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, 2008; 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)




4
Robert Speck Parkway, 15th
Floor


Mississauga,
Ontario, L4Z 1S1, Canada


(905)
402-9925


(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, 2008, the registrant had 22,424,719 common shares
outstanding.





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


Yes
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    o                                                              Non-accelerated
filer    x




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




Page




PART
      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
                  11A.
                  History
      and Development of the Company
                  11B.
                  Business
      Overview
                  12C.
                  Organizational
      Structure
                  14D.
                  Property,
      Plant and Equipment
                  14Item
      5.
                  Operating
      and Financial Review and Prospects
                  14A.
                  Operating
      Results
                  15B.
                  Liquidity
      and Capital Resources
                  20C.
                  Research
      and development, patents, and licenses, etc.
                  22D.
                  Trend
      Information
                  22E.
                  Off-balance
      sheet arrangements
                  23F.
                  Contractual
      obligations
                  23G.
                  Safe
      Harbor
                  23Item
      6.
                  Directors,
      Senior Management and Employees
                  24A.
                  Directors
      and Senior Management
                  24B.
                  Compensation
                  25C.
                  Board
      Practices
                  27D.
                  Employees
                  31E.
                  Share
      Ownership
                  31Item
      7.
                  Major
      Shareholders and Related Party Transactions
                  33A.
                  Major
      Shareholders
                  33B.
                  Related
      Party Transactions
                  33Item
      8.
                  Financial
      Information
                  33A.
                  Consolidated
      Statements and Other Financial Information
                  33B.
                  Significant
      changes
                  33Item
      9.
                  Offer
      and Listing
                  33Item
      10.
                  Additional
      Information
                  36A.
                  Share
      Capital
                  36B.
                  Memorandum
      and Articles of Association
                  36C.
                  Material
      Contracts
                  40D.
                  Exchange
      Controls
                  40E.
                  Taxation
                  41F.
                  Dividends
      and Paying Agents
                  47G.
                  Statement
      by Experts
                  47H.
                  Documents
      on Display
                  47I.
                  Subsidiary
      Information
                  47Item
      11.
                  Qualitative
      and Quantitative Disclosures about Market Risk
                  47Currency
      risk:
                  
                  47Item
      12.
                  Description
      of Securities Other than Equity Securities.
                  49Item
      13.
                  Defaults,
      Dividends Arrearages and Delinquencies
                  49Item
      14.
                  Material
      Modifications to the Rights of Security Holders and Use of
      Proceeds
                  49Item
      15.
                  Controls
      and Procedures
                  49                                                    i
 Item
      16A.
                  Audit
      Committee Financial Expert
                  50Item
      16B.
                  Code
      of Ethics
                  51Item
      16C.
                  Principal
      Accountant Fees and Services
                  51Item
      16D.
                  Exemptions
      from the Listing Standards for Audit Committees
                  51Item
      16E.
                  Purchases
      of Equity Securities by the Issuer and Affiliated
    Purchasers
                  51PART
      III.
                  
                  51Item
      17.
                  Financial
      Statements
                  51Item
      18.
                  Financial
      Statements
                  51Item
      19.
                  Exhibits
                  103

























ii




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, plans to consider a sale,
merger, acquisition, or other strategic alternatives resulting from our
strategic review, statements regarding the status of development, or
expenditures relating to the Celacade System or our VP series of drugs,
including VP015 and VP025, plans to fund our current activities, statements
concerning our partnering activities, health regulatory submissions, strategy,
future operations, future financial position, future revenues and projected
costs.  In some cases, you can identify forward-looking statements by
terminology such as “may”, “will”, “should”, “expects”, “plans”, “anticipates”,
“believes”, “estimated”, “predicts”, “potential”, “continue”, “intends”,
“could”, or the negative of such terms or other comparable terminology. A number
of assumptions were made by us in the preparation of these forward-looking
statements.  You should not place undue reliance on our
forward-looking statements which are subject to a multitude of risks and
uncertainties that could cause actual results, future circumstances, or events
to differ materially from those projected in the forward-looking statements.
These risks include, but are not limited to, the outcome of our strategic
review, securing and maintaining corporate alliances, the need for additional
capital and the effect of capital market conditions and other factors, including
the current status of our programs, on capital availability, the potential
dilutive effects of any financing and the other risks and uncertainties
described under the heading “Risk Factors - Risks Relating to our Business”
below as well as elsewhere in this annual report.  This list is not
exhaustive of the factors that may affect any of our forward-looking
statements.  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.







In
this annual report, unless the context otherwise requires, the terms “we”, “us”,
“Vasogen” and the “Company” refer to Vasogen Inc. and its
subsidiaries.







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 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, 2008 and is prepared in
accordance with Canadian generally accepted accounting principles (“Canadian
GAAP”), which except as described in Note 18 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.




1




Years
ended November 30


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


2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004
                
                
                Period
      from December 1, 1987 to November 30, 2008Statements
      of operations, deficit and comprehensive incomeResearch
      and development
                
                
                8,794
                
                
                
                12,039
                
                
                
                32,732
                
                
                
                71,421
                
                
                
                51,794
                
                
                
                247,711General
      and administration
                
                
                8,098
                
                
                
                14,259
                
                
                
                19,251
                
                
                
                22,126
                
                
                
                15,852
                
                
                
                125,326Foreign
      exchange loss (gain)
                
                
                (305
                )
                
                
                1,977
                
                
                
                104
                
                
                
                (719
                )
                
                
                8,288
                
                
                
                10,665Accretion
      in carrying value of senior convertible notes payable
                
                
                0
                
                
                
                (728
                )
                
                
                (7,824
                )
                
                
                (1,742
                )
                
                
                0
                
                
                
                (10,294
                )Loss
      on extinguishment of senior convertible notes payable
                
                
                0
                
                
                
                (1,754
                )
                
                
                (4,995
                )
                
                
                0
                
                
                
                0
                
                
                
                (6,749
                )Investment
      income
                
                
                513
                
                
                
                1,310
                
                
                
                1,971
                
                
                
                2,274
                
                
                
                1,384
                
                
                
                13,838Loss
      and comprehensive loss for the period
                
                
                (16,074
                )
                
                
                (28,777
                )
                
                
                (66,360
                )
                
                
                (93,048
                )
                
                
                (74,550
                )
                
                
                (390,414
                )Basic
      and diluted loss per share
                
                
                (0.72
                )
                
                
                (1.46
                )
                
                
                (7.05
                )
                
                
                (11.65
                )
                
                
                (10.70
                )Balance
      sheetShares
      outstanding
                
                
                22,424,719
                
                
                
                22,391,386
                
                
                
                15,665,134
                
                
                
                8,225,537
                
                
                
                7,233,127Total
      assets
                
                
                9,342
                
                
                
                28,050
                
                
                
                41,770
                
                
                
                94,811
                
                
                
                80,963Share
      capital
                
                
                365,677
                
                
                
                365,670
                
                
                
                344,217
                
                
                
                295,007
                
                
                
                245,465Net
      assets
                
                
                8,100
                
                
                
                23,356
                
                
                
                24,580
                
                
                
                32,307
                
                
                
                60,455





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  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, 2008, 2007, and
      2006:




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




Fiscal
      Years Ended November 302008
                
                
                2007
                
                
                2006Loss
      for the period
                
                $
                (10,570
                )
                
                $
                (18,176
                )
                
                $
                (60,921
                )Basic
      and diluted loss per share
                
                
                (0.47
                )
                
                
                (0.92
                )
                
                
                (6.48
                )Share
      capital
                
                
                364,874
                
                
                
                364,867
                
                
                
                343,906Shareholders’
      equity
                
                
                8,750
                
                
                
                18,502
                
                
                
                13,722








The
following table sets forth the exchange rate for one Canadian dollar expressed
in terms of one U.S. dollar for the fiscal years 2004 through 2008 and for
August 2008 through January 2009.




AVERAGE2004
                .76372005
                .82222006
                .88122007
                .92072008
                .9545





LOW
              HIGHAugust
      2008
              .9352
              .9736September
      2008
              .9289
              .9682October
      2008
              .7759
              .9416November
      2008
              .7731
              .8687December
      2008
              .7824
              .8356January
      2009
              .7889
              .8485





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, 2009, 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 $0.7971







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.




4





RISKS
RELATING TO OUR BUSINESS




Prospects
for companies in the pharmaceutical, biotechnology, and medical device industry
generally may be regarded as uncertain given the research and development nature
of the industry and, accordingly, investments in companies such as ours should
be regarded as very speculative.  Our current focus is on considering
our strategic alternatives which also involves high and significant degrees of
risk.   An investor should carefully consider the risks and
uncertainties described below, as well as other information contained in this
annual report.  Our activities entail significant risks. In addition
to the usual risks associated with a business, the following is a general
description of certain significant risk factors which may be applicable to
us.  The list of risks and uncertainties described below is not an
exhaustive list.




We
may not complete a sale, merger, acquisition, or alternative strategic
transaction.




We
are undertaking a strategic review which may result in a sale, merger,
acquisition, or alternative strategic transaction.   If we do not
complete a sale, merger, acquisition, or alternative strategic transaction, we
will have to consider other possibilities which may include, seeking to
out-license assets, potential asset divestitures, winding up, dissolution or
liquidation of the Company.  If we do not complete a sale, merger,
acquisition, or alternative strategic transaction, it could result in a further
delay and additional expenses to the Company and a further decline in the price
of our common shares.




We
may require additional funds in our business that may be difficult to obtain
when needed or on terms acceptable to us.




As
of November 30, 2008, we had a cash balance of $8.6 million (US$6.9 million)
consisting of cash and cash equivalents.  As of January 31, 2009, our
cash balance was $8.5 million (US$6.8 million).  Our share price has
not recovered following the announcement of our restructurings and this may
negatively impact our ability to obtain financing in the
future.  Furthermore, while we are currently seeking strategic options
to enhance shareholder value, the uncertainty of a successful outcome and/or a
lack of a successful outcome will likely negatively impact our ability to obtain
financing in the future and may result in a liquidation of the
Company.




Any
future debt financing arrangements we enter into would likely contain
restrictive covenants that would impose significant operating and, if any,
financial restrictions on us.  In order to secure financing, if it is
even available, it is likely that we would need to sell additional common shares
or financial instruments that are exchangeable for or convertible into common
shares. Also, in order to provide incentives to current employees and induce
prospective employees and consultants to work for us, we have granted options
and intend to offer and issue options to purchase common shares and/or rights
exchangeable for or convertible into common shares.  We have also
issued options and deferred share units to directors of the Company. 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
share price has been highly volatile and our shares could suffer a further
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:




•
            the
      results of our strategic review;


•
            sales
      of our common shares, including in connection with further
      financings;


•
            announcements
      regarding new or existing corporate
  partnerships;


•
            announcements
      regarding our listings on the NASDAQ and
TSX;


•
            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;




5


•
            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 or
directors;


•
            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 drug development
companies, medical device companies, and 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. 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 Capital Market (“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 (the “Minimum Bid Price Rule”).  If the bid price
falls below the US$1.00 minimum for more than 30 consecutive trading days, we
will normally 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 we were not in compliance with the Minimum
Bid Price Rule.  On February 9, 2007, we transferred the listing of
our common shares from the NASDAQ Global Market to the NASDAQ Capital Market,
which provided us with an additional 180-day compliance period with respect to
the Minimum Bid Price Rule.  On April 17, 2007, we implemented a
one-for-ten consolidation of our common shares, which enabled us to regain
compliance with the Minimum Bid Price Rule for continued listing on The NASDAQ
Capital Market.




On
April 24, 2008, we received a letter from the Listing Qualifications Department
of The NASDAQ Stock Market indicating that the minimum closing bid price of our
common shares had again fallen below US$1.00 for 30 consecutive trading days,
and therefore, we were not in compliance with the Minimum Bid Price
Rule.  In accordance with NASDAQ Marketplace Rule 4310(c)(8)(D), we
were provided a compliance period of 180 calendar days, or until October 21,
2008, to regain compliance with this requirement.  On October 16,
2008, the NASDAQ issued a notice that it was temporarily suspending the
enforcement of the rules requiring a minimum US$1.00 closing bid
price.  Accordingly, the NASDAQ indicated that it would not take any
action to delist any security, including our common shares, for a violation of
the Minimum Bid Price Rule during the suspension.  The suspension was
to remain in effect through January 19, 2009 and the original rules were to be
reinstated on January 20, 2009.  Subsequently, on December 9, 2008,
the NASDAQ extended this suspension.  Accordingly, the NASDAQ will not
take action to delist any security, including our common shares, for a violation
of the Minimum Bid Price Rule during the suspension, which now has been extended
until April 20, 2009.




If
we are unable to comply with the Minimum Bid Price Rule by April 20, 2009, but
we meet the NASDAQ Capital Market’s initial listing criteria, other than the
initial listing bid price requirement, the NASDAQ will provide us an additional
180 calendar days to meet the minimum bid price
requirement.  Currently, irrespective of the minimum bid price
requirement, we do not meet the initial listing criteria of the NASDAQ Capital
Market.  Given our recent share price of US$0.15 as
of  February 24, 2009, it is very unlikely that we will be in
compliance with the NASDAQ’s minimum closing bid price by April 20,
2009.  If we receive another notice from the NASDAQ that our shares
are subject to delisting from the NASDAQ Capital Market, we may request a
hearing before a NASDAQ Listing Qualifications Panel to review the NASDAQ’s
determination.  A hearing request will stay the delisting of our
common shares, pending the decision of the Panel, allowing our common shares to
continue to be listed on the NASDAQ Capital Market.  We expect that
any discussions with the NASDAQ regarding our plans for regaining compliance
will be impacted by the strategic initiatives that we are currently exploring,
but there can be no assurance that the Panel will grant a request for continued
listing on the NASDAQ Capital Market.  If we do not request a hearing,
our common shares could be delisted from the NASDAQ Capital Market.




6




If
delisted from The NASDAQ Capital Market, our common shares may be eligible for
trading on an over-the-counter 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.




We
may not continue to be listed on the TSX.




Failure
to maintain the applicable listing requirements of the TSX could result in our
common shares being delisted from the TSX.  The TSX will normally
consider the delisting of securities if, in the opinion of the exchange, it
appears that the public distribution, price, or trading activity of the
securities has been so reduced as to make further dealings in the securities on
TSX unwarranted.  Specifically, participating securities may be
delisted from the TSX if, among other things, the market value of our common
shares is less than C$3,000,000 over any period of 30 consecutive trading
days.  In such circumstances, the TSX may place an issuer under a
delisting review pursuant to which we would be reviewed under the TSX’s remedial
review process and typically be granted 120 days to comply with all requirements
for continued listing.   Given the market value of our common
shares of  $4.5 million, as of February 24, 2009, it is currently
unlikely that we will be delisted from the TSX.  However, if the
market price of our common shares declines further or we are unable to maintain
other listing requirements, the TSX could commence a remedial review process
that could lead to the delisting of our common shares from the
TSX.  Further, if we complete a sale, merger, acquisition, or
alternative strategic transaction, we will have to consider if the continued
listing of our common shares on the TSX is appropriate or possible.




If
our common shares are no longer listed on the TSX, they may be eligible for
listing on the TSX Venture Exchange.  In the event that we are not
able to maintain a listing for our common shares on the TSX or the TSX Venture
Exchange, it may be extremely difficult or impossible for shareholders to sell
their common shares in Canada.  Moreover, if we are delisted and
obtain a substitute listing for our common shares on the TSX Venture Exchange,
our common shares will likely have less liquidity and more price volatility than
experienced on the TSX.  Shareholders may not be able to sell their
common shares on any such substitute exchange 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 TSX, the price of our common shares is likely to
decline.




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.




Depending
on the outcome of our strategic review, we may need to issue substantial amounts
of our common shares in the future.  To the extent that the market
price of our 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 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”). Up to 1,727,659 common shares in aggregate are issuable upon due
exercise of the series A warrants at a price of US$6.30 per common
share.  The series B warrants terminated on May 14,
2007.  The placement agent also received 256,000 compensation
warrants, which will expire on November 14, 2009, to purchase common shares at
US$6.30 per share.





7




On
May 24, 2007, we raised US$16 million in gross proceeds through the sale of our
common shares at a price of US$3.25.  In connection with this
offering, 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.  Additionally, we issued to the placement agents 295,044
compensation warrants, which will expire on May 24, 2010, to purchase common
shares at $US3.81 per share.




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.  Any future financing will trigger
anti-dilution adjustments contained in the warrants that were issued in
connection with the senior convertible notes on October 7, 2005.  The
senior convertible notes were fully repaid in 2007.




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, if
available, and dilution associated with such activities could cause our share
price to decline.  In addition, the existence of 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.




Our
strategic alliances are dormant and unlikely to be reinstated.




During
2007, we entered into a collaboration agreement (the “Agreement”) with Grupo
Ferrer Internacional S.A. (“Ferrer”) to commercialize our Celacade technology
for the treatment of chronic heart failure in certain countries of the European
Union (“E.U.”) and Latin America.    Based on a European
sales forecast for Celacade provided to us by Ferrer in the second quarter of
2008, we determined that we could not financially justify maintaining an
infrastructure to support E.U. commercialization.  As a result, we
restructured our organization, which included a discontinuation of operational
and financial support for European commercialization.  We expect that
the Agreement with Ferrer will be terminated in fiscal 2009.




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 was to establish an outpatient delivery model to accommodate
patient referrals outside hospital clinics and cardiology
practises.  We have recently terminated our agreement with
Quest.




Our
failure to have our strategic alliances reinstated could have a material adverse
effect on our business, financial condition and results of
operations.




We
are a development-stage company with a history of losses, we have not recognized
any product revenues, and we may never achieve profitability.




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 Company are highly dependent on
the outcome of our ongoing strategic review process.  There can be no
assurance that we will grow and be profitable.




At
November 30, 2008, we had an accumulated deficit of approximately $(397,857)
million (US$(321,630) million).  We have not generated revenues from
the commercialization of any products.  Given the uncertainty surrounding
the outcome of our strategic review, there can be no assurance that we will be
able to generate any product revenue or sufficient product revenue to become
profitable.




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 operate. 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 results of operations.




Our
intellectual property may not provide meaningful protection for our product
candidates.




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. 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.




As
part of our restructuring plan, we have implemented certain decisions with
respect to our intellectual property portfolio resulting in the abandonment of
various patents and patent applications.   These decisions were
based on a qualitative assessments of numerous factors including, but not
limited to, our cash resources, development timelines, evolving development
plans for our products, evolving importance placed on jurisdictions of lesser
economic value, whether the intellectual property was core to a current product
or originally filed to protect potential future or alternative versions of a
current product, and the life of a patent relative to the potential timeframe
for commercialization.  As such, we have abandoned a number of patents
and patent applications and expect to abandon further patents and patent
applications in the foreseeable future.




Competition
in our industry is intense, and developments by other companies could render our
product candidates obsolete.




The
industry in which we compete 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 organizations have
substantially greater financial and/or other resources and 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.




We
do not have any manufacturing capability, and we lack commercial manufacturing
experience.




The
manufacture of our products in our industry involves a number of steps and
requires compliance with stringent quality control specifications imposed by the
Food and Drug Administration (“FDA”) and other regulatory agencies. Moreover,
many 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 locate manufacturing
capacity quickly if required. Our inability or reduced capacity to manufacture
our products, if required, would have a material adverse effect on our business,
financial condition, and results of operations.





9




We
have limited sales, marketing, and distribution experience.




We
have limited experience in the sales, marketing, and distribution of
pharmaceutical or medical device products. There can be no assurance that if
required, we would 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 would be successful. If we fail
to establish successful marketing and sales capabilities or to make arrangements
with third parties, our business, financial condition and results of operations
will be materially adversely affected.




Our
operations may be adversely affected by risks associated with international
business.




We
may be 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.




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.  The actual timing of these
events can vary dramatically due to a number of factors such as delays in our
strategic review process, delays or failures in clinical trials, the
uncertainties inherent in the regulatory approval process, and delays in
achieving product development, manufacturing, or marketing milestones necessary
to commercialize products. There can be no assurance that any clinical trials
that are necessary for regulatory approvals will be completed, that we will make
regulatory submissions, or receive regulatory approvals. If we fail to achieve
one or more of our milestones as planned, the price of our common shares could
decline.




Our
business involves the use of hazardous material, which requires us to comply
with environmental regulations.




Although
we do not currently manufacture products, we have in the past produced limited
quantities of such products for our clinical trials. Our research and
development processes have involved 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 complied with the
standards prescribed by such laws and regulations, we may still be subject to
liabilities associated with the inappropriate handling of such materials. 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.




10




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.




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. See “Description of Share
Capital”.




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 2008 taxable year, and
we believe there is a significant likelihood that we will be classified as a
PFIC in our 2009 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 “Certain Income Tax
Considerations - United States Federal Income Taxation.”







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 intellectual
property related to our products and technologies. Our registered principal
office is located at 66 Wellington Street West, Suite 5300, Toronto Dominion
Bank Tower, Toronto, Ontario, Canada M5K 1E6. We are currently a “reporting
issuer” in all of the provinces and territories of Canada. Our telephone number
is (905) 402-9925 and our facsimile number is (905) 847-6270. 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.




11




For
the three fiscal years ended November 30, 2008, 2007, and 2006, we spent a total
of $8.8 million, $12.0 million, and $32.7 million, respectively, on research and
development.  At the present time, we have significantly reduced
R&D expenditures pending the outcome of our ongoing strategic review
process.  Over the past three fiscal years, we have raised
approximately $36.8 million in net proceeds from the issuance of debt and equity
securities to investors. 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 historically 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. One of our products,
Celacade, was designed to activate the immune response to apoptosis - an
important physiological process that regulates
inflammation.  Historically, we also focused on developing our VP
series of drugs for the treatment of certain neuro-inflammatory
disorders.





During 2008, we implemented our
restructuring plan to significantly reduce the rate at which we use our cash and
to focus our efforts on opportunities that the Board and Management believe are
most likely to provide shareholder value. As a result, we discontinued
maintaining the necessary quality processes and personnel to support European
commercialization and any clinical development of our Celacade technology,
materially reduced expenses associated with the VP series of drugs, and reduced
the number of full-time employees from 104 to six.  We also retained JMP
Securities LLC to assist in exploring potential strategic alternatives. To
further reduce the rate at which we use our cash during our strategic review
process, in February, 2009, we further reduced our number of full-time employees
to two.    As part of this restructuring, Chris Waddick, our
President and CEO, will be terminated effective March 1, 2009.  We will
take a charge of approximately $1.0 million as a result of such termination as
further discussed in the notes to our financial statements. Mr. Waddick has
agreed to fulfill the role of CEO, in a consulting capacity at a substantially
reduced compensation, to assist the Board in bringing closure to the ongoing
strategic review process.





