UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 20-F
 
o
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)
OF THE SECURITIES EXCHANGE ACT OF 1934; or
   
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended November 30, 2007; or
   
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period ________ to ________; or
   
o
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report
   

Commission File No. 0-29350
 
VASOGEN INC.
(Exact name of registrant as specified in its charter)
 
Canada
(Jurisdiction of Incorporation or organization)
 
2505 Meadowvale Boulevard
Mississauga, Ontario, L5N 5S2, Canada
(905) 817-2000
(Address, including zip code and telephone number,
 including area code, of registrant’s principal executive offices)
 
Securities registered or to be registered pursuant to Section 12(b) of the Act:
 
Title of each class
Name of each exchange
on which registered
Common shares, no par value
NASDAQ
 
TSX

Securities registered or to be registered pursuant to Section 12(g) of the Act:
 
None
 
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
 
None
 

As of November 30, 2007, the registrant had 22,391,386   common shares outstanding.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
 
Yes o
No x
 
If this report is an annual report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
 
Yes o
No x
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes x
No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer o
Accelerated filer x
Non-accelerated filer o  
           
Indicate by check mark which financial statement item the registrant has elected to follow:
 
Item 17  o
Item 18  x
 
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes o
No x
 
 
 

TABLE OF CONTENTS
 
       
Page
 
PART I
     
1
 
           
 
Item 1.
 
Identity of Directors, Senior Management and Advisors
1
 
 
Item 2.
 
Offer Statistics and Expected Timetable
1
 
 
Item 3.
 
Key Information
1
 
   
A.
Selected Financial Data
1
 
   
B.
Capitalization and Indebtedness
4
 
   
C.
Reasons for the Offer and Use of Proceeds
4
 
   
D.
Risk Factors
4
 
 
Item 4.
 
Information on the Company
16
 
   
A.
History and Development of the Company
16
 
   
B.
Business Overview
17
 
   
C.
Organizational Structure
23
 
   
D.
Property, Plant and Equipment
23
 
 
Item 5.
 
Operating and Financial Review and Prospects
23
 
   
A.
Operating Results
23
 
   
B.
Liquidity and Capital Resources
29
 
   
C.
Research and development, patents, and licenses, etc
31
 
   
D.
Trend Information
31
 
   
E.
Off-balance sheet arrangements
32
 
   
F.
Contractual obligations
32
 
   
G.
Safe Harbor
33
 
 
Item 6.
  Directors, Senior Management and Employees 33  
   
A.
Compensation
38
 
   
B.
Board Practices
41
 
   
C.
Employees
44
 
   
D.
Share Ownership
44
 
 
Item 7.
 
Major Shareholders and Related Party Transactions
47
 
   
A.
Major Shareholders
47
 
   
B.
Related Party Transactions
47
 
 
Item 8.
 
Financial Information
47
 
   
A.
Consolidated Statements and Other Financial Information
47
 
   
B.
Significant changes
47
 
 
Item 9.
 
Offer and Listing
47
 
 
Item 10.
 
Additional Information
49
 
   
A.
Share Capital
49
 
   
B.
Memorandum and Articles of Association
49
 
   
C.
Material Contracts
54
 
   
D.
Exchange Controls
55
 
   
E.
Taxation
55
 
   
F.
Dividends and Paying Agents
61
 
   
G.
Statement by Experts
61
 
   
H.
Documents on Display
61
 
   
I.
Subsidiary Information
61
 
 
Item 11.
 
Qualitative and Quantitative Disclosures about Market Risk
61
 
 
Item 12.
 
Description of Securities Other than Equity Securities
62
 
           
PART II       62  
           
 
Item 13.
 
Defaults, Dividends Arrearages and Delinquencies
62
 
 
Item 14.
 
Material Modifications to the Rights of Security Holders and Use of Proceeds
62
 
 
Item 15.
 
