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


                                       OR

[ ]  TRANSITION  REPORT  PURSUANT  TO  SECTION  13 OR  15(d)  OF THE  SECURITIES
     EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from
     to

Commission file number         0-29350

                    VASOGEN INC.
(Exact name of Registrant as specified in its charter)

                    VASOGEN INC.
(Translation of Registrant's name into English)

          Province of Ontario, Canada
(Jurisdiction of incorporation or organization)

2155 Dunwin Drive, Suite 10
Mississauga, Ontario  L5L 4M1 Canada (Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(g) of the Act:
                    Common Shares, no par value
(Title of Class)

Securities for which there is a reporting  obligation  pursuant to Section 15(d)
of the Act:
                              None
(Title of Class)

Indicate the number of  outstanding  shares of each of the  issuer's  classes of
capital  or common  shares as of the close of the  period  covered by the annual
report - 26,574,110 shares outstanding

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 which financial statement item the Registrant has elected
to follow. Item 17 . Item 18 X .
<PAGE>
PART I

Item 1.  Description of Business1.

General

         Vasogen Inc.,  which  together with its  subsidiaries,  is  hereinafter
referred to as the "Company" or the  "Corporation"  or "Vasogen",  is focused on
the  development  and  commercialization  of its  therapies  for  immune  system
modulation  for  the  treatment  of   cardiovascular,   autoimmune,   and  other
cell-mediated inflammatory conditions. Delivered by a medical device technology,
these immune modulation  therapies utilize  components  derived from a patient's
own blood which are  believed to  down-regulate  or inhibit  destructive  immune
processes involved in a number of major diseases.  In collaboration with leading
university  research  centres,  the Company has therapies in development for the
treatment of cardiovascular  and autoimmune  disease,  and for the prevention or
amelioration  of  ischemia/reperfusion  injury.  Vasogen  is also  developing  a
process for treating bone marrow to prevent  graft-versus-host disease ("GvHD"),
a life- threatening complication of bone marrow transplantation.

         Delivered by a platform medical device technology,  Vasogen's therapies
are designed to target  fundamental  disease causing  processes more effectively
while  causing  fewer side effects than  current  therapies.  The Company has an
active research and development program for new products and for the advancement
of existing  products.  The Company  controls the development and manufacture of
its technologies for use in pre-clinical and clinical  research and continues to
advance its  product  development  program to support  future  commercial  scale
production. Patent applications are filed by the Company to protect its products
and processes.  The Company's  policy is to file patent  applications to protect
inventions,  technology,  and improvements that are important to the development
of its  business  and with respect to the  application  of its  therapies to the
treatment of a number of disease indications.

         The Company intends to commercialize  its therapies  through  licensing
agreements with established health care companies.

         For the two fiscal years ended  November 30, 1998 and 1997, the Company
spent a total of $4,656,643 Cdn2 and $5,351,578 Cdn., respectively,  on research
and development.


1 See  Glossary  at  the  end  of  section for terms used throughout this Annual
Report.

2 Unless indicated otherwise, all references in this Annual Report are expressed
in Canadian  dollars.  The following table sets forth the exchange rates for one
Canadian dollar expressed in terms of one U.S. dollar for the past five years.
 <TABLE>
<CAPTION>
                  Average             Low - High             Year End
<S>                <C>              <C>     <C>               <C>
1994               .7300            .7103 - .7631             .7178
1995               .7305            .7023 - .7527             .7323
1996               .7332            .7140 - .7472             .7301
1997               .7223            .7020 - .7487             .7020
1998               .6743            .6311 - .7123             .6523
</TABLE>
    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 May 19, 1999,  one Canadian  dollar,  as quoted by National Bank at 9:00
a.m., for foreign exchange cash selling rates was $0.6868 in U.S. dollars.
<PAGE>
Corporate History

         The  Company  was  incorporated  under the  Business  Corporations  Act
(Ontario) by Certificate and Articles of Incorporation dated January 10, 1980 as
amended by certificates and articles of amendment dated September 19, 1985; June
15, 1988; and April 21, 1994.

Immune Modulation Therapy

         Vasogen's immune modulation therapies utilize components derived from a
patient's  blood that are believed to  down-regulate  or inhibit the destructive
immune  processes  involved in a number of major  diseases.  These therapies are
designed to target fundamental disease-causing processes more effectively,  with
fewer  side  effects,  than  current  therapies.  The  administration  of  these
therapies  involves the withdrawal of a small sample of a patient's  blood,  its
subsequent  processing,  and the  readministration of the processed blood to the
patient.  The  procedure  can be  performed in 30 minutes.  A typical  course of
therapy involves 30-minute procedures  administered on a outpatient basis over a
two to three-week period.

Delivery Technology

         The Company has developed a platform medical device  technology for the
production of immune  modulation  therapies and for the processing of donor bone
marrow.  The medical  device is  designed  to apply a number of  physicochemical
stress factors such as heat and oxidation, to a sample of a patient's own blood.
The system  employs a single use disposable  unit,  which contains the patient's
blood or donor bone marrow during processing.

All products are designed,  manufactured,  and serviced under Vasogen's  quality
system,  which  is  registered  to  ISO  9001  and  EN  46001.  ISO  9001  is an
internationally  recognized standard governing the establishment and maintenance
of quality management systems.  The standard prescribes the characteristics of a
company's  quality  system  needed  for  registration   under  ISO  9001.  These
characteristics  apply to most aspects of a company's operations including order
review,  purchasing,  manufacturing and testing, design, servicing and training.
EN 46001 is a European standard which prescribes the additional  characteristics
of a quality  system  needed  for the  development  and  manufacture  of medical
devices.  Operation of a compliant  quality  management  system and registration
under both ISO 9001 and EN 46001 are one method a company  can pursue to achieve
CE Marking of medical devices necessary for introduction to the European market.
Ongoing  compliance  of a  quality  management  system  registered  under  these
standards is monitored both by Company  internal audit and by periodic audits by
accredited third party organizations, known as Notified Bodies.

Products

         Vasogen's research program is focused on the development of products to
address  significant market  opportunities as described below. Immune modulation
therapies  currently  in  development  include:  VasoCare(TM)  therapy  for  the
treatment of cardiovascular  disease,  VAS971 for the prevention or amelioration
of  ischemia/reperfusion  injury,  and VAS972 for the  treatment  of  autoimmune
disease. The Company is also developing VAS981 for treating bone marrow prior to
transplantation to prevent GvHD.
<PAGE>
VasoCare(TM) Therapy and Cardiovascular Disease

         VasoCare(TM)   therapy  is  being   developed   for  the  treatment  of
cardiovascular disease. Cardiovascular disease is the leading cause of death and
disability in the western world. The disease generally results from narrowing of
the arteries  (atherosclerosis),  which leads to heart attack,  stroke,  and the
symptoms of  peripheral  vascular  disease.  The Company has  received  European
regulatory  approval for  VasoCare(TM)  therapy for the  treatment of peripheral
vascular disease.

         Atherosclerosis, the build-up of fat-containing plaque within the blood
vessel wall, is a common cause of many types of cardiovascular  disease.  In the
United States  alone,  13.9 million  people  suffer from coronary  heart disease
while another 4 million people suffer from stroke  (American  Heart  Association
website.  Cardiovascular  Disease  Statistics  -  www.americanheart.org).  A key
factor in the initiation of atherosclerotic plaque formation is believed to be a
dysfunction of the endothelial  cells that line blood vessel walls.  Endothelial
cells exposed to injury become "sticky" through  up-regulation or stimulation of
adhesion  molecules  (Anderson  et al.  1995.  Systemic  nature  of  endothelial
dysfunction in  atherosclerosis.  American  Journal of Cardiology 75:  71B-74B).
This causes leukocytes to adhere and migrate through the endothelium,  a process
accompanied  by the release of cytokines and other  inflammatory  mediators that
cause further endothelial dysfunction.  Endothelial dysfunction further enhances
the ability of LDL  cholesterol  to migrate into the blood vessel wall and it is
the presence of the oxidized LDL  molecules in the wall of the blood vessel that
attracts the leukocytes to the site.  There are indications  that there may be a
significant  autoimmune component in atherosclerosis.  Although the experimental
evidence of Tcell driven  autoimmune  activity,  even at the earliest  stages of
atherosclerosis is considerable,  it is not yet clear whether autoimmunity is an
initiating or secondary factor in causing the disease. Autoimmunity does appear,
however,  to play an important role in the  progression  of the  atherosclerotic
process referred to as atherogenesis.

         Vasogen is initially developing  VasoCare(TM) therapy for the treatment
of peripheral vascular disease ("PVD"), a serious form of cardiovascular disease
that affects an  individual's  extremities,  particularly  the legs and feet. An
estimated  5.6  million  people in North  America  and  Europe  suffer  from the
disease.  PVD results in leg pain when walking,  progresses to pain at rest and,
in approximately 25% of patients requires expensive medical intervention such as
balloon  angioplasty,  surgical  bypass graft or  amputation  (Tooke and Lowe. A
Textbook of Vascular Medicine. Oxford University Press Inc. New York. page 164).
Management  estimates  that  surgery for PVD costs  health care systems in North
America and Europe in excess of ten billion dollars annually.

         VasoCare(TM) therapy is being developed for PVD patients primarily as a
therapy to prevent or reverse  progression of the disease and to reduce the need
for  surgical   intervention.   VasoCare(TM)   therapy  may   potentially  be  a
prophylactic  therapy in an area that  currently  has no effective  prophylactic
treatment.  The therapy may also improve  walking  distance,  reduce  pain,  and
improve quality of life.
<PAGE>
         A key risk factor in atherosclerosis  and the resulting  cardiovascular
disease  has  been  shown  to  be  high  blood  lipids  (LDL   cholesterol   and
triglycerides).  During  1998,  Vasogen  completed  pre-clinical  studies  in  a
standard  animal model of  atherosclerosis  conducted by Drs. Duncan Stewart and
Dr. Pierre Picard of the Division of Cardiology,  St. Michael's  Hospital at the
University of Toronto.  Based on the results of these studies, the Company filed
a patent application with the United States Patent Office in respect of a method
of lowering blood lipids (LDL  cholesterol  and  triglycerides).  At least fifty
percent of patients with symptomatic  coronary heart disease have elevated blood
cholesterol  levels.  Reduction  through  diet  and  cholesterol-lowering  drugs
significantly reduces the likelihood of future heart attacks and death. However,
diet is only partially effective, and most of the currently used drugs, although
effective,  have significant side effects and are costly. Although triglycerides
are not as directly  atherogenic  as  cholesterol,  they are closely linked with
recognized coronary risk factors, including diabetes, obesity and hypertension.

         During  1998,  the  Company  also  initiated  a  controlled  randomized
double-blind  clinical study in PVD at the  Universities  of Bristol and Dundee,
UK. A common form of PVD is that caused by  obstructions  in the arterial  blood
flow in the extremities, secondary to atherosclerosis.  An initial open clinical
study at the Bristol Royal Infirmary,  University of Bristol,  UK, was completed
on  patients  with PVD and  intermittent  claudication  (severe  leg  pain  upon
walking).  As a group,  the  patients in this study  experienced  a  significant
increase  in their  pain-free  walking  distance  after  receiving  VasoCare(TM)
therapy  and  maintained  this  improvement  for a minimum  of six  weeks  after
therapy. Some patients continued to show an improvement after six months.

         The Company  has also  conducted  research  into a form of PVD known as
Raynaud's disease.  Patients with Raynaud's suffer a wide range of symptoms from
mild cold  intolerance  to severe and disabling  pain in the fingers and toes on
exposure to cold, loss of feeling in the extremities,  digital skin ulcers, and,
in some cases,  gangrene  leading to amputation.  During 1996,  based on results
from a pilot study conducted at the University of London,  the Company conducted
a double blind, placebo controlled study in 38 Raynaud's disease patients at the
University of Dundee,  Scotland,  under the direction of professor J.J.F. Belch.
Primary Raynaud's is a seasonal disease, the symptoms of which are brought on by
exposure to cold.  Accordingly,  trials into Raynaud's disease must be conducted
during the winter months.  In 1997,  Dundee  experienced an  unexpectedly  early
spring, with the average maximum temperature in March reaching  11(degree)C--34%
warmer  than the 30 year  average.  For this  reason,  for the  analysis  of the
results,  the patients  enrolled in the trial were split into two  groups--those
who had  completed  the trial  before the warm  weather set in and those who had
not. Of the sixteen  patients who received  treatment prior to the onset of warm
weather,   nine  received   VasoCare(TM)  therapy  and  seven  received  placebo
treatment. In the VasoCare(TM)-treated group, there was a 51 percent improvement
in   the   severity   of   patients'   symptoms.    The   improvement   in   the
VasoCare(TM)-treated  group  was  double  that  of  the 24  percent  improvement
reported in the group who received a placebo treatment. The level of improvement
in the placebo group was consistent  with the placebo  effect  reported in other
Raynaud's trials. The second group of Raynaud's patients in the Dundee trial, as
expected, appeared to benefit from the warmer weather, with both the treated and
placebo groups showing a similar  improvement in their  symptoms.  There were no
reports  of  significant  adverse  side  effects  associated  with  VasoCare(TM)
therapy.
<PAGE>
         During the 1994 - 1995 period,  the Company  conducted a pilot study on
four patients with severe primary  Raynaud's  disease.  The Raynaud's  study was
completed  under the  direction  of Dr. E. D. Cooke,  director  of the  Clinical
Microvascular Unit at St.  Bartholomew's  Hospital in London,  England. The four
severe  Raynaud's  patients  recruited  for this open  trial were all female and
ranged in age from 15 to 80. All had been  subjected  to the  available  medical
treatments,  none of which were  successful.  Following a course of VasoCare(TM)
therapy,  all four  patients  responded  positively  and  showed  a  significant
(p<0.05)  improvement in endothelial  function reflecting an improved skin blood
flow.  The results of this study were  presented  at an  international  vascular
meeting in March  1996 and  published  in the  International  Angiology  Journal
(International Angiology Journal, 1997; 16:250-4). Their Raynaud's symptoms were
alleviated  for time  periods  ranging from a minimum of three months to over 18
months with no  significant  adverse  side  effects  observed.  The Company also
conducted  basic  research  into the  effects of  VasoCare(TM)  therapy on blood
components.  In vitro experiments  produced  evidence that VasoCare(TM)  therapy
significantly inhibits the aggregation of platelets and increases the production
of vasodilators nitric oxide and prostacyclin in vitro. Following these results,
the Company completed a controlled study in healthy  volunteers to determine the
systemic  effects of  VasoCare(TM)  therapy and to confirm the safety profile of
this  therapy.  The results of this trial  showed that,  following  VasoCare(TM)
therapy,  there was an increase in the production of systemic  prostacyclin.  In
addition,  upregulation  of the  expression  of  immune  cell  surface  markers,
including  HLA-DR,  which is  associated  with cell  activation,  was  observed.
VasoCare(TM)  therapy  resulted in  significant  increases in this marker in the
treated  group,  while no  significant  changes were detected in a control group
given a placebo  treatment.  There  were no  significant  adverse  side  effects
associated  with  VasoCare(TM)  therapy.  Based on current  plans,  the  Company
anticipates having sufficient data concerning VasoCare(TM) therapy to conclude a
strategic alliance within 15 months.

VAS971 and Pre-conditioning against Ischemia Reperfusion Injury

         VAS971  is  being  developed  for the  prevention  or  amelioration  of
ischemia/reperfusion  injury during major vascular surgery. Each year, more than
500,000 major  vascular  surgical  procedures are performed in North America and
Europe (1 Espicom.  Medical Markets of Western Europe.  West Sussex, UK: Espicom
Business  Intelligence  Publications  Limited,  1997 and 2 Health Care Costs and
Utilization  Project.  HCUP-3  Nationwide  Inpatient  Sample Release 3 for 1994.
Hyattsville,  MD: US Department  of Health and Human  Resources,  1996).  During
these  procedures,  the  blood  supply  to major  organs  is often  interrupted,
resulting in injury to the organs. This is known as ischemia/reperfusion ("I/R")
injury.  Ischemia  is a lack of blood flow;  reperfusion  is the return of blood
flow. Both ischemia and reperfusion cause damage to organs and tissues.

         Three  surgical  interventions  that result in I/R injury are  coronary
artery bypass graft  ("CABG")  procedures,  abdominal  aortic  aneurysm  ("AAA")
repair surgery and thoracic aortic aneurysm  ("TAA") repair surgery.  Vasogen is
initially  developing VAS971 to prevent organ damage in patients who undergo TAA
repair surgery. A thoracic aortic aneurysm is a weakness or bulge in the wall of
the upper part of the aorta, which, if not repaired,  could lead to blood vessel
rupture and death from internal bleeding.  It is estimated that more than 10,000
TAA repairs  are  performed  annually in North  America and Europe at an average
cost of $71,000 per procedure (Rice et al. Financial impact of  thoracoabdominal
aneurysm repair. 1993 American Journal of Surgery 166:186-190). If the Company's
efforts  with  respect to TAA repairs  are  successful,  the Company  intends to
pursue expansion into other markets such as AAA or CABG.
<PAGE>
         TAA repair surgery poses significant  perioperative risk, requiring the
aorta to be clamped for up to one hour,  cutting off blood flow and  potentially
causing I/R injury to the  kidneys,  bowel,  liver,  and spinal  cord.  As well,
because of the major nature of the surgery and the fact that most  patients have
underlying  generalized  vascular  disease,  cardiac,  pulmonary,  and  cerebral
complications  are common.  Management  estimates that TAA surgery  results in a
major  complication  rate of approximately  42% and death in approximately 7% of
cases and that long-term  direct health care costs resulting from  complications
associated with the TAA repair procedure exceed $30,000 per patient, on average.

         Based on pre-clinical  studies to date,  treatment with VAS971 prior to
surgery could have a significant effect in reducing  ischemia/reperfusion injury
during major surgery,  considerably reducing morbidity and mortality.  Using two
different animal models, Vasogen has shown that pre-treatment with VAS971 causes
a significant reduction in I/R injury to the kidney by reducing the level of I/R
injury induced cell death in this organ.  Data  confirming the ability of VAS971
to provide  protection  against the damaging effects of I/R injury was presented
at the VIIth Annual Scientific Meeting of La Societe  Quebecoise  d'hypertension
arterielle,  held in Quebec City in January,  1999.  The results  presented were
based on studies  carried out by Dr. Huifang Chen of the Research  Centre of the
University of Montreal  ("CHUM") in a standard large animal model of I/R-induced
kidney failure.  Dr. Chen's findings  confirmed earlier studies performed by Dr.
Johanne  Tremblay of CHUM,  described  below,  which were presented at the Third
International Congress of Pathophysiology, Lahti, Finland, in June 1998.

