UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
  FORM
20-F
  o
              REGISTRATION
      STATEMENT PURSUANT TO SECTION 12(b) OR (g)
                OF
      THE SECURITIES EXCHANGE ACT OF 1934; orx
              ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d)
                OF
      THE SECURITIES EXCHANGE ACT OF 1934
                For
      the fiscal year ended November 30, 2007; oro
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d)
                OF
      THE SECURITIES EXCHANGE ACT OF 1934
                For
      the transition period ________ to ________; oro
              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
 
 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:
  Title
      of each class
              Name
      of each exchange
                  on
      which registeredCommon
      shares, no par value
              NASDAQTSX
 
 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
  
 As
of November 30, 2007, the registrant had 22,391,386common 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 o
              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 o
              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 o
  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 o
              Accelerated filer
      x
              Non-accelerated
      filer o
 
 Indicate
by check mark which financial statement item the registrant has elected to
follow:
  Item 17 o
              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 o
              No x
    
 TABLE
OF CONTENTS
  PagePART
      I
                
                
                
                1Item
      1.
                
                Identity
      of Directors, Senior Management and Advisors
                1Item
      2.
                
                Offer
      Statistics and Expected Timetable
                1Item
      3.
                
                Key
      Information
                1A.
                Selected
      Financial Data
                1B.
                Capitalization
      and Indebtedness
                4C.
                Reasons
      for the Offer and Use of Proceeds
                4D.
                Risk
      Factors
                4Item
      4.
                
                Information
      on the Company
                16A.
                History
      and Development of the Company
                16B.
                Business
      Overview
                17C.
                Organizational
      Structure
                23D.
                Property,
      Plant and Equipment
                23Item
      5.
                
                Operating
      and Financial Review and Prospects
                23A.
                Operating
      Results
                23B.
                Liquidity
      and Capital Resources
                29C.
                Research
      and development, patents, and licenses, etc
                31D.
                Trend
      Information
                31E.
                Off-balance
      sheet arrangements
                32F.
                Contractual
      obligations
                32G.
                Safe
      Harbor
                33Item
      6.
                
                Directors,
      Senior Management and Employees
                33A.
                Compensation
                38B.
                Board
      Practices
                41C.
                Employees
                44D.
                Share
      Ownership
                44Item
      7.
                
                Major
      Shareholders and Related Party Transactions
                47A.
                Major
      Shareholders
                47B.
                Related
      Party Transactions
                47Item
      8.
                
                Financial
      Information
                47A.
                Consolidated
      Statements and Other Financial Information
                47B.
                Significant
      changes
                47Item
      9.
                
                Offer
      and Listing
                47Item
      10.
                
                Additional
      Information
                49A.
                Share
      Capital
                49B.
                Memorandum
      and Articles of Association
                49C.
                Material
      Contracts
                54D.
                Exchange
      Controls
                55E.
                Taxation
                55F.
                Dividends
      and Paying Agents
                61G.
                Statement
      by Experts
                61H.
                Documents
      on Display
                61I.
                Subsidiary
      Information
                61Item
      11.
                
                Qualitative
      and Quantitative Disclosures about Market Risk
                61Item
      12.
                
                Description
      of Securities Other than Equity Securities
                62PART
      II
                
                
                
                62Item
      13.
                
                Defaults,
      Dividends Arrearages and Delinquencies
                62Item
      14.
                
                Material
      Modifications to the Rights of Security Holders and Use of
      Proceeds
                62Item
      15.
                
                Controls
      and Procedures
                63
   
   Item
      16A.
                Audit
      Committee Financial Expert
                64Item
      16B.
                Code
      of Ethics
                64Item
      16C.
                Principal
      Accountant Fees and Services
                64Item
      16D.
                Exemptions
      from the Listing Standards for Audit Committees
                64Item
      16E.
                Purchases
      of Equity Securities by the Issuer and Affiliated
    Purchasers
                64PART
      III
                
                
                65Item
      17.
                
                Financial
      Statements
                65Item
      18.
                
                Financial
      Statements
                65Item
      19.
                
                Exhibits
                126
 
  DISCLOSURE
REGARDING FORWARD-LOOKING INFORMATION
  Certain
statements contained in this annual report and in certain documents incorporated
by reference herein constitute “forward-looking statements” within the meaning
of the United States Private Securities Litigation Reform Act of 1995 and/or
“forward-looking information” under the Securities Act (Ontario). These
statements may include, without limitation, summary statements relating to
results of the ACCLAIM trial in patients with chronic heart failure, plans to
advance the development of  the CelacadeTM1 System
(“Celacade”), our medical device for the treatment of chronic heart failure, and
VP025, statements concerning our partnering activities and discussions with
health regulatory authorities, plans for health regulatory submissions,
strategy, future operations, future financial position, future revenues,
projected costs, prospects, plans and objectives of
management.   In some cases, you can identify forward-looking
statements by terminology such as “may”, “will”, “should”, “expects”, “plans”,
“anticipates”, “believes”, “estimated”, “predicts”, “potential”, “continue”,
“intends”, “could”, or the negative of such terms or other comparable
terminology. We have made a number of assumptions in the preparation of these
forward-looking statements, including assumptions about the nature, size, and
accessibility of the market for Celacade in the treatment of chronic heart
failure, particularly in Europe, the regulatory approval process leading to
commercialization, the availability of capital on acceptable terms to pursue the
development of Celacade, and the feasibility of additional
trials.  You should not place undue reliance on our forward-looking
statements which are subject to a multitude of risks and uncertainties that
could cause actual results, future circumstances, or events to differ materially
from those projected in the forward-looking statements. The risks include, but
are not limited to, those discussed below that could cause our actual results to
differ significantly from those contained in any forward-looking statements
and/or forward-looking information.  Additional risks and
uncertainties relating to our Company and our business can be found under “Risks
Relating to our Business” and  “Risks Relating to our Securities”
below, as well as in our later public filings. The forward-looking statements
are made as of the date hereof and we disclaim any intention and have no
obligation or responsibility, except as required by law, to update or revise any
forward-looking statements, whether as a result of new information, future
events, or otherwise.
  
  PART
I.
  Item
      1. Identity of
      Directors, Senior Management and
Advisors
  Not
Applicable.
  Item
      2. Offer
      Statistics and Expected Timetable
  Not
Applicable.
  Item
      3. Key
      Information
  A. Selected
Financial Data
  The
following selected financial data of Vasogen Inc. (“we”, “us”, “Vasogen” or the
“Company”), has been derived from the audited consolidated financial statements
of the Company as at and for each of the years in the five-year period ended
November 30, 2007 and is prepared in accordance with Canadian generally accepted
accounting principles (“Canadian GAAP”), which except as described in Note 16 to
the financial statements in Item 18, conform in all material respects with
accounting principles generally accepted in the United States (“US
GAAP”).    All dollar amounts herein are expressed in
Canadian dollars, unless otherwise indicated.
  
 1Celacade is a trade-mark owned by Vasogen Ireland Limited, a wholly-owned
subsidiary of Vasogen Inc., and is used with permission.   1
 Years
ended November 30
  (in
thousands of  Canadian dollars, except for share and per share
data)
  2007
              
              
              2006
              
              
              2005
              
              
              2004
              
              
              2003
              
              
              Period
      from December 1, 1987 to November 30, 2007Statements
      of operations, deficit and comprehensive incomeResearch
      and development
              
              
              12,039
              
              
              
              32,732
              
              
              
              71,421
              
              
              
              51,794
              
              
              
              21,730
              
              
              
              238,917General
      and administration
              
              
              14,259
              
              
              
              19,251
              
              
              
              22,126
              
              
              
              15,852
              
              
              
              10,250
              
              
              
              117,228Foreign
      exchange loss (gain)
              
              
              1,977
              
              
              
              104
              
              
              
              (719
              )
              
              
              8,288
              
              
              
              1,111
              
              
              
              10,970Accretion
      in carrying value of senior convertible notes payable
              
              
              (728
              )
              
              
              (7,824
              )
              
              
              (1,742
              )
              
              
              0
              
              
              
              0
              
              
              
              (10,294
              )Loss
      on extinguishment of senior convertible notes payable
              
              
              (1,754
              )
              
              
              (4,995
              )
              
              
              0
              
              
              
              0
              
              
              
              0
              
              
              
              (6,749
              )Investment
      income
              
              
              1,310
              
              
              
              1,971
              
              
              
              2,274
              
              
              
              1,384
              
              
              
              1,143
              
              
              
              13,325Loss
      and comprehensive loss for the period
              
              
              (28,777
              )
              
              
              (66,360
              )
              
              
              (93,048
              )
              
              
              (74,550
              )
              
              
              (31,948
              )
              
              
              (374,340
              )Basic
      and diluted loss per share
              
              
              (1.46
              )
              
              
              (7.05
              )
              
              
              (11.65
              )
              
              
              (10.70
              )
              
              
              (5.70
              )Balance
      sheetShares
      outstanding
              
              
              22,391,386
              
              
              
              15,665,134
              
              
              
              8,225,537
              
              
              
              7,233,127
              
              
              
              6,202,230Total
      assets
              
              
              28,050
              
              
              
              41,770
              
              
              
              94,811
              
              
              
              80,963
              
              
              
              68,783Share
      capital
              
              
              365,670
              
              
              
              344,217
              
              
              
              295,007
              
              
              
              245,465
              
              
              
              173,380Net
      assets
              
              
              23,356
              
              
              
              24,580
              
              
              
              32,307
              
              
              
              60,455
              
              
              
              62,465
 
 Notes:
  (1)           To
date, the Company has been in the development stage and, accordingly, has no
revenue.
  (2)
              Effective
      December 1, 2004, the Company adopted the amendment to The Canadian
      Institute of Chartered Accountants’ (“CICA”) Handbook Section 3870,
      Stock-based Compensation and Other Stock-based Payments (“Section
      3870”).  Pursuant to the transitional provisions of Section
      3870, the Company applied this change retroactively, without restatement
      of prior periods.  The impact of the Company’s adoption of this
      revised accounting standard was a charge to opening deficit of $4,006,000
      with corresponding increases of $55,000 to share capital for those stock
      options exercised prior to December 1, 2004 and $3,951,000 to stock
      options for those vested options not yet exercised at December 1,
      2004.
   2
  (3)
              Effective
      on December 1, 2006, the Company adopted the recommendations of CICA
      Handbook Section 1530, Comprehensive Income ("Section 1530"); CICA
      Handbook Section 3855, “Financial Instruments - Recognition and
      Measurement” (“Section 3855”); Section 3861, Financial Instruments -
      Disclosure and Presentation ("Section 3861"); and Section 3251,
      Equity.  These sections provide standards for recognition,
      measurement, disclosure and presentation of financial assets, financial
      liabilities and non-financial derivatives.  Section 1530
      provides standards for the reporting and presentation of comprehensive
      income, which represents the change in equity from transactions and other
      events and circumstances from non-owner sources.  Other
      comprehensive income refers to items recognized in comprehensive income
      that are excluded from net income calculated in accordance with Canadian
      GAAP.
 
 Upon
adoption of the new standards on December 1, 2006, the Company continued to
account for cash equivalents held at that date as held-to-maturity investments,
recorded at cost and accrued interest.  The Company designates all new
cash equivalents acquired subsequent to December 1, 2006 as held-for-trading
investments measured at fair value and the resulting gain or loss is recognized
in the consolidated statement of operations, deficit and comprehensive
income.  The effect of the change in accounting for cash equivalents
is not material.
 
 Accounts
payable and accrued liabilities are classified as other financial
liabilities.  The senior convertible notes payable were also accounted
for as an other financial liability and were accounted for at amortized cost
using the effective interest method, which was consistent with the Company's
accounting policy prior to the adoption of Section 3855.
 
 Section
3855 requires that the Company identify embedded derivatives that require
separation from the related host contract and measure those embedded derivatives
at fair value.  Subsequent changes in the fair value of embedded
derivatives are recognized in the consolidated statement of operations, deficit
and comprehensive income in the period the change
occurs.  Freestanding derivatives not designated as hedging items are
also measured at fair value with subsequent changes in fair value recognized in
the consolidated statement of operations, deficit and comprehensive income in
the period the change occurs.
 
 Transactions
costs that are directly attributable to the acquisition or issuance of financial
assets or liabilities are accounted for as part of the respective asset or
liability's carrying value at inception.
 
 The
Company identified and measured all embedded derivatives that required
separation and determined the fair value of those embedded derivatives at
December 1, 2006.  As a result, the Company was required to
revise the initial allocation of the proceeds received in connection with the
issuance of the senior convertible notes payable, the warrants and the equity
classified conversion option on October 7, 2005 and to remeasure any subsequent
transactions affecting these items in accordance with Section
3855.  Prior to the adoption of Section 3855, the proceeds received
were allocated on a relative fair value basis to the liability component, being
the senior convertible notes payable; and to the equity components, being the
warrants and the conversion option.  As a consequence of adopting
Section 3855, the proceeds initially allocated to the senior convertible notes
payable were further allocated to the embedded derivatives at their fair value
and the residual amount to the senior convertible notes payable.  Any
subsequent transactions affecting the carrying amount of the senior convertible
notes payable, the embedded derivatives, the warrants and the equity conversion
option were also remeasured in accordance with Section 3855.
 
 As
a result of adopting Section 3855, retrospectively without restatement, the
Company recorded an increase of $1.6 million to deficit as at December 1, 2006,
a decrease in the carrying amount of the senior convertible notes payable of
$0.1 million, the initial recognition of an embedded derivatives liability of
$0.8 million and an increase in share capital of $0.9 million at December 1,
2006.
 3
 
 (4)
              The
      following table sets forth how the above amounts would be presented under
      US GAAP for the fiscal years ended November 30, 2007, 2006, and
      2005:
  (in
thousands of Canadian dollars, except for per share data)
  Fiscal
      Years Ended November 302007
              
              
              2006
              
              
              2005Loss
      for the period
              
              $
              (18,176
              )
              
              $
              (60,921
              )
              
              $
              (87,380
              )Basic
      and diluted loss per share
              
              
              (0.92
              )
              
              
              (6.48
              )
              
              
              (10.94
              )Share
      capital
              
              
              364,867
              
              
              
              343,906
              
              
              
              294,937Shareholders’
      equity
              
              
              18,502
              
              
              
              13,722
              
              
              
              22,533
 
 
 The
following table sets forth the exchange rate for one Canadian dollar expressed
in terms of one U.S. dollar for the fiscal years 2003 through 2007 and for
August 2007 through January 2008.
  AVERAGE2003
                .70342004
                .76372005
                .82222006
                .88122007
                .9207
 
 LOW
                HIGHAugust
      2007
                0.9298
                0.9525September
      2007
                0.9466
                1.0069October
      2007
                0.9996
                1.0527November
      2007
                0.9992
                1.0905December
      2007
                0.9788
                1.0220January
      2008
                0.9686
                1.0120
  The
exchange rates are based upon the noon buying rate in New York City for cable
transfers in foreign currencies as certified for customs purposes by the Federal
Reserve Bank of New York.  At February 25, 2008, the exchange rate for
one Canadian dollar expressed in terms of one U.S. dollar, as quoted by The Bank
of Canada at 4 p.m. Eastern Time, equaled $0.9952.
  
 B. Capitalization and
Indebtedness
  Not
Applicable.
  C. Reasons for
the Offer and Use of Proceeds
  Not
Applicable.
  D. Risk
Factors
  The
risks and uncertainties described below are those that we currently believe may
materially affect us.  Additional risks and uncertainties that we are
unaware of or that we currently deem immaterial may also become important
factors that affect us.  If any of the following risks actually
occurs, our business, operating results, or financial condition could be
materially adversely affected.
  RISKS
RELATING TO OUR BUSINESS
  Our
business entails significant risks. In addition to the usual risks associated
with a business, the following is a general description of certain significant
risk factors which are applicable to us.
  4
 We
will require additional funds in our business that may be difficult to obtain
when needed or on terms acceptable to us.
  As
of November 30, 2007, we had cash and cash equivalents of $23.5 million (US$23.5
million).  As of January 31, 2008, our cash balance was $21.4 million
(US$21.4 million).   We will need to raise additional funds to
conduct research and development, preclinical studies, and clinical trials
necessary to bring our potential products to market, and to establish marketing,
sales, and distribution capabilities, including, as warranted, for
Celacade.  Our future capital requirements will depend on many
factors, including continued scientific progress in our research and development
programs, the scope and results of preclinical studies and clinical trials, the
time and costs involved in obtaining regulatory approvals, the costs involved in
filing, prosecuting, and enforcing patent claims, competing technological and
market developments, the cost of manufacturing scale-up, effective
commercialization activities and arrangements, and other factors not within our
control.  We have no committed sources of capital.  Adequate
funds may not be available when needed or on terms acceptable to us.
Insufficient funds may require us to scale back or eliminate some, or all, of
our research and development programs or license to third parties products or
technologies that we would otherwise seek to develop.  Any future debt
financing arrangements we enter into likely would contain restrictive covenants
that impose significant operating and financial restrictions on
us.  Our share price has not significantly recovered following the
announcement of the ACCLAIM top-line results in 2006, which may negatively
impact our ability to obtain financing in the future.  Should our
ability to secure additional financing be delayed, management would be required
to adjust its commercialization plans and research and development programs and
reduce its cash expenditures in order to ensure that we have sufficient cash to
fund planned expenditures.
  In
order to secure financing, if it is even available, it is likely that we will
sell additional common shares or financial instruments that are exchangeable for
or convertible into common shares. Also, in order to provide incentives to
current employees and induce prospective employees and consultants to work for
us, we have granted options and restricted stock units and intend to offer and
issue options and restricted stock units to purchase common shares and/or rights
exchangeable for or convertible into common shares.  These activities
could result in substantial dilution to all our shareholders.  Capital
raising activities and dilution associated with such activities could cause our
share price to decline.
  Our
Collaboration with Grupo Ferrer Internacional S.A. (“Ferrer”) may not be
successful
  On
April 18, 2007, we announced a collaboration with Ferrer, a leading European
pharmaceutical and medical devices company, to commercialize our Celacade
technology for the treatment of chronic heart failure in certain European and
Latin American countries.
  Under
the collaboration agreement (the “Agreement”), Ferrer will have the exclusive
rights to market our Celacade technology for the treatment of chronic heat
failure and other cardiovascular conditions in specified countries of Europe,
including Germany, Spain, Portugal, France, and Italy, and certain countries in
Latin America, including Mexico, Brazil, Argentina, and
Venezuela.  Ferrer has also acquired the right of first negotiation
with respect to the remaining countries of the European Union
(“E.U.”).
  Under
the Agreement, the commercial launch strategy for Celacade in Europe involves an
initial commercialization phase (“ICP”) during which Ferrer will target key
physicians to ensure support for expanded use of Celacade within the broader
cardiology community.  Based on Ferrer’s current plan, the ICP is
expected to conclude no later than September 1, 2008.  Under the terms
of the Agreement, we are responsible for the cost of delivering the Celacade
technology to Ferrer, based on orders received, which includes the Celacade
single-use disposable cartridges required for the delivery of each Celacade
monthly treatment.  During the ICP, Ferrer will pay us a fixed amount
for the disposable cartridges and following the completion of this phase, we
will receive 45% of Celacade revenues generated by Ferrer through the sale of
Celacade single-use disposable cartridges, one of which is required for the
delivery of each Celacade monthly treatment. After a period of five years from
the date of the first commercial sale on a country-specific basis, our share of
the revenues will be 42%.  We will also receive milestone payments
based on Ferrer’s achievement of the first commercial sale of Celacade after the
completion of the ICP on a country-specific basis, and on reaching pre-specified
sales thresholds. Should we not reach the pre-specified sales thresholds or
should the collaboration not ultimately be successful, our business may be
affected adversely.
  5
 We
are in the early stages of commercialization and may experience significant
fluctuations in revenues, expenses and losses.
  We
are in the early stages of commercializing our products.  Although
Ferrer received initial orders for our Celacade technology in December 2007,
market uptake remains uncertain.  As a result, our ability to continue
operations is uncertain and is dependent on our ability to generate sufficient
revenue from European commercialization, additional partnerships or additional
financings.  We may experience significant fluctuations in revenues,
expenses and losses.  Such fluctuations may be affected by a number of
factors, including variances in the sales cycle, the level of market acceptance
for Celacade, responses by competitors, research and development expenses,
financing and regulatory compliance costs and the acquisition/loss of key
customers.
  We
are a development-stage company with a history of losses, we have not recognized
any product revenues, and we may never achieve profitability.
  Except
for the commercialization of Celacade through our collaboration with Ferrer,our products are in the
development stage and, accordingly, our business operations are subject to all
of the risks inherent in the establishment and maintenance of a developing
business enterprise, such as those related to competition and viable operations
management.  We have incurred a loss in each year since our inception
and have received no cash flow from operations to date.  These losses
have resulted in decreases in our cash balances, working capital, and
shareholders’ equity. The future earnings and cash flow from operations of our
business are dependent, in part, on our ability to commercialize Celacade
successfully and further develop our products. There can be no assurance that we
will grow and be profitable.
  At
November 30, 2007, we had an accumulated deficit of approximately $381.8 million
(US$381.8 million).  We have not generated revenues from the
commercialization of any products.  Our net operating losses over the
near-term and the next several years are expected to continue as a result of the
further clinical trial activity and preparation for regulatory submission
necessary to support regulatory approval of our products, subject to partial
offset based on revenues expected from our collaboration with Ferrer. To obtain
regulatory approval in North America or to support the use of our Celacade
technology in a broader range of heart failure patients, it will be necessary to
conduct another phase III trial of Celacade and the cost and time required to
achieve regulatory approval, if the Celacade device is approved at all, could be
substantially increased.  There can be no assurance that such
additional clinical trials will be successful.  There can be no
assurance that we will be able to generate sufficient product revenue to become
profitable at all or on a sustained basis. We expect to have quarter-to-quarter
fluctuations in expenses, some of which could be significant, due to expanded
research, development, and clinical trial activities.
  We
intend to seek additional collaborative arrangements to commercialize our
products.  These collaborations, if secured, may not be
successful.
  We
have entered into a collaboration with Ferrer for the commercialization of our
Celacade product in specified countries in the E.U. and in Latin America and
intend to seek additional collaborative arrangements to develop and
commercialize Celacade in other markets.  We also intend to seek
collaborative arrangements to develop and commercialize our other products,
including VP025, in Europe and North America. There can be no assurance that we
will be able to negotiate collaborative arrangements on favorable terms, or at
all, in the future, or that our current or future collaborative arrangements
will be successful.
  Our
strategy for the research, development, and commercialization of our products
requires entering into various arrangements with corporate collaborators,
licensors, licensees, health care institutions and principal investigators and
others, and our commercial success is dependent upon these outside parties
performing their respective contractual obligations responsibly and with
integrity. The amount and timing of resources such third parties will devote to
these activities may not be within our control. There can be no assurance that
such parties will perform their obligations as expected. There can be no
assurance that our collaborators will devote adequate resources to our
programs.
  
  6
 We
are subject to stringent ongoing government regulation.
  Biotechnology,
medical device, and pharmaceutical companies operate in a high-risk regulatory
environment. The FDA, Health Canada, and other health agencies can require
additional clinical trials and can be very slow to approve a product and can
also withhold product approvals. In addition, these health agencies also oversee
many other medical product operations, such as research and development,
manufacturing, and testing and safety regulation of medical products. As a
result, regulatory risk is normally higher than in other industry
sectors.
  We
have incurred, and expect to continue to incur, substantial clinical research
and other costs in connection with obtaining regulatory approvals for our
medical products in Canada, the United States, and other jurisdictions. While we
are not aware of any pending or threatened governmental action against us in any
country, any enforcement action by regulatory authorities with respect to past,
or any future, regulatory non-compliance could have a material adverse effect on
our business, financial condition, and results of operations.
  To
date, our Celacade technology has been regulated by the FDA and Health Canada as
a medical device. In preparation for ACCLAIM II, the FDA has been reviewing
Celacade in the context of its newly issued draft document entitled “Guidance
for Industry Regulation of Human Cells, Tissues and Cellular and Tissue-Based
Products (HCT/Ps) - Small Entity Compliance Guide” to assess whether this draft
guidance is relevant to the Celacade technology.  To date, Celacade
has been regulated as a medical device with the CRDH acting as lead reviewer
with input from the CBER.  The FDA has recently informed us that
Celacade will remain regulated as a medical device. However, CBER will take the
role of lead reviewer, with CDRH providing input.
  There
can be no assurance that this regulatory status will not change in the future or
that additional regulatory bodies will not have input into the approval of our
medical products. If the FDA or Health Canada decides to regulate the Celacade
therapeutic device as a drug, biologic, or combination product, we could be
obligated to conduct additional clinical trials and, in any event, the cost and
time required to achieve regulatory approval, if the Celacade device is approved
at all, could be substantially increased.
  We
have discussed our phase III ACCLAIM trial (in particular, the results presented
in respect of Class II New York Heart Association (“NYHA”) patients) with the
FDA.  As a result of these discussions, the FDA recommended that we
conduct an additional phase III clinical trial as a condition of
approval.  Our election to conduct an additional study will increase
the cost of and the timeline for developing Celacade for chronic heart
failure.  As a result of our meeting with the FDA, on September 17,
2007, we announced plans for ACCLAIM II that, if successful, is expected to
support an application for regulatory approval in the United States of our
Celacade technology for the treatment of patients with NYHA Class II heart
failure.  There can be no assurance that the final design of ACCLAIM
II will be similar to that currently contemplated.
  There
can be no assurance that we will be able to achieve or maintain regulatory
compliance with respect to all or any part of our current or future products,
including maintaining our CE Mark approval for Celacade in Europe, or that we
will be able to timely and profitably produce our products while complying with
applicable regulatory requirements. If we fail to maintain compliance,
regulatory authorities can institute proceedings to detain or seize products,
issue a recall, enjoin future violations, assess civil and criminal penalties
against us and our directors, officers, and employees, or require us to make
substantial changes to our manufacturing operations. Any such actions could have
a material adverse effect on our business, financial condition, and results of
operations.
  We
do not yet have all the required approvals to market our product candidates, and
our clinical trials may not yield results that will enable us to obtain
regulatory approval outside of Europe.
  There
can be no assurance that any of our products will be successfully developed.
None of our products has received regulatory approval for commercial use and
sale in North America. We cannot market a pharmaceutical or medical device
product in any jurisdiction until it has completed thorough preclinical testing
and clinical trials in addition to that jurisdiction’s extensive regulatory
approval process. In general, significant research and development and clinical
studies are required to demonstrate the safety and effectiveness of our products
before we can submit any regulatory applications. We may never obtain the
required regulatory approvals for Celacade in North America.  There
can be no assurance that the results of all required clinical trials will
demonstrate that these product candidates are safe and effective or, even if the
results of the clinical trials are considered successful by us, that the FDA
will not require us to conduct additional large-scale clinical trials before it
will consider approving such product candidates for commercial use. Approval or
consent by the FDA or other regulatory authorities to commence a clinical trial
does not indicate that the device, drug, or treatment being studied can or will
be approved. Preparing, submitting, and advancing applications for regulatory
approval is complex, expensive, and time intensive and entails significant
uncertainty.
  7
 The
results of our completed preclinical studies and clinical trials may or may not
be indicative of future clinical trial results. A commitment of substantial
resources to conduct time-consuming research, preclinical studies, and clinical
trials will be required if we are to complete development of our products.
Clinical trials of our products require that we identify and enroll a large
number of patients with the illness under investigation. We may not be able to
enroll a sufficient number of appropriate patients to complete our clinical
trials in a timely manner. If we experience difficulty in enrolling a sufficient
number of patients to conduct our clinical trials, we may need to delay or
terminate ongoing clinical trials and will not accomplish objectives material to
our success that could affect the price of our common shares. Delays in planned
patient enrolment, or lower than anticipated event rates in our current clinical
trials or future clinical trials may result in increased costs, program delays,
or both.
  There
can be no assurance that unacceptable toxicities or adverse side effects will
not occur at any time in the course of preclinical studies or human clinical
trials or, if any products are successfully developed and approved for
marketing, during commercial use of our products. The appearance of any such
unacceptable toxicities or adverse side effects could interrupt, limit, delay,
or abort the development of any of our products or, if previously approved,
necessitate their withdrawal from the market. Furthermore, there can be no
assurance that disease resistance or other unforeseen factors will not limit the
effectiveness of our potential products. Any products resulting from our
programs are not expected to be successfully developed or made commercially
available in the near term and may not be successfully developed or made
commercially available at all.
  On
June 26, 2006, we announced the initial results from the 2,408-patient
phase III ACCLAIM trial of Celacade in chronic heart failure.  While
the ACCLAIM study did not reach the primary endpoint of significantly reducing
the risk of death and cardiovascular hospitalization in the total population,
this endpoint was met for the subgroup of 689 patients with NYHA Class II
chronic heart failure.  In addition, Celacade significantly reduced
the risk of death or first cardiovascular hospitalization in a subgroup of 919
patients with no prior history of heart attack at baseline.  The FDA
advised us to complete a further confirmatory study and ACCLAIM II is currently
under development.  There is no assurance that the results from the
ACCLAIM II study will enable us to obtain regulatory approval to market Celacade
in North America.
  The
science underlying our Celacade technology is relatively new and
unproven.
  Definitive
proof of the precise mechanism of action of our Celacade technology will require
considerably more basic scientific research than we or others have accomplished
to date. We have not, nor to our knowledge has any other company, successfully
commercialized a therapy similar to that using the Celacade therapeutic
device.  There can be no assurance that the products we are currently
developing will be approved by additional regulatory agencies or that further
testing will yield positive results. Should one of our product candidates prove
to have insufficient benefit and/or have an unsafe profile, its development will
likely be discontinued.  Except for the CE Mark in Europe, we do not
yet have all the required approvals to market our product candidates in the
markets we may wish to enter, and our clinical trials may not yield results that
will enable us to obtain these additional regulatory approvals.
  A
further setback in the development of our Celacade technology would likely cause
a further drop in the price of our common shares.
  We intend to rely
substantially on the exploitation of our Celacade technology for our future
earnings. If our Celacade technology does not become commercially viable, we may
not achieve profitability and our common share price would likely decline
further.For example, on June 26, 2006, we announced the
initial results from the 2,408-patient phase III ACCLAIM
trial of Celacadein
chronic heart failure.  While the ACCLAIM study did not reach the
primary endpoint of significantly reducing the risk of death and cardiovascular
hospitalization in the total population, this endpoint was met for the subgroup
of 689 patients with NYHA Class II chronic heart failure.  The closing
price of our common shares on NASDAQ decreased from US$18.50 on June 23,
2006, the last trading day prior to the announcement, to US$4.80 on
June 26, 2006 (in each case, after giving effect to the one for 10 reverse
split (consolidation) that occurred on April 17, 2007).
  8
 We
are reliant on our key personnel.
  The
operations of our business are highly dependent upon the participation of our
key personnel. The loss of the service of any one of our key personnel may
materially affect our ability to complete the development of our products,
successfully commercialize our products, and to grow and expand our business
operations. There is intense competition for qualified management and skilled
employees, and our failure to recruit, train, and retain such employees could
have a material adverse effect on our business, financial condition, and/or
results of operations.
  Our
intellectual property may not provide meaningful protection for our product
candidates. We may infringe others’ patents. Patent litigation is time consuming
and expensive.
  Our
success may depend, in part, on our ability to obtain patent protection for our
products and processes. We have filed a number of patent applications in the
United States and many other countries relating to our products and processes
and we have been issued patents covering certain aspects of our immune
modulation therapies and medical devices. There can be no assurance that our
patent applications will be issued as patents or that any of our issued patents,
or any patent that may be issued in the future, will provide us with adequate
protection for our products, processes, or technology. The patent positions of
biotechnology, pharmaceutical, and medical device companies can be highly
uncertain and involve complex legal and factual questions. Therefore, the
breadth of claims allowed in biotechnology, pharmaceutical and medical device
patents cannot be predicted. We also rely upon unpatented trade secrets and
know-how, and no assurance can be given that others will not independently
develop substantially equivalent trade secrets or know-how. In addition, whether
or not our patents are issued, or issued with limited coverage, others may
receive patents that contain claims applicable to our products. Our competitors
may attempt to circumvent our patents by means of alternative designs and
processes. There can be no assurance that any of our patents, or any patents
issued to us in the future, will afford meaningful protection against
competitors. There can be no assurance that our patents will be held valid or
enforceable by a court of competent jurisdiction. The patents of our competitors
may impair our ability to do business in a particular area. We also rely in part
on confidentiality agreements with our corporate collaborators, employees,
consultants, and certain contractors to protect our proprietary technology.
There can be no assurance that these agreements will not be breached, that we
will have adequate remedies for any breach, or that our trade secrets will not
otherwise become known or independently discovered by our
competitors.
  It
is possible that our products or processes will infringe, or will be found to
infringe, patents not owned or controlled by us. In addition, because patent
applications are often maintained in secrecy and may take many years to issue,
there may be currently pending patent applications that may later result in
issued patents that our products infringe. If any relevant claims of third-party
patents that relate to our products are upheld as valid and enforceable, we
could be prevented from practicing the subject matter claimed in such patents,
or would be required to obtain licenses or redesign our products or processes to
avoid infringement. There can be no assurance that such licenses would be
available at all or on terms commercially reasonable to us or that we could
redesign our products or processes to avoid infringement. Litigation may be
necessary to defend against claims of infringement, to enforce patents issued to
us, or to protect trade secrets. Such litigation could result in substantial
costs and diversion of management efforts regardless of the results of such
litigation, and an adverse result could subject us to significant liabilities to
third parties, require disputed rights to be licensed, or require us to cease
using our technology.
  If
we fail to obtain acceptable prices or appropriate reimbursement for our
products, our ability to successfully commercialize our products will be
impaired.
  Government
and insurance reimbursements for healthcare expenditures play an important role
for all healthcare providers, including physicians, medical device companies,
drug companies, medical supply companies, and companies, such as ours, that plan
to offer various products in the United States and other countries in the
future. Our ability to earn sufficient returns on our products will depend in
part on the extent to which reimbursement for the costs of such products,
related therapies and related treatments will be available from government
health administration authorities, private health coverage insurers, managed
care organizations, and other organizations. In the United States, our ability
to have our products and related treatments and therapies eligible for Medicare
or private insurance reimbursement will be an important factor in determining
the ultimate success of our products. If, for any reason, Medicare or the
insurance companies decline to provide reimbursement for our products and
related treatments, our ability to commercialize our products would be adversely
affected. There can be no assurance that our products and related treatments
will be eligible for reimbursement.
  9
 If
purchasers or users of our products and related treatments are not able to
obtain appropriate reimbursement for the cost of using such products and related
treatments, they may forgo or reduce such use. Even if our products and related
treatments are approved for reimbursement by Medicare and private insurers, of
which there can be no assurance, the amount of reimbursement may be reduced at
times, or even eliminated. This would have a material adverse effect on our
business, financial condition, and results of operations.
  Significant
uncertainty exists as to the reimbursement status of newly approved healthcare
products, and there can be no assurance that adequate third-party coverage will
be available.
  Competition
in our target markets is intense, and developments by other companies could
render our product candidates obsolete.
  The
industry that we compete in is not a static environment, and market share can
change rapidly if competing products are introduced. There can be no assurance
that we can avoid intense competition from other medical technology companies,
pharmaceutical or biotechnology companies, universities, government agencies, or
research organizations, and from other technological advances that could render
our technology uneconomical or obsolete. Many of these competitors have
substantially greater financial and/or other resources. Our competitors may
succeed in developing technologies and products that are more effective or
cheaper to use than any that we may develop. These developments could render our
products obsolete and uncompetitive, which would have a material adverse effect
on our business, financial condition and results of operations. In addition,
there are numerous existing therapies for chronic heart failure, and
neurological diseases, and others are being developed.
  If
we are unable to continue developing advanced technology, advanced versions of
our existing products and new products in a timely and cost-effective manner,
our ability to generate revenue and become profitable will be
impaired.
  We
believe that if we are to generate revenue and become profitable, we must
continue to develop advanced technology, advanced versions of our existing
products and new products. These technologies and products must be developed and
introduced to the market in a timely and cost-effective manner to meet both
changing customer needs and technological developments. There can be no
assurance that we will be able to successfully develop on a timely basis any new
technology, products or advanced versions of existing products, or that any new
technology, products or advanced versions of existing products will achieve
acceptance in the market. If we are unable to successfully develop new
technology, products or advanced versions of existing products in the future or
if those technologies or products are not accepted in the market, our ability to
generate significant revenues will be significantly impaired, we could
experience additional significant losses and our business, financial condition
and results of operations will be materially harmed.
  We
are subject to exposure to product liability claims.
  We
face an inherent business risk of exposure to product liability and other claims
in the event that the development or use of our technology or prospective
products or therapies results, or is alleged to have resulted, in adverse
effects. While we have taken, and will continue to take, what we believe are
appropriate precautions, there can be no assurance that we will avoid
significant liability exposure. Although we currently carry product liability
insurance, there can be no assurance that we have sufficient coverage, or can in
the future obtain sufficient coverage at a reasonable cost. An inability to
obtain product liability insurance at an acceptable cost or to otherwise protect
against potential product liability claims could prevent or inhibit the
commercialization of products we develop. A product liability claim could have a
material adverse effect on our business, financial condition, and results of
operations.
  10
 We
do not have commercial-scale manufacturing capability, and we lack commercial
manufacturing experience.
  We
currently rely upon single sources for the supply of some of the components
required to manufacture and use our products. For example, we currently rely on
a single subcontractor for the disposable cartridges that are components of the
Celacade technology. The establishment of additional or replacement suppliers
for certain materials, components, subassemblies, assemblies, supplies, or
finished products cannot be accomplished quickly, largely due to the regulatory
approval systems and the complex nature of the manufacturing processes employed
by many suppliers. The failure to obtain sufficient quantities of component
materials on commercially reasonable terms could have a material adverse effect
on our clinical studies, business, financial condition, and results of
operations.
  If
we are successful in developing the markets for our products, including our
collaboration with Ferrer, we would have to arrange for their scaled-up
manufacture. At the present time, we have not arranged for the large-scale
manufacture of our products. There can be no assurance that we will, on a timely
basis, be able to make the transition from manufacturing clinical trial
quantities to commercial production quantities successfully or be able to
arrange for contract manufacturing. We believe our contractors will be able to
manufacture our medical devices for commercialization in Europe.  We
also believe our contractors will be able to manufacture our medical devices for
initial commercialization if the products obtain FDA and other regulatory
approvals, but we have not yet demonstrated the capability to manufacture the
medical devices in commercial quantities. Potential difficulties experienced by
us in manufacturing scale-up, including recalls or safety alerts, could have a
material adverse effect on our business, financial condition, and results of
operations.
  The
manufacture of our products involves a number of steps and requires compliance
with stringent quality control specifications imposed by the FDA and other
regulatory agencies. Moreover, our products can only be manufactured in a
facility that has undergone a satisfactory inspection by the FDA and/or other
relevant regulatory authorities. For these reasons, we would not be able to
replace our manufacturing capacity quickly if we were unable to use our
manufacturing facilities as a result of a fire, natural disaster (including an
earthquake), equipment failure, or other difficulty, or if such facilities are
deemed not in compliance with the regulatory requirements and the non-compliance
could not be rapidly rectified. Our inability or reduced capacity to manufacture
our products would have a material adverse effect on our business, financial
condition, and results of operations.
  We
expect to enter into additional arrangements with contract manufacturing
companies in order to meet requirements for our products or to attempt to
improve manufacturing efficiency. If we choose to contract for manufacturing
services and encounter delays or difficulties in establishing relationships with
manufacturers to produce, package, and distribute our finished products, then
clinical trials, market introduction, and subsequent sales of such products
would be adversely affected. Further, contract manufacturers must also operate
in compliance with the FDA and other regulatory requirements. Failure to do so
could result in, among other things, the disruption of product supplies. Our
potential dependence upon third parties for the design and/or manufacture of our
products may adversely affect our profit margins and our ability to develop and
deliver such products on a timely and competitive basis.
  We
have limited sales, marketing, and distribution experience.
  We
have limited experience in the sales, marketing, and distribution of
pharmaceutical or medical device products. Except through our collaboration with
Ferrer, there can be no assurance that we will be able to establish sales,
marketing, and distribution capabilities or make arrangements with our
collaborators, licensees, or others to perform such activities or that such
efforts will be successful. If we decide to market any of our products directly,
we must either acquire or internally develop a marketing and sales force with
technical expertise and with supporting distribution
capabilities.  The acquisition or development of a sales and
distribution infrastructure would require substantial resources, which may
divert the attention of our management and key personnel, and have a negative
impact on our product development efforts.  If we contract with third
parties for the sales and marketing of our products, our revenues will be
dependent on the efforts of these third parties, whose efforts may not be
successful. If we fail to establish successful marketing and sales capabilities
or to make arrangements with third parties, our business, financial condition
and results of operations will be materially adversely
affected.
  11
 Our
strategic alliance with Quest Diagnostics may not be successful.
  To
develop a potential secondary point of care for integration of our Celacade
technology, we formed a strategic alliance in November 2001 with Quest
Diagnostics in the United States on an exclusive basis.  The purpose
of this alliance is to establish an outpatient delivery model to accommodate
patient referrals outside hospital clinics and cardiology
practices.  The final terms of this alliance are not yet established.
Should we not finalize the terms of this strategic alliance, or should the
strategic alliance not ultimately be successful, our business may be adversely
affected.
  Our
operations may be adversely affected by risks associated with international
business.
  We
plan to sell our products in many countries.  Therefore, we are
subject to certain risks that are inherent in an international
business.  These include:
  •
              varying
      regulatory restrictions on sales of our products to certain markets and
      unexpected changes in regulatory
requirements;
  •
              tariffs,
      customs, duties and other trade
barriers;
  •
              difficulties
      in managing foreign operations and foreign distribution
      partners;
  •
              longer
      payment cycles and problems in collecting accounts
    receivable;
  •
              fluctuations
      in currency exchange rates;
  •
              political
      risks;
  •
              foreign
      exchange controls that may restrict or prohibit repatriation of
      funds;
  •
              export
      and import restrictions or prohibitions, and delays from customs brokers
      or government agencies;
  •
              seasonal
      reductions in business activity in certain parts of the world;
      and
  •
              potentially
      adverse tax consequences.
  Depending
on the countries involved, any or all of the foregoing factors could materially
harm our business, financial condition and results of operations.
  If
our products do not gain market acceptance, we may be unable to generate
significant revenues.
  We
do not yet have the required clinical data and results to successfully market
our Celacade technology in all of our markets of interest; future clinical or
preclinical results (such as from ACCLAIM II) may be negative or insufficient to
allow us to successfully market any of our product candidates; and obtaining
needed data and results may take longer than planned, and may not be obtained at
all.  In particular, and in light of the ACCLAIM results, penetration
into the heart failure market will take longer than originally
expected.
  Even
though our Celacade technology is approved for sale in the E.U., it may not be
successful in the marketplace. Market acceptance of any of our products will
depend on a number of factors, including demonstration of clinical effectiveness
and safety; the potential advantages of our products over alternative
treatments; the availability of acceptable pricing and adequate third-party
reimbursement; and the effectiveness of marketing and distribution methods for
the products. If our products do not gain market acceptance among physicians,
patients, and others in the medical community, our ability to generate
significant revenues from our products would be limited.
  We
may not achieve our projected development goals in the time frames we announce
and expect.
  We
set goals for and make public statements regarding timing of the accomplishment
of objectives material to our success, such as the commencement and completion
of clinical trials, anticipated regulatory approval dates, and time of product
launch. The actual timing of these events can vary dramatically due to factors
such as delays or failures in our clinical trials, the uncertainties inherent in
the regulatory approval process, and delays in achieving product development,
manufacturing, or marketing milestones necessary to commercialize our products.
There can be no assurance that our clinical trials will be completed, that we
will make regulatory submissions or receive regulatory approvals as planned, or
that we will be able to adhere to our current schedule for the scale-up of
manufacturing and launch of any of our products. If we fail to achieve one or
more of these milestones as planned, the price of our common shares could
decline.
  12
 Our
business involves the use of hazardous material, which requires us to comply
with environmental regulations.
  Although
we do not currently manufacture commercial quantities of our products, we
produce limited quantities of such products for our clinical trials. Our
research and development processes involve the controlled storage, use, and
disposal of hazardous materials and hazardous biological materials. We are
subject to laws and regulations governing the use, manufacture, storage,
handling, and disposal of such materials and certain waste products. Although we
believe that our safety procedures for handling and disposing of such materials
comply with the standards prescribed by such laws and regulations, the risk of
accidental contamination or injury from these materials cannot be completely
eliminated. In the event of such an accident, we could be held liable for any
damages that result, and any such liability could exceed our resources. There
can be no assurance that we will not be required to incur significant costs to
comply with current or future environmental laws and regulations, or that our
business, financial condition, and results of operations will not be materially
or adversely affected by current or future environmental laws or
regulations.
  Our
insurance may not provide adequate coverage with respect to environmental
matters.
  Environmental
regulation could have a material adverse effect on the results of our operations
and our financial position.
  We
are subject to a broad range of environmental regulations imposed by federal,
state, provincial, and local governmental authorities. Such environmental
regulation relates to, among other things, the handling and storage of hazardous
materials, the disposal of waste, and the discharge of contaminants into the
environment. Although we believe that we are in material compliance with
applicable environmental regulation, as a result of the potential existence of
unknown environmental issues and frequent changes to environmental regulation
and the interpretation and enforcement thereof, there can be no assurance that
compliance with environmental regulation or obligations imposed thereunder will
not have a material adverse effect on us in the future.
  There
are risks related to the handling of blood.
  Our
product development activities and our clinical trials involve the withdrawal of
a small sample of a patient’s blood cells into our Celacade single-use
disposable cartridge, exposure of such blood cells to our controlled treatment
process using our proprietary Celacade therapeutic device and then
re-administration of such blood cells to the patient
intramuscularly.  There are risks associated with the handling of
human blood that may contain infectious agents, notwithstanding the aseptic
techniques employed in our clinical trials.  While we believe that our
processes and safety procedures for handling human blood are adequate to ensure
against infection of the patient and our clinical staff and employees, there is
a risk that such procedures will fail and will result in
infection.  In the event of such infection, we could be held liable
for any damages that result, and any such liability could exceed our
resources.
  RISKS
RELATING TO OUR SECURITIES
  Our
share price has been highly volatile and our shares could suffer a decline in
value.
  The
trading price of our common shares has been highly volatile and could continue
to be subject to wide fluctuations in price in response to various factors, many
of which are beyond our control, including:
  •
              announcements
      by us of results of, and developments in, our research and development
      efforts, including results and adequacy of, and developments in, our
      clinical trials, for example, our June 2006 announcement of the ACCLAIM
      results;
   13
  •
              sales
      of our common shares, including in connection with further
      financings;
  •
              announcements
      regarding new or existing corporate
  partnerships;
  •
              announcements
      regarding our listing on the
NASDAQ;
  •
              actual
      or anticipated period-to-period fluctuations in financial
      results;
  •
              litigation
      or threat of litigation;
  •
              failure
      to achieve, or changes in, financial estimates by securities
      analysts;
  •
              announcements
      regarding new or existing products or services or technological
      innovations by us or our
competitors;
  •
              comments
      or opinions by securities analysts or members of the medical
      community;
  •
              conditions
      or trends in the pharmaceutical, biotechnology and life science
      industries;
  •
              announcements
      by us of significant acquisitions, joint ventures or capital
      commitments;
  •
              additions
      or departures of key personnel;
  •
              economic
      and other external factors or disasters or
  crises;
  •
              limited
      daily trading volume; and
  •
              developments
      regarding our patents or other intellectual property or that of our
      competitors.
  
