
            891,334
            
            
            765,907Impairment
                of goodwill
            
            
            65,945,686
            
            
            —Restructuring
                charges
            
            
            819,642
            
            
            —75,353,887
            
            
            7,800,007Loss
                from operations
            
            
            (76,925,489
            )
            
            (7,502,218
            )Other
                income (expense)Interest
                income
            
            
            781,153
            
            
            776,022Other
            
            
            (7,105
            )
            
            (32,475
            )774,048
            
            
            743,547Loss
                before income taxes and cumulative effect of a change in accounting
                principle
            
            
            (76,151,441
            )
            
            (6,758,671
            )Recovery
                of income taxes
            
            
            316,850
            
            
            317,583Loss
                before cumulative effect of a change in accounting
                principle
            
            
            (75,834,591
            )
            
            (6,441,088
            )Cumulative
                effect of a change in accounting principle
            
            
            107,045
            
            
            —**Net
                loss for the period**
            
            $
            (75,727,546
            )
            $
            (6,441,088
            )**Weighted
                average number of shares outstanding**
              **-
                basic and diluted**
            
            
            42,177,130
            
            
            41,835,772Loss
                before cumulative effect of a change in accounting principle per
                share -
                basic and diluted
            
            $
            (1.80
            )
            $
            (0.15
            )Cumulative
                effect of a change in accounting principle per share - basic and
                diluted
            
            
            —
            
            
            —Basic
                and diluted net loss per share
            
            $
            (1.80
            )
            $
            (0.15
            )


*See
      accompanying notes to interim consolidated financial
      statements*


7








**OccuLogix,
      Inc.**








**CONSOLIDATED
      STATEMENTS OF CHANGES**


**IN
      STOCKHOLDERS’ EQUITY**


(expressed
      in U.S. dollars)


(Unaudited)








**Voting
                common stock**
              **at
                par value****Number
                of shares issued**
            **Value**
            **Additional
                paid-in capital**
            **Accumulated
                deficit**
            **Net
                stockholders’ equity****December
                31, 2005**
            42,085,853
            $
                42,086
            $
                336,977,578
            $
                (210,979,105)
            $
                126,040,559Stock-based
                compensation
            ―
            ―
            852,908
            ―
            852,908Common
                stock issued on exercise of options
            100,726
            101
            233,609
            ―
            233,710Return
                of inventory to related party, net of inventory
                contributed
            ―
            ―
            (34,500)
            ―
            (34,500)Contribution
                of inventory from unrelated party
            ―
            ―
            11,994
            ―
            11,994Net
                loss for the period
            ―
            ―
            ―
            (75,727,546)
            (75,727,546)**June
                30, 2006**
            42,186,579
            $
                42,187
            $
                338,041,589
            $
                (286,706,651)
            $
                51,377,125


*See
      accompanying notes to interim consolidated financial
      statements*











8








**OccuLogix,
      Inc.**





**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


(expressed
      in U.S. dollars)


(Unaudited)


**Six
                months ended**
              **June
                30,****2006**
            
            **2005****OPERATING
                ACTIVITIES**Net
                loss for the period
            
            $
            (75,727,546
            )
            $
            (6,441,088
            )Adjustments
                to reconcile net loss tocash
                used in operating activities:Write-down
                of inventory
            
            
            1,625,000
            
            
            —Stock-based
                compensation
            
            
            959,953
            
            
            137,087Amortization
                of fixed assets
            
            
            68,300
            
            
            40,918Amortization
                of patents and trademarks
            
            
            3,081
            
            
            2,771Amortization
                of intangible asset
            
            
            858,333
            
            
            858,333Impairment
                of goodwill
            
            
            65,945,686
            
            
            —Amortization
                of premiums/discounts on short-term investments
            
            
            37,845
            
            
            50,669Subscription
                receivable - provision for doubtful amount
            
            
            —
            
            
            37,545Deferred
                income taxes
            
            
            (317,583
            )
            
            (317,583
            )Cumulative
                effect of a change in accounting principle
            
            
            (107,045
            )
            
            —Net
                change in non-cash working capitalbalances
                related to operations
            
            
            (1,685,838
            )
            
            (4,888,298
            )**Cash
                used in operating activities**
            
            
            (8,339,814
            )
            
            (10,519,646
            )**INVESTING
                ACTIVITIES**Sale
                of short-term investments
            
            
            19,070,000
            
            
            4,664,818Additions
                to fixed assets
            
            
            (231,030
            )
            
            (96,036
            )Additions
                to patents and trademarks
            
            
            (101,903
            )
            
            (41,513
            )Other
                asset
            
            
            (2,000,000
            )
            
            —Deferred
                acquisition costs
            
            
            (50,527
            )
            
            —**Cash
                provided by investing activities**
            
            
            16,686,540
            
            
            4,527,269**FINANCING
                ACTIVITIES**Proceeds
                from the exercise of common stock options
            
            
            233,710
            
            
            12,445Proceeds
                from the exercise of Series A convertible preferred stock
                warrants
            
            
            —
            
            
            184,115Fractional
                payout of converted shares due to preferred stockholders
            
            
            —
            
            
            (792
            )Share
                issuance costs
            
            
            —
            
            
            (88,714
            )**Cash
                provided by financing activities**
            
            
            233,710
            
            
            107,054**Net
                increase (decrease) in cash and cash equivalents**
              **during
                the period**
            
            
            8,580,436
            
            
            (5,885,323
            )Cash
                and cash equivalents, beginning of period
            
            
            9,599,950
            
            
            17,530,552**Cash
                and cash equivalents, end of period**
            
            $
            18,180,386
            
            $
            11,645,229


*See
      accompanying notes to interim consolidated financial
      statements*











9








**OccuLogix,
      Inc.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


(expressed
      in U.S. dollars unless otherwise stated)


June
      30,
      2006 (Unaudited)






**1.** **BASIS
      OF PRESENTATION AND ACCOUNTING POLICIES**





The
      accompanying unaudited consolidated financial statements have been prepared
      in
      accordance with United States generally accepted accounting principles (“US
      GAAP”). These consolidated financial statements contain all normal recurring
      adjustments and estimates necessary to present fairly the financial position
      of
      OccuLogix, Inc. (the “Company”) as of June 30, 2006 and the results of its
      operations for the three- and six-month periods then ended. These interim
      unaudited consolidated financial statements should be read in conjunction with
      the consolidated financial statements and notes included in the Company’s latest
      annual report on Form 10-K filed with the U.S. Securities and Exchange
      Commission (the “SEC”). Interim results are not necessarily indicative of
      results for a full year.





These
      interim consolidated financial statements have been prepared using accounting
      policies that are consistent with the policies used in preparing the Company’s
      audited consolidated financial statements for the year ended December 31,
      2005.




**2.**
            **GOODWILL**




The
      carrying amount of goodwill was nil and $65,945,686 as at June 30, 2006 and
      December 31, 2005, respectively. The Company performed its annual goodwill
      impairment analysis on October 1, 2005 using the market capitalization method.




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




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





**3.**
            **RESTRUCTURING
                CHARGES**





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





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





10


**4.** **INVENTORY**





The
      Company evaluates its ending inventories for estimated excess quantities and
      obsolescence, based on expected future sales levels and estimates of future
      demand, with the excess inventory provided for. In addition, the Company
      assesses the impact of changing technology and market conditions in determining
      its inventory provision. During the second quarter of 2006, the Company sold
      a
      total of 408 treatment sets to its only customer, Veris Health Sciences Inc.
      (“Veris”) *(see
      note 8)* ,
      at a
      price lower than the Company’s cost. Accordingly, in its results of operations
      for the first quarter of 2006, the Company had written down the value of its
      treatment sets by $1,625,000 to reflect this current net realizable value.





As
      at
      June 30, 2006 and December 31, 2005, the Company had inventory reserves of
      $3,615,830 and $1,990,830, respectively.





**5.** **RECENT
      ACCOUNTING PRONOUNCEMENTS**





In
      December 2004, the Financial Accounting Standards Board (the “FASB”) issued SFAS
      No. 123R, “Share-Based Payments”, which revised SFAS No. 123, “Accounting for
      Stock-Based Compensation”, and supersedes Accounting Principles Board Opinion
      No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”). SFAS No. 123R
      requires all share-based payments to employees, including grants of employee
      stock options, to be recognized in the consolidated financial statements based
      on their fair values. The pro forma disclosures previously permitted under
      SFAS
      No. 123 are no longer an alternative to financial statement recognition. SFAS
      No. 123R is effective at the beginning of the first fiscal year beginning after
      June 15, 2005. Accordingly, the Company has adopted SFAS No. 123R beginning
      January 1, 2006. The Company has selected the Black-Scholes option-pricing
      model
      as its method of determining the fair value for its awards and will recognize
      compensation cost on a straight-line basis over the awards’ vesting periods *(see
      note 6).*





Prior
      to
      the adoption of SFAS No. 123R, the Company applied the provisions of SFAS
      No. 123, which allowed companies either to expense the estimated fair value
      of
      employee stock options or to follow the intrinsic value method as set forth
      in
      APB No. 25 but required companies to disclose the pro forma effects on net
      loss
      as if the fair value of the options had been expensed. The Company elected
      to
      apply APB No. 25 in accounting for employee stock options. Therefore, as
      required by SFAS No.123, prior to the adoption of SFAS No. 123R, the Company
      provided pro forma net loss and pro forma net loss per share disclosures for
      stock-based awards as if the fair value of the options had been
      expensed.





The
      adoption of the following recent accounting pronouncements in the first six
      months of fiscal 2006 did not have a material impact on the Company’s results of
      operations and financial condition:





·
            SFAS
                No. 151, “Inventory Costs — An Amendment of ARB No. 43, Chapter 4”;


·
            SFAS
                No. 153, “Exchanges of Nonmonetary Assets — An Amendment of APB Opinion
                No. 29”; and


·
            SFAS
                No. 154, “Accounting Changes and Error Corrections” which replaces APB No.
                20, “Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes in
                Interim Financial Statements — An Amendment of APB Opinion No.
                28”





In
      November 2005, the FASB issued FASB Staff Position FAS 115-1 and FAS 124-1,
“The
      Meaning of Other-Than-Temporary Impairment and Its Application to Certain
      Investments” (“FSP 115-1”), which provides guidance on determining when
      investments in certain debt and equity securities are considered impaired,
      on
      whether that impairment is other-than-temporary and on measuring such impairment
      loss. FSP 115-1 also includes accounting considerations subsequent to the
      recognition of an other-than-temporary impairment and requires certain
      disclosures about unrealized losses that have not been recognized as
      other-than-temporary impairments. FSP 115-1 is required to be applied to
      reporting periods beginning after December 15, 2005. The adoption of FSP 115-1
      on January 1, 2006 did not have a material impact on the Company’s results of
      operations and financial condition.