         Dr. Chen's research focused on the effect of VAS971 on the mechanism of
protection  against  cell death,  the ultimate  result of I/R injury.  It is now
known that impaired function of the mitochondria,  the structures on which cells
depend for energy and survival, is a sign of impending apoptosis,  a common form
of cell death. The results of these new studies demonstrate that VAS971 improves
the retention of mitochondrial  integrity  subsequent to ischemic  damage,  thus
enhancing cell survival after I/R injury.

         In Dr. Chen's studies,  animals were given a course of either VAS971 or
placebo,  followed by surgical  removal of one kidney.  The blood  supply to the
remaining  kidney was clamped for 60 minutes and then released,  re-establishing
blood flow,  thereby simulating the I/R injury that occurs during major vascular
surgery. Recovery of kidney function following I/R injury was monitored daily by
measurement of serum  creatinine  levels.  In addition,  mitochondrial  membrane
potential  ("MMP") was measured in kidney tubule cells at the  conclusion of the
experiment.  Reduction  in MMP is one of the  earliest  indications  of impaired
mitochondrial function and impending cell death.

         The  results  showed  that the degree of kidney  damage  following  I/R
injury, as reflected by elevation of serum creatinine  levels, was significantly
less in the  VAS971-treated  group. The average daily creatinine levels over the
six-day observation period were 45% lower in the VAS971-treated  group, compared
to the placebo group (p=0.0325).  Following I/R injury, MMP was fully maintained
and significantly  higher in the kidneys of the VAS971-treated group compared to
the placebo group, a difference of 48% (p=0.006).

         During  1997,  a research  team led by Dr.  Johanne  Tremblay  of CHUM,
demonstrated  that VAS971 reduces several responses to stress in an animal model
of human essential  hypertension.  Experiments  showed that VAS971 resulted in a
significant  improvement in the response to psychological  stress as measured by
reductions in stress-induced  increases in diastolic blood pressure, heart rate,
and body temperature (p < 0.0001 in each case). It was also shown that following
surgery for  implantation  of  telemetry  monitors,  elevated  body  temperature
returned to normal  significantly more rapidly in the VAS971-treated  group (p <
0.002).
<PAGE>
         Vasogen is currently preparing regulatory submissions to begin clinical
studies of VAS971 in North America.  The Company is initially  developing VAS971
to prevent the serious  complications  resulting  from I/R injury  during  major
vascular surgery, such as TAA repair. Success in the TAA repair indication could
also lead to the  commercial  development  of VAS971  for other  major  vascular
surgery,  including  abdominal aortic aneurysm repair and coronary artery bypass
graft surgery,  where the incidence of I/R related injury is significant.  Based
on current plans,  the Company  anticipates  having  sufficient  data concerning
VAS971 to conclude a strategic alliance within 18 months.

VAS972 and Autoimmune disease

         VAS972 is being  developed  for the  treatment of  autoimmune  disease.
Autoimmune  diseases  affect over 40 million people  throughout the world.  Many
autoimmune  diseases are  characterized  by an imbalance  between the  different
types of Tcells, the  pro-inflammatory  Th1 cells and the regulatory Th2 type of
cells.  In  certain  autoimmune  diseases,   including   rheumatoid   arthritis,
scleroderma  and  psoriasis,  there is a relative  increase  in Th1  cells.  The
Company is focusing  development  of VAS972 on Th1-driven  autoimmune  diseases,
particularly rheumatoid arthritis and psoriasis.

         Rheumatoid  arthritis (RA) is a progressive and destructive  autoimmune
disease in which the body's immune system attacks the joints.  The prevalence of
RA is estimated to be 1 percent of the population over the age of 16 years, with
a total  prevalence  in Europe and North  America of  approximately  5.4 million
people (Jacobsen et al. Epidemiology and estimated population burden of selected
autoimmune   diseases  in  the  United  States.  1997  Clinical  Immunology  and
Immunopathology.   84(3):   223-243).   As  the  disease   progresses,   chronic
inflammation  irreversibly  erodes cartilage,  bone, the articular capsule,  and
ligaments,  resulting in swelling,  pain, and eventual destruction of the joint.
Progression  of damage can lead to profound  disability,  chronic  pain,  and an
increased risk of premature death. The economic impact of RA is significant with
annual  direct  medical costs per RA patient  ranging from $US  3,300-$US  3,800
(Gabriel et al. 1997.  Direct  medical  costs  unique to people with  rheumatoid
arthritis, 1997 Journal of Rheumatology 24: 719-725).

         Psoriasis  is  believed to be a  Th1-driven  autoimmune  disease.  This
chronic  disease  affects  the  skin  and  is   characterized   by  scaling  and
inflammation.  Scaling  occurs when cells in the outer  layer of skin  reproduce
faster than normal and pile up on the skin's surface.  People with psoriasis may
suffer  discomfort,   restricted  motion  of  joints,  and  emotional  distress.
Psoriasis  affects an estimated two percent of the population,  or more than ten
million people in North America and Europe. Approximately five to ten percent of
people with psoriasis develop  psoriatic  arthritis,  a joint  inflammation that
produces  symptoms of arthritis.  Annual treatment costs for psoriasis  patients
are estimated to aggregate  $US 1.6 to 3.2 billion  dollars in the United States
(American  Autoimmune Related Diseases Association Inc. website - www.aarda.org,
National Psoriasis Foundation website - www.psoriasis.org).

         During 1997,  preliminary clinical studies at the University of Toronto
on patients with the autoimmune disease scleroderma indicated a significant (p <
0.05)  reduction in the  proportion of Th1 to Th2 Tcells in the blood  following
treatment with VAS972.  This research  provided initial evidence  indicating how
VAS972 may modulate the immune  system and suggests the potential of the therapy
for the treatment of inflammatory and autoimmune conditions.  This work is being
extended by investigating the effects of VAS972 on autoimmune  disease processes
and immune/endothelial cell interactions.
<PAGE>
         Vasogen  believes  that the increase in the  proportion of Th2 cells to
Th1 cells observed  following the  administration of VAS972 in patients with the
autoimmune disease  scleroderma suggest that the therapy leads to the production
of  inhibitory   cytokines  and  to  a  down-regulation  or  inhibition  of  the
autoreactive immune responses.  The potential ability of VAS972 to down-regulate
or inhibit  these  destructive  processes  could provide  significant  long-term
therapeutic  benefit  in  patients  with  autoimmune  disease.  Based  on  these
findings,  the Company is conducting a series of pre-clinical  studies in models
of autoimmune disease at the University of Toronto.  Based on current plans, the
Company  anticipates  having  sufficient  data  concerning  VAS972 to conclude a
strategic alliance within 24 months.

VAS981 and Graft-versus-Host Disease

         VAS981  is  being   developed   for  treating   bone  marrow  prior  to
transplantation  to  prevent  Graft  -versus-Host  Disease,  a  life-threatening
complication  of bone marrow  transplantation.  During  curative  treatment  for
malignancies  of the blood,  such as  leukemia,  patients  undergo high doses of
chemotherapy  or  radiotherapy,  which  severely  damages the bone marrow.  Bone
marrow can be replaced through a procedure known as bone marrow transplantation.
GvHD is a life-threatening  complication of bone marrow transplantation ("BMT").
It occurs  when  Tcells in the  donated  marrow  (graft)  identify  cells of the
recipient's body (host) as foreign and attack them. The disease is characterized
by  gastrointestinal   involvement  manifested  by  loss  of  appetite,  nausea,
vomiting, diarrhea, abdominal pain and mal-absorption and/or liver dysfunction.

         The ability to treat the bone marrow graft,  to prevent GvHD would have
major  beneficial  implications for the treatment of a number of forms of cancer
by increasing the number of patients who would become candidates for life saving
BMTs. The economic  impact of GvHD is also  significant.  Charges for allogeneic
BMT (11,000  procedures  per annum) range from $US 50,000 to $US  300,000,  with
treatments for associated GvHD  complications  averaging $US 40,000 per affected
patient  (Weeks  et al.  The true  cost of bone  marrow  transplantation.  (1997
American Journal of the Medical Sciences 314(2): 101-112).  Unless a genetically
identical  donor can be found,  bone marrow  transplantation  is  accompanied by
GvHD, whereby lymphocytes present in the bone marrow graft attack the tissues of
the immunologically incompatible patient.

         Vasogen is developing VAS981 for patients with malignancies,  who could
potentially be treated with a bone marrow transplant. The therapy is anticipated
to  decrease  the  severity  and  incidence  of GvHD and  provide  a  clinically
effective  process  to allow a parent or  sibling to donate  bone  marrow.  This
latter benefit could result in a significant increase in the potential number of
bone marrow transplants.

         The Company is currently conducting pre-clinical studies in GvHD at the
Ontario Cancer Institute and the Sunnybrook Health Science Centre, University of
Toronto  under the  direction of Dr. David  Spaner,  using  experimental  animal
systems,  which  introduce  incompatible  bone marrow stem cells into  unrelated
hosts.  Based on the initial  results of this work, the Company filed a Canadian
patent  application  pertaining to methods of alleviating GvHD. Based on current
plans,  the Company  anticipates  having  sufficient data  concerning  VAS981 to
conclude a strategic alliance within 18 months.
<PAGE>
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 similar medical  conditions as
those  targeted  by the  Company.  Many of these  companies  have  substantially
greater financial and other resources, larger research and development staff and
more extensive marketing and manufacturing  organizations than the Company. Many
of these companies have significant  experience in pre-clinical  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 joint ventures. 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 the Company in recruiting and
retaining highly qualified scientific personnel.

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.  The Company's  policy is to file patent
applications  to  protect  inventions,  technology  and  improvements  that  are
important to the development of its business and with respect to the application
of its  therapies  to the  treatment  of a number of  disease  indications.  The
Company  seeks patent  protection  in various  commercial  jurisdictions  of the
world;  for example,  the Company  currently  has four issued  patents and eight
patent  applications  pending.  The issued U.S.  patents  relate to a device for
processing blood (1990),  an ozone generator (1996), a method for inhibiting the
aggregation  of  blood   platelets   (1997)  and  a  method  of  increasing  the
concentration of nitric oxide in a human (1998). The pending patent applications
mainly relate to the application of specific  physicochemical  stress factors in
connection with a variety of disease indications, including a method of lowering
blood  lipids,   treatment  of   autoimmune   disease,   stress   treatment  and
pre-conditioning against stress,  improvement in endothelium function, and GvHD.
The Company  will  continue to seek  intellectual  property  protection  for its
technology as appropriate.

         The  Company  requires  its  employees,  consultants,  members  of  the
Scientific  Advisory  Board,  outside  scientific  collaborators  and  sponsored
researchers  to enter into  confidentiality  agreements  with the  Company  that
contain  assignment  of invention  clauses.  These  agreements  provide that all
confidential  information  developed or made known to the individual  during the
course  of  the  individual's  relationship  with  the  Company  is to  be  kept
confidential and not disclosed except in specific circumstances.

Manufacturing

         The Company's medical device technology for the production and delivery
of  immune  modulation  therapies  and for the  processing  of bone  marrow  are
designed  and  manufactured  under  the  Company's  quality  system,   which  is
registered to ISO 9001 and EN 46001.  These  quality  system  registrations  are
necessary to support  regulatory  approvals (see "Government  Regulation").  For
entry into the U.S.  market,  the Company's  quality system is being modified as
necessary  to conform to the current  Good  Manufacturing  Practices  (cGMP) and
other regulatory requirements (see "Government Regulation").
<PAGE>
         The manufacture of the Company's medical device technology is currently
subcontracted to suppliers and managed by Vasogen.  The technology consists of a
medical  device  system that is  designed  to apply a number of  physicochemical
stress  factors  to a sample of a  patient's  own blood.  The  system  employs a
single-use   disposable  vessel,  which  contains  the  patient's  blood  during
processing.  Vasogen  currently  relies  upon a  single  subcontractor  for  the
disposable  blood containers and a single  subcontractor  for the medical device
system.  Both  subcontractors  operate  quality  systems in accordance  with ISO
9001/EN  46001  requirements.  In  addition,  the  Company's  subcontractor  for
disposable  blood  containers  executes  all  critical  assembly  operations  in
controlled  environment rooms in which bacterial and airborne particulate levels
are monitored and meet regulatory requirements.


Human Resources

     At April 5, 1999,  the Company had seventeen  full time  employees and four
part-time  employees.   As  the  Company  encourages  share  ownership,  it  has
established an option plan (see "Item 12.  Compensation - Stock Option Plan") to
attract,  motivate  and retain key  employees  and  consultants.  The  Company's
employees are not governed by a collective agreement.  The Company believes that
its employee relations are excellent.


REGULATION

         The Company's  therapies are produced by a medical  device  utilizing a
sample of the patient's own blood.  The production of these  therapies  involves
the removal from the patient of a small quantity of blood, the processing of the
blood   by   applying   physicochemical   stress   factors   to  it,   and   the
re-administration of the processed  autologous blood to the same patient.  Sales
of  medical   products  and  therapies  are  subject  to  stringent   regulatory
requirements  in most  countries.  The regulatory  review  process  required for
commercial  sales  varies from  country to country.  In certain  countries,  the
Company may also be subject to  regulations  governing  clinical  studies of its
products.  The Company pursues  pre-market  approvals and complies with clinical
study requirements in those jurisdictions, namely Europe, the United States, and
Canada,  where  activities are being planned or are conducted by or on behalf of
the Company.  The Company  cannot  predict or give any  assurances as to whether
further regulatory approvals will be received or how long the process of seeking
approval will take.

Europe

         Medical  products  that are placed on the market in the European  Union
(EU) are currently 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 (MPD),  Council Directive
65/65/EEC  for  pharmaceutical   products.  The  Company's  technology  for  the
production and delivery of  VasoCare(TM)  therapy has been classified as medical
devices in the EU.

         Generally,  in order to sell its  medical  device  products  within the
European  Union,  Norway and  Switzerland,  the  Company is  required to achieve
compliance with the  requirements of the MDD and affix CE Marking on its medical
device  products  to attest  to such  compliance.  To  achieve  compliance,  the
Company's medical device products must meet the "essential  requirements" of the
MDD relating to safety and performance and the Company must successfully undergo
verification  of  its  regulatory  compliance  ("conformity  assessment")  by  a
qualified third party (a "Notified  Body") selected by the Company.  The Company
was granted CE Marking certification for Vasogen's technology for the production
and delivery of VasoCare(TM) therapy and Vasogen's quality system was registered
to ISO 9001:1994 and BS EN 46001:1997 on February 3, 1998.
<PAGE>
         As the MDD is applied  through  enactment  of national  legislation  of
European  Union  member  states,  the  Company  must  comply  with a variety  of
different  legislative  requirements  in each country in which  Vasogen plans to
sell its products, such as use of certain languages for labelling,  notification
and assessment  procedures for clinical trials,  and notification to authorities
prior  to  entry of the  product  into the  market.  At this  time,  the  review
conducted by the Notified  Body and the  subsequent  CE Marking of the Company's
technology  for the  production  and delivery of  VasoCare(TM)  therapy are both
necessary and sufficient to place the devices on the market in all states of the
European  Union,  Norway and  Switzerland.  Except in cases of ethical or public
health concerns,  or in the case of procedures shown to have significant adverse
effects  once on the market,  the  relevant  authorities  in each country do not
usually  involve  themselves  directly  in the  market  approval/disapproval  of
medical procedures based on medical devices,  however, there can be no assurance
that this situation may not change in the future.

         The Company is subject to continued audit by its Notified Body and will
be required to report any serious  adverse  incidents  or near  incidents to the
appropriate authorities.

United States

         In the United  States,  the  Company's  technology  is  expected  to be
subject to regulation by the health  authorities  as medical  devices;  however,
this product  classification  is not yet finalized.  The manufacture and sale of
medical  devices  in the  United  States  are  controlled  by the  Food and Drug
Administration  (FDA).  The Company is subject to the  regulation of the FDA, as
well as state and local  authorities.  It is expected that the Company's medical
devices will be 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 the Company to submit to the FDA scientifically valid pre-clinical
and  clinical  data  which  it has  developed  to  demonstrate  the  safety  and
effectiveness of the device for the stated medical indications or uses.

         The  clinical  studies to generate  the  clinical  data for the PMA are
subject  to  regulation  under  the  investigational  device  exemption  ("IDE")
regulations.  Before the clinical  study(ies) of the Company's device can begin,
an IDE application  must be submitted to the FDA and be approved.  Also,  before
the  studies  can  begin,  the  institutional  review  boards at the  respective
clinical  centres  participating  in  the  studies  must  approve  the  clinical
protocol.

         Toward  the end of 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 ("QSR")
requirements.  The QSR  requirements  mandate that the Company  manufacture  its
devices and  maintain  its  documents  in a  prescribed  manner with  respect to
design,  manufacturing,  testing, and control activities. If the FDA evaluations
of both the PMA application and the manufacturing  facilities are favorable, the
FDA may  issue  an  approvable  letter,  which  usually  contains  a  number  of
conditions  which must be met in order to secure final approval of the PMA. When
those  conditions have been fulfilled to the satisfaction of the FDA, the agency
will 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  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.
<PAGE>
Canada

         In  Canada,  the  Company's  technology  is  expected  to be subject to
regulation by the health authorities as medical devices;  however,  this product
classification is not yet finalized. The Medical Devices Bureau ("MDB") controls
the  manufacture  and  sale  of  medical  devices  in  Canada.  In  their  basic
requirements,  the  regulations  of Canada  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.  As well,  there  must 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 therapy and
technology is a multi-step  process and the Company is prohibited from promoting
or  commercializing  its  products  prior  to  regulatory   approval.   For  any
investigation  and  testing  of the  Company's  products  in Canada  on  humans,
authorization by the MDB is required.

         The Company must  manufacture the device under approved  quality system
conditions and must validate the  performance  characteristics  of the device to
ensure that the device performs safely, consistently and reliably.

         In addition to the regulatory product approval  framework,  the Company
is also subject to regulation  under  municipal,  provincial,  and federal laws,
including requirements regarding occupational safety,  laboratory practices, the
use, handling and disposition of biological waste,  environmental protection and
hazardous  substance  control,  and may be subject to other  present  and future
local,  provincial,  state,  federal and foreign  regulation,  including  future
regulation  of  the  biotechnology  industry.  The  Company  believes  it  is in
compliance with all such existing regulations.

Summary

         The Company's  regulatory affairs advisors and product development team
has extensive  experience  with, and understands the European and North American
regulatory requirements.  They are continuing to develop the VasoCare(TM) device
and disposable technologies in compliance with all such requirements.