 In
addition, the stock market in general and the market for biotechnology companies
in particular, have experienced significant price and volume fluctuations that
have often been unrelated or disproportionate to the operating performance of
those companies. Further, there has been significant volatility in the market
prices of securities of life science companies. Factors such as the results and
adequacy of our preclinical studies and clinical trials, as well as those of our
collaborators, or our competitors; other evidence of the safety or effectiveness
of our products or those of our competitors; announcements of technological
innovations or new products by us or our competitors; governmental regulatory
actions; developments with our collaborators; developments (including
litigation) concerning our patent or other proprietary rights or those of our
competitors; concern as to the safety of our products; changes in estimates of
our performance by securities analysts; market conditions for biotechnology
stocks in general; and other factors not within our control could have a
significant adverse impact on the market price of our common shares, regardless
of our operating performance. In the past, following periods of volatility in
the market price of a company’s securities, securities class action litigation
has often been instituted. A securities class action suit against us could
result in substantial costs, potential liabilities and the diversion of
management’s attention and resources.
  There
may not be an active, liquid market for our common shares.
  There
is no guarantee that an active trading market for our common shares will be
maintained on the NASDAQ or the Toronto Stock Exchange (“TSX”). Investors may
not be able to sell their shares quickly or at the latest market price if
trading in our common shares is not active.
  We
may not meet NASDAQ’s continued listing requirements.
  Failure
to meet the applicable quantitative and/or qualitative maintenance requirements
of NASDAQ could result in our common shares being delisted from the NASDAQ
Capital Market.  For continued listing, NASDAQ requires, among other
things, that listed securities maintain a minimum bid price of not less than
US$1.00 per share.  If the bid price falls below the US$1.00 minimum
for more than 30 consecutive trading days, we will have 180 days to satisfy the
US$1.00 minimum bid price, which must be maintained for a period of at least ten
trading days in order to regain compliance.
  In
August 2006, we received a letter from the Listing Qualifications Department of
The NASDAQ Stock Market stating that for the last 30 consecutive business days,
the bid price of our common shares had closed below the minimum bid price of
US$1.00 per share requirement for continued inclusion on the NASDAQ Global
Market under Marketplace Rule 4450(a)(5) (the “Minimum Bid Price
Rule”).  At the opening of business on February 9, 2007, we
transferred the listing of our common shares from the NASDAQ Global Market to
the NASDAQ Capital Market.  In accordance with Marketplace Rules
4310(c)(8)(D), this provided us with an additional 180-day calendar day
compliance period, or until August 3, 2007, to regain compliance with the NASDAQ
Minimum Bid Price Rule.
  14
 On
April 17, 2007, we implemented a one-for-ten consolidation of our common stock,
which began trading on a split adjusted basis on the NASDAQ and TSX on April 17,
2007.  At the end of trading on April 13, 2007, we had 174,739,990
shares of common stock issued and outstanding.  When the market opened
on April 17, 2007, there were approximately 17,473,999 shares issued and
outstanding. As a result of this consolidation, we regained compliance with the
US$1.00 per share minimum closing bid price requirement for continued listing on
The NASDAQ Capital Market.  Any future failure to meet the applicable
quantitative and/or qualitative maintenance requirements of NASDAQ could result
in our common shares being delisted from NASDAQ.
  If
delisted from The NASDAQ Capital Market, our common shares may be eligible for
trading on another market in the United States. In the event that we are not
able to obtain a listing on another U.S. stock exchange or quotation service for
our common shares, it may be extremely difficult or impossible for shareholders
to sell their common shares in the United States.  Moreover, if we are
delisted and obtain a substitute listing for our common shares in the United
States, it will likely be on a market with less liquidity, and therefore
potentially more price volatility, than The NASDAQ Capital
Market.  Shareholders may not be able to sell their common shares on
any such substitute U.S. market in the quantities, at the times, or at the
prices that could potentially be available on a more liquid trading
market.  As a result of these factors, if our common shares are
delisted from The NASDAQ Capital Market, the price of our common shares is
likely to decline.  In addition, a decline in the price our common
shares will impair our ability to obtain financing in the future.
  Future
issuances of our common shares could adversely affect the trading price of our
common shares and could result in substantial dilution to our
shareholders.
  We
expect to issue substantial amounts of common shares in the
future.  To the extent that the market price of the common shares
declines, we will need to issue an increasing number of common shares per dollar
of equity investment.  On November 14, 2006, we issued 4,319,149 units
of the Company (the “units”) at a price of US$4.70 per unit.  Each
unit consisted of one common share, 0.4 of one common share purchase warrant
expiring on November 14, 2011 (a “series A warrant”) and 0.1 of one common share
purchase warrant expiring on May 14, 2007 (a “series B warrant”). Each whole
series A warrant represents the right, during the term of the warrant, to
purchase one common share at a price of US$6.30 per common share.  Up
to 1,727,659 common shares in aggregate are issuable upon due exercise of the
series A warrants.  Any series A warrant which remains unexercised as
at November 14, 2011 will terminate and be of no further force or
effect.  The series B warrants terminated as at May 14, 2007 and are
of no further force or effect.  Additionally, in connection with the
offering, we issued to the placement agent 256,000 compensation warrants to
purchase common shares at US$6.30 per share.  These warrants will
expire on November 14, 2009.
  On
May 24, 2007, we closed a purchase agreement with institutional investors to
raise US$16 million in gross proceeds through the sale of its common shares at a
price of US$3.25. Under the terms of the purchase agreements, we also issued
five-year warrants to purchase an additional 3.7 million common shares at an
exercise price of US$3.16 per share. If all of the 3.7 million warrants are
exercised, the Company will receive an additional US$11.7 million in gross
proceeds.   Additionally, in connection with this offering, we
issued to the placement agents 295,044 compensation warrants to purchase common
shares at $US3.81 per share.  These warrants will expire on May 24,
2010.
 
 In
addition to common shares issuable in connection with the exercise of the
warrants, our investors, employees, and directors hold rights to acquire
substantial amounts of our common shares.  In order to obtain future
financing, it is likely that we will issue additional common shares or financial
instruments that are exchangeable for or convertible into common
shares.  Also, in order to provide incentives to current employees and
induce prospective employees and consultants to work for us, we intend to offer
and issue options to purchase common shares and/or rights exchangeable for or
convertible into common shares.
  15
 Future
issuances of substantial amounts of our common shares, or the perception that
such issuances are likely to occur, could affect prevailing trading prices of
our common shares. Future issuances of our common shares could result in
substantial dilution to our shareholders. Capital raising activities and
dilution associated with such activities could cause our share price to
decline.  In addition, the existence of the notes and warrants may
encourage short selling by market participants.
  If
there are substantial sales of our common shares, the market price of our common
shares could decline.
  Sales
of substantial numbers of our common shares could cause a decline in the market
price of our common shares.  Any sales by existing shareholders or
holders of options or warrants may have an adverse effect on our ability to
raise capital and may adversely affect the market price of our common
shares.
  We
have not paid dividends.
  We
have never paid cash dividends on our common shares and do not anticipate paying
any cash dividends in the foreseeable future. We currently intend to retain our
future earnings, if any, to finance further research and the expansion of our
business.
  It
may be difficult to obtain and enforce judgments against us because of our
Canadian residency.
  We
are governed by the laws of Canada. Most of our directors and officers, as well
as some of the experts named in this annual report, are residents of Canada or
other jurisdictions outside of the United States and all or a substantial
portion of our assets and the assets of such persons may be located outside of
the United States. As a result, it may be difficult for shareholders to effect
service of process upon us or such persons within the United States or to
realize in the United States on judgments of courts of the United States
predicated upon the civil liability provisions of the U.S. federal securities
laws or other laws of the United States. In addition, there is doubt as to the
enforceability in Canada of liabilities predicated solely upon U.S. federal
securities law against us, our directors, controlling persons and officers and
the experts named in this annual report who are not residents of the United
States, in original actions or in actions for enforcements of judgments of U.S.
courts.
  We
have adopted a shareholder rights plan.
  We
have adopted a shareholder rights plan. The provisions of such plan could make
it more difficult for a third party to acquire a majority of our outstanding
common shares, the effect of which may be to deprive our shareholders of a
control premium that might otherwise be realized in connection with an
acquisition of our common shares.
  We
are likely to be classified as a “passive foreign investment company” for U.S.
income tax purposes, which could have significant and adverse tax consequences
to U.S. investors.
  We
were a passive foreign investment company (“PFIC”) in our 2007 taxable year, and
we believe there is a significant likelihood that we will be classified as a
PFIC in our 2008 taxable year and possibly in subsequent years. Our
classification as a PFIC could have significant and adverse tax consequences for
U.S. holders of our common shares. It may be possible for U.S. holders of common
shares to mitigate certain of these consequences by making a “qualified electing
fund” election or a mark-to-market election.  See Item 9E below and
consult your tax advisors.
  Item
      4. Information on
      the Company
  A. History and
Development of the Company
  Vasogen
Inc. was incorporated under the Business Corporations Act(Ontario) and was continued under the Canada Business Corporations Actby certificate and articles of continuance dated August 9,
1999.  We have two wholly-owned subsidiaries: Vasogen, Corp.,
incorporated under the laws of Delaware, U.S.A. and Vasogen Ireland Limited,
incorporated under the laws of the Republic of Ireland.  Vasogen
Ireland Limited owns certain of our intellectual property related to our
products and technologies.  Our registered principal office is located
at 2505 Meadowvale Boulevard, Mississauga, Ontario, Canada L5N 5S2. We are
currently a “reporting issuer” in all of the provinces and territories of
Canada. Our telephone number is (905) 817-2000 and our facsimile number is (905)
569-9231. Our website is www.vasogen.com. Any information contained on our
website is not, and will be deemed not to be, incorporated herein by
reference.  All currency figures herein are in Canadian dollars,
unless otherwise noted.
  16
 For
the three fiscal years ended November 30, 2007, 2006, and 2005, we spent a total
of $12.0 million, $32.7 million, and $71.5 million, respectively, on research
and development.  At the present time, our principal capital
expenditures are focused on the commercialization of Celacade in Europe and on
the advancement our research and development program.  Over the past
three fiscal years, we have raised approximately $129 million in net proceeds
from the issuance of debt and equity securities to investors and the exercise of
options and warrants.  Our common shares are listed on the TSX under
the symbol “VAS” and on the NASDAQ under the symbol “VSGN”.
  During
the last and current financial year, we have not been aware of any indications
of public takeover offers by third parties in respect of the Company’s shares or
by the Company in respect of other companies’ shares.
  For
additional information on key events, see Item 4B below.
  B. Business
Overview
  GENERAL
DEVELOPMENT OF THE BUSINESS
  We
are a biotechnology company that is focused on the research and commercial
development of therapies designed to target the destructive inflammatory process
associated with the development and progression of cardiovascular and
neurodegenerative disorders. Our lead product, Celacade, is designed to activate
the immune response to apoptosis - an important physiological process that
regulates inflammation.  Celacade has received European regulatory
approval under the CE Mark for chronic heart failure and is being marketed in
the E.U. by Ferrer.  Celacade is in late-stage clinical development
for the treatment of chronic heart failure in the United States. We are also
developing a new class of drugs for the treatment of certain neuro-inflammatory
disorders.  VP025 is the lead drug candidate from this new
class.
  We
manage the development and manufacture of our products for use in preclinical
and clinical research and we continue to advance our product development program
to support future commercial scale production.  Patent applications
are filed to protect our products and processes.  Our policy is to
file patent applications to protect inventions, technology, and improvements
that are important to the development of our business and with respect to the
application of our technologies to the treatment of a number of disease
indications.  We own patents and patent applications relating to our
products and technologies in the United States, Canada, and other jurisdictions
around the world.
 
 We
may establish corporate alliances, primarily to support marketing and sales of
our products, in the United States, Canada, and elsewhere.  Based on
market research to date, we expect that the primary point of use of Celacade
will be the outpatient hospital clinic and/or cardiology practices.
 
 Over
the past three fiscal years, we have raised approximately $129.0 million in net
proceeds from the issuance of debt and equity securities to investors, and
through the exercise of options and warrants. Our common shares are listed on
the TSX under the symbol “VAS” and are quoted for trading on the NASDAQ Capital
Market under the symbol “VSGN”.
  
  
 17
  Vasogen
Development Pipeline
 
 Product
      Candidate
              Indication
              Developmental
      StageCelacade
      System
              Chronic
      Heart Failure
              -
      Phase III results published
                -
      Confirmatory study in planning stage for the purpose of U.S. regulatory
      approval
                -
      E.U. commercialization activities ongoingVP025
              Neuro-inflammatory
      Conditions
              -
      Phase I completedVP015
              Inflammatory
      Conditions
              -
      Preclinical
 
  DESCRIPTION
OF THE BUSINESS
  We
are a biotechnology company focused on the research and commercial development
of technologies targeting the chronic inflammation underlying cardiovascular and
neurological disease. Our lead product, Celacade, is a device-based therapy for
the treatment of chronic heart failure.  Celacade is being marketed in
the E.U. and is in late-stage clinical development in the United
States.  We are also developing our VP series of drugs for the
treatment of inflammatory conditions.
   PRODUCTS
AND MARKETS
  Celacade_Chronic
Heart Failure Program
  Heart
failure, most frequently resulting from coronary artery disease or hypertension,
is a debilitating syndrome in which the heart’s ability to function as a pump is
impaired. Patients with heart failure experience a continuing decline in their
health, resulting in an increased frequency of hospitalization and premature
death.  According to the Heart Failure Society of America, heart
failure is the only major cardiovascular condition with prevalence and incidence
on the rise. Heart failure, which is now often referred to as an epidemic, is
estimated to affect 12 million individuals in North America and Europe. In North
America alone, heart failure affects more than five million people and is
associated with more than 300,000 deaths each year and the direct cost of
healthcare primarily resulting from hospitalization is estimated to exceed
US$34.8 billion annually.
  Therapy
utilizing our Celacade technology is designed to target the destructive
inflammation underlying chronic heart failure and other cardiovascular diseases.
Inflammation is a normal response of the immune system to cellular injury caused
by infection, trauma, or other stimuli. During the inflammatory process, immune
cells release a number of factors, including cytokines - potent chemical
messengers that modulate inflammation and facilitate the healing process. While
this inflammatory process is usually self-limiting, it can persist, become
chronic, and lead to a number of serious medical conditions.
  During
a brief outpatient procedure, a small sample of a patient’s blood is drawn into
our Celacade single-use disposable cartridge and exposed to controlled oxidative
stress utilizing our proprietary Celacade medical device technology. Oxidative
stress is a factor known to initiate apoptosis, a physiologic process that is
inherently anti-inflammatory. The treated blood is then administered to the same
patient intramuscularly. An initial course of treatment comprising three
consecutive outpatient procedures is administered over a two-week period, and
treatments are continued once per month thereafter.
  Our
double-blind, placebo-controlled ACCLAIM trial studied 2,408 subjects with
chronic heart failure at 175 clinical centers in seven
countries.  ACCLAIM was designed to assess the ability of Celacade to
reduce the risk of death or first cardiovascular
hospitalization.  Patients included in the study had NYHA Class II,
III, or IV symptoms of heart failure with a left-ventricular ejection fraction
(LVEF) of 30% or less and had been hospitalized or received intravenous drug
therapy for heart failure within the previous 12 months, or had NYHA Class
III/IV heart failure with a LVEF of less than 25%.
 
 Patients
in the ACCLAIM trial were receiving optimal standard-of-care therapy for heart
failure, which at baseline included a number of pharmaceuticals such as
diuretics (94%), ACE-inhibitors (94%) and beta-blockers (87%), as well as device
therapies including automatic implantable cardioverter defibrillators (26%), and
use of cardiac resynchronization therapy (10.5%).  The placebo
(n=1,204 patients) and Celacade (n=1,204 patients) groups were balanced for all
important baseline characteristics, including demographics, LVEF, NYHA
classification, concomitant medical conditions, medications, and device
therapies.
 
 18
 Results
from the ACCLAIM study have been published in The Lancet(Lancet2008; 371: 228-36), a
world-leading medical journal.  The key findings from the ACCLAIM
trial were also presented at the World Congress of Cardiology 2006 in Barcelona,
Spain, and at the 10th Annual Scientific Meeting of the Heart Failure Society of
America in Seattle, Washington.
 
 The
difference in time to death or first cardiovascular hospitalization, the primary
endpoint of ACCLAIM, for the intent-to-treat study population was not
statistically significant (p=0.22); however, the risk reduction
directionally favored the Celacade group (hazard ratio=0.92).
 
 In
the ACCLAIM trial, Celacade was shown to significantly reduce the risk of death
or first cardiovascular hospitalization by 39% in a pre-defined subgroup of
patients with NYHA Class II heart failure at baseline (n=689 patients, 216
events, p=0.0003) and in a pre-defined subgroup of patients with no prior
history of heart attack at baseline, Celacade was also shown to significantly
reduce the risk of death or first cardiovascular hospitalization by 26% (n=919
patients, 243 events, p=0.02).  Furthermore, consistent with the
impact of Celacade on the risk of mortality and morbidity in large subgroups
within the ACCLAIM trial was the finding of a significant improvement in quality
of life (as measured by the Minnesota Living with Heart Failure Questionnaire)
for patients in the intent-to-treat study population
(p=0.04).  Celacade was also shown to be well tolerated in the ACCLAIM
patient population, and there were no significant between-group differences for
any serious adverse events.
 
 We
have already received E.U. regulatory approval as a medical device under the CE
Mark, which enables marketing of Celacade for the treatment of all NYHA Class II
patients, as well as NYHA Class , III, and IV patients who do not have a prior
history of heart attack in the 27 member countries of the E.U.
 
 During
2007, we completed a collaboration agreement (the “Agreement”) with Ferrer to
commercialize Celacade for the treatment of chronic heart failure in certain
countries of the E.U. and Latin America.  Under the Agreement, Ferrer
will have the exclusive rights to market Celacade for the treatment of chronic
heart failure and other cardiovascular conditions in certain countries of the
E.U. and Latin America.  Ferrer has also acquired the right of first
negotiation with respect to the remaining countries of the E.U.  In
December 2007, Ferrer received initial orders for Celacade in
Germany.
 
 Under
the Agreement, the commercial launch strategy for Celacade in certain countries
of the E.U. will involve an initial commercialization phase (ICP) during which
Ferrer will target key physicians to build support for expanded use of Celacade
within the broader medical community.  Based on Ferrer’s current plan,
the ICP is expected to conclude no later than September 1,
2008.  Under the terms of the Agreement, we are responsible for the
cost of delivering the Celacade technology to Ferrer, which includes the
Celacade single-use disposable cartridges required for the delivery of each
Celacade monthly treatment. During the ICP, Ferrer will pay us a fixed amount
for the disposable cartridges and following the successful completion of the
ICP, and upon the first commercial sale as defined in the Agreement, we will
receive 45% of revenues generated by Ferrer through the sale of the
cartridges.  After a period five years from the date of the first
commercial sale on a country-specific basis, our share of the revenues will be
42%.  Following the ICP, we will also receive milestone payments,
based on the first commercial sale of Celacade on a country-specific basis, and
we will receive milestone payments on reaching pre-specified thresholds based on
overall sales.  Also under the terms of the Agreement, Ferrer will be
financially responsible for costs associated with the launch and marketing of
Celacade.   Our Agreement with Ferrer is available on SEDAR and
EDGAR.
 
 At
a meeting with the FDA to discuss the ACCLAIM results in May 2007, the agency
strongly recommended that we conduct a confirmatory study to support a U.S.
Pre-Market Approval (“PMA”) filing for Celacade for NYHA Class II heart failure
patients and also recommended that we use a Bayesian statistical
approach.  This approach involves a trial design methodology that may
allow for the utilization of prior trial results to contribute to the
statistical power of a confirmatory study and therefore potentially provides the
opportunity to significantly reduce the number of required patients, as well as
the cost and duration of a confirmatory study.  As a result of the
FDA’s recommendations, we retained Berry Consultants and Dr. Donald A.
Berry, Head, Division of Quantitative Sciences and Chairman, Department of
Biostatistics, The University of Texas MD Anderson Cancer Center, and an
authority in the area of Bayesian and adaptive trial design, to assist with the
development of the study.
 
 19
 In
September 2007, we announced our plans for ACCLAIM II, which would support an
application for regulatory approval in the United States of our Celacade System
for the treatment of patients with NYHA Class II heart failure.  We
have been working closely with the FDA to finalize the ACCLAIM II protocol and
the statistical analysis plan.  In preparation for ACCLAIM II, the FDA
has been reviewing Celacade in the context of their newly issued draft document
entitled ‘Guidance for Industry Regulation of Human Cells, Tissues, and Cellular
and Tissue-Based Products (HCT/Ps) - Small Entity Compliance Guide’ to assess
whether this draft guidance is relevant to the Celacade System.  To
date, the Celacade System has been regulated as a medical device with the Center
for Devices and Radiological Health (CDRH) acting as lead reviewer, with input
from Center for Biologics Evaluation and Research (CBER).  The FDA has
recently informed us that Celacade will remain regulated as a medical device;
however, CBER will take the role of lead reviewer with CDRH providing
input.  We are planning to meet with CBER to finalize their input into
the design of ACCLAIM II.
  We
have established the Steering Committee to provide input to the ACCLAIM II final
study design. James B. Young, MD, Chairman, Division of Medicine at the
Cleveland Clinic Foundation and Medical Director, Kaufman Center for Heart
Failure, has agreed to be the Global Principal Investigator and Chairman of the
Steering Committee for the ACCLAIM II study.  Dr. Young was the Global
Principal Investigator for ACCLAIM and has played a leading role in numerous
other multi-center clinical trials focusing on heart failure and
transplantation.
 
 
 VP025
and VP Series
of Drugs Development Program
 
 We
are also developing a new class of drugs that is based on synthetic
three-dimensional phospholipid-based structures with specific groups of surface
molecules that are designed to modulate cytokine levels and control
inflammation. VP025, the lead product candidate from this new class of drugs, is
being developed for the treatment of neuro-inflammatory
disorders.  VP015, an additional product candidate from this new class
of drugs, is being developed to treat other inflammatory
conditions.
 
 Among
the many neurological conditions associated with an inflammatory response in the
nervous system are Alzheimer’s disease, Parkinson’s disease, and amyotrophic
lateral sclerosis (“ALS”). These conditions are characterized by increased
levels of inflammatory mediators, including cytokines, leading to the death of
nerve cells and the eventual loss of functional activity.  Due to the
prevalence, morbidity, and mortality associated with neuro-inflammatory
diseases, they represent a significant medical, social, and financial burden. It
is estimated that neurological conditions, which are expected to increase in
prevalence as the population ages, currently affect more than five million
people in North America and generate costs of care that exceed $75 billion
annually.
 
 We
have completed considerable preclinical work that has demonstrated the ability
of VP025 to reduce inflammation in models of a number of neurodegenerative
diseases, including Parkinson’s disease, Alzheimer’s disease, ALS, and diabetic
retinopathy. We have also successfully completed a phase I clinical trial of
VP025.  This double-blind, placebo-controlled, dose-escalation trial
examined the safety and tolerability of three doses of VP025 in 24 healthy
volunteers.  Multiple administrations of either low, mid, or high
doses of VP025 were shown to be safe and well tolerated when compared to
placebo, and no drug-related serious adverse events were reported. We continue
to focus on optimizing the manufacture of VP025 to support further clinical
development.
 
 We
plan to seek collaborations for VP025 and our VP series of drugs for one or more
of the potential applications to assist with the clinical and commercial
development of these products allowing us to focus our current resources on the
commercialization of Celacade in the E.U. and the execution of our planned
ACCLAIM II study, which we currently believe provide the best opportunities to
enhance shareholder value.
  20
  COMPETITIVE
ENVIRONMENT
 
 The
pharmaceutical, medical device, and biotechnology industries are characterized
by rapidly evolving technology and intense competition. Many companies,
including major pharmaceutical as well as specialized biotechnology companies,
are engaged in activities focused on medical conditions that are the same as, or
similar to, those targeted by us. Many of these companies have substantially
greater financial and other resources, larger research and development staff,
and more extensive marketing and manufacturing organizations than we do. Many of
these companies have significant experience in preclinical testing, human
clinical trials, product manufacturing, marketing and distribution, and other
regulatory approval procedures. In addition, colleges, universities, government
agencies, and other public and private research organizations conduct research
and may market commercial products on their own or through collaborative
agreements.  These institutions are becoming more active in seeking
patent protection and licensing arrangements to collect royalties for use of
technology that they have developed. These institutions also compete with us in
recruiting and retaining highly qualified scientific personnel.
 
 MANUFACTURING
  We
maintain a quality management system that is registered to ISO13485. This
quality system registration is necessary to support regulatory approvals. For
entry into the U.S. market, we are also ensuring the necessary compliance of our
quality system to the FDA Quality System Regulation (“QSR”). In addition, our
medical devices meet the requirements of the E.U. Medical Devices Directive
93/42/EEC for CE Marking.
  We
currently rely upon subcontractors for the manufacture of our device technology.
The subcontractors operate quality systems in accordance with ISO13485, and/or
the FDA QSR, as necessary. Manufacturing, testing, and maintenance of our
medical devices are verified and validated as appropriate to ensure conformance
to defined specifications.
  The
manufacturing of VP025 is performed according to current Good Manufacturing
Practice (“GMP”) at contract manufacturing organizations that have been approved
by our quality assurance department, following audits in relation to the
appropriate regulations.  Manufactured product is tested for
conformance with product specifications prior to release by our quality
assurance department.  GMP batches of VP025 are subjected to
prospectively designed stability test protocols.
  