In
      February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
      Financial Instruments — An Amendment of FASB Statements No. 133 and 140". SFAS
      No. 155 simplifies accounting for certain hybrid instruments currently governed
      by SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities",
      by allowing fair value re-measurement of hybrid instruments that contain an
      embedded derivative that otherwise would require bifurcation. SFAS No. 155
      also
      eliminates the guidance in SFAS No. 133 Implementation Issue No. D1,
      "Application of Statement 133 to Beneficial Interests in Securitized Financial
      Assets", which provides that such beneficial interests are not subject to SFAS
      No. 133. SFAS No. 155 amends SFAS No. 140, "Accounting for Transfers and
      Servicing of Financial Assets and Extinguishments of Liabilities — A Replacement
      of FASB Statement No. 125", by eliminating the restriction on passive derivative
      instruments that a qualifying special-purpose entity may hold. SFAS No. 155
      is
      effective for financial instruments acquired or issued after the beginning
      of
      fiscal years beginning after September 15, 2006. The Company does not expect
      the
      adoption of this statement to have a material impact on its results of
      operations and financial condition.





11


In
      March
      2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial
      Assets — An Amendment of FASB Statement No. 140". SFAS No.156 requires an entity
      to recognize a servicing asset or servicing liability each time it undertakes
      an
      obligation to service a financial asset by entering into a servicing contract
      in
      specific situations. Additionally, the servicing asset or servicing liability
      shall be initially measured at fair value; however, an entity may elect the
      "amortization method" or "fair value method" for subsequent balance sheet
      reporting periods. SFAS No.156 is effective for fiscal years beginning after
      September 15, 2006. The Company does not expect the adoption of this statement
      to have a material impact on its results of operations and financial
      condition.





In
      June
      2006, the FASB issued FASB Interpretation (“FIN”) No. 48, "Accounting for
      Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109",
      which clarifies the accounting for uncertainty in tax positions. FIN No. 48
      requires the Company to 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. The Company
      is currently evaluating the effect that the adoption of FIN No. 48 will have
      on
      its consolidated results of operations and financial position.





**6.** **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 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 was approved
      by
      the Board of Directors, and such options were granted on terms and conditions
      similar to those options issued under the Stock Option Plan.





On
      January 1, 2006, the Company adopted the provisions of SFAS No. 123R, requiring
      the recognition of expense related to the fair value of its stock-based
      compensation awards. The Company elected to use the modified prospective
      transition method as permitted by SFAS No. 123R and therefore has not restated
      its financial results for prior periods. Under this transition method, the
      stock-based compensation expense for the three and six months ended June 30,
      2006 includes compensation expense for all stock-based compensation awards
      granted prior to, but not yet vested, as of January 1, 2006 based on the grant
      date fair value estimated in accordance with the original provisions of SFAS
      No.
      123. Stock-based compensation expense for all stock-based compensation awards
      granted subsequent to January 1, 2006 is based on the grant date fair value
      estimated in accordance with the provisions of SFAS No. 123R. The Company
      recognizes compensation expense for stock option awards on a straight-line
      basis
      over the requisite service period of the award.





The
      following table sets forth the total stock-based compensation expense resulting
      from stock options included in the Company’s Consolidated Statements of
      Operations:





**Three
                months ended**
              **June
                30,**
            
            **Six
                months ended**
              **June
                30,****2006****(i)**
            
            **2005****(ii)**
            
            **2006****(i)**
            
            **2005****(ii)**General
                and administrative
            
            $
            414,279
            
            $
            37,998
            
            $
            583,628
            
            $
            64,098Clinical
                and regulatory
            
            
            83,390
            
            
            57,451
            
            
            110,823
            
            
            72,989Sales
                and marketing
            
            
            169,378
            
            
            —
            
            
            265,502
            
            
            —Stock-based
                compensation expense before income taxes(iii)
            
            $
            667,047
            
            $
            95,449
            
            $
            959,953
            
            $
            137,087





(i)  At
      the
      annual meeting of stockholders of the Company held on June 23, 2006, the
      stockholders of the Company approved the re-pricing of all out-of-the-money
      stock options of the Company. Consequently, the exercise price of all
      outstanding stock options of the Company that, on June 23, 2006, was greater
      than $2.05, being the weighted average trading price of the Company’s common
      stock on the NASDAQ National Market during the five-trading day period
      immediately preceding June 23, 2006, was adjusted downward to $2.05. 2,585,000
      of the Company’s outstanding stock options with a weighted average exercise
      price of $8.42 were affected by the re-pricing. SFAS No. 123R requires the
      re-pricing of equity awards to be treated as a modification of the original
      award and provides that such a modification is an exchange of the original
      award
      for a new award. SFAS No. 123R considers the modification to be the repurchase
      of the old award for a new award of equal or greater value, incurring additional
      compensation cost for any incremental value. This incremental difference in
      value is measured as the excess, if any, of the fair value of the modified
      award
      determined in accordance with the provisions of SFAS No. 123R over the fair
      value of the original award immediately before its terms are modified, measured
      based on the share price and other pertinent factors at that date. SFAS No.
      123R
      provides that this incremental fair value, plus the remaining unrecognized
      compensation cost from the original measurement of the fair value of the old
      option, must be recognized over the remaining vesting period. Of the 2,585,000
      options affected by the re-pricing 1,196,857 were vested as at June 23, 2006.
      Therefore, additional compensation cost of $347,187 for the 1,196,857 stock
      options that were vested was recognized immediately and is included in the
      stock-based compensation expense for the three and six months ended June 30,
      2006. The remaining unrecognized incremental fair value of $187,265 plus the
      compensation cost from the original measurement of the fair value of the old
      options of $3,228,872, which totaled $3,416,137 in unrecognized compensation
      expense as at June 30, 2006, is expected to be amortized over a weighted average
      vesting period of three years.





In
      accordance with SFAS No. 123R, the Company also recorded a compensation expense
      of $3,363 in the three months ended June 30, 2006 as the Board of Directors
      approved accelerating the vesting of 1,250 unvested stock options granted to
      a
      terminated employee on April 28, 2006. SFAS No. 123R treats such a modification
      as a cancellation of the original unvested award and the grant of a new fully
      vested award as of that date.





(ii)  Stock-based
      compensation expense for the three and six months ended June 30, 2005 relates
      primarily to compensation expense associated with non-employee stock options.
      The fair value of these options was determined using the Black-Scholes fair
      value options model and was recorded in the Company’s Consolidated Statements of
      Operations in accordance with the provisions of SFAS No. 123.





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





Net
      cash
      proceeds from the exercise of stock options were nil and $8,465 for the three
      months ended June 30, 2006 and 2005 and $233,710 and $12,445 for the six months
      ended June 30, 2006 and 2005, respectively. No income tax benefit was realized
      from stock option exercises during the three and six months ended June 30,
      2006
      and 2005. In accordance with SFAS No. 123R, the Company presents excess tax
      benefits from the exercise of stock options, if any, as financing cash flows
      rather than operating cash flows.


12


As
      a
      result of adopting SFAS No. 123R on January 1, 2006, the Company’s net loss for
      the three and six months ended June 30, 2006 is $527,960 and $628,802,
      respectively, higher than if it had continued to account for share-based
      compensation under APB No. 25. Basic and diluted loss per share for the three
      and six months ended June 30, 2006 increased by $0.01 and $0.02, respectively,
      with the adoption of 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 and six months ended June 30, 2006, the Company recognized
      nil
      and $107,045, respectively, as the cumulative effect of a change in accounting
      principle resulting from the requirement to estimate forfeitures on its
      outstanding awards as at January 1, 2006. The compensation cost previously
      recognized in prior periods before the adoption of SFAS No. 123R relates to
      compensation expense associated with non-employee stock options.




Prior
      to
      the adoption of SFAS No. 123R, the Company applied the provisions of SFAS
      No. 123, which allowed companies either to expense the estimated fair value
      of
      employee stock options or to follow the intrinsic value method as set forth
      in
      APB No. 25 but required companies to disclose the pro forma effects on net
      loss
      as if the fair value of the options had been expensed. The Company elected
      to
      apply APB No. 25 in accounting for employee stock options. Therefore, as
      required by SFAS No.123, prior to the adoption of SFAS No. 123R, the Company
      provided pro forma net loss and pro forma net loss per share disclosures for
      stock-based awards as if the fair value of the options had been
      expensed.





The
      following table illustrates the pro forma net loss and net loss per share of
      common stock as if the fair value method had been applied to all awards during
      the three and six months ended June 30, 2005:





**Three
                months ended**
            
            
            **Six
                months ended****June
                30, 2005**
            
            
            **June
                30, 2005**Net
                loss, as reported
            
            $
            (3,159,720
            )
            $
            (6,441,088)Adjustment
                for APB No. 25
            
            
            11,899
            
            
            11,899Adjustment
                for SFAS No. 123
            
            
            (1,151,953
            )
            
            (1,594,365)Pro
                forma net loss
            
            
            (4,299,774
            )
            
            (8,023,554)Pro
                forma net loss per share - basic and diluted
            
            $
            (0.10
            )
            $
            (0.19)





The
      fair
      value of stock options granted during the three and six months ended June 30,
      2006 and 2005 was $2.00, $2.59, $2.82 and $3.63, respectively. The estimated
      fair value was determined using the Black-Scholes option-pricing model with
      the
      following weighted-average assumptions:





**Three
                months ended**
              **June
                30,**
            **Six
                months ended**
              **June
                30,****2006**
            
            **2005**
            **2006**
            
            **2005**Volatility
            
            
            99.2%
            
            
            72.4%
            
            99%
            
            
            71%Expected
                life of options
            
            
            6
                years
            
            
            2.41
                years
            
            5.95
                years
            
            
            2.07
                yearsRisk-free
                interest rate
            
            
            5.04%
            
            
            3.56%
            
            4.86%
            
            
            3.81%Dividend
                yield
            
            
            0%
            
            
            0%
            
            0%
            
            
            0%





The
      Company’s computation of expected volatility for the three and six months ended
      June 30, 2006 and 2005 is based on a comparable company’s historical stock
      prices as the Company did not have sufficient historical data. The Company’s
      computation of expected life has been estimated using the “short-cut approach”
as provided in Staff Accounting Bulletin No. 107. Under this approach, estimated
      life is calculated to be the mid-point between the vesting date and the end
      of
      the contractual period. The risk-free interest rate for an award is based on
      the
      U.S. Treasury yield curve with a term equal to the expected life of the award
      on
      the date of grant.





Prior
      to
      the adoption of SFAS No. 123R, the Board of Directors approved accelerating
      the
      vesting of unvested stock options granted prior to December 31, 2004 to
      employees, officers and directors. As a result of the vesting acceleration,
      options to purchase 438,561 shares of the Company’s common stock became
      exercisable immediately, including 308,611 held by executive officers, 48,958
      held by non-employee directors and 80,992 held by other employees. These
      accelerated stock options represent approximately 30% of the total employee
      stock options of the Company that would not have been vested as at December
      31,
      2005. The weighted average exercise price of the options that were accelerated
      was $11.78. The purpose of the acceleration was to enable the Company to avoid
      recognizing compensation expense associated with these options of $1,532,203
      and
      $1,466,253 during the years ending December 31, 2006 and 2007, respectively,
      in
      its consolidated statements of operations as a result of the adoption of SFAS
      No. 123R on January 1, 2006. In accordance with APB No. 25, the Company recorded
      a compensation expense of $53,295 for the year ended December 31, 2005 as 9,033
      of the total options, of which the vesting was accelerated, were “in-the-money”
as at the date of the accelerated vesting. With respect to SFAS No. 123, the
      Company recognized, for purposes of pro forma disclosures, the incremental
      increase in fair value and the remaining balance of unrecognized compensation
      cost for the affected options at the time of acceleration.





