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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 20-F

        [_]     REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)
                    OF THE SECURITIES EXCHANGE ACT OF 1934; or
        [X]     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                    OF THE SECURITIES EXCHANGE ACT OF 1934
                 For the fiscal year ended November 30, 2006; or
        [_]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                    OF THE SECURITIES EXCHANGE ACT OF 1934
                For the transition period ________ to ________; or
        [_]     SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d)
                    OF THE SECURITIES EXCHANGE ACT OF 1934
                 Date of event requiring this shell company report

      FOR THE TRANSITION PERIOD FROM DECEMBER 1, 2005 TO NOVEMBER 30, 2006

                           COMMISSION FILE NO. 0-29350

                                  VASOGEN INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)


                                     CANADA
                 (JURISDICTION OF INCORPORATION OR ORGANIZATION)

                            2505 MEADOWVALE BOULEVARD
                      MISSISSAUGA, ONTARIO, L5N 5S2, CANADA
                                 (905) 817-2000
               (ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER,
        INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

 SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

                                                Name of each exchange
                Title of each class              on which registered
            ---------------------------         ---------------------
            Common shares, no par value                 NASDAQ
                                                         TSX

 SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

                                      None

          SECURITIES FOR WHICH THERE IS A REPORTING OBLIGATION PURSUANT
                          TO SECTION 15(D) OF THE ACT:

                                      None

<PAGE>

         As of November 30, 2006, the registrant had 156,651,342 common shares
outstanding.

         Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.

                           Yes [_]      No [X]

         If this report is an annual report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934.

                           Yes [_]      No [X]

         Indicate by check mark whether the registrant (1) has 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 filer [X]   Non-accelerated filer [_]

         Indicate by check mark which financial statement item the registrant
has elected to follow:

                          Item 17 [_]  Item 18  [X]

         If this is an annual report, indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

                           Yes [_]      No [X]

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                                       2

<PAGE>

                                TABLE OF CONTENTS

                                                                            PAGE


PART I.........................................................................1

    Item 1.      Identity of Directors, Senior Management and Advisors.........1
    Item 2.      Offer Statistics and Expected Timetable.......................1
    Item 3.      Key Information...............................................1
           A.    Selected Financial Data.......................................1
           B.    Capitalization and Indebtedness...............................3
           C.    Reasons for the Offer and Use of Proceeds.....................3
           D.    Risk Factors..................................................3
    Item 4.      Information on the Company...................................16
           A.    History and Development of the Company.......................16
           B.    Business Overview............................................16
           C.    Organizational Structure.....................................23
           D.    Property, Plant and Equipment................................23
    Item 5.      Operating and Financial Review and Prospects.................23
           A.    Operating Results............................................23
           B.    Liquidity and Capital Resources..............................28
           C.    Research and development, patents, and licenses, etc.........31
           D.    Trend Information............................................31
           E.    Off-balance sheet arrangements...............................32
           F.    Contractual obligations......................................32
           G.    Safe Harbor..................................................33
    Item 6.      Directors, Senior Management and Employees...................33
           A.    Directors and Senior Management..............................33
           B.    Compensation.................................................37
           C.    Board Practices..............................................40
           D.    Employees....................................................42
           E.    Share Ownership..............................................42
    Item 7.      Major Shareholders and Related Party Transactions............44
           A.    Major Shareholders...........................................44
           B.    Related Party Transactions...................................45
    Item 8.      Financial Information........................................45
           A.    Consolidated Statements and Other Financial Information......45
           B.    Significant changes..........................................45
    Item 9.      Offer and Listing............................................45
    Item 10.     Additional Information.......................................46
           A.    Share Capital................................................47
           B.1.  Memorandum and Articles of Association.......................47
           C.    Material Contracts...........................................52
           D.    Exchange Controls............................................52
           E.    Taxation.....................................................52
           F.    Dividends and Paying Agents..................................58
           G.    Statement by Experts.........................................58
           H.    Documents on Display.........................................58
           I.    Subsidiary Information.......................................58
    Item 11.     Qualitative and Quantitative Disclosures about Market Risk...58
    Item 12.     Description of Securities Other than Equity Securities.......59

PART II.......................................................................59

    Item 13.     Defaults, Dividends Arrearages and Delinquencies.............59

                                       i
<PAGE>

    Item 14.     Material Modifications to the Rights of Security Holders
                 and Use of Proceeds..........................................60
    Item 15.     T Controls and Procedures....................................60
    Item 16.     [Reserved]...................................................61
        Item 16A.    Audit Committee Financial Expert.........................61
        Item 16B.    Code of Ethics...........................................61
        Item 16C.    Principal Accountant Fees and Services...................61
        Item 16D.    Exemptions from the Listing Standards for
                     Audit Committees.........................................61
        Item 16E.    Purchases of Equity Securities by the Issuer and
                     Affiliated Purchasers....................................61

PART III......................................................................62

    Item 17.     Financial Statements.........................................62
    Item 18.     Financial Statements.........................................62
    Item 19.     Exhibits....................................................113


                                       ii
<PAGE>

                DISCLOSURE REGARDING FORWARD-LOOKING INFORMATION

         Certain  statements  contained  in this  annual  report and in certain
documents   incorporated  by  reference   herein  and  therein  may  constitute
"forward-looking  statements"  within the meaning of the United States  Private
Securities Litigation Reform Act of 1995 and/or  "forward-looking  information"
under the  Securities  Act (Ontario).  These  statements  may include,  without
limitation,  summary  statements  relating to results of the  ACCLAIM  trial in
patients  with  chronic  heart  failure,  plans to advance the  development  of
Celacade(TM)  , our medical  device for the treatment of chronic heart failure,
plans to fund our current  activities,  statements  concerning  our  partnering
activities and health  regulatory  discussions,  strategy,  future  operations,
future financial position, future revenues,  projected costs, prospects, plans,
and objectives of management.  In some cases, you can identify  forward-looking
statements by terminology such as "may", "will", "should",  "expects", "plans",
"anticipates",  "believes", "estimated",  "predicts", "potential",  "continue",
"intends",  "could",  or  the  negative  of  such  terms  or  other  comparable
terminology.  A number of  assumptions  were made by us in the  preparation  of
these forward-looking statements, including assumptions about the nature of the
market for Celacade in the treatment of chronic heart failure,  particularly in
Europe,  the regulatory  approval  process  leading to  commercialization,  the
availability  of  capital on  acceptable  terms to pursue  the  development  of
Celacade,  and the feasibility of additional  clinical  trials.  You should not
place undue reliance on our  forward-looking  statements which are subject to a
multitude of risks and  uncertainties  that could cause actual results,  future
circumstances,  or events to differ  materially  from  those  projected  in the
forward-looking  statements.  The risks include,  but are not limited to, those
discussed  below that could  cause our actual  results to differ  significantly
from those contained in any forward-looking  statements and/or  forward-looking
information.

                                     PART I.

ITEM 1.  IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS

         Not Applicable.

ITEM 2.  OFFER STATISTICS AND EXPECTED TIMETABLE

         Not Applicable.

ITEM 3.  KEY INFORMATION

A.       SELECTED FINANCIAL DATA

         Following is selected  financial  data of Vasogen Inc.  ("Vasogen"  or
"the Company"), expressed in Canadian dollars, for each of the last five fiscal
years ended  November 30, and for the period from  December 1, 1987 to November
30, 2006,  calculated in accordance with Canadian generally accepted accounting
principles, which except as described in Note 17 to the financial statements in
Item 18, conform in all material respects with accounting  principles generally
accepted in the United States.

         Years ended November 30

         (in thousands of Canadian dollars except for per share data)

<TABLE>
<CAPTION>
                                                                                                         Period from
                                                                                                         December 1,
                                                                                                           1987 to
                                                                                                           November
                                      2006          2005(2)        2004           2003          2002       30, 2006(1)
                                   -------       -------        -------        -------       -------       --------
<S>                                 <C>           <C>            <C>            <C>           <C>           <C>
Research and development            32,732        71,421         51,794         21,730        12,675        228,681

General and administration          19,251        22,126         15,852         10,250         7,542        105,172

Foreign exchange loss (gain)           104          (719)         8,288          1,111           267          8,993

Loss before the undernoted         (52,087)      (92,828)       (75,934)       (33,091)      (20,484)      (342,846)
</TABLE>

                                       1
<PAGE>
<TABLE>
<CAPTION>
                                                                                                         Period from
                                                                                                         December 1,
                                                                                                           1987 to
                                                                                                           November
                                      2006          2005 (2)       2004           2003          2002       30, 2006 (1)
                                   -------       -------        -------        -------       -------       --------
<S>                                 <C>           <C>            <C>            <C>           <C>           <C>
Accretion in carrying value
of senior convertible notes
payable (3)                         (7,824)       (1,742)             0              0             0       (9,566)

Loss on extinguishment of
senior convertible notes (3)        (4,995)            0              0              0             0       (4,995)

Investment income                    1,971         2,274          1,384          1,143           977        12,015

Loss for the period (3)            (66,360)      (93,048)       (74,550)       (31,948)      (19,507)    (349,569)

Shares outstanding              156,651,342   82,255,374     72,331,286     62,022,306    51,935,000

Basic and diluted loss per
share (3)                            (0.71)        (1.17)         (1.07)         (0.57)        (0.40)

Total assets                        41,770        94,811         80,963         68,783        48,836

Share capital (3)                  344,217       295,007        245,465        173,380       126,673

Net Assets (3)                      24,580        32,307         60,455         62,465        45,506
</TABLE>

Notes:
         (1)  To  date,  the  Company  is  a  development  stage  company  and,
accordingly, has no revenue.

         (2) Effective  December 1, 2004, the Company  adopted the amendment to
The Canadian  Institute of Chartered  Accountants'  ("CICA")  Handbook  Section
3870, Stock-based Compensation and Other Stock-based Payments ("Section 3870").
Pursuant to the  transitional  provisions of Section 3870, the Company  applied
this change retroactively,  without restatement of prior periods. The impact of
the  Company's  adoption of this  revised  accounting  standard was a charge to
opening deficit of $4,006,000 with corresponding  increases of $55,000 to share
capital  for  those  stock  options  exercised  prior to  December  1, 2004 and
$3,951,000  to stock  options for those  vested  options not yet  exercised  at
December 1, 2004. Stock  compensation  charges of $3.1 million in 2006 and $3.6
million in 2005 were recorded in the financial  statements.  Stock compensation
charges of  approximately  $3.4 million in 2004,  $1.6 million in 2003 and $1.0
million  in 2002  were  not  recorded  in the  financial  statements  but  were
disclosed in the pro forma statement of operations and deficit  included in the
US GAAP reconciliation.

         (3) The  following  table  sets forth how the above  amounts  would be
presented under United States generally accepted accounting  principles for the
fiscal years ended November 30, 2006, 2005, and 2004:

         Years Ended November 30

         (in thousands of Canadian dollars except for per share data)

                                             2006           2005         2004
Loss for the period                       (60,921)       (87,380)     (74,269)
Basic and diluted loss per share            (0.65)         (1.09)       (1.07)
Share capital                             343,906        294,937      245,526
Net assets                                 13,722         22,533       59,696
Accretion in carrying value of             10,197          2,023            0
   senior convertible notes payable
Loss on debt extinguishment                 6,126              0            0
   of senior convertible notes
Fair market value adjustment on             9,711          3,032            0
   embedded derivatives and warrants


         All dollar  amounts herein are expressed in Canadian  dollars,  unless
otherwise indicated.

         The  following  table sets forth the  exchange  rate for one  Canadian
dollar  expressed in terms of one U.S. dollar for the fiscal years 2002 through
2006 and for July 2006 through December 2006.

                                  AVERAGE
                            2002          .6362
                            2003          .7034
                            2004          .7637
                            2005          .8222
                            2006          .8812

                                      LOW               HIGH
       July 2006                     .8727             .9048
       August 2006                   .8793             .9058
       September 2006                .8858             .9062
       October 2006                  .8760             .8976
       November 2006                 .8699             .8884
       December 2006                 .8569             .8787

         The  exchange  rates are based upon the noon  buying  rate in New York
City for cable  transfers  in  foreign  currencies  as  certified  for  customs
purposes by the Federal  Reserve  Bank of New York.  At January 30,  2007,  the
exchange rate for one Canadian dollar expressed in terms of one U.S. dollar, as
quoted by The Bank of Canada at 4 p.m. Eastern Time, equaled $0.8474.

                                       2
<PAGE>

B.       CAPITALIZATION AND INDEBTEDNESS

         Not Applicable.

C.       REASONS FOR THE OFFER AND USE OF PROCEEDS

         Not Applicable.

D.       RISK FACTORS

         The  risks  and  uncertainties  described  below  are  those  that  we
currently  believe may materially affect us. Additional risks and uncertainties
that we are unaware of or that we  currently  deem  immaterial  may also become
important  factors  that  affect  us. If any of the  following  risks  actually
occurs,  our  business,  operating  results,  or financial  condition  could be
materially adversely affected.

                         RISKS RELATING TO OUR BUSINESS

         Our business entails significant risks. In addition to the usual risks
associated with a business,  the following is a general  description of certain
significant risk factors which are applicable to us.

WE WILL REQUIRE ADDITIONAL FUNDS IN OUR BUSINESS THAT MAY BE DIFFICULT TO OBTAIN
WHEN NEEDED OR ON TERMS ACCEPTABLE TO US.

         As of  January 1, 2007,  we had a net cash  balance of C$32.5  million
(US$27.9  million)  consisting  of  cash,  cash  equivalents   (including  cash
collaterizing  a letter  of  credit  under  the  notes  described  below),  and
marketable  securities.  We will  need to raise  additional  funds  to  conduct
research and development, preclinical studies, and clinical trials necessary to
bring our potential products to market, and to establish marketing,  sales, and
distribution  capabilities,  including, as warranted,  for Celacade. Our future
capital   requirements  will  depend  on  many  factors,   including  continued
scientific  progress in our research and  development  programs,  the scope and
results of preclinical studies and clinical trials, the time and costs involved
in obtaining regulatory approvals,  the costs involved in filing,  prosecuting,
and enforcing patent claims,  competing  technological and market developments,
the cost of manufacturing scale-up,  effective commercialization activities and
arrangements,  and other  factors not within our control.  We have no committed
sources of capital. Adequate funds may not be available when needed or on terms
acceptable  to us. In  particular,  the 6.45% notes issued by  us on October 7,
2005 (the "notes")  substantially limit our ability to incur additional secured
or  unsecured  debt  while the notes are  outstanding.  Insufficient  funds may
require  us to scale  back or  eliminate  some,  or all,  of our  research  and
development  programs or license to third parties products or technologies that
we would otherwise seek to develop.  Any future debt financing  arrangements we
enter into likely would contain  restrictive  covenants that impose significant
operating and financial  restrictions on us. As a consequence of the failure of
the ACCLAIM trial to reach its primary  endpoint,  under the terms of the notes
we must maintain a net cash balance of 110% of the outstanding principal amount
on the notes. As of January 1, 2007, the remaining principal  outstanding under
the notes was C$5.3  million  (US$4.6  million).  In addition,  our share price
declined  significantly  following  the  announcement  of the ACCLAIM  top-line
results  in June  2006,

                                       3
<PAGE>

which may  negatively  impact our  ability to obtain  financing  in the future.
Should our ability to secure additional financing be delayed,  management would
be required to adjust its commercialization  plans and research and development
programs  and  reduce  its cash  expenditures  in order to ensure  that we have
sufficient cash to fund planned expenditures.

         In order to secure  financing,  if it is even available,  it is likely
that we will sell additional  common shares or financial  instruments  that are
exchangeable for or convertible  into common shares.  Also, in order to provide
incentives  to  current   employees  and  induce   prospective   employees  and
consultants  to work for us, we have  granted  options  and intend to offer and
issue  options to purchase  common shares  and/or  rights  exchangeable  for or
convertible  into common shares.  These  activities could result in substantial
dilution to all our  shareholders.  Capital  raising  activities  and  dilution
associated with such activities could cause our share price to decline.

A CONSIDERABLE  AMOUNT OF TIME IS REQUIRED TO ANALYZE AND DIGEST THE VOLUMINOUS
CLINICAL TRIAL DATA ARISING FROM THE ACCLAIM TRIAL AND FURTHER  INFORMATION MAY
LEAD TO ADJUSTMENTS IN STRATEGIES.

         A large  international  trial such as ACCLAIM  results in considerable
data that need to be analyzed and reviewed.  We continue to analyze data and it
will  subsequently be further reviewed and analyzed by independent  experts and
regulators.  Results  disclosed  are  based  on data  analyzed  to the  date of
disclosure.  When combined with results disclosed,  such additional information
may lead to adjustments in strategy.

WE INTEND TO SEEK ADDITIONAL  COLLABORATIVE  ARRANGEMENTS TO COMMERCIALIZE  OUR
PRODUCTS. THESE COLLABORATIONS, IF SECURED, MAY NOT BE SUCCESSFUL.

         We intend to seek additional collaborative arrangements to develop and
commercialize  some of our products,  including  Celacade,  in Europe and North
America.  There  can  be no  assurance  that  we  will  be  able  to  negotiate
collaborative  arrangements on favorable  terms,  or at all, in the future,  or
that our current or future collaborative arrangements will be successful.

         Our strategy for the research,  development,  and commercialization of
our  products  requires  entering  into  various  arrangements  with  corporate
collaborators,  licensors,  licensees,  health care  institutions and principal
investigators  and others,  and our commercial  success is dependent upon these
outside parties performing their respective contractual obligations responsibly
and with integrity.  The amount and timing of resources such third parties will
devote to these  activities  may not be  within  our  control.  There can be no
assurance that such parties will perform their  obligations as expected.  There
can be no assurance that our  collaborators  will devote adequate  resources to
our programs.

WE ARE A  DEVELOPMENT-STAGE  COMPANY  WITH A  HISTORY  OF  LOSSES,  WE HAVE NOT
RECOGNIZED ANY PRODUCT REVENUES, AND WE MAY NEVER ACHIEVE PROFITABILITY.

         Our  products  are in the  development  stage  and,  accordingly,  our
business   operations  are  subject  to  all  of  the  risks  inherent  in  the
establishment  and  maintenance of a developing  business  enterprise,  such as
those related to competition and viable operations management. We have incurred
a loss in each year since our  inception  and have  received  no cash flow from
operations  to date,  and there is no assurance  that we will have  earnings or
cash flow from operations in the future. These losses have resulted in, and are
expected to continue to cause decreases in, our cash balances, working capital,
and shareholders'  equity. The future earnings and cash flow from operations of
our  business are  dependent,  in part,  on our ability to further  develop our
products. There can be no assurance that we will grow and be profitable.

         At November 30, 2006, we had an accumulated  deficit of  approximately
C$351.4 million. We have not generated revenues from the  commercialization  of
any products.  Our net operating losses over the near term and the next several
years are  expected  to  continue  as a result of the  further  clinical  trial
activity and preparation,  as warranted, for regulatory submission necessary to
support regulatory  approval of our products.  To obtain regulatory approval in
North America or to support the use of our Celacade  technology in HF patients,
it may be necessary to conduct another Phase III trial of Celacade and the cost
and time required to achieve  regulatory  approval,  if the Celacade  device is
approved at all, could be substantially increased. There can be no assurance as
to if or when such

                                       4
<PAGE>

additional  clinical trial would be undertaken.  There can be no assurance that
any such additional clinical trial would be successful.

         There can be no assurance that we will be able to generate  sufficient
product revenue to become  profitable at all or on a sustained basis. We expect
to have  quarter-to-quarter  fluctuations  in expenses,  some of which could be
significant,  due  to  expanded  research,   development,  and  clinical  trial
activities.

CASH  PAYMENTS  MAY BE  REQUIRED  UNDER THE NOTES  UPON AN EVENT OF  DEFAULT OR
CHANGE OF CONTROL.

         Holders  of  the  notes  (the  "noteholders")  may  require  that  the
principal amount of the notes be repaid in cash or that all or a portion of the
notes be  redeemed  in cash upon the  occurrence  of various  events of default
(subject to certain cure periods), including but not limited to:

         o        the failure of the common shares of any holder of notes to be
                  freely tradable under applicable  Canadian law on the TSX and
                  such lapse continues for a period of ten consecutive  days or
                  for more than an aggregate of 30 days in any 365-day period;

         o        the  failure  of the  registration  statement  to resell  the
                  common  shares  underlying  the  notes  and  warrants  to  be
                  maintained   effective   pursuant   to  the   terms   of  the
                  registration  rights  agreement,  subject to permitted  grace
                  periods;

         o        the  suspension  of the common shares from trading on the TSX
                  and NASDAQ (or The NASDAQ Capital Market);

         o        the  failure  to  deliver  common  shares to the  noteholders
                  within ten trading days after the conversion date;

         o        the failure to pay  principal  and/or  interest due under the
                  notes;

         o        the  failure to  maintain  a net cash  balance of 110% of the
                  aggregate principal amount outstanding under the notes;

         o        any material  default  under any  indebtedness  of ours in an
                  aggregate principal amount of US$5,000,000 or greater;

         o        upon our  breach in any  material  respect  of any  covenant,
                  including  the  covenant  to  maintain a cash  balance in the
                  circumstances   described   above,   under  the   transaction
                  documents (as such term is defined in the securities purchase
                  agreements,  as filed on SEDAR,  dated October 7, 2005, among
                  us,  Vasogen  Ireland  Limited,   Vasogen,   Corp.,  and  the
                  subscribers  for the notes and the warrants)  relating to the
                  notes and warrants; and

         o        upon any  guarantee of the notes  ceasing to be in full force
                  and effect.

         Upon the occurrence and during the continuance of an event of default,
the  interest  rate on the  notes  will be  increased  to 12%  per  annum.  The
noteholders  may also require all or a portion of the notes be redeemed in cash
upon a change of control. We have not established a sinking fund for payment of
the notes,  nor do we anticipate doing so. As of January 1, 2007, we have a net
cash balance of $32.5 million (US$27.9 million) and  approximately  $5.3million
(US$4.6  million) of principal  indebtedness  outstanding  under the notes.  In
addition,  upon certain  fundamental  transactions  such as a merger or sale of
substantially all assets of Vasogen Inc., the warrant holders would be entitled
to require us (or our successor entity) to redeem the warrants for cash.

WE ARE LEVERAGED AND HAVE DEBT SERVICE OBLIGATIONS.

         As of  January  1,  2007,  we had  approximately  $5.3million  (US$4.6
million)  of  principal  indebtedness  outstanding  under the notes  that bears
interest at 6.45% per annum.

                                       5
<PAGE>

         This  indebtedness  could  have  important  consequences  to  us.  For
example, it could:

         o        increase our  vulnerability  to general adverse  economic and
                  industry conditions;

         o        impair our  ability  to obtain  additional  financing  in the
                  future for working capital needs,  capital  expenditures,  or
                  general corporate purposes;

         o        require us to dedicate a portion of our existing  cash to the
                  payment of principal  and  interest on our debt,  which would
                  reduce the funds available for our operations;

         o        limit our  flexibility  in  planning  for,  or  reacting  to,
                  changes in the business and the industry in which we operate;
                  or

         o        place  us  at a  competitive  disadvantage  compared  to  our
                  competitors that have less debt.

         In  addition,  we must  maintain  a net  cash  balance  of 110% of the
outstanding  principal  amount of the notes.  As of  January  1, 2007,  we were
required to maintain a net cash  balance of $5.9  million  (US$5.0  million) in
accordance  with the terms of the notes and we had a net cash  balance of $32.5
million (US$27.9 million).

DESPITE CURRENT INDEBTEDNESS LEVELS AND THE TERMS OF THE NOTES, WE MAY STILL BE
ABLE TO INCUR SUBSTANTIALLY MORE DEBT.

         Despite current indebtedness levels and the terms of the notes, we may
be able to incur substantial  additional  indebtedness in the future. Under the
notes,  we  are  permitted  to  incur,   among  other  types  of  indebtedness,
indebtedness  that is pari passu with or  subordinate  to the notes and that is
repayable on or after 91 days following the maturity date of the notes.  If new
debt is added to our current  debt levels,  the related  risks that we now face
could increase.

WE ARE SUBJECT TO STRINGENT ONGOING GOVERNMENT REGULATION.

         Biotechnology, medical device, and pharmaceutical companies operate in
a high-risk  regulatory  environment.  The FDA, Health Canada, and other health
agencies can require additional clinical trials and can be very slow to approve
a product and can also withhold product  approvals.  In addition,  these health
agencies also oversee many other medical product  operations,  such as research
and development,  manufacturing,  and testing and safety  regulation of medical
products.  As a  result,  regulatory  risk is  normally  higher  than in  other
industry sectors.

         We have  incurred,  and  expect  to  continue  to  incur,  substantial
clinical  research  and other costs in  connection  with  obtaining  regulatory
approvals  for our medical  products in Canada,  the United  States,  and other
jurisdictions. While we are not aware of any pending or threatened governmental
action  against  us in  any  country,  any  enforcement  action  by  regulatory
authorities  with  respect to past,  or any future,  regulatory  non-compliance
could have a material adverse effect on our business,  financial condition, and
results of operations.

         To date,  our Celacade  technology  has been  regulated by the FDA and
Health  Canada  as a  medical  device.  There  can be no  assurance  that  this
regulatory  status will not change in the future or that additional  regulatory
bodies  beyond  the  medical  device  authorities  will not have input into the
approval  of our  medical  products.  If the FDA or Health  Canada  decides  to
regulate the Celacade  therapeutic device as a drug,  biologic,  or combination
product,  we could be obligated to conduct  additional  clinical trials and, in
any event, the cost and time required to achieve  regulatory  approval,  if the
Celacade device is approved at all, could be substantially increased.

         We expect to pursue discussions  regarding our phase III ACCLAIM trial
with  the  FDA.  It is  possible  that  these  discussions  could  lead  to the
requirement for additional phase III or phase IV clinical trials as a condition
of approval. The results presented in respect of Class II NYHA patients may not
be sufficient to support FDA or other health  regulatory  approvals.  Should we
elect to conduct additional  studies,  such decision would increase the cost of
and the timeline for developing Celacade for chronic heart failure.

                                       6
<PAGE>

         There can be no assurance  that we will be able to achieve or maintain
regulatory  compliance with respect to all or any part of our current or future
products, including maintaining our CE Mark approval for Celacade in Europe, or
that we will be able to  timely  and  profitably  produce  our  products  while
complying  with  applicable  regulatory  requirements.  If we fail to  maintain
compliance, regulatory authorities can institute proceedings to detain or seize
products,  issue a recall, enjoin future violations,  assess civil and criminal
penalties against us and our directors,  officers, and employees, or require us
to make substantial changes to our manufacturing  operations.  Any such actions
could have a material adverse effect on our business,  financial condition, and
results of operations.

WE DO NOT YET HAVE ALL THE REQUIRED APPROVALS TO MARKET OUR PRODUCT CANDIDATES,
AND OUR  CLINICAL  TRIALS MAY NOT YIELD  RESULTS  THAT WILL ENABLE US TO OBTAIN
REGULATORY APPROVAL.

         We have not completed the development of any products and there can be
no assurance  that any products  will be  successfully  developed.  None of our
products has received  regulatory approval for commercial use and sale in North
America.  We cannot market a  pharmaceutical  or medical  device product in any
jurisdiction until it has completed thorough  preclinical  testing and clinical
trials  in  addition  to  that  jurisdiction's  extensive  regulatory  approval
process. In general,  significant research and development and clinical studies
are required to demonstrate the safety and effectiveness of our products before
we can submit any  regulatory  applications.  We may never  obtain the required
regulatory  approvals for Celacade in North America.  There can be no assurance
that the results of all required  clinical trials will  demonstrate  that these
product  candidates  are safe and  effective  or,  even if the  results  of the
clinical trials are considered  successful by us, that the FDA will not require
us to conduct  additional  large-scale  clinical trials before it will consider
approving such product  candidates for commercial  use.  Approval or consent by
the FDA or other  regulatory  authorities to commence a clinical trial does not
indicate  that the device,  drug,  or  treatment  being  studied can or will be
approved.  Preparing,  submitting,  and advancing  applications  for regulatory
approval is complex,  expensive,  and time  intensive  and entails  significant
uncertainty.

         The results of our completed  preclinical  studies and clinical trials
may not be  indicative  of future  clinical  trial  results.  A  commitment  of
substantial resources to conduct time-consuming research,  preclinical studies,
and clinical  trials will be required if we are to complete  development of our
products. Clinical trials of our products require that we identify and enroll a
large number of patients  with the illness under  investigation.  We may not be
able to enroll a  sufficient  number of  appropriate  patients to complete  our
clinical trials in a timely manner. If we experience  difficulty in enrolling a
sufficient  number of patients to conduct our clinical  trials,  we may need to
delay or terminate  ongoing clinical trials and will not accomplish  objectives
material  to our  success  that could  affect  the price of our common  shares.
Delays in planned patient  enrolment,  or lower than anticipated event rates in
our current  clinical  trials or future clinical trials may result in increased
costs, program delays, or both.

         There can be no assurance that unacceptable toxicities or adverse side
effects  will not occur at any time in the  course of  preclinical  studies  or
human  clinical  trials or, if any  products  are  successfully  developed  and
approved for marketing,  during commercial use of our products.  The appearance
of any such  unacceptable  toxicities or adverse side effects could  interrupt,
limit, delay, or abort the development of any of our products or, if previously
approved,  necessitate their withdrawal from the market. Furthermore, there can
be no assurance that disease  resistance or other  unforeseen  factors will not
limit the effectiveness of our potential products.  Any products resulting from
our programs are not expected to be successfully developed or made commercially
available  in the  near  term  and may not be  successfully  developed  or made
commercially available at all.

         On August 30, 2005, we announced  that the pivotal phase III SIMPADICO
trial, which was designed to further investigate the use of Celacade technology
for  peripheral  arterial  disease  ("PAD")  was being  closed  out early at 50
centers in North America.  In March 2006, we announced that the SIMPADICO trial
did not reach its  primary  endpoint  of change in  maximal  treadmill  walking
distance.

         On  June  26,  2006,  we  announced  the  initial   results  from  the
2,408-patient  phase III ACCLAIM  trial of  Celacade  in chronic HF.  While the
ACCLAIM study did not reach the primary endpoint of significantly  reducing the
risk of death or cardiovascular  hospitalization in the total population,  this
endpoint  was met  for  the  subgroup  of 689  patients  with  New  York  Heart
Association (NYHA) Class II chronic HF.

THE SCIENCE UNDERLYING OUR CELACADE TECHNOLOGY IS RELATIVELY NEW AND UNPROVEN.

                                       7
<PAGE>

         Definitive  proof of the precise  mechanism  of action of our Celacade
technology will require  considerably more basic scientific research than we or
others  have  accomplished  to date.  We have not,  nor has any other  company,
successfully  commercialized  a therapy  similar  to that  using  the  Celacade
therapeutic  device.  There  can  be no  assurance  that  the  products  we are
currently developing will be approved by additional regulatory agencies or that
further  testing  will  yield  positive  results.  Should  one of  our  product
candidates  prove to have  insufficient  benefit and/or have an unsafe profile,
its development will likely be  discontinued.  With respect to results from the
SIMPADICO  and  ACCLAIM  trials,  see  Item  4B,  "General  Development  of the
Business." We do not yet have all the required  approvals to market our product
candidates,  and our clinical  trials may not yield results that will enable us
to obtain regulatory approval.

A FURTHER  SETBACK IN THE DEVELOPMENT OF OUR CELACADE  TECHNOLOGY  WOULD LIKELY
CAUSE A FURTHER DROP IN THE PRICE OF OUR COMMON SHARES.

         We intend to rely  substantially  on the  exploitation of our Celacade
technology for our future earnings.  If our Celacade technology does not become
commercially  viable,  we may not achieve  profitability  and our common  share
price would likely decline further. For example, on June 26, 2006, we announced
the initial results from the 2,408-patient  phase III ACCLAIM trial of Celacade
in chronic HF.  While the ACCLAIM  study did not reach the primary  endpoint of
significantly  reducing the risk of death or cardiovascular  hospitalization in
the total  population,  this  endpoint was met for the subgroup of 689 patients
with NYHA Class II chronic HF. The closing price of our common shares on NASDAQ
decreased  from  US$1.85 on June 23,  2006,  the last  trading day prior to the
announcement, to US$0.482 on June 26, 2006.

WE ARE RELIANT ON OUR KEY PERSONNEL.

         The  operations  of  our  business  are  highly   dependent  upon  the
participation  of our key personnel.  The loss of the service of any one of our
key personnel may materially  affect our ability to complete the development of
our products,  successfully  commercialize our products, and to grow and expand
our business operations.  There is intense competition for qualified management
and  skilled  employees,  and our failure to  recruit,  train,  and retain such
employees  could  have a material  adverse  effect on our  business,  financial
condition, and/or results of operations.

OUR INTELLECTUAL PROPERTY MAY NOT PROVIDE MEANINGFUL PROTECTION FOR OUR PRODUCT
CANDIDATES.  WE  MAY  INFRINGE  OTHERS'  PATENTS.  PATENT  LITIGATION  IS  TIME
CONSUMING AND EXPENSIVE.

         Our  success  may depend,  in part,  on our  ability to obtain  patent
protection  for our  products and  processes.  We have filed a number of patent
applications  in the United  States and many other  countries  relating  to our
products and processes and we have been issued patents covering certain aspects
of our  immune  modulation  therapies  and  medical  devices.  There  can be no
assurance that our patent applications will be issued as patents or that any of
our  issued  patents,  or any  patent  that may be issued in the  future,  will
provide us with adequate protection for our products, processes, or technology.
The patent  positions  of  biotechnology,  pharmaceutical,  and medical  device
companies  can be highly  uncertain  and  involve  complex  legal  and  factual
questions.   Therefore,   the  breadth  of  claims  allowed  in  biotechnology,
pharmaceutical  and medical device  patents  cannot be predicted.  We also rely
upon unpatented trade secrets and know-how,  and no assurance can be given that
others will not independently develop substantially equivalent trade secrets or
know-how.  In addition,  whether or not our patents are issued,  or issued with
limited coverage,  others may receive patents that contain claims applicable to
our products. Our competitors may attempt to circumvent our patents by means of
alternative  designs and  processes.  There can be no assurance that any of our
patents,  or any  patents  issued to us in the future,  will afford  meaningful
protection against competitors. There can be no assurance that our patents will
be held valid or enforceable by a court of competent jurisdiction.  The patents
of our competitors may impair our ability to do business in a particular  area.
We  also  rely  in  part  on  confidentiality  agreements  with  our  corporate
collaborators,  employees,  consultants, and certain contractors to protect our
proprietary  technology.  There can be no assurance that these  agreements will
not be breached,  that we will have adequate  remedies for any breach,  or that
our trade secrets will not otherwise become known or  independently  discovered
by our competitors.

         It is possible that our products or processes will  infringe,  or will
be found to  infringe,  patents  not owned or  controlled  by us. In  addition,
because patent  applications  are often maintained in secrecy and may take many
years to issue,  there may be currently  pending patent  applications  that may
later  result in issued  patents that our  products

                                       8
<PAGE>

infringe.  If any  relevant  claims of  third-party  patents that relate to our
products  are  upheld  as valid and  enforceable,  we could be  prevented  from
practicing the subject matter claimed in such patents,  or would be required to
obtain  licenses or redesign our  products or processes to avoid  infringement.
There can be no assurance  that such  licenses  would be available at all or on
terms  commercially  reasonable to us or that we could redesign our products or
processes to avoid infringement.  Litigation may be necessary to defend against
claims of  infringement,  to enforce  patents issued to us, or to protect trade
secrets.  Such  litigation  could result in substantial  costs and diversion of
management efforts regardless of the results of such litigation, and an adverse
result could subject us to significant  liabilities  to third parties,  require
disputed rights to be licensed, or require us to cease using our technology.

IF WE FAIL TO OBTAIN  ACCEPTABLE  PRICES OR APPROPRIATE  REIMBURSEMENT  FOR OUR
PRODUCTS,  OUR  ABILITY TO  SUCCESSFULLY  COMMERCIALIZE  OUR  PRODUCTS  WILL BE
IMPAIRED.

         Government and insurance  reimbursements  for healthcare  expenditures
play an important  role for all  healthcare  providers,  including  physicians,
medical  device  companies,  drug  companies,  medical  supply  companies,  and
companies,  such as ours,  that plan to offer  various  products  in the United
States and other  countries  in the  future.  Our  ability  to earn  sufficient
returns  on  our  products   will  depend  in  part  on  the  extent  to  which
reimbursement  for the costs of such  products,  related  therapies and related
treatments will be available from government health administration authorities,
private  health  coverage  insurers,  managed  care  organizations,  and  other
organizations.  In the United  States,  our  ability to have our  products  and
related  treatments  and therapies  eligible for Medicare or private  insurance
reimbursement  will be an important  factor in determining the ultimate success
of our  products.  If,  for  any  reason,  federal  programs  or the  insurance
companies  decline  to  provide  reimbursement  for our  products  and  related
treatments,  our  ability to  commercialize  our  products  would be  adversely
affected.  There can be no assurance  that our products and related  treatments
will be eligible for reimbursement.

         There  has  been a  trend  toward  declining  government  and  private
insurance  expenditures  for many  healthcare  items.  Third-party  payors  are
increasingly challenging the price of medical products and services.

         If purchasers or users of our products and related  treatments are not
able to obtain  appropriate  reimbursement  for the cost of using such products
and related treatments, they may forgo or reduce such use. Even if our products
and related  treatments are approved for  reimbursement  by federal and private
insurers,  of which there can be no assurance,  the amount of reimbursement may
be reduced at times,  or even  eliminated.  This would have a material  adverse
effect on our business, financial condition, and results of operations.

         Significant uncertainty exists as to the reimbursement status of newly
approved  healthcare  products,  and there can be no  assurance  that  adequate
third-party coverage will be available.

COMPETITION  IN OUR  TARGET  MARKETS  IS  INTENSE,  AND  DEVELOPMENTS  BY OTHER
COMPANIES COULD RENDER OUR PRODUCT CANDIDATES OBSOLETE.

         The  industry  that we  compete  in is not a static  environment,  and
market share can change rapidly if competing products are introduced. There can
be no  assurance  that we can avoid  intense  competition  from  other  medical
technology companies,  pharmaceutical or biotechnology companies, universities,
government agencies,  or research  organizations,  and from other technological
advances that could render our  technology  uneconomical  or obsolete.  Many of
these competitors have substantially  greater financial and/or other resources.
Our  competitors may succeed in developing  technologies  and products that are
more  effective  or  cheaper  to  use  than  any  that  we may  develop.  These
developments could render our products obsolete and uncompetitive,  which would
have a material adverse effect on our business, financial condition and results
of operations.  In addition,  there are numerous existing therapies for chronic
heart failure, PAD, and neurological diseases, and others are being developed.

WE ARE SUBJECT TO EXPOSURE TO PRODUCT LIABILITY CLAIMS.

         We face an inherent business risk of exposure to product liability and
other  claims in the event that the  development  or use of our  technology  or
prospective  products or therapies results, or is alleged to have resulted,  in
adverse  effects.  While we have  taken,  and will  continue  to take,  what we
believe are  appropriate  precautions,  there

                                       9
<PAGE>

can be no assurance that we will avoid significant liability exposure. Although
we currently carry product liability  insurance for clinical trials,  there can
be no assurance that we have sufficient  coverage,  or can in the future obtain
sufficient  coverage at a  reasonable  cost.  An  inability  to obtain  product
liability  insurance  at an  acceptable  cost or to otherwise  protect  against
potential   product   liability   claims   could   prevent   or   inhibit   the
commercialization  of products we develop. A product liability claim could have
a material adverse effect on our business,  financial condition, and results of
operations.

WE  DO  NOT  HAVE  COMMERCIAL-SCALE   MANUFACTURING  CAPABILITY,  AND  WE  LACK
COMMERCIAL MANUFACTURING EXPERIENCE.

         We  currently  rely upon single  sources for the supply of some of the
components  required to  manufacture  and use our  products.  For  example,  we
currently rely on a single subcontractor for the disposable cartridges that are
components  of the Celacade  technology.  The  establishment  of  additional or
replacement  suppliers  for  certain  materials,   components,   subassemblies,
assemblies,  supplies,  or finished  products cannot be  accomplished  quickly,
largely due to the  regulatory  approval  systems and the complex nature of the
manufacturing  processes  employed  by many  suppliers.  The  failure to obtain
sufficient  quantities of component materials on commercially  reasonable terms
could  have a  material  adverse  effect  on our  clinical  studies,  business,
financial condition, and results of operations.

         If we are  successful in developing  the markets for our products,  we
would have to arrange for their scaled-up manufacture.  At the present time, we
have not arranged for the large-scale manufacture of our products. There can be
no assurance  that we will, on a timely basis,  be able to make the  transition
from   manufacturing   clinical  trial  quantities  to  commercial   production
quantities  successfully or be able to arrange for contract  manufacturing.  We
believe our  contractors  will be able to manufacture  our medical  devices for
initial  commercialization  if the  products  obtain  FDA and other  regulatory
approvals,  but we have not yet  demonstrated the capability to manufacture the
medical devices in commercial quantities. Potential difficulties experienced by
us in manufacturing scale-up,  including recalls or safety alerts, could have a
material adverse effect on our business,  financial  condition,  and results of
operations.

         The  manufacture  of our  products  involves  a number  of  steps  and
requires  compliance with stringent quality control  specifications  imposed by
the FDA and other  regulatory  agencies.  Moreover,  our  products  can only be
manufactured in a facility that has undergone a satisfactory  inspection by the
FDA and/or other relevant regulatory  authorities.  For these reasons, we would
not be able to replace our manufacturing  capacity quickly if we were unable to
use our  manufacturing  facilities  as a  result  of a fire,  natural  disaster
(including an earthquake),  equipment failure, or other difficulty,  or if such
facilities are deemed not in compliance  with the regulatory  requirements  and
the  non-compliance  could not be rapidly  rectified.  Our inability or reduced
capacity to manufacture  our products  would have a material  adverse effect on
our business, financial condition, and results of operations.

         We  expect  to  enter  into  additional   arrangements  with  contract
manufacturing  companies in order to meet  requirements  for our products or to
attempt to  improve  manufacturing  efficiency.  If we choose to  contract  for
manufacturing  services and encounter  delays or  difficulties  in establishing
relationships  with  manufacturers  to produce,  package,  and  distribute  our
finished products,  then clinical trials,  market introduction,  and subsequent
sales  of  such  products  would  be  adversely  affected.   Further,  contract
manufacturers must also operate in compliance with the FDA and other regulatory
requirements.  Failure  to do so could  result  in,  among  other  things,  the
disruption of product supplies. Our potential dependence upon third parties for
the design and/or  manufacture of our products may adversely  affect our profit
margins and our ability to develop  and deliver  such  products on a timely and
competitive basis.

WE HAVE NO SALES, MARKETING, AND DISTRIBUTION EXPERIENCE.

         We have no experience in the sales,  marketing,  and  distribution  of
pharmaceutical  or medical device  products.  There can be no assurance that we
will be able to establish sales,  marketing,  and distribution  capabilities or
make arrangements with our collaborators,  licensees, or others to perform such
activities or that such efforts will be successful.  If we decide to market any
of our  products  directly,  we must  either  acquire or  internally  develop a
marketing  and  sales  force  with  technical  expertise  and  with  supporting
distribution  capabilities.  The  acquisition  or  development  of a sales  and
distribution  infrastructure  would require  substantial  resources,  which may
divert the attention of our management  and key personnel,  and have a negative
impact on our product  development  efforts.  If

                                      10
<PAGE>

we contract with third parties for the sales and marketing of our products, our
revenues will be dependent on the efforts of these third parties, whose efforts
may not be successful.  If we fail to establish  successful marketing and sales
capabilities  or  to  make  arrangements  with  third  parties,  our  business,
financial  condition  and results of operations  will be  materially  adversely
affected.

OUR  STRATEGIC  ALLIANCE  WITH  QUEST  DIAGNOSTICS   INCORPORATED  MAY  NOT  BE
SUCCESSFUL.

         To develop a potential  secondary point of care for integration of our
Celacade technology, we formed a strategic alliance in November 2001 with Quest
Diagnostics  Incorporated  in the  United  States on an  exclusive  basis.  The
purpose of this  alliance  is to  establish  an  outpatient  delivery  model to
accommodate   patient   referrals   outside  hospital  clinics  and  cardiology
practices. The final terms of this alliance are not yet established and are the
subject  of  continued  discussion  between  the two  companies.  Should we not
finalize the terms of this strategic alliance, or should the strategic alliance
not ultimately be successful, our business may be adversely affected.

