##### 



Managements Responsibility The accompanying consolidated financial statements of Vasogen Inc. and other financial information
contained in this annual report are the responsibility of Management. The consolidated financial
statements have been prepared in conformity with Canadian generally accepted accounting principles,
using Managements best estimates and judgments where appropriate. In the opinion of Management,
these consolidated financial statements reflect fairly the financial position and the results of
operations and cash flows of the Company within reasonable limits of materiality. The financial
information contained elsewhere in this annual report has been reviewed to ensure consistency with
that in the consolidated financial statements. The integrity and objectivity of data in the
financial statements and elsewhere in this annual report are the responsibility of Management. In fulfilling its responsibilities for the integrity of the data presented and to safeguard the
Companys assets, Management employs a system of internal accounting controls designed to provide
reasonable assurance, at appropriate cost, that the Companys assets are protected and that
transactions are appropriately authorized, recorded, and summarized. This system of internal
control is supported by the selection of qualified personnel, by organizational assignments that
provide appropriate delegation of authority and division of responsibilities, and by the
dissemination of written policies and procedures. The Board of Directors is responsible for approving the annual financial statements and for
ensuring that Management fulfills its responsibilities for financial reporting and internal
controls. The Board carries out this responsibility principally through its independent Audit
Committee, which is composed of unrelated independent directors. The Audit Committee is responsible
for the appointment and oversight of the external auditors. The Audit Committee meets regularly
during the year to review significant accounting and auditing matters with Management and the
independent auditor, to review the interim and annual consolidated financial statements of the
Company, and to recommend the annual financial statements to the Board of Directors for approval. The consolidated financial statements have been audited by KPMG LLP, Chartered Accountants, which
has full and unrestricted access to the Audit Committee. KPMGs report on the consolidated
financial statements is presented herein. By: /s/ Christopher Waddick
Christopher J. Waddick
Executive Vice President and Chief Financial Officer By: /s/ David Elsley
David G. Elsley
President and Chief Executive Officer January 7, 2005




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##### 



Consolidated Financial Statements
(Expressed in Canadian dollars)VASOGEN
INC.(A DEVELOPMENT STAGE COMPANY)Years ended November 30, 2004, 2003, 2002 and
period from December 1, 1987 to November 30, 2004




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##### 



(KPMG LOGO)KPMG LLP
    
    Telephone
    (416)228-7000Chartered Accountants
    
    Fax
    (416)228-7123Yonge Corporate Centre
    
    Internet
    www.kpmg.ca4100 Yonge Street Suite 200Toronto ON M2P 2H3Canada
 AUDITORS REPORT TO THE SHAREHOLDERS We have audited the consolidated balance sheets of Vasogen Inc. (a Development Stage Company)
as at November 30, 2004 and 2003 and the consolidated statements of operations and deficit and cash
flows for each of the years in the three-year period ended November 30, 2004 and for the period
from December 1, 1987 to November 30, 2004. These financial statements are the responsibility of
the Companys management. Our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those
standards require that we plan and perform an audit to obtain reasonable assurance whether the
financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects,
the financial position of the Company as at November 30, 2004 and 2003 and the results of its
operations and its cash flows for each of the years in the three-year period ended November 30,
2004 and for the period from December 1, 1987 to November 30, 2004 in accordance with Canadian
generally accepted accounting principles. (KPMG LLP SIG) Chartered Accountants Toronto, Canada January 7, 2005 (KPMG LLP note)




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##### 



(KPMG LOGO)KPMG LLP
    
    Telephone
    (416)228-7000Chartered Accountants
    
    Fax
    (416)228-7123Yonge Corporate Centre
    
    Internet
    www.kpmg.ca4100 Yonge Street Suite 200Toronto ON M2P 2H3Canada
 COMMENTS BY AUDITORS FOR UNITED STATES READERS ONCANADA-UNITED STATES REPORTING DIFFERENCE In the United States, reporting standards for auditors require the addition of an explanatory
paragraph (following the opinion paragraph) when there is a change in accounting principles that
has a material effect on the comparability of the Companys financial statements, such as the
changes described in Note 1(o) to the financial statements. Our report to the shareholders dated
January 7, 2004 is expressed in accordance with Canadian reporting standards which do not require a
reference to such a change in accounting principles in the auditors report when the change is
properly accounted for and adequately disclosed in the financial statements. (KPMG LLP SIG) Chartered Accountants Toronto, Canada January 7, 2005 (KPMG LLP NOTE)




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##### 



VASOGEN INC.  Consolidated Balance Sheets
(In thousands of Canadian dollars) November 30, 2004 and 2003 2004
    
    
    2003AssetsCurrent assets:Cash
    
    $
    5,336
    
    
    $
    4,476Marketable securities (note 2)
    
    
    67,651
    
    
    
    52,354Clinical supplies
    
    
    2,804
    
    
    
    4,418Tax credits recoverable
    
    
    1,596
    
    
    
    1,383Prepaid expenses and deposits
    
    
    1,850
    
    
    
    1,02179,237
    
    
    
    63,652Marketable securities (note 2)
    
    
    
    
    
    
    3,255Property and equipment (note 3)
    
    
    967
    
    
    
    360Acquired technology (note 4)
    
    
    759
    
    
    
    1,013Deferred share issue costs
    
    
    
    
    
    
    503$
    80,963
    
    
    $
    68,783Liabilities and Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    8,120
    
    
    $
    3,831Accrued liabilities
    
    
    7,168
    
    
    
    2,487Accrued loss on forward exchange contracts (note 8)
    
    
    5,220
    
    
    
    20,508
    
    
    
    6,318Shareholders equity (note 5):Share capital:Authorized:Unlimited common shares, without par value
Issued and outstanding:72,331,286 common shares (2003 - 62,022,306)
    
    
    245,465
    
    
    
    173,380Warrants
    
    
    1,456
    
    
    
    1,456Options
    
    
    1,199
    
    
    
    744Deficit
    
    
    (187,665
    )
    
    
    (113,115
    )60,455
    
    
    
    62,465Commitments (notes 11 and 12)$
    80,963
    
    
    $
    68,783
 See accompanying notes to consolidated financial statements. On behalf of the Board: Benoit La SalleDirectorWilliam R. GrantDirector 1




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##### 



VASOGEN INC.  Consolidated Statements of Operations and Deficit
(In thousands of Canadian dollars, except per share amounts) Period fromDecember 1,1987 toYears ended November 30,
    
    
    November 30,2004
    
    
    2003
    
    
    2002
    
    
    2004Expenses:Research and development
(note 14)
    
    $
    51,794
    
    
    $
    21,730
    
    
    $
    12,675
    
    
    $
    122,725General and administration
    
    
    15,852
    
    
    
    10,250
    
    
    
    7,542
    
    
    
    61,592Foreign exchange loss
    
    
    8,288
    
    
    
    1,111
    
    
    
    267
    
    
    
    9,608Loss before
the undernoted
    
    
    (75,934
    )
    
    
    (33,091
    )
    
    
    (20,484
    )
    
    
    (193,925
    )Investment income
    
    
    1,384
    
    
    
    1,143
    
    
    
    977
    
    
    
    7,770Loss for the period
    
    
    (74,550
    )
    
    
    (31,948
    )
    
    
    (19,507
    )
    
    
    (186,155
    )Deficit, beginning of period
    
    
    (113,115
    )
    
    
    (81,167
    )
    
    
    (61,660
    )
    
    
    (1,510
    )Deficit, end of period
    
    $
    (187,665
    )
    
    $
    (113,115
    )
    
    $
    (81,167
    )
    
    $
    (187,665
    )Basic and diluted loss per
common share (note 6)
    
    $
    (1.07
    )
    
    $
    (0.57
    )
    
    $
    (0.40
    )
 See accompanying notes to consolidated financial statements. 2




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##### 



VASOGEN INC.  Consolidated Statements of Cash Flows
(In thousands of Canadian dollars) Period fromDecember 1,1987 toYears ended November 30,
    
    
    November 30,2004
    
    
    2003
    
    
    2002
    
    
    2004Cash provided by (used in):Operating activities:Loss for the period
    
    $
    (74,550
    )
    
    $
    (31,948
    )
    
    $
    (19,507
    )
    
    $
    (186,155
    )Items not involving cash:Amortization of property
and equipment and
acquired technology
    
    
    463
    
    
    
    393
    
    
    
    377
    
    
    
    4,286Stock-based compensation costs
    
    
    455
    
    
    
    431
    
    
    
    
    
    
    
    886Common shares issued
for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,449Foreign exchange loss
    
    
    8,278
    
    
    
    1,186
    
    
    
    228
    
    
    
    9,584Other
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    (35
    )Change in non-cash operating
working capital (note 7(a))
    
    
    9,542
    
    
    
    708
    
    
    
    (1,235
    )
    
    
    9,010(55,812
    )
    
    
    (29,226
    )
    
    
    (20,137
    )
    
    
    (159,975
    )Financing activities:Shares issued for cash
    
    
    76,913
    
    
    
    50,669
    
    
    
    25,000
    
    
    
    233,405Warrants exercised for cash
    
    
    
    
    
    
    1,347
    
    
    
    
    
    
    
    16,941Options exercised for cash
    
    
    1,300
    
    
    
    589
    
    
    
    540
    
    
    
    7,042Share issue costs
    
    
    (5,625
    )
    
    
    (4,632
    )
    
    
    (1,901
    )
    
    
    (17,265
    )Issue of convertible debt, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    622Payable to related parties
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (234
    )72,588
    
    
    
    47,973
    
    
    
    23,639
    
    
    
    240,511Investing activities:Increase in property and equipment
    
    
    (816
    )
    
    
    (192
    )
    
    
    (87
    )
    
    
    (1,903
    )Increase in acquired
technology
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,283
    )Purchases of marketable securities
    
    
    (74,872
    )
    
    
    (49,151
    )
    
    
    (24,201
    )
    