13


A
      summary
      of the options issued during the six months ended June 30, 2006 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 ValueOutstanding,
                December 31, 2005
            4,107,614
            $6.19Granted
            270,000
            2.05Exercised
            (100,726)
            2.32
            
            $76,365Forfeited
            (338,750)
            8.63**Outstanding,
                June 30, 2006**
            **3,938,138**
            **1.73**
            **7.83**
            **1,734,540****Vested
                or expected to vest, June 30, 2006**
            **2,507,609**
            **1.55**
            **7.18**
            **1,562,878****Exercisable,
                June 30, 2006**
            **2,198,971**
            **1.48**
            **6.93**
            **1,525,840**





The
      aggregate intrinsic value in the table above represents the total pre-tax
      intrinsic value (i.e., the difference between the Company’s closing stock price
      on the last trading day of the second quarter of 2006 of $2.17 and the exercise
      price, multiplied by the number of shares that would have been received by
      the
      option holders if the options had been exercised on June 30, 2006). This amount
      changes according to the fair market value of the Company’s stock.





As
      at
      June 30, 2006, $3,510,181 of total unrecognized compensation cost related to
      stock options is expected to be recognized over a weighted-average period of
      three years.




**7.** **LOSS
      PER SHARE**





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




**Three
                months ended**
              **June
                30,**
            **Six
                months ended**
              **June
                30,****2006**
            
            **2005**
            
            **2006**
            
            **2005**Weighted
                average number of shares outstanding - basic
            
            
            42,186,579
            
            
            41,860,288
            
            42,177,130
            
            41,835,772Effect
                of dilutive security:Stock
                options
            
            
            1,293,936
            
            
            1,510,526
            
            2,432,544
            
            1,550,007Weighted
                average number of shares - fully diluted
            
            
            43,480,515
            
            
            43,370,814
            
            44,609,674
            
            43,385,779





**8.** **RELATED
      PARTY TRANSACTIONS**





The
      following are the Company’s related party transactions:





**RHEO
      Clinic Inc.**





**June
                30,**
            
            **December
                31,****2006**
            
            **2005**Due
                from/(to):RHEO
                Clinic Inc.
            
            $
            892
            
            $
            (5,065
            )$
            892
            
            $
            (5,065
            )





14


One
      of
      the Company’s primary customers had been RHEO Clinic Inc., a subsidiary of TLC
      Vision Corporation (“TLC Vision”). RHEO Clinic Inc. used the RHEOTM System to
      treat patients for which it charged its customers (the patients) a per-treatment
      fee. During the third quarter of 2005, RHEO Clinic Inc. determined that it
      will
      no longer treat patients and subsequently sold certain of its assets to the
      Company at a purchase price of C$61,812, including all applicable taxes. In
      connection with that sale, the Company agreed to share equally in losses
      incurred by RHEO Clinic Inc., to a maximum of C$28,952, for assets that RHEO
      Clinic Inc. is not able to dispose of as at the agreed date, being December
      31,
      2005. On May 1, 2006, the Company paid RHEO Clinic Inc. C$31,859 which included
      the amount owing for losses incurred for assets that RHEO Clinic Inc. was not
      able to dispose of as at the agreed date. Included in the balance due from/to
      RHEO Clinic Inc. as at June 30, 2006 and December 31, 2005 is the amount owing
      to the Company for the purchase of the components of the RHEOTM System net of the
      amount owing to RHEO Clinic Inc. for clinical and administrative support
      provided by RHEO Clinic Inc. for the Company’s MIRA-1 and related clinical
      trials.





**TLC
      Vision and Diamed Medizintechnik GmbH**





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





The
      $5,000,000 portion of the $12,000,000 commitment which was not convertible
      into
      the Company’s common stock was not advanced and the commitment was terminated
      prior to the completion of the Company's initial public offering of shares
      of
      its common stock. During the years ended December 31, 2004 and 2003, the Company
      issued 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 June 30, 2006, the two companies have a combined 54.2%
      equity interest in the Company on a fully diluted basis.





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.**





The
      Company is 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. In the event the Company is not able to
      obtain regulatory approval for the RHEOTM System from the FDA and other necessary
      approvals in the territories for which the Company has distribution rights
      by
      the end of December 2006, Asahi Medical can terminate the distributorship
      agreement. The Company is currently in discussions with Asahi Medical to
      renegotiate this agreement.





The
      Company received free inventory from Asahi Medical for the purpose of the MIRA-1
      and related clinical studies. The Company has accounted for this inventory
      at a
      value equivalent to the cost the Company has paid for the same filters purchased
      from Asahi Medical for commercial sales to its customers. During the three
      months ended June 30, 2006, the Company returned 300 filters, valued at $60,000,
      to Asahi Medical as the filters were labeled for commercial use and cannot
      be
      utilized for the clinical trials. The value of the free inventory received
      from
      Asahi Medical was $25,500, $113,388 and $167,730 for the six months ended June
      30, 2006 and 2005 and the year ended December 31, 2005,
      respectively.





**Mr.
      Hans Stock** ***(Note
      9)***





On
      February 21, 2002, the Company entered into an agreement with Mr. Stock as
      a
      result of his assistance in procuring a distributor agreement for the filter
      products used in the RHEOTM System from Asahi Medical. Mr. Stock agreed to
      further assist the Company in procuring new product lines from Asahi Medical
      for
      marketing and distribution by the Company. The agreement will remain effective
      for a term consistent with the term of the distributorship agreement with Asahi
      Medical, and Mr. Stock will receive a 5% royalty payment on the purchase of
      the
      filters from Asahi Medical. During the three and six months ended June 30,
      2006
      and 2005 and the year ended December 31, 2005, the Company paid Mr. Stock nil,
      nil, $106,961, $142,614 and $240,657, respectively, as royalty fees. Included
      in
      due to stockholders as at June 30, 2006 and December 31, 2005 is $48,023 and
      $29,663, respectively, due to Mr. Stock.





15


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





On
      August
      6, 2004, the Company entered into a patent license and royalty agreement with
      Mr. Stock to obtain an exclusive license to U.S. Patent No. 6,245,038. The
      Company is required to make royalty payments totaling 1.5% of product sales
      to
      Mr. Stock, subject to minimum advance royalty payments of $12,500 per quarter.
      The advance payments are credited against future royalty payments to be made
      in
      accordance with the agreement. This agreement replaces the June 25, 2002
      consulting agreement with Mr. Stock which provided for a royalty payment of
      1%
      of product sales *.* During
      the three and six months ended June 30, 2006 and 2005 and the year ended
      December 31, 2005, the Company paid $12,500, $25,000, $12,500, $25,000 and
      $50,000, respectively, to Mr. Stock as royalty fees. Included in due to
      stockholders as at June 30, 2006 and December 31, 2005 is $12,500 and $12,500,
      respectively, due to Mr. Stock.





**Apheresis
      Technologies, Inc.**





On
      May 1,
      2002, the Company entered into an exclusive distribution services agreement
      with
      Apheresis Technologies, Inc. (“ATI”), a company controlled by certain
      stockholders of the Company pursuant to which the Company pays ATI 5% of the
      Company’s cost of components of the RHEOTM System. Under this agreement, ATI was
      the exclusive provider of warehousing, order fulfillment, shipping, billing
      services and customer service related to shipping and billing to the
      Company.





On
      July
      30, 2004, the Company amended its distribution services agreement with ATI
      such
      that the Company would have the sole discretion as to when the agreement would
      terminate. In consideration of this amendment, the Company agreed to pay ATI
      $100,000 on the successful completion of the Company’s initial public offering.
      On January 18, 2005, the Company paid ATI $100,000 as provided for in the
      amended distribution services agreement. On March 28, 2005, the Company
      terminated its distribution services agreement with ATI.





**Other**





On
      June
      25, 2003, the Company entered into a reimbursement agreement with ATI, pursuant
      to which employees of ATI, including John Cornish, one of the Company’s
      stockholders and its Vice President, Operations, provide services to the Company
      and ATI is reimbursed for the applicable percentage of time the employees spend
      working for the Company. Effective April 1, 2005, the Company terminated its
      reimbursement agreement with ATI such that the Company no longer compensates
      ATI
      in respect of any salary paid to, or benefits provided to, Mr. Cornish by ATI.
      Until April 1, 2005, Mr. Cornish did not have an employment contract with the
      Company and received no direct compensation from the Company. On April 1, 2005,
      Mr. Cornish entered into an employment agreement with the Company under which
      he
      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.





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 the three and six months ended June 30, 2006 and
      2005 and the year ended December 31, 2005, the Company paid Cornish Properties
      Corporation an amount of $8,235, $16,470, $8,235, $16,470 and $32,940,
      respectively.





Effective
      June 25, 2003, Elias Vamvakas, then the Chairman of TLC Vision, became the
      Chairman and Secretary of the Company. 500,000 stock options issued to Mr.
      Vamvakas in December 2003 were accounted for in accordance with APB No. 25.
      The
      Company estimated the intrinsic value of these options granted to Mr. Vamvakas
      to be approximately $5,880,000. Management estimated the fair value of the
      underlying common stock based on management’s estimate of the Company’s value.
      The intrinsic value of the options is being amortized over the vesting period.
      However, upon the successful completion of the Company’s initial public offering
      in December 2004, the options vested immediately, and therefore, any unvested
      compensation expense was expensed immediately.





16


In
      addition, the Company entered into a consultancy and non-competition agreement
      on July 1, 2003 with the Center for Clinical Research (“CCR”), then a
      significant shareholder, which requires the Company to pay a fee of $5,000
      per
      month. For the year ended December 31, 2003, CCR agreed to forego the payment
      of
      $75,250 due to it in exchange for options to purchase 20,926 shares of the
      Company’s common stock at an exercise price of $0.13 per share. In addition, CCR
      also agreed to the repayment of the balance of $150,500 due to it at $7,500
      per
      month beginning in July 2003. On August 22, 2005, the Company amended the
      consultancy and non-competition agreement with CCR such that the fee payable
      to
      it was increased from $5,000 to $15,000 per month effective January 1, 2005,
      the
      payment of a one-time bonus of $200,000 upon 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 *(see
      Note 6)* .
      These
      options are expected to fully vest on receipt by the Company of FDA approval
      of
      the RHEOTM System. This resulted in a combined consulting expense, included
      within clinical and regulatory expense for the three and six months ended June
      30, 2006, of $53,379 and $104,450, respectively.





On
      September 29, 2004, the Company signed a product purchase agreement with Veris
      for its purchase from the Company of 8,004 treatment sets over the period from
      October 2004 to December 2005, a transaction valued at $6,003,000, after
      introductory rebates. However, due to delays in opening its planned number
      of
      clinics throughout Canada, Veris no longer required the contracted-for number
      of
      treatment sets in the period. The Company agreed to the original pricing for
      the
      reduced number of treatment sets required in the period. Dr. 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 June 30, 2006, the
      Company had received a total of $1,779,566 from Veris. Included in amounts
      receivable as at June 30, 2006 and December 31, 2005 is $904,101 and $1,047,622,
      respectively, due from Veris for the purchase of additional pumps and treatment
      sets. Veris has agreed to the payment of interest at the rate of 8% per annum
      on
      all amounts outstanding for more than 45 days up to March 31, 2006, the expected
      date of final payment. In January 2006, the 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 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 U.S. 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 in the six months ended June
      30,
      2006.