IF OUR  PRODUCTS  DO NOT GAIN MARKET  ACCEPTANCE,  WE MAY BE UNABLE TO GENERATE
SIGNIFICANT REVENUES.

         We may  not yet  have  the  required  clinical  data  and  results  to
successfully  market  our  Celacade  technology  in  any  jurisdiction;  future
clinical or preclinical  results may be negative or insufficient to allow us to
successfully  market any of our product  candidates;  and obtaining needed data
and results may take longer than planned, and may not be obtained at all.

         Even if our products are approved for sale, they may not be successful
in the marketplace.  Market  acceptance of any of our products will depend on a
number of  factors,  including  demonstration  of  clinical  effectiveness  and
safety; the potential  advantages of our products over alternative  treatments;
the availability of acceptable pricing and adequate third-party  reimbursement;
and the  effectiveness of marketing and distribution  methods for the products.
If our products do not gain market acceptance among physicians,  patients,  and
others in the medical community,  our ability to generate  significant revenues
from our products would be limited.

WE MAY NOT  ACHIEVE  OUR  PROJECTED  DEVELOPMENT  GOALS IN THE TIME  FRAMES  WE
ANNOUNCE AND EXPECT.

         We set goals for and make public  statements  regarding  timing of the
accomplishment of objectives material to our success,  such as the commencement
and completion of clinical trials,  anticipated  regulatory approval dates, and
time of product launch. The actual timing of these events can vary dramatically
due to  factors  such  as  delays  or  failures  in our  clinical  trials,  the
uncertainties  inherent  in the  regulatory  approval  process,  and  delays in
achieving product development, manufacturing, or marketing milestones necessary
to  commercialize  our  products.  There can be no assurance  that our clinical
trials will be completed,  that we will make regulatory  submissions or receive
regulatory  approvals  as  planned,  or that we will be able to  adhere  to our
current  schedule  for the scale-up of  manufacturing  and launch of any of our
products. If we fail to achieve one or more of these milestones as planned, the
price of our common shares could decline.

OUR  BUSINESS  INVOLVES  THE USE OF HAZARDOUS  MATERIAL,  WHICH  REQUIRES US TO
COMPLY WITH ENVIRONMENTAL REGULATIONS.

         Although we do not currently manufacture  commercial quantities of our
products,  we produce  limited  quantities  of such  products  for our clinical
trials. Our research and development  processes involve the controlled storage,
use, and disposal of hazardous materials and hazardous biological materials. We
are subject to laws and regulations  governing the use,  manufacture,  storage,
handling,  and disposal of such materials and certain waste products.  Although
we believe  that our safety  procedures  for  handling  and  disposing  of such
materials  comply with the standards  prescribed by such laws and  regulations,
the risk of accidental  contamination  or injury from these materials cannot be
completely  eliminated.  In the  event  of such an  accident,  we could be held
liable for any damages that  result,  and any such  liability  could exceed our
resources.  There can be no  assurance  that we will not be  required  to incur
significant  costs to comply  with  current  or future  environmental  laws and
regulations,  or  that  our  business,  financial  condition,  and  results  of
operations  will not be materially  or adversely  affected by current or future
environmental laws or regulations.

                                      11
<PAGE>

         Our  insurance  may not  provide  adequate  coverage  with  respect to
environmental matters.

ENVIRONMENTAL REGULATION COULD HAVE A MATERIAL ADVERSE EFFECT ON THE RESULTS OF
OUR OPERATIONS AND OUR FINANCIAL POSITION.

         We are subject to a broad range of environmental  regulations  imposed
by  federal,  state,  provincial,  and  local  governmental  authorities.  Such
environmental  regulation  relates to,  among other  things,  the  handling and
storage of hazardous  materials,  the disposal of waste,  and the  discharge of
contaminants into the environment.  Although we believe that we are in material
compliance  with  applicable  environmental  regulation,  as a  result  of  the
potential  existence of unknown  environmental  issues and frequent  changes to
environmental  regulation and the interpretation and enforcement thereof, there
can  be  no  assurance  that  compliance  with   environmental   regulation  or
obligations imposed thereunder will not have a material adverse effect on us in
the future.

THERE ARE RISKS RELATED TO THE HANDLING OF BLOOD.

         Our product development activities and our clinical trials involve the
withdrawal  of a small  sample of a  patient's  blood  cells into our  Celacade
single-use disposable cartridge, exposure of such blood cells to our controlled
treatment process  utilizing our proprietary  Celacade  therapeutic  device and
then  re-administration  of such blood  cells to the  patient  intramuscularly.
There are risks  associated  with the  handling of human blood that may contain
infectious  agents,  notwithstanding  the  sterile  techniques  employed in our
clinical trials.  While we believe that our processes and safety procedures for
handling  human blood are adequate to ensure  against  infection of the patient
and our clinical staff and employees, there is a risk that such procedures will
fail and will result in infection.  In the event of such infection, we could be
held liable for any damages that result,  and any such  liability  could exceed
our resources.

                        RISKS RELATING TO OUR SECURITIES

OUR SHARE PRICE HAS BEEN HIGHLY  VOLATILE AND OUR SHARES COULD SUFFER A DECLINE
IN VALUE.

         The trading  price of our common  shares has been highly  volatile and
could  continue  to be subject to wide  fluctuations  in price in  response  to
various factors, many of which are beyond our control, including:

         o        announcements  by us of results of, and  developments in, our
                  research  and  development  efforts,  including  results  and
                  adequacy of, and  developments  in, our  clinical  trials and
                  applications for regulatory  approval,  for example, our June
                  26, 2006 announcement of the initial ACCLAIM results;

         o        sales of our common shares, including by holders of the notes
                  on  conversion  or  repayment  by us in common  shares and in
                  connection with further financings;

         o        announcements    regarding   new   or   existing    corporate
                  partnerships;

         o        announcements  regarding  our listing on NASDAQ or The NASDAQ
                  Capital Market;

         o        actual  or  anticipated   period-to-period   fluctuations  in
                  financial results;

         o        litigation or threat of litigation;

         o        failure to achieve,  or changes in,  financial  estimates  by
                  securities analysts;

         o        announcements  regarding new or existing products or services
                  or technological innovations by us or our competitors;

         o        comments or opinions by securities analysts or members of the
                  medical community;

                                      12
<PAGE>

         o        conditions or trends in the pharmaceutical, biotechnology and
                  life science industries;

         o        announcements  by  us  of  significant  acquisitions,   joint
                  ventures or capital commitments;

         o        additions or departures of key personnel;

         o        economic and other external factors or disasters or crises;

         o        limited daily trading volume; and

         o        developments  regarding  our  patents  or other  intellectual
                  property or that of our competitors.

         In  addition,   the  stock  market  in  general  and  the  market  for
biotechnology  companies in particular,  have experienced significant price and
volume  fluctuations that have often been unrelated or  disproportionate to the
operating performance of those companies.  Further,  there has been significant
volatility  in the  market  prices of  securities  of life  science  companies.
Factors  such as the  results  and  adequacy  of our  preclinical  studies  and
clinical  trials,  as well as those of our  collaborators,  or our competitors;
other evidence of the safety or  effectiveness  of our products or those of our
competitors;  announcements of technological  innovations or new products by us
or our competitors;  governmental  regulatory  actions;  developments  with our
collaborators;  developments  (including  litigation)  concerning our patent or
other proprietary rights or those of our competitors;  concern as to the safety
of our  products;  changes  in  estimates  of  our  performance  by  securities
analysts;  market  conditions for  biotechnology  stocks in general;  and other
factors not within our control could have a significant  adverse  impact on the
market price of our common shares, regardless of our operating performance.  In
the past,  following  periods of  volatility in the market price of a company's
securities,  securities class action  litigation has often been  instituted.  A
securities  class  action suit against us could  result in  substantial  costs,
potential   liabilities  and  the  diversion  of  management's   attention  and
resources.

UNDER  THE TERMS OF THE  NOTES  AND IN THE  EVENT  THAT WE ARE  UNABLE TO ISSUE
SHARES AT THE CONVERSION PRICE STIPULATED BY THE NOTES, WE MUST MAKE ADDITIONAL
CASH PAYMENTS TO THE NOTEHOLDERS.

         If,  due to  restrictions  promulgated  by any of  NASDAQ,  The NASDAQ
Capital Market,  or the TSX, we are unable to issue a sufficient  number of our
common shares at the conversion price stipulated by the notes to noteholders on
conversion  of their  notes  into  common  shares or on payment of the notes in
common shares,  we are required to pay to such noteholders an amount in cash to
compensate for those shares we are unable to issue.

THERE MAY NOT BE AN ACTIVE, LIQUID MARKET FOR OUR COMMON SHARES.

         There is no  guarantee  that an active  trading  market for our common
shares will be  maintained on NASDAQ or The NASDAQ  Capital  Market or the TSX.
Investors may not be able to sell their shares  quickly or at the latest market
price if trading in our common shares is not active.

WE MAY NOT MEET NASDAQ'S CONTINUED LISTING REQUIREMENTS.

         Failure  to  meet  the  applicable   quantitative  and/or  qualitative
maintenance  requirements  of NASDAQ  could  result in our common  shares being
delisted  from NASDAQ.  For continued  listing,  NASDAQ  requires,  among other
things,  that listed  securities  maintain a minimum bid price of not less than
US$1.00 per share.  If the bid price  falls below the US$1.00  minimum for more
than 30 consecutive  trading days, we will have 180 days to satisfy the US$1.00
minimum bid price for a period of at least ten trading days. From June 26, 2006
through  January 30, 2007,  our common shares have not traded above the US$1.00
minimum bid.

         On August 11, 2006,  we  announced  that we had received a letter from
the Listing  Qualifications  Department of The NASDAQ Stock Market stating that
for the 30  consecutive  business days prior to such date, the bid price of our
common  shares  closed  below  the  minimum  bid  price of  US$1.00  per  share
requirement for continued  inclusion under  Marketplace Rule 4450(a)(5).  It is
NASDAQ's  practice  to issue a letter when a listed

                                      13
<PAGE>

company does not meet the minimum bid price requirement. Under the rules of the
NASDAQ,  we are provided six months (180 calendar  days),  or until February 5,
2007, to regain compliance with the bid price requirement.

         Based on NASDAQ  Marketplace rules, if, at any time before February 5,
2007,  the bid price of our common  shares  closes at US$1.00 per share or more
for a minimum of ten consecutive  business days, we will regain compliance with
such rules.

         If delisted from NASDAQ, our common shares may be eligible for trading
on The NASDAQ Capital Market or on other over-the-counter markets in the United
States.  We currently plan to apply for a listing on The NASDAQ Capital Market.
There can be no assurance  that our common  shares will be eligible for trading
on any such alternative exchanges or markets in the United States.  Although we
may explore  various  actions to meet NASDAQ's  minimum  listing  requirements,
including effecting a share consolidation,  if necessary, there is no guarantee
that any such actions will be  successful in bringing us into  compliance  with
such requirements.

         In the event  that we are not able to obtain a listing  on The  NASDAQ
Capital  Market or another U.S.  stock  exchange or  quotation  service for our
common shares, it may be extremely  difficult or impossible for shareholders to
sell their common shares in the United States. Moreover, if we are delisted and
obtain a substitute listing for our common shares in the United States, it will
likely be on a market with less liquidity, and therefore potentially more price
volatility,  than NASDAQ or The NASDAQ Capital Market.  Shareholders may not be
able to sell their  common  shares on any such  substitute  U.S.  market in the
quantities,  at the times, or at the prices that could potentially be available
on a more liquid trading  market.  As a result of these factors,  if our common
shares are delisted from NASDAQ or The NASDAQ Capital Market,  the price of our
common  shares is likely to decline.  In  addition,  a decline in the price our
common shares will impair our ability to obtain financing in the future.

FUTURE  ISSUANCES OF OUR COMMON SHARES COULD ADVERSELY AFFECT THE TRADING PRICE
OF  OUR  COMMON  SHARES  AND  COULD  RESULT  IN  SUBSTANTIAL  DILUTION  TO  OUR
SHAREHOLDERS.

         We expect to issue substantial amounts of common shares in the future.
Holders of any  remaining  outstanding  notes may elect to convert  their notes
into common shares at US$1.99 per share and subject to further  adjustments  in
accordance  with the terms of the notes. In addition,  the principal  amount of
any  outstanding  notes is repayable at the election of Vasogen Ireland Limited
by  the  issuance  of  common  shares,   subject  to  satisfaction  of  certain
conditions.  If the  outstanding  notes are  repaid by the  issuance  of common
shares,  the common  shares will be issued at a 5%  discount to the  arithmetic
average of the weighted  average  price of the common shares during each of the
12 consecutive  trading days preceding the time of issuance (the "12-day market
price"),  or, in the event that the common shares have a 12-day market price of
less than  US$1.00,  then the common shares will be issued at a 10% discount to
the 12-day  market  price.  To the extent  that the market  price of the common
shares  declines,  we will need to issue an increasing  number of common shares
per  dollar  of  principal  to be  repaid.  Subject  to  certain  restrictions,
noteholders  may  engage in short  sales of the common  stock  that  negatively
impact the market  price of the common  shares,  thereby  causing us to have to
issue more  common  shares to repay any  outstanding  notes.  As at January 30,
2007,  the closing  price of the common  shares on NASDAQ was US$0.43 per share
and on the TSX was $0.51 per share and the  aggregate  principal  amount of the
notes remaining outstanding was $5.3 million (US$4.6 million).

         We  issued  warrants  to  purchase  3,333,334  common  shares  to  the
investors  who  subscribed  for the notes on  issuance  of the notes in October
2005.  Each  warrant  entitles  the holder to purchase  one common  share at an
exercise  price of  US$1.99  per  share,  subject  to  further  adjustments  in
accordance with the terms of the warrants.  The warrants have a five-year term.
If Vasogen Ireland Limited elects to accelerate  repayment of the notes, we are
obligated,  subject  to  regulatory  approval,  to  issue  additional  warrants
generally  having an exercise price equal to US$1.99 per share, and a five-year
term commencing upon the date of issuance.  The number of warrants to be issued
upon Vasogen Ireland Limited's election to accelerate repayment of the notes is
equal to that  number of warrants  sufficient  to entitle the holder to acquire
that  number of common  shares  equal to 65% of the  number  obtained  when the
accelerated  amount being repaid is divided by US$1.99 per share and subject to
further adjustment.  We elected to make a US$1.8 million  acceleration  payment
with  each of the  March,  April,  and May  2006  installment  payments  to the
noteholders  and a US$2.8  million  acceleration  payment  with  the June  2006
installment. In respect of the March 1, 2006 acceleration payment, we issued an
additional 390,000 warrants exercisable at US$3.11 adjusted to $2.06 for a term
of five years from the date of issue, and in respect of each of the

                                      14
<PAGE>

April 1 and May 1, 2006 acceleration  payments, we issued an additional 390,000
warrants  exercisable  at US$3.00  adjusted to US$1.99 for a term of five years
from the date of issue. In respect of the June 1, 2006 acceleration payment, we
issued an  additional  606,666  warrants  exercisable  at US$3.00  adjusted  to
US$1.99  for a term of five  years  from the date of issue.  As a result of the
financing  that was  completed on November 14, 2006  described  below,  the 5.1
million  warrants  outstanding  can now be  exercised  for 7.7  million  common
shares,  which is an increase  from the 5.1 million  common shares prior to the
anti-dilution   provisions  that  were  triggered  by  the  November  14,  2006
financing.

         On November 14, 2006, we issued  43,191,492  units of the Company (the
"units")  at a price of US$0.47  per unit.  Each unit  consisted  of one common
share,  0.4 of one common share purchase  warrant expiring on November 14, 2011
(a "series A warrant") and 0.1 of one common share purchase warrant expiring on
May 14, 2007 (a "series B warrant").  Warrant  certificates issued in favour of
purchasers  of units in the offering  completed  in November  2006 provide that
each  whole  series A warrant  represents  the  right,  during  the term of the
warrant,  to purchase  one common share at a price of US$ 0.63 per common share
and each whole series B warrant  represents  the right,  during the term of the
warrant,  to purchase one common share at a price of US$0.53 per common  share.
Up to  21,595,745  common shares in aggregate are issuable upon due exercise of
the  series A and  series  B  warrants.  Any  series A  warrant  which  remains
unexercised  as at November 14, 2011,  and any series B warrant  which  remains
unexercised  as at May 14, 2007,  will  terminate and be of no further force or
effect.  Additionally,  in  connection  with the  offering,  we  issued  to the
placement  agent 2,560,000  compensation  warrants to purchase common shares at
US$0.63 per share. These warrants will expire on November 14, 2009. In addition
to common  shares  issuable in connection  with  conversion or repayment of the
notes and exercise of the warrants,  our  investors,  employees,  and directors
hold rights to acquire  substantial  amounts of our common shares.  In order to
obtain  future  financing,  it is likely that we will issue  additional  common
shares or financial  instruments  that are exchangeable for or convertible into
common shares.  Also, in order to provide  incentives to current  employees and
induce prospective employees and consultants to work for us, we intend to offer
and issue options to purchase common shares and/or rights  exchangeable  for or
convertible into common shares.

         Future issuances of substantial  amounts of our common shares,  or the
perception  that such  issuances are likely to occur,  could affect  prevailing
trading  prices of our common  shares.  Future  issuances of our common  shares
could  result in  substantial  dilution to our  shareholders.  Capital  raising
activities and dilution  associated with such activities  could cause our share
price to decline.  In  addition,  the  existence  of the notes and warrants may
encourage short selling by market participants.

IF THERE ARE  SUBSTANTIAL  SALES OF OUR COMMON SHARES,  THE MARKET PRICE OF OUR
COMMON SHARES COULD DECLINE.

         Sales of  substantial  numbers  of our  common  shares  could  cause a
decline  in the  market  price of our  common  shares.  Any  sales by  existing
shareholders  or holders of options or warrants  may have an adverse  effect on
our ability to raise capital and may  adversely  affect the market price of our
common shares.

WE HAVE NOT PAID DIVIDENDS.

         We have never  paid cash  dividends  on our  common  shares and do not
anticipate  paying any cash dividends in the foreseeable  future.  We currently
intend to retain our future  earnings,  if any, to finance further research and
the expansion of our business.

IT MAY BE DIFFICULT TO OBTAIN AND ENFORCE  JUDGMENTS  AGAINST US BECAUSE OF OUR
CANADIAN RESIDENCY.

         We are  governed  by the laws of  Canada.  Most of our  directors  and
officers, as well as some of the experts named in this annual information form,
are residents of Canada or other jurisdictions outside of the United States and
all or a  substantial  portion of our assets and the assets of such persons may
be located outside of the United States.  As a result,  it may be difficult for
shareholders  to effect  service of process upon us or such persons  within the
United  States or to realize in the United States on judgments of courts of the
United  States  predicated  upon the  civil  liability  provisions  of the U.S.
federal securities laws or other laws of the United States. In addition,  there
is doubt as to the  enforceability  in Canada of liabilities  predicated solely
upon U.S. federal securities law against us, our directors, controlling persons
and officers and the experts named in this annual  information form who are not
residents  of  the  United  States,  in  original  actions  or in  actions  for
enforcements of judgments of U.S. courts.

                                      15
<PAGE>

WE HAVE ADOPTED A SHAREHOLDER RIGHTS PLAN.

         We have adopted a shareholder rights plan. The provisions of such plan
could make it more  difficult  for a third  party to acquire a majority  of our
outstanding  common  shares,  the  effect  of  which  may  be  to  deprive  our
shareholders  of  a  control  premium  that  might  otherwise  be  realized  in
connection with an acquisition of our common shares.

WE ARE LIKELY TO BE CLASSIFIED AS A "PASSIVE  FOREIGN  INVESTMENT  COMPANY" FOR
U.S.  INCOME  TAX  PURPOSES,  WHICH  COULD HAVE  SIGNIFICANT  AND  ADVERSE  TAX
CONSEQUENCES TO U.S. INVESTORS.

         We were a passive  foreign  investment  company  ("PFIC")  in our 2006
taxable year, and we believe there is a significant  likelihood that we will be
classified as a PFIC in our 2007 taxable year and possibly in subsequent years.
Our   classification   as  a  PFIC  could  have  significant  and  adverse  tax
consequences for U.S. holders of our common shares. It may be possible for U.S.
holders of common shares to mitigate these  consequences  by making a so-called
"qualified  electing fund" election.  U.S.  investors should read carefully the
discussion  of PFICs in Item 10 under  the  caption  "Certain  Material  United
States Federal Income Tax Considerations" and consult their tax advisers.

ITEM 4.  INFORMATION ON THE COMPANY

A.       HISTORY AND DEVELOPMENT OF THE COMPANY

         Vasogen Inc. was  incorporated  under the  BUSINESS  CORPORATIONS  ACT
(Ontario)  and was  continued  under the CANADA  BUSINESS  CORPORATIONS  ACT by
certificate  and  articles of  continuance  dated  August 9, 1999.  We have two
wholly-owned  subsidiaries:  Vasogen,  Corp.,  incorporated  under  the laws of
Delaware,  U.S.A. and Vasogen Ireland Limited,  incorporated  under the laws of
the  Republic  of  Ireland.   Vasogen  Ireland  Limited  owns  certain  of  our
intellectual property related to our products and technologies.  Our registered
principal office is located at 2505 Meadowvale Boulevard, Mississauga, Ontario,
Canada L5N 5S2. We are  currently a "reporting  issuer" in all of the provinces
and  territories  of Canada.  Our  telephone  number is (905)  817-2000 and our
facsimile  number  is (905)  569-9231.  Our  website  is  www.vasogen.com.  Any
information  contained  on our  website  is not,  and will be deemed not to be,
incorporated  herein by reference.  All currency figures herein are in Canadian
dollars, unless otherwise noted.

         For the years ended  November  30,  2006,  2005 and 2004,  the Company
spent a total of $32.7 million, $71.5 million, and $51.8 million, respectively,
on research and  development.  At the present  time,  the  Company's  principal
expenditures  are focused on the  advancement  of the  Company's  research  and
development  program.  Over the past three  fiscal  years,  Vasogen  has raised
approximately  $185.7  million  in net  proceeds  from the  issuance  of equity
securities and  convertible  notes to investors and the exercise of options and
warrants.  The Company's common shares are listed on the Toronto Stock Exchange
under the symbol "VAS" and on the NASDAQ under the symbol "VSGN".

         During  the  last and  current  financial  year,  there  have  been no
indications  of public  takeover  offers by third  parties  in  respect  of the
Company's shares or by the Company in respect of other companies' shares.

         For additional information on key events, see Item 4B below.

B.       BUSINESS OVERVIEW

                      GENERAL DEVELOPMENT OF THE BUSINESS

         We  are  focused  on  the  research  and  commercial   development  of
technologies targeting the chronic inflammation  underlying  cardiovascular and
neurological  disease.  The  recently  completed  international   2,408-patient
double-blind,  placebo-controlled ACCLAIM trial assessed the impact of our lead
product,  Celacade, on reducing the risk of mortality and morbidity in patients
with chronic heart failure  ("HF").  On June 26, 2006, we announced the initial
results from the 2,408-patient  ACCLAIM trial.  While the ACCLAIM study did not
reach the

                                      16
<PAGE>

primary endpoint of significantly  reducing the risk of death or cardiovascular
hospitalization  in the total patient  population,  this endpoint was met for a
pre-specified subgroup of 689 patients with New York Heart Association ("NYHA")
Class II chronic HF. Additional results for the ACCLAIM study were presented at
the World Congress of Cardiology  2006,  held in Barcelona,  Spain, at the 10th
Annual  Scientific  Meeting of the Heart Failure Society of America in Seattle,
Washington, and at the 2006 Canadian Cardiovascular Congress held in Vancouver,
British Columbia.

         In summary, the ACCLAIM results indicated the following:

         o        The  difference  in time to  death  or  first  cardiovascular
                  hospitalization    (the    primary    endpoint)    for    the
                  intent-to-treat   study  population  was  not   statistically
                  significant   (p=0.22)*;    however,   the   risk   reduction
                  directionally favored the Celacade group (hazard ratio=0.92);

         o        In a pre-specified subgroup of patients with NYHA Class II HF
                  at baseline,  Celacade was shown to significantly  reduce the
                  risk of death or first cardiovascular  hospitalization by 39%
                  (n=689 patients, 216 events, p=0.0003);

         o        Celacade  significantly  reduced  the  risk of death or first
                  cardiovascular  hospitalization  by  26%  in a  pre-specified
                  subgroup of patients with no prior history of heart attack at
                  baseline (n=919 patients, 243 events, p=0.02);

         o        Celacade was found to result in a significant  improvement in
                  quality of life (as  measured  by the  Minnesota  Living with
                  Heart  Failure   Questionnaire)   for  the  evaluable   study
                  population (n=2,408 patients, p=0.04); and

         o        Celacade  was  shown  to be  well  tolerated  in the  ACCLAIM
                  patient  population,   who  were  receiving  standard-of-care
                  medications   for   heart   failure,   including   diuretics,
                  beta-blockers, and ACE-inhibitors; there  were no significant
                  between-group differences for any serious adverse events.

         Based on our  continuing  analysis,  we are preparing to meet with the
U.S.  Food and Drug  Administration  ("FDA") and Health  Canada to present data
related to the significant  risk reduction  observed in NYHA Class II patients,
and to discuss  next  steps.  No  assurances  can be provided as to how the FDA
would  view  such  data.  In North  America  and  Europe,  chronic  HF  affects
approximately  12 million  people,  40% of whom have no prior  history of heart
attack. At any one time, approximately 4.4 million of these 12 million patients
are in the NYHA  Class II stage of  disease.  Currently  there are no  approved
therapies that target the inflammation underlying chronic HF.

         Our  Celacade  technology  is  designed to be  integrated  at multiple
points of care, including outpatient hospital clinics and cardiology practices.
In Europe,  Celacade is approved  under the CE Mark as a medical device for the
treatment of HF. Where required health regulatory approvals have been obtained,
we plan to establish the sales and marketing  capability  needed to promote the
use of our technology by cardiologists  and other physicians  through corporate
alliances  with  established  healthcare  companies.  Based  on the  impact  of
Celacade  on patients in NYHA Class II and  patients  with no prior  history of
heart attack,  described  above,  we are discussing with  prospective  partners
Celacade's  commercial potential in Europe under the CE Mark. No assurances can
be provided that such discussions will be successful.

         On August 30, 2005, we announced  that the pivotal phase III SIMPADICO
trial, which was designed to further investigate the use of Celacade technology
for  peripheral  arterial  disease  ("PAD")  was being  closed  out early at 50
centers in North  America.  The  decision to close out the trial was based on a
recommendation by the External Safety and Efficacy  Monitoring  Committee which
cited a  potential  safety  concern and the  absence of a  sufficiently  strong
efficacy  signal to warrant the  continuance  of the study.  In March 2006,  we
announced that the SIMPADICO trial did not reach its primary endpoint of change
in maximal treadmill walking distance.

         We are also  developing  a new  class of drugs  for the  treatment  of
neuro-inflammatory disorders. VP025 is the lead product candidate from this new
class  of  drugs.   Plans  are   underway  to  advance   VP025  into  Phase  2a
proof-of-concept clinical testing.

------------------
*  Note: The use of the term "significant" or  "significantly"  when describing
   clinical  and  preclinical  results  in the  following  sections  refers  to
   "statistical significance," in which there is a 5% or lower probability that
   the observed difference between groups on a certain outcome measure occurred
   randomly.

                                      17
<PAGE>

         We manage the  development  and manufacture of our products for use in
preclinical  and  clinical  research  and we  continue  to advance  our product
development  program to support  future  commercial  scale  production.  Patent
applications are filed to protect our products and processes.  Our policy is to
file patent  applications to protect inventions,  technology,  and improvements
that are important to the  development  of our business and with respect to the
application  of our  technologies  to the  treatment  of a  number  of  disease
indications.  We own patents and patent  applications  relating to our products
and technologies in the United States,  Canada, and other jurisdictions  around
the world. We may establish corporate alliances, primarily to support marketing
and sales of our products, in the United States,  Canada, and elsewhere.  Based
on market  research to date,  we expect  that the  primary  point of use of our
Celacade  technology will be the outpatient  hospital clinic and/or  cardiology
and interventional cardiology practices.


                          VASOGEN DEVELOPMENT PIPELINE

PRODUCT CANDIDATE        INDICATION                        DEVELOPMENTAL STAGE
Celacade technology      Chronic Heart Failure             Phase III*
VP025                    Neuro-inflammatory Diseases       Phase I completed

         *Phase III clinical  trials are  multi-center  studies  undertaken  to
confirm efficacy and safety in large patient groups.

                           DESCRIPTION OF THE BUSINESS

         We  are  focused  on  the  research  and  commercial   development  of
technologies targeting the chronic inflammation  underlying  cardiovascular and
neurological  disease.  The  recently  completed  international   2,408-patient
double-blind,  placebo-controlled ACCLAIM trial assessed the impact of our lead
product,  Celacade, on reducing the risk of mortality and morbidity in patients
with  advanced  heart  failure.  See above under  "General  Development  of the
Business" for a summary of the results.  We are also  developing a new class of
drugs for the treatment of neuro-inflammatory and disorders.  VP025 is the lead
product candidate from this new class of drugs.

                              PRODUCTS AND MARKETS

         Our  Celacade  technology  is being  developed  to target the  chronic
inflammation  underlying  chronic  heart  failure.  During  a brief  outpatient
procedure,  a small  sample of a  patient's  blood is drawn  into our  Celacade
single-use  disposable  cartridge,   exposed  to  controlled  oxidative  stress
utilizing  our   proprietary   Celacade   device,   and  then   re-administered
intramuscularly.  Following  an initial  course of treatment  comprising  three
consecutive   outpatient  procedures   administered  over  a  two-week  period,
treatments are continued once per month. Our Celacade technology is designed to
be integrated at multiple points of care, including outpatient hospital clinics
and cardiology practices.

         We are also developing a new class of drugs that is based on synthetic
three-dimensional phospholipid-based structures with specific groups of surface
molecules   that  are  designed  to  modulate   cytokine   levels  and  control
inflammation. VP025, the lead product candidate from this new class of drugs is
being developed for the treatment of neuro-inflammatory disorders.

CELACADE CHRONIC HEART FAILURE PROGRAM

         Chronic heart failure,  most frequently resulting from coronary artery
disease or  hypertension,  is a  debilitating  condition  in which the  heart's
ability to  function  as a pump is  impaired.  Patients  with HF  experience  a
continuing  decline in their  health,  resulting in an  increased  frequency of
hospitalization and premature death.

                                      18
<PAGE>

         In North America  alone,  HF affects more than five million people and
is  associated  with more than  300,000  deaths  each year.  The direct cost of
healthcare  primarily resulting from hospitalization is estimated to exceed $25
billion  annually.   These  statistics  suggest  that  important   pathological
mechanisms,  including inflammation,  remain active and unmodified by available
therapies. The 2,408-patient  double-blind,  placebo-controlled,  pivotal phase
III ACCLAIM  (Advanced  Chronic  Heart  Failure  CLinical  Assessment of Immune
Modulation  Therapy)  trial was  completed  at 175  clinical  centers  in North
America, Europe, and Israel. The study was designed to assess the impact of our
Celacade   technology  on  reducing  the  risk  of  death  and   cardiovascular
hospitalization  in  patients  with  advanced  chronic  HF.  The study was also
intended to support  regulatory  approval in North America and marketing in the
European  Union,  where  regulatory  approval  (the CE Mark) has  already  been
obtained for use of our Celacade technology for the treatment of chronic HF.

         The  Global  Principal  Investigator  and  Chairman  of  the  Steering
Committee for ACCLAIM was Dr. James B. Young, Chairman, Division of Medicine at
The Cleveland Clinic Foundation and Medical Director,  Kaufman Center for Heart
Failure in Cleveland.

         On June 26, 2006,  we announced  the initial  results from the ACCLAIM
trial.  While  the  ACCLAIM  study  did  not  reach  the  primary  endpoint  of
significantly  reducing the risk of death or cardiovascular  hospitalization in
the  total  patient  population,  this  endpoint  was met  for a  pre-specified
subgroup  of 689  patients  with New York  Heart  Association  (NYHA)  Class II
chronic HF.  Additional  results for the ACCLAIM  study were  presented  at the
World Congress of Cardiology 2006, held in Barcelona, Spain, at the 10th Annual
Scientific  Meeting  of the  Heart  Failure  Society  of  America  in  Seattle,
Washington and at the 2006 Canadian  Cardiovascular Congress held in Vancouver,
British Columbia.  See above under "General  Development of the Business" for a
summary of the results.

VP025 DRUG DEVELOPMENT PROGRAM

         Our VP series of investigational  drugs is designed to regulate tissue
levels of cytokines and control the inflammation underlying a number of medical
conditions,  including  neuro-inflammatory  disorders.  VP025, the lead product
candidate  from  this  series,   is  being   developed  for  the  treatment  of
neuro-inflammatory disorders. Among the many neurological conditions associated
with an inflammatory  response in the nervous system are  Alzheimer's  disease,
Parkinson's  disease,  and amyotrophic lateral sclerosis.  It is estimated that
neurological  conditions,  which are expected to increase in  prevalence as the
population  ages,  currently  affect  more  than five  million  people in North
America and generate costs of care that exceed $75 billion annually.

         In 2005, we successfully completed a double-blind,  placebo-controlled
phase I trial of VP025.  This  dose-escalation  trial  examined  the safety and
tolerability of three doses of VP025 in 24 healthy  volunteers.  Results of the
study  demonstrated that multiple  administrations of low,  mid-level,  or high
doses of VP025  were safe and well  tolerated  when  compared  to  placebo.  No
drug-related serious adverse events were reported.

         We have also completed a considerable  amount of preclinical work that
has  demonstrated  the ability of VP025 to impact key  components of the immune
system resulting in a reduction of the chronic inflammation associated with the
development and progression of a number of neurodegenerative diseases.

         Findings  from our VP025  preclinical  program have  demonstrated  the
significant reduction of several inflammatory  mediators in a model of diabetes
with diabetic  retinopathy,  a common  complication of diabetes that eventually
results in the loss of vision. Diabetic retinopathy,  which causes up to 24,000
new cases of  blindness in the United  States each year,  is the major cause of
blindness  in people  with  diabetes  and is  estimated  to affect 4.1  million
Americans age 40 and older.

         During the 2006 Scientific Sessions of the Association for Research in
Vision and Ophthalmology Meeting, Dr. Kyle Krady, Assistant Professor of Neural
and Behavioral Sciences, Penn State College of Medicine, presented the findings
from  a  preclinical  model  designed  to  develop  diabetes.   These  findings
demonstrated  that VP025 had a  significant  effect  (p<0.05) on  reducing  the
expression,  in the retina,  of several  pro-inflammatory  cytokines  including
IL-1,  IL-6,  and MCP-1,  which are associated  with the  initiation  stages of
diabetic retinopathy.  Concurrently,  the intramuscular administration of VP025
resulted in the increased  expression  of both IL-10 and  TGF-beta,  two potent
anti-inflammatory  cytokines. Based on information in the scientific literature
and current research  observations,  we

                                      19
<PAGE>

believe  this  effect  is  mediated  via  the  regulation  of  microglial  cell
activation.  Microglial cells are  inflammatory  cells found within the central
nervous system and in the retina.

         Results from a number of other  experimental  models have demonstrated
the ability of VP025 to reduce  inflammation across the blood-brain barrier and
improve  correlates  of memory  and  learning  function.  Preclinical  research
carried out by Dr. Marina  Lynch's team from the Trinity  College  Institute of
Neuroscience  in  Ireland   demonstrated   the  ability  of  VP025  to  reverse
detrimental neurological effects of chronic beta-amyloid exposure. Beta-amyloid
is the major  component  of the  plaques  found in the  brains  of  Alzheimer's
disease  patients and is implicated in the  development and progression of this
condition.  Beta-amyloid  has also  been  linked  to  increased  activation  of
microglial cells and reduced memory and learning function. Dr. Lynch's research
demonstrated  that VP025 both  prevented  microglial  activation  and preserved
memory and learning function.

         Dr.  Marina  Lynch's  team also  demonstrated  the ability of VP025 to
reverse  age-related  inflammation  in the  brain.  The  process  of  aging  is
associated  with increased  inflammation in the brain resulting from activation
of microglial cells, as evidenced by increases in inflammatory  cytokines and a
reduction in memory and learning function (measured as long-term potentiation).
CD200, a protein that controls  inflammation and maintains  microglial cells in
an  unactivated  state,  decreases  with aging.  Treatment  with VP025 reversed
age-related  decreases  in  CD200  levels  in  the  brain,  reduced  levels  of
microglial cell activation, and restored memory and learning function.

         Dr. Yvonne Nolan's team from the  Department of  Anatomy/Neuroscience,
University  College,  Cork,  Ireland,  has demonstrated the ability of VP025 to
prevent  increases  in  levels  of  p38  MAP  kinase,  a key  component  of the
inflammation-signaling  pathway,  regulating  IL-1beta,  TNF-alpha,  and  other
immune system  responses  associated with many  inflammatory  conditions.  In a
preclinical model of Parkinson's disease, pre-treatment with VP025 was shown to
prevent  both  the  increase  in  p38  levels  and  the  associated   death  of
dopaminergic  neurons.  The death of dopaminergic  neurons in this model system
leads  to the  onset  of  movement  abnormalities  that  mimic  those  seen  in
Parkinson's disease.

         Based on a successful phase I study and encouraging  findings from our
preclinical  program,  plans  are  underway  to  advance  VP025  into  phase 2a
proof-of-concept clinical testing. The cost and time required to bring VPO25 to
market are depend upon the results of our preclinical and clinical programs, as
well as many of the  other  risk  factors  outlined  elsewhere  in this  Annual
Information Form.

                             COMPETITIVE ENVIRONMENT

         The pharmaceutical,  medical device, and biotechnology  industries are
characterized  by rapidly  evolving  technology and intense  competition.  Many
companies,  including major pharmaceutical as well as specialized biotechnology
companies, are engaged in activities focused on medical conditions that are the
same as, or similar to,  those  targeted by us.  Many of these  companies  have
substantially  greater  financial  and other  resources,  larger  research  and
development staff, and more extensive marketing and manufacturing organizations
than we do. Many of these companies have significant  experience in preclinical
testing,   human  clinical  trials,   product   manufacturing,   marketing  and
distribution,  and other regulatory approval procedures. In addition, colleges,
universities,  government  agencies,  and other  public  and  private  research
organizations  conduct research and may market commercial products on their own
or through  collaborative  agreements.  These  institutions  are becoming  more
active in seeking  patent  protection  and  licensing  arrangements  to collect
royalties for use of technology  that they have developed.  These  institutions
also compete with us in recruiting and retaining  highly  qualified  scientific
personnel.

                                  MANUFACTURING

         We  maintain  a  quality  management  system  that  is  registered  to
ISO13485.  This quality system  registration is necessary to support regulatory
approvals.  For entry into the U.S. market,  we are also ensuring the necessary
compliance of our quality system to the FDA Quality System Regulation  ("QSR").
In addition,  our medical  devices meet the  requirements of the European Union
Medical Devices Directive 93/42/EEC for CE Marking.

                                      20
<PAGE>

         We  currently  rely upon  subcontractors  for the  manufacture  of our
device  technology.  The  subcontractors  operate quality systems in accordance
with ISO13485,  and/or the FDA QSR, as necessary.  Manufacturing,  testing, and
maintenance of our medical devices are verified and validated as appropriate to
ensure conformance to defined specifications.

         The  manufacturing  of VP025 is  performed  according  to current Good
Manufacturing  Practice ("GMP") at contract  manufacturing  organizations  that
have been approved by our quality  assurance  department,  following  audits in
relation to the  appropriate  regulations.  Manufactured  product is tested for
conformance  with  product  specifications  prior  to  release  by our  quality
assurance  department.  GMP  batches of VP025 are  subjected  to  prospectively
designed stability test protocols.

                              INTELLECTUAL PROPERTY

         Because of the substantial  length of time and expense associated with
developing new products, the pharmaceutical,  medical device, and biotechnology
industries place considerable importance on obtaining patent protection for new
technologies,   products,   and  processes.   Our  policy  is  to  file  patent
applications  to protect  inventions,  technology,  and  improvements  that are
important  to  the  development  of  our  business  and  with  respect  to  the
application  of our products and  technologies  to the treatment of a number of
disease indications.  We seek patent protection in various jurisdictions of the
world.  We own patents and patent  applications  relating to our  products  and
technologies  in the United States,  Canada,  Europe,  and other  jurisdictions
around the world.  We own trademark  registrations  and trademark  applications
associated with our Celacade technology in various  jurisdictions,  and rely on
our  legal  rights  in other  jurisdictions.  The  scope  and  duration  of our
intellectual  property  rights vary from  country to country  depending  on the
nature  and  extent  of  our  intellectual  property  filings,  the  applicable
statutory  provisions governing the intellectual  property,  and the nature and
extent of our legal  rights.  We will  continue to seek  intellectual  property
protection as appropriate.

         We require  our  employees,  consultants,  members  of the  Scientific
Advisory Board, outside scientific collaborators,  and sponsored researchers to
enter  into  confidentiality  agreements  with us that  contain  assignment  of
invention clauses outlining  ownership of any intellectual  property  developed
during the course of the individual's relationship with us.

                             REGULATORY REQUIREMENTS

         Before medical products can be distributed commercially,  a submission
providing detailed  information must be reviewed and approved by the applicable
government  or  agency  in the  jurisdiction  in  which  the  product  is to be
marketed.  The  regulatory  review and approval  process varies from country to
country.  Similarly,  we are also  subject  to  separate  regulations  where we
conduct clinical trials. We cannot predict or give any assurances as to whether
further  regulatory  approvals  will be  received  or how long the  process  of
seeking regulatory approvals will take.

EUROPE

         Medical  products that are placed on the market in the European  Union
("EU") are subject to one of two mutually exclusive regulatory regimes:  either
the Medical Devices Directive ("MDD"), Council Directive 93/42/EEC, for medical
devices, or the Medicinal Products  Directive,  Council Directive 65/65/EEC for
pharmaceutical  products.  Our Celacade  technology  has been  classified  as a
medical device in the EU.

         We are required to demonstrate compliance with the requirements of the
MDD 93/42/EEC and affix a CE mark to our medical  devices in order to place our
medical  device  products  on the market  within  the member  states of the EU,
Norway,  and  Switzerland.  We have  received CE Mark approval for our Celacade
device in chronic heart failure and in peripheral arterial disease. The CE Mark
attests that our medical device products meet the "essential  requirements"  of
the MDD  relating  to  safety  and  efficacy.  We  must  also  demonstrate  our
regulatory  compliance  ("conformity  assessment") annually through a qualified
third  party (a  "Notified  Body")  selected  by us. We have  demonstrated  our
regulatory  compliance with these requirements for devices placed in Europe for
clinical  trials,  and our quality system was registered to ISO9001 and EN46001
in  February   1998.  In  addition,   our  quality  system  was  registered  to
ISO13485:1996 in August 2001 and to ISO 13485:2003 in Sept 2006.

                                      21
<PAGE>

         We are subject to annual  surveillance audits by our Notified Body and
are  required  to  report  any  device-related  serious  adverse  incidents  or
near-incidents to the appropriate authorities.

         To place a CE-Marked  medical  device in clinics  within most European
jurisdictions, we are required to provide notification to national authorities.
In addition,  before a clinical  study can  commence,  each  clinical  center's
ethics  review  board must  approve the  clinical  protocol  and other  related
documents.

UNITED STATES

         In the United States, clinical trials and commercialization of medical
devices  require the approval of the FDA. We are subject to  regulation  by the
FDA, as well as state and local authorities. Our medical devices are subject to
the FDA's Pre-Market  Approval ("PMA") process prior to marketing in the United
States.  The PMA approval  process is a multi-step  process that requires us to
submit to the FDA preclinical,  clinical,  and design and  manufacturing  data,
which we have been compiling to demonstrate the safety and effectiveness of our
devices for the stated medical indications or uses.