RISK FACTORS AFFECTING THE COMPANY

         The  business  of  the  Company  entails   significant  risks,  and  an
investment in the Common Shares should be considered  highly  speculative  for a
variety of reasons.  An investment in Common Shares should only be undertaken by
persons who have  sufficient  financial  resources to enable them to assume such
risks. In addition to the usual risks  associated with investment in a business,
the  following is a general  description  of certain  significant  risk factors,
which should be considered.

 (a)  Regulatory Environment

              Biotechnology,   medical  device,  and  pharmaceutical   companies
historically  operate in a high-risk regulatory  environment.  The FDA and other
health  agencies  can be very slow to  approve a product  and can also  withhold
product  approvals.  In addition,  these health agencies also oversee many other
Company  operations,  such as  manufacturing.  As a result,  regulatory  risk is
normally higher than other industry sectors.
<PAGE>
         The Company has incurred, and expects to continue to incur, substantial
clinical  research  and other  costs in  connection  with  obtaining  regulatory
approvals  for its medical  products in Canada,  the United  States,  Europe and
other jurisdictions. While the Company is not aware of any pending or threatened
governmental  action  against  it 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 the Company's  business,
financial condition and results of operations.

         There can be no  assurance  that the Company will be able to achieve or
maintain  regulatory  compliance on all or any of its current or future products
or that it will be able to timely and  profitably  produce  its  products  while
complying  with  applicable  regulatory  requirements.  Failure  to  achieve  or
maintain such compliance could have a material adverse effect upon the Company's
business, financial condition, and results of operations.

         Certain regulatory  authorities can institute  proceedings to detain or
seize  products,  issue a recall,  enjoin  future  violations,  assess civil and
criminal  penalties  against the Company,  its officers  and its  employees,  or
require the Company to make substantial changes to its manufacturing operations.
Any of such  actions  could  have a  material  adverse  effect on the  Company's
business, financial condition and results of operations.

         While  the  Company  believes  it is in  compliance  with all  existing
regulations,  there can be no  assurance  that a violation of such laws will not
occur, or that any such  violations  will not have a material  adverse effect on
the Company's business, financial condition or results of operations.

(b) Government Reduction in Health Care Expenditures

         Almost all medical  devices are subject to the reduction in health care
expenditures  in most  countries.  However,  those devices which reduce  overall
health care costs will benefit by being adopted by the health care industry. The
Company's products are expected to be such devices.

(c) Potential Competition

              The biotechnology  industry  continues to undergo rapid change and
competition  is intense and is expected to  increase.  There can be no assurance
that  competitors  have not or will not succeed in developing  technologies  and
products that are more effective than any which have been or are being developed
by the Company or which  would  render the  Company's  technology  and  products
obsolete  and   noncompetitive.   Many  of  the   Company's   competitors   have
substantially   greater  experience,   financial  and  technical  resources  and
production,   marketing   and   development   capabilities   than  the  Company.
Accordingly,  certain of the  Company's  competitors  may  succeed in  obtaining
regulatory  approval for products more rapidly or effectively  than the Company.
If the  Company  commences  commercial  sales of its  products,  it will also be
competing  with  respect to  manufacturing  efficiency  and sales and  marketing
capabilities, areas in which it currently has no experience.
<PAGE>
(d) Development Stage

              Vasogen's products are in the development stage and,  accordingly,
Vasogen's  business  operations  are subject to all of the risks inherent in the
establishment  and  maintenance  of a developing  business  enterprise,  such as
competition and viable operations  management.  Due to its initial investment in
extensive research and development and clinical testing,  Vasogen has incurred a
loss and has  received  no cash flow from  operations  to date,  and there is no
assurance that it will have earnings or cash flow from operations in the future.
The future earnings and cash flow from  operations of Vasogen are dependent,  in
part, on its ability to further develop its products. There can be no assurances
that  Vasogen  will  grow and be  profitable.  The  operations  of  Vasogen  are
presently  funded  by  external  financing  and if  sufficient  cash  flow  from
operations or earnings is not generated in the future, additional financing will
be required. There is no assurance that such financing will be available.

(e) Product Concentration

              Vasogen intends to rely  substantially  on the exploitation of its
products that are currently in development  for its future  earnings.  If any of
these  products  do  not  become  commercially  saleable  for  whatever  reason,
Vasogen's  future  earnings  will suffer.  If the products  become  commercially
suitable,  Vasogen's  future  financial  performance  will  then  depend  on the
successful introduction and customer acceptance of its products.

(f) Proprietary Technology

              Vasogen  owns  all  of  its  key  technologies.  However,  as  the
development of its products  continues and increases,  the potential uses of its
products  may overlap  with other  products  and as a result,  may  increasingly
become  subject  to claims of  infringement.  To date,  Vasogen  is  unaware  of
infringement  claims made or being made against it or of any such  products.  As
Vasogen  continues the  development  of its products,  there can be no assurance
that third parties will not assert  infringement  claims against  Vasogen in the
future,  or require  Vasogen to obtain a license for the  intellectual  property
right of third  parties.  There  can be no  assurance  that  such  licenses,  if
required, will be available on reasonable terms, or at all.

              The Company's success will depend in part on its ability to obtain

patent  protection  for  its  product   candidates.   The  patent  positions  of
pharmaceutical  and  biotechnology  industry are uncertain  and involve  complex
legal  and  factual  questions.   Moreover,   the  coverage  claimed  in  patent
applications  can  be  significantly   reduced  before  the  patent  is  issued.
Consequently,  the Company does not know whether any of its patent  applications
will result in the  issuance  of patents or, if any patents are issued,  whether
they will provide significant protection or will be circumvented or invalidated.
Since patent  applications  in the United States are maintained in secrecy until
patents issue and since  publication of discoveries in the scientific and patent
literature often lags behind actual  discoveries,  the Company cannot be certain
that it was the first  creator  of  inventions  covered  by its  pending  patent
applications  or that it was the  first  to file  patent  application  for  such
inventions.  There can be no assurance  that the Company's  patents,  if issued,
would  be held to be  valid by a court of  competent  jurisdiction.  An  adverse
outcome could subject the Company to  significant  liabilities to third parties,
require disputed rights to be licensed from third parties or require the Company
to cease using such technology.
<PAGE>
(g) Scientific Research and Product Risk

              Definitive  proof  of  the  precise   mechanism  of  action  of  a
biological  response  modifier  such as immune  modulation  therapy will require
considerably more basic scientific  research than has been accomplished to date.
With the exception of certain patient trials,  results from clinical trials have
not yet been  obtained  and the  impact  of  immune  modulation  therapy  in the
treatment  of these  conditions  has not yet  been  addressed.  There  can be no
assurances  that the products,  which Vasogen is currently  developing,  will be
approved by  regulatory  agencies or that further  testing  will yield  positive
results.  Should  the  product  prove to have no benefit  and/or  have an unsafe
profile, its development will likely be discontinued. Evidence to date, however,
suggests that the products are both efficacious and very safe.

(h) Key Personnel

         The   operations  of  the  Company  are  highly   dependent   upon  the
participation  of its key  personnel.  The loss of the service of any one of the
key  personnel  may  materially  affect the  ability of the  Company to grow and
expand.  The  Company  carries  $1 million of keyman  insurance  on Dr.  Anthony
Bolton, Director of Research.

(i) Financing


         The Company may need to raise  additional funds to conduct research and
development,  pre-clinical  studies and clinical  trials  necessary to bring its
potential   products  to  market  and  establish   manufacturing  and  marketing
capabilities.  The Company's  future  capital  requirements  will depend on many
factors, including continued scientific progress in its 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 the
Company's control.

              Adequate  funds  may not be  available  when  needed  or on  terms
acceptable to the Company.  Insufficient  funds may require the Company to scale
back or  eliminate  some or all of its  research  and  development  programs  or
license  to third  parties  products  or  technologies  that the  Company  would
otherwise  seek to develop  itself.  The Company  anticipates  that its existing
resources will enable the Company to maintain its current and planned operations
through fiscal 2000.

(j) Manufacturing

         Vasogen currently relies upon a single subcontractor for the disposable
blood containers and a single subcontractor for the medical instruments on which
its  immune  modulation  therapy  delivery  systems  are based.  The  Company is
continually  reviewing  its own  capabilities  and  the  capabilities  of  other
potential  suppliers  and  subcontractors.  The  establishment  of additional or
replacement   suppliers  for  certain  materials,   components,   subassemblies,
assemblies,  or finished products cannot be accomplished quickly, largely due to
the  regulatory  approval  systems  and  the  complex  nature  of  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 the  Company's  business,  financial  condition and
results of operations.
<PAGE>
         There  can be no  assurance  that the  Company  will be  successful  in
scaling  up  its  manufacturing  operations  or  that  it  will  not  experience
manufacturing  difficulties or recalls or safety alerts in the future. Potential
difficulties  experienced by the Company in  manufacturing  scale-up,  including
recalls or safety alerts,  could have a material adverse effect on the Company's
business, financial condition and results of operations.

(k) Year 2000 Compliance

         Year 2000  computer  risks  arise from the  practice  of some  computer
software  using only two digits rather than four to indicate the year portion of
the date.  On January 1, 2000,  this  software will change the year from "99" to
"00" and may react as if it is the year 1900. Such reaction could  theoretically
disable or impair the performance of computer software.

         The Year 2000  issue  creates  risks for the  Company  from  unforeseen
problems  that may  occur in its own  computer  systems,  as well as in those of
third parties with whom the Company  interacts.  The Company has  established an
internal  task force led by senior  management to deal with the Year 2000 issue.
The Company has undertaken a review of its internal  computer  systems to assess
the risk of a material effect on the Company's financial condition or results of
operations as a result of the Year 2000 issue.

         Although  the  Company   does  not  believe   there  are  any  material
operational  issues or costs  associated with preparing its internal systems for
Year 2000  compliance,  there can be no  assurances  that the  Company  will not
experience serious  unanticipated  negative  consequences  and/or material costs
caused by undetected  errors or defects in the  technology  used in its internal
systems, as well as in those of third parties with whom the Company interacts.

(l) Dilution

     As a business having no sales or revenues,  Management anticipates that the
Company will be dependant over the foreseeable  future upon securing  additional
financing,  of which there can be no  assurance.  In order to obtain  additional
financing,  if it is even  available,  it is likely that the  Company  will sell
additional   shares  or  financial   instruments,   which  are  exchangeable  or
convertible into shares,  resulting in substantial dilution to all shareholders.
In order to provide  incentives  to  current  employees  and induce  prospective
employees  and  consultants  to work for the  Company,  the  Company has granted
options and intends to offer and issue options to purchase shares and/or rights,
exchangeable  or  convertible  into shares;  the exercise of such options and/or
conversion of such other rights  exchangeable  or convertible  into shares could
result in substantial dilution to all shareholders.

(m) Uncertainty of Product Development and Clinical Testing

         The Company has not completed the development of any products and there
can be no assurance any products will be successfully  developed.  The Company's
immune modulation  therapies will require  significant  additional  research and
development efforts and regulatory  approvals,  including clinical trials, prior
to potential  commercialization  in the United  States and  elsewhere.  However,
there can be no assurance that the results of all required  clinical trials will
demonstrate that these immune modulation  therapies are safe and efficacious or,
that even if the results of the clinical trials are considered successful by the
Company,  that the FDA will not require the Company to conduct  additional large
scale clinical trials with these immune modulation therapies before the FDA will
consider approving therapies for commercial sale.
<PAGE>
         Failure of these trials to demonstrate the safety and  effectiveness of
these immune  modulation  therapies could have a material  adverse effect on the
regulatory  approval  process  for  this  potential  product.  There  can  be no
assurance  that the results of the  Company's  preclinical  studies and clinical
trials will 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 the Company is to complete  development
of its products.  Delays in planned patient  enrollment in the Company's current
clinical trials or future clinical trials may result in increased costs, program
delays or both.  There can be no assurance  that any of the Company's  potential
products  will prove to be safe and  effective in clinical  trials,  that FDA or
other  regulatory  approvals will be obtained or that such products will achieve
market acceptance.

         Any  products  resulting  from these  programs  are not  expected to be
successfully  developed or  commercially  available  in the United  States for a
number  of  years,  if at  all.  There  can be no  assurance  that  unacceptable
toxicities  or side  effects  will not occur at any time in the  course of human
clinical trials or, if any products are successfully  developed and approved for
marketing,  during commercial use of the Company's  products.  The appearance of
any such unacceptable  toxicities or side effects could interrupt,  limit, delay
or abort the  development  of any of the  Company's  products or, if  previously
approved,  necessitate their withdrawal from the market. Furthermore,  there can
be no assurance that disease resistance will not limit the efficacy of potential
products.

(n) Potential Conflicts of Interests

         Certain of the directors and officers of the Company are also directors
and officers of other companies.  Consequently, there exists the possibility for
such  directors and officers to be in a position of conflict.  Any decision made
by any of  such  directors  and  officers  involving  the  Company  are  made in
accordance  with their duties and  obligations  to deal fairly and in good faith
with the Company and such other companies. In addition, each of the directors of
the Company  will  declare a conflict in, and refrain from voting on, any matter
in which such  director  may have a conflict of  interest.  Reference is made to
"Item 13. Interest of Management in Certain Transactions."

(o) History of Operating Losses

          As of November 30,  1998,  the Company had an  accumulated  deficit of
approximately  $29.54 million.  The Company has not generated  revenues from the
commercialization of any products and expects to incur substantial net operating
losses over the next several  years.  There can be no assurance that the Company
will be able to generate  sufficient product revenue to become profitable at all
or on a  sustained  basis.  The  Company  expects  to have  quarter  to  quarter
fluctuations in expenses,  some of, which could be significant,  due to expanded
research, development and clinical trial activities.
<PAGE>
(p) Patents and Proprietary Technology

         The  Company  has filed a number of patent  applications  in the United
States and many  international  countries.  The Company  files  applications  as
appropriate  for patents  covering its products and  processes.  The Company has
been issued patents covering certain aspects of its immune modulation therapies.
The  Company's  success  may  depend in part on its  ability  to  obtain  patent
protection  for its products and  processes.  There can be no assurance that the
Company's  patent  applications  will be  issued as  patents  or that any of its
issued patents, or any patent that may be issued in the future, will provide the
Company  with  adequate  protection  for  the  covered  products,  processes  or
technology.  The patent positions of biotechnology and pharmaceutical  companies
can be highly  uncertain,  and  involve  complex  legal and  factual  questions.
Therefore,  the breadth of claims allowed in  biotechnology  and  pharmaceutical
patents  cannot be  predicted.  The Company  also relies 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 the  Company's  patents  are  issued,  or issued  with
limited coverage, others may receive patents, which contain claims applicable to
the  Company's  product.  There can be no  assurance  that any of the  Company's
patents,  or any  patents  issued to the  Company  in the  future,  will  afford
meaningful  protection against  competitors.  Defending any such patent could be
costly to the  Company,  and there can be no  assurance  that the  patent  would
beheld valid by a court of competent jurisdiction.

         The Company also relies on  protecting  its  proprietary  technology in
part  through  confidentiality  agreements  with  its  corporate  collaborators,
employees,  consultants and certain contractors.  There can be no assurance that
these  agreements  will not be  breached,  that the Company  will have  adequate
remedies for any breach,  or that the Company's trade secrets will not otherwise
become known or independently discovered by its competitors. It is possible that
the Company's products or processes will infringe, or will be found to infringe,
patents not owned or controlled by the Company.  If any relevant claims of third
party  patents  are  upheld  as valid  and  enforceable,  the  Company  could be
prevented from  practicing the subject matter claimed in such patents,  or would
be required to obtain  licenses or redesign  its  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 the Company or that the Company could
redesign  its products or processes  to avoid  infringement.  Litigation  may be
necessary to defend against claims of infringement, to enforce patents issued to
the  Company  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  the  Company  to
significant liabilities to third parties, require disputed rights to be licensed
or require the Company to cease using such technology.

(q) Dependence on Third Parties

         The   Company's   strategy   for   the   research,    development   and
commercialization  of its products requires  entering into various  arrangements
with corporate collaborators, licensors, licensees and others, and the Company's
commercial  success is dependent  upon these outside  parties  performing  their
respective contractual responsibilities. The amount and timing of resources such
third parties will devote to these  activities  may not be within the control of
the  Company.  There can be no assurance  that such  parties will perform  their
obligations  as expected or that the Company  will derive any revenue  from such
arrangements. There can be no assurance that these collaborations will result in
the  development  of any  commercial  products.  The  Company  intends  to  seek
additional  collaborative  arrangements to develop and commercialize  certain of
its  products.  There  can be no  assurance  that  the  Company  will be able to
negotiate  collaborative  arrangements  on  favorable  terms,  or at all, in the
future,  or that  its  current  or  future  collaborative  arrangements  will be
successful.
<PAGE>
(r) Lack of Commercial Manufacturing and Marketing Experience

         If the  Company is  successful  in  developing  the  markets for immune
modulation  therapies,  the Company would have to arrange for the manufacture of
its  devices.  At the  present  time,  the  Company  has  not  arranged  for the
manufacture of these treatment  medical  devices on a large scale.  There can no
assurance  that  the  Company,  on a  timely  basis,  will be  able to make  the
transition from manufacturing clinical trial quantities to commercial production
quantities  successfully or be able to arrange for contract  manufacturing.  The
Company  believes it will be able to manufacture its medical devices for initial
commercialization,  if the  product  obtains  FDA  approval,  but it has not yet
demonstrated  the capability to manufacture the treatment  devices in commercial
quantities.

         The Company has no experience in the sales,  marketing and distribution
of  pharmaceutical  or  medical  products.  There can be no  assurance  that the
Company will be able to establish sales, marketing and distribution capabilities
or make arrangements with its collaborators, licensees or others to perform such
activities  or that such  efforts will be  successful.  The  manufacture  of the
Company's  products  involves  a number of steps and  requires  compliance  with
stringent  quality control  specifications  imposed by the Company itself and by
the FDA. Moreover, the Company's products can only be manufactured in a facility
that has undergone a satisfactory  inspection by the FDA. For these reasons, the
Company  would not be able quickly to replace its  manufacturing  capacity if it
were unable to use its 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  FDA's  drug  GMP
requirements  and  the  non-compliance  could  not  be  rapidly  rectified.  The
Company's inability or reduced capacity to manufacture its products would have a
material adverse effect on the Company's business and results of operations.