In
      April
      2006, the Company agreed to sell a total of 1,000 treatment sets, with
      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. During the three
      months ended June 30, 2006, the Company received a total of $81,600 from Veris
      for the purchase of 408 treatment sets. This amount is included in revenue
      for
      the three and six months ended June 30, 2006 as all the treatment sets have
      been
      delivered to Veris.





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, as at June
      30,
      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.





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 for the time being.





On
      March
      28, 2005, the Company entered into a supply and co-marketing agreement with
      Rheogenx Biosciences Corporation (“Rheogenx”) for the supply of pumps and
      disposable treatment sets to Rheogenx and its affiliates, including PhereSys
      Therapeutics Corporation (“PhereSys”), Rheogenx’s wholly-owned subsidiary. Under
      this agreement, the Company will provide marketing support for PhereSys’s mobile
      apheresis business upon obtaining FDA approval to market the RHEOTM System in the
      United States. In connection with entering into this agreement, the Company
      also
      entered into an asset purchase agreement with Rheogenx on March 28, 2005 to
      effectively terminate the patent, know-how and trademark rights to
      non-ophthalmic indications for the RHEOTM System in North America which the
      Company had previously licensed to Rheogenx. The purchase price of the assets
      under the asset purchase agreement was $10 and has been included within accrued
      liabilities.





17


During
      the fourth quarter of 2004, the Company began a business relationship with
      Innovasium Inc. Innovasium Inc. designed and built some of the Company’s
      websites and also created some of the sales and marketing materials to reflect
      the look of the Company’s websites. Daniel Hageman, who is the President and one
      of the owners of Innovasium Inc., is the spouse of an officer of the Company.
      During the three and six months ended June 30, 2006 and 2005 and the year ended
      December 31, 2005, the Company paid Innovasium Inc. C$3,709, C$31,345, C$36,484,
      C$71,118 and C$123,967, respectively. Included in accounts payable and accrued
      liabilities as at June 30, 2006 and December 31, 2005 is C$400 and C$15,798,
      respectively, due to Innovasium Inc. These amounts are expensed in the period
      incurred and paid when due.




**9.** **DUE
      TO STOCKHOLDERS**





**June
                30,**
            
            **December
                31,****2006**
            
            **2005****Due
                to:**TLC
                Vision Corporation
            
            $
            30,441
            
            $
            116,070Other
                stockholder
            
            
            60,523
            
            
            42,163$
            90,964
            
            $
            158,233





Included
      in amounts due to stockholders as at June 30, 2006 and December 31, 2005 is
      $30,441 and $116,070, respectively, owing to TLC Vision for its payment of
      benefits of certain employees of the Company and for computer and administrative
      support.





The
      balances due to other stockholders as of June 30, 2006 and December 31, 2005
      are
      $60,523 and $42,163, respectively, and are for amounts due to Mr. Hans Stock
      for
      royalty fees *(see
      note 8).*




**10.** **OTHER
      ASSET**





On
      April
      4, 2006, the Company initiated its expansion into the glaucoma market by signing
      a non-binding Letter of Intent to acquire Solx, Inc. (“SOLX”), a privately held
      company based at the Boston University Photonics Center that has developed
      a
      system for the treatment of glaucoma. The DeepLight® Glaucoma Treatment System
      ("DeepLight® System") includes the DeepLight® 790 Titanium Sapphire Laser, the
      DeepLight® Gold Micro-Shunt and the DeepLight® Gold Micro-Shunt Plus which can
      be used to provide physicians with multiple options to manage intraocular
      pressure. The components of SOLX's DeepLight® System have received approval from
      Intertek Certification Services, a European agency for the evaluation of
      medicinal products, and are currently the subject of two randomized,
      multi-center studies in the U.S. SOLX is seeking to obtain 510K approval to
      market the components of the DeepLight® System in the U.S. Although we have been
      advised by SOLX that it is aiming to achieve this goal before the end of 2007,
      its success is subject to many variables and is not guaranteed.





In
      connection with the proposed acquisition, the Company advanced to SOLX a
      convertible unsecured loan in the principal amount of $2,000,000 at an annual
      interest rate equal to the prime rate, as announced from time to time by Bank
      of
      America, N.A. or its successor, plus 2%, to be accrued on a daily basis from
      the
      date of advance. The Convertible Unsecured Promissory Note of SOLX dated April
      4, 2006 (the “Note”), governing the terms of the loan, provides that the
      principal amount of the loan, and accrued but unpaid interest thereon, are
      to be
      repaid in one payment on October 2, 2006 (the “Maturity Date”). The Note further
      provides the Company with the right to acquire 10% of the issued and outstanding
      capital stock of SOLX on a fully diluted basis under certain conditions,
      including if the principal amount of the loan remains outstanding and owing
      after the Maturity Date. Interest accrued on the Note in each of the three
      and
      six months ended June 30, 2006 was $47,726 and is included in amounts
      receivable. Included in other asset as at June 30, 2006 is the $2,000,000
      convertible unsecured loan advanced to SOLX.





On
      August
      1, 2006, the Company signed a definitive merger agreement to acquire SOLX.
      Under **** the
      terms
      of the agreement, the Company will be acquiring SOLX by way of a merger of
      SOLX
      and OccuLogix Mergeco, Inc., a newly incorporated, wholly owned subsidiary
      of
      the Company. The transaction will be subject to customary closing conditions,
      including approval by the Toronto Stock Exchange (the “TSX”). The Company has
      provided SOLX with a $240,000 bridge loan and currently expects the transaction
      to be completed within 31 days of August 1, 2006. At the closing, the Company
      will issue 8,400,000 shares of its common stock and pay $7,000,000 in cash.
      The
      Company will make additional payments of $3,000,000 and $5,000,000 in cash
      on
      the first and second anniversaries of the closing, respectively. Finally, if
      SOLX receives final FDA approval for the marketing and sale of the DeepLight®
Gold Micro-Shunt on or prior to December 31, 2007, the Company will pay an
      additional $5,000,000 in cash *(see
      Note 13)* .





18


**11.** **ACCRUED
      LIABILITIES**





**June
                30, 2006**
            
            **December
                31, 2005**Due
                to professionals
            
            $
            706,446
            
            $
            348,044Due
                to clinical trial sites
            
            
            90,768
            
            
            32,936Due
                to clinical trial specialists
            
            
            115,259
            
            
            227,009Due
                to ATI
            
            
            16,955
            
            
            7,490Due
                to employees and directors
            
            
            393,544
            
            
            993,177Sales
                and capital taxes payable
            
            
            11,074
            
            
            155,604Due
                to MeSys GmbH for pumps
            
            
            —
            
            
            191,692Corporate
                compliance
            
            
            207,275
            
            
            141,667Miscellaneous
            
            
            138,467
            
            
            129,000$
            1,679,788
            
            $
            2,226,619





**12.** **CONSOLIDATED
      STATEMENTS OF CASH FLOW**





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





**Six
                months ended**
              **June
                30,****2006**
            
            
            **2005**Due
                to/from related party
            
            $
            (5,957
            )
            $
            111,612Amounts
                receivable
            
            
            43,359
            
            
            (730,579
            )Inventory
            
            
            (1,152,288
            )
            
            (2,755,107
            )Prepaid
                expenses
            
            
            503,163
            
            
            (75,514
            )Deposit
            
            
            (5,551
            )
            
            4,105Accounts
                payable
            
            
            (363,275
            )
            
            156,019Accrued
                liabilities
            
            
            (638,020
            )
            
            (1,325,094
            )Due
                to stockholders
            
            
            (67,269
            )
            
            (273,740
            )$
            (1,685,838
            )
            $
            (4,888,298
            )





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





**Six
                months ended****June
                30,****2006**
            
            **2005**Non-cash
                investing and financing activitiesDeferred
                acquisition costs
            
            $
            91,189
            
            $
            —Free
                inventory
            
            
            (22,506
            )
            
            113,388Additional
                cash flow informationIncome
                taxes paid
            
            $
            (733
            )
            $
            —





**13.** **SUBSEQUENT
      EVENTS**





a.
            On
                August 3, 2006, the Board of Directors approved the grant to Elias
                Vamvakas of 300,000 options under the Stock Option Plan. In exchange
                for
                these options, Mr. Vamvakas will forego cash payment of (i) his base
                salary of C$475,000 per annum, pro rated for the period from July
                1, 2006
                to December 31, 2006 inclusive, and (ii) C$308,750 representing the
                maximum amount that would have been payable to him as bonus compensation
                for the year ending December 31,
                2006.





19


The
      Board
      of Directors also approved the grant to the directors of the Company, other
      than
      Mr. Vamvakas, of a total of 82,500 options under the 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
      the
      Company during the second, third and fourth quarters of 2006 in respect of
      (i)
      his or her annual director’s fee of $15,000, (ii) in the case of those directors
      who chair a committee of the Board of Directors, his or her fee of $5,000 per
      annum for chairing such committee and (iii) his or her fee of $2,500 per fiscal
      quarter for attending the quarterly in-person meetings of the Board of
      Directors.





The
      numbers of options granted to Mr. Vamvakas and each of the other directors
      of
      the Company were determined using the Black-Scholes valuation method, based
      on
      an attributed value of $2.05 per share of the Company’s common stock underlying
      the options. 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.





**b.**
            On
                August 1, 2006, the Company signed a definitive agreement to acquire
                SOLX
                pursuant to the Company’s diversification plans focusing on age-related
                eye diseases. Under the terms of the agreement, theCompany will be acquiring SOLX by way of a merger of SOLX and OccuLogix
                Mergeco, Inc., a newly incorporated, wholly owned subsidiary of the
                Company. The transaction will be subject to customary closing conditions,
                including approval by the TSX. The Company has provided SOLX with
                a
                $240,000 bridge loan and currently expects the transaction to be
                completed
                within 31 days of August 1, 2006. At the closing, the Company will
                issue
                8,400,000 shares of its common stock and pay $7,000,000 in cash.
                The
                Company will make additional payments of $3,000,000 and $5,000,000
                in cash
                on the first and second anniversaries of the closing, respectively.
                Finally, if SOLX receives final FDA approval for the marketing and
                sale of
                the DeepLight® Gold Micro-Shunt on or prior to December 31, 2007, the
                Company will pay an additional $5,000,000 in cash*(see
                Note 10)*.





20





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





**OVERVIEW**





We
      are an
      ophthalmic therapeutic company founded to commercialize innovative treatments
      for eye diseases, including age-related macular degeneration, or AMD. Our core
      purpose is to improve life through evidence-based medical therapies. The RHEOTM
System is used to perform the RheopheresisTM procedure, a procedure that
      selectively removes molecules from plasma, which is designed to treat Dry AMD,
      the most common form of the disease.