 INTELLECTUAL
PROPERTY
  Because
of the substantial length of time and expense associated with developing new
products, the pharmaceutical, medical device, and biotechnology industries place
considerable importance on obtaining patent protection for new technologies,
products, and processes. Our policy is to file patent applications to protect
inventions, technology, and improvements that are important to the development
of our business and with respect to the application of our products and
technologies to the treatment of a number of disease indications. We seek patent
protection in various jurisdictions of the world. We own patents and patent
applications relating to our products and technologies in the United States,
Canada, Europe, and other jurisdictions around the world. We own trademark
registrations and trademark applications associated with our Celacade technology
in various jurisdictions, and rely on our legal rights in other
jurisdictions.  The scope and duration of our intellectual property
rights vary from country to country depending on the nature and extent of our
intellectual property filings, the applicable statutory provisions governing the
intellectual property, and the nature and extent of our legal
rights.  We will continue to seek intellectual property protection as
appropriate.
  We
require our employees, consultants, members of the SAB, outside scientific
collaborators, and sponsored researchers to enter into confidentiality
agreements with us that contain assignment of invention clauses outlining
ownership of any intellectual property developed during the course of the
individual’s relationship with us.
  21
 
 REGULATORY
REQUIREMENTS
  Before
medical products can be distributed commercially, a submission providing
detailed information must be reviewed and approved by the applicable government
or agency in the jurisdiction in which the product is to be marketed. The
regulatory review and approval process varies from country to country.
Similarly, we are also subject to separate regulations where we conduct clinical
trials. We cannot predict or give any assurances as to whether further
regulatory approvals will be received or how long the process of seeking
regulatory approvals will take.
  Europe
  Medical
products that are placed on the market in the E.U. are subject to one of two
mutually exclusive regulatory regimes: either the Medical Devices Directive
(“MDD”), Council Directive 93/42/EEC, for medical devices, or the Medicinal
Products Directive, Council Directive 65/65/EEC for pharmaceutical products. Our
Celacade technology has been classified as a medical device in the
E.U.
  We
are required to demonstrate compliance with the requirements of the MDD
93/42/EEC and affix a CE Mark to our medical devices in order to place our
medical device products on the market within the member states of the E.U.,
Norway, and Switzerland. We have CE Mark approval for our Celacade System in
chronic heart failure. The CE Mark attests that our medical device products meet
the “essential requirements” of the MDD relating to safety and efficacy. We must
also demonstrate our regulatory compliance (“conformity assessment”) annually
through a qualified third party (a “Notified Body”) selected by us. We have
demonstrated our regulatory compliance with these requirements for devices
placed in Europe for clinical trials, and our quality system was registered to
ISO9001 and EN46001 in February 1998. In addition, our quality system was
registered to ISO13485:1996 in August 2001 and to ISO 13485:2003 in September
2006.
  We
are subject to annual surveillance audits by our Notified Body and are required
to report any device-related serious adverse incidents or near-incidents to the
appropriate authorities.  To place a CE-Marked medical device on the
market within most European jurisdictions, we are required to provide
notification to national authorities.
  United
States
  In
the United States, clinical trials and commercialization of medical devices
require the approval of the FDA.   We are subject to regulation
by the FDA, as well as state and local authorities. Our medical devices are
subject to the PMA process prior to marketing in the United States. The PMA
process is a multi-step process that requires us to submit to the FDA
preclinical, clinical, and design and manufacturing data, which we have been
compiling to demonstrate the safety and effectiveness of our devices for the
stated medical indications or uses.
  The
clinical studies that generate the clinical data for the PMA are subject to
regulation under the investigational device exemption (“IDE”) regulations.
Before clinical studies of our device can begin, an IDE application must be
submitted to, and approved by, the FDA. In addition, before a study can commence
at each participating clinical center, the center’s institutional review board
(“IRB”) must approve the clinical protocol and other related documents. During
the PMA review process, the FDA will conduct an inspection of the manufacturer’s
facilities to ensure that the device design and manufacture are in compliance
with applicable QSR requirements. The QSR requirements mandate that we
manufacture our devices and maintain our documents in a prescribed manner with
respect to design, manufacturing, testing, and control
activities.  The FDA may also conduct inspections of the clinical
trial sites and the preclinical laboratories conducting pivotal safety studies
to ensure compliance with Good Clinical Practice and Good Laboratory Practice
requirements and may seek the advice of one of their Advisory Committees or
other Centers with the FDA.   If the FDA evaluations of the PMA
application and the results of inspections are favorable, the FDA may issue an
approvable letter, which usually contains a number of conditions that must be
met in order to secure final approval of the PMA. Only when those conditions
have been fulfilled to the satisfaction of the FDA will the FDA issue a PMA
approval order, authorizing commercial marketing of the device for stated
indications. The FDA also has the authority to impose certain post-approval
requirements, such as post-market surveillance clinical trials, in the PMA
approval order. FDA approval can be withdrawn for failure to comply with any
post-approval requirements or for other reasons, such as the discovery of
significant adverse effects.
  22
 Canada
  In
Canada, clinical trials and the commercialization of medical products require
the approval of Health Canada. The Therapeutic Products Directorate (“TPD”) of
Health Canada regulates the manufacture and sale of medical devices in Canada.
The Canadian Medical Device Regulations are similar to those of the United
States and require that clinical studies be conducted to demonstrate the safety
and effectiveness of devices prior to marketing. There must also be documented
evidence that the devices are developed, manufactured, and produced under
current quality system regulations and guidelines in order to ensure the quality
of the product made available for sale. Approval of such technology is a
multi-step process, and we are prohibited from promoting or commercializing our
products prior to regulatory approval. For any clinical investigation and
testing of our products in Canada, authorization by the TPD is required. In
addition, before a study can commence at each participating clinical center, the
center’s IRB must approve the clinical protocol and other related
documents.
  We
must manufacture our devices under approved quality system conditions and must
validate the performance characteristics of the devices to ensure that the
devices perform safely, consistently, and reliably. The TPD has adopted ISO13485
and relies upon accredited registrars to certify manufacturers of medical
devices. Our quality system was registered to ISO13485 in August 2001 and to ISO
13485:2003 in September 2006.
  Manufacturers
of marketed devices must also be licensed by Health Canada. Licensing is
contingent upon successful certification by an accredited
registrar.
  In
addition to the regulatory product approval framework, we are also subject to
municipal, provincial, and federal laws governing occupational safety,
laboratory practices, the use, handling, and disposition of biological waste,
environmental protection, and hazardous substance control. We may be subject to
other current and future regulations, including future regulation of the
biotechnology/pharmaceutical and/or medical device industry. We believe we are
in material compliance with all such existing regulations.
  C. Organizational
Structure
  See
Item 4A above.
  D. Property,
Plant and Equipment
  We
lease facilities at 2505 Meadowvale Boulevard, Mississauga, Ontario Canada L5N
5S1 and at the MaRS Discovery District, 101 College Street, Toronto, Ontario,
Canada M5G 1L7.  Effective January 1, 2008, the lease commitments at these
premises cover a total of approximately 38,000 square feet. In addition, Vasogen
Ireland Limited leases premises in Ireland totaling approximately 5,500 square
feet. We continually monitor our facility requirements in the context of our
needs and the results of our research and development activities, and we expect
these requirements to change commensurately with our activities.
  Item
      5. Operating and
      Financial Review and Prospects
  The
following discussion and analysis should be read in conjunction with the audited
consolidated financial statements of the Company and notes
thereto.  See “Item 18. Financial Statements” The consolidated
financial statements have been prepared in accordance with Canadian GAAP, which,
except as described in Note 16 to Item 18, conform in all material respects with
US GAAP. All amounts are expressed in Canadian dollars unless otherwise noted.
Annual references are to the Company’s fiscal years, which end on November
30.
  A. Operating
Results
  We
are a development-stage enterprise that currently dedicates our cash resources
mainly to research and development (“R&D”) activities and to the initial
commercial launch of Celacade in Europe.  Our products have not yet
been approved by regulatory authorities in all relevant jurisdictions. In
December 2007, Ferrer received initial orders for Celacade in Germany; as such
we did not generate any revenues from operations in fiscal 2007.
  23
 Loss
  The
loss for the years ended November 30, 2007, 2006, and 2005, is reflected in the
following table:
  Loss
      (in millions of dollars, except per-share amounts)
              2007
              2006
              (Decrease)
              2006
              2005
              (Decrease)Loss
              $28.8
              $66.4
              ($37.6)
              $           66.4
              $           93.0
              ($26.6)Basic
      and fully diluted loss per share
              $1.46
              $7.05
              ($5.59)
              $           7.05
              $           11.65
              ($4.60)
 
  The
loss for 2007 has decreased when compared with 2006 and in 2006 when compared
with 2005.  A key driver of this reduction is the lower costs
associated with our phase III clinical programs and the corporate costs
associated with supporting these programs. Another reason for the reduced loss
is the reduction in expenses associated with the senior convertible notes issued
in 2005 and repaid in full in April 2007.
  Research
and Development
  The
changes in R&D expense, and their key components, for the years ended
November 30, 2007, 2006, and 2005, are reflected in the following
table:
  R&D
      expense (in millions of dollars, except percentages)
              
              2007
              
              
              2006
              
              
              Increase
                (Decrease)
              
              
              2006
              
              
              2005
              
              
              Increase
                (Decrease)Program
      costs:Direct
              
              $
              0.6
              
              
              $
              13.1
              
              
              $
              (12.5
              )
              
              $
              13.1
              
              
              $
              47.5
              
              
              $
              (34.4
              )Indirect
              
              $
              6.8
              
              
              $
              13.6
              
              
              $
              (6.8
              )
              
              $
              13.6
              
              
              $
              17.8
              
              
              $
              (4.2
              )Preclinical
      costs
              
              $
              3.1
              
              
              $
              3.4
              
              
              $
              (0.3
              )
              
              $
              3.4
              
              
              $
              3.8
              
              
              $
              (0.4
              )Intellectual
      property costs
              
              $
              1.4
              
              
              $
              2.2
              
              
              $
              (0.8
              )
              
              $
              2.2
              
              
              $
              1.8
              
              
              $
              0.4Other
      costs
              
              $
              0.1
              
              
              $
              0.4
              
              
              $
              (0.3
              )
              
              $
              0.4
              
              
              $
              0.6
              
              
              $
              (0.2
              )Total
      R&D
              
              $
              12.0
              
              
              $
              32.7
              
              
              $
              (20.7
              )
              
              $
              32.7
              
              
              $
              71.5
              
              
              $
              (38.8
              )R&D
      expense as a percentage of the sum of R&D and General and
      Administration expenses
              
              
              46
              %
              
              
              63
              %
              
              
              (17
              %)
              
              
              63
              %
              
              
              77
              %
              
              
              (14
              %)
 
  Program
Costs
  The
expenses related to our Celacade programs are expensed for accounting purposes
and have been the key driver of our losses over the last three fiscal
years.   The majority of the decrease in our R&D expenses for
2007, when compared with the same period in 2006, and for 2006, when compared
with the same period in 2005, resulted from a significant reduction in the
clinical trial activities relating to the completion of our phase III
trials.
 
 Direct
costs to support these trials include expenses for clinical site fees, study
monitoring, site close out, data management and analysis, and technology
support.  For 2007, direct costs decreased significantly, as our phase
III trials were completed; however, for the comparable period in 2006, these
costs were still being incurred, as our phase III trials were completed in the
second half of 2006.  During 2005, the number of clinical sites
participating in these programs and the number of patients enrolled in these
programs were a significant driver of the direct costs; however, for the
comparable periods in 2006, these costs were reduced substantially, as our phase
III trials were completed.
 
 Expenses
in 2007 related to further analysis of the ACCLAIM trial results and other
activities in preparation for our May 2007 meeting with the FDA.
 
 Indirect
costs to support these programs consist of salaries and benefits for employees
who support the Celacade program, employee termination costs, professional fees,
and other support costs.    Indirect costs decreased in 2007
when compared with 2006, and in 2006 when compared with 2005, as a result of a
reduced level of service and technology development activity required to support
our clinical programs.  These decreases were offset somewhat by
restructuring costs associated with employee terminations, which were $0.7
million for 2007, compared with $0.1 million in 2006. No restructuring costs
were incurred in 2005.
 
 24
 During
2007, program costs were incurred for the preparation of initial commercial
development of Celacade in Europe and for planning in anticipation of a
confirmatory study that is expected to support an application for regulatory
approval in the United States of Celacade technology for the treatment of
patients with NYHA Class II heart failure.
 
 A
more detailed summary of our clinical programs is provided below.
 
 CELACADE
Program
 
 Inflammation
is implicated in the development and progression of heart
failure.  Our Celacade System targets the inflammation underlying
chronic heart failure.
 
 The
double-blind, placebo-controlled ACCLAIM trial completed in 2006 studied 2,408
subjects with chronic heart failure at 175 clinical centers in seven
countries.  ACCLAIM was designed to assess the ability of Celacade to
reduce the risk of death or first cardiovascular
hospitalization.  Patients included in the study had NYHA Class II,
III, or IV heart failure with a left-ventricular ejection fraction (LVEF) of 30%
or less and had been hospitalized or received intravenous drug therapy for heart
failure within the previous 12 months, or had NYHA Class III/IV heart failure
with a LVEF of less than 25%.
 
 Patients
in the ACCLAIM trial were receiving optimal standard-of-care therapy for heart
failure, which at baseline included a number of pharmaceuticals such as
diuretics (94%), ACE-inhibitors (94%) and beta-blockers (87%), as well as device
therapies including automatic implantable cardioverter defibrillators (26%), and
use of cardiac resynchronization therapy (10.5%).  The placebo
(n=1,204 patients) and Celacade (n=1,204 patients) groups were balanced for all
important baseline characteristics, including demographics, LVEF, NYHA
classification, concomitant medical conditions, medications, and device
therapies.
 
 The
results of the ACCLAIM trial have been published in the January 19, 2008 issue
of The Lancet(Lancet2008; 371: 228-36), a world-leading
medical journal.    The key findings from the ACCLAIM trial
were also presented at the World Congress of Cardiology 2006 in Barcelona,
Spain, and at the 10th Annual Scientific Meeting of the Heart Failure Society of
America in Seattle, Washington.
 
 The
difference in time to death or first cardiovascular hospitalization, the primary
endpoint of ACCLAIM, for the intent-to-treat study population was not
statistically significant (p=0.22); however, the risk reduction
directionally favored the Celacade group (hazard ratio=0.92).
 
 In
the ACCLAIM trial, Celacade was shown to significantly reduce the risk of death
or first cardiovascular hospitalization by 39% in a pre-defined subgroup of
patients with NYHA Class II heart failure at baseline (n=689 patients, 216
events, p=0.0003) and in a pre-defined subgroup of patients with no prior
history of heart attack at baseline, Celacade was also shown to significantly
reduce the risk of death or first cardiovascular hospitalization by 26% (n=919
patients, 243 events, p=0.02).  Furthermore, consistent with the
impact of Celacade on the risk of mortality and morbidity in large subgroups
within the ACCLAIM trial was the finding of a significant improvement in quality
of life (as measured by the Minnesota Living with Heart Failure Questionnaire)
for the patients assessed for quality of life in the intent-to-treat study
population (p=0.04).  Celacade was also shown to be well tolerated in
the ACCLAIM patient population, and there were no significant between-group
differences for any serious adverse events.
 
 During
2007, we completed a collaboration agreement (the “Agreement”) with Ferrer to
commercialize Celacade for the treatment of chronic heart failure in certain
countries of the E.U. and Latin America.  Under the agreement, Ferrer
will have the exclusive rights to market Celacade for the treatment of chronic
heart failure and other cardiovascular conditions in certain countries of the
E.U. and Latin America.  We have already received E.U. regulatory
approval as a medical device under the CE Mark, which enables marketing of
Celacade for the treatment of chronic heart failure in the 27 member countries
of the E.U.  Ferrer has also acquired the right of first negotiation
with respect to the remaining countries of the E.U.  In December 2007,
Ferrer received initial orders for Celacade in Germany.
 
 25
 Under
the Agreement, the commercial launch strategy for Celacade in Europe will
involve an initial commercialization phase (ICP), during which Ferrer will
target key physicians to build support for expanded use of Celacade within the
broader medical community.  Based on Ferrer’s current plan, the ICP is
expected to conclude no later than September 1, 2008.  Under the terms
of the Agreement, we are responsible for the cost of delivering the Celacade
technology to Ferrer, as required, based on orders received, which includes the
Celacade single-use disposable cartridges required for the delivery of each
Celacade monthly treatment. During the ICP, Ferrer will pay us a fixed amount
for the disposable cartridges and, following the successful completion of the
ICP, and upon the first commercial sale as defined in the Agreement, we will
receive 45% of revenues generated by Ferrer through the sale of the
cartridges.  After a period five years from the date of the first
commercial sale on a country-specific basis, our share of the revenues will be
42%.  Following the ICP, we will also receive milestone payments,
based on the first commercial sale of Celacade on a country-specific basis, and
we will receive milestone payments on reaching pre-specified thresholds based on
overall sales.  Also under the terms of the Agreement, Ferrer will be
financially responsible for costs associated with the launch and marketing of
Celacade.   Our agreement with Ferrer is available on SEDAR and
EDGAR.
 
 At
a meeting with the FDA to discuss the ACCLAIM results in May 2007, the agency
strongly recommended that we conduct a confirmatory study to support a U.S. PMA
filing for Celacade for NYHA Class II heart failure patients and also
recommended that we use a Bayesian statistical approach.  This
approach involves a trial design methodology that may allow utilization of prior
trial results to contribute to the statistical power of a confirmatory study and
therefore potentially provides the opportunity to significantly reduce the
number of required patients, as well as the cost and duration of the
study.  As a result of the FDA’s recommendations, we
retained Berry Consultants and Dr. Donald A. Berry, Head, Division of
Quantitative Sciences and Chairman, Department of Biostatistics, The University
of Texas MD Anderson Cancer Center, and an authority in the area of Bayesian and
adaptive trial design, to assist with the development of the
study.
 
 In
September 2007, we announced our plans for a confirmatory study (ACCLAIM II)
that would support an application for regulatory approval in the United States
of Celacade for the treatment of patients with NYHA Class II heart
failure.   We have been working with the FDA to finalize the
ACCLAIM II protocol and the statistical analysis plan.  In preparation
for ACCLAIM II, the FDA has been reviewing Celacade in the context of their
recently issued draft document entitled ‘Guidance for Industry Regulation of
Human Cells, Tissues, and Cellular and Tissue-Based Products (HCT/Ps) - Small
Entity Compliance Guide’ to assess whether this draft guidance is relevant to
the Celacade System.  To date, Celacade has been regulated as a
medical device with the Center for Devices and Radiological Health (CDRH) acting
as lead reviewer, with input from Center for Biologics Evaluation and Research
(CBER).  The FDA has recently informed us that Celacade will remain
regulated as a medical device; however, CBER will take the role of lead
reviewer, with CDRH providing input.  We are planning to
meet  with CBER to finalize their input into the design of ACCLAIM
II.
 
 We have established the Steering
Committee to provide input to the ACCLAIM II final study design. James B. Young,
MD, Chairman, Division of Medicine at the Cleveland Clinic Foundation and
Medical Director, Kaufman Center for Heart Failure, has agreed to be the Global
Principal Investigator and Chairman of the Steering Committee for the ACCLAIM II
study.  Dr. Young was the Global Principal Investigator for ACCLAIM
and has played a leading role in numerous other multi-center clinical trials
focusing on heart failure and transplantation.
 
 VP025
& VP Series of Drugs Program
 
 VP025,
our lead product from a new class of drugs called the VP series of drugs, is
being developed to target the chronic inflammation that is associated with a
number of neurological diseases.  Many neurological conditions,
including Alzheimer’s disease, Parkinson’s disease, and amyotrophic lateral
sclerosis (ALS, also known as Lou Gehrig’s disease), are associated with an
inflammatory response in the nervous system.  These conditions are
characterized by increased levels of inflammatory mediators, including
cytokines, leading to the death of nerve cells and the eventual loss of
functional activity.  Due to the prevalence, morbidity, and mortality
associated with neuro-inflammatory diseases, they represent a significant
medical, social, and financial burden.
  We
have completed a considerable amount of preclinical work that has demonstrated
the ability of VP025 to reduce inflammation in models of a number of
neurodegenerative diseases, including Parkinson’s disease, Alzheimer’s disease,
ALS, and diabetic retinopathy. We have also successfully completed a phase I
clinical trial of VP025.  This double-blind, placebo-controlled,
dose-escalation trial examined the safety and tolerability of three doses of
VP025 in 24 healthy volunteers.  Multiple administrations of either
low, mid, or high doses of VP025 were shown to be safe and well tolerated when
compared to placebo, and no drug-related serious adverse events were
reported.  We continue to focus on the optimizing the manufacture of
VP025 to support further clinical development.
  26
 We
plan to seek collaborations for one or more of these applications to assist with
the clinical and commercial development of these products allowing us to focus
our current resources on the commercialization of Celacade in Europe and the
execution of our planned ACCLAIM II study, which we currently believe provide
the best opportunities to enhance shareholder value.
  Preclinical
Costs
 
 Our
preclinical research programs are focused on developing a new class of drugs, of
which VP025 is the lead candidate, and on supporting our Celacade
program.
  The
R&D expenses associated with preclinical research activities during 2007,
2006, and 2005 were primarily the result of the above VP025 & VP series of
drugs program studies.  Preclinical expenditures consist of salaries
and benefits for employees who support the preclinical activities and costs to
the medical institutions to whom our research is outsourced. Preclinical costs
for 2007 decreased when compared to 2006, and in 2006 when compared to 2005,
given a reduction in our preclinical activities.
 
 Intellectual
Property
 
 Our
research and development initiatives have resulted in the filing of numerous
patent applications.  We own patents and pending patent applications
relating to our products and technologies in the United States and other
jurisdictions around the world.  Our intellectual property
expenditures primarily consist of fees paid to patent offices worldwide and to
external patent counsel.  These costs are included in R&D expense
and are expensed as incurred.  These costs are a result of advancing
our patent protection into additional countries through international patent
grants, and additional patent and trademark activities associated with
protecting our existing technologies, as well as new discoveries and
developments resulting from our research and development programs.
  The
costs for 2007 are lower than the costs for the same period in 2006 due to a
lower level of activity and the maturing of certain portions of the
portfolio.  The costs for 2006 are higher than the costs for the same
periods in 2005.  In addition to a higher level of activity
surrounding our existing patent portfolio, we carried out additional patent
activities to protect intellectual property arising from the ACCLAIM clinical
trial.
  General
and Administration
  The
changes in general and administration expense, and their key components, for the
years ended November 30, 2007, 2006, and 2005, are reflected in the following
table:
  General
      and Administration expense (in millions of dollars)
              
              2007
              
              
              2006
              
              
              Increase
                (Decrease)
              
              
              2006
              
              
              2005
              
              
              Increase
                (Decrease)Infrastructure
      and other support costs
              
              $
              11.9
              
              
              $
              16.6
              
              
              $
              (4.7
              )
              
              $
              16.6
              
              
              $
              19.3
              
              
              $
              (2.7
              )Insurance
              
              $
              1.1
              
              
              $
              1.7
              
              
              $
              (0.6
              )
              
              $
              1.7
              
              
              $
              1.5
              
              
              $
              0.2Professional
      fees
              
              $
              1.3
              
              
              $
              1.0
              
              
              $
              0.3
              
              
              $
              1.0
              
              
              $
              1.3
              
              
              $
              (0.3
              )Total
      General and Administration expense
              
              $
              14.3
              
              
              $
              19.3
              
              
              $
              (5.0
              )
              
              $
              19.3
              
              
              $
              22.1
              
              
              $
              (2.8
              )
 
  Infrastructure
and other support costs include salaries and related employee costs for those
employees not directly involved in research and development, facility-related
and information technology expenses for all employees, and restructuring
costs.  These costs decreased in 2007 when compared to 2006, and in
2006 when compared with 2005, as a result of a reduced level of activity
required to support the current operations. The cost reduction is primarily
driven by the decrease in full-time employees to 104 as at November 30, 2007.
There were 125 full-time employees as at November 30, 2006, compared with 172 as
at November 30, 2005.  The reduction in expenses was offset by
restructuring costs, which consisted primarily of termination costs of $2.6
million for 2007, compared with $0.5 million in 2006; no restructuring costs
were incurred in 2005.  Insurance costs decreased in 2007 when
compared to 2006, and increased moderately in 2006 when compared to 2005, as a
result of market conditions that impacted our insurance
premiums.  Professional fees include expenses for legal, tax,
accounting, and other specialized services and are comparable to the prior
periods.
  27
 During
2007, general and administration expenditures did not decrease in direct
proportion to R&D expenditures.  This is a result of restructuring
costs that were incurred, and which are being included in G&A
expenditures.  In addition, expenditures associated with the European
commercial launch and preparations for ACCLAIM II, which are included in R&D
expenditures, were not as significant as costs incurred for the ACCLAIM
trial.  G&A expenditures also include other fixed costs which are
not necessarily reduced based on the level of corporate activity, such as cost
associated with being a public company.
  Foreign
Exchange
  The
foreign exchange gain or loss for the years ended November 30, 2007, 2006, and
2005, is reflected in the following table:
  Foreign
      Exchange
                (in
      millions of dollars)
              2007
              2006
              Increase
              2006
              2005
              IncreaseForeign
      exchange (gain) loss
              $2.0
              $0.1
              $1.9
              $0.1
              $(0.7)
              $0.8
 
 We
are holding U.S. dollars directly and indirectly through forward currency
contracts to make payments for R&D and operating expenditures denominated in
U.S. dollars. At November 30, 2007, we held U.S. dollar denominated securities
in the amount of US$0.1 million, and had a contractual obligation to purchase
back US$12.9 million (see Item 5B below).  As our functional or
measurement currency is the Canadian dollar, U.S. dollar exchange rate
fluctuations may have a significant impact from an accounting perspective, but
they do not impair or enhance our ability to pay these U.S. dollar denominated
expenses.
 
 Our
statement of operations includes a foreign exchange loss for 2007 that arose as
a result of the strengthening of the Canadian dollar, our functional currency,
relative to the U.S. dollar, during this period.  The year-end
conversion rates from the U.S. dollar to the Canadian dollar for November 30,
2007, 2006 and 2005 were 1.000, 1.1422, and 1.1669, respectively.  In
2006, losses resulting from cash being held in U.S. dollars have been partially
offset by gains on liabilities that are denominated in U.S.
dollars.
 
 Investment
Income
  Investment
income for the years ended November 30, 2007, 2006, and 2005, is reflected in
the following table:
  Investment
      Income
                (in
      millions of dollars)
              2007
              2006
              (Decrease)
              2006
              2005
              (Decrease)Investment
      income
              $1.3
              $2.0
              ($0.7)
              $2.0
              $2.3
              ($0.3)
 
 Investment
income for 2007 was lower when compared with 2006, and in 2006 when compared
with 2005, due to a decline in the average amount of cash and cash equivalents,
available for sale securities, and restricted cash on hand.
  28
 
 Other
expenses
  Other
expenses for the years ended November 30, 2007, 2006, and 2005, are reflected in
the following table:
  
 Other
      expense
                (in
      millions of dollars)
              
              2007
              
              
              2006
              
              
              Decrease
              
              
              2006
              
              
              2005
              
              
              IncreaseInterest
      expense on senior convertible notes payable
              
              $
              0.0
              
              
              $
              0.9
              
              
              $
              (0.9
              )
              
              $
              0.9
              
              
              $
              0.3
              
              
              $
              0.6Accretion
      of the carrying value of senior convertible notes payable
              
              $
              0.7
              
              
              $
              7.8
              
              
              $
              (7.1
              )
              
              $
              7.8
              
              
              $
              1.7
              
              
              $
              6.1Amortization
      of deferred financing costs
              
              $
              0.2
              
              
              $
              2.5
              
              
              $
              (2.3
              )
              
              $
              2.5
              
              
              $
              0.4
              
              
              $
              2.1Loss
      on debt extinguishment
              
              $
              1.8
              
              
              $
              5.0
              
              
              $
              (3.2
              )
              
              $
              5.0
              
              
              $
              0.0
              
              
              $
              5.0Change
      in fair value of embedded derivatives
              
              $
              (0.8
              )
              
              $
              0.0
              
              
              $
              (0.8
              )
              
              $
              0.0
              
              
              $
              0.0
              
              
              $
              0.0Total
              
              $
              1.9
              
              
              $
              16.2
              
              
              $
              (14.3
              )
              
              $
              16.2
              
              
              $
              2.4
              
              
              $
              13.8
 
 Except
for interest expense, other expenses associated with the senior convertible
notes are non-cash expenditures.  These expenses are lower for 2007,
when compared to the same period in 2006, as the senior convertible notes were
repaid during April 2007.
  Except
as described under Item 4 or elsewhere in this annual report, there are no
governmental economic, fiscal, monetary or political policies or factors that
have materially affected, or could materially affect, directly or indirectly,
the Company’s operation or investments by U.S. shareholders.
  B. Liquidity and
Capital Resources
  Since
our inception, we have financed our operations primarily from public and private
sales of equity, the issuance of senior convertible notes, the exercise of
warrants and stock options, and interest on funds held for future
investments.
  On
May 24, 2007, we completed a public offering for net proceeds of $15.4 million
(US$14.2 million), resulting in the issuance of 4.9 million common shares and
3.7 million five-year warrants to purchase common shares at US$3.16 per
share.  This financing triggered the anti-dilution adjustments
contained in the warrants that were issued in connection with the senior
convertible notes issued on October 7, 2005, which are discussed
below.
  On
November 14, 2006 we completed a public offering for gross proceeds of $23.1
million (US$20.3 million), resulting in the issuance of 4.3 million common
shares, 1.7 million five-year warrants to purchase common share at US$6.30 per
share and 0.4 million six-month warrants to purchase common shares at US$5.30
per share.  This financing triggered the anti-dilution adjustments
contained in the senior convertible notes and warrants that were issued on
October 7, 2005 which are discussed in greater detail below.
  On
October 7, 2005, our wholly-owned subsidiary, Vasogen Ireland Limited, raised
gross proceeds of US$40 million through the issuance of senior convertible notes
(“the notes”). Costs of this transaction, including agency and legal fees and
other expenses, were US$3.6 million.   The notes had a maturity
date of two years from issuance and bore interest at a rate of
6.45%.  As of April 1, 2007, the principal amount under the senior
convertible notes was fully repaid.    As a result of the
financing that was completed on May 24, 2007, the debt agreement’s anti-dilution
provisions provided that the exercise price of the 471,999 warrants outstanding
to the note holders at an exercise price of US$19.90 was reduced to US$13.59 and
the exercise price of the 39,000 warrants at an exercise price of US$20.60 was
reduced to US$14.05.  In addition, the 0.5 million warrants
outstanding can now be exercised for 1.1 million common shares, which is an
increase from 0.8 million common shares.  As a result of the financing
that was completed on November 14, 2006, the debt agreement’s anti-dilution
provisions provided that the exercise price of the 471,999 warrants outstanding
to the note holders at an exercise price of US$30.00 was reduced to US$19.90 and
the exercise price of the 39,000 warrants at an exercise price of US$30.11 was
reduced to US$20.60.  In addition, the 0.5 million warrants
outstanding could be exercised for 0.8 million common shares, which is an
increase from 0.5 million common shares.
  29
 On
February 2, 2005, we completed a public offering for gross proceeds of $52.5
million (US$42.3 million), resulting in the issuance of 0.9 million common
shares.
  During
2007 and 2006, we did not receive funds from the exercise of options and
warrants.  In 2005, the proceeds from the exercise of options and
warrants were $0.6 million. The total number of common shares outstanding at
November 30, 2007 increased to 22.4 million from 15.7 million at November 30,
2006.  The comparative information for the Shareholders’ Equity
section in our financial statements has been adjusted to give effect to the 10:1
share consolidation that was approved by our shareholders on April 3, 2007, and
implemented on April 17, 2007, as directed by the Board of
Directors.  The number of employee stock options outstanding at
November 30, 2007 was 0.9 million. The conversion rate of the options is on a
one-to-one basis for common shares.  The number of warrants
outstanding at November 30, 2007 was 6.5 million. The conversion rate of the
warrants is on a one-to-one basis for common shares, excluding 0.5 million
warrants that have been issued to the note holders, which are now convertible
into common shares at a rate of approximately 2.2 common shares for one
warrant.
  As
at January 18, 2008, we had 22.4 million common shares outstanding; 0.9 million
options to purchase common shares outstanding; and 6.5 million warrants to
purchase 7.1 million common shares.
  At
November 30, 2007, our cash and cash equivalents, and restricted cash totaled
$23.5 million, compared with $36.8 million at November 30, 2006.  The
decrease is a result of the cash used in operations during 2007 offset by the
proceeds from the financing that closed on May 24, 2007.   We
were required to maintain a letter of credit in connection with the senior
convertible notes payable.  The letter of credit expired on July 3,
2007 and was cancelled during the third quarter.  With the repayment of our
convertible notes during the second quarter, we no longer have any restricted
cash.  We invest our cash resources in liquid government and corporate
debt instruments having a single “A” credit rating or greater.  We do
not believe that the results of operations or cash flows would be affected to
any significant degree by a sudden change in market interest rates relative to
interest rates on our investments, owing to the relative short-term nature of
the investments. We currently hold our cash resources in investments issued and
guaranteed by major Canadian financial institutions.
  We
are exposed to changes in foreign exchange rates between the Canadian and U.S.
dollars, which could affect the value of our cash and cash
equivalents.  At November 30, 2007, we held U.S. dollar denominated
securities in the amount of US$0.1 million, and had a contractual obligation to
purchase US$12.9 million (see discussion below).
  In
November 2007, we purchased Canadian dollars totaling $12.5 million for US$12.9
million, and concurrently entered into a forward contract to purchase the U.S.
dollars back in December 2007.  The Canadian dollars were acquired to
enable us to invest our cash resources in Canadian investments; however, the
forward contract enabled us to preserve our U.S. funds, even when converted to
Canadian dollars.  Our U.S. funds will be used to cover future
expenditures denominated in U.S. dollars. This forward contract matured in
December 2007.
  In
November 2006, we entered into a contract to purchase Canadian dollars totaling
$9.2 million (US$8.0 million), and concurrently entered into a forward contract
to purchase the U.S. dollars back in December 2006.  The Canadian
dollars were acquired to enable us to invest our cash resources in Canadian
investments; however, the forward contract enabled us to preserve our U.S.
funds, even when converted to Canadian dollars.  Our U.S. funds will
be used to cover expenditures denominated in U.S. dollars. This forward contract
matured in December 2006.
  Our
net cash used in operating activities for 2007 was $25.8 million, compared with
$64.4 million and $74.6 million for 2006 and 2005, respectively.  Our
net cash used in operating activities for the three months ended November 30,
2007 was $4.5 million.  Our net cash used in operations included
restructuring costs for 2007 of $2.7 million and $0.3 million for the three
months ended November 30, 2007.  Other than our losses, changes in our
accounts payables and accrued liabilities within working capital had the most
significant impact on our cash used in operations.  Our working
capital is affected by the increase or decrease in our accounts payable and
accrued liabilities as a result of certain expenses incurred in our phase III
clinical trials that were not paid until certain trial milestones were reached,
such as the receipt of final study reports from clinical sites at the end of the
trials. In 2006, a significant number of these milestones were achieved, which
resulted in the payment of cash related to the expenditures incurred in 2005 and
2004.
  30
 We
intend to continue to use our capital resources to fund our research and
development activities, including ACCLAIM II and the commercialization of
Celacade in Europe.  The amount of capital resources to be allocated
to these activities will depend upon the scale of programs
undertaken.
 
 Based
on our current plans, we will need to raise additional funds for ongoing
operating costs, research and development activities, preclinical studies, and
clinical trials necessary to bring our potential products to market,
particularly for ACCLAIM II, or to potentially establish marketing, sales, and
distribution capabilities.  We may endeavor to secure additional
financing through strategic alliance arrangements, the exercise of options and
warrants, the issuance of new share capital, and/or our European
commercialization activities, as well as through other financing opportunities.
There can be no assurance that additional financing will be available and, if
available, will be on terms acceptable to us.  The availability of
financing will be affected by the results of our preclinical and clinical
research, including the ACCLAIM trial, which failed to reach its primary
endpoint, our ability to advance the development of Celacade and obtain
regulatory approvals, the market acceptance of our products, the state of the
capital markets generally (with particular reference to biotechnology
companies), strategic alliance agreements, and other relevant commercial
considerations.
 
 C. Research and
development, patents, and licenses, etc
  We
expense all R&D costs.  The majority of our research is outsourced
to medical institutions, under contractual agreements, for which expenditures
are settled with cash payments that are aligned with the achievement of
pre-defined activities.  The costs of our prepaid clinical supplies
are deferred, on the basis that these supplies have future alternative uses
related to the various clinical applications of our Celacade technology, and are
expensed as they are shipped to outsourced research centers or clinical
sites.
  The
cost of our acquired technology, representing part of our platform medical
device technology, is amortized on a straight-line basis over 20 years in
recognition of the term of the acquired patent.
  Our
ability to recover the carrying value of our acquired technology and clinical
supplies is impacted by several factors, including, but not limited to, the
progress of clinical trials, our ongoing ability to fund clinical trials,
feedback and decisions from health regulators regarding clinical trial results
and reimbursement, ongoing technological improvements, technological
obsolescence, the timing of product launch, the development of our patent
portfolio, the ability to defend any claims made by third parties against our
intellectual property, and our financial ability to challenge those third
parties who may infringe our intellectual property.  Based on analysis
to date, we believe that the results of the phase III ACCLAIM trial warrant
efforts to advance the development of Celacade in a pre-defined sub-group and
that the value of our acquired technology and the clinical supplies is
recoverable.
  For
the years ended November 30, 2007, 2006, and 2005, the Company spent $12.0
million, $32.7 million, and $71.5 million, respectively, on research and
development.  At the present time, the Company’s principal
expenditures are focused on the advancement of the company’s research and
development program.  Over the past three years, Vasogen has raised
approximately $129 million in net proceeds from the issuance of equity
securities and convertible notes to investors and the exercise of options and
warrants.  The Company’s common shares are listed on the TSX under the
symbol “VAS” and on the NASDAQ under the symbol “VSGN”.
  D. Trend
Information
  It
is important to note that historical patterns of expenditures cannot be taken as
an indication of future expenditures.  The amount and timing of
expenditures and availability of capital resources vary substantially from
period to period, depending on the level of research and development activity
being undertaken at any one time and the availability of funding from investors
and prospective commercial partners.
  The
following table presents unaudited selected financial data for each of the last
eight quarters ended November 30, 2007:
 31
  Loss
      for the period (000’s)
              
              
              Basic
      and diluted loss per share
              
              
              Foreign
      exchange gain/(loss) (000’s)November
      30, 2007
              
              $
              (6,058
              )
              
              $
              (0.27
              )
              
              $
              (777
              )August
      31, 2007
              
              $
              (5,347
              )
              
              $
              (0.24
              )
              
              $
              (242
              )May
      31, 2007
              
              $
              (9,694
              )
              
              $
              (0.54
              )
              
              $
              (1,092
              )February
      28, 2007
              
              $
              (7,678
              )
              
              $
              (0.47
              )
              
              $
              134November
      30, 2006
              
              $
              (10,024
              )
              
              $
              (0.89
              )
              
              $
              56August
      31, 2006
              
              $
              (14,566
              )
              
              $
              (1.55
              )
              
              $
              12May
      31, 2006
              
              $
              (22,438
              )
              
              $
              (2.59
              )
              
              $
              (169
              )February
      28, 2006
              
              $
              (19,332
              )
              
              $
              (2.34
              )
              
              $
              (3
              )
 
 Our
quarterly losses have decreased significantly as a result of the gradual ramping
down of clinical activity of our phase III clinical programs.  This
reduction has also been driven by a reduction of expenses associated with the
senior convertible notes.  Both of these factors are discussed in
greater detail elsewhere in this annual report.  The operations of our
Company are not subject to any material seasonality or cyclicality
factors.  The quarterly losses for 2006 above do not include any
adjustment to reflect the adoption of the recommendations of Section
3855.  We adopted this amendment on a retroactive basis, without
restatement.
  The
loss in the fourth quarter of 2007 increased when compared to that in the third
quarter of 2007 as a result of a foreign exchange loss that arose as a result of
the strengthening of the Canadian dollar, our functional currency, relative to
the U.S. dollar, during this quarter. R&D and general and administration
expense for the fourth quarter was $5.6 million, compared with $5.5 million in
the third quarter.
  Except
as disclosed elsewhere in this annual report, the Company knows of no trends,
uncertainties, demands, commitments or events that are reasonably likely to have
a material effect on the Company’s liquidity or capital resources or that would
cause reported financial information not necessarily to be indicative of future
operating results or financial conditions.
  E. Off-balance
sheet arrangements
  We
have no debt, guarantees, off-balance sheet arrangements, or capital lease
obligations. Other long-term obligations are discussed below.
  F. Contractual
obligations
  Our
contractual obligations as of November 30, 2007 are as follows:
  Contractual
      Obligations
                (in
      millions of dollars)
              Total
              Less
      than 1 year
              1
      - 3 years
              4
      - 5 years
              More
      than
                5
      yearsOperating
      lease obligations
              $1.0
              $0.6
              $0.4
              nil
              nilSenior
      convertible notes
              nil
              nil
              nil
              nil
              nil
 
 We
have granted royalties to arm’s-length third parties based on gross amounts
receivable by us from future commercial sales of our Celacade technology,
aggregating 1.5% on all sales, to a maximum royalty of $1.3 million per annum
and an additional 2% with respect to revenue derived from certain applications
of this technology, to a maximum royalty of $5.0 million per
annum.  To date, no royalties are due and/or payable.  In
October 2005, we issued the notes described above.   As of April
1, 2007, the principal amount under the notes was fully repaid.  In
November 2007, we purchased Canadian dollars totaling $12.5 million for US$12.9
million and concurrently entered into a forward contract to purchase the U.S.
dollars back in December 2007.
  32
 G. Safe
Harbor
  Certain
statements contained in this annual report and in certain documents incorporated
by reference herein constitute “forward-looking statements” within the meaning
of the United States Private Securities Litigation Reform Act of 1995 and/or
“forward-looking information” under the Securities Act (Ontario). These
statements may include, without limitation, summary statements relating to
results of the ACCLAIM trial in patients with chronic heart failure, plans to
advance the development of Celacade, our medical device for the treatment of
chronic heart failure, and VP025, statements concerning our partnering
activities and discussions with health regulatory authorities, plans for health
regulatory submissions, strategy, future operations, future financial position,
future revenues, projected costs, prospects, plans and objectives of
management.   In some cases, you can identify forward-looking
statements by terminology such as “may”, “will”, “should”, “expects”, “plans”,
“anticipates”, “believes”, “estimated”, “predicts”, “potential”, “continue”,
“intends”, “could”, or the negative of such terms or other comparable
terminology. We made a number of assumptions in the preparation of these
forward-looking statements, including assumptions about the nature, size, and
accessibility of the market for Celacade in the treatment of chronic heart
failure, particularly in Europe, the regulatory approval process leading to
commercialization, the availability of capital on acceptable terms to pursue the
development of Celacade, and the feasibility of additional
trials.  You should not place undue reliance on our forward-looking
statements which are subject to a multitude of risks and uncertainties that
could cause actual results, future circumstances, or events to differ materially
from those projected in the forward-looking statements. The risks include, but
are not limited to, those discussed above that could cause our actual results to
differ significantly from those contained in any forward-looking statements
and/or forward-looking information.  Additional risks and
uncertainties relating to our Company and our business can be found in Item 3D
under “Risks Relating to our Business” and “Risks Relating to our Securities”,
as well as in our later public filings. The forward-looking statements are made
as of the date hereof and we disclaim any intention and have no obligation or
responsibility, except as required by law, to update or revise any
forward-looking statements, whether as a result of new information, future
events, or otherwise.
  Item 6.            Directors,
Senior Management and Employees
  Directors
and Senior Management
  DIRECTORS
AND OFFICERS
 