Pursuant
to our restructuring plan, we have been considering strategic alternatives
for the purpose of enhancing shareholder value. This process has included
screening, reviewing, and short-listing potential opportunities including the
sale of our Company, a merger or acquisition, and exploring the monetization of
certain tangible and intangible assets.    At this time, we
have significantly narrowed down the number of third party proposals under
consideration.  If a definitive agreement that the Board believes is
in the best interest of our shareholders cannot be reached in the near future,
the Board will consider the other alternatives that it has been
evaluating.  These alternatives include the potential to realize value
from the monetization of certain intangible assets either alone, or potentially
in combination with a strategic transaction.  The Board will continue
to assess the merits of these options relative to liquidating the Company
and distributing the remaining cash to the shareholders.





Over
the past three fiscal years, we have raised approximately $36.8 million in net
proceeds from the issuance of debt and equity securities to
investors.







DESCRIPTION
OF THE BUSINESS




We
are a development-stage biotechnology company that has historically focused on
the research and commercial development of technologies targeting the chronic
inflammation.  We are conducting a strategic review to identify
opportunities that we feel have the potential to maximize shareholder
value.




12




PRODUCTS
AND MARKETS




Celacade
Program




Our
Celacade System was being developed to target the inflammation underlying
chronic heart failure.





During
2008, we had ongoing communications with the FDA regarding the use of a Bayesian
approach for ACCLAIM II, a study that was intended to support a U.S. Pre-Market
Approval filing for Celacade for NYHA Class II heart failure
patients.  We are not planning any additional communications with the
FDA regarding the design of ACCLAIM II pending the outcome of our current
strategic review process.





Subsequent
to November 30, 2008, we entered into an agreement to sell a United States
patent application and its related foreign counterparts for US$0.4 million. This
device-based intellectual property has not been used to date in the Celacade
System; however, we have retained rights to this technology for any potential
use as it relates to the Celacade System.





Celacade in the
E.U.




Celacade
had received E.U. regulatory approval as a medical device under the CE
Mark.    As a result of our restructuring, we have
discontinued maintaining the infrastructure to support the quality systems
necessary to support the CE Mark.  The CE Mark was suspended on
November 1, 2008 and subsequent to year end we notified the appropriate
authority that they will not be able to conduct a recertification audit;
therefore the CE Mark was withdrawn.





During
2007, we entered into the Agreement with Ferrer to commercialize our Celacade
technology for the treatment of chronic heart failure in certain countries of
the E.U. and Latin America.  Based on a European sales forecast for
Celacade provided to us by Ferrer in the second quarter of 2008, we determined
that we could not financially justify maintaining an infrastructure to support
E.U. commercialization.  As a result, we restructured our
organization, which included a discontinuation of operational and financial
support for European commercialization.  We expect that the Agreement
with Ferrer will be terminated in fiscal 2009.  We do not expect the
termination of this agreement to trigger any penalties or fees.





VP
Series of Drugs Program




Our
VP series of drugs was being developed to target inflammation underlying certain
neurological conditions.  During the third quarter of 2008 and
following an extensive review of our VP series of drugs program, we announced a
significant reduction in activities and expenses associated with this program to
further reduce our cash burn rate as we continue to explore strategic
alternatives.




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.




13




MANUFACTURING




We
do not have any external or internal manufacturing capabilities and as part of
our restructuring, we no longer maintain the quality management systems are
necessary to support regulatory approvals for our products.




INTELLECTUAL
PROPERTY




In
the past, we filed patent applications to protect our products and processes.
Historically, our policy was to file patent applications to protect inventions,
technology, and improvements that were 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.  As part of our
restructuring plan, we have implemented certain processes with respect to our
intellectual property portfolio resulting in the abandonment of various patents
and patent applications.   Decisions to abandon certain patents
and patent applications were based on a qualitative assessments of numerous
factors including, but not limited to, our cash resources, development
timelines, evolving development plans for our products, evolving importance
placed on jurisdictions of lesser economic value, whether the intellectual
property was core to a current product or originally filed to protect potential
future or alternative versions of a current product, and the life of a patent
relative to the potential timeframe for commercialization.  As such,
we have abandoned a number of patents and patent applications and expect to
abandon further patents and patent applications in the foreseeable
future.





We
require our employees, consultants, members of the Scientific Advisory Board
(“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.




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.   While we are currently not undertaking the development
of any of our products, should we reinstate the development of our current
products, or develop other products, we cannot predict or give any assurances as
to whether the necessary regulatory approvals will be received or how long the
process of seeking regulatory approvals will take.




C.           Organizational
Structure




See
Item 4A above.




D.           Property,
Plant and Equipment




We
use the services offered by a virtual office space provider located at 4 Robert
Speck Parkway, 15th Floor,
Mississauga, Ontario, Canada L4Z 1S1.  In addition, Vasogen Ireland
Limited leases premises in Ireland totaling approximately 5,500 square feet. We
do not plan on renewing this lease, which expires on February 28, 2009. We
continually monitor our facility requirements in the context of our needs 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 18 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.




14




A.           Operating
Results




We
are a development-stage enterprise that has historically dedicated our cash
resources mainly to research and development (“R&D”)
activities.  Currently, we are primarily focused on exploring other
strategic opportunities including the sale of the Company, a merger or
acquisition, and exploring the monetization of certain tangible and intangible
assets. This process has also included a review of the potential out-licensing
of assets, asset divestiture, or liquidation of the Company.  Until
all our strategic options have been explored, we do not plan to incur material
expenditures to significantly advance our products.




Loss




The
loss for the years ended November 30, 2008, 2007, and 2006, is reflected in the
following table:




Loss
      (in thousands of dollars, except per-share amounts)
                  
                  2008
                  
                  
                  2007
                  
                  
                  Decrease
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  DecreaseLoss
                  
                  $
                  16,074
                  
                  
                  $
                  28,777
                  
                  
                  $
                  (12,703
                  )
                  
                  $
                  28,777
                  
                  
                  $
                  66,360
                  
                  
                  $
                  (37,583
                  )Basic
      and fully dilutedloss
      per share
                  
                  $
                  0.72
                  
                  
                  $
                  1.46
                  
                  
                  $
                  (0.74
                  )
                  
                  $
                  1.46
                  
                  
                  $
                  7.05
                  
                  
                  $
                  (5.59
                  )







The
loss for the year ended November 30, 2008 has decreased when compared with the
same period in 2007.  A key driver of this decrease was lower
compensation costs, reduced stock compensation expense, lower infrastructure and
other support costs driven by the significant reduction in employee numbers that
resulted from our two restructurings in 2008, and a decrease in the foreign
exchange loss that was incurred in the prior period. In addition, the decrease
was impacted by a reduction in expenses resulting from the repayment of the
senior convertible notes in April 2007.




The
loss for 2007 has decreased when compared with 2006.  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.  The loss for 2006 above does not
include any adjustment to reflect the adoption of the recommendations of CICA
Handbook Section 3855, “Financial Instruments - Recognition and Measurement”
("Section 3855”).  We adopted this amendment on a retroactive basis,
without restatement.




Research
and Development





The
changes in R&D expense, and their key components, for the years ended
November 30, 2008, 2007, and 2006, are reflected in the following
table:





R&D
      expense (in thousands of dollars, except percentages)
                  
                  2008
                  
                  
                  2007
                  
                  
                  Increase
                    (Decrease)
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  Increase
                    (Decrease)Program
      costs:Direct
                  
                  $
                  404
                  
                  
                  $
                  517
                  
                  
                  $
                  (113
                  )
                  
                  $
                  517
                  
                  
                  $
                  12,954
                  
                  
                  $
                  (12,437
                  )Indirect
                  
                  $
                  5,474
                  
                  
                  $
                  6,830
                  
                  
                  $
                  (1,356
                  )
                  
                  $
                  6,830
                  
                  
                  $
                  13,569
                  
                  
                  $
                  (6,739
                  )Preclinical
      costs
                  
                  $
                  2,138
                  
                  
                  $
                  3,097
                  
                  
                  $
                  (959
                  )
                  
                  $
                  3,097
                  
                  
                  $
                  3,392
                  
                  
                  $
                  (295
                  )Intellectual
      property costs
                  
                  $
                  767
                  
                  
                  $
                  1,459
                  
                  
                  $
                  (692
                  )
                  
                  $
                  1,459
                  
                  
                  $
                  2,256
                  
                  
                  $
                  (797
                  )Other
      costs
                  
                  $
                  11
                  
                  
                  $
                  136
                  
                  
                  $
                  (125
                  )
                  
                  $
                  136
                  
                  
                  $
                  561
                  
                  
                  $
                  (425
                  )Total
      R&D
                  
                  $
                  8,794
                  
                  
                  $
                  12,039
                  
                  
                  $
                  (3,245
                  )
                  
                  $
                  12,039
                  
                  
                  $
                  32,732
                  
                  
                  $
                  (20,693
                  )R&D
      expense as a percentage of the sum of R&D and General and
      Administration expense
                  
                  
                  52
                  %
                  
                  
                  46
                  %
                  
                  
                  6
                  %
                  
                  
                  46
                  %
                  
                  
                  63
                  %
                  
                  
                  (17
                  %)





15




The
majority of the decrease in our R&D expenses for 2008, when compared with
the same period in 2007, resulted from a significant reduction in research and
development activities as a result of our restructurings announced in April and
July of 2008, which have been partially offset by costs incurred to implement
these restructurings.  Restructuring costs for employees directly
involved in research and development for the year ended November 30, 2008 were
$2.1 million, compared with $0.7 million for the year ended November 30, 2007,
and compared with $0.1 million for the year ended November 30,
2006.  Restructuring costs consist of pay in lieu of notice, severance
payments, and outplacement counseling.  The majority of the decrease
in our R&D expenses for 2007, when compared with the same period in 2006,
resulted from a significant reduction in the clinical trial activities relating
to the completion of our phase III clinical trials.





Program
Costs





Program
costs consist of direct and indirect costs.  Direct costs to support
trials include expenses for clinical site fees, project management, study
monitoring, site close out, data management and analysis, and technology
support.  Indirect costs to support these programs consist of
compensation costs for employees who support the Celacade program, employee
termination costs, professional fees, and other support costs.




Program
costs have decreased in the year ended November 30, 2008 compared to the same
periods in 2007.  During 2008, prior to our restructuring, program
costs for Celacade were incurred for the preparation of initial commercial
launch of Celacade in Europe and for the planning of a study that was expected
to support an application for regulatory approval of Celacade in the United
States.  In addition to restructuring costs during the year ended
November 30, 2008, we incurred a $1.2 million non-cash provision taken against
our clinical supplies at the date of the April restructuring as we believe that
the value of our clinical supplies was not recoverable.   These
charges have been offset by reduced compensation costs and reduced stock
compensation expense for employees as a result of the
restructurings announced in April and July of 2008.  Employee stock
options, which were being expensed for the year ended November 30, 2007, are no
longer being expensed as the unvested options were forfeited upon termination of
employees in accordance with our Stock Option Plan.




For
2007, program 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.




A
summary of our past programs, on which expenses were incurred during the years
ended November 30, 2008, 2007, and 2006 is provided below.




Celacade
Program





Our
Celacade System was being developed to target the inflammation underlying
chronic heart failure.





During
2008, we had ongoing communications with the FDA regarding the use of a Bayesian
approach for ACCLAIM II, a study that was intended to support a U.S. Pre-Market
Approval filing for Celacade for NYHA Class II heart failure
patients.  We are not planning any additional communications with the
FDA regarding the design of ACCLAIM II pending the outcome of our current
strategic review process.





Subsequent
to November 30, 2008 we entered into an agreement to sell a United States patent
application and its related foreign counterparts for US$0.4 million. This
device-based intellectual property has not been used to date in the Celacade
System; however, we have retained rights to this technology for any potential
use as it relates to the Celacade System.





Celacade
in the E.U.




Celacade
had received E.U. regulatory approval as a medical device under the CE
Mark.    As a result of our restructuring, we have
discontinued maintaining the infrastructure to support the quality systems
necessary to support the CE Mark.  The CE Mark was suspended on
November 1, 2008 and subsequent to year end we notified the appropriate
authority that they will not be able to conduct a recertification audit;
therefore the CE Mark was withdrawn.




16




During
2007, we entered into the Agreement with Ferrer to commercialize our Celacade
technology for the treatment of chronic heart failure in certain countries of
the E.U. and Latin America.  Based on a European sales forecast for
Celacade provided to us by Ferrer in the second quarter of 2008, we determined
that we could not financially justify maintaining an infrastructure to support
E.U. commercialization.  As a result, we restructured our
organization, which included a discontinuation of operational and financial
support for European commercialization.  We expect that the Agreement
with Ferrer will be terminated in fiscal 2009. We do not expect the termination
of this agreement to trigger any penalties or fees.





VP
Series of Drugs Program




Our
VP series of drugs was being developed to target inflammation underlying certain
neurological conditions.  During the third quarter of 2008 and
following an extensive review of our VP series of drugs program, we announced a
significant reduction in activities and expenses associated with this program to
further reduce our cash burn rate as we continue to explore strategic
alternatives.




Preclinical
Costs




Our
preclinical research programs were focused on developing our VP series of drugs
and on supporting our Celacade program.




Preclinical
expenses consist of salaries and benefits for employees who support the
preclinical activities, employee termination costs, costs to the medical
institutions to whom our research is outsourced, professional fees, and other
support costs.  During 2008, preclinical costs were incurred, prior to
our restructuring, for work related to optimizing the manufacturability of VP025
and the VP series of drugs.  Preclinical costs for the year ended
November 30, 2008 have decreased when compared with the costs for the same
periods in 2007 as lower costs for work related to optimizing the
manufacturability of VP025 and the VP series of drugs have been partially offset
by restructurings costs.  Preclinical costs for 2007 were lower when
compared to 2006, given a reduction in our preclinical activities in the prior
year.




Intellectual
Property Costs




Our
research and development initiatives have resulted in the filing of numerous
patent applications.  We own patents and patent applications relating
to our products and technologies in the United States and other jurisdictions
around the world.  Our intellectual property (“IP”) expenses 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 filing international patent
applications, 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 the year ended November 30, 2008 have
decreased when compared with the costs for the same period in
2007.  The reduced patent costs are largely due to a combination of a
greater proportion of the patent prosecution work being done in-house, patent
applications maturing to patents, and implementing certain decisions with
respect to our intellectual property portfolio resulting in the abandonment of
various patents and patent applications.   These decisions were
based on a qualitative assessments of numerous factors including, but not
limited to, our cash resources, development timelines, evolving development
plans for our products, evolving importance placed on jurisdictions of lesser
economic value, whether the IP was core to a current product or originally filed
to protect potential future or alternative versions of a current product, and
the life of a patent relative to the potential timeframe for commercialization.
The costs for 2007 are lower than the costs for the same period in 2006 due to a
greater proportion of the patent prosecution work being done in-house and patent
applications maturing to patents.




General
and Administration




The
changes in general and administration expense, and their key components, for the
years ended November 30, 2008, 2007, and 2006, are reflected in the following
table:





17


General
      and Administration expense (in thousands of dollars)
                  
                  2008
                  
                  
                  2007
                  
                  
                  Increase
                    (Decrease)
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  Increase
                    (Decrease)Infrastructure
      and other support costs
                  
                  $
                  6,086
                  
                  
                  $
                  11,803
                  
                  
                  $
                  (5,717
                  )
                  
                  $
                  11,803
                  
                  
                  $
                  16,563
                  
                  
                  $
                  (4,760
                  )Insurance
                  
                  $
                  724
                  
                  
                  $
                  1,131
                  
                  
                  $
                  (407
                  )
                  
                  $
                  1,131
                  
                  
                  $
                  1,660
                  
                  
                  $
                  (529
                  )Professional
      fees
                  
                  $
                  1,288
                  
                  
                  $
                  1,325
                  
                  
                  $
                  (37
                  )
                  
                  $
                  1,325
                  
                  
                  $
                  1,028
                  
                  
                  $
                  297Total
      General and Administration expense
                  
                  $
                  8,098
                  
                  
                  $
                  14,259
                  
                  
                  $
                  (6,161
                  )
                  
                  $
                  14,259
                  
                  
                  $
                  19,251
                  
                  
                  $
                  (4,992
                  )





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 have decreased for the year ended November 30, 2008 when compared to
the same periods in 2007, as a result of lower restructuring costs, reduced
stock compensation expense, and a reduced level of activity required to support
the current operations. Restructuring costs included in General and
Administration expense for the year ended November 30, 2008 were $1.0 million
compared with restructuring costs of $2.6 million for the year ended November
30, 2007.  In addition, we had a reduced stock compensation expense
for employees as a result of terminations.  These
employee stock options, which were expensed for the year ended November 30,
2007, are no longer being expensed as the unvested options were forfeited upon
termination of employees in accordance with our Stock Option
Plan.  The cost reduction is also driven by the decrease in full-time
employees to six as at November 30, 2008.  There were 104 full-time
employees as at November 30, 2007.  Infrastructure and other support
costs have decreased in 2007 when compared to 2006, 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.




Insurance
costs decreased in the year ended November 30, 2008 when compared to the same
periods in 2007, as a result of market conditions at renewal and a reduction in
liability insurance for our directors and officers, both of which impacted our
insurance premiums on renewal.  The total amount of the insurance
coverage provided to our directors and officers decreased to US$20.0 million
from US$25.0 million.  Insurance costs decreased in 2007 when compared
to 2006, as a result of market conditions that impacted our insurance
premiums.




Professional
fees, which include expenses for legal, tax, accounting, and other specialized
services, incurred during the year ended November 30, 2008 and are comparable to
the same periods in 2007.  Accounting costs have decreased during the
year ended November 30, 2008 from the same periods in 2007 as estimated costs
for the 2008 year-end audit are less than the prior period as we will not
require a Sarbanes-Oxley audit opinion on the effectiveness of internal control
for 2008 due to the fact that our market capitalization was below US$50 million
on May 31, 2008, which is the test date for determining our filer status on
November 30, 2008. This was offset by an increase in legal costs increased
during the year ended November 30, 2008 compared to the same periods in 2007
mainly as a result of costs associated with the ongoing strategic
review.  Professional fees increased in the year ended November 30,
2007 when compared to the same periods in 2006, as we had additional costs for
the 2007 year-end audit as we required a Sarbanes-Oxley audit opinion on the
effectiveness of internal control for 2007.




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)
              
              2008
              
              
              2007
              
              
              Increase
              
              
              2007
              
              
              2006
              
              
              IncreaseForeign
      exchange (gain) loss
              
              $
              (0.3
              )
              
              $
              2.0
              
              
              $
              (2.3
              )
              
              $
              2.0
              
              
              $
              0.1
              
              
              $
              1.9




18




We
are holding U.S. dollars directly to make payments for operating expenses
denominated in U.S. dollars. At November 30, 2008, we held U.S. dollar
denominated securities in the amount of US$740 thousand (see “Liquidity and
Capital Resources” section).  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 our U.S. dollar denominated expenses.





Our
statement of operations includes a foreign exchange gain for the year ended
November 30, 2008 that arose as a result of the weakening 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, 2008, and 2007 were 1.237, and 1.000,
respectively.  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, and 2006 were 1.000, and 1.1422,
respectively.





Investment
Income




Investment
income for the years ended November 30, 2008, 2007, and 2006, is reflected in
the following table:





Investment
      Income
                      (in
      thousands of dollars)
                    
                    2008
                    
                    
                    2007
                    
                    
                    Decrease
                    
                    
                    2007
                    
                    
                    2006
                    
                    
                    DecreaseInvestment
      income
                    
                    $
                    513
                    
                    
                    $
                    1,310
                    
                    
                    $
                    (797
                    )
                    
                    $
                    1,310
                    
                    
                    $
                    1,971
                    
                    
                    $
                    (661
                    )





Investment
income for 2008 was lower when compared with 2007 primarily as a result of a
lower average amount of cash and cash equivalents and lower rates of returns on
our investments.  Investment income for 2007 was lower when compared
with 2006, primarily due to a decline in the average amount of cash and cash
equivalents, available for sale securities, and restricted cash on
hand.





Other
expenses




Other
expenses for the years ended November 30, 2008, 2007, and 2006, are reflected in
the following table:





Other
      expense
                              (in
      thousands of dollars)
                            
                            2008
                            
                            
                            2007
                            
                            
                            Increase
                              (Decrease)
                            
                            
                            2007
                            
                            
                            2006
                            
                            
                            DecreaseInterest
      expense on senior convertible notes payable
                            
                            $
                            0.0
                            
                            
                            $
                            5
                            
                            
                            $
                            (5
                            )
                            
                            $
                            5
                            
                            
                            $
                            930
                            
                            
                            $
                            (925
                            )Accretion
      of the carrying value of senior convertible notes payable
                            
                            $
                            0.0
                            
                            
                            $
                            728
                            
                            
                            $
                            (728
                            )
                            
                            $
                            728
                            
                            
                            $
                            7,824
                            
                            
                            $
                            (7,096
                            )Amortization
      of deferred financing costs
                            
                            $
                            0.0
                            
                            
                            $
                            154
                            
                            
                            $
                            (154
                            )
                            
                            $
                            154
                            
                            
                            $
                            2,495
                            
                            
                            $
                            (2,341
                            )Loss
      on debt extinguishment
                            
                            $
                            0.0
                            
                            
                            $
                            1,754
                            
                            
                            $
                            (1,754
                            )
                            
                            $
                            1,754
                            
                            
                            $
                            4,995
                            
                            
                            $
                            (3,241
                            )Change
      in fair value of embedded derivatives
                            
                            $
                            0.0
                            
                            
                            $
                            (829
                            )
                            
                            $
                            829
                            
                            
                            $
                            (829
                            )
                            
                            $
                            0.0
                            
                            
                            $
                            (829
                            )Total
                            
                            $
                            0.0
                            
                            
                            $
                            1,812
                            
                            
                            $
                            (1,812
                            )
                            
                            $
                            1,812
                            
                            
                            $
                            16,244
                            
                            
                            $
                            (14,432
                            )





We
had no other expenses for the year ended November 30,2008, when compared to
the same periods in 2007, as a result of the outstanding balance of the senior
convertible notes being fully repaid during the second quarter of
2007.  Other expenses associated with the senior convertible notes
were primarily non-cash expenses.