Controls and Procedures
63
 
 
 
i

 
 
 
Item 16A.
Audit Committee Financial Expert
64
 
 
Item 16B.
Code of Ethics
64
 
 
Item 16C.
Principal Accountant Fees and Services
64
 
 
Item 16D.
Exemptions from the Listing Standards for Audit Committees
64
 
 
Item 16E.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
64
 
         
PART III
   
65
 
       
 
Item 17.
 
Financial Statements
65
 
 
Item 18.
 
Financial Statements
65
 
 
Item 19.
 
Exhibits
126
 


ii

 
DISCLOSURE REGARDING FORWARD-LOOKING INFORMATION
 
Certain statements contained in this annual report and in certain documents incorporated by reference herein constitute “forward-looking statements” within the meaning of the United States Private Securities Litigation Reform Act of 1995 and/or “forward-looking information” under the Securities Act (Ontario). These statements may include, without limitation, summary statements relating to results of the ACCLAIM trial in patients with chronic heart failure, plans to advance the development of  the Celacade TM1 System (“Celacade”), our medical device for the treatment of chronic heart failure, and VP025, statements concerning our partnering activities and discussions with health regulatory authorities, plans for health regulatory submissions, strategy, future operations, future financial position, future revenues, projected costs, prospects, plans and objectives of management.   In some cases, you can identify forward-looking statements by terminology such as “may”, “will”, “should”, “expects”, “plans”, “anticipates”, “believes”, “estimated”, “predicts”, “potential”, “continue”, “intends”, “could”, or the negative of such terms or other comparable terminology. We have made a number of assumptions in the preparation of these forward-looking statements, including assumptions about the nature, size, and accessibility of the market for Celacade in the treatment of chronic heart failure, particularly in Europe, the regulatory approval process leading to commercialization, the availability of capital on acceptable terms to pursue the development of Celacade, and the feasibility of additional trials.  You should not place undue reliance on our forward-looking statements which are subject to a multitude of risks and uncertainties that could cause actual results, future circumstances, or events to differ materially from those projected in the forward-looking statements. The risks include, but are not limited to, those discussed below that could cause our actual results to differ significantly from those contained in any forward-looking statements and/or forward-looking information.  Additional risks and uncertainties relating to our Company and our business can be found under “Risks Relating to our Business” and  “Risks Relating to our Securities” below, as well as in our later public filings. The forward-looking statements are made as of the date hereof and we disclaim any intention and have no obligation or responsibility, except as required by law, to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
 

 
PART I.
 
Item 1.      Identity of Directors, Senior Management and Advisors
 
Not Applicable.
 
Item 2.      Offer Statistics and Expected Timetable
 
Not Applicable.
 
Item 3.      Key Information
 
A.      Selected Financial Data
 
The following selected financial data of Vasogen Inc. (“we”, “us”, “Vasogen” or the “Company”), has been derived from the audited consolidated financial statements of the Company as at and for each of the years in the five-year period ended November 30, 2007 and is prepared in accordance with Canadian generally accepted accounting principles (“Canadian GAAP”), which except as described in Note 16 to the financial statements in Item 18, conform in all material respects with accounting principles generally accepted in the United States (“US GAAP”).    All dollar amounts herein are expressed in Canadian dollars, unless otherwise indicated.
 


  1 Celacade is a trade-mark owned by Vasogen Ireland Limited, a wholly-owned subsidiary of Vasogen Inc., and is used with permission.
 
 
1

Years ended November 30
 
(in thousands of  Canadian dollars, except for share and per share data)
 
   
2007
   
2006
   
2005
   
2004
   
2003
   
Period from December 1, 1987 to November 30, 2007
 
Statements of operations, deficit and comprehensive income
                                   
Research and development
    12,039       32,732       71,421       51,794       21,730       238,917  
General and administration
    14,259       19,251       22,126       15,852       10,250       117,228  
Foreign exchange loss (gain)
    1,977       104       (719 )     8,288       1,111       10,970  
Accretion in carrying value of senior convertible notes payable
    (728 )     (7,824 )     (1,742 )     0       0       (10,294 )
Loss on extinguishment of senior convertible notes payable
    (1,754 )     (4,995 )     0       0       0       (6,749 )
Investment income
    1,310       1,971       2,274       1,384       1,143       13,325  
Loss and comprehensive loss for the period
    (28,777 )     (66,360 )     (93,048 )     (74,550 )     (31,948 )     (374,340 )
Basic and diluted loss per share
    (1.46 )     (7.05 )     (11.65 )     (10.70 )     (5.70 )        
Balance sheet
                                               