 The
names and municipalities of residence of all our directors and officers as at
the date hereof, the offices presently held, principal occupations, and the year
each director or officer first became a director or officer are set out below.
Each director was elected to serve until the next annual meeting of our
shareholders or until his successor is elected or appointed. Officers are
appointed annually and serve at the discretion of the Board of
Directors.
  Name
      and Residence(3)
              Position
      with the Company and Principal Occupation for the last five
      years
              Other
      Public Company Boards
              Director/Officer
      SinceTerrance
      H. Gregg(2)
                Los
      Angeles, California, USA
              Chairman
      of the Board and Director of the Company.  Formerly Interim
      President and CEO of the Company (2007).  Mr. Gregg is the
      President and CEO of Dexcom Inc. Mr. Gregg is the former President of
      Medtronic MiniMed.
              DexCom
      Inc.
                LMS
      Medical Systems Limited
              September
      1999Dr.
      Ronald M. Cresswell(1)
                Ann
      Arbor, Michigan,
      USA
              Director
      of the Company.  Dr. Cresswell is the former Senior Vice
      President and Chief Scientific Officer of Warner Lambert.
              None
              January
      2006
                Dr.
      Cresswell will be retiring as a director after the Company’s next Annual
      General Meeting.
   33
  Name
      and Residence(3)
              Position
      with the Company and Principal Occupation for the last five
      years
              Other
      Public Company Boards
              Director/Officer
      Since
 David
      G. Elsley
                Oakville,
      Ontario,Canada
              Director
      of the Company.  Mr. Elsley is a consultant.  Mr.
      Elsley was the President of the Company from 1991 to 2007, and Chief
      Executive Officer of the Company from 1994 to March 7,
2007
              None
              January
      1991Benoit
      La Salle(1)(4)
                Montréal,
      Québec, Canada
              Director
      of the Company.  President and Chief Executive Officer of SEMAFO
      Inc.
              LMS
      Medical Systems Limited
                SEMAFO
      Inc.
                20/20
      Technologies Inc.
                Foster
      Parents Plan of Canada
                ART
      Technologies Inc.
              January
      1997
                Mr.
      La Salle will be retiring as a director after the Company’s next Annual
      General Meeting.
 Dr.
      Eldon R. Smith(5)
                Calgary,
      Alberta, Canada
              Senior
      Vice President, Scientific Affairs, Chief Medical Officer, and Head of
      Cardiovascular Development, and a Director of the Company.
              Canadian
      Natural Resources Limited
                Sernova
      Corp.
                VentriPoint
      Inc.
                Aston
      Hill Financial Inc.
              July
      1998Dr.
      Calvin R. Stiller(2)(6)
                London,
      Ontario,
      Canada
              Director
      of the Company.  Dr. Stiller is the former Chairman and Chief
      Executive Officer of Canadian Medical Discoveries Fund
Inc.
              NPS
      Pharmaceuticals, Inc.,
              January
      2006John
      C. Villforth(1),
      (2)
                Gaithersburg,
      Maryland, USA
              Director
      of the Company.  Former President and Executive Director, Food
      and Drug Law Institute.
              None
              March
      2001Christopher
      J. Waddick,Georgetown, Ontario, Canada
              President,
      Chief Executive Officer and Director of the Company since
      2007.  Mr. Waddick was formerly Chief Operating Officer,
      Executive Vice President, Chief Financial Officer, and Treasurer of the
      Company.
              None
              March
      1997Dr.
      Anthony E. Bolton
                Bakewell,
      Derbyshire, England
              Chief
      Scientific Officer of the Company.
              None
              January
      1995Catherine
      M. Bouchard
                Lakefield,
      Ontario,
      Canada
              Vice
      President, Human Resources, formerly Director of Human Resources of the
      Company.  Ms. Bouchard was formerly Director of Human Resources
      at MDS Laboratories.
              None
              August
      2006John
      Geddes
                Oakville,
      Ontario, Canada
              Vice
      President, Marketing and Business Development of the
      Company.  Mr. Geddes was previously the Director of Marketing
      and Business Development, for the Company.
              None
              October
      2007
   34
  Name
      and Residence(3)
              Position
      with the Company and Principal Occupation for the last five
      years
              Other
      Public Company Boards
              Director/Officer
      SinceSusan
      F.  Langlois
                Bolton,
      Ontario, Canada
              Vice
      President, Regulatory Affairs and Quality Assurance of the
      Company.  Ms. Langlois  was formerly Vice-President,
      Clinical and Regulatory Affairs at Hemosol and Director, Global Regulatory
      Affairs at Connaught Laboratories Ltd.
              None
              May
      2003Dr.
      Anne Goodbody
                Toronto,
      Ontario, Canada
              Vice
      President, Drug Development of the Company.  Dr. Goodbody was
      previously Director of Research for the Company.
              None
              June
      2007Graham
      Neil
                Brampton,
      Ontario, Canada
              Vice
      President, Finance and Chief Financial Officer of the
      Company.  Mr. Neil was formerly Director of Finance and
      Controller of the Company.
              None
              July
      2007Dr.
      Michael E. Shannon
                Picton,Ontario, Canada
              Vice
      President, Medical Affairs of the Company.  Dr. Shannon was
      formerly Vice President, Medical Sciences for Hemosol Inc., Senior Medical
      Advisor and Principal for the Canadian Auditor General, and the Director
      General of the Laboratory Center for Disease Control, Health
      Canada.
              None
              September
      2004
 Notes:
  1.
              Member
      of the Audit Committee of the Board of
  Directors.
 2.
              Member
      of the Compensation, Nominating, and Corporate Governance Committee of the
      Board of Directors.
 3.
              The
      Company does not have an executive committee of the Board of
      Directors.
 4.
              On December 9, 2002,
      BridgePoint International Inc., a company of which Mr. Benoit La Salle was
      a director and chairman, announced in a press release that cease trade
      orders had been issued with respect to its shares by the securities
      regulatory authorities in each of Quebec, Ontario, Manitoba, Alberta, and
      British Columbia as a consequence of its default in filing its audited
      financial statements for the year ended June 30, 2002 within the
      prescribed time period. On or before April 1, 2003, all cease trade orders
      were revoked by these securities regulatory
  authorities.
 5.
              In
      May of  2002, the British Columbia Securities Commission - and
      in July of 2002, the Alberta Securities Commission - each issued cease
      trade orders for shares in BioMax Technologies Inc. for failure to file
      financial statements. Dr. Smith was a Director and Vice Chairman of this
      company at the time. He subsequently resigned and subsequent to that date,
      the Company was delisted for failure to file financial statements and the
      payment of penalties. The company has not declared bankruptcy and
      continues as a solvent private
company.
 6.
              On
      November 14, 2007, Dr. Stiller and a group of current and former officers
      and directors of NPS Pharmaceuticals, Inc. were named as defendants in a
      purported derivative action in Utah.  The lawsuit alleges that
      the defendants made false and misleading statements regarding certain of
      NPS’ products and business. The lawsuit seeks a determination that it is
      an appropriate derivative action, and damages in unspecified
      amounts.
 
 
 As
of November 30, 2007, the directors and executive officers of the Company as a
group beneficially owned, directly or indirectly, or exercised control or
direction over 211,738common shares
(Directors’ Deferred Share Units included), representing approximately 1%
of the issued common shares of the Company.
  
 SCIENTIFIC
ADVISORY BOARD
  We
have an independent Scientific Advisory Board (“SAB”) to advise management and
the Board of Directors on our scientific, technical, research, development, and
commercialization endeavors. Members of the SAB are entitled to an annual
honorarium and reimbursement for their reasonable out-of-pocket expenses
incurred in connection with our business. Members are eligible to receive stock
options. Members of the SAB through their affiliation with universities,
hospitals, and other centers of biomedical research may, from time to time,
collaborate on or direct independent basic research, preclinical studies, and/or
feasibility clinical trials involving our technologies and receive, in
connection therewith, professional fees at market rates. The members of our SAB
are:
  35
 Robert Roberts, MD, FRCP(C),
FACC, Chairman
  Dr.
Roberts is the President and CEO of the University of Ottawa Heart Institute,
one of Canada’s leading centers in cardiovascular medicine.  Dr Roberts was
formerly Chief of Cardiology, Don W. Chapman Professor of Medicine, and
Professor of Molecular Physiology and Biophysics at Baylor College of Medicine
in Houston, Texas, one of the world’s leading centers for cardiovascular care,
research, and education.  Dr. Roberts is an active clinician and researcher
recognized for his groundbreaking research on cardiac creatine kinase (CK-MB), a
key diagnostic marker for cardiac injury, as well as for his original
contributions to the molecular biology and genetics of heart disease.  He
and his research team are credited with uncovering the genetic basis for several
inherited cardiac disorders.  He is the author of more than 700 scientific
publications and sits on several key editorial boards and is Editor of Current
Opinion in Cardiology.  He has been Associate Editor of Hurst's the Heart
since 1990.  Dr. Roberts has received many honours and awards, including
the prestigious American College of Cardiology’s 1998 Distinguished Scientist
Award and the American Heart Association's Merit Award in 2001.  In 2002,
he was awarded a member of the most cited and influential Researcher in the
world.  In 2005, Dr. Robert Roberts founded The Ruddy Canadian
Cardiovascular Genetics Centre which recently identified the first common gene
for coronary artery disease.  In addition to his contributions to basic
research, Dr. Roberts is also well recognized for his role as a principal
investigator in several pivotal clinical trials related to the introduction of
new therapies for heart disease.
  Stanley H. Appel,MD
  Dr.
Appel is Chair of the Department of Neurology at the Methodist Neurological
Institute, and Professor of Neurology at Weill Medical College of Cornell
University.  He is also the Peggy and Gary Edwards Distinguished
Endowed Chair for the Treatment and Research of ALS Chair, Dept of Neurology
Methodist Neurological Institute.  He serves as the Director of the
MDA/ALS Research and Clinical Center and is the former Director of the
Alzheimer’s disease Research Center at Baylor College of Medicine and previously
served as the Director of the Jerry Lewis Neuromuscular Research Center at
Baylor College of Medicine in Houston, Texas.  Dr. Appel is a leading
expert on degenerative neurological diseases, such as Parkinson’s, Alzheimer’s,
and amyotrophic lateral sclerosis (ALS), also known as Lou Gehrig’s
disease.  Specifically, Dr. Appel focuses on the importance of
neurotrophic factors and immune mechanisms, including the role of inflammatory
cytokines in these diseases.  He has served as an Advisory Board
member of the Alzheimer’s disease and Related Disorders Association and as a
Council member of the American Society of Neurochemistry.  For ten
years, he acted as Editor-in-Chief for Current
Neurology.  Dr. Appel received his medical degree from Columbia
College of Physicians and Surgeons and has over 350 scientific publications to
his credit.
 
 Valentin Fuster,MD,
PhD
  Dr.
Fuster serves The Mount Sinai Medical Center as Director of Mount Sinai Heart,
the Zena and Michael A. Wiener Cardiovascular Institute and the Marie-Josée and
Henry R. Kravis Center for Cardiovascular Health. He is also the Richard Gorlin,
MD/Heart Research Foundation Professor, Mount Sinai School of Medicine. Among
the positions of distinction that he holds are Past President of the American
Heart Association, Immediate Past President of the World Heart Federation, a
member of the Institute of Medicine of the National Academy of Sciences, a
former member of the National Heart, Lung and Blood Institute Advisory Council,
and former Chairman of the Fellowship Training Directors Program of the American
College of Cardiology. Seventeen distinguished universities throughout the world
have granted him honoris
causa.  Dr. Fuster is the President of Science of the Centro
Nacional de Investigaciones Cardiovasculares Carlos III (CNIC) in Madrid, Spain. Dr.
Fuster is the recipient of two major ongoing NIH grants. He has published more
than 700 articles on the subjects of coronary artery disease, atherosclerosis
and thrombosis, and he has become the lead Editor of two major textbooks on
cardiology, 'The Heart' (previously edited by Dr. J. Willis Hurst) and
"Atherothrombosis and Coronary Artery Disease" (with Dr. Eric Topol and Dr.
Elizabeth Nabel). Dr. Fuster has been appointed Editor-in-Chief of the Nature journal that focuses
on cardiovascular medicine. Dr.
Fuster is the only cardiologist to receive all four major research awards from
the four major cardiovascular organizations: The Distinguished Researcher Award
(Interamerican Society of Cardiology, 2005), Andreas Gruntzig Scientific Award
(European Society of Cardiology, 1992), Distinguished Scientist (American Heart
Association, 2003), and the Distinguished Scientist Award (American College of
Cardiology, 1993). In
addition, he has received the Lewis A. Conner Memorial Award by the American
Heart Association, the James B. Herrick Achievement Award from the Council of
Clinical Cardiology of the American Heart Association, the 1996 Principe de
Asturias Award of Science and Technology (the highest award given to
Spanish-speaking scientists), the Distinguished Service Award from the American
College of Cardiology, the Gold Heart Award (American Heart Association's
highest award), and the Gold Medal of the European Society of Cardiology
(Vienna, September 2007).  In 2008, Dr. Fuster will receive the Kurt
Polzer Cardiovascular Award from the European Academy of Science and Arts. After
receiving his medical degree from Barcelona University and completing an
internship at Hospital Clinic in Barcelona, Dr. Fuster spent several years at
the Mayo Clinic, first as a resident and later as Professor of Medicine and
Consultant in Cardiology. In 1981, he came to Mount Sinai School of Medicine as
head of Cardiology. From 1991 to 1994, he was Mallinckrodt Professor of Medicine
at Harvard Medical School and Chief of Cardiology at the Massachusetts General
Hospital. He returned to Mount Sinai in 1994 as Director of the Zena and Michael
A. Wiener Cardiovascular Institute and most recently, he has been named the
Director of the Mount Sinai Heart.
 
 36
 
  Milton
Packer, MD
  Dr.
Packer is Professor and Chair of the Department of Clinical Sciences and the
Gayle and Paul Stoffel Distinguished Chair in Cardiology, Southwestern Medical
Center, University of Texas. He is the former Chief of the Division of
Circulatory Physiology at the Columbia University College of Physicians and
Surgeons, and the former Director of the Heart Failure Center at the
Columbia-Presbyterian Medical Center in New York City. One of the leading
experts in the pathophysiology and treatment of heart failure, Dr. Packer has
made significant contributions to heart failure research and has been
instrumental in the introduction of a number of new treatments.  The
author of more than 200 papers, he has won numerous honors for teaching and has
lectured around the world, including a number of prestigious named lectureships,
on the treatment of heart failure.  He has served, or currently
serves, on the editorial boards of many major medical journals, including Circulation and Journal of the American College of
Cardiology. He has also been elected to a number of societies, including
the American Society for Clinical Investigation.  He is currently on
the executive committees of both the American Heart Association and the American
College of Cardiology and is past-President of the Heart Failure Society of
America.  Dr. Packer is a primary consultant to the National
Institutes of Health and the Food and Drug Administration on the management of
heart failure and on matters related to cardiovascular research and drug
development and health care policy.
  David
Wofsy, MD
  Dr.
Wofsy is Professor of Medicine and Microbiology/Immunology at the University of
California, San Francisco (UCSF).  He also serves as Associate Dean for
Admissions at the UCSF School of Medicine. Dr. Wofsy is a leading authority on
the cellular and molecular mechanisms underlying autoimmune diseases.
 Based on extensive research, he has developed novel approaches to the use
of immune modulation therapies in the treatment of this very common group of
diseases.  Much of Dr. Wofsy’s research has been on systemic lupus
erythematosus (SLE), an autoimmune disease, where he was the first to
demonstrate the key pathological role of CD4+T cells in a standard animal model
of this disease. His most recent research has extended to additional novel
methods for blocking T cell activation. These approaches are currently in
clinical trials.  He is the author of numerous key publications and book
chapters and serves on the editorial and advisory boards of several major
immunology journals. He has received many distinguished awards and his visiting
professorships include Harvard University and the National Institutes of
Health.
  There
are no family relationships between the directors, senior management of the
Company and employees of the Company upon whose work the Company is
dependent.
  37
 A. Compensation
  Director
Compensation
  During
2007, directors of the Company who were not full-time employees of the Company
received an annual retainer of $30,000.  In addition, a fee of $1,500
was paid for each Board or Board Committee meeting attended in person, or $1,000
if the Director participated by conference call.  The chairpersons of
the Audit Committee and of the Compensation, Nominating, and Corporate
Governance Committee each received an additional annual retainer in the amount
of $10,000 and $7,500, respectively.  The annual retainer and
applicable meeting fees are all paid in Deferred Share Units
(“DSUs”).  Directors are also entitled to be reimbursed for their
reasonable and documented out-of-pocket expenses incurred on the business of the
Company.
  The
Company implemented a Directors’ Deferred Share Unit and Stock Plan (the “DSU
Plan”) effective January 1, 2004, applicable to the 2004 fiscal year and
subsequent years.  Under the terms of the DSU Plan, non-employee
directors are paid their directors’ fees entirely in DSUs, in lieu of any cash
payment.  The DSU grants are effective as of the date of the meetings
in respect of which fees are payable.  A DSU may only be converted
into cash and/or shares (as determined by the Company) after a participant
ceases to be a director, with each DSU at the time of conversion having a value
of one common share or the equivalent market value thereof.  Because
of the deferred payment feature of the DSU Plan, directors benefit only from
long-term increases in the value of the Company’s shares arising over the term
of their directorship thereby promoting a greater alignment of interest between
the directors and the shareholders of the Company.
  The
Company has reserved a maximum of 125,000 common shares for purposes of the DSU
Plan.  During fiscal 2007, the Company issued a total of 58,140 DSUs
to directors in respect of aggregate fees of $0.2 million.
  Directors
of the Company are also eligible to be granted stock options.  During
fiscal 2007, non-management directors of the Company, other than the Chairman of
the Board, were awarded options to acquire 1,500 common shares of the Company
each, and the Chairman of the Board was awarded options to acquire 2,500 common
shares of the Company. During 2007, options to acquire 6,000 common shares of
the Company were granted to non-management directors.
  Executive
Compensation
  The
following table sets forth all compensation for the periods indicated in respect
of the individuals who were the Chief Executive Officer of the Company or the
Chief Financial Officer of the Company at any time during 2007, as well as the
individuals who were, as at November 30, 2007 the three other most highly
compensated executive officers of the Company (“Named Executive
Officers”).
  38
 2007
Summary Compensation Table
  Annual
      Compensation
              Long-Term
      CompensationAwards
              PayoutsName
      and Principal
                Position
              Year
              Salary
                ($)
              Bonus
                ($)
              Other
                Annual
                Compensation
      (1)
                ($)
              Securities
      Under
                Options/
                SARs(2)
                Granted
                (#)
              Shares
                Or
      Units Subject to Resale Restrictions
                ($)
              LTIP
                Payouts
                ($)
              All
      Other Compensation
                ($)Chris
      Waddick(3)
                (President
      & CEO)
              2007
                2006
                2005
              302,222
                280,000
                263,000
              165,000
                85,050
                115,920
              45,000(4)
                45,000(4)
                39,000(4)
              200,000
                39,266
                4,120Terrance
      H. Gregg(5)
                (Interim
      President &
                CEO)
              2007
                2006
                2005
              0
                n/a
                n/a
              0
                n/a
                n/a
              0
                n/a
                n/a
              0
                2,500
                1,000David
      Elsley(6)
                (Former
      President & CEO)
              2007
                2006
                2005
              96,507
                345,600
                320,000
              n/a
                110,880
                151,800
              
              20,000
                13,105
                10,816
              
              
              964,560Graham
      Neil(7)
                (VP
      of Finance & CFO)
              2007
                2006
                2005
              139,765
                122,834
                111,281
              58,125
                18,288
                21,423
              
              0
                10,487
                1,673Paul
      Van Damme (8)
                (Former
      VP, Finance & CFO)
              2007
                2006
                2005
              81,250
                215,625
                n/a
              n/a
                56,754
                n/a
              
              0
                25,000
                n/a
              
              
              169,925Anne
      Goodbody
                (VP,
      Drug Development)
              2007
                2006
                2005
              162,709
                158,306
                154,000
              61,278
                41,444
                54,834
              
              0
                18,944
                1,990Susan
      Langlois
                (VP,
      Regulatory Affairs
                &
      Quality Assurance)
              2007
                2006
                2005
              179,320
                169,833
                165,000
              70,300
                44,750
                58,740
              
              0
                19,225
                2,073Dr.
      Eldon Smith
                (Senior
      VP, Scientific Affairs)
              2007
                2006
                2005
              226,500
                226,500
                226,500
              90,600
                54,360
                83,352
              
              10,000
                20,996
                2,944
 
 Notes:
  1.
              Except
      as otherwise stated, perquisites and other personal benefits do not exceed
      the lesser of $50,000 or 10% of the total of the annual salary and bonus
      for the above-named officers.
   39
  2.
              To
      date, no stock appreciation rights (“SARs”) have been
    granted.
  3.
              Mr.
      Waddick became the CEO on June 20, 2007.  Mr. Waddick was
      previously the Chief Operating Officer of the Company and Executive Vice
      President and Chief Financial Officer of the
  Company.
  4.
              Other
      annual compensation was provided to Mr. Waddick in connection with a
      Company-required relocation, net of applicable
  taxes.
  5.
              Mr.
      Gregg, who is the Chairman of the Board of Directors, also served as
      Interim President and CEO of the Company from March 7, 2007 to June 20,
      2007, at which time Mr. Waddick was appointed as President and
      CEO.  Upon his appointment as Interim President and CEO, and in
      lieu of cash compensation, Mr. Gregg received 52,631 restricted stock
      units, with an exercise price of $4.50 and 30,000 stock
      options.  The units and options were cancelled upon the
      appointment of Mr. Waddick as President and CEO of the Company, and no
      compensation was thereby realized by Mr.
Gregg.
  6.
              Mr.
      Elsley ceased to be the President and CEO on March 7, 2007, and received
      “other compensation” in 2007 in accordance with the terms of his
      employment agreement.
  7.
              Mr.
      Neil became the Vice President of Finance and CFO on July 10,
      2007.
  8.
              Mr.
      Van Damme ceased to be the CFO on April 10, 2007, and received “other
      compensation” in 2007 in accordance with the terms of his employment
      agreement.
  
 Employment
Contracts
  The
Company entered into an employment agreement with Chris Waddick as of June 20,
2007. Pursuant to this agreement, Mr. Waddick serves the Company as its
President and CEO. The agreement provides for an annual reviewable remuneration
of $330,000.  The agreement is terminable at the option of the
Company; however, if the agreement is terminated other than for cause, Mr.
Waddick is entitled to a lump-sum payment equal to two years’ cash compensation,
and any options then outstanding shall remain in full force and effect until
their expiry. The agreement contains standard non-competition and
non-solicitation provisions.
  The
Company entered into an employment agreement with Graham Neil as of July 10,
2007. Pursuant to this agreement, Mr. Neil serves the Company as its Vice
President of Finance and Chief Financial Officer. The agreement provides for an
annual reviewable remuneration of $155,000.  The Company entered into
an employment agreement with Dr. Anne Goodbody as of April 28, 2003. Pursuant to
this agreement, Dr. Goodbody serves the Company as its Vice President of Drug
Development. The agreement provides for an annual reviewable remuneration of
$165,617.  The Company entered into an employment agreement with Susan
Langlois as of November 10, 2005. Pursuant to this agreement, Ms. Langlois
serves the Company as its Vice President, Regulatory Affairs and Quality
Assurance. The agreement provides for an annual reviewable remuneration of
$185,000.   The Company entered into an employment agreement with
Eldon R. Smith & Associates Ltd. as of February 01, 2007. Pursuant to this
agreement, Eldon R. Smith & Associates Ltd. provides the services of Eldon
Smith as the Company’s Vice President, Scientific Affairs. The agreement
provides for an annual reviewable remuneration of $226,500.
  In
the case of each of the agreements with Mr. Neil, Dr. Goodbody, and Ms.
Langlois, the agreement is terminable at the option of the Company; however, if
the agreement is terminated other than for cause, the employee is entitled to a
lump-sum payment equal to 6 months cash compensation plus one month for each
year of service to a maximum of 12 months.  Each agreement contains
standard non-competition and non-solicitation provisions.
  There
are no amounts set aside or accrued by the Company or its subsidiaries to
provide pension, retirement or similar benefits.
  
 40
  B. Board
Practices
  Board
of Directors
  See
Items 6A and 6B.
  Committees
of the Board of Directors
  AUDIT
COMMITTEE
  The
Audit Committee of the Board monitors our financial activities, policies, and
internal control procedures.  The audit committee is comprised of
three independent directors: Benoit La Salle, John Villforth and Ronald
Cresswell.
  Mr.
La Salle is a chartered accountant and is a member of the Quebec Order of
Chartered Accountants and the Canadian Institute of Chartered Accountants. He
holds a Commerce degree from McGill University and a Master of Business
Administration from IMEDE, Switzerland.  In 1980, he founded Grou La
Salle & Associés, Chartered Accountants.  Mr. La Salle joined our
Board of Directors in 1997.
  Rear
Admiral Villforth is the Past-President and Executive Director of the Food and
Drug Law Institute and the former Director of the FDA Center for Devices and
Radiological Health.  He has almost three decades of experiences as a
commissioned officer in the U.S. Public Health Service in the Department of
Health and Human Services.  Mr. Villforth retired from the public
service sector with the rank of Assistant Surgeon General (Rear
Admiral).
  Dr.
Cresswell brings over three decades of research and commercial development
experience in cardiovascular and other therapeutic areas.  In his
capacity of Senior Vice President and Chief Scientific Officer of
Warner-Lambert, he developed an understanding of accounting principles and, in
particular, gained experience in the analysis and evaluation of financial
statements, particularly as relates to health product related research and
development activities and the internal controls and procedures relevant to such
activities.  Dr. Cresswell joined our Board of Directors in
2006.
  Under
the SEC rules implementing the Sarbanes-Oxley Act of 2002, Canadian issuers
filing reports in the United States must disclose whether their audit committees
have at least one “audit committee financial expert”. The Board has determined
that Benoit La Salle qualifies as a financial expert under such
rules.  In addition, all members of the Audit Committee are considered
financially literate under applicable Canadian laws.
  The
Audit Committee assists the Board in fulfilling its oversight responsibility to
shareholders, potential shareholders, the investment community and others with
respect to the Company’s financial statements, financial reporting process,
systems of internal accounting and disclosure controls, performance of the
external auditors and risk assessment and management.  The Committee
has the power to conduct or authorize investigations into any matters within its
scope of responsibilities, with full access to all books, records, facilities
and personnel of the Company, its auditors and its legal advisors. In connection
with such investigations or otherwise in the course of fulfilling its
responsibilities under this charter, the Committee has the authority to
independently retain special legal, accounting, or other consultants to advise
it.
  The
Audit Committee reviewed with the independent auditor, who is responsible for
expressing an opinion on the conformity of the Company’s audited financial
statements with US GAAP, their judgments as to the quality, not just the
acceptability, of the Company’s accounting principles and such other matters as
are required to be discussed with the Audit Committee under Canadian and United
States generally accepted auditing standards. In addition, the Audit Committee
has discussed with the independent auditor the auditor’s independence from
management and the Company including the matters in the written disclosures
provided to the Audit Committee by the independent auditor and considered the
compatibility of non-audit services with the auditor’s
independence.
  The
Company’s independent auditor is accountable to the Board of Directors and to
the Audit Committee. The Board of Directors, through the Audit Committee, has
the ultimate responsibility to evaluate the performance of the independent
auditor, and through the shareholders, to appoint, replace and compensate the
independent auditor. Under the Sarbanes-Oxley Act of 2002, the independent
auditor of a public company is prohibited from performing certain non-audit
services.  The Audit Committee has adopted procedures and policies for
the pre-approval of non-audit services, as described in the audit committee
charter.  Under the terms of such policies and procedures, the Audit
Committee has adopted a list of pre-approved services, including audit and
audit-related services and tax services, and a list of prohibited non-audit
services deemed inconsistent with an auditor’s independence.
  41
 The
list of Pre-Approved Services includes:
  1.           Audit
Services
   •
              Audits
      of the Company’s consolidatedfinancial
      statements;
   •
              Statutory
      audits of the financial statements of the Company’s
      subsidiaries;
   •
              Reviews
      of the quarterly consolidatedfinancial
      statements of the Company;
   •
              Services
      associated with registration statements, prospectuses, periodic reports
      and other documents filed with securities regulatory bodies (such as the
      SEC and OSC) or other documents issued in connection with securities
      offerings (e.g., comfort letters and consent letters) and assistance in
      responding to comment letters from securities regulatory
      bodies;
   •
              Special
      attest services as required by regulatory and statutory
      requirements;
   •
              Regulatory
      attestation of management reports on internal controls as required by the
      regulators; and
   •
              Consultations
      with the Company’s management as to the accounting or disclosure treatment
      of transactions or events and/or the actual or potential impact of final
      or proposed rules, standards or interpretations by the securities
      regulatory authorities, accounting standard setting bodies (such as the
      FASB or CICA), or other regulatory or standard setting
    bodies.
   2.
              Audit-Related
      Services
   •
              Presentations
      or training on accounting or regulatory
  pronouncements;
   •
              Due
      diligence services related to accounting and tax matters in connection
      with potential acquisitions /
dispositions;
   •
              Advice
      and documentation assistance with respect to internal controls over
      financial reporting and disclosure controls and procedures of the
      Company;
   3.           Tax
Services
   a.           Compliance
Services
   •
              Assistance
      with the preparation of corporate income tax returns and related schedules
      for the Company and its
subsidiaries;
   •
              Assistance
      with the preparation of Scientific Research & Experimental Development
      investment tax credit claims and amended tax returns of the company;
      and
   •
              Assistance
      in responding to Canada Revenue Agency or Internal Revenue Service on
      proposed reassessments and other
matters.
   b.           Canadian
& International Planning Services
   •
              Advice
      with respect to cross-border/transfer pricing tax
  issues;
   42
  •
              Advice
      related to the ownership of corporate intellectual property in
      jurisdictions outside of Canada;
   •
              Assistance
      in interpreting and understanding existing and proposed domestic and
      international legislation, and the administrative policies followed by
      various jurisdictions in administering the law, including assisting in
      applying for and requesting advance tax rulings or technical
      interpretations;
   •
              Assistance
      in interpreting and understanding the potential impact of domestic and
      foreign judicial tax decisions;
   •
              Assistance
      and advising on routine planning matters;
and
   •
              Assistance
      in advising on the implications of the routine financing of domestic and
      foreign operations, including the tax implications of using debt or equity
      in structuring such financing, the potential impact of non-resident
      withholding tax and the taxation of the repatriation of funds as a return
      of capital, a payment of a dividend, or a payment of
    interest.
   c.           Commodity
Tax Services
   •
              Assistance
      regarding GST/PST/Customs/Property Tax filings and
      assessments;
   •
              Commodity
      tax advice and compliance assistance with business
      reorganizations;
   •
              Advice
      and assistance with respect to government
    audits/assessments;
   •
              Advice
      with respect to other provincial tax filings and assessments;
      and
   •
              Assistance
      with interpretations or rulings.
   The
list of Prohibited Services includes:
  1.
              Bookkeeping
      or other services related to the preparation of accounting records or
      financial statements.
  2.
              Financial
      information systems design and
implementation.
  3.
              Appraisal
      or valuation services for financial reporting
  purposes.
  4.
              Actuarial
      services for items recorded in the financial
  statements.
  5.
              Internal
      audit outsourcing services.
  6.
              Management
      functions.
  7.
              Human
      resources.
  8.
              Certain
      corporate finance and other
services.
  9.
              Legal
      services.
  10.
              Certain
      expert services unrelated to the
audit.
   The
Audit Committee also discussed with the Company’s independent auditor the
overall scope and plans for their audit.  The Audit Committee meets
with the independent auditor, with and without management present, to discuss
the results of their examination, their evaluations of the Company’s internal
controls, and the overall quality of the Company’s financial reporting. The
Audit Committee held four meetings during the twelve-month period ended November
30, 2007.
  In
reliance on the reviews and discussions referred to above, the Audit Committee
recommended to the Board of Directors (and the Board of Directors approved) that
the audited consolidated financial statements be included in the Annual Report
for the twelve month period ended November 30, 2007 for filing with the Canadian
provincial securities commissions and the United States Securities and Exchange
Commission.
  43
 The
charter of the Audit Committee can also be found on our website at
www.vasogen.com.
  Report
Submitted by the Audit Committee:
  Benoit
La Salle
 Ronald
Cresswell
 John
Villforth
 
 
 COMPENSATION,
NOMINATING, AND CORPORATE GOVERNANCE COMMITTEE
  The
Compensation, Nominating, and Corporate Governance Committee of the Board of
Directors (the “Committee”) is charged with the responsibility of reviewing the
Company’s compensation policies and practices, compensation of officers
(including the Chief Executive Officer), succession planning, and corporate
governance practices. As appropriate, recommendations regarding these issues are
made to the Board of Directors (the “Board”).   The Committee
consists of three independent and unrelated directors, Terrance H. Gregg, Ronald
Cresswell and John C. Villforth.  The Chief Executive Officer absents
himself from Board and Committee meetings during voting and deliberation on the
Chief Executive Officer’s compensation.
  The
objectives of the Company’s compensation policies and programs for executive
officers are to:
  (a)           motivate
and reward executive officers for the achievement of corporate and functional
objectives;
  (b)
              recruit
      and retain executive officers of a high caliber by offering compensation
      that is competitive with that offered for comparable positions in other
      biotechnology companies; and
  (c)
              align
      the interests of the executive officers with the long-term interests of
      shareholders and the intermediate and long-term objectives of the
      Company.
  C. Employees
  The
number of employees for each of last three fiscal years is as
follows:
  2007
              2006
              2005Number
      of Employees
              104
              125
              172
 
 Our
employees are not governed by a collective agreement.  We have not
experienced a work stoppage and believe our employee relations are
satisfactory.
  D. Share
Ownership
  The
following table states the names of the directors and officers of the Company,
the positions within the Company now held by them, and the approximate number of
shares of the Company beneficially owned or over which control or direction is
exercised by each of them as of February 5, 2008.  The following table
includes DSUs, but does not reflect shares that may be acquired pursuant to the
exercise of stock options.
  44
 
  Name
              Position
      with the Company
              Number
      of Shares OwnedTerrance
      H. Gregg (1)
              Chairman
      of the Board and Director of the Company.
              17,702Dr.
      Ronald M.  Cresswell
              Director
      of the Company.
              35,026David
      G. Elsley
              Director
      of the Company.
              31,269Benoit
      La Salle
              Director
      of the Company.
              25,022Dr.
      Eldon R. Smith
              Senior
      Vice President, Scientific Affairs and Director of the
      Company.
              7,131Dr.
      Calvin R. Stiller
              Director
      of the Company.
              15,191John
      C. Villforth
              Director
      of the Company.
              21,325Dr.
      Anthony E. Bolton
              Chief  Scientific
      Officer of the Company
              28,214Catherine
      M. Bouchard
              Vice
      President, Human Resources of the Company
              1,020John
      A. Geddes
              Vice
      President Marketing and Business Development of the
      Company
              0Anne
      Goodbody
              Vice
      President, Drug Development of the
      Company
              550Susan
      F. Langlois
              Vice
      President, Regulatory Affairs and Quality Assurance of the
      Company
              244Graham
      D. Neil
              Vice
      President, Finance and Chief Financial Officer of the
      Company
              190Christopher
      J. Waddick
              President
      and Chief Executive Officer of the Company
              38,026
 
 As
of February 5, 2008, the directors and executive officers of the Company as a
group beneficially owned, directly or indirectly, or exercised control or
direction over 220,910common shares (DSUs
included), representing approximately 1% of the issued common shares of the
Company.
  (1) The
number of common shares for Mr. Gregg includes shares owned in the Gregg Family
Trust.
 