These
expenses are lower for 2007, when compared to the same period in 2006, as a
result of the outstanding balance of the senior convertible notes being fully
repaid as at May 31, 2007. These notes were outstanding throughout fiscal
2006.  As a result of adopting Handbook Section 3855, “Financial
Instruments - Recognition and Measurement”, the Company allocated gross proceeds
received from the issuance of the senior convertible notes between the debt, the
conversion option, warrants, and the identified embedded
derivatives.  These embedded derivatives were measured at fair market
value at each reporting date and changes in fair market value are recognized in
the statements of operations and deficit.




19




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.  Other than interest on our investments, we did not
receive funds from any of these activities during the year ended November 30,
2008. During the year ended November 30, 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.   During the year ended
November 30, 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.  These financings triggered the anti-dilution adjustments
contained in the senior convertible notes and warrants that were issued on
October 7, 2005.




Our
common shares are traded on both the Toronto Stock Exchange and the NASDAQ
Capital Market.  On April 24, 2008, we received a letter from the
Listing Qualifications Department of The NASDAQ Stock Market indicating that the
minimum closing bid price of our common stock had fallen below US$1.00 for 30
consecutive trading days, and therefore, we were not in compliance with
Marketplace Rule 4310(c)(4) (the “Minimum Bid Price Rule”). In accordance with
the NASDAQ Marketplace Rule 4310(c)(8)(D), we were provided a compliance period
of 180 calendar days, or until October 21, 2008, to regain compliance with this
requirement. In October 2008 the NASDAQ Stock Market suspended the enforcement
of the Minimum Bid Price Rule requiring a minimum US$1 closing price until
January 20, 2009. The suspension was to remain in effect through January 19,
2009 and the original rules were to be reinstated on January 20,
2009.  Subsequently, on December 9, 2008, the Nasdaq extended this
suspension. Accordingly, the NASDAQ indicated that it will not take action to
delist any security, including our common shares, for a violation of the minimum
bid price rule during the suspension, which has now been extended until April
20, 2009.  If we are unable to comply with the Minimum Bid Price Rule
by April 20, 2009, but we meet the NASDAQ Capital Market’s initial listing
criteria, other than the initial listing bid price requirement, the NASDAQ will
provide us an additional 180 calendar days to meet the minimum bid price
requirement.  Currently, irrespective of the minimum bid price
requirement, we do not meet the initial listing criteria of the NASDAQ Capital
Market.  Given our recent share price of US$0.15 as
of  February 24, 2009, it is very unlikely that we will be in
compliance with the NASDAQ’s minimum closing bid price by April 20,
2009.  If we receive another notice from the NASDAQ that our shares
are subject to delisting from the NASDAQ Capital Market, we may request a
hearing before a NASDAQ Listing Qualifications Panel to review the NASDAQ’s
determination.  A hearing request will stay the delisting of our
common shares, pending the decision of the Panel, allowing our common shares to
continue to be listed on the NASDAQ Capital Market.  We expect that
any discussions with the NASDAQ regarding our plans for regaining compliance
will be impacted by the strategic initiatives that we are currently exploring,
but there can be no assurance that the Panel will grant a request for continued
listing on the NASDAQ Capital Market.  If we do not request a hearing,
our common shares could be delisted from the NASDAQ Capital Market.




If
our common shares are delisted from the NASDAQ Capital Market, it will likely
materially impair our ability to obtain financing in the future.




As
at November 30, 2008, the total number of common shares outstanding was 22.4
million.  The number of employee stock options outstanding at November
30, 2008 is 1.0 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, 2008 is 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.  All outstanding options and warrants are currently out of
the money.  The weighted average exercise price of the outstanding
options is $11.61, while the exercise prices of the warrants range from US$3.16
to US$14.05.




20




As
at February 25, 2009, we have 22.5 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.




From
November 30, 2008 to the date of this annual report, no options to purchase our
common shares were granted, no options to purchase our common shares were
exercised, 68,961options to purchase our common shares expired, and no options
to purchase our common shares were cancelled.  From November 30, 2008
to the date of this annual report, 67,377 deferred share units to purchase our
common shares were granted, 95,019 deferred share units to purchase our common
shares were exercised, and 2,693 deferred share units to purchase our common
shares were cancelled.





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.




At
November 30, 2008, our cash and cash equivalents totaled $8.6 million, compared
with $23.5 million at November 30, 2007.  The decrease is a result of
the cash used in operations during the year ended November 30,
2008.  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 by
major Canadian governments or 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, 2008, we held U.S. dollar denominated
securities in the amount of US$740 thousand.  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 U.S. dollar denominated
expenses.    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.  This forward contract matured in December 2007.




Our
net cash used in operating activities for 2008, was $15.2 million, compared with
$25.8 million and $64.4 million for 2007 and 2006, respectively.  Our
net cash used in operations included restructuring costs for the year ended
November 30, 2008 of $3.1 million compared with $2.9 million, for
the  year ended November 30, 2007, respectively.




Our
ability to continue as a going concern is completely dependent upon our ability
to identify and complete a sale, merger, acquisition, or alternative strategic
transaction and/or secure additional funds.  Potential sources of
capital are limited but may include equity or debt financings, or payments from
potential strategic partners, as well as other financing
opportunities.  The availability of financing will be affected by a
sale, merger, acquisition, or alternative strategic transaction, the state of
the economy and capital markets generally (including with reference to
biotechnology companies), the liquidity of our common shares and the status of
our listing on the NASDAQ market and the TSX, strategic alliance agreements, and
other relevant commercial considerations. The current economic conditions may
make the availability of debt or equity financing scarce.  Our cash
outflows are currently expected to consist primarily of payroll costs,
insurance, public company expenses, and potential expenses related to the
outcome of the ongoing strategic review process.  This disclosure
regarding our ability to continue as a going concern is included in Note 1 to
our financial statements for the year ended November 30, 2008.  If we
cannot complete a, sale, merger, acquisition, or alternative strategic
transaction, secure additional financing, or if we cannot secure additional
financing on terms that would be acceptable to us, we will have to consider
other possibilities which may include, seeking to out-license assets, potential
asset divestitures, winding up, dissolution, or liquidation of the
Company.





21




C.           Research
and development, patents, and licenses, etc.




We
expense R&D costs.  The majority of our research was 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.




Prior
to implementation of our strategic restructuring plan on April 14, 2008, the
costs of our prepaid clinical supplies were capitalized, on the basis that these
supplies have future alternative uses related to the various clinical
applications of our Celacade technology, and were expensed as they are shipped
to outsourced research centers or clinical sites.




Our
ability to recover the carrying value of our clinical supplies was 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 our analysis, we believe that, as a
result of our restructuring during the second quarter, the value of our clinical
supplies is not recoverable, so such supplies were expensed at the date of the
April restructuring.




For
the three fiscal years ended November 30, 2008, 2007, and 2006, we spent a total
of $8.8 million, $12.0 million, and $32.7 million, respectively, on research and
development.  At the present time, we have significantly reduced
R&D expenditures pending the outcome of our ongoing strategic review
process.  Over the past three fiscal years, we have raised
approximately $36.8 million in net proceeds from the issuance of debt and equity
securities to investors.




D.           Trend
Information




It
is important to note that historical patterns of expenses cannot be taken as an
indication of future expenses.  The amount and timing of expenses 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, 2008:







Loss
      for the period(000’s)
                                                            
                                                            
                                                            Basic
      and dilutedloss per
      share
                                                            
                                                            
                                                            Foreign
      exchangegain/(loss)
      (000’s)November
      30, 2008
                                                            
                                                            $
                                                            (750
                                                            )
                                                            
                                                            $
                                                            (0.03
                                                            )
                                                            
                                                            $
                                                            111August
      31, 2008
                                                            
                                                            $
                                                            (2,586
                                                            )
                                                            
                                                            $
                                                            (0.12
                                                            )
                                                            
                                                            $
                                                            59May
      31, 2008
                                                            
                                                            $
                                                            (7,418
                                                            )
                                                            
                                                            $
                                                            (0.33
                                                            )
                                                            
                                                            $
                                                            338February
      29, 2008
                                                            
                                                            $
                                                            (5,320
                                                            )
                                                            
                                                            $
                                                            (0.24
                                                            )
                                                            
                                                            $
                                                            (203
                                                            )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
                                                            )
                                                            
                                                            $
                                                            134





R&D
and general and administration expense for the fourth quarter were $0.9 million,
compared with $2.7 million in the third quarter.  The loss in the
fourth quarter of 2008 has decreased compared to the loss in the third quarter
of 2008 and the fourth quarter of 2007 as a result of reduced operating costs
resulting from our two restructurings.  During the third quarter of
2008, as a result of our restructuring announced on July 3, 2008, we incurred
restructuring costs of $0.8 million. No such costs were incurred during the
fourth quarter of 2008.




The
loss in the third quarter of 2008 was less than the loss in the second quarter
of 2008 as a result of restructuring costs and the non-cash provision taken
against our clinical supplies, which were expensed during the second quarter as
a result of our restructuring (announced on April 14, 2008). R&D and general
and administration expense for the third quarter was $2.7 million, compared with
$7.8 million in the second quarter.




22




Prior
to the restructuring that occurred in the second quarter of 2008, our R&D
and general and administration expenses for the previous three quarters had been
comparable; therefore, changes to our losses for the period had been impacted by
foreign exchange losses and interest income.  The higher quarterly
losses in the first and second quarter of 2007 were driven by expenses
associated with the senior convertible notes which are discussed in greater
detail elsewhere in this document. The loss in the second quarter of 2007 was
higher as a result of restructuring costs, which were expensed during that
period. The operations of our Company are not subject to any material
seasonality or cyclicality factors.




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, 2008 are as follows:




Contractual
      Obligations
                  (in
      thousands of dollars)
                
                Total
                
                
                Less
      than 1 year
                
                1
      - 3 years
                4
      - 5 years
                More
      than 5 yearsOperating
      lease obligations
                
                $
                92
                
                
                $
                92
                
                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.




G.           
Safe Harbor




Certain
statements contained in this annual report and in certain documents incorporated
by reference herein and therein may constitute “forward-looking statements”
within the meaning of the United States Private Securities Litigation Reform Act
of 1995 and/or “forward-looking information” under the Securities Act (Ontario).
These statements may include, without limitation, plans to consider a sale,
merger, acquisition, or other strategic alternatives resulting from our
strategic review, statements regarding the status of development, or
expenditures relating to the Celacade System or our VP series of drugs,
including VP015 and VP025, plans to fund our current activities, statements
concerning our partnering activities, health regulatory submissions, strategy,
future operations, future financial position, future revenues and projected
costs.  In some cases, you can identify forward-looking statements by
terminology such as “may”, “will”, “should”, “expects”, “plans”, “anticipates”,
“believes”, “estimated”, “predicts”, “potential”, “continue”, “intends”,
“could”, or the negative of such terms or other comparable terminology. A number
of assumptions were made by us in the preparation of these forward-looking
statements.  You should not place undue reliance on our
forward-looking statements which are subject to a multitude of risks and
uncertainties that could cause actual results, future circumstances, or events
to differ materially from those projected in the forward-looking statements.
These risks include, but are not limited to, the outcome of our strategic
review, securing and maintaining corporate alliances, the need for additional
capital and the effect of capital market conditions and other factors, including
the current status of our programs, on capital availability, the potential
dilutive effects of any financing and other risks detailed from time to time in
our public disclosure documents or other filings with the Canadian and U.S.
securities commissions or other securities regulatory bodies.  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.




23







Item
6.                      Directors,
Senior Management and Employees




A.           Directors
and Senior Management





DIRECTORS
AND OFFICERS





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




Name
      and Residence(1)
                          Position
      with the Company and Principal Occupation for the last five
      years
                          Other
      Public Company Boards
                          Director/Officer
      SinceTerrance
      H. Gregg(2),(4),(5)
                            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.
                          September
      1999David
      G. Elsley(2),(3),
      (5)
                            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
      1991Dr.
      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(4)
                            London,
      Ontario, Canada
                          Director
      of the Company.  Dr. Stiller is the former Chairman and Chief
      Executive Officer of Canadian Medical Discoveries Fund
Inc.
                          None
                          January
      2006John
      C. Villforth(2),(4)
                            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
      1997Graham
      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
      2007





Notes:


1.
            The
      Company does not have an executive committee of the Board of
      Directors.


2.
            Member
      of the Audit Committee of the Board of
  Directors.


3.
            Mr.
      Elsley was appointed to fill a vacancy on the audit committee resulting
      from the resignation of Mr. Clarke effective December 31,
      2008.   In compliance with applicable Canadian securities
      law requirements, a director appointed to fill a vacancy on the Audit
      Committee need not be considered
independent.


4.
            Member
      of the Compensation, Nominating, and Corporate Governance Committee of the
      Board of Directors.


5.
            Member
      of the Special Committee of the Board with respect to the Company’s
      strategic review process.





24





As
of November 30, 2008, the directors and executive officers of the Company as a
group beneficially own, directly or indirectly, or exercise control or direction
over 479,447 common shares (Directors’ Deferred Share Units included),
representing approximately 2.14% of the issued common shares of the
Company.




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. This action has been dismissed.




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.





SCIENTIFIC
ADVISORY BOARD




As
part of our restructuring during 2008, we disbanded our SAB. Members of the SAB
were entitled to an annual honorarium and reimbursement for their reasonable
out-of-pocket expenses incurred in connection with our business. Members were
also eligible to receive stock options. Members of the SAB through their
affiliation with universities, hospitals, and other centers of biomedical
research may have, from time to time, collaborated on or directed independent
basic research, preclinical studies, and/or feasibility clinical trials
involving our technologies and received, in connection therewith, professional
fees at market rates.




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




B.           Compensation




Director
Compensation




During
2008, directors of Vasogen who were not full-time employees of Vasogen 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 Board also holds regular update
calls with management.   From time to time these calls have
formal agendas and, if so, a fee of $500 is paid.  The Chairman of the
Board and 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 $15,000, $15,000, and $10,000,
respectively.  The annual retainer and applicable meeting fees are all
paid in deferred share units.  Directors are also entitled to be
reimbursed for their reasonable and documented out-of-pocket expenses incurred
on the business of Vasogen.




Effective
January 1, 2004, the Company established a plan to grant deferred share units
("DSU’s") to its non-management directors.  On March 25, 2008, the
Company's shareholders approved an increase in the maximum number of common
shares issuable under the DSU plan to 625,000.  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
DSU’s 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 DSU’s 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.




During
fiscal 2008, the Company issued a total of 346,852 DSU’s to directors in respect
of aggregate fees of $0.2 million.




25




Directors
of the Company are also eligible to be granted stock options.  During
fiscal 2008, non-management directors of the Company, other than the Chairman of
the Board, were awarded options to acquire 15,000 common shares of the Company
each, and the Chairman of the Board was awarded options to acquire 25,000 common
shares of the Company. During 2008, options to acquire 85,000 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 2008, as well as the
individuals who were, as at November 30, 2008 the three other most highly
compensated executive officers of the Company (“Named Executive
Officers”).




2008
Summary Compensation Table




Annual
      Compensation
                    Long-Term
      CompensationAwards
                    PayoutsSecurities
                    SharesName and PrincipalPosition
                    Year
                    Salary($)
                    Bonus($)
                    Other
                      Annual
                      Compensation(1)($)
                    UnderOptions/
                      SARs(2)
                      Granted(#)
                    Or UnitsSubject
      to
                      Resale
                      Restrictions

                          ($)
                    LTIP
                      Payouts
                      ($)
                    All Other Compen­sation
      ($)Chris Waddick(3)(4)
                      (President &
      CEO)
                    2008
                    330,000
                    82,500
                    45,000(4)
                    152,308
                    -
                    -
                    -2007
                    302,222
                    165,000
                    45 000(4)
                    200,0002006
                    280,000
                    85,050
                    45,000(4)
                    39,266Graham Neil47)
                      (VP of Finance &
      CFO)
                    2008
                    155,000
                    31,000
                    -
                    44,712
                    -
                    -
                    -2007
                    139,765
                    58,125
                    
                    -2006
                    122,834
                    18,288
                    
                    10,487Dr. Eldon
      Smith
                      (Senior VP,
      Scientific
                      Affairs)2008
                    157,500
                    31,500
                    -
                    69,692
                    -
                    -
                    -2007
                    226,500
                    90,600
                    
                    10,0002006
                    226,500
                    54,360
                    
                    20,996




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.




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.
      Neil became the Vice President of Finance and CFO on July 10,
      2007.




26





Employment
Contracts




The
employment agreement with Christopher Waddick was terminated effective March 1,
2009.  The Company subsequently entered into a consulting agreement to
retain the services of  Mr. Waddick as the Company’s President and CEO
at a significantly reduced compensation.  The agreement provides for a
base monthly retainer of $15,650 and is terminable at the option of the
Company.





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.  This 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.  The agreement contains standard non-competition and
non-solicitation provisions. The agreement also contains change-of-control
provisions resulting in the triggering of the standard severance provisions of
the agreement in the event that a change-of-control transaction takes
place.




The
Company entered into an agreement with Eldon R. Smith & Associates Ltd. as
of June 01, 2008. Pursuant to this agreement, Eldon R. Smith & Associates
Ltd. provides the services of Eldon Smith as the Company’s Senior Vice
President, Scientific Affairs. The agreement provides for an annual remuneration
of $90,000.   This 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 12 months of his annual
remuneration.




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




Annual
Bonus




Prior
to the beginning of each fiscal year, the Board approves annual corporate
objectives, and these, along with personal performance objectives, are reviewed
at the end of the year for the purpose of determining annual
bonuses.  Annual assessments of senior management also evaluate other
performance measures, including the promotion of teamwork, leadership, and the
development of individuals responsible to the applicable officer. The CEO’s
annual bonus is weighted 100% on the achievement of corporate objectives, and
the annual bonus of the other executive officers is weighted 75% on the
achievement of corporate objectives and 25% on the achievement of individual
objectives.  The maximum bonus percentage payable to executive
officers ranges from 40% to 50%.




C.           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 comprises two
independent directors and one director who is not considered independent as
defined under applicable Canadian securities law requirements and in Nasdaq
Marketplace Rule 4200(a)(15).  John Villforth and Terrance Gregg are
considered independent.  David Elsley is not considered independent
under applicable Canadian securities law requirements, but his appointment does
comply with an exception to the independence requirement as he was appointed to
fill a vacancy left by the resignation of Mr. Clarke.  Further, he is
not considered independent under the Nasdaq rules, but he does satisfy the
independence criteria of Rule 10A - 3(b)(1) under the Securities Exchange Act of
1934, as amended (the “Exchange Act”).





27




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).  Mr. Villforth joined Vasogen’s Board of Directors in
2001.





Mr.
Gregg is the President and Chief Executive Officer of DexCom Inc. In 2002, he
retired as President of Medtronic MiniMed, a world leader in diabetes management
systems.  He became President and Chief Operating Officer of MiniMed,
Inc. in 1996 and was instrumental in Medtronic’s US $3.4 billion acquisition of
MiniMed in 2001. He also served in executive positions with Smith & Nephew
and Allergan Inc. Between March and June, 2007, he served as the interim Chief
Executive Officer of Vasogen. Mr. Gregg joined Vasogen’s Board in
1999.





Mr.
Elsley is currently a consultant.  He was the President and Chief
Executive Officer of Vasogen from 1994 through 2007. In that role, he was
responsible for the scientific, clinical, and commercial development of
Vasogen’s Celacade technology.  Mr. Elsley holds a Master of Business
Administration from the Richard Ivey School of Business, University of Western
Ontario.  Mr. Elsley joined Vasogen’s Board in 1991.





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".  Additionally, under
Nasdaq Marketplace Rule 4350(d)(2)(A), the Nasdaq requires that one member of
the audit committee be financially sophisticated, meaning that they must have
"past employment experience in finance or accounting, requisite professional
certification in accounting, or any other comparable experience or background
which results in the individual's financial sophistication, including being or
having been a chief executive officer, chief financial officer, or other senior
officer with financial oversight responsibilities."  The Board has
determined that both Mr. Elsley and Mr. Gregg qualify as audit committee
financial experts under the SEC rules and as financially sophisticated under the
Nasdaq rules.





Nasdaq
Marketplace Rule 4350(c)(1) requires that the Board must comprise a majority of
independent directors.  Nasdaq Marketplace Rule 4350(d)(2)(A) requires
that each of the members of the Audit Committee be independent and requires that
no member of the Audit Committee has participated in the preparation of
Vasogen’s financial statements during the last three years.  Nasdaq
Marketplace Rule 4350(a)(1) allows a foreign private issuer like Vasogen to
follow home country practice in lieu of this Nasdaq requirement, as long as the
company discloses in its annual reports filed with the SEC or on its website
that it does not follow the requirement and describes the home country practice
that it follows in lieu of the Nasdaq requirement.





Under
the applicable requirements under Canadian securities laws, Vasogen’s Board is
not required to have a majority of independent
directors.  Additionally, with regard to audit committee requirements
in Canada, National Instrument 52-110, Audit Committees (the “Instrument”)
requires that, except in certain limited circumstances, a company’s audit
committee must comprise at least three directors, each of whom must be
independent.  However, Section 3.5 of the Instrument further provides
that if the resignation of an audit committee member results in a vacancy on the
audit committee that the board of directors is required to fill, an audit
committee member appointed to fill such vacancy is exempt from the requirements
of independence for a period ending on the later of (a) the next annual meeting
of the issuer, and (b) the date that is six months from the date the vacancy was
created.  In compliance with these Canadian requirements, the Board
appointed Mr. Elsley to fill the vacancy on the Audit Committee created by the
resignation of Mr. Thomas Clarke from the Board effective December 31,
2008.





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 Audit
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 Audit Committee has the authority to
independently retain special legal, accounting, or other consultants to advise
it.





28




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 Canadian and United States generally accepted accounting
principles, their judgments as to the quality, not just the acceptability, of
the Company’s accounting principles and such other matters as are required to be
discussed with the Audit Committee under Canadian and United States generally
accepted auditing standards. In addition, the Audit Committee has discussed with
the independent auditor the auditor’s independence from management and the
Company including the matters in the written disclosures provided to the Audit
Committee by the independent auditor and considered the compatibility of
non-audit services with the auditor’s independence.