    
    (221,767
    )Maturities of marketable securities
    
    
    59,976
    
    
    
    33,143
    
    
    
    21,626
    
    
    
    149,947(15,712
    )
    
    
    (16,200
    )
    
    
    (2,662
    )
    
    
    (75,006
    )Foreign exchange loss on cash
held in foreign currency
    
    
    (204
    )
    
    
    (95
    )
    
    
    (3
    )
    
    
    (194
    )Increase in cash and cash equivalents
    
    
    860
    
    
    
    2,452
    
    
    
    837
    
    
    
    5,336Cash, beginning of period
    
    
    4,476
    
    
    
    2,024
    
    
    
    1,187
    
    
    
    Cash, end of period
    
    $
    5,336
    
    
    $
    4,476
    
    
    $
    2,024
    
    
    $
    5,336
 Supplemental disclosure and supplemental cash flow information (note 7(b) and (c)) See accompanying notes to consolidated financial statements. 3




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##### 



VASOGEN INC.  Notes to Consolidated
Financial Statements
(Tabular figures in thousands of Canadian dollars, except per share amounts) Years ended November 30,
2004, 2003, 2002 and period
from December 1, 1987 to November 30, 2004   Since its inception, the Company has been engaged in the research and commercial development
of product candidates for the treatment of disease and has had no commercial operations. The
operations of the Company are not subject to any seasonality or cyclicality factors. The consolidated financial statements presented have been prepared on the basis that the Company is
considered a development stage enterprise and, accordingly, the consolidated statements of
operations and deficit and cash flows also reflect the cumulative amounts from December 1, 1987
(the date development operations commenced) to November 30, 2004. The continuation of the Companys research and development activities and the commercialization of
its CelacadeTM medical device technology is dependent upon the Companys ability to
successfully complete its research and development programs and finance its cash requirements
through a combination of equity financing and payments from strategic partners. The Companys
current level of cash and short-term investments is sufficient to execute the Companys current
planned expenditures for the next 12 months.  1.
    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 15,
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 (incorporated in 1998) and Vasogen
Corp. (Delaware-incorporated in 2004). The functional currency of both subsidiaries is
the Canadian dollar. All material intercompany balances and transactions have been
eliminated.  (b)
    Cash and cash equivalents:The Company considers unrestricted cash on hand, in banks, in term deposits and in
commercial paper with original maturities of three months or less as cash and cash
equivalents. The Company does not have any cash equivalents as at November 30, 2004 and
2003. 4




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##### 



VASOGEN INC.  Notes to Consolidated
Financial Statements (continued)
(Tabular figures in thousands of Canadian dollars, except per share amounts) Years ended November 30,
2004, 2003, 2002 and period
from December 1, 1987 to November 30, 2004    1.
    Significant accounting policies (continued):  (c)
    Marketable securities:Marketable securities are stated at amortized cost plus accrued interest. The Company
regularly reviews the carrying value of its investments. Should there be a decline in
value that is other than a temporary decline, the Company measures the amount of the
write-down based on the quoted market value of the investments and charges such
write-down to the consolidated statements of operations and deficit. Interest income is
recognized on an effective yield basis. All marketable securities are held to maturity.(d)
    Concentration of credit risk:Financial instruments potentially exposing the Company to a concentration of credit risk
consist principally of marketable securities. The Company manages this credit risk by
investing only in highly rated Canadian and U.S. corporations, trading on active markets
and capable of prompt liquidation.(e)
    Property and equipment:Property and equipment are recorded at cost less any impairment losses recognized in
accordance with note 1(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
 5




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##### 



VASOGEN INC.  Notes to Consolidated
Financial Statements (continued)
(Tabular figures in thousands of Canadian dollars, except per share amounts) Years ended November 30,
2004, 2003, 2002 and period
from December 1, 1987 to November 30, 2004    1.
    Significant accounting policies (continued):  (f)
    Acquired technology:Acquired technology, representing part of the Companys platform medical device
technology, is stated at amortized cost less any impairment losses recognized in
accordance with note 1(g). Amortization is provided on a straight-line basis over 20
years, representing the term of the acquired patent.(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 for impairment in long-lived assets 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 at 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 (note 1(o)).(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 and deficit were $337,058 in 2004 (2003  $200,000;
2002  $297,663; from December 1, 1987 to November 30, 2004  $1,969,721). 6




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VASOGEN INC.  Notes to Consolidated
Financial Statements (continued)
(Tabular figures in thousands of Canadian dollars, except per share amounts) Years ended November 30,
2004, 2003, 2002 and period
from December 1, 1987 to November 30, 2004    1.
    Significant accounting policies (continued):Clinical supplies represent the devices and disposables on hand at year end that will be
consumed in the Companys future research and clinical trials. These supplies are
carried at the lower of cost on a first-in-first-out basis and net realizable value and
are expensed as research and development expenses when shipped to outsourced research
centres or clinical sites.  (i)
    Derivative financial instruments:The Company is party to forward foreign exchange contracts in order to pursue its
investment objectives without changing its foreign currency exposure. These financial
instruments are measured at fair value, which is determined based on amounts quoted by
the Companys banker to realize favourable contracts or to settle unfavourable contracts,
taking into account foreign exchange rates and the duration of each contract. The
unrealized gain or loss arising from changes in fair value of the forward 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 tax assets and liabilities are recognized for the future
taxes attributable to temporary differences between the financial statement carrying
values of existing assets and liabilities and their respective tax carrying values.
Future tax assets and liabilities are measured using enacted or substantively enacted tax
rates expected to apply to taxable income in the period in which those temporary
differences are expected to be recovered or settled. The effect on future tax assets and
liabilities of a change in tax rates is recognized in income in the period that includes
that substantive enactment date. 7




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##### 



VASOGEN INC.  Notes to Consolidated
Financial Statements (continued)
(Tabular figures in thousands of Canadian dollars, except per share amounts) Years ended November 30,
2004, 2003, 2002 and period
from December 1, 1987 to November 30, 2004    1.
    Significant accounting policies (continued):Future tax assets initially recognized are reduced by a valuation allowance. Management
has provided a valuation allowance equivalent to the net future tax asset balances, given
that the Companys activities are in the development stage and the uncertainty that it
will generate sufficient income for tax purposes to utilize the tax losses in the
carryforward period.The benefits of tax credits for scientific research and development expenditures are
recognized in the year 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 accounts for its stock-based compensation plan, as described in note 5, using
the settlement method for awards to employees, directors and officers. Under this
method, no compensation expense is recognized when stock options or warrants are granted
to employees, officers or directors. Any consideration paid on the exercise of stock
options or warrants, or on purchase of stock, is credited to share capital.The Company uses the fair value method of accounting for stock options granted to
non-employees and recognizes the expense over the performance period (note 1(o)(iii)).
Fair value is determined using the Black-Scholes option pricing model.The Company has a deferred share units plan (DSU), as described in note 5. 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, will be recorded as a liability on the Companys balance sheet. The
value of the DSU liability will be adjusted to reflect changes in the market value of the
Companys common shares at each period end. 8




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##### 



VASOGEN INC.  Notes to Consolidated
Financial Statements (continued)
(Tabular figures in thousands of Canadian dollars, except per share amounts) Years ended November 30,
2004, 2003, 2002 and period
from December 1, 1987 to November 30, 2004    1.
    Significant accounting policies (continued):  (m)
    Basic and diluted loss per common share:Basic loss per common share is computed by dividing loss for the period by the weighted
average number of common shares outstanding during the reporting period. Diluted loss
per common share is computed similarly to basic loss per common share, except that the
weighted average number of shares outstanding is increased to include additional shares
from the assumed exercise of stock options and warrants, 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.(n)
    Measurement uncertainty:The preparation of financial statements in accordance with Canadian GAAP requires
management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses during the period.
Actual results could differ from those estimates.The Company has estimated the useful lives of all depreciable assets and the
recoverability of property and equipment and acquired technology using estimates of
future cash flows and other measures of fair values. Significant changes in the
assumptions with respect to future business plans could result in impairment of property
and equipment or acquired technology. 9




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##### 



VASOGEN INC.  Notes to Consolidated
Financial Statements (continued)
(Tabular figures in thousands of Canadian dollars, except per share amounts) Years ended November 30,
2004, 2003, 2002 and period
from December 1, 1987 to November 30, 2004    1.
    Significant accounting policies (continued):  (o)
    Changes in accounting policies:(i)
    In December 2002, the Accounting Standards Board of The Canadian
Institute of Chartered Accountants (CICA) issued Handbook Section 3063,
Impairment of Long-Lived Assets (Section 3063). Section 3063 supersedes the
write-down and disposal provisions of CICA 3061, Property, plant and equipment.
Under Section 3063, long-lived assets are tested for impairment whenever events or
changes in circumstances indicate that the assets might be impaired. The impairment
test is carried out in two steps. In the first step, the carrying amount of the
asset (or asset group) is compared with its recoverable amount. The carrying amount
of a long-lived asset is not recoverable if the carrying amount exceeds the sum of
the undiscounted cash flows expected to result from its use and eventual
disposition. The second step is carried out when the carrying amount of a
long-lived asset is not recoverable, in which case, the fair value of the long-lived
asset is compared with its carrying amount to measure the amount of the impairment
loss, if any. When an impairment loss is recognized, it is recorded in the
statement of operations. When quoted market prices are not available, the fair
value of the long-lived assets is determined using the discounted estimated future
cash flow method.The Company adopted Section 3063, effective December 1, 2002. In accordance with the
requirements of Section 3063, this change in accounting policy has been applied
prospectively and the amounts presented for prior periods have not been restated for
this change. The adoption of Section 3063 had no impact on the Companys
consolidated financial position or results of operations.(ii)
    Goodwill and other intangible assets:Effective December 1, 2002, the Company adopted prospectively, CICA Handbook Section
3062, Goodwill and Other Intangible Assets, which requires that goodwill and
indefinite life intangible assets no longer be amortized but rather be tested for
impairment at least annually and written down only when impaired. Intangible assets
with definite useful lives are amortized over their useful lives. The adoption of
Section 3062 had no impact on the Companys consolidated financial position or
results of operations. 10