         The clinical  studies that  generate the clinical data for the PMA are
subject  to  regulation  under the  investigational  device  exemption  ("IDE")
regulations.   Before  clinical  studies  of  our  device  can  begin,  an  IDE
application must be submitted to, and approved by, the FDA. In addition, before
a study can  commence  at each  participating  clinical  center,  the  center's
institutional review board ("IRB") must approve the clinical protocol and other
related  documents.  During the PMA  review  process,  the FDA will  conduct an
inspection  of the  manufacturer's  facilities to ensure that the device design
and manufacture are in compliance  with  applicable  Quality System  Regulation
requirements.  The QSR requirements mandate that we manufacture our devices and
maintain  our  documents  in  a  prescribed  manner  with  respect  to  design,
manufacturing,  testing,  and  control  activities.  The FDA may  also  conduct
inspections  of the  clinical  trial  sites  and the  preclinical  laboratories
conducting  pivotal  safety  studies to ensure  compliance  with Good  Clinical
Practice and Good Laboratory  Practice  requirements and may seek the advice of
one of their  Advisory  Committees  or other  Centers  with the FDA. If the FDA
evaluations  of  the  PMA  application  and  the  results  of  inspections  are
favorable,  the FDA may issue an approvable  letter,  which usually  contains a
number of conditions  that must be met in order to secure final approval of the
PMA. Only when those  conditions have been fulfilled to the satisfaction of the
FDA will the FDA issue a PMA approval order,  authorizing  commercial marketing
of the device for stated indications.  The FDA also has the authority to impose
certain post-approval  requirements,  such as post-market surveillance clinical
trials, in the PMA approval order. FDA approval can be withdrawn for failure to
comply with any  post-approval  requirements or for other reasons,  such as the
discovery of significant adverse effects.

CANADA

         In  Canada,  clinical  trials  and the  commercialization  of  medical
products  require  the  approval of Health  Canada.  The  Therapeutic  Products
Directorate  ("TPD") of Health  Canada  regulates the  manufacture  and sale of
medical devices in Canada.  The Canadian Medical Device Regulations are similar
to those of the United States and require that clinical studies be conducted to
demonstrate the safety and  effectiveness of devices prior to marketing.  There
must also be documented evidence that the devices are developed,  manufactured,
and produced under current  quality system  regulations and guidelines in order
to ensure the quality of the product made available for sale.  Approval of such
technology is a multi-step  process,  and we are  prohibited  from promoting or
commercializing  our products  prior to regulatory  approval.  For any clinical
investigation  and testing of our products in Canada,  authorization by the TPD
is  required.  In addition,  before a study can commence at each  participating
clinical center,  the center's IRB must approve the clinical protocol and other
related documents.

         We  must   manufacture  our  devices  under  approved  quality  system
conditions and must validate the performance  characteristics of the devices to
ensure that the devices perform safely, consistently, and reliably. The TPD has
adopted ISO13485 and relies upon accredited registrars to certify manufacturers
of medical  devices.  Our quality  system was  registered to ISO13485 in August
2001 and to ISO 13485:2003 in September 2006.  Also,  manufacturers of marketed
devices  must be  licensed  by Health  Canada.  Licensing  is  contingent  upon
successful certification by an accredited registrar.

                                      22
<PAGE>

         In addition to the regulatory product approval framework,  we are also
subject to  municipal,  provincial,  and federal  laws  governing  occupational
safety,  laboratory practices, the use, handling, and disposition of biological
waste,  environmental  protection,  and hazardous  substance control. We may be
subject to other current and future regulations, including future regulation of
the biotechnology/pharmaceutical  and/or medical device industry. We believe we
are in material compliance with all such existing regulations.

C.       ORGANIZATIONAL STRUCTURE

         See Item 4A above.

D.       PROPERTY, PLANT AND EQUIPMENT

         We lease facilities at 2505 Meadowvale Boulevard, Mississauga, Ontario
Canada L5N 5S1 and at the MaRS Discovery District, 101 College Street, Toronto,
Ontario,  Canada M5G 1L7.  Effective  January 1, 2007, the lease commitments at
these  premises  cover a total of 38,369  square  feet.  In  addition,  Vasogen
Ireland Limited leases premises in Ireland totaling  approximately 5,500 square
feet. We continually  monitor our facility  requirements  in the context of our
growth and the  results of our  research  and  development  activities,  and we
expect these requirements to change commensurately with our activities.

ITEM 5.  OPERATING AND FINANCIAL REVIEW AND PROSPECTS

         The following  discussion  and analysis  should be read in conjunction
with the audited  consolidated  financial  statements  of the Company and notes
thereto.  See  "Item  18.  Financial  Statements"  The  consolidated  financial
statements have been prepared in accordance with generally accepted  accounting
principles (GAAP) in Canada,  which, except as described in Note 17 to Item 18,
conform in all material respects with generally accepted accounting  principles
in the United  States.  All amounts are  expressed in Canadian  dollars  unless
otherwise noted. Annual references are to the Company's fiscal years, which end
on November 30.

A.       OPERATING RESULTS

         We  are  a  development-stage   enterprise  that  dedicates  our  cash
resources mainly to research and development ("R&D")  activities.  Our products
have  not  yet  been  approved  by  regulatory   authorities  in  all  relevant
jurisdictions and we have not yet marketed products  commercially;  as such, we
do not currently generate any revenues from operations.

LOSS

         The loss for the years ended  November 30, 2006,  2005,  and 2004,  is
reflected in the following table:

<TABLE>
<CAPTION>
Loss (in millions of dollars,
except per-share amounts)                2006         2005    (Decrease)          2005          2004     Increase
<S>                                  <C>         <C>          <C>            <C>           <C>          <C>
Loss                                 $   66.4    $    93.0    ( $  26.6)     $    93.0     $    74.6    $    18.4
Basic and fully diluted loss per
share                                $   0.71    $    1.17    ($   0.46)     $    1.17     $    1.07    $    0.10
</TABLE>

         The loss  during  2006 has  decreased  when  compared  with 2005.  The
reduction in the costs associated with our phase III clinical  programs and the
corporate costs  associated with supporting  these programs have been partially
offset by the costs  associated  with the senior  convertible  notes.  The loss
during 2005  increased  when compared with the similar period in 2004 primarily
from higher  costs  associated  with the  expansion  of our phase III  clinical
programs and the corporate costs associated with supporting these programs.

RESEARCH AND DEVELOPMENT

         The changes in R&D expense,  and their key  components,  for the years
ended November 30, 2006, 2005, and 2004, are reflected in the following table:

                                      23
<PAGE>
<TABLE>
<CAPTION>
R&D expense (in millions of                                    Increase
dollars, except percentages)             2006         2005    (Decrease)          2005          2004     Increase
<S>                                  <C>          <C>          <C>            <C>           <C>          <C>
Clinical costs:
   Direct                            $   13.1     $   47.5     ($  34.4)      $   47.5      $   31.3     $   16.2
   Indirect                          $   13.6     $   17.8     ($   4.2)      $   17.8      $   14.0     $    3.8
Preclinical costs                    $    3.4     $    3.8     ($   0.4)      $    3.8      $    4.0    ($    0.2)
Intellectual property costs          $    2.2     $    1.8      $   0.4       $    1.8      $    2.2    ($    0.4)
Other costs                          $    0.4     $    0.6     ($   0.2)      $    0.6      $    0.3     $    0.3
Total R&D                            $   32.7     $   71.5     ($  38.8)      $   71.5      $   51.8     $   19.7
R&D expense as a percentage of the        63%          77%         (14%)           77%           77%          nil
sum of R&D and General and
Administration expenses
</TABLE>


CLINICAL COSTS

         The  expenditures  related  to our phase  III  Celacade  programs  are
expensed for accounting purposes and are the key driver of our losses.

         The  majority  of the  decrease  in our R&D  expenses  for 2006,  when
compared with the same periods in 2005,  resulted from a significant  reduction
in the clinical  trial  activities  relating to the completion of our phase III
programs. The increase in our R&D expense in 2005 compared with 2004 was driven
primarily  by the  increase in the number of clinical  sites  participating  in
these programs and the associated increase in the number of patients enrolled.

         Direct  costs to support  these trials  include  expenses for clinical
site fees, study monitoring,  site close out, data management and analysis, and
technology support.  During 2005, the number of clinical sites participating in
these  programs and the number of patients  enrolled in these  programs  were a
significant driver of the direct costs;  however, for the comparable periods in
2006,  these  costs were  reduced  substantially,  as our phase III trials were
completed. During 2005, the number of clinical sites initiated increased by 15%
and the number of patients enrolled into our phase III trials increased by 113%
when compared to 2004.

         Indirect  costs  to  support  these  programs   consist  of  salaries,
professional  fees, and other support  costs.  Indirect costs have decreased in
2006 as a result of a  reduced  level of  service  and  technology  development
activity  required to support the phase III  clinical  trials.  Both direct and
indirect costs increased significantly in 2005 compared with 2004 as the number
of clinical sites initiated and the number of patients enrolled increased.  The
proportionate  increase in indirect  costs was not as great as the  increase in
direct costs.

         A more  detailed  summary of our phase III  clinical  trial in chronic
heart failure is provided below.

CELACADE

         The key findings from the ACCLAIM trial of our Celacade  technology in
chronic heart failure were  presented by Dr.  Torre-Amione,  Medical  Director,
Heart  Transplant  Program,  Methodist  DeBakey  Heart Center at The  Methodist
Hospital,  and Principal  Investigator for the U.S. arm of the ACCLAIM trial in
September at the World Congress of Cardiology  2006 in Barcelona,  Spain and at
the 10th Annual  Scientific  Meeting of the Heart Failure Society of America in
Seattle, Washington.

         The  double-blind,  placebo-controlled  ACCLAIM  trial  studied  2,408
subjects with chronic heart failure at 175 clinical centers in seven countries.
ACCLAIM  was  designed  to assess the ability of Celacade to reduce the risk of
death or first cardiovascular  hospitalization.  Patients included in the study
had NYHA Class II, III, or IV heart  failure with a  left-ventricular  ejection
fraction  (LVEF)  of  30%  or  less  and  had  been  hospitalized  or  received
intravenous  drug therapy for heart failure  within the previous 12 months,  or
had NYHA Class III/IV heart failure with a LVEF of less than 25%.

         Patients in the ACCLAIM trial were receiving optimal  standard-of-care
therapy  for  heart   failure,   which  at   baseline   included  a  number  of
pharmaceuticals such as diuretics (94%), ACE-inhibitors (94%) and beta-blockers
(87%), as well as device therapies including automatic implantable cardioverter
defibrillators (26%), and use of cardiac resynchronization therapy (10.5%). The
placebo (n=1,204 patients) and Celacade (n=1,204 patients) groups

                                      24
<PAGE>

were   balanced  for  all   important   baseline   characteristics,   including
demographics,  left-ventricular  ejection fraction (LVEF), NYHA classification,
concomitant medical conditions, medications, and device therapies.

         The   difference   in   time  to   death   or   first   cardiovascular
hospitalization (the primary endpoint of ACCLAIM) for the intent-to-treat study
population  was not  statistically  significant  (p=0.22),  however,  the  risk
reduction directionally favored the Celacade group (hazard ratio=0.92).

         Celacade was shown to significantly  reduce the risk of death or first
cardiovascular  hospitalization by 39% in the pre-defined  subgroup of patients
with NYHA Class II heart  failure at  baseline  (n=689  patients,  216  events,
p=0.0003)  and in a  pre-defined  subgroup of patients with no prior history of
heart attack at baseline,  Celacade was also shown to significantly  reduce the
risk of death or first  cardiovascular  hospitalization by 26% (n=919 patients,
243 events, p=0.02).

         Furthermore,  consistent  with the impact of  Celacade  on the risk of
mortality  and  morbidity in large  subgroups  within the ACCLAIM trial was the
finding of a  significant  improvement  in quality of life (as  measured by the
Minnesota Living with Heart Failure  Questionnaire)  for the patients  assessed
for quality of life in the intent-to-treat study population (p=0.04).  Celacade
was also shown to be well  tolerated  in the ACCLAIM  patient  population,  and
there were no significant  between-group  differences  for any serious  adverse
events.

         In light of the findings from the ACCLAIM trial,  preparations are now
underway  for a meeting with the Food and Drug  Administration  to discuss next
steps with respect to the development of Celacade in the United States. We also
have CE Mark regulatory  approval for our Celacade medical device technology in
the  European  Union  and are  currently  in  discussions  to  secure a partner
necessary to support commercialization in that market.

VP025

         VP025,  our lead product from a new class of drugs, is being developed
to target the chronic  inflammation  within the central  nervous system that is
associated with a number of neurological  diseases.  In July 2005, we announced
the  successful  completion  of  a  phase  I  clinical  trial  of  VP025.  This
double-blind, placebo-controlled, dose-escalation trial examined the safety and
tolerability  of  three  doses  of VP025  in 24  healthy  volunteers.  Multiple
administrations  of either  low,  mid,  or high doses of VP025 were shown to be
safe and well tolerated when compared to placebo,  and no drug-related  serious
adverse events were reported.

         In May 2006,  we announced  that  preclinical  findings from our VP025
drug  development  program  demonstrated  a  significant  reduction  of several
pro-inflammatory  cytokines in a  preclinical  model of diabetes  with diabetic
retinopathy,  a common  complication of diabetes that eventually results in the
loss of vision.  Dr. Kyle Krady,  Assistant  Professor of Neural and Behavioral
Sciences,  Penn State  College of Medicine,  presented the findings on May 1 at
the  Scientific  Sessions  of  the  Association  for  Research  in  Vision  and
Ophthalmology   (ARVO)  Annual  Meeting  in  Florida.   Inflammation  has  been
implicated in the pathogenesis of diabetic retinopathy.  In a preclinical model
designed  to develop  diabetes,  VP025 was shown to have a  significant  effect
(p<0.05) on reducing the expression, in the retina, of several pro-inflammatory
cytokines  including  IL-1,  IL-6,  and MCP-1,  which are  associated  with the
initiation  stages of diabetic  retinopathy.  Concurrently,  the  intramuscular
administration of VP025 resulted in the increased  expression of both IL-10 and
TGF-beta, two potent anti-inflammatory  cytokines.  Based on information in the
scientific literature and current research observations, we believe this effect
is mediated via the regulation of microglial cell activation.  Microglial cells
are  inflammatory  cells  found  within the central  nervous  system and in the
retina.

         Many  neurological  conditions  are  associated  with an  inflammatory
response in the nervous  system,  including  Alzheimer's  disease,  Parkinson's
disease,  and  amyotrophic  lateral  sclerosis (ALS, also known as Lou Gehrig's
disease).   These   conditions  are   characterized   by  increased  levels  of
inflammatory  mediators,  including  cytokines,  leading  to the death of nerve
cells and the eventual  loss of  functional  activity.  Due to the  prevalence,
morbidity,  and mortality  associated with  neuro-inflammatory  diseases,  they
represent a significant medical, social, and financial burden.

                                      25
<PAGE>

         Based on the successful  phase I clinical  trial, we are now preparing
to initiate a phase II program.  The expenditures  associated with the phase II
trial are expected to be similar to the costs incurred with the phase I trial.

PRECLINICAL COSTS

         Our  preclinical  research  programs  are focused on  developing a new
class of drugs,  the lead  candidate  being VP025.  We have completed a phase I
study of VP025.  Additional  preclinical  studies are  ongoing to continue  the
advancement of VP025 for various indications.

         The R&D expenditures  associated with preclinical  research activities
during 2006,  2005 and 2004 were primarily the result of the above studies,  as
well as other preclinical studies necessary to support the advancement of VP025
into  clinical  development.  Preclinical  costs for 2006 have  decreased  when
compared  to the  same  period  in 2005  as we  have  increased  our  focus  on
activities   associated  with  preparations  to  initiate  a  phase  II  study.
Preclinical  costs were  comparable in 2005 and 2004, as  significant  work was
done on supporting the development of VP025.

INTELLECTUAL PROPERTY

         Our research and development  initiatives  have resulted in the filing
of numerous patent applications. We own patents and pending patent applications
relating  to our  products  and  technologies  in the  United  States and other
jurisdictions  around  the  world.  Our  intellectual   property   expenditures
primarily  consist of fees paid to patent  offices  worldwide  and to  external
patent  counsel.  These costs are  included in R&D expense and are  expensed as
incurred.  These costs are a result of  advancing  our patent  protection  into
additional countries through international patent grants, and additional patent
and trademark activities associated with protecting our existing  technologies,
as well as new  discoveries  and  developments  resulting from our research and
development programs.

         The costs for 2006 are higher  than the costs for the same  periods in
2005. In addition to a higher level of activity surrounding our existing patent
portfolio,  we carried out additional patent activities to protect intellectual
property arising from the ACCLAIM clinical trial.

GENERAL AND ADMINISTRATION

         The  changes  in general  and  administration  expense,  and their key
components,  for the years  ended  November  30,  2006,  2005,  and  2004,  are
reflected in the following table:

<TABLE>
<CAPTION>
General and Administration expense                             Increase
(in millions of dollars)                 2006         2005    (Decrease)          2005          2004     Increase
<S>                                  <C>          <C>           <C>           <C>           <C>          <C>
Infrastructure and other support
costs                                $   16.6     $   19.3     ($   2.7)      $   19.3      $   13.3     $    6.0
Insurance
                                     $    1.7     $    1.5      $   0.2       $    1.5      $    1.4     $    0.1
Professional fees
                                     $    1.0     $    1.3     ($   0.3)      $    1.3      $    1.2     $    0.1
Total General and Administration
expense                              $   19.3     $   22.1     ($   2.8)      $   22.1      $   15.9     $    6.2
</TABLE>

         Infrastructure  and other support  costs include  salaries and related
employee  costs for those  employees  not  directly  involved in  research  and
development,   as  well  as   facility-related   and   information   technology
expenditures  for all  employees.  These  costs  have  decreased  in 2006  when
compared to 2005 as a result of a reduced level of activity required to support
the current operations and increased for 2005 when compared to 2004 as a result
of an increased level of activity  required to support  operations in 2005. The
2006 cost reduction is primarily driven by a decrease in full time employees to
125 as at  November  30, 2006 from 172 as at November  30,  2005,  which was an
increase  from 149 as at November  30,  2004.  Insurance  costs have  increased
moderately in 2006 when compared to 2005 and in 2005 when compared to 2004 as a
result of market conditions that impacted our insurance premiums.  Professional
fees include  expenditures for legal,  tax,  accounting,  and other specialized
services. These costs have decreased moderately for 2006 when compared to 2005,
and  increased  moderately  for 2005 when  compared  to 2004 as a result of the
relatively stable level of activity required to support current operations.

                                      26
<PAGE>

FOREIGN EXCHANGE

         The foreign exchange gain or loss for the years ended November 30,
2006, 2005, and 2004, is reflected in the following table:

<TABLE>
<CAPTION>
Foreign Exchange
(in millions of dollars)                 2006         2005     Decrease           2005          2004     Decrease
<S>                                  <C>          <C>          <C>            <C>           <C>          <C>
Foreign exchange (gain) loss         $    0.1     ($   0.7)    $    0.8       ($   0.7)     $    8.3     $    9.0
</TABLE>

         In prior periods we held a more significant amount of U.S. dollar cash
and  cash  equivalents  and  restricted  cash.  Under  the  terms  of the  2005
convertible note financing, we have issued a US$5.6 million letter of credit to
the  noteholders.  The letter of credit is fully  secured by US$5.6  million of
restricted  cash. We are also holding U.S.  dollars to make the final  payments
for R&D expenditures denominated in U.S. dollars related to our completed phase
III  clinical  trials and future  operating  expenditures  denominated  in U.S.
dollars.  U.S. dollar holdings  amounted to  approximately  US$14.5 million and
US$41.6 million at November 30, 2006, and November 30, 2005,  respectively.  As
our  functional or measurement  currency is the Canadian  dollar,  U.S.  dollar
exchange rate  fluctuations  may have a  significant  impact from an accounting
perspective,  but they do not impair or enhance  our  ability to pay these U.S.
dollar denominated R&D expenses.

         The  year-end  conversion  rates from the U.S.  dollar to the Canadian
dollar for  November 30,  2006,  2005 and 2004 were 1.1422,  1.1669 and 1.1858,
respectively.  In 2006,  losses  resulting from cash being held in U.S. dollars
have been partially offset by gains on liabilities that are denominated in U.S.
dollars.

INVESTMENT INCOME

         Investment  income for the years ended  November 30, 2006,  2005,  and
2004, is reflected in the following table:

<TABLE>
<CAPTION>
Investment Income
(in millions of dollars)           2006         2005    (Decrease)          2005          2004     Increase
<S>                            <C>          <C>          <C>            <C>           <C>          <C>
Investment income              $    2.0     $    2.3     ($   0.3)      $    2.3      $    1.4     $    0.9
</TABLE>

         Despite higher  interest rates,  investment  income for 2006 was lower
when  compared  with  2005,  due to a  decline  in the  amount of cash and cash
equivalents,  marketable securities and restricted cash on hand. Interest rates
on one-month commercial paper denominated in Canadian dollars averaged 4.06% in
2006, compared with 2.68% in 2005. Similarly, one-month U.S. dollar-denominated
commercial  paper  averaged  4.99%  in  2006,  compared  with  3.19%  in  2005.
Investment income in 2005 increased when compared to 2004 as a result of higher
interest  rates  available  in the  marketplace.  The  rate on  one-month  U.S.
commercial paper rose by roughly 200 basis points, while the one-month Canadian
rate rose by approximately 55 basis points.

OTHER EXPENSES

         Other expenses for the years ended November 30, 2006,  2005, and 2004,
are reflected in the following table:

<TABLE>
<CAPTION>
Other expense
(in millions of dollars)                 2006         2005     Increase           2005          2004     Increase
Interest expense on senior
<S>                                  <C>          <C>          <C>            <C>           <C>          <C>
convertible notes payable            $    0.9     $    0.3     $    0.6       $    0.3      $    0.0     $    0.3
Accretion of the carrying value of
senior convertible notes payable     $    7.8     $    1.7     $    6.1       $    1.7      $    0.0     $    1.7
Amortization of deferred financing
costs                                $    2.5     $    0.4     $    2.1       $    0.4      $    0.0     $    0.4
Loss on debt extinguishment
                                     $    5.0     $    0.0     $    5.0       $    0.0      $    0.0     $    0.0
Total
                                     $   16.2     $    2.4     $   13.8       $    2.4      $    0.0     $    2.4
</TABLE>

                                      27
<PAGE>

         Except for interest expense, other expenses associated with the senior
convertible  notes are  non-cash  expenditures.  These  expenses are higher for
2006, when compared to the same period in 2005, as the senior convertible notes
were issued  during  October  2005.  Therefore  there were no similar  expenses
incurred in 2004.

         Except as described under Item 4 or elsewhere in this document,  there
are no governmental economic, fiscal, monetary or political policies or factors
that  have  materially  affected,  or  could  materially  affect,  directly  or
indirectly, the Company's operation or investments by US shareholders.

B.       LIQUIDITY AND CAPITAL RESOURCES

         Since our inception,  we have financed our  operations  primarily from
public and private sales of equity,  the issuance of senior  convertible notes,
the  exercise of warrants  and stock  options,  and  interest on funds held for
future investments.

         On November 14, 2006 we completed a public offering for gross proceeds
of $23.1 million (US$20.3  million),  resulting in the issuance of 43.2 million
common  shares,  17.3 million  five-year  warrants to purchase  common share at
US$0.63 per share and 4.3 million six-month  warrants to purchase common shares
at US$0.53 per share. This financing  triggered the  anti-dilution  adjustments
contained  in the senior  convertible  notes and  warrants  that were issued on
October 7, 2005 which are discussed in greater detail below.

         On October 7,  2005,  our  wholly-owned  subsidiary,  Vasogen  Ireland
Limited,  raised gross proceeds of US$40 million through the issuance of senior
convertible notes ("the notes").  Costs of this  transaction,  including agency
and legal  fees and other  expenses,  were  US$3.6  million.  The notes  have a
maturity  date of two years from issuance and bear interest at a rate of 6.45%.
As of January 1, 2007, the principal amount  outstanding  under the convertible
notes  was  US$4.6  million.  The  outstanding  notes  are  convertible  at the
investors'  option into our common  shares at an adjusted  conversion  price of
US$1.99  subject to  anti-dilution  and other  adjustments  as  provided in the
notes. We are required to repay the notes in equal monthly  installments and we
may elect to repay principal in any combination of cash or common shares at our
option, provided certain conditions are met. Starting with the November 1, 2006
installment  we can no longer  issue  shares  based on a discount  of the share
price to the note  holders  as we have  exceeded  the limit for the  discounted
shares that was  established  in the  financing.  As a result each  installment
payment  made in shares  will  require us to issue  shares at 100% of the share
price and make the note holders  whole with a cash payment  equal to the 10% of
the  installment  amount.  We also have the option to  accelerate  payments  of
outstanding  principal of up to US$8.0 million on each  installment date if our
share price is greater  than US$1.00 per share,  or up to 40% of the  principal
outstanding  each calendar year if our share price is greater than US $4.00 per
share, subject to issuance of additional warrants in connection with exercising
this  option.  For the March,  April,  and May 2006  installment  payments,  we
elected to make a US$1.8 million  acceleration payment with each installment to
the debt holders and a US$2.8 million  acceleration  payment with the June 2006
installment.  In respect of the March 1, 2006,  acceleration payment, we issued
an additional  390,000  warrants  exercisable at an adjusted  exercise price of
US$2.06 for a term of five years from the date of issue, and in respect of each
of the April 1 and May 1, 2006 acceleration  payments,  we issued an additional
390,000  warrants  exercisable  at an adjusted  exercise price of US$1.99 for a
term of five  years  from the date of  issue.  In  respect  of the June 1, 2006
acceleration  payment, we issued an additional 606,666 warrants  exercisable at
an adjusted exercise price of US$1.99 for a term of five years from the date of
issue.  On February 2, 2006,  one of the note holders  exercised  its option to
convert  US$300,000 of the senior  convertible notes, which resulted in 100,000
shares being issued to the debt holder.

         As a result of the  financing  that was completed on November 14, 2006
the  conversion  price of the senior  convertible  notes was reduced to US$1.99
from US$3.00 in accordance with the anti-dilution  provisions  contained within
the notes. The  anti-dilution  provisions also provided that the exercise price
of the 4,720,000 warrants  outstanding to the note holders at an exercise price
of US$3.00  was  reduced  to  US$1.99  and the  exercise  price of the  390,000
warrants at an exercise  price of US$3.11 was reduced to US$2.06.  In addition,
the 5.1  million  warrants  outstanding  can now be  exercised  for 7.7 million
common shares, which is an increase from the 5.1 million common shares prior to
the  anti-dilution  provisions  that were  triggered  by the  November 14, 2006
financing.

         Under the terms of the notes,  commencing  September 1, 2006,  we must
maintain a net cash  balance  of 110% of the  principal  outstanding  under the
notes.  Any failure to maintain such net cash balance of 110% would

                                      28
<PAGE>

constitute an event of default as described  below.  We have  satisfied the net
cash balance test at all times beginning  September 1, 2006. We are required to
maintain  a letter of credit in  connection  with  these  notes  payable in the
amount of US$5.6 million,  which is fully secured by cash on hand. The terms of
the notes  allowed  us to reduce the  US$10.0  million  original  amount of the
letter  of  credit  by  US$4.4  million,  an  amount  equal  to one half of the
difference  between US$17.0 million and the aggregate  principal  amount of the
notes  outstanding  of US$8.2 million on November 1, 2006. The letter of credit
and the restricted  cash required to secure the letter of credit can be further
reduced at our option after the outstanding principal amount of the convertible
notes has been reduced by a further $2 million,  such reduction amount to equal
the difference between (A) one-half of the difference between (i) US$17 million
and (ii) the aggregate  principal amount of the senior  convertible  notes then
outstanding and (B) the aggregate  amount of any prior reductions of the letter
of credit amount.

         If an event of  default  or a change of  control  should  occur,  note
holders will be entitled to require the redemption of their notes,  in whole or
in part, at a price  determined  according to a formula  outlined in the notes.
The holders have the right to demand  repayment in cash or in common  shares at
125% of the face amount of principal outstanding in the event of default, or at
115% of the face amount of  principal  outstanding  in the event of a change in
control or the value of the  common  shares the  holder  would  otherwise  have
received  on  conversion  of the  shares  prior to the event of  default or the
change in control.

         Under the notes,  inter-company  indebtedness  between the Company and
its  subsidiaries  must be subordinate in right of payment to the  indebtedness
evidenced  by the  notes.  Subject  to the  foregoing  and  normal  course  tax
requirements, there are no legal or economic restrictions on the ability of the
Company's  subsidiaries  to  transfer  funds to the Company in the form of cash
dividends, loans or advances and such restrictions are not expected to have any
impact on the ability of the Company to meet its cash obligations.

         On February 2, 2005, we completed a public offering for gross proceeds
of $52.5  million  (US$42.3  million),  resulting  in the issuance of 9,005,000
common shares.

         During 2006, we did not receive funds from the exercise of options and
warrants,  compared  with  $0.6  million  and $1.3  million  in 2005 and  2004,
respectively.  The total number of common  shares  outstanding  at November 30,
2006,  increased to 156.7  million from 82.3 million at November 30, 2005.  The
number of options and  warrants  outstanding  at  November  30,  2006,  is 37.4
million.  The  conversion  rate of the options and  warrants is on a one-to-one
basis for common shares excluding 5.1 million warrants that have been issued to
the note  holders  which are now  convertible  into common  shares at a rate of
approximately one and a half common shares for one warrant.

         As  at  January  30,  2007,  we  have  168.3  million   common  shares
outstanding;  7.9 million  options to purchase common shares  outstanding;  and
29.3 million warrants to purchase 31.9 million common shares. It is our present
intention to issue common shares on repayment of the notes as described  above,
provided certain conditions are met.

         At  November  30,  2006,  our cash and  cash  equivalents,  marketable
securities  and  restricted  cash totaled  $36.8  million,  compared with $85.2
million at  November  30,  2005.  The  decrease is a result of the cash used in
operations during 2006. In addition,  two installment payments under the senior
convertible  notes,  one in the amount of $2.1 million (US$1.8 million) and the
other in the amount of $1.7 million  (US$1.5  million)  were paid in cash.  The
letter of credit  and amount of  restricted  cash was  reduced by $5.0  million
(US$4.4 million) and may be reduced further at our option,  as described above.
We  invest  our  cash  resources  in  liquid   government  and  corporate  debt
instruments  having a single "A" credit  rating or  greater.  We do not believe
that  the  results  of  operations  or cash  flows  would  be  affected  to any
significant  degree by a sudden  change in market  interest  rates  relative to
interest rates on our investments,  owing to the relative  short-term nature of
the investments.

         We are  exposed to  market-rate  risk  related to changes in  interest
rates and foreign exchange rates between the Canadian and U.S.  dollars,  which
could  affect  the  value  of our  marketable  securities  or our cash and cash
equivalents.  At November  30, 2006,  we held  directly or  indirectly  through
forward currency contracts U.S. dollar denominated  securities in the amount of
US$8.9  million  excluding  cash that is not invested in  securities or held as
restricted cash.

                                      29
<PAGE>

         In November  2006,  we entered  into a contract  to purchase  Canadian
dollars totaling $9.2 million (US$8.0 million),  and concurrently  entered into
forward  contract to purchase  the U.S.  dollars  back in  December  2006.  The
Canadian  dollars  were  acquired to enable us to invest our cash  resources in
Canadian investments;  however, the forward contract enabled us to preserve our
U.S.  funds,  even when converted to Canadian  dollars.  Our U.S. funds will be
used to cover operating expenditures  denominated in U.S. dollars and the final
U.S. dollar payments associated with our phase III clinical trials. At November
30, 2006, the equivalent value of these forward contracts, when compared to the
amount due on maturity,  resulted in a nominal net unrealized  foreign exchange
loss.  The  fair  value  of  these  contracts  has  been  included  in  current
liabilities.

         In November  2005,  we entered  into  contracts  to purchase  Canadian
dollars totaling $59.0 million (US$50.0 million), and concurrently entered into
forward  contracts to purchase the U.S.  dollars back at specific future dates.
These  forward  contracts  matured in  December  2005 and  February  2006.  The
Canadian  dollars  were  acquired to enable us to invest our cash  resources in
Canadian investments;  however,  these forward contracts enabled us to preserve
our U.S. funds,  even when converted to Canadian  dollars.  Our U.S. funds were
used to cover U.S. expenditures associated with our phase III clinical trials.

         In November 2005, we entered into contracts to sell Canadian  dollars,
totaling $30.1 million (US$25.3  million),  at specific times, and concurrently
entered  into  forward  contracts  to purchase  the  Canadian  dollars  back at
specific future dates.  These forward contracts matured in December 2005. These
Canadian  funds were used to fund Canadian  dollar  expenditures  during fiscal
2006.

         Our net cash used in operating  activities for 2006, was $64.4 million
compared with $74.6 million and $55.8 million for 2005 and 2004,  respectively.
Other than our losses,  changes in our working capital had the most significant
impact on our cash used in operations.  Our working  capital is affected by the
increase or  decrease in our  accounts  payable  and accrued  liabilities  as a
result of certain expenses  incurred in our phase III clinical trials that were
not paid until certain trial  milestones  were reached,  such as the receipt of
final study  reports  from  clinical  sites at the end of the trials.  In 2006,
virtually all of these  milestones  were achieved which resulted in the payment
of cash related to the expenditures incurred in 2005 and 2004.

         We  intend  to  continue  to use our  capital  resources  to fund  our
research and development  activities and potentially for the  commercialization
of Celacade in Europe  where we have been  granted the CE mark.  The Company is
currently seeking a partner to participate in the commercialization of Celacade
in Europe.  The amount of capital resources to be allocated to these activities
will  depend upon the scale of  programs  undertaken  and is subject to further
analysis. Management believes that the Company's current level of cash and cash
equivalents is sufficient to fund planned  expenditures for the next 12 months.
We intend to continue to raise additional  financing through strategic alliance
arrangements,  the  exercise of options and  warrants,  and the issuance of new
share capital, as well as through other financing  opportunities.  There can be
no assurance  that  additional  financing  will be available and, if available,
will be on terms  acceptable  to us.  The  availability  of  financing  will be
affected by the results of our  pre-clinical and clinical  research,  including
the ACCLAIM  trial which failed to reach its primary  endpoint,  our ability to
advance the development of Celacade and obtain regulatory approvals, the market
acceptance of our products,  the state of the capital  markets  generally (with
particular reference to biotechnology companies),  the status of our listing on
the NASDAQ Global market,  strategic  alliance  agreements,  and other relevant
commercial considerations.

         The  terms of the notes may  limit  our  ability  to incur  additional
secured or unsecured debt while the notes are outstanding. As long as the notes
are  outstanding,  we and our  subsidiaries  are  prohibited  from incurring or
guaranteeing any indebtedness  other than the indebtedness  under the notes and
certain other permitted indebtedness,  which includes indebtedness that is pari
passu with or subordinate to the indebtedness under the notes and that does not
provide for any payments of  principal or premium  until at least 91 days after
the maturity date of the notes; indebtedness to trade creditors incurred in the
ordinary course of business;  intercompany indebtedness which is subordinate in
right of payment to the  indebtedness  under the notes;  and  indebtedness  the
proceeds of which are used to redeem,  repay, or otherwise retire the notes. In
addition, the notes contain anti-dilution  provisions,  which could require the
adjustment of the  conversion  price of the notes in the event of certain types
of share  issuances  below the current  conversion  price of US$1.99.  Based on
acceleration  payments and  installment  payments made to date and assuming the
continued  payment of the equal monthly  installments  of US$1.8  million,  the
notes  will be

                                      30
<PAGE>

completely  repaid as of April 1, 2007. We generally  assess  circumstances  in
advance of each installment date and make a determination as to whether to make
an installment payment in cash or shares or a combination of both.

         As of the end of the 2006 financial  year and to the date hereof,  the
Company has no material  commitments  for capital  expenditures.  As  disclosed
elsewhere  in this  document,  the Company is  continuing  its  analysis of the
ACCLAIM  results  and is  preparing  to meet with the FDA and Health  Canada to
present data related to the significant  risk reduction  observed in NYHA Class
II patients and to discuss next steps. In addition,  as disclosed  elsewhere in
this document,  the Company is discussing  Celacade's  commercial  potential in
Europe under the CE Mark with prospective partners.  While no assurances can be
provided  that  either  initiative  will be  successful,  capital  expenditures
associated  with such  initiatives  would be funded from current cash resources
and further financings.

C.       RESEARCH AND DEVELOPMENT, PATENTS, AND LICENSES, ETC

         We expense all R&D costs.  The majority of our research is  outsourced
to medical institutions,  under contractual agreements,  for which expenditures
are  settled  with cash  payments  that are  aligned  with the  achievement  of
pre-defined  activities.  The  costs  of  our  prepaid  clinical  supplies  are
deferred, on the basis that these supplies have future alternative uses related
to the  various  clinical  applications  of our  Celacade  technology,  and are
expensed as they are shipped to outsourced research centers or clinical sites.

         The cost of our acquired technology, representing part of our platform
medical device technology,  is amortized on a straight-line basis over 20 years
in recognition of the term of the acquired patent.

         Our ability to recover the carrying  value of our acquired  technology
and  clinical  supplies  is  impacted by several  factors,  including,  but not
limited  to, the  progress  of clinical  trials,  our  ongoing  ability to fund
clinical  trials,  feedback  and  decisions  from health  regulators  regarding
clinical trial results and reimbursement,  ongoing technological  improvements,
technological  obsolescence,  the timing of product launch,  the development of
our patent  portfolio,  the ability to defend any claims made by third  parties
against our intellectual property, and our financial ability to challenge those
third parties who may infringe our intellectual property.  Based on analysis to
date,  we believe  that the  results  of the phase III  ACCLAIM  trial  warrant
efforts to advance the  development of Celacade in a pre-defined  sub-group and
that  the  value  of our  acquired  technology  and the  clinical  supplies  is
recoverable.  The majority of our direct clinical R&D  expenditures was related
to our phase III ACCLAIM trial and was payable in U.S. dollars. In addition,  a
significant  component of the direct costs of our ACCLAIM  trial was payable in
euros. The majority of general and administration costs are payable in Canadian
dollars.

         For the years ended  November  30,  2006,  2005 and 2004,  the Company
spent  $32.7  million,  $71.4  million,  and $51.8  million,  respectively,  on
research  and  development.  At  the  present  time,  the  Company's  principal
expenditures  are focused on the  advancement  of the  company's  research  and
development   program.   Over  the  past  three   years,   Vasogen  has  raised
approximately  $185.7  million  in net  proceeds  from the  issuance  of equity
securities and  convertible  notes to investors and the exercise of options and
warrants.  The Company's common shares are listed on the Toronto Stock Exchange
under the symbol "VAS" and on the NASDAQ under the symbol "VSGN".

D.       TREND INFORMATION

         It is  important  to note that  historical  patterns  of  expenditures
cannot be taken as an indication of future expenditures.  The amount and timing
of expenditures and availability of capital resources vary  substantially  from
period to period,  depending on the level of research and development  activity
being undertaken at any one time and the availability of funding from investors
and prospective commercial partners.

         The following  table presents  unaudited  selected  financial data for
each of the last eight quarters ended November 30, 2006:

                                      31
<PAGE>

                          Loss for the    Basic and diluted   Foreign exchange
                         period (000's)    loss per share    gain/(loss) (000's)
                         --------------    --------------    -------------------
November 30, 2006         ($10,024)        ($     0.09)        $     56

August 31, 2006           ($14,566)        ($     0.15)        $     12

May 31, 2006              ($22,438)        ($     0. 26)      ($    169)

February 28, 2006         ($19,332)        ($     0. 23)      ($      3)

November 30, 2005         ($24,010)        ($     0.29)        $    146

August 31, 2005           ($24,069)        ($     0.30)       ($  2,243)

May 31, 2005              ($25,071)        ($     0.31)        $    924

February 28, 2005         ($19,898)        ($     0. 27)       $  1,892

         Our quarterly losses increased  significantly  during 2005 as a result
of the  expansion of our phase III clinical  programs and the  corporate  costs
associated with supporting  these programs.  However,  for 2006, our costs have
decreased  mainly as a result of the gradual ramping down of clinical  activity
leading to the database lock and subsequent  analysis of our phase III clinical
programs.  This  reduction has been partially  offset by non-cash  expenditures
associated  with  the  senior  convertible  notes.  Both of these  factors  are
discussed in greater detail  elsewhere in this document.  The operations of our
Company are not subject to any material seasonality or cyclicality factors.

         The loss in the fourth quarter of 2006 decreased when compared to that
in the third  quarter  of 2006  mainly as a result  of a  reduction  in our R&D
expenses.  R&D and general and  administration  expenses for the fourth quarter
were $7.9  million,  compared  with  $11.2  million  in the third  quarter.  In
addition,  expenses  associated  with the  convertible  debt  decreased by $1.4
million, as we made no acceleration payments during the fourth quarter of 2006.

         Except as disclosed  elsewhere in this document,  the Company knows of
no trends,  uncertainties,  demands,  commitments or events that are reasonably
likely  to  have a  material  effect  on the  Company's  liquidity  or  capital
resources or that would cause reported financial information not necessarily to
be indicative of future operating results or financial conditions.

E.       OFF-BALANCE SHEET ARRANGEMENTS

         We  have no  debt,  guarantees,  off-balance  sheet  arrangements,  or
capital  lease   obligations  other  than  those  associated  with  the  senior
convertible  note financing that was completed  October 7, 2005 and outstanding
forward  exchange  contracts,  which are discussed  elsewhere in this document.

F.       CONTRACTUAL OBLIGATIONS

         Our contractual obligations as of November 30, 2006 are as follows:

<TABLE>
<CAPTION>
Contractual Obligations                 Less than 1                                   More than
(in millions of dollars)    Total       year           1 - 3 years    4 - 5 years     5 years
<S>                         <C>         <C>            <C>            <C>             <C>
Operating lease
obligations                 $1.6        $0.6           $1.0           nil             nil
Senior convertible notes    US$8.2      US$8.2         nil            nil             nil
</TABLE>

         We have granted royalties to arm's-length third parties based on gross
amounts  receivable  by  us  from  future  commercial  sales  of  our  Celacade
technology, aggregating 1.5% on all sales, to a maximum royalty of $1.3 million
per annum and an  additional  2% with  respect to revenue  derived from certain
applications  of this  technology,  to a maximum  royalty of $5.0  million  per
annum. To date, no royalties are due and/or payable. In October 2005, we issued
the  notes  described  above.  Under the  current  terms  and  conditions  this
obligation  requires a principal  payment of  approximately  US$1.8 million per
month  payable  in  shares or cash at our  discretion  together  with  interest
payable in cash.

                                      32
<PAGE>

G.       SAFE HARBOR

         Certain  statements  in  this  document  constitute   "forward-looking
statements"  within  the  meaning  of  the  United  States  Private  Securities
Litigation Reform Act of 1995 and/or "forward -looking  information"  under the
Securities Act (Ontario).  These  statements may include,  without  limitation,
summary  statements  relating to results of the ACCLAIM  trial in patients with
chronic  heart  failure,  plans to advance  the  development  of  Celacade(TM),
statements   concerning  our  partnering   activities  and  health   regulatory
submissions,  strategy,  future operations,  future financial position,  future
revenues,  projected costs, prospects,  plans and objectives of management.  In
some cases, you can identify forward-looking  statements by terminology such as
"may",  "will",  "should",  "expects",  "plans",   "anticipates",   "believes",
"estimated",  "predicts",  "potential",  "continue", "intends", "could", or the
negative  of such terms or other  comparable  terminology.  We made a number of
assumptions in the preparation of these forward-looking  statements,  including
assumptions about the nature, size and accessibility of the market for Celacade
in the  treatment  of  chronic  heart  failure,  particularly  in  Europe,  the
regulatory approval process leading to  commercialization,  the availability of
capital on  acceptable  terms to pursue the  development  of  Celacade  and the
feasibility  of additional  trials.  You should not place undue reliance on our
forward-looking  statements  which  are  subject  to a  multitude  of risks and
uncertainties that could cause actual results,  future  circumstances or events
to differ  materially from those projected in the  forward-looking  statements.
These risks include, but are not limited to, the outcome of further analysis of
the ACCLAIM trial results,  the  requirement or election to conduct  additional
clinical  trials,  delays  or  setbacks  in the  regulatory  approval  process,
securing and maintaining  corporate alliances,  the need for additional capital
and the  effect of  capital  market  conditions  and other  factors  on capital
availability, the potential dilutive effects of any financing, risks associated
with the outcome of our research and development programs, the adequacy, timing
and results of our  clinical  trials,  competition,  market  acceptance  of our
products,  the availability of government and insurance  reimbursements for our
products, the strength of intellectual property, reliance on subcontractors and
key personnel,  losses due to fluctuations in the U.S.-Canadian  exchange rate,
and other risks detailed from time to time in our public  disclosure  documents
or other  filings with the Canadian and U.S.  securities  commissions  or other
securities  regulatory bodies.  Additional risks and uncertainties  relating to
our Company and our business can be found in the "Risk Factors"  section of our
Annual  Information Form and Form 20-F for the year ended November 30, 2006, as
well as in our later public filings. The forward-looking statements are made as
of the date hereof,  and we disclaim any  intention  and have no  obligation or
responsibility,   except  as   required   by  law,  to  update  or  revise  any
forward-looking  statements,  whether  as a result of new  information,  future
events or otherwise.  Unless otherwise  indicated,  numerical values indicating
the statistical significance  ("p-values") of results included in this document
are based on analyses that do not account for endpoint multiplicity.

