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

                                  FORM 20-F/A
                               (Amendment No. 1)

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

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

                           COMMISSION FILE NO. 0-29350

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


                                     CANADA
                 (JURISDICTION OF INCORPORATION OR ORGANIZATION)

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

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

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

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

                                      None

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

                                      None

<PAGE>

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

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

                           Yes [_]      No [X]

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

                           Yes [_]      No [X]

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

                           Yes [X]      No [_]

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

Large accelerated filer [_]   Accelerated filer [X]   Non-accelerated filer [_]

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

                          Item 17 [_]  Item 18  [X]

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

                           Yes [_]      No [X]

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

                                       2

<PAGE>


                                EXPLANATORY NOTE

         The  Company is amending  its Annual  Report on Form 20-F for the year
ended November 30, 2006 (the "Annual Report") to:

o    include an amended report of the independent  registered public accounting
     firm  to  the  Board  of  Directors   that  reflects  the  fact  that  the
     consolidated  balance  sheets of the Company as of  November  30, 2006 and
     2005 and the consolidated statements of operations, deficit and cash flows
     for each of the years in the three-year period ended November 30, 2006 and
     the period from December 1, 1987 to November 30, 2006 have been audited in
     accordance  with  Canadian  generally  accepted  auditing  standards.  The
     Company's independent auditors have not audited the consolidated financial
     statements  of  operations,  deficit  and cash flows for the  period  from
     December 1, 1987 to November 30, 2006 or the period from  December 1, 1987
     to November  30, 2003 as set out in note 9 to the  consolidated  financial
     statements  in  accordance  with  the  standards  of  the  Public  Company
     Accounting Oversight Board (United States); and

o    revise its consolidated  audited financial statements as disclosed in note
     18 to give effect to the 10:1 common share  consolidation that occurred on
     April 17, 2007 as  determined by the Board of Directors and as approved by
     the shareholders on April 3, 2007.


         Other than as described  above, no other changes are being made to the
Annual Report, as originally filed, although Exhibits 12.1, 12.2, 13.1 and 13.2
are being  refiled in their current form.  Other than as described  above,  the
Annual Report, as amended by this Amendment,  continues to speak as of the date
of its original filing,  and the Company has not updated the disclosure as of a
later  date.  Therefore,  this  Amendment  should be read  together  with other
documents  that  the  Company  has  filed  with  the  Securities  and  Exchange
Commission  subsequent to the filing of the original Form 20-F.  Information in
such reports and documents updates and supersedes certain information contained
in this  Amendment.  The  filing  of this  Amendment  shall  not be  deemed  an
admission that the original Form 20-F,  when made,  included any known,  untrue
statement  of  material  fact or  knowingly  omitted to state a  material  fact
necessary to make a statement not misleading.

<PAGE>


                                    PART III.

ITEM 18. FINANCIAL STATEMENTS

<PAGE>











     Consolidated Financial Statements
     (Expressed in Canadian dollars)

     VASOGEN INC.
     (A DEVELOPMENT STAGE COMPANY)

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



<PAGE>

[GRAPHIC OMITTED -- LOGO]

               KPMG LLP                                 Telephone (416) 777-8500
               CHARTERED ACCOUNTANTS                    Fax       (416) 777-8818
               Suite 3300 Commerce Court West           Internet     www.kpmg.ca
               PO Box 31 Stn Commerce Court
               Toronto ON M5L 1B2



REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM

To the Board of Directors of Vasogen Inc.

We have audited the  accompanying  consolidated  balance sheets of Vasogen Inc.
("the  Company") as of November 30, 2006 and 2005 and the related  consolidated
statements of  operations,  deficit and cash flows for each of the years in the
three-year  period ended  November 30, 2006 and for the period from December 1,
1987 to November 30, 2006.  These  consolidated  financial  statements  are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with Canadian generally accepted auditing
standards.  With respect of the consolidated  financial  statements for each of
the years in the  three-year  period ended November 30, 2006, we also conducted
our audits in accordance  with the standards of the Public  Company  Accounting
Oversight Board (United States).  We did not audit the consolidated  statements
of  operations,  deficit and cash flows for the period from December 1, 1987 to
November  30, 2006 or the period from  December 1, 1987 to November 30, 2003 as
set out in note 9 in  accordance  with  the  standards  of the  Public  Company
Accounting  Oversight Board (United  States).  Those standards  require that we
plan and perform the audit to obtain  reasonable  assurance  about  whether the
financial  statements  are free of  material  misstatement.  An audit  includes
examining,  on a test basis, evidence supporting the amounts and disclosures in
the  financial  statements.  An audit also includes  assessing  the  accounting
principles  used  and  significant  estimates  made by  management,  as well as
evaluating the overall financial  statement  presentation.  We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material  respects,  the financial position of the Company as of
November 30, 2006 and 2005 and the results of its operations and its cash flows
for each of the years in the three-year  period ended November 30, 2006 and for
the period from  December 1, 1987 to November  30,  2006,  in  conformity  with
Canadian generally accepted accounting principles.

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

/s/ KPMG LLP

Chartered Accountants, Licensed Public Accountants

Toronto, Canada
January 30, 2007, except
as to note 18 which is
as of May 17, 2007



       KPMG LLP, a Canadian limited liability partnership is the Canadian
            member firm of KPMG International, a Swiss cooperative.

<PAGE>


VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Consolidated Balance Sheets
(In thousands of Canadian dollars)

November 30, 2006 and 2005

-------------------------------------------------------------------------------
                                                      2006                 2005
-------------------------------------------------------------------------------
Assets

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

Restricted cash (note 4)                                      -          11,701
Property and equipment (note 6)                             615           1,121
Acquired technology (note 7)                                253             506
Deferred financing costs (note 8)                           150           2,645

-------------------------------------------------------------------------------
                                                    $    41,770     $    94,811
===============================================================================

Liabilities and Shareholders' Equity

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

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

Shareholders' equity (notes 9 and 18):
     Share capital:
         Authorized:
              Unlimited common shares, without
                par value
              Issued and outstanding:
                15,665,134 common shares
                (2005 - 8,225,537)                      344,217         295,007
     Stock options                                       10,713           8,466
     Equity component of senior convertible
          notes payable (note 8)                          1,639           7,985
     Warrants                                            11,390           5,345
     Contributed surplus                                  7,995             223
     Deficit                                           (351,374)       (284,719)
-------------------------------------------------------------------------------
                                                         24,580          32,307

Commitments and contingencies (note 14)
Subsequent event (note 18)
-------------------------------------------------------------------------------
                                                    $    41,770     $    94,811
===============================================================================


See accompanying notes to consolidated financial statements.

On behalf of the Board:

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


                                       1
<PAGE>


VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

<TABLE>
<CAPTION>


--------------------------------------------------------------------------------------------------------------
                                                                                                   Period from
                                                                                                   December 1,
                                                                                                       1987 to
                                                           Years ended November 30,               November 30,
                                                  2006               2005               2004              2006
--------------------------------------------------------------------------------------------------------------
<S>                                      <C>                <C>               <C>                <C>

Expenses:
     Research and development
       (note 16)                         $      32,732      $      71,421     $       51,794     $     228,681
     General and administration                 19,251             22,126             15,852           105,172
     Foreign exchange (gain) loss                  104               (719)             8,288             8,993
--------------------------------------------------------------------------------------------------------------

Loss before the undernoted                     (52,087)           (92,828)           (75,934)         (342,846)

Interest expense on senior
   convertible notes payable                      (930)              (344)                 -            (1,274)

Accretion in carrying value of
   senior convertible notes payable             (7,824)            (1,742)                 -            (9,566)

Amortization of deferred financing
   costs                                        (2,495)              (408)                 -            (2,903)

Loss on extinguishment of senior
   convertible notes payable                    (4,995)                 -                  -            (4,995)

Investment income                                1,971              2,274              1,384            12,015
--------------------------------------------------------------------------------------------------------------

Loss for the period                            (66,360)           (93,048)           (74,550)         (349,569)

Deficit, beginning of period:
     As originally reported                   (284,719)          (187,665)          (113,115)           (1,510)
     Impact of change in
       accounting for stock-based
       compensation (note 2(m))                      -             (4,006)                 -                 -
--------------------------------------------------------------------------------------------------------------
     As restated                              (284,719)          (191,671)          (113,115)           (1,510)

Charge for acceleration payments
   on equity component of senior
   convertible notes payable                      (295)                 -                  -              (295)

--------------------------------------------------------------------------------------------------------------
Deficit, end of period                   $    (351,374)     $    (284,719)    $     (187,665)    $    (351,374)
==============================================================================================================

Basic and diluted loss per
   common share (notes 10 and 18)        $       (7.05)     $      (11.65)    $      (10.71)

==============================================================================================================
</TABLE>

See accompanying notes to consolidated financial statements.