 Stock
Option Plans
  2003
Employee Stock Option Plan
  The
objectives of the Company’s compensation policies and programs are to motivate
and reward officers, other employees, and consultants upon the achievement of
significant corporate and functional objectives, to recruit and retain employees
of a high caliber by offering compensation that is competitive with that offered
for comparable positions in other biotechnology companies across Canada and the
United States, and to align employee interests with the long-term interests of
shareholders and the intermediate and long-term objectives of the
Company.  The 2003 Plan is an integral part of achieving these
objectives as it provides officers, employees, and consultants of the Company
and its subsidiaries, with the opportunity to participate in the growth and
development of the Company.
  45
 The
2003 Plan was approved by the Board of Directors on March 15,
2003.  It was approved by the shareholders of the Company at the
Annual and Special Meeting of Shareholders held on May 7, 2003.  Two
hundred thousand common shares were initially reserved for issuance under the
2003 Plan.  Upon approval by the shareholders in 2003, the 2003 Plan
replaced the Company’s previous stock option plan (the “Previous Plan”), and no
new options have been granted under the Previous Plan since May
2003.  At the March 2005 Annual and Special Meeting of Shareholders,
the number of options authorized for issuance under the 2003 Plan was increased
by 300,000 from 200,000 to 500,000. At the March 2006 Annual and Special Meeting
of Shareholders, the number of options authorized for issuance under the 2003
Plan was increased by 300,000 from 500,000 to 800,000. At the March 2007 Annual
and Special Meeting of the Shareholders, the number of options authorized for
issuance under the 2003 Plan was increased by 1,000,000 from 800,000 to
1,800,000.
  As
of February 5, 2008, the Company currently has options authorized under the 2003
Plan and the Previous Plan to purchase a maximum of 850,702 shares.
  Individuals
who are eligible to participate in the 2003 Plan are employees, officers,
consultants, and members of the Scientific Advisory Board (“SAB”) of the
Company.  Directors who are also officers or employees of the Company
are eligible participants. Eligible employee and officer participants have the
opportunity to be granted options on an annual basis, through the achievement of
both key corporate and individual objectives.
  The
number of common shares reserved for issuance under the Plans at any time to any
one person shall not exceed 5% of the number of common shares then issued and
outstanding.
  The
Board of Directors is responsible for granting of options under the Plans, and
does so upon the recommendation of the Compensation, Nominating, and Corporate
Governance Committee of the Board of Directors.  Under the terms of
the Plans, the exercise price for the options is fixed by the Board of
Directors. For shares listed on the TSX, the exercise price of the options shall
not be less than the closing sale price of the shares on the TSX on the last
trading day prior to the grant of the option. The vesting terms of the options
are determined by the Board of Directors.  The period for exercising
an option shall not exceed ten years beyond the date of grant of the
option.
  In
the event that a participant ceases to be an officer, employee, or consultant of
the Company due to reason of resignation or by reason of discharge for cause,
then the options shall terminate and cease to be exercisable on the earliest to
occur of (a) the effective date upon which the person ceased to be an officer,
employee or consultant and (b) the date that notice of dismissal is provided to
the person.
  The
Previous Plan
  The
Company’s previous stock option plan (the “Plan”), pursuant to which a maximum
of 540,000 options or such greater number as shall have been duly approved by
the Board of Directors and if required, by any exchange or over-the-counter
market on which the common shares may be listed or quoted for trading or any
security regulatory authority, and by the shareholders of the Company, may be
granted by the Board of Directors to executive officers, directors, employees,
consultants and members of the Scientific Advisory Board of the Company in such
numbers, for such periods of time, and at exercise prices as the Board may
approve and according to the rules and regulations of any stock exchange or
dealing network on which the Common Shares may be listed or quoted for trading
from time to time.
  The
amount of shares from time to time reserved under the Plan is not reflective of
the number of options that are outstanding at any given time because options
that are exercised over time do not replenish the number reserved, but is merely
an indication of the number of shares or potential shares in respect of which a
listing fee has been paid to the stock exchanges upon which the Company’s shares
are listed.
  To
our knowledge, none of our securities are held in escrow.
  46
 Item
7. Major
Shareholders and Related Party Transactions
  A. Major
Shareholders
  To
our knowledge, based on U.S. securities regulatory filings, as of January 31,
2008, no shareholders held more than 5% of the Company’s outstanding common
shares.  Renaissance Technologies LLC,  filed a 13G with the
Securities Exchange Commission on February 13, 2008, indicating that they held
1,306,680 Vasogen common shares or 5.84% of the Company’s outstanding
shares.  Based on records maintained by our transfer agent and a
geographic analysis of beneficial shareholders, as of November 28, 2007, the
percentage of common shares held in the U.S. is estimated to be 73% and the
number of record holders in the U.S. is 36.
  To
the best of the Company’s knowledge, the Company is not directly or indirectly
owned or controlled by another corporation or foreign government or by any other
natural or legal entity.
  There
are no arrangements, known to the Company, the operation of which may at a
subsequent date result in a change in control of the Company.
  B. Related Party
Transactions
  Since
the beginning of the Company’s preceding three financial years to the date
hereof, there have been no transactions or proposed transactions which are
material to the Company or to any associate, holder of ten percent of the
Company’s outstanding shares, director or officer or any transactions that are
unusual in their nature or conditions to which the Company or any of its
subsidiaries was a party.
  Item
8. Financial
Information
  A. Consolidated
Statements and Other Financial Information
  Reference
is made to “Item 18. Financial Statements”
for the financial statements included in this annual report.
  There
are no outstanding legal proceedings or regulatory actions to which we are party
nor, to our knowledge, are any such proceedings or actions
contemplated.
  The
Company has not paid, and has no current plans to pay, dividends on its common
shares.  We currently intend to retain future earnings, if any, to
finance the development of our business.  Any future dividend policy
will be determined by the Board of Directors, and will depend upon, among other
factors, our earnings, if any, financial condition, capital requirements, any
contractual restrictions with respect to the payment of dividends, the impact of
the distribution of dividends on our financial condition, tax liabilities, and
such economic and other conditions as the Board of Directors may deem
relevant.
  B. Significant
changes
  No
significant changes occurred since the date of our annual consolidated financial
statements included elsewhere in this annual report.
  Item
9. Offer
and Listing
  Not
Applicable, except for Item 9A (4) and Item 9C.
  Our
common shares are listed on the TSX and quoted for trading on the NASDAQ Capital
Market.  Prior to February 9, 2007, our common shares were traded on
the NASDAQ Global Market.   Prior to December 17, 2003, our
common shares were listed on the American Stock Exchange.
  47
 The
following table sets forth, for the periods indicated, the reported high and low
prices (in Canadian dollars) of our common shares on the TSX.  Amounts
in this table have been adjusted to reflect our April 17, 2007 share
consolidation (reverse split):
  YEAR/QUARTER/
                  MONTH
              HIGH
              LOW2003
              85.60
              30.502004
              100.60
              47.002005
              73.40
              20.802006
              39.70
              3.202007
              5.70
              1.35Q1
      2006
              39.70
              22.00Q2
      2006
              39.30
              21.20Q3
      2006
              24.00
              3.20Q4
      2006
              8.50
              4.30Q1
      2007
              5.70
              3.65Q2
      2007
              5.20
              2.45Q3
      2007
              3.01
              2.26Q4
      2007
              2.49
              1.35Aug
      07
              2.65
              2.31Sep
      07
              2.49
              2.06Oct
      07
              2.26
              1.70Nov
      07
              1.84
              1.35Dec
      07
              2.56
              1.52Jan
      08
              2.70
              1.50
 
 The
following is a summary of trading of the Company’s Shares on the NASDAQ and
AMEX. The prices represent trading on AMEX prior to December 17, 2003, and
trading on NASDAQ on and after that date. In December 2003, a high of US$7.50
occurred on NASDAQ, while a low of US$5.31 occurred on the AMEX.
The  table sets forth, for the periods indicated, the reported high
and low prices (in United States dollars) of our common shares traded on the
NASDAQ Global Market and the NASDAQ Capital Market.  Amounts in this
table have been adjusted to reflect our share consolidation (reverse
split).
  YEAR/QUARTER/
                  MONTH
              HIGH
              LOW2003
              65.00
              18.502004
              78.00
              36.802005
              60.80
              17.502006
              34.50
              2.70Q1
      2006
              34.50
              19.00Q2
      2006
              33.90
              18.90Q3
      2006
              21.50
              2.70Q4
      2006
              7.60
              3.80Q1
      2007
              4.90
              3.00Q2
      2007
              4.60
              2.26Q3
      2007
              2.90
              2.10
   48
  YEAR/QUARTER/
                  MONTH
              HIGH
              LOW
 Q4
      2007
              2.40
              1.41Aug
      07
              2.50
              2.15Sep
      07
              2.40
              2.11Oct
      07
              2.34
              1.82Nov
      07
              1.86
              1.41Dec
      07
              2.59
              1.55Jan
      08
              2.68
              1.61
  Variations
from Certain NASDAQ Rules
  NASDAQ
listing rules permit the Company to follow certain home country practices in
lieu of compliance with certain NASDAQ corporate governance
rules.  Set forth below are the requirements of Marketplace Rule 4350
that the Company does not follow and the home country practices that it follows
in lieu thereof.
  Distribution of Annual and
Interim Reports:  NASDAQ’s Marketplace Rule 4350(b) requires
each issuer, among other things, to distribute to shareholders copies of an
annual report containing audited financial statements of the company and its
subsidiaries.  The report must be distributed to shareholders a
reasonable period of time prior to the company’s annual meeting of shareholders
and must be filed on NASDAQ at the time it is distributed to
shareholders.  Under the exemption available to Foreign Private
Issuers under Marketplace Rule 4350(a)(1), the Company does not follow this
NASDAQ rule.  Instead, and in accordance with the NASDAQ exemption,
the Company complies with applicable TSX rules and applicable Canadian corporate
and securities regulatory requirements.
  Shareholder Approval in
Connection with Certain Transactions:  NASDAQ’s Marketplace
Rule 4350(i) requires each issuer to obtain shareholder approval prior to
certain dilutive events, including a transaction other than a public offering
involving the sale of 20% or more of the issuer’s common shares outstanding
prior to the transaction.  Under the exemption available to Foreign
Private Issuers under Marketplace Rule 4350(a)(1), the Company does not follow
this NASDAQ rule.  Instead, and in accordance with the NASDAQ
exemption, the Company complies with applicable TSX rules and applicable
Canadian corporate and securities regulatory requirements.
   Item
10. Additional
Information
  A. Share
Capital
  Not
Applicable.
  B. Memorandum
and Articles of Association
  Common
Shares
  The
Company’s authorized capital consists of an unlimited number of common shares,
without par value (“Shares”).
  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 ten pre-consolidated common shares.  The
consolidation was implemented on April 17, 2007.  All references to
number of common shares issued and outstanding, stock options, deferred share
units and warrants, have been amended to give effect to the share
consolidation.
  49
 At
January 31, 2008, there were 22.4 million shares issued and
outstanding.  All issued and outstanding Shares are fully paid and
non-assessable.
  An
additional 8.0 million shares have been allotted and reserved for issuance
pursuant to outstanding options and warrants.
  All
shares are entitled to one vote per share at all meetings of shareholders, rank
equally as to dividends and as to the distribution of the Company's assets
available for distribution in the event of a liquidation, dissolution, or
winding up of the Company. There are no preemptive, conversion, or exchange
rights and no provision for redemption, purchase for cancellation, surrender or
sinking or purchase funds.
  Provisions
as to the modification, amendment or variation of such rights and provisions are
contained in the Canada Business Corporations Act (the "Act") and the
regulations promulgated thereunder. Certain fundamental changes to the articles
of the Company will require the approval of two-thirds of the votes cast on a
resolution submitted to a special meeting of the Company's shareholders called
for the purpose of considering the resolution. These items include (i) an
amendment to the provisions relating to the outstanding capital of the Company,
(ii) a sale of all or substantially all of the assets of the Company, (iii) an
amalgamation of the Company with another company, other than a subsidiary, (iv)
a winding-up of the Company, (v) a continuance of the Company into another
jurisdiction, (vi) a statutory court approved arrangement under the Act
(essentially a corporate reorganization such as an amalgamation, sale of assets,
winding-up, etc.), or (vii) a change of name.
  Under
the Act, a corporation cannot repurchase its shares or declare dividends if
there are reasonable grounds for believing that (a) the corporation is, or after
payment would be, unable to pay its liabilities as they become due, or (b) after
the payment, the realizable value of the corporation's assets would be less than
the aggregate of (i) its liabilities and (ii) its stated capital of all classes
of its securities. Generally, stated capital is the amount paid on the issuance
of a share.
  ARTICLES
AND BY-LAWS
  The
following presents a description of certain terms and provisions of the
Company's articles and by-laws.
  General
  The
Company was incorporated under the Business Corporations Act (Ontario) by
articles of incorporation dated January 10, 1980, as amended by certificate and
articles of amendment dated September 19, 1985, June 15, 1988, and April 21,
1994, and was continued under the Canada Business Corporations Act by
certificate and articles of continuance dated August 9, 1999.
  The
Company's corporate objectives and purpose are unrestricted.
  Directors
  The
Company's by-laws provide that a director who is a party to, or who is a
director or officer of or has a material interest in any person who is a party
to, a material contract or transaction or proposed material contract or
transaction with the Company shall disclose the nature and extent of that
interest and shall not vote on any resolution to approve such contract or
transaction.
  The
Company's by-laws provide that the directors shall be paid such remuneration for
their services as the Board of Directors may from time to time
determine.
  The
Company's by-laws provide that the Board may from time to time on the Company's
behalf, without authorization of shareholders:
  •
              borrow
      money upon credit;
   50
  •
              issue,
      reissue, sell or pledge bonds, debentures, notes or other evidences of
      indebtedness or guarantee of us, whether secured or
    unsecured;
  •
              to
      the extent permitted by the Canada Business Corporations Act, give
      directly or indirectly financial assistance to any person by means of a
      loan, a guarantee or otherwise on our behalf to secure performance of any
      present or future indebtedness, liability or obligation of any person;
      and
  •
              mortgage,
      hypothecate, pledge or otherwise create a security interest in all or any
      or currently owned or subsequently acquired real or personal, movable or
      immovable, property including book debts, rights, powers, franchises and
      undertakings, to secure any of our bonds, debentures, notes or other
      evidences of indebtedness or guarantee or any other present or future
      indebtedness, liability or
obligation.
  •
              The
      Company's by-laws provide that no person shall be qualified for election
      as a director if such person is less than 18 years of age. There is no
      provision in the Company's by-laws relating to retirement or
      non-retirement of directors under an age limit requirement. A director
      need not be a shareholder. A majority of directors must be resident
      Canadians and at least one-third of the directors must not be officers or
      employees of the Company or of any of the Company's
      affiliates.
  Annual
and Special Meetings
  The
annual meeting and special meetings of shareholders are held at such time and
place as the Board of Directors shall determine. Notice of meetings are sent out
to shareholders not less than 21 nor more than 50 days before the date of such
meeting. All shareholders at the record date are entitled to notice of the
meeting and have the right to attend the meeting. The directors do not stand for
re-election at staggered intervals.
  There
are no by-law provisions governing the ownership threshold above which
shareholder ownership must be disclosed.
  There
are no provisions in either the Company's articles of incorporation or by-laws
that would have the effect of delaying, deferring or preventing a change in
control of the Company and that would operate only with respect to a merger,
acquisition or corporate restructuring involving the Company or its subsidiary,
other than as described in the Shareholder Rights Plan below.
  Adoption
of Shareholder Rights Plan
  The
Board of Directors of the Company adopted a shareholder rights plan as of
November 22, 2000 (the "Rights Plan") and amended May 7, 2003 and March 22,
2006.
  The
Rights Plan was effective immediately upon its adoption by the Board, but it had
to be confirmed by shareholders to remain in effect, which occurred at the
Company's Annual and Special Meeting of Shareholders held on May 2, 2001. The
Rights Plan was not adopted by the Board of Directors in response to, or in
anticipation of, any offer or takeover bid.
  Purpose
of the Rights Plan
  The
Rights Plan is designed to give the Company’s shareholders sufficient time to
properly assess a take-over bid without undue pressure and to give the Company’s
Board of Directors time to consider alternatives to allow the Company’s
shareholders to receive full and fair value for their common
shares.  Additionally, the Rights Plan is designed to provide
shareholders of the Company with equal treatment in a take-over
bid.  The desire to ensure that the Company is able to address
unsolicited take-over bids for its common shares during the term of the Rights
Plan stems from a concern that Canadian take-over bid rules for companies that
are subject to unsolicited take-over bids provide too short a response time to
ensure that shareholders are offered full and fair value for their
shares.
  51
 In
recent years, shareholder rights plans have been adopted by many Canadian
companies, and the terms of such plans have evolved to reflect changes in
investor attitudes, standards of corporate governance, requirements of
securities regulatory authorities, and the views of third-party
commentators.  The Rights Plan reflects this evolution.
  Summary
of the Rights Plan
  The
following is a summary of the principal terms of the Rights Plan, as amended,
which is qualified in its entirety by reference to the text of the Rights Plan,
a copy of which is available from the Company upon request.
  Term
  Subject
to the approval of the proposed amendment to the Rights Plan, the Rights Plan
and the share purchase rights (“Rights”) issued thereunder will expire at the
close of the Company’s annual meeting of shareholders to be held in 2009, unless
the Rights are terminated, redeemed, or exchanged earlier by the Board of
Directors.
  Issue
of Rights
  Under
the Rights Plan, one Right was issued for each common share outstanding as at
5:00 p.m. (Toronto time) on November 22, 2000 (the “Record Time”) and for each
common share issued subsequent to the Record Time (but prior to the earlier of
the Separation Time (as defined below) and the redemption or expiration of the
Rights).  The Company has entered into a rights plan agreement dated
as of November 22, 2000, as amended as of May 7, 2003, which was further amended
by agreement effective March 22, 2006, with CIBC Mellon Trust Company of Canada,
as rights agent, which provides for the exercise of the Rights, the issue of
certificates evidencing the Rights, and other related matters including those
described in this annual report.
  Rights
Exercise Privilege
  The
Rights separate from the Company’s common shares and become exercisable eight
trading days after a person publicly discloses that it has acquired 20% or more
of, or commences or announces a take-over bid for, the Company’s outstanding
Voting Shares (defined to include the common shares and any other shares that
the Company may issue that carry voting rights relating to the election of
directors), in each case other than pursuant to a Permitted Bid or a Competing
Permitted Bid (each as defined below).  Where a person becomes a
beneficial owner of 20% or more of the Company’s common shares and thereby
becomes an “Acquiring Person”, this is referred to as a “Flip-in
Event.”
  Any
rights held by an Acquiring Person become void upon the occurrence of the
Flip-in Event.  By making any take-over bid other than a Permitted Bid
or a Competing Permitted Bid prohibitively expensive for an Acquiring Person,
the Rights Plan is designed to require any person interested in acquiring more
than 20% of the Company’s common shares to do so by way of a Permitted Bid or a
Competing Permitted Bid or to make a take-over bid that the Board of Directors
considers to represent the full and fair value of the Company’s common
shares.
  Prior
to the Rights being triggered, they will have no value and no dilutive effect on
the Company’s common shares.
  Flip-In
Event
  Upon
the occurrence of the Flip-in Event, each Right (except for Rights beneficially
owned by the Acquiring Person and certain other persons specified below) shall
thereafter constitute the right to purchase from the Company for the Exercise
Price upon exercise thereof in accordance with the terms of the Rights Plan,
that number of common shares of the Company having an aggregate Market Price (as
defined in the Rights Plan) equal to twice the Exercise Price (as defined in the
Rights Plan).  For example, if one assumes a market price at the time
of a Flip-in Event of $10 per share, then a current holder of one Right could
purchase 40 shares for $200 (being the exercise price per right), effectively
acquiring the shares at half of the current market price.
  52
 The
Rights Plan provides that Rights that are beneficially owned by (i) an Acquiring
Person or any affiliate or associate of an Acquiring Person, or any person
acting jointly or in concert with an Acquiring Person, or any affiliate or
associate of such Acquiring Person; or (ii) a transferee or other successor in
title of Rights of an Acquiring Person (or any affiliate or associate of an
Acquiring Person or of any person acting jointly or in concert with an Acquiring
Person or any associate or affiliate of an Acquiring Person) who becomes a
transferee or successor in title concurrently with or subsequent to the
Acquiring Person becoming an Acquiring Person shall become null and void without
any further action, and any holder of such Rights (including transferees or
successors in title) shall not have any right whatsoever to exercise such Rights
under any provision of the Rights Plan.
  Acquiring
Person
  An
“Acquiring Person” is a person who Beneficially Owns (as defined in the Rights
Plan) twenty percent (20%) or more of the outstanding Voting Shares of the
Company.  An Acquiring Person does not, however, include the Company
or any subsidiary of the Company, or any person who becomes the Beneficial Owner
of twenty percent (20%) or more of the outstanding Voting Shares of the Company
as a result of Permitted Bids, Competing Permitted Bids, and certain other
exempt transactions.
  Permitted
Bids and Competing Permitted Bids
  A
“Permitted Bid” is a take-over bid made by a take-over bid circular in
compliance with the following additional provisions:
  (1)
              the
      bid must be made to all holders of record of common
  shares;
  (2)
              the
      bid must be open for a minimum of 60 days following the date of the bid,
      and no shares may be taken up prior to such
  time;
  (3)
              take-up
      and payment for shares may not occur unless the bid is accepted by persons
      holding more than fifty percent (50%) of the outstanding common shares
      exclusive of shares held by the person responsible for triggering the
      Flip-in Event or any person who has announced an intention to make, or who
      has made, a take-over bid for the shares of the Company and the respective
      affiliates and associates of such persons and persons acting jointly or in
      concert with such persons;
  (4)
              shares
      may be deposited into or withdrawn from the bid at any time prior to the
      take-up date; and
  (5)
              if
      the bid is accepted by the requisite percentage specified in (3) above,
      the bidder must extend the bid for a period of 10 business days to allow
      other shareholders to tender into the bid, should they so wish, and must
      make a public announcement to such
effect.
  A
“Competing Permitted Bid” is a take-over bid that satisfies all of the criteria
of a Permitted Bid except that it is made after a Permitted Bid has been made,
the minimum deposit period and the time period for the take-up of and payment
for shares tendered under a Competing Bid is not 60 days, but is instead the
greater of 35 days (the minimum permitted by law) and the 60th day after the
date on which the Permitted Bid then in existence was made.
  Neither
a Permitted Bid nor a Competing Permitted Bid need be approved by the Board of
Directors and may be taken directly to the shareholders of the
Company.  Acquisitions of common shares made pursuant to a Permitted
Bid or a Competing Permitted Bid do not give rise to a Flip-in
Event.
  Certificates
and Transferability
  Prior
to separation, the Rights will be evidenced by a legend imprinted on the common
share certificates of the Company and will not be transferable separately from
the common shares.  Common share certificates do not need to be
exchanged to entitle a shareholder to these Rights.  The legend will
be on all new certificates issued by the Company.  From and after
separation, the Rights will be evidenced by Rights certificates and will be
transferable separately from the Company’s common shares.
  53
 Redemption
and Waiver
  The
Board of Directors may, at any time prior to the occurrence of a Flip-in Event
and subject to shareholder approval, elect to redeem all but not less than all
of the Rights at a redemption price of $0.0001 per Right (the “Redemption
Price”), appropriately adjusted in certain events.  Rights will be
deemed to be automatically redeemed at the Redemption Price where a person who
has made a Permitted Bid, a Competing Permitted Bid, or a take-over bid
otherwise exempted by the Board of Directors takes up and pays for the Company’s
shares under the terms of the bid.  If the Board of Directors elects
or is deemed to have elected to redeem the Rights, the right to exercise the
Rights will terminate, and each Right will, after redemption, be null and void,
and the only right thereafter of the holders of Rights shall be to receive the
Redemption Price.  Under the Rights Plan, the Board of Directors has
discretion to waive application of the Rights Plan to a take-over bid, subject
to an automatic waiver with respect to all other take-over bids make while the
waived take-over bid is outstanding.  The Board of Directors of the
Company may also waive the application of the Rights Plan to a Flip-in Event
that occurs through inadvertence, subject to the “inadvertent” Acquiring Person
reducing its holding of the Company’s shares within an agreed
time.  Other waivers of the Rights Plan will require shareholder
approval.
  Amendment
  Amendments
or supplements to the terms of the Rights Plan (other than for clerical errors
or to maintain the Rights Plan’s validity as a result of changes in legislation)
require prior shareholder approval.  Changes arising from changes in
applicable legislation will require subsequent shareholder
ratification.
  C. Material
Contracts
  We
have not, during our financial year ended November 30, 2007, entered into any
material contracts other than contracts in the ordinary course of business, our
agreement with Ferrer dated April 18, 2007, and contracts in connection with the
issuance of the common shares and warrants on May 24, 2007 for gross proceeds of
US$16,000,000.  The common shares and warrants are described under
“Capital Structure”.
  On
May 24, 2007, we closed purchase agreements with institutional investors to
raise US$16 million in gross proceeds through the sale of our common shares at a
price of US$3.25. Under the terms of the purchase agreements, we also issued
five-year warrants to purchase an additional 3.7 million common shares at an
exercise price of US$3.16 per share. If all of the 3.7 million warrants are
exercised, we will receive an additional US$11.7 million in gross
proceeds.  Pursuant to  engagement agreements, with Rodman
& Renshaw LLP and JMP Securities LLC, as placement agents, we
paid  an aggregate commission equal to 6.25% of the gross proceeds of
the sale of units in the offering and issued compensation warrants to purchase
common shares equal to 6% of the aggregate number of common shares sold in the
offering. The placement agents in  this transaction together received
295,044 three-year warrants to purchase common shares at US$3.81 per
share.
  On
November 14, 2006, we closed purchase agreements with institutional investors to
raise approximately US$20.3 million in gross proceeds through the sale of our
common shares at a price of US$4.70 per unit, with each unit consisting of one
common share, 0.4 of a series A warrant and 0.1 of a series B
warrant.  Each whole series A warrant represents the right, during the
term of the warrant, to purchase one common share at a price of US$6.30 per
common share.  The series B warrants terminated as at May 14, 2007 and
are of no further force or effect.  Pursuant to an engagement
agreement with Rodman & Renshaw, LLC, as placement agent, we paid the
placement agent an aggregate commission equal to 6% of the gross proceeds of the
sale of units in the offering (other than on sales to one former securityholder
of ours in respect of which the commission was 3%) and issued compensation
warrants to purchase common shares equal to 6% of the aggregate number of common
shares sold in the offering (other than on sales to one former securityholder of
ours in respect of which the compensation warrants were to purchase common
shares equal to 3% of the aggregate number of common shares sold to such former
securityholder).  The compensation warrants were substantially on the
same terms as the warrants offered, except that the compensation warrants have
an exercise price equal to US$6.30, which will expire on November 14, 2009, and
will otherwise comply with NASD Rule 2710.
  54
 
 D. Exchange
Controls
  Canada
has no system of currency exchange controls.  There are no
governmental laws, decrees or regulations in Canada that restrict the export or
import of capital, including but not limited to, foreign exchange controls, or
that affect the remittance of dividends, interest or other payments to
non-resident holders of the company’s securities.
  E. Taxation
  United
States Taxation
  Certain
Material United States Federal Income Tax Considerations
  The
following summary is based on the advice of Paul, Weiss, Rifkind, Wharton &
Garrison LLP and describes certain material United States federal income tax
consequences of the ownership and disposition of our common shares that are
generally applicable to a United States person that holds our common shares as
capital assets (a “U.S. Holder”) within the meaning of Section 1221 of the
Internal Revenue Code of 1986, as amended (the “Code”). This discussion does not
address holders of other securities, including holders of our
warrants.  This discussion assumes that we are not a “controlled
foreign corporation” for U.S. federal income tax purposes.  The
following discussion does not purport to be a complete analysis of all of the
potential United States federal income tax  considerations that may
be  relevant to  particular holders of our common shares in
light of their particular  circumstances nor does it deal with
persons  that are  subject to special  tax
rules,  such as  brokers,  dealers in
securities  or  currencies,   financial  institutions,  insurance
companies, tax-exempt organizations,  persons liable for alternative
minimum tax, U.S. expatriates, partnerships or other pass-through entities, U.S.
Holders who own (directly, indirectly or by attribution) ten percent or more of
the total combined voting power of all classes of stock entitled to vote,
persons holding our common shares as part of a straddle, hedge or conversion
transaction or as part of a synthetic security or other
integrated  transaction, traders in securities  that elect
to use a  mark-to-market  method of
accounting  for their
securities  holdings,  holders whose
“functional  currency” is not the United States dollar, and holders
who are not U.S. Holders.  In addition, the discussion below does not
address the tax consequences of the law of any state, locality or foreign
jurisdiction or United States federal tax consequences (e.g., estate or gift
tax) other than those pertaining to the income tax.  There can be no
assurance that the United States Internal Revenue Service (the “IRS”) will take
a similar view as to any of the tax consequences described in this
summary.
  The
following is based on currently existing provisions of the Code, existing and
proposed Treasury regulations under the Code and current administrative rulings
and court decisions.  Everything listed in the previous sentence may
change, possibly on a retroactive basis, and any change could affect the
continuing validity of this discussion.
  Each
U.S. Holder and each holder of common shares that is not a U.S. Holder should
consult its tax adviser regarding the United States federal income tax
consequences of holding our common shares applicable to such holder in light of
its particular situation, as well as any tax consequences that may arise under
the laws of any  other relevant foreign, state, local, or other taxing
jurisdiction.
  As
used in this section, the term “United States person” means a beneficial owner
of our common shares that is:
  (i)
a citizen or an individual resident of the United States;
  (ii)
a  corporation  (or an entity  taxable as
a  corporation  for United States federal  income
tax  purposes)  created or organized in or under the laws of
the United States or any political subdivision of the United
States;
  (iii)
an estate the income of which is subject to United States federal income
taxation regardless of its source; or
  55
 (iv)
a trust  which (A) is  subject  to
the  supervision  of a court  within the
United  States and the control of a United States person as described
in Section 7701(a)(30) of the Code; or (B) is subject to a valid election under
applicable Treasury Regulations to be treated as a United States
person.
  If
a partnership (including for this purpose any entity treated as a partnership
for U.S. federal income tax purposes) holds our common shares, the United States
federal income tax treatment of a partner generally will depend on the status of
the partner and the activities of the partnership.  A United States
person that is a partner of the partnership holding our common shares should
consult its own tax adviser.
  Passive
Foreign Investment Company
  Special,
generally unfavorable rules apply to the ownership and disposition of the stock
of a passive foreign investment company (“PFIC”).  As discussed below,
however, it may well be possible to mitigate these consequences by making a
so-called qualified electing fund (“QEF”) election.
  For
United States federal income tax purposes, a foreign corporation is classified
as a PFIC for each taxable year in which either:
  •
              at
      least  75% of its gross  income
      is  “passive”  income  (referred  to
      as the “income test”); or
  •
              at
      least 50% of the average value of its assets is attributable to assets
      that produce  passive  income  or
      are  held  for
      the  production  of  passive  income
      (referred to as the “asset test”).
  For
purposes of the income test and the asset  test,  if a
foreign  corporation
owns  directly  or  indirectly  at least
25% (by  value) of the stock of another
corporation,  that  foreign  corporation  will  be  treated  as
if it  held  its proportionate share of the assets of the
other corporation and received directly
its  proportionate  share of the income of
that  other  corporation.  Also, for purposes of
the income test and the asset test,  passive income does not include
any income that is interest, a dividend or a rent or royalty,  which
is received or accrued from a related person to the extent that amount is
properly allocable to the income of the related person that is not passive
income.
  We
were a PFIC in the 2007 taxable year and we believe there is a significant
likelihood that we will be classified as a PFIC in the 2008 taxable year and
possibly in subsequent years. In any event, PFIC status is fundamentally factual
in nature, generally cannot be determined until the close of the taxable year in
question and is determined annually.
  Under
applicable attribution rules, if Vasogen is a PFIC, U.S. Holders of common
shares will be treated as holding  for certain  purposes of
the PFIC rules, stock of Vasogen's subsidiaries (including Vasogen Ireland
Limited) that are PFICs. In such case, certain dispositions of, and
distributions on, stock of such subsidiaries may have consequences under the
PFIC rules directly to U.S. Holders.
  In
the  absence of any  election,  a U.S. Holder of a
PFIC will be taxed under the generally unfavorable rules described below,
including loss of favorable capital gains rates and the imposition of an
interest  charge,  that apply if the holder
recognizes  gain on the sale or other  disposition of the
PFIC stock or receives
certain  distributions  with  respect  to
the stock (see  “-- The  “No  Election”
Alternative - Taxation  of
Excess  Distributions”).  U.S. Holders may avoid most of
these consequences by making a QEF Election with respect to
Vasogen,  which will have the consequences described in “-- The QEF
Election Alternative.” A U.S. Holder may also consider making an election to
mark the common shares to market (a “Mark to Market Election”).
  U.S.  HOLDERS  ARE  URGED  TO  CONSULT  THEIR  TAX  ADVISORS  ABOUT  THE  POSSIBLE
APPLICABILITY OF THE PFIC RULES AND THE AVAILABILITY OF MAKING A QEF ELECTION TO
AVOID ADVERSE U.S. TAX CONSEQUENCES.
  
 56
  The QEF Election
      Alternative
  A
U.S. Holder who elects (an  “Electing  U.S.
Holder”)  in a timely  manner to treat Vasogen  as
a QEF (a
“QEF  Election”)  would  include  in
gross  income  (and be subject to
current  U.S.  federal  income tax on) the U.S.
dollar  value of both its pro rata  share
of  Vasogen's  ordinary  earnings,  as
ordinary  income,  and its pro rata share of Vasogen 's net
capital gains, as long-term capital gain, during
any  taxable  years  of the U.S.  Holder
in which we are classified as a PFIC, regardless of whether such amounts are
actually distributed.  An Electing U.S. Holder may further elect, in
any given taxable year, to defer payment of the taxes owing as a result of
including our ordinary earnings and net capital gains currently in income,
subject to certain limitations.  However, if deferred, the taxes will
be subject to an interest charge, which will be non-deductible to U.S. Holders
that are not corporations.  Distributions  paid out
of  earnings  and
profits  that  previously  were  taxed
to the  Electing  U.S. Holder  shall not be
subject to tax again upon distribution.
  We
believe that we will not have any earnings and profits (as computed for U.S.
federal income tax purposes) for the current taxable year and little, if any,
earnings and profits for any future taxable year in which our company is a PFIC.
In that event, a QEF Election with respect to our common shares would subject a
U.S. Holder to correspondingly little, if any, current
taxation.  However, there can be no assurance as to these
matters.
  Similarly,  if
Vasogen  Ireland  Limited were  classified as a
PFIC, a U.S. Holder that makes a timely QEF Election with respect to
Vasogen  Ireland  Limited would be subject to the QEF rules
as  described  above  with  respect to
the  holder's pro rata share of the ordinary  earnings and
net capital gains of Vasogen Ireland Limited.  Earnings of
Vasogen  (or  Vasogen  Ireland  Limited)  attributable  to
distributions  from Vasogen Ireland Limited that had previously been
included in the income of an Electing U.S. Holder under the QEF rules
would  generally  not be taxed to the Electing U.S. Holder
again.
  Upon
the sale or other  disposition of common shares,  an
Electing U.S. Holder who makes a QEF Election for the first  taxable
year in which he owns common  shares
will  recognize  capital  gain or loss for U.S.
federal  income tax purposes in an
amount  equal  to  the  difference  between  the  net  amount  realized  on  the
disposition  and the U.S. Holder's  adjusted tax basis in
the common shares.  Such gain or loss will be capital gain or loss,
which will be long-term capital gain or loss if the U.S. Holder's holding period
in the common shares is more than one year and otherwise   will
be short-term   capital gain or loss.  The
deductibility of capital losses is subject to certain limitations.  If
the U.S. Holder is a
United  States  resident  (as  defined
in section  865 of the Code), gains realized
upon  disposition  of a common share by such U.S.
Holder  generally will be U.S. source income,  and
disposition losses generally will be allocated to reduce U.S. source
income.
  A
QEF Election must be made in a timely manner as specified in applicable Treasury
regulations. Generally, the QEF Election must be made in a timely filed
federal  income  tax  return of a U.S.
Holder  for the first  taxable  year of the
foreign  corporation  during  which  the  corporation  was
at any  time a  PFIC. Although a QEF Election may be made
after the PFIC's first taxable year that was included in the  Electing
U.S.
Holder's  holding  period,  the  Electing
U.S. Holder would continue to be subject to the
excess  distribution  rules  described below (see
“-- The “No Election” Alternative - Taxation of Excess Distributions”) unless
the  holder  makes a Mark to
Market  Election,  which  would  result
in a deemed disposition of the PFIC stock to which the excess distribution rules
may apply.
  The
QEF Election is made on a shareholder-by-shareholder basis and can be revoked
only with the consent of the IRS. A shareholder  makes a QEF Election
by attaching  a  completed  IRS
Form  8621,  including  a
PFIC  annual  information statement,  to a timely
filed United States federal income tax return. Even if a QEF Election is not
made, a shareholder in a PFIC who is a U.S. person must file a completed IRS
Form 8621 every year.
  We
intend to make available to U.S. Holders timely and accurate information as to
our status as a PFIC and intend to comply with all applicable record keeping,
reporting and other requirements  so that each U.S. Holder may elect
to treat our company as a QEF.
  57
 
  The “No Election”
      Alternative - Taxation of Excess
  Distributions
  If
we are  classified  as a PFIC for any year
during  which a U.S. Holder has held common  shares and
that  holder has not made a QEF  Election or a Mark to
Market Election,  special  rules may subject  that
holder to increased  tax  liability,
including  loss
of  favorable  capital  gains  rates  and
the  imposition  of an interest charge, upon the sale or
other disposition of the common shares or upon the receipt of any excess
distribution (as defined below). Under these rules:
  •
              the
      gain or excess distribution will be allocated ratably over the U.S.
      Holder's holding period;
  •
              the
      amount  allocated  to the
      current  taxable  year and any year prior to the
      first  year in which  we are a PFIC  will be
      taxed  as  ordinary  income  in
      the current year;
  •
              the
      amount allocated to each of the other taxable years will be subject to tax
      at the highest  rate of tax in effect for
      the  applicable  class of taxpayer for that year;
      and
  •
              an
      interest charge for the deemed deferral benefit will be imposed with
      respect to the resulting tax attributable to each of the other taxable
      years.
  These
rules will continue to apply to the holder even after we cease to meet the
definition of a PFIC, unless the holder elects to be treated as having sold our
common shares on the last day of the last taxable year in which we qualified as
a PFIC.
  An
“excess  distribution,”  in general,  is
any  distribution  on common  shares
received  in a taxable  year by a
US  Holder  that is  greater  than 125%
of the average  annual  distributions  received by
that  holder in the three  preceding taxable years or, if
shorter, that holder's holding period for common shares.
  Any
portion of a distribution paid to a U.S. Holder that does not constitute an
excess distribution will be treated as ordinary dividend income to the extent of
our current and accumulated earnings and profits (as computed for U.S. federal
income tax purposes).  Such dividends generally will not qualify for
the dividends-received deduction otherwise available to U.S. corporations. Any
amounts treated  as  dividends  paid by a
PFIC  do
not  constitute  “qualified  dividend
income”  within the meaning of Section  1(h)(11) of the
Code, and will therefore be ineligible  for taxation at the maximum
rate of 15% applicable to individuals
who  receive  such  income.  Any
such  amounts  in  excess  of
our  current  and
accumulated  earnings  and  profits  will
be applied  against  the  Electing  U.S.
Holder's tax basis in the common shares and, to the extent in excess of such tax
basis, will be treated as gain from a sale or exchange of such common shares. It
is possible that any such gain might be treated as an excess
distribution.
  Mark to Market
      Election Alternative
  Assuming  that
our common shares are treated
as  marketable  stock,  a U.S. Holder
that  does not make a
QEF  Election  may  avoid
the  application  of the  excess
distribution  rules,  at least in part, by electing to mark
the common shares to
market  annually,  recognizing  as  ordinary  income
or loss each year an amount equal to the  difference  as of
the close of the taxable  year  between the fair
market  value of its common  shares and
the  holder's  adjusted tax basis in the common shares. Any
mark to market loss is treated as an ordinary deduction, but only to the extent
of the ordinary income that the holder has included pursuant to the election in
prior tax years. The electing U.S. Holder's basis in its common shares would be
adjusted to reflect any of these income or loss amounts.  Any gain on
a disposition of our common shares by an electing U.S. Holder would be treated
as ordinary income.  Any loss on such a disposition would be treated
as an ordinary deduction, but only to the extent of the ordinary income that the
holder has included pursuant to the election in prior tax years. For purposes of
making this election, stock of a foreign corporation is “marketable” if it is
regularly traded on certain qualified exchanges.  Under applicable
Treasury regulations, a “qualified exchange” includes a national securities
exchange that is registered with the SEC or the national market system
established under the Securities Exchange Act of 1934, as amended (the “1934
Act”) and certain foreign securities exchanges.  Currently, our common
shares are traded on a “qualified exchange.” Under applicable Treasury
Regulations, PFIC stock traded on a qualified exchange is regularly traded on
such exchange for any calendar year during which such stock is traded, other
than in de minimis
quantities, on at least 15 days during each calendar quarter.  We
cannot assure U.S. Holders that our common shares will be treated as regularly
traded stock.
  58
 With
respect to its direct ownership of common shares, a U.S. Holder that receives
a  distribution  with  respect to its
common  shares will avoid the  unfavorable
consequences  applicable to
excess  distributions  described above if the holder has
made a timely  Mark
to  Market  Election  in the first  year
of its  holding period during which we are treated as a PFIC. Such
distribution would instead be taxed under the rules described in the final
paragraph of the above section (“ - The “No Election” Alternative - Taxation of
Excess Distributions”).  If a U.S. Holder has held
common  shares for one or more taxable years during which we are
treated  as a PFIC  and does not make
a  timely  Mark
to  Market  Election  with
respect  to  the  common  shares  held  during  the  first  of  those  years,  a
coordination  rule applies to ensure that a later Mark to
Market  Election  does not cause the holder to avoid the
interest charge on excess  distributions  with respect to
amounts attributable to periods before the election.
  An
election to mark to market applies to the year for which the election is made
and the following years unless the PFIC stock ceases to be marketable or
the IRS consents to the revocation of the election.  In addition, a
U.S. Holder that has made a Mark to Market Election does not include mark to
market gains, or deduct mark to market losses, for years when the corporation
ceases to be treated as a PFIC.  If a timely QEF Election were made by
a U.S. Holder, the mark to market rules would not apply.
  The
mark to market rules do not appear to prevent the application of the excess
distribution rules in respect of stock of Vasogen Ireland Limited in the event
that Vasogen Ireland Limited were a considered PFIC. Accordingly, if Vasogen and
Vasogen Ireland Limited were both considered PFICs, and a U.S. Holder made a
Mark to Market Election with respect to its common shares, the U.S. Holder may
remain subject to the excess distribution rules described above with respect to
its indirectly owned Vasogen Ireland Limited stock.
  Foreign Tax
Credits
  Regardless
of which of the above alternatives applies to a U.S. Holder, any tax withheld by
Canadian taxing authorities with respect to distributions on our common shares
may, subject to a number of complex limitations, be claimed as a foreign tax
credit against a U.S. Holder's United States federal income tax liability or may
be claimed as a deduction for United States federal income tax
purposes.  The limitation on foreign taxes eligible for credit is
calculated separately with respect to specific classes of income.  For
this purpose, dividends we distribute with respect to our common shares will be
“passive income” or “general income.” Because of the complexity of those
limitations, each U.S. Holder should consult its own tax adviser with respect to
the amount of foreign taxes that may be claimed as a credit.
  Information Reporting and
Backup Withholding
  In
general, information reporting requirements will apply to certain payments of
dividends on the common shares and to certain payments of proceeds from the sale
or exchange of common shares made to U.S. Holders  other
than  certain  exempt recipients (such
as  corporations).  A U.S. Holder that is not an exempt
recipient will  generally be subject to backup  withholding
with respect to such payments (currently at a rate of 28%, which rate will be
replaced by a 31% rate beginning in 2011) unless the U.S.
Holder  provides  an  accurate  taxpayer  identification
number and otherwise  complies  with  applicable
requirements of the backup withholding rules.
  Any
amounts  withheld  under the
backup  withholding  rules will be allowed as a
credit  against the U.S. Holder's  United
States  federal  income tax liability or
refundable  to the extent that it exceeds
such  liability.  A U.S. Holder who does not provide a
correct taxpayer identification number may be subject to penalties imposed by
the IRS.
  