Shares outstanding
    22,391,386       15,665,134       8,225,537       7,233,127       6,202,230          
Total assets
    28,050       41,770       94,811       80,963       68,783          
Share capital
    365,670       344,217       295,007       245,465       173,380          
Net assets
    23,356       24,580       32,307       60,455       62,465          

Notes:
 
(1)           To date, the Company has been in the development stage and, accordingly, has no revenue.
 
 
(2)
Effective December 1, 2004, the Company adopted the amendment to The Canadian Institute of Chartered Accountants’ (“CICA”) Handbook Section 3870, Stock-based Compensation and Other Stock-based Payments (“Section 3870”).  Pursuant to the transitional provisions of Section 3870, the Company applied this change retroactively, without restatement of prior periods.  The impact of the Company’s adoption of this revised accounting standard was a charge to opening deficit of $4,006,000 with corresponding increases of $55,000 to share capital for those stock options exercised prior to December 1, 2004 and $3,951,000 to stock options for those vested options not yet exercised at December 1, 2004.
 
 
2

 
 
(3)
Effective on December 1, 2006, the Company adopted the recommendations of CICA Handbook Section 1530, Comprehensive Income ("Section 1530"); CICA Handbook Section 3855, “Financial Instruments - Recognition and Measurement” (“Section 3855”); Section 3861, Financial Instruments - Disclosure and Presentation ("Section 3861"); and Section 3251, Equity.  These sections provide standards for recognition, measurement, disclosure and presentation of financial assets, financial liabilities and non-financial derivatives.  Section 1530 provides standards for the reporting and presentation of comprehensive income, which represents the change in equity from transactions and other events and circumstances from non-owner sources.  Other comprehensive income refers to items recognized in comprehensive income that are excluded from net income calculated in accordance with Canadian GAAP.

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

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

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

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

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

As a result of adopting Section 3855, retrospectively without restatement, the Company recorded an increase of $1.6 million to deficit as at December 1, 2006, a decrease in the carrying amount of the senior convertible notes payable of $0.1 million, the initial recognition of an embedded derivatives liability of $0.8 million and an increase in share capital of $0.9 million at December 1, 2006.
3


 
(4)
The following table sets forth how the above amounts would be presented under US GAAP for the fiscal years ended November 30, 2007, 2006, and 2005:
 
 (in thousands of Canadian dollars, except for per share data)
 
   
Fiscal Years Ended November 30
 
   
2007
   
2006
   
2005
 
Loss for the period
  $ (18,176 )   $ (60,921 )   $ (87,380 )
Basic and diluted loss per share
    (0.92 )     (6.48 )     (10.94 )
Share capital
    364,867       343,906       294,937  
Shareholders’ equity
    18,502       13,722       22,533  


The following table sets forth the exchange rate for one Canadian dollar expressed in terms of one U.S. dollar for the fiscal years 2003 through 2007 and for August 2007 through January 2008.
 
AVERAGE
   
2003
.7034
2004
.7637
2005
.8222
2006
.8812
2007
.9207

 
LOW
HIGH
August 2007
0.9298
0.9525
September 2007
0.9466
1.0069
October 2007
0.9996
1.0527
November 2007
0.9992
1.0905
December 2007
0.9788
1.0220
January 2008
0.9686
1.0120
 
The exchange rates are based upon the noon buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York.  At February 25, 2008, the exchange rate for one Canadian dollar expressed in terms of one U.S. dollar, as quoted by The Bank of Canada at 4 p.m. Eastern Time, equaled $0.9952.
 