                                       2
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

<TABLE>
<CAPTION>

--------------------------------------------------------------------------------------------------------------
                                                                                                   Period from
                                                                                                   December 1,
                                                                                                       1987 to
                                                           Years ended November 30,               November 30,
                                                  2006               2005               2004              2006
--------------------------------------------------------------------------------------------------------------
<S>                                        <C>                <C>                <C>              <C>

Cash provided by (used in):

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

Financing activities:
     Shares and warrants issued for cash        23,106             52,502             76,913           309,013
     Warrants exercised for cash                     -                  -                  -            16,941
     Options exercised for cash                      -                627              1,300             7,669
     Share issue costs                          (2,221)            (3,720)            (5,625)          (23,206)
     Issue (repayment) of senior convertible
       notes payable, net (note 8)              (3,976)            42,790                  -            39,436
     Restricted cash                             5,298            (11,701)                 -            (6,403)
     Paid to related parties                         -                  -                  -              (234)
--------------------------------------------------------------------------------------------------------------
                                                22,207             80,498             72,588           343,216

Investing activities:
     Purchases of property and equipment           (23)              (490)              (816)           (2,416)
     Purchases of acquired technology                -                  -                  -            (1,283)
     Purchases of marketable securities            (80)           (22,999)           (74,872)         (244,846)
     Settlement of forward exchange
       contracts                                  (102)            (4,732)                 -            (4,834)
     Maturities of marketable securities        23,079             67,651             59,976           240,677
--------------------------------------------------------------------------------------------------------------
                                                22,874             39,430            (15,712)          (12,702)

Foreign exchange loss on cash
   held in foreign currency                       (807)              (141)              (204)           (1,142)
--------------------------------------------------------------------------------------------------------------

Increase (decrease) in cash and
   cash equivalents                            (20,094)            45,185                860            30,427

Cash and cash equivalents,
   beginning of period                          50,521              5,336              4,476                 -

--------------------------------------------------------------------------------------------------------------
Cash and cash equivalents,
   end of period                           $    30,427        $    50,521        $     5,336      $     30,427
==============================================================================================================
</TABLE>

Supplemental cash flow information (note 11)

See accompanying notes to consolidated financial statements.


                                       3
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

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

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

1.     BASIS OF PRESENTATION:

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

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

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

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


                                       4
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

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

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

2.   SIGNIFICANT ACCOUNTING POLICIES:

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

     (a)  Principles of consolidation:

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

     (b)  Cash and cash equivalents:

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

     (c)  Marketable securities:

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


                                       5
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

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

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

2.   SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

     (d)  Concentration of credit risk:

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

     (e)  Property and equipment:

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

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

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

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

     (f)  Acquired technology:

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

     (g)  Deferred financing costs:

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


                                       6
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

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

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

2.   SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):


     (h)  Impairment of long-lived assets:

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

     (i)  Research and development:

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

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

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


                                       7
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

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

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

2.   SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):


     (j)  Derivative financial instruments:

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

     (k)  Translation of foreign currency:

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

     (l)  Income taxes and investment tax credits:

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


                                       8
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

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

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

2.   SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

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

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

     (m)  Stock-based compensation plans:

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

     (n)  Deferred share units plan:

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


                                       9
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

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

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

2.   SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

     (o)  Basic and diluted loss per common share:

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

     (p)  Measurement uncertainty:

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

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


                                       10
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

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

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

2.   SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

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

          (i)  Financial instruments, recognition and measurement:

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

          (ii) Comprehensive income and equity:

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

          (iii) Hedges:

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


                                       11
<PAGE>



VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

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

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

2.   SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

          (iv) Non-monetary transactions:

               In June  2005,  the CICA  released  new  Handbook  Section  3831,
               Non-monetary Transactions, effective for annual periods beginning
               on  or  after  January  1,  2006.  This  standard   requires  all
               non-monetary  transactions  to be measured  at fair value  unless
               they  meet  one  of  four  very  specific  criteria.   Commercial
               substance  replaces  culmination  of the earnings  process as the
               test for fair value  measurement.  A transaction  has  commercial
               substance if it causes an identifiable  and measurable  change in
               the economic circumstances of the entity. Commercial substance is
               a function of the cash flows  expected by the  reporting  entity.
               The Company does not expect the adoption of this standard to have
               a material  impact on its  consolidated  financial  position  and
               results of operations.

          (v)  Accounting changes:

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


                                       12
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

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

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

2.   SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

          (vi) Capital disclosure:

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

3.   CASH AND CASH EQUIVALENTS:

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

4.   RESTRICTED CASH:

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


                                       13
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

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

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

4.   RESTRICTED CASH (CONTINUED):

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


5.   MARKETABLE SECURITIES:

<TABLE>
<CAPTION>

     -------------------------------------------------------------------------------------------------------
                                               Less than   Greater than
                                                one year       one year                             Yield to
     2006                                     maturities     maturities           Total             maturity
     -------------------------------------------------------------------------------------------------------
     <S>                                     <C>             <C>            <C>                <C>

     Corporate bonds, commercial
       paper and medium-term notes           $         -     $        -     $         -                    -

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


     -------------------------------------------------------------------------------------------------------
                                               Less than   Greater than
                                                one year       one year                             Yield to
     2005                                     maturities     maturities           Total             maturity
     -------------------------------------------------------------------------------------------------------

     Corporate bonds, commercial
       paper and medium-term notes           $    22,999     $        -     $    22,999        3.04% - 4.25%

     =======================================================================================================
</TABLE>


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

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


                                       14
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

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

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

<TABLE>
<CAPTION>
6.   PROPERTY AND EQUIPMENT:

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

     --------------------------------------------------------------------------------------------
                                                $    1,864          $   1,249          $      615
     ============================================================================================

     --------------------------------------------------------------------------------------------
                                                                  Accumulated            Net book
     2005                                             Cost       amortization               value
     --------------------------------------------------------------------------------------------

     Testing equipment                          $      936          $     595          $      341
     Computer and other equipment                      539                288                 251
     Leasehold improvements                            730                201                 529

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

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

<TABLE>
<CAPTION>
7.   ACQUIRED TECHNOLOGY:

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

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

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

                                       15
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

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

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

8.   SENIOR CONVERTIBLE NOTES PAYABLE:

     On October 7, 2005,  the  Company,  through  its  wholly-owned  subsidiary,
     Vasogen Ireland Limited, issued 6.45% U.S. $40.0 million senior convertible
     notes payable and 0.3 million common share purchase warrants,  as disclosed
     in note 9(e),  for net proceeds of $42.8 million  (gross  proceeds of $47.0
     million (U.S.  $40.0  million) less issuance  costs of $4.2  million).  The
     notes will be repaid by April 1, 2007,  which  shall be extended to October
     7, 2010 upon the occurrence of pre-market approval granted by the U.S. Food
     and  Drug  Administration  for the  marketing  of  Celacade  for use in the
     treatment of chronic heart failure.

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

     The notes are  convertible by the holders at any time into common shares of
     the Company at an adjusted  conversion price of U.S. $19.90 per share (2005
     - U.S.  $30.00 per share),  adjusted for  anti-dilution  and other downward
     adjustments,  including  if the Company  issues or sells  common stock at a
     price of less  than  U.S.  $19.90  (2005 - $30.00  per  share)  unless  the
     offering is in excess of U.S. $50.0 million in total or in connection  with
     terms  permitted  under the agreement,  issues options or warrants to third
     parties  with an  exercise  price of less than U.S.  $19.90 or  convertible
     securities with a conversion price of less than U.S. $19.90  (collectively,
     the "conversion price").


                                       16
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

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

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

8.   SENIOR CONVERTIBLE NOTES PAYABLE (CONTINUED):

     The Company is required  to pay the notes in 22 equal  monthly  instalments
     commencing  December 1, 2005. As a result of acceleration  payments made as
     at November 30, 2006, only five instalments  remain and,  accordingly,  the
     notes are expected to be fully repaid on April 1, 2007.  While  interest is
     always payable in cash, the Company,  at its option, may pay the instalment
     in cash  at the  face  amount  of the  instalment  principal  or in  freely
     tradable common shares,  or any combination  thereof.  If settled in common
     shares,  the  number  of common  shares is based on the face  amount of the
     instalment  principal divided by the lesser of (i) the conversion price and
     (ii) 90% of the five-day  weighted  average price of the  Company's  common
     shares,  as defined in the agreement,  if the stock price is less than U.S.
     $10.00,  or 95% of the five-day  weighted  average  price of the  Company's
     common shares,  as defined in the agreement,  if greater than U.S.  $10.00.
     The  aggregate  number of common  shares that the Company can issue to make
     the instalment  payments in accordance  with these  provisions is 2,500,000
     (the  "Exchange  Cap").  Once  exceeded,  the  Company is required to issue
     shares at 100% of the share  price and make whole the note  holders  with a
     cash  payment  equal  to 10% of  the  instalment  amount.  The  Company  is
     obligated   to  provide   additional   common   shares  at  no   additional
     consideration if subsequent to the instalment date, the number of shares is
     greater when the subsequent twelve-day weighted average share price is used
     in the formula ("the twelve-day  weighted average share price adjustment").
     Additional  principal is deemed to be  extinguished if the number of shares
     issued is in excess of the number of shares otherwise  determined using the
     subsequent  twelve-day  weighted  average  share price in the formula.  The
     Company accounts for the twelve-day weighted average share price adjustment
     as an adjustment to share capital.

     The Company has the right to accelerate  payments of outstanding  principal
     of up to U.S. $8.0 million on each instalment date if the Company's  common
     share  price is  greater  than  U.S.  $10.00  per share or up to 40% of the
     principal  outstanding  each calendar  year if the  Company's  common share
     price is greater than U.S.  $40.00 per share.  The  acceleration  repayment
     terms are  similar to the monthly  instalment  redemption  terms  described
     above. In addition, the Company is obliged to issue additional common share
     purchase  warrants with terms similar to those  warrants  issued  initially
     with the  maturity  date being five years from the date of issuance and the
     exercise  price of U.S.  $19.90 per common  share  (subject  to  adjustment
     similar to the conversion price) (2005 - U.S. $30.00 per common share).


                                       17
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

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

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

8.   SENIOR CONVERTIBLE NOTES PAYABLE (CONTINUED):

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

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

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

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

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

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


                                       18
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

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

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

8.   SENIOR CONVERTIBLE NOTES PAYABLE (CONTINUED):

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

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

     As a result of the financing  that was completed on November 14, 2006,  the
     conversion price of the senior convertible notes was reduced to U.S. $19.90
     from U.S. $30.00 in accordance with the anti-dilution  provisions contained
     within the notes.  The  anti-dilution  provisions  also  provided  that the
     exercise price of the 0.5 million warrants  outstanding to the note holders
     at an  exercise  price of U.S.  $30.00 was  reduced to U.S.  $19.90 and the
     exercise price of the 39,000  warrants at an exercise price of U.S.  $31.10
     was  reduced  to  U.S.  $20.60.  In  addition,  the  0.5  million  warrants
     outstanding can now be exercised for 0.8 million common shares, which is an
     increase  from the 0.5 million  common  shares  prior to the  anti-dilution
     provisions that were triggered by the November 14, 2006 financing.