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





The
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;
and




•
            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.




29




b.  Canadian
& International Planning Services


•
            Advice
      with respect to cross-border/transfer pricing tax
  issues;




•
            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:


•
            Bookkeeping
      or other services related to the preparation of accounting records or
      financial statements;


•
            Financial
      information systems design and
implementation;


•
            Appraisal
      or valuation services for financial reporting
  purposes;


•
            Actuarial
      services for items recorded in the financial
  statements;


•
            Internal
      audit outsourcing services;


•
            Management
      functions;


•
            Human
      resources;


•
            Certain
      corporate finance and other
services;


•
            Legal
      services; and


•
            Certain
      expert services unrelated to the
audit.





The
Audit Committee also discusses 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 12-month period ended November 30,
2008.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, 2008 for filing
with the Canadian provincial securities commissions and the United States
Securities and Exchange Commission.





The
charter of the Audit Committee can be found the Company’s website at
www.vasogen.com.




Report
submitted by the Audit Committee




David
G.
Elsley                                           Terrance
H.
Gregg                                           John
C. Villforth





30




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 CEO), succession planning, and corporate governance practices. As
appropriate, recommendations regarding these issues are made to the Board of
Directors (the “Board”).   The Board did not reject or modify in
any material way any of the recommendations of the Committee during the
financial year ended November 30, 2008. The Committee consists of John
Villforth, Terrance Gregg, and Calvin Stiller, each of whom is an independent
and unrelated director.  Mr. Gregg is also the Chairman of the
Board.  The CEO does not participate in voting on his
compensation.





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


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





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





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




D.           Employees




The
number of full-time employees as of November 30 of each of last three fiscal
years is as follows:




2008
                        2007
                        2006Number
      of Employees
                        6
                        104
                        125





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




E.           Share
Ownership




The
following table states the names of the directors and officers of the Company,
the positions within the Company now held by them, and the approximate number of
shares of the Company beneficially owned or over which control or direction is
exercised by each of them as of February 5, 2009.  The following table
includes DSU’s, but does not reflect shares that may be acquired pursuant to the
exercise of stock options.




Name
                                            Position
      with the Company
                                            Number
      of Shares OwnedTerrance
      H. Gregg (1)
                                            Chairman
      of the Board and Director of the Company
                                            99,203David
      G. Elsley
                                            Director
      of the Company
                                            97,640Dr.
      Eldon R. Smith
                                            Senior
      Vice President, Scientific Affairs and Director of the
    Company
                                            7,131Dr.
      Calvin R. Stiller
                                            Director
      of the Company
                                            74,363John
      C. Villforth
                                            Director
      of the Company
                                            108,417Christopher
      J. Waddick
                                            President
      and Chief Executive Officer and Director of the Company
                                            48,026Graham
      D. Neil
                                            Vice
      President, Finance and Chief Financial Officer of the
    Company
                                            190
  31





As
of February 5, 2009, the directors and executive officers of the Company as a
group beneficially owned, directly or indirectly, or exercised control or
direction over 434,970common shares (DSU’s
included), representing approximately 1.9% of the issued common shares of the
Company.




(1)
The number of common shares for Mr. Gregg includes shares owned by 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.




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 original
stock option plan (the "Original Plan").  All grants of options
after May 2003 are made from the new plans and no further option grants will be
made under the Original Plan.




On
March 25, 2008, the Company's shareholders approved an increase in the maximum
number of common shares issuable under the 2003 Employee Plan to 12% of the
issued and outstanding common shares of the Company from time to time, or
2,690,966, based on the number of issued and outstanding common shares as at
November 30, 2008.  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, 2008.  On March 25, 2008, the Company's shareholders
approved an increase in the maximum number of common shares issuable under the
2003 Director Plan to 300,000.




Individuals
who are eligible to participate in the 2003 Plan are employees, officers,
consultants, and members of the 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.




32




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.




Item
7.    Major Shareholders and Related Party
Transactions




A.           
Major Shareholders




Based
on U.S. securities regulatory filings with the Securities Exchange Commission,
Renaissance Technologies LLC indicated that as of December 31, 2008, they held
1,306,680 Vasogen common shares representing 6.85% of our outstanding
shares.  To our knowledge, no other shareholder owns more than 5% of
our shares outstanding.  Based on records maintained by our transfer
agent and a geographic analysis of registered shareholders, as of November 28,
2008, the percentage of common shares held in the U.S. is estimated to be 74%
and the number of record holders in the U.S. is 71.




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.




33




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.




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
                    
                    LOW2004
                    
                    100.60
                    
                    47.002005
                    
                    73.40
                    
                    20.802006
                    
                    39.70
                    
                    3.202007
                    
                    5.70
                    
                    1.352008
                    
                    2.70
                    
                    0.09Q1
      2007
                    
                    5.70
                    
                    3.65Q2
      2007
                    
                    5.20
                    
                    2.45Q3
      2007
                    
                    3.01
                    
                    2.26Q4
      2007
                    
                    2.49
                    
                    1.35Q1
      2008
                    
                    2.70
                    
                    1.50Q2
      2008
                    
                    1.75
                    
                    0.34Q3
      2008
                    
                    0.48
                    
                    0.25Q4
      2008
                    
                    0.38
                    
                    0.09Aug
      08
                    
                    0.42
                    
                    0.25Sep
      08
                    
                    0.38
                    
                    0.19Oct
      08
                    
                    0.22
                    
                    0.15Nov
      08
                    
                    0.23
                    
                    0.09Dec
      08
                    
                    0.20
                    
                    0.05Jan
      09
                    
                    0.33
                    
                    0.14










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).




34





YEAR/QUARTER/
                      MONTH
                    
                    HIGH
                    
                    LOW2004
                    
                    78.00
                    
                    36.802005
                    
                    60.80
                    
                    17.502006
                    
                    34.50
                    
                    2.702007
                    
                    4.90
                    
                    1.412008
                    
                    2.68
                    
                    0.5Q1
      2007
                    
                    4.90
                    
                    3.00Q2
      2007
                    
                    4.60
                    
                    2.26Q3
      2007
                    
                    2.90
                    
                    2.10Q4
      2007
                    
                    2.40
                    
                    1.41Q1
      2008
                    
                    2.68
                    
                    1.55Q2
      2008
                    
                    1.68
                    
                    0.34Q3
      2008
                    
                    0.49
                    
                    0.27Q4
      2008
                    
                    0.37
                    
                    0.05Aug
      08
                    
                    0.39
                    
                    0.28Sep
      08
                    
                    0.37
                    
                    0.18Oct
      08
                    
                    0.22
                    
                    0.11Nov
      08
                    
                    0.16
                    
                    0.05Dec
      08
                    
                    0.18
                    
                    0.6Jan
      09
                    
                    0.25
                    
                    0.08





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.




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.




Independence of the Majority
of the Board of Directors: NASDAQ’s Marketplace Rule 4350(c)(1) requires
that the Board of Directors be comprised of a majority of independent directors,
as defined in Rule 4200(a)(15).  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 the applicable TSX rules and applicable
Canadian corporate and securities regulatory requirements.




Audit Committee Member
Independence: NASDAQ’s Marketplace Rule 4350(d)(2)(A) requires that each
of the members of the Company’s Audit Committee be independent, as defined in
Rule 4200(a)(15), and that none of the members of the Company’s Audit Committee
have participated in the preparation of the financial statements if the Company
during the last three years.  Under the exemption available to foreign
private issuers under Marketplace Rule 4350(a)(1), the Company does not follow
these components of the NASDAQ rule.  Instead, and in accordance with
the NASDAQ exemption, the Company complies with the applicable TSX rules and
applicable Canadian corporate and securities regulatory
requirements.




35




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.




At
January 31, 2009, there were 22.5 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 at least 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) certain amendments 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 pay 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 unless the stated capital has been adjusted in
accordance with the Act.




36





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 as amended by
certificate and articles of amendment dated April 12, 2007




The
Company's corporate objectives and purpose are unrestricted.




Directors




The
Company’s by-laws provide for the indemnification of officers, directors, and
former officers and directors and his or her heirs and legal representatives to
the extent permitted by the Act.  The Company may also indemnify acts
or employees, and former agents and employees of the Company in certain
circumstances.  These rights may apply to current and former
directors, officers, employees and agents who acted in a similar capacity for
another entity at the Company’s request.




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 is sent out
to shareholders not less than 21 or 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.  However, there are
disclosure requirements pursuant to applicable Canadian law.




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 on 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.




37




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.




38




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 or paid for 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.




39




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, 2008, entered into any
material contracts other than contracts in the ordinary course of
business.





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.




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.




40




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 1221of 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




(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.




41




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 2008 taxable year and we believe there is a significant
likelihood that we will be classified as a PFIC in the 2009 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 PFIC’s.
In such case, certain dispositions of, and distributions on, stock of such
subsidiaries may have consequences under the ‘ 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.




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.




42




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.




43




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.




44




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 PFIC’s, 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%) 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 if the required
information is timely furnished to the IRS.  A U.S. Holder who does
not provide a correct taxpayer identification number may be subject to penalties
imposed by the IRS.




45





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
was ratified by the United States government in December 2008 (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.




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.  The value of the Company’s shares is not derived principally
from real property.




46




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




Currency
risk:




The
Company is exposed to foreign exchange risk from various currencies, primarily
U.S. dollars.  Foreign exchange risk arises from purchase
transactions, as well as recognized financial assets and liabilities denominated
in foreign currencies.




The
Company's main objective in managing its foreign exchange risk is to maintain
U.S. cash on hand to support U.S. forecasted cash flows over an 18-month
horizon.  To achieve this objective, the Company monitors forecasted
cash flows in foreign currencies and attempts to mitigate the risk by modifying
the nature of cash and cash equivalents held or by entering into foreign
exchange contracts with Canadian chartered banks.  Foreign exchange
contracts are only entered into for purposes of managing foreign exchange risk
and not for speculative purposes.




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.  There were no forward foreign exchange contracts entered into
in 2008.





47




Balances
in foreign currencies at November 30, 2008 are as follows:







U.S.dollars
                                    
                                    
                                    Euros
                                    
                                    
                                    BritishpoundsCash
      and cash equivalents
                                    
                                    $
                                    764
                                    
                                    
                                    €
                                    17
                                    
                                    
                                    £
                                    -Accounts
      payable and accrued liabilities
                                    
                                    
                                    (246
                                    )
                                    
                                    
                                    (76
                                    )
                                    
                                    
                                    (1
                                    )$
                                    518
                                    
                                    
                                    €
                                    (59
                                    )
                                    
                                    £
                                    (1
                                    )





As
the Company’s functional or measurement currency is the Canadian dollar, U.S.
dollar exchange rate fluctuations may have a potentially significant impact from
an accounting perspective.  However, they would not impair or enhance
the ability of the Company to pay its foreign currency-denominated expenses as
such items would be similarly affected.





Interest
rate risk:





Interest
rate risk is the risk that the future cash flows of a financial instrument will
fluctuate because of changes in market interest rates.





Financial
assets and financial liabilities with variable interest rates expose the Company
to cash flow interest rate risk.  The Company's cash and cash
equivalents include highly liquid investments that earn interest at market
rates.





The
Company manages its interest rate risk by maximizing the interest income earned
on excess funds while maintaining the liquidity necessary to conduct operations
on a day-to-day basis.  The Company's policy limits the investing of
excess funds to liquid government and corporate bonds having a single "A" credit
rating or greater.


Fluctuations
in market rates of interest do not have a significant impact on the Company's
results of operations due to the short term to maturity of the investments
held.





Credit
risk:





Credit
risk is the risk of a financial loss to the Company if a customer or
counterparty to a financial instrument fails to meet its contractual
obligation.





The
maximum exposure to credit risk of the Company at period end is the carrying
value of its 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.  Cash and cash equivalents of $8.6 million (November
30, 2007 - $23.5 million) are not subject to any external
restrictions.





Liquidity
risk:





Liquidity
risk is the risk that the Company will not be able to meet its obligations as
they fall due.


The
Company manages its liquidity risk by forecasting cash flows from operations and
anticipated investing and financing activities.  Senior management is
also actively involved in the review and approval of planned
expenditures.





48




The
following are the contractual maturities of the undiscounted cash flows of
financial liabilities as at November 30, 2008:





Less
      than
                  
                  
                  3
      to 6
                  
                  
                  6
      to 9
                  
                  
                  9
      months to
                  
                  
                  Greater
      than3
      months
                  
                  
                  months
                  
                  
                  months
                  
                  
                  1
      year
                  
                  
                  1
      yearAccounts
      payable andaccrued liabilities
                  
                  $
                  1,065
                  
                  
                  $
                  131
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  46





Limitations:




The
above discussion includes only those exposures that exist as of November 30,
2008 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.




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, 2008, 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, we have
concluded that our internal control over financial reporting was effective as of
that date.





49




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.





This
annual report does not include an attestation report of the Company's registered
public accounting firm regarding internal control over financial reporting.
Management's report is not subject to attestation by the Company's registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management's report
in this annual report.








CHANGES
IN INTERNAL CONTROL OVER FINANCIAL REPORTING





There
have been no changes in our internal control over financial reporting, as of
November 30, 2008 that have materially affected or are reasonably likely to
materially affect, our internal control over financial reporting.








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, 2008, the Chief Executive Officer and
the Chief Financial Officer 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 Chief Executive Officer and the Chief Financial
Officer, and all procedures, taking into consideration the size of the Company
and the number of employees.  Based on the evaluation described above,
the Chief Executive Officer and the Chief Financial Officer have concluded that,
as at November 30, 2008, 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.





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".  Additionally, under
Nasdaq Marketplace Rule 4350(d)(2)(A), the Nasdaq requires that one member of
the audit committee be financially sophisticated, meaning that they must have
"past employment experience in finance or accounting, requisite professional
certification in accounting, or any other comparable experience or background
which results in the individual's financial sophistication, including being or
having been a chief executive officer, chief financial officer, or other senior
officer with financial oversight responsibilities."  The Board has
determined that both Mr. Elsley and Mr. Gregg qualify as audit committee
financial experts under the SEC rules and as financially sophisticated under the
Nasdaq rules.





In
addition, all members of the Audit Committee are considered financially literate
under applicable Canadian laws.




50




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, 2008


and
November 30, 2007 for audit fees, audit-related fees, tax fees and all other
fees are set forth below:





Year
      Ended
                                        November
      30, 2008
                                      
                                      
                                      Year
      Ended
                                        November
      30, 2007Audit
      Fees (1)
                                      
                                      $
                                      281,782
                                      
                                      
                                      $
                                      504,665Audit-Related
      Fees (2)
                                      
                                      $
                                      0
                                      
                                      
                                      $
                                      75,000Tax
      Fees (3)
                                      
                                      $
                                      85,800
                                      
                                      
                                      $
                                      133,510All
      Other Fees
                                      
                                      $
                                      0
                                      
                                      
                                      NilTotals
                                      
                                      $
                                      367,582
                                      
                                      
                                      $
                                      713,175





Notes:




(1)
                  Audit
      fees consist of fees related to the audit of the Company’s consolidated
      financial statements, reviews of quarterly interim financial statements
      and auditor involvement with prospectuses and a financing completed during
      2008.


(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 Ireland Limited, and Vasogen
  Corp.


(4)
              The
      Audit Committee’s pre-approval policy and procedures is disclosed under
      Item 6 C “Board Practices”. All amounts above were approved in accordance
      with this policy.








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, and audit related services to the Company and its
subsidiaries.  Our Audit Committee has concluded that the provision of
these 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.




PART
III.




Item
17.                       Financial
Statements




See
Item 18 below.




Item
18.                       Financial
Statements




2008
FINANCIAL STATEMENTS





51
 
 Consolidated
Financial Statements
 (In
Canadian dollars)
 
 VASOGEN
INC.
 (A
DEVELOPMENT STAGE COMPANY)
 
 Years
ended November 30, 2008, 2007, 2006 and
 period
from December 1, 1987 to November 30, 2008
      52
  kpmg logoKPMG
      LLPChartered
      AccountantsYonge
      Corporate
      Centre4100
      Yonge Street Suite 200
                            Toronto
      ON  M2P 2H3Canada
                          TelephoneFaxInternet
                          (416)
      228-7000(416) 228-7123
                            www.kpmg.ca
  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, 2008 and 2007 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, 2008 and for
the period from December 1, 1987 to November 30, 2008.  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, 2008 and 2007 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,
2008 in accordance with the standards of the Public Company Accounting Oversight
Board (United States).  We did not audit the consolidated statements
of operations and deficit and cash flows for the period from inception on
December 1, 1987 to November 30, 2008 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, 2008 and 2007 and the results of its operations and its cash flows for each
of the years in the three-year period ended November 30, 2008 and for the period
from December 1, 1987 to November 30, 2008 in conformity with Canadian generally
accepted accounting principles.
 
 Canadian
generally accepted accounting principles vary in certain significant respects
from U.S. generally accepted accounting principles.  Information
relating to the nature and effect of such differences is presented in note 18 to
the consolidated financial statements.
  On
December 1, 2007, the Company adopted the new recommendations of The Canadian
Institute of Chartered Accountants' Handbook Section 1535, Capital Disclosures,
Section 3862, Financial Instruments - Disclosures and Section 3863, Financial
Instruments - Presentation.  The effect of those changes is discussed
in note 2(p) to the consolidated financial statements.
  
  Chartered
Accountants, Licensed Public Accountants
 
 Toronto,
Canada
 February
25, 2009
   
 53
  VASOGEN
INC.
 (A
      DEVELOPMENT STAGE COMPANY)
 
 Consolidated
      Balance Sheets
 (In
      thousands of Canadian
dollars)
 
 November
      30, 2008 and 2007
 2008
                                              
                                              
                                              2007AssetsCurrent
      assets:Cash
      and cash equivalents (note
      3)
                                              
                                              $
                                              8,556
                                              
                                              
                                              $
                                              23,545Clinical
      supplies (note
      4)
                                              
                                              
                                              –
                                              
                                              
                                              
                                              1,363Tax
      credits
      recoverable
                                              
                                              
                                              582
                                              
                                              
                                              
                                              1,565Prepaid
      expenses and
      deposits
                                              
                                              
                                              188
                                              
                                              
                                              
                                              787Change
      in fair value of forward foreign exchangecontracts (note
      14(a)(i))
                                              
                                              
                                              –
                                              
                                              
                                              
                                              3769,326
                                              
                                              
                                              
                                              27,636Property
      and equipment (note 6)
                                              
                                              
                                              16
                                              
                                              
                                              
                                              414$
                                              9,342
                                              
                                              
                                              $
                                              28,050Liabilities
      and Shareholders' EquityCurrent
      liabilities:Accounts
      payable
                                              
                                              $
                                              101
                                              
                                              
                                              $
                                              1,175Accrued
      liabilities
                                              
                                              
                                              1,141
                                              
                                              
                                              
                                              3,5191,242
                                              
                                              
                                              
                                              4,694Shareholders'
      equity (note
      8):Share
      capital:Authorized:Unlimited
      common shares, without par
      valueIssued
      and
      outstanding:22,424,719 common shares
      (2007 -
      22,391,386)
                                              
                                              
                                              365,677
                                              
                                              
                                              
                                              365,670Warrants
                                              
                                              
                                              16,725
                                              
                                              
                                              
                                              16,725Contributed
      surplus
                                              
                                              
                                              23,555
                                              
                                              
                                              
                                              22,744Deficit
                                              
                                              
                                              (397,857
                                              )
                                              
                                              
                                              (381,783
                                              )8,100
                                              
                                              
                                              
                                              23,356Basis
      of presentation - going concern (note
      1)Commitments
      and contingencies (note
      15)Subsequent
      events (note
      19)$
                                              9,342
                                              
                                              
                                              $
                                              28,050
 
 See accompanying
notes to consolidated financial statements.
  On behalf of the
Board:
  elsley signature
                  gregg signatureDavid G. Elsley,
      Director
                  Terrance H. Gregg,
      Director
  
 54
 
 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
30,2008
                                                                                            
                                                                                            
                                                                                            2007
                                                                                            
                                                                                            
                                                                                            2006
                                                                                            
                                                                                            
                                                                                            2008Expenses:Research and
      development(note 17)
                                                                                            
                                                                                            $
                                                                                            8,794
                                                                                            
                                                                                            
                                                                                            $
                                                                                            12,039
                                                                                            
                                                                                            
                                                                                            $
                                                                                            32,732
                                                                                            
                                                                                            
                                                                                            $
                                                                                            247,711General
      and administration
                                                                                            
                                                                                            
                                                                                            8,098
                                                                                            
                                                                                            
                                                                                            
                                                                                            14,259
                                                                                            
                                                                                            
                                                                                            
                                                                                            19,251
                                                                                            
                                                                                            
                                                                                            
                                                                                            125,326Foreign
      exchange loss (gain)
                                                                                            
                                                                                            
                                                                                            (305
                                                                                            )
                                                                                            
                                                                                            
                                                                                            1,977
                                                                                            
                                                                                            
                                                                                            
                                                                                            104
                                                                                            
                                                                                            
                                                                                            
                                                                                            10,665Loss
      before the undernoted
                                                                                            
                                                                                            
                                                                                            (16,587
                                                                                            )
                                                                                            
                                                                                            
                                                                                            (28,275
                                                                                            )
                                                                                            
                                                                                            
                                                                                            (52,087
                                                                                            )
                                                                                            
                                                                                            
                                                                                            (383,702
                                                                                            )Interest
      expense on seniorconvertible notes
      payable
                                                                                            
                                                                                            
                                                                                            –
                                                                                            
                                                                                            
                                                                                            
                                                                                            (5
                                                                                            )
                                                                                            
                                                                                            
                                                                                            (930
                                                                                            )
                                                                                            
                                                                                            
                                                                                            (1,279
                                                                                            )Accretion
      in carrying value ofsenior convertible notes
      payable
                                                                                            
                                                                                            
                                                                                            –
                                                                                            
                                                                                            
                                                                                            
                                                                                            (728
                                                                                            )
                                                                                            
                                                                                            
                                                                                            (7,824
                                                                                            )
                                                                                            
                                                                                            
                                                                                            (10,294
                                                                                            )Amortization
      of deferred financingcosts
                                                                                            
                                                                                            
                                                                                            –
                                                                                            
                                                                                            
                                                                                            
                                                                                            (154
                                                                                            )
                                                                                            
                                                                                            
                                                                                            (2,495
                                                                                            )
                                                                                            