B.      Capitalization and Indebtedness
 
Not Applicable.
 
C.      Reasons for the Offer and Use of Proceeds
 
Not Applicable.
 
D.      Risk Factors
 
The risks and uncertainties described below are those that we currently believe may materially affect us.  Additional risks and uncertainties that we are unaware of or that we currently deem immaterial may also become important factors that affect us.  If any of the following risks actually occurs, our business, operating results, or financial condition could be materially adversely affected.
 
RISKS RELATING TO OUR BUSINESS
 
Our business entails significant risks. In addition to the usual risks associated with a business, the following is a general description of certain significant risk factors which are applicable to us.
 
4

We will require additional funds in our business that may be difficult to obtain when needed or on terms acceptable to us.
 
As of November 30, 2007, we had cash and cash equivalents of $23.5 million (US$23.5 million).  As of January 31, 2008, our cash balance was $21.4 million (US$21.4 million).   We will need to raise additional funds to conduct research and development, preclinical studies, and clinical trials necessary to bring our potential products to market, and to establish marketing, sales, and distribution capabilities, including, as warranted, for Celacade.  Our future capital requirements will depend on many factors, including continued scientific progress in our research and development programs, the scope and results of preclinical studies and clinical trials, the time and costs involved in obtaining regulatory approvals, the costs involved in filing, prosecuting, and enforcing patent claims, competing technological and market developments, the cost of manufacturing scale-up, effective commercialization activities and arrangements, and other factors not within our control.  We have no committed sources of capital.  Adequate funds may not be available when needed or on terms acceptable to us. Insufficient funds may require us to scale back or eliminate some, or all, of our research and development programs or license to third parties products or technologies that we would otherwise seek to develop.  Any future debt financing arrangements we enter into likely would contain restrictive covenants that impose significant operating and financial restrictions on us.  Our share price has not significantly recovered following the announcement of the ACCLAIM top-line results in 2006, which may negatively impact our ability to obtain financing in the future.  Should our ability to secure additional financing be delayed, management would be required to adjust its commercialization plans and research and development programs and reduce its cash expenditures in order to ensure that we have sufficient cash to fund planned expenditures.
 
In order to secure financing, if it is even available, it is likely that we will sell additional common shares or financial instruments that are exchangeable for or convertible into common shares. Also, in order to provide incentives to current employees and induce prospective employees and consultants to work for us, we have granted options and restricted stock units and intend to offer and issue options and restricted stock units to purchase common shares and/or rights exchangeable for or convertible into common shares.  These activities could result in substantial dilution to all our shareholders.  Capital raising activities and dilution associated with such activities could cause our share price to decline.
 
Our Collaboration with Grupo Ferrer Internacional S.A. (“Ferrer”) may not be successful
 
On April 18, 2007, we announced a collaboration with Ferrer, a leading European pharmaceutical and medical devices company, to commercialize our Celacade technology for the treatment of chronic heart failure in certain European and Latin American countries.
 
Under the collaboration agreement (the “Agreement”), Ferrer will have the exclusive rights to market our Celacade technology for the treatment of chronic heat failure and other cardiovascular conditions in specified countries of Europe, including Germany, Spain, Portugal, France, and Italy, and certain countries in Latin America, including Mexico, Brazil, Argentina, and Venezuela.  Ferrer has also acquired the right of first negotiation with respect to the remaining countries of the European Union (“E.U.”).
 
Under the Agreement, the commercial launch strategy for Celacade in Europe involves an initial commercialization phase (“ICP”) during which Ferrer will target key physicians to ensure support for expanded use of Celacade within the broader cardiology community.  Based on Ferrer’s current plan, the ICP is expected to conclude no later than September 1, 2008.  Under the terms of the Agreement, we are responsible for the cost of delivering the Celacade technology to Ferrer, based on orders received, which includes the Celacade single-use disposable cartridges required for the delivery of each Celacade monthly treatment.  During the ICP, Ferrer will pay us a fixed amount for the disposable cartridges and following the completion of this phase, we will receive 45% of Celacade revenues generated by Ferrer through the sale of Celacade single-use disposable cartridges, one of which is required for the delivery of each Celacade monthly treatment. After a period of five years from the date of the first commercial sale on a country-specific basis, our share of the revenues will be 42%.  We will also receive milestone payments based on Ferrer’s achievement of the first commercial sale of Celacade after the completion of the ICP on a country-specific basis, and on reaching pre-specified sales thresholds. Should we not reach the pre-specified sales thresholds or should the collaboration not ultimately be successful, our business may be affected adversely.
 