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


                                       19
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

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

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

8.   SENIOR CONVERTIBLE NOTES PAYABLE (CONTINUED):

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

<TABLE>
<CAPTION>
     ----------------------------------------------------------------------------------------
                                                                                   Impact on
                                                                                      senior
                                                    Number of                    convertible
                                                       common     Number of            notes
                                                       shares      warrants          payable
     ----------------------------------------------------------------------------------------
<S>                                                     <C>             <C>     <C>
       Balance, October 7, 2005
         (date of issuance)                                 -             -     $     33,969
       Accretion in carrying value                          -             -            1,742
       Impact of foreign exchange                           -             -             (257)
     ----------------------------------------------------------------------------------------

       Balance, November 30, 2005                           -             -           35,454
       December 1, 2005 instalment
         payment in advance applied                        77             -           (2,122)
       Instalment payments settled in cash                  -             -           (3,926)
       Instalment payments settled in shares            2,697             -          (19,849)
       Acceleration payments settled in
         common shares and warrants                       411           178           (7,265)
       Conversion by note holder to common
         shares                                            10             -             (263)
       Accretion in carrying value                          -             -            7,824
       Impact of foreign exchange                           -             -           (1,099)

     ----------------------------------------------------------------------------------------
       Balance, November 30, 2006                       3,195           178     $      8,754
     ========================================================================================
</TABLE>

                                       20
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

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

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

8.   SENIOR CONVERTIBLE NOTES PAYABLE (CONTINUED):

     ---------------------------------------------------------------------------
                                                               2006        2005
     ---------------------------------------------------------------------------

       Par value of senior convertible notes payable at
         November 30                                       $  9,379   $  46,676
       Balance remaining to be accreted                        (625)    (11,222)
     ---------------------------------------------------------------------------

       Senior convertible notes payable                       8,754      35,454

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

     ---------------------------------------------------------------------------
       Senior convertible notes payable, long term         $      -   $  18,795
     ===========================================================================

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


                                       21
<PAGE>


VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

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

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
9.  SHAREHOLDERS' EQUITY:

    (a) Consolidated statement of shareholders' equity:

    -------------------------------------------------------------------------------------------------------------------------------
                                                                                Equity
                                                                          component of                                  Period from
                                               Common                           senior                                  December 1,
                                              shares'                      convertible                                      1987 to
                                  Number      average     Share     Stock        notes           Contributed           November 30,
                               of shares  share price   capital   options      payable  Warrants     surplus  Deficit          2006
    -------------------------------------------------------------------------------------------------------------------------------
    <S>                              <C>        <C>    <C>        <C>        <C>        <C>      <C>          <C>        <C>
    Balance, December 1, 1987        103               $  1,213   $     -    $       -  $      - $         -  $(1,510)   $     (297)
    Shares issued for cash            13        14.00       195         -            -         -           -        -           195
    Shares issued for services         1        35.00        17         -            -         -           -        -            17
    Shares issued to acquire a
     license                         157        15.10     2,375         -            -         -           -        -         2,375
    Loss                               -                      -         -            -         -           -     (755)         (755)
    -------------------------------------------------------------------------------------------------------------------------------

    Balance, November 30, 1988       274                  3,800         -            -         -           -   (2,265)        1,535
    Loss                               -                      -         -            -         -           -     (601)         (601)
    -------------------------------------------------------------------------------------------------------------------------------

    Balance, November 30, 1989       274                  3,800         -            -         -           -   (2,866)          934
    Shares issued for cash            25        42.20     1,061         -            -         -           -        -         1,061
    Options exercised                  5        21.00       105         -            -         -           -        -           105
    Shares issued for services         1        42.00        45         -            -         -           -        -            45
    Debt conversion                   18        11.20       200         -            -         -           -        -           200
    Loss                               -                      -         -            -         -           -     (725)         (725)
    -------------------------------------------------------------------------------------------------------------------------------

    Balance, November 30, 1990       323                  5,211         -            -         -           -   (3,591)        1,620
    Shares issued for cash            68        13.30       909         -            -         -           -        -           909
    Options exercised                  2        21.00        30         -            -         -           -        -            30
    Shares issued for services         9        18.70       168         -            -         -           -        -           168
    Shares issued to acquire a
     license                           7        14.80       100         -            -         -           -        -           100
    Loss                               -                      -         -            -         -           -     (593)         (593)
    -------------------------------------------------------------------------------------------------------------------------------

    Balance, November 30, 1991       409                  6,418         -            -         -           -   (4,184)        2,234
</TABLE>

                                       22
<PAGE>
VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

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

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
9.  SHAREHOLDERS' EQUITY (CONTINUED):

    -------------------------------------------------------------------------------------------------------------------------------
                                                                                Equity
                                                                          component of                                  Period from
                                               Common                           senior                                  December 1,
                                              shares'                      convertible                                      1987 to
                                  Number      average     Share     Stock        notes           Contributed           November 30,
                               of shares  share price   capital   options      payable  Warrants     surplus  Deficit          2006
    -------------------------------------------------------------------------------------------------------------------------------
    <S>                              <C>        <C>    <C>        <C>        <C>        <C>      <C>          <C>        <C>
    Balance, November 30, 1991       409                  6,418         -            -         -           -   (4,184)        2,234
    Shares issued for cash             2        30.80        44         -            -         -           -        -            44
    Options exercised                 13        17.80       239         -            -         -           -        -           239
    Shares issued for services         8        26.10       202         -            -         -           -        -           202
    Debt conversion                   43        10.50       450         -            -         -           -        -           450
    Loss                               -                      -         -            -         -           -     (975)         (975)
    -------------------------------------------------------------------------------------------------------------------------------

    Balance, November 30, 1992       475                  7,353         -            -         -           -   (5,159)        2,194
    Shares issued for cash             7        21.00       150         -            -         -           -        -           150
    Warrants exercised                12        17.10       203         -            -         -           -        -           203
    Options exercised                  5        21.00        96         -            -         -           -        -            96
    Shares issued for services        10        21.00       202         -            -         -           -        -           202
    Loss                               -            -         -         -            -         -           -     (752)         (752)
    -------------------------------------------------------------------------------------------------------------------------------

    Balance, November 30, 1993       509                  8,004         -            -         -           -   (5,911)        2,093
    Shares issued for cash            77        13.00     1,006         -            -         -           -        -         1,006
    Share issue costs                  -            -      (192)        -            -         -           -        -          (192)
    Warrants exercised                14        17.50       247         -            -         -           -        -           247
    Options exercised                  3        15.40        44         -            -         -           -        -            44
    Shares issued for services         3        21.00        60         -            -         -           -        -            60
    Loss                               -                      -         -            -         -           -     (996)         (996)
    -------------------------------------------------------------------------------------------------------------------------------

    Balance, November 30, 1994       606                  9,169         -            -         -           -   (6,907)        2,262
</TABLE>

                                       23
<PAGE>
VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

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

-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
9.  SHAREHOLDERS' EQUITY (CONTINUED):

    -------------------------------------------------------------------------------------------------------------------------------
                                                                                Equity
                                                                          component of                                  Period from
                                               Common                           senior                                  December 1,
                                              shares'                      convertible                                      1987 to
                                  Number      average     Share     Stock        notes           Contributed           November 30,
                               of shares  share price   capital   options      payable  Warrants     surplus  Deficit          2006
    -------------------------------------------------------------------------------------------------------------------------------
    <S>                              <C>        <C>    <C>        <C>        <C>        <C>      <C>          <C>        <C>
    Balance, November 30, 1994       606                  9,169         -            -         -           -   (6,907)        2,262
    Shares issued for cash           346        10.00     3,460         -            -         -           -        -         3,460
    Share issue costs                  -            -      (294)        -            -         -           -        -          (294)
    Warrants exercised                19         5.00        93         -            -         -           -        -            93
    Options exercised                 12         5.00        60         -            -         -           -        -            60
    Shares issued for services        24        10.40       246         -            -         -           -        -           246
    Loss                               -                      -         -            -         -           -   (2,323)       (2,323)
    -------------------------------------------------------------------------------------------------------------------------------

    Balance, November 30, 1995     1,007                 12,734         -            -         -           -   (9,230)        3,504
    Shares issued for cash           356        11.00     3,913         -            -         -           -        -         3,913
    Share issue costs                  -            -      (962)        -            -         -           -        -          (962)
    Warrants exercised               340        13.40     4,539         -            -         -           -        -         4,539
    Options exercised                 39         6.20       245         -            -         -           -        -           245
    Shares issued for services        63        11.80       748         -            -         -           -        -           748
    Shares issued to acquire
      license                         27        12.00       324         -            -         -           -        -           324
    Loss                               -                      -         -            -         -           -   (4,862)       (4,862)
    -------------------------------------------------------------------------------------------------------------------------------

    Balance, November 30, 1996     1,832                 21,541         -            -         -           -  (14,092)        7,449
    Shares issued for cash           306        24.90     7,625         -            -         -           -        -         7,625
    Share issue costs                  -            -      (312)        -            -         -           -        -          (312)
    Warrants exercised               135        12.00     1,621         -            -         -           -        -         1,621
    Options exercised                 49         9.80       482         -            -         -           -        -           482
    Shares issued for services        12        18.70       215         -            -         -           -        -           215
    Loss                               -                      -         -            -         -           -   (7,991)       (7,991)
    -------------------------------------------------------------------------------------------------------------------------------