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##### 



VASOGEN INC. (A DEVELOPMENT STAGE COMPANY) Notes to Consolidated
Financial Statements (continued)
(Tabular figures in thousands of Canadian dollars, except per share amounts) Years ended November 30, 2004, 2003, 2002 and period
from December 1, 1987 to November 30, 2004    1.
    Significant accounting policies (continued):  (iii)
    Stock-based compensation and other stock-based payments:Effective December 1, 2002, the Company adopted CICA Handbook Section 3870,
Stock-based Compensation and Other Stock-based Payments. The recommendations
require all stock-based payments to non-employees, employee awards that are direct
awards of stock that call for settlement in cash or other assets, or stock
appreciation rights that call for settlement by the issuance of equity instruments,
granted on or after December 1, 2002, be accounted for using the fair value-based
method.The Company (a) maintained its current policy described in note 1(l) of accounting
for employee stock-based compensation using the settlement method, and (b) changed
its policy to record compensation costs for stock-based compensation issued on or
after December 1, 2002 to non-employees at fair value. Pro forma disclosures have
been made in note 5.(iv)
    Guarantees:Effective December 1, 2002, the Company adopted CICA Accounting Guideline 14,
Disclosure of Guarantees (AcG-14), that requires a guarantor to disclose
significant information about guarantees it has provided, without regard to whether
it will have to make any payments under the guarantees and in addition to the
accounting and disclosure requirements of CICA Handbook 3290, Contingencies. The
Company has no material guarantees requiring disclosure.(v)
    Asset retirement obligations:Effective December 1, 2002, the Company adopted CICA Handbook Section 3110, Asset
Retirement Obligations, which harmonize Canadian GAAP with SFAS No. 143, Accounting
for Asset Retirement Obligations. This Section establishes standards for the
recognition, measurement, and disclosure of liabilities for asset retirement
obligations and the associated retirement costs. This Section applies to legal
obligations associated with the retirement of a tangible long-lived asset that result
from its acquisition, construction, development, or normal operation. The adoption
of Section 3110 had no impact on the Companys consolidated financial position or
results of operations. 11




---



##### 



VASOGEN INC.  Notes to Consolidated
Financial Statements (continued)
(Tabular figures in thousands of Canadian dollars, except per share amounts) Years ended November 30, 2004, 2003, 2002 and period
from December 1, 1987 to November 30, 2004    1.
    Significant accounting policies (continued):  (vi)
    Generally accepted accounting principles:Effective December 1, 2003, the Company adopted CICA Handbook Section 1100,
Generally Accepted Accounting Principles. This Section establishes standards for
financial reporting in accordance with Canadian GAAP and it describes what
constitutes Canadian GAAP and its sources. This Section also provides guidance on
sources to consult when selecting accounting policies and determining appropriate
disclosures when a matter is not dealt with explicitly in the primary sources of
Canadian GAAP. The adoption of Section 1100 had no material impact on the Companys
consolidated financial position or results of operations.(vii)
    Derivative instruments and hedging activities:Effective December 1, 2003, the Company adopted CICA Accounting Guideline 13
(AcG-13), Hedging Relationships, and the Emerging Issues Committees (EIC)
Abstract, EIC-128, Accounting for Trading, Speculative, or Non-hedging Derivative
Financial Instruments. The new standards establish requirements related to the
identification, designation, documentation and effectiveness of hedging relationships
and the accounting for freestanding derivative financial instruments that do not
qualify for hedge accounting under AcG-13. The standards have been applied on a
prospective basis to all instruments existing on, or entered into, after December 1,
2003. Under the new guidance, hedge accounting is optional for derivative
transactions that are effective in offsetting financial statements risks. Derivative
financial instruments that are not subject to hedge accounting are recorded on the
balance sheet at fair value. Adoption of the new standards had no impact on the
Companys financial position or results of operations as at December 1, 2003. For
the year ended November 30, 2004, the Company has recognized an unrealized foreign
exchange loss on forward exchange contracts of $5,220,000 as a result of the adoption
of EIC 128. 12




---



##### 



VASOGEN INC.  Notes to Consolidated
Financial Statements (continued)
(Tabular figures in thousands of Canadian dollars, except per share amounts) Years ended November 30, 2004, 2003, 2002 and period
from December 1, 1987 to November 30, 2004    2.
    Marketable securities: Less than
    
    
    Greater thanone year
    
    
    one year
    
    
    
    
    
    
    Yield to2004
    
    maturities
    
    
    maturities
    
    
    Total
    
    
    maturityCorporate bonds, commercial
paper and medium-term notes
    
    $
    67,651
    
    
    $
    
    
    
    $
    67,651
    
    
    
    1.50% - 2.65
    %
 Less than
    
    
    Greater thanone year
    
    
    one year
    
    
    
    
    
    
    Yield to2003
    
    maturities
    
    
    maturities
    
    
    Total
    
    
    maturityCorporate bonds, commercial
paper and medium-term notes
    
    $
    52,354
    
    
    $
    3,255
    
    
    $
    55,609
    
    
    
    2.50% - 2.95
    %
  At November 30, 2004, $18,355,284 (2003  nil) of marketable securities were held in U.S.
dollar-denominated investments aggregating U.S. $15,479,241 (2003  U.S. nil).At November 30, 2004 and 2003, the carrying values of marketable securities approximated
their quoted market values. Marketable securities held at November 30, 2004 have varying
maturities from one to five months (2003  one to thirteen months).3.
    Property and equipment: Accumulated
    
    
    Net book2004
    
    Cost
    
    
    amortization
    
    
    valueTesting equipment
    
    $
    852
    
    
    $
    454
    
    
    $
    398Computer and other equipment
    
    
    446
    
    
    
    231
    
    
    
    215Leasehold improvements
    
    
    417
    
    
    
    63
    
    
    
    354$
    1,715
    
    
    $
    748
    
    
    $
    967
 13




---



##### 



VASOGEN INC.  Notes to Consolidated
Financial Statements (continued)
(Tabular figures in thousands of Canadian dollars, except per share amounts) Years ended November 30, 2004, 2003, 2002 and period
from December 1, 1987 to November 30, 2004    3.
    Property and equipment (continued): Accumulated
    
    
    Net book2003
    
    Cost
    
    
    amortization
    
    
    valueTesting equipment
    
    $
    629
    
    
    $
    326
    
    
    $
    303Computer and other equipment
    
    
    217
    
    
    
    174
    
    
    
    43Leasehold improvements
    
    
    53
    
    
    
    39
    
    
    
    14$
    899
    
    
    $
    539
    
    
    $
    360
  In 2004, amortization expense amounted to $209,000 (2003  $140,000; 2002  $124,000).4.
    Acquired technology: 2004
    
    
    2003Cost
    
    $
    4,081
    
    
    $
    4,081Less accumulated amortization
    
    
    3,322
    
    
    
    3,068Net book value
    
    $
    759
    
    
    $
    1,013
  In 2004, amortization expense amounted to $254,000 (2003  $253,000; 2002  $253,000). 14




---



##### 



VASOGEN INC.  Notes to Consolidated
Financial Statements (continued)
(Tabular figures in thousands of Canadian dollars, except per share amounts) Years ended November 30, 2004, 2003, 2002 and period
from December 1, 1987 to November 30, 2004    5.
    Shareholders equity:  (a)
    Common shares:Authorized: Unlimited common shares, without par value  Issued: Period fromYears ended November 30,
    
    
    December 1, 1987 to2004
    
    
    2003
    
    
    2002
    
    
    November 30, 2004Number
    
    
    
    
    
    
    Number
    
    
    
    
    
    
    Number
    
    
    
    
    
    
    Numberof shares
    
    
    Amount
    
    
    of shares
    
    
    Amount
    
    
    of shares
    
    
    Amount
    
    
    of shares
    
    
    Amount(000s
    )
    
    
    
    
    
    
    (000s
    )
    
    
    
    
    
    
    (000s
    )
    
    
    
    
    
    
    (000s
    )Balance, beginning of period
    
    
    62,022
    
    
    $
    173,380
    
    
    
    51,934
    
    
    $
    126,673
    
    
    
    46,364
    
    
    $
    103,034
    
    
    
    1,032
    
    
    $
    1,213Issued for:Cash
    
    
    9,775
    
    
    
    76,913
    
    
    
    9,478
    
    
    
    50,669
    
    
    
    5,155
    
    
    
    25,000
    
    
    
    51,036
    
    
    
    233,405Services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,571
    
    
    
    2,449Technology
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,913
    
    
    
    2,799Warrants exercised
    
    
    
    
    
    
    
    
    
    
    250
    
    
    
    1,347
    
    
    
    
    
    
    
    
    
    
    
    11,279
    
    
    
    16,941Options exercised
    
    
    534
    
    
    
    1,300
    
    
    
    360
    
    
    
    589
    
    
    
    415
    
    
    
    540
    
    
    
    4,892
    
    
    
    7,042Debt conversion
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    608
    
    
    
    650Share issue costs
    
    
    
    
    
    
    (6,128
    )
    
    
    
    
    
    
    (5,898
    )
    
    
    
    
    
    
    (1,901
    )
    
    
    
    
    
    
    (19,034
    )Balance, end of period
    
    
    72,331
    
    
    $
    245,465
    
    
    
    62,022
    
    
    $
    173,380
    
    
    
    51,934
    
    
    $
    126,673
    
    
    
    72,331
    
    
    $
    245,465
  Common shares issued for services or acquired technology are recorded at the quoted
market value of the shares at the respective issue date. 15