5

We are in the early stages of commercialization and may experience significant fluctuations in revenues, expenses and losses.
 
We are in the early stages of commercializing our products.  Although Ferrer received initial orders for our Celacade technology in December 2007, market uptake remains uncertain.  As a result, our ability to continue operations is uncertain and is dependent on our ability to generate sufficient revenue from European commercialization, additional partnerships or additional financings.  We may experience significant fluctuations in revenues, expenses and losses.  Such fluctuations may be affected by a number of factors, including variances in the sales cycle, the level of market acceptance for Celacade, responses by competitors, research and development expenses, financing and regulatory compliance costs and the acquisition/loss of key customers.
 
We are a development-stage company with a history of losses, we have not recognized any product revenues, and we may never achieve profitability.
 
Except for the commercialization of Celacade through our collaboration with Ferrer , our products are in the development stage and, accordingly, our business operations are subject to all of the risks inherent in the establishment and maintenance of a developing business enterprise, such as those related to competition and viable operations management.  We have incurred a loss in each year since our inception and have received no cash flow from operations to date.  These losses have resulted in decreases in our cash balances, working capital, and shareholders’ equity. The future earnings and cash flow from operations of our business are dependent, in part, on our ability to commercialize Celacade successfully and further develop our products. There can be no assurance that we will grow and be profitable.
 
At November 30, 2007, we had an accumulated deficit of approximately $381.8 million (US$381.8 million).  We have not generated revenues from the commercialization of any products.  Our net operating losses over the near-term and the next several years are expected to continue as a result of the further clinical trial activity and preparation for regulatory submission necessary to support regulatory approval of our products, subject to partial offset based on revenues expected from our collaboration with Ferrer. To obtain regulatory approval in North America or to support the use of our Celacade technology in a broader range of heart failure patients, it will be necessary to conduct another phase III trial of Celacade and the cost and time required to achieve regulatory approval, if the Celacade device is approved at all, could be substantially increased.  There can be no assurance that such additional clinical trials will be successful.  There can be no assurance that we will be able to generate sufficient product revenue to become profitable at all or on a sustained basis. We expect to have quarter-to-quarter fluctuations in expenses, some of which could be significant, due to expanded research, development, and clinical trial activities.
 
We intend to seek additional collaborative arrangements to commercialize our products.  These collaborations, if secured, may not be successful.
 
We have entered into a collaboration with Ferrer for the commercialization of our Celacade product in specified countries in the E.U. and in Latin America and intend to seek additional collaborative arrangements to develop and commercialize Celacade in other markets.  We also intend to seek collaborative arrangements to develop and commercialize our other products, including VP025, in Europe and North America. There can be no assurance that we will be able to negotiate collaborative arrangements on favorable terms, or at all, in the future, or that our current or future collaborative arrangements will be successful.
 
Our strategy for the research, development, and commercialization of our products requires entering into various arrangements with corporate collaborators, licensors, licensees, health care institutions and principal investigators and others, and our commercial success is dependent upon these outside parties performing their respective contractual obligations responsibly and with integrity. The amount and timing of resources such third parties will devote to these activities may not be within our control. There can be no assurance that such parties will perform their obligations as expected. There can be no assurance that our collaborators will devote adequate resources to our programs.
 

 
6

We are subject to stringent ongoing government regulation.
 