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





Subsequent
      to the February 3, 2006 announcement, the Company completed an in-depth analysis
      of the MIRA-1 study data identifying subjects that were included in the
      intent-to-treat, or ITT, population but who deviated from the MIRA-1 protocol
      as
      well as those patients who had documented losses or gains in vision for reasons
      not related to retinal disease such as cataracts that were not specifically
      excluded by the protocol. Those subjects in the ITT population who met the
      protocol requirements, and who did not exhibit 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 = 0.0099).
      The following table presents a summary of the ETDRS BCVA changes observed 12
      months post-baseline in the modified per-protocol analysis of
      MIRA-1:





Treatment
                Group
              (n=69)
            Placebo
                Group
              (n=46)Vision
                improvement greater or equal to:1
                line
            47%
            18%2
                lines
            28%
            9%3
                lines
            9%
            2%Vision
                loss greater or equal to:1
                line
            10%
            24%2
                lines
            6%
            7%3
                lines
            3%
            2%





Within
      the modified per-protocol population with pre-treatment vision worse than 20/40,
      47% of RHEOTM Therapy-treated eyes improved, after treatment, to 20/40 or better
      (which is the required visual acuity to qualify for a driver’s license) 12
      months post-baseline, compared to 12% of placebo eyes.





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





On
      June
      8, 2006, we met with the FDA to discuss the results of MIRA-1 and the impact
      the
      results will have on our application to market the RHEOTM System in the United
      States. In light of MIRA-1’s failure to meet its primary efficacy endpoint, the
      FDA advised that it will require an additional study of the RHEOTM System to be
      performed. The FDA also indicated its willingness to allow the substitution,
      in
      the upcoming study, of the new polysulfone RheofilterTM for the older cellulose
      acetate filter which currently forms part of the RHEOTM System. The replacement
      of the filter removes the regulatory uncertainties presented by making the
      replacement following FDA approval. Furthermore, due to manufacturing
      constraints on the number of cellulose acetate filters that can be produced
      by
      Asahi Kasei Medical Co., Ltd. (formerly Asahi Medical Co., Ltd.), 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
      in
      preparation for commercial launch. We recently submitted our draft
      Investigational Device Exemption, or IDE, package to the FDA together with
      a
      draft of the new protocol and are currently awaiting the FDA’s feedback which,
      when received, will enable us to proceed with the formal submission to the
      FDA
      of our IDE package and protocol.





As
      a
      result of the announcement on February 3, 2006, the per share price of our
      common stock as traded on the NASDAQ National Market System decreased from
      $12.75 on February 2, 2006 to close at $4.10 on February 3, 2006. The 10-day
      average price of the stock immediately following the announcement was $3.65
      and
      reflected a decrease in our market capitalization from $536.6 million on
      February 2, 2006 to $153.6 million based on the 10-day average share price
      subsequent to the announcement. 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 has continued to decline subsequent
      to
      the June 12, 2006 announcement and again after the June 30, 2006 announcement.
      Based on the result of the preliminary 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 to be 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.





During
      the second quarter of 2006, we sold a number of treatment sets, with a
      negotiated discount, to Veris at a price lower than our cost. Accordingly,
      the
      price which we charged to Veris, net of a negotiated discount, represents the
      current net realizable value; therefore, we wrote down the value of our
      treatment sets to reflect this current net realizable value as at June 30,
      2006.





As
      at
      June 30, 2006 and December 31, 2005, we had inventory reserves of
      $3,615,830 and $1,990,830, respectively. During the six months ended June 30,
      2006, we recognized a provision related to inventory of $1,625,000 based on
      the
      above analysis (2005 - nil).





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 June 30, 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.




21


Our
      results of operations for the six months ended June 30, 2006 were impacted
      by
      our adoption of Statement of Financial Accounting Standards (“SFAS”) No. 123R
      (revised 2004), “Share-Based Payments” (“SFAS No. 123R”), which requires us to
      recognize a non-cash expense related to the fair value of our stock-based
      compensation awards. We elected to use the modified prospective transition
      method of adoption requiring us to include this stock-compensation charge in
      our
      results of operations beginning on January 1, 2006 without restating prior
      periods to include stock-based compensation expense. This method also 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 income should be recognized
      as the cumulative effect of a change in accounting principle as of the required
      effective date. Of the $959,953 stock-based compensation expense recognized
      in
      the six months ended June 30, 2006, $583,628 is included in general and
      administrative expenses, $110,823 in clinical and regulatory expenses and
      $265,502 in sales and marketing expenses. We also recognized $107,045 as the
      cumulative effect of a change in accounting principle reflecting the impact
      of
      our estimated forfeitures of outstanding awards as of January 1,
      2006.





At
      the
      annual meeting of stockholders of the Company held on June 23, 2006, our
      stockholders approved the re-pricing of all out-of-the-money stock options
      of
      the Company. Consequently, the exercise price of all outstanding stock options
      that, on June 23, 2006, was greater than $2.05, being the weighted average
      trading price of our common stock on the NASDAQ National Market during the
      five-trading day period immediately preceding June 23, 2006, was adjusted
      downward to $2.05. 2,585,000 of the outstanding stock options with a weighted
      average exercise price of $8.42 were affected by the re-pricing. SFAS No. 123R
      treats the re-pricing of equity awards as a modification of the original award
      and provides that such a modification is an exchange of the original award
      for a
      new award. SFAS No. 123R considers the modification to be the repurchase of
      the
      old award for a new award of equal or greater value, incurring additional
      compensation cost for any incremental value. This incremental difference in
      value is measured as the excess, if any, of the fair value of the modified
      award
      determined in accordance with the provisions of SFAS No. 123R over the fair
      value of the original award immediately before its terms are modified, measured
      based on the share price and other pertinent factors at that date. SFAS No.
      123R
      provides that this incremental fair value, plus the remaining unrecognized
      compensation cost from the original measurement of the fair value of the old
      option, must be recognized over the remaining vesting period. Of the 2,585,000
      options affected by the re-pricing 1,196,857 were vested as at June 23, 2006.
      Therefore, additional compensation cost of $347,187 for the 1,196,857 options
      was recognized immediately and is included in the stock-based compensation
      expense for the six months ended June 30, 2006. The remaining unrecognized
      incremental fair value of $187,265 plus the compensation cost from the original
      measurement of the fair value of the old options of $3,228,872, which totaled
      $3,416,137 in unrecognized compensation expense as at June 30, 2006, is expected
      to be amortized over a weighted average vesting period of three
      years.





In
      accordance with SFAS No. 123R, we also recorded a compensation expense of $3,363
      in the three months ended June 30, 2006 as our Board of Directors approved
      accelerating the vesting of 1,250 unvested stock options granted to a terminated
      employee on April 28, 2006. SFAS No. 123R treats such a modification as a
      cancellation of the original unvested award and the grant of a new fully vested
      award as of that date.





Prior
      to
      the adoption of SFAS No. 123R, we applied the provisions of SFAS No. 123,
“Accounting for Stock-Based Compensation” (“SFAS No. 123”), which allowed
      companies either to expense the estimated fair value of employee stock options
      or to follow the intrinsic value method set forth in Accounting Principles
      Board
      Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”), but
      required companies to disclose the pro forma effects on net loss as if the
      fair
      value of the options had been expensed. We elected to apply APB No. 25 in
      accounting for employee stock options. As required by SFAS No. 123, prior to
      the
      adoption of SFAS No. 123R, we provided pro forma net loss and pro forma net
      loss
      per share disclosures for stock-based awards as if the fair value of the options
      had been expensed.





As
      at
      June 30, 2006, $3,510,181 of total unrecognized compensation cost related to
      stock options is expected to be recognized over a weighted-average period of
      three years.





On
      April
      4, 2006, we announced our planned acquisition of Solx, Inc. (“SOLX”), subject to
      the Company completing its due diligence. The acquisition of SOLX represents
      an
      expansion of the Company’s ophthalmic product portfolio beyond the RHEOTM
procedure for Dry AMD. This expansion or diversification has been a long-term
      corporate objective, and in light of the delay in the U.S. commercial launch
      of
      the RHEOTM System, we have accelerated these 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.




Based
      at
      the Boston University Photonics Center, SOLX is a privately held company that
      has developed a system for the treatment of glaucoma. The DeepLight® Glaucoma
      Treatment System ("DeepLight® System") includes the DeepLight® 790 Titanium
      Sapphire Laser, the DeepLight® Gold Micro-Shunt and the DeepLight® Gold
      Micro-Shunt Plus, which can be used to provide physicians with multiple options
      to manage intraocular pressure. The components of SOLX's DeepLight® System have
      received approval from Intertek Certification Services, a European agency for
      the evaluation of medicinal products, and are currently the subject of two
      randomized, multi-center studies in the United States. SOLX expects to complete
      enrollment in both of these trials by 2007 and will be seeking 510K approval
      to
      market the components of the DeepLight® System in the United States. Although we
      have been advised by SOLX that it is aiming to achieve this goal before the
      end
      of 2007, its success is subject to many variables and is not guaranteed.





In
      connection with the proposed acquisition of SOLX, we advanced to it a
      convertible unsecured loan in the principal amount of $2,000,000 at an annual
      interest rate equal to the prime rate, as announced from time to time by Bank
      of
      America, N.A. or its successor, plus 2%, to be accrued on a daily basis from
      the
      date of advance. The Convertible Unsecured Promissory Note of SOLX dated April
      4, 2006 (the “Note”), governing the terms of the loan, provides that the
      principal amount of the loan, and accrued but unpaid interest thereon, are
      to be
      repaid in one payment on October 2, 2006 (the “Maturity Date”). The Note further
      provides us with the right to acquire 10% of the issued and outstanding capital
      stock of SOLX on a fully diluted basis under certain conditions, including
      if
      the principal amount of the loan remains outstanding and owing after the
      Maturity Date. Interest accrued on the Note in the six-month period ended June
      30, 2006 was $47,726.





On
      August
      1, 2006, we signed a definitive merger agreement to acquire SOLX.
      Under **** the
      terms
      of the agreement, we will be acquiring SOLX by way of a merger of SOLX and
      OccuLogix Mergeco, Inc., a newly incorporated, wholly owned subsidiary of the
      Company. The transaction will be subject to customary closing conditions,
      including approval by the Toronto Stock Exchange. We have provided SOLX with
      a
      $240,000 bridge loan and currently expect the transaction to be completed within
      31 days of August 1, 2006. At the closing, the Company will issue 8,400,000
      shares of its common stock and pay $7,000,000 in cash. We will make additional
      payments of $3,000,000 and $5,000,000 in cash on the first and second
      anniversaries of the closing, respectively. Finally, if SOLX receives final
      FDA
      approval for the marketing and sale of the DeepLight® Gold Micro-Shunt on or
      prior to December 31, 2007, we will pay an additional $5,000,000 in
      cash.





22


**RECENT
      DEVELOPMENTS**





On
      June
      14, 2006, we announced that we had entered into a letter of intent with Sowood
      pursuant to which certain funds and accounts managed or advised by Sowood and
      its affiliates proposed to make a private purchase from the Company of
      approximately $30,000,000 of zero-coupon convertible notes. The notes were
      anticipated to be convertible under certain circumstances into shares of the
      Company’s common stock at a conversion price of $3.30 per share. In connection
      with the purchase of the notes, Sowood would have acquired the right to nominate
      one member of the Company’s Board of Directors. After preliminary discussions
      with Sowood, we decided that it would be in the best interests of the Company
      and its stockholders to discontinue negotiations and, on June 30, 2006,
      announced the termination of negotiations.