---



##### 



VASOGEN INC.  Notes to Consolidated
Financial Statements (continued)
(Tabular figures in thousands of Canadian dollars, except per share amounts) Years ended November 30, 2004, 2003, 2002 and period
from December 1, 1987 to November 30, 2004    5.
    Shareholders equity (continued):  (b)
    Public offerings:On March 4, 2004, the Company issued 9,775,000 common shares for gross proceeds of
$76,912,564 (U.S. $57.7 million) (net proceeds of $70,785,018 after costs of issuance of
$6,127,546).In July 2003, the Company issued 9,477,986 common shares for gross proceeds of
$50,669,313 (net proceeds of $46,540,313 after costs of issuance of $4,129,000, which
excludes $1,769,000 for the fair value of warrants and options granted to the agent and
other advisors as additional non-cash compensation).In connection with the July 2003 offering of common shares, the Company granted 360,000
warrants and 77,500 options to the agent and other advisors. These warrants and options
have been ascribed a fair value of $1,456,000 and $313,000, respectively, with the
associated cost reflected as a cost of issuing the related common shares. Each warrant
and option entitles the holder to purchase one common share at U.S. $4.69 per share until
July 2, 2006. As of November 30, 2004, none of these warrants or options had been
exercised.In May 2002, the Company issued 5,154,700 common shares for gross proceeds of $25,000,295
(net proceeds of $23,098,694 after costs of issuance of $1,901,601. As additional
compensation to the underwriters, the Company issued warrants to purchase up to 250,000
shares exercisable at $5.39 per common share until November 24, 2003. The
above-mentioned warrants were exercised during the year ended November 30, 2003. 16




---



##### 



VASOGEN INC.  Notes to Consolidated
Financial Statements (continued)
(Tabular figures in thousands of Canadian dollars, except per share amounts) Years ended November 30, 2004, 2003, 2002 and period
from December 1, 1987 to November 30, 2004    5.
    Shareholders equity (continued):  (c)
    Stock-based compensation plans:In May 2003, the Company adopted two new stock option plans (the 2003 Employee Plan and
the 2003 Director Plan) to eventually replace the Companys existing stock option plan
(the Existing Plan). All grants of options after May 2003 are made from the new plans
and no further option grants will be made under the Existing Plan. The Company reserved
for issuance 2,000,000 common shares under the 2003 Employee Plan and
250,000 common shares under the 2003 Director Plan. Each option granted allows the holder to purchase
one common share. Options granted under these plans have a maximum term of 10 years and
generally vest over a period of up to four years. The exercise price must not be 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.As at November 30, 2004, there were 660,121 (2003  1,496,366) options available for
grant. 2004
    
    
    
    
    
    
    2003
    
    
    
    
    
    
    2002Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    Weightedaverage
    
    
    
    
    
    
    average
    
    
    
    
    
    
    averageNumber of
    
    
    exercise
    
    
    Number of
    
    
    exercise
    
    
    Number of
    
    
    exerciseoptions
    
    
    price
    
    
    options
    
    
    price
    
    
    options
    
    
    price(000's
    )
    
    
    
    
    
    
    (000's
    )
    
    
    
    
    
    
    (000s
    )Outstanding, beginning
of year
    
    
    3,245
    
    
    $
    5.00
    
    
    
    2,271
    
    
    $
    4.68
    
    
    
    2,037
    
    
    $
    4.37Issued
    
    
    842
    
    
    
    7.66
    
    
    
    1,460
    
    
    
    5.01
    
    
    
    805
    
    
    
    4.34Exercised
    
    
    (534
    )
    
    
    2.43
    
    
    
    (360
    )
    
    
    1.64
    
    
    
    (415
    )
    
    
    1.30Expired or cancelled
    
    
    (35
    )
    
    
    6.12
    
    
    
    (126
    )
    
    
    8.87
    
    
    
    (156
    )
    
    
    7.96Outstanding, end of year
    
    
    3,518
    
    
    
    6.01
    
    
    
    3,245
    
    
    
    5.00
    
    
    
    2,271
    
    
    
    4.68Exercisable, end of year
    
    
    1,831
    
    
    
    
    
    
    
    1,549
    
    
    
    
    
    
    
    1,510
  The table above includes 74,766 (2003  345,109) options granted to non-employees
for a fair value of $379,380 (2003  $743,740). 17




---



##### 



VASOGEN INC.  Notes to Consolidated
Financial Statements (continued)
(Tabular figures in thousands of Canadian dollars, except per share amounts) Years ended November 30, 2004, 2003, 2002 and period
from December 1, 1987 to November 30, 2004    5.
    Shareholders equity (continued):The following table provides information on options outstanding and exercisable as of
November 30, 2004: Options outstanding
    
    Options exercisableWeightedWeighted
    
    
    average
    
    
    
    
    
    
    Weightedaverage
    
    
    remaining
    
    
    
    
    
    
    averageExercise
    
    Number
    
    
    exercise
    
    
    contractual
    
    
    Number
    
    
    exerciseprice
    
    outstanding
    
    
    price
    
    
    life (years)
    
    
    exercisable
    
    
    price(000s
    )
    
    
    
    
    
    
    
    
    
    
    (000s
    )$1.25 - $3.39
    
    
    436
    
    
    $
    2.86
    
    
    
    2.8
    
    
    
    213
    
    
    $
    2.87$3.40 - $5.65
    
    
    1,429
    
    
    
    4.71
    
    
    
    5.7
    
    
    
    601
    
    
    
    4.57$5.66 - $9.04
    
    
    1,160
    
    
    
    7.30
    
    
    
    3.2
    
    
    
    827
    
    
    
    7.20$9.05 - $11.30
    
    
    493
    
    
    
    9.55
    
    
    
    3.1
    
    
    
    190
    
    
    
    10.103,518
    
    
    
    6.01
    
    
    
    
    
    
    
    1,831
    
    
    
    6.13
  For the year ended November 30, 2004, CICA Handbook Section 3870 does not require
the recording of compensation cost at fair value for options issued to employees; it does
require disclosure of pro forma net loss and loss per share information as if the Company
had measured options issued to employees under the fair value method and recognized the
fair value over the vesting period. This information is as follows: 2004
    
    
    2003Loss for the year
    
    $
    (74,550
    )
    
    $
    (31,948
    )Pro forma compensation expense  employees
    
    
    (2,902
    )
    
    
    (1,103
    )Pro forma loss for the year
    
    $
    (77,452
    )
    
    $
    (33,051
    )Pro forma loss per share:Basic and diluted
    
    $
    (1.11
    )
    
    $
    (0.59
    )
  The above pro forma disclosure excludes the effect of stock option awards granted before
December 1, 2002. 18




---



##### 



VASOGEN INC.  Notes to Consolidated Financial Statements (continued)
(Tabular figures in thousands of Canadian dollars, except per share amounts) Years ended November 30, 2004, 2003, 2002 and period
from December 1, 1987 to November 30, 2004    5.
    Shareholders equity (continued):The fair value of stock-based compensation has been estimated at the grant date under the
following assumptions: 2004
    
    
    2003Dividend yield
    
    
    
    
    
    
    Weighted average risk-free interest rate
    
    
    3.89
    %
    
    
    4.49
    %Volatility factor of the expected market
price of the Companys common shares
    
    
    69.1
    %
    
    
    82
    %Weighted average expected life of the
employment options
    
    4.60 years
    
    4.4 years
  The resulting weighted average fair value per share at the grant date of the employee and
non-employee stock-based compensation issued in fiscal 2004 was $4.77 (2003 - $3.26).The effect of applying CICA Handbook Section 3870 to calculate employee compensation
costs may not be representative of the effects on pro forma net loss in future periods.(d)
    Deferred share units:Effective January 1, 2004, the Company established a plan to grant DSUs to its
non-management directors and reserved a maximum of 250,000 common shares for issuance
under the plan. Under the plan, the directors will defer any cash remuneration that they
would have otherwise received for services rendered and in lieu thereof will receive the
number of DSUs which is equivalent in value to the remuneration deferred. A DSU is a
unit equivalent in value to one common share of the Company based on the trading price of
the Companys common shares on The Toronto Stock Exchange. Upon termination of board
service, the director will be able to redeem DSUs based upon the then market price of the
Companys common shares on the date of redemption in exchange for any combination of cash
or common shares as the Company may determine.The Company recorded $189,000 in compensation expense relating to 26,270 DSUs granted in
2004 for services rendered during the year. Based upon the market value of the Companys
common shares at November 30, 2004, the Company has accrued $148,690 related to these
DSUs. 19




---



##### 



VASOGEN INC.  Notes to Consolidated
Financial Statements (continued)
(Tabular figures in thousands of Canadian dollars, except per share amounts) Years ended November 30, 2004, 2003, 2002 and period
from December 1, 1987 to November 30, 2004    5.
    Shareholders equity (continued):  (e)
    Warrants:As at November 30, 2004, the warrants which are outstanding and exercisable are as
follows: 2004
    
    
    2003
    
    
    2002(000's
    )
    
    
    (000's
    )
    
    
    (000's
    )Outstanding, beginning of year
    
    
    985
    
    
    
    875
    
    
    
    625Issued
    
    
    
    
    
    
    360
    
    
    
    250Exercised
    
    
    
    
    
    
    (250
    )
    
    
    Outstanding, end of year
    
    
    985
    
    
    
    985
    
    
    
    875Exercisable, end of year
    
    
    985
    
    
    
    985
    
    
    
    875
  Of the warrants outstanding at November 30, 2004, 360,000 are exercisable at a price of
U.S. $4.69 per share and expire on July 2, 2006, and 625,237 are exercisable at a price
of Cdn. $12.73 per share and expire on November 6, 2006.  6.
    Loss per share:  The computations for basic and diluted loss per share are as follows: 2004
    
    
    2003
    
    
    2002Loss for the year
    
    $
    (74,550
    )
    
    $
    (31,948
    )
    
    $
    (19,507
    )Weighted average number of
common shares outstanding (000s):Basic and diluted
    