    Balance, November 30, 1997     2,334                 31,172         -            -         -           -  (22,083)        9,089
</TABLE>

                                       24
<PAGE>
VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

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

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
9.  SHAREHOLDERS' EQUITY (CONTINUED):

    -------------------------------------------------------------------------------------------------------------------------------
                                                                                Equity
                                                                          component of                                  Period from
                                               Common                           senior                                  December 1,
                                              shares'                      convertible                                      1987 to
                                  Number      average     Share     Stock        notes           Contributed           November 30,
                               of shares  share price   capital   options      payable  Warrants     surplus  Deficit          2006
    -------------------------------------------------------------------------------------------------------------------------------
    <S>                              <C>        <C>    <C>        <C>        <C>        <C>      <C>          <C>        <C>
    Balance, November 30, 1997     2,334                 31,172         -            -         -           -  (22,083)        9,089
    Shares issued for cash           288        17.50     5,043         -            -         -           -        -         5,043
    Share issue costs                  -            -      (479)        -            -         -           -        -          (479)
    Warrants exercised                23        11.10       253         -            -         -           -        -           253
    Options exercised                 10         9.50        95         -            -         -           -        -            95
    Shares issued for services         3        16.70        55         -            -         -           -        -            55
    Loss                               -                      -         -            -         -           -   (7,312)       (7,312)
    -------------------------------------------------------------------------------------------------------------------------------

    Balance, November 30, 1998     2,658                 36,139         -            -         -           -  (29,395)        6,744
    Shares issued for cash           659        14.90     9,825         -            -         -           -        -         9,825
    Share issue costs                  -            -      (934)        -            -         -           -        -          (934)
    Warrants exercised               163        10.70     1,739         -            -         -           -        -         1,739
    Options exercised                 59        12.20       724         -            -         -           -        -           724
    Shares issued for services        21        12.50       259         -            -         -           -        -           259
    Loss                               -                      -         -            -         -           -   (7,915)       (7,915)
    -------------------------------------------------------------------------------------------------------------------------------

    Balance, November 30, 1999     3,560                 47,752         -            -         -           -  (37,310)       10,442
    Shares issued for cash           374        95.40    35,650         -            -         -           -        -        35,650
    Share issue costs                  -            -    (1,812)        -            -         -           -        -        (1,812)
    Warrants exercised               398        17.30     6,898         -            -         -           -        -         6,898
    Options exercised                139        14.80     2,064         -            -         -           -        -         2,064
    Shares issued for services         4        58.30       233         -            -         -           -        -           233
    Loss                               -                      -         -            -         -           -   (9,961)       (9,961)
    -------------------------------------------------------------------------------------------------------------------------------

    Balance, November 30, 2000     4,475                 90,785         -            -         -           -  (47,271)       43,514
</TABLE>

                                       25
<PAGE>
VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

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

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
9.  SHAREHOLDERS' EQUITY (CONTINUED):

    -------------------------------------------------------------------------------------------------------------------------------
                                                                                Equity
                                                                          component of                                  Period from
                                               Common                           senior                                  December 1,
                                              shares'                      convertible                                      1987 to
                                  Number      average     Share     Stock        notes           Contributed           November 30,
                               of shares  share price   capital   options      payable  Warrants     surplus  Deficit          2006
    -------------------------------------------------------------------------------------------------------------------------------
    <S>                              <C>        <C>    <C>        <C>        <C>        <C>      <C>          <C>        <C>
    Balance, November 30, 2000     4,475                 90,785         -            -         -           -  (47,271)       43,514
    Shares issued for cash           140        84.90    11,941         -            -         -           -        -        11,941
    Share issue costs                  -            -      (121)        -            -         -           -        -          (121)
    Options exercised                 22        19.90       429         -            -         -           -        -           429
    Loss                               -                      -         -            -         -           -  (14,389)      (14,389)
    -------------------------------------------------------------------------------------------------------------------------------

    Balance, November 30, 2001     4,637                103,034         -            -         -           -  (61,660)       41,374
    Shares issued for cash           515        48.50    25,000         -            -         -           -        -        25,000
    Share issue costs                  -            -    (1,901)        -            -         -           -        -        (1,901)
    Options exercised                 41        13.00       540         -            -         -           -        -           540
    Loss                               -            -         -         -            -         -           -  (19,507)      (19,507)
    -------------------------------------------------------------------------------------------------------------------------------

    Balance, November 30, 2002     5,193                126,673         -            -         -           -  (81,167)       45,506
    Shares issued for cash           948        53.50    50,669         -            -         -           -        -        50,669
    Share issue costs                  -            -    (5,898)        -            -         -           -        -        (5,898)
    Warrants exercised                25        53.90     1,347         -            -         -           -        -         1,347
    Options exercised                 36        16.40       589         -            -         -           -        -           589
    Fair value of stock
      options and warrants
      issued to consultants            -            -         -       744            -     1,456           -        -         2,200
    Loss                               -                      -         -            -         -           -  (31,948)      (31,948)
    -------------------------------------------------------------------------------------------------------------------------------

    Balance, November 30, 2003     6,202                173,380       744            -     1,456           - (113,115)       62,465
</TABLE>

                                       26
<PAGE>
VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

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

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
9.  SHAREHOLDERS' EQUITY (CONTINUED):

    -------------------------------------------------------------------------------------------------------------------------------
                                                                                Equity
                                                                          component of                                  Period from
                                               Common                           senior                                  December 1,
                                              shares'                      convertible                                      1987 to
                                  Number      average     Share     Stock        notes           Contributed           November 30,
                               of shares  share price   capital   options      payable  Warrants     surplus  Deficit          2006
    -------------------------------------------------------------------------------------------------------------------------------
    <S>                              <C>        <C>    <C>        <C>        <C>        <C>      <C>          <C>        <C>
    Balance, November 30, 2003     6,202                173,380       744            -     1,456           - (113,115)       62,465
    Shares issued for cash (b)       978        78.70    76,913         -            -         -           -        -        76,913
    Share issue costs (b)              -            -    (6,128)        -            -         -           -        -        (6,128)
    Options exercised                 53        24.30     1,300         -            -         -           -        -         1,300
    Fair value of stock
       options issued to
       consultants                     -                      -       455            -         -           -        -           455
    Loss                               -                      -         -            -         -           -  (74,550)      (74,550)
    -------------------------------------------------------------------------------------------------------------------------------

    Balance, November 30, 2004,
       as originally reported      7,233                245,465     1,199            -     1,456           - (187,665)       60,455
    Change in accounting for
       stock-based compensation        -            -        55     3,951            -         -           -   (4,006)            -
    -------------------------------------------------------------------------------------------------------------------------------

    Balance, November 30, 2004,
       as restated                 7,233            -   245,520     5,150            -     1,456           - (191,671)       60,455
</TABLE>

                                       27
<PAGE>
VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

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

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
9.  SHAREHOLDERS' EQUITY (CONTINUED):

    -------------------------------------------------------------------------------------------------------------------------------
                                                                                Equity
                                                                          component of                                  Period from
                                               Common                           senior                                  December 1,
                                              shares'                      convertible                                      1987 to
                                  Number      average     Share     Stock        notes           Contributed           November 30,
                               of shares  share price   capital   options      payable  Warrants     surplus  Deficit          2006
    -------------------------------------------------------------------------------------------------------------------------------
    <S>                              <C>        <C>    <C>        <C>        <C>        <C>      <C>          <C>        <C>
    Balance, November 30, 2004,
       as restated                 7,233                245,520     5,150            -     1,456           - (191,671)       60,455
    Shares issued for cash (b)       901        58.30    52,502         -            -         -           -        -        52,502
    Share issue costs (b)              -            -    (3,720)        -            -         -           -        -        (3,720)
    Fair value of stock
       options granted                 -            -         -     3,826            -         -           -        -         3,826
    Options exercised                 15        43.20       627         -            -         -           -        -           627
    Shares issued in advance
       for instalment payment
       on senior convertible
       notes payable                  77        26.30     2,034         -            -         -           -        -         2,034
    Instalment payment made in
       advance                         -            -    (2,032)        -            -         -           -        -        (2,032)
    Senior convertible notes           -            -         -         -        8,774     4,273           -        -        13,047
    Financing costs on equity
       component of senior
       convertible notes               -            -         -         -         (789)     (384)          -        -        (1,173)
    Transfer of stock options
       exercised                       -            -        76       (76)           -         -           -        -             -
    Reversal of forfeited and
       expired vested options          -            -         -      (223)           -         -         223        -             -
    Transfer of forfeited
       unvested options                -            -         -      (211)           -         -           -        -          (211)
    Loss                               -            -         -         -            -         -           -  (93,048)      (93,048)
    -------------------------------------------------------------------------------------------------------------------------------

    Balance, November 30, 2005     8,226                295,007     8,466        7,985     5,345         223 (284,719)       32,307
</TABLE>

                                       28
<PAGE>
VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

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

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
9.  SHAREHOLDERS' EQUITY (CONTINUED):