In
      connection with the proposed purchase of notes, we agreed to cover costs
      incurred by Sowood to perform its due diligence on the Company up to a maximum
      of $250,000. This amount is included in accrued liabilities as at June 30,
      2006
      and was expensed in the six-month period ended June 30, 2006.





On
      August
      3, 2006, the Board of Directors of the Company (“Board of Directors “) approved
      the grant to Elias Vamvakas of 300,000 options under the Company’s 2002 Stock
      Option Plan. In exchange for these options, Mr. Vamvakas will forego cash
      payment of (i) his base salary of C$475,000 per annum, pro rated for the period
      from July 1, 2006 to December 31, 2006 inclusive, and (ii) C$308,750
      representing the maximum amount that would have been payable to him as bonus
      compensation for the year ending December 31, 2006.





The
      Board
      of Directors also approved the grant to the directors of the Company, other
      than
      Mr. Vamvakas, of a total of 82,500 options under the 2002 Stock Option Plan.
      In
      exchange for these options, each of our directors will forego the cash
      remuneration which he or she would have been entitled to receive from us during
      the second, third and fourth quarters of 2006 in respect of (i) his or her
      annual director’s fee of $15,000, (ii) in the case of those directors who chair
      a committee of the Board of Directors, his or her fee of $5,000 per annum for
      chairing such committee and (iii) his or her fee of $2,500 per fiscal quarter
      for attending the quarterly in-person meetings of the Board of
      Directors.





The
      numbers of options granted to Mr. Vamvakas and each of the other directors
      of
      the Company were determined using the Black-Scholes valuation method, based
      on
      an attributed value of $2.05 per share of the Company’s common stock underlying
      the options. 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.





**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 disclosure. 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 six months ended
      June 30, 2006 to the items disclosed as our critical accounting policies and
      estimates in our discussion and analysis of financial condition and results
      of
      operations in our 2005 Form 10-K, except as noted below.





*Inventory
      valuation*





Management
      must make estimates about future customer demand for our products when
      establishing the appropriate provisions for inventory and also determine whether
      market demand has had any impact on our inventory’s net realizable value. When
      making these estimates, we consider general economic conditions and growth
      prospects, including the impact of us receiving FDA approval for the RHEOTM
System.





With
      respect to our provisioning policy, in general, we fully reserve for surplus
      inventory in excess of our demand forecast, taking into consideration the expiry
      date of our filters. In addition, we assess whether recent transactions provide
      indicators as to whether the net realizable value of our inventory is below
      our
      cost.





As
      at
      June 30, 2006 and December 31, 2005, we had inventory reserves of
      $3,615,830 and $1,990,830, respectively. During the six months ended June 30,
      2006, we recognized a provision related to inventory of $1,625,000 based on
      the
      above analysis (2005 - nil).





*Stock
      based compensation*





In
      December 2004, the Financial Accounting Standards Board (the “FASB”) issued SFAS
      No. 123R, which revised SFAS No. 123 and APB No. 25. SFAS No. 123R requires
      all
      share-based payments to employees, including grants of employee stock options
      to
      be recognized in the consolidated financial statements based on their fair
      values. The pro forma disclosure previously permitted under SFAS No. 123 is
      no
      longer an alternative to financial statement recognition. SFAS No. 123R is
      effective at the beginning of the first interim or annual period beginning
      after
      June 15, 2005. In April 2005, the SEC announced the adoption of a new rule
      that
      amends the compliance dates for SFAS No. 123R. The SEC’s new rule allows
      companies to implement SFAS No. 123R at the beginning of their next fiscal
      year,
      instead of the next reporting period that begins after June 15, 2005.
      Accordingly, we adopted SFAS No. 123R beginning January 1, 2006. We have
      selected the Black-Scholes option-pricing model as our method of determining
      the
      fair value for all our awards and will recognize compensation cost on a
      straight-line basis over the awards’ vesting periods.





*Goodwill*





Effective
      January 1, 2002, goodwill is no longer amortized and is subject to an annual
      impairment test. Goodwill impairment is evaluated between annual tests upon
      the
      occurrence of certain events or circumstances. Goodwill impairment is assessed
      based on a comparison of the fair value of the reporting unit to the underlying
      carrying value of the reporting unit's net assets, including goodwill. When
      the
      carrying amount of the reporting unit exceeds its fair value, the fair value
      of
      the reporting unit's goodwill is compared with its carrying amount to measure
      the amount of impairment loss, if any. The Company is a single reporting unit.
      Therefore, management has determined the fair value of the Company's goodwill
      using its market capitalization as opposed to the fair value of its assets
      and
      liabilities. As a result of the announcement on February 3, 2006, the per share
      price of our common stock as traded on the NASDAQ National Market System
      decreased from $12.75 on February 2, 2006 to close at $4.10 on February 3,
      2006.
      The 10-day average price of the stock immediately following the announcement
      was
      $3.65 and reflected a decrease in our market capitalization from $536.6 million
      on February 2, 2006 to $153.6 million based on the 10-day average share price
      subsequent to the announcement. 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 have terminated negotiations with 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 has continued to decline subsequent to the June 12, 2006 announcement
      and
      again after the June 30, 2006 announcement. Based on the result of the
      preliminary 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.




23


**RESULTS
      OF OPERATIONS**





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





**Three
                Months Ended June 30,**
            
            **Six
                Months Ended June 30,****2006**
            **2005**
            
            **Change**
            
            
            **2006**
            
            **2005**
            
            **Change**Revenues
            $
            82,715
            $
            597,841
            
            (86.2%)
            
            $
            82,715
            $
            1,001,579
            
            (91.7%)Cost
                of sales
            
            4,317
            
            403,855
            
            98.9%
            
            
            1,654,317
            
            703,790
            
            (135.1%)Gross
                margin
            
            78,398
            
            193,986
            
            (59.6%)
            
            
            (1,571,602)
            
            297,789
            
            (627.8%)





*Revenues*





Subsequent
      to the Company’s February 3, 2006 announcement that MIRA-1 had not met its
      primary efficacy endpoint, our sole customer, Veris, halted purchases while
      the
      Company completed its in-depth analysis of the MIRA-1 study data. The modified
      per-protocol analysis of the MIRA-1 data supports historical clinical and
      commercial experience with respect to the safety of RHEOTM Therapy, with observed
      treatment side effects generally being mild, transient and self-limiting. Based
      on the result of the analysis and in line with our continued support of Veris
      in
      Canada, in April 2006, we 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 our cost. It was also agreed that payment for the treatment sets
      must
      be received by the Company in advance of shipment.





During
      the second quarter of 2006, as compared with the corresponding period in fiscal
      2005, revenues decreased significantly primarily due to reduced sales of
      components of the RHEOTM System to Veris as a result of our February 3, 2006
      announcement that MIRA-1 did not meet its primary efficacy endpoint. In
      addition, included in revenues for the three months ended June 30, 2005 are
      sales made to RHEO Clinic Inc., a subsidiary of TLC Vision Corporation and
      a
      related party, for which we reported revenues of $14,726 in the period. RHEO
      Clinic Inc. has since ceased the treatment of commercial patients and is
      therefore no longer a source of revenue for us.





Revenues
      for the six months ended June 30, 2005 included revenues generated from sales
      made to Veris and RHEO Clinic Inc. for which we reported revenues of $923,315
      and $78,264, respectively, in the period. The decrease in revenue in the
      corresponding period in 2006 is primarily due to reduced sales of the Company’s
      products to Veris.





*Cost
      of Sales*





In
      April
      2006, we sold a total of 408 treatment sets to Veris at a price, net of
      negotiated discounts, which was lower than our cost. As Veris is currently
      our
      sole customer, we believe that the price at which we sold the treatment sets
      to
      Veris represents our inventory’s current net realizable value, and therefore, we
      have written down the value of the treatment sets to reflect this net realizable
      value. Included in cost of sales for the six months ended June 30, 2006 is
      $1,625,000 which reflects the write-down of the treatment sets to its net
      realizable value.





During
      the three months ended June 30, 2006, as compared with the corresponding period
      in fiscal 2005, cost of sales reduced significantly and reflects the reduced
      sales in the period. In addition, during the three-month period ended June
      30,
      2006, Veris returned four pumps which had been sold to it in December 2005.
      In
      fiscal 2005, we had recorded an inventory loss associated with all sales made
      to
      Veris in December 2005 and did not recognize revenue due to our anticipation
      that Veris may not return the products shipped to it and would not be able
      to
      pay for the amounts invoiced. Accordingly, the cost of the four pumps returned
      by Veris, valued at $85,058, was used to reduce the cost of sales in the
      period.





Cost
      of
      sales for the six months ended June 30, 2006 includes a charge of $1,625,000
      which reflects the write-down of our inventory of treatment sets to its net
      realizable value. There was no comparable expense in the six months ended June
      30, 2005.





*Gross
      Margin*





Gross
      margin on sales was lower in the three months ended June 30, 2006 as compared
      with the corresponding period in fiscal 2005 due to reduced sales offset by
      the
      value of the four pumps returned by Veris in the period.




Gross
      margin on sales was a loss of $1,571,602 for the six months ended June 30,
      2006
      as compared with a profit of $297,789 during the comparative prior year period
      due primarily to the write-down of our inventory to its net realizable value
      offset by the value of the four pumps returned by Veris in the period.





**Operating
      Expenses**





**Three
                Months Ended June 30,**
            
            **Six
                Months Ended June 30,****2006**
            
            **2005**
            
            **Change**
            
            
            **2006**
            
            **2005**
            
            **Change**General
                and administrative
            $
            2,753,780
            $
            2,199,372
            
            25.2%
            
            $
            4,750,365
            $
            4,380,086
            
            8.5%Clinical
                and regulatory
            
            1,471,473
            
            1,309,989
            
            12.3%
            
            
            2,946,860
            
            2,654,014
            
            11%Sales
                and marketing
            
            465,347
            
            380,061
            
            22.4%
            
            
            891,334
            
            765,907
            
            16.4%Impairment
                of goodwill
            
            65,945,686
            
            —
            
            100%
            
            
            65,945,686
            
            —
            
            100%Restructuring
                charges
            
            —
            
            —
            
            —
            
            
            819,642
            
            —
            
            100%Total
                operating expenses
            $
            70,636,286
            $
            3,889,422
            
            1716%
            
            $
            75,353,887
            $
            7,800,007
            
            866%





*General
      and Administrative Expenses*





General
      and administrative expenses increased by $554,408 during the second quarter
      of
      2006, as compared with the corresponding period of fiscal 2005, due to an
      increase of $376,281 in stock-based compensation expense associated with the
      re-pricing of out-of-the-money stock options of the Company during the period
      and the adoption of SFAS No. 123R beginning January 1, 2006 and an increase
      in
      employee travel and administrative expenses of $79,479. General and
      administrative expenses also include a charge for $250,000 which represents
      our
      exposure in respect of costs incurred by Sowood to perform its due diligence
      on
      the Company in connection with its proposed purchase of notes of the Company,
      the negotiations for which have been terminated as at June 29, 2006. These
      increases were partially offset by the decrease in professional fees and fees
      associated with compliance with Section 404 of the Sarbanes-Oxley Act of 2002
      of
      $117,579.