ITEM 6.  DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A.       DIRECTORS AND SENIOR MANAGEMENT

                             DIRECTORS AND OFFICERS

         The names and  municipalities  of residence of all our  directors  and
officers  as  at  the  date  hereof,  the  offices  presently  held,  principal
occupations,  and the year each  director or officer first became a director or
officer are set out below.  Each  director  was elected to serve until the next
annual  meeting  of our  shareholders  or until his  successor  is  elected  or
appointed.  Officers are appointed  annually and serve at the discretion of the
Board of Directors.

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
                          POSITION WITH THE COMPANY AND
                          PRINCIPAL OCCUPATION FOR THE LAST                                 DIRECTOR/OFFICER
NAME AND RESIDENCE(3)     FIVE YEARS                           OTHER PUBLIC COMPANY BOARDS  SINCE
-----------------------------------------------------------------------------------------------------------------
<S>                       <C>                                  <C>                          <C>
TERRANCE H. GREGG(2)      Chairman of the Board and Director   Amylin Pharmaceuticals,      September 1999
Los Angeles, California,  of the Company.  Mr. Gregg is the    Inc.
USA                       former President of Medtronic        DexCom Inc.
                          MiniMed.  He became President and    LMS Medical Systems Limited
                          Chief Operating Officer of MiniMed
                          in 1996.
-----------------------------------------------------------------------------------------------------------------
WILLIAM R. GRANT(1)       Director of the Company.  Vice       Advanced Medical Optics,     November 1998;
New York,                 Chairman of Galen Associates.        Inc.                         Chairman from
New York, USA                                                  Massey Energy Company        March 2001 to March
                                                               Quest Diagnostics            2006
                                                                   Incorporated
-----------------------------------------------------------------------------------------------------------------
</TABLE>

                                      33
<PAGE>

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
                          POSITION WITH THE COMPANY AND
                          PRINCIPAL OCCUPATION FOR THE LAST                                 DIRECTOR/OFFICER
NAME AND RESIDENCE(3)     FIVE YEARS                           OTHER PUBLIC COMPANY BOARDS  SINCE
-----------------------------------------------------------------------------------------------------------------
<S>                       <C>                                  <C>                          <C>
DR. RONALD M.             Director of the Company.  Dr.        None                         January 2006
CRESSWELL(1)              Cresswell is the former Senior Vice
Ann Arbor, Michigan, USA  President and Chief Scientific
                          Officer of Warner Lambert.
-----------------------------------------------------------------------------------------------------------------
DAVID G. ELSLEY           President, Chief Executive Officer,  None                         January 1991
Oakville, Ontario,        and a Director of the Company.
Canada
-----------------------------------------------------------------------------------------------------------------
BENOIT LA SALLE(1)        Director of the Company.  President  Contact Image Inc.           January 1997
Montreal, Quebec, Canada  and Chief Executive Officer of       ART Research Technologies
                          SEMAFO Inc.                          LMS Medical Systems Limited
                                                               Pebercan Inc.
                                                               SEMAFO Inc.
                                                               20/20 Technologies Inc.
-----------------------------------------------------------------------------------------------------------------
ELDON R. SMITH Calgary,   Vice President, Scientific Affairs,  Canadian Natural Resources   July 1998
Alberta, Canada           and a Director of the Company.       Limited
                                                               Overlord Financial Inc.
                                                               Sernova Corp.
-----------------------------------------------------------------------------------------------------------------
DR. CALVIN R. STILLER(2)  Director of the Company. Dr.         NPS Pharmaceuticals, Inc.,   January 2006
London, Ontario, Canada   Stiller is the former Chairman and   Residence Retirement REIT,
                          Chief Executive Officer of Canadian  CPL Trust, NeuroMedix Inc.
                          Medical Discoveries Fund Inc.
-----------------------------------------------------------------------------------------------------------------
JOHN C. VILLFORTH(2)      Director of the Company.  Former     EduNeering Inc.              March 2001
Gaithersburg, Maryland,   President and Executive Director,
USA                       Food and Drug Law Institute.
-----------------------------------------------------------------------------------------------------------------
DR. ANTHONY E. BOLTON     Chief Scientific Officer of the      None                         January 1995
Bakewell, Derbyshire,     Company
England
-----------------------------------------------------------------------------------------------------------------
CATHERINE M. BOUCHARD     Vice President, Human Resources,     None                         August 2006
Lakefield, Ontario,       formerly Director of Human
Canada                    Resources of the Company.  Ms.
                          Bouchard was formerly Director of
                          Human Resources at MDS
                          Laboratories.
-----------------------------------------------------------------------------------------------------------------
DR. JAY H. KLEIMAN        Chief Medical Officer and Head of    None                         December 2004
Lake Forest, Illinois,    Cardiovascular Development of the
USA                       Company.  Dr. Kleiman was formerly
                          Vice President, Clinical Affairs of
                          Northfield Laboratories, and
                          formerly Medical Director,
                          Cardiovascular/Metabolic Clinical
                          Research for the G. D. Searle
                          division of Pharmacia (now Pfizer).
-----------------------------------------------------------------------------------------------------------------
SUSAN F.  LANGLOIS        Vice President, Regulatory Affairs   None                         May 2003
Bolton, Ontario, Canada   of the Company.  Ms. Langlois  was
                          formerly Vice-President, Clinical
                          and Regulatory Affairs at Hemosol
                          and Director, Global Regulatory
                          Affairs at Connaught Laboratories
                          Ltd.
-----------------------------------------------------------------------------------------------------------------
JACQUELINE H.R. LE SAUX   Vice-President, Corporate & Legal     None                         July  2005
Toronto, Ontario, Canada  Affairs of the Company.  Ms. Le
                          Saux was formerly a legal and
                          business development executive with
                          Sanofi-aventis Canada, Zinc
                          Therapeutics, Ellipis Biotherapeutics
                          and Draxis Health.
-----------------------------------------------------------------------------------------------------------------
BERNARD LIM               Senior Vice President, Operations,    None                         March 2001
Oakville, Ontario,        formerly, Vice-President Technology
Canada                    of the Company.  Mr. Lim was
                          formerly the Managing Director of
                          WELMED (IVAC), and formerly Managing
                          Consultant of Belle Consulting.
-----------------------------------------------------------------------------------------------------------------
DR. MICHAEL E. SHANNON    Vice President, Medical Affairs of   None                         September 2004
Picton, Ontario, Canada   the Company.  Dr. Shannon was
                          formerly Vice President, Medical
                          Sciences for Hemosol Inc., Senior
                          Medical Advisor and Principal for
                          the Canadian Auditor General, and
                          the Director General of the
                          Laboratory Center for Disease
                          Control, Health Canada.
-----------------------------------------------------------------------------------------------------------------
</TABLE>

                                      34
<PAGE>

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
                          POSITION WITH THE COMPANY AND
                          PRINCIPAL OCCUPATION FOR THE LAST                                 DIRECTOR/OFFICER
NAME AND RESIDENCE(3)     FIVE YEARS                           OTHER PUBLIC COMPANY BOARDS  SINCE
-----------------------------------------------------------------------------------------------------------------
<S>                       <C>                                  <C>                          <C>
PAUL J. VAN DAMME         Vice-President, Finance, and Chief   None                         December 2005
Toronto, Ontario, Canada  Financial Officer.  Mr. Van Damme
                          was formerly Chief Financial
                          Officer of Lorus Therapeutics Inc.,
                          Affinity Express Inc., and
                          Electrovaya Inc.
-----------------------------------------------------------------------------------------------------------------
CHRISTOPHER J. WADDICK,   Chief Operating Officer and          None                         March 1997
Georgetown, Ontario,      formerly Executive Vice President,
Canada                    Chief Financial Officer, and
                          Treasurer of the Company.
-----------------------------------------------------------------------------------------------------------------
</TABLE>
Notes:
1.   Member of the Audit Committee of the Board of Directors.
2.   Member of the Compensation, Nominating, and Corporate Governance Committee
     of the Board of Directors.
3.   The  Company  does  not  have  an  executive  committee  of the  Board  of
     Directors.

         As of November 30, 2006,  the directors and executive  officers of the
Company as a group  beneficially  own,  directly  or  indirectly,  or  exercise
control or direction over 1,368,083 common shares,  representing  approximately
1% of the issued common shares of the Company.

         On  December 9, 2002,  BridgePoint  International  Inc.,  a company of
which Mr.  Benoit La Salle was a director  and  chairman,  announced in a press
release  that cease trade  orders had been issued with respect to its shares by
the securities  regulatory  authorities in each of Quebec,  Ontario,  Manitoba,
Alberta,  and British  Columbia as a  consequence  of its default in filing its
audited  financial  statements  for the year  ended  June 30,  2002  within the
prescribed time period. On or before April 1, 2003, all cease trade orders were
revoked by these securities regulatory authorities.

                            SCIENTIFIC ADVISORY BOARD

         We have an  independent  Scientific  Advisory  Board ("SAB") to advise
management and the Board of Directors on our scientific,  technical,  research,
development,  and commercialization  endeavors. Members of the SAB are entitled
to an annual honorarium and  reimbursement  for their reasonable  out-of-pocket
expenses incurred in connection with our business,  and are eligible to receive
stock options.  Members of the SAB through their affiliation with universities,
hospitals,  and other  centers of  biomedical  research may, from time to time,
collaborate  on or direct  independent  basic  research,  preclinical  studies,
and/or feasibility  clinical trials involving our technologies and receive,  in
connection therewith, professional fees at market rates. The members of our SAB
are:

ROBERT ROBERTS, MD, FRCP(C), FACC, CHAIRMAN

         Dr. Roberts is the President and CEO of the University of Ottawa Heart
Institute,  one of Canada's  leading  centers in  cardiovascular  medicine.  Dr
Roberts was formerly Chief of Cardiology, Don W. Chapman Professor of Medicine,
and  Professor of Molecular  Physiology  and  Biophysics  at Baylor  College of
Medicine  in  Houston,   Texas,   one  of  the  world's   leading  centers  for
cardiovascular  care,  research,  and  education.  Dr.  Roberts  is  an  active
clinician and researcher recognized for his groundbreaking  research on cardiac
creatine kinase (CK-MB), a key diagnostic marker for cardiac injury, as well as
for his original  contributions to the molecular  biology and genetics of heart
disease.  He and his research  team are credited  with  uncovering  the genetic
basis for several  inherited cardiac  disorders.  He is the author of more than
600  scientific  publications  and sits on several key  editorial  boards.  Dr.
Roberts has received many honors and awards, including the prestigious American
College of  Cardiology's  1998  Distinguished  Scientist Award and the American
Heart  Association's  Merit Award in 2001. In addition to his  contributions to
basic research, Dr. Roberts is also well recognized for his role as a principal
investigator in several pivotal  clinical trials related to the introduction of
new therapies for heart disease.

                                       35
<PAGE>

STANLEY H. APPEL, MD

         Dr. Appel is Chair of the  Department  of  Neurology at the  Methodist
Neurological Institute,  and Professor of Neurology at Weill Medical College of
Cornell  University.  He serves as the  Director  of the MDA/ALS  Research  and
Clinical Center and is the former Director of the Alzheimer's  disease Research
Center at Baylor College of Medicine and  previously  served as the Director of
the Jerry Lewis Neuromuscular  Research Center at Baylor College of Medicine in
Houston,  Texas.  Dr. Appel is a leading  expert on  degenerative  neurological
diseases, such as Parkinson's,  Alzheimer's,  and amyotrophic lateral sclerosis
(ALS), also known as Lou Gehrig's disease.  Specifically,  Dr. Appel focuses on
the importance of  neurotrophic  factors and immune  mechanisms,  including the
role of inflammatory  cytokines in these diseases. He has served as an Advisory
Board member of the Alzheimer's  disease and Related Disorders  Association and
as a Council member of the American Society of  Neurochemistry.  For ten years,
he acted as  Editor-in-Chief  for Current  Neurology.  Dr.  Appel  received his
medical  degree from Columbia  College of Physicians  and Surgeons and has over
350 scientific publications to his credit.

VALENTIN FUSTER, MD, PHD

         Dr. Fuster serves The Mount Sinai Medical  Center as Director of Mount
Sinai Heart,  the Zena and Michael A. Wiener  Cardiovascular  Institute and the
Marie-Josee and Henry R. Kravis Center for  Cardiovascular  Health.  He is also
the Richard Gorlin, MD/Heart Research Foundation Professor,  Mount Sinai School
of Medicine.

         Among the seemingly  countless  positions of distinction that he holds
are Past  President of the American Heart  Association,  President of the World
Heart Federation, a member of the Institute of Medicine of the National Academy
of Sciences,  a former member of the National  Heart,  Lung and Blood Institute
Advisory  Council,  and former  Chairman of the Fellowship  Training  Directors
Program  of  the  American   College  of  Cardiology.   Sixteen   distinguished
universities throughout the world have granted him honoris causa. Dr. Fuster is
President of the Scientific Advisory and External  Evaluation  Committee at the
Fundacion Centro Nacional de Investigaciones Cardiovasculares Carlos III (CNIC)
in Madrid, Spain.

         Dr. Fuster is the recipient of three major ongoing NIH grants.  He has
published  more than 400 articles on the subjects of coronary  artery  disease,
atherosclerosis and thrombosis,  and he has become the lead Editor of two major
textbooks on cardiology, `The Heart' (previously edited by Dr. J. Willis Hurst)
and "Atherothrombosis and Coronary Artery Disease" (with Dr. Eric Topol and Dr.
Elizabeth Nabel). Dr. Fuster is also Editor-in-Chief of the Nature journal that
focuses on cardiovascular medicine.

         Dr. Fuster is the only cardiologist to receive all four major research
awards  from the four major  cardiovascular  organizations:  The  Distinguished
Researcher Award (Interamerican Society of Cardiology,  2005), Andreas Gruntzig
Scientific  Award  (European  Society  of  Cardiology,   1992),   Distinguished
Scientist (American Heart Association,  2003), and the Distinguished  Scientist
Award (American College of Cardiology, 1993).

         In addition, he has received the Lewis A. Conner Memorial Award by the
American Heart  Association,  the James B. Herrick  Achievement  Award from the
Council of Clinical  Cardiology  of the American  Heart  Association,  the 1996
Principe de Asturias Award of Science and  Technology  (the highest award given
to  Spanish-speaking  scientists),  the  Distinguished  Service  Award from the
American  College of  Cardiology,  and the Gold  Heart  Award  (American  Heart
Association's  highest award). Most recently,  Dr. Fuster was inducted into the
prestigious European Academy of Yuste.

         After  receiving  his medical  degree from  Barcelona  University  and
completing  an internship  at Hospital  Clinic in  Barcelona,  Dr. Fuster spent
several years at the Mayo Clinic, first as a resident and later as Professor of
Medicine and Consultant in  Cardiology.  In 1981, he came to Mount Sinai School
of  Medicine  as head of  Cardiology.  From 1991 to 1994,  he was  Mallinckrodt
Professor of Medicine at Harvard  Medical School and Chief of Cardiology at the
Massachusetts  General Hospital. He returned to Mount Sinai in 1994 as Director
of the Zena and Michael A. Wiener Cardiovascular Institute.

                                      36
<PAGE>

RICHARD G. MILLER, PHD, FRSC

         Dr. Miller is Professor and past-Chairman of the Department of Medical
Biophysics and Professor and founding Chairman (1984-1990) of the Department of
Immunology at the University of Toronto. He is a past-President of the Canadian
Society  of  Immunology  and a Fellow of the Royal  Society  of  Canada.  As an
internationally  recognized scientist and leader in the field of immunology, he
has received many honors,  including  being invited as a visiting  scientist to
many of the world's leading  immunology  centers.  He is the author of over 150
publications  and numerous book chapters and has been a member of the editorial
board of several key scientific journals in the areas of immunology and cancer.
Dr. Miller is a gold medal  graduate in Physics from the  University of Alberta
and was awarded his PhD at the California Institute of Technology.

MILTON PACKER, MD

         Dr.  Packer is  Professor  and  Chair of the  Department  of  Clinical
Sciences  and the Gayle and Paul  Stoffel  Distinguished  Chair in  Cardiology,
Southwestern Medical Center, University of Texas. He is the former Chief of the
Division  of  Circulatory  Physiology  at the  Columbia  University  College of
Physicians and Surgeons, and the former Director of the Heart Failure Center at
the  Columbia-Presbyterian  Medical Center in New York City. One of the leading
experts in the pathophysiology  and treatment of heart failure,  Dr. Packer has
made  significant   contributions  to  heart  failure  research  and  has  been
instrumental in the  introduction of a number of new treatments.  The author of
more than 200 papers,  he has won numerous honors for teaching and has lectured
around the world, including a number of prestigious named lectureships,  on the
treatment  of  heart  failure.  He has  served,  or  currently  serves,  on the
editorial  boards of many major medical  journals,  including  Circulation  and
Journal of the American  College of  Cardiology.  He has also been elected to a
number of societies, including the American Society for Clinical Investigation.
He is  currently  on the  executive  committees  of  both  the  American  Heart
Association and the American College of Cardiology and is past-President of the
Heart Failure  Society of America.  Dr.  Packer is a primary  consultant to the
National  Institutes  of  Health  and the Food and Drug  Administration  on the
management of heart failure and on matters related to  cardiovascular  research
and drug development and health care policy.

DAVID WOFSY, MD

         Dr.  Wofsy  is  Professor  of  Medicine  and  Microbiology/Immunology,
Director of the Clinical Trials Center,  and George A. Zimmerman  Distinguished
Professor at the  University of California,  San  Francisco.  He also serves as
Chief of Rheumatology at the San Francisco Veterans Affairs Medical Center. Dr.
Wofsy  is  a  leading  authority  on  the  cellular  and  molecular  mechanisms
underlying  autoimmune diseases.  Based on extensive research, he has developed
novel approaches to the use of immune modulation  therapies in the treatment of
this very common group of diseases.  Much of Dr.  Wofsy's  research has been on
systemic lupus  erythematosus  (SLE), an autoimmune  disease,  where he was the
first to  demonstrate  the key  pathological  role of CD4+T cells in a standard
animal  model of this  disease.  His  most  recent  research  has  extended  to
additional novel methods for blocking T cell  activation.  These approaches are
currently in clinical trials. He is the author of numerous key publications and
book chapters and serves on the editorial and advisory  boards of several major
immunology journals. He has received many distinguished awards and his visiting
professorships  include  Harvard  University  and the  National  Institutes  of
Health.

         There  are no  family  relationships  between  the  directors,  senior
management  of the Company  and  employees  of the Company  upon whose work the
Company is dependent.

B.       COMPENSATION

DIRECTOR COMPENSATION

         During 2006, directors of the Company who were not full-time employees
of the Company  received an annual retainer of $30,000.  In addition,  a fee of
$1,500 was paid for each Board or Board Committee  meeting  attended in person,
or $1,000 if the Director  participated by conference call. The chairpersons of
the  Audit  Committee  and  of  the  Compensation,  Nominating,  and  Corporate
Governance  Committee each received an

                                      37
<PAGE>

additional  annual retainer in the amount of $10,000 and $7,500,  respectively.
Directors  are  also  entitled  to  be  reimbursed  for  their  reasonable  and
documented out-of-pocket expenses incurred on the business of the Company.

         The Company  implemented  a Directors'  Deferred  Share Unit and Stock
Plan (the "DSU Plan")  effective  January 1, 2004 applicable to the 2004 fiscal
year and  subsequent  years.  Under  the  terms of the DSU  Plan,  non-employee
directors  are paid their  directors'  fees  entirely in  Deferred  Share Units
("DSUs"),  in lieu of any cash  payment.  The  number  of DSUs  credited  to an
eligible  director  is  determined  by dividing  the dollar  amount of the fees
otherwise  payable to the director by the market value of the Company's  common
shares at the time of grant.  DSU  grants are  effective  as of the date of the
meetings in respect of which fees are  payable.  A DSU is a  bookkeeping  entry
credited to the account  maintained for each eligible director and has the same
value as one common share of the Company. A DSU may only be converted into cash
and/or shares (as determined by the Company) after a participant ceases to be a
director,  with each DSU at the time of conversion having a value of one common
share or the equivalent  market value thereof.  Because of the deferred payment
feature of the DSU Plan, directors benefit only from long term increases in the
value of the  Company's  shares  arising  over  the term of their  directorship
thereby promoting a greater alignment of interest between the directors and the
shareholders of the Company.

         The  Company  has  reserved  a maximum of  250,000  common  shares for
purposes of the DSU Plan.  During  fiscal 2006,  the Company  issued a total of
144,762  DSU's to directors in respect of  aggregate  fees of $270,000.  During
fiscal 2006, 23,958 DSUs with a value of $33,761 have been converted to cash or
shares of the Company.

         Directors  of the  Company  are  also  eligible  to be  granted  stock
options.  During fiscal 2006,  non-management  directors of the Company,  other
than the Chairman of the Board,  were awarded  options to acquire 15,000 common
shares  each,  and the  Chairman  of the Board was  awarded  options to acquire
25,000 common  shares.  During 2006,  options to acquire  100,000 common shares
were granted to non-management directors.

EXECUTIVE COMPENSATION

         The  following  table  sets  forth all  compensation  for the  periods
indicated in respect of the  individuals who were, as at November 30, 2006, the
Chief  Executive  Officer of the Company,  the Chief  Financial  Officer of the
Company, and the three other most highly compensated  executive officers of the
Company ("Named Executive Officers").

<TABLE>
<CAPTION>
                                      2006 SUMMARY COMPENSATION TABLE

-----------------------------------------------------------------------------------------------------------------
                                                                                 Shares
                                                         Other     Securities   Or Units on
                                                         Annual      Under     Subject to              All Other
                                                        Compen-     Options/      Resale      LTIP       Compen-
    Name and Principal      Year   Salary    Bonus ($)   sation     SARs(1)    Restrictions  Payouts      sation
         Position                     ($)               ($)((2))   Granted (#)      ($)         ($)       ($)
-----------------------------------------------------------------------------------------------------------------
<S>                         <C>     <C>       <C>       <C>          <C>        <C>          <C>       <C>
David Elsley                2006    345,600     (3)                  131,050
(President and Chief        2005    320,000   151,800                108,169
Executive Officer)          2004    279,375   135,000                29,902
-----------------------------------------------------------------------------------------------------------------
Christopher Waddick         2006    280,000     (3)     45,000((4))  392,662
(Chief Operating Officer)   2005    263,000   115,920   39,000((4))  41,203
                            2004    229,791   103,275                19,978
-----------------------------------------------------------------------------------------------------------------
Jay Kleiman((5))            2006    230,000     (3)                  208,906
(Chief Medical Officer      2005    215,000    81,880                  Nil
and Head of                 2004      Nil       Nil                  60,000
Cardiovascular
Development)
-----------------------------------------------------------------------------------------------------------------
Michael Martin((6))         2006    215,000                          64,255                            282,423
(Vice President,            2005    200,000    76,540                29,895
Marketing and Business      2004    195,000    70,200                20,038
Development)
-----------------------------------------------------------------------------------------------------------------
Paul Van Damme((7))         2006    215,625     (3)                  250,000
(Vice President, Finance    2005      Nil       Nil                    Nil
and Chief Financial         2004      Nil       Nil                    Nil
Officer)
-----------------------------------------------------------------------------------------------------------------
Jacqueline Le Saux((8))     2006    230,000     (3)                  208,906
(Vice President,            2005    86,250     30,296                60,000
Corporate & Legal Affairs   2004      Nil       Nil                    Nil
-----------------------------------------------------------------------------------------------------------------
</TABLE>

                                      38
<PAGE>

         Notes:

         (1)      To date,  no stock  appreciation  rights  ("SARs")  have been
granted.

         (2)      Except as otherwise  stated,  perquisites  and other personal
benefits  do not exceed the lesser of $50,000 or 10% of the total of the annual
salary and bonus for the above-named officers.

         (3)      As of January  30,  2007,  bonus  payments  in respect of the
financial year ending November 30, 2006 have not been determined.

         (4)      Other  annual  compensation  was  provided to Mr.  Waddick in
connection with a Company required move, net of applicable taxes.

         (5)      Dr.  Kleiman joined the Company in December 2004. All amounts
in the table relating to Dr. Kleiman are in U.S. dollars.

         (6)      Mr. Martin left the Company in November  2006. All amounts in
the table relating to Mr. Martin are in U.S. dollars.

         (7)      Mr. Van Damme joined the Company in December 2005.

         (8)      Ms. Le Saux joined the Company in July 2005.

EMPLOYMENT CONTRACTS

         The  Company  has  entered  into an  employment  agreement  with David
Elsley.  Pursuant  to this  agreement,  Mr.  Elsley  serves the  Company as its
President and Chief Executive Officer.  The following is a summary of the terms
of the  agreement  with  Mr.  Elsley.  The  agreement  provides  for an  annual
reviewable  remuneration,  which for the period  commencing  January 1, 2006 is
$369,600.  Mr. Elsley is entitled to benefits  available to other  employees of
the Company. The agreement is terminable at the option of the Company; however,
if the agreement is terminated  other than for cause, Mr. Elsley is entitled to
a lump-sum payment equal to two years' cash compensation,  and any options then
outstanding  shall  remain in full force and effect  until  their  expiry.  The
agreement contains standard non-competition and non-solicitation provisions.

         The Company has entered into an employment  agreement with Christopher
Waddick as of December 2004. Pursuant to this agreement, Mr. Waddick serves the
Company as its Chief Operating  Officer.  The agreement  provides for an annual
reviewable  remuneration of $280,000. The agreement is terminable at the option
of the Company;  however,  if the agreement is terminated other than for cause,
Mr.  Waddick  is  entitled  to a  lump-sum  payment  equal to two  years'  cash
compensation,  and any options then outstanding  shall remain in full force and
effect until their expiry. The agreement contains standard  non-competition and
non-solicitation provisions.

         The Company has entered into an employment  agreement with Jay Kleiman
as of December 2004. Pursuant to this agreement, Dr. Kleiman serves the Company
as its Chief Medical Officer.  The agreement  provides for an annual reviewable
remuneration  of  US$230,000.  The agreement is terminable at the option of the
Company;  however,  if the  agreement is terminated  other than for cause,  Dr.
Kleiman is entitled to a lump-sum  payment equal to six months' salary plus one
month for each year of service up to a maximum  of 12 months,  and any  options
outstanding  vest and their  term  shall  extend  180 days  beyond  the date of
termination.    The   agreement   contains   standard    non-competition    and
non-solicitation provisions.

         The Company  entered into an employment  agreement with Michael Martin
as of August 2005. Pursuant to this agreement, Mr. Martin served the Company as
its Vice President, Marketing and Business Development until November 2006. The
agreement provided annual reviewable remuneration of US$215,000.  In accordance
with the

                                      39
<PAGE>

agreement, on separation from the Company in November 2006, Mr. Martin received
a lump-sum  payment of $282,423.22.  His  outstanding  options vested and their
term shall expire in May 2007.

         The Company has entered into an employment  agreement with  Jacqueline
Le Saux as of July 2005.  Pursuant  to this  agreement,  Ms. Le Saux serves the
Company  as its  Vice  President,  Corporate  & Legal  Affairs.  The  agreement
provides for an annual  reviewable  remuneration of $230,000.  The agreement is
terminable  at the  option  of  the  Company;  however,  if  the  agreement  is
terminated  other than for cause, Ms. Le Saux is entitled to a lump-sum payment
equal to twelve months' salary and any options  outstanding vest and their term
shall extend 180 days beyond the date of  termination.  The agreement  contains
standard non-competition and non-solicitation provisions.

         The Company has entered  into an  employment  agreement  with Paul Van
Damme as of December 2005. Pursuant to this agreement, Mr. Van Damme serves the
Company  as its Vice  President,  Finance  and  Chief  Financial  Officer.  The
agreement  provides for an annual  reviewable  remuneration  of  $225,000.  The
agreement is terminable at the option of the Company; however, if the agreement
is  terminated  other than for cause,  Mr. Van Damme is  entitled to a lump-sum
payment equal to six months'  salary plus one month for each year of service up
to a maximum  of 12 months,  and any  options  outstanding  vest and their term
shall extend 180 days beyond the date of  termination.  The agreement  contains
standard non-competition and non-solicitation provisions.

         There  are no  amounts  set aside or  accrued  by the  Company  or its
subsidiaries to provide pension, retirement or similar benefits.

C.       BOARD PRACTICES

BOARD OF DIRECTORS

         See Items 6A and 6B.

         The Company has entered  into a  consultancy  agreement  with Eldon R.
Smith & Associates Ltd. (the  "Consultant") of 1901 Varsity Estates Drive N.W.,
Calgary  Alberta,  for  the  services  of  Eldon  Smith.  The  insiders  of the
Consultant  are Eldon Smith,  Sheila  Smith,  Gregory  Smith,  and Trudi Smith.
Pursuant to this agreement,  the Consultant provides the services of Dr. Smith,
who serves the Company as its Vice  President,  Scientific  Affairs.  Dr. Smith
also serves as a director.  Pursuant to an amended  agreement dated November 1,
2006,  the monthly  fee paid to Eldon R. Smith &  Associates  was reduced  from
$18,875 to $8,000.  The Company is entitled at its sole discretion to terminate
the  retainer at any time.  However,  (i) if the  termination  occurs  prior to
October 31, 2007,  the Company will pay to the Consultant the balance of the 12
month  term  ending  October  31,  2007 at the rate of $8,000 per month and the
Consultant will receive an additional  lump sum payment  representing 12 months
retainer  at $8,000  per  month,  except if the  termination  is for  breach of
contract (ii) if the  termination  occurs after  October 31, 2007,  the Company
will pay to the Consultant a lump sum equal to one year's  retainer at the rate
of $8,000 per month,  except if termination is for breach of contract and (iii)
if prior to October 31, 2007,  there is a change of control of the Company or a
winding up of the Company  that results in  termination  of the  retainer,  the
Company will pay to the  Consultant  a lump sum equal to 12 months  retainer at
the rate of $18,875 per month.  In addition,  if the  Consultant's  retainer is
terminated by the Company,  other than for breach of contract, any options held
by the Consultant to purchase  shares in the Company shall remain in full force
and effect until expiry thereof.

COMMITTEES OF THE BOARD OF DIRECTORS

                                 AUDIT COMMITTEE

         The Audit  Committee of the Board  monitors our financial  activities,
policies, and internal control procedures.  The audit committee is comprised of
three  independent  directors:  William R. Grant,  Benoit La Salle,  and Ronald
Cresswell.

         Mr. Grant joined our Board of Directors in 1998 and became Chairman in
March 2001. He was succeeded as Chairman by Terrance Gregg in March 2006. He is
Vice Chairman and  Co-founder of Galen  Associates,  a New  York-based  private
equity firm that focuses exclusively on the healthcare industry.  Mr. Grant has
more than 40

                                      40
<PAGE>

years of experience in the investment banking and healthcare fields. During his
25  years  with  Smith   Barney,   Mr.  Grant  was  elected   President,   then
Vice-Chairman,  and participated in the financing of many healthcare companies.
Mr. Grant then joined MacKay-Shields Financial Corporation as President and was
later elected Chairman of the Board.

         Mr. La Salle is a chartered  accountant  and is a member of the Quebec
Order  of  Chartered  Accountants  and  the  Canadian  Institute  of  Chartered
Accountants.  He holds a Commerce degree from McGill University and a Master of
Business  Administration from IMEDE,  Switzerland.  In 1980, he founded Grou La
Salle &  Associes,  Chartered  Accountants.  Mr. La Salle  joined  our Board of
Directors in 1997.

         Dr.  Cresswell  brings over three  decades of research and  commercial
development  experience in cardiovascular  and other therapeutic  areas. In his
capacity   of  Senior  Vice   President   and  Chief   Scientific   Officer  of
Warner-Lambert,  he developed an understanding of accounting principles and, in
particular,  gained  experience  in the  analysis and  evaluation  of financial
statements,  particularly  as relates to health  product  related  research and
development  activities and the internal  controls and  procedures  relevant to
such activities. Dr. Cresswell joined our Board of Directors in 2006.

         Under  the SEC  rules  implementing  the  Sarbanes-Oxley  Act of 2002,
Canadian  issuers  filing  reports in the United States must  disclose  whether
their audit  committees have at least one "audit committee  financial  expert".
The Board has determined that Benoit La Salle  qualifies as a financial  expert
under  such  rules.  In  addition,  all  members  of the  Audit  Committee  are
considered financially literate under applicable Canadian laws.

         The Audit  Committee  assists the Board in  fulfilling  its  oversight
responsibility  to  shareholders,   potential   shareholders,   the  investment
community  and others  with  respect  to the  Company's  financial  statements,
financial  reporting  process,  systems of internal  accounting  and disclosure
controls,  performance  of  the  external  auditors  and  risk  assessment  and
management.  The Committee has the power to conduct or authorize investigations
into any matters within its scope of responsibilities,  with full access to all
books,  records,  facilities and personnel of the Company, its auditors and its
legal  advisors.  In connection  with such  investigations  or otherwise in the
course of fulfilling its responsibilities under this charter, the Committee has
the authority to  independently  retain  special  legal,  accounting,  or other
consultants to advise it.

         The Audit  Committee  reviewed with the  independent  auditor,  who is
responsible  for  expressing  an opinion  on the  conformity  of the  Company's
audited financial  statements with United States generally accepted  accounting
principles,  their judgments as to the quality, not just the acceptability,  of
the Company's  accounting  principles and such other matters as are required to
be  discussed  with the  Audit  Committee  under  Canadian  and  United  States
generally  accepted auditing  standards.  In addition,  the Audit Committee has
discussed  with  the  independent  auditor  the  auditor's   independence  from
management  and the Company  including  the matters in the written  disclosures
provided to the Audit Committee by the  independent  auditor and considered the
compatibility of non-audit services with the auditor's independence.

         The  Company's  independent  auditor  is  accountable  to the Board of
Directors and to the Audit Committee. The Board of Directors, through the Audit
Committee,  has the ultimate  responsibility to evaluate the performance of the
independent  auditor,  and through the  shareholders,  to appoint,  replace and
compensate the independent  auditor.  Under the Sarbanes-Oxley Act of 2002, the
independent  auditor of a public company is prohibited from performing  certain
non-audit services. The Audit Committee has adopted procedures and policies for
the  pre-approval  of non-audit  services,  as described in the audit committee
charter.  Under the terms of such policies and procedures,  the Audit Committee
has adopted a list of pre-approved services,  including audit and audit-related
services and tax services,  and a list of prohibited  non-audit services deemed
inconsistent with an auditor's independence.

         The Audit  Committee  also  discussed  with the Company's  independent
auditor the overall scope and plans for their audit.  The Audit Committee meets
with the independent  auditor,  with and without management present, to discuss
the results of their  examination,  their evaluations of the Company's internal
controls,  and the overall quality of the Company's  financial  reporting.  The
Audit  Committee  held five  meetings  during  the  twelve-month  period  ended
November 30, 2006.

                                      41
<PAGE>

         In reliance on the reviews and discussions referred to above, the Audit
Committee recommended to the Board of Directors (and the Board of Directors
approved) that the audited consolidated financial statements be included in the
Annual Report for the twelve month period ended November 30, 2006 for filing
with the Canadian provincial securities commissions and the United States
Securities and Exchange Commission.

         Report Submitted by the Audit Committee

              William R. Grant    Benoit La Salle     Ronald Cresswell

          COMPENSATION, NOMINATING, AND CORPORATE GOVERNANCE COMMITTEE

         The Compensation,  Nominating,  and Corporate  Governance Committee of
the Board of Directors (the "Committee") is charged with the  responsibility of
reviewing the Company's  compensation  policies and practices,  compensation of
officers  (including the Chief Executive  Officer),  succession  planning,  and
corporate governance practices. As appropriate, recommendations regarding these
issues are made to the Board of Directors (the "Board"). The Committee consists
of three  independent  and  unrelated  directors,  Terrance  H.  Gregg,  Ronald
Cresswell and John C. Villforth . The Chief  Executive  Officer absents himself
from Board and Committee  meetings during voting and  deliberation on the Chief
Executive Officer's compensation.

         The objectives of the Company's compensation policies and programs for
executive officers are to:

         (a)      motivate and reward executive officers for the achievement of
corporate and functional objectives;

         (b)      recruit and retain  executive  officers of a high  caliber by
offering  compensation  that is  competitive  with that offered for  comparable
positions in other biotechnology companies; and

         (c)      align  the  interests  of the  executive  officers  with  the
long-term   interests  of  shareholders  and  the  intermediate  and  long-term
objectives of the Company.

D.       EMPLOYEES

         The  number of  employees  for each of last three  fiscal  years is as
follows:

------------------------------------------------------------------------
                              2006            2005             2004
------------------------------------------------------------------------
Number of Employees            125             172              149
------------------------------------------------------------------------

         Our employees are not governed by a collective agreement.  We have not
experienced   a  work   stoppage  and  believe  our  employee   relations   are
satisfactory.

E.       SHARE OWNERSHIP

The  following  table  states the names of the  directors  and  officers of the
Company, the positions within the Company now held by them, and the approximate
number of shares of the  Company  beneficially  owned or over which  control or
direction is exercised by each of them as of November 30, 2006.  The  following
table does not reflect shares,  which may be acquired  pursuant to the exercise
of stock options.

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
                                                                          NUMBER OF SHARES
             NAME                     POSITION WITH THE COMPANY                 OWNED
-------------------------------------------------------------------------------------------
<S>                             <C>                                               <C>
TERRANCE H. GREGG               Chairman of the Board and Director of              72,500*
                                the Company.                                       22,000*
-------------------------------------------------------------------------------------------
WILLIAM R. GRANT                Director of the Company.                          197,900*
                                                                                    9,700*
-------------------------------------------------------------------------------------------
</TABLE>

                                      42
<PAGE>

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
                                                                          NUMBER OF SHARES
             NAME                     POSITION WITH THE COMPANY                 OWNED
-------------------------------------------------------------------------------------------
<S>                             <C>                                               <C>
DR. RONALD M.  CRESSWELL        Director of the Company.                          195,000*
-------------------------------------------------------------------------------------------
DAVID G. ELSLEY                 President, Chief Executive Officer,               209,958*
                                Director of the Company.
-------------------------------------------------------------------------------------------
BENOIT LA SALLE                 Director of the Company.                           81,150*

-------------------------------------------------------------------------------------------
ELDON R. SMITH                  Vice President, Scientific Affairs,                65,258*
                                and Director of the Company.                        5,790*
-------------------------------------------------------------------------------------------
DR. CALVIN R. STILLER           Director of the Company.                           15,000*
-------------------------------------------------------------------------------------------
JOHN C. VILLFORTH               Director of the Company.                           15,000*
-------------------------------------------------------------------------------------------
DR. ANTHONY E. BOLTON           Chief  Scientific Officer                         282,143*
-------------------------------------------------------------------------------------------
CATHERINE M. BOUCHARD           Vice President, Human Resources                    10,200*
-------------------------------------------------------------------------------------------
SUSAN F. LANGLOIS               Vice President, Regulatory Affairs                  2,447*
-------------------------------------------------------------------------------------------
JACQUELINE H. R. LE SAUX        Vice President, Corporate and Legal                 4,000*
                                Affairs
-------------------------------------------------------------------------------------------
CHRISTOPHER J. WADDICK          Chief Operating Officer                           180,267*
-------------------------------------------------------------------------------------------
</TABLE>
Note: * Represents less than 1% of the Company's outstanding shares.

STOCK OPTION PLANS

2003 EMPLOYEE STOCK OPTION PLAN

         The objectives of the Company's compensation policies and programs are
to motivate and reward  officers,  other  employees,  and consultants  upon the
achievement of significant corporate and functional objectives,  to recruit and
retain employees of a high caliber by offering compensation that is competitive
with that offered for  comparable  positions in other  biotechnology  companies
across Canada and the United States,  and to align employee  interests with the
long-term   interests  of  shareholders  and  the  intermediate  and  long-term
objectives of the Company. The 2003 Plan is an integral part of achieving these
objectives as it provides officers,  employees,  and consultants of the Company
and its  subsidiaries,  with the  opportunity  to participate in the growth and
development of the Company.

         The 2003  Plan was  approved  by the Board of  Directors  on March 15,
2003.  It was  approved  by the  shareholders  of the Company at the Annual and
Special Meeting of Shareholders  held on May 7, 2003. Two million common shares
were initially  reserved for issuance under the 2003 Plan. Upon approval by the
shareholders  in 2003,  the 2003 Plan  replaced the  Company's  previous  stock
option plan (the "Previous  Plan"),  and no new options have been granted under
the Previous Plan since May 2003. At the March 2005 Annual and Special  Meeting
of Shareholders,  the number of options  authorized for issuance under the 2003
Plan was increased by 3,000,000 from 2,000,000 to 5,000,000.  At the March 2006
Annual and Special Meeting of  Shareholders,  the number of options  authorized
for issuance  under the 2003 Plan was increased by 3,000,000  from 5,000,000 to
8,000,000.

         As of January 30, 2007, the company  currently has options  authorized
under the 2003 Plan and the  Previous  Plan to purchase a maximum of  8,977,120
shares.

                                      43
<PAGE>

         Individuals  who are  eligible  to  participate  in the 2003  Plan are
employees, officers,  consultants, and members of the Scientific Advisory Board
("SAB") of the  Company.  Directors  who are also  officers or employees of the
Company are eligible  participants.  Eligible employee and officer participants
have the  opportunity  to be granted  options on an annual  basis,  through the
achievement of both key corporate and individual objectives.

         The number of common shares  reserved for issuance  under the Plans at
any time to any one person  shall not exceed 5% of the number of common  shares
then issued and outstanding.

         The Board of Directors is  responsible  for granting of options  under
the Plans, and does so upon the recommendation of the Compensation, Nominating,
and Corporate Governance  Committee of the Board of Directors.  Under the terms
of the  Plans,  the  exercise  price for the  options  is fixed by the Board of
Directors.  For shares listed on the Toronto Stock Exchange, the exercise price
of the options  shall not be less than the closing  sale price of the shares on
the Toronto  Stock  Exchange on the last  trading day prior to the grant of the
option.  The  vesting  terms of the  options  are  determined  by the  Board of
Directors.  The  period  for  exercising  an option  shall not exceed ten years
beyond the date of grant of the option.

         In the event that a participant ceases to be an officer,  employee, or
consultant  of the  Company  due to  reason  of  resignation  or by  reason  of
discharge  for  cause,  then  the  options  shall  terminate  and  cease  to be
exercisable  on the earliest to occur of (a) the effective  date upon which the
person ceased to be an officer,  employee or  consultant  and (b) the date that
notice of dismissal is provided to the person

THE PREVIOUS PLAN

         The Company  maintains a stock  option plan (the  "Plan")  pursuant to
which a maximum of 5,400,000  options or such greater number as shall have been
duly  approved by the Board of Directors  and if  required,  by any exchange or
over-the-counter  market on which the common shares may be listed or quoted for
trading or any security  regulatory  authority,  and by the shareholders of the
Company,  may be  granted  by the Board of  Directors  to  executive  officers,
directors, employees,  consultants and members of the Scientific Advisory Board
of the  Company in such  numbers,  for such  periods of time,  and at  exercise
prices as the Board may approve and according to the rules and  regulations  of
any stock exchange or dealing  network on which the Common Shares may be listed
or quoted for trading from time to time.

         The amount of shares from time to time reserved  under the Plan is not
reflective  of the number of  options  that are  outstanding  at any given time
because  options  that are  exercised  over time do not  replenish  the  number
reserved,  but is merely an  indication  of the  number of shares or  potential
shares in respect of which a listing  fee has been paid to the stock  exchanges
upon which the Company's shares are listed.

         To our knowledge, none of our securities are held in escrow.

ITEM 7.  MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A.       MAJOR SHAREHOLDERS

         To our knowledge,  based on their US securities  regulatory filings of
December 7, 2006 and  November  20, 2006  respectively,  as of January 1, 2007,
Federated  Investors,  Inc and RA Capital  Management  LLC  beneficially  owned
15,957,447 and 10,638,298 common shares of the Company  representing 10% and 7%
respectively of the Company's  outstanding  common shares. The Company is aware
that both such  shareholders  participated  in the  financing of the Company in
November 2006 described  under Item 5B. The voting rights  associated with such
common shares are the same as for all holders of common shares.

         Based on records  maintained  by our  transfer  agent and a geographic
analysis of beneficial  shareholders,  as of December 1, 2006 the percentage of
common  shares held in the US is  estimated  to be 69% and the number of record
holders in the US is 74.