    -------------------------------------------------------------------------------------------------------------------------------
                                                                                Equity
                                                                          component of                                  Period from
                                               Common                           senior                                  December 1,
                                              shares'                      convertible                                      1987 to
                                  Number      average     Share     Stock        notes           Contributed           November 30,
                               of shares  share price   capital   options      payable  Warrants     surplus   Deficit         2006
    -------------------------------------------------------------------------------------------------------------------------------
    <S>                              <C>        <C>    <C>        <C>        <C>        <C>      <C>          <C>        <C>
    Balance, November 30, 2005     8,226                295,007     8,466        7,985     5,345         223  (284,719)      32,307
    Public offering (b)            4,319         4.20    18,082         -            -     5,024           -         -       23,106
    Fair value of broker
       warrants (b)                    -            -         -         -            -       705           -         -          705
    Share issue costs (b)              -            -    (2,376)        -            -      (550)          -         -       (2,926)
    Shares issued for deferred
       share units                     2        15.00        36         -            -         -           -         -           36
    Fair value of stock
       options granted                 -            -         -     3,682            -         -           -         -        3,682
    Shares issued for
       instalment payments on
       senior convertible
       notes payable               2,697         8.70    23,481         -       (4,269)        -       4,269         -       23,481
    Shares and warrants issued
       for acceleration
       payments on senior
       convertible notes
       payable                       411        23.60     9,723         -       (1,655)    2,322         848      (295)      10,943
    Holders' conversion of
       notes                          10        32.20       322         -          (59)        -           -         -          263
    December 1, 2006 instalment
       payment made in advance         -            -    (2,090)        -            -         -           -         -       (2,090)
    December 1, 2005 instalment
       payment in advance
       applied                         -            -     2,032         -         (363)        -         363         -        2,032
    Transfer of forfeited and
       expired vested options          -            -         -      (836)           -         -         836         -            -
    Reversal of forfeited
       unvested options                -            -         -      (599)           -         -           -         -         (599)
    Transfer of forfeited and
       expired vested warrants         -            -         -         -            -    (1,456)      1,456         -            -
    Loss                               -            -         -         -            -         -           -   (66,360)     (66,360)

    -------------------------------------------------------------------------------------------------------------------------------
    Balance, November 30, 2006    15,665              $ 344,217 $  10,713     $  1,639  $ 11,390   $   7,995 $(351,374)   $  24,580
    ===============================================================================================================================
</TABLE>

                                       29
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

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

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

9.   SHAREHOLDERS' EQUITY (CONTINUED):

     (b) Share issuances:

         On November 14, 2006, the Company issued 4.3 million common shares, 1.7
         million  five-year  warrants  and 0.4  million  six-month  warrants  to
         purchase  common  shares for gross cash proceeds of $23.1 million (U.S.
         $20.3 million) (net proceeds of $21.1 million after cost of issuance of
         $2.0  million).  In  addition,  the Company  issued 0.3 million  broker
         warrants to the placement agent in connection  with the financing.  The
         terms of the warrants are  described  in note 9(e).  The proceeds  were
         allocated  to the common  shares and warrants  based on their  relative
         fair values.  The fair value of the warrants  was  estimated  using the
         Black-Scholes option pricing model using the following assumptions:

<TABLE>
<CAPTION>
         ----------------------------------------------------------------------------------
                                                  Five year       Six month         Broker
                                                   warrants        warrants       warrants
         ----------------------------------------------------------------------------------
<S>                                               <C>             <C>             <C>
         Dividend yield                                   -               -              -
         Risk-free interest rates                      3.90            4.19           3.94
         Volatility                                      90             115            115
         Expected life of warrants                  5 years        6 months        3 years

         ==================================================================================
</TABLE>

         On February 2, 2005,  the Company  issued 0.9 million common shares for
         gross  proceeds of $52.5 million (U.S.  $42.3 million) (net proceeds of
         $48.8 million after costs of issuance of $3.7 million).

         On March 4, 2004,  the  Company  issued 1.0 million  common  shares for
         gross  proceeds of $76.9 million (U.S.  $57.7 million) (net proceeds of
         $70.8 million after costs of issuance of $6.1 million).

                                       30
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

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

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

9.   SHAREHOLDERS' EQUITY (CONTINUED):

     (c) Stock-based compensation plans:

         In May 2003, the Company  adopted two new stock option plans (the "2003
         Employee Plan" and the "2003 Director Plan") to eventually  replace the
         Company's  existing stock option plan (the "Existing Plan"). All grants
         of  options  after May 2003 are made from the new plans and no  further
         option  grants  will be made  under  the  Existing  Plan.  The  Company
         reserved for issuance  200,000  common  shares under the 2003  Employee
         Plan and 25,000 common  shares under the 2003  Director  Plan. In March
         2005, the Company's shareholders approved increasing the maximum number
         of common  shares  under the 2003  Employee  Plan to 500,000.  In March
         2006, the Company's  shareholders also approved  increasing the maximum
         number of common shares under the 2003 Employee Plan to 800,000 and the
         2003 Director Plan to 50,000.  Each option granted allows the holder to
         purchase  one  common  share at an  exercise  price  not less  than the
         closing  price of the  Company's  common  shares on The  Toronto  Stock
         Exchange  on the last  trading  day prior to the  grant of the  option.
         Options  granted under these plans have a maximum term of ten years and
         generally vest over a period of up to three years.

         As at November  30, 2006,  there were 0.2 million  (2005 - 0.3 million;
         2004 - 0.1 million) options available for grant.

<TABLE>
<CAPTION>
         ---------------------------------------------------------------------------------------------------
                                              2006                    2005                     2004
         ---------------------------------------------------------------------------------------------------
                                                   Weighted                Weighted                 Weighted
                                                    average                 average                  average
                                     Number of     exercise   Number of    exercise   Number of     exercise
                                       options        price     options       price     options        price
         ---------------------------------------------------------------------------------------------------
<S>                                        <C>    <C>               <C>   <C>               <C>    <C>
         Outstanding, beginning
            of year                        431    $   56.00         352   $   60.10         325    $   50.00
         Issued                            502        13.80         130       46.50          84        76.60
         Exercised                           -            -         (15)      43.20         (53)       24.30
         Expired or cancelled             (121)       53.00         (36)      67.30          (4)       61.20

         ---------------------------------------------------------------------------------------------------
          Outstanding, end of year         812        30.30         431       56.00         352        60.10
         ---------------------------------------------------------------------------------------------------

         Exercisable, end of year          313                      259                     183

         ===================================================================================================
</TABLE>

         The table above includes  24,497 (2005 - 29,363;  2004 - 7,477) options
         granted to non-employees  for a fair value of $0.2 million (2005 - $0.8
         million; 2004 - $0.4 million).


                                       31
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

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

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

9.   SHAREHOLDERS' EQUITY (CONTINUED):

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

         ---------------------------------------------------------------------------------------------------
                                                OPTIONS OUTSTANDING                  OPTIONS EXERCISABLE
                                    ------------------------------------------   ---------------------------
                                                                      Weighted
                                                      Weighted         average                      Weighted
                                                       average       remaining                       average
         Exercise                        Number       exercise     contractual         Number       exercise
         price                      outstanding          price    life (years)    exercisable          price
         ---------------------------------------------------------------------------------------------------
<S>                                         <C>       <C>                  <C>            <C>        <C>
         $  4.90 - $  6.80                  173       $   5.70             9.7              -        $     -
         $  6.81 - $ 26.80                  286          18.10             9.1             21          25.90
         $ 26.81 - $ 55.40                  197          39.90             3.2            158          37.90
         $ 55.41 - $ 92.10                  156          68.00             3.2            134          67.50

         ---------------------------------------------------------------------------------------------------
                                            812          30.30             6.7            313          49.80
         ===================================================================================================
</TABLE>

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

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

         ===================================================================================================
</TABLE>

         The resulting  weighted  average fair value per share at the grant date
         of the employee and  non-employee  stock-based  compensation  issued in
         fiscal 2006 is $9.60 (2005 - $29.60; 2004 - $47.70).


                                       32
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

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

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

9.   SHAREHOLDERS' EQUITY (CONTINUED):

     (d) Deferred share units:

         Effective January 1, 2004, the Company established a plan to grant DSUs
         to its non-management directors and reserved a maximum of 25,000 common
         shares for issuance under the plan.  Under the plan, the directors will
         defer any cash remuneration that they would have otherwise received for
         services  rendered  and in lieu thereof will receive the number of DSUs
         which is equivalent in value to the remuneration  deferred.  A DSU is a
         unit  equivalent  in value to one common share of the Company  based on
         the trading price of the  Company's  common shares on The Toronto Stock
         Exchange.  Upon termination of board service, the director will be able
         to redeem DSUs based upon the then market price of the Company's common
         shares on the date of  redemption  in exchange for any  combination  of
         cash or common shares as the Company may determine.

         The Company recorded $0.3 million (2005 - $0.3 million) in compensation
         expense  relating  to 14,476  (2005 - 5,202)  DSUs  granted in 2006 for
         services  rendered  during the year.  As at November 30,  2006,  19,909
         (2005 - 7,829)  DSUs are  issued and  outstanding  with a value of $0.1
         million  (2005 - $0.2  million)  based  upon  the  market  value of the
         Company's  common shares at November 30, 2006. In addition,  2,396 DSUs
         were exercised in 2006.