         The Company may enter into  arrangements  with  contract  manufacturing
companies to expand its own  production  capacity in order to meet  requirements
for its  products,  or to attempt to improve  manufacturing  efficiency.  If the
Company chooses to contract for manufacturing  services and encounters delays or
difficulties  in  establishing  relationships  with  manufacturers  to  produce,
package  and  distribute  its  finished   products,   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's
drug GMP requirements; failure to do so could result in, among other things, the
disruption of product supplies. Until recently,  biologic product licenses could
not be  held  by any  company  unless  it  performed  significant  manufacturing
operations.  The FDA recently  amended its  regulations in this regard,  and the
Company  believes that under these new  regulations it can now hold licenses for
its biological  products without  performing  significant  manufacturing  steps.
Nonetheless,  the  Company's  potential  dependence  upon third  parties for the
manufacture  of its products may adversely  affect the Company's  profit margins
and its ability to develop and deliver such products on a timely and competitive
basis.

(s) Uncertainty of Product Pricing, Reimbursement and Related Matters

         The Company's  ability to earn sufficient  returns on its products will
depend  in part on the  extent  to  which  reimbursement  for the  costs of such
products  and  related  treatments  will be  available  from  government  health
administration  authorities,  private  health  coverage  insurers,  managed care
organizations  and other  organizations.  Third  party  payors are  increasingly
challenging the price of medical  products and services.  If purchasers or users
of the Company's products are not able to obtain adequate  reimbursement for the
cost of using such  products,  they may forego or reduce  such use.  Significant
uncertainty exists as to the reimbursement  status of newly approved health care
products,  and there can be no assurance that adequate third party coverage will
be available.
<PAGE>
(t) Product Liability Exposure

         The  Company  faces an  inherent  business  risk of exposure to product
liability  and  other  claims in the event  that the  development  or use of its
technology  or  prospective  products  is  alleged to have  resulted  in adverse
effects.  While the  Company  has  taken,  and will  continue  to take,  what it
believes are  appropriate  precautions,  there can be no assurance  that it will
avoid  significant  liability  exposure.  Although the Company currently carries
product liability insurance for clinical trials,  there can be no assurance that
the Company has sufficient  coverage,  or can obtain sufficient  coverage,  at a
reasonable  cost.  An  inability  to  obtain  product  liability   insurance  at
acceptable cost or to otherwise  protect  against  potential  product  liability
claims could prevent or inhibit the  commercialization  of products developed by
the Company.  A product  liability claim could have a material adverse effect on
the Company's business, financial condition and results of operations.

(u) Hazardous Material; Environmental Matters

         Although  the  Company  does  not  currently   manufacture   commercial
quantities of its products,  it produces limited quantities of such products for
its clinical trials.  The Company's  research and development  processes involve
the controlled storage, use and disposal of hazardous materials,  and biological
hazardous materials. The Company is subject to federal, state and local laws and
regulations  governing the use, manufacture,  storage,  handling and disposal of
such materials and certain waste  products.  Although the Company  believes that
its 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,  the Company could be held liable for any damages
that result,  and any such liability  could exceed the resources of the Company.
There  can be no  assurance  that  the  Company  will not be  required  to incur
significant  costs to  comply  with  current  or future  environmental  laws and
regulations nor that the operations,  business or assets of the Company will not
be materially or adversely  affected by current or future  environmental laws or
regulations.

(v) Volatility of Stock Price and Absence of Dividends

         The market price of the Company's Shares, like that of the common stock
of many other  biopharmaceutical  companies in the development  stages, has been
and is likely to be highly volatile.  Factors such as the results of preclinical
studies  and  clinical  trials  by  the  Company,   its   collaborators  or  its
competitors, other evidence of the safety or efficacy of products of the Company
or its competitors,  announcements of technological  innovations or new products
by the Company or its competitors, governmental regulatory actions, developments
with  the  Company's  collaborators,  developments  concerning  patent  or other
proprietary  rights of the Company or its  competitors  (including  litigation),
concern  as  to  the  safety  of  the   Company's   products,   period-to-period
fluctuations  in the Company's  operating  results,  changes in estimates of the
Company's   performance   by  securities   analysts,   market   conditions   for
biopharmaceutical  stocks in general and other factors not within the control of
the Company could have a significant  adverse  impact on the market price of the
Common Stock.  The Company has never paid cash dividends on its Common Stock and
does not anticipate paying any cash dividends in the foreseeable future.
<PAGE>
GLOSSARY

         Following is a glossary of terms used throughout this Annual Report.

AAA                 Abdominal Aortic Aneurysm, meaning a balloon-like dilatation
                    of the abdominal aorta (main artery).

Arterial Blood      Rate of blood flow through arteries.
Flow

Atherosclerosis:    Deposits   of   fat    (cholesterol)   in   the   walls   of
                    arteries--causes obstruction and/or thrombosis.

Autoimmune:         A reaction of the body's immune cells against its own cells.

Balloon             Dilation  of a  narrowed  coronary  artery by an  expandable
Angioplasty         balloon.


Blood Lipids        An alternate term for blood fats.

Claudication:       Muscle pain on exercise, due to lack of oxygen.

CABG                Coronary Artery Bypass Graft,  meaning a venous or synthetic
                    graft which bypasses a blocked coronary artery.

Cytokines           Intercellular   messengers   produced  by  cells  which  are
                    involved  in many  body  functions  particularly  in how the
                    immune system is run.

Endothelium:        The thin cellular  lining of blood vessels which plays a key
                    role in regulating  blood flow by secreting  vasoconstrictor
                    and vasodilator substance

Endothelial Cells   A thin layer of cells that  lines the blood  vessels  and is
                    very important in controlling blood flow and blood clotting.

Endothelial         Failure of the endothelium to perform its normal function.
Dysfunction:

In Vitro            Describes  tests  done  outside  the body i.e.  as in a test
                    tube.

HLA-DR              A cell receptor involved in antigen presentation to T cells,
                    also a type  of cell  marker  important  in  transplantation
                    immunity.

LDL Cholesterol     A form of cholesterol  that is harmful because it can easily
                    penetrate  the  endothelial   lining  ,and  form  the  fatty
                    deposits of atherosclerosis.

Leukocytes:         White blood cells.

Nitric Oxide:       A gas which causes smooth  muscle  fibers to relax,  i.e. in
                    blood vessels; has many other functions in the body.

Platelets:          Small cells in the blood required for blood clotting.

Prostacyclin:       Causes   relaxation   of   smooth   muscle   cells   causing
                    vasodilation.
<PAGE>
Raynaud's Disease:  Excessive  constriction of digital blood vessels on exposure
                    to cold, leading to pain and numbness.

Rheumatoid          An  autoimmune   disease,   which  causes  arthritis  (joint
Arthritis:          inflammation) in many different joints.


Scleroderma:        An Autoimmune  disease which causes hardening and thickening
                    of the skin and blood vessels; may affect internal organs.

Serum Creatinine    A measure of kidney function.
levels

T cell              A type of lymphocyte which constitutes the attack arm of the
                    immune system.

Th1                 A proinflammatory type of T cell.

Th2                 A less  inflammatory  type of T cell which can  control  Th1
                    cells.

Triglycerides       A type of blood fat thought to be involved in coronary heart
                    disease.

Vasoconstrictor:    Causes blood vessels to narrow.

Vasodilators:       Causes blood vessels to dilate.

Vascular:           Pertaining to blood vessels.

             * * * * * * * * * * * * *


Item 2.  Description of Property.

         The Company's principal  facility,  which is leased, is located at 2155
Dunwin Drive,  Suite 10  Mississauga,  Ontario,  L5L 4M1. The lease covers 8,333
square feet.  The lease  commenced on May 1, 1998 and expires on April 30, 2005.
Management  believes  that the existing  facility is adequate for the  Company's
current and future needs. Management continually monitors the Company's facility
requirements in light of the results of its research and development activities.

Item 3.  Legal Proceedings.

         There are no legal proceedings of a material nature pending against the
Company,  or its  subsidiaries.  The Company is unaware of any legal proceedings
known to be contemplated by any governmental authorities.

Item 4.  Control of Registrant.

         (a) To the best of the Company's knowledge, the Company is not directly
or indirectly owned or controlled by another corporation or foreign government.

         (b) At April 19, 1999, there were 33,561,049 Shares outstanding with an
authorized  capital of an unlimited number of shares.  At such date, the Company
is  unaware  of any  person  beneficially  owning  10% or more of the  Company's
outstanding shares.

         At April 14, 1999,  officers and directors,  as a group,  owned 652,839
shares of the Company.
<PAGE>
         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.

Item 5.  Nature of Trading Market.

         The  Company's  Shares  commenced  trading on The Montreal  Exchange in
Canada on July 6, 1996. The Montreal  Exchange is the primary trading market for
the Company's  Shares.  The Company's  shares also trade, on a limited basis, on
the NASD OTC  Electronic  Bulletin  Board.  Prior to July 6, 1996, the Company's
shares  were  traded on The  Canadian  Dealing  Network  Inc.  in  Ontario.  The
following is a summary of trading,  on a quarterly  basis,  in the Shares on The
Montreal  Exchange  for 1997,  1998 and the first  quarter  of 1999  (stated  in
Canadian dollars):
<TABLE>
<CAPTION>
1997

<S>                         <C>                      <C>              <C>
1st  Quarter                3.65                     1.25             15,074,600
2nd  Quarter                3.70                     2.00              6,918,100
3rd  Quarter                3.00                     1.75              3,331,454
4th  Quarter                3.30                     1.55              5,664,234

1998

1st  Quarter                2.30                     1.30              3,195,598
2nd  Quarter                2.25                     1.10              2,236,812
3rd  Quarter                1.88                     0.81              1,389,975
4th  Quarter                1.55                     0.81              2,078,939

1999

1st  Quarter                2.29                     1.10              3,209,118
</TABLE>

         The closing  sales price of the Shares on the Montreal  Exchange on May
19, 1999 was $1.55.

         At April 14, 1999,  the Company had 4,700  shareholders  of record.  At
April 14, 1999,  there were 26 United  States  shareholders  of record,  holding
1,007,868 Shares, which represents 3.0% of the outstanding class.

Item 6.  Exchange Controls and Other Limitations Affecting  Security Holders.

         (a) There are no laws or governmental  decrees or regulations in Canada
that  restrict  the export or import of  capital,  or affect the  remittance  of
dividends,  interest,  or other payments to holders of the Company's  securities
who are not  residents  of Canada,  other  than  withholding  tax  requirements.
Reference is made to "Item 7. Taxation."

         (b) There are no limitations imposed by the laws of Canada, the laws of
Ontario or by the  charter or other  governing  documents  of the Company on the
right of a non-resident to hold or vote Common Shares of the Company, other than
as provided in the Investment  Canada Act (Canada) (the  "Investment  Act"). The
following  summarizes  the  principal  features  of  the  Investment  Act  for a
non-resident who proposes to acquire Common Shares.  The summary is of a general
nature only and is not  intended to be nor is it, a  substitute  of  independent
advice from an investor's own advisor. The summary does not anticipate statutory
or regulatory amendments.
<PAGE>
         The Investment Act generally  prohibits  implementation of a reviewable
investment  by  an  individual,   government  or  agency  thereof,  corporation,
partnership,  trust or joint  venture that is not a "Canadian" as defined in the
Investment Act (a "non-Canadian"), unless after review, the minister responsible
for the  Investment  Act (the  "Minister")  is satisfied  that the investment is
likely to be of net benefit to Canada. Under the Investment Act, a United States
citizen  qualifies  as a "World  Trade  Organization  Investor."  Subject to the
restrictions  noted below, an investment in a Canadian business by a World Trade
Organization  Investor,  would be reviewable under the Investment Act only if it
is an investment to acquire  control of such Canadian  business and the value of
the assets of the Canadian business as shown on its financial  statements is not
less than a specified amount,  which for 1998 is $172 million.  An investment in
the shares of a Canadian  business by a  non-Canadian  other than a "World Trade
Organization  Investor"  when the  Company is not  controlled  by a World  Trade
Organization Investor, would be review able under the Investment Act if it is an
investment  to acquire  control of the  Canadian  business  and the value of the
assets of the  Canadian  business  as shown on its  financial  statements  is $5
million or more, or if an order for review is made by the federal cabinet on the
grounds that the investment  relates to Canada's  cultural  heritage or national
identity.

         The acquisition by a World Trade Organization  Investor of control of a
Canadian  business in any of the following  sectors is also subject to review if
the value of the assets of the Canadian business exceeds $5 million (as shown on
its financial  statements):  uranium,  financial  services  (except  insurance),
transportation  services and cultural businesses,  which include broadcast media
(publication, distribution or sale of books, magazines, periodicals, newspapers,
music,  film and video products and the exhibition of film and video  products),
television and radio services.

         A non-Canadian would acquire control of the Company for purposes of the
Investment Act if the non-Canadian acquired a majority of the Common Shares. The
acquisition  of less than a majority but  one-third or more of the Common Shares
would be presumed to be an acquisition of control of the Company unless it could
be established  that, on acquisition,  the Company was not controlled in fact by
the acquiree through the ownership of Common Shares.

         Certain  transactions  relating  to Common  Shares are exempt  from the
Investment Act, including:

         (a) an acquisition of Common Shares by a person in the ordinary  course
of that person's business as a trader or dealer in securities;

         (b) an  acquisition  of control of the Company in  connection  with the
realization of security granted for a loan or other financial assistance and not
for a purpose related to the provisions of the Investment Act; and

         (c)  an  acquisition  of  control  of  the  Company  by  reason  of  an
amalgamation, merger, consolidation or corporate reorganization, following which
the  ultimate  direct or indirect  control in fact of the  Company,  through the
ownership of Common Shares, remained unchanged.
<PAGE>
Competition Act Review

         Investments  giving rise to the acquisition or establishment,  directly
or indirectly, by one of more persons of control over, or a significant interest
in the whole or part of a business of a competitor,  supplier, customer or other
person are subject to substantive review by Canada's  Competition Law Authority,
the Director of  Investigation  and Research  (the  "Director").  If or when the
Director  concludes  that  Merger,  whether  by  purchase  or lease of shares or
assets, by amalgamation or by combination, or otherwise, prevents or lessens, or
is likely to prevent or lessen competition substantially, he may apply as may be
necessary to eliminate the  substantial  lessening or prevention of competition.
Such substantive Merger review power applies to all Mergers, whether or not they
meet limits for pre-notification under the Competition Act.

         In addition to substantive  Merger review, the Competition Act provides
for a notification regime respecting Mergers of certain size. The regime applies
in  respect  of  share  acquisitions,  asset  acquisitions,   amalgamations  and
combinations,  for ease of reference.  This filing refers  specifically to share
acquisition,  although the pre-notification regime applies, with the appropriate
modification, to other types of acquisition of control as well.

         In order for a share acquisition transaction to be pre-notifiable,  the
parties to the transaction  (being the person or persons who proposed to acquire
shares,  and the Corporation  the shares of which are to be acquired),  together
with their affiliates  (being all firms with a 50% or more voting shares linkage
up and down the chain) must have:

         (i)  aggregate  gross assets in Canada that exceed  $400,000,000.00  in
value,  as shown on their  audited  financial  statements  for the most recently
completed fiscal year (which must be within the last fifteen (15) months); or

         (ii)  aggregate  gross revenue from sales in, from, or into Canada that
exceed  $400,000,000.00 for the most recently completed fiscal year shown on the
said financial statements; and

         (iii) the party being  acquired  must have gross  assets in Canada,  or
gross revenues from sales in or form Canada,  exceeding  $35,000,000 as whose on
the said financial  statements.  Acquisition of shares carrying up to 20% of the
votes  of a  publicly  traded  corporation,  or 35% of the  votes  in a  private
corporation  will not be subject to  pre-notification,  regardless  of the above
thresholds. However, exceeding the 20% or the 35% threshold, and again exceeding
the 50%  threshold,  gives rise to an  obligation  of  notification  if the size
threshold is met.

         If a  transaction  is  pre-notifiable,  a filing  must be made with the
Director containing the prescribed  information with respect to the parties, and
a waiting period,  (either seven or twenty-one days, depending on whether a long
or short form filing is chosen) must expire prior to closing.

         As an  alternative  to  pre-notification,  the  Director  may  grant an
Advance Ruling Certificate, which exempts the transaction from pre-notification.
Advance Ruling Certificates are granted where the Director  concludes,  based on
the information  provided to him, that he would not have  sufficient  grounds on
which to apply to the Competition Tribunal to challenge the Merger.
<PAGE>
Item 7.  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
with the Company,  holds the Company's Shares as capital property,  and 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 (a "United States Holder").

         This  following  summary is based upon the  current  provisions  of the
Canadian Tax Act, the regulations  thereunder,  all specific  proposals to amend
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
published  administrative  practices  of  Revenue  Canada,  Customs,  Excise and
Taxation.  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 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.  However,  pursuant to the Canada-United States Income Tax Convention
(the  "Convention"),  the  withholding tax rate on the gross amount of dividends
paid to  residents  of the United  States is reduced to 15% or, in the case of a
U.S.  corporation  which 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 resident in the
United  States may be exempt from  Canadian  withholding  taxes,  including  any
withholding tax levied in respect of dividends received on the Company's Shares.

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
(i) such shares are "taxable Canadian property" within the meaning of the Income
Tax Act (Canada) (the "Act") and no relief is afforded  under any applicable tax
treaty.  The shares of the  Company  would be  taxable  Canadian  property  of a
non-resident if at any time during the five year period immediately  preceding a
disposition by the non-resident of such shares,  not less than 25% of the issued
shares of any class or series of al class of shares of the  Company  belonged to
the  non-resident,  to persons with whom the  non-resident did not deal at arm's
length,  or to the  non-resident  and persons with whom the non-resident did not
deal at arm's length for purposes of the Act. For this  purpose,  issued  shares
includes options to acquire such shares  (including  conversion  rights) held by
such persons. Under the Convention, a capital gain realized by a resident of the
United States will not be subject to Canadian tax unless the value of the shares
of the  Company is derived  principally  from real  property  (as defined in the
Convention) situated in Canada.
<PAGE>
Item 8. Selected Financial Data.

         Following  is selected  financial  data of the  Company,  expressed  in
Canadian  dollars,  for each of the last five fiscal  years ended  November  30,
calculated in accordance with Canadian generally accepted accounting principles,
which except as described in Note 10 to the financial statements, conform in all
material respects with accounting  principles  generally  accepted in the United
States.
<TABLE>
<CAPTION>
Years ended November 30

(in thousands of dollars except
for per share data)           1998       1997       1996       1995       1994

<S>                           <C>        <C>        <C>        <C>        <C>
Research & development        4,656      5,351      3,167      1,496        382
Other expenses                2,656      2,640      1,695        827        614

Loss for the
period                       (7,312)    (7,991)    (4,862)    (2,323)      (996)
Loss per share                (0.29)     (0.38)     (0.38)     (0.27)     (0.18)

Working capital               4,807      7,188      5,426      1,644        251
Total assets                  7,490      9,470      7,696      3,550      2,384

Share capital                36,139     31,172     21,541     12,735      9,171
Deficit                     (29,395)   (22,083)   (14,092)    (9,230)    (6,907)

Shareholders' equity          6,744      9,089      7,449      3,505      2,264
</TABLE>
Notes:

(1) To date, the Company has been in the development stage and, accordingly, has
no  revenue.