                                                                                            
                                                                                            (3,057
                                                                                            )Loss
      on extinguishment of seniorconvertible notes
      payable
                                                                                            
                                                                                            
                                                                                            –
                                                                                            
                                                                                            
                                                                                            
                                                                                            (1,754
                                                                                            )
                                                                                            
                                                                                            
                                                                                            (4,995
                                                                                            )
                                                                                            
                                                                                            
                                                                                            (6,749
                                                                                            )Investment
      income
                                                                                            
                                                                                            
                                                                                            513
                                                                                            
                                                                                            
                                                                                            
                                                                                            1,310
                                                                                            
                                                                                            
                                                                                            
                                                                                            1,971
                                                                                            
                                                                                            
                                                                                            
                                                                                            13,838Change
      in fair value of embeddedderivatives
                                                                                            
                                                                                            
                                                                                            –
                                                                                            
                                                                                            
                                                                                            
                                                                                            829
                                                                                            
                                                                                            
                                                                                            
                                                                                            –
                                                                                            
                                                                                            
                                                                                            
                                                                                            829Loss
      and comprehensive lossfor the
      period
                                                                                            
                                                                                            
                                                                                            (16,074
                                                                                            )
                                                                                            
                                                                                            
                                                                                            (28,777
                                                                                            )
                                                                                            
                                                                                            
                                                                                            (66,360
                                                                                            )
                                                                                            
                                                                                            
                                                                                            (390,414
                                                                                            )Deficit,
      beginning of period:As
      originally reported
                                                                                            
                                                                                            
                                                                                            (381,783
                                                                                            )
                                                                                            
                                                                                            
                                                                                            (351,374
                                                                                            )
                                                                                            
                                                                                            
                                                                                            (284,719
                                                                                            )
                                                                                            
                                                                                            
                                                                                            (1,510
                                                                                            )Impact
      of change inaccounting for stock-based compensation
      (note 2(l))
                                                                                            
                                                                                            
                                                                                            –
                                                                                            
                                                                                            
                                                                                            
                                                                                            –
                                                                                            
                                                                                            
                                                                                            
                                                                                            –
                                                                                            
                                                                                            
                                                                                            
                                                                                            (4,006
                                                                                            )Impact
      of change in accounting for financial instruments on December 1, 2006
      (note 2(o))
                                                                                            
                                                                                            
                                                                                            –
                                                                                            
                                                                                            
                                                                                            
                                                                                            (1,632
                                                                                            )
                                                                                            
                                                                                            
                                                                                            –
                                                                                            
                                                                                            
                                                                                            
                                                                                            (1,632
                                                                                            )As
      revised
                                                                                            
                                                                                            
                                                                                            (381,783
                                                                                            )
                                                                                            
                                                                                            
                                                                                            (353,006
                                                                                            )
                                                                                            
                                                                                            
                                                                                            (284,719
                                                                                            )Charge
      for acceleration paymentson equity component of
      senior convertible notes payable
                                                                                            
                                                                                            
                                                                                            –
                                                                                            
                                                                                            
                                                                                            
                                                                                            –
                                                                                            
                                                                                            
                                                                                            
                                                                                            (295
                                                                                            )
                                                                                            
                                                                                            
                                                                                            (295
                                                                                            )Deficit,
      end of period
                                                                                            
                                                                                            $
                                                                                            (397,857
                                                                                            )
                                                                                            
                                                                                            $
                                                                                            (381,783
                                                                                            )
                                                                                            
                                                                                            $
                                                                                            (351,374
                                                                                            )
                                                                                            
                                                                                            $
                                                                                            (397,857
                                                                                            )Basic
      and diluted loss percommon share (notes 8 and
      9)
                                                                                            
                                                                                            $
                                                                                            (0.72
                                                                                            )
                                                                                            
                                                                                            $
                                                                                            (1.46
                                                                                            )
                                                                                            
                                                                                            $
                                                                                            (7.05
                                                                                            )
  
 See
accompanying notes to consolidated financial statements.
  55
  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
30,2008
                                            
                                            
                                            2007
                                            
                                            
                                            2006
                                            
                                            
                                            2008Cash provided by (used
      in):Operating
      activities:Loss for the
      period
                                            
                                            $
                                            (16,074
                                            )
                                            
                                            $
                                            (28,777
                                            )
                                            
                                            $
                                            (66,360
                                            )
                                            
                                            $
                                            (390,414
                                            )Items not
      involving cash:Amortization
                                            
                                            
                                            217
                                            
                                            
                                            
                                            503
                                            
                                            
                                            
                                            782
                                            
                                            
                                            
                                            6,377Loss on
      disposition of property and equipment
                                            
                                            
                                            125
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            125Accretion in
      carrying value of senior convertible notes payable
                                            
                                            
                                            –
                                            
                                            
                                            
                                            728
                                            
                                            
                                            
                                            7,824
                                            
                                            
                                            
                                            10,294Amortization of
      deferred financing costs
                                            
                                            
                                            –
                                            
                                            
                                            
                                            154
                                            
                                            
                                            
                                            2,495
                                            
                                            
                                            
                                            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
                                            
                                            
                                            811
                                            
                                            
                                            
                                            1,995
                                            
                                            
                                            
                                            3,083
                                            
                                            
                                            
                                            10,390Common shares
      issued for services
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            36
                                            
                                            
                                            
                                            2,485Unrealized gain
      on forward foreign exchange contract
                                            
                                            
                                            376
                                            
                                            
                                            
                                            (376
                                            )
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –Unrealized
      foreign exchange loss (gain)
                                            
                                            
                                            (124
                                            )
                                            
                                            
                                            2,566
                                            
                                            
                                            
                                            (65
                                            )
                                            
                                            
                                            11,419Other
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            (35
                                            )Change in
      non-cash operating working capital (note 10(a))
                                            
                                            
                                            (513
                                            )
                                            
                                            
                                            (3,535
                                            )
                                            
                                            
                                            (17,158
                                            )
                                            
                                            
                                            438(15,182
                                            )
                                            
                                            
                                            (25,817
                                            )
                                            
                                            
                                            (64,368
                                            )
                                            
                                            
                                            (339,944
                                            )Financing
      activities:Shares and
      warrants issued for cash
                                            
                                            
                                            –
                                            
                                            
                                            
                                            17,345
                                            
                                            
                                            
                                            23,106
                                            
                                            
                                            
                                            326,358Warrants and
      options exercised for cash
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            24,610Share issue
      costs
                                            
                                            
                                            –
                                            
                                            
                                            
                                            (1,440
                                            )
                                            
                                            
                                            (2,221
                                            )
                                            
                                            
                                            (24,646
                                            )Issue
      (repayment) of senior convertible notes payable, net (note
      7)
                                            
                                            
                                            –
                                            
                                            
                                            
                                            (924
                                            )
                                            
                                            
                                            (3,976
                                            )
                                            
                                            
                                            38,512Cash released
      from restriction
                                            
                                            
                                            –
                                            
                                            
                                            
                                            6,403
                                            
                                            
                                            
                                            5,298
                                            
                                            
                                            
                                            –Paid to related
      parties
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            (234
                                            )–
                                            
                                            
                                            
                                            21,384
                                            
                                            
                                            
                                            22,207
                                            
                                            
                                            
                                            364,600Investing
      activities:Purchases of
      acquired technology
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            (1,283
                                            )Purchases of
      property and equipment
                                            
                                            
                                            (6
                                            )
                                            
                                            
                                            (49
                                            )
                                            
                                            
                                            (23
                                            )
                                            
                                            
                                            (2,471
                                            )Proceeds from
      disposition of property and equipment
                                            
                                            
                                            62
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            62Purchases of
      marketable securities
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            (80
                                            )
                                            
                                            
                                            (244,846
                                            )Settlement of
      forward foreign exchange contracts
                                            
                                            
                                            –
                                            
                                            
                                            
                                            10
                                            
                                            
                                            
                                            (102
                                            )
                                            
                                            
                                            (4,824
                                            )Maturities of
      marketable securities
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            23,079
                                            
                                            
                                            
                                            240,67756
                                            
                                            
                                            
                                            (39
                                            )
                                            
                                            
                                            22,874
                                            
                                            
                                            
                                            (12,685
                                            )Foreign exchange gain (loss) on
      cash held in foreign currency
                                            
                                            
                                            137
                                            
                                            
                                            
                                            (2,410
                                            )
                                            
                                            
                                            (807
                                            )
                                            
                                            
                                            (3,415
                                            )Increase (decrease) in cash and
      cash equivalents
                                            
                                            
                                            (14,989
                                            )
                                            
                                            
                                            (6,882
                                            )
                                            
                                            
                                            (20,094
                                            )
                                            
                                            
                                            8,556Cash and cash
      equivalents,beginning of
      period
                                            
                                            
                                            23,545
                                            
                                            
                                            
                                            30,427
                                            
                                            
                                            
                                            50,521
                                            
                                            
                                            
                                            –Cash and cash
      equivalents,end of
    period
                                            
                                            $
                                            8,556
                                            
                                            
                                            $
                                            23,545
                                            
                                            
                                            $
                                            30,427
                                            
                                            
                                            $
                                            8,556
 Supplemental
cash flow information (note 10)
  See
accompanying notes to consolidated financial statements.
  56
 VASOGEN
INC.
 (A
      DEVELOPMENT STAGE COMPANY)
 
 Notes
      to Consolidated Financial
Statements
 (Tabular
      figures in thousands, except per share
amounts)
 
 Years
      ended November 30, 2008, 2007, 2006
and
 period
      from December 1, 1987 to November 30, 2008
 
 1.
                  Basis
      of presentation - going concern:
  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, 2008.
  The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern.  The Company has
sustained losses since its formation and at November 30, 2008 had a deficit of
$398 million.  On April 14, 2008, the Company undertook a significant
reduction in work force after receiving communications from the United States
Food and Drug Administration regarding additional clinical studies that would be
required to receive approval for the Company's lead product, CelacadeTM, and in
an effort to manage expenses, the Company suspended all operations related to
the commercialization of CelacadeTM in Europe.  On July 3, 2008,
following an extensive review of the Company's VP Series of drug programs,
the Company undertook an additional restructuring to further manage expenses as
strategic alternatives are explored.  The Company has retained an
investment bank to assist it in exploring these potential strategic
alternatives.
  While
these consolidated financial statements do not include the adjustments that
would be necessary should the Company be unable to continue as a going concern,
the above matters raise substantial doubt about the Company's ability to
continue to operate as currently structured.
  The
Company's future operations are completely dependent upon its ability to
complete a sale, merger, acquisition or other strategic alternative, and/or
secure additional funds.  If the Company cannot complete a sale,
merger, acquisition or other strategic alternative, secure additional financing,
or if it cannot secure additional financing on terms that would be acceptable to
it, the Company will have to consider additional strategic alternatives which
may include, among other strategies, exploring the monetization of certain
intangible assets as well as seeking to outlicense assets, potential asset
divestitures, winding up, dissolution or liquidation of the
Company.
 57
 VASOGEN
INC.
 (A
      DEVELOPMENT STAGE COMPANY)
 
 Notes
      to Consolidated Financial
Statements
 (Tabular
      figures in thousands, except per share
amounts)
 
 Years
      ended November 30, 2008, 2007, 2006
and
 period
      from December 1, 1987 to November 30, 2008
 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 18, 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, corporate bonds and commercial paper with original maturities
of three months or less as cash and cash equivalents.  Cash
equivalents are designated as held-for-trading and are carried at fair
value.
  (c)
                    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
  58
 VASOGEN
INC.
 (A
      DEVELOPMENT STAGE COMPANY)
 
 Notes
      to Consolidated Financial
Statements
 (Tabular
      figures in thousands, except per share
amounts)
 
 Years
      ended November 30, 2008, 2007, 2006
and
 period
      from December 1, 1987 to November 30, 2008
 2.
                  Significant
      accounting policies (continued):
  (d)
                  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.  The Company's acquired technology was fully amortized at
November 30, 2007.  In 2008, amortization expense was nil (2007 - $0.3
million; 2006 - $0.3 million).
  (e)
                  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(o), deferred financing costs are accounted for as
part of the financial liabilities' carrying value at inception.
  (f)
                  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.
  Key
areas of estimates where management has made judgments, often as a result of
matters that are inherently uncertain, include certain accrued liabilities and
the valuation allowance on income taxes loss
carryforwards.  Significant changes in the assumptions with respect to
future business plans could materially change the recorded carrying
amounts.
 59
 VASOGEN
INC.
 (A
      DEVELOPMENT STAGE COMPANY)
 
 Notes
      to Consolidated Financial
Statements
 (Tabular
      figures in thousands, except per share
amounts)
 
 Years
      ended November 30, 2008, 2007, 2006
and
 period
      from December 1, 1987 to November 30, 2008
 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.
  (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 $0.2 million (2007 - $0.3
million; 2006 - $0.8 million; December 1, 1987 to November 30, 2008 -
$3.5 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 were 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.
 60
 VASOGEN
INC.
 (A
      DEVELOPMENT STAGE COMPANY)
 
 Notes
      to Consolidated Financial
Statements
 (Tabular
      figures in thousands, except per share
amounts)
 
 Years
      ended November 30, 2008, 2007, 2006
and
 period
      from December 1, 1987 to November 30, 2008
 2.
                  Significant
      accounting policies (continued):
  (i)
                  Derivative
      financial instruments:
  The
Company has been 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.  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.
  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.
  61
 VASOGEN
INC.
 (A
      DEVELOPMENT STAGE COMPANY)
 
 Notes
      to Consolidated Financial
Statements
 (Tabular
      figures in thousands, except per share
amounts)
 
 Years
      ended November 30, 2008, 2007, 2006
and
 period
      from December 1, 1987 to November 30, 2008
 2.
                  Significant
      accounting policies (continued):
  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(d).  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(e).  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.
 62
 VASOGEN
INC.
 (A
      DEVELOPMENT STAGE COMPANY)
 
 Notes
      to Consolidated Financial
Statements
 (Tabular
      figures in thousands, except per share
amounts)
 
 Years
      ended November 30, 2008, 2007, 2006
and
 period
      from December 1, 1987 to November 30, 2008
 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)
                    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.
 63
 VASOGEN
INC.
 (A
      DEVELOPMENT STAGE COMPANY)
 
 Notes
      to Consolidated Financial
Statements
 (Tabular
      figures in thousands, except per share
amounts)
 
 Years
      ended November 30, 2008, 2007, 2006
and
 period
      from December 1, 1987 to November 30, 2008
 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 statements 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 statements 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 statements 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.
 64
 VASOGEN
INC.
 (A
      DEVELOPMENT STAGE COMPANY)
 
 Notes
      to Consolidated Financial
Statements
 (Tabular
      figures in thousands, except per share
amounts)
 
 Years
      ended November 30, 2008, 2007, 2006
and
 period
      from December 1, 1987 to November 30, 2008
 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.
  (p)
                  Changes
      in accounting policy:
  Financial
instruments and capital disclosure:
  Effective
December 1, 2007, the Company adopted the recommendations of CICA Handbook
Section 1535, Capital Disclosures ("Section 1535").  The new standard
requires an entity to disclose information to enable users of its financial
statements to evaluate the entity's objectives, policies and processes for
managing capital.  Disclosure requirements pertaining to Section 1535
are contained in note 13.
 65
 VASOGEN
INC.
 (A
      DEVELOPMENT STAGE COMPANY)
 
 Notes
      to Consolidated Financial
Statements
 (Tabular
      figures in thousands, except per share
amounts)
 
 Years
      ended November 30, 2008, 2007, 2006
and
 period
      from December 1, 1987 to November 30, 2008
 2.
                  Significant
      accounting policies (continued):
  Effective
December 1, 2007, the Company adopted the recommendations of CICA Handbook
Section 3862, Financial Instruments - Disclosures ("Section
3862").  Section 3862 provides standards for disclosures about
financial instruments, including disclosures about fair value and the credit,
liquidity and market risks associated with the financial
instruments.  Disclosure requirements pertaining to Section 3862 are
contained in note 14.
  Effective
December 1, 2007, the Company adopted the recommendations of CICA Handbook
Section 3863, Financial Instruments - Presentation ("Section 3863").
Section 3863 provides standards for presentation of financial instruments
and non-financial derivatives.  Adoption of this standard had no
impact on the Company's financial instrument-related presentation
disclosures.
  (q)
                  Recent
      accounting pronouncements issued and not yet
  applied:
  (i)
                  Inventories:
  In May
2007, the Accounting Standards Board ("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, and is expected to have no impact on
the Company's consolidated financial position and results of
operations.
 66
 VASOGEN
INC.
 (A
      DEVELOPMENT STAGE COMPANY)
 
 Notes
      to Consolidated Financial
Statements
 (Tabular
      figures in thousands, except per share
amounts)
 
 Years
      ended November 30, 2008, 2007, 2006
and
 period
      from December 1, 1987 to November 30, 2008
 2.
                  Significant
      accounting policies (continued):
  (ii)
                  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 and are expected to have no impact on the
Company's consolidated financial position and results of operations, as we have
disclosed our assessment of going concern in note 1.
  (iii)
                  Goodwill
      and intangible assets:
  In
November 2007, the CICA issued Section 3064, Goodwill and Intangible Assets
("Section 3064").  Section 3064, which replaces Section 3062, Goodwill
and Intangible Assets, and Section 3450, Research and Development Costs,
establishes standards for the recognition, measurement and disclosure of
goodwill and intangible assets.  This standard is effective for the
Company, for interim and annual consolidated financial statements beginning on
December 1, 2008.  This section will have no current impact on the
Company's financial position and results of operations as the Company has no
recorded goodwill or unamortized intangible assets.
 67
 VASOGEN
INC.
 (A
      DEVELOPMENT STAGE COMPANY)
 
 Notes
      to Consolidated Financial
Statements
 (Tabular
      figures in thousands, except per share
amounts)
 
 Years
      ended November 30, 2008, 2007, 2006
and
 period
      from December 1, 1987 to November 30, 2008
 2.
                  Significant
      accounting policies (continued):
  (iv)
                  Business
      combinations:
  In
January 2009, the CICA issued Handbook Section 1582, Business Combinations,
which replaces the existing standards.  This section establishes the
standards for the accounting of business combinations, and states that all
assets and liabilities of an acquired business will be recorded at fair
value.  Obligations for contingent considerations and contingencies
will also be recorded at fair value at the acquisition date.  The
standard also states that acquisition-related costs will be expensed as incurred
and that restructuring charges will be expensed in the periods after the
acquisition date.  This standard is effective for business
combinations with acquisition dates on or after January 1,
2011.  Earlier adoption is permitted.  The Company is
currently assessing the impact this standard will have on its financial position
and results of operations.
  (v)
                  Consolidated
      financial statements:
  In
January 2009, the CICA issued Handbook Section 1601, Consolidated Financial
Statements, which replaces the existing standards.  This section
establishes the standards for preparing consolidated financial statements and is
effective for the Company on December 1, 2011.  Earlier adoption is
permitted. The Company is currently assessing the impact this standard will have
on its financial position and results of operations.
  (vi)
                  Non-controlling
      interests:
  In
January 2009, the CICA issued Handbook Section 1602, Non-controlling Interests,
which establishes standards for the accounting of non-controlling interests of a
subsidiary in the preparation of consolidated financial statements subsequent to
a business combination, and is effective for the Company on December 1,
2011.  The Company is currently assessing the impact this standard
will have on its financial position and results of operations.
 68
 VASOGEN
INC.
 (A
      DEVELOPMENT STAGE COMPANY)
 
 Notes
      to Consolidated Financial
Statements
 (Tabular
      figures in thousands, except per share
amounts)
 
 Years
      ended November 30, 2008, 2007, 2006
and
 period
      from December 1, 1987 to November 30, 2008
 2.
                  Significant
      accounting policies (continued):
  (vii)
                  International
      financial reporting standards:
  In
February 2008, the CICA confirmed its strategy of replacing Canadian GAAP with
International Financial Reporting Standards ("IFRS") for Canadian publicly
accountable enterprises.  These new standards will be effective for
the Company's interim and annual financial statements commencing December 1,
2011.  The Company is assessing the impact of the transition to IFRS
on its financial statements.
  3.
                  Cash
      and cash equivalents:
  As at
November 30, 2008, the Company held $8.5 million (2007 - $23.3 million) of cash
equivalents, of which $0.9 million (U.S. $0.7 million) (2007 - $0.1 million
(U.S. $0.1 million)) are denominated in U.S. dollars.  Cash
equivalents consist of highly liquid government and corporate bonds having a
single "A" credit rating or greater.
  As at
November 30, 2008, the Company's cash equivalents were held with major Canadian
financial institutions, as detailed below:
  Description
                                              Maturity
                                              
                                              AmountRoyal Bank of
      CanadaBankers'
      Acceptance
                                              December 1,
      2008
                                              
                                              $
                                              2,725Royal Bank of
      CanadaBankers'
      Acceptance
                                              December 8,
      2008
                                              
                                              
                                              780Royal Bank of
      CanadaBankers'
      Acceptance
                                              December 15,
      2008
                                              
                                              
                                              4,076Royal Bank of
      CanadaU.S. Dollar
      Term Deposit
                                              December 1,
      2008
                                              
                                              
                                              915$
                                              8,496
 
 4.
                  Clinical
      supplies:
  The
costs of prepaid clinical supplies were capitalized on the basis that these
supplies had future alternative uses related to the various clinical
applications of the CelacadeTM technology, and
were expensed as they were shipped to outsourced research centers or clinical
sites.  As a result of the April 2008 restructuring, the value of
clinical supplies is not recoverable at November 30, 2008 and a write-down of
$1.2 million was recorded.
 69
 VASOGEN
INC.
 (A
      DEVELOPMENT STAGE COMPANY)
 
 Notes
      to Consolidated Financial
Statements
 (Tabular
      figures in thousands, except per share
amounts)
 
 Years
      ended November 30, 2008, 2007, 2006
and
 period
      from December 1, 1987 to November 30, 2008
 5.
                  Restricted
      cash:
  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.
  6.
                  Property
      and equipment:
 Accumulated
                                      
                                      
                                      Net book2008
                                      
                                      Cost
                                      
                                      
                                      amortization
                                      
                                      
                                      valueComputer and other
      equipment
                                      
                                      $
                                      130
                                      
                                      
                                      $
                                      114
                                      
                                      
                                      $
                                      16
 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
 