                                       33
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

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

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

9.   SHAREHOLDERS' EQUITY (CONTINUED):

     (e) Warrants:

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

         ----------------------------------------------------------------------
                                                      2006       2005      2004
         ----------------------------------------------------------------------

         Outstanding, beginning of year                431         98        98
         Issued                                      2,594        333         -
         Exercised                                       -          -         -
         Expired                                       (98)         -         -

         ----------------------------------------------------------------------
         Outstanding, end of year                    2,927        431        98
         ----------------------------------------------------------------------

         Exercisable, end of year                    2,927        431        98

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

         The following table provides  information on warrants outstanding as of
         November 30, 2006:

         ----------------------------------------------------------------------
         Exercise                Number                         Shares issuable
         price              outstanding                Expiry     upon exercise
         ----------------------------------------------------------------------

         U.S. $5.30                 432          May 14, 2007               432
         U.S. $6.30                 256     November 14, 2009               256
         U.S. $19.90                333       October 7, 2010               502
         U.S. $20.60                 39     February 28, 2011                59
         U.S. $19.90                 39        March 31, 2011                59
         U.S. $19.90                 39        April 30, 2011                59
         U.S. $19.90                 61          May 31, 2011                91
         U.S. $6.30               1,728     November 14, 2011             1,728

         ----------------------------------------------------------------------
                                  2,927                                   3,186
         ======================================================================


                                       34
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

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

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

10.  LOSS PER SHARE:

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

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

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

         Weighted average number of
           common shares outstanding:
             Basic and diluted                               9,408               7,987                6,960

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

         Loss per common share:
             Basic and diluted                       $      (7.05)        $     (11.65)        $     (10.71)

         ===================================================================================================
</TABLE>

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


11.  CONSOLIDATED STATEMENTS OF CASH FLOWS:

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

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

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

                                       35
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

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

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

11.  CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED):

     (b) Supplemental disclosure of non-cash transactions:

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

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

         ===================================================================================================
</TABLE>

     (c) Supplemental cash flow information:

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

         ===================================================================================================
</TABLE>

                                       36
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

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

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

12.  FAIR VALUES OF FINANCIAL INSTRUMENTS:

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

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

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

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

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

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


                                       37
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

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

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

13.  INCOME TAXES:

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

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

     --------------------------------------------------------------------------------------------------------
                                                      $           -        $          -         $          -
     ========================================================================================================
</TABLE>

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

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

     Valuation allowance                                                        (50,289)             (39,307)

     --------------------------------------------------------------------------------------------------------
     Net future tax asset                                                   $         -          $         -
     ========================================================================================================
</TABLE>

                                       38
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

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

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

13.  INCOME TAXES (CONTINUED):

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

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

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

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

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

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

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

     ---------------------------------------------------------------------------
                                                                    $    14,528
     ===========================================================================

                                       39
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

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

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

14.  COMMITMENTS AND CONTINGENCIES:

     (a) Royalty commitments:

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

     (b) Commitments:

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

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

         2007                                                        $      645
         2008                                                               568
         2009                                                               346

         -----------------------------------------------------------------------
                                                                     $    1,559
         =======================================================================

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


15.  SEGMENT INFORMATION:

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


                                       40
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

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

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

16.  RESEARCH AND DEVELOPMENT PROJECTS:

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

     (a) Platform Technology:

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

     (b) Celacade Technology - Cardiovascular disease:

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

     (c) Celacade Technology - Autoimmune disease:

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


                                       41
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

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

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

16.  RESEARCH AND DEVELOPMENT PROJECTS (CONTINUED):

     (d) VP025 - Neuro-inflammatory disease:

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

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

<TABLE>
<CAPTION>
     -------------------------------------------------------------------------------------------------------
                                                                                                 Period from
                                                                                                 December 1,
                                                                                                     1987 to
                                                        Years ended November 30,                November 30,
                                                2006               2005               2004              2006
     -------------------------------------------------------------------------------------------------------
<S>                                      <C>                <C>                <C>              <C>
     Research and development costs expensed:
         Platform technology             $     2,472        $     1,947        $     2,881      $     41,101
         Cardiovascular program               25,813             64,444             45,162           168,177
         Autoimmune program                        -                  -                  -             4,565
         VP025                                 4,447              5,030              3,751            14,838

     -------------------------------------------------------------------------------------------------------
     Total research and
       development costs
       expensed                          $    32,732        $    71,421        $    51,794      $    228,681
     -------------------------------------------------------------------------------------------------------

     Acquired technology:
         Celacade platform               $         -        $         -        $         -      $      4,081

     =======================================================================================================
</TABLE>

                                       42
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

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

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

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

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

<TABLE>
<CAPTION>
     (a) Consolidated statements of operations and deficit:

         ---------------------------------------------------------------------------------------------------
                                                                                                 Period from
                                                                                                 December 1,
                                                                                                     1987 to
                                                         Years ended November 30,               November 30,
                                                2006               2005               2004              2006
         ---------------------------------------------------------------------------------------------------
<S>                                      <C>                <C>                <C>             <C>
         Loss per Canadian GAAP          $   (66,360)       $   (93,048)       $   (74,550)    $    (349,569)
         Acquired technology costs (b)(i)          -                  -                  -            (4,081)
         Technology amortization (b)(i)          253                253                254             3,828
         Non-employee stock options
            (b)(ii)                              (58)              (101)              (137)           (3,476)
         Employee stock options (b)(iii)           -              2,879                  -             6,885
         Performance-based options
            (b)(iii)                               -                 31                164              (278)
         Warrants issued to acquire
            technology (b)(iv)                     -                  -                  -               (61)
         Accretion of senior convertible
            note payable (b)(v)               (2,373)              (281)                 -            (2,654)
         Amortization of deferred
            financing costs (b)(v)              (963)              (145)                 -            (1,108)
         Loss on debt extinguishment
            (b)(v)                            (1,131)                 -                  -            (1,131)
         Fair market value adjustment
            on embedded derivatives
            and warrants (b)(v)                9,711              3,032                  -            12,743

         ---------------------------------------------------------------------------------------------------
         Loss and comprehensive loss
            per United States GAAP       $   (60,921)       $   (87,380)       $   (74,269)    $    (338,902)
         ===================================================================================================

         Weighted average number
            of common shares under
            United States GAAP:
              Basic and diluted                9,408              7,987              6,960                 -

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

         Basic and diluted loss
            per common share under
            United States GAAP           $     (6.48)       $    (10.94)       $    (10.67)                -

         ===================================================================================================
</TABLE>

                                       43
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

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

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

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

<TABLE>
<CAPTION>
     (b) Consolidated balance sheets:

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

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

                                       44
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

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

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

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

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

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

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

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

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


                                       45
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

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

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

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

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

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

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

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

         (iv)   In 1996,  10,000  warrants were issued as part of the technology
                acquisition  consideration.  United States GAAP  requires  these
                acquired   technology   costs  to  be   recorded  in  an  amount
                approximating  the fair value of the warrants issued,  estimated
                at their  grant  date  using the  Black-Scholes  option  pricing
                model, and expensed as research and development expenses.

                                       46
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

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

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

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

         (v)  Senior convertible notes payable and warrants:

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

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

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


                                       47
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

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

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

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

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

              Under United States GAAP,  the twelve-day  weighted  average share
              price adjustment  represents a derivative that will be measured at
              fair  value  and  changes  in  fair  value  are  recorded  in  the
              consolidated  statement of operations as extinguishment  loss. The
              settlement  of  the  twelve-day   weighted   average  share  price
              adjustment  is accounted  for as either a settlement of additional
              debt, if an asset, or as the proceeds to issue  additional  shares
              if a liability.  Under Canadian  GAAP,  there is no recognition of
              the derivative.  Any subsequent adjustment to the number of shares
              issued  or  debt  exchanged  as a  consequence  of the  twelve-day
              weighted  average share price  adjustment will be accounted for as
              an adjustment to share capital.

         (vi) Warrants:

              Under Canadian GAAP, the common shares and the warrants  issued on
              November  14,  2006 are  presented  separately  as  components  of
              shareholders'  equity.  The Company  allocated the gross  proceeds
              received on a relative  fair value basis between the common shares
              and the warrants.  The related  issuance costs were allocated on a
              pro rata basis to the common shares and the warrants.


                                       48
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

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

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

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

              Under  United  States  GAAP,  the Company  allocated  the residual
              amount of the gross  proceeds  received to the common shares after
              the separate fair value  measurement of the warrants.  The Company
              allocated  $17.8  million to the common shares and $5.3 million to
              the warrants. In addition,  under United States GAAP, the warrants
              are presented as a liability because they do not meet the criteria
              of EITF 00-19 for equity classification. Subsequent changes in the
              fair  value  of the  warrants  are  recorded  in the  consolidated
              statements of operations  and deficit.  Under  Canadian  GAAP, the
              related  issuance  costs were allocated on a pro rata basis to the
              common shares and the warrants.  However, under United States GAAP
              the amount  allocated  to the warrants is  recognized  as deferred
              financing costs and is amortized to the consolidated statements of
              operations and deficit over the term of the liability.

     (c) Consolidated statements of cash flows:

         Cash from operations  under United States GAAP includes the adjustments
         to loss for the year outlined in note 17(b).  Cash used in  investments
         under  United  States  GAAP  excludes  amounts  representing   acquired
         technology (note 17(b)(i)).

     (d) Income taxes:

         Under  Canadian  GAAP,  investment  tax credits and other  research and
         development  credits are deducted from research and development expense
         for items of a current nature, and deducted from property and equipment
         for items of a capital  nature.  Under United  States  GAAP,  these tax
         credits  would be  reclassified  as a reduction  of income tax expense.
         Total research and development tax credits netted against  research and
         development  expenses on the consolidated  statements of operations and
         deficit are set out in note 2(i).

     (e) Pro forma information:

         On December 1, 2005, the Company  adopted the fair  value-based  method
         for   measurement   and  cost   recognition  of  employee   share-based
         compensation  arrangements under the provisions of SFAS No. 123R, using
         the modified prospective application transitional approach.