Biotechnology, medical device, and pharmaceutical companies operate in a high-risk regulatory environment. The FDA, Health Canada, and other health agencies can require additional clinical trials and can be very slow to approve a product and can also withhold product approvals. In addition, these health agencies also oversee many other medical product operations, such as research and development, manufacturing, and testing and safety regulation of medical products. As a result, regulatory risk is normally higher than in other industry sectors.
 
We have incurred, and expect to continue to incur, substantial clinical research and other costs in connection with obtaining regulatory approvals for our medical products in Canada, the United States, and other jurisdictions. While we are not aware of any pending or threatened governmental action against us in any country, any enforcement action by regulatory authorities with respect to past, or any future, regulatory non-compliance could have a material adverse effect on our business, financial condition, and results of operations.
 
To date, our Celacade technology has been regulated by the FDA and Health Canada as a medical device. In preparation for ACCLAIM II, the FDA has been reviewing Celacade in the context of its newly issued draft document entitled “Guidance for Industry Regulation of Human Cells, Tissues and Cellular and Tissue-Based Products (HCT/Ps) - Small Entity Compliance Guide” to assess whether this draft guidance is relevant to the Celacade technology.  To date, Celacade has been regulated as a medical device with the CRDH acting as lead reviewer with input from the CBER.  The FDA has recently informed us that Celacade will remain regulated as a medical device. However, CBER will take the role of lead reviewer, with CDRH providing input.  
 
There can be no assurance that this regulatory status will not change in the future or that additional regulatory bodies will not have input into the approval of our medical products. If the FDA or Health Canada decides to regulate the Celacade therapeutic device as a drug, biologic, or combination product, we could be obligated to conduct additional clinical trials and, in any event, the cost and time required to achieve regulatory approval, if the Celacade device is approved at all, could be substantially increased.
 
We have discussed our phase III ACCLAIM trial (in particular, the results presented in respect of Class II New York Heart Association (“NYHA”) patients) with the FDA.  As a result of these discussions, the FDA recommended that we conduct an additional phase III clinical trial as a condition of approval.  Our election to conduct an additional study will increase the cost of and the timeline for developing Celacade for chronic heart failure.  As a result of our meeting with the FDA, on September 17, 2007, we announced plans for ACCLAIM II that, if successful, is expected to support an application for regulatory approval in the United States of our Celacade technology for the treatment of patients with NYHA Class II heart failure.  There can be no assurance that the final design of ACCLAIM II will be similar to that currently contemplated.
 
There can be no assurance that we will be able to achieve or maintain regulatory compliance with respect to all or any part of our current or future products, including maintaining our CE Mark approval for Celacade in Europe, or that we will be able to timely and profitably produce our products while complying with applicable regulatory requirements. If we fail to maintain compliance, regulatory authorities can institute proceedings to detain or seize products, issue a recall, enjoin future violations, assess civil and criminal penalties against us and our directors, officers, and employees, or require us to make substantial changes to our manufacturing operations. Any such actions could have a material adverse effect on our business, financial condition, and results of operations.
 
We do not yet have all the required approvals to market our product candidates, and our clinical trials may not yield results that will enable us to obtain regulatory approval outside of Europe.
 
There can be no assurance that any of our products will be successfully developed. None of our products has received regulatory approval for commercial use and sale in North America. We cannot market a pharmaceutical or medical device product in any jurisdiction until it has completed thorough preclinical testing and clinical trials in addition to that jurisdiction’s extensive regulatory approval process. In general, significant research and development and clinical studies are required to demonstrate the safety and effectiveness of our products before we can submit any regulatory applications. We may never obtain the required regulatory approvals for Celacade in North America.  There can be no assurance that the results of all required clinical trials will demonstrate that these product candidates are safe and effective or, even if the results of the clinical trials are considered successful by us, that the FDA will not require us to conduct additional large-scale clinical trials before it will consider approving such product candidates for commercial use. Approval or consent by the FDA or other regulatory authorities to commence a clinical trial does not indicate that the device, drug, or treatment being studied can or will be approved. Preparing, submitting, and advancing applications for regulatory approval is complex, expensive, and time intensive and entails significant uncertainty.
 