 
 In
2008, amortization expense was $0.2 million (2007 - $0.3 million; 2006 - $0.5
million).  The total impairment loss recorded through depreciation
expense on the consolidated statements of operations and deficit and
comprehensive income is $0.1 million (2007 - nil; 2006 - nil).
  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.
 70
 VASOGEN
INC.
 (A
      DEVELOPMENT STAGE COMPANY)
 
 Notes
      to Consolidated Financial
Statements
 (Tabular
      figures in thousands, except per share
amounts)
 
 Years
      ended November 30, 2008, 2007, 2006
and
 period
      from December 1, 1987 to November 30, 2008
 8.
                  Shareholders'
      equity:
  (a)
                    Consolidated
      statement of shareholders' equity:
 Number
                                                                  
                                                                  Commonshares'averageshare
                                                                  
                                                                  Share
                                                                  
                                                                  
                                                                  Contributed
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  Period
      fromDecember 1,1987 toNovember 30,of
      shares
                                                                  
                                                                  price
                                                                  
                                                                  capital
                                                                  
                                                                  
                                                                  surplus
                                                                  
                                                                  
                                                                  Warrants
                                                                  
                                                                  
                                                                  Deficit
                                                                  
                                                                  
                                                                  2008Balance,December
      1, 1987
                                                                  
                                                                  
                                                                  103
                                                                  
                                                                  
                                                                  
                                                                  $
                                                                  1,213
                                                                  
                                                                  
                                                                  $
                                                                  –
                                                                  
                                                                  
                                                                  $
                                                                  –
                                                                  
                                                                  
                                                                  $
                                                                  (1,510
                                                                  )
                                                                  
                                                                  $
                                                                  (297
                                                                  )Period
      from December 1, 1987to
      November 30,2005:Shares
      issued for cash
                                                                  
                                                                  
                                                                  6,003
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  285,906
                                                                  
                                                                  
                                                                  
                                                                  –
                                                                  
                                                                  
                                                                  
                                                                  –
                                                                  
                                                                  
                                                                  
                                                                  –
                                                                  
                                                                  
                                                                  
                                                                  285,906Shares
      issue costs
                                                                  
                                                                  
                                                                  –
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  (22,753
                                                                  )
                                                                  
                                                                  
                                                                  –
                                                                  
                                                                  
                                                                  
                                                                  –
                                                                  
                                                                  
                                                                  
                                                                  –
                                                                  
                                                                  
                                                                  
                                                                  (22,753
                                                                  )Fair
      value of stock options granted
                                                                  
                                                                  
                                                                  –
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  –
                                                                  
                                                                  
                                                                  
                                                                  3,826
                                                                  
                                                                  
                                                                  
                                                                  –
                                                                  
                                                                  
                                                                  
                                                                  –
                                                                  
                                                                  
                                                                  
                                                                  3,826Options
      exercised
                                                                  
                                                                  
                                                                  503
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  7,669
                                                                  
                                                                  
                                                                  
                                                                  –
                                                                  
                                                                  
                                                                  
                                                                  –
                                                                  
                                                                  
                                                                  
                                                                  –
                                                                  
                                                                  
                                                                  
                                                                  7,669Fair
      value of stock options and warrants issued to
      consultants
                                                                  
                                                                  
                                                                  –
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  –
                                                                  
                                                                  
                                                                  
                                                                  1,199
                                                                  
                                                                  
                                                                  
                                                                  1,456
                                                                  
                                                                  
                                                                  
                                                                  –
                                                                  
                                                                  
                                                                  
                                                                  2,655Debt
      conversion
                                                                  
                                                                  
                                                                  61
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  650
                                                                  
                                                                  
                                                                  
                                                                  –
                                                                  
                                                                  
                                                                  
                                                                  –
                                                                  
                                                                  
                                                                  
                                                                  –
                                                                  
                                                                  
                                                                  
                                                                  650Warrants
      exercised
                                                                  
                                                                  
                                                                  1,129
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  16,940
                                                                  
                                                                  
                                                                  
                                                                  –
                                                                  
                                                                  
                                                                  
                                                                  –
                                                                  
                                                                  
                                                                  
                                                                  –
                                                                  
                                                                  
                                                                  
                                                                  16,940Shares
      issued for services
                                                                  
                                                                  
                                                                  159
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  2,450
                                                                  
                                                                  
                                                                  
                                                                  –
                                                                  
                                                                  
                                                                  
                                                                  –
                                                                  
                                                                  
                                                                  
                                                                  –
                                                                  
                                                                  
                                                                  
                                                                  2,450Shares
      issued to acquire a license
                                                                  
                                                                  
                                                                  191
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  2,799
                                                                  
                                                                  
                                                                  
                                                                  –
                                                                  
                                                                  
                                                                  
                                                                  –
                                                                  
                                                                  
                                                                  
                                                                  –
                                                                  
                                                                  
                                                                  
                                                                  2,799Shares
      issued in advance for instalment payment on senior convertible notes
      payable
                                                                  
                                                                  
                                                                  77
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  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
                                                                  
                                                                  
                                                                  –
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  –
                                                                  
                                                                  
                                                                  
                                                                  –
                                                                  
                                                                  
                                                                  
                                                                  –
                                                                  
                                                                  
                                                                  
                                                                  (279,203
                                                                  )
                                                                  
                                                                  
                                                                  (279,203
                                                                  )Change
      in accounting for stock-based
      compensation
                                                                  
                                                                  
                                                                  –
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  55
                                                                  
                                                                  
                                                                  
                                                                  3,951
                                                                  
                                                                  
                                                                  
                                                                  –
                                                                  
                                                                  
                                                                  
                                                                  (4,006
                                                                  )
                                                                  
                                                                  
                                                                  –Balance,November
      30,2005
                                                                  
                                                                  
                                                                  8,226
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  295,007
                                                                  
                                                                  
                                                                  
                                                                  16,674
                                                                  
                                                                  
                                                                  
                                                                  5,345
                                                                  
                                                                  
                                                                  
                                                                  (284,719
                                                                  )
                                                                  
                                                                  
                                                                  32,307
 71
 VASOGEN
INC.
 (A
      DEVELOPMENT STAGE COMPANY)
 
 Notes
      to Consolidated Financial
Statements
 (Tabular
      figures in thousands, except per share
amounts)
 
 Years
      ended November 30, 2008, 2007, 2006
and
 period
      from December 1, 1987 to November 30, 2008
 8.
                  Shareholders'
      equity (continued):
  Number
                                                    
                                                    
                                                    Commonshares'averageshare
                                                    
                                                    
                                                    Share
                                                    
                                                    
                                                    Contributed
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    Period
      fromDecember 1,1987 toNovember 30,of
      shares
                                                    
                                                    
                                                    price
                                                    
                                                    
                                                    capital
                                                    
                                                    
                                                    surplus
                                                    
                                                    
                                                    Warrants
                                                    
                                                    
                                                    Deficit
                                                    
                                                    
                                                    2008Balance,November
      30,2005
                                                    
                                                    
                                                    8,226
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    295,007
                                                    
                                                    
                                                    
                                                    16,674
                                                    
                                                    
                                                    
                                                    5,345
                                                    
                                                    
                                                    
                                                    (284,719
                                                    )
                                                    
                                                    
                                                    32,307Public
      offering (c)
                                                    
                                                    
                                                    4,319
                                                    
                                                    
                                                    
                                                    4.19
                                                    
                                                    
                                                    
                                                    18,082
                                                    
                                                    
                                                    
                                                    –
                                                    
                                                    
                                                    
                                                    5,024
                                                    
                                                    
                                                    
                                                    –
                                                    
                                                    
                                                    
                                                    23,106Fair
      value of broker warrants (c)
                                                    
                                                    
                                                    –
                                                    
                                                    
                                                    
                                                    –
                                                    
                                                    
                                                    
                                                    –
                                                    
                                                    
                                                    
                                                    –
                                                    
                                                    
                                                    
                                                    705
                                                    
                                                    
                                                    
                                                    –
                                                    
                                                    
                                                    
                                                    705Share
      issue costs (c)
                                                    
                                                    
                                                    –
                                                    
                                                    
                                                    
                                                    –
                                                    
                                                    
                                                    
                                                    (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, 2006instalment
      payment made in advance
                                                    
                                                    
                                                    –
                                                    
                                                    
                                                    
                                                    –
                                                    
                                                    
                                                    
                                                    (2,090
                                                    )
                                                    
                                                    
                                                    –
                                                    
                                                    
                                                    
                                                    –
                                                    
                                                    
                                                    
                                                    –
                                                    
                                                    
                                                    
                                                    (2,090
                                                    )December
      1, 2005instalment
      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
 72
 VASOGEN
INC.
 (A
      DEVELOPMENT STAGE COMPANY)
 
 Notes
      to Consolidated Financial
Statements
 (Tabular
      figures in thousands, except per share
amounts)
 
 Years
      ended November 30, 2008, 2007, 2006
and
 period
      from December 1, 1987 to November 30, 2008
 8.
                  Shareholders'
      equity (continued):
  Number
                                                                                                          
                                                                                                          
                                                                                                          Commonshares'averageshare
                                                                                                          
                                                                                                          
                                                                                                          Share
                                                                                                          
                                                                                                          
                                                                                                          Contributed
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          Period
      fromDecember 1,1987 toNovember 30,of
      shares
                                                                                                          
                                                                                                          
                                                                                                          price
                                                                                                          
                                                                                                          
                                                                                                          capital
                                                                                                          
                                                                                                          
                                                                                                          surplus
                                                                                                          
                                                                                                          
                                                                                                          Warrants
                                                                                                          
                                                                                                          
                                                                                                          Deficit
                                                                                                          
                                                                                                          
                                                                                                          2008Balance,November 30, 2006, as originally
      reported
                                                                                                          
                                                                                                          
                                                                                                          15,665
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          344,217
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          20,347
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          11,390
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          (351,374
                                                                                                          )
                                                                                                          
                                                                                                          
                                                                                                          24,580Impact
      ofchange 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 (c)
                                                                                                          
                                                                                                          
                                                                                                          4,917
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          2.32
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          11,425
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          –
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          5,920
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          –
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          17,345Fair
      value ofbroker warrants
                                                                                                          
                                                                                                          
                                                                                                          –
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          –
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          –
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          –
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          470
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          –
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          470Share
      issue costs
                                                                                                          
                                                                                                          
                                                                                                          –
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          –
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          (1,257
                                                                                                          )
                                                                                                          
                                                                                                          
                                                                                                          –
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          (653
                                                                                                          )
                                                                                                          
                                                                                                          
                                                                                                          –
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          (1,910
                                                                                                          )Fair
      value ofstock options
      granted
                                                                                                          
                                                                                                          
                                                                                                          –
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          –
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          –
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          1,995
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          –
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          –
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          1,995Shares
      issuedfor instalment payments on senior convertible
      notes
                                                                                                          
                                                                                                          
                                                                                                          1,809
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          4.58
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          8,281
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          –
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          –
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          –
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          8,281December
      1, 2006instalment made in
      advance
                                                                                                          
                                                                                                          
                                                                                                          –
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          –
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          2,090
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          –
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          –
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          –
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          2,090Transfer
      ofexpired warrants
                                                                                                          
                                                                                                          
                                                                                                          –
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          –
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          –
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          402
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          (402
                                                                                                          )
                                                                                                          
                                                                                                          
                                                                                                          –
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          –Loss
                                                                                                          
                                                                                                          
                                                                                                          –
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          –
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          –
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          –
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          (28,777
                                                                                                          )
                                                                                                          
                                                                                                          
                                                                                                          (28,777
                                                                                                          )Balance,November 30, 2007
                                                                                                          
                                                                                                          
                                                                                                          22,391
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          365,670
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          22,744
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          16,725
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          (381,783
                                                                                                          )
                                                                                                          
                                                                                                          
                                                                                                          23,356Fair
      value of stockoptions granted
                                                                                                          
                                                                                                          
                                                                                                          –
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          –
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          –
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          811
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          –
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          –
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          811Deferred
      shareunits exercised
                                                                                                          
                                                                                                          
                                                                                                          34
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          0.21
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          7
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          –
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          –
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          –
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          7Loss
                                                                                                          
                                                                                                          
                                                                                                          –
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          –
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          –
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          –
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          (16,074
                                                                                                          )
                                                                                                          
                                                                                                          
                                                                                                          (16,074
                                                                                                          )Balance,November 30, 2008
                                                                                                          
                                                                                                          
                                                                                                          22,425
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          $
                                                                                                          365,677
                                                                                                          
                                                                                                          
                                                                                                          $
                                                                                                          23,555
                                                                                                          
                                                                                                          
                                                                                                          $
                                                                                                          16,725
                                                                                                          
                                                                                                          
                                                                                                          $
                                                                                                          (397,857
                                                                                                          )
                                                                                                          
                                                                                                          $
                                                                                                          8,100
 
 73
 VASOGEN
INC.
 (A
      DEVELOPMENT STAGE COMPANY)
 
 Notes
      to Consolidated Financial
Statements
 (Tabular
      figures in thousands, except per share
amounts)
 
 Years
      ended November 30, 2008, 2007, 2006
and
 period
      from December 1, 1987 to November 30, 2008
 8.
                  Shareholders'
      equity (continued):
  (b)
                  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, 18(a),
18(b)(iv) and 18(e) has been amended to give effect to the share
consolidation.
  (c)
                  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(f).  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(f).  The proceeds were allocated to the common
shares and warrants based on their relative fair values.
 74
 VASOGEN
INC.
 (A
      DEVELOPMENT STAGE COMPANY)
 
 Notes
      to Consolidated Financial
Statements
 (Tabular
      figures in thousands, except per share
amounts)
 
 Years
      ended November 30, 2008, 2007, 2006
and
 period
      from December 1, 1987 to November 30, 2008
 8.
                  Shareholders'
      equity (continued):
  (d)
                  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 original stock
option plan (the "Original Plan").  All grants of options after May
2003 are made from the new plans and no further option grants will be made under
the Original Plan.
  On
March 25, 2008, the Company's shareholders approved an increase in the maximum
number of common shares issuable under the 2003 Employee Plan to 12% of the
issued and outstanding common shares of the Company from time to time, or
2,690,966, based on the number of issued and outstanding common shares as at
November 30, 2008.  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 outstanding as at November
30, 2008.  On March 25, 2008, the Company's shareholders approved an
increase in the maximum number of common shares issuable under the 2003 Director
Plan to 300,000.
  Each
option granted allows the holder to purchase one common share at an exercise
price not less than the closing price of the Company's common shares on The
Toronto Stock Exchange on the last trading day prior to the grant of the
option.  Options granted under these plans have a maximum term of 10
years and generally vest over a period of up to three years.  As at
November 30, 2008, there were 2.0 million (2007 - 1.0 million; 2006 -
0.2 million) options and restricted stock units available for
grant.
  2008
                                                  
                                                  
                                                  2007
                                                  
                                                  
                                                  2006Weighted
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  Weighted
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  Weightedaverage
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  average
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  averageNumber
      of
                                                  
                                                  
                                                  exercise
                                                  
                                                  
                                                  Number
      of
                                                  
                                                  
                                                  exercise
                                                  
                                                  
                                                  Number
      of
                                                  
                                                  
                                                  exerciseoptions
                                                  
                                                  
                                                  price
                                                  
                                                  
                                                  options
                                                  
                                                  
                                                  price
                                                  
                                                  
                                                  options
                                                  
                                                  
                                                  priceOutstanding,
      beginning of year
                                                  
                                                  
                                                  879
                                                  
                                                  
                                                  $
                                                  20.67
                                                  
                                                  
                                                  
                                                  812
                                                  
                                                  
                                                  $
                                                  30.30
                                                  
                                                  
                                                  
                                                  431
                                                  
                                                  
                                                  $
                                                  56.00Issued
                                                  
                                                  
                                                  1,224
                                                  
                                                  
                                                  
                                                  1.74
                                                  
                                                  
                                                  
                                                  404
                                                  
                                                  
                                                  
                                                  3.19
                                                  
                                                  
                                                  
                                                  502
                                                  
                                                  
                                                  
                                                  13.80Expired or
      cancelled
                                                  
                                                  
                                                  (1,094
                                                  )
                                                  
                                                  
                                                  7.21
                                                  
                                                  
                                                  
                                                  (337
                                                  )
                                                  
                                                  
                                                  22.97
                                                  
                                                  
                                                  
                                                  (121
                                                  )
                                                  
                                                  
                                                  53.00Outstanding, end
      of year
                                                  
                                                  
                                                  1,009
                                                  
                                                  
                                                  
                                                  11.61
                                                  
                                                  
                                                  
                                                  879
                                                  
                                                  
                                                  
                                                  20.67
                                                  
                                                  
                                                  
                                                  812
                                                  
                                                  
                                                  
                                                  30.30Exercisable, end
      of year
                                                  
                                                  
                                                  517
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  402
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  313
  The
table above includes 25,000 (2007 - 2,500; 2006 - 24,497) options granted to
non-employees for a fair value of $15,513 (2007 - $8,700; 2006 - $0.2 million),
all of which was recorded as an expense in 2008.
 75
 VASOGEN
INC.
 (A
      DEVELOPMENT STAGE COMPANY)
 
 Notes
      to Consolidated Financial
Statements
 (Tabular
      figures in thousands, except per share
amounts)
 
 Years
      ended November 30, 2008, 2007, 2006
and
 period
      from December 1, 1987 to November 30, 2008
 8.
                  Shareholders'
      equity (continued):
  The
following table provides information on options outstanding and exercisable as
of November 30, 2008:
  Options
      outstanding
                                                                                                  
                                                                                                  
                                                                                                  Options
      exercisableExerciseprice
                                                                                                  
                                                                                                  
                                                                                                  Numberoutstanding
                                                                                                  
                                                                                                  
                                                                                                  Weightedaverageexerciseprice
                                                                                                  
                                                                                                  
                                                                                                  Weightedaverageremainingcontractuallife (years)
                                                                                                  
                                                                                                  
                                                                                                  Numberexercisable
                                                                                                  
                                                                                                  
                                                                                                  Weightedaverageexerciseprice$0.79
      - $1.63
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  91
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  0.79
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  9.04
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  90
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  0.79$1.64
      - $2.11
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  333
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  1.92
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  9.21
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  25
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  1.92$2.12
      - $4.29
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  200
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  2.12
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  8.84
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  83
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  2.12$4.30
      - $7.50
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  167
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  5.68
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  6.22
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  117
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  5.75$7.51 -
      $92.10
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  218
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  44.18
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  3.54
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  202
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  45.521,009
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  11.61
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  7.40
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  517
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  19.67
 
 The
total number of in-the-money options vested and exercisable as of
November 30, 2008 was nil.
  The
aggregate intrinsic value of exercisable options as at November 30, 2008 and
2007 was nil.
  The
weighted average remaining contractual life of exercisable options is 5.9
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:
  2008
                                    
                                    
                                    2007
                                    
                                    
                                    2006Dividend
      yield
                                    
                                    
                                    –
                                    
                                    
                                    
                                    –
                                    
                                    
                                    
                                    –Weighted
      average risk-free interest rate
                                    
                                    
                                    3.42
                                    %
                                    
                                    
                                    4.19
                                    %
                                    
                                    
                                    4.10
                                    %Volatility
      factor of the expected marketprice of the Company's
      common shares
                                    
                                    
                                    96.2
                                    %
                                    
                                    
                                    95.3
                                    %
                                    
                                    
                                    87.3
                                    %Weighted
      average expected life of theemployment
      options
                                    
                                    6.1
      years
                                    
                                    
                                    6.0
      years
                                    
                                    
                                    5.9
      years
 76
 VASOGEN
INC.
 (A
      DEVELOPMENT STAGE COMPANY)
 
 Notes
      to Consolidated Financial
Statements
 (Tabular
      figures in thousands, except per share
amounts)
 
 Years
      ended November 30, 2008, 2007, 2006
and
 period
      from December 1, 1987 to November 30, 2008
 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 2008 is
$1.38 (2007 - $2.34; 2006 - $9.60).
  Total
compensation cost for stock-based compensation arrangements recognized in income
in fiscal 2008 was $0.8 million (2007 - $2.0 million; 2006 - $3.1
million).
  On
exercise of options, the Company's policy is to issue shares from
treasury.
  (e)
                  Deferred
      share units:
  Effective
January 1, 2004, the Company established a plan to grant DSUs to its
non-management directors.  On March 25, 2008, the Company's
shareholders approved increasing the maximum number of common shares issuable
under the DSU plan to 625,000.  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 (2007 - $0.2 million; 2006 - $0.3 million) in
compensation expense relating to 346,852 (2007 - 58,140; 2006 - 14,476) DSUs
granted in 2008 for services rendered during the year.  As at November
30, 2008, 390,705 (2007 - 78,049) DSUs are issued and outstanding with a
value of $47,000 (2007 - $0.1 million) based upon the market value of the
Company's common shares at November 30, 2008.  During 2008, 34,196
DSUs were exercised (2007 - nil; 2006 - 2,396).
 77
 VASOGEN
INC.
 (A
      DEVELOPMENT STAGE COMPANY)
 
 Notes
      to Consolidated Financial
Statements
 (Tabular
      figures in thousands, except per share
amounts)
 
 Years
      ended November 30, 2008, 2007, 2006
and
 period
      from December 1, 1987 to November 30, 2008
 8.
                  Shareholders'
      equity (continued):
  (f)
                  Warrants:
  As at
November 30, the warrants which are outstanding and exercisable are as
follows:
 2008
                                          
                                          
                                          2007
                                          
                                          
                                          2006Outstanding, beginning of
      year
                                          
                                          
                                          6,478
                                          
                                          
                                          
                                          2,927
                                          
                                          
                                          
                                          431Issued
                                          
                                          
                                          –
                                          
                                          
                                          
                                          3,983
                                          
                                          
                                          
                                          2,594Expired
                                          
                                          
                                          –
                                          
                                          
                                          
                                          (432
                                          )
                                          
                                          
                                          (98
                                          )Outstanding, end of
      year
                                          
                                          
                                          6,478
                                          
                                          
                                          
                                          6,478
                                          
                                          
                                          
                                          2,927Exercisable, end of
      year
                                          
                                          
                                          6,478
                                          
                                          
                                          
                                          6,478
                                          
                                          
                                          
                                          2,927
 
 
 The
following table provides information on warrants outstanding as of November 30,
2008:
  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
 78
 VASOGEN
INC.
 (A
      DEVELOPMENT STAGE COMPANY)
 