                                      44
<PAGE>

         To the best of the Company's knowledge, the Company is not directly or
indirectly owned or controlled by another  corporation or foreign government or
by any other natural or legal entity.

         There are no  arrangements,  known to the  Company,  the  operation of
which may at a subsequent date result in a change in control of the Company.

B.       RELATED PARTY TRANSACTIONS

         Since the beginning of the Company's  preceding  three financial years
to the date hereof,  there have been no transactions  or proposed  transactions
which are material to the Company or to any associate, holder of ten percent of
the Company's outstanding shares,  director or officer or any transactions that
are unusual in their  nature or  conditions  to which the Company or any of its
subsidiaries was a party.

ITEM 8.  FINANCIAL INFORMATION

A.       CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION

         Reference is made to "Item 18. FINANCIAL STATEMENTS" for the financial
statements included in this annual report.

         There are no outstanding  legal  proceedings or regulatory  actions to
which we are party nor, to our knowledge,  are any such  proceedings or actions
contemplated.

         The Company has not paid,  and has no current plans to pay,  dividends
on its common shares. We currently intend to retain future earnings, if any, to
finance the  development of our business.  Any future  dividend  policy will be
determined  by the  Board of  Directors,  and will  depend  upon,  among  other
factors, our earnings, if any, financial condition,  capital requirements,  any
contractual  restrictions with respect to the payment of dividends,  the impact
of the distribution of dividends on our financial  condition,  tax liabilities,
and such  economic  and other  conditions  as the Board of  Directors  may deem
relevant.

B.       SIGNIFICANT CHANGES

         No  significant   changes  occurred  since  the  date  of  our  annual
consolidated financial statements included elsewhere in this Annual Report.

ITEM 9.  OFFER AND LISTING

         Not Applicable, except for Item 9A (4) and Item 9C.

         The  following  is a summary of trading  of the  Company's  Shares (in
Canadian dollars) on the Toronto Stock Exchange:


    YEAR/QUARTER/
        MONTH                HIGH            LOW
        -----                ----            ---
         2002                7.95            2.48
         2003                8.56            3.05
         2004               10.06            4.70
         2005                7.34            2.08
         2006                3.97            0.32
       Q1 2005               6.85            5.20
       Q2 2005               5.64            4.33
       Q3 2005               7.34            2.27

                                      45
<PAGE>

    YEAR/QUARTER/
        MONTH                HIGH            LOW
        -----                ----            ---
       Q4 2005               3.50            2.08
       Q1 2006               3.97            2.20
       Q2 2006               3.93            2.12
       Q3 2006               2.40            0.32
       Q4 2006               0.85            0.43
       July 06               0.56            0.32
        Aug 06               0.83            0.36
        Sep 06               0.85            0.58
        Oct 06               0.84            0.58
        Nov 06               0.68            0.43
        Dec 06               0.49            0.37

         The following is a summary of trading of the  Company's  Shares on the
NASDAQ and AMEX.  The prices  represent  trading on AMEX prior to December  17,
2003, and trading on NASDAQ on and after that date. In December 2003, a high of
US $7.50 occurred on NASDAQ, while a low of US $5.31 occurred on the AMEX.


    YEAR/QUARTER/
        MONTH                HIGH            LOW
        -----                ----            ---
         2002                5.04            1.55
         2003                6.50            1.85
         2004                7.80            3.68
         2005                6.08            1.75
         2006                3.45            0.27
       Q1 2005               5.59            4.22
       Q2 2005               4.58            3.62
       Q3 2005               6.08            2.07
       Q4 2005               3.00            1.75
       Q1 2006               3.45            1.90
       Q2 2006               3.39            1.89
       Q3 2006               2.15            0.27
       Q4 2006               0.76            0.38
       July 06               0.51            0.27
        Aug 06               0.74            0.31
        Sep 06               0.76            0.52
        Oct 06               0.75            0.51
        Nov 06               0.59            0.38
        Dec 06               0.43            0.31

VARIATIONS FROM CERTAIN NASDAQ RULES

         NASDAQ listing rules permit the Company to follow certain home country
practices in lieu of compliance with certain NASDAQ corporate governance rules.
Set forth below are the  requirements of Marketplace Rule 4350 that the Company
does not follow and the home country practices that it follows in lieu thereof.

                                      46
<PAGE>

         DISTRIBUTION OF ANNUAL AND INTERIM REPORTS:  NASDAQ's Marketplace Rule
4350(b) requires each issuer, among other things, to distribute to shareholders
copies of an annual  report  containing  audited  financial  statements  of the
company and its subsidiaries.  The report must be distributed to shareholders a
reasonable period of time prior to the company's annual meeting of shareholders
and must be filed on  NASDAQ  at the time it is  distributed  to  shareholders.
Under the exemption available to Foreign Private Issuers under Marketplace Rule
4350(a)(1),  the  Company  does not follow this NASDAQ  rule.  Instead,  and in
accordance  with the NASDAQ  exemption,  the Company  complies with  applicable
Toronto Stock Exchange rules and applicable  Canadian  corporate and securities
regulatory requirements.

         SHAREHOLDER APPROVAL IN CONNECTION WITH CERTAIN TRANSACTIONS: NASDAQ's
Marketplace  Rule 4350(i) requires each issuer to obtain  shareholder  approval
prior to certain dilutive events,  including a transaction  other than a public
offering  involving  the  sale  of 20% or more of the  issuer's  common  shares
outstanding prior to the transaction.  Under the exemption available to Foreign
Private Issuers under Marketplace Rule 4350(a)(1),  the Company does not follow
this NASDAQ rule.  Instead,  and in accordance with the NASDAQ  exemption,  the
Company  complies with  applicable  Toronto Stock Exchange rules and applicable
Canadian corporate and securities regulatory requirements.

ITEM 10. ADDITIONAL INFORMATION

A.       SHARE CAPITAL

         Not Applicable.

B.       MEMORANDUM AND ARTICLES OF ASSOCIATION

COMMON SHARES

         The Company's  authorized  capital  consists of an unlimited number of
common shares, without par value ("Shares"). As at January 30, 2007, there were
168.3 million  shares  issued and  outstanding  and an additional  41.3 million
shares have been  allotted and reserved  for issuance  pursuant to  outstanding
options  and  warrants.  All issued and  outstanding  Shares are fully paid and
non-assessable.

         All  Shares  are  entitled  to one vote per share at all  meetings  of
shareholders,  rank equally as to dividends and as to the  distribution  of the
Company's  assets  available for  distribution  in the event of a  liquidation,
dissolution, or winding up of the Company. There are no preemptive, conversion,
or exchange rights and no provision for redemption,  purchase for cancellation,
surrender or sinking or purchase funds.

         Provisions  as to the  modification,  amendment  or  variation of such
rights and provisions  are contained in the Canada  Business  Corporations  Act
(the "Act") and the regulations  promulgated  thereunder.  Certain  fundamental
changes to the articles of the Company will require the approval of  two-thirds
of the  votes  cast on a  resolution  submitted  to a  special  meeting  of the
Company's  shareholders  called for the purpose of considering  the resolution.
These  items  include  (i) an  amendment  to  the  provisions  relating  to the
outstanding capital of the Company,  (ii) a sale of all or substantially all of
the assets of the Company,  (iii) an  amalgamation  of the Company with another
company,  other than a  subsidiary,  (iv) a winding-up  of the  Company,  (v) a
continuance of the Company into another  jurisdiction,  (vi) a statutory  court
approved arrangement under the Act (essentially a corporate reorganization such
as an  amalgamation,  sale of assets,  winding-up,  etc.), or (vii) a change of
name.

         Under the Act, a corporation  cannot  repurchase its shares or declare
dividends  if  there  are  reasonable   grounds  for  believing  that  (a)  the
corporation  is, or after payment would be,  unable to pay its  liabilities  as
they  become  due,  or (b)  after  the  payment,  the  realizable  value of the
corporation's  assets would be less than the


                                      47
<PAGE>

aggregate of (i) its  liabilities and (ii) its stated capital of all classes of
its securities. Generally, stated capital is the amount paid on the issuance of
a share,

                              ARTICLES AND BY-LAWS

         The following  presents a description  of certain terms and provisions
of the Company's articles and by-laws.

GENERAL

         The Company  was  incorporated  under the  Business  Corporations  Act
(Ontario) by articles of  incorporation  dated  January 10, 1980, as amended by
certificate  and articles of amendment dated September 19, 1985, June 15, 1988,
and April 21, 1994, and was continued  under the Canada  Business  Corporations
Act by certificate and articles of continuance dated August 9, 1999.

         The Company's corporate objectives and purpose are unrestricted.

DIRECTORS

         The  Company's  by-laws  provide that a director who is a party to, or
who is a director or officer of or has a material interest in any person who is
a party to, a material contract or transaction or proposed material contract or
transaction  with the  Company  shall  disclose  the  nature and extent of that
interest  and shall not vote on any  resolution  to approve  such  contract  or
transaction.

         The Company's  by-laws  provide that the directors  shall be paid such
remuneration for their services as the Board of Directors may from time to time
determine.

         The Company's  by-laws provide that the Board may from time to time on
the Company's behalf, without authorization of shareholders:

         o        borrow money upon credit;

         o        issue,  reissue, sell or pledge bonds,  debentures,  notes or
                  other  evidences of  indebtedness or guarantee of us, whether
                  secured or unsecured;

         o        to the extent  permitted by the Canada Business  Corporations
                  Act, give directly or indirectly  financial assistance to any
                  person by means of a loan,  a guarantee  or  otherwise on our
                  behalf  to  secure  performance  of  any  present  or  future
                  indebtedness, liability or obligation of any person; and

         o        mortgage,  hypothecate, pledge or otherwise create a security
                  interest  in all or any or  currently  owned or  subsequently
                  acquired  real or personal,  movable or  immovable,  property
                  including  book  debts,   rights,   powers,   franchises  and
                  undertakings,  to secure any of our bonds, debentures,  notes
                  or other  evidences of indebtedness or guarantee or any other
                  present or future indebtedness, liability or obligation.

         o        The  Company's  by-laws  provide  that  no  person  shall  be
                  qualified  for  election as a director if such person is less
                  than 18 years of age.  There is no provision in the Company's
                  by-laws relating to retirement or non-retirement of directors
                  under an age  limit  requirement.  A  director  need not be a
                  shareholder.   A  majority  of  directors  must  be  resident
                  Canadians and at least one-third of the directors must not be
                  officers  or  employees  of  the  Company  or of  any  of the
                  Company's affiliates.

ANNUAL AND SPECIAL MEETINGS

         The annual meeting and special  meetings of  shareholders  are held at
such  time and  place as the  Board of  Directors  shall  determine.  Notice of
meetings  are sent out to  shareholders  not less than 21 nor more than 50 days

                                      48
<PAGE>

before  the date of such  meeting.  All  shareholders  at the  record  date are
entitled to notice of the meeting and have the right to attend the meeting. The
directors do not stand for re-election at staggered intervals.

         There are no by-law provisions governing the ownership threshold above
which shareholder ownership must be disclosed.

         There  are  no  provisions   in  either  the  Company's   articles  of
incorporation  or by-laws that would have the effect of delaying,  deferring or
preventing a change in control of the Company and that would  operate only with
respect to a merger,  acquisition  or  corporate  restructuring  involving  the
Company or its subsidiary,  other than as described in the  Shareholder  Rights
Plan below.

ADOPTION OF SHAREHOLDER RIGHTS PLAN

         The Board of Directors  of the Company  adopted a  shareholder  rights
plan as of November  22, 2000 (the  "Rights  Plan") and amended May 7, 2003 and
March 22, 2006.

         The Rights Plan was  effective  immediately  upon its  adoption by the
Board,  but it had to be confirmed by shareholders  to remain in effect,  which
occurred at the Company's  Annual and Special Meeting of  Shareholders  held on
May 2, 2001.  The Rights  Plan was not  adopted  by the Board of  Directors  in
response to, or in anticipation of, any offer or takeover bid.

PURPOSE OF THE RIGHTS PLAN

         The  Rights  Plan is  designed  to  give  the  Company's  shareholders
sufficient  time to properly  assess a take-over bid without undue pressure and
to give the Company's Board of Directors time to consider alternatives to allow
the  Company's  shareholders  to receive  full and fair value for their  common
shares.  Additionally,  the Rights Plan is designed to provide  shareholders of
the Company with equal  treatment in a take-over bid. The desire to ensure that
the Company is able to address unsolicited take-over bids for its common shares
during the term of the Rights Plan stems from a concern that Canadian take-over
bid rules for companies that are subject to unsolicited  take-over bids provide
too short a response time to ensure that shareholders are offered full and fair
value for their shares.

         In recent  years,  shareholder  rights plans have been adopted by many
Canadian companies, and the terms of such plans have evolved to reflect changes
in investor  attitudes,  standards of  corporate  governance,  requirements  of
securities regulatory authorities,  and the views of third-party  commentators.
The Rights Plan reflects this evolution.

SUMMARY OF THE RIGHTS PLAN

         The following is a summary of the principal  terms of the Rights Plan,
as amended,  which is qualified in its entirety by reference to the text of the
Rights Plan, a copy of which is available from the Company upon request.

TERM

         Subject to the approval of the proposed  amendment to the Rights Plan,
the Rights Plan and the share purchase rights ("Rights") issued thereunder will
expire at the close of the Company's  annual meeting of shareholders to be held
in 2009,  unless the Rights are terminated,  redeemed,  or exchanged earlier by
the Board of Directors.

ISSUE OF RIGHTS

         Under the Rights  Plan,  one Right was issued  for each  common  share
outstanding  as at 5:00 p.m.  (Toronto  time) on November 22, 2000 (the "Record
Time") and for each  common  share  issued  subsequent  to the Record Time (but
prior  to the  earlier  of the  Separation  Time  (as  defined  below)  and the
redemption or expiration of the Rights).  The Company has entered into a rights
plan  agreement  dated as of November 22,  2000,  as amended as of May 7, 2003,
which will be further amended by agreement  effective March 22, 2006, with CIBC
Mellon  Trust

                                      49
<PAGE>

Company of Canada,  as rights  agent,  which  provides  for the exercise of the
Rights,  the issue of  certificates  evidencing  the Rights,  and other related
matters including those described in this Management Proxy Circular.

RIGHTS EXERCISE PRIVILEGE

         The  Rights  separate  from the  Company's  common  shares  and become
exercisable  eight trading days after a person  publicly  discloses that it has
acquired 20% or more of, or  commences  or  announces a take-over  bid for, the
Company's  outstanding  Voting Shares (defined to include the common shares and
any other shares that the Company may issue that carry voting  rights  relating
to the election of directors),  in each case other than pursuant to a Permitted
Bid or a  Competing  Permitted  Bid  (each as  defined  below).  Where a person
becomes a beneficial  owner of 20% or more of the  Company's  common shares and
thereby  becomes  an  "Acquiring  Person",  this is  referred  to as a "Flip-in
Event."

         Any rights held by an Acquiring Person become void upon the occurrence
of the Flip-in Event. By making any take-over bid other than a Permitted Bid or
a Competing Permitted Bid prohibitively  expensive for an Acquiring Person, the
Rights Plan is designed to require any person interested in acquiring more than
20% of the  Company's  common  shares to do so by way of a  Permitted  Bid or a
Competing  Permitted Bid or to make a take-over bid that the Board of Directors
considers to represent the full and fair value of the Company's common shares.

         Prior to the Rights  being  triggered,  they will have no value and no
dilutive effect on the Company's common shares.

FLIP-IN EVENT

         Upon the  occurrence  of the  Flip-in  Event,  each Right  (except for
Rights  beneficially  owned by the  Acquiring  Person and certain other persons
specified  below) shall  thereafter  constitute  the right to purchase from the
Company for the Exercise  Price upon exercise  thereof in  accordance  with the
terms of the Rights Plan, that number of common shares of the Company having an
aggregate  Market  Price (as  defined  in the Rights  Plan)  equal to twice the
Exercise Price (as defined in the Rights Plan).  For example,  if one assumes a
market  price at the time of a Flip-in  Event of $10 per share,  then a current
holder of one Right could purchase 40 shares for $200 (being the exercise price
per right),  effectively  acquiring  the shares at half of the  current  market
price.

         The Rights Plan  provides that Rights that are  beneficially  owned by
(i) an Acquiring  Person or any affiliate or associate of an Acquiring  Person,
or any person  acting  jointly or in concert with an Acquiring  Person,  or any
affiliate or associate of such Acquiring  Person; or (ii) a transferee or other
successor  in title of Rights  of an  Acquiring  Person  (or any  affiliate  or
associate of an Acquiring  Person or of any person acting jointly or in concert
with an Acquiring Person or any associate or affiliate of an Acquiring  Person)
who becomes a transferee or successor in title  concurrently with or subsequent
to the Acquiring Person becoming an Acquiring Person shall become null and void
without  any  further  action,   and  any  holder  of  such  Rights  (including
transferees  or  successors  in title) shall not have any right  whatsoever  to
exercise such Rights under any provision of the Rights Plan.

ACQUIRING PERSON

         An "Acquiring Person" is a person who Beneficially Owns (as defined in
the Rights Plan) twenty percent (20%) or more of the outstanding  Voting Shares
of the Company.  An Acquiring Person does not, however,  include the Company or
any subsidiary of the Company,  or any person who becomes the Beneficial  Owner
of twenty percent (20%) or more of the outstanding Voting Shares of the Company
as a result of Permitted  Bids,  Competing  Permitted  Bids,  and certain other
exempt transactions.

PERMITTED BIDS AND COMPETING PERMITTED BIDS

         A "Permitted Bid" is a take-over bid made by a take-over bid circular
in compliance with the following additional provisions:

         (1)      the bid  must be made to all  holders  of  record  of  common
                  shares;

                                      50
<PAGE>

         (2)      the bid must be open for a minimum of 60 days  following  the
                  date of the bid,  and no shares may be taken up prior to such
                  time;

         (3)      take-up and  payment for shares may not occur  unless the bid
                  is accepted by persons  holding more than fifty percent (50%)
                  of the outstanding  common shares exclusive of shares held by
                  the person  responsible  for  triggering the Flip-in Event or
                  any person who has announced an intention to make, or who has
                  made,  a take-over  bid for the shares of the Company and the
                  respective  affiliates  and  associates  of such  persons and
                  persons acting jointly or in concert with such persons;

         (4)      shares may be deposited into or withdrawn from the bid at any
                  time prior to the take-up date; and

         (5)      if the bid is accepted by the requisite  percentage specified
                  in (3) above,  the bidder must extend the bid for a period of
                  10 business days to allow other  shareholders  to tender into
                  the  bid,  should  they  so  wish,  and  must  make a  public
                  announcement to such effect.

         A "Competing  Permitted  Bid" is a take-over bid that satisfies all of
the  criteria of a Permitted  Bid except that it is made after a Permitted  Bid
has been made,  the minimum  deposit period and the time period for the take-up
of and payment for shares tendered under a Competing Bid is not 60 days, but is
instead the greater of 35 days (the minimum  permitted by law) and the 60th day
after the date on which the Permitted Bid then in existence was made.

         Neither a Permitted Bid nor a Competing Permitted Bid need be approved
by the Board of Directors and may be taken directly to the  shareholders of the
Company.  Acquisitions  of common  shares made pursuant to a Permitted Bid or a
Competing Permitted Bid do not give rise to a Flip-in Event.

CERTIFICATES AND TRANSFERABILITY

         Prior  to  separation,  the  Rights  will  be  evidenced  by a  legend
imprinted  on the common  share  certificates  of the  Company  and will not be
transferable  separately from the common shares.  Common share  certificates do
not need to be exchanged to entitle a shareholder  to these Rights.  The legend
will  be on  all  new  certificates  issued  by the  Company.  From  and  after
separation,  the Rights will be  evidenced by Rights  certificates  and will be
transferable separately from the Company's common shares.

REDEMPTION AND WAIVER

         The Board of Directors  may, at any time prior to the  occurrence of a
Flip-in Event and subject to shareholder approval,  elect to redeem all but not
less than all of the Rights at a  redemption  price of  $0.0001  per Right (the
"Redemption Price"),  appropriately  adjusted in certain events. Rights will be
deemed to be automatically  redeemed at the Redemption Price where a person who
has made a  Permitted  Bid, a  Competing  Permitted  Bid,  or a  take-over  bid
otherwise  exempted  by the  Board  of  Directors  takes  up and  pays  for the
Company's  shares under the terms of the bid. If the Board of Directors  elects
or is deemed to have  elected to redeem the Rights,  the right to exercise  the
Rights will terminate, and each Right will, after redemption, be null and void,
and the only right  thereafter of the holders of Rights shall be to receive the
Redemption Price.  Under the Rights Plan, the Board of Directors has discretion
to waive  application  of the Rights  Plan to a  take-over  bid,  subject to an
automatic waiver with respect to all other take-over bids make while the waived
take-over  bid is  outstanding.  The Board of Directors of the Company may also
waive the application of the Rights Plan to a Flip-in Event that occurs through
inadvertence,  subject  to the  "inadvertent"  Acquiring  Person  reducing  its
holding of the  Company's  shares  within an agreed time.  Other waivers of the
Rights Plan will require shareholder approval.

AMENDMENT

         Amendments or  supplements to the terms of the Rights Plan (other than
for clerical  errors or to maintain the Rights  Plan's  validity as a result of
changes in legislation)  require prior  shareholder  approval.  Changes arising
from changes in  applicable  legislation  will require  subsequent  shareholder
ratification.

                                      51
<PAGE>

C.       MATERIAL CONTRACTS

         We have not,  during our  financial  year  ended  November  30,  2006,
entered into any material contracts other than contracts in the ordinary course
of business and other than in connection with the issuance of the common shares
and  warrants on November  14, 2006 for gross  proceeds of  US$20,300,000.  The
common shares and warrants are described in Item 5B.

         On November 3, 2006,  we entered  into an  engagement  agreement  with
Rodman & Renshaw,  LLC pursuant to which Rodman & Renshaw, LLC agreed to act as
an exclusive placement agent in connection with the offering of units under the
prospectus  supplement of November 9, 2006. Pursuant to the agreement,  we paid
the placement agent an aggregate  commission  equal to 6% of the gross proceeds
of the sale of units in the offering  (other than on sales to one noteholder in
respect of which the  commission  was 3%) and issued  compensation  warrants to
purchase that number of common  shares equal to 6% of the  aggregate  number of
common  shares sold in the offering  (other than on sales to one  noteholder in
respect of which the  compensation  warrants  were to  purchase  that number of
common shares equal to 3% of the aggregate number of common shares sold to such
noteholder).  The compensation warrants were substantially on the same terms as
the warrants  offered,  except that the compensation  warrants have an exercise
price equal to US$0.63,  will expire on November 14, 2009, and otherwise comply
with NASD Rule 2710. We also agreed to reimburse the placement  agent for up to
a maximum of US$20,000 of expenses incurred in connection with the offering.

         For  material  contracts in 2005 see the notes as described in Item 5B
above.

D.       EXCHANGE CONTROLS

         Canada  has no  system of  currency  exchange  controls.  There are no
governmental laws, decrees or regulations in Canada that restrict the export or
import of capital,  including but not limited to, foreign exchange controls, or
that  affect  the  remittance  of  dividends,  interest  or other  payments  to
non-resident holders of the company's securities.

E.       TAXATION

UNITED STATES TAXATION

         CERTAIN MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS


         The following summary is based on the advice of Paul, Weiss,  Rifkind,
Wharton & Garrison LLP and describes  certain  material  United States  federal
income tax  consequences  of the ownership and disposition of our common shares
that are  generally  applicable to a United States person that holds our common
shares as capital assets (a "US Holder")  within the meaning of Section 1221 of
the Internal  Revenue Code of 1986,  as amended (the "Code").  This  discussion
does  not  address  holders  of  other  securities,  including  holders  of our
warrants.  This  discussion  assumes  that  we are  not a  "controlled  foreign
corporation"  for U.S.  federal income tax purposes.  The following  discussion
does not  purport  to be a complete  analysis  of all of the  potential  United
States  federal  income tax  considerations  that may be relevant to particular
holders of our common  shares in light of their  particular  circumstances  nor
does it deal with  persons  that are  subject  to special  tax  rules,  such as
brokers, dealers in securities or currencies, financial institutions, insurance
companies,  tax-exempt  organizations,  persons liable for alternative  minimum
tax,  U.S.  expatriates,  partnerships  or other  pass-through  entities,  U.S.
Holders who own (directly, indirectly or by attribution) ten percent or more of
the total  combined  voting  power of all  classes of stock  entitled  to vote,
persons  holding our common  shares as part of a straddle,  hedge or conversion
transaction or as part of a synthetic security or other integrated transaction,
traders in securities that elect to use a  mark-to-market  method of accounting
for their securities holdings,  holders whose "functional  currency" is not the
United  States  dollar,  and holders who are not US Holders.  In addition,  the
discussion below does not address the tax consequences of the law of any state,
locality or foreign  jurisdiction  or United  States  federal tax  consequences
(e.g., estate or gift tax) other than those pertaining to the income tax. There
can be no assurance that the United States

                                      52
<PAGE>

Internal  Revenue Service (the "IRS") will take a similar view as to any of the
tax consequences described in this summary.

         The following is based on currently  existing  provisions of the Code,
existing  and  proposed  Treasury   regulations  under  the  Code  and  current
administrative  rulings and court decisions.  Everything listed in the previous
sentence  may change,  possibly on a  retroactive  basis,  and any change could
affect the continuing validity of this discussion.

         Each US  Holder  and each  holder of  common  shares  that is not a US
holder  should  consult its tax adviser  regarding  the United  States  federal
income tax consequences of holding our common shares  applicable to such holder
in light of its particular situation,  as well as any tax consequences that may
arise under the laws of any other  relevant  foreign,  state,  local,  or other
taxing jurisdiction.

         As used in this  section,  the term  "United  States  person"  means a
beneficial owner of our common shares that is:

         (i) a citizen or an individual resident of the United States;

         (ii) a corporation  (or an entity taxable as a corporation  for United
States federal  income tax purposes)  created or organized in or under the laws
of the United States or any political subdivision of the United States;

         (iii) an estate  the  income  of which is  subject  to  United  States
federal income taxation regardless of its source; or

         (iv) a trust which (A) is subject to the supervision of a court within
the United  States and the control of a United  States  person as  described in
Section 7701(a)(30) of the Code; or (B) was in existence on August 20, 1996 and
has properly  elected under applicable  Treasury  Regulations to continue to be
treated as a United States person.

         If a partnership  (including  for this purpose any entity treated as a
partnership for U.S. federal income tax purposes) holds our common shares,  the
United States federal  income tax treatment of a partner  generally will depend
on the status of the partner and the  activities of the  partnership.  A United
States  person that is a partner of the  partnership  holding our common shares
should consult its own tax adviser.

         Passive Foreign Investment Company

         Special,  generally  unfavorable  rules  apply  to the  ownership  and
disposition of the stock of a passive foreign investment  company ("PFIC").  As
discussed  below,   however,   it  may  well  be  possible  to  mitigate  these
consequences by making a so-called qualified electing fund ("QEF") election.

         For United States federal income tax purposes,  a foreign  corporation
is classified as a PFIC for each taxable year in which either:

    o    at least 75% of its gross income is "passive"  income  (referred to as
         the "income test"); or

    o    at least 50% of the  average  value of its assets is  attributable  to
         assets that produce  passive  income or are held for the production of
         passive income (referred to as the "asset test").

         For  purposes  of the  income  test and the asset  test,  if a foreign
corporation owns directly or indirectly at least 25% (by value) of the stock of
another corporation, that foreign corporation will be treated as if it held its
proportionate  share  of the  assets  of the  other  corporation  and  received
directly its proportionate share of the income of that other corporation. Also,
for  purposes of the income test and the asset  test,  passive  income does not
include any income that is interest, a dividend or a rent or royalty,  which is
received or accrued from a related person to the extent that amount is properly
allocable to the income of the related person that is not passive income.

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<PAGE>

         We were a PFIC in the  2006  taxable  year and we  believe  there is a
significant likelihood that we will be classified as a PFIC in the 2007 taxable
year  and  possibly  in  subsequent   years.  In  any  event,  PFIC  status  is
fundamentally factual in nature, generally cannot be determined until the close
of the taxable year in question and is determined annually.

         Under applicable  attribution rules, if Vasogen. is a PFIC, US Holders
of common  shares will be treated as holding  for certain  purposes of the PFIC
rules stock of Vasogen's subsidiaries  (including Vasogen Ireland Limited) that
are PFICs. In such case,  certain  dispositions of, and distributions on, stock
of such subsidiaries may have consequences  under the PFIC rules directly to US
Holders.

         In the  absence of any  election,  a US Holder of a PFIC will be taxed
under the  generally  unfavorable  rules  described  below,  including  loss of
favorable  capital gains rates and the imposition of an interest  charge,  that
apply if the holder  recognizes  gain on the sale or other  disposition  of the
PFIC stock or receives  certain  distributions  with  respect to the stock (see
"--The  "No  Election"  Alternative--Taxation  of  Excess  Distributions").  US
Holders  may avoid most of these  consequences  by making a QEF  Election  with
respect to Vasogen,  which will have the  consequences  described in "--The QEF
Election Alternative." A US Holder may also consider making an election to mark
the common shares to market (a "Mark to Market Election").

US  HOLDERS  ARE  URGED TO  CONSULT  THEIR  TAX  ADVISORS  ABOUT  THE  POSSIBLE
APPLICABILITY  OF THE PFIC RULES AND THE  AVAILABILITY OF MAKING A QEF ELECTION
TO AVOID ADVERSE US TAX CONSEQUENCES.


    THE QEF ELECTION ALTERNATIVE

         A US Holder who elects (an "Electing US Holder") in a timely manner to
treat Vasogen as a QEF (a "QEF Election") would include in gross income (and be
subject to current  US federal  income tax on) the US dollar  value of both its
prorata  share of Vasogen's  ordinary  earnings,  as ordinary  income,  and its
prorata  share of Vasogen 's net capital  gains,  as  long-term  capital  gain,
during any taxable years of the US Holder in which we are classified as a PFIC,
regardless  of whether such amounts are  actually  distributed.  An Electing US
Holder may further  elect,  in any given  taxable year, to defer payment of the
taxes owing as a result of  including  our  ordinary  earnings  and net capital
gains  currently  in  income,  subject  to  certain  limitations.  However,  if
deferred,  the taxes  will be  subject  to an  interest  charge,  which will be
non-deductible to US Holders that are not corporations.  Distributions paid out
of earnings  and profits that  previously  were taxed to the Electing US Holder
shall not be subject to tax again upon distribution.

         We believe that we will not have any earnings and profits (as computed
for US federal income tax purposes) for the current taxable year and little, if
any, earnings and profits for any future taxable year in which our company is a
PFIC.  In that event,  a QEF Election  with respect to our common  shares would
subject  a US Holder  to  correspondingly  little,  if any,  current  taxation.
However, there can be no assurance as to these matters.

         Similarly,  if Vasogen Ireland Limited were classified as a PFIC, a US
Holder that makes a timely QEF Election with respect to Vasogen Ireland Limited
would be  subject  to the QEF rules as  described  above  with  respect  to the
holder's  prorata  share of the  ordinary  earnings  and net  capital  gains of
Vasogen  Ireland  Limited.  Earnings of Vasogen (or  Vasogen  Ireland  Limited)
attributable to distributions  from Vasogen Ireland Limited that had previously
been  included in the income of an Electing US Holder under the QEF rules would
generally not be taxed to the Electing US Holder again.

         Upon the sale or other  disposition of common  shares,  an Electing US
Holder who makes a QEF  Election  for the first  taxable  year in which he owns
common  shares will  recognize  capital gain or loss for US federal  income tax
purposes in an amount equal to the difference  between the net amount  realized
on the disposition and the US Holder's adjusted tax basis in the common shares.
Such gain or loss will be capital gain or loss, which will be long-term capital
gain or loss if the US  Holder's  holding  period in the common  shares is more
than  one year and  otherwise  will be  short-term  capital  gain or loss.  The
deductibility  of capital losses is subject to certain  limitations.  If the US
Holder is a United  States  resident  (as  defined in section 865 of the Code),
gains realized

                                      54
<PAGE>

upon  disposition  of a common  share by such US  Holder  generally  will be US
source income,  and disposition losses generally will be allocated to reduce US
source income.

         A QEF  Election  must be made  in a  timely  manner  as  specified  in
applicable Treasury regulations.  Generally, the QEF Election must be made in a
timely  filed  federal  income tax return of a US Holder for the first  taxable
year of the foreign  corporation during which the corporation was at any time a
PFIC.  Although a QEF Election may be made after the PFIC's first  taxable year
that was included in the Electing US Holder's  holding period,  the Electing US
Holder would continue to be subject to the excess  distribution rules described
below (see "--The "No Election" Alternative--Taxation of Excess Distributions")
unless the holder  makes a Mark to Market  Election,  which  would  result in a
deemed disposition of the PFIC stock to which the excess distribution rules may
apply.

         The QEF Election is made on a shareholder-by-shareholder basis and can
be revoked only with the consent of the IRS. A shareholder makes a QEF Election
by  attaching a completed  IRS Form 8621,  including a PFIC annual  information
statement, to a timely filed United States federal income tax return. Even if a
QEF Election is not made, a shareholder  in a PFIC who is a US person must file
a completed IRS Form 8621 every year.

         We  intend  to  make  available  to US  Holders  timely  and  accurate
information as to our status as a PFIC and intend to comply with all applicable
record  keeping,  reporting and other  requirements  so that each US Holder may
elect to treat our company as a QEF.

    THE "NO ELECTION" ALTERNATIVE--TAXATION OF EXCESS DISTRIBUTIONS

         If we are  classified  as a PFIC for any year during which a US Holder
has held common shares and that holder has not made a QEF Election or a Mark to
Market  Election,  special  rules may  subject  that  holder to  increased  tax
liability,  including loss of favorable  capital gains rates and the imposition
of an interest charge,  upon the sale or other disposition of the common shares
or upon the receipt of any excess distribution (as defined below).  Under these
rules:

    o    the gain or excess  distribution will be allocated ratably over the US
         Holder's holding period;

    o    the amount allocated to the current taxable year and any year prior to
         the first year in which we are a PFIC will be taxed as ordinary income
         in the current year;

    o    the  amount  allocated  to each of the  other  taxable  years  will be
         subject to tax at the highest rate of tax in effect for the applicable
         class of taxpayer for that year; and

    o    an interest  charge for the deemed  deferral  benefit  will be imposed
         with respect to the  resulting tax  attributable  to each of the other
         taxable years.

         These  rules will  continue to apply to the holder even after we cease
to meet the  definition  of a PFIC,  unless the holder  elects to be treated as
having sold our common shares on the last day of the last taxable year in which
we qualified as a PFIC.

         An "excess  distribution,"  in general,  is any distribution on common
shares  received in a taxable  year by a US Holder that is greater than 125% of
the average annual distributions received by that holder in the three preceding
taxable years or, if shorter, that holder's holding period for common shares.

         Any  portion  of a  distribution  paid to a US  Holder  that  does not
constitute an excess  distribution  will be treated as ordinary dividend income
to the extent of our current and accumulated  earnings and profits (as computed
for US federal income tax purposes).  Such dividends generally will not qualify
for the  dividends-received  deduction  otherwise available to US corporations.
Any amounts  treated as dividends paid by a PFIC do not  constitute  "qualified
dividend  income" within the meaning of Section  1(h)(11) of the Code, and will
therefore be ineligible  for taxation at the maximum rate of 15%  applicable to
individuals who receive such income.  Any such amounts in excess of our current
and  accumulated  earnings and profits will be applied  against the Electing US

                                      55
<PAGE>

Holder's  tax basis in the common  shares  and, to the extent in excess of such
tax  basis,  will be  treated as gain from a sale or  exchange  of such  common
shares.  It is  possible  that any such  gain  might be  treated  as an  excess
distribution.

MARK TO MARKET ELECTION ALTERNATIVE

         Assuming that our common shares are treated as marketable  stock, a US
Holder  that does not make a QEF  Election  may avoid  the  application  of the
excess  distribution  rules,  at least in part,  by electing to mark the common
shares to market annually,  recognizing as ordinary income or loss each year an
amount equal to the  difference as of the close of the taxable year between the
fair market value of its common  shares and the holder's  adjusted tax basis in
the common shares. Any mark to market loss is treated as an ordinary deduction,
but only to the extent of the  ordinary  income  that the  holder has  included
pursuant to the election in prior tax years.  The electing US Holder's basis in
its common  shares  would be adjusted  to reflect  any of these  income or loss
amounts.  Any gain on a  disposition  of our common  shares by an  electing  US
Holder  would be treated as  ordinary  income.  Any loss on such a  disposition
would be  treated  as an  ordinary  deduction,  but only to the  extent  of the
ordinary income that the holder has included  pursuant to the election in prior
tax years. For purposes of making this election, stock of a foreign corporation
is "marketable" if it is regularly traded on certain qualified exchanges. Under
applicable  Treasury  regulations,  a "qualified  exchange" includes a national
securities  exchange  that is  registered  with the SEC or the national  market
system  established under the Securities  Exchange Act of 1934, as amended (the
"1934 Act") and certain foreign  securities  exchanges.  Currently,  our common
shares  are  traded  on  a  "qualified  exchange."  Under  applicable  Treasury
Regulations,  PFIC stock traded on a qualified  exchange is regularly traded on
such  exchange for any calendar  year during which such stock is traded,  other
than in de  minimis  quantities,  on at  least  15 days  during  each  calendar
quarter.  We cannot assure US Holders that our common shares will be treated as
regularly traded stock.

         With  respect to its direct  ownership of common  shares,  a US Holder
that receives a  distribution  with respect to its common shares will avoid the
unfavorable  consequences applicable to excess distributions described above if
the holder has made a timely  Mark to Market  Election in the first year of its
holding period during which we are treated as a PFIC. Such  distribution  would
instead be taxed under the rules  described in the final paragraph of the above
section ("--The "No Election"  Alternative--Taxation of Excess Distributions").
If a US Holder has held  common  shares for one or more  taxable  years  during
which we are  treated  as a PFIC and  does  not  make a timely  Mark to  Market
Election  with  respect to the  common  shares  held  during the first of those
years,  a  coordination  rule  applies  to ensure  that a later  Mark to Market
Election  does not cause the  holder  to avoid  the  interest  charge on excess
distributions  with  respect to  amounts  attributable  to  periods  before the
election.

         An  election  to mark to  market  applies  to the year for  which  the
election is made and the  following  years  unless the PFIC stock  ceases to be
marketable or the IRS consents to the revocation of the election.  In addition,
a US Holder that has made a Mark to Market  Election  does not include  mark to
market gains,  or deduct mark to market losses,  for years when the corporation
ceases to be treated  as a PFIC.  If a timely  QEF  Election  were made by a US
Holder, the mark to market rules would not apply.

         The mark to market rules do not appear to prevent the  application  of
the excess distribution rules in respect of stock of Vasogen Ireland Limited in
the event that Vasogen Ireland Limited were a considered PFIC. Accordingly,  if
Vasogen and Vasogen Ireland Limited were both considered PFICs, and a US Holder
made a Mark to Market Election with respect to its common shares, the US Holder
may remain  subject  to the  excess  distribution  rules  described  above with
respect to its indirectly owned Vasogen Ireland Limited stock.

         FOREIGN TAX CREDITS

         Regardless of which of the above alternatives  applies to a US Holder,
any tax withheld by Canadian taxing  authorities  with respect to distributions
on our  common  shares  may,  subject to a number of  complex  limitations,  be
claimed as a foreign tax credit  against a US Holder's  United  States  federal
income tax liability or may be claimed as a deduction for United States federal
income tax purposes.  The  limitation  on foreign taxes  eligible for credit is
calculated  separately  with  respect to specific  classes of income.  For this
purpose,  dividends we  distribute  with  respect to our common  shares will be
"passive  income"  or  "general  income."  Because of the  complexity  of those

                                      56
<PAGE>

limitations,  each US Holder should consult its own tax adviser with respect to
the amount of foreign taxes that may be claimed as a credit.

         INFORMATION REPORTING AND BACKUP WITHHOLDING

         In general,  information reporting  requirements will apply to certain
payments of dividends on the common shares and to certain  payments of proceeds
from the sale or  exchange  of common  shares  made to US  Holders  other  than
certain exempt  recipients (such as  corporations).  A US Holder that is not an
exempt  recipient will generally be subject to backup  withholding with respect
to such payments  (currently at a rate of 28%, which rate will be replaced by a
31% rate beginning in 2011) unless the US Holder provides an accurate  taxpayer
identification  number and otherwise  complies with applicable  requirements of
the backup withholding rules.

         Any  amounts  withheld  under the  backup  withholding  rules  will be
allowed as a credit  against the US Holder's  United States  federal income tax
liability  or  refundable  to the extent that it exceeds such  liability.  A US
Holder who does not  provide a correct  taxpayer  identification  number may be
subject to penalties imposed by the IRS.

CANADIAN FEDERAL INCOME TAX CONSIDERATIONS

         TAXATION

         The following summary describes the principal  Canadian federal income
tax  considerations  generally  applicable to a holder of the Company's  Shares
who, for purposes of the Income Tax Act (Canada)  (the  "Canadian Tax Act") and
the Convention  between Canada and the United States of America with Respect to
Taxes on Income and on Capital (the "Convention") and at all relevant times, is
resident in the United States and not resident in Canada, deals at arm's length
and is not affiliated with the Company,  holds the Company's  Shares as capital
property,  does not use or hold and is not deemed to use or hold the  Company's
Shares in or in the  course of  carrying  on  business  in Canada  and is not a
non-resident insurer (a "United States Holder").

         This  following  summary  is based on the  current  provisions  of the
Convention,  the Canadian Tax Act and the regulations thereunder,  all specific
proposals to amend the  Convention,  the  Canadian Tax Act and the  regulations
announced by the Minister of Finance  (Canada) prior to the date hereof and the
Company's understanding of the administrative practices published in writing by
the  Canada  Revenue  Agency.  This  summary  does not  take  into  account  or
anticipate  any other  changes  in the  governing  law,  whether  by  judicial,
governmental or legislative  decision or action,  nor does it take into account
the  tax  legislation  or   considerations   of  any  province,   territory  or
non-Canadian (including U.S.) jurisdiction, which legislation or considerations
may differ significantly from those described herein.

         This  summary is of a general  nature only and is not  intended to be,
and  should  not be  interpreted  as legal  or tax  advice  to any  prospective
purchaser or holder of the Company's Shares and no representation  with respect
to the  Canadian  federal  income  tax  consequences  to any  such  prospective
purchaser  is made.  Accordingly,  prospective  purchasers  and  holders of the
Company's  shares  should  consult their own tax advisors with respect to their
individual circumstances.

         DIVIDENDS ON THE COMPANY'S SHARES

         Generally,  dividends paid by Canadian  corporations  to  non-resident
shareholders  are subject to a  withholding  tax of 25% of the gross  amount of
such  dividends.  Pursuant to the  Convention,  the withholding tax rate on the
gross amount of dividends  paid to  residents of the United  States  Holders is
reduced  to 15%  or,  in the  case of a  United  States  Holder  that is a U.S.
corporation  which  beneficially  owns at least 10% of the voting  stock of the
Canadian  corporation  paying the dividends,  to 5% of the gross amount of such
dividends.

         Pursuant  to the  Convention,  certain  tax-exempt  entities  that are
United States Holders may be exempt from Canadian withholding taxes,  including
any  withholding  tax levied in respect of dividends  received on the Company's
Shares.

                                      57
<PAGE>

         DISPOSITION OF THE COMPANY'S SHARES

         In  general,  a United  States  Holder will not be subject to Canadian
income tax on capital gains arising on the disposition of the Company's Shares,
unless such shares are "taxable  Canadian  property"  within the meaning of the
Canada  Tax Act and no relief is  afforded  under any  applicable  tax  treaty.
Generally,  the shares of the Company would be taxable  Canadian  property of a
United States  Holder if at any time during the sixty month period  immediately
preceding a disposition  by the United  States Holder of such shares,  not less
than 25% of the  issued  shares  of any class or series of a class of shares of
the Company  belonged to the United  States  Holder,  to persons  with whom the
United  States  Holder did not deal at arm's length  (within the meaning of the
Canadian  Tax Act),  or to the United  States  Holder and persons with whom the
non-resident  did not deal at arm's length  (within the meaning of the Canadian
Tax Act).  For this  purpose,  issued  shares  include  options to acquire such
shares  (including   conversion  rights)  held  by  such  persons.   Under  the
Convention,  a capital  gain  realized  by a United  States  Holder will not be
subject to  Canadian  tax unless the value of the  Company's  Shares is derived
principally  from real  property  (as  defined in the  Convention)  situated in
Canada.