 59
  Canadian
Federal Income Tax Considerations
  Taxation
  The
following summary describes the principal Canadian federal income tax
considerations generally applicable to a holder of the Company’s Shares who, for
purposes of the Income Tax
Act (Canada) (the “Canadian Tax Act”) and the Convention between Canada and the
United States of America with Respect to Taxes on Income and on Capital
(the “Convention”) and at all relevant times, is resident in the United States
and was not and is not resident in Canada, deals at arm’s length and is not
affiliated with the Company, holds the Company’s Shares as capital property,
does not use or hold and is not deemed to use or hold the Company’s Shares in or
in the course of carrying on business in Canada and is not a non-resident
insurer and who otherwise qualifies for the full benefit of the Convention (a
“United States Holder”).
  This
following summary is based on the current provisions of the Convention, the
Canadian Tax Act and the regulations thereunder, all specific proposals to amend
the Canadian Tax Act and the regulations announced by the Minister of Finance
(Canada) prior to the date hereof and the Company’s understanding of the
administrative practices published in writing by the Canada Revenue Agency prior
to the date hereof.  On September 21, 2007, the Minister of Finance
(Canada) and the United States Secretary of the Treasury signed the fifth
protocol to the Convention (the “Protocol”) which includes amendments to many of
the provisions of the Convention, including significant amendments to the
limitation on benefits provision and treatment of fiscally transparent entities
such as some United States limited liability companies.  The Protocol
will enter into force once it is ratified by the United States government (it
was ratified by the Canadian government in 2007) and will have effect in some
cases from the first day of the calendar year in which the Protocol enters into
force.  United States Holders are urged to consult their own tax
advisors to determine the impact of the Protocol and their entitlement to relief
under the Convention based on their particular circumstances.  This
summary does not take into account or anticipate any other changes in the
governing law, whether by judicial, governmental or legislative decision or
action, nor does it take into account the tax legislation or considerations of
any province, territory or non-Canadian (including U.S.) jurisdiction, which
legislation or considerations may differ significantly from those described
herein.
  For
the purposes of the Canadian Tax Act, the Canadian tax results of a United
States Holder are to be determined using Canadian currency based on the relevant
exchange rate applicable thereto.
  This
summary is of a general nature only and is not intended to be, and should not be
interpreted as legal or tax advice to any prospective purchaser or holder of the
Company’s Shares and no representation with respect to the Canadian federal
income tax consequences to any such prospective purchaser is
made.  Accordingly, prospective purchasers and holders of the
Company’s shares should consult their own tax advisors with respect to their
individual circumstances.
  Dividends
on the Company’s Shares
  Generally,
dividends paid by Canadian corporations to non-resident shareholders are subject
to a withholding tax of 25% of the gross amount of such
dividends.  Pursuant to the Convention, the withholding tax rate on
the gross amount of dividends paid to United States Holders is reduced to 15%
or, in the case of a United States Holder that is a U.S. corporation which
beneficially owns at least 10% of the voting stock of the Canadian corporation
paying the dividends, to 5% of the gross amount of such dividends.
  Pursuant
to the Convention, certain tax-exempt entities that are United States Holders
may be exempt from Canadian withholding taxes, including any withholding tax
levied in respect of dividends received on the Company’s Shares.
  
  
  60
 Disposition
of the Company’s Shares
  In
general, a United States Holder will not be subject to Canadian income tax on
capital gains arising on the disposition of the Company’s Shares, unless such
shares are “taxable Canadian property” within the meaning of the Canada Tax Act
and no relief is afforded under the Convention.  Generally, the shares
of the Company would be taxable Canadian property of a United States Holder if
at any time during the sixty month period immediately preceding a disposition by
the United States Holder of such shares, not less than 25% of the issued shares
of any class or series of a class of shares of the Company belonged to the
United States Holder, to persons with whom the United States Holder did not deal
at arm’s length (within the meaning of the Canadian Tax Act), or to the United
States Holder and persons with whom the non-resident did not deal at arm’s
length (within the meaning of the Canadian Tax Act).  Under the
Convention, a capital gain realized by a United States Holder will not be
subject to Canadian tax unless the value of the Company’s Shares is derived
principally from real property (as defined in the Convention) situated in
Canada.
  F. Dividends and
Paying Agents
  Not
Applicable.
  G. Statement by
Experts
  Not
Applicable.
  H. Documents on
Display
  Copies
of the documents referred to in this annual report may be inspected, during
normal business hours, at the Company’s headquarters located at 2505 Meadowvale
Boulevard, Mississauga, Ontario, L5N 1S2, Canada.
  We
are required to file reports and other information with the SEC under the
Securities Exchange Act of 1934. Reports and other information filed by us with
the SEC may be inspected and copied at the SEC’s public reference facilities
described above. As a foreign private issuer, we are exempt from the rules under
the Exchange Act prescribing the furnishing and content of proxy statements and
our officers, Directors and principal shareholders are exempt from the reporting
and short-swing profit recovery provisions contained in Section 16 of the
Exchange Act. Under the Exchange Act, as a foreign private issuer, we are not
required to publish financial statements as frequently or as promptly as United
States companies.
  I. Subsidiary
Information
  See
Item 4.A. of this annual report.
  Item
11. Qualitative and
Quantitative Disclosures about Market Risk
  The
Company's primary market risk exposures are interest rate risk and foreign
currency risk.  The Company is exposed to interest rate risk on its
cash and cash equivalents.
  The
Company's reporting currency is the Canadian dollar. The Company is exposed to
foreign exchange risk associated with purchases from U.S. suppliers, cash and
cash equivalents.  Gains and losses resulting from the effects of
changes in the U.S. dollar to Canadian dollar exchange rate are recorded in
income.
  The
Company does not utilize derivative financial instruments to hedge its interest
rate or foreign currency rate risks.
  Interest
rate risk
  We
invest our cash resources in liquid government and corporate debt instruments
having a single "A" credit rating or greater.  We do not believe that
the results of operations or cash flows would be affected to any significant
degree by a sudden change in market interest rates relative to interest rates on
our investments, owing to the relative short-term nature of the
investments.
  61
 Credit
risk
  Financial
instruments potentially exposing us to a concentration of credit risk consist
principally of cash and cash equivalents.  We  manage 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.  We
currently hold our cash resources in investments issued and guaranteed by major
Canadian financial institutions.
  Exchange
rate sensitivity
  The
functional currency of the Company is the Canadian
dollar.  Accordingly, monetary items denominated in a foreign currency
are translated into Canadian dollars at exchange rates in effect at the balance
sheet dates and non-monetary items are translated at rates of exchange in effect
when the assets were acquired or obligations incurred.  Revenue and
expenses are translated at rates in effect at the time of the
transactions.  Foreign exchange gains and losses are included in the
determination of loss for the period.
  As
our functional or measurement currency is the Canadian dollar, U.S. dollar
exchange rate fluctuations may have a significant impact from an accounting
perspective, but they do not impair or enhance our ability to pay these U.S.
dollar denominated R&D expenses.
  In
November 2007, the Company entered into a forward foreign exchange contract to
purchase, in aggregate, U.S. $12.9 million for $12.5 million in December
2007.  The fair value of this instrument at November 30, 2007 was an
asset of $0.4 million.  The related gain was recorded in foreign
exchange loss (gain) in the statement of operations, deficit and comprehensive
income.
 
  Limitations
  The
above discussion includes only those exposures that exist as of November 30,
2007 and as a result, does not consider exposures or positions that could arise
after that date. The Company's ultimate realized gain or loss with respect to
interest rate and exchange rate fluctuations would depend on the exposures that
arise during the period and interest and foreign exchange rates.
  Item
12. Description of
Securities Other than Equity Securities.
  Not
Applicable.
  
  PART
II.
  Item
13. Defaults, Dividends
Arrearages and Delinquencies
  There
have been no material defaults in the payment of any principal or interest
owing.  Neither the Company nor its subsidiaries has any preferred
shares outstanding.
  Item
14. Material
Modifications to the Rights of Security Holders and Use of Proceeds
  There
has been no material modification of the instruments defining the rights of
holders of any class of registered securities.  There has been no
withdrawal or substitution of assets securing any class of registered
securities.  The trustees for our registered securities have not
changed during the last financial year.
  62
 Item
15. Controls and
Procedures
  INTERNAL
CONTROL OVER FINANCIAL REPORTING
  Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as required under applicable Canadian and U.S.
securities regulatory requirements.
 
 Our
internal control over financial reporting includes those policies and procedures
that: (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of our assets;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with GAAP, and that our
expenditures are being made only in accordance with authorizations of our
management and directors; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition
of our assets that could have a material effect on the financial
statements.
  Under the
supervision and with the participation of our Chief Executive Officer and our
Chief Financial Officer, management conducted an evaluation of the effectiveness
of our internal control over financial reporting, as of November 30, 2007, based
on the framework set forth in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on its evaluation under this framework, management concluded that our
internal control over financial reporting was effective as of that
date.
   KPMG LLP, our independent
registered public accounting firm, has issued an attestation report on our
internal control over financial reporting as of November 30, 2007.  The
attestation report is included as Exhibit 15.2 to this annual
report.
   CHANGES
IN INTERNAL CONTROL OVER FINANCIAL REPORTING
  There have been no
changes in our internal controls over financial reporting during the
fourth quarter that have materially affected, or are reasonably likely to
materially affect, our internal control over financial
reporting.  During the second quarter, we implemented additional
controls surrounding the US GAAP reconciliation.  Based on the results
of our testing, these controls were found to be operating effectively at
November 30, 2007.
 
 The
design of any system of controls and procedures is based in part upon certain
assumptions about the likelihood of certain events.  There can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions, including conditions that are remote.
 
 DISCLOSURE
CONTROLS AND PROCEDURES
  Disclosure
controls and procedures are designed to provide reasonable assurance that all
material information required to be publicly disclosed by a public company is
gathered and communicated to management, including the certifying officers, on a
timely basis so that the appropriate decisions can be made regarding public
disclosure.  As at November 30, 2007, the certifying officers and
other members of management evaluated the effectiveness of our disclosure
controls and procedures (as this term is defined in the rules adopted by
Canadian securities regulatory authorities and the United States Securities and
Exchange Commission).  This evaluation included a review of our
existing disclosure policy, compliance with regard to that policy, the
disclosure controls currently in place surrounding our interim and annual
financial statements, MD&A, and other required documents and discussions
with management surrounding the process of communicating material information to
management and in turn the certifying officers and all procedures taking into
consideration the size of the company and the number of
employees.  Based on the evaluation described above, the certifying
officers have concluded that, as at November 30, 2007, the disclosure controls
and procedures were effective to provide reasonable assurance that the
information we are required to disclose on a continuous basis in annual and
interim filings and other reports is recorded, processed, summarized, and
reported or disclosed on a timely basis as required.
  63
 Item
16A. Audit Committee
Financial Expert
  Under
the SEC rules implementing the Sarbanes-Oxley Act of 2002, Canadian issuers
filing reports in the United States must disclose whether their audit committees
have at least one “audit committee financial expert”. The Board has determined
that Benoit La Salle qualifies as a financial expert under such
rules.  In addition, all members of the Audit Committee are considered
financially literate under applicable Canadian laws.
  Item
16B. Code of
Ethics
  The
Board of Directors’ Code of Conduct and the Employee Code of Conduct for our
employees have been implemented. These may be viewed on our website at
www.vasogen.com or at www.sedar.com.  No waivers or requests for
exemptions from the Codes of Conduct were either requested or
granted.
  Item
16C. Principal Accountant
Fees and Services
  The
aggregate amounts billed by our auditors to us for each of the fiscal years
ended November 30, 2007 and
November 30, 2006 for audit fees, audit-related fees, tax fees and all other
fees are set forth below:
 
 Year
      Ended
                November
      30, 2007
              Year
      Ended
                November
      30, 2006Audit
      Fees (1)
              $504,665
              $616,869Audit-Related
      Fees (2)
              $75,000
              $4,500Tax
      Fees (3)
              $133,510
              $78,114All
      Other Fees
              Nil
              NilTotals
              $713,175
              $699,483
 
 NOTES:
  (1) Audit
fees represent fees for our audited annual financial statements, reviews of
quarterly interim financial statements, and reviews in connection with our
statutory and regulatory filings and with financings completed during 2006 and
2007.
  (2)
Audit-related fees related to advice and documentation assistance with respect
to internal controls over financial reporting
  (3)Tax
fees consist of fees for tax consultation and tax compliance services for
Vasogen Inc., Vasogen Corp., and Vasogen Ireland Limited.
  
 Our
auditor is KPMG LLP, Chartered Accountants, Yonge Corporate Centre, 4100 Yonge
Street, Toronto, Ontario M2P 2H3.  KPMG LLP has confirmed that it is
independent with respect to the Company within the meaning of the Rules of
Professional Conduct of the Institute of Chartered Accountants of
Ontario.
 
 KPMG
provides tax, financial advisory, and other non-audit services to the Company
and its subsidiaries.  Our Audit Committee has concluded that the
provision of these non-audit services by KPMG is compatible with KPMG
maintaining its independence.
 
 Item
16D. Exemptions from the
Listing Standards for Audit Committees
  Not
Applicable.
  Item
16E. Purchases of Equity
Securities by the Issuer and Affiliated Purchasers
  Neither
the Company nor, to our knowledge, any affiliated purchaser has made any
purchases of our registered shares during the last financial year.
  64
 PART
III.
  Item
17. Financial
Statements
  See
Item 18 below.
  Item
18. Financial
Statements
      65












Consolidated
      Financial Statements
              (In
      Canadian dollars)
              
              VASOGEN
      INC.
              (A
      DEVELOPMENT STAGE COMPANY)
              
              Years
      ended November 30, 2007, 2006, 2005 and
              period
      from December 1, 1987 to November 30, 2007




















66




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, 2007 and 2006 and the related consolidated statements of
operations, deficit and comprehensive income and cash flows for each of the
years in the three-year period ended November 30, 2007 and for the period from
December 1, 1987 to November 30, 2007. 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. We have also audited the accompanying consolidated balance sheets of
the Company as of November 30, 2007 and 2006 and the related consolidated
statements of operations, deficit and comprehensive income and cash flows for
each of the years in the three-year period ended November 30, 2007 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
comprehensive income and cash flows for the period from inception on December 1,
1987 to November 30, 2007 in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Canadian generally
accepted auditing standards and the standards of the Public Company Accounting
Oversight Board (United States) 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, 2007 and 2006 and the results of its operations and its cash flows for each
of the years in the three-year period ended November 30, 2007 and for the period
from December 1, 1987 to November 30, 2007 in conformity with Canadian generally
accepted accounting principles.
  Canadian
generally accepted accounting principles vary in certain significant respects
from US generally accepted accounting principles. Information relating to the
nature and effect of such differences is presented in Note 16 to the
consolidated financial statements.
  On
December 1, 2006, the Company adopted retrospectively, without restatement, the
new recommendations of CICA Handbook Section 1530, Comprehensive Income, Section
3855, Financial Instruments - Recognition and Measurement, Section 3861,
Financial Instruments - Disclosure and Presentation and Section 3251,
Equity.  The effect of those changes is discussed in Note 2(p)(ii) to
the consolidated financial statements.
  We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company's internal control over financial
reporting as of November 30, 2007, based on the criteria established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated January
18, 2008 expressed an unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting.
  /s/ KPMG,
LLP, Licensed d Public Accountants
  Toronto,
Canada
 January
18, 2008


67


VASOGEN
INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 Consolidated
Balance Sheets
 (In
thousands of Canadian dollars)
 
 November
30, 2007 and 2006
 2007
              
              
              2006AssetsCurrent
      assets:Cash
      and cash equivalents (note 3)
              
              $
              23,545
              
              
              $
              30,427Restricted cash
      (note 4)
              
              
              -
              
              
              
              6,403Clinical
      supplies
              
              
              1,363
              
              
              
              1,211Tax
      credits recoverable
              
              
              1,565
              
              
              
              1,327Prepaid
      expenses and deposits
              
              
              787
              
              
              
              1,384Change
      in fair value of forward foreign exchange contracts (note
    11)
              
              
              376
              
              
              
              -27,636
              
              
              
              40,752Property
      and equipment (note 5)
              
              
              414
              
              
              
              615Acquired
      technology (note 6)
              
              
              -
              
              
              
              253Deferred
      financing costs (note 7)
              
              
              -
              
              
              
              150$
              28,050
              
              
              $
              41,770Liabilities
      and Shareholders' EquityCurrent
      liabilities:Accounts
      payable
              
              $
              1,175
              
              
              $
              3,369Accrued
      liabilities
              
              
              3,519
              
              
              
              5,067Current
      portion of senior convertible notes payable (note 7)
              
              
              -
              
              
              
              8,7544,694
              
              
              
              17,190Shareholders'
      equity (notes 8 and 17):Share
      capital:Authorized:Unlimited
      common shares, without par valueIssued
      and outstanding:22,391,386
      common shares (2006 - 15,665,134)
              
              
              365,670
              
              
              
              344,217Warrants
              
              
              16,725
              
              
              
              11,390Contributed
      surplus
              
              
              22,744
              
              
              
              20,347Deficit
              
              
              (381,783
              )
              
              
              (351,374
              )23,356
              
              
              
              24,580Commitments
      and contingencies (note 13)Basis
      of presentation - future operations (note 1)$
              28,050
              
              
              $
              41,770
  See
accompanying notes to consolidated financial statements.
  On
behalf of the Board:
 
 /s/
      Benoit La Salle
              
              Director
              /s/
      Ronald M. Cresswell
              
              DirectorBenoit
      L Salle
              
              
              Ronald
      M. Cresswell
  68
  VASOGEN
INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 Consolidated
Statements of Operations, Deficit and Comprehensive Income
 (In
thousands of Canadian dollars, except per share amounts)
 Period
      fromDecember
      1,1987
      toYears
      ended November 30,
              
              
              November
      30,2007
              
              
              2006
              
              
              2005
              
              
              2007Expenses:Research and
      development (note 15)
              
              $
              12,039
              
              
              $
              32,732
              
              
              $
              71,421
              
              
              $
              238,917General
      and administration
              
              
              14,259
              
              
              
              19,251
              
              
              
              22,126
              
              
              
              117,228Foreign
      exchange loss (gain)
              
              
              1,977
              
              
              
              104
              
              
              
              (719
              )
              
              
              10,970Loss
      before the undernoted
              
              
              (28,275
              )
              
              
              (52,087
              )
              
              
              (92,828
              )
              
              
              (367,115
              )Interest
      expense on senior convertible notes payable
              
              
              (5
              )
              
              
              (930
              )
              
              
              (344
              )
              
              
              (1,279
              )Accretion
      in carrying value of senior convertible notes payable
              
              
              (728
              )
              
              
              (7,824
              )
              
              
              (1,742
              )
              
              
              (10,294
              )Amortization
      of deferred financing costs
              
              
              (154
              )
              
              
              (2,495
              )
              
              
              (408
              )
              
              
              (3,057
              )Loss
      on extinguishment of senior convertible notes payable
              
              
              (1,754
              )
              
              
              (4,995
              )
              
              
              -
              
              
              
              (6,749
              )Investment
      income
              
              
              1,310
              
              
              
              1,971
              
              
              
              2,274
              
              
              
              13,325Change
      in fair value of embedded derivatives
              
              
              829
              
              
              
              -
              
              
              
              -
              
              
              
              829Loss
      and comprehensive loss for the period
              
              
              (28,777
              )
              
              
              (66,360
              )
              
              
              (93,048
              )
              
              
              (374,340
              )Deficit,
      beginning of period:As
      originally reported
              
              
              (351,374
              )
              
              
              (284,719
              )
              
              
              (187,665
              )
              
              
              (1,510
              )Impact
      of change in accounting for stock-based compensation (note
      2(l))
              
              
              -
              
              
              
              -
              
              
              
              (4,006
              )
              
              
              (4,006
              )Impact
      of change in accounting for financial instruments on December 1, 2006
      (note 2(p)(ii))
              
              
              (1,632
              )
              
              
              -
              
              
              
              -
              
              
              
              (1,632
              )As
      revised
              
              
              (353,006
              )
              
              
              (284,719
              )
              
              
              (191,671
              )Charge
      for acceleration payments on equity component of senior convertible notes
      payable
              
              
              -
              
              
              
              (295
              )
              
              
              -
              
              
              
              (295
              )Deficit,
      end of period
              
              $
              (381,783
              )
              
              $
              (351,374
              )
              
              $
              (284,719
              )
              
              $
              (381,783
              )Basic
      and diluted loss per common share (notes 9 and 17)
              
              $
              (1.46
              )
              
              $
              (7.05
              )
              
              $
              (11.65
              )
 
  See
accompanying notes to consolidated financial statements.
  69
  VASOGEN
INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 Consolidated
Statements of Cash Flows
 (In
thousands of Canadian dollars)
 Period
      fromDecember
      1,1987
      toYears
      ended November 30,
              
              
              November
      30,2007
              
              
              2006
              
              
              2005
              
              
              2007Cash
      provided by (used in):Operating
      activities:Loss
      for the period
              
              $
              (28,777
              )
              
              $
              (66,360
              )
              
              $
              (93,048
              )
              
              $
              (374,340
              )Items
      not involving cash:Amortization
              
              
              503
              
              
              
              782
              
              
              
              589
              
              
              
              6,160Accretion in
      carrying value of senior convertible notes payable
              
              
              728
              
              
              
              7,824
              
              
              
              1,742
              
              
              
              10,294Amortization of
      deferred financing costs
              
              
              154
              
              
              
              2,495
              
              
              
              408
              
              
              
              3,057Loss on
      extinguishment of senior convertible notes payable
              
              
              1,754
              
              
              
              4,995
              
              
              
              -
              
              
              
              6,749Change
      in fair value of embedded derivatives
              
              
              (829
              )
              
              
              -
              
              
              
              -
              
              
              
              (829
              )Stock-based
      compensation
              
              
              1,995
              
              
              
              3,083
              
              
              
              3,615
              
              
              
              9,579Common
      shares issued for services
              
              
              -
              
              
              
              36
              
              
              
              -
              
              
              
              2,485Unrealized gain
      on forward foreign exchange contract
              
              
              (376
              )
              
              
              -
              
              
              
              -
              
              
              
              (376
              )Unrealized
      foreign exchange loss (gain)
              
              
              2,566
              
              
              
              (65
              )
              
              
              (542
              )
              
              
              11,543Other
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (35
              )Change
      in non-cash operating working capital (note 10(a))
              
              
              (3,535
              )
              
              
              (17,158
              )
              
              
              12,634
              
              
              
              951(25,817
              )
              
              
              (64,368
              )
              
              
              (74,602
              )
              
              
              (324,762
              )Financing
      activities:Shares
      and warrants issued for cash
              
              
              17,345
              
              
              
              23,106
              
              
              
              52,502
              
              
              
              326,358Warrants
      exercised for cash
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              16,941Options
      exercised for cash
              
              
              -
              
              
              
              -
              
              
              
              627
              
              
              
              7,669Share
      issue costs
              
              
              (1,440
              )
              
              
              (2,221
              )
              
              
              (3,720
              )
              
              
              (24,646
              )Issue
      (repayment) of senior convertible notes payable, net (note
    7)
              
              
              (924
              )
              
              
              (3,976
              )
              
              
              42,790
              
              
              
              38,512Cash
      released from (placed under) restriction
              
              
              6,403
              
              
              
              5,298
              
              
              
              (11,701
              )
              
              
              -Paid to
      related parties
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (234
              )21,384
              
              
              
              22,207
              
              
              
              80,498
              
              
              
              364,600Investing
      activities:Purchases of
      property and equipment
              
              
              (49
              )
              
              
              (23
              )
              
              
              (490
              )
              
              
              (2,465
              )Purchases of
      acquired technology
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (1,283
              )Purchases of
      marketable securities
              
              
              -
              
              
              
              (80
              )
              
              
              (22,999
              )
              
              
              (244,846
              )Settlement of
      forward foreign exchange contracts
              
              
              10
              
              
              
              (102
              )
              
              
              (4,732
              )
              
              
              (4,824
              )Maturities of
      marketable securities
              
              
              -
              
              
              
              23,079
              
              
              
              67,651
              
              
              
              240,677(39
              )
              
              
              22,874
              
              
              
              39,430
              
              
              
              (12,741
              )Foreign
      exchange loss on cash held in foreign currency
              
              
              (2,410
              )
              
              
              (807
              )
              
              
              (141
              )
              
              
              (3,552
              )Increase
      (decrease) in cash and cash equivalents
              
              
              (6,882
              )
              
              
              (20,094
              )
              
              
              45,185
              
              
              
              23,545Cash
      and cash equivalents, beginning of period
              
              
              30,427
              
              
              
              50,521
              
              
              
              5,336
              
              
              
              -Cash
      and cash equivalents, end of period
              
              $
              23,545
              
              
              $
              30,427
              
              
              $
              50,521
              
              
              $
              23,545
 
 Supplemental
cash flow information (note 10)
  See
accompanying notes to consolidated financial statements.
  70








VASOGEN
INC.


(A
DEVELOPMENT STAGE COMPANY)





Notes
to Consolidated Financial Statements


(Tabular
figures in thousands, except per share amounts)





Years
ended November 30, 2007, 2006, 2005 and


period
from December 1, 1987 to November 30, 2007







1.
            Basis
      of presentation - future operations:




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, deficit and comprehensive income and cash
flows also reflect the cumulative amounts from December 1, 1987 (the date
development operations commenced) to November 30, 2007.




The
Company's future operations are dependant upon its ability to finance the
commercialization of its lead product, CelacadeTM, and the continued development
of its product candidate, VP025.  While the Company's ACCLAIM Phase
III trial of Celacade 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 certain large pre-defined
subgroups.  In September 2007, the Company announced plans for a
confirmatory study that would support an application for regulatory approval in
the United States of its Celecade technology for the treatment of patients with
NYHA Class II heart failure.  The Company has received CE Mark
regulatory approval for its Celacade medical device technology in the European
Union and, in April 2007, entered into a collaborative agreement necessary to
commence 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.  Management believes that the Company currently has
sufficient cash and cash equivalents to fund planned expenditures for at least
the next 12 months.





71





VASOGEN
INC.


(A
DEVELOPMENT STAGE COMPANY)





Notes
to Consolidated Financial Statements (continued)


(Tabular
figures in thousands, except per share amounts)





Years
ended November 30, 2007, 2006, 2005 and


period
from December 1, 1987 to November 30, 2007







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 16, 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 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
highly liquid government and corporate bonds with original maturities of three
months or less as cash and cash equivalents.




(c)
            Concentration
      of credit risk:




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





72


VASOGEN
INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 Notes
to Consolidated Financial Statements (continued)
 (Tabular
figures in thousands, except per share amounts)
 
 Years
ended November 30, 2007, 2006, 2005 and
 period
from December 1, 1987 to November 30, 2007




2.
            Significant
      accounting policies (continued):




(d)
            Property
      and equipment:




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


Testing
      equipment
            5
      yearsComputer
      and other equipment
            5
      yearsLeasehold
      improvements
            Over
      term of lease




(e) Acquired
technology:




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




(f)
            Deferred
      financing costs:




Deferred
financing costs were comprised primarily of the placement fee and professional
fees associated with the issuance of the Company's senior convertible notes
payable.  Deferred financing costs were amortized over the term of the
convertible notes using the effective yield method.  As a consequence
of adopting The Canadian Institute of Chartered Accountants' ("CICA") Handbook
Section 3855, Financial Instruments - Recognition and Measurement ("Section
3855"), as described in note 2(p)(ii), deferred financing costs are accounted
for as part of the financial liabilities' carrying value at
inception.





73


VASOGEN
INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 Notes
to Consolidated Financial Statements (continued)
 (Tabular
figures in thousands, except per share amounts)
 
 Years
ended November 30, 2007, 2006, 2005 and
 period
from December 1, 1987 to November 30, 2007




2.
            Significant
      accounting policies (continued):




(g)
            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, 2007 and 2006, no such impairment losses were
recorded.




(h)
            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, deficit and comprehensive income are $0.3 million (2006 - $0.8
million; 2005 - $0.2 million; December 1, 1987 to November 30, 2007 -
$3.3 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.





74


VASOGEN
INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 Notes
to Consolidated Financial Statements (continued)
 (Tabular
figures in thousands, except per share amounts)
 
 Years
ended November 30, 2007, 2006, 2005 and
 period
from December 1, 1987 to November 30, 2007




2.
            Significant
      accounting policies (continued):




(i)
            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
foreign exchange contracts is included in the determination of loss for the
period as the instruments are not considered hedging instruments.




(j)
            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.




(k)
            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 income 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 income 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 income tax assets and liabilities of
a change in tax rates is recognized in income in the period that includes the
substantive enactment date.





75


VASOGEN
INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 Notes
to Consolidated Financial Statements (continued)
 (Tabular
figures in thousands, except per share amounts)
 
 Years
ended November 30, 2007, 2006, 2005 and
 period
from December 1, 1987 to November 30, 2007




2.
            Significant
      accounting policies (continued):




Future
income tax assets recognized are reduced by a valuation
allowance.  Management has provided a valuation allowance equivalent
to the net future income 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.




(l)
            Stock-based
      compensation plans:




The
Company has two stock-based compensation plans, described in note
8(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 measure, as compensation cost, the fair value of all employee
stock-based awards granted or modified since December 1, 2002 and to amortize
this cost over the vesting period of the awards.  Fair value is
determined using the Black-Scholes option pricing model.  The Company
estimates forfeitures for each grant and incorporates this estimate into the
calculation of compensation cost recorded each period.




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.




(m)
            Deferred
      share units plan:




The
Company has a deferred share units ("DSU") plan, as described in note
8(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.





76


VASOGEN
INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 Notes
to Consolidated Financial Statements (continued)
 (Tabular
figures in thousands, except per share amounts)
 
 Years
ended November 30, 2007, 2006, 2005 and
 period
from December 1, 1987 to November 30, 2007




2.
            Significant
      accounting policies (continued):




(n)
            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 common 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 share
equivalents are not included in the calculation of the weighted average number
of common shares outstanding for diluted loss per common share when the effect
would be anti-dilutive.




(o)
            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 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.





77


VASOGEN
INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 Notes
to Consolidated Financial Statements (continued)
 (Tabular
figures in thousands, except per share amounts)
 
 Years
ended November 30, 2007, 2006, 2005 and
 period
from December 1, 1987 to November 30, 2007




2.
            Significant
      accounting policies (continued):




(p)
            Changes
      in accounting policy:




(i)
            Accounting
      changes:




In July
2006, the Accounting Standards Board ("AcSB") issued a replacement of CICA
Handbook Section 1506, Accounting Changes ("Section 1506").  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 retroactively
unless doing so is impracticable, requires prior period errors to be corrected
retroactively and calls for enhanced disclosures about the effects of changes in
accounting policies, estimates and errors on the financial
statements.  The adoption of Section 1506, effective
December 1, 2006, has no impact on these consolidated financial
statements.




(ii)
            Financial
      instruments:




Effective
on December 1, 2006, the Company adopted the recommendations of CICA Handbook
Section 1530, Comprehensive Income ("Section 1530"); Section 3855; Section 3861,
Financial Instruments - Disclosure and Presentation ("Section 3861"); and
Section 3251, Equity.  These sections provide standards for
recognition, measurement, disclosure and presentation of financial assets,
financial liabilities and non-financial
derivatives.  Section 1530 provides standards for the reporting
and presentation of comprehensive income, which represents the change in equity
from transactions and other events and circumstances from non-owner
sources.  Other comprehensive income refers to items recognized in
comprehensive income that are excluded from net income calculated in accordance
with Canadian GAAP.





78


VASOGEN
INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 Notes
to Consolidated Financial Statements (continued)
 (Tabular
figures in thousands, except per share amounts)
 
 Years
ended November 30, 2007, 2006, 2005 and
 period
from December 1, 1987 to November 30, 2007




2.
            Significant
      accounting policies (continued):




Upon
adoption of the new standards on December 1, 2006, the Company continued to
account for cash equivalents held at that date as held-to-maturity investments,
recorded at cost and accrued interest.  The Company designates all new
cash equivalents acquired subsequent to December 1, 2006 as held-for-trading
investments measured at fair value and the resulting gain or loss is recognized
in the consolidated statement of operations, deficit and comprehensive
income.  The effect of the change in accounting for cash equivalents
is not material.




Accounts
payable and accrued liabilities are classified as other financial
liabilities.  The senior convertible notes payable were also accounted
for as an other financial liability and were accounted for at amortized cost
using the effective interest method, which was consistent with the Company's
accounting policy prior to the adoption of Section 3855.




Section
3855 requires that the Company identify embedded derivatives that require
separation from the related host contract and measure those embedded derivatives
at fair value.  Subsequent changes in the fair value of embedded
derivatives are recognized in the consolidated statement of operations, deficit
and comprehensive income in the period the change
occurs.  Freestanding derivatives not designated as hedging items are
also measured at fair value with subsequent changes in fair value recognized in
the consolidated statement of operations, deficit and comprehensive income in
the period the change occurs.




Transactions
costs that are directly attributable to the acquisition or issuance of financial
assets or liabilities are accounted for as part of the respective asset or
liability's carrying value at inception.





79


VASOGEN
INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 Notes
to Consolidated Financial Statements (continued)
 (Tabular
figures in thousands, except per share amounts)
 
 Years
ended November 30, 2007, 2006, 2005 and
 period
from December 1, 1987 to November 30, 2007




2.
            Significant
      accounting policies (continued):




The
Company identified and measured all embedded derivatives that required
separation and determined the fair value of those embedded derivatives at
December 1, 2006.  As a result, the Company was required to
revise the initial allocation of the proceeds received in connection with the
issuance of the senior convertible notes payable, the warrants and the equity
classified conversion option on October 7, 2005 and to remeasure any subsequent
transactions affecting these items in accordance with Section
3855.  Prior to the adoption of Section 3855, the proceeds received
were allocated on a relative fair value basis to the liability component, being
the senior convertible notes payable; and to the equity components, being the
warrants and the conversion option.  As a consequence of adopting
Section 3855, the proceeds initially allocated to the senior convertible notes
payable were further allocated to the embedded derivatives at their fair value
and the residual amount to the senior convertible notes payable.  Any
subsequent transactions affecting the carrying amount of the senior convertible
notes payable, the embedded derivatives, the warrants and the equity conversion
option were also remeasured in accordance with Section 3855.




As a
result of adopting Section 3855, retrospectively without restatement, the
Company recorded an increase of $1.6 million to deficit as at December 1, 2006,
a decrease in the carrying amount of the senior convertible notes payable of
$0.1 million, the initial recognition of an embedded derivatives liability of
$0.8 million and an increase in share capital of $0.9 million at December 1,
2006.










80


VASOGEN
INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 Notes
to Consolidated Financial Statements (continued)
 (Tabular
figures in thousands, except per share amounts)
 
 Years
ended November 30, 2007, 2006, 2005 and
 period
from December 1, 1987 to November 30, 2007




2.
            Significant
      accounting policies (continued):




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




(i)
            Financial
      instruments and capital disclosure:




In
October 2006, the AcSB approved disclosure and presentation requirements for
financial instruments that revise and enhance the disclosure requirements of
Section 3861.  These requirements are included in Section 3862,
Financial Instruments - Disclosure ("Section 3862"), which replaces
Section 3861, and Section 1535, Capital Disclosures ("Section 1535"), which
establishes standards for disclosing information about an entity's capital and
how it is managed.




Section
1535 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 the Company for interim and annual financial statements beginning
on December 1, 2007.




Section
3862 requires disclosures, by class of financial instrument, that enables users
to evaluate the significance of financial instruments for an entity's financial
position and performance, including disclosures about fair value.  In
addition, disclosure is required of qualitative and quantitative information
about exposure to risks arising from financial instruments, including specified
minimum disclosures about credit risk, liquidity risk and market
risk.  The quantitative disclosures must also include a sensitivity
analysis for each type of market risk to which an entity is exposed, showing how
net income and other comprehensive income would have been affected by reasonably
possible changes in the relevant risk variable.  This standard is
effective for the Company for interim and annual financial statements beginning
on December 1, 2007.




The
Company is currently assessing the impact that Section 3862 and Section 1535
will have on the consolidated financial statements.