7

The results of our completed preclinical studies and clinical trials may or may not be indicative of future clinical trial results. A commitment of substantial resources to conduct time-consuming research, preclinical studies, and clinical trials will be required if we are to complete development of our products. Clinical trials of our products require that we identify and enroll a large number of patients with the illness under investigation. We may not be able to enroll a sufficient number of appropriate patients to complete our clinical trials in a timely manner. If we experience difficulty in enrolling a sufficient number of patients to conduct our clinical trials, we may need to delay or terminate ongoing clinical trials and will not accomplish objectives material to our success that could affect the price of our common shares. Delays in planned patient enrolment, or lower than anticipated event rates in our current clinical trials or future clinical trials may result in increased costs, program delays, or both.
 
There can be no assurance that unacceptable toxicities or adverse side effects will not occur at any time in the course of preclinical studies or human clinical trials or, if any products are successfully developed and approved for marketing, during commercial use of our products. The appearance of any such unacceptable toxicities or adverse side effects could interrupt, limit, delay, or abort the development of any of our products or, if previously approved, necessitate their withdrawal from the market. Furthermore, there can be no assurance that disease resistance or other unforeseen factors will not limit the effectiveness of our potential products. Any products resulting from our programs are not expected to be successfully developed or made commercially available in the near term and may not be successfully developed or made commercially available at all.
 
On June 26, 2006, we announced the initial results from the 2,408-patient phase III ACCLAIM trial of Celacade in chronic heart failure.  While the ACCLAIM study did not reach the primary endpoint of significantly reducing the risk of death and cardiovascular hospitalization in the total population, this endpoint was met for the subgroup of 689 patients with NYHA Class II chronic heart failure.  In addition, Celacade significantly reduced the risk of death or first cardiovascular hospitalization in a subgroup of 919 patients with no prior history of heart attack at baseline.  The FDA advised us to complete a further confirmatory study and ACCLAIM II is currently under development.  There is no assurance that the results from the ACCLAIM II study will enable us to obtain regulatory approval to market Celacade in North America.
 
The science underlying our Celacade technology is relatively new and unproven.
 
Definitive proof of the precise mechanism of action of our Celacade technology will require considerably more basic scientific research than we or others have accomplished to date. We have not, nor to our knowledge has any other company, successfully commercialized a therapy similar to that using the Celacade therapeutic device.  There can be no assurance that the products we are currently developing will be approved by additional regulatory agencies or that further testing will yield positive results. Should one of our product candidates prove to have insufficient benefit and/or have an unsafe profile, its development will likely be discontinued.  Except for the CE Mark in Europe, we do not yet have all the required approvals to market our product candidates in the markets we may wish to enter, and our clinical trials may not yield results that will enable us to obtain these additional regulatory approvals.
 
A further setback in the development of our Celacade technology would likely cause a further drop in the price of our common shares.
 
We intend to rely substantially on the exploitation of our Celacade technology for our future earnings. If our Celacade technology does not become commercially viable, we may not achieve profitability and our common share price would likely decline further.   For example, on June 26, 2006, we announced the initial results from the 2,408 - patient phase III ACCLAIM trial of Celacade in chronic heart failure.  While the ACCLAIM study did not reach the primary endpoint of significantly reducing the risk of death and cardiovascular hospitalization in the total population, this endpoint was met for the subgroup of 689 patients with NYHA Class II chronic heart failure.  The closing price of our common shares on NASDAQ decreased from US$18.50 on June 23, 2006, the last trading day prior to the announcement, to US$4.80 on June 26, 2006 (in each case, after giving effect to the one for 10 reverse split (consolidation) that occurred on April 17, 2007).
 
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We are reliant on our key personnel.
 
The operations of our business are highly dependent upon the participation of our key personnel. The loss of the service of any one of our key personnel may materially affect our ability to complete the development of our products, successfully commercialize our products, and to grow and expand our business operations. There is intense competition for qualified management and skilled employees, and our failure to recruit, train, and retain such employees could have a material adverse effect on our business, financial condition, and/or results of operations.
 