(2) The  common  shares  of the  Company  were  consolidated  on a
seven-for-one basis on April 21, 1994.

         All dollar  amounts  herein are expressed in Canadian  dollars,  except
where otherwise indicated. Reference is made to footnote number 2, on page 2 for
a summary of the exchange  rates  between the U.S.  and Canadian  dollar for the
past five years.

         Reference  is  made  to  Note  10 of the  Company's  audited  financial
statement  for the  year  ended  November  30,  1998,  in  "Item  18.  Financial
Statements.",  for a description of the differences  between Canadian and United
States  generally  accepted  accounting  principles,  and how these  differences
affect the Company's financial statements.
<PAGE>
         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, 1998, 1997 and 1996:

Fiscal Years Ended November 30
<TABLE>
<CAPTION>
                                                1998         1997         1996
<S>                                             <C>          <C>          <C>
Research and development                        4,631        5,225        3,371
Loss for the period                            (7,415)      (8,332)      (5,066)
Basic and diluted loss per share                (0.29)       (0.39)       (0.40)
Total Assets                                    5,652        7,606        5,705
Share Capital                                  36,795       31,700       21,602
Deficit                                       (31,889)     (24,474)     (16,143)
Shareholders' equity                            4,906        7,226        5,459
</TABLE>
Item 9. Management's  Discussion and Analysis of Financial Condition and Results
of Operations.

         The following  discussion  and analysis  should be read in  conjunction
with the audited financial statements and notes thereto. See "Item 18. Financial
Statements."  The financial  statements  have been  prepared in accordance  with
generally  accepted  accounting  principles  (GAAP) in Canada  which,  except as
described  in  Note  10,  conform  in  all  material  respects  with  accounting
principles  generally  accepted in the United States.  In addition to historical
information,  the following  Management's  Discussion  and Analysis of Financial
Condition and Results of Operations  contains  forward-looking  statements  that
involve  risks and  uncertainties.  The  Company's  actual  results could differ
significantly  from those anticipated in these  forward-looking  statements as a
result of certain factors,  including those discussed in "Risk Factors" and else
where in this Annual Report.

Overview

         Vasogen is focused on the development and  commercialization  of immune
modulation therapies for the treatment of human disease.  Delivered by a medical
device  technology,  these therapies utilize components derived from a patient's
own blood which are  believed to  down-regulate  or inhibit  destructive  immune
processes involved in a number of major diseases.  In collaboration with leading
university  research  centres,  the Company has several therapies in development
for  the  treatment  of  cardiovascular  and  autoimmune  disease,  and  for the
prevention  or  amelioration  of  ischemia/reperfusion  injury.  Vasogen is also
developing  a process  for  treating  bone  marrow to prevent  Graft-versus-Host
disease, a life threatening complication of bone marrow transplantation.

         Delivered by a platform medical device technology,  Vasogen's therapies
are designed to target fundamental  disease causing processes  effectively while
causing  fewer side effects than  current  therapies.  The Company has an active
research  and  development  program  for new  products  and the  advancement  of
existing  products.  The Company controls the development and manufacture of its
technologies  for use in  pre-clinical  and clinical  research and  continues to
advance its product  development program to support commercial scale production.
Patent  applications  are filed by the  Company  to  protect  its  products  and
processes.  The  Company's  policy is to file  patent  applications  to  protect
inventions,  technology,  and improvements that are important to the development
of its  business  and with respect to the  application  of its  therapies to the
treatment of a number of disease  indications.  The Company  currently  has four
issued patents and eight patent applications.
<PAGE>
         The Company intends to commercialize  its therapies  through  licensing
agreements with established health care companies.

         During 1998,  Vasogen remained in a research and development  phase and
has not yet  generated  revenues.  To fund its  operations,  the Company  relies
principally  upon the  proceeds  of  public  and  private  offerings  of  equity
securities and the resulting  interest  revenue  generated.  In the future,  the
Company may establish  alliances  with other health care  companies to assist in
marketing its therapy, as well as to provide research and development funding.

         The Company has received regulatory  approval for VasoCare(TM)  therapy
for the treatment of peripheral vascular disease (PVD).  Marketing the Company's
products  outside the European  Community,  or offering it for the  treatment of
disease indications,  other than PVD, within the European Community will require
the  completion of further  clinical  trials and/or  regulatory  approvals,  the
timing and outcome of which will impact future operations.

Results of Operations

         The Company is in its research and development  phase and, as such, has
incurred  losses  since its  inception.  For the fiscal year ended  November 30,
1998,  the Company  recorded a loss of $7.3 million,  or $0.29 per common share.
These results compare with a loss of $8.0 million or $0.38 per common share, for
the fiscal year ended  November 30, 1997 and a loss of $4.9 million or $0.38 per
common share, for the fiscal 1996.

         Research and  development  expenses,  including  costs  associated with
pre-clinical and clinical research, product development, and regulatory affairs,
decreased  by $0.7  million,  in fiscal  1998,  as  compared  to fiscal 1997 and
increased by $1.5 million as compared to fiscal 1996.

         The major reason for the decrease in research and development  expenses
in 1998 as compared to 1997 is the one-time costs  associated with preparing for
the European  regulatory  approval process and the  implementation  of a quality
system registered to ISO 9001 and EN 46001 incurred during 1997. The increase in
fiscal  1997 as  compared  to fiscal  1996 also  reflected  new  research at the
University  of Montreal  and  increased  product  development  and  intellectual
property activity.

         Professional fees increased by $0.1 million in fiscal 1998, compared to
fiscal 1997 and by $0.4 million  compared to fiscal 1996.  These include  legal,
audit, tax, market research,  strategic planning,  investor relations, and other
consulting costs not directly related to research and development.  The increase
in 1998 was  associated  with  increased  corporate  activity.  During 1997, the
Company filed a 20-F  Registration  Statement  with the  Securities and Exchange
Commission in the United States.

         Salary expenses decreased by $0.1 million,  compared to fiscal 1997 and
increased  by $0.5  million  compared to fiscal  1996.  The  reduction in salary
expense  in 1998 was the  result of higher  expenses  required  to  support  the
Company's  preparation for the European regulatory approval process during 1997.
Salary  expenses  increased  in fiscal  1997,  compared to fiscal  1996,  as the
Company  added  staff   commensurate   with  corporate  growth  and  development
activities. The increase in salary expenses in 1997 also reflected the full-year
impact of employees added during 1996.

Liquidity and Capital Resources

         As  at  November  30,  1998,  the  Company  had  cash  equivalents  and
marketable securities of $5.2 million, versus $7.5 million in the previous year.
Cash  equivalents  consist of  certificates  of deposit and Canadian  government
treasury  bills.  Marketable  securities  include bonds with varying  maturities
issued by Canadian  governments  and  corporations,  which are capable of prompt
liquidation.
<PAGE>
         Cash used for  operations in fiscal 1998 was $6.9 million,  compared to
$7.5 million in fiscal 1997. This decrease resulted from one-time costs incurred
in 1997 to support the Company's successful European regulatory approval process
and lower product development expenses in 1998.

         Cash provided  from  financing  activities  during fiscal 1998 was $4.9
million,  compared to $9.4 million in fiscal 1997. The Company completed private
placements  for proceeds of $4.6  million net of share issue  costs.  A total of
2,881,860  Common  Shares  was  issued  in  connection  with  these  placements.
Additional  funding was generated  through the exercise of warrants and options,
for proceeds of $0.3 million,  which  resulted in the issuance of 327,870 Common
Shares.  During 1998,  33,500  Common Shares valued at $0.05 million were issued
for services provided to the Company.

         As at November 30, 1998, the Company had no long-term obligations.

Year 2000

          The  Company is aware of the issues  associated  with the  programming
code in existing computer systems as the millennium (Year 2000) approaches.  The
Year 2000 issue creates risks for the Company from unforeseen  problems that may
occur in its own computer systems and Company products that incorporate computer
systems,  as well as in those of third parties with whom the Company  interacts.
The Company has  contracted an external  consulting  firm to assess its internal
computer  systems with respect to the Year 2000 issue.  This  assessment is near
completion,   with  no  significant  issues  identified  to  date.  Vasogen  has
established  an internal  task force led by senior  management  to deal with the
Year 2000 issue.  The Company has  undertaken a review of its internal  computer
systems  to assess  the risk of a  material  effect on the  Company's  financial
condition  or  results of  operations  as a result of the Year 2000  issue.  The
Company  believes that it will be compliant  before the end of the 1999 calendar
year. The Company has made reasonable inquiry of its major suppliers as to their
Year 2000  compliance  to add further  assurance.  The  Company has  implemented
certain  contingency  plans  with  respect  to its  major  suppliers,  including
building up a significant level of inventory and identifying alternative sources
of  supply.  The  Company  will  continue  to  develop  contingency  plans as it
identifies the  opportunity  to mitigate third party  exposures to the Year 2000
issue.  The  Company's  Year 2000  plans and  progress  have also been  reviewed
through an  independent  review of its  medical  device  technology  and quality
system.  No costs of  significance  in  respect  of Year 2000  issues  have been
incurred  to date and costs  anticipated  in the future are not  expected  to be
material. Any costs associated with this issue will be treated, in the financial
statements of the Company,  in accordance  with  generally  accepted  accounting
principles. Generally, the Company believes that as a development stage company,
the  scope  of  Vasogen's  activities  and  the  structure  of  its  information
technology  function are such that Vasogen is not at material risk in respect of
the Year 2000 issue.
<PAGE>
Item 10.  Directors and Officers of Registrant.

The following table outlines the names and  municipalities  of residence of each
of the directors and officers of Vasogen,  their principal occupations and their
periods of service as directors or officers.  Each  director is expected to hold
these positions until the next Annual General Meeting of Shareholders, scheduled
for May 26, 1999.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
Name of Directors                        Principal Occupation                            Position Since
and Executive Officers
===========================================================================================================
<S>                                      <C>                                              <C>
William A. Cochrane +,  OC, MD           Chairman of the Board                            February 1995
Calgary, Alberta                         and a Director of the Company and Healthcare
                                         Consultant
-----------------------------------------------------------------------------------------------------------
David G. Elsley, MBA                     President, CEO and a Director of the Company     January 1991
Toronto, Ontario
-----------------------------------------------------------------------------------------------------------
William R. Grant *                       Director of the Company and Chairman of          November 1998
New York, NY                             Galen Associates
-----------------------------------------------------------------------------------------------------------
Graham Strachan +                        Director of the Company and President & CEO      September 1998
Mississauga, Ontario                     of Allelix Biopharmaceuticals
-----------------------------------------------------------------------------------------------------------
Dr. Eldon Smith                          Vice-President, Scientific Affairs and a         May 1998
Calgary Alberta                          Director of the Company
-----------------------------------------------------------------------------------------------------------
Benoit La Salle *+                       Director of the Company and President of         January 1997
Montreal, Quebec                         Semafo Inc.
-----------------------------------------------------------------------------------------------------------
Jan-Eric Osterlund *                     Director of the Company and Chairman of          February 1997
London, United Kingdom                   QueQuoin Holdings
-----------------------------------------------------------------------------------------------------------
Christopher J. Waddick                   Vice-President, Finance, Chief Financial         January 1991
Chatham, Ontario                         Officer, Corporate Secretary and Treasurer
                                         of the Company
-----------------------------------------------------------------------------------------------------------
Paul G.A. Moore                          Executive Vice-President and Chief Operating     February 1997
Burlington, Ontario                      Officer of the Company
-----------------------------------------------------------------------------------------------------------
</TABLE>
Notes:

1.   * denotes a member of the Audit Committee of the board of directors.

2.   + denotes a member of the Compensation and Corporate  Governance  Committee
     of the board of directors.

3.   The Company does not have an executive committee of the board of directors.

<PAGE>
Directors and Officers

William A. Cochrane, OC, MD, Chairman of the Board, Director

Dr. Cochrane joined the Board of Directors as Chairman in 1995. As Chairman,  he
is  responsible  for  guiding the  Company's  strategic  development  through to
commercialization.  For ten years the  Chairman and Chief  Executive  Officer of
Connaught   Laboratories  Ltd.,  Dr.  Cochrane  is  currently  an  international
investment  consultant in the area of health products and services. He serves on
several boards, including MDS Capital Corp., StressGen Biotechnologies Corp, and
Selective Genetics Inc. of San Diego. He was a senior advisor to Vencap Equities
Alberta  Ltd.  He is a past  Chairman  of the  National  Biotechnology  Advisory
Committee.  Dr.  Cochrane  was the first Dean of Medicine of the  University  of
Calgary Medical School and his academic career  culminated in his appointment as
President and  Vice-Chancellor  of the  University  of Calgary.  He served for a
short time as Deputy Minister of Health Services in the Government of Alberta.

David Elsley, MBA, President and Chief Executive Officer, Director

Mr. Elsley has served as an officer and director  since 1992. In this  capacity,
he has been responsible for identifying,  acquiring the Company's technology and
for  assembling a management  team with the  requisite  experience to manage the
commercial development of Vasogen's products.  Prior to joining Vasogen Inc., he
held  marketing  and  management  positions in the computer  industry with Seiko
Epson  Corporation  and the Hudson's Bay Company of Canada.  Mr.  Elsley holds a
Master of Business Administration from the University of Western Ontario.

William R. Grant, Director

Mr. Grant  co-founded  Galen  Associates in 1990 and possesses a combination  of
more than 40 years of  experience  in the  investment  banking and  risk-capital
fields.  In  addition,   his  career  includes  substantial  experience  in  the
healthcare  industry.  During  his 25 years  with Smith  Barney,  Mr.  Grant was
elected  President and then  Vice-Chairman.  He participated in the financing of
many  healthcare  companies,  including  G.  D.  Searle,  A. H.  Robins,  Marion
Laboratories  (now Hoechst Marion Roussel),  American Hospital Supply Corp., and
SmithKline Beecham. Mr. Grant, then, joined MacKay-Shields Financial Corporation
as  President  and was later  elected  Chairman of the Board.  He served as Vice
Chairman of SmithKline  Beecham for ten years and currently serves on the Boards
of Allergan,  Inc.; Fluor  Corporation;  MiniMed Inc.;  Ocular  Sciences,  Inc.;
WBN.com; Witco Corporation and several private Galen portfolio companies.  He is
a Trustee of the Mary Flagler Cary Charitable  Trust and a member of the General
Electric Equity Advisory Board.

Benoit La Salle, CA, Director

Mr. La Salle is a chartered  accountant  and is a member of the Quebec  Order of
Chartered  Accountants,  the Canadian  Institute of Chartered  Accountants,  the
Order  of  Chartered  Administrators  of  Quebec  and the  Quebec  Institute  of
Financial  Planners.  He holds a Commerce  degree from McGill  University  and a
Master of Business  Administration from IMEDE,  Switzerland.  In 1980 he founded
Parisien,  Grou, La Salle and Grou La Salle & Associes,  Chartered  Accountants.
Mr. La Salle is  currently  President . of Semafo Inc.  and the  Chairman of the
Board of  Vauquelin  Mines Ltd. He has  extensive  experience  in  international
taxation.  He is the Treasurer and member of the  executive  board  committee of
Foster  Parents  Plan of Canada,  and a member of the board of several  Canadian
companies.
<PAGE>
Jan-Eric Osterlund, MMech Eng, MBA, Director

Mr.  Osterlund  is chairman of QueQuoin  Holdings  Ltd., a UK  investment  group
specializing in medical venture capital. He is also chairman of Phairson Medical
Ltd., a biotechnology  group;  Jomed NV, a medical device  company;  Stril AB, a
leader in  radiation  sterilization;  Epivac Ltd. and BM Research  A/S,  both of
which  specialize  in drug  delivery  systems.  Mr.  Osterlund  is a Director of
Ermitage International Ltd., a money management company;  Shilling Banco Ltd., a
UK  commercial  real  estate  investment  company;  and  Ostrumentia,  a Swedish
commercial real estate investment  company.  Mr. Osterlund is also a Director of
Indigo Aviation AB, a company quoted on NASDAQ. Mr. Osterlund holds a Masters of
Mechanical  Engineering  from  Chalmers,  Gothenburg  and a Masters of  Business
Administration  from the  University of Uppsala.  He  structured  the buy-out of
HemoCue from Pharmacia  Incorporated in 1988, became its Chairman and later sold
the group in 1992. Since 1983, Mr. Osterlund has managed his business  interests
from London, England.

Eldon R. Smith, MD, FRCP(C), FACC, Vice-President Scientific Affairs, Director

Dr. Smith, is a Professor at the University of Calgary Medical School,  Alberta,
where he was the former Dean of the Faculty of Medicine,  and previously Head of
the  Department  of Medicine  and Head of the  Division of  Cardiology.  He is a
distinguished  clinician and research scientist who has made major contributions
to the Canadian cardiology and medical  communities.  He has served as President
of the Canadian Cardiovascular Society,  Chairman of the Scientific Grant Review
Committee of the Heart and Stroke  Foundation,  and President of the Association
of Canadian Medical Colleges.  He has received numerous awards and serves on the
advisory or corporate boards of a number of Canadian  companies.  Dr. Smith is a
graduate of Dalhousie  University Medical School and received his cardiology and
research training at the National Heart Institute, London, U.K. and the National
Institutes of Health, Bethesda, Maryland.

Graham Strachan, Director

Mr.   Strachan  became   President  and  Chief  Executive   Officer  of  Allelix
Biopharmaceuticals  Inc. in 1988. Mr.  Strachan was involved in the formation of
Allelix in 1983 as  Vice-President  and Commercial  Director and participated in
the growth and evolution of the original Allelix venture into three  independent
companies.  Prior to  joining  Allelix,  Mr.  Strachan  was  Vice-President  for
Commercial Development at John Labatt Limited.  During 15 years with Labatt, Mr.
Strachan  was  involved  in patents and  licensing,  technology  management  and
business  development.  Previously,  Mr.  Strachan  worked for several  years in
product  licensing  with  the  European  Division  of  Schering  Inc.,  a  major
pharmaceutical  company.  Mr. Strachan has served on the National  Biotechnology
Advisory  Committee  (NBAC)  since 1989 and has been  Chairman  since 1992.  Mr.
Strachan  serves as a Director and  past-Chair of the  Industrial  Biotechnology
Association of Canada, as well as  past-President of the Biotechnology  Industry
Organization   (BIO),  an  international  trade  association  for  biotechnology
companies,  based in Washington,  D.C. Mr. Strachan is a chemistry graduate from
the University of Glasgow,  a qualified  patent agent and a Fellow of the Patent
and Trade Mark Institute of Canada.