81


VASOGEN
INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 Notes
to Consolidated Financial Statements (continued)
 (Tabular
figures in thousands, except per share amounts)
 
 Years
ended November 30, 2007, 2006, 2005 and
 period
from December 1, 1987 to November 30, 2007




2.
            Significant
      accounting policies (continued):




(ii)
            Financial
      instruments presentation:




In
October 2006, the AcSB approved Section 3863, Financial Instruments -
Presentation ("Section 3863"), which replaces Section 3861.  The
existing requirements on presentation of financial instruments have been carried
forward unchanged to Section 3863.




This
standard is effective for the Company for interim and annual financial
statements beginning on December 1, 2007 and is expected to have no impact on
the Company's consolidated financial statements.




(iii)
            Inventories:




In May
2007, the AcSB issued Section 3031, Inventories, which supersedes existing
guidance on inventories in Section 3030, Inventories.  This standard
introduces significant changes to the measurement and disclosure of inventories,
including the requirement to measure inventories at the lower of cost and net
realizable value, the allocation of overhead based on normal capacity, the use
of the specific cost method for inventories that are not ordinarily
interchangeable or goods and services produced for specific purposes, and the
reversal of previous write-downs to net realizable value when there is a
subsequent increase in the value of inventories.  Inventory policies,
carrying amounts, amounts recognized as an expense, write-downs and the
reversals of write-downs are required to be disclosed.




This
standard is effective for the Company for interim and annual financial
statements beginning on December 1, 2008.  The Company is currently
assessing the impact that this section will have on its financial position and
results of operations.





82


VASOGEN
INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 Notes
to Consolidated Financial Statements (continued)
 (Tabular
figures in thousands, except per share amounts)
 
 Years
ended November 30, 2007, 2006, 2005 and
 period
from December 1, 1987 to November 30, 2007




2.
            Significant
      accounting policies (continued):




(iv)
            General
      standards of financial statement presentation:




In May
2007, the AcSB amended Section 1400, General Standards of Financial Statement
Presentation, to change the guidance related to management's responsibility to
assess the ability of the entity to continue as a going
concern.  Management is required to make an assessment of an entity's
ability to continue as a going concern and should take into account all
available information about the future, which is at least, but is not limited
to, 12 months from the balance sheet dates.  Disclosure is required of
material uncertainties related to events or conditions that may cast significant
doubt upon the entity's ability to continue as a going concern.




These
amendments are effective for the Company for interim and annual periods
beginning on December 1, 2008.




3.
            Cash
      and cash equivalents:




As at
November 30, 2007, the Company held $23.3 million (2006 - $29.9 million) of cash
equivalents, of which $0.1 million (U.S. $0.1 million) (2006 - $1.0 million
(U.S. $0.9 million)) are denominated in U.S. dollars.  Cash
equivalents consist of highly liquid government and corporate bonds having a
single "A" rating or greater.




4.
            Restricted
      cash:




As at
November 30, 2006, the Company had restricted cash of $6.4 million
(U.S. $5.6 million).  Restricted cash represented cash on
deposit to secure the letter of credit provided as security to the holders of
the senior convertible notes payable.  The senior convertible notes
payable were repaid in full in April 2007 and the letter of credit expired on
July 3, 2007.  The obligation to retain a balance in restricted
cash ceased at that time.





83


VASOGEN
INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 Notes
to Consolidated Financial Statements (continued)
 (Tabular
figures in thousands, except per share amounts)
 
 Years
ended November 30, 2007, 2006, 2005 and
 period
from December 1, 1987 to November 30, 2007




5.
            Property
      and equipment:




Accumulated
            
            
            Net
      book2007
            
            Cost
            
            
            amortization
            
            
            valueTesting
      equipment
            
            $
            936
            
            
            $
            820
            
            
            $
            116Computer
      and other equipment
            
            
            611
            
            
            
            440
            
            
            
            171Leasehold
      improvements
            
            
            366
            
            
            
            239
            
            
            
            127$
            1,913
            
            
            $
            1,499
            
            
            $
            414





Accumulated
            
            
            Net
      book2006
            
            Cost
            
            
            amortization
            
            
            valueTesting
      equipment
            
            $
            936
            
            
            $
            715
            
            
            $
            221Computer
      and other equipment
            
            
            562
            
            
            
            369
            
            
            
            193Leasehold
      improvements
            
            
            366
            
            
            
            165
            
            
            
            201$
            1,864
            
            
            $
            1,249
            
            
            $
            615




In
2007, amortization expense was $0.3 million (2006 - $0.5 million; 2005 - $0.3
million).




6.
            Acquired
      technology:




2007
            
            
            2006Cost
            
            $
            4,081
            
            
            $
            4,081Less
      accumulated amortization
            
            
            4,081
            
            
            
            3,828Net
      book value
            
            $
            -
            
            
            $
            253




In
2007, amortization expense was $0.3 million (2006 - $0.3 million; 2005 - $0.3
million).





84


VASOGEN
INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 Notes
to Consolidated Financial Statements (continued)
 (Tabular
figures in thousands, except per share amounts)
 
 Years
ended November 30, 2007, 2006, 2005 and
 period
from December 1, 1987 to November 30, 2007




7.
            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 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 were repaid on April 1,
2007.




As a
consequence of adopting Section 3855 effective December 1, 2006 as described in
note 2, the Company revised previously reported amounts related to the
senior convertible notes payable as follows:


As
      originallyreported,
            
            
            Effect
      of
            
            
            As
      revised,November
      30,
            
            
            adopting
            
            
            December
      1,2006
            
            
            Section
      3855
            
            
            2006Current
      liabilities:Senior
      convertible notes payable
            
            $
            8,754
            
            
            $
            (104
            )
            
            $
            8,650Embedded
      derivative instruments
            
            
            -
            
            
            
            829
            
            
            
            829Non-current
      asset:Deferred
      financing costs
            
            
            150
            
            
            
            4
            
            
            
            154




During
the year ended November 30, 2007, the Company repaid and extinguished the senior
convertible notes payable by issuing a total of 1.8 million common shares having
an aggregate fair value of $10.4 million, and paying cash of $0.9
million.  The Company recorded a loss on extinguishment of senior
convertible notes payable of $1.8 million.  The equity conversion
option of the senior convertible notes expired unexercised and was reduced by
$1.6 million to nil.




The
Company recorded nominal interest expense for the year ended November 30,
2007.  Interest was settled in cash.





85


VASOGEN
INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 Notes
to Consolidated Financial Statements (continued)
 (Tabular
figures in thousands, except per share amounts)
 
 Years
ended November 30, 2007, 2006, 2005 and
 period
from December 1, 1987 to November 30, 2007




7.
            Senior
      convertible notes payable (continued):




The
following table sets out the continuity of the senior convertible notes payable
since November 30, 2005:


Impact
      onseniorNumber
      of
            
            
            
            
            
            convertiblecommon
            
            
            Number
      of
            
            
            notesshares
            
            
            warrants
            
            
            payableBalance,
      November 30, 2005
            
            
            -
            
            
            
            -
            
            
            $
            35,454December
      1, 2005 instalment payment in advance applied
            
            
            77
            
            
            
            -
            
            
            
            (2,122
            )Instalment
      payments settled in cash
            
            
            -
            
            
            
            -
            
            
            
            (3,976
            )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
            
            
            -
            
            
            
            -
            
            
            
            7,824Impact
      of foreign exchange
            
            
            -
            
            
            
            -
            
            
            
            (1,049
            )Balance,
      November 30, 2006, as originally reported
            
            
            3,195
            
            
            
            178
            
            
            
            8,754Change
      in accounting for senior convertible notes as a result of adopting Section
      3855 (note 2)
            
            
            -
            
            
            
            -
            
            
            
            (104
            )Balance,
      November 30, 2006, as revised
            
            
            3,195
            
            
            
            178
            
            
            
            8,650December
      1, 2006 instalment payment in advance applied
            
            
            -
            
            
            
            -
            
            
            
            (1,872
            )Instalment
      payments settled in cash
            
            
            -
            
            
            
            -
            
            
            
            (924
            )Instalment
      payments settled in shares
            
            
            1,809
            
            
            
            -
            
            
            
            (6,437
            )Adjustment
      for twelve-day weighted average share price
            
            
            -
            
            
            
            -
            
            
            
            (313
            )Accretion
      in carrying value
            
            
            -
            
            
            
            -
            
            
            
            728Impact
      of foreign exchange
            
            
            -
            
            
            
            -
            
            
            
            168Balance,
      November 30, 2007
            
            
            5,004
            
            
            
            178
            
            
            $
            -





2007
            
            
            2006Par
      value of senior convertible notes payable
            
            $
            -
            
            
            $
            9,379Balance
      remaining to be accreted
            
            
            -
            
            
            
            (625
            )Senior
      convertible notes payable
            
            $
            -
            
            
            $
            8,754


















86





VASOGEN
INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 Notes
to Consolidated Financial Statements (continued)
 (Tabular
figures in thousands, except per share amounts)
 
 Years
ended November 30, 2007, 2006, 2005 and
 period
from December 1, 1987 to November 30, 2007


8.
            Shareholders'
      equity:




(a)
            Consolidated
      statement of shareholders' equity:




Common
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            Period
      fromshares'
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            December
      1,average
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1987
      toNumber
            
            
            share
            
            
            Share
            
            
            Contributed
            
            
            
            
            
            
            
            
            November
      30,of
      shares
            
            
            price
            
            
            capital
            
            
            surplus
            
            
            Warrants
            
            
            Deficit
            
            
            2007Balance,
      December 1, 1987
            
            
            103
            
            
            
            
            
            $
            1,213
            
            
            $
            -
            
            
            $
            -
            
            
            $
            (1,510
            )
            
            $
            (297
            )Shares
      issued  for cash
            
            
            13
            
            
            
            15.00
            
            
            
            195
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            195Shares
      issued for services
            
            
            1
            
            
            
            17.00
            
            
            
            17
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            17Shares
      issued to acquire a license
            
            
            157
            
            
            
            15.13
            
            
            
            2,375
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2,375Loss
            
            
            -
            
            
            
            
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (755
            )
            
            
            (755
            )Balance,
      November 30, 1988
            
            
            274
            
            
            
            
            
            
            
            3,800
            
            
            
            -
            
            
            
            -
            
            
            
            (2,265
            )
            
            
            1,535Loss
            
            
            -
            
            
            
            
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (601
            )
            
            
            (601
            )Balance,
      November 30, 1989
            
            
            274
            
            
            
            
            
            
            
            3,800
            
            
            
            -
            
            
            
            -
            
            
            
            (2,866
            )
            
            
            934Shares
      issued for cash
            
            
            25
            
            
            
            42.44
            
            
            
            1,061
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,061Options
      exercised
            
            
            5
            
            
            
            21.00
            
            
            
            105
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            105Shares
      issued for services
            
            
            1
            
            
            
            45.00
            
            
            
            45
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            45Debt
      conversion
            
            
            18
            
            
            
            11.11
            
            
            
            200
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            200Loss
            
            
            -
            
            
            
            
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (725
            )
            
            
            (725
            )Balance,
      November 30, 1990
            
            
            323
            
            
            
            
            
            
            
            5,211
            
            
            
            -
            
            
            
            -
            
            
            
            (3,591
            )
            
            
            1,620Shares
      issued for cash
            
            
            68
            
            
            
            13.36
            
            
            
            909
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            909Options
      exercised
            
            
            2
            
            
            
            15.00
            
            
            
            30
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            30Shares
      issued for services
            
            
            9
            
            
            
            18.66
            
            
            
            168
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            168Shares
      issued to acquire a license
            
            
            7
            
            
            
            14.28
            
            
            
            100
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            100Loss
            
            
            -
            
            
            
            
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (593
            )
            
            
            (593
            )Balance,
      November 30, 1991
            
            
            409
            
            
            
            
            
            
            
            6,418
            
            
            
            -
            
            
            
            -
            
            
            
            (4,184
            )
            
            
            2,234











87


VASOGEN
INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 Notes
to Consolidated Financial Statements (continued)
 (Tabular
figures in thousands, except per share amounts)
 
 Years
ended November 30, 2007, 2006, 2005 and
 period
from December 1, 1987 to November 30, 2007




8.
            Shareholders'
      equity (continued):




Common
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            Period
      fromshares'
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            December
      1,average
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1987
      toNumber
            
            
            share
            
            
            Share
            
            
            Contributed
            
            
            
            
            
            
            
            
            November
      30,of
      shares
            
            
            price
            
            
            capital
            
            
            surplus
            
            
            Warrants
            
            
            Deficit
            
            
            2007Balance,
      November 30, 1991
            
            
            409
            
            
            
            
            
            
            6,418
            
            
            
            -
            
            
            
            -
            
            
            
            (4,184
            )
            
            
            2,234Shares
      issued for cash
            
            
            2
            
            
            
            22.00
            
            
            
            44
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            44Options
      exercised
            
            
            13
            
            
            
            18.38
            
            
            
            239
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            239Shares
      issued for services
            
            
            8
            
            
            
            25.25
            
            
            
            202
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            202Debt
      conversion
            
            
            43
            
            
            
            10.46
            
            
            
            450
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            450Loss
            
            
            -
            
            
            
            
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (975
            )
            
            
            (975
            )Balance,
      November 30, 1992
            
            
            475
            
            
            
            
            
            
            
            7,353
            
            
            
            -
            
            
            
            -
            
            
            
            (5,159
            )
            
            
            2,194Shares
      issued for cash
            
            
            7
            
            
            
            21.42
            
            
            
            150
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            150Warrants
      exercised
            
            
            12
            
            
            
            16.91
            
            
            
            203
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            203Options
      exercised
            
            
            5
            
            
            
            19.20
            
            
            
            96
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            96Shares
      issued for services
            
            
            10
            
            
            
            20.20
            
            
            
            202
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            202Loss
            
            
            -
            
            
            
            
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (752
            )
            
            
            (752
            )Balance,
      November 30, 1993
            
            
            509
            
            
            
            
            
            
            
            8,004
            
            
            
            -
            
            
            
            -
            
            
            
            (5,911
            )
            
            
            2,093Shares
      issued for cash
            
            
            77
            
            
            
            13.06
            
            
            
            1,006
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,006Share
      issue costs
            
            
            -
            
            
            
            -
            
            
            
            (192
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (192
            )Warrants
      exercised
            
            
            14
            
            
            
            17.64
            
            
            
            247
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            247Options
      exercised
            
            
            3
            
            
            
            14.66
            
            
            
            44
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            44Shares
      issued for services
            
            
            3
            
            
            
            20.00
            
            
            
            60
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            60Loss
            
            
            -
            
            
            
            
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (996
            )
            
            
            (996
            )Balance,
      November 30, 1994
            
            
            606
            
            
            
            
            
            
            
            9,169
            
            
            
            -
            
            
            
            -
            
            
            
            (6,907
            )
            
            
            2,262











88


VASOGEN
INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 Notes
to Consolidated Financial Statements (continued)
 (Tabular
figures in thousands, except per share amounts)
 
 Years
ended November 30, 2007, 2006, 2005 and
 period
from December 1, 1987 to November 30, 2007




8.
            Shareholders'
      equity (continued):




Common
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            Period
      fromshares'
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            December
      1,average
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1987
      toNumber
            
            
            share
            
            
            Share
            
            
            Contributed
            
            
            
            
            
            
            
            
            November
      30,of
      shares
            
            
            price
            
            
            capital
            
            
            surplus
            
            
            Warrants
            
            
            Deficit
            
            
            2007Balance,
      November 30, 1994
            
            
            606
            
            
            
            
            
            
            9,169
            
            
            
            -
            
            
            
            -
            
            
            
            (6,907
            )
            
            
            2,262Shares
      issued for cash
            
            
            346
            
            
            
            10.00
            
            
            
            3,460
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            3,460Share
      issue costs
            
            
            -
            
            
            
            -
            
            
            
            (294
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (294
            )Warrants
      exercised
            
            
            19
            
            
            
            4.89
            
            
            
            93
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            93Options
      exercised
            
            
            12
            
            
            
            5.00
            
            
            
            60
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            60Shares
      issued for services
            
            
            24
            
            
            
            10.25
            
            
            
            246
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            246Loss
            
            
            -
            
            
            
            
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (2,323
            )
            
            
            (2,323
            )Balance,
      November 30, 1995
            
            
            1,007
            
            
            
            
            
            
            
            12,734
            
            
            
            -
            
            
            
            -
            
            
            
            (9,230
            )
            
            
            3,504Shares
      issued for cash
            
            
            356
            
            
            
            10.99
            
            
            
            3,913
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            3,913Share
      issue costs
            
            
            -
            
            
            
            -
            
            
            
            (962
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (962
            )Warrants
      exercised
            
            
            340
            
            
            
            13.35
            
            
            
            4,539
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            4,539Options
      exercised
            
            
            39
            
            
            
            6.28
            
            
            
            245
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            245Shares
      issued for services
            
            
            63
            
            
            
            11.87
            
            
            
            748
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            748Shares
      issued  to acquire license
            
            
            27
            
            
            
            12.00
            
            
            
            324
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            324Loss
            
            
            -
            
            
            
            
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (4,862
            )
            
            
            (4,862
            )Balance,
      November 30, 1996
            
            
            1,832
            
            
            
            
            
            
            
            21,541
            
            
            
            -
            
            
            
            -
            
            
            
            (14,092
            )
            
            
            7,449Shares
      issued for cash
            
            
            306
            
            
            
            24.92
            
            
            
            7,625
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            7,625Share
      issue costs
            
            
            -
            
            
            
            -
            
            
            
            (312
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (312
            )Warrants
      exercised
            
            
            135
            
            
            
            12.00
            
            
            
            1,621
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,621Options
      exercised
            
            
            49
            
            
            
            9.84
            
            
            
            482
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            482Shares
      issued for services
            
            
            12
            
            
            
            17.92
            
            
            
            215
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            215Loss
            
            
            -
            
            
            
            
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (7,991
            )
            
            
            (7,991
            )Balance,
      November 30, 1997
            
            
            2,334
            
            
            
            
            
            
            
            31,172
            
            
            
            -
            
            
            
            -
            
            
            
            (22,083
            )
            
            
            9,089











89


VASOGEN
INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 Notes
to Consolidated Financial Statements (continued)
 (Tabular
figures in thousands, except per share amounts)
 
 Years
ended November 30, 2007, 2006, 2005 and
 period
from December 1, 1987 to November 30, 2007




8.
            Shareholders'
      equity (continued):




Common
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            Period
      fromshares'
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            December
      1,average
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1987
      toNumber
            
            
            share
            
            
            Share
            
            
            Contributed
            
            
            
            
            
            
            
            
            November
      30,of
      shares
            
            
            price
            
            
            capital
            
            
            surplus
            
            
            Warrants
            
            
            Deficit
            
            
            2007Balance,
      November 30, 1997
            
            
            2,334
            
            
            
            
            
            
            31,172
            
            
            
            -
            
            
            
            -
            
            
            
            (22,083
            )
            
            
            9,089Shares
      issued for cash
            
            
            288
            
            
            
            17.50
            
            
            
            5,043
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            5,043Share
      issue costs
            
            
            -
            
            
            
            -
            
            
            
            (479
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (479
            )Warrants
      exercised
            
            
            23
            
            
            
            11.00
            
            
            
            253
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            253Options
      exercised
            
            
            10
            
            
            
            9.50
            
            
            
            95
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            95Shares
      issued for services
            
            
            3
            
            
            
            18.33
            
            
            
            55
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            55Loss
            
            
            -
            
            
            
            
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (7,312
            )
            
            
            (7,312
            )Balance,
      November 30, 1998
            
            
            2,658
            
            
            
            
            
            
            
            36,139
            
            
            
            -
            
            
            
            -
            
            
            
            (29,395
            )
            
            
            6,744Shares
      issued for cash
            
            
            659
            
            
            
            14.90
            
            
            
            9,825
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            9,825Share
      issue costs
            
            
            -
            
            
            
            -
            
            
            
            (934
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (934
            )Warrants
      exercised
            
            
            163
            
            
            
            10.67
            
            
            
            1,739
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,739Options
      exercised
            
            
            59
            
            
            
            12.27
            
            
            
            724
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            724Shares
      issued for services
            
            
            21
            
            
            
            12.33
            
            
            
            259
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            259Loss
            
            
            -
            
            
            
            
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (7,915
            )
            
            
            (7,915
            )Balance,
      November 30, 1999
            
            
            3,560
            
            
            
            
            
            
            
            47,752
            
            
            
            -
            
            
            
            -
            
            
            
            (37,310
            )
            
            
            10,442Shares
      issued for cash
            
            
            374
            
            
            
            95.32
            
            
            
            35,650
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            35,650Share
      issue costs
            
            
            -
            
            
            
            -
            
            
            
            (1,812
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (1,812
            )Warrants
      exercised
            
            
            398
            
            
            
            17.33
            
            
            
            6,898
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            6,898Options
      exercised
            
            
            139
            
            
            
            14.85
            
            
            
            2,064
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2,064Shares
      issued for services
            
            
            4
            
            
            
            58.25
            
            
            
            233
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            233Loss
            
            
            -
            
            
            
            
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (9,961
            )
            
            
            (9,961
            )Balance,
      November 30, 2000
            
            
            4,475
            
            
            
            
            
            
            
            90,785
            
            
            
            -
            
            
            
            -
            
            
            
            (47,271
            )
            
            
            43,514











90


VASOGEN
INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 Notes
to Consolidated Financial Statements (continued)
 (Tabular
figures in thousands, except per share amounts)
 
 Years
ended November 30, 2007, 2006, 2005 and
 period
from December 1, 1987 to November 30, 2007




8.
            Shareholders'
      equity (continued):




Common
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            Period
      fromshares'
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            December
      1,average
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1987
      toNumber
            
            
            share
            
            
            Share
            
            
            Contributed
            
            
            
            
            
            
            
            
            November
      30,of
      shares
            
            
            price
            
            
            capital
            
            
            surplus
            
            
            Warrants
            
            
            Deficit
            
            
            2007Balance,
      November 30, 2000
            
            
            4,475
            
            
            
            
            
            
            90,785
            
            
            
            -
            
            
            
            -
            
            
            
            (47,271
            )
            
            
            43,514Shares
      issued for cash
            
            
            140
            
            
            
            85.29
            
            
            
            11,941
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            11,941Share
      issue costs
            
            
            -
            
            
            
            -
            
            
            
            (121
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (121
            )Options
      exercised
            
            
            22
            
            
            
            19.50
            
            
            
            429
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            429Loss
            
            
            -
            
            
            
            
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (14,389
            )
            
            
            (14,389
            )Balance,
      November 30, 2001
            
            
            4,637
            
            
            
            
            
            
            
            103,034
            
            
            
            -
            
            
            
            -
            
            
            
            (61,660
            )
            
            
            41,374Shares
      issued for cash
            
            
            515
            
            
            
            48.54
            
            
            
            25,000
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            25,000Share
      issue costs
            
            
            -
            
            
            
            -
            
            
            
            (1,901
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (1,901
            )Options
      exercised
            
            
            41
            
            
            
            13.17
            
            
            
            540
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            540Loss
            
            
            -
            
            
            
            
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (19,507
            )
            
            
            (19,507
            )Balance,
      November 30, 2002
            
            
            5,193
            
            
            
            
            
            
            
            126,673
            
            
            
            -
            
            
            
            -
            
            
            
            (81,167
            )
            
            
            45,506Shares
      issued for cash
            
            
            948
            
            
            
            53.45
            
            
            
            50,669
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            50,669Share
      issue costs
            
            
            -
            
            
            
            -
            
            
            
            (5,898
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (5,898
            )Warrants
      exercised
            
            
            25
            
            
            
            53.88
            
            
            
            1,347
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,347Options
      exercised
            
            
            36
            
            
            
            16.36
            
            
            
            589
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            589Fair
      value of stock options and warrants issued to consultants
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            744
            
            
            
            1,456
            
            
            
            -
            
            
            
            2,200Loss
            
            
            -
            
            
            
            
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (31,948
            )
            
            
            (31,948
            )Balance,
      November 30, 2003
            
            
            6,202
            
            
            
            
            
            
            
            173,380
            
            
            
            744
            
            
            
            1,456
            
            
            
            (113,115
            )
            
            
            62,465











91


VASOGEN
INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 Notes
to Consolidated Financial Statements (continued)
 (Tabular
figures in thousands, except per share amounts)
 
 Years
ended November 30, 2007, 2006, 2005 and
 period
from December 1, 1987 to November 30, 2007




8.
            Shareholders'
      equity (continued):




Common
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            Period
      fromshares'
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            December
      1,average
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1987
      toNumber
            
            
            share
            
            
            Share
            
            
            Contributed
            
            
            
            
            
            
            
            
            November
      30,of
      shares
            
            
            price
            
            
            capital
            
            
            surplus
            
            
            Warrants
            
            
            Deficit
            
            
            2007Balance,
      November 30, 2003
            
            
            6,202
            
            
            
            
            
            
            173,380
            
            
            
            744
            
            
            
            1,456
            
            
            
            (113,115
            )
            
            
            62,465Shares
      issued for cash
            
            
            978
            
            
            
            78.64
            
            
            
            76,913
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            76,913Share
      issue costs
            
            
            -
            
            
            
            -
            
            
            
            (6,128
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (6,128
            )Options
      exercised
            
            
            53
            
            
            
            24.53
            
            
            
            1,300
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,300Fair
      value of stock options issued to consultants
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            455
            
            
            
            -
            
            
            
            -
            
            
            
            455Loss
            
            
            -
            
            
            
            
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (74,550
            )
            
            
            (74,550
            )Balance,
      November 30, 2004, as originally reported
            
            
            7,233
            
            
            
            
            
            
            
            245,465
            
            
            
            1,199
            
            
            
            1,456
            
            
            
            (187,665
            )
            
            
            60,455Change
      in accounting for stock-based compensation
            
            
            -
            
            
            
            -
            
            
            
            55
            
            
            
            3,951
            
            
            
            -
            
            
            
            (4,006
            )
            
            
            -Balance,
      November 30, 2004, as revised
            
            
            7,233
            
            
            
            
            
            
            
            245,520
            
            
            
            5,150
            
            
            
            1,456
            
            
            
            (191,671
            )
            
            
            60,455














92


VASOGEN
INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 Notes
to Consolidated Financial Statements (continued)
 (Tabular
figures in thousands, except per share amounts)
 
 Years
ended November 30, 2007, 2006, 2005 and
 period
from December 1, 1987 to November 30, 2007




8.
            Shareholders'
      equity (continued):




Common
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            Period
      fromshares'
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            December
      1,average
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1987
      toNumber
            
            
            share
            
            
            Share
            
            
            Contributed
            
            
            
            
            
            
            
            
            November
      30,of
      shares
            
            
            price
            
            
            capital
            
            
            surplus
            
            
            Warrants
            
            
            Deficit
            
            
            2007Balance,
      November 30, 2004, as revised
            
            
            7,233
            
            
            
            
            
            
            245,520
            
            
            
            5,150
            
            
            
            1,456
            
            
            
            (191,671
            )
            
            
            60,455Shares
      issued for cash
            
            
            901
            
            
            
            58.27
            
            
            
            52,502
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            52,502Share
      issue costs
            
            
            -
            
            
            
            -
            
            
            
            (3,720
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (3,720
            )Fair
      value of stock options granted
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            3,826
            
            
            
            -
            
            
            
            -
            
            
            
            3,826Options
      exercised
            
            
            15
            
            
            
            41.80
            
            
            
            627
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            627Shares
      issued in advance for instalment payment on senior convertible notes
      payable
            
            
            77
            
            
            
            26.42
            
            
            
            2,034
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2,034Instalment
      payment made in advance
            
            
            -
            
            
            
            -
            
            
            
            (2,032
            )
            
            
            8,774
            
            
            
            -
            
            
            
            -
            
            
            
            6,742Senior
      convertible notes
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            4,273
            
            
            
            -
            
            
            
            4,273Financing
      costs on equity component of senior convertible notes
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (789
            )
            
            
            (384
            )
            
            
            -
            
            
            
            (1,173
            )Transfer
      of stock options exercised
            
            
            -
            
            
            
            -
            
            
            
            76
            
            
            
            (76
            )
            
            
            -
            
            
            
            -
            
            
            
            -Transfer
      of forfeited unvested options
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (211
            )
            
            
            -
            
            
            
            -
            
            
            
            (211
            )Loss
            
            
            -
            
            
            
            
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (93,048
            )
            
            
            (93,048
            )Balance,
      November 30, 2005
            
            
            8,226
            
            
            
            
            
            
            
            295,007
            
            
            
            16,674
            
            
            
            5,345
            
            
            
            (284,719
            )
            
            
            32,307











93


VASOGEN
INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 Notes
to Consolidated Financial Statements (continued)
 (Tabular
figures in thousands, except per share amounts)
 
 Years
ended November 30, 2007, 2006, 2005 and
 period
from December 1, 1987 to November 30, 2007




8.
            Shareholders'
      equity (continued):




Common
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            Period
      fromshares'
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            December
      1,average
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1987
      toNumber
            
            
            share
            
            
            Share
            
            
            Contributed
            
            
            
            
            
            
            
            
            November
      30,of
      shares
            
            
            price
            
            
            capital
            
            
            surplus
            
            
            Warrants
            
            
            Deficit
            
            
            2007Balance,
      November 30, 2005
            
            
            8,226
            
            
            
            
            
            
            295,007
            
            
            
            16,674
            
            
            
            5,345
            
            
            
            (284,719
            )
            
            
            32,307Public
      offering (b)
            
            
            4,319
            
            
            
            4.19
            
            
            
            18,082
            
            
            
            -
            
            
            
            5,024
            
            
            
            -
            
            
            
            23,106Fair
      value of broker warrants (b)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            705
            
            
            
            -
            
            
            
            705Share
      issue costs (b)
            
            
            -
            
            
            
            -
            
            
            
            (2,376
            )
            
            
            -
            
            
            
            (550
            )
            
            
            -
            
            
            
            (2,926
            )Shares
      issued for deferred share units
            
            
            2
            
            
            
            18.00
            
            
            
            36
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            36Fair
      value of stock options granted
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            3,682
            
            
            
            -
            
            
            
            -
            
            
            
            3,682Shares
      issued for instalment payments on senior convertible notes
      payable
            
            
            2,697
            
            
            
            8.70
            
            
            
            23,481
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            23,481Shares
      and warrants issued for acceleration payments on senior convertible notes
      payable
            
            
            411
            
            
            
            23.66
            
            
            
            9,723
            
            
            
            (807
            )
            
            
            2,322
            
            
            
            (295
            )
            
            
            10,943Holders'
      conversion of notes
            
            
            10
            
            
            
            32.20
            
            
            
            322
            
            
            
            (59
            )
            
            
            -
            
            
            
            -
            
            
            
            263December
      1, 2006 instalment payment made in advance
            
            
            -
            
            
            
            -
            
            
            
            (2,090
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (2,090
            )December
      1, 2005 instalment payment in advance applied
            
            
            -
            
            
            
            -
            
            
            
            2,032
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2,032Reversal
      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, as originally reported
            
            
            15,665
            
            
            
            
            
            
            
            344,217
            
            
            
            20,347
            
            
            
            11,390
            
            
            
            (351,374
            )
            
            
            24,580











94


VASOGEN
INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 Notes
to Consolidated Financial Statements (continued)
 (Tabular
figures in thousands, except per share amounts)
 
 Years
ended November 30, 2007, 2006, 2005 and
 period
from December 1, 1987 to November 30, 2007




8.
            Shareholders'
      equity (continued):




Common
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            Period
      fromshares'
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            December
      1,average
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1987
      toNumber
            
            
            share
            
            
            Share
            
            
            Contributed
            
            
            
            
            
            
            
            
            November
      30,of
      shares
            
            
            price
            
            
            capital
            
            
            surplus
            
            
            Warrants
            
            
            Deficit
            
            
            2007Balance,
      November 30, 2006, as originally reported
            
            
            15,665
            
            
            
            
            
            
            344,217
            
            
            
            20,347
            
            
            
            11,390
            
            
            
            (351,374
            )
            
            
            24,580Impact
      of change in accounting for financial instruments
            
            
            -
            
            
            
            -
            
            
            
            914
            
            
            
            -
            
            
            
            -
            
            
            
            (1,632
            )
            
            
            (718
            )Balance,
      November 30, 2006, as revised
            
            
            15,665
            
            
            
            
            
            
            
            345,131
            
            
            
            20,347
            
            
            
            11,390
            
            
            
            (353,006
            )
            
            
            23,862Public
      offering (b)
            
            
            4,917
            
            
            
            2.32
            
            
            
            11,425
            
            
            
            -
            
            
            
            5,920
            
            
            
            -
            
            
            
            17,345Fair
      value of broker warrants
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            470
            
            
            
            -
            
            
            
            470Share
      issue costs
            
            
            -
            
            
            
            -
            
            
            
            (1,257
            )
            
            
            -
            
            
            
            (653
            )
            
            
            -
            
            
            
            (1,910
            )Fair
      value of stock options granted
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,995
            
            
            
            -
            
            
            
            -
            
            
            
            1,995Shares
      issued for instalment payments on senior convertible notes
            
            
            1,809
            
            
            
            4.58
            
            
            
            8,281
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            8,281December
      1, 2006 instalment made in advance
            
            
            -
            
            
            
            -
            
            
            
            2,090
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2,090Transfer
      of expired warrants
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            402
            
            
            
            (402
            )
            
            
            -
            
            
            
            -Loss
            
            
            -
            
            
            
            
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (28,777
            )
            
            
            (28,777
            )Balance,
      November 30, 2007
            
            
            22,391
            
            
            
            
            
            
            $
            365,670
            
            
            $
            22,744
            
            
            $
            16,725
            
            
            $
            (381,783
            )
            
            $
            23,356











95


VASOGEN
INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 Notes
to Consolidated Financial Statements (continued)
 (Tabular
figures in thousands, except per share amounts)
 
 Years
ended November 30, 2007, 2006, 2005 and
 period
from December 1, 1987 to November 30, 2007







8.
            Shareholders'
      equity (continued):




(b)
            Share
      issuances:




On May
24, 2007, the Company issued 4.9 million common shares and 3.7 million five-year
warrants for gross cash proceeds of $17.3 million (U.S. $16.0 million) (net
proceeds of $15.4 million after costs of issuance of $1.9
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 8(e).  The proceeds were
allocated to the common shares and warrants based on their relative fair
values.  The fair value of the warrants was estimated using the
Black-Scholes option pricing model using the following assumptions:


Five-year
            
            
            Brokerwarrants
            
            
            warrantsDividend
      yield
            
            
            -
            
            
            
            -Risk-free
      interest rates
            
            
            4.41
            %
            
            
            4.43
            %Volatility
            
            
            93
            %
            
            
            115
            %Expected
      life of warrants
            
            5.0
      years
            
            
            3.0
      years





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
$20.2 million after cost of issuance of $2.9 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 8(e).  The proceeds were allocated to the common
shares and warrants based on their relative fair values.





96


VASOGEN
INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 Notes
to Consolidated Financial Statements (continued)
 (Tabular
figures in thousands, except per share amounts)
 
 Years
ended November 30, 2007, 2006, 2005 and
 period
from December 1, 1987 to November 30, 2007




8.
            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.  In April 2007,
the Company's shareholders approved increasing the maximum number of common
shares under the 2003 Employee Plan to 1,800,000.  In addition, the
Company's shareholders approved amending the 2003 Employee Plan to allow
restricted stock units to be granted.  No restricted stock units were
issued or outstanding as at November 30, 2007.  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
10 years and generally vest over a period of up to three
years.




As at
November 30, 2007, there were 1.0 million (2006 - 0.2 million; 2005 - 0.3
million) options and restricted stock units available for grant.


2007
            
            
            2006
            
            
            2005Weighted
            
            
            
            
            
            Weighted
            
            
            
            
            
            Weightedaverage
            
            
            
            
            
            average
            
            
            
            
            
            averageNumber
      of
            
            
            exercise
            
            
            Number
      of
            
            
            exercise
            
            
            Number
      of
            
            
            exerciseoptions
            
            
            price
            
            
            options
            
            
            price
            
            
            options
            
            
            priceOutstanding,
      beginning of year
            
            
            812
            
            
            $
            30.30
            
            
            
            431
            
            
            $
            56.00
            
            
            
            352
            
            
            $
            60.10Issued
            
            
            404
            
            
            
            3.19
            
            
            
            502
            
            
            
            13.80
            
            
            
            130
            
            
            
            46.50Exercised
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (15
            )
            
            
            43.20Expired
      or cancelled
            
            
            (337
            )
            
            
            22.97
            
            
            
            (121
            )
            
            
            53.00
            
            
            
            (36
            )
            
            
            67.30Outstanding,
      end of year
            
            
            879
            
            
            
            20.67
            
            
            
            812
            
            
            
            30.30
            
            
            
            431
            
            
            
            56.00Exercisable,
      end of year
            
            
            402
            
            
            
            
            
            
            
            313
            
            
            
            
            
            
            
            259





The
table above includes 2,500 (2006 - 24,497; 2005 - 29,363) options granted to
non-employees for a fair value of $8,700 (2006 - $0.2 million; 2005 - $0.8
million) all of which was recorded as an expense in 2007.





97


VASOGEN
INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 Notes
to Consolidated Financial Statements (continued)
 (Tabular
figures in thousands, except per share amounts)
 
 Years
ended November 30, 2007, 2006, 2005 and
 period
from December 1, 1987 to November 30, 2007




8.
            Shareholders'
      equity (continued):




The
following table provides information on options outstanding and exercisable as
of November 30, 2007:


Options
      outstanding
            
            
            Options
      exercisableWeightedWeighted
            
            
            average
            
            
            
            
            Weightedaverage
            
            
            remaining
            
            
            
            
            averageExercise
            
            
            Number
            
            exercise
            
            
            contractual
            
            
            Number
            
            exerciseprice
            
            
            outstanding
            
            
            price
            
            
            life
      (years)
            
            
            exercisable
            
            
            price$2.12
      - $ 4.29
            
            
            
            218
            
            
            $
            2.12
            
            
            
            9.8
            
            
            
            17
            
            
            $
            2.12$4.30
      - $ 4.90
            
            
            
            126
            
            
            
            4.56
            
            
            
            8.8
            
            
            
            49
            
            
            
            4.84$4.91
      - $ 7.50
            
            
            
            180
            
            
            
            6.48
            
            
            
            8.6
            
            
            
            63
            
            
            
            6.50$7.51
      - $32.10
            
            
            
            136
            
            
            
            27.41
            
            
            
            6.9
            
            
            
            71
            
            
            
            28.11$32.11
      - $92.10
            
            
            
            219
            
            
            
            55.93
            
            
            
            2.7
            
            
            
            202
            
            
            
            56.28879
            
            
            
            20.67
            
            
            
            7.2
            
            
            
            402
            
            
            
            34.99





The
aggregate intrinsic value of exercisable options as at November 30, 2007 and
2006 was nil.




The
weighted average remaining contractual life of exercisable options is 5.1
years.