    
    69,600
    
    
    
    55,987
    
    
    
    49,231Loss per common share:Basic and diluted
    
    $
    (1.07
    )
    
    $
    (0.57
    )
    
    $
    (0.40
    )
 20




---



##### 



VASOGEN INC.  Notes to Consolidated
Financial Statements (continued)
(Tabular figures in thousands of Canadian dollars, except per share amounts) Years ended November 30, 2004, 2003, 2002 and period
from December 1, 1987 to November 30, 2004    6.
    Loss per share (continued):The options and warrants to purchase common shares were not included in the calculation of
diluted loss per share because the Company has a loss for the period and to do so would have
been anti-dilutive.7.
    Consolidated statements of cash flows:  (a)
    Change in non-cash operating working capital: Period fromDecember 1,1987 toYears ended November 30,
    
    
    November 30,2004
    
    
    2003
    
    
    2002
    
    
    2004Clinical supplies
    
    $
    1,614
    
    
    $
    (1,773
    )
    
    $
    (813
    )
    
    $
    (2,804
    )Tax credits recoverable
    
    
    (213
    )
    
    
    (4
    )
    
    
    (120
    )
    
    
    (1,596
    )Prepaid expenses
and deposits
    
    
    (829
    )
    
    
    (503
    )
    
    
    (237
    )
    
    
    (1,817
    )Accounts payable and
accrued liabilities
    
    
    8,970
    
    
    
    2,988
    
    
    
    (65
    )
    
    
    15,227$
    9,542
    
    
    $
    708
    
    
    $
    (1,235
    )
    
    $
    9,010
 21




---



##### 



VASOGEN INC.  Notes to Consolidated
Financial Statements (continued)
(Tabular figures in thousands of Canadian dollars, except per share amounts) Years ended November 30, 2004, 2003, 2002 and period
from December 1, 1987 to November 30, 2004    7.
    Consolidated statements of cash flows (continued):  (b)
    Supplemental disclosures: Period fromDecember 1,1987 toYears ended November 30,
    
    
    November 30,2004
    
    
    2003
    
    
    2002
    
    
    2004Non-cash financing activities:Warrants and options issued
as share issuance costs
    
    $
    
    
    
    $
    1,769
    
    
    $
    
    
    
    $
    1,769Shares issued for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,449Debt conversion
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (650
    )Shares issued on debt
conversion
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    650Shares issued for
technology
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,799Deferred share issue costs
    
    
    503
    
    
    
    
    
    
    
    
    
    
    
    503$
    503
    
    
    $
    1,769
    
    
    $
    
    
    
    $
    7,520Non-cash investing activities:Technology acquired for
shares issued
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (2,799
    )
  (c)
    Supplemental cash flow information:The interest received in 2004 was $1,731,000 (2003  $1,052,000; 2002  $1,351,000; from
December 1, 1987 to November 30, 2004  $7,934,000). No interest or income taxes were
paid in any of the periods presented. 22




---



##### 



VASOGEN INC.  Notes to Consolidated
Financial Statements (continued)
(Tabular figures in thousands of Canadian dollars, except per share amounts) Years ended November 30, 2004, 2003, 2002 and period
from December 1, 1987 to November 30, 2004    8.
    Fair values of financial instruments:The carrying values of cash, prepaid expenses and deposits, marketable securities, accounts
payable and accrued liabilities approximate their fair values due to the relatively short
periods to maturity of these instruments.The Company entered into forward exchange contracts to sell $49,871,005 to acquire U.S.
$37,500,000 in December 2004 and April 2005. The fair value of the forward contracts, as at
November 30, 2004, is a liability of $5,220,000.9.
    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: 2004
    
    
    2003Basic rate applied to loss before
provision of income taxes
    
    $
    (26,927
    )
    
    $
    (11,747
    )Adjustments resulting from:Foreign losses affected at lower rates
    
    
    15,034
    
    
    
    7,446Permanent differences
    
    
    276
    
    
    
    (784
    )Change in valuation allowance
    
    
    11,417
    
    
    
    5,085Other
    
    
    200
    
    
    
    $
    
    
    
    $
    
 23




---



##### 



VASOGEN INC.  Notes to Consolidated Financial Statements (continued)
(Tabular figures in thousands of Canadian dollars, except per share amounts) Years ended November 30, 2004, 2003, 2002 and period
from December 1, 1987 to November 30, 2004    9.
    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:
 2004
    
    
    2003Future tax assets:Non-capital losses
    
    $
    20,907
    
    
    $
    12,672Other, including net capital losses
    
    
    1,727
    
    
    
    Deductible share issue costs
    
    
    3,332
    
    
    
    2,411Excess of tax value of capital assets over book value
    
    
    87
    
    
    
    33SR&ED expenditure pool, net of refundable tax credits
    
    
    3,765
    
    
    
    3,28529,818
    
    
    
    18,401Valuation allowance
    
    
    (29,818
    )
    
    
    (18,401
    )Net future tax asset
    
    $
    
    
    
    $
    
 The Companys subsidiary, Vasogen Ireland Limited, also has losses of approximately
$164,525,000 (2003  $101,379,000) 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 $854,000
included in the consolidated non-capital losses, which begin to expire in 2024. The Company also has approximately $565,000 of net capital losses available to reduce future
years taxable capital gains. These net capital losses are available for carryforward
indefinitely. 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, 2004, is approximately $12,526,000
(2003  $9,785,000). 24




---



##### 



VASOGEN INC.  Notes to Consolidated Financial Statements (continued)
(Tabular figures in thousands of Canadian dollars, except per share amounts) Years ended November 30, 2004, 2003, 2002 and period
from December 1, 1987 to November 30, 2004    9.
    Income taxes (continued):  
 The Company also has $12,786,000 of investment tax credits (ITCs) on SR&ED expenditures
which have not been recognized in the accounts. The eligibility of the Company for provincial
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:
 2006
    
    $
    742007
    
    
    952008
    
    
    2222009
    
    
    4382010
    
    
    6052011
    
    
    9512012
    
    
    1,0962013
    
    
    4,1462014
    
    
    5,159$
    12,786
    10.
    Segment information:The Company operates in one business segment: the development of treatments and related
products addressing chronic inflammatory disease. The primary property and equipment are
located in Canada and the acquired technology is located in Ireland.  11.
    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. 25




---



##### 



VASOGEN INC.  Notes to Consolidated Financial Statements (continued)
(Tabular figures in thousands of Canadian dollars, except per share amounts) Years ended November 30, 2004, 2003, 2002 and period
from December 1, 1987 to November 30, 2004    12.
    Commitments:  
 Under the terms of operating lease agreements for its operating facilities, the Company is
committed to make payments as follows for the years ending November 30:
 2005
    
    $
    6962006
    
    
    7002007
    
    
    7272008
    
    
    7142009
    
    
    5812010
    
    
    98$
    3,516
 Rent expense under operating leases, for the year ended November 30, 2004, amounted to
$640,000 (2003  $386,000; 2002  $370,000).  13.
    Related party transactions:  (a)
    Strategic alliance:During the year ended November 30, 2001, the Company entered into a strategic alliance
with Quest Diagnostics, a third party, regarding the establishment of an outpatient
services delivery model to support the commercial development of its
CelacadeTM technology. In the United States on an exclusive basis. The terms
of the strategic alliance with Quest Diagnostics are to be finalized prior to the Company
filing for FDA approval for its CelacadeTMtechnology. The Company remains
free to pursue marketing arrangements with other parties to augment its relationship with
Quest Diagnostics. As part of the agreement, Quest Diagnostics made a Cdn. $11.9 million
(U.S. $7.5 million) investment in the Company and received 1,406,783 shares. Quest
Diagnostics also received 625,237 warrants at an exercise price of $12.73, expiring in
November 2006. The fair value of the warrants on the day of grant was negligible. 26




---



##### 



VASOGEN INC.  Notes to Consolidated Financial Statements (continued)
(Tabular figures in thousands of Canadian dollars, except per share amounts) Years ended November 30, 2004, 2003, 2002 and period
from December 1, 1987 to November 30, 2004    13.
    Related party transactions (continued):  (b)
    Transactions with Quest Diagnostics:During the year ended November 30, 2004, Quest Diagnostics provided central laboratory
testing and related services to the Company under the terms of a Clinical Trial Services
agreement. The cost of these services, aggregating $455,349 (2003  $73,738; 2002  nil;
December 1, 1987 to November 20, 2004  $529,087) was charged to research and development
expense. These transactions are measured at the exchange amount of consideration
established and agreed to by the related parties. At November 30, 2004, the Company owed
Quest Diagnostics $92,270 (2003  nil) for such fees, which is included in accounts
payable.  14.
    Research and development projects:The Company has undertaken the following significant research and development projects:  (a)
    Platform Technology:The Company is focused on the research and development of treatments targeting the
chronic inflammation underlying cardiovascular, neurological and other chronic
inflammatory diseases. The purpose of this project is to advance the development of
these treatments and the associated product technology, enhance the value of the
intellectual property, identify new approaches to treatment and new disease indications
for clinical development, and, when deemed appropriate, initiate research in these
indications.(b)
    CelacadeTM Technology  Cardiovascular disease:The Companys Celacade technology is being developed to target the chronic inflammation
associated with cardiovascular disease. The Company has completed preclinical and
clinical studies targeted at various areas of cardiovascular disease. The Companys
CelacadeTM technology is currently in two pivotal phase III clinical trials.
The 2,000-patient ACCLAIM trial is designed to further investigate the use of Celacade
technology to reduce the risk of death and hospitalization in patients with advanced
chronic heart failure. The 500-patient SIMPADICO trial is designed to further
investigate the use of Celacade technology to improve intermittent claudication, a
debilitating symptom associated with peripheral arterial disease. 27