General
      and administrative expenses increased by $370,279 during the six months ended
      June 30, 2006, as compared with the corresponding prior year period due to
      an
      increase of $519,530 associated with stock-based compensation expense and the
      charge of $250,000 in respect of costs incurred by Sowood to perform its due
      diligence on the Company. In addition, employee travel and administrative
      expenses increased by $100,499 during the six-month period ended June 30, 2006.
      These increases were partially offset by the decrease in professional fees
      and
      fees associated with compliance with Section 404 of the Sarbanes-Oxley Act
      of
      2002 of $550,696.


24


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 $161,484 and $292,846 in the three and
      six
      months ended June 30, 2006, respectively, as compared with the corresponding
      prior year periods as a result of increased activities associated with the
      LEARN
      trial, or Long-term Efficacy in AMD from Rheopheresis in North America, and
      other clinical trials. Stock-based compensation expense also increased by
      $25,939 and $37,834 in the three- and six-month periods ended June 30, 2006,
      respectively, as a result of the re-pricing of out-of-the-money stock options
      of
      the Company during the period and the adoption of SFAS No. 123R beginning
      January 1, 2006.





Our
      goal
      is to establish RHEOTM Therapy as the leading treatment for Dry AMD in North
      America. Accordingly, we expect clinical and regulatory expenses to increase
      in
      the future as we are required to conduct an additional study of the RHEOTM System
      in order to support our PMA application to the FDA.





*Sales
      and Marketing Expenses*





Sales
      and
      marketing expenses increased by $85,286 in the three months ended June 30,
      2006,
      as compared with the three months ended June 30, 2005 due to stock-based
      compensation expense of $169,124 associated with the re-pricing of
      out-of-the-money stock options of the Company during the period and the adoption
      of SFAS No. 123R beginning January 1, 2006. Sales and marketing expenses also
      include fees and expenses of the Company’s Scientific Advisory Board members of
      $90,371 during the three-month period ended June 30, 2006. There was no
      comparable expense in the prior year period. These increases in expenses were
      partially offset by reduced employee and travel costs during the period of
      $72,061 and a decrease in marketing expenses of $112,518 due to reduced
      marketing efforts in the period following the announcement of MIRA-1
      results.





During
      the six months ended June 30, 2006, sales and marketing expenses increased
      by
      $125,426 as compared with the corresponding prior year period due to stock-based
      compensation expense of $265,502 and fees and expenses of the Scientific
      Advisory Board members of $153,440. There was no comparable expense in the
      six
      months ended June 30, 2005. These increases in expenses were partially offset
      by
      reduced employee and travel costs of $119,163 and a decrease in marketing
      expenses of $183,570 during the six months ended June 30, 2006.





We
      will
      continue to develop and execute our conference and podium strategy to ensure
      visibility and “evidence-based” positioning of the RHEOTM System.





*Impairment
      of Goodwill*





The
      continued decrease in our stock price subsequent to the February 3, 2006
      announcement of MIRA-1's failure to meet its primary endpoint, the June 12,
      2006
      announcement of the outcome of our meeting with the FDA and the June 30, 2006
      announcement of the termination of negotiations with Sowood were identified
      as
      indicators of impairment which led to an analysis of our intangible assets
      and
      goodwill which, in turn, resulted in the reporting of an impairment charge
      of
      $65,946,686. The impairment of goodwill charge of $65,946,686 in the three
      months ended June 30, 2006 represents the write-down of the value of goodwill
      acquired on the purchase of TLC Vision's 50% interest in OccuLogix, L.P. on
      December 8, 2004 to its fair value as at June 30, 2006. There was no comparable
      charge in the three-month period ended June 30, 2005.





*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 in the six months ended June 30, 2006. The Company
      implemented a number of structural and management changes designed both to
      support the continued development of the RHEOTM System and to execute the
      Company’s accelerated diversification strategy within ophthalmology. The
      restructuring charge of $819,642 recorded in the six months ended 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 have been fully paid by June 30, 2006.
      There was no comparable expense in the three months ended June 30, 2006 and
      2005
      and the six months ended June 30, 2005.





25


**Interest
      and Other Income, Net**





**Three
                Months Ended June 30,**
            
            **Six
                Months Ended June 30,****2006**
            
            **2005**
            
            **Change**
            
            
            **2006**
            
            **2005**
            
            **Change**Interest
                and other income, net
            $
            403,504
            $
            376,924
            
            7%
            
            $
            774,048
            $
            743,547
            
            4.1%





*Interest
      and Other Income, Net*





Interest
      and other income, net consists primarily of interest income earned in the
      current periods and the corresponding prior periods 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 plus interest accrued on the $2,000,000 loan
      advanced to SOLX in April 2006.





**Recovery
      of Income Taxes**





**Three
                Months Ended June 30,**
            
            **Six
                Months Ended June 30,****2006**
            
            **2005**
            
            **Change**
            
            
            **2006**
            
            **2005**
            
            **Change**Recovery
                of income taxes
            $
            158,792
            $
            158,792
            
            —
            
            $
            316,850
            $
            317,583
            
            0.2%





*Recovery
      of Income Taxes*





Recovery
      of income taxes represents the amortization of the deferred tax liability which
      was recorded based on the difference between the fair value of the intangible
      asset acquired in December 2004 and its tax basis. The deferred tax liability
      of
      $9,527,500 is being amortized over 15 years, the estimated useful life of the
      intangible asset.





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





**Three
                Months Ended June 30,**
            
            **Six
                Months Ended June 30,****2006**
            
            **2005**
            
            **Change**
            
            
            **2006**
            
            **2005**
            
            **Change**Cumulative
                effect of a change in accounting principle
            $
            —
            $
            —
            
            —
            
            $
            107,045
            $
            —
            
            100%





*Cumulative
      Effect of a Change in Accounting Principle*





The
      cumulative effect of a change in accounting principle reflects the impact of
      our
      estimated forfeitures of outstanding stock option awards as of January 1,
      2006. On January 1, 2006, the effective date of adopting SFAS No. 123R, we
      were required to estimate the number of forfeitures of our outstanding awards
      as
      of the effective date. Consolidated balance sheet amounts related to any
      compensation cost for these estimated forfeitures previously recognized in
      prior
      periods before the adoption of SFAS No. 123R have to be eliminated and
      recognized in income as the cumulative effect of a change in accounting
      principle as of the effective date. The compensation cost previously recognized
      in prior periods before the adoption of SFAS No. 123R relates to compensation
      expense associated with non-employee stock options.





**LIQUIDITY
      AND CAPITAL RESOURCES**





**June
                30, 2006**
            
            **December
                31, 2005**
            
            **Change**Cash
                and cash equivalents
            $
            18,180,386
            $
            9,599,950
            $
            8,580,436Short-term
                investments
            
            12,555,000
            
            31,662,845
            
            (19,107,845)Total
                cash, cash equivalents and short-term investments
            $
            30,735,386
            $
            41,262,795
            $
            (10,527,409)Percentage
                of total assets
            
            24.1%
            
            29.9%
            
            (5.8)
                ptsWorking
                capital
            $
            33,834,681
            $
            44,414,947
            $
            (10,580,266)





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.





26


To
      date,
      cash has been primarily utilized to finance increased infrastructure costs,
      to
      accumulate inventory and to fund costs of the MIRA-1 clinical trial and, more
      recently, the LEARN and other clinical trials. We expect that, in the future,
      we
      will use our cash resources to fund our diversification strategy, the
      development of our infrastructure and to conduct clinical trials as we will
      be
      required to conduct a new clinical trial of the RHEOTM System, following up
      MIRA-1, in order to support our PMA application to the FDA.





**Changes
      in Cash Flow**





**Six
                Months Ended June 30,****2006**
            
            **2005**
            
            **Change**Cash
                used in operating activities
            $
            (8,339,814)
            $
            (10,519,646)
            $
            2,179,832Cash
                provided by investing activities
            
            16,686,540
            
            4,527,269
            
            12,159,271Cash
                provided by financing activities
            
            233,710
            
            107,054
            
            126,656Net
                increase (decrease) in cash and cash equivalents during the
                period
            $
            8,580,436
            $
            (5,885,323)
            $
            14,465,759





*Cash
      Used in Operating Activities*





During
      the six months ended June 30, 2006, net cash used to fund our operating
      activities was $8,339,814. The following significantly impacted the cash used
      to
      fund our operating activities:





Net
      loss
      of $72,727,546 includes $69,073,569 in non-cash charges, which are comprised
      primarily of the goodwill impairment of $65,945,686, and the amortization of
      intangible asset, fixed assets, patents and trademarks and premium/discounts
      on
      investments of $967,559 netted by applicable deferred income taxes of $317,583.
      Additional non-cash charges consists of $1,625,000 in inventory write-down
      and
      $959,953 stock-based compensation charges netted by the cumulative effect of
      a
      change in accounting principle of $107,045.





The
      net
      change in non-cash working capital balances related to operations for the six
      months ended June 30, 2006 and 2005 consists of the following:





**Six
                months ended**
              **June
                30,****2006**
            
            
            **2005**Due
                to/from related party
            
            $
            (5,957
            )
            $
            111,612Amounts
                receivable
            
            
            43,359
            
            
            (730,579
            )Inventory
            
            
            (1,152,288
            )
            
            (2,755,107
            )Prepaid
                expenses
            
            
            503,163
            
            
            (75,514
            )Deposit
            
            
            (5,551
            )
            
            4,105Accounts
                payable
            
            
            (363,275
            )
            
            156,019Accrued
                liabilities
            
            
            (638,020
            )
            
            (1,325,094
            )Due
                to stockholders
            
            
            (67,269
            )
            
            (273,740
            )$
            (1,685,838
            )
            $
            (4,888,298
            )





·
            Amounts
                receivable decreased due primarily to the receipt of accrued interest
                receivable on investments.


·
            Increase
                in inventory balance reflects the completion of purchase obligations
                in
                line with supplier expectations.


·
            Decrease
                in prepaid expenses is primarily from applying outstanding invoices
                to
                retainers paid in prior periods and the amortization of prepaid
                insurance.


·
            Accounts
                payable and accrued liabilities decreased as payments are being made
                for
                costs associated with the Company’s
                activities.


·
            The
                decrease in amounts due to stockholders is due to payments made to
                TLC
                Vision during the six-month period.





*Cash
      Provided by Investing Activities*





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





*Cash
      Provided by Financing Activities*





Net
      cash
      provided by financing activities for the six months ended June 30, 2006 is
      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, will be sufficient
      to fund the Company’s anticipated level of operations and other demands and
      commitments until the latter half of 2007.





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:




27


·
            the
                costs of acquiring and operating businesses that are in line with
                the
                Company’s diversification strategy;


·
            the
                cost and results of the follow-up clinical trial of the RHEOTM System to
                support our PMA application to the
                FDA;


·
            the
                rate of progress, cost and results of the LEARN and other clinical
                trials;


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


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


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


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


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


·
            the
                costs of establishing sales, marketing and distribution capabilities;
                and


·
            the
                effect of competing technological and market
                developments.