                                       49
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

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

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

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

         Under the modified prospective  application  transitional approach, the
         fair value of the cost of  share-based  compensation  is recognized for
         awards granted,  modified,  repurchased or cancelled  subsequent to the
         adoption of SFAS No. 123R.  In addition,  share-based  compensation  is
         recognized,  subsequent  to the  adoption  of SFAS  No.  123R,  for the
         remaining portion of the vesting period, if any, for outstanding awards
         granted  prior  to the date of  adoption.  Accordingly,  on a  modified
         prospective  basis,  there  is no  difference  in  the  recognition  of
         stock-based  compensation  awards under  Section 3870 and SFAS No. 123R
         for employee and performance-based options. Prior periods have not been
         adjusted and the Company  continues to provide pro form  disclosures as
         if it had  accounted for employee  share-based  payments in all periods
         presented under the fair value  provisions of SFAS No. 123,  Accounting
         for Stock-based Compensation, which is presented below:

<TABLE>
<CAPTION>
         ------------------------------------------------------------------------------
                                                                   2005           2004
         ------------------------------------------------------------------------------
<S>                                                          <C>            <C>
         Loss for the year - United States GAAP              $  (87,380)    $  (74,269)
         Compensation cost - employees (17(b)(iii))              (2,879)        (3,391)
         Compensation expense (17(b)(iii))                         (192)          (164)

         ------------------------------------------------------------------------------
         Pro forma loss for the year -
            United States GAAP                               $  (90,451)    $  (77,824)
         ------------------------------------------------------------------------------

         Pro forma basic and diluted loss
            per share - United States GAAP                   $   (11.32)    $   (11.18)

         ==============================================================================
</TABLE>


                                       50
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

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

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

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

<TABLE>
<CAPTION>
     (f) Consolidated  statement  of  shareholders'  equity in  accordance  with
         United States GAAP:

      ---------------------------------------------------------------------------------------------------------------------------
                                                                                                                      Period from
                                                        Common                                                        December 1,
                                                       shares'                                                            1987 to
                                          Number       average      Share                    Contributed             November 30,
                                       of shares   share price    capital  Options  Warrants     surplus     Deficit         2006
      ---------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>           <C>    <C>        <C>      <C>       <C>         <C>         <C>
      Balance, November 30, 2003           6,202                $ 173,441  $ 4,397  $  1,456  $        -  $ (117,842) $    61,452
      Shares issued for cash                 978         78.70     76,913        -         -           -           -       76,913
      Share issue costs                        -             -     (6,128)       -         -           -           -       (6,128)
      Options exercised                       53         24.30      1,300        -         -           -           -        1,300
      Fair value of stock options issued
         to consultants                        -                        -      592         -           -           -          592
      Performance-based options                -             -          -     (164)        -           -           -         (164)
      Loss and comprehensive loss              -                        -        -         -           -     (74,269)     (74,269)
      ---------------------------------------------------------------------------------------------------------------------------

      Balance, November 30, 2004           7,233                  245,526    4,825     1,456           -    (192,111)      59,696
      Shares issued for cash                 901         58.30     52,502        -         -           -           -       52,502
      Share issue costs                        -             -     (3,720)       -         -           -           -       (3,720)
      Options exercised                       15         43.20        627        -         -           -           -          627
      Fair value of stock options granted      -             -          -      837         -           -           -          837
      Fair value of vested options/
         warrants forfeited and expired        -             -          -     (223)        -         223           -            -
      Shares issued in advance for
         instalment payment on senior
         convertible notes payable            77         27.40      2,034        -         -           -           -        2,034
      Instalment payment in advance            -             -     (2,032)       -         -           -           -       (2,032)
      Performance-based options                -             -          -      (31)        -           -           -          (31)
      Loss and comprehensive loss              -             -          -        -         -           -     (87,380)     (87,380)
      ---------------------------------------------------------------------------------------------------------------------------

      Balance, November 30, 2005           8,226                  294,937    5,408     1,456         223    (279,491)      22,533
</TABLE>

                                       51
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

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

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

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

<TABLE>
<CAPTION>
      ---------------------------------------------------------------------------------------------------------------------------
                                                                                                                      Period from
                                                        Common                                                        December 1,
                                                       shares'                                                            1987 to
                                          Number       average      Share                    Contributed             November 30,
                                       of shares   share price    capital  Options  Warrants     surplus     Deficit         2006
      ---------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>           <C>    <C>        <C>      <C>       <C>         <C>         <C>
      Balance, November 30, 2005           8,226                  294,937    5,408     1,456         223    (279,491)      22,533
      Shares issued for cash               4,319          4.10     17,779        -         -           -           -       17,779
      Share issued for services                2         15.00         36        -         -           -           -           36
      Share issue costs                        -             -     (2,329)       -         -           -           -       (2,329)
      Shares and warrants issued for
         instalment payments and
         acceleration payments on senior
         convertible notes payable         3,108         10.30     31,913        -         -           -           -       31,913
      Holders' conversion of notes            10         32.20        322        -         -           -           -          322
      Instalment payment in advance            -             -     (2,090)       -         -           -           -       (2,090)
      Instalment payment in advance
         applied                               -             -      2,032        -         -           -           -        2,032
      Fair value of stock options granted      -             -          -    3,141         -           -           -        3,141
      Value of embedded derivatives
         on holders conversion                 -             -      1,306        -         -           -           -        1,306
      Fair value of vested options/
         warrants forfeited and expired        -             -          -     (836)   (1,456)      2,292           -            -
      Loss for the period                      -             -          -        -         -           -     (60,921)     (60,921)

      ---------------------------------------------------------------------------------------------------------------------------
      Balance, November 30, 2006          15,665               $  343,906 $  7,713  $      -   $   2,515 $  (340,412)   $  13,722
      ===========================================================================================================================
</TABLE>

                                       52
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

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

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

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

     (g) Recent accounting pronouncements issued and adopted:

         Considering the effects of prior year  misstatements  when  quantifying
         misstatements in current year financial statements:

         Issued in September 2006,  Staff Accounting  Bulletin 108,  Considering
         the Effects of Prior Year Misstatements when Quantifying  Misstatements
         in Current Year  Financial  Statements  ("SAB 108"),  addresses how the
         effects of prior year  uncorrected  misstatements  should be considered
         when quantifying  misstatements  in current year financial  statements.
         SAB 108  requires  companies to quantify  misstatements  using both the
         balance  sheet  ("iron  curtain")  and  income  statement  ("rollover")
         approaches and to evaluate  whether either approach results in an error
         that is  material  in light of relevant  quantitative  and  qualitative
         factors.

         The guidance is effective  for the Company for the year ended  December
         31, 2005. A material error identified upon application of this guidance
         may be corrected  through a one-time  cumulative-effect  adjustment  to
         beginning of year retained earnings, provided that the misstatement was
         determined to be immaterial in the past based on the application of the
         company's previous method for quantifying  misstatements.  The adoption
         of this  standard  did not have an  impact on the  Company's  financial
         statements and results of operations.


                                       53
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

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

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

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

     (h) Recent accounting pronouncements issued and not yet adopted:

         (i)  Accounting changes and error corrections:

              In May 2005, the FASB issued SFAS No. 154,  Accounting Changes and
              Error  Corrections  ("SFAS No. 154"),  which  replaces  Accounting
              Principles Board Opinion No. 20, Accounting Changes,  and SFAS No.
              3, Reporting  Accounting Changes in Interim Financial  Statements.
              SFAS  No.  154  provides  guidance  on  the  accounting  for,  and
              reporting  of,   changes  in  accounting   principles   and  error
              corrections.  SFAS No. 154 requires  retrospective  application to
              prior  period's  financial  statements  of  voluntary  changes  in
              accounting  principles  and  changes  required  by new  accounting
              standards when the standard does not include  specific  transition
              provisions,   unless  it  is   impracticable  to  do  so.  Certain
              disclosures are also required for  restatements  due to correction
              of an error. SFAS No. 154 is effective for accounting  changes and
              corrections  of  errors  made  in  fiscal  years  beginning  after
              December 15, 2005,  and will be adopted by the Company on December
              1, 2006,  in fiscal 2007,  for the year ending  November 30, 2007.
              The  impact  that the  adoption  of SFAS No.  154 will have on the
              Company's  results of  operations  and  financial  condition  will
              depend on the nature of future  accounting  changes and the nature
              of   transitional   guidance   provided   in   future   accounting
              pronouncements.


                                       54
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

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

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

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

         (ii)   Accounting for certain hybrid financial instruments:

                In February 2006,  the FASB issued SFAS No. 155,  Accounting for
                Certain  Hybrid  Financial  Instruments  ("SFAS  No.  155") - an
                amendment  of SFAS  No.  133 and  SFAS No.  140.  SFAS No.  155,
                permits  fair  value  remeasurement  for  any  hybrid  financial
                instrument  that contains an embedded  derivative that otherwise
                would require bifurcation,  clarifies which interest-only strips
                and principal-only strips are not subject to the requirements of
                SFAS No. 133,  establishes a requirement to evaluate interest in
                securitized  financial  assets to  identify  interests  that are
                freestanding   derivatives   or  that   are   hybrid   financial
                instruments  that  contain  an  embedded  derivative   requiring
                bifurcation, clarifies that concentrations of credit risk in the
                form of subordination are not embedded  derivatives,  and amends
                SFAS No. 140 to  eliminate  the  prohibition  on the  qualifying
                special-purpose  entity  from  holding  a  derivative  financial
                instrument  that  pertains to a beneficial  interest  other than
                another  derivative  financial  instrument.   SFAS  No.  155  is
                effective for the Company for all financial instruments acquired
                or issued after  December 1, 2006.  The adoption of SFAS No. 155
                is not  expected  to have a  material  impact  on the  Company's
                consolidated financial position and results of operations.

         (iii)  Fair value measurements:

                In September  2006,  the FASB  approved SFAS No. 157, Fair Value
                Measurements,  which defines fair value, establishes a framework
                for measuring fair value in GAAP and enhances  disclosures about
                fair  value  measurements.  This  statement  applies  when other
                accounting  pronouncements  require fair value measurements.  It
                does not require new fair value measurements.  This statement is
                effective  for  financial  statements  issued for  fiscal  years
                beginning  after  November 15, 2007 and interim  periods  within
                those years,  specifically December 1, 2007 for the Company. The
                Company does not expect the adoption of this  standard to have a
                material  impact  on its  consolidated  financial  position  and
                results of operations.