---



##### 



VASOGEN INC.  Notes to Consolidated Financial Statements (continued)
(Tabular figures in thousands of Canadian dollars, except per share amounts) Years ended November 30, 2004, 2003, 2002 and period
from December 1, 1987 to November 30, 2004    14.
    Research and development projects (continued):  
 (c)
    Celacade Technology  Autoimmune disease:The Company has completed preclinical and early-stage clinical studies with its Celacade
technology in autoimmune disease. Although autoimmune diseases may be candidates for
future clinical development, the Company is currently not focusing any significant
resources in this area.(d)
    VP025  Neuro-inflammatory disease:The Company is also developing a new class of drugs, designed to interact with immune
cells, leading to the modulation of cytokines  potent chemical messengers that regulate
and control inflammation. VP025, the lead product candidate from this new class of
drugs, is in development for the treatment of neurodegenerative disorders, including
Parkinsons disease and Alzheimers disease.
 The following table outlines research and development costs expensed for the Companys
significant research and development projects: Period fromDecember 1,1987 toYears ended November 30,
    
    
    November 30,2004
    
    
    2003
    
    
    2002
    
    
    2004Research and development
costs expensed:Platform technology
    
    $
    2,881
    
    
    $
    2,270
    
    
    $
    4,688
    
    
    $
    36,556Cardiovascular program
    
    
    45,162
    
    
    
    17,930
    
    
    
    7,523
    
    
    
    76,371Autoimmune program
    
    
    
    
    
    
    48
    
    
    
    464
    
    
    
    4,565VP025
    
    
    3,751
    
    
    
    1,482
    
    
    
    
    
    
    
    5,233Total research and
development costs
expensed
    
    $
    51,794
    
    
    $
    21,730
    
    
    $
    12,675
    
    
    $
    122,725Acquired technology:CelacadeTM platform
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    4,081
   28




---



##### 



VASOGEN INC.  Notes to Consolidated Financial Statements (continued)
(Tabular figures in thousands of Canadian dollars, except per share amounts) Years ended November 30, 2004, 2003, 2002 and period
from December 1, 1987 to November 30, 2004    15.
    Differences between generally accepted accounting principles in Canada and the
United States:The Companys consolidated financial statements are prepared in accordance with Canadian
GAAP, which differ in certain respects from United States GAAP. The following tables present
the impact of material differences between Canadian GAAP and United States GAAP on the
Companys consolidated financial statements:  
 (a)
    Consolidated statements of operations and deficit:
 Period fromDecember 1,1987 toYears ended November 30,
    
    
    November 30,2004
    
    
    2003
    
    
    2002
    
    
    2004Loss per Canadian GAAP
    
    $
    (74,550
    )
    
    $
    (31,948
    )
    
    $
    (19,507
    )
    
    $
    (186,155
    )Technology costs
(15(b)(i))
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,081
    )Technology amortization
(15(b)(i))
    
    
    254
    
    
    
    253
    
    
    
    253
    
    
    
    3,322Non-employee stock
options (15(b)(ii))
    
    
    (137
    )
    
    
    (214
    )
    
    
    (559
    )
    
    
    (3,317
    )Performance based
options (15(b)(iii))
    
    
    164
    
    
    
    (473
    )
    
    
    
    
    
    
    (309
    )Warrants issued to
acquire technology
(15(b)(iv))
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (61
    )Loss and comprehensive
loss per United States
GAAP
    
    $
    (74,269
    )
    
    $
    (32,382
    )
    
    $
    (19,813
    )
    
    $
    (190,601
    )Basic and diluted loss
per share per
United States GAAP
    
    $
    (1.07
    )
    
    $
    (0.58
    )
    
    $
    (0.40
    )
   29




---



##### 



VASOGEN INC.  Notes to Consolidated Financial Statements (continued)
(Tabular figures in thousands of Canadian dollars, except per share amounts) Years ended November 30, 2004, 2003, 2002 and period
from December 1, 1987 to November 30, 2004    15.
    Differences between generally accepted accounting principles in Canada and the
United States (continued):  
 (b)
    Consolidated balance sheets:
 2004
    
    
    2003United
    
    
    
    
    
    
    UnitedCanada
    
    
    States
    
    
    Canada
    
    
    StatesAcquired technology,
net (i)
    
    $
    759
    
    
    $
    
    
    
    $
    1,013
    
    
    $
    Share capital, warrants
and options (ii), (iv)
    
    
    248,120
    
    
    
    251,807
    
    
    
    175,580
    
    
    
    179,294Deficit, end of year
(i), (ii), (iii), (iv)
    
    
    (187,665
    )
    
    
    (192,111
    )
    
    
    (113,115
    )
    
    
    (117,842
    )Deficit accumulated
during development
stage (i), (ii), (iii), (iv)
    
    
    (186,155
    )
    
    
    (190,601
    )
    
    
    (111,605
    )
    
    
    (116,332
    )
  (i)
    Canadian GAAP requires the capitalization and amortization of acquired
technology costs. Under United States GAAP, such acquired technology costs are
charged to expense when incurred if, at the acquisition date, the technological
feasibility of this technology has not yet been established and no future
alternative uses exist. 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 have been reversed.(ii)
    Financial Accounting Standards Board (FASB) Statement of Financial
Accounting Standards 123 (SFAS No. 123), Accounting for Stock-based Compensation,
requires recognition of compensation costs at fair value for stock options and
warrants issued after December 15, 1995, to non-employees, such as members of the
Scientific Advisory Board, and other consultants and advisors. The fair value of
the non-employee stock options and warrants granted after December 15, 1995 has been
estimated as the performance occurs and the options are earned using the
Black-Scholes option pricing model based on the assumptions set out in note 15(e).Under Canadian GAAP, all stock-based compensation granted to non-employees on or
after December 1, 2002 is also accounted for at fair value.   30




---



##### 



VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY) Notes to Consolidated Financial Statements (continued)
(Tabular figures in thousands of Canadian dollars, except per share amounts) Years ended November 30, 2004, 2003, 2002 and period
from December 1, 1987 to November 30, 2004    15.
    Differences between generally accepted accounting principles in Canada and the
United States (continued):  (iii)
    Under Canadian GAAP, the Company accounts for employee stock-based
compensation under the settlement method. Under United States GAAP, the Company has
elected under SFAS No. 123, Accounting for Stock-based Compensation, to continue to
apply the provisions of Accounting Principles Board Opinion 25 (APB 25) to its
accounting for stock compensation to employees using the intrinsic value method.
However, the Company has granted performance-based options to employees. In
accordance with United States GAAP, these options are being accounted for using
variable plan accounting. At each reporting date, compensation cost is measured
based on an estimate of the number of options that will vest considering the
performance criteria and the difference between the market price of the underlying
stock and the exercise price at such dates. The compensation cost is being
recognized over the estimated performance period.(iv)
    In 1996, 100,000 warrants were issued as part of the technology
acquisition consideration. United States GAAP requires these acquired technology
costs to be recorded in an amount approximating the fair value of the warrants
issued, estimated at their grant date using the Black-Scholes option pricing model,
and expensed as research and development expenses.  (c)
    Consolidated statements of cash flows:Cash from operations under United States GAAP includes the adjustments to loss for the
year outlined in note 15(b). Cash used in investments under United States GAAP excludes
amounts representing acquired technology (note 15(b)(i)). 31




---



##### 



VASOGEN INC.  Notes to Consolidated Financial Statements (continued)
(Tabular figures in thousands of Canadian dollars, except per share amounts) Years ended November 30, 2004, 2003, 2002 and period
from December 1, 1987 to November 30, 2004    15.
    Differences between generally accepted accounting principles in Canada and the
United States (continued):  
 (d)
    Income taxes:Under Canadian GAAP, investment tax credits and other research and development credits
are deducted from research and development expense for items of a current nature, and
deducted from property and equipment for items of a capital nature. Under United States
GAAP, these tax credits would be reclassified as a reduction of income tax expense.
Total research and development tax credits netted against research and development
expenses on the consolidated statements of operations and deficit are set out in note
1(h).(e)
    Pro forma information:While SFAS No. 123 does not require the recognition of compensation cost for stock
options issued to employees at fair value, it does require disclosure of pro forma net
income and income per share information as if the Company had measured options issued to
employees under the fair value method and recognized that fair value over the vesting
period.The fair value of the employee and non-employee stock-based compensation has been
estimated at the date of grant using the Black-Scholes option pricing model under the
assumptions listed below:
 2004
    
    
    2003
    
    
    2002
    
    
    2001Dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average risk-free
interest rate
    
    
    3.89
    %
    
    
    4.49
    %
    
    
    4.26
    %
    
    
    5.11
    %Volatility factor of the expected
market price of the Companys
common shares
    
    
    69.1
    %
    
    
    82
    %
    
    
    81
    %
    
    
    86
    %Weighted average expected
life of the employment options
    
    4.6 years
    
    4.4 years
    
    4 years
    
    4 years
  The resulting weighted average grant-date fair value of the employee and non-employee
stock-based compensation issued in 2004 was $4.77 (2003  $3.26; 2002  $2.77).   32




---



##### 



VASOGEN INC.  Notes to Consolidated Financial Statements (continued)
(Tabular figures in thousands of Canadian dollars, except per share amounts) Years ended November 30, 2004, 2003, 2002 and period
from December 1, 1987 to November 30, 2004    15.
    Differences between generally accepted accounting principles in Canada and the
United States (continued):  
 2004
    
    
    2003
    
    
    2002Loss for the year  United States GAAP
    
    $
    (74,269
    )
    
    $
    (32,382
    )
    
    $
    (19,813
    )Compensation cost  employees
    
    
    (3,391
    )
    
    
    (1,636
    )
    
    
    (1,027
    )Compensation expense (15(b)(iii))
    
    
    (164
    )
    
    
    473
    
    
    
    Pro forma loss for the year -
United States GAAP
    
    $
    (77,824
    )
    
    $
    (33,545
    )
    
    $
    (20,840
    )Pro forma basic and diluted loss
per share  United States GAAP
    