F.       DIVIDENDS AND PAYING AGENTS

         Not Applicable.

G.       STATEMENT BY EXPERTS

         Not Applicable.

H.       DOCUMENTS ON DISPLAY

         Copies of the documents referred to in this document may be inspected,
during normal  business hours,  at the Company's  headquarters  located at 2505
Meadowvale Boulevard, Mississauga, Ontario, L5N 1S2, Canada.

         We are  required to file  reports and other  information  with the SEC
under the Securities  Exchange Act of 1934. Reports and other information filed
by us with the SEC may be inspected  and copied at the SEC's  public  reference
facilities described above. As a foreign private issuer, we are exempt from the
rules under the Exchange Act  prescribing  the  furnishing and content of proxy
statements and our officers,  Directors and principal  shareholders  are exempt
from the reporting and  short-swing  profit  recovery  provisions  contained in
Section 16 of the Exchange Act.  Under the Exchange  Act, as a foreign  private
issuer, we are not required to publish financial statements as frequently or as
promptly as United States companies.

I.       SUBSIDIARY INFORMATION

         See Item 4.A. of this annual report.

ITEM 11. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

         The Company's primary market risk exposures are interest rate risk and
foreign currency risk. The Company is exposed to interest rate risk on its cash
and cash equivalents and marketable securities and senior convertible notes.

         The Company's  reporting  currency is the Canadian dollar. The Company
is  exposed  to foreign  exchange  risk  associated  with  purchases  from U.S.
suppliers,  cash and cash  equivalents  and marketable  securities and from the
senior  convertible notes payable.  Gains and losses resulting from the effects
of changes in the U.S.  dollar to Canadian dollar exchange rate are recorded in
income.

         The Company does not utilize derivative financial instruments to hedge
its interest rate or foreign currency rate risks.

                                      58
<PAGE>

INTEREST RATE RISK

         We invest our cash  resources in liquid  government and corporate debt
instruments  having a single "A" credit  rating or  greater.  We do not believe
that  the  results  of  operations  or cash  flows  would  be  affected  to any
significant  degree by a sudden  change in market  interest  rates  relative to
interest rates on our investments,  owing to the relative  short-term nature of
the investments.

CREDIT RISK

         Financial   instruments   potentially   exposing   the  Company  to  a
concentration  of credit risk consist  principally of cash and cash equivalents
and marketable securities.  The Company manages this credit risk by maintaining
bank accounts with Schedule I banks and investing only in highly rated Canadian
and U.S. corporations with securities that are traded on active markets and are
capable of prompt liquidation.

EXCHANGE RATE SENSITIVITY

         The  functional  currency  of  the  Company  is the  Canadian  dollar.
Accordingly,  monetary items  denominated in a foreign  currency are translated
into  Canadian  dollars at exchange  rates in effect at the balance sheet dates
and  non-monetary  items are translated at rates of exchange in effect when the
assets  were  acquired  or  obligations  incurred.  Revenue  and  expenses  are
translated at rates in effect at the time of the transactions. Foreign exchange
gains and losses are included in the determination of loss for the period.

         As our functional or measurement currency is the Canadian dollar, U.S.
dollar  exchange  rate  fluctuations  may  have a  significant  impact  from an
accounting  perspective,  but they do not impair or enhance  our ability to pay
these U.S. dollar denominated R&D expenses.

         In November  2006,  we entered  into a contract  to purchase  Canadian
dollars totaling $9.2 million (US$8.0 million),  and concurrently  entered into
forward  contract to purchase  the U.S.  dollars  back in  December  2006.  The
Canadian  dollars  were  acquired to enable us to invest our cash  resources in
Canadian investments;  however, the forward contract enabled us to preserve our
U.S.  funds,  even when converted to Canadian  dollars.  Our U.S. funds will be
used to cover operating expenditures  denominated in U.S. dollars and the final
U.S. dollar payments associated with our phase III clinical trials. At November
30, 2006, the equivalent value of these forward contracts, when compared to the
amount due on maturity,  resulted in a nominal net unrealized  foreign exchange
loss.  The  fair  value  of  these  contracts  has  been  included  in  current
liabilities.

LIMITATIONS

         The above  discussion  includes only those  exposures that exist as of
November  30, 2006 and as a result,  does not  consider  exposures or positions
that could arise after that date. The Company's  ultimate realized gain or loss
with respect to interest  rate and exchange rate  fluctuations  would depend on
the  exposures  that arise during the period and interest and foreign  exchange
rates.

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.

         Not Applicable.

                                    PART II.

ITEM 13. DEFAULTS, DIVIDENDS ARREARAGES AND DELINQUENCIES

         There have been no material  defaults in the payment of any  principal
or interest owing.  Neither the Company nor its  subsidiaries has any preferred
shares outstanding.

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<PAGE>

ITEM 14. MATERIAL  MODIFICATIONS  TO THE RIGHTS OF SECURITY  HOLDERS AND USE OF
         PROCEEDS

         There has been no material  modification of the  instruments  defining
the rights of holders of any class of registered securities.  There has been no
withdrawal  or   substitution  of  assets  securing  any  class  of  registered
securities.  The trustees for our registered securities have not changed during
the last financial year.

ITEM 15. T    CONTROLS AND PROCEDURES

                    INTERNAL CONTROL OVER FINANCIAL REPORTING

         Our  management  is  responsible  for   establishing  and  maintaining
adequate internal control over financial reporting as required under applicable
Canadian and U.S. securities regulatory requirements.

         Our internal control over financial  reporting includes those policies
and  procedures  that:  (1)  pertain to the  maintenance  of records  that,  in
reasonable   detail,   accurately  and  fairly  reflect  the  transactions  and
dispositions of our assets; (2) provide reasonable  assurance that transactions
are recorded as  necessary to permit  preparation  of financial  statements  in
accordance  with  generally  accepted  accounting  principles,   and  that  our
expenditures  are being  made only in  accordance  with  authorizations  of our
management  and  directors;  and (3)  provide  reasonable  assurance  regarding
prevention or timely detection of unauthorized acquisition,  use or disposition
of our assets that could have a material effect on the financial statements.

         Under  the  supervision  and  with  the  participation  of  our  Chief
Executive  Officer and our Chief  Financial  Officer,  management  conducted an
evaluation  of  the  effectiveness  of  our  internal  control  over  financial
reporting,  as of  November  30,  2006,  based on the  framework  set  forth in
Internal  Control-Integrated  Framework  issued by the  Committee of Sponsoring
Organizations of the Treadway Commission (COSO).  Based on its evaluation under
this framework,  management  concluded that our internal control over financial
reporting was effective as of that date.

              CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

         There have been no changes in our  internal  controls  over  financial
reporting  during  the  period  covered  by this  report or during  the  fourth
quarter,  that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.

         The design of any system of controls and  procedures  is based in part
upon certain  assumptions about the likelihood of certain events.  There can be
no assurance  that any design will succeed in achieving  its stated goals under
all potential future conditions, including conditions that are remote.

                       DISCLOSURE CONTROLS AND PROCEDURES

         Disclosure  controls and procedures are designed to provide reasonable
assurance that all material  information required to be publicly disclosed by a
public  company is gathered  and  communicated  to  management,  including  the
certifying officers, on a timely basis so that the appropriate decisions can be
made  regarding  public  disclosure.  As at November 30, 2006,  the  certifying
officers and other members of management  evaluated  the  effectiveness  of our
disclosure  controls  and  procedures  (as this  term is  defined  in the rules
adopted by Canadian  securities  regulatory  authorities  and the United States
Securities and Exchange  Commission).  This evaluation included a review of our
existing  disclosure  policy,  compliance  with  regard  to  that  policy,  the
disclosure  controls  currently  in place  surrounding  our  interim and annual
financial  statements,  MD&A, and other required documents and discussions with
management  surrounding the process of  communicating  material  information to
management and in turn the certifying  officers and all procedures  taking into
consideration the size of the company and the number of employees. Based on the
evaluation  described above, the certifying officers have concluded that, as at
November 30, 2006,  the disclosure  controls and  procedures  were effective to
provide  reasonable  assurance that the information we are required to disclose
on a  continuous  basis in annual  and  interim  filings  and other  reports is
recorded, processed, summarized, and reported or disclosed on a timely basis as
required.

                                      60
<PAGE>

ITEM 16. [RESERVED]

ITEM 16A.         AUDIT COMMITTEE FINANCIAL EXPERT

         Under  the SEC  rules  implementing  the  Sarbanes-Oxley  Act of 2002,
Canadian  issuers  filing  reports in the United States must  disclose  whether
their audit  committees have at least one "audit committee  financial  expert".
The Board has determined that Benoit La Salle  qualifies as a financial  expert
under  such  rules.  In  addition,  all  members  of the  Audit  Committee  are
considered financially literate under applicable Canadian laws.

ITEM 16B.         CODE OF ETHICS

         The Board of  Directors'  Code of  Conduct  and the  Employee  Code of
Conduct for our  employees  have been  implemented.  These may be viewed on our
website at www.vasogen.com or at www.sedar.com.  During the year ended November
30, 2006,  both Codes of Conduct were amended and updated to ensure  compliance
with relevant  regulatory  requirements.  No waivers or requests for exemptions
from the Codes of Conduct were either requested or granted.

ITEM 16C.         PRINCIPAL ACCOUNTANT FEES AND SERVICES

         The  aggregate  amounts  billed by our  auditors to us for each of the
fiscal  years ended  November  30, 2006 and  November  30, 2005 for audit fees,
audit-related fees, tax fees and all other fees are set forth below:

--------------------------------------------------------------------------------
                                Year Ended                    Year Ended
                                November 30, 2006             November 30, 2005
--------------------------------------------------------------------------------
Audit Fees (1)                  $616,869                      $383,027
--------------------------------------------------------------------------------
Audit-Related Fees              $4,500                        $1,750
--------------------------------------------------------------------------------
Tax Fees (2)                    $78,114                       $120,227
--------------------------------------------------------------------------------
All Other Fees                  Nil                           Nil
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
Totals                          $699,483                      $505,004
--------------------------------------------------------------------------------

NOTES:
(1) Audit Fees  represent  fees for our audited  annual  financial  statements,
reviews of quarterly  interim financial  statements,  and reviews in connection
with our statutory and regulatory filings and with financings  completed during
2005 and 2006.
(2) Tax fees consist of fees for tax consultation  and tax compliance  services
for Vasogen Inc., Vasogen Corp., and Vasogen Ireland Limited.

Our auditor is KPMG LLP, Chartered  Accountants,  Yonge Corporate Centre,  4100
Yonge Street, Toronto, Ontario M2P 2H3.

KPMG provides tax,  financial  advisory,  and other  non-audit  services to the
Company  and its  subsidiaries.  Our Audit  Committee  has  concluded  that the
provision  of  these  non-audit  services  by  KPMG  is  compatible  with  KPMG
maintaining its independence.

ITEM 16D.         EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

         Not Applicable.

ITEM 16E.         PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
                  PURCHASERS

         Neither the Company nor, to our knowledge,  any  affiliated  purchaser
has made any purchases of our registered shares during the last financial year.

                                      61
<PAGE>

                                    PART III.

ITEM 17. FINANCIAL STATEMENTS

         See Item 18 below.

ITEM 18. FINANCIAL STATEMENTS







                                      62
<PAGE>






                        Consolidated Financial Statements
                         (Expressed in Canadian dollars)




                                  VASOGEN INC.
                          (A Development Stage Company)




                  Years ended November 30, 2006, 2005, 2004 and
                period from December 1, 1987 to November 30, 2006






<PAGE>

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors of Vasogen Inc.

We have audited the  accompanying  consolidated  balance sheets of Vasogen Inc.
("the Company") as of November 30, 2006 and the related consolidated statements
of  operations,  deficit and cash flows for each of the years in the three-year
period ended November 30, 2006. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance  with the standards of the Public Company
Accounting  Oversight Board (United  States).  Those standards  require that we
plan and perform the audit to obtain  reasonable  assurance  about  whether the
financial  statements  are free of  material  misstatement.  An audit  includes
examining,  on a test basis, evidence supporting the amounts and disclosures in
the  financial  statements.  An audit also includes  assessing  the  accounting
principles  used  and  significant  estimates  made by  management,  as well as
evaluating the overall financial  statement  presentation.  We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material  respects,  the financial position of the Company as of
November 30, 2006 and 2005 and the results of its operations and its cash flows
for each of the years in the  three-year  period ended  November  30, 2006,  in
conformity with Canadian generally accepted accounting principles.

Canadian generally accepted  accounting  principles vary in certain significant
respects from US generally accepted accounting principles. Information relating
to the nature and effect of such  differences  is  presented  in Note 17 to the
consolidated financial statements.



/s/ KPMG LLC

Toronto, Ontario, Canada

January 30, 2007





<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Consolidated Balance Sheets
(In thousands of Canadian dollars)

November 30, 2006 and 2005

<TABLE>
<CAPTION>
=======================================================================================================
                                                                                 2006           2005
-------------------------------------------------------------------------------------------------------
<S>                                                                           <C>            <C>
ASSETS
Current assets:
          Cash and cash equivalents (note 3)                                  $30,427        $50,521
          Restricted cash (note 4)                                              6,403              -
          Marketable securities (note 5)                                            -         22,999
          Clinical supplies                                                     1,211          1,862
          Tax credits recoverable                                               1,327          1,130
          Prepaid expenses and deposits                                         1,384          1,623
          Accrued gain on forward exchange contracts (note 12)                      -            703
         ----------------------------------------------------------------------------------------------
                                                                               40,752         78,838

Restricted cash (note 4)                                                            -         11,701
Property and equipment (note 6)                                                   615          1,121
Acquired technology (note 7)                                                      253            506
Deferred financing costs (note 8)                                                 150          2,645
-------------------------------------------------------------------------------------------------------
                                                                              $41,770        $94,811
=======================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
          Accounts payable                                                     $3,369         $5,733
          Accrued liabilities                                                   5,067         20,554
          Current portion of senior convertible notes payable (note 8)          8,754         16,659
          Accrued loss on forward exchange contracts (note 12)                      -            763
         ----------------------------------------------------------------------------------------------
                                                                               17,190         43,709

Senior convertible notes payable (note 8)                                           -         18,795

Shareholders' equity (note 9):
       Share capital:
         Authorized:
               Unlimited common shares, without par value Issued and
         outstanding:
               156,651,342 common shares (2005 - 82,255,374)                  344,217        295,007
       Stock options                                                           10,713          8,466
       Equity component of senior convertible notes payable (note 8)            1,639          7,985
       Warrants                                                                11,390          5,345
       Contributed surplus                                                      7,995            223
          Deficit                                                            (351,374)      (284,719)
         ----------------------------------------------------------------------------------------------
                                                                               24,580         32,307
Commitments and contingencies (note 14)
-------------------------------------------------------------------------------------------------------
                                                                              $41,770        $94,811
=======================================================================================================
</TABLE>

See accompanying notes to consolidated financial statements.

On behalf of the Board:

                          Director                                   Director
--------------------------                ---------------------------

                                      65
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Consolidated Statements of Operations and Deficit
(In thousands of Canadian dollars, except per share amounts)

<TABLE>
<CAPTION>
==================================================================================================
                                                                                     Period from
                                                                                     December 1,
                                                                                       1987 to
                                              Years ended November 30,               November 30,
                                      2006             2005             2004              2006
--------------------------------------------------------------------------------------------------
<S>                               <C>              <C>              <C>              <C>
Expenses:
    Research and development
       (note 16)                  $ 32,732         $ 71,421         $ 51,794         $ 228,681
    General and administration      19,251           22,126           15,852           105,172
    Foreign exchange (gain)
    loss                               104             (719)           8,288             8,993
--------------------------------------------------------------------------------------------------
Loss before the undernoted         (52,087)         (92,828)         (75,934)         (342,846)
Interest expense on senior
    convertible notes payable         (930)            (344)               -            (1,274)
Accretion in carrying value
    of senior convertible
    notes payable                   (7,824)          (1,742)               -            (9,566)
Amortization of deferred
    financing costs                 (2,495)            (408)               -            (2,903)
Loss on extinguishment of
    senior convertible notes
    payable                         (4,995)               -                -            (4,995)
Investment income                    1,971            2,274            1,384            12,015
--------------------------------------------------------------------------------------------------
Loss for the period                (66,360)         (93,048)         (74,550)         (349,569)

Deficit, beginning of period:
    As originally reported        (284,719)        (187,665)        (113,115)           (1,510)
    Impact of change in
      accounting for
      stock-based
      compensation (note 2(m))           -           (4,006)               -                 -
--------------------------------------------------------------------------------------------------
    As restated                   (284,719)        (191,671)        (113,115)           (1,510)
Charge for acceleration
    payments on equity
    component of senior
    convertible notes payable         (295)               -                -              (295)
--------------------------------------------------------------------------------------------------
                                 $(351,374)      $ (284,719)      $ (187,665)       $ (351,374)
Deficit, end of period
==================================================================================================

Basic and diluted loss per
    common share (note 10)         $ (0.71)         $ (1.17)         $ (1.07)
==================================================================================================
</TABLE>

See accompanying notes to consolidated financial statements.

                                      66
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Consolidated Statements of Cash Flow
(In thousands of Canadian dollars)

<TABLE>
<CAPTION>
===================================================================================================
                                                                                       Period from
                                                                                       December 1,
                                                                                         1987 to
                                                       Years ended November 30,        November 30,
                                                  2006            2005          2004        2006
---------------------------------------------------------------------------------------------------
<S>                                           <C>             <C>           <C>        <C>
Cash provided by (used in):
Operating activities:
   Loss for the period                        $(66,360)       $(93,048)     $(74,550)  $(349,569)
   Items not involving cash:
      Amortization                                 782             589           463       5,657
      Accretion in carrying value of
        senior convertible notes payable         7,824           1,742             -       9,566
      Amortization of deferred financing
        costs                                    2,495             408             -       2,903
      Loss on extinguishment of senior
        convertible notes payable                4,995               -             -       4,995
      Stock-based compensation                   3,083           3,615           455      11,590
      Common shares issued for services             36               -             -       2,485
      Unrealized foreign exchange loss
        (gain)                                     (65)           (542)        8,278       8,977
      Other                                          -               -             -         (35)
      Change in non-cash operating
        working capital (note 11(a))           (17,158)         12,634         9,542       4,486
---------------------------------------------------------------------------------------------------
                                               (64,368)        (74,602)      (55,812)   (298,945)

Financing activities:
    Shares and warrants issued for cash         23,106          52,502        76,913     309,013
    Warrants exercised for cash                      -               -             -      16,941
    Options exercised for cash                       -             627         1,300       7,669
    Share issue costs                           (2,221)         (3,720)       (5,625)    (23,206)
    Issue (repayment) of senior
      convertible notes payable, net
      (note 8)                                  (3,976)         42,790             -      39,436
    Restricted cash                              5,298         (11,701)            -      (6,403)
    Paid to related parties                          -               -             -        (234)
---------------------------------------------------------------------------------------------------
                                                22,207          80,498        72,588     343,216
Investing activities:
   Purchases of property and equipment             (23)           (490)         (816)     (2,416)
   Purchases of acquired technology                  -               -             -      (1,283)
   Purchases of marketable securities              (80)        (22,999)      (74,872)   (244,846)
   Settlement of forward exchange
   contracts                                      (102)         (4,732)            -      (4,834)
   Maturities of marketable securities          23,079          67,651        59,976     240,677
---------------------------------------------------------------------------------------------------
                                                22,874          39,430       (15,712)    (12,702)
Foreign exchange loss on cash
   held in foreign currency                       (807)           (141)         (204)     (1,142)
---------------------------------------------------------------------------------------------------


Increase (decrease) in cash
   and cash equivalents                        (20,094)         45,185           860      30,427
Cash and cash equivalents,
   beginning of period                          50,521           5,336         4,476           -
---------------------------------------------------------------------------------------------------
Cash and cash equivalents,                     $30,427         $50,521        $5,336     $30,427
   end of period
===================================================================================================
</TABLE>

Supplemental cash flow information (note 11)

See accompanying notes to consolidated financial statements.

                                      67
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements
(Tabular figures in thousands, except per share amounts)

Years ended November 30, 2006, 2005, 2004 and
period from December 1, 1987 to November 30, 2006
===============================================================================

1.       BASIS OF PRESENTATION:

         Since its inception,  the Company has been engaged in the research and
         commercial  development  of product  candidates  for the  treatment of
         disease and has had no commercial  operations.  The  operations of the
         Company are not subject to any seasonality or cyclicality factors.

         The consolidated  financial statements presented have been prepared on
         the  basis  that  the  Company  is  considered  a  development   stage
         enterprise and, accordingly, the consolidated statements of operations
         and deficit and cash flows also  reflect the  cumulative  amounts from
         December  1, 1987  (the  date  development  operations  commenced)  to
         November 30, 2006.

         The Company's  future  operations  are  dependant  upon its ability to
         finance the commercialization of its lead product,  Celacade,  and the
         continued  development  of its  product  candidate  VP025.  While  the
         Company's  ACCLAIM Phase III trial of its lead product,  Celacade(TM),
         did not reach the primary endpoint of significantly  reducing the risk
         of death  and  cardiovascular  hospitalization  in the  total  patient
         population,  this  endpoint was met for large  pre-defined  subgroups.
         Management is investigating  certain large pre-defined subgroups where
         the endpoint was met. The Company also has CE Mark regulatory approval
         for its Celacade  medical device  technology in the European Union and
         is currently in discussions  to secure a partner  necessary to support
         commercialization in that market.

         The  Company's  commercialization  efforts of Celacade  and  continued
         development   of  VP025  are  dependent  upon  its  ability  to  raise
         additional   financing   through  a  combination  of  equity  or  debt
         financing,   payments  from  strategic  partners,  or  upon  strategic
         partners   funding   directly   some   or   all  of   the   costs   of
         commercialization.  Should the Company's  ability to raise  additional
         financial  support  be  delayed,  management  believes  the  Company's
         current  level of cash  and cash  equivalents  is  sufficient  to fund
         planned expenditures for the next 12 months.


                                      68
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements
(Tabular figures in thousands, except per share amounts)

Years ended November 30, 2006, 2005, 2004 and
period from December 1, 1987 to November 30, 2006
===============================================================================


2.       SIGNIFICANT ACCOUNTING POLICIES:

         These  consolidated  financial  statements  are prepared in accordance
         with accounting  principles  generally  accepted in Canada  ("Canadian
         GAAP"),  which,  except  as  described  in note  17,  conform,  in all
         material respects,  with accounting  principles  generally accepted in
         the United States ("United States GAAP").

         (a)      Principles of consolidation:

                  These consolidated  financial statements include the accounts
                  of the Company  and its  wholly-owned  subsidiaries,  Vasogen
                  Ireland  Limited  (Irish-incorporated  entity  established in
                  1998)  and  Vasogen   Corp.   (Delaware-incorporated   entity
                  established  in  2004).  The  functional   currency  of  both
                  subsidiaries   is   the   Canadian   dollar.   All   material
                  intercompany balances and transactions have been eliminated.

         (b)      Cash and cash equivalents:

                  The Company considers unrestricted cash on hand, in banks, in
                  term deposits and in corporate bonds or commercial paper with
                  original  maturities of three months or less as cash and cash
                  equivalents.

         (c)      Marketable securities:

                  Marketable   securities   consisted   of   corporate   bonds,
                  commercial  paper and  medium-term  notes which are stated at
                  amortized cost plus accrued  interest.  The Company regularly
                  reviews the carrying value of its  investments.  Should there
                  be a decline in value that is other than a temporary decline,
                  the Company  measures the amount of the  write-down  based on
                  the quoted market value of the  investments  and charges such
                  write-down to the  consolidated  statements of operations and
                  deficit.  Interest income is recognized on an effective yield
                  basis. All marketable securities are held to maturity.

         (d)      Concentration of credit risk:

                  Financial  instruments  potentially exposing the Company to a
                  concentration of credit risk consist  principally of cash and
                  cash  equivalents  and  marketable  securities.  The  Company
                  manages this credit risk by  maintaining  bank  accounts with
                  Schedule I banks and investing  only in highly rated Canadian
                  and U.S.  corporations  with  securities  that are  traded on
                  active markets and are capable of prompt liquidation.

         (e)      Property and equipment:

                  Property  and   equipment  are  recorded  at  cost  less  any
                  impairment losses recognized in accordance with note 2(h) and
                  amortized  on a  straight-line  basis  over  their  estimated
                  useful lives as follows:

                                      69
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements
(Tabular figures in thousands, except per share amounts)

Years ended November 30, 2006, 2005, 2004 and
period from December 1, 1987 to November 30, 2006
===============================================================================


2.       SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):


                 -------------------------------------------------------------
                 Testing equipment                                    5 years
                 Computer and other equipment                         5 years
                 Leasehold improvements                    Over term of lease
                 -------------------------------------------------------------

         (f)      Acquired technology:

                  Acquired  technology,  representing  part  of  the  Company's
                  platform  medical device  technology,  is stated at amortized
                  cost less any impairment losses recognized in accordance with
                  note 2(h).  Amortization is provided on a straight-line basis
                  over 20 years, representing the term of the acquired patent.

         (g)      Deferred financing costs:

                  Deferred  financing  costs  are  comprised  primarily  of the
                  placement  fee and  professional  fees  associated  with  the
                  issuance of the Company's senior  convertible  notes payable.
                  Deferred  financing  costs are amortized over the term of the
                  convertible notes using the effective yield method.

         (h)      Impairment of long-lived assets:

                  The Company  periodically  reviews  the useful  lives and the
                  carrying values of its long-lived assets. The Company reviews
                  its  long-lived  assets  for  impairment  whenever  events or
                  changes in circumstances indicate that the carrying amount of
                  the  assets  may  not  be  recoverable.  If  the  sum  of the
                  undiscounted  expected  future cash flows  expected to result
                  from  the use and  eventual  disposition  of an asset is less
                  than its carrying amount, it is considered to be impaired. An
                  impairment  loss is  measured  as the  amount  by  which  the
                  carrying amount of the asset exceeds its fair value, which is
                  estimated as the expected  future cash flows  discounted at a
                  rate commensurate with the risks associated with the recovery
                  of the asset. As at November 30, 2006, 2005 and 2004, no such
                  impairment losses were recorded.

         (i)      Research and development:

                  Research  costs are expensed as incurred.  Development  costs
                  are expensed as incurred  unless they meet the criteria under
                  Canadian GAAP for deferral and amortization.  The Company has
                  not capitalized  any such  development  costs to date.  Total
                  research and development tax credits netted against  research
                  and development  expenses on the  consolidated  statements of
                  operations and deficit are $0.8 million (2005 - $0.2 million;
                  2004 - $0.3 million;  December 1, 1987 to November 30, 2006 -
                  $3.0 million).

                  Tax credits  recoverable  include the Ontario  Innovation Tax
                  Credits,  the  Goods  and  Services  Tax  credits  and  other
                  recoverable tax amounts.  These amounts are recoverable after
                  the filing of  various  tax  returns  and the  completion  of
                  various tax audits.

                                      70
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements
(Tabular figures in thousands, except per share amounts)

Years ended November 30, 2006, 2005, 2004 and
period from December 1, 1987 to November 30, 2006
===============================================================================


2.       SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):


                  Clinical supplies represent the devices and disposables on
                  hand at year end that will be consumed in the Company's future
                  research and clinical trials. These supplies are carried at
                  the lower of cost, on a first-in-first-out basis, and
                  replacement cost, adjusted for any impairment in value due to
                  obsolescence and are expensed as research and development
                  expenses when shipped to outsourced research centers or
                  clinical sites.

         (j)      Derivative financial instruments:

                  The Company is party to forward foreign exchange contracts in
                  order to pursue its investment  objectives  without  changing
                  its foreign currency  exposure.  These financial  instruments
                  are  measured at fair  value,  which is  determined  based on
                  amounts quoted by the Company's  banker to realize  favorable
                  contracts  or to settle  unfavorable  contracts,  taking into
                  account  foreign  exchange  rates  and the  duration  of each
                  contract. The unrealized gain or loss arising from changes in
                  fair value of the forward  exchange  contracts is included in
                  the  determination  of loss for the period as the instruments
                  are not considered hedging instruments.

         (k)      Translation of foreign currency:

                  The  functional  currency  of the  Company  is  the  Canadian
                  dollar. Accordingly,  monetary items denominated in a foreign
                  currency are  translated  into  Canadian  dollars at exchange
                  rates in effect at the balance  sheet dates and  non-monetary
                  items are  translated at rates of exchange in effect when the
                  assets were  acquired or  obligations  incurred.  Revenue and
                  expenses are translated at rates in effect at the time of the
                  transactions.  Foreign exchange gains and losses are included
                  in the determination of loss for the period.

         (l)      Income taxes and investment tax credits:

                  The  Company  accounts  for  income  taxes by the  asset  and
                  liability  method.  Under  the asset  and  liability  method,
                  future tax  assets and  liabilities  are  recognized  for the
                  future  income taxes  attributable  to temporary  differences
                  between the financial  statement  carrying values of existing
                  assets and  liabilities  and their  respective  tax  carrying
                  values.  Future tax assets and liabilities are measured using
                  enacted or substantively  enacted tax rates expected to apply
                  to  taxable  income in the  period in which  those  temporary
                  differences  are  expected to be  recovered  or settled.  The
                  effect on future tax assets  and  liabilities  of a change in
                  tax rates is recognized in income in the period that includes
                  the substantive enactment date.

                  Future  tax assets  recognized  are  reduced  by a  valuation
                  allowance.  Management  has  provided a  valuation  allowance
                  equivalent to the net future tax asset  balances,  given that
                  the Company's activities are in the development stage and the
                  uncertainty that it will generate  sufficient  income for tax
                  purposes  to  utilize  the  tax  losses  in the  carryforward
                  period.

                  The  benefits  of tax  credits for  scientific  research  and
                  development  expenditures  are  recognized  in the period the
                  qualifying   expenditures   are  made,   provided   there  is
                  reasonable  assurance  of  recoverability.  The  tax  credits
                  reduce the cost of property and equipment or research  costs,
                  as applicable.

                                      71
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements
(Tabular figures in thousands, except per share amounts)

Years ended November 30, 2006, 2005, 2004 and
period from December 1, 1987 to November 30, 2006
===============================================================================


2.       SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):


         (m)      Stock-based compensation plans:

                  The Company has a stock-based compensation plan, described in
                  note 9(c).  Prior to  December  1, 2004,  stock-based  awards
                  granted to employees,  directors and officers were  accounted
                  for using the  settlement  method.  On December 1, 2004,  the
                  Company  adopted  the fair  value  method of  accounting  for
                  stock-based  awards  to  employees,  directors  and  officers
                  granted or  modified  after  December  1, 2002.  This  method
                  requires the Company to expense, over the vesting period, the
                  fair  value of all  employee  stock-based  awards  granted or
                  modified since  December 1, 2002.  Stock options and warrants
                  awarded to  non-employees  are  accounted  for using the fair
                  value  method  and  expensed  as the  service  or  product is
                  received.  The fair  value of  performance-based  options  is
                  recognized  over  the  estimated  period  to  achievement  of
                  performance conditions.  The Company estimates forfeitures as
                  part of the  initial  measure of the grant date fair value of
                  the award.  Fair value is determined using the  Black-Scholes
                  option pricing model.

         (n)      Deferred share units plan:

                  The  Company  has a deferred  share units  ("DSU")  plan,  as
                  described in note 9(d). On the date of grant,  the fair value
                  of each DSU,  being the fair  market  value of the  Company's
                  common shares at that date, is recorded as a liability on the
                  Company's  consolidated  balance sheets. The value of the DSU
                  liability is adjusted to reflect  changes in the market value
                  of the Company's common shares at each period end.

         (o)      Basic and diluted loss per common share:

                  Basic loss per common share is computed by dividing  loss for
                  the period by the weighted  average  number of common  shares
                  outstanding  during the  reporting  period.  Diluted loss per
                  common  share is computed  similarly to basic loss per common
                  share,  except  that the  weighted  average  number of shares
                  outstanding  is increased to include  additional  shares from
                  the assumed  exercise of stock  options and  warrants and the
                  conversion  of  the  senior  convertible  notes  payable,  if
                  dilutive.  The number of  additional  shares is calculated by
                  assuming  that  outstanding  stock  options and warrants were
                  exercised and that proceeds from such  exercises were used to
                  acquire  shares of common  stock at the average  market price
                  during the reporting period. The additional shares would also
                  include those shares issuable upon the assumed  conversion of
                  the senior  convertible notes payable,  with an adjustment to
                  loss for the period to add back any interest paid to the note
                  holders.  These common  equivalent shares are not included in
                  the  calculation  of the  weighted  average  number of shares
                  outstanding for diluted loss per common share when the effect
                  would be anti-dilutive.

         (p)      Measurement uncertainty:

                  The  preparation of financial  statements in accordance  with
                  Canadian  GAAP  requires  management  to make  estimates  and
                  assumptions  that affect the  reported  amounts of assets and
                  liabilities   and   disclosure  of   contingent   assets  and
                  liabilities  at the date of the financial  statements and the
                  reported  amounts of revenue and expenses  during the period.
                  Actual results could differ from those estimates.

                                      72
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements
(Tabular figures in thousands, except per share amounts)

Years ended November 30, 2006, 2005, 2004 and
period from December 1, 1987 to November 30, 2006
===============================================================================


2.       SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):


                  The Company has estimated the useful lives of all depreciable
                  assets and the recoverability of property and equipment and
                  acquired technology using estimates of future cash flows and
                  other measures of fair values. Significant changes in the
                  assumptions with respect to future business plans could result
                  in impairment of property and equipment or acquired
                  technology.

         (q)      Recent accounting pronouncements issued and not yet applied:

                  (i)      Financial instruments, recognition and measurement:

                           In January 2005, The Canadian Institute of Chartered
                           Accountants  ("CICA")  released new Handbook Section
                           3855,   Financial   Instruments,   Recognition   and
                           Measurement,   effective   for  annual  and  interim
                           periods  beginning on or after October 1, 2006. This
                           new   section   establishes    standards   for   the
                           recognition   and   measurement   of  all  financial
                           instruments,    provides   a   characteristics-based
                           definition of a derivative financial instrument, and
                           provides  criteria  to be used to  determine  when a
                           financial instrument should be recognized and when a
                           financial  instrument  is  to be  extinguished.  The
                           Company  has not yet  determined  the effect of this
                           new standard on its consolidated  financial position
                           and results of operations.

                  (ii)     Comprehensive income and equity:

                           In January  2005,  the CICA  released  new  Handbook
                           Section  1530,  Comprehensive  Income,  and  Section
                           3251,  Equity,  effective  for  annual  and  interim
                           periods  beginning  on or  after  October  1,  2006.
                           Section 1530  establishes  standards  for  reporting
                           comprehensive  income.  The section does not address
                           issues   of   recognition    or   measurement    for
                           comprehensive  income  and its  components.  Section
                           3251  establishes  standards for the presentation of
                           equity and  changes in equity  during the  reporting
                           period.  The  requirements  in  Section  3251 are in
                           addition  to  Section  1530.  The  Company  does not
                           expect  the  adoption  of  this  standard  to have a
                           material  impact  on  its   consolidated   financial
                           position and results of operations.

                  (iii)    Hedges:

                           In January  2005,  the CICA  released  new  Handbook
                           Section  3865,  Hedges,  effective  for  annual  and
                           interim  periods  beginning  on or after  October 1,
                           2006.  This new section  establishes  standards from
                           when and how hedge accounting may be applied.  Hedge
                           accounting is optional.  The Company does not expect
                           the  adoption  of this  standard  to have a material
                           impact on its  consolidated  financial  position and
                           results of operations.

                  (iv)     Non-monetary transactions:

                           In June 2005, the CICA released new Handbook Section
                           3831,  Non-monetary   Transactions,   effective  for
                           annual  periods  beginning  on or after  January  1,
                           2006.  This  standard   requires  all   non-monetary
                           transactions  to be  measured  at fair value  unless
                           they  meet  one  of  four  very  specific  criteria.
                           Commercial  substance  replaces  culmination  of the
                           earnings   process   as  the  test  for  fair  value
                           measurement.  A transaction has

                                      73
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements
(Tabular figures in thousands, except per share amounts)

Years ended November 30, 2006, 2005, 2004 and
period from December 1, 1987 to November 30, 2006
===============================================================================


2.       SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):


                           commercial  substance  if it causes an  identifiable
                           and measurable change in the economic  circumstances
                           of the entity. Commercial substance is a function of
                           the cash flows expected by the reporting entity. The
                           Company   does  not  expect  the  adoption  of  this
                           standard   to  have  a   material   impact   on  its
                           consolidated   financial  position  and  results  of
                           operations.

                  (v)      Accounting changes:

                           In  July  2006,  the  Accounting   Standards   Board
                           ("AcSB")  issued a replacement  of Handbook  Section
                           1506,  Accounting  Changes.  The new standard allows
                           for voluntary changes in accounting policy only when
                           they result in the  financial  statements  providing
                           reliable  and more  relevant  information,  requires
                           changes   in   accounting   policy  to  be   applied
                           retrospectively  unless  doing so is  impracticable,
                           requires   prior  period   errors  to  be  corrected
                           retrospectively  and calls for enhanced  disclosures
                           about the effects of changes in accounting policies,
                           estimates  and errors on the  financial  statements.
                           The standard is effective for fiscal years beginning
                           on or after January 1, 2007,  with earlier  adoption
                           encouraged. The Company does not expect the adoption
                           of this  standard  to have a material  impact on its
                           consolidated   financial  position  and  results  of
                           operations.

                  (vi)     Capital disclosure:

                           In  October  2006,   the  AcSB  approved  a  set  of
                           disclosure   and   presentation   requirements   for
                           financial  instruments  that  revise and enhance the
                           disclosure  requirements  of Handbook  Section 3861,
                           Financial Instruments - Disclosure and Presentation.
                           This set of disclosure and presentation requirements
                           included Handbook Section 1535, Capital Disclosures,
                           which    establishes    standards   for   disclosing
                           information  about an entity's capital and how it is
                           managed.  This standard  requires  disclosure of: an
                           entity's  objectives,  policies  and  processes  for
                           managing  capital,  quantitative data about what the
                           entity regards as capital and whether the entity has
                           complied  with any capital  requirements  and, if it
                           has  not   complied,   the   consequences   of  such
                           non-compliance.   This  standard  is  effective  for
                           interim and annual financial  statements relating to
                           fiscal years  beginning on or after October 1, 2007.
                           Early  adoption  is  permitted  at the same  time an
                           entity adopts other standards relating to accounting
                           for  financial  instruments.  The  Company  does not
                           expect  the  adoption  of  this  standard  to have a
                           material  impact  on  its   consolidated   financial
                           position and results of operations.

3.       CASH AND CASH EQUIVALENTS:

         As at November 30, 2006,  included in total cash and cash  equivalents
         of $30.4 million (2005 - $50.5 million), the Company has $29.9 million
         (2005 - $47.6  million)  of cash  equivalents,  of which $1.0  million
         (U.S. $0.9 million) are denominated in U.S. dollars; in 2005, all were
         denominated in Canadian dollars.


                                      74
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements
(Tabular figures in thousands, except per share amounts)

Years ended November 30, 2006, 2005, 2004 and
period from December 1, 1987 to November 30, 2006
===============================================================================


4.       RESTRICTED CASH:

         As at November  30,  2006,  the Company has $6.4  million  (U.S.  $5.6
         million)  (2005 - $11.7  million (U.S.  $10.0  million)) in restricted
         cash,  which represents cash on deposit to secure the letter of credit
         provided as security  to the holders of the senior  convertible  notes
         payable,  which were  issued on October 7, 2005.  The letter of credit
         automatically  renews every year and shall not expire  earlier than 91
         days after the maturity date of the convertible notes.

         In accordance with the terms of the senior  convertible notes payable,
         the Company  was  required to obtain a U.S.  $10.0  million  letter of
         credit in favour of the noteholders.  During 2006, the Company reduced
         the U.S. $10.0 million  original  amount of the letter of credit by an
         amount equal to one half of the difference  between U.S. $17.0 million
         and the aggregate  principal  amount of the notes  outstanding of U.S.
         $8.2  million on November  1, 2006 as provided  under the terms of the
         senior convertible notes payable.

5.       MARKETABLE SECURITIES

<TABLE>
<CAPTION>
        =================================================================================================
                                                 Less than   Greater than
                                                 one year      one year                   Yield to
        2006                                    maturities    maturities      Total       maturity
        -------------------------------------------------------------------------------------------------
        <S>                                    <C>           <C>           <C>        <C>
        Corporate bonds, commercial
             paper and medium-term notes       $    -        $     -       $    -     $       -
        =================================================================================================

        =================================================================================================
                                                Less than    Greater than
                                                 one year      one year
        2005                                    maturities    maturities     Total    Yield to maturity
        -------------------------------------------------------------------------------------------------
        Corporate bonds, commercial            $     22,999  $     -       $   22,999       3.04% - 4.25%
             paper and medium-term notes
        =================================================================================================
</TABLE>

         At November 30, 2005, $7.8 million marketable  securities were held in
         U.S. dollar-denominated investments, aggregating U.S. $6.7 million.

         At November 30, 2005,  the carrying  values of  marketable  securities
         approximated their quoted market values. Marketable securities held at
         November 30, 2005 had varying maturities from one to four months.

6.       PROPERTY AND EQUIPMENT:

<TABLE>
<CAPTION>
        ===========================================================================================
                                                                        Accumulated       Net book
        2006                                                 Cost      amortization        value
        -------------------------------------------------------------------------------------------
        <S>                                                  <C>           <C>            <C>
        Testing equipment                                    $    936      $     715      $    221
        Computer and other equipment                              562            369           193
        Leasehold improvements                                    366            165           201

        -------------------------------------------------------------------------------------------
                                                             $  1,864      $   1,249      $    615
        ===========================================================================================
</TABLE>

                                      75
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements
(Tabular figures in thousands, except per share amounts)

Years ended November 30, 2006, 2005, 2004 and
period from December 1, 1987 to November 30, 2006
===============================================================================

<TABLE>
<CAPTION>
        ===========================================================================================
                                                                        Accumulated       Net book
        2005                                                 Cost      amortization        value
        -------------------------------------------------------------------------------------------
        <S>                                                  <C>           <C>            <C>
        Testing equipment                                    $    936      $     595      $    341
        Computer and other equipment                              539            288           251
        Leasehold improvements                                    730            201           529

        -------------------------------------------------------------------------------------------
                                                             $  2,205      $   1,084      $  1,121
        ===========================================================================================
</TABLE>

         In 2006,  amortization  expense is $0.5 million  (2005 - $0.3 million;
         2004 - $0.2 million).

7.       ACQUIRED TECHNOLOGY:

<TABLE>
<CAPTION>
        ================================================================================
                                                                   2006           2005
        --------------------------------------------------------------------------------
        <S>                                                   <C>           <C>
        Cost                                                  $   4,081     $    4,081
        Less accumulated amortization                             3,828          3,575
        --------------------------------------------------------------------------------

        Net book value                                        $     253     $      506
        ================================================================================
</TABLE>

         In 2006,  amortization  expense is $0.3 million  (2005 - $0.3 million;
         2004 - $0.3 million).

8.       SENIOR CONVERTIBLE NOTES PAYABLE:

         On October 7, 2005, the Company,  through its wholly-owned subsidiary,
         Vasogen  Ireland  Limited,  issued  6.45% U.S.  $40.0  million  senior
         convertible  notes  payable  and 3.3  million  common  share  purchase
         warrants, as disclosed in note 9(e), for net proceeds of $42.8 million
         (gross  proceeds of $47.0 million (U.S.  $40.0  million) less issuance
         costs of $4.2  million).  The notes  will be repaid by April 1,  2007,
         which  shall be  extended  to October 7, 2010 upon the  occurrence  of
         pre-market  approval granted by the U.S. Food and Drug  Administration
         for the  marketing  of Celacade  for use in the  treatment  of chronic
         heart failure.

         The notes  are  guaranteed  by  Vasogen  Inc.  and are  secured  by an
         irrevocable U.S. $5.6 million letter of credit issued in favour of the
         note holders which is fully secured by cash on hand (note 4).