Paul G.A. Moore, P.Eng., MBA, Executive Vice-President & Chief Operating Officer

Mr.  Moore was  formerly a senior  manager  with Gennum  Corporation,  a leading
Canadian microelectronics manufacturer,  where he was responsible for the growth
of Gennum's Video and Broadcast  business.  Mr. Moore, a Professional  Engineer,
received  a Bachelor  of Applied  Science  in  Electrical  Engineering  from the
University   of  Waterloo   in  1985.   He  also  holds  a  Master  of  Business
Administration from the University of Western Ontario.
<PAGE>
Christopher  J. Waddick,  MBA, CMA,  Vice-President,  Finance,  Chief  Financial
Officer, Corporate Secretary and Treasurer

As Chief  Financial  Officer,  Mr.  Waddick  is  responsible  for  managing  the
Company's  financial  and  corporate  affairs.  Mr.  Waddick has over ten years'
experience  in  various  financial  roles.  Prior  to  joining  Vasogen,  he was
responsible  for  financial  planning  at Union Gas  Limited,  a  leading  North
American  energy  services  provider.  He holds an honours  Business degree from
Wilfrid Laurier University and has his CMA designation. Mr. Waddick obtained his
Master of Business Administration from York University.

Scientific Advisory Board


The members of this board are:

Paul W. Armstrong, MD, FRCP(C), FACC

Dr.  Armstrong  is  Chairman of the  Department  of Medicine  and  Professor  of
Medicine at the University of Alberta Medical School, Edmonton,  Alberta. He was
previously  Chief of the Division of  Cardiology  at St.  Michael's  Hospital in
Toronto and  Professor of Medicine at the  University  of Toronto.  He is widely
recognized  for  his  role  in  organizing  and  leading  major   international,
multi-centre,  clinical  trials in the area of  cardiovascular  disease.  He has
served  as  Chairman  of the  Scientific  Review  Committee  and  Vice-President
(Medical)  of the Heart  and  Stroke  Foundation  of  Canada  and as a  regional
governor of the  American  College of  Cardiology.  Dr.  Armstrong  is a medical
graduate of Queen's  University and received his clinical training in cardiology
and  research at St.  George's  Hospital in London,  the  Massachusetts  General
Hospital  and Harvard  Medical  School.  His major  research  interests  include
coronary artery disease and congestive heart failure.
<PAGE>
Pavel Hamet, MD, PhD, FRCP(C)

Dr. Hamet is Director of Research of the Centre  hospitalier de  l'Universite de
Montreal (CHUM),  and Chief of the Laboratory of Molecular  Medicine at the CHUM
Research  Centre in Montreal,  and a Professor of Medicine at the  University of
Montreal. He is an international authority on the molecular biology and genetics
of hypertension and has a major interest in diabetes.  He has published over 300
research papers and has held many distinguished positions including President of
the Canadian  Hypertension Society. Dr. Hamet graduated in Medicine from Charles
University,  Prague,  Czechoslovakia,  and received his  speciality and research
training in Paris, Montreal, and Nashville, Tennessee.

Richard G. Miller, PhD, FRSC

Dr. Miller is a Professor and Chairman of the  Department of Medical  Biophysics
at the University of Toronto,  where he was founding and Acting  Chairman of the
Department of Immunology  from 1984 through 1990. He is also a Past President of
the Canadian  Society of Immunology and a Fellow of the Royal Society of Canada.
An internationally  recognized  scientist and leader in the field of immunology,
he has received many honours  including being an invited  visiting  scientist at
many of the world's  leading  immunology  centres.  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.

Robert Roberts, MD, FRCP(C), FACC

Dr.  Roberts  is Chief of  Cardiology  at Baylor  College  of  Medicine  and The
Methodist  Hospital,  Houston,  Texas,  one of the world's  leading  centres for
cardiovascular  care,  research and education.  Dr. Roberts,  a Professor in the
Departments  of Medicine,  Physiology  and Biology,  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 500  scientific
publications and sits on several key editorial boards.  Dr. Roberts has received
many honours and awards,  the most recent of which was the prestigious  American
College of Cardiology's 1998  Distinguished  Scientist Award. 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.

Duncan J. Stewart, MD, FRCP(C)

Dr. Stewart was appointed Chief, Division of Cardiology, St. Michael's Hospital,
Toronto and Associate Professor of Medicine,  University of Toronto, in 1994. In
1997 he was appointed as Director,  Division of Cardiology of the  University of
Toronto, and was awarded the Dexter H-C Man Chair of Cardiology. He has combined
a keen interest in clinical  cardiovascular research with laboratory science. He
is an  international  authority on the study of gene  regulation in  endothelial
cells (cells which line blood  vessels) and the clinical  effects of endothelial
cell  dysfunction  on the  cardiovascular  system with  particular  reference to
congestive  heart failure and pulmonary  hypertension.  Dr. Stewart is a medical
graduate  of  McGill  University  and  received  his   post-graduate,   clinical
cardiology,  and  research  training at the Royal  Victoria  Hospital and McGill
University in Montreal.
<PAGE>
Item 11.  Compensation of Directors and Officers

         The  following  table  sets  forth  all  compensation  for all  periods
indicated in respect of the  individual  who was, as of November  30, 1998,  the
chief  executive  officer of the Company,  and all other officers of the Company
who received,  during the financial year of the Company ended November 30, 1998,
salary and bonus in excess of $100,000 ("Named Executive Officers").

Summary Compensation Table
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
                                            Annual Compensation               Long-Term Compensation
                                     -----------------------------------
                                                                        ------------------------------------
                                                                                 Awards           Payouts
                                                                        ------------------------------------
                                                                                      Restricted
                                                                         Securities     Shares
                                                                           Under          Or
                                                               Other      Options/    Restricted
 Name and Principal Position                                   Annual       SARs        Share       LTIP       All Other
                              Year     Salary     Bonus(2)  Compensation  Granted       Units      Payouts   Compensation
                                         ($)        ($)         ($)         (#)          ($)        ($)          ($)
--------------------------------------------------------------------------------------------------------------------------
<S>                           <C>      <C>            <C>                 <C>                                  <C>
David Elsley                  1998     167,200        63,954              687,800(1)
(President and Chief          1997     161,183                            565,000
Executive Officer)            1996     125,000                            565,000
--------------------------------------------------------------------------------------------------------------------------
Paul Moore                    1998     150,000        47,325              405,700(1)                          62,499 (3)
(Executive Vice-President,    1997     131,000                            330,000                             61,067(3)
Chief Operating Officer)      1996      46,000                             30,000
--------------------------------------------------------------------------------------------------------------------------
Dr. Anthony Bolton            1998     150,000        47,925              526,700(1)
(Director Research and        1997     150,000                            450,000
Development)                  1996     100,000                            450,000
--------------------------------------------------------------------------------------------------------------------------
Christopher Waddick           1998     132,200        41,709              346,700(1)
(Vice-President Finance,      1997     124,067        25,000              280,000
Chief Financial Officer,      1996      59,800                             80,000
Corporate Secretary and
Treasurer)
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1)  This  is  a  cumulative  total  and  represents  the  aggregate  number  of
     securities under option at November 30, 1998.

(2)  Bonus paid through the issuance of common shares of the Company.

(3)  This payment was made to compensate Mr. Moore for loss of benefits suffered
     as a result of his acceptance of the position of Chief Operating Officer of
     the Company.
<PAGE>
Employment Contracts

         The Company has entered into an  employment  agreement,  made as of the
1st day of January 1997,  with Mr. David G. Elsley.  Pursuant to this agreement,
Mr. Elsley serves the Company as its President and Chief Executive Officer.  The
following  is the summary of the terms of the  agreement  with Mr.  Elsley.  The
agreement  provides for a fixed  five-year term ending on December 31, 2002, and
an annual remuneration of $167,200. 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 such agreement is not terminated for cause, Mr. Elsley
is entitled to a lump sum payment  equal to two years' salary and any options or
warrants  then  outstanding  vest for their full term.  The  agreement  contains
standard non-competition and non-solicitation provisions.

         The Company has entered into an  employment  agreement,  made as of the
1st  day of  February  1997,  with  Dr.  Anthony  E.  Bolton.  Pursuant  to this
agreement,  Dr.  Bolton  serves the  Company as its  Director of  Research.  The
agreement  provides for an annual  remuneration of $150,000.  The other terms of
the agreement are similar to those described for Mr. Elsley.

         The Company has entered in an employment agreement,  made as of the 1st
day of February 1997, with Mr. Paul G. A. Moore. Pursuant to this agreement, Mr.
Moore serves the Company as its  Executive  Vice-President  and Chief  Operating
Officer.  The agreement  provides for an annual  remuneration  of $150,000.  The
other terms of the agreement are similar to those described for Mr. Elsley.

         The Company has entered in an employment agreement, made as of the 10th
day of March 1997, with Mr. Christopher J. Waddick.  Pursuant to this agreement,
Mr. Waddick serves the Company as its Vice-President,  Finance,  Chief Financial
Officer, Corporate Secretary and Treasurer. The agreement provides for an annual
remuneration of $132,200.  The other terms of the agreement are similar to those
described for Mr. Elsley.

Compensation of Directors

         During the financial  year ended  November 30, 1998 no directors'  fees
were paid.  One member of the board of directors  was paid $42,750 in consulting
fees in the  fiscal  year  ended  November  30,  1998  for  consulting  services
rendered.

         Officers and directors, as a group, received total cash remuneration of
approximately $705,000 during the fiscal year ended November 30, 1998.

         No  amount  has  been set  aside  or  accrued  by the  Company  and its
subsidiaries  during the last  fiscal  year of the  Company to provide  pension,
retirement  or similar  benefits  for  directors  and  officers of the  Company,
pursuant to any existing plan provided or  contributed to by the Company and its
subsidiaries.

<PAGE>
Item 12.  Options to Purchase Securities from Registrant or Subsidiaries.

Stock Option Plan

           The Company maintains a stock option plan pursuant to which a maximum
of 3,500,000  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,  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 following  table sets out  information  relating to outstanding  options and
warrants to purchase  common shares granted by the Company that are  outstanding
as at the date  hereof  with the  number of persons  in each  category  shown in
parentheses:
<TABLE>
<CAPTION>
                                  NUMBER OF                           MARKET VALUE OF       EXERCISE
                                COMMON SHARES        DATE OF          SECURITIES ON        PRICE PER     EXPIRY DATE
                                  OPTIONED           GRANT            DATE OF GRANT          SHARE
<S>                                 <C>                 <C>                <C>              <C>               <C>
Executive Officers
(Five)
                                    125,000        Feb. 9, 1995            1.00             1.00         Feb. 9, 2000
                                    160,000        July 5, 1995            1.15             1.15         July 5, 2000
                                    300,000        Sept 15, 1998           1.00             1.00         Sept 15, 2003
                                     50,000        July 5, 1995            1.39             1.39         July 5, 2000
                                    300,000        May 28, 1996            1.00             1.00         May 28, 2001
                                    100,000        June 19, 1996           1.20             1.20         June 18,2001
                                     60,000        Jan. 8, 1997            1.69             1.69         Jan. 8, 2000
                                    280,774        Dec 15, 1998            1.25             1.25         Dec 15, 2003
                                    100,000        June 19, 1996           1.20             1.20         June 18,2002
                                    300,000        Jan. 8, 1997            1.69             1.69         Jan. 8, 2002
Directors
(Excluding Executive
Officers)  (Four)
                                    100,000        Sept 15, 1998           1.00             1.00         Sept 15, 2001
                                    100,000        Dec 15, 1998            1.25             1.25         Dec 15, 2001
                                    100,000        Jan. 8, 1997            1.69             1.69         Jan. 8, 2000
                                    100,000        May 1, 1997             2.30             2.30         May 1, 2000
Other Employees Of
And Advisors To
The Company
(Twenty)
                                    100,000        Nov. 17, 1994          0.50              0.50         Nov. 17, 1999
                                    150,000        Feb. 9, 1995           1.00              1.00         Feb. 9, 2000
                                    150,000        July 5, 1995           1.00              1.00         July 5, 2005
                                     20,000        July 5, 1995           1.15              1.15         July 5, 2000
                                     40,000        May 23, 1995           1.00              1.00         May 23, 2000
                                     63,202        July 5, 1995           1.15              1.39         July 5, 2000
                                     10,000        Nov. 24, 1995          1.10              1.10         Nov 24, 2000
                                    115,000        May 7, 1998            2.00              2.00         May 7, 2003
                                     50,000        Jan. 8, 1997           1.69              1.69         Jan. 8, 2000
                                    170,416        Dec 15, 1998           1.25              1.25         Dec 15, 2003
                                    225,000        Sept 15, 1998          1.00              1.00         Sept 15, 2003
                                     10,000        May, 1 1997            2.30              2.30         May 1, 2000
                                     25,000        May 1, 1997            2.30              2.30         May 1, 2002
                                    100,000        Jan 24, 1996           1.15              1.15         Jan. 24, 2001
                                    200,000        June 19, 1996          1.20              1.20         June 18,2001
                                    100,000        June 30, 1996          1.25              1.25         June 30,2001
                                    100,000        June 19, 1996          1.20              1.20         June 18, 2002
                                    300,000        Aug. 1, 1996           1.10              1.10         Aug. 1, 1999
                                     72,000        Dec. 3, 1996           1.60              1.60         Dec. 3, 1999
                                    100,000        May 28, 1996           1.00              1.00         May 28, 2001
                                     14,000        Dec. 3, 1997           1.70              1.70         Dec. 3, 2000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                  NUMBER OF                           MARKET VALUE OF       EXERCISE
                                COMMON SHARES        DATE OF          SECURITIES ON        PRICE PER     EXPIRY DATE
                                  OPTIONED           GRANT            DATE OF GRANT          SHARE
<S>                                 <C>                 <C>                <C>              <C>               <C>
Other Persons Or
Corporations
(Forty-six)
                                    400,000        Nov. 17, 1994          0.50              0.50         Nov. 17, 1999
                                    100,000        May 28, 1996           1.15              1.15         May 28, 2001
                                  1,481,500        Mar. 10, 1998          1.75              1.75         Nov. 30, 2000
                                     50,000        Dec. 3, 1997           1.70              1.70         Dec. 3, 2000
                                    195,000        Jan. 2, 1996           1.15              1.15         Mar. 13, 2001
                                    671,430        May 25. 1998           1.75              1.75         Nov. 30, 2000
                                    225,000        June 19, 1996          1.20              1.20         June 18,2001
                                    300,000        Jan. 17, 1997          2.48              2.48         Jan. 17, 2001
                                     30,000        June 2, 1997           2.64              2.64         June 2, 2000
                                     30,000        Sept. 2, 1997          2.64              2.64         Sept. 2, 2000
                                     30,000        Dec. 1, 1997           1.87              1.87         Dec. 1, 2000
                                     30,000        Mar. 1, 1998           1.90              1.90         Mar. 1, 2001
                                     30,000        June 1, 1998           1.88              1.88         June 1, 2001
                                    100,000        May 12, 1998           2.00              3.05         Mar. 13, 2002
                                     50,000        Jan. 11, 1999          1.25              1.56         Jan. 11, 2002
                                    100,000        Jan. 8, 1997           1.69              1.69         Jan. 8, 2000
                                    124,000        Jan. 13, 1999          1.98              1.98         July 13, 2000
                                     72,500        Feb. 24. 1999          2.00              2.00         Aug. 22, 2000
</TABLE>

Options/SARs  Granted or Exercised During the Most Recently Completed  Financial
Year

         During  the   financial   year  ended   November  30,  1998,  no  stock
appreciation  rights  or stock  options  were  granted  to the  Chief  Executive
Officer.  Details of options granted to the Named Executive  Officers during the
financial year ended November 30, 1998 are shown in the table set out below.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
                                       % of Total                           Market Value
                     Securities,        Options/                           of Securities
                        Under             SARs                               Underlying
                       Options/        Granted to         Exercise            Options/
       Name              SARs          Employees             Or         SARs on the Date of
                       Granted        in Financial       Base Price            Grant                  Expiration
                         (#)              Year          ($/Security)        ($/Security)                 Date
--------------------------------------------------------------------------------------------------------------------------
<S>                   <C>                 <C>               <C>                <C>                <C>
Christopher           200,000             25%               $1.00              $1.00              September 15, 2003
Waddick
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
During  the  financial  year  ended  November  30,  1998,  no  options  or stock
appreciation rights were exercised by the Named Executive Officers.

Item 13.  Interest of Management in Certain Transactions.

         (a) During  the fiscal  year ended  November  30,  1998,  there were no
transactions,  and  there  are no  proposed  transactions,  in which  directors,
executive officers,  holders of ten percent of the Company's outstanding shares,
or any  associate or affiliate  of such  person,  have had a material  interest,
direct or indirect.
<PAGE>
         (b) None of the  officers or  directors  of the Company are indebted to
the  Company or were  indebted  to the  Company  during the fiscal  years  ended
November 30, 1998, 1997, and 1996.

PART II

Item 14. Description of Securities to be Registered.

         Not Applicable


PART III

Item 15.  Defaults Upon Senior Securities.

         None.

Item 16.  Changes   in  Securities  and  Changes  in   Security  for  Registered
          Securities.

         None.


PART IV

Item 17.  Financial Statements.

See "Item 18.  Financial Statements."

Item 18.  Financial Statements.

         a) Report and  Consolidated  Financial  Statements  for the years ended
November  30,  1998,  1997,  and  1996  reported  on  by  KPMG  LLP,   Chartered
Accountants. These statements are prepared in accordance with generally accepted
accounting  principles in Canada,  which, except as described in Note 10 conform
in all material respects with accounting  principles  generally  accepted in the
United States.

Item 19.  Financial Statements and Exhibits.

         1)  Financial Statements.

         a) Report and  Consolidated  Financial  Statements  for the years ended
November  30,  1998,  1997,  and  1996  reported  on  by  KPMG  LLP,   Chartered
Accountants. These statements are prepared in accordance with generally accepted
accounting  principles in Canada,  which, except as described in Note 10 conform
in all material respects with accounting  principles  generally  accepted in the
United States.

         2) Exhibits.