    $
    (1.12
    )
    
    $
    (0.60
    )
    
    $
    (0.42
    )
  The effects of applying SFAS No. 123 to calculate compensation cost may not be
representative of the effects on pro forma loss in future periods.(f)
    Changes in accounting policies:  (i)
    Consolidation of variable interest entities:In December 2003, FASB issued interpretation No. 46R (FIN 46R), Consolidation of
Variable Interest Entities, that replaced FIN 46 that had been issued in January
2003. FIN 46R provides guidance on the identification of variable interest entities
(VIEs), for which control is achieved through means other than through voting
rights, and how to determine whether a variable interest holder should consolidate
the VIEs. This interpretation applies to financial statements of public entities
that have interests in VIEs or potential VIEs commonly referred to as special purpose
entities for periods ending after December 15, 2003. FIN 46R applies to all public
entities for all other types of VIEs in financial statements for periods ending after
March 15, 2004. Adoption of the new standard had no impact on the Companys
consolidated financial position or results of operations.   33




---



##### 



VASOGEN INC.  Notes to Consolidated Financial Statements (continued)
(Tabular figures in thousands of Canadian dollars, except per share amounts) Years ended November 30, 2004, 2003, 2002 and period
from December 1, 1987 to November 30, 2004    15.
    Differences between generally accepted accounting principles in Canada and the
United States (continued):  (ii)
    Derivative instruments and hedging activities:In April 2003, FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities, which amends FASB Statements No. 133,
Accounting for Derivative Instruments and Hedging Activities, to clarify under what
circumstances a contract with an initial net investment meets the characteristics of
a derivative, to clarify when a derivative contains a financing component, to amend
the definition of an underlying to conform it to the language in FASB Interpretation
No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, and to amend certain other existing
pronouncements. SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003, and is to be applied prospectively. Implementation of SFAS No.
149 had no impact on the Companys financial position or results of operations.(iii)
    Accounting for certain financial instruments with characteristics of
both liabilities and equity:In May 2003, FASB issued SFAS No. 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity. SFAS No. 150 requires that
certain financial instruments issued in the form of shares that are mandatorily
redeemable, as well as certain other financial instruments be classified as
liabilities in the financial statements. SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003 and otherwise was effective
beginning in the Companys second quarter of 2004. The adoption of this statement
had no impact on the Companys consolidated financial position or results of
operations. 34




---



##### 



VASOGEN INC.  Notes to Consolidated Financial Statements (continued)
(Tabular figures in thousands of Canadian dollars, except per share amounts) Years ended November 30, 2004, 2003, 2002 and period
from December 1, 1987 to November 30, 2004    15.
    Differences between generally accepted accounting principles in Canada and the
United States (continued):  
 (g)
    Consolidated statement of shareholders equity for the period from December 1, 1987
to November 30, 2004:
 CommonsharesNumber of
    
    
    averageof shares
    
    
    share price
    
    
    Amount
    
    
    Options
    
    
    Warrants
    
    
    Deficit
    
    
    Total(000s)Balance, December 1, 1987
    
    
    1,032
    
    
    
    
    
    
    $
    1,213
    
    
    $
    
    
    
    $
    
    
    
    $
    (1,510
    )
    
    $
    (297
    )Shares issued for cash
    
    
    138
    
    
    
    0.03
    
    
    
    195
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    195Shares issued for services
    
    
    5
    
    
    
    0.07
    
    
    
    17
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17Shares issued to acquire a license
    
    
    1,571
    
    
    
    0.03
    
    
    
    2,375
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,375Deficit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (755
    )
    
    
    (755
    )Balance, November 30, 1988
    
    
    2,746
    
    
    
    
    
    
    
    3,800
    
    
    
    
    
    
    
    
    
    
    
    (2,265
    )
    
    
    1,535Deficit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (601
    )
    
    
    (601
    )Balance, November 30, 1989
    
    
    2,746
    
    
    
    
    
    
    
    3,800
    
    
    
    
    
    
    
    
    
    
    
    (2,866
    )
    
    
    934Shares issued for cash
    
    
    251
    
    
    
    0.09
    
    
    
    1,061
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,061Options exercised for services
    
    
    50
    
    
    
    0.04
    
    
    
    105
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    105Shares issued for services
    
    
    11
    
    
    
    0.09
    
    
    
    45
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45Debt conversion
    
    
    179
    
    
    
    0.02
    
    
    
    200
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    200Deficit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (725
    )
    
    
    (725
    )Balance, November 30, 1990
    
    
    3,237
    
    
    
    
    
    
    
    5,211
    
    
    
    
    
    
    
    
    
    
    
    (3,591
    )
    
    
    1,620Shares issued for cash
    
    
    683
    
    
    
    0.03
    
    
    
    909
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    909Options exercised for services
    
    
    14
    
    
    
    0.04
    
    
    
    30
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30Shares issued for services
    
    
    90
    
    
    
    0.04
    
    
    
    168
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    168Shares issued to acquire a license
    
    
    71
    
    
    
    0.03
    
    
    
    100
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100Deficit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (593
    )
    
    
    (593
    )Balance, November 30, 1991
    
    
    4,095
    
    
    
    
    
    
    
    6,418
    
    
    
    
    
    
    
    
    
    
    
    (4,184
    )
    
    
    2,234
   35




---



##### 



VASOGEN INC.  Notes to Consolidated Financial Statements (continued)
(Tabular figures in thousands of Canadian dollars, except per share amounts) Years ended November 30, 2004, 2003, 2002 and period
from December 1, 1987 to November 30, 2004    15.
    Differences between generally accepted accounting principles in Canada and the
United States (continued):  
 CommonsharesNumber of
    
    
    averageof shares
    
    
    share price
    
    
    Amount
    
    
    Options
    
    
    Warrants
    
    
    Deficit
    
    
    Total(000s)Shares issued for cash
    
    
    14
    
    
    
    0.06
    
    
    
    44
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    44Options exercised for services
    
    
    134
    
    
    
    0.04
    
    
    
    239
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    239Shares issued for services
    
    
    77
    
    
    
    0.05
    
    
    
    202
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    202Debt conversion
    
    
    429
    
    
    
    0.02
    
    
    
    450
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    450Deficit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (975
    )
    
    
    (975
    )Balance, November 30, 1992
    
    
    4,749
    
    
    
    
    
    
    
    7,353
    
    
    
    
    
    
    
    
    
    
    
    (5,159
    )
    
    
    2,194Shares issued for cash
    
    
    71
    
    
    
    2.10
    
    
    
    150
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    150Warrants exercised for services
    
    
    119
    
    
    
    1.71
    
    
    
    203
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    203Options exercised for services
    
    
    46
    
    
    
    2.10
    
    
    
    96
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    96Shares issued for services
    
    
    96
    
    
    
    2.10
    
    
    
    202
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    202Deficit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (752
    )
    
    
    (752
    )Balance, November 30, 1993
    
    
    5,081
    
    
    
    
    
    
    
    8,004
    
    
    
    
    
    
    
    
    
    
    
    (5,911
    )
    
    
    2,093Shares issued for cash
    
    
    774
    
    
    
    1.30
    
    
    
    1,006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,006Share issue costs
    
    
    
    
    
    
    
    
    
    
    (192
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (192
    )Warrants exercised for services
    
    
    142
    
    
    
    1.75
    
    
    
    247
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    247Options exercised for services
    
    
    29
    
    
    
    1.54
    
    
    
    44
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    44Shares issued for services
    
    
    29
    
    
    
    2.10
    
    
    
    60
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    60Deficit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (996
    )
    
    
    (996
    )Balance, November 30, 1994
    
    
    6,055
    
    
    
    
    
    
    
    9,169
    
    
    
    
    
    
    
    
    
    
    
    (6,907
    )
    
    
    2,262
   36




---



##### 



VASOGEN INC.  Notes to Consolidated Financial Statements (continued)
(Tabular figures in thousands of Canadian dollars, except per share amounts) Years ended November 30, 2004, 2003, 2002 and period
from December 1, 1987 to November 30, 2004    15.
    Differences between generally accepted accounting principles in Canada and the
United States (continued):  
 CommonsharesNumber of
    
    
    averageof shares
    
    
    share price
    
    
    Amount
    
    
    Options
    
    
    Warrants
    
    
    Deficit
    
    
    Total(000s)Shares issued for cash
    
    
    3,460
    
    
    
    1.00
    
    
    
    3,460
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,460Share issue costs
    
    
    
    
    
    
    
    
    
    
    (294
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (294
    )Warrants exercised for services
    
    
    185
    
    
    
    0.50
    
    
    
    93
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    93Options exercised for services
    
    
    120
    
    
    
    0.50
    
    
    
    60
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    60Shares issued for services
    
    
    236
    
    
    
    1.04
    
    
    
    246
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    246Deficit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,323
    )
    
    
    (2,323
    )Balance, November 30, 1995
    
    
    10,056
    
    
    
    
    
    
    
    12,734
    
    
    
    
    
    
    
    
    
    
    
    (9,230
    )
    
    
    3,504Shares issued for cash
    
    
    3,557
    
    
    
    1.10
    
    
    
    3,913
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,913Share issue costs
    
    
    
    
    
    
    
    
    
    
    (962
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (962
    )Warrants exercised for services
    
    
    3,397
    
    
    
    1.34
    
    
    
    4,539
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,539Options exercised for services
    
    
    394
    
    
    
    0.62
    
    
    
    245
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    245Shares issued for services
    
    
    632
    
    
    
    1.18
    
    
    
    748
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    748Shares issued to acquire license
    
    
    270
    
    
    
    1.20
    
    
    
    324
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    324Deficit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,862
    )
    
    
    (4,862
    )Balance, November 30, 1996
    
    
    18,306
    
    
    
    
    
    
    
    21,541
    
    
    
    
    
    
    
    
    
    
    
    (14,092
    )
    