 Notes
      to Consolidated Financial
Statements
 (Tabular
      figures in thousands, except per share
amounts)
 
 Years
      ended November 30, 2008, 2007, 2006
and
 period
      from December 1, 1987 to November 30, 2008
 9.
                  Loss
      per share:
  The computations
for basic and diluted loss per share are as follows:
 2008
                                                  
                                                  
                                                  2007
                                                  
                                                  
                                                  2006Loss
      for the year
                                                  
                                                  $
                                                  (16,074
                                                  )
                                                  
                                                  $
                                                  (28,777
                                                  )
                                                  
                                                  $
                                                  (66,360
                                                  )Weighted
      average number ofcommon shares
      outstanding:Basic
      and diluted
                                                  
                                                  
                                                  22,397
                                                  
                                                  
                                                  
                                                  19,717
                                                  
                                                  
                                                  
                                                  9,408Loss
      per common share:Basic
      and diluted
                                                  
                                                  $
                                                  (0.72
                                                  )
                                                  
                                                  $
                                                  (1.46
                                                  )
                                                  
                                                  $
                                                  (7.05
                                                  )
 
 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:
 Years
      ended November 30,
                                                  
                                                  
                                                  Period
      fromDecember 1,1987 toNovember 30,2008
                                                  
                                                  
                                                  2007
                                                  
                                                  
                                                  2006
                                                  
                                                  
                                                  2008Decrease
      (increase) in:Clinical
      supplies
                                                  
                                                  $
                                                  1,363
                                                  
                                                  
                                                  $
                                                  (152
                                                  )
                                                  
                                                  $
                                                  651
                                                  
                                                  
                                                  $
                                                  –Tax
      credits recoverable
                                                  
                                                  
                                                  983
                                                  
                                                  
                                                  
                                                  (238
                                                  )
                                                  
                                                  
                                                  (197
                                                  )
                                                  
                                                  
                                                  (582
                                                  )Prepaid
      expenses anddeposits
                                                  
                                                  
                                                  599
                                                  
                                                  
                                                  
                                                  597
                                                  
                                                  
                                                  
                                                  239
                                                  
                                                  
                                                  
                                                  (156
                                                  )Increase
      (decrease) in:Accounts
      payable andaccrued liabilities
                                                  
                                                  
                                                  (3,458
                                                  )
                                                  
                                                  
                                                  (3,742
                                                  )
                                                  
                                                  
                                                  (17,851
                                                  )
                                                  
                                                  
                                                  1,176$
                                                  (513
                                                  )
                                                  
                                                  $
                                                  (3,535
                                                  )
                                                  
                                                  $
                                                  (17,158
                                                  )
                                                  
                                                  $
                                                  438
 79
 VASOGEN
INC.
 (A
      DEVELOPMENT STAGE COMPANY)
 
 Notes
      to Consolidated Financial
Statements
 (Tabular
      figures in thousands, except per share
amounts)
 
 Years
      ended November 30, 2008, 2007, 2006
and
 period
      from December 1, 1987 to November 30, 2008
 10.
                  Consolidated
      statements of cash flows
(continued):
  (b)
                  Supplemental
      disclosure of non-cash
transactions:
  Years
      ended November 30,
                                                                    
                                                                    
                                                                    Period
      fromDecember 1,1987 toNovember 30,2008
                                                                    
                                                                    
                                                                    2007
                                                                    
                                                                    
                                                                    2006
                                                                    
                                                                    
                                                                    2008Non-cash
      financing activities:Warrants
      and optionsissued as share issue
      costs
                                                                    
                                                                    $
                                                                    –
                                                                    
                                                                    
                                                                    $
                                                                    470
                                                                    
                                                                    
                                                                    $
                                                                    705
                                                                    
                                                                    
                                                                    $
                                                                    2,944Shares
      issued forservices
                                                                    
                                                                    
                                                                    7
                                                                    
                                                                    
                                                                    
                                                                    –
                                                                    
                                                                    
                                                                    
                                                                    36
                                                                    
                                                                    
                                                                    
                                                                    2,492Debt
      conversion
                                                                    
                                                                    
                                                                    –
                                                                    
                                                                    
                                                                    
                                                                    (8,622
                                                                    )
                                                                    
                                                                    
                                                                    (29,288
                                                                    )
                                                                    
                                                                    
                                                                    (40,684
                                                                    )Shares
      issued on debtconversion
                                                                    
                                                                    
                                                                    –
                                                                    
                                                                    
                                                                    
                                                                    10,371
                                                                    
                                                                    
                                                                    
                                                                    31,114
                                                                    
                                                                    
                                                                    
                                                                    44,259Acceleration
      warrants issuedin connection with
      debt
                                                                    
                                                                    
                                                                    –
                                                                    
                                                                    
                                                                    
                                                                    –
                                                                    
                                                                    
                                                                    
                                                                    2,322
                                                                    
                                                                    
                                                                    
                                                                    2,322Shares
      issued on debtconversion by note
      holders
                                                                    
                                                                    
                                                                    –
                                                                    
                                                                    
                                                                    
                                                                    –
                                                                    
                                                                    
                                                                    
                                                                    263
                                                                    
                                                                    
                                                                    
                                                                    263Shares
      issued fortechnology
                                                                    
                                                                    
                                                                    –
                                                                    
                                                                    
                                                                    
                                                                    –
                                                                    
                                                                    
                                                                    
                                                                    –
                                                                    
                                                                    
                                                                    
                                                                    2,799Share
      issue costsassociated with public
      offering
                                                                    
                                                                    
                                                                    –
                                                                    
                                                                    
                                                                    
                                                                    (470
                                                                    )
                                                                    
                                                                    
                                                                    (705
                                                                    )
                                                                    
                                                                    
                                                                    (1,175
                                                                    )Deferred
      share issuecosts
                                                                    
                                                                    
                                                                    –
                                                                    
                                                                    
                                                                    
                                                                    –
                                                                    
                                                                    
                                                                    
                                                                    –
                                                                    
                                                                    
                                                                    
                                                                    503Non-cash
      investing activities:Shares
      issued to acquiretechnology
                                                                    
                                                                    
                                                                    –
                                                                    
                                                                    
                                                                    
                                                                    –
                                                                    
                                                                    
                                                                    
                                                                    –
                                                                    
                                                                    
                                                                    
                                                                    (2,799
                                                                    )
 80
 VASOGEN
INC.
 (A
      DEVELOPMENT STAGE COMPANY)
 
 Notes
      to Consolidated Financial
Statements
 (Tabular
      figures in thousands, except per share
amounts)
 
 Years
      ended November 30, 2008, 2007, 2006
and
 period
      from December 1, 1987 to November 30, 2008
 10.
                  Consolidated
      statements of cash flows
(continued):
  (c)
                  Supplemental
      cash flow information:
  Years
      ended November 30,
                                              
                                              Period
      fromDecember 1,1987 toNovember 30,2008
                                              
                                              
                                              2007
                                              
                                              
                                              2006
                                              
                                              
                                              2008Interest
      received
                                              
                                              $
                                              528
                                              
                                              
                                              $
                                              1,328
                                              
                                              
                                              $
                                              2,119
                                              
                                              
                                              $
                                              13,829Interest
      paid
                                              
                                              
                                              –
                                              
                                              
                                              
                                              5
                                              
                                              
                                              
                                              930
                                              
                                              
                                              
                                              1,279
  
 11.
                  Fair
      values of financial instruments:
  The
carrying values of cash and cash equivalents, 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:
 2008
                                            
                                            
                                            2007
                                            
                                            
                                            2006Statutory
      income tax rate
                                            
                                            
                                            33.73
                                            %
                                            
                                            
                                            36.12
                                            %
                                            
                                            
                                            36.12
                                            %Basic
      rate applied to loss beforeincome
      taxes
                                            
                                            $
                                            (5,421
                                            )
                                            
                                            $
                                            (10,394
                                            )
                                            
                                            $
                                            (23,969
                                            )Adjustments
      resulting from:Foreign losses affected at lower rates
                                            
                                            
                                            1,922
                                            
                                            
                                            
                                            4,959
                                            
                                            
                                            
                                            10,383Permanent
      differences
                                            
                                            
                                            274
                                            
                                            
                                            
                                            1,950
                                            
                                            
                                            
                                            1,998Change
      in valuation allowance
                                            
                                            
                                            4,851
                                            
                                            
                                            
                                            2,329
                                            
                                            
                                            
                                            10,982Change
      in enacted income tax rates
                                            
                                            
                                            1,915
                                            
                                            
                                            
                                            556
                                            
                                            
                                            
                                            710Other,
      including foreign exchangeadjustment to Irish
      losses
                                            
                                            
                                            (3,541
                                            )
                                            
                                            
                                            600
                                            
                                            
                                            
                                            (104
                                            )$
                                            –
                                            
                                            
                                            $
                                            –
                                            
                                            
                                            $
                                            –
 
 81
 VASOGEN
INC.
 (A
      DEVELOPMENT STAGE COMPANY)
 
 Notes
      to Consolidated Financial
Statements
 (Tabular
      figures in thousands, except per share
amounts)
 
 Years
      ended November 30, 2008, 2007, 2006
and
 period
      from December 1, 1987 to November 30, 2008
 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:
 2008
                                    
                                    2007Future tax
      assets:Non-capital
      losses
                                    $
                                    46,039
                                    $
                                    38,010Deductible
      share issue costs
                                    
                                    774
                                    
                                    1,823Excess of tax
      value of capital assets over book value
                                    
                                    128
                                    
                                    147SR&ED
      expenditure pool, net of refundable tax credits
                                    
                                    7,990
                                    
                                    9,776Other,
      including net capital losses
                                    
                                    2,538
                                    
                                    2,86257,469
                                    
                                    52,618Valuation
      allowance
                                    
                                    (57,469)
                                    
                                    (52,618)Net future tax
      asset
                                    $
                                    –
                                    $
                                    –
 
 The
Company has non-capital losses of approximately $8.4 million (2007 - nil)
included in the consolidated non-capital losses, of which $2.4 million expires
in 2027 and the remaining in 2028, the benefit of which will be recognized in
the accounts when realized.
  The
Company's subsidiary, Vasogen Ireland Limited, has losses of approximately
$339.7 million (2007 - $297.4 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 $2.8
million (2007 - $2.1 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, 2008 is approximately
$30.2 million (2007 - $32.4 million) for federal income tax purposes and
$24.7 million (2007 - $26.9 million) for Ontario tax purposes.
 82
 VASOGEN
INC.
 (A
      DEVELOPMENT STAGE COMPANY)
 
 Notes
      to Consolidated Financial
Statements
 (Tabular
      figures in thousands, except per share
amounts)
 
 Years
      ended November 30, 2008, 2007, 2006
and
 period
      from December 1, 1987 to November 30, 2008
 12.
                  Income
      taxes (continued):
  The
Company also has $12.6 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:
 
 2009
                                            
                                            $
                                            4392010
                                            
                                            
                                            6052011
                                            
                                            
                                            9512012
                                            
                                            
                                            9602013
                                            
                                            
                                            1,4972014
                                            
                                            
                                            2,3432015
                                            
                                            
                                            2,0622026
                                            
                                            
                                            2,4172027
                                            
                                            
                                            9072028
                                            
                                            
                                            396$
                                            12,577
  13.
                  Capital
      risk management:
  The
Company's objectives when managing capital is to maintain its ability to
continue as a going concern in order to provide returns for shareholders and
benefits for other stakeholders.  Note 1 provides a discussion
surrounding the Company's ability to continue as a going concern.
  The
Company includes cash and cash equivalents, long-term debt and equity, comprised
of issued common shares, contributed surplus, warrants and deficit, in the
definition of capital.
  The
Company's primary objective with respect to its capital management is to ensure
that it has sufficient cash resources to maintain its ongoing
operations.  To secure the additional capital, the Company may attempt
to raise additional funds through the issuance of debt, equity and warrants or
by securing strategic partners.
 83
 VASOGEN
INC.
 (A
      DEVELOPMENT STAGE COMPANY)
 
 Notes
      to Consolidated Financial
Statements
 (Tabular
      figures in thousands, except per share
amounts)
 
 Years
      ended November 30, 2008, 2007, 2006
and
 period
      from December 1, 1987 to November 30, 2008
 13.
                  Capital
      risk management (continued):
  The
Company is not subject to externally imposed capital requirements and there has
been no change with respect to the overall capital risk management strategy
during the year ended November 30, 2008.
  14.
                  Financial
      risk management:
 The
Company is exposed to a variety of financial risks by virtue of its activities:
market risk (including currency risk and interest rate risk), credit risk, and
liquidity risk.  The overall risk management program focuses on the
unpredictability of financial markets and seeks to minimize potential adverse
effects on financial performance.
  Risk
management is carried out under policies approved by the Board of
Directors.  Management identifies and evaluates financial risks and is
charged with the responsibility of establishing controls and procedures to
ensure that financial risks are mitigated in accordance with the approved
policies.
  (a)
                  Market
      risk:
  (i)
                  Currency
      risk:
  The
Company is exposed to foreign exchange risk from various currencies, primarily
U.S. dollars.  Foreign exchange risk arises from purchase
transactions, as well as recognized financial assets and liabilities denominated
in foreign currencies.
  The
Company's main objective in managing its foreign exchange risk is to maintain
U.S. cash on hand to support U.S. forecasted cash flows over an 18-month
horizon.  To achieve this objective, the Company monitors forecasted
cash flows in foreign currencies and attempts to mitigate the risk by modifying
the nature of cash and cash equivalents held or by entering into foreign
exchange contracts with Canadian chartered banks.  Foreign exchange
contracts are only entered into for purposes of managing foreign exchange risk
and not for speculative purposes.
 84
 VASOGEN
INC.
 (A
      DEVELOPMENT STAGE COMPANY)
 
 Notes
      to Consolidated Financial
Statements
 (Tabular
      figures in thousands, except per share
amounts)
 
 Years
      ended November 30, 2008, 2007, 2006
and
 period
      from December 1, 1987 to November 30, 2008
 14.
                  Financial
      risk management (continued):
  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 consolidated statement of operations,
deficit and comprehensive income.  The Company did not have any
forward foreign exchange contracts outstanding at November 30,
2008.
  Balances
in foreign currencies at November 30, 2008 are as follows:
 U.S.
      dollar
                                              
                                              
                                              Euros
                                              
                                              
                                              BritishpoundsCash
      and cash equivalents
                                              
                                              $
                                              764
                                              
                                              
                                              €
                                              17
                                              
                                              
                                              £
                                              –Accounts
      payable andaccrued liabilities
                                              
                                              
                                              (246
                                              )
                                              
                                              
                                              (76
                                              )
                                              
                                              
                                              (1
                                              )$
                                              518
                                              
                                              
                                              €
                                              (59
                                              )
                                              
                                              £
                                              (1
                                              )
 
 As the
Company's functional or measurement currency is the Canadian dollar,
U.S. dollar exchange rate fluctuations may have a significant impact from
an accounting perspective.  However, they would not impair or enhance
the ability of the Company to pay its foreign currency-denominated expenses as
such items would be similarly affected.
  (ii)
                  Interest
      rate risk:
  Interest
rate risk is the risk that the future cash flows of a financial instrument will
fluctuate because of changes in market interest rates.
  Financial
assets and financial liabilities with variable interest rates expose the Company
to cash flow interest rate risk.  The Company's cash and cash
equivalents include highly liquid investments that earn interest at market
rates.
 85
 VASOGEN
INC.
 (A
      DEVELOPMENT STAGE COMPANY)
 
 Notes
      to Consolidated Financial
Statements
 (Tabular
      figures in thousands, except per share
amounts)
 
 Years
      ended November 30, 2008, 2007, 2006
and
 period
      from December 1, 1987 to November 30, 2008
 14.
                  Financial
      risk management (continued):
  The
Company manages its interest rate risk by maximizing the interest income earned
on excess funds while maintaining the liquidity necessary to conduct operations
on a day-to-day basis.  The Company's policy limits the investing of
excess funds to liquid government and corporate bonds having a single "A" credit
rating or greater.
  Fluctuations
in market rates of interest do not have a significant impact on the Company's
results of operations due to the short term to maturity of the investments
held.
  The
Company has recorded investment income at $0.5 million (2007 - $1.3 million;
2006 - $2.0 million) in relation to its cash and cash equivalents held for
trading.
  (b)
                  Credit
      risk:
  Credit
risk is the risk of a financial loss to the Company if a customer or
counterparty to a financial instrument fails to meet its contractual
obligation.
  The
maximum exposure to credit risk of the Company at period end is the carrying
value of its 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. Cash and cash equivalents of $8.6 million (November 30, 2007 -
$23.5 million) are not subject to any external restrictions.
  (c)
                  Liquidity
      risk:
  Liquidity
risk is the risk that the Company will not be able to meet its obligations as
they fall due.
  The
Company manages its liquidity risk by forecasting cash flows from operations and
anticipated investing and financing activities.  Senior management is
also actively involved in the review and approval of planned
expenditures.
 86
 VASOGEN
INC.
 (A
      DEVELOPMENT STAGE COMPANY)
 
 Notes
      to Consolidated Financial
Statements
 (Tabular
      figures in thousands, except per share
amounts)
 
 Years
      ended November 30, 2008, 2007, 2006
and
 period
      from December 1, 1987 to November 30, 2008
 14.
                  Financial
      risk management (continued):
  The
following are the contractual maturities of the undiscounted cash flows of
financial liabilities as at November 30, 2008:
 Less
      than
                                    3
      to 6
                                    6
      to 9
                                    9
      months
                                    Greater
      than3
      months
                                    months
                                    months
                                    to
      1 year
                                    1
      yearAccounts
      payableand accrued
      liabilities
                                    $
      1,065
                                    $
      131
                                    $
                                    –
                                    $
                                    –
                                    $
                                    46
 
 15.
                  Commitments
      and contingencies:
  (a)
                  Royalty
      commitments:
  The
Company agreed to pay royalties to arm's-length third parties based on gross
amounts receivable by the Company from future commercial sales of its products,
aggregating 1.5% on all sales to a maximum royalty of $1.3 million per annum and
an additional 2% with respect to revenue derived from certain applications of
the Company's Celacade technology to a maximum royalty of $5.0 million per
annum.  To date, no royalties are due and/or payable.
  (b)
                  Commitments:
  Under
the terms of certain operating lease agreements, the Company is committed to
make a payment of $92,000 for the year ending November 30, 2009.  The
Company has no further commitments beyond 2009.
  Rent
expense under operating leases, for the year ended November 30, 2008, is
$0.6 million (2007 - $0.7 million; 2006 - $0.8 million).
  87
 VASOGEN
INC.
 (A
      DEVELOPMENT STAGE COMPANY)
 
 Notes
      to Consolidated Financial
Statements
 (Tabular
      figures in thousands, except per share
amounts)
 
 Years
      ended November 30, 2008, 2007, 2006
and
 period
      from December 1, 1987 to November 30, 2008
 
 16.
                  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, 2008 and
2007 was fully amortized, is primarily in Ireland.
  17.
                  Research
      and development projects:
  The
Company has undertaken the following significant research and development
projects:
  (a)
                  Platform
      technology:
  The
Company was 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 was 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.  Based on the April 2008 and
July 2008 restructurings, the Company is no longer focusing any significant
resources in this area, pending the outcome of the Company's current strategic
review process.
  (b)
                  Celacade
      technology - cardiovascular
program:
  The
Company's Celacade technology was 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.  Based on the April 2008 restructuring, the
Company is no longer focusing any significant resources in this area, pending
the outcome of the Company's current strategic review process.
 88
 VASOGEN
INC.
 (A
      DEVELOPMENT STAGE COMPANY)
 
 Notes
      to Consolidated Financial
Statements
 (Tabular
      figures in thousands, except per share
amounts)
 
 Years
      ended November 30, 2008, 2007, 2006
and
 period
      from December 1, 1987 to November 30, 2008
 17.
                  Research
      and development projects
(continued):
  (c)
                  Celacade
      technology - autoimmune program:
  The
Company has completed preclinical and early-stage clinical studies with its
Celacade technology in autoimmune disease.  The Company has not
focused any significant resources in this area over the last three fiscal
periods.
  (d)
                  VP025
      - neuro-inflammatory program:
  The
Company was 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.  Based on the July
2008 restructuring, the Company is no longer focusing any significant resources
in this area, pending the outcome of the Company's current strategic review
process.
  The
following table outlines research and development costs expensed for the
Company's significant research and development projects:
 Years
      ended November 30,
                                                        
                                                        
                                                        Period
      fromDecember 1,1987 toNovember 30,2008
                                                        
                                                        
                                                        2007
                                                        
                                                        
                                                        2006
                                                        
                                                        
                                                        2008Research
      and developmentcosts expensed:Platform
      technology
                                                        
                                                        $
                                                        1,386
                                                        
                                                        
                                                        $
                                                        2,156
                                                        
                                                        
                                                        $
                                                        2,472
                                                        
                                                        
                                                        $
                                                        44,643Cardiovascular
      program
                                                        
                                                        
                                                        5,736
                                                        
                                                        
                                                        
                                                        7,224
                                                        
                                                        
                                                        
                                                        25,813
                                                        
                                                        
                                                        
                                                        179,334Autoimmune
      program
                                                        
                                                        
                                                        –
                                                        
                                                        
                                                        
                                                        –
                                                        
                                                        
                                                        
                                                        –
                                                        
                                                        
                                                        
                                                        4,565VP025
                                                        
                                                        
                                                        1,672
                                                        
                                                        
                                                        
                                                        2,659
                                                        
                                                        
                                                        
                                                        4,447
                                                        
                                                        
                                                        
                                                        19,169Total
      research anddevelopment costs
      expensed
                                                        
                                                        $
                                                        8,794
                                                        
                                                        
                                                        $
                                                        12,039
                                                        
                                                        
                                                        $
                                                        32,732
                                                        
                                                        
                                                        $
                                                        247,711Acquired
      technology:Celacade
      platform
                                                        
                                                        $
                                                        –
                                                        
                                                        
                                                        $
                                                        –
                                                        
                                                        
                                                        $
                                                        –
                                                        
                                                        
                                                        $
                                                        4,081
 89
 VASOGEN
INC.
 (A
      DEVELOPMENT STAGE COMPANY)
 
 Notes
      to Consolidated Financial
Statements
 (Tabular
      figures in thousands, except per share
amounts)
 