(Exhibits 1, 2, and 3 (a) have been  previously  filed with the  Securities  and
Exchange Commission on July 2, 1997 in the Company's  Registration  Statement on
Form 20 - F, and  exhibits  3 (b) and (c) have been  previously  filed  with the
Securities and Exchange Commission on September 1, 1997 in Amendment Number 1 to
the  Registration  Statement  on  Form  20 - F and are  hereby  incorporated  by
reference  Exhibits  3 (d) has been  previously  filed with the  Securities  and
Exchange Commission on June 12, 1998 in the Company's  Registration Statement on
Form 20 - F)
<PAGE>
1.       Articles of Incorporation and Amendments thereto.

2.       By-Laws.

3.       List of Agreements.

          a. Agreement  dated January 31, 1996 between  Quarzlampenfabrik  Dr. -
          Ing. Felix W. Muller and Vasogen Inc.;

          b. Agreement dated April 15, 1997 between Delvin Inc. and Vasogen Inc.

          c.  Agreement  dated June 1, 1997  between  Dominick  &  Dominick  and
          Vasogen Inc.

          d.  Agreement  dated November 30, 1997 between Delvin Inc. and Vasogen
          Inc.

         Pursuant to the  requirements of Section 12 of the Securities  Exchange
Act of 1934, the Registrant  certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused  this annual  report to be signed on its
behalf by the undersigned, thereunto duly authorized.

                                                     VASOGEN INC.


                         By: /s/ Christopher J.  Waddick
                         -------------------------------
                             Christopher J.  Waddick
                             Vice President, Finance, CFO



Date: May 27, 1999
<PAGE>


                      Consolidated Financial Statements of

                      VASOGEN INC.

                      Years ended November 30, 1998, 1997 and 1996

<PAGE>
AUDITORS' REPORT


To the Shareholders of Vasogen Inc.



We have audited the  consolidated  balance sheets of Vasogen Inc. as at November
30, 1998 and 1997 and the consolidated  statements of operations and deficit and
cash flows for each of the years in the three year  period  ended  November  30,
1998 and for the period  from  December  1, 1987 to  November  30,  1998.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards  require that we plan and perform an audit to obtain
reasonable  assurance  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.

In our opinion,  these consolidated  financial statements present fairly, in all
material respects, the financial position of the Company as at November 30, 1998
and 1997 and the  results of its  operations  and its cash flows for each of the
years in the three year period  ended  November 30, 1998 and for the period from
December 1, 1987 to November  30, 1998 in  accordance  with  Canadian  generally
accepted accounting principles.


[GRAPHIC OMITTED]

Chartered Accountants



Toronto, Canada

December 18, 1998, except
as to note 11 which is as of
February 24, 1999
<PAGE>
VASOGEN INC.
Consolidated Balance Sheets
(In thousands of dollars)

November 30, 1998 and 1997
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
                                                                                  1998                 1997
-----------------------------------------------------------------------------------------------------------
Assets
<S>                                                                        <C>                <C>
Current assets:
     Cash and cash equivalents (note 2)                                    $   1,073          $     455
     Marketable securities (note 3)                                            4,128              7,028
     Inventory                                                                   243                  -
     Prepaid expenses and advances                                               109                 86
     ------------------------------------------------------------------------------------------------------
                                                                               5,553              7,569
Capital assets                                                                   158                182
Less accumulated amortization                                                     59                145
-----------------------------------------------------------------------------------------------------------
                                                                                  99                 37
Acquired technology (notes 4 and 9)                                            1,838              1,864
-----------------------------------------------------------------------------------------------------------
                                                                           $   7,490          $   9,470
-----------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity

Current liabilities:
     Accounts payable and accrued liabilities                              $     746          $     381

Shareholders' equity:
     Share capital (note 5)                                                   36,139             31,172
     Deficit                                                                 (29,395)           (22,083)
     ------------------------------------------------------------------------------------------------------
                                                                               6,744              9,089

-----------------------------------------------------------------------------------------------------------
                                                                           $   7,490          $   9,470
</TABLE>
See accompanying notes to consolidated financial statements.

On behalf of the Board:

/s/ William Grant        Director
----------------------
William Grant

/s/ Jan-Eric Osterlund   Director
----------------------
Jan-Eric Osterlund
<PAGE>
VASOGEN INC.
Consolidated Statements of Operations and Deficit
(In thousands of dollars except per share amounts)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
                                                                                                   Period from
                                                                                                   December 1,
                                                                                                       1987 to
                                                               Years ended November 30            November 30,
                                                      1998             1997              1996             1998
--------------------------------------------------------------------------------------------------------------
Expenses:
<S>                                            <C>              <C>               <C>              <C>
     Research and development                  $     4,656      $     5,351       $     3,167      $    16,537
     Salaries                                          981            1,097               443            3,777
     General and administration                        822              813               859            4,203
     Professional fees                                 821              717               378            3,118
     Amortization of capital assets                     32               13                15              250
--------------------------------------------------------------------------------------------------------------
Loss for the period                                 (7,312)          (7,991)           (4,862)         (27,885)

Deficit, beginning of period, as
   restated (note 9)                               (22,083)         (14,092)           (9,230)          (1,510)
--------------------------------------------------------------------------------------------------------------
Deficit, end of period                         $   (29,395)     $   (22,083)      $   (14,092)     $   (29,395)
--------------------------------------------------------------------------------------------------------------
Loss per share                                 $    (0.29)      $    (0.38)       $    (0.38)
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
VASOGEN INC.
Consolidated Statements of Cash Flows
(In thousands of dollars)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
                                                                                                   Period from
                                                                                                   December 1,
                                                                                                       1987 to
                                                               Years ended November 30            November 30,
                                                      1998             1997              1996             1998
--------------------------------------------------------------------------------------------------------------
<S>                                             <C>             <C>                <C>             <C>
     Loss for the period                        $   (7,312)     $    (7,991)       $   (4,862)     $   (27,885)
     Items not involving cash:
         Amortization of capital assets and
           technology                                  236              199               196            2,081
         Loss on write-off of capital assets             6                -                 -               24
         Forgiveness of debt                             -                -                 -              (63)
         Services provided for
           common shares                                55              215               748            1,957
     Changes in non-cash working capital:
         Changes in inventory                         (243)               -                 -             (243)
         Changes in prepaid expenses
           and advances                                (23)             (52)              (16)             (77)
         Changes in accounts payable
           and accrued liabilities                     365              135               201              686
--------------------------------------------------------------------------------------------------------------
                                                    (6,916)          (7,494)           (3,733)         (23,520)
Financing:
     Shares issued for cash                          5,043            7,625             3,913           23,407
     Warrants exercised for cash                       253            1,621             4,539            6,957
     Options exercised for cash                         95              482               245            1,396
     Share issue costs                                (479)            (312)             (962)          (2,240)
     Issue of convertible debt                           -                -                 -              650
     Financing costs                                     -                -                 -              (28)
     Payable to related parties                          -                -                 -             (232)
--------------------------------------------------------------------------------------------------------------
                                                     4,912            9,416             7,735           29,910
Investing:
     Increase in capital assets                       (100)             (17)              (36)            (346)
     Increase in acquired technology                  (178)             (60)                -             (843)
     Purchase of marketable securities                   -           (7,028)                -           (7,028)
     Marketable securities' maturities               2,900                -                 -            2,900
--------------------------------------------------------------------------------------------------------------
                                                     2,622           (7,105)              (36)          (5,317)
--------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
                                                                                                   Period from
                                                                                                   December 1,
                                                                                                       1987 to
                                                               Years ended November 30            November 30,
                                                      1998             1997              1996             1998
--------------------------------------------------------------------------------------------------------------
Consolidated Statement of
Cash Flow (continued)
<S>                                                   <C>            <C>                <C>             <C>
Increase (decrease) in cash
   and cash equivalents                                618           (5,183)            3,966            1,073

Cash and cash equivalents,
   beginning of period                                 455            5,638             1,672                -
--------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period        $    1,073      $       455        $    5,638      $     1,073
--------------------------------------------------------------------------------------------------------------
Supplementary disclosures:
Non-cash financing activity:
     Debt conversion                                     -                -                 -             (650)
     Shares issued on debt conversion                    -                -                 -              650
     Shares issued for services                         55              215               748            1,957
     Shares issued for technology                        -                -               324            2,799
--------------------------------------------------------------------------------------------------------------
                                                        55              215             1,072            4,756
--------------------------------------------------------------------------------------------------------------
Non-cash investing activity:
     Technology acquired for shares issued               -                -              (324)          (2,799)
--------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
VASOGEN INC.
Notes to Consolidated Financial Statements
(Tabular amounts in thousands of dollars)

Years ended November 30, 1998, 1997 and 1996

--------------------------------------------------------------------------------

Since  December  1, 1987,  the  Company  has been  engaged in the  research  and
commercial  development of its proprietary  platform medical  technology for the
treatment  and  prevention  of disease.  The Company has not had any  commercial
operations  since  that  date.  The  financial  information  presented  has been
prepared  on the basis  that the  Company  is  considered  a  development  stage
enterprise  and  accordingly,  the statements of operations and deficit and cash
flows reflect the cumulative amounts from December 1, 1987 to November 30, 1998.

1.     Significant accounting policies:

       These consolidated  financial  statements are prepared in accordance with
       accounting  principles  generally  accepted in Canada,  which,  except as
       described in note 10,  conform in all material  respects with  accounting
       principles generally accepted in the United States.


       (a) Principles of consolidation:


           These consolidated  financial  statements include the accounts of the
           Company and its  wholly-owned  subsidiary,  Vasogen Ireland  Limited,
           incorporated in 1998.


       (b) Cash equivalents and marketable securities:


           Cash  equivalents  and  marketable  securities  held-to-maturity  are
           stated at the lower of amortized cost or market.


       (c) Concentration of credit risk:


           Financial   instruments   potentially   exposing  the  Company  to  a
           concentration of credit risk consist  principally of cash equivalents
           and marketable securities.


           Cash  equivalents  consist of  certificates  of deposit and  Canadian
           government treasury bills having short-term  maturities of 90 days or
           less from the date of purchase.  Marketable  securities include bonds
           issued  by  Canadian   governments  and  corporations   with  varying
           maturities  generally  ranging  between six months and sixteen months
           from  the  date  of   purchase   and  which  are  capable  of  prompt
           liquidation. Market value of these securities approximates cost.
<PAGE>
1.     Significant accounting policies (continued):

       (d) Inventory:

           Inventory is carried at the lower of cost or net realizable value.

       (e) Capital assets:

           Capital  assets are  stated at cost and  include  testing  equipment,
           computer  equipment  and  leasehold  improvements.   Amortization  is
           provided  on a  straight-line  basis  over five  years.  The  Company
           regularly  reviews the carrying values of its capital assets.  If the
           carrying values of its capital assets exceed the amount  recoverable,
           a write-down is charged to the statement of operations.

       (f) Acquired technology:

           Acquired  technology  representing  the  Company's  platform  medical
           device  technology  is stated at cost.  This  technology is amortized
           using the straight-line  method over 20 years representing the period
           from the  acquisition  date to the  expiry  date of the  technology's
           initial patent. On an on-going basis, management reviews the carrying
           value and amortization of the technology,  taking into  consideration
           any  events and  circumstances  that  might  impair  its  value.  The
           acquired technology is carried on the consolidated  balance sheets at
           cost less accumulated amortization of $1,802,775 (1997 - $1,598,605).

       (g) Research and development:

           Research  costs  are  expensed  as  incurred.  Development  costs are
           expensed as incurred  unless they meet the criteria  under  generally
           accepted   accounting   principles   in  Canada  for   deferral   and
           amortization.  The  Company  has not  deferred  any such  development
           costs.

       (h) Foreign currency translation:

           The accounts of the Company's  Irish  subsidiary are translated  into
           Canadian  dollars  using the  temporal  method.  Monetary  assets and
           liabilities   are   translated   at  the  year  end  exchange   rate,
           non-monetary  assets and liabilities are translated at the historical
           exchange  rate and revenues and  expenses are  translated  at average
           exchange rates.  Gains and losses arising from the translation of the
           financial   statements  of  the  Irish  subsidiary  are  included  in
           operations.
<PAGE>
VASOGEN INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of dollars)

Years ended November 30, 1998, 1997 and 1996

--------------------------------------------------------------------------------

1.     Significant accounting policies (continued):

       (i) Measurement uncertainty:

           The preparation of financial  statements in conformity with generally
           accepted accounting  principles 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
           revenues and expenses during the period.  Actual results could differ
           from those estimates.

2. Cash and cash equivalents:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
                                                                                    1998                  1997
--------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>                    <C>
       Cash                                                                     $  1,073               $     -
       Cash equivalents                                                                 -                  455
--------------------------------------------------------------------------------------------------------------
                                                                                $  1,073               $   455
--------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>

3.     Marketable securities:
--------------------------------------------------------------------------------------------------------------
                                                                        One
                                                    One year      year plus                           Yield to
       1998                                         maturity     maturities          Total            maturity
--------------------------------------------------------------------------------------------------------------
<S>                                               <C>            <C>              <C>                    <C>
       Canadian federal government bonds          $      100     $        -       $    100               3.62%
       Canadian provincial government
         bonds                                         3,107              -          3,107        3.70 - 5.03%
       Canadian corporate bonds                          598            323            921        5.00 - 5.75%
--------------------------------------------------------------------------------------------------------------
                                                  $    3,805      $     323       $  4,128
--------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
                                                                        One
                                                    One year      year plus                           Yield to
       1997                                         maturity     maturities          Total            maturity
--------------------------------------------------------------------------------------------------------------
<S>                                               <C>            <C>              <C>                    <C>
       Canadian federal government bonds          $    1,282      $      96       $  1,378        2.92 - 3.55%
       Canadian provincial government
         bonds                                         4,386            119          4,505        2.69 - 3.79%
       Canadian corporate bonds                          321            824          1,145        5.00 - 6.94%
--------------------------------------------------------------------------------------------------------------
                                                  $    5,989      $   1,039       $  7,028
--------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
VASOGEN INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of dollars)

Years ended November 30, 1998, 1997 and 1996

--------------------------------------------------------------------------------
4.     Acquired technology:

       In 1988, the Company entered into an agreement with Quarzlampenfabrik Dr.
       Muller GmbH & Co. KG ("Quarz") of Essen,  Germany,  which  granted to the
       Company the sole, exclusive,  irrevocable,  unconditional,  perpetual and
       royalty-free  right and license to the  Patents  and Patent  Applications
       owned by Quarz for proprietary  platform medical device  technology.  The
       total  consideration  paid for the  grant of all  rights  to the  Company
       amounted to $3,078,301, of which $603,301 was paid in cash and $2,475,000
       was paid in common shares of the Company.

       Effective  January 31, 1996,  the Company  acquired from Quarz all right,
       title and  interest in the  technology  industry  patents  and  technical
       information  formerly licensed from Quarz thereby allowing the Company to
       modify or further  develop  the  technology.  Quarz also  entered  into a
       non-competition  and  confidentiality  agreement  with  the  Company.  In
       consideration  for these  agreements,  the Company  issued 270,000 common
       shares  valued  at  $324,000;  100,000  common  share  purchase  warrants
       entitling  the  holder to  purchase  100,000  common  shares at $1.20 per
       share;  and a graduated  royalty of 4% to 6% on sales  incorporating  the
       technology.

       During 1997,  the Company  negotiated an agreement  providing it with the
       option to modify the royalty payments from the graduated rate of 4% to 6%
       to a rate of 1.5% on sales  incorporating the technology with the maximum
       annual  royalty so calculated not to exceed  $1,300,000.  The cost of the
       royalty  buy-down  is  $715,000  payable  from  the  proceeds  of  future
       financings  completed  by the Company  prior to November 1, 1999,  net of
       interim  retainer fees of $10,000 per month.  In 1997 and 1998,  payments
       totalling $60,000 and $178,956 were made respectively. Should the Company
       elect not to make the full $715,000 payment, the royalty rate will revert
       to the original graduated rates.
<PAGE>
VASOGEN INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of dollars)

Years ended November 30, 1998, 1997 and 1996

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
5.     Share capital:
<S>                                                               <C>                <C>                 <C>
       (a) Common shares, without par value; authorized - unlimited.
--------------------------------------------------------------------------------------------------------------
                                                                                                Period from
                                                                                                December 1,
                                                                                                   1987 to
                                                                                              November 30,
                                    1998                   1997                 1996                  1998
--------------------------------------------------------------------------------------------------------------
                          Number of              Number of             Number of            Number of
                           shares      Amount     shares       Amount   shares     Amount    shares     Amount
--------------------------------------------------------------------------------------------------------------
                      (In thousands)         (In thousands)          (In thousands)      (In thousands)
       Balance, beginning
         of year           23,331     $31,172     18,307     $ 21,541   10,057    $12,734     1,031    $ 1,213
       Issued for:
           Cash             2,882       5,043      3,064        7,625    3,557      3,913    15,079     23,407
           Services            33          55        115          215      632        748     1,324      1,957
           Technology           -           -          -            -      270        324     1,913      2,799
       Warrants exercised     228         253      1,352        1,621    3,397      4,539     5,422      6,957
       Options exercised      100          95        493          482      394        245     1,381      1,396
       Debt conversion          -           -          -            -        -          -       424        650
       Share issue costs        -        (479)         -         (312)       -       (962)        -     (2,240)
--------------------------------------------------------------------------------------------------------------
       Balance, end of year26,574     $36,139     23,331     $ 31,172   18,307    $21,541    26,574    $36,139
--------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
<S>                                                               <C>                <C>                 <C>
       (b) Stock options:
                                                                   1998               1997                1996
--------------------------------------------------------------------------------------------------------------
                                                                                (In thousands)
           Balance, beginning of year                             2,481              1,629               1,128
           Issued                                                   569              1,345                 895
           Exercised                                               (100)              (493)               (394)
           Expired or cancelled                                    (515)                 -                   -
--------------------------------------------------------------------------------------------------------------
           Outstanding, end of year                               2,435              2,481               1,629
--------------------------------------------------------------------------------------------------------------
           Exercisable, end of year                               2,285              1,793               1,179
--------------------------------------------------------------------------------------------------------------
</TABLE>
            The  exercise  prices set must at least  equal the fair value of the
            underlying  common  shares  on the date of the  grant.  Each  option
            granted  allows  the holder to  purchase  one  common  share.  As at
            November 30, 1998,  these options have exercise  prices ranging from
            $0.50 to $2.30,  generally  vest over a maximum  period of two years
            and expire over various dates to 2003.
<PAGE>
VASOGEN INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of dollars)

Years ended November 30, 1998, 1997 and 1996
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
5.     Share capital (continued):