                                       55
<PAGE>

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

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

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

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

         (iv)   Accounting for uncertainty in income taxes:

                In June 2006,  the FASB  approved  FASB  Interpretation  No. 48,
                Accounting for  Uncertainty in Income taxes - an  interpretation
                of FASB  Statement  No. 109 ("FIN  48").  FIN 48  clarifies  the
                criteria for  recognizing  tax benefits under FASB Statement No.
                109,  Accounting for Income Taxes.  It also requires  additional
                financial  statement  disclosures about uncertain tax positions.
                FIN 48 is effective for fiscal years  beginning  after  December
                15, 2006.  The Company is evaluating the impact of this standard
                on  its   consolidated   financial   position   and  results  of
                operations.


18.  SUBSEQUENT EVENT:

     On April 3, 2007, the Company received  shareholder approval to consolidate
     its   issued   and   outstanding   common   shares  on  the  basis  of  one
     post-consolidated common share for every 10 pre-consolidated common shares.
     Approval  of the  special  resolution  by  shareholders  gave the  Board of
     Directors  authority to implement  the  consolidation  at any time prior to
     April 3, 2008. The  consolidation  was implemented on April 17, 2007 upon a
     determination by the Board of Directors that the  consolidation  was in the
     best  interests of the Company and its  shareholders,  taking into account,
     among  other  things,   the  NASDAQ  Capital  Market  Minimum  Share  Price
     Requirements. The number of common shares issued and outstanding, the basic
     and diluted  loss per common share and the  information  in notes 8, 9, 10,
     17(a),  17(b)(iv),  17(e) and 17(f) has been  amended to give effect to the
     share consolidation.


                                       56
<PAGE>

ITEM 19. EXHIBITS

                                  EXHIBIT INDEX


    NUMBER                            EXHIBIT
------------  -----------------------------------------------------------------
       1      ARTICLES OF INCORPORATION AND BY-LAWS

      1.1     Articles  of  Incorporation  of Vasogen  and  Amendments  thereto
              (incorporated by reference to Exhibit 1 of Vasogen's Registration
              Statement  on  Form  20-F  filed  on  July  2,  1997,   File  No.
              000-29350).

      1.2     By-laws of Vasogen  (incorporated  by  reference  to Exhibit 2 of
              Vasogen's  Registration  Statement  on Form 20-F filed on July 2,
              1997, File No. 000-29350).

       4      MATERIAL CONTRACTS AND AGREEMENTS

      4.1     Securities  Purchase  Agreement,  dated  October 7,  2005,  among
              Vasogen,  Vasogen Ireland Limited,  Vasogen, Corp. and Kings Road
              Investments  Ltd.  (incorporated  by reference to Exhibit 99.1 to
              Form 6-K filed on November 21, 2005).

      4.2     Securities  Purchase  Agreement,  dated  October 7,  2005,  among
              Vasogen, Vasogen Ireland Limited,  Vasogen, Corp. and Amatis Ltd.
              (incorporated  by  reference to Exhibit 99.1 to Form 6-K filed on
              November 21, 2005).

      4.3     Securities  Purchase  Agreement,  dated  October 7,  2005,  among
              Vasogen,  Vasogen Ireland Limited,  Vasogen, Corp. and Castlerigg
              Master  Investments  Ltd.  (incorporated  by reference to Exhibit
              99.1 to Form 6-K filed on November 21, 2005).

      4.4     Securities  Purchase  Agreement,  dated  October 7,  2005,  among
              Vasogen,  Vasogen  Ireland  Limited,  Vasogen,  Corp. and Capital
              Ventures International (incorporated by reference to Exhibit 99.1
              to Form 6-K filed on November 21, 2005).

      4.5     Securities  Purchase  Agreement,  dated  October 7,  2005,  among
              Vasogen,  Vasogen Ireland Limited,  Vasogen, Corp. and Smithfield
              Fiduciary LLC  (incorporated by reference to Exhibit 99.1 to Form
              6-K filed on November 21, 2005).

      4.6     Senior  Convertible  Note,  issued by Vasogen  Ireland Limited to
              Kings Road Investments Ltd., dated October 7, 2005, and Amendment
              No. 1 thereto  (incorporated by reference to Exhibit 99.1 to Form
              6-K filed on November 21, 2005).

      4.7     Senior  Convertible  Note,  issued by Vasogen  Ireland Limited to
              Amatis Ltd.,  dated October 7, 2005,  and Amendment No. 1 thereto
              (incorporated  by  reference to Exhibit 99.1 to Form 6-K filed on
              November 21, 2005).

      4.8     Senior  Convertible  Note,  issued by Vasogen  Ireland Limited to
              Castlerigg  Master  Investments  Ltd., dated October 7, 2005, and
              Amendment  No. 1 thereto  (incorporated  by  reference to Exhibit
              99.1 to Form 6-K filed on November 21, 2005).

      4.9     Senior  Convertible  Note,  issued by Vasogen  Ireland Limited to
              Capital  Ventures  International,  dated  October  7,  2005,  and
              Amendment  No. 1 thereto  (incorporated  by  reference to Exhibit
              99.1 to Form 6-K filed on November 21, 2005).

     4.10     Senior  Convertible  Note,  issued by Vasogen  Ireland Limited to
              Smithfield  Fiduciary  LLC,  dated October 7, 2005, and Amendment
              No. 1 thereto  (incorporated by reference to Exhibit 99.1 to Form
              6-K filed on November 21, 2005).

     4.11     Warrant,  issued by Vasogen to Kings Road Investments Ltd., dated
              October 7, 2005,  and  Amendment No. 1 thereto  (incorporated  by
              reference  to  Exhibit  99.1 to Form 6-K  filed on  November  21,
              2005).

     4.12     Warrant, issued by Vasogen to Amatis Ltd., dated October 7, 2005,
              and Amendment No. 1 thereto (incorporated by reference to Exhibit
              99.1 to Form 6-K filed on November 21, 2005).

     4.13     Warrant, issued by Vasogen to Castlerigg Master Investments Ltd.,
              dated October 7, 2005, and Amendment No. 1 thereto  (incorporated
              by  reference  to Exhibit  99.1 to Form 6-K filed on November 21,
              2005).

     4.14     Warrant,  issued by Vasogen to  Capital  Ventures  International,
              dated October 7, 2005, and Amendment No. 1 thereto  (incorporated
              by  reference  to Exhibit  99.1 to Form 6-K filed on November 21,
              2005).

     4.15     Warrant,  issued by Vasogen to Smithfield  Fiduciary  LLC,  dated
              October 7, 2005,  and  Amendment No. 1 thereto  (incorporated  by
              reference  to  Exhibit  99.1 to Form 6-K  filed on  November  21,
              2005).

     4.16     Registration  Rights  Agreement,  dated  October 7,  2005,  among
              Vasogen,  Kings Road Investments  Ltd.,  Amatis Ltd.,  Castlerigg
              Master  Investments  Ltd.,  Capital  Ventures  International  and
              Smithfield Fiduciary LLC, and Amendments thereto (incorporated by
              reference  to  Exhibit  99.1 to Form 6-K  filed on  November  21,
              2005).

<PAGE>

     4.17     Guaranty,   made  by  Vasogen  for  the  benefit  of  Kings  Road
              Investments   Ltd.,  dated  October  7,  2005   (incorporated  by
              reference  to  Exhibit  99.1 to Form 6-K  filed on  November  21,
              2005).

     4.18     Guaranty,  made by Vasogen for the benefit of Amatis Ltd.,  dated
              October 7, 2005  (incorporated  by  reference  to Exhibit 99.1 to
              Form 6-K filed on November 21, 2005).

     4.19     Guaranty,  made by Vasogen for the benefit of  Castlerigg  Master
              Investments   Ltd.,  dated  October  7,  2005   (incorporated  by
              reference  to  Exhibit  99.1 to Form 6-K  filed on  November  21,
              2005).

     4.20     Guaranty,  made by Vasogen  for the  benefit of Capital  Ventures
              International,  dated October 7, 2005  (incorporated by reference
              to Exhibit 99.1 to Form 6-K filed on November 21, 2005).

     4.21     Guaranty, made by Vasogen for the benefit of Smithfield Fiduciary
              LLC, dated October 7, 2005  (incorporated by reference to Exhibit
              99.1 to Form 6-K filed on November 21, 2005).

     4.22     Engagement Agreement, dated November 3, 2006, between Vasogen and
              Rodman & Renshaw LLC  (incorporated  by reference to Exhibit 99.1
              to Form 6-K filed on November 16, 2006).

      8.1     Subsidiaries  of Vasogen (list included in Item 4C of this annual
              report).

     11.1     Employee  Code of Conduct  (incorporated  by reference to Exhibit
              99.1 to Form 6-K filed on July 5, 2006).

     11.2     Board of Directors' Code of Conduct (incorporated by reference to
              Exhibit 99.1 to Form 6-K filed on January 26, 2007).

     12.1     Certification  of the Chief  Executive  Officer  pursuant to Rule
              13a-14(a) of the Securities Exchange Act of 1934.

     12.2     Certification  of the Chief  Financial  Officer  pursuant to Rule
              13a-14(a) of the Securities Exchange Act of 1934.

     13.1     Certification of the Chief Executive  Officer pursuant to Section
              906 of the Sarbanes-Oxley Act of 2002.

     13.2     Certification of the Chief Financial  Officer pursuant to Section
              906 of the Sarbanes-Oxley Act of 2002.

      15      ADDITIONAL EXHIBITS

     15.1     Consent of KPMG, LLP, independent chartered accountants


<PAGE>

SIGNATURES

The  registrant  hereby  certifies  that it meets all of the  requirements  for
filing  on  Form  20-F/A  and  that  it has  duly  caused  and  authorized  the
undersigned to sign this annual report on its behalf.



                                    VASOGEN INC.


                                    /s/ Jacqueline Le Saux
                                    ------------------------------------------
                                    Name:   Jacqueline Le Saux
                                    Title:  Vice-President, Corporate &
                                            Legal Affairs

                                    Date:   May 17, 2007.