 Years
      ended November 30, 2008, 2007, 2006
and
 period
      from December 1, 1987 to November 30, 2008
 18.
                  Differencesbetween 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:
 Years
      ended November 30,
                                                                                                      
                                                                                                      
                                                                                                      Period
      fromDecember 1,1987 toNovember 30,2008
                                                                                                      
                                                                                                      
                                                                                                      2007
                                                                                                      
                                                                                                      
                                                                                                      2006
                                                                                                      
                                                                                                      
                                                                                                      2008Loss
      per Canadian GAAP
                                                                                                      
                                                                                                      $
                                                                                                      (16,074
                                                                                                      )
                                                                                                      
                                                                                                      $
                                                                                                      (28,777
                                                                                                      )
                                                                                                      
                                                                                                      $
                                                                                                      (66,360
                                                                                                      )
                                                                                                      
                                                                                                      $
                                                                                                      (390,414
                                                                                                      )Acquired
      technology costs (b)(i)
                                                                                                      
                                                                                                      
                                                                                                      –
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      –
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      –
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      (4,081
                                                                                                      )Technology
      amortization (b)(i)
                                                                                                      
                                                                                                      
                                                                                                      –
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      253
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      253
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      4,081Non-employee
      stock options(b)(ii)
                                                                                                      
                                                                                                      
                                                                                                      –
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      –
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      (58
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      (3,476
                                                                                                      )Employee
      stock options (b)(iii)
                                                                                                      
                                                                                                      
                                                                                                      –
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      –
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      –
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      2,879Performance-based
      options (b)(iii)
                                                                                                      
                                                                                                      
                                                                                                      –
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      –
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      –
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      (278
                                                                                                      )Warrants
      issued to acquiretechnology
      (b)(iv)
                                                                                                      
                                                                                                      
                                                                                                      –
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      –
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      –
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      (61
                                                                                                      )Accretion
      of senior convertiblenotes payable
      (b)(v)
                                                                                                      
                                                                                                      
                                                                                                      –
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      799
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      (2,373
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      (1,855
                                                                                                      )Amortization
      of deferredfinancing costs
    (b)(v)
                                                                                                      
                                                                                                      
                                                                                                      (265
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      (298
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      (963
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      (1,671
                                                                                                      )Loss
      on debt extinguishment(b)(v)
                                                                                                      
                                                                                                      
                                                                                                      –
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      (1,426
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      (1,131
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      (2,557
                                                                                                      )Fair
      value adjustmenton embedded derivatives and warrants
      (b)(v)
                                                                                                      
                                                                                                      
                                                                                                      779
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      3,394
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      9,711
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      16,890Fair
      value adjustmenton warrants
    fromNovember
      2006 financing (b)(vi)
                                                                                                      
                                                                                                      
                                                                                                      1,360
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      4,623
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      –
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      6,009Fair
      value adjustment onwarrants from May 2007 financing
      (b)(vi)
                                                                                                      
                                                                                                      
                                                                                                      3,630
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      3,256
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      –
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      6,886Loss
      and comprehensive lossper United States
      GAAP
                                                                                                      
                                                                                                      $
                                                                                                      (10,570
                                                                                                      )
                                                                                                      
                                                                                                      $
                                                                                                      (18,176
                                                                                                      )
                                                                                                      
                                                                                                      $
                                                                                                      (60,921
                                                                                                      )
                                                                                                      
                                                                                                      $
                                                                                                      (367,648
                                                                                                      )Weighted
      average number ofcommon shares under United States
      GAAP:Basic
      and diluted
                                                                                                      
                                                                                                      
                                                                                                      22,397
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      19,717
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      9,408Basic
      and diluted lossper common share under United States
      GAAP
                                                                                                      
                                                                                                      $
                                                                                                      (0.47
                                                                                                      )
                                                                                                      
                                                                                                      $
                                                                                                      (0.92
                                                                                                      )
                                                                                                      
                                                                                                      $
                                                                                                      (6.48
                                                                                                      )
 90
 VASOGEN
INC.
 (A
      DEVELOPMENT STAGE COMPANY)
 
 Notes
      to Consolidated Financial
Statements
 (Tabular
      figures in thousands, except per share
amounts)
 
 Years
      ended November 30, 2008, 2007, 2006
and
 period
      from December 1, 1987 to November 30, 2008
 18.
                  Differencesbetween generally
      accepted accounting principles in Canada and the United States
      (continued):
  (b)
                  Consolidated
      balance sheets:
  2008
                                    
                                    
                                    2007United
                                    
                                    
                                    
                                    
                                    
                                    UnitedCanada
                                    
                                    
                                    States
                                    
                                    
                                    Canada
                                    
                                    
                                    StatesAssets:Deferred
      financing costs(v), (vi)
                                    
                                    $
                                    –
                                    
                                    
                                    $
                                    774
                                    
                                    
                                    $
                                    –
                                    
                                    
                                    $
                                    1,039Liabilities:Warrants
      (v), (vi)
                                    
                                    
                                    –
                                    
                                    
                                    
                                    124
                                    
                                    
                                    
                                    –
                                    
                                    
                                    
                                    5,893Shareholders'
      equity:Share
      capital (iv)
                                    
                                    
                                    365,677
                                    
                                    
                                    
                                    364,874
                                    
                                    
                                    
                                    365,670
                                    
                                    
                                    
                                    364,867Contributed
      surplus(ii), (iii), (v)
                                    
                                    
                                    23,555
                                    
                                    
                                    
                                    13,034
                                    
                                    
                                    
                                    22,744
                                    
                                    
                                    
                                    12,223Warrants
                                    
                                    
                                    16,725
                                    
                                    
                                    
                                    –
                                    
                                    
                                    
                                    16,725
                                    
                                    
                                    
                                    –Deficit,
      end of period (i), (ii),(iii), (iv), (v),
      (vi)
                                    
                                    
                                    (397,857
                                    )
                                    
                                    
                                    (369,158
                                    )
                                    
                                    
                                    (381,783
                                    )
                                    
                                    
                                    (358,588
                                    )Deficit
      accumulated duringdevelopment stage (i), (ii),
      (iii), (iv), (v), (vi)
                                    
                                    
                                    (396,347
                                    )
                                    
                                    
                                    (367,648
                                    )
                                    
                                    
                                    (380,273
                                    )
                                    
                                    
                                    (357,078
                                    )
 
 (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.
 91
 VASOGEN
INC.
 (A
      DEVELOPMENT STAGE COMPANY)
 
 Notes
      to Consolidated Financial
Statements
 (Tabular
      figures in thousands, except per share
amounts)
 
 Years
      ended November 30, 2008, 2007, 2006
and
 period
      from December 1, 1987 to November 30, 2008
 18.
                  Differencesbetween 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 Financial Accounting
Standards Board ("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 GAAP 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.
 92
 VASOGEN
INC.
 (A
      DEVELOPMENT STAGE COMPANY)
 
 Notes
      to Consolidated Financial
Statements
 (Tabular
      figures in thousands, except per share
amounts)
 
 Years
      ended November 30, 2008, 2007, 2006
and
 period
      from December 1, 1987 to November 30, 2008
 18.
                  Differencesbetween 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 GAAP 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.
 93
 VASOGEN
INC.
 (A
      DEVELOPMENT STAGE COMPANY)
 
 Notes
      to Consolidated Financial
Statements
 (Tabular
      figures in thousands, except per share
amounts)
 
 Years
      ended November 30, 2008, 2007, 2006
and
 period
      from December 1, 1987 to November 30, 2008
 18.
                  Differencesbetween 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.
 94
 VASOGEN
INC.
 (A
      DEVELOPMENT STAGE COMPANY)
 
 Notes
      to Consolidated Financial
Statements
 (Tabular
      figures in thousands, except per share
amounts)
 
 Years
      ended November 30, 2008, 2007, 2006
and
 period
      from December 1, 1987 to November 30, 2008
 18.
                  Differencesbetween 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 at 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.
 95
 VASOGEN
INC.
 (A
      DEVELOPMENT STAGE COMPANY)
 
 Notes
      to Consolidated Financial
Statements
 (Tabular
      figures in thousands, except per share
amounts)
 
 Years
      ended November 30, 2008, 2007, 2006
and
 period
      from December 1, 1987 to November 30, 2008
 18.
                  Differencesbetween generally
      accepted accounting principles in Canada and the United States
      (continued):
  (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.
  (c)
                  Consolidated
      statements of cash flows:
  Cash
from operations under United States GAAP includes the adjustments to loss for
the year outlined in note 18(b).  Cash used in investments under
United States GAAP excludes amounts representing acquired technology (note
18(b)(i)).
 96
 VASOGEN
INC.
 (A
      DEVELOPMENT STAGE COMPANY)
 
 Notes
      to Consolidated Financial
Statements
 (Tabular
      figures in thousands, except per share
amounts)
 
 Years
      ended November 30, 2008, 2007, 2006
and
 period
      from December 1, 1987 to November 30, 2008
 18.
                  Differencesbetween generally
      accepted accounting principles in Canada and the United States
      (continued):
  (d)
                  Income
      taxes:
  During
the years ended November 30, 2008 and 2007, the Company did not record any tax
expense on loss from operations.
  On
December 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting for
Uncertainties in Income Taxes ("FIN 48"), an interpretation of FASB Statement
109, Accounting for Income Taxes ("SFAS 109").  FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an enterprise's
financial statements in accordance with SFAS 109.  The
interpretation prescribed a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return.  FIN 48 also provides accounting
guidance on de-recognition, classification, interest and penalties, accounting
in interim periods, disclosure and transition.  The evaluation of tax
positions under FIN 48 is a two-step process, whereby (i) the Company
determines whether it is more likely than not that the tax positions will be
sustained based on the technical merits of the position; and (ii) for those tax
positions that meet the more-likely-than-not recognition threshold, the Company
would recognize the largest amount of tax benefit that is greater than 50%
likely of being realized upon ultimate settlement with the related tax
authority.
  The
adoption of FIN 48 did not result in a change to the Company's opening
accumulated deficit as at December 1, 2007.  As a result of the
adoption of FIN 48, the Company reduced its gross deferred tax asset by
approximately $470,000 related to the future benefit of certain stock-based
compensation paid to non-employees in Canada.
  The
Company has approximately $470,000 of total gross unrecognized tax benefits as
of the adoption of FIN 48 at December 1, 2007.  As the Company has a
full valuation allowance against these unrecognized tax benefits, the
recognition of these benefits would not favourably affect the effective income
tax rate in future periods.
  As at
November 30, 2008, the Company did not have any gross unrecognized tax
benefits.  The decrease of $470,000 since adoption resulted from a
settlement of a stock-based compensation deduction with the Canada Revenue
Agency in the second quarter of 2008.
 97
 VASOGEN
INC.
 (A
      DEVELOPMENT STAGE COMPANY)
 
 Notes
      to Consolidated Financial
Statements
 (Tabular
      figures in thousands, except per share
amounts)
 
 Years
      ended November 30, 2008, 2007, 2006
and
 period
      from December 1, 1987 to November 30, 2008
 18.
                  Differencesbetween generally
      accepted accounting principles in Canada and the United States
      (continued):
  The
Company recognizes interest and penalties accrued related to unrecognized tax
benefits in income tax expense.  During the years ended November 30,
2008 and November 30, 2007, the Company did not recognize any interest and
penalties.  The Company had no amounts accrued for the payment of
interest and penalties as of November 30, 2008 or November 30,
2007.
  The
Company is subject to tax examinations in all major taxing jurisdictions in
which it operates (namely Canada, the United States and Ireland).  The
Company's tax years 2001 through 2008 remain open in Canada for regular
examination and for transfer pricing purposes.  Furthermore, taxation
years 2003 through 2008 remain open for examination in other
jurisdictions.
  The
following is a tabular reconciliation of the Company's change in uncertain tax
position under FIN 48:
 Total grossunrecognizedtax
benefitsBalance, November 30,
      2007
                                    
                                    $
                                    470Settlement of tax
      positions
                                    
                                    
                                    (470
                                    )Balance, November 30,
      2008
                                    
                                    $
                                    –
 
 In
accordance with SFAS 109, the Company reviews all available positive and
negative evidence to evaluate the recoverability of the deferred tax
assets.  This includes a review of such evidence as the carryforward
periods of the significant tax assets, the Company's history of generating
taxable income in its significant tax jurisdictions (namely Canada, the United
States and Ireland), the Company's cumulative profits or losses in recent years,
and the Company's projections of earnings in its significant
jurisdictions.  On a jurisdictional basis, the Company is in a
cumulative loss position in all of its significant jurisdictions.  For
all jurisdictions, the Company continues to maintain a valuation allowance
against all of its deferred income tax assets.
 98
 VASOGEN
INC.
 (A
      DEVELOPMENT STAGE COMPANY)
 
 Notes
      to Consolidated Financial
Statements
 (Tabular
      figures in thousands, except per share
amounts)
 
 Years
      ended November 30, 2008, 2007, 2006
and
 period
      from December 1, 1987 to November 30, 2008
 18.
                  Differencesbetween generally
      accepted accounting principles in Canada and the United States
      (continued):
  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)
                    Consolidated
      statement of shareholders' equity in accordance with United States
      GAAP:
 Numberof shares
                                                                                        
                                                                                        
                                                                                        Commonshares'averageshareprice
                                                                                        
                                                                                        
                                                                                        Sharecapital
                                                                                        
                                                                                        
                                                                                        Additionalpaid-incapital
                                                                                        
                                                                                        
                                                                                        Warrants
                                                                                        
                                                                                        
                                                                                        Deficit
                                                                                        
                                                                                        
                                                                                        Period
      fromDecember 1,1987 toNovember 30,2008Balance,November 30, 2006
                                                                                        
                                                                                        
                                                                                        15,665
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        $
                                                                                        343,906
                                                                                        
                                                                                        
                                                                                        $
                                                                                        10,228
                                                                                        
                                                                                        
                                                                                        $
                                                                                        –
                                                                                        
                                                                                        
                                                                                        $
                                                                                        (340,412
                                                                                        )
                                                                                        
                                                                                        $
                                                                                        13,722Shares
      issuedfor 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 ofstock options granted
                                                                                        
                                                                                        
                                                                                        –
                                                                                        
                                                                                        
                                                                                        
                                                                                        –
                                                                                        
                                                                                        
                                                                                        
                                                                                        –
                                                                                        
                                                                                        
                                                                                        
                                                                                        1,995
                                                                                        
                                                                                        
                                                                                        
                                                                                        –
                                                                                        
                                                                                        
                                                                                        
                                                                                        –
                                                                                        
                                                                                        
                                                                                        
                                                                                        1,995Loss
      andcomprehensive loss
                                                                                        
                                                                                        
                                                                                        –
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        –
                                                                                        
                                                                                        
                                                                                        
                                                                                        –
                                                                                        
                                                                                        
                                                                                        
                                                                                        –
                                                                                        
                                                                                        
                                                                                        
                                                                                        (18,176
                                                                                        )
                                                                                        
                                                                                        
                                                                                        (18,176
                                                                                        )Balance,November 30, 2007
                                                                                        
                                                                                        
                                                                                        22,391
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        364,867
                                                                                        
                                                                                        
                                                                                        
                                                                                        12,223
                                                                                        
                                                                                        
                                                                                        
                                                                                        –
                                                                                        
                                                                                        
                                                                                        
                                                                                        (358,588
                                                                                        )
                                                                                        
                                                                                        
                                                                                        18,502Fair
      value ofstock options granted
                                                                                        
                                                                                        
                                                                                        –
                                                                                        
                                                                                        
                                                                                        
                                                                                        –
                                                                                        
                                                                                        
                                                                                        
                                                                                        –
                                                                                        
                                                                                        
                                                                                        
                                                                                        811
                                                                                        
                                                                                        
                                                                                        
                                                                                        –
                                                                                        
                                                                                        
                                                                                        
                                                                                        –
                                                                                        
                                                                                        
                                                                                        
                                                                                        811DSUs
      exercised
                                                                                        
                                                                                        
                                                                                        34
                                                                                        
                                                                                        
                                                                                        
                                                                                        0.21
                                                                                        
                                                                                        
                                                                                        
                                                                                        7
                                                                                        
                                                                                        
                                                                                        
                                                                                        –
                                                                                        
                                                                                        
                                                                                        
                                                                                        –
                                                                                        
                                                                                        
                                                                                        
                                                                                        –
                                                                                        
                                                                                        
                                                                                        
                                                                                        7Loss
      andcomprehensive loss
                                                                                        
                                                                                        
                                                                                        –
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        –
                                                                                        
                                                                                        
                                                                                        
                                                                                        –
                                                                                        
                                                                                        
                                                                                        
                                                                                        –
                                                                                        
                                                                                        
                                                                                        
                                                                                        (10,570
                                                                                        )
                                                                                        
                                                                                        
                                                                                        (10,570
                                                                                        )Balance,November 30, 2008
                                                                                        
                                                                                        
                                                                                        22,425
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        $
                                                                                        364,874
                                                                                        
                                                                                        
                                                                                        $
                                                                                        13,034
                                                                                        
                                                                                        
                                                                                        $
                                                                                        –
                                                                                        
                                                                                        
                                                                                        $
                                                                                        (369,158
                                                                                        )
                                                                                        
                                                                                        $
                                                                                        8,750
 99
 VASOGEN
INC.
 (A
      DEVELOPMENT STAGE COMPANY)
 
 Notes
      to Consolidated Financial
Statements
 (Tabular
      figures in thousands, except per share
amounts)
 
 Years
      ended November 30, 2008, 2007, 2006
and
 period
      from December 1, 1987 to November 30, 2008
 18.
                  Differencesbetween generally
      accepted accounting principles in Canada and the United States
      (continued):
  (f)
                  Changes
      in accounting policies:
  (i)
                  Fair
      value measurements:
  On
December 1, 2007, the Company adopted the currently effective provisions of
SFAS 157, Fair Value Measurements, which defines fair value, establishes a
framework for measuring fair value in United States 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.  The adoption of this standard did not have a material
impact on the Company's consolidated financial position and results of
operations.
  (ii)
                  Fair
      value option:
  On
December 1, 2007, the Company adopted SFAS 159, The Fair Value Option for
Financial Assets and Financial Liabilities ("SFAS 159").  Under the
provisions of SFAS 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 are recognized in
earnings each reporting period.  The adoption of this standard did not
have a material impact on the Company's consolidated financial position and
results of operations.
  (g)
                  Recent
      accounting pronouncements issued and not yet
  adopted:
  (i)
                  Collaborative
      arrangements:
  EITF
No. 07-1, Collaborative Arrangements ("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 required to adopt the provision effective December 1,
2008.  The Company is currently assessing the impact of EITF 07-1
on its results of operations and financial position.
 100
 VASOGEN
INC.
 (A
      DEVELOPMENT STAGE COMPANY)
 
 Notes
      to Consolidated Financial
Statements
 (Tabular
      figures in thousands, except per share
amounts)
 
 Years
      ended November 30, 2008, 2007, 2006
and
 period
      from December 1, 1987 to November 30, 2008
 18.
                  Differencesbetween generally
      accepted accounting principles in Canada and the United States
      (continued):
  (ii)
                  Accounting
      for advance payments for research and development
    activities:
  EITF
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"), 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
required to adopt the provisions of EITF 07-3 on December 1,
2008.  The Company is currently assessing the impact that it will have
on its results of operations and financial position.
  (iii)
                  Disclosure
      about derivative instruments and hedging
  activities:
  SFAS
161, Disclosures about Derivative Instruments and Hedging Activities
("SFAS 161"), amends and expands the disclosure requirements in
SFAS 133, Accounting for Derivative Instruments and Hedging
Activities.  The intention is to provide an enhanced understanding of
how and why an entity used derivative instruments, how derivative instruments
and related hedges items are accounted for, and how derivative instruments and
related hedged items affect an entity's financial position, financial
performance and cash flows.  The Company is required to adopt the
provisions of SFAS 161 on December 1, 2008.  The Company is currently
assessing the impact that it will have on its disclosures in accordance with
United States GAAP.
  (iv)
                  Business
      combinations:
  In
December 2007, the FASB issued FASB Statement No. 141R, Business
Combinations.  The statement will require all business acquisitions to
be measured at fair value, the existing definition of a business would be
expanded, pre-acquisition contingencies would be measured at fair value, most
acquisition-related costs would be recognized as expenses as incurred, as well
as other changes.  The statement is effective for the Company
beginning December 1, 2009.  The Company is currently assessing the
impact of this new standard on its consolidated financial
statements.
 101
 VASOGEN
INC.
 (A
      DEVELOPMENT STAGE COMPANY)
 
 Notes
      to Consolidated Financial
Statements
 (Tabular
      figures in thousands, except per share
amounts)
 
 Years
      ended November 30, 2008, 2007, 2006
and
 period
      from December 1, 1987 to November 30, 2008
 18.
                  Differencesbetween generally
      accepted accounting principles in Canada and the United States
      (continued):
  (v)
                  Non-controlling
      interests:
  In
December 2007, the FASB issued FASB Statement No. 160, Non-controlling Interests
in Financial Statements.  The statement will improve the relevance,
comparability and transparency of the financial information that a reporting
entity provides in its consolidated financial statements by establishing new
accounting and reporting standards.  The statement is effective for
the Company beginning December 1, 2009.  The Company is currently
assessing the impact of this new standard on its consolidated financial
statements.
  19.
                  Subsequent
      events:
  Subsequent
to November 30, 2008, the Company entered into an agreement to sell a United
States patent application and its related foreign counterparts for U.S. $0.4
million.  This device-based intellectual property has not been used to
date in the Celacade System; however, the Company has retained rights to this
technology for any potential use as it relates to its Celacade
System.
  Subsequent
to November 30, 2008, the Company announced additional terminations to further
reduce its cash-burn rate as the Company continues to explore strategic
alternatives.  As a result, $0.1 million in severance will be paid to
terminated employees subsequent to year end.
  Subsequent
to November 30, 2008, the Company's employment contract with its President and
Chief Executive Officer was terminated.  As a result of contractual
obligations under the employment agreement, the Company will pay $1.0 million in
the first quarter of 2009 in full settlement of those
obligations.  The Chief Executive Officer will continue to provide
services to the Company under a contract arrangement.
 
 102




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
            
            Report of
      KPMG, LLP, independent chartered
  accountants





103





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.
      NeilGraham
      D. Neil
                  Vice
      President, Finance and Chief Financial Officer (Principal Financial
      Officer),
                  Vasogen
      Inc.





February
27, 2009