       (c) Warrants:
--------------------------------------------------------------------------------------------------------------
                                                                                1998         1997         1996
--------------------------------------------------------------------------------------------------------------
                                                             Warrants
                                                           issued for
                                            Warrants       financing/
                                          issued for       technology
                                            services      acquisition          Total        Total        Total
--------------------------------------------------------------------------------------------------------------
                                                                      (In thousands)
--------------------------------------------------------------------------------------------------------------
<S>                                            <C>              <C>            <C>          <C>          <C>
           Balance, beginning of year          1,965            2,760          4,725        4,078        5,348
           Issued                                235            2,303          2,538        2,182        2,128
           Exercised                             (50)            (178)          (228)      (1,352)      (3,397)
           Expired or cancelled                  (50)          (1,100)        (1,150)        (183)          (1)
--------------------------------------------------------------------------------------------------------------
           Outstanding, end of year            2,100            3,785          5,885        4,725        4,078
--------------------------------------------------------------------------------------------------------------
           Exercisable, end of year            2,100            3,785          5,885        4,585        4,078
--------------------------------------------------------------------------------------------------------------
</TABLE>
            As at November 30, 1998, these warrants have exercise prices ranging
            from  $0.50 to $3.05 and expire  over  various  dates to 2003.  Each
            warrant  granted  allows the holder to  purchase  one common  share.
            Warrants  issued for services are at values  which  approximate  the
            market value of the services received.
<PAGE>
       (d) Employment options:


            The following tables present information on employment options which
            include stock options and common share purchase  warrants issued for
            employment compensation:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
                                              1998                     1997                        1996
--------------------------------------------------------------------------------------------------------------
                                                  Weighted                  Weighted                  Weighted
                                                   average                   average                   average
                                                  exercise                  exercise                  exercise
                                      Number         price       Number        price         Number      price
--------------------------------------------------------------------------------------------------------------
                              (In thousands)             (In thousands)                  (In thousands)
<S>                                    <C>     <C>              <C>       <C>               <C>      <C>
           Outstanding, beginning
            of year                    4,445     $    1.43        3,444     $   1.08          1,678    $  0.85
           Issued                        804          1.25        1,745         1.84          2,345       1.15
           Exercised                    (150)         1.01         (744)        1.05           (579)      0.74
           Expired or cancelled         (565)         2.23            -                           -
--------------------------------------------------------------------------------------------------------------
           Outstanding, end of year    4,534     $    1.37        4,445     $   1.43          3,444    $  1.08
--------------------------------------------------------------------------------------------------------------

           Exercisable, end of year    4,385     $    1.35        3,618     $   1.31          2,994    $  1.06
--------------------------------------------------------------------------------------------------------------
</TABLE>
As at November 30, 1998 there were 380,798 (1997 - 569,798)  employment  options
available for grant.
<PAGE>
VASOGEN INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of dollars)

Years ended November 30, 1998, 1997 and 1996
--------------------------------------------------------------------------------
5.     Share capital (continued):

           Employment  options  outstanding  and  exercisable as of November 30,
1998 are as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
                                           1998 Employment                                     1998 Employment
                                       options outstanding                                 options exercisable
--------------------------------------------------------------------------------------------------------------
                                                                    Weighted-average
           Exercise                                                     remaining
           price                                    Number          contractual life                    Number
--------------------------------------------------------------------------------------------------------------
                                            (In thousands)                                      (In thousands)

<S>        <C>       <C>                             <C>                 <C>   <C>                       <C>
           $  0.50 - 1.00                            1,570               1.0 - 3.5                       1,570
           $  1.01 - 1.39                            1,668               1.4 - 2.6                       1,643
           $  1.40 - 2.00                            1,101               1.0 - 4.5                         992
           $  2.01 - 2.64                              195               1.5 - 1.9                         180

--------------------------------------------------------------------------------------------------------------
                                                     4,534                     2.3                       4,385
--------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
6.     Fair value of financial instruments:

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

7.     Income taxes:

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

       The  balance  of  the  Scientific  Research  &  Experimental  Development
       expenditure pool at November 30, 1998 is approximately $5,887,000 (1997 -
       $3,687,000).

       The Company has also earned estimated  investment tax credits ("ITCs") on
       Scientific  Research & Experimental  Development  expenditures which will
       expire as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
       <S>                                                                                              <C>
       2007                                                                                             $   35
       2008                                                                                                440
--------------------------------------------------------------------------------------------------------------
                                                                                                        $  475
--------------------------------------------------------------------------------------------------------------
</TABLE>
7.     Income taxes (continued):

       The parent Company has losses of approximately  $10,028,000  available to
       reduce future taxable income,  the benefit of which will be recognized in
       the accounts when realized. These tax losses expire as follows:
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
       <S>                                                                                          <C>
       2003                                                                                         $    3,555
       2004                                                                                              6,473
--------------------------------------------------------------------------------------------------------------
                                                                                                    $   10,028
--------------------------------------------------------------------------------------------------------------
</TABLE>
       The  Company's  subsidiary,   Vasogen  Ireland  Limited,  has  losses  of
       approximately  $2,576,000 available indefinitely to reduce future taxable
       income,  the benefit of which will be  recognized  in the  accounts  when
       realized.

8.     Uncertainty due to the Year 2000 Issue:

       The Year 2000 Issue  arises  because  many  computerized  systems use two
       digits  rather than four to identify a year.  Date-sensitive  systems may
       recognize  the year 2000 as 1900 or some other date,  resulting in errors
       when information using year 2000 dates is processed. In addition, similar
       problems  may arise in some  systems  which use certain  dates in 1999 to
       represent something other than a date. The effects of the Year 2000 Issue
       may be  experienced  before,  on, or after  January 1, 2000,  and, if not
       addressed,  the impact on operations  and  financial  reporting may range
       from minor errors to  significant  systems  failure which could affect an
       entity's  ability  to  conduct  normal  business  operations.  It is  not
       possible to be certain that all aspects of the Year 2000 Issue  affecting
       the  Company,  including  those  related  to the  efforts  of  customers,
       suppliers, or other third parties, will be fully resolved.

9.     Change in accounting policy:

       Prior to 1998,  the Company did not  amortize  its  acquired  technology.
       Commencing in 1998, the Company is amortizing this  technology  using the
       straight-line  method over 20 years. This change in accounting policy has
       been applied  retroactively  such that the carrying value of the acquired
       technology  previously  reported  has  been  reduced  by and the  deficit
       increased by $1,802,775  and $1,598,605 as at November 30, 1998 and 1997,
       respectively,  these amounts representing the accumulated amortization as
       at each year-end date;  amortization expense,  classified within research
       and development  costs on the  consolidated  statements of operations and
       deficit, increased by $204,170, $186,370 and $180,915 for the years ended
       November 30, 1998, 1997 and 1996,  respectively;  cumulative amortization
       expense and the loss previously  reported for the period from December 1,
       1987 to November 30, 1998 increased by $1,802,775.


10.   Differences  between  generally  accepted accounting  principles (GAAP) in
      Canada and the United States:

      The  Company's   consolidated   financial   statements  are  prepared  in
      accordance  with GAAP in Canada  which  differ in certain  respects  from
      those  applied in the United  States.  The following  tables  present the
      impact of  material  differences  between  Canadian  GAAP and GAAP in the
      United States on the Company's consolidated financial statements.
<PAGE>
       (a) Consolidated statements of operations and deficit:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
                                                                                                   Period from
                                                                                                   December 1,
                                                                                                       1987 to
                                                       Years ended November 30                    November 30,
                                               1998                1997               1996                1998
--------------------------------------------------------------------------------------------------------------
<S>                                       <C>                <C>                 <C>               <C>
       Loss per Canadian GAAP             $  (7,312)         $   (7,991)         $  (4,862)        $   (27,885)

       Technology costs (i)                    (179)                (60)              (324)             (3,641)
       Technology amortization (i)              204                 186                181               1,803
       Non-employee stock options (ii)         (128)               (467)                 -                (595)
       Warrants issued to acquire
         technology (iii)                         -                   -                (61)                (61)
--------------------------------------------------------------------------------------------------------------
       Loss per United States GAAP        $  (7,415)         $   (8,332)         $  (5,066)        $   (30,379)
--------------------------------------------------------------------------------------------------------------
       Basic and diluted loss per share
         under United States GAAP         $   (0.29)         $   (0.39)          $   (0.40)
------------------------------------------------------------------------------------------
       Weighted average number of                         (In thousands)
         under United States GAAP            25,416              21,360             12,651
------------------------------------------------------------------------------------------
</TABLE>
10.    Differences  between generally accepted  accounting  principles (GAAP) in
       Canada and the United States (continued):

       (b) Consolidated balance sheets:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
                                                         1998                                 1997
--------------------------------------------------------------------------------------------------------------
                                                                   United                               United
                                                 Canada            States           Canada              States
--------------------------------------------------------------------------------------------------------------
<S>                                         <C>               <C>               <C>                <C>
       Acquired technology (i)              $     1,838       $         -       $    1,864         $         -
       Share capital (ii) (iii)                  36,139            36,795           31,172              31,700
       Deficit, end of period (i) (ii) (iii)    (29,395)          (31,889)         (22,083)            (24,474)
       Deficit accumulated during
         development stage (i) (ii) (iii)       (27,885)          (30,379)         (20,573)            (22,964)
--------------------------------------------------------------------------------------------------------------
</TABLE>
       (i)  Canadian  GAAP  permits  the   capitalization  and  amortization  of
            acquired  technology costs.  Under United States GAAP, such acquired
            technology  costs are charged to expense.  At the acquisition  date,
            the  technological  feasibility of this  technology had not yet been
            established and had no future alternative uses.

       (ii) In 1996, Financial Accounting Standards Board Statement of Financial
            Accounting  Standards  (SFAS No.  123)  "Accounting  for Stock Based
            Compensation"  was issued and requires the recording of compensation
            costs  for  stock  options   issued  after   December  15,  1995  to
            non-employees,  such as members of the Scientific Advisory Board and
            Business  Advisory  Board,  at fair  value.  The  fair  value of the
            non-employee stock options granted in 1998 has been estimated at the
            date of grant using the Black-Scholes  option pricing model based on
            the assumptions set out in note 10(e).  There was no increase in the
            loss for 1996 because the amounts so determined were immaterial.
<PAGE>
            For purposes of  measuring  compensation  cost under  United  States
            GAAP,  the Company has applied the  provisions of APB Opinion No. 25
            in accounting for stock options and common share  purchase  warrants
            issued for employment  compensation  ("employment  options").  Under
            this  method  compensation  cost is measured  consistently  with the
            approach used under Canadian GAAP and  accordingly  no  compensation
            expense has been recognized.

       (iii)In 1996,  100,000 common share purchase warrants were issued as part
            of the technology acquisition  consideration (note 4). 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 based on the  assumptions  similar to those  disclosed in note
            10(e).
<PAGE>
VASOGEN INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of dollars)

Years ended November 30, 1998, 1997 and 1996
--------------------------------------------------------------------------------
10.    Differences  between generally accepted  accounting  principles (GAAP) in
       Canada and the United States (continued):

       (c) Consolidated statements of cash flows:

           On August 1, 1998, the Company adopted the new CICA Handbook Standard
           on cash flow  statements  which  closely  aligns  Canadian and United
           States  accounting  policies  resulting in the following  reconciling
           items  in 1998;  the  change  has had no  significant  effect  on the
           statements of changes in financial position in 1997 and 1996:

           Cash  from   operations   under  United   States  GAAP  includes  the
           adjustments (i), (ii) and (iii) to the loss for the period.

           Cash used in investing  activities  under United States GAAP excludes
           amounts representing acquired technology (adjustment (i)).

       (d) Income taxes:

           Under Canadian GAAP,  deferred tax assets  resulting from the benefit
           of loss  carryforwards  are  recognized  only when  there is  virtual
           certainty that the losses will be utilized.

           United States GAAP  requires that deferred  income taxes be accounted
           for under the  liability  method  whereby  deferred  tax  assets  and
           liabilities   are   recognized   for  the  future  tax   consequences
           attributable  to differences  between  financial  statement  carrying
           amounts of existing assets and  liabilities and their  respective tax
           bases. A valuation  allowance against the net deferred tax debits may
           be provided due to the uncertainty of realization.


           The Company has  determined  that there is no material  difference in
           the net deferred income tax position of the Company  recognized under
           United States GAAP as any deferred  taxes  initially  recognized  are
           fully  offset by a valuation  allowance.  Management  has  provided a
           valuation allowance  equivalent to the gross deferred tax asset given
           the nature of the Company's  activities and uncertainty  that it will
           generate  sufficient  income for tax purposes to utilize these losses
           in the carryforward period.
<PAGE>
VASOGEN INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of dollars)

Years ended November 30, 1998, 1997 and 1996
--------------------------------------------------------------------------------

10.    Differences  between generally accepted  accounting  principles (GAAP) in
       Canada and the United States (continued):


           The approximate tax effect of the Company's temporary  difference and
           losses  carryforward  which give rise to the  Company's  deferred tax
           asset are as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
                                                                         Years ended November 30
                                                                 1998               1997                  1996
--------------------------------------------------------------------------------------------------------------
<S>                                                         <C>                 <C>                 <C>
           Unclaimed technology costs                       $   2,413           $  1,544            $    1,516
           Loss carryforwards                                   4,368              7,692                 4,452
--------------------------------------------------------------------------------------------------------------
           Gross deferred tax asset                             6,781              9,236                 5,968
           Valuation allowance                                 (6,781)            (9,236)               (5,968)
--------------------------------------------------------------------------------------------------------------
           Net deferred tax asset                           $       -           $      -            $        -
--------------------------------------------------------------------------------------------------------------
</TABLE>
       (e) Stock-based compensation:

           The fair value of the employment options and non-employee options has
           been   estimated  at  the  date  of  grant  or  re-issue   using  the
           Black-Scholes option pricing model under the following assumptions:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
                                                                       1998             1997              1996
--------------------------------------------------------------------------------------------------------------
<S>                                                                  <C>              <C>               <C>
           Weighted-average risk free interest rate                  5.54%           6.71%              6.00%
           Dividend yield                                            0.00            0.00               0.00
           Volatility factor of the expected market
              price of the Company's common shares                   0.90            0.90               0.90
           Weighted-average expected life of the
              employment options                                   2 years         2 years           2 years
--------------------------------------------------------------------------------------------------------------
</TABLE>
            The  resulting  weighted-average,   grant-date  fair  value  of  the
            employment options and non-employee options issued in 1998 was $0.88
            (1997 - $0.97).
<PAGE>
VASOGEN INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of dollars)

Years ended November 30, 1998, 1997 and 1996
--------------------------------------------------------------------------------

10.    Differences  between generally accepted  accounting  principles (GAAP) in
       Canada and the United States (continued):


           While SFAS No. 123 does not require  the  recording  of  compensation
           cost for stock  options  issued to employees  at fair value,  it does
           require  disclosure  of pro forma net income and  earnings  per share
           information  as if the Company had accounted for  employment  options
           issued  in 1998,  1997 and 1996  under  the  fair  value  method,  as
           follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
                                                                 1998               1997                  1996
--------------------------------------------------------------------------------------------------------------
                                                                           (Unaudited)

<S>                                                        <C>              <C>                    <C>
           Loss for the year                               $   (7,415)      $     (8,332)          $    (5,066)
           Compensation cost - employees                         (665)              (797)               (1,110)
--------------------------------------------------------------------------------------------------------------
           Pro forma loss for the year                     $   (8,080)      $     (9,129)          $    (6,176)
--------------------------------------------------------------------------------------------------------------
           Pro forma loss per share                        $    (0.32)      $      (0.43)          $     (0.49)
--------------------------------------------------------------------------------------------------------------
</TABLE>
           The effects of applying SFAS No. 123 to calculate  compensation  cost
           in 1998,  1997 and 1996 may not be  representative  of the effects on
           pro forma net income in future periods.

       (f) Recent accounting pronouncements:

           During 1998, the Financial  Accounting  Standards Board (FASB) issued
           SFAS No. 130 "Reporting  Comprehensive  Income".  This pronouncement,
           which is solely a financial statement presentation standard, requires
           the Company to disclose  non-owner charges included in equity but not
           included  in net  earnings.  These  charges  include  the fair  value
           adjustment to certain  cost-based  investments,  the foreign currency
           translation   adjustments,   and  the   minimum   pension   liability
           adjustment.  The Company will be required to  implement  SFAS No. 130
           for its fiscal year ending November 30, 1999. The Company expects the
           adoption  of SFAS  No.  130  will  have  no  material  impact  on its
           financial position, results of operations or cash flows.


           In  June  1998,  the  FASB  issued  SFAS  No.  133,  "Accounting  for
           Derivative   Instruments  and  Hedging  Activities".   SFAS  No.  133
           established   methods  of   accounting   for   derivative   financial
           instruments and hedging  activities  related to those  instruments as
           well as other  hedging  activities.  The Company  will be required to
           implement SFAS No. 133 for its fiscal year ending  November 30, 1999.
           The  Company  expects  the  adoption  of SFAS No.  133  will  have no
           material impact on its financial  position,  results of operations or
           cash flows.
<PAGE>
VASOGEN INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of dollars)

Years ended November 30, 1998, 1997 and 1996
--------------------------------------------------------------------------------

10.    Differences  between generally accepted  accounting  principles (GAAP) in
       Canada and the United States (continued):

           In April 1998, the AICPA issued SOP 98-5,  "Reporting on the Costs of
           Start-Up  Activities".  SOP 98-5  requires  that all  start-up  costs
           related to new operations must be expensed as incurred.  In addition,
           all start-up costs that were  capitalized in the past must be written
           off  when  SOP 98-5 is  adopted.  The  Company  will be  required  to
           implement SOP 98-5 for its fiscal year ending  November 30, 1999. The
           Company  expects  that the adoption of SOP 98-5 will have no material
           impact on its  financial  position,  results  of  operations  or cash
           flows.

11.    Subsequent events:

       (a) Private placement:

           Subsequent to year end, the Company raised  $1,625,000 from a private
           placement of 1,300,000  common  shares at a price of $1.25 per common
           share.

       (b) Public offering of common shares:

           Pursuant to a preliminary  prospectus  dated  February 24, 1999,  the
           Company  is  offering  5,290,000  common  shares,   issuable  without
           additional  payment upon the exercise of 5,290,000  special  warrants
           previously  issued by the Company  during  February  1999 pursuant to
           prospectus exemptions. The Company raised $8,199,500, before offering
           costs,  from the special  warrants  placement.  Each special  warrant
           entitles the holder thereof to acquire one common share.

           The  Company  has also  granted  the  underwriters  250,000  brokers'
           special  warrants  exercisable  for no  additional  consideration  to
           acquire compensation options. Each compensation option is exercisable
           to acquire one common  share at an exercise  price of $2.00 per share
           for a period of eighteen months following February 22, 1999.

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