    
    7,449Shares issued for cash
    
    
    3,064
    
    
    
    2.49
    
    
    
    7,625
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,625Share issue costs
    
    
    
    
    
    
    
    
    
    
    (312
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (312
    )Warrants exercised for services
    
    
    1,352
    
    
    
    1.20
    
    
    
    1,621
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,621Options exercised for services
    
    
    494
    
    
    
    0.98
    
    
    
    482
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    482Shares issued for services
    
    
    115
    
    
    
    1.87
    
    
    
    215
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    215Deficit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,991
    )
    
    
    (7,991
    )Balance, November 30, 1997
    
    
    23,331
    
    
    
    
    
    
    
    31,172
    
    
    
    
    
    
    
    
    
    
    
    (22,083
    )
    
    
    9,089
   37




---



##### 



VASOGEN INC.  Notes to Consolidated Financial Statements (continued)
(Tabular figures in thousands of Canadian dollars, except per share amounts) Years ended November 30, 2004, 2003, 2002 and period
from December 1, 1987 to November 30, 2004    15.
    Differences between generally accepted accounting principles in Canada and the
United States (continued):  
 CommonsharesNumber of
    
    
    averageof shares
    
    
    share price
    
    
    Amount
    
    
    Options
    
    
    Warrants
    
    
    Deficit
    
    
    Total(000s)Shares issued for cash
    
    
    2,882
    
    
    
    1.75
    
    
    
    5,043
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,043Share issue costs
    
    
    
    
    
    
    
    
    
    
    (479
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (479
    )Warrants exercised for services
    
    
    228
    
    
    
    1.11
    
    
    
    253
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    253Options exercised for services
    
    
    100
    
    
    
    0.95
    
    
    
    95
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    95Shares issued for services
    
    
    33
    
    
    
    1.67
    
    
    
    55
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    55Deficit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,312
    )
    
    
    (7,312
    )Balance, November 30, 1998
    
    
    26,574
    
    
    
    
    
    
    
    36,139
    
    
    
    
    
    
    
    
    
    
    
    (29,395
    )
    
    
    6,744Shares issued for cash
    
    
    6,590
    
    
    
    1.49
    
    
    
    9,825
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,825Share issue costs
    
    
    
    
    
    
    
    
    
    
    (934
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (934
    )Warrants exercised for services
    
    
    1,627
    
    
    
    1.07
    
    
    
    1,739
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,739Options exercised for services
    
    
    594
    
    
    
    1.22
    
    
    
    724
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    724Shares issued for services
    
    
    207
    
    
    
    1.25
    
    
    
    259
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    259Deficit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,915
    )
    
    
    (7,915
    )Balance, November 30, 1999
    
    
    35,592
    
    
    
    
    
    
    
    47,752
    
    
    
    
    
    
    
    
    
    
    
    (37,310
    )
    
    
    10,442Shares issued for cash
    
    
    3,738
    
    
    
    9.54
    
    
    
    35,650
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35,650Share issue costs
    
    
    
    
    
    
    
    
    
    
    (1,812
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,812
    )Warrants exercised for services
    
    
    3,979
    
    
    
    1.73
    
    
    
    6,898
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,898Options exercised for services
    
    
    1,393
    
    
    
    1.48
    
    
    
    2,064
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,064Shares issued for services
    
    
    40
    
    
    
    5.83
    
    
    
    233
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    233Deficit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,961
    )
    
    
    (9,961
    )Balance, November 30, 2000
    
    
    44,742
    
    
    
    
    
    
    
    90,785
    
    
    
    
    
    
    
    
    
    
    
    (47,271
    )
    
    
    43,514
   38




---



##### 



VASOGEN INC.  Notes to Consolidated Financial Statements (continued)
(Tabular figures in thousands of Canadian dollars, except per share amounts) Years ended November 30, 2004, 2003, 2002 and period
from December 1, 1987 to November 30, 2004    15.
    Differences between generally accepted accounting principles in Canada and the
United States (continued):  
 CommonsharesNumber of
    
    
    averageof shares
    
    
    share price
    
    
    Amount
    
    
    Options
    
    
    Warrants
    
    
    Deficit
    
    
    Total(000s)Shares issued for cash
    
    
    1,406
    
    
    
    8.49
    
    
    
    11,941
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,941Share issue costs
    
    
    
    
    
    
    
    
    
    
    (121
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (121
    )Options exercised for services
    
    
    216
    
    
    
    1.99
    
    
    
    429
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    429Deficit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,389
    )
    
    
    (14,389
    )Balance, November 30, 2001
    
    
    46,364
    
    
    
    
    
    
    
    103,034
    
    
    
    
    
    
    
    
    
    
    
    (61,660
    )
    
    
    41,374Shares issued for cash
    
    
    5,155
    
    
    
    4.85
    
    
    
    25,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,000Share issue costs
    
    
    
    
    
    
    
    
    
    
    (1,901
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,901
    )Options exercised for services
    
    
    415
    
    
    
    1.30
    
    
    
    540
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    540Deficit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,507
    )
    
    
    (19,507
    )Balance, November 30, 2002
    
    
    51,934
    
    
    
    
    
    
    
    126,673
    
    
    
    
    
    
    
    
    
    
    
    (81,167
    )
    
    
    45,506Shares issued for cash
    
    
    9,478
    
    
    
    5.35
    
    
    
    50,669
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,669Share issue costs
    
    
    
    
    
    
    
    
    
    
    (5,898
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,898
    )Warrants exercised for services
    
    
    250
    
    
    
    5.39
    
    
    
    1,347
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,347Options exercised for services
    
    
    360
    
    
    
    1.64
    
    
    
    589
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    589Fair value of stock options and
warrants issued to consultants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    744
    
    
    
    1,456
    
    
    
    
    
    
    
    2,200Deficit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (31,948
    )
    
    
    (31,948
    )Balance, November 30, 2003
    
    
    62,022
    
    
    
    
    
    
    
    173,380
    
    
    
    744
    
    
    
    1,456
    
    
    
    (113,115
    )
    
    
    62,465Shares issued for cash
    
    
    9,775
    
    
    
    7.87
    
    
    
    76,913
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    76,913Share issue costs
    
    
    
    
    
    
    
    
    
    
    (6,128
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,128
    )Options exercised for services
    
    
    534
    
    
    
    2.43
    
    
    
    1,300
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,300Fair value of stock options issued
to consultants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    455
    
    
    
    
    
    
    
    
    
    
    
    455Deficit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (74,550
    )
    
    
    (74,550
    )Balance, November 30, 2004
    
    
    72,331
    
    
    
    
    
    
    $
    245,465
    
    
    $
    1,199
    
    
    $
    1,456
    
    
    $
    (187,665
    )
    
    $
    60,455
   39




---



##### 



VASOGEN INC.  Notes to Consolidated Financial Statements (continued)
(Tabular figures in thousands of Canadian dollars, except per share amounts) Years ended November 30, 2004, 2003, 2002 and period
from December 1, 1987 to November 30, 2004    16.
    Recent accounting pronouncements:  (a)
    Canadian GAAP:  (i)
    Consolidation of variable interest entities (revised):In September 2004, the CICA released revised Accounting Guideline 15R (AcG-15R).
AcG-15R is now substantially consistent with FASB Interpretation No. 46 (revised).
AcG-15R is effective for annual and interim periods beginning on or after November 1,
2004. The Company does not expect the adoption of AcG-15R to impact its consolidated
financial position and results of operations.(ii)
    Stock-based compensation and other stock-based payments:In September 2003, the CICA revised the transitional provisions of Handbook Section
3870 to provide the same alternative methods of transition as is provided in the U.S.
for voluntary adoption of the fair value-based method of accounting. These
provisions permit retroactive application of the recognition provisions to awards not
previously accounted for at fair value either with or without restatement of prior
periods.The AcSB has also amended the standards to require that all transactions, whereby
goods and services are received in exchange for stock-based compensation and other
payments, results in expenses that should be recognized in financial statements, and
that this requirement would be applicable for financial periods beginning on or after
January 1, 2004. The standards require that share-based transactions should be
measured on a fair value basis. The Company will adopt this standard retroactively
without restatement effective December 1, 2004 and expects the impact of adopting the
standard to approximate the pro forma amounts disclosed in note 5. 40




---



##### 



VASOGEN INC.  Notes to Consolidated Financial Statements (continued)
(Tabular figures in thousands of Canadian dollars, except per share amounts) Years ended November 30, 2004, 2003, 2002 and period
from December 1, 1987 to November 30, 2004    16.
    Recent accounting pronouncements:  (b)
    United States GAAP:  (i)
    Accounting for stock-based compensation:In December 2004, the FASB revised SFAS 123 to require companies to recognize in the
income statement the grant-date fair value of stock options and other equity-based
compensation issued to employees, but expressed no preference for a type of valuation
model. The way an award is classified will affect the measurement of compensation
cost. Liability-classified awards are remeasured to fair value at each balance sheet
date until the award is settled. Equity-classified awards are measured at grant-date
fair value and the grant-date fair value is recognized over the requisite service
period. Such awards are not subsequently remeasured. The revised statement is
effective for interim or annual periods beginning after June 15, 2005 and is
effective for the Companys fourth quarter of fiscal 2005. The Company has not yet
determined the effect of this new standard on its consolidated financial position and
results of operations.(ii)
    Accounting for non-monetary transactions:In December 2004, the FASB issued SFAS 153 that amends APB Opinion 29. The new
standard requires non-monetary exchanges to be accounted for at fair value,
recognizing any gains or loss, if the transactions meet a commercial substance
criterion and fair value is determinable. The amendment will be effective for
non-monetary transactions occurring in fiscal periods beginning after June 15, 2005.
The Company does not expect the adoption of this standard to have a material impact
on its consolidated financial position and results of operations.  17.
    Comparative figures:Certain 2003 comparative figures have been reclassified to conform with the financial
statement presentation adopted in 2004. 41