                                      76
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements
(Tabular figures in thousands, except per share amounts)

Years ended November 30, 2006, 2005, 2004 and
period from December 1, 1987 to November 30, 2006
===============================================================================


8.       SENIOR CONVERTIBLE NOTES PAYABLE (CONTINUED):

         The notes  are  convertible  by the  holders  at any time into  common
         shares of the Company at an adjusted  conversion  price of U.S.  $1.99
         per share (2005 - U.S.  $3.00 per share),  adjusted for  anti-dilution
         and other  downward  adjustments,  including if the Company  issues or
         sells  common  stock at a price of less than U.S.  $1.99 (2005 - $3.00
         per share)  unless the offering is in excess of U.S.  $50.0 million in
         total or in  connection  with  terms  permitted  under the  agreement,
         issues  options or warrants to third parties with an exercise price of
         less than U.S. $1.99 or convertible securities with a conversion price
         of less than U.S. $1.99 (collectively, the "conversion price").

         The  Company  is  required  to  pay  the  notes  in 22  equal  monthly
         installments  commencing December 1, 2005. As a result of acceleration
         payments made as at November 30, 2006, only five  installments  remain
         and,  accordingly,  the notes are expected to be fully repaid on April
         1, 2007. While interest is always payable in cash, the Company, at its
         option,  may pay the  installment  in cash at the face  amount  of the
         installment  principal or in freely  tradable  common  shares,  or any
         combination thereof. If settled in common shares, the number of common
         shares  is based  on the  face  amount  of the  installment  principal
         divided by the lesser of (i) the conversion  price and (ii) 90% of the
         five-day  weighted  average price of the Company's  common shares,  as
         defined in the agreement,  if the stock price is less than U.S. $1.00,
         or 95% of the five-day  weighted average price of the Company's common
         shares,  as defined in the agreement,  if greater than U.S. $1.00. The
         aggregate  number of common  shares that the Company can issue to make
         the  installment  payments  in  accordance  with these  provisions  is
         25,000,000  (the  "Exchange  Cap").  Once  exceeded,  the  Company  is
         required to issue shares at 100% of the share price and make whole the
         note  holders  with a cash  payment  equal  to 10% of the  installment
         amount.  The Company is obligated to provide  additional common shares
         at no additional  consideration if subsequent to the installment date,
         the  number  of  shares  is  greater  when the  subsequent  twelve-day
         weighted  average share price is used in the formula ("the  twelve-day
         weighted  average share price  adjustment").  Additional  principal is
         deemed to be  extinguished if the number of shares issued is in excess
         of the  number of shares  otherwise  determined  using the  subsequent
         twelve-day  weighted  average share price in the formula.  The Company
         accounts for the twelve-day weighted average share price adjustment as
         an adjustment to share capital.


                                      77
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements
(Tabular figures in thousands, except per share amounts)

Years ended November 30, 2006, 2005, 2004 and
period from December 1, 1987 to November 30, 2006
===============================================================================


8.       SENIOR CONVERTIBLE NOTES PAYABLE (CONTINUED):

         The  Company  has the  right to  accelerate  payments  of  outstanding
         principal of up to U.S. $8.0 million on each  installment  date if the
         Company's  common share price is greater than U.S.  $1.00 per share or
         up to 40% of the  principal  outstanding  each  calendar  year  if the
         Company's common share price is greater than U.S. $4.00 per share. The
         acceleration  repayment  terms are similar to the monthly  installment
         redemption terms described above. In addition,  the Company is obliged
         to issue additional  common share purchase warrants with terms similar
         to those warrants  issued  initially with the maturity date being five
         years from the date of issuance and the exercise  price of U.S.  $1.99
         per common  share  (subject to  adjustment  similar to the  conversion
         price) (2005 - U.S. $3.00 per common share).

         Effective  September  1, 2006,  the Company  must  maintain a net cash
         balance of 110% of the outstanding  principal  amount on the notes. If
         the  Company  does not  maintain a net cash  balance of 110%,  it will
         trigger an event of default.  The Company has been in compliance  with
         this cash test at all times since it came into effect.

         The  interest  rate  increases  to 12%  upon  and  during  an event of
         default.  The Company is required to pay 2% of the  purchase  price of
         the notes and warrants each month if the  Company's  common shares are
         not freely tradable under applicable Ontario and U.S.  securities laws
         and regulations.

         The  holders  also have the right to  demand  repayment  in cash or in
         common shares at 125% of the face amount of principal  outstanding  in
         the event of default or at 115% in the event of a change in control or
         the  value of the  common  shares  the  holder  would  otherwise  have
         received on  conversion of the shares prior to the event of default or
         the change in control.  No accounting  consideration has been given to
         these  holders'  contingent put rights since it is  management's  view
         that these contingent events are not probable of occurrence.

         The Company  allocated  the gross  proceeds  received of $47.0 million
         from the issuance of the convertible  notes and warrants on a relative
         fair value basis as follows:  $33.9 million to the debt,  $8.8 million
         to the equity  component  and $4.3 million to the  warrants.  The fair
         value of the debt was  determined  based  on the  future  payments  of
         principal and interest for a debt  instrument  of comparable  maturity
         and credit quality but excluding any conversion  option by the holder.
         The senior  convertible notes payable carry an effective interest rate
         of 48%. The conversion  option or equity  component of the convertible
         notes was  valued  using the  Binomial  model.  The fair  value of the
         warrants was  determined  based on the  Black-Scholes  option  pricing
         model.


                                      78
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements
(Tabular figures in thousands, except per share amounts)

Years ended November 30, 2006, 2005, 2004 and
period from December 1, 1987 to November 30, 2006
===============================================================================


8.       SENIOR CONVERTIBLE NOTES PAYABLE (CONTINUED):

         The issue costs related to the  transaction  of $4.2 million were also
         allocated  on a  proportionate  basis  as  follows:  $3.0  million  to
         deferred  financing costs to be amortized on an effective yield basis,
         $0.8 million to the equity component and $0.4 million to the warrants.

         The fair  value of the  monthly  installment  payment  paid in  common
         shares is recorded as share capital and the carrying value of the debt
         is  reduced  with any  difference  being  charged as a gain or loss on
         extinguishment of the senior convertible notes payable.

         Any acceleration  payment is accounted for as an early  extinguishment
         of the  outstanding  principal.  Accordingly,  the  fair  value of the
         consideration   given  is  allocated   between  the  debt  and  equity
         components of the senior convertible notes with any difference between
         the carrying value and allocated  fair value being  accounted for as a
         capital   transaction   for  the  equity   component  and  a  loss  on
         extinguishment for the liability component.

         Additional  common  shares issued in  connection  with the  twelve-day
         weighted  average  share  price  adjustment  related  to  the  monthly
         installment   and   acceleration   payment   are  for  no   additional
         consideration.  Accordingly, no accounting recognition is given to the
         issuance of these common shares. If additional  principal is deemed to
         be extinguished related to the twelve-day weighted average share price
         adjustment,  the Company  records a reduction in long-term debt and an
         increase in share capital.

         As a result of the financing  that was completed on November 14, 2006,
         the conversion  price of the senior  convertible  notes was reduced to
         U.S.  $1.99  from  U.S.  $3.00 in  accordance  with the  anti-dilution
         provisions  contained within the notes. The  anti-dilution  provisions
         also  provided  that the  exercise  price of the 4.7 million  warrants
         outstanding to the note holders at an exercise price of U.S. $3.00 was
         reduced  to U.S.  $1.99  and the  exercise  price  of the 0.4  million
         warrants at an exercise price of U.S. $3.11 was reduced to U.S. $2.06.
         In addition, the 5.1 million warrants outstanding can now be exercised
         for 7.7  million  common  shares,  which is an  increase  from the 5.1
         million common shares prior to the anti-dilution  provisions that were
         triggered by the November 14, 2006 financing.

         Commencing on November 1, 2006,  the Company has exceeded the Exchange
         Cap,  and  therefore  the Company will issue shares to settle the debt
         and make a cash payment of 10% of the installment amount.


                                      79
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements
(Tabular figures in thousands, except per share amounts)

Years ended November 30, 2006, 2005, 2004 and
period from December 1, 1987 to November 30, 2006
===============================================================================


8.       SENIOR CONVERTIBLE NOTES PAYABLE (CONTINUED):

         The following table sets out the continuity of the senior  convertible
         notes payable since the issuance date:

<TABLE>
<CAPTION>
        ============================================================================================
                                                                                          Impact on
                                                         Number of                           senior
                                                            common        Number of     convertible
                                                            shares         warrants   notes payable
        --------------------------------------------------------------------------------------------
        <S>                                                 <C>              <C>         <C>
        Balance, October 7, 2005
             (date of issuance)                                  -               -       $   33,969
        Accretion in carrying value                              -               -            1,742
        Impact of foreign exchange                               -               -             (257)
        --------------------------------------------------------------------------------------------
                                                                 -               -           35,454
        Balance, November 30, 2005
        December 1, 2005 installment
             payment in advance applied                        774               -           (2,122)
        Installment payments settled in cash                     -               -           (3,926)
        Installment payments settled in shares              26,968               -          (19,849)
        Acceleration payments settled in
             common shares and warrants                      4,112           1,777           (7,265)
        Conversion by note holder to
             common shares                                     100               -             (263)
        Accretion in carrying value                              -               -            7,824
        Impact of foreign exchange                               -               -           (1,099)
        --------------------------------------------------------------------------------------------
        Balance, November 30, 2006                          31,954           1,777       $    8,754
        ============================================================================================
</TABLE>


                                      80
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements
(Tabular figures in thousands, except per share amounts)

Years ended November 30, 2006, 2005, 2004 and
period from December 1, 1987 to November 30, 2006
===============================================================================


8.       SENIOR CONVERTIBLE NOTES PAYABLE (CONTINUED):

<TABLE>
<CAPTION>
        ==========================================================================================
                                                                             2006           2005
        ------------------------------------------------------------------------------------------
        <S>                                                          <C>            <C>
        Par value of senior convertible notes payable at
           November 30                                               $      9,379   $     46,676
        Balance remaining to be accreted                                     (625)       (11,222)
        ------------------------------------------------------------------------------------------

        Senior convertible notes payable                                    8,754         35,454

        Current portion of senior convertible notes payable                 8,754         16,659
        ------------------------------------------------------------------------------------------

        Senior convertible notes payable, long term                  $          -   $     18,795
        ==========================================================================================
</TABLE>

         At November 30, 2006,  $8.8  million  (2005 - $16.7  million) has been
         presented  as a current  liability  since the Company is  obligated to
         settle that portion of the carrying amount of the convertible notes in
         cash or in common shares in the next five months.


                                      81
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements
(Tabular figures in thousands, except per share amounts)

Years ended November 30, 2006, 2005, 2004 and
period from December 1, 1987 to November 30, 2006
===============================================================================


9.       SHAREHOLDERS' EQUITY:

         (a)     Consolidated statement of shareholders' equity:

<TABLE>
<CAPTION>
=================================================================================================================================
                                                                          Equity
                                                                         component
                                                                            of                                       Period from
                                        Common                            senior                                     December 1,
                                        shares'                         convertible                                    1987 to
                             Number     average     Share      Stock       notes               Contributed           November 30,
                           of shares  share price  capital    options     payable    Warrants   surplus    Deficit       2006
----------------------------------------------------------------------------------------------------------------------------------
<S>                        <C>        <C>          <C>        <C>        <C>         <C>        <C>        <C>        <C>
Balance, December 1, 1987      1,032               $  1,213   $      -   $      -   $      -    $      -   $ (1,510)  $   (297)
Shares issued for cash           138          1.40      195          -          -          -           -          -        195
Shares issued for
services                           5          3.50       17          -          -          -           -          -         17
Shares issued to acquire
   a license                   1,571          1.51    2,375          -          -          -           -          -      2,375
Loss                               -                      -          -          -          -           -       (755)      (755)
----------------------------------------------------------------------------------------------------------------------------------
Balance, November 30, 1988     2,746                  3,800          -          -          -           -     (2,265)     1,535
Loss                               -                      -          -          -          -           -       (601)      (601)
----------------------------------------------------------------------------------------------------------------------------------
Balance, November 30, 1989     2,746                  3,800          -          -          -           -     (2,866)       934
Shares issued for cash           251          4.22    1,061          -          -          -           -          -      1,061
Options exercised                 50          2.10      105          -          -          -           -          -        105
Shares issued for services        11          4.20       45          -          -          -           -          -         45
Debt conversion                  179          1.12      200          -          -          -           -          -        200
Loss                               -                      -          -          -          -           -       (725)      (725)
----------------------------------------------------------------------------------------------------------------------------------
Balance, November 30, 1990     3,237                  5,211          -          -          -           -     (3,591)     1,620
Shares issued for cash           683          1.33      909          -          -          -           -          -        909
Options exercised                 14          2.10       30          -          -          -           -          -         30
Shares issued for services        90          1.87      168          -          -          -           -          -        168
Shares issued to acquire
   a license                      71          1.48      100          -          -          -           -          -        100
Loss                               -                      -          -          -          -           -       (593)      (593)
----------------------------------------------------------------------------------------------------------------------------------
Balance, November 30, 1991     4,095                  6,418          -          -          -           -     (4,184)     2,234
</TABLE>

                                      82
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements
(Tabular figures in thousands, except per share amounts)

Years ended November 30, 2006, 2005, 2004 and
period from December 1, 1987 to November 30, 2006
===============================================================================


9.       SHAREHOLDERS' EQUITY (CONTINUED):

<TABLE>
<CAPTION>
=================================================================================================================================
                                                                          Equity
                                                                         component
                                                                            of                                       Period from
                                        Common                            senior                                     December 1,
                                        shares'                         convertible                                    1987 to
                             Number     average     Share      Stock       notes               Contributed           November 30,
                           of shares  share price  capital    options     payable    Warrants   surplus    Deficit       2006
----------------------------------------------------------------------------------------------------------------------------------
<S>                        <C>        <C>          <C>        <C>        <C>         <C>        <C>        <C>        <C>
Balance, November 30, 1991     4,095                  6,418          -          -           -          -     (4,184)     2,234
Shares issued for cash            14          3.08       44          -          -           -          -          -         44
Options exercised                134          1.78      239          -          -           -          -          -        239
Shares issued for services        77          2.61      202          -          -           -          -          -        202
Debt conversion                  429          1.05      450          -          -           -          -          -        450
Loss                                                      -          -          -           -          -       (975)      (975)
----------------------------------------------------------------------------------------------------------------------------------
Balance, November 30, 1992     4,749                  7,353          -          -           -          -     (5,159)     2,194
Shares issued for cash            71          2.10      150          -          -           -          -          -        150
Warrants exercised               119          1.71      203          -          -           -          -          -        203
Options exercised                 46          2.10       96          -          -           -          -          -         96
Shares issued for services        96          2.10      202          -          -           -          -          -        202
Loss                               -                      -          -          -           -          -       (752)      (752)
----------------------------------------------------------------------------------------------------------------------------------
Balance, November 30, 1993     5,081                  8,004          -          -           -          -     (5,911)     2,093
Shares issued for cash           774          1.30    1,006          -          -           -          -          -      1,006
Share issue costs                  -          -        (192)         -          -           -          -          -       (192)
Warrants exercised               142          1.75      247          -          -           -          -          -        247
Options exercised                 29          1.54       44          -          -           -          -          -         44
Shares issued for services        29          2.10       60          -          -           -          -          -         60
Loss                               -                      -          -          -           -          -       (996)      (996)
----------------------------------------------------------------------------------------------------------------------------------
Balance, November 30, 1994     6,055                  9,169          -          -           -          -     (6,907)     2,262
</TABLE>

                                      83
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements
(Tabular figures in thousands, except per share amounts)

Years ended November 30, 2006, 2005, 2004 and
period from December 1, 1987 to November 30, 2006
===============================================================================


9.       SHAREHOLDERS' EQUITY (CONTINUED):

<TABLE>
<CAPTION>
=================================================================================================================================
                                                                          Equity
                                                                         component
                                                                            of                                       Period from
                                        Common                            senior                                     December 1,
                                        shares'                         convertible                                    1987 to
                             Number     average     Share      Stock       notes               Contributed           November 30,
                           of shares  share price  capital    options     payable    Warrants   surplus    Deficit       2006
----------------------------------------------------------------------------------------------------------------------------------
<S>                        <C>        <C>          <C>        <C>        <C>         <C>        <C>        <C>        <C>
Balance, November 30, 1994    6,055                  9,169          -          -           -          -     (6,907)       2,262
Shares issued for cash        3,460          1.00    3,460          -          -           -          -          -        3,460
Share issue costs                 -          -        (294)         -          -           -          -          -         (294)
Warrants exercised              185          0.50       93          -          -           -          -          -           93
Options exercised               120          0.50       60          -          -           -          -          -           60
Shares issued for services      236          1.04      246          -          -           -          -          -          246
Loss                              -                      -          -          -           -          -     (2,323)      (2,323)
----------------------------------------------------------------------------------------------------------------------------------
Balance, November 30, 1995   10,056                 12,734          -          -           -          -     (9,230)       3,504
Shares issued for cash        3,557          1.10    3,913          -          -           -          -          -        3,913
Share issue costs                 -          -        (962)         -          -           -          -          -         (962)
Warrants exercised            3,397          1.34    4,539          -          -           -          -          -        4,539
Options exercised               394          0.62      245          -          -           -          -          -          245
Shares issued for services      632          1.18      748          -          -           -          -          -          748
Shares issued to acquire
   license                      270          1.20      324          -          -           -          -          -          324
Loss                              -                      -          -          -           -          -     (4,862)      (4,862)
----------------------------------------------------------------------------------------------------------------------------------
Balance, November 30, 1996   18,306                 21,541          -          -           -          -    (14,092)       7,449
Shares issued for cash        3,064          2.49    7,625          -          -           -          -          -        7,625
Share issue costs                 -          -        (312)         -          -           -          -          -         (312)
Warrants exercised            1,352          1.20    1,621          -          -           -          -          -        1,621
Options exercised               494          0.98      482          -          -           -          -          -          482
Shares issued for services      115          1.87      215          -          -           -          -          -          215
Loss                              -                      -          -          -           -          -     (7,991)      (7,991)
----------------------------------------------------------------------------------------------------------------------------------
Balance, November 30, 1997   23,331                 31,172          -          -           -          -    (22,083)       9,089
</TABLE>

                                      84
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements
(Tabular figures in thousands, except per share amounts)

Years ended November 30, 2006, 2005, 2004 and
period from December 1, 1987 to November 30, 2006
===============================================================================


9.       SHAREHOLDERS' EQUITY (CONTINUED):

<TABLE>
<CAPTION>
=================================================================================================================================
                                                                          Equity
                                                                         component
                                                                            of                                       Period from
                                        Common                            senior                                     December 1,
                                        shares'                         convertible                                    1987 to
                             Number     average     Share      Stock       notes               Contributed           November 30,
                           of shares  share price  capital    options     payable    Warrants   surplus    Deficit       2006
----------------------------------------------------------------------------------------------------------------------------------
<S>                        <C>        <C>          <C>        <C>        <C>         <C>        <C>        <C>        <C>
Balance, November 30, 1997   23,331                 31,172          -          -           -          -    (22,083)       9,089
Shares issued for cash        2,882          1.75    5,043          -          -           -          -          -        5,043
Share issue costs                 -          -        (479)         -          -           -          -          -         (479)
Warrants exercised              228          1.11      253          -          -           -          -          -          253
Options exercised               100          0.95       95          -          -           -          -          -           95
Shares issued for services       33          1.67       55          -          -           -          -          -           55
Loss                              -                      -          -          -           -          -     (7,312)      (7,312)
----------------------------------------------------------------------------------------------------------------------------------
Balance, November 30, 1998   26,574                 36,139          -          -           -          -    (29,395)       6,744
Shares issued for cash        6,590          1.49    9,825          -          -           -          -          -        9,825
Share issue costs                 -          -        (934)         -          -           -          -          -         (934)
Warrants exercised            1,627          1.07    1,739          -          -           -          -          -        1,739
Options exercised               594          1.22      724          -          -           -          -          -          724
Shares issued for services      207          1.25      259          -          -           -          -          -          259
Loss                              -                      -          -          -           -          -     (7,915)      (7,915)
----------------------------------------------------------------------------------------------------------------------------------
Balance, November 30, 1999   35,592                 47,752          -          -           -          -    (37,310)      10,442
Shares issued for cash        3,738          9.54   35,650          -          -           -          -          -       35,650
Share issue costs                 -          -      (1,812)         -          -           -          -          -       (1,812)
Warrants exercised            3,979          1.73    6,898          -          -           -          -          -        6,898
Options exercised             1,393          1.48    2,064          -          -           -          -          -        2,064
Shares issued for services       40          5.83      233          -          -           -          -          -          233
Loss                              -                      -          -          -           -          -     (9,961)      (9,961)
----------------------------------------------------------------------------------------------------------------------------------
Balance, November 30, 2000   44,742                 90,785          -          -           -          -    (47,271)      43,514
</TABLE>

                                      85
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements
(Tabular figures in thousands, except per share amounts)

Years ended November 30, 2006, 2005, 2004 and
period from December 1, 1987 to November 30, 2006
===============================================================================


9.       SHAREHOLDERS' EQUITY (CONTINUED):

<TABLE>
<CAPTION>
=================================================================================================================================
                                                                          Equity
                                                                         component
                                                                            of                                       Period from
                                        Common                            senior                                     December 1,
                                        shares'                         convertible                                    1987 to
                             Number     average     Share      Stock       notes               Contributed           November 30,
                           of shares  share price  capital    options     payable    Warrants   surplus    Deficit       2006
----------------------------------------------------------------------------------------------------------------------------------
<S>                        <C>        <C>          <C>        <C>        <C>         <C>        <C>        <C>        <C>
Balance, November 30, 2000    44,742                 90,785          -          -           -          -    (47,271)     43,514
Shares issued for cash         1,406          8.49   11,941          -          -           -          -          -      11,941
Share issue costs                  -          -        (121)         -          -           -          -          -        (121)
Options exercised                216          1.99      429          -          -           -          -          -         429
Loss                               -                      -          -          -           -          -    (14,389)    (14,389)
----------------------------------------------------------------------------------------------------------------------------------
Balance, November 30, 2001    46,364                103,034          -          -           -          -    (61,660)     41,374
Shares issued for cash         5,155          4.85   25,000          -          -           -          -          -      25,000
Share issue costs                  -          -      (1,901)         -          -           -          -          -      (1,901)
Options exercised                415          1.30      540          -          -           -          -          -         540
Loss                               -          -           -          -          -           -          -    (19,507)    (19,507)
----------------------------------------------------------------------------------------------------------------------------------
Balance, November 30, 2002    51,934                126,673          -          -           -          -    (81,167)     45,506
Shares issued for cash         9,478          5.35   50,669          -          -           -          -          -      50,669
Share issue costs                  -          -      (5,898)         -          -           -          -          -      (5,898)
Warrants exercised               250          5.39    1,347          -          -           -          -          -       1,347
Options exercised                360          1.64      589          -          -           -          -          -         589
Fair value of stock
options and warrants
issued to consultants              -          -           -        744          -       1,456          -          -       2,200
Loss                               -                      -          -          -           -          -    (31,948)    (31,948)
----------------------------------------------------------------------------------------------------------------------------------
Balance, November 30, 2003    62,022                173,380        744          -       1,456          -   (113,115)     62,465
</TABLE>

                                      86
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements
(Tabular figures in thousands, except per share amounts)

Years ended November 30, 2006, 2005, 2004 and
period from December 1, 1987 to November 30, 2006
===============================================================================


9.       SHAREHOLDERS' EQUITY (CONTINUED):

<TABLE>
<CAPTION>
=================================================================================================================================
                                                                          Equity
                                                                         component
                                                                            of                                       Period from
                                        Common                            senior                                     December 1,
                                        shares'                         convertible                                    1987 to
                             Number     average     Share      Stock       notes               Contributed           November 30,
                           of shares  share price  capital    options     payable    Warrants   surplus    Deficit       2006
----------------------------------------------------------------------------------------------------------------------------------
<S>                        <C>        <C>          <C>        <C>        <C>         <C>        <C>        <C>        <C>

Balance, November 30, 2003    62,022                173,380        744          -       1,456          -   (113,115)     62,465
Shares issued for cash (b)     9,775          7.87   76,913          -          -           -          -          -      76,913
Share issue costs (b)              -          -      (6,128)         -          -           -          -          -      (6,128)
Options exercised                534          2.43    1,300          -          -           -          -          -       1,300
Fair value of stock
   options issued to
   consultants                     -                      -        455          -           -          -          -         455
Loss                               -                      -          -          -           -          -    (74,550)    (74,550)
----------------------------------------------------------------------------------------------------------------------------------
Balance, November 30,
   2004, as originally
   reported                   72,331                245,465      1,199                  1,456              (187,665)     60,455
Change in accounting for
   stock-based
   compensation                    -          -          55      3,951          -           -          -     (4,006)          -
----------------------------------------------------------------------------------------------------------------------------------
Balance, November 30,
   2004, as restated          72,331          -     245,520      5,150          -       1,456          -   (191,671)     60,455
</TABLE>

                                      87
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements
(Tabular figures in thousands, except per share amounts)

Years ended November 30, 2006, 2005, 2004 and
period from December 1, 1987 to November 30, 2006
===============================================================================


9.       SHAREHOLDERS' EQUITY (CONTINUED):

<TABLE>
<CAPTION>
=================================================================================================================================
                                                                          Equity
                                                                         component
                                                                            of                                       Period from
                                        Common                            senior                                     December 1,
                                        shares'                         convertible                                    1987 to
                             Number     average     Share      Stock       notes               Contributed           November 30,
                           of shares  share price  capital    options     payable    Warrants   surplus    Deficit       2006
----------------------------------------------------------------------------------------------------------------------------------
<S>                        <C>        <C>          <C>        <C>        <C>         <C>        <C>        <C>        <C>
Balance, November 30,
   2004, as restated         72,331                245,520      5,150          -       1,456          -    (191,671)     60,455
Shares issued for cash (b)    9,005          5.83   52,502          -          -           -          -           -      52,502
Share issue costs (b)             -          -      (3,720)         -          -           -          -           -      (3,720)
Fair value of stock
   options granted                -          -           -      3,826          -           -          -           -       3,826
Options exercised               145          4.32      627          -          -           -          -           -         627
Shares issued in advance
   for installment payment
   on senior convertible
   notes payable                774          2.63    2,034          -          -           -          -           -       2,034
Installment payment made
   in advance                     -          -      (2,032)         -          -           -          -           -      (2,032)
Senior convertible notes          -          -           -          -      8,774       4,273          -           -      13,047
Financing costs on equity
   component of senior
   convertible notes              -          -           -          -       (789)       (384)         -           -      (1,173)
Transfer of stock options
   exercised                      -          -          76        (76)         -           -          -           -           -
Reversal of forfeited and
   expired vested options         -          -           -       (223)         -           -        223           -           -
Transfer of forfeited
   unvested options               -          -           -       (211)         -           -          -           -        (211)
Loss                              -          -           -          -          -           -          -     (93,048)    (93,048)
----------------------------------------------------------------------------------------------------------------------------------
Balance, November 30, 2005   82,255                295,007      8,466      7,985       5,345        223    (284,719)     32,307
</TABLE>

                                      88
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements
(Tabular figures in thousands, except per share amounts)

Years ended November 30, 2006, 2005, 2004 and
period from December 1, 1987 to November 30, 2006
===============================================================================


9.       SHAREHOLDERS' EQUITY (CONTINUED):

<TABLE>
<CAPTION>
===================================================================================================================================
                                                                            Equity
                                                                           component
                                                                               of                                       Period from
                                           Common                            senior                                     December 1,
                                           shares'                         convertible                                    1987 to
                                Number     average     Share      Stock       notes               Contributed           November 30,
                              of shares  share price  capital    options     payable    Warrants   surplus    Deficit       2006
-----------------------------------------------------------------------------------------------------------------------------------
<S>                             <C>      <C>          <C>        <C>        <C>         <C>        <C>        <C>        <C>
                                 82,255                 295,007     8,466       7,985      5,345        223    (284,719)    32,307
Balance, November 30, 2005
Public offering (b)              43,192        0.42      18,082         -           -      5,024          -           -     23,106
Fair value of broker
   warrants (b)                       -           -           -         -           -        705          -           -        705
Share issue costs (b)                 -           -      (2,376)        -           -       (550)         -           -     (2,926)
Shares issued for deferred                        0
   share units                       24         1.5          36         -           -          -          -           -         36
Fair value of stock options
   granted                            -           -           -     3,682           -          -          -           -      3,682
Shares issued for installment
   payments on senior
   convertible notes payable     26,968        0.87      23,481         -      (4,269)         -      4,269           -     23,481
Shares and warrants issued for
   acceleration payments on
   senior convertible notes
   payable                        4,112        2.36       9,723         -      (1,655)     2,322        848        (295)    10,943
Holders' conversion of notes        100        3.22         322         -         (59)         -          -           -        263
December 1, 2006 installment
   payment made in advance            -           -      (2,090)        -           -          -          -           -      (2,090)
December 1, 2005 installment
   payment in advance applied         -           -       2,032         -        (363)         -        363           -      2,032
Transfer of forfeited and
   expired vested options             -           -           -      (836)          -          -        836           -          -
Reversal of forfeited unvested
   options                            -           -           -      (599)          -          -          -           -       (599)
Transfer of forfeited and
   expired vested warrants            -           -           -         -           -     (1,456)     1,456           -          -
Loss                                  -           -           -         -           -          -          -     (66,360)   (66,360)
-----------------------------------------------------------------------------------------------------------------------------------
Balance, November 30, 2006      156,651              $  344,217 $  10,713    $  1,639  $  11,390   $  7,995   $(351,374) $  24,580
===================================================================================================================================
</TABLE>

                                      89
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements
(Tabular figures in thousands, except per share amounts)

Years ended November 30, 2006, 2005, 2004 and
period from December 1, 1987 to November 30, 2006
===============================================================================


9.       SHAREHOLDERS' EQUITY (CONTINUED):

         (b)      Share issuances:

                  On November 14, 2006,  the Company issued 43.2 million common
                  shares,  17.3  million  five-year  warrants  and 4.3  million
                  six-month  warrants to purchase  common shares for gross cash
                  proceeds of $23.1 million (U.S.  $20.3 million) (net proceeds
                  of $21.1 million after cost of issuance of $2.0 million).  In
                  addition,  the Company issued 2.6 million broker  warrants to
                  the placement  agent in connection  with the  financing.  The
                  terms  of the  warrants  are  described  in  note  9(e).  The
                  proceeds  were  allocated  to the common  shares and warrants
                  based on their  relative  fair values.  The fair value of the
                  warrants was estimated using the Black-Scholes option pricing
                  model using the following assumptions:

                  ==============================================================
                                                Five year   Six month    Broker
                                                 warrants    warrants   warrants
                  --------------------------------------------------------------
                  Dividend yield                        -           -          -
                  Risk-free interest rates           3.90        4.19       3.94
                  Volatility                           90         115        115
                  Expected life of warrants       5 years    6 months    3 years
                  --------------------------------------------------------------

                  On February 2, 2005,  the Company  issued 9.0 million  common
                  shares  for  gross  proceeds  of $52.5  million  (U.S.  $42.3
                  million)  (net  proceeds  of  $48.8  million  after  costs of
                  issuance of $3.7 million).

                  On March 4,  2004,  the  Company  issued 9.8  million  common
                  shares  for  gross  proceeds  of $76.9  million  (U.S.  $57.7
                  million)  (net  proceeds  of  $70.8  million  after  costs of
                  issuance of $6.1 million).

                                      90
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements
(Tabular figures in thousands, except per share amounts)

Years ended November 30, 2006, 2005, 2004 and
period from December 1, 1987 to November 30, 2006
===============================================================================


9.       SHAREHOLDERS' EQUITY (CONTINUED):

         (c)      Stock-based compensation plans:

                  In May 2003,  the Company  adopted two new stock option plans
                  (the "2003 Employee  Plan" and the "2003  Director  Plan") to
                  eventually  replace the Company's  existing stock option plan
                  (the "Existing  Plan").  All grants of options after May 2003
                  are made from the new plans and no further option grants will
                  be made under the  Existing  Plan.  The Company  reserved for
                  issuance 2,000,000 common shares under the 2003 Employee Plan
                  and 250,000  common shares under the 2003  Director  Plan. In
                  March 2005, the Company's  shareholders  approved  increasing
                  the maximum  number of common  shares under the 2003 Employee
                  Plan to 5,000,000.  In March 2006, the Company's shareholders
                  also approved  increasing the maximum number of common shares
                  under  the  2003  Employee  Plan to  8,000,000  and the  2003
                  Director  Plan to  500,000.  Each option  granted  allows the
                  holder to purchase one common share at an exercise  price not
                  less than the closing price of the Company's common shares on
                  The Toronto  Stock  Exchange on the last trading day prior to
                  the grant of the option.  Options  granted  under these plans
                  have a maximum  term of ten years and  generally  vest over a
                  period of up to three years.

                  As at November 30, 2006,  there were 1.5 million  (2005 - 2.5
                  million; 2004 - 0.7 million) options available for grant.

<TABLE>
<CAPTION>
                  ===========================================================================================
                                                      2006                  2005                 2004
                  -------------------------------------------------------------------------------------------
                                                          Weighted              Weighted             Weighted
                                                 Number    Average     Number    average    Number    average
                                                     of   Exercise         of   exercise        of   exercise
                                                options      price    options      price   options      price
                  -------------------------------------------------------------------------------------------
                  <S>                             <C>     <C>           <C>     <C>          <C>     <C>
                  Outstanding, beginning          4,311   $   5.60      3,518   $   6.01     3,245   $   5.00
                     of year
                  Issued                          5,022       1.38      1,302       4.65       842       7.66
                  Exercised                           -       -          (145)      4.32      (534)      2.43
                  Expired or cancelled           (1,213)      5.30       (364)      6.73       (35)      6.12
                  -------------------------------------------------------------------------------------------
                  Outstanding, end of year        8,120       3.03      4,311       5.60     3,518       6.01
                  ===========================================================================================
                  Exercisable, end of year        3,133                 2,588                1,831
                  ===========================================================================================
</TABLE>

                                      91
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements
(Tabular figures in thousands, except per share amounts)

Years ended November 30, 2006, 2005, 2004 and
period from December 1, 1987 to November 30, 2006
===============================================================================


9.       SHAREHOLDERS' EQUITY (CONTINUED):

                  The table above  includes  0.2 million  (2005 - 0.3  million;
                  2004 - 0.1 million)  options granted to  non-employees  for a
                  fair value of $0.2 million (2005 - $0.8 million;  2004 - $0.4
                  million).

         The following  table provides  information on options  outstanding and
         exercisable as of November 30, 2006:

<TABLE>
<CAPTION>
                                            Options outstanding                          Options exercisable
                            ---------------------------------------------------- -------------------------------
                                                                    Weighted
                                                  Weighted          average                             Weighted
                                                  average          remaining                            average
        Exercise                 Number           exercise        contractual          Number           exercise
        price                 outstanding          price          life (years)      exercisable          price
        --------------------------------------------------------------------------------------------------------
        <S>                      <C>             <C>                   <C>             <C>             <C>
        $0.49 - $0.68            1,732           $  0.57               9.7                 -           $    -
        $0.69 - $2.68            2,859              1.81               9.1               209              2.59
        $2.69 - $5.54            1,972              3.99               3.2             1,575              3.79
        $5.55 - $9.21            1,557              6.80               3.2             1,349              6.75
        --------------------------------------------------------------------------------------------------------
                                 8,120              3.03               6.7             3,133              4.98
        ========================================================================================================
</TABLE>

         The fair value of stock-based  compensation was estimated at the grant
         date under the following assumptions:

<TABLE>
<CAPTION>
        ================================================================================================
                                                                       2006          2005          2004
        ------------------------------------------------------------------------------------------------
        <S>                                                       <C>           <C>           <C>
        Dividend yield                                                    -             -             -
        Weighted average risk-free interest rate                      4.10%         3.77%         3.89%
        Volatility factor of the expected market                      87.3%         73.2%         69.1%
             price of the Company's common shares
        Weighted average expected life of the                     5.9 years     4.7 years     4.6 years
             employment options
        ================================================================================================
</TABLE>

         The resulting  weighted average fair value per share at the grant date
         of the employee and non-employee  stock-based  compensation  issued in
         fiscal 2006 is $0.96 (2005 - $2.96; 2004 - $4.77).


                                      92
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements
(Tabular figures in thousands, except per share amounts)

Years ended November 30, 2006, 2005, 2004 and
period from December 1, 1987 to November 30, 2006
===============================================================================


9.       SHAREHOLDERS' EQUITY (CONTINUED):

         (d)      Deferred share units:

                  Effective January 1, 2004, the Company  established a plan to
                  grant DSUs to its  non-management  directors  and  reserved a
                  maximum of 250,000 common shares for issuance under the plan.
                  Under  the  plan,   the   directors   will   defer  any  cash
                  remuneration  that they would  have  otherwise  received  for
                  services rendered and in lieu thereof will receive the number
                  of DSUs  which is  equivalent  in  value to the  remuneration
                  deferred.  A DSU is a unit  equivalent in value to one common
                  share  of the  Company  based  on the  trading  price  of the
                  Company's  common shares on The Toronto Stock Exchange.  Upon
                  termination  of board  service,  the director will be able to
                  redeem DSUs based upon the then market price of the Company's
                  common  shares on the date of  redemption in exchange for any
                  combination  of cash or  common  shares  as the  Company  may
                  determine.

                  The Company  recorded  $0.3 million  (2005 - $0.3 million) in
                  compensation expense relating to 144,762 (2005 - 52,015) DSUs
                  granted in 2006 for services  rendered during the year. As at
                  November 30, 2006, 199,089 (2005 -78,285) DSUs are issued and
                  outstanding  with  a  value  of  $0.1  million  (2005  - $0.2
                  million) based upon the market value of the Company's  common
                  shares at November  30, 2006.  In addition,  23,958 DSUs were
                  exercised in 2006.


                                      93
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements
(Tabular figures in thousands, except per share amounts)

Years ended November 30, 2006, 2005, 2004 and
period from December 1, 1987 to November 30, 2006
===============================================================================


9.       SHAREHOLDERS' EQUITY (CONTINUED):

         (e)      Warrants:

                  As at November 30, the  warrants  which are  outstanding  and
                  exercisable are as follows:

<TABLE>
<CAPTION>
                  ======================================================================
                                                            2006       2005       2004
                  ----------------------------------------------------------------------
                  <S>                                      <C>         <C>          <C>
                  Outstanding, beginning of year            4,319        985        985
                  Issued                                   25,933      3,334          -
                  Exercised                                     -          -          -
                  Expired                                    (985)         -          -
                  ----------------------------------------------------------------------
                  Outstanding, end of year                 29,267      4,319        985
                  ======================================================================

                  Exercisable, end of year                 29,267      4,319        985

                  ======================================================================
</TABLE>
                  The  following   table   provides   information  on  warrants
                  outstanding as of November 30, 2006:

<TABLE>
<CAPTION>
                  =========================================================================
                  Exercise                Number                 Expiry    Shares issuable
                  price              outstanding                             upon exercise
                  -------------------------------------------------------------------------
                  <S>                     <C>        <C>                         <C>
                  U.S. $0.53               4,319           May 14, 2007          4,319
                  U.S. $0.63               2,560      November 14, 2009          2,560
                  U.S. $1.99               3,334        October 7, 2010          5,025
                  U.S. $2.06                 390      February 28, 2011            589
                  U.S. $1.99                 390         March 31, 2011            588
                  U.S. $1.99                 390         April 30, 2011            588
                  U.S. $1.99                 607           May 31, 2011            914
                  U.S. $0.63              17,277      November 14, 2011         17,277
                  -------------------------------------------------------------------------
                                          29,267                                31,860
                  =========================================================================
</TABLE>

                                      94
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements
(Tabular figures in thousands, except per share amounts)

Years ended November 30, 2006, 2005, 2004 and
period from December 1, 1987 to November 30, 2006
===============================================================================


10.      LOSS PER SHARE:

         The computations for basic and diluted loss per share are as follows:

<TABLE>
<CAPTION>
         ==============================================================================================
                                                               2006             2005             2004
         ----------------------------------------------------------------------------------------------
         <S>                                              <C>              <C>               <C>
         Loss for the year                                $ (66,360)       $ (93,048)        $ (74,550)
         ==============================================================================================

         Weighted average number of common shares outstanding:
            Basic and diluted                                94,076           79,865            69,600
         ==============================================================================================

         Loss per common share:
            Basic and diluted                             $   (0.71)       $   (1.17)        $   (1.07)
         ==============================================================================================
</TABLE>

         The options and  warrants  to  purchase  common  shares and the senior
         convertible  notes  payable  are not  included in the  calculation  of
         diluted loss per share  because the Company has a loss for each period
         presented and to do so would have been anti-dilutive.

11.      CONSOLIDATED STATEMENTS OF CASH FLOWS:

         (a)      Change in non-cash operating working capital balances:

<TABLE>
<CAPTION>
                  ======================================================================================
                                                                                           Period from
                                                                                            December 1,
                                                                                              1987 to
                                                            Years ended November 30,        November 30,
                                                       2006          2005          2004        2006
                  --------------------------------------------------------------------------------------
                  <S>                             <C>            <C>          <C>           <C>
                  Decrease (increase) in:
                     Clinical supplies            $     651      $    942     $   1,614     $  (1,211)
                     Tax credits recoverable           (197)          466          (213)       (1,327)
                     Prepaid expenses and
                       deposits                         239           227          (829)       (1,351)
                  Increase (decrease) in:
                     Accounts payable and
                       accrued liabilities          (17,851)       10,999         8,970         8,375

                  --------------------------------------------------------------------------------------
                                                  $ (17,158)     $ 12,634     $   9,542     $   4,486
                  ======================================================================================
</TABLE>

                                      95
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements
(Tabular figures in thousands, except per share amounts)

Years ended November 30, 2006, 2005, 2004 and
period from December 1, 1987 to November 30, 2006
===============================================================================


11.      CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED):

         (b)      Supplemental disclosure of non-cash transactions:

<TABLE>
<CAPTION>
                  ======================================================================================
                                                                                            Period from
                                                                                            December 1,
                                                                                              1987 to
                                                           Years ended November 30,         November 30,
                                                      2006          2005          2004         2006
                  --------------------------------------------------------------------------------------
                  <S>                              <C>           <C>          <C>            <C>
                  Non-cash financing
                  activities:
                     Warrants and options
                       issued as share
                       issue costs                 $    705      $      -     $       -      $  2,474
                     Shares issued for
                       services                          36             -             -         2,485
                     Debt conversion                (29,288)       (2,034)            -       (32,062)
                     Shares issued on debt
                       conversion                    31,114         2,034             -        33,888
                     Acceleration warrants
                       issued in connection
                       with debt                      2,322             -             -         2,322
                     Shares issued on debt
                       conversion by note
                       holders                          263             -             -           263
                     Shares issued for
                       technology                         -             -             -         2,799
                     Deferred share issue
                       costs                              -             -           503           503

                  Non-cash investing
                  activities:
                     Technology acquired for
                       shares issued                      -             -             -        (2,799)

                  ======================================================================================

         (c)       Supplemental cash flow information:

                  ======================================================================================
                                                                                            Period from
                                                                                            December 1,
                                                                                              1987 to
                                                           Years ended November 30,         November 30,
                                                      2006          2005          2004         2006
                  --------------------------------------------------------------------------------------
                  Interest received               $  2,119     $   1,147      $  1,731      $  11,200
                  Interest paid                        930           344             -          1,274
                  Income taxes paid                      -             -             -              -
                  ======================================================================================
</TABLE>

                                      96
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements
(Tabular figures in thousands, except per share amounts)

Years ended November 30, 2006, 2005, 2004 and
period from December 1, 1987 to November 30, 2006
===============================================================================


12.      FAIR VALUES OF FINANCIAL INSTRUMENTS:

         The  carrying  values  of  cash  and  cash   equivalents,   marketable
         securities, accounts payable and accrued liabilities approximate their
         fair values due to the  relatively  short periods to maturity of these
         instruments.

         In November 2006, the Company entered into a forward exchange contract
         to purchase U.S. $8.0 million for $9.2 million in December 2006.  This
         transaction created a nominal exchange loss.

         In November 2005, the Company entered into forward exchange  contracts
         to sell, in aggregate,  U.S. $25.3 million to acquire $30.1 million in
         December  2005.  The fair value of these  instruments  at November 30,
         2005 was an asset of $0.7 million.

         In November 2005, the Company entered into forward exchange  contracts
         to purchase,  in  aggregate,  U.S.  $50.0 million for $59.0 million in
         December 2005 and February 2006.  The fair value of these  instruments
         at November 30, 2005 was a liability of $0.8 million.

         In 2004, the Company entered into forward exchange  contracts to sell,
         in  aggregate,  $49.9  million to acquire U.S.  $37.5  million,  which
         matured in December 2004 and April 2005. The fair value of the forward
         contracts at November 30, 2004, was a liability of $5.2 million.