The
fair value of stock-based compensation was estimated using the Black-Scholes
option pricing model at the grant date using the following
assumptions:


2007
            
            
            2006
            
            
            2005Dividend
      yield
            
            
            -
            
            
            
            -
            
            
            
            -Weighted
      average risk-free interest rate
            
            
            4.19
            %
            
            
            4.10
            %
            
            
            3.77
            %Volatility
      factor of the expected market price of the Company's common
      shares
            
            
            95.3
            %
            
            
            87.3
            %
            
            
            73.2
            %Weighted
      average expected life of the employment options
            
            6.0
      years
            
            
            5.9
      years
            
            
            4.7
      years
















98


VASOGEN
INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 Notes
to Consolidated Financial Statements (continued)
 (Tabular
figures in thousands, except per share amounts)
 
 Years
ended November 30, 2007, 2006, 2005 and
 period
from December 1, 1987 to November 30, 2007




8.
            Shareholders'
      equity (continued):




The
resulting weighted average fair value per share at the grant date of the
employee and non-employee stock-based compensation issued in fiscal 2007 is
$2.34 (2006 - $9.60; 2005 - $29.60).




Total
compensation cost for stock-based compensation arrangements recognized in income
in fiscal 2007 was $2.0 million (2006 - $3.1 million; 2005 - $3.6
million).




On
exercise of options, the Company's policy is to issue shares from
treasury.




(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.  In April 2007, the Company's shareholders
approved increasing the maximum number of common shares under the DSU plan to
125,000.  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 $0.2 million (2006 - $0.3 million; 2005 - $0.3 million) in
compensation expense relating to 58,140 (2006 - 14,476; 2005 - 5,202) DSUs
granted in 2007 for services rendered during the year.  As at November
30, 2007, 78,049 (2006 - 19,909) DSUs are issued and outstanding with a value of
$0.1 million (2006 - $0.1 million) based upon the market value of the Company's
common shares at November 30, 2007.  No DSUs were exercised in
2007.





99


VASOGEN
INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 Notes
to Consolidated Financial Statements (continued)
 (Tabular
figures in thousands, except per share amounts)
 
 Years
ended November 30, 2007, 2006, 2005 and
 period
from December 1, 1987 to November 30, 2007




8.
            Shareholders'
      equity (continued):




(e)
            Warrants:




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


2007
            
            
            2006
            
            
            2005Outstanding,
      beginning of year
            
            
            2,927
            
            
            
            431
            
            
            
            98Issued
            
            
            3,983
            
            
            
            2,594
            
            
            
            333Exercised
            
            
            -
            
            
            
            -
            
            
            
            -Expired
            
            
            (432
            )
            
            
            (98
            )
            
            
            -Outstanding,
      end of year
            
            
            6,478
            
            
            
            2,927
            
            
            
            431Exercisable,
      end of year
            
            
            6,478
            
            
            
            2,927
            
            
            
            431




The
following table provides information on warrants outstanding as of November 30,
2007:


Exercise
            Number
            
            Shares
      issuableprice
            outstanding
            Expiry
            upon
      exerciseU.S.
      $13.59
            333
            October
      7, 2010
            736U.S.
      $14.05
            39
            February
      28, 2011
            86U.S.
      $13.59
            39
            March
      31, 2011
            86U.S.
      $13.59
            39
            April
      30, 2011
            86U.S.
      $ 13.59
            61
            May
      31, 2011
            134U.S.
      $ 6.30
            1,728
            November
      14, 2011
            1,728U.S.
      $ 6.30
            256
            November
      14, 2009
            256U.S.
      $ 3.16
            3,688
            May
      24, 2012
            3,688U.S.
      $ 3.81
            295
            May
      24, 2010
            2956,478
            
            7,095
















100


VASOGEN
INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 Notes
to Consolidated Financial Statements (continued)
 (Tabular
figures in thousands, except per share amounts)
 
 Years
ended November 30, 2007, 2006, 2005 and
 period
from December 1, 1987 to November 30, 2007




9.
            Loss
      per share:




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


2007
            
            
            2006
            
            
            2005Loss
      for the year
            
            $
            (28,777
            )
            
            $
            (66,360
            )
            
            $
            (93,048
            )Weighted
      average number of common shares outstanding:Basic
      and diluted
            
            
            19,717
            
            
            
            9,408
            
            
            
            7,987Loss
      per common share:Basic
      and diluted
            
            $
            (1.46
            )
            
            $
            (7.05
            )
            
            $
            (11.65
            )




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 be
anti-dilutive.




10.
            Consolidated
      statements of cash flows:




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




Period
      fromDecember
      1,1987
      toYears
      ended November 30,
            
            November
      30,2007
            
            
            2006
            
            
            2005
            
            
            2007Decrease
      (increase) in:Clinical
      supplies
            
            $
            (152
            )
            
            $
            651
            
            
            $
            942
            
            
            $
            (1,363
            )Tax
      credits recoverable
            
            
            (238
            )
            
            
            (197
            )
            
            
            466
            
            
            
            (1,565
            )Prepaid
      expenses and deposits
            
            
            597
            
            
            
            239
            
            
            
            227
            
            
            
            (755
            )Increase
      (decrease) in:Accounts
      payable and accrued liabilities
            
            
            (3,742
            )
            
            
            (17,851
            )
            
            
            10,999
            
            
            
            4,634$
            (3,535
            )
            
            $
            (17,158
            )
            
            $
            12,634
            
            
            $
            951











101


VASOGEN
INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 Notes
to Consolidated Financial Statements (continued)
 (Tabular
figures in thousands, except per share amounts)
 
 Years
ended November 30, 2007, 2006, 2005 and
 period
from December 1, 1987 to November 30, 2007




10.
            Consolidated
      statements of cash flows (continued):




(b)
            Supplemental
      disclosure of non-cash transactions:


Period
      fromDecember
      1,1987
      toYears
      ended November 30,
            
            
            November
      30,2007
            
            
            2006
            
            
            2005
            
            
            2007Non-cash
      financing activities:Warrants and
      options issued as share issue costs
            
            $
            470
            
            
            $
            705
            
            
            $
            -
            
            
            $
            (2,944
            )Shares
      issued for services
            
            
            -
            
            
            
            36
            
            
            
            -
            
            
            
            2,485Debt
      conversion
            
            
            (8,622
            )
            
            
            (29,288
            )
            
            
            (2,034
            )
            
            
            (40,684
            )Shares
      issued on debt conversion
            
            
            10,371
            
            
            
            31,114
            
            
            
            2,034
            
            
            
            44,259Acceleration
      warrants issued in connection with debt
            
            
            -
            
            
            
            2,322
            
            
            
            -
            
            
            
            2,322Shares
      issued on debt conversion by note holders
            
            
            -
            
            
            
            263
            
            
            
            -
            
            
            
            263Shares
      issued for technology
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2,799Share
      issue costs associated with public offering
            
            
            (470
            )
            
            
            (705
            )
            
            
            -
            
            
            
            (1,175
            )Deferred share
      issue costs
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            503Non-cash
      investing activities:Shares
      issued to acquire technology
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (2,799
            )











102


VASOGEN
INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 Notes
to Consolidated Financial Statements (continued)
 (Tabular
figures in thousands, except per share amounts)
 
 Years
ended November 30, 2007, 2006, 2005 and
 period
from December 1, 1987 to November 30, 2007




10.
            Consolidated
      statements of cash flows (continued):




(c)
            Supplemental
      cash flow information:


Period
      fromDecember
      1,1987
      toYears
      ended November 30,
            
            
            November
      30,2007
            
            
            2006
            
            
            2005
            
            
            2007Interest
      received
            
            $
            1,328
            
            
            $
            2,119
            
            
            $
            1,147
            
            
            $
            13,301Interest
      paid
            
            
            5
            
            
            
            930
            
            
            
            344
            
            
            
            1,279Income
      taxes paid
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -




11.
            Fair
      values of financial instruments:




Financial
instruments potentially exposing the Company to a concentration of credit risk
and interest rate risk consist principally of cash and cash
equivalents.  The Company manages 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.




The
Company does not believe that the results of operations or cash flows would be
affected to any significant degree by a sudden change in market interest rates
relative to interest rates on the investments, owing to the relative short-term
nature of the investments.




Financial
instruments potentially exposing the Company to foreign exchange risk consist
principally of cash and cash equivalents.  The Company manages foreign
exchange risk by maintaining U.S. cash on hand to support U.S. forecasted cash
outflows over an 18-month horizon.




In
November 2007, the Company entered into a forward foreign exchange contract to
purchase, in aggregate, U.S. $12.9 million for $12.5 million in December
2007.  The fair value of this instrument at November 30, 2007 was an
asset of $0.4 million.  The related gain was recorded in foreign
exchange loss (gain) in the statement of operations, deficit and comprehensive
income.





103


VASOGEN
INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 Notes
to Consolidated Financial Statements (continued)
 (Tabular
figures in thousands, except per share amounts)
 
 Years
ended November 30, 2007, 2006, 2005 and
 period
from December 1, 1987 to November 30, 2007




11.
            Fair
      values of financial instruments (continued):




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




The
Company believes that the results of operations and cash flows would be affected
by a sudden change in foreign exchange rates, but would not impair or enhance
its ability to pay its U.S. dollar-denominated obligations.




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




12.
            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:


2007
            
            
            2006
            
            
            2005Statutory
      income tax rate
            
            
            36.12
            %
            
            
            36.12
            %
            
            
            35.0
            %Basic
      rate applied to loss before income taxes
            
            $
            (10,394
            )
            
            $
            (23,969
            )
            
            $
            (32,567
            )Adjustments
      resulting from:Foreign
      losses affected at lower rates
            
            
            4,959
            
            
            
            10,383
            
            
            
            23,234Permanent
      differences
            
            
            1,950
            
            
            
            1,998
            
            
            
            (74
            )Change
      in valuation allowance
            
            
            2,329
            
            
            
            10,982
            
            
            
            9,489Change
      in enacted income tax rates
            
            
            556
            
            
            
            710
            
            
            
            -Other
            
            
            600
            
            
            
            (104
            )
            
            
            (82
            )$
            -
            
            
            $
            -
            
            
            $
            -
















104


VASOGEN
INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 Notes
to Consolidated Financial Statements (continued)
 (Tabular
figures in thousands, except per share amounts)
 
 Years
ended November 30, 2007, 2006, 2005 and
 period
from December 1, 1987 to November 30, 2007




12.
            Income
      taxes (continued):




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:


2007
            
            
            2006Future
      tax assets:Non-capital
      losses
            
            $
            38,010
            
            
            $
            37,811Deductible
      share issue costs
            
            
            1,823
            
            
            
            2,646Excess
      of tax value of capital assets over book value
            
            
            147
            
            
            
            174SR&ED
      expenditure pool, net of refundable tax credits
            
            
            9,776
            
            
            
            8,198Other,
      including net capital losses
            
            
            2,862
            
            
            
            1,46052,618
            
            
            
            50,289Valuation
      allowance
            
            
            (52,618
            )
            
            
            (50,289
            )Net
      future tax asset
            
            $
            -
            
            
            $
            -





The
Company's subsidiary, Vasogen Ireland Limited, has losses of approximately
$297.4 million (2006 - $291.5 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 $2.1
million (2006 - $3.4 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, 2007 is approximately
$32.4 million (2006 - $27.1 million) for federal income tax purposes and
$26.9 million (2006 - $21.7 million) for Ontario tax purposes.





105


VASOGEN
INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 Notes
to Consolidated Financial Statements (continued)
 (Tabular
figures in thousands, except per share amounts)
 
 Years
ended November 30, 2007, 2006, 2005 and
 period
from December 1, 1987 to November 30, 2007




12.
            Income
      taxes (continued):




The
Company also has $13.6 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
            
            $
            2222009
            
            
            4382010
            
            
            6052011
            
            
            9512012
            
            
            9602013
            
            
            1,4972014
            
            
            2,3432015
            
            
            2,0622026
            
            
            2,5822027
            
            
            1,932$
            13,592




13.
            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.





106


VASOGEN
INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 Notes
to Consolidated Financial Statements (continued)
 (Tabular
figures in thousands, except per share amounts)
 
 Years
ended November 30, 2007, 2006, 2005 and
 period
from December 1, 1987 to November 30, 2007




13.
            Commitments
      and contingencies (continued):




(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:


2008
            
            $
            6272009
            
            
            368$
            995





Rent
expense under operating leases, for the year ended November 30, 2007, is
$0.7 million (2006 - $0.8 million; 2005 - $0.9 million).




(c)
            Contingencies:




There
exist certain claims and potential claims against the Company, none of which are
expected to have a material adverse effect on the consolidated financial
statements.




14.
            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.  The acquired technology, which as at November 30, 2007 was
fully amortized, is in Ireland.





107


VASOGEN
INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 Notes
to Consolidated Financial Statements (continued)
 (Tabular
figures in thousands, except per share amounts)
 
 Years
ended November 30, 2007, 2006, 2005 and
 period
from December 1, 1987 to November 30, 2007




15.
            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 program:




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.  While the Company's ACCLAIM Phase III trial
of Celacade 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 certain large, pre-defined
subgroups.  In September 2007, the Company announced plans for a
confirmatory study that would support an application for regulatory approval in
the United States of its Celacade technology for the treatment of patients with
NYHA Class II heart failure.  The Company also has CE Mark regulatory
approval for its Celacade medical device technology in the European Union and,
in April 2007, entered into a collaborative agreement necessary to commence
commercialization in that market.




(c)
            Celacade
      technology - autoimmune program:




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.





108


VASOGEN
INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 Notes
to Consolidated Financial Statements (continued)
 (Tabular
figures in thousands, except per share amounts)
 
 Years
ended November 30, 2007, 2006, 2005 and
 period
from December 1, 1987 to November 30, 2007




15.
            Research
      and development projects (continued):




(d)
            VP025
      - neuro-inflammatory program:




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:


Period
      fromDecember
      1,1987
      toYears
      ended November 30,
            
            
            November
      30,2007
            
            
            2006
            
            
            2005
            
            
            2007Research
      and development costs expensed:Platform
      technology
            
            $
            2,156
            
            
            $
            2,472
            
            
            $
            1,947
            
            
            $
            43,257Cardiovascular
      program
            
            
            7,224
            
            
            
            25,813
            
            
            
            64,444
            
            
            
            173,598Autoimmune
      program
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            4,565VP025
            
            
            2,659
            
            
            
            4,447
            
            
            
            5,030
            
            
            
            17,497Total
      research and development costs expensed
            
            $
            12,039
            
            
            $
            32,732
            
            
            $
            71,421
            
            
            $
            238,917Acquired
      technology:Celacade
      platform
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            4,081











109


VASOGEN
INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 Notes
to Consolidated Financial Statements (continued)
 (Tabular
figures in thousands, except per share amounts)
 
 Years
ended November 30, 2007, 2006, 2005 and
 period
from December 1, 1987 to November 30, 2007




16.
            Differences
      between generally accepted accounting principles in Canada and the United
      States:




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




(a)
            Consolidated
      statements of operations, deficit and comprehensive income:




Period
      fromDecember
      1,1987
      toYears
      ended November 30,
            
            
            November
      30,2007
            
            
            2006
            
            
            2005
            
            
            2007Loss
      per Canadian GAAP
            
            $
            (28,777
            )
            
            $
            (66,360
            )
            
            $
            (93,048
            )
            
            $
            (374,340
            )Acquired
      technology costs (b)(i)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (4,081
            )Technology
      amortization (b)(i)
            
            
            253
            
            
            
            253
            
            
            
            253
            
            
            
            4,081Non-employee
      stock options (b)(ii)
            
            
            -
            
            
            
            (58
            )
            
            
            (101
            )
            
            
            (3,476
            )Employee
      stock options (b)(iii)
            
            
            -
            
            
            
            -
            
            
            
            2,879
            
            
            
            2,879Performance-based
      options (b)(iii)
            
            
            -
            
            
            
            -
            
            
            
            31
            
            
            
            (278
            )Warrants
      issued to acquire technology (b)(iv)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (61
            )Accretion
      of senior convertible notes payable (b)(v)
            
            
            799
            
            
            
            (2,373
            )
            
            
            (281
            )
            
            
            (1,855
            )Amortization
      of deferred financing costs (b)(v)
            
            
            (298
            )
            
            
            (963
            )
            
            
            (145
            )
            
            
            (1,406
            )Loss
      on debt extinguishment (b)(v)
            
            
            (1,426
            )
            
            
            (1,131
            )
            
            
            -
            
            
            
            (2,557
            )Fair
      value adjustment on embedded derivatives and warrants
    (b)(v)
            
            
            3,394
            
            
            
            9,711
            
            
            
            3,032
            
            
            
            16,111Fair
      value adjustment on warrants from November 2006 financing
      (b)(vi)
            
            
            4,623
            
            
            
            -
            
            
            
            -
            
            
            
            4,649Fair
      value adjustment on warrants from May 2007 financing
    (b)(vi)
            
            
            3,256
            
            
            
            -
            
            
            
            -
            
            
            
            3,256Loss
      and comprehensive loss per United States GAAP
            
            $
            (18,176
            )
            
            $
            (60,921
            )
            
            $
            (87,380
            )
            
            $
            (357,078
            )Weighted
      average number of common shares under United States GAAP:Basic
      and diluted
            
            
            19,717
            
            
            
            9,408
            
            
            
            7,987Basic
      and diluted loss per common share under United States GAAP
            
            $
            (0.92
            )
            
            $
            (6.48
            )
            
            $
            (10.94
            )
















110


VASOGEN
INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 Notes
to Consolidated Financial Statements (continued)
 (Tabular
figures in thousands, except per share amounts)
 
 Years
ended November 30, 2007, 2006, 2005 and
 period
from December 1, 1987 to November 30, 2007




16.
            Differences
      between generally accepted accounting principles in Canada and the United
      States (continued):




(b)
            Consolidated
      balance sheets:


2007
            
            
            2006United
            
            
            
            
            
            UnitedCanada
            
            
            States
            
            
            Canada
            
            
            StatesAssets:Acquired
      technology (i)
            
            $
            -
            
            
            $
            -
            
            
            $
            253
            
            
            $
            -Deferred
      financing costs (v), (vi)
            
            
            -
            
            
            
            1,039
            
            
            
            150
            
            
            
            648Liabilities:Current
      portion of senior convertible notes payable (v)
            
            
            -
            
            
            
            -
            
            
            
            8,754
            
            
            
            8,553Senior
      convertible notes payable (v)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Embedded
      derivatives (v)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            914Warrants (v),
      (vi)
            
            
            -
            
            
            
            5,893
            
            
            
            -
            
            
            
            7,859Shareholders'
      equity:Share
      capital (iv)
            
            
            365,670
            
            
            
            364,867
            
            
            
            344,217
            
            
            
            343,906Contributed
      surplus (ii), (iii), (v)
            
            
            22,744
            
            
            
            12,223
            
            
            
            20,347
            
            
            
            10,228Warrants
            
            
            16,725
            
            
            
            -
            
            
            
            11,390
            
            
            
            -Deficit, end of
      period (i), (ii), (iii), (iv), (v), (vi)
            
            
            (381,783
            )
            
            
            (358,588
            )
            
            
            (351,374
            )
            
            
            (340,412
            )Deficit
      accumulated during development stage (i), (ii), (iii), (iv), (v),
      (vi)
            
            
            (380,273
            )
            
            
            (357,078
            )
            
            
            (349,864
            )
            
            
            (338,902
            )




(i)
            Acquired
      technology:




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.





111


VASOGEN
INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 Notes
to Consolidated Financial Statements (continued)
 (Tabular
figures in thousands, except per share amounts)
 
 Years
ended November 30, 2007, 2006, 2005 and
 period
from December 1, 1987 to November 30, 2007




16.
            Differences
      between generally accepted accounting principles in Canada and the United
      States (continued):




(ii)
            Stock-based
      compensation to non-employees:




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




Under
United States GAAP, the Company accounted for stock-based compensation,
including options and warrants granted to non-employees on or after
December 15, 1995, at fair value in accordance with FASB Statement of
Financial Accounting Standards No. 123, Accounting for Stock-based
Compensation.  Effective December 1, 2005, the Company adopted
FASB Statement of Financial Accounting Standards No. 123 (Revised 2004),
Share-based Payments ("SFAS No. 123R").  There was no impact on
the accounting for stock-based awards issued to non-employees in exchange for
services as a result of this change.




There
exists a difference between Canadian and United States GAAP for the fair value
of options granted to non-employees after December 15, 1995 and prior to
December 1, 2002, which are recorded at fair value under United States GAAP
and which have not been recorded under Canadian GAAP.




(iii)
            Stock-based
      compensation to employees:




Under
Canadian GAAP, effective December 1, 2004, the Company accounts for stock-based
compensation granted to employees, officers and directors on or after December
1, 2002 at fair value which is measured using the Black-Scholes option pricing
model.  Compensation cost is recognized over the service
period.  Prior to December 1, 2004, the Company accounted for
stock-based awards to employees, officers and directors using the settlement
method.





112


VASOGEN
INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 Notes
to Consolidated Financial Statements (continued)
 (Tabular
figures in thousands, except per share amounts)
 
 Years
ended November 30, 2007, 2006, 2005 and
 period
from December 1, 1987 to November 30, 2007




16.
            Differences
      between generally accepted accounting principles in Canada and the United
      States (continued):




Under
United States GAAP, the Company accounted for stock-based compensation,
including options and warrants granted to employees prior to December 1, 2005,
using the intrinsic value method in accordance with Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees ("APB
25").  In addition, the Company granted performance-based options to
employees.  In accordance with APB 25, these awards 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 vest considering the performance criteria and the difference between the
market price of the underlying stock and the exercise price on that
date.  Compensation cost was recognized over the performance
period.




Effective
December 1, 2005, the Company adopted SFAS No. 123R using the modified
prospective transition approach whereby the fair value of awards granted or
modified on or after December 1, 2005 are measured at fair value.  The
Company's awards have graded vesting conditions.  The compensation
cost for each award is recognized on a straight-line basis over the service
period of the entire award.




There
exists a difference between Canadian and United States GAAP for the intrinsic
and variable plan measurement for employee and performance-based options granted
to employees prior to December 1, 2005 under United States GAAP and for the fair
value measurement of such awards under Canadian GAAP.




(iv)
            1996
      warrants:




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.





113


VASOGEN
INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 Notes
to Consolidated Financial Statements (continued)
 (Tabular
figures in thousands, except per share amounts)
 
 Years
ended November 30, 2007, 2006, 2005 and
 period
from December 1, 1987 to November 30, 2007




16.
            Differences
      between generally accepted accounting principles in Canada and the United
      States (continued):




(v)
            Senior
      convertible notes payable and warrants:




Prior
to December 1, 2006 and the adoption of Section 3855 under Canadian GAAP, the
common share purchase warrants and the equity component of the senior
convertible notes payable were presented separately as components of
shareholders' equity.  The Company allocated the gross proceeds
received on the issuance of the senior convertible notes payable 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.  Prior to
December 1, 2006, Canadian GAAP did not permit separate accounting for embedded
derivatives.




Effective
December 1, 2006, with the adoption of Section 3855, Canadian GAAP requires
recognition of embedded derivatives at fair value.  The Company
adopted Section 3855 retrospectively, without restatement.  As a
result of the adoption of Section 3855, the gross proceeds allocated to the
debt component of the senior convertible notes payable was further allocated
between the embedded derivatives, at fair value, and the debt component at the
residual amount.  The embedded derivatives identified on December 1,
2006 were consistent with those previously recognized under United States
GAAP.




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, deficit and comprehensive
income at each reporting date.  Embedded derivatives that met the
criteria for bifurcation from the senior convertible notes payable and that
were, therefore, measured at fair value consisted 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, the conversion option was an equity
instrument that did not need to be remeasured.  As the conversion
option expired unexercised, the amounts allocated to it were reclassified to
contributed surplus.





114


VASOGEN
INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 Notes
to Consolidated Financial Statements (continued)
 (Tabular
figures in thousands, except per share amounts)
 
 Years
ended November 30, 2007, 2006, 2005 and
 period
from December 1, 1987 to November 30, 2007




16.
            Differences
      between generally accepted accounting principles in Canada and the United
      States (continued):




Under
United States GAAP, the warrants are presented as a liability because they do
not meet the criteria of Emerging Issues Task Force Issue No. 00-19, Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock ("EITF 00-19"), for equity
classification.  Subsequent changes in fair value are recorded in the
consolidated statements of operations, deficit and comprehensive
income.  Under Canadian GAAP, the warrants are considered equity
instruments and are not remeasured.




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.  All
of the issuance costs related to the transaction were recognized as deferred
financing costs under United States GAAP and were amortized to the consolidated
statements of operations, deficit and comprehensive income using the effective
interest yield method over the period to maturity.  The senior
convertible notes payable carried 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 warrants and
the conversion option as liabilities each reporting period.




Subsequent
to December 1, 2006 for Canadian GAAP and United States GAAP, the twelve-day
weighted average share price adjustment represented a derivative that was
measured at fair value and changes in fair value were recorded in the
consolidated statements of operations, deficit and comprehensive income as
extinguishment loss.  The settlement of the twelve-day weighted
average share price adjustment was accounted for as either a settlement of
additional debt, if an asset, or as the proceeds to issue additional shares if a
liability.  Prior to the adoption of Section 3855, under Canadian
GAAP, there was no recognition of the twelve-day weighted average share price
adjustment as a derivative.  Adjustments to the number of shares
issued or debt exchanged were accounted for as adjustments to share capital at
no value.





115


VASOGEN
INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 Notes
to Consolidated Financial Statements (continued)
 (Tabular
figures in thousands, except per share amounts)
 
 Years
ended November 30, 2007, 2006, 2005 and
 period
from December 1, 1987 to November 30, 2007




16.
            Differences
      between generally accepted accounting principles in Canada and the United
      States (continued):




During
the year, the Company recorded certain corrections related to the accounting for
the senior convertible notes payable under United States GAAP.  The
corrections relate to fiscal 2006, are not considered to be material to that
period and are not material with respect to the net loss for fiscal 2007 or to
trends in the consolidated statement of operations, deficit and comprehensive
income.  The Company has increased share capital by $0.9 million,
decreased accretion expense by $0.9 million, increased the loss on
extinguishment of the senior convertible notes payable by $1.5 million and
increased the gain on the change in the fair value of warrants and embedded
derivatives by $2.2 million.




The net
impact of these adjustments was to increase share capital by $0.9 million, to
reduce the deficit by $1.6 million and to decrease basic and diluted loss per
share for the year ended November 30, 2007 by $0.08.




(vi)
            Warrants:




Under
Canadian GAAP, the common shares and the warrants issued on November 14, 2006
and on May 24, 2007 are presented separately as components of shareholders'
equity.  The Company allocated the gross proceeds received on a
relative fair value basis between the common shares and the
warrants.  The related issuance costs were allocated on a pro rata
basis to the common shares and the warrants.




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





116


VASOGEN
INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 Notes
to Consolidated Financial Statements (continued)
 (Tabular
figures in thousands, except per share amounts)
 
 Years
ended November 30, 2007, 2006, 2005 and
 period
from December 1, 1987 to November 30, 2007




16.
            Differences
      between generally accepted accounting principles in Canada and the United
      States (continued):




(c)
            Consolidated
      statements of cash flows:




Cash
from operations under United States GAAP includes the adjustments to loss for
the year outlined in note 16(b).  Cash used in investments under
United States GAAP excludes amounts representing acquired technology (note
16(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, deficit and comprehensive income are set
out in note 2(h).




(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.





117


VASOGEN
INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 Notes
to Consolidated Financial Statements (continued)
 (Tabular
figures in thousands, except per share amounts)
 
 Years
ended November 30, 2007, 2006, 2005 and
 period
from December 1, 1987 to November 30, 2007




16.
            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:


2005Loss
      for the year - United States GAAP
            
            $
            (87,380
            )Compensation
      cost - employees (16(b)(iii))
            
            
            (2,879
            )Compensation
      expense (16(b)(iii))
            
            
            (192
            )Pro
      forma loss for the year - United States GAAP
            
            $
            (90,451
            )Pro
      forma basic and diluted loss per share - United States
GAAP
            
            $
            (11.32
            )
















118


VASOGEN
INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 Notes
to Consolidated Financial Statements (continued)
 (Tabular
figures in thousands, except per share amounts)
 
 Years
ended November 30, 2007, 2006, 2005 and
 period
from December 1, 1987 to November 30, 2007







16.
            Differences
      between generally accepted accounting principles in Canada and the United
      States (continued):




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


Common
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            Period
      fromshares'
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            December
      1,average
            
            
            
            
            
            Additional
            
            
            
            
            
            
            
            
            1987
      toNumber
            
            
            share
            
            
            Share
            
            
            paid-in
            
            
            
            
            
            
            
            
            November
      30,of
      shares
            
            
            price
            
            
            capital
            
            
            capital
            
            
            Warrants
            
            
            Deficit
            
            
            2007Balance,
      November 30, 2004
            
            
            7,233
            
            
            
            
            
            $
            245,526
            
            
            $
            4,825
            
            
            $
            1,456
            
            
            $
            (192,111
            )
            
            $
            59,696Shares
      issued for cash
            
            
            901
            
            
            
            58.27
            
            
            
            52,502
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            52,502Share
      issue costs
            
            
            -
            
            
            
            -
            
            
            
            (3,720
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (3,720
            )Options
      exercised
            
            
            15
            
            
            
            41.80
            
            
            
            627
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            627Fair
      value of stock options granted
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            837
            
            
            
            -
            
            
            
            -
            
            
            
            837Shares
      issued in advance for instalment payment on senior convertible notes
      payable
            
            
            77
            
            
            
            26.42
            
            
            
            2,034
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2,034Instalment
      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
            
            
            
            5,631
            
            
            
            1,456
            
            
            
            (279,491
            )
            
            
            22,533
















119


VASOGEN
INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 Notes
to Consolidated Financial Statements (continued)
 (Tabular
figures in thousands, except per share amounts)
 
 Years
ended November 30, 2007, 2006, 2005 and
 period
from December 1, 1987 to November 30, 2007




16.
            Differences
      between generally accepted accounting principles in Canada and the United
      States (continued):


Common
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            Period
      fromshares'
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            December
      1,average
            
            
            
            
            
            Additional
            
            
            
            
            
            
            
            
            1987
      toNumber
            
            
            share
            
            
            Share
            
            
            paid-in
            
            
            
            
            
            
            
            
            November
      30,of
      shares
            
            
            price
            
            
            capital
            
            
            capital
            
            
            Warrants
            
            
            Deficit
            
            
            2007Balance,
      November 30, 2005
            
            
            8,226
            
            
            
            
            
            
            294,937
            
            
            
            5,631
            
            
            
            1,456
            
            
            
            (279,491
            )
            
            
            22,533Shares
      issued for cash
            
            
            4,319
            
            
            
            4.12
            
            
            
            17,779
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            17,779Shares
      issued for services
            
            
            2
            
            
            
            18.00
            
            
            
            36
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            36Share
      issue costs
            
            
            -
            
            
            
            -
            
            
            
            (2,329
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (2,329
            )Shares
      and warrants issued for instalment payments and acceleration payments on
      senior convertible notes payable
            
            
            3,108
            
            
            
            10.27
            
            
            
            31,913
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            31,913Holders'
      conversion of notes
            
            
            10
            
            
            
            32.20
            
            
            
            322
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            322Instalment
      payment made in advance
            
            
            -
            
            
            
            -
            
            
            
            (2,090
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (2,090
            )Instalment
      payment in advance applied
            
            
            -
            
            
            
            -
            
            
            
            2,032
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2,032Fair
      value of stock options granted
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            3,141
            
            
            
            -
            
            
            
            -
            
            
            
            3,141Value
      of embedded derivatives on holders' conversion
            
            
            -
            
            
            
            -
            
            
            
            1,306
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,306Fair
      value of vested options/warrants forfeited and expired
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,456
            
            
            
            (1,456
            )
            
            
            -
            
            
            
            -Loss
      and comprehensive loss
            
            
            -
            
            
            
            
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (60,921
            )
            
            
            (60,921
            )Balance,
      November 30, 2006
            
            
            15,665
            
            
            
            
            
            
            
            343,906
            
            
            
            10,228
            
            
            
            -
            
            
            
            (340,412
            )
            
            
            13,722











120


VASOGEN
INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 Notes
to Consolidated Financial Statements (continued)
 (Tabular
figures in thousands, except per share amounts)
 
 Years
ended November 30, 2007, 2006, 2005 and
 period
from December 1, 1987 to November 30, 2007




16.
            Differences
      between generally accepted accounting principles in Canada and the United
      States (continued):


Common
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            Period
      fromshares'
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            December
      1,average
            
            
            
            
            
            Additional
            
            
            
            
            
            
            
            
            1987
      toNumber
            
            
            share
            
            
            Share
            
            
            paid-in
            
            
            
            
            
            
            
            
            November
      30,of
      shares
            
            
            price
            
            
            capital
            
            
            capital
            
            
            Warrants
            
            
            Deficit
            
            
            2007Balance,
      November 30, 2006
            
            
            15,665
            
            
            
            
            
            
            343,906
            
            
            
            10,228
            
            
            
            -
            
            
            
            (340,412
            )
            
            
            13,722Shares
      issued for cash
            
            
            4,917
            
            
            
            2.20
            
            
            
            10,827
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            10,827Share
      issue costs
            
            
            -
            
            
            
            -
            
            
            
            (1,184
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (1,184
            )Debt
      conversion
            
            
            1,809
            
            
            
            6.26
            
            
            
            11,318
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            11,318Fair
      value of stock options granted
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,995
            
            
            
            -
            
            
            
            -
            
            
            
            1,995Loss
      and comprehensive loss
            
            
            -
            
            
            
            
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (18,176
            )
            
            
            (18,176
            )Balance,
      November 30, 2007
            
            
            22,391
            
            
            
            
            
            
            $
            364,867
            
            
            $
            12,223
            
            
            $
            -
            
            
            $
            (358,588
            )
            
            $
            18,502




(g)
            Changes
      in accounting policy:




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 was adopted by the Company on December 1,
2006.  The adoption of SFAS No. 154 had no impact on the
Company's results of operations and financial condition.





121


VASOGEN
INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 Notes
to Consolidated Financial Statements (continued)
 (Tabular
figures in thousands, except per share amounts)
 
 Years
ended November 30, 2007, 2006, 2005 and
 period
from December 1, 1987 to November 30, 2007







16.
            Differences
      between generally accepted accounting principles in Canada and the United
      States (continued):




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




(i)
            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.




(ii)
            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 interim and annual financial
statements issued by the Company after December 1, 2007.  The Company
is evaluating the impact of this standard on its consolidated financial position
and results of operations.





122


VASOGEN
INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 Notes
to Consolidated Financial Statements (continued)
 (Tabular
figures in thousands, except per share amounts)
 
 Years
ended November 30, 2007, 2006, 2005 and
 period
from December 1, 1987 to November 30, 2007




16.
            Differences
      between generally accepted accounting principles in Canada and the United
      States (continued):




(iii)
            Fair
      value option:




In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities ("SFAS No. 159").  Under the
provisions of SFAS No. 159, companies may choose to account for
eligible financial instruments, warranties and insurance contracts at fair value
on a contract-by-contract basis.  Changes in fair value will be
recognized in earnings each reporting period.  SFAS No. 159
is effective for financial statements issued for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal years.  The
Company is required to adopt the provisions of SFAS No. 159 effective December
1, 2007.  The Company is currently assessing the impact of the
adoption of SFAS No. 159.




(iv)
            Considering
      the effect of prior year misstatements:




In
September 2006, the U.S. Securities and Exchange Commission issued Staff
Accounting Bulletin 108, Considering the Effects of Prior Year Misstatements
when Quantifying Misstatements in Current Year Financial Statements ("SAB
108").  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 registrants 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.




SAB 108
was adopted by the Company on December 1, 2006.





123


VASOGEN
INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 Notes
to Consolidated Financial Statements (continued)
 (Tabular
figures in thousands, except per share amounts)
 
 Years
ended November 30, 2007, 2006, 2005 and
 period
from December 1, 1987 to November 30, 2007




16.
            Differences
      between generally accepted accounting principles in Canada and the United
      States (continued):




(v)
            Accounting
      for advance payments for research and development activities:




In June
2007, the EITF reached a consensus on EITF Issue No. 07-3, Accounting for
Advance Payments for Goods or Services to be Received for Use in Future Research
and Development Activities ("EITF 07-3").  EITF 07-3 provides
clarification surrounding the accounting for non-refundable research and
development advance payments, whereby such payments should be recorded as an
asset when the advance payment is made and recognized as an expense when the
research and development activities are performed.  The Company is
currently assessing the impact of EITF 07-3 on its results of operations and
financial condition.




(vi)
            Collaborative
      arrangements:




In
September 2007, the EITF reached a consensus on EITF Issue No. 07-1,
Collaborative Arrangements ("EITF 07-1").  EITF 07-1 addresses the
accounting for arrangements in which two companies work together to achieve a
commercial objective, without forming a separate legal entity.  The
nature and purpose of a company's collaborative arrangements are required to be
disclosed, along with the accounting policies applied and the classification and
amounts for significant financial activities related to the
arrangements.  The Company is currently assessing the impact of EITF
07-1 on its results of operations and financial condition.




17.
            Common
      share consolidation:




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.  The
consolidation was implemented on April 17, 2007.  The comparative
number of common shares issued and outstanding, warrants, basic and diluted loss
per common share and the information in notes 7, 8, 9, 16(a),
16(b)(iv), 16(e) and 16(f) has been amended to give effect to the share
consolidation.





124


VASOGEN
INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 Notes
to Consolidated Financial Statements (continued)
 (Tabular
figures in thousands, except per share amounts)
 
 Years
ended November 30, 2007, 2006, 2005 and
 period
from December 1, 1987 to November 30, 2007




18.
            Comparative
      figures:




Certain
comparative figures have been reclassified to conform with the financial
statement presentation adopted in 2007.


















125


Item
19. Exhibits
  EXHIBIT
INDEX
 
 Number
              Exhibit1
              Articles
      of Incorporation and By-laws1.1
              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 H-1 of Vasogen’s Notice
      of 2007 Annual and Special meeting of shareholders and Management Proxy
      Circular, filed as Exhibit 99.1 to Form 6-k filed on March 1,
      2007.4
              Material
      Contracts and Agreements4.1
              Distribution
      and License Agreement, dated April 18, 2007, by and among Vasogen Inc.,
      Vasogen Ireland Limited and Grupo Ferrer Internacional S.A. (incorporated
      by reference to Exhibit 99.1 to Form 6-K filed on April 19,
      2007).4.2
              Engagement
      Agreement, dated May 3, 2007, among Vasogen, Rodman & Renshaw LLC and
      JMP Securities LLC (incorporated by reference to Exhibit 99.5 to Form 6-K
      filed on May 2007.4.3
              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
      Exhibits15.1
              Consent
      of KPMG, LLP, independent chartered accountants15.2
              Report
      of independent registered public accounting
firm
 
 
 126
 SIGNATURES
  The
registrant hereby certifies that it meets all of the requirements for filing on
Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf.
  
  /s/Graham D.
Neil
 Graham
D. Neil
 Vice
President, Finance and Chief Financial Officer (Principal Financial
Officer),
 Vasogen
Inc.
 
 February
27, 2008
   127