We
      cannot
      begin commercialization of the RHEOTM System in the United States until we
      receive FDA approval. In light of MIRA-1’s failure to meet its primary efficacy
      endpoint, we are required to conduct a follow-up clinical trial of the RHEOTM
System in order to support our PMA application to the FDA. We recently submitted
      our draft IDE package to the FDA together with a draft of the protocol and
      are
      currently awaiting the FDA’s feedback which, when received, will enable us to
      proceed with the formal submission to the FDA of our IDE package and protocol.
      Accordingly, at this time, we do not know when we can expect to begin to
      generate revenues from the RHEOTM System in the United States. Until we can
      generate a sufficient amount of revenue, we expect to finance future cash needs
      through public or private equity offerings, debt financings, corporate
      collaboration or licensing or other arrangements. We cannot be certain that
      additional funding will be available on acceptable terms, or at all. To the
      extent that we raise additional funds by issuing equity securities, our
      stockholders may experience dilution. In addition, future debt financing, if
      available, may involve restrictive covenants. To the extent that we raise
      additional funds through collaboration and licensing arrangements, it may be
      necessary to relinquish some rights to our technologies, or grant licenses
      on
      terms that are not favorable to us. If adequate funds are not available, we
      may
      be required to delay or reduce the scope of, or eliminate, some of our
      commercialization efforts.





**RECENT
      ACCOUNTING PRONOUNCEMENT**





In
      December 2004, the FASB issued SFAS No. 123R which revised SFAS No. 123 and
      supersedes APB No. 25. SFAS No. 123R requires all share-based payments to
      employees, including grants of employee stock options to be recognized in the
      financial statements based on their fair values. The pro forma disclosure
      previously permitted under SFAS No. 123 is no longer an alternative to financial
      statement recognition. SFAS No. 123R is effective at the beginning of the first
      interim or annual period beginning after June 15, 2005. Accordingly, we adopted
      SFAS No. 123R beginning January 1, 2006. We have selected the Black-Scholes
      option-pricing model as our method of determining the fair value for our awards
      and will recognize compensation cost on a straight-line basis over the awards’
vesting periods.




The
      adoption of the following recent accounting pronouncements in the first six
      months of fiscal 2006 did not have a material impact on our results of
      operations and financial condition:





·
            SFAS
                No. 151, “Inventory Costs — An Amendment of ARB No. 43, Chapter
                4”;


·
            SFAS
                No. 153, “Exchanges of Nonmonetary Assets — An Amendment of APB Opinion
                No. 29”; and


·
            SFAS
                No. 154, “Accounting Changes and Error Corrections” which replaces APB No.
                20, “Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes in
                Interim Financial Statements — An Amendment of APB Opinion No.
                28”.





In
      November 2005, the FASB issued FASB Staff Position FAS 115-1 and FAS 124-1,
“The
      Meaning of Other-Than-Temporary Impairment and Its Application to Certain
      Investments” (“FSP 115-1”), which provides guidance on determining when
      investments in certain debt and equity securities are considered impaired,
      on
      whether that impairment is other-than-temporary and on measuring such impairment
      loss. FSP 115-1 also includes accounting considerations subsequent to the
      recognition of an other-than-temporary impairment and requires certain
      disclosures about unrealized losses that have not been recognized as
      other-than-temporary impairments. FSP 115-1 is required to be applied to
      reporting periods beginning after December 15, 2005. The adoption of FSP 115-1
      in the first quarter of fiscal 2006 did not have a material impact on our
      results of operations and financial condition.





In
      February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
      Financial Instruments — An Amendment of FASB Statements No. 133 and 140". SFAS
      No. 155 simplifies accounting for certain hybrid instruments currently governed
      by SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities",
      by allowing fair value re-measurement of hybrid instruments that contain an
      embedded derivative that otherwise would require bifurcation. SFAS No. 155
      also
      eliminates the guidance in SFAS No. 133 Implementation Issue No. D1,
      "Application of Statement 133 to Beneficial Interests in Securitized Financial
      Assets", which provides that such beneficial interests are not subject to SFAS
      No. 133. SFAS No. 155 amends SFAS No. 140, "Accounting for Transfers and
      Servicing of Financial Assets and Extinguishments of Liabilities — A Replacement
      of FASB Statement No. 125", by eliminating the restriction on passive derivative
      instruments that a qualifying special-purpose entity may hold. SFAS No. 155
      is
      effective for financial instruments acquired or issued after the beginning
      of
      fiscal years beginning after September 15, 2006. We do not expect the adoption
      of this statement to have a material impact on our results of operations and
      financial condition.





In
      March
      2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial
      Assets — An Amendment of FASB Statement No. 140". SFAS No.156 requires an entity
      to recognize a servicing asset or servicing liability each time it undertakes
      an
      obligation to service a financial asset by entering into a servicing contract
      in
      specific situations. Additionally, the servicing asset or servicing liability
      shall be initially measured at fair value; however, an entity may elect the
      "amortization method" or "fair value method" for subsequent balance sheet
      reporting periods. SFAS No.156 is effective for fiscal years beginning after
      September 15, 2006. We do not expect the adoption of this statement to have
      a
      material impact on our results of operations and financial
      condition.





In
      June
      2006, the FASB issued FASB Interpretation (“FIN”) No. 48, "Accounting for
      Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109",
      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. We are
      currently evaluating the effect that the adoption of FIN No. 48 will have on
      our
      consolidated results of operations and financial position.


28





**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 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)   Management’s
      Report on Internal Control over Financial Reporting and Evaluation of Disclosure
      Controls and Procedures .
      As of
      the end of the six-month period ended June 30, 2006, an evaluation of the
      effectiveness of our “disclosure controls and procedures” (as such term is
      defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of
      1934,
      as amended (the “Exchange Act”)) was carried out by our principal executive
      officer (the “CEO”) and our principal financial officer (the “CFO”). Based upon
      that evaluation, the CEO and the CFO have concluded that, as of the end of
      that
      fiscal period, our disclosure controls and procedures are effective to ensure
      that information required to be disclosed by us in reports that we file or
      submit under the Exchange Act is recorded, processed, summarized and reported
      within the time periods specified in SEC rules and forms.





(b)   Limitations
      on the Effectiveness of Controls .
      The
      Company maintains a system of internal accounting controls to provide reasonable
      assurance that assets are safeguarded and that transactions are executed in
      accordance with management’s authorization and recorded properly to permit the
      preparation of financial statements in accordance with accounting principles
      generally accepted in the United States. However, the Company’s management,
      including the CEO and the CFO, does not expect that the Company’s disclosure
      controls or internal controls will prevent all errors and all fraud. A control
      system, no matter how well conceived and operated, can provide only reasonable,
      not absolute, assurance that the objectives of the control system are met.
      Further, the design of a control system must reflect the fact that there are
      resource constraints, and the benefits of more controls must be considered
      relative to their costs. Because of the inherent limitations in all control
      systems, no evaluation of controls can provide absolute assurance that all
      control issues and instances of fraud, if any, within the Company have been
      detected. These inherent limitations include the realities that judgments in
      decision-making can be faulty and that breakdowns can occur because of a simple
      error or mistake. Additionally, controls can be circumvented by the individual
      acts of some persons, by collusion of two or more people or by management
      override of the controls. The design of any system of controls also is based
      in
      part upon certain assumptions about the likelihood of future events, and there
      can be no absolute assurance that any design will succeed in achieving its
      stated goals under all potential future conditions. Over time, controls may
      become inadequate because of changes in conditions, or the degree of compliance
      with the policies or procedures may deteriorate. Because of the inherent
      limitations in a cost-effective control system, misstatement due to error or
      fraud may occur and not be detected.





(c)   Changes
      in Internal Control over Financial Reporting .
      During
      the six-month period ended June 30, 2006, there were no changes in our internal
      control over financial reporting that has materially affected, or is reasonably
      likely to materially affect, our internal control over financial
      reporting.








29




PART
      II.
      OTHER INFORMATION





ITEM
      1.
      LEGAL PROCEEDINGS





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





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





None.





ITEM
      3.
      DEFAULTS UPON SENIOR SECURITIES





There
      has
      not been any default upon our senior securities.





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





On
      June
      23, 2006, the Company held its 2006 Annual Meeting of Stockholders. At the
      Annual Meeting, the following matters were submitted to a vote of
      stockholders:





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




Elias
                  Vamvakas
              FOR:
              37,497,424WITHHOLD
                  AUTHORITY:
              175,387Thomas
                  N. Davidson
              FOR:
              37,497,424WITHHOLD
                  AUTHORITY:
              175,387Jay
                  T.
                  Holmes
              FOR:
              37,497,424WITHHOLD
                  AUTHORITY:
              175,387Richard
                  L. Lindstrom
              FOR:
              37,497,424WITHHOLD
                  AUTHORITY:
              175,387GeorgesNoël
              FOR:
              37,497,424WITHHOLD
                  AUTHORITY:
              175,387Gilbert
                  S. Omenn
              FOR:
              37,497,424WITHHOLD
                  AUTHORITY:
              175,387Adrienne
                  L.
                  Graves
              FOR:
              37,497,424WITHHOLD
                  AUTHORITY:
              175,387




2.
            The
                holders of 37,589,805 shares of the Company’s common stock voted in favour
                of, 58,948 voted against and 24,058 abstained from voting with respect
                to
                the ratification of the selection of Ernst & Young LLP, auditors, to
                serve as independent accountants of the Company for the fiscal year
                ending
                December 31, 2006.





3.
            The
                holders of 27,123,563 shares of the Company’s common stock voted in favour
                of, 1,005,028 voted against and 216,647 abstained from voting with
                respect
                to the approval of the re-pricing of certain of the Company’s outstanding
                stock options, of which the exercise price was greater than the weighted
                average trading price of the Company’s common stock on the NASDAQ National
                Market during the five-trading day period immediately preceding the
                date
                of the Annual Meeting (the “Current Fair Market Value”), to the Current
                Fair Market Value.





However,
      of the number of shares of the Company’s common stock indicated above as having
      been voted by their respective holders in favour of this matter, 287,725 was
      subtracted from such number since 287,725 shares of the Company’s common stock
      were held by insiders of the Company at the close of business on May 5, 2006,
      the record date for the Annual Meeting. Accordingly, the holders of 26,835,838
      shares of the Company’s common stock were deemed to have voted in favour of this
      matter,





ITEM
      5.
      OTHER INFORMATION





None.


30




ITEM
      6.
      EXHIBITS





Index
      to Exhibits




10.1
            Agreement
                and Plan of Merger, dated as of August 1, 2006, by and among the
                Registrant, OccuLogix Mergeco, Inc., Solx, Inc. and Doug P. Adams,
                John
                Sullivan and Peter M. Adams, acting, in each case, in his capacity
                as a
                member of the Stockholder Representative Committee referred to
                therein.  (exhibits have been omitted pursuant to Item 601(b)(2) of
                Regulation S-K and will be provided to the Securities and Exchange
                Commission upon request).10.2
            Convertible
                Unsecured Promissory Note of Solx, Inc., dated August 1, 2006, in
                the
                principal amount of $240,000.31.1
            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.


31








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





**OCCULOGIX, INC.**Date:August
                    9, 2006
                By:
                /s/ Elias
                    VamvakasChief
                    Executive Officer


32