         The fair value of the senior convertible notes payable at November 30,
         2006 is $10.0 million.


                                      97
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements
(Tabular figures in thousands, except per share amounts)

Years ended November 30, 2006, 2005, 2004 and
period from December 1, 1987 to November 30, 2006
===============================================================================


13.      INCOME TAXES:

         The provision for income taxes differs from the amount computed by
         applying the statutory income tax rate to loss before income taxes. The
         sources and tax effects of the differences are as follows:

<TABLE>
<CAPTION>
         ===========================================================================================================
                                                                              2006              2005          2004
         -----------------------------------------------------------------------------------------------------------
         <S>                                                            <C>               <C>           <C>
         Basic rate applied to loss before recovery of income taxes     $  (23,969)       $  (32,567)   $  (26,927)
         Adjustments resulting from:
            Foreign losses affected at lower rates                          10,383            23,234        15,034
            Permanent differences                                            1,998               (74)          276
            Change in valuation allowance                                   10,982             9,489        11,417
            Change in enacted income tax rates                                 710                 -             -
            Other                                                             (104)              (82)          200
         -----------------------------------------------------------------------------------------------------------
                                                                        $       -         $       -     $       -
         ===========================================================================================================

         The tax effect of temporary  differences that give rise to significant
         components  of  the  Company's   future  tax  assets  and  future  tax
         liabilities at November 30 are presented below:

         ===========================================================================================================
                                                                                        2006                 2005
         -----------------------------------------------------------------------------------------------------------
         Future tax assets:
            Non-capital losses                                                 $      37,811        $      30,148
            Deductible share issue costs                                               2,646                3,313
            Excess of tax value of capital assets over book value                        174                  227
            SR&ED expenditure pool, net of refundable tax credits                      8,198                4,178
            Other, including net capital losses                                        1,460                1,441
         -----------------------------------------------------------------------------------------------------------
                                                                                      50,289               39,307

         Valuation allowance                                                         (50,289)             (39,307)
         -----------------------------------------------------------------------------------------------------------
         Net future tax asset                                                  $          -         $          -
         ===========================================================================================================
</TABLE>


                                      98
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements
(Tabular figures in thousands, except per share amounts)

Years ended November 30, 2006, 2005, 2004 and
period from December 1, 1987 to November 30, 2006
===============================================================================


13.      INCOME TAXES (CONTINUED):

         The Company's subsidiary,  Vasogen Ireland Limited, also has losses of
         approximately  $291.5 million (2005 - $221.7 million)  included in the
         consolidated  non-capital  losses,  available  indefinitely  to reduce
         future taxable income,  the benefit of which will be recognized in the
         accounts when realized.

         The Company's  other  subsidiary,  Vasogen  Corp.,  also has losses of
         approximately  $3.4  million  (2005 - $1.6  million)  included  in the
         consolidated  non-capital  losses,  which begin to expire in 2025, the
         benefit of which will be recognized in the accounts when realized.

         Under the Income Tax Act (Canada), certain expenditures are classified
         as   Scientific   Research  &   Experimental   Development   ("SR&ED")
         expenditures and, for tax purposes,  are grouped into a pool, which is
         100% deductible in the year incurred.  This SR&ED expenditure pool can
         also be  carried  forward  indefinitely  and  deducted  in full in any
         subsequent year.

         The  balance of the SR&ED  expenditure  pool at  November  30, 2006 is
         approximately $27.1 million (2005 - $14.0 million).

         The Company also has $14.5 million of investment tax credits  ("ITCs")
         on SR&ED  expenditures which have not been recognized in the accounts.
         These ITCs are available to be applied against federal taxes otherwise
         payable in future years. The eligibility of the Company for provincial
         refundable  research tax credits  depends on the Company's  compliance
         with  the  provincial  tax  legislation.  The  amount  of tax  credits
         ultimately  received  by the  Company  is  dependent  upon  review  by
         taxation  authorities  of the technical  and financial  aspects of the
         claims. The ITCs will expire as follows:

         =======================================================================
         2008                                                  $         222
         2009                                                            438
         2010                                                            605
         2011                                                            951
         2012                                                            960
         2013                                                          1,497
         2014                                                          2,342
         2015                                                          3,629
         2026                                                          3,884
         -----------------------------------------------------------------------
                                                               $      14,528
         =======================================================================

                                      99
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements
(Tabular figures in thousands, except per share amounts)

Years ended November 30, 2006, 2005, 2004 and
period from December 1, 1987 to November 30, 2006
===============================================================================


14.      COMMITMENTS AND CONTINGENCIES:

         (a)      Royalty commitments:

                  The Company  agreed to pay  royalties to  arm's-length  third
                  parties based on gross amounts receivable by the Company from
                  future commercial sales of its products,  aggregating 1.5% on
                  all sales to a maximum  royalty of $1.3 million per annum and
                  an additional 2% with respect to revenue derived from certain
                  applications  of  the  Company's  Celacade  technology  to  a
                  maximum  royalty  of $5.0  million  per  annum.  To date,  no
                  royalties are due and/or payable.

         (b)      Commitments:

                  Under  the  terms  of  operating  lease  agreements  for  its
                  operating  facilities,  the  Company  is  committed  to  make
                  payments as follows for the years ending November 30:

                  ==============================================================
                  2007                                              $     645
                  2008                                                    568
                  2009                                                    346
                  --------------------------------------------------------------
                                                                     $  1,559
                  ==============================================================

                  Rent  expense  under  operating  leases,  for the year  ended
                  November 30, 2006, is $0.8 million (2005 - $0.9 million; 2004
                  - $0.6 million).

15.      SEGMENT INFORMATION:

                  The Company operates in one business segment: the development
                  of  treatments  and  related  products   addressing   chronic
                  inflammatory  disease. The primary property and equipment are
                  located in Canada and the  acquired  technology  is primarily
                  located in Ireland.

                                      100
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements
(Tabular figures in thousands, except per share amounts)

Years ended November 30, 2006, 2005, 2004 and
period from December 1, 1987 to November 30, 2006
===============================================================================


16.      RESEARCH AND DEVELOPMENT PROJECTS:

         The Company has  undertaken  the  following  significant  research and
         development projects:

         (a)      Platform Technology:

                  The Company is focused on the  research  and  development  of
                  treatments  targeting  the  chronic  inflammation  underlying
                  cardiovascular,  neurological and other chronic  inflammatory
                  diseases.  The  purpose of this  project  is to  advance  the
                  development of these  treatments  and the associated  product
                  technology,  enhance the value of the intellectual  property,
                  identify  new   approaches   to  treatment  and  new  disease
                  indications  for  clinical   development,   and  when  deemed
                  appropriate, initiate research in these indications.

         (b)      Celacade Technology - Cardiovascular disease:

                  The  Company's  Celacade  technology  is being  developed  to
                  target   the    chronic    inflammation    associated    with
                  cardiovascular disease. The Company has completed preclinical
                  and   clinical   studies   targeted   at  various   areas  of
                  cardiovascular disease. The Company's Celacade technology has
                  reported  results in two pivotal  Phase III clinical  trials.
                  Subject to further  analysis and the Company's  consultations
                  with outside  experts and  regulators,  the Company  plans to
                  pursue regulatory  approval and/or  commercialization  of its
                  Celacade   technology   to  reduce  the  risk  of  death  and
                  hospitalization  in  patients  with  advanced  chronic  heart
                  failure.

         (c)      Celacade Technology - Autoimmune disease:

                  The  Company  has  completed   preclinical   and  early-stage
                  clinical  studies with its Celacade  technology in autoimmune
                  disease.  Although  autoimmune diseases may be candidates for
                  future  clinical  development,  the Company is currently  not
                  focusing any significant resources in this area.


                                      101
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements
(Tabular figures in thousands, except per share amounts)

Years ended November 30, 2006, 2005, 2004 and
period from December 1, 1987 to November 30, 2006
===============================================================================


16.      RESEARCH AND DEVELOPMENT PROJECTS (CONTINUED):

         (d)      VP025 - Neuro-inflammatory disease:

                  The Company is also developing a new class of drugs, designed
                  to interact with immune cells,  leading to the  modulation of
                  cytokines - potent  chemical  messengers  that  regulate  and
                  control inflammation.  VP025, the lead product candidate from
                  this new class of drugs,  is in development for the treatment
                  of neuro-inflammatory disorders.

         The following table outlines  research and development  costs expensed
         for the Company's significant research and development projects:

<TABLE>
<CAPTION>
         ==========================================================================================================
                                                                                                       Period from
                                                                                                       December 1,
                                                                                                         1987 to
                                                                   Years ended November 30,            November 30,
                                                           2006             2005            2004           2006
         ----------------------------------------------------------------------------------------------------------
         <S>                                          <C>              <C>            <C>               <C>
         Research and development costs expensed:
              Platform technology                     $   2,472        $   1,947      $    2,881        $  41,101
              Cardiovascular program                     25,813           64,444          45,162          168,177
              Autoimmune program                              -                -               -            4,565
              VP025                                       4,447            5,030           3,751           14,838
         ----------------------------------------------------------------------------------------------------------
         Total research and development costs         $  32,732        $  71,421      $   51,794        $ 228,681
              expensed
         ----------------------------------------------------------------------------------------------------------
         Acquired technology:
              Celacade platform                       $       -        $       -      $        -        $   4,081
         ==========================================================================================================
</TABLE>


                                      102
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements
(Tabular figures in thousands, except per share amounts)

Years ended November 30, 2006, 2005, 2004 and
period from December 1, 1987 to November 30, 2006
===============================================================================


17. DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND
THE UNITED STATES:

         The Company's consolidated financial statements are prepared in
         accordance with Canadian GAAP, which differ in certain respects from
         United States GAAP. The following tables present the impact of material
         differences between Canadian GAAP and United States GAAP on the
         Company's consolidated financial statements:

         (a)      Consolidated statements of operations and deficit:

<TABLE>
<CAPTION>
         ==========================================================================================================
                                                                                                       Period from
                                                                                                       December 1,
                                                                                                         1987 to
                                                                    Years ended November 30,           November 30,
                                                            2006            2005             2004          2006
         ----------------------------------------------------------------------------------------------------------
         <S>                                          <C>              <C>             <C>              <C>
         Loss per Canadian GAAP                       $  (66,360)      $ (93,048)      $  (74,550)      $ (349,569)
         Acquired technology costs (b)(i)                      -               -                -           (4,081)
         Technology amortization (b)(i)                      253             253              254            3,828
         Non-employee stock options (b)(ii)                  (58)           (101)            (137)          (3,476)
         Employee stock options (b)(iii)                       -           2,879                -            6,885
         Performance-based options (b)(iii)                    -              31              164             (278)
         Warrants issued to acquire technology
              (b)(iv)                                          -               -                -              (61)
         Accretion of senior convertible note
              payable (b)(v)                              (2,373)           (281)               -           (2,654)
         Amortization of deferred financing costs
              (b)(v)                                        (963)           (145)               -           (1,108)
         Loss on debt extinguishment (b)(v)               (1,131)              -                -           (1,131)
         Fair market value adjustment on embedded
              derivatives and warrants (b)(v)              9,711           3,032                -           12,743
         ----------------------------------------------------------------------------------------------------------
         Loss and comprehensive loss per United       $  (60,921)      $ (87,380)      $  (74,269)      $ (338,902)
              States GAAP
         ----------------------------------------------------------------------------------------------------------
         Weighted average number of common shares
              under United States GAAP:
              Basic and diluted                           94,099          79,865           69,600                -
         ==========================================================================================================
         Basic and diluted loss per common share
              under United States GAAP                $    (0.65)      $   (1.09)      $    (1.07)               -
         ==========================================================================================================
</TABLE>

                                      103
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements
(Tabular figures in thousands, except per share amounts)

Years ended November 30, 2006, 2005, 2004 and
period from December 1, 1987 to November 30, 2006
===============================================================================


17.      DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA
         AND THE UNITED STATES (CONTINUED):

         (b)      Consolidated balance sheets:

<TABLE>
<CAPTION>
======================================================================================================================
                                                                2006                               2005
======================================================================================================================
                                                      Canada        United States        Canada        United States
----------------------------------------------------------------------------------------------------------------------
<S>                                                <C>                <C>               <C>             <C>
Assets:
     Acquired technology (i)                       $       253        $       -         $     506       $        -
     Deferred financing costs (v)                          150              648             2,645            3,674
Liabilities:
     Current portion of senior  convertible
         notes payable (v)                               8,754            8,553            16,659           15,047
     Senior convertible notes payable (v)                    -                -            18,795           18,268
     Embedded derivatives (v)                                -              914                 -            8,324
     Warrants (v)                                            -            7,859                 -            4,129
Shareholders' equity:
     Share capital (iv)                                344,217          343,906           295,007          294,937
     Stock options (ii), (iii)                          10,713            7,713             8,466            5,408
     Equity component of senior convertible
         notes payable (v)                               1,639                -             7,985                -
     Warrants (vi)                                      11,390                -             5,345            1,456
     Contributed surplus                                 7,995            2,515               223              223
     Deficit, end of period (i), (ii), (iii),
         (iv), (v), (vi)                              (351,374)        (340,412)         (284,719)        (279,491)
     Deficit accumulated during  development
         stage (i), (ii), (iii), (iv), (v), (vi)      (349,864)        (338,902)         (283,209)        (277,981)
======================================================================================================================
</TABLE>

                  (i)      Canadian  GAAP  requires  the   capitalization   and
                           amortization  of acquired  technology  costs.  Under
                           United States GAAP, such acquired  technology  costs
                           are  charged to  expense  when  incurred  if, at the
                           acquisition date, the  technological  feasibility of
                           this technology has not yet been  established and no
                           future  alternative uses existed.  Accordingly,  for
                           United  States GAAP  purposes,  the costs would have
                           been  expensed  at the date of  acquisition  and the
                           amortization  recorded  under Canadian GAAP would be
                           reversed.

                  (ii)     Prior to  December  1, 2005,  the  Company  followed
                           Financial   Accounting   Standards   Board  ("FASB")
                           Statement of  Financial  Accounting  Standards  123,
                           Accounting for Stock-based  Compensation  ("SFAS No.
                           123"),    which   requires   the    recognition   of
                           compensation  costs for stock  options and  warrants
                           issued  after  December  15, 1995 to  non-employees,
                           such as members of the Scientific Advisory Board and
                           other consultants and advisors, at fair value.

                           The fair value of the non-employee stock options and
                           warrants  granted  after  December 15, 1995 has been
                           estimated  using the  Black-Scholes  option  pricing
                           model based on the assumptions set out in note 9(c).

                           Under Canadian GAAP,  all  stock-based  compensation
                           granted to  non-employees  on or after  December  1,
                           2002 is also  accounted for at fair value.  The fair
                           value of any  options  granted  prior to December 1,
                           2002 is not  required to be  recorded  or  presented
                           under Canadian GAAP.

                                      104
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements
(Tabular figures in thousands, except per share amounts)

Years ended November 30, 2006, 2005, 2004 and
period from December 1, 1987 to November 30, 2006
===============================================================================


17.      DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA
         AND THE UNITED STATES (CONTINUED):

                           As a result, the fair value of any options granted
                           prior to December 1, 2002 and subsequent to December
                           15, 1995 has not been recorded under Canadian GAAP.
                           Under United States GAAP, the fair value of these
                           options is recorded in accordance with SFAS No. 123.

                           Effective December 1, 2005, the Company adopted FASB
                           Statement of Accounting Standards No. 123 (Revised
                           2004), Share-Based Payment ("SFAS No. 123R"),
                           however, there was no impact as a result of the
                           change in the accounting for stock-based awards
                           issued to non-employees in exchange for services
                           under United States GAAP.

                  (iii)    Under Canadian GAAP and effective  December 1, 2004,
                           the Company  adopted the  amendment to CICA Handbook
                           Section 3870. Prior to December 1, 2004, the Company
                           used the settlement  method to account for awards to
                           employees,   officers  and  directors.   Under  this
                           method, no compensation expense was recognized under
                           the stock option plan when stock options were issued
                           to  these  individuals.  Adoption  of  Section  3870
                           requires  the  Company to expense  over the  vesting
                           period,  the fair value of all employee  stock-based
                           awards  granted or modified  since December 1, 2002.
                           Fair  value is  determined  using the  Black-Scholes
                           option pricing model.  Pursuant to the  transitional
                           provisions of Section 3870, the Company applied this
                           change  retroactively,  without restatement of prior
                           periods.

                           For United  States GAAP,  prior to December 1, 2005,
                           the  Company   elected  to  account   for   employee
                           share-based  compensation  using the intrinsic value
                           method  based  upon  Accounting   Principles   Board
                           Opinion  No.  25,  Accounting  for  Stock  Issued to
                           Employees  ("APB 25"). In most cases the application
                           of the intrinsic value method by the Company did not
                           result in  compensation  expense under United States
                           GAAP.

                           The Company also granted  performance-based  options
                           to  employees.  In  accordance  with  APB 25,  these
                           options  were  accounted  for  using  variable  plan
                           accounting.  At each  reporting  date,  compensation
                           cost was measured based on an estimate of the number
                           of   options   that   will  vest   considering   the
                           performance  criteria and the difference between the
                           market  price  of  the  underlying   stock  and  the
                           exercise price at such dates. The compensation  cost
                           was  recognized   over  the  estimated   performance
                           period.

                           GAAP differences between intrinsic and variable plan
                           measurement  under United  States GAAP for employee-
                           and   performance-based   options   and  fair  value
                           measurement under Canadian GAAP prior to December 1,
                           2005  are   presented  in  the  United  States  GAAP
                           reconciliation.

                  (iv)     In 1996, 100,000 warrants were issued as part of the
                           technology acquisition consideration.  United States
                           GAAP requires these acquired  technology costs to be
                           recorded in an amount  approximating  the fair value
                           of the  warrants  issued,  estimated  at their grant
                           date using the  Black-Scholes  option pricing model,
                           and expensed as research and development expenses.

                                      105
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements
(Tabular figures in thousands, except per share amounts)

Years ended November 30, 2006, 2005, 2004 and
period from December 1, 1987 to November 30, 2006
===============================================================================


17.      DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA
         AND THE UNITED STATES (CONTINUED):

                  (v)      Senior convertible notes payable and warrants:

                           Under  Canadian  GAAP,  the  common  share  purchase
                           warrants  and the  equity  component  of the  senior
                           convertible  notes payable are presented  separately
                           as components of shareholders'  equity.  The Company
                           allocated the gross proceeds  received on a relative
                           fair value  basis  between the three  elements:  the
                           equity and debt components of the senior convertible
                           notes payable, and the warrants. Issuance costs were
                           allocated  on a  pro  rata  basis  among  the  three
                           elements.

                           Under United States GAAP,  SFAS No. 133,  Accounting
                           for Derivative  Instruments and Hedging  Activities,
                           as amended,  requires  that an  embedded  derivative
                           included  in  a  debt   arrangement  for  which  the
                           economic  characteristics  and risks are not clearly
                           and closely related to the economic  characteristics
                           of the debt host  contract be measured at fair value
                           and presented as a liability.  Changes in fair value
                           of  the  embedded  derivative  are  recorded  in the
                           consolidated statements of operations and deficit at
                           each reporting date. Embedded  derivatives that meet
                           the  criteria  for   bifurcation   from  the  senior
                           convertible  notes  payable  and that are  therefore
                           measured  at  fair  value  consist  of the  holders'
                           conversion right, the installment  payment mechanism
                           and   the   holders'   contingent   redemption   and
                           conversion  rights  in  the  event  of a  change  in
                           control or an event of default. Under Canadian GAAP,
                           except  for  the  conversion  option,  there  is  no
                           requirement   to  identify  and  measure  the  other
                           embedded derivatives.

                           Under United States GAAP, the warrants are presented
                           as a liability because they do not meet the criteria
                           of EITF 00-19,  Accounting for Derivative  Financial
                           Instruments  Indexed to, and Potentially Settled in,
                           a Company's  Own Stock,  for equity  classification.
                           Subsequent changes in fair value are recorded in the
                           consolidated statements of operations and deficit.

                           Under United States GAAP, the Company  allocated the
                           residual  amount of the gross  proceeds  received to
                           the  senior  convertible  notes  payable  after  the
                           separate fair value  measurement of the warrants and
                           embedded  derivatives.  The Company  allocated $31.5
                           million to the debt,  $4.5  million to the  warrants
                           and $11.0 million to the embedded  derivatives.  All
                           of the issuance costs related to the transaction are
                           recognized as deferred  financing costs under United
                           States GAAP and are  amortized  to the  consolidated
                           statements  of  operations  and  deficit  using  the
                           effective  interest  yield  method over the maturity
                           date of the  notes.  The  senior  convertible  notes
                           payable  carry an  effective  interest  rate of 42%.
                           Differences  in United States GAAP and Canadian GAAP
                           result from the initial  allocation  differences and
                           the subsequent accretion expense and amortization of
                           deferred  financing  costs.  Differences  in  United
                           States   GAAP  also   result  from  the  fair  value
                           remeasurement    of   the   warrant   and   embedded
                           derivatives as liabilities each reporting period.

                           Under United States GAAP,  the  twelve-day  weighted
                           average   share  price   adjustment   represents   a
                           derivative  that will be  measured at fair value and
                           changes   in  fair   value  are   recorded   in  the
                           consolidated     statement    of    operations    as
                           extinguishment   loss.   The

                                      106
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements
(Tabular figures in thousands, except per share amounts)

Years ended November 30, 2006, 2005, 2004 and
period from December 1, 1987 to November 30, 2006
===============================================================================


17.      DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA
         AND THE UNITED STATES (CONTINUED):

                           settlement of the twelve-day  weighted average share
                           price  adjustment  is  accounted  for  as  either  a
                           settlement  of additional  debt, if an asset,  or as
                           the  proceeds  to  issue  additional   shares  if  a
                           liability.   Under  Canadian   GAAP,   there  is  no
                           recognition  of  the   derivative.   Any  subsequent
                           adjustment  to the  number of shares  issued or debt
                           exchanged  as  a  consequence   of  the   twelve-day
                           weighted  average  share  price  adjustment  will be
                           accounted for as an adjustment to share capital.

                  (vi)     Warrants:

                           Under  Canadian  GAAP,  the  common  shares  and the
                           warrants  issued on November 14, 2006 are  presented
                           separately as components  of  shareholders'  equity.
                           The Company allocated the gross proceeds received on
                           a  relative  fair  value  basis  between  the common
                           shares and the warrants.  The related issuance costs
                           were  allocated  on a pro rata  basis to the  common
                           shares and the warrants.

                           Under United States GAAP, the Company  allocated the
                           residual  amount of the gross  proceeds  received to
                           the  common  shares  after the  separate  fair value
                           measurement of the warrants.  The Company  allocated
                           $17.8  million to the common shares and $5.3 million
                           to the  warrants.  In addition,  under United States
                           GAAP,  the  warrants  are  presented  as a liability
                           because  they do not meet the criteria of EITF 00-19
                           for equity classification. Subsequent changes in the
                           fair  value  of the  warrants  are  recorded  in the
                           consolidated  statements of operations  and deficit.
                           Under Canadian GAAP, the related issuance costs were
                           allocated  on a pro rata basis to the common  shares
                           and the warrants.  However, under United States GAAP
                           the amount  allocated to the warrants is  recognized
                           as deferred  financing costs and is amortized to the
                           consolidated  statements of  operations  and deficit
                           over the term of the liability.

         (c)      Consolidated statements of cash flows:

                  Cash from  operations  under United  States GAAP includes the
                  adjustments to loss for the year outlined in note 17(b). Cash
                  used in investments under United States GAAP excludes amounts
                  representing acquired technology (note 17(b)(i)).

         (d)      Income taxes:

                  Under  Canadian  GAAP,   investment  tax  credits  and  other
                  research and  development  credits are deducted from research
                  and development  expense for items of a current  nature,  and
                  deducted  from  property and equipment for items of a capital
                  nature.  Under United States GAAP, these tax credits would be
                  reclassified  as a  reduction  of income tax  expense.  Total
                  research and development tax credits netted against  research
                  and development  expenses on the  consolidated  statements of
                  operations and deficit are set out in note 2(i).

                                      107
<PAGE>

         (e)      Pro forma information:

                  On December 1, 2005, the Company adopted the fair value-based
                  method  for  measurement  and cost  recognition  of  employee
                  share-based compensation arrangements under the provisions of
                  SFAS No.  123R,  using the modified  prospective  application
                  transitional approach.

                  Under  the  modified  prospective  application   transitional
                  approach,   the  fair  value  of  the  cost  of   share-based
                  compensation  is  recognized  for awards  granted,  modified,
                  repurchased  or cancelled  subsequent to the adoption of SFAS
                  No.  123R.   In   addition,   share-based   compensation   is
                  recognized,  subsequent to the adoption of SFAS No. 123R, for
                  the  remaining  portion of the vesting  period,  if any,  for
                  outstanding  awards  granted  prior to the date of  adoption.
                  Accordingly,  on a modified  prospective  basis,  there is no
                  difference in the  recognition  of  stock-based  compensation
                  awards under  Section 3870 and SFAS No. 123R for employee and
                  performance-based   options.  Prior  periods  have  not  been
                  adjusted  and the  Company  continues  to  provide  pro forma
                  disclosures  as if it had accounted for employee  share-based
                  payments  in all  periods  presented  under  the  fair  value
                  provisions  of  SFAS  No.  123,  Accounting  for  Stock-based
                  Compensation, which is presented below:

<TABLE>
<CAPTION>
         ==============================================================================================
                                                                                    2005          2004
         <S>                                                                  <C>           <C>
         Loss for the year - United States GAAP                               $  (87,380)   $  (74,269)
         Compensation cost - employees (17(b)(iii))                               (2,879)       (3,391)
         Compensation expense (17(b)(iii))                                          (192)         (164)
         Pro forma loss for the year -  United States GAAP                    $  (90,451)   $  (77,824)
         ==============================================================================================
         Pro forma basic and diluted loss  per share - United States GAAP     $    (1.13)   $    (1.12)
         ==============================================================================================
</TABLE>

                                      108
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements
(Tabular figures in thousands, except per share amounts)

Years ended November 30, 2006, 2005, 2004 and
period from December 1, 1987 to November 30, 2006
===============================================================================


17.      DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA
         AND THE UNITED STATES (CONTINUED):


         (f)      Consolidated  statement of shareholders' equity in accordance
                  with United States GAAP:

<TABLE>
<CAPTION>
====================================================================================================================================
                                                                                                                        Period from
                                               Common                                                                   December 1,
                                               shares'                                                                   1987 to
                                 Number of    average                                          Contributed              November 30,
                                   shares   share price  Share capital   Options    Warrants     surplus       Deficit     2006
------------------------------------------------------------------------------------------------------------------------------------
<S>                                <C>             <C>   <C>            <C>         <C>          <C>        <C>         <C>
Balance, November 30, 2003         62,022                $  173,441     $  4,397    $  1,456     $      -   $ (117,842) $   61,452
Shares issued for cash              9,775          7.87      76,913            -           -            -            -      76,913
Share issue costs                       -          -         (6,128)           -           -            -            -      (6,128)
Options exercised                     534          2.43       1,300            -           -            -            -       1,300
Fair value of stock options
     issued
     to consultants                     -                         -          592           -            -            -         592
Performance-based options               -          -              -         (164)          -            -            -        (164)
Loss and comprehensive loss             -                         -            -           -            -      (74,269)    (74,269)
------------------------------------------------------------------------------------------------------------------------------------
Balance, November 30, 2004         72,331                   245,526        4,825       1,456            -     (192,111)     59,696
Shares issued for cash              9,005          5.83      52,502            -           -            -            -      52,502
Share issue costs                       -          -         (3,720)           -           -            -            -      (3,720)
Options exercised                     145          4.32         627            -           -            -            -         627
Fair value of stock options
     granted                            -          -              -          837           -            -            -         837
Fair value of vested options/
     warrants forfeited and
     expired                            -          -              -         (223)          -          223            -           -
Shares issued in advance for
     installment payment on
     senior
     convertible notes payable        774          2.74       2,034            -           -            -            -       2,034
Installment payment in advance          -          -         (2,032)           -           -            -            -      (2,032)
Performance-based options               -          -              -          (31)          -            -            -         (31)
Loss and comprehensive loss             -          -              -            -           -            -      (87,380)    (87,380)
------------------------------------------------------------------------------------------------------------------------------------
Balance, November 30, 2005         82,255                   294,937        5,408       1,456          223     (279,491)     22,533
</TABLE>

                                      109
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements
(Tabular figures in thousands, except per share amounts)

Years ended November 30, 2006, 2005, 2004 and
period from December 1, 1987 to November 30, 2006
===============================================================================


17.      DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA
         AND THE UNITED STATES (CONTINUED):


<TABLE>
<CAPTION>
====================================================================================================================================
                                                                                                                        Period from
                                               Common                                                                   December 1,
                                               shares'                                                                   1987 to
                                 Number of    average                                          Contributed              November 30,
                                   shares   share price  Share capital   Options    Warrants     surplus       Deficit     2006
------------------------------------------------------------------------------------------------------------------------------------
<S>                               <C>             <C>   <C>             <C>         <C>          <C>          <C>         <C>
Balance, November 30, 2005         82,255                  294,937          5,408       1,456         223      (279,491)     22,533
Shares issued for cash             43,192         0.41      17,779              -           -           -             -      17,779
Share issued for services              24         1.50          36              -           -           -             -          36
Share issue costs                       -         -         (2,329)             -           -           -             -      (2,329)
Shares and warrants issued for
     installment payments and
     acceleration payments on
     senior convertible notes
     payable                       31,080         1.03      31,913              -           -           -             -      31,913
Holders' conversion of notes          100         3.22         322              -           -           -             -         322
Installment payment in advance          -         -         (2,090)             -           -           -             -      (2,090)
Installment payment in advance
     applied                            -         -          2,032              -           -           -             -       2,032
Fair value of stock options
     granted                            -         -              -          3,141           -           -             -       3,141
Value of embedded derivatives
     on holders conversion              -         -          1,306              -           -           -             -       1,306
Fair value of vested options/
     warrants forfeited and
     expired                            -         -              -           (836)     (1,456)      2,292             -           -
Loss for the period                     -         -              -              -           -           -       (60,921)    (60,921)
------------------------------------------------------------------------------------------------------------------------------------
Balance, November 30, 2006        156,651               $  343,906      $   7,713   $       -   $   2,515    $ (340,412)  $  13,722
====================================================================================================================================
</TABLE>

                                      110
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements
(Tabular figures in thousands, except per share amounts)

Years ended November 30, 2006, 2005, 2004 and
period from December 1, 1987 to November 30, 2006
===============================================================================


17.      DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA
         AND THE UNITED STATES (CONTINUED):


         (g)      Recent accounting pronouncements issued and adopted:

                  Considering  the  effects  of prior year  misstatements  when
                  quantifying   misstatements   in   current   year   financial
                  statements:

                  Issued in September  2006,  Staff  Accounting  Bulletin  108,
                  Considering  the  Effects  of Prior Year  Misstatements  when
                  Quantifying   Misstatements   in   Current   Year   Financial
                  Statements  ("SAB 108"),  addresses  how the effects of prior
                  year  uncorrected  misstatements  should be  considered  when
                  quantifying   misstatements   in   current   year   financial
                  statements.   SAB  108   requires   companies   to   quantify
                  misstatements  using both the balance sheet ("iron  curtain")
                  and income statement ("rollover")  approaches and to evaluate
                  whether either approach  results in an error that is material
                  in light of relevant quantitative and qualitative factors.

                  The guidance is effective  for the Company for the year ended
                  November  30,  2006.  A  material   error   identified   upon
                  application  of this  guidance  may be  corrected  through  a
                  one-time  cumulative-effect  adjustment  to beginning of year
                  retained   earnings,   provided  that  the  misstatement  was
                  determined  to  be  immaterial  in  the  past  based  on  the
                  application of the company's  previous method for quantifying
                  misstatements.  The adoption of this standard did not have an
                  impact on the Company's  financial  statements and results of
                  operations.

         (h)      Recent accounting pronouncements issued and not yet adopted:

                  (i)      Accounting changes and error corrections:

                           In  May  2005,   the  FASB   issued  SFAS  No.  154,
                           Accounting  Changes and Error Corrections ("SFAS No.
                           154"),  which replaces  Accounting  Principles Board
                           Opinion No. 20, Accounting Changes,  and SFAS No. 3,
                           Reporting  Accounting  Changes in Interim  Financial
                           Statements.  SFAS No. 154  provides  guidance on the
                           accounting   for,  and  reporting  of,   changes  in
                           accounting  principles and error  corrections.  SFAS
                           No. 154 requires retrospective  application to prior
                           period's  financial  statements of voluntary changes
                           in accounting principles and changes required by new
                           accounting  standards  when  the  standard  does not
                           include specific transition provisions, unless it is
                           impracticable to do so. Certain disclosures are also
                           required for  restatements  due to  correction of an
                           error.  SFAS No.  154 is  effective  for  accounting
                           changes  and  corrections  of errors  made in fiscal
                           years beginning after December 15, 2005, and will be
                           adopted by the  Company  on  December  1,  2006,  in
                           fiscal 2007, for the year ending  November 30, 2007.
                           The impact  that the  adoption  of SFAS No. 154 will
                           have on the  Company's  results  of  operations  and
                           financial  condition  will  depend on the  nature of
                           future   accounting   changes   and  the  nature  of
                           transitional  guidance provided in future accounting
                           pronouncements.

                  (ii)     Accounting for certain hybrid financial instruments:

                           In  February  2006,  the FASB  issued  SFAS No. 155,
                           Accounting for Certain Hybrid Financial  Instruments
                           ("SFAS No.  155") - an amendment of SFAS No. 133 and
                           SFAS No.  140.  SFAS No.  155,  permits  fair  value
                           remeasurement  for any hybrid  financial

<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements
(Tabular figures in thousands, except per share amounts)

Years ended November 30, 2006, 2005, 2004 and
period from December 1, 1987 to November 30, 2006
===============================================================================


17.      DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA
         AND THE UNITED STATES (CONTINUED):


                           instrument that contains an embedded derivative that
                           otherwise would require bifurcation, clarifies which
                           interest-only  strips and principal-only  strips are
                           not  subject to the  requirements  of SFAS No.  133,
                           establishes  a requirement  to evaluate  interest in
                           securitized  financial assets to identify  interests
                           that are freestanding derivatives or that are hybrid
                           financial   instruments  that  contain  an  embedded
                           derivative  requiring  bifurcation,  clarifies  that
                           concentrations   of  credit  risk  in  the  form  of
                           subordination  are  not  embedded  derivatives,  and
                           amends SFAS No. 140 to eliminate the  prohibition on
                           the qualifying special-purpose entity from holding a
                           derivative  financial  instrument that pertains to a
                           beneficial  interest  other than another  derivative
                           financial instrument.  SFAS No. 155 is effective for
                           the Company for all financial  instruments  acquired
                           or issued  after  December 1, 2006.  The adoption of
                           SFAS  No.  155 is not  expected  to have a  material
                           impact  on  the  Company's   consolidated  financial
                           position and results of operations.

                  (iii)    Fair value measurements:

                           In September  2006,  the FASB approved SFAS No. 157,
                           Fair Value  Measurements,  which defines fair value,
                           establishes a framework for measuring  fair value in
                           GAAP  and  enhances  disclosures  about  fair  value
                           measurements.  This  statement  applies  when  other
                           accounting   pronouncements   require   fair   value
                           measurements.  It does not  require  new fair  value
                           measurements.   This   statement  is  effective  for
                           financial   statements   issued  for  fiscal   years
                           beginning   after  November  15,  2007  and  interim
                           periods within those years, specifically December 1,
                           2007 for the  Company.  The Company  does not expect
                           the  adoption  of this  standard  to have a material
                           impact on its  consolidated  financial  position and
                           results of operations.

                 (iv)      Accounting for uncertainty in income taxes:

                           In June 2006, the FASB approved FASB  Interpretation
                           No. 48, Accounting for Uncertainty in Income taxes -
                           an  interpretation  of FASB  Statement No. 109 ("FIN
                           48"). FIN 48 clarifies the criteria for  recognizing
                           tax   benefits   under  FASB   Statement   No.  109,
                           Accounting  for  Income  Taxes.   It  also  requires
                           additional  financial  statement  disclosures  about
                           uncertain  tax  positions.  FIN 48 is effective  for
                           fiscal years  beginning after December 15, 2006. The
                           Company is evaluating the impact of this standard on
                           its consolidated  financial  position and results of
                           operations.


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<PAGE>

ITEM 19. EXHIBITS

                                  EXHIBIT INDEX


    NUMBER                            EXHIBIT
------------  -----------------------------------------------------------------
       1      ARTICLES OF INCORPORATION AND BY-LAWS

      1.1     Articles  of  Incorporation  of Vasogen  and  Amendments  thereto
              (incorporated by reference to Exhibit 1 of Vasogen's Registration
              Statement  on  Form  20-F  filed  on  July  2,  1997,   File  No.
              000-29350).

      1.2     By-laws of Vasogen  (incorporated  by  reference  to Exhibit 2 of
              Vasogen's  Registration  Statement  on Form 20-F filed on July 2,
              1997, File No. 000-29350).

       4      MATERIAL CONTRACTS AND AGREEMENTS

      4.1     Securities  Purchase  Agreement,  dated  October 7,  2005,  among
              Vasogen,  Vasogen Ireland Limited,  Vasogen, Corp. and Kings Road
              Investments  Ltd.  (incorporated  by reference to Exhibit 99.1 to
              Form 6-K filed on November 21, 2005).

      4.2     Securities  Purchase  Agreement,  dated  October 7,  2005,  among
              Vasogen, Vasogen Ireland Limited,  Vasogen, Corp. and Amatis Ltd.
              (incorporated  by  reference to Exhibit 99.1 to Form 6-K filed on
              November 21, 2005).

      4.3     Securities  Purchase  Agreement,  dated  October 7,  2005,  among
              Vasogen,  Vasogen Ireland Limited,  Vasogen, Corp. and Castlerigg
              Master  Investments  Ltd.  (incorporated  by reference to Exhibit
              99.1 to Form 6-K filed on November 21, 2005).

      4.4     Securities  Purchase  Agreement,  dated  October 7,  2005,  among
              Vasogen,  Vasogen  Ireland  Limited,  Vasogen,  Corp. and Capital
              Ventures International (incorporated by reference to Exhibit 99.1
              to Form 6-K filed on November 21, 2005).

      4.5     Securities  Purchase  Agreement,  dated  October 7,  2005,  among
              Vasogen,  Vasogen Ireland Limited,  Vasogen, Corp. and Smithfield
              Fiduciary LLC  (incorporated by reference to Exhibit 99.1 to Form
              6-K filed on November 21, 2005).

      4.6     Senior  Convertible  Note,  issued by Vasogen  Ireland Limited to
              Kings Road Investments Ltd., dated October 7, 2005, and Amendment
              No. 1 thereto  (incorporated by reference to Exhibit 99.1 to Form
              6-K filed on November 21, 2005).

      4.7     Senior  Convertible  Note,  issued by Vasogen  Ireland Limited to
              Amatis Ltd.,  dated October 7, 2005,  and Amendment No. 1 thereto
              (incorporated  by  reference to Exhibit 99.1 to Form 6-K filed on
              November 21, 2005).

      4.8     Senior  Convertible  Note,  issued by Vasogen  Ireland Limited to
              Castlerigg  Master  Investments  Ltd., dated October 7, 2005, and
              Amendment  No. 1 thereto  (incorporated  by  reference to Exhibit
              99.1 to Form 6-K filed on November 21, 2005).

      4.9     Senior  Convertible  Note,  issued by Vasogen  Ireland Limited to
              Capital  Ventures  International,  dated  October  7,  2005,  and
              Amendment  No. 1 thereto  (incorporated  by  reference to Exhibit
              99.1 to Form 6-K filed on November 21, 2005).

     4.10     Senior  Convertible  Note,  issued by Vasogen  Ireland Limited to
              Smithfield  Fiduciary  LLC,  dated October 7, 2005, and Amendment
              No. 1 thereto  (incorporated by reference to Exhibit 99.1 to Form
              6-K filed on November 21, 2005).

     4.11     Warrant,  issued by Vasogen to Kings Road Investments Ltd., dated
              October 7, 2005,  and  Amendment No. 1 thereto  (incorporated  by
              reference  to  Exhibit  99.1 to Form 6-K  filed on  November  21,
              2005).

     4.12     Warrant, issued by Vasogen to Amatis Ltd., dated October 7, 2005,
              and Amendment No. 1 thereto (incorporated by reference to Exhibit
              99.1 to Form 6-K filed on November 21, 2005).

     4.13     Warrant, issued by Vasogen to Castlerigg Master Investments Ltd.,
              dated October 7, 2005, and Amendment No. 1 thereto  (incorporated
              by  reference  to Exhibit  99.1 to Form 6-K filed on November 21,
              2005).

     4.14     Warrant,  issued by Vasogen to  Capital  Ventures  International,
              dated October 7, 2005, and Amendment No. 1 thereto  (incorporated
              by  reference  to Exhibit  99.1 to Form 6-K filed on November 21,
              2005).

     4.15     Warrant,  issued by Vasogen to Smithfield  Fiduciary  LLC,  dated
              October 7, 2005,  and  Amendment No. 1 thereto  (incorporated  by
              reference  to  Exhibit  99.1 to Form 6-K  filed on  November  21,
              2005).

     4.16     Registration  Rights  Agreement,  dated  October 7,  2005,  among
              Vasogen,  Kings Road Investments  Ltd.,  Amatis Ltd.,  Castlerigg
              Master  Investments  Ltd.,  Capital  Ventures  International  and
              Smithfield Fiduciary LLC, and Amendments thereto (incorporated by
              reference  to  Exhibit  99.1 to Form 6-K  filed on  November  21,
              2005).

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<PAGE>

     4.17     Guaranty,   made  by  Vasogen  for  the  benefit  of  Kings  Road
              Investments   Ltd.,  dated  October  7,  2005   (incorporated  by
              reference  to  Exhibit  99.1 to Form 6-K  filed on  November  21,
              2005).

     4.18     Guaranty,  made by Vasogen for the benefit of Amatis Ltd.,  dated
              October 7, 2005  (incorporated  by  reference  to Exhibit 99.1 to
              Form 6-K filed on November 21, 2005).

     4.19     Guaranty,  made by Vasogen for the benefit of  Castlerigg  Master
              Investments   Ltd.,  dated  October  7,  2005   (incorporated  by
              reference  to  Exhibit  99.1 to Form 6-K  filed on  November  21,
              2005).

     4.20     Guaranty,  made by Vasogen  for the  benefit of Capital  Ventures
              International,  dated October 7, 2005  (incorporated by reference
              to Exhibit 99.1 to Form 6-K filed on November 21, 2005).

     4.21     Guaranty, made by Vasogen for the benefit of Smithfield Fiduciary
              LLC, dated October 7, 2005  (incorporated by reference to Exhibit
              99.1 to Form 6-K filed on November 21, 2005).

     4.22     Engagement Agreement, dated November 3, 2006, between Vasogen and
              Rodman & Renshaw LLC  (incorporated  by reference to Exhibit 99.1
              to Form 6-K filed on November 16, 2006).

      8.1     Subsidiaries  of Vasogen (list included in Item 4C of this annual
              report).

     11.1     Employee  Code of Conduct  (incorporated  by reference to Exhibit
              99.1 to Form 6-K filed on July 5, 2006).

     11.2     Board of Directors' Code of Conduct (incorporated by reference to
              Exhibit 99.1 to Form 6-K filed on January 26, 2007).

     12.1     Certification  of the Chief  Executive  Officer  pursuant to Rule
              13a-14(a) of the Securities Exchange Act of 1934.

     12.2     Certification  of the Chief  Financial  Officer  pursuant to Rule
              13a-14(a) of the Securities Exchange Act of 1934.

     13.1     Certification of the Chief Executive  Officer pursuant to Section
              906 of the Sarbanes-Oxley Act of 2002.

     13.2     Certification of the Chief Financial  Officer pursuant to Section
              906 of the Sarbanes-Oxley Act of 2002.

      15      ADDITIONAL EXHIBITS

     15.1     Consent of KPMG, LLP, independent chartered accountants


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<PAGE>

SIGNATURES

The  registrant  hereby  certifies  that it meets all of the  requirements  for
filing on Form 20 -F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf.



                                    VASOGEN INC.


                                    /s/ Jacqueline Le Saux
                                    ------------------------------------------
                                    Name:   Jacqueline Le Saux
                                    Title:  Vice-President, Corporate &
                                            Legal Affairs

                                    Date:   January 31, 2007.




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