Our intellectual property may not provide meaningful protection for our product candidates. We may infringe others’ patents. Patent litigation is time consuming and expensive.
 
Our success may depend, in part, on our ability to obtain patent protection for our products and processes. We have filed a number of patent applications in the United States and many other countries relating to our products and processes and we have been issued patents covering certain aspects of our immune modulation therapies and medical devices. There can be no assurance that our patent applications will be issued as patents or that any of our issued patents, or any patent that may be issued in the future, will provide us with adequate protection for our products, processes, or technology. The patent positions of biotechnology, pharmaceutical, and medical device companies can be highly uncertain and involve complex legal and factual questions. Therefore, the breadth of claims allowed in biotechnology, pharmaceutical and medical device patents cannot be predicted. We also rely upon unpatented trade secrets and know-how, and no assurance can be given that others will not independently develop substantially equivalent trade secrets or know-how. In addition, whether or not our patents are issued, or issued with limited coverage, others may receive patents that contain claims applicable to our products. Our competitors may attempt to circumvent our patents by means of alternative designs and processes. There can be no assurance that any of our patents, or any patents issued to us in the future, will afford meaningful protection against competitors. There can be no assurance that our patents will be held valid or enforceable by a court of competent jurisdiction. The patents of our competitors may impair our ability to do business in a particular area. We also rely in part on confidentiality agreements with our corporate collaborators, employees, consultants, and certain contractors to protect our proprietary technology. There can be no assurance that these agreements will not be breached, that we will have adequate remedies for any breach, or that our trade secrets will not otherwise become known or independently discovered by our competitors.
 
It is possible that our products or processes will infringe, or will be found to infringe, patents not owned or controlled by us. In addition, because patent applications are often maintained in secrecy and may take many years to issue, there may be currently pending patent applications that may later result in issued patents that our products infringe. If any relevant claims of third-party patents that relate to our products are upheld as valid and enforceable, we could be prevented from practicing the subject matter claimed in such patents, or would be required to obtain licenses or redesign our products or processes to avoid infringement. There can be no assurance that such licenses would be available at all or on terms commercially reasonable to us or that we could redesign our products or processes to avoid infringement. Litigation may be necessary to defend against claims of infringement, to enforce patents issued to us, or to protect trade secrets. Such litigation could result in substantial costs and diversion of management efforts regardless of the results of such litigation, and an adverse result could subject us to significant liabilities to third parties, require disputed rights to be licensed, or require us to cease using our technology.
 
If we fail to obtain acceptable prices or appropriate reimbursement for our products, our ability to successfully commercialize our products will be impaired.
 
Government and insurance reimbursements for healthcare expenditures play an important role for all healthcare providers, including physicians, medical device companies, drug companies, medical supply companies, and companies, such as ours, that plan to offer various products in the United States and other countries in the future. Our ability to earn sufficient returns on our products will depend in part on the extent to which reimbursement for the costs of such products, related therapies and related treatments will be available from government health administration authorities, private health coverage insurers, managed care organizations, and other organizations. In the United States, our ability to have our products and related treatments and therapies eligible for Medicare or private insurance reimbursement will be an important factor in determining the ultimate success of our products. If, for any reason, Medicare or the insurance companies decline to provide reimbursement for our products and related treatments, our ability to commercialize our products would be adversely affected. There can be no assurance that our products and related treatments will be eligible for reimbursement.
 
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If purchasers or users of our products and related treatments are not able to obtain appropriate reimbursement for the cost of using such products and related treatments, they may forgo or reduce such use. Even if our products and related treatments are approved for reimbursement by Medicare and private insurers, of which there can be no assurance, the amount of reimbursement may be reduced at times, or even eliminated. This would have a material adverse effect on our business, financial condition, and results of operations.
 
Significant uncertainty exists as to the reimbursement status of newly approved healthcare products, and there can be no assurance that adequate third-party coverage will be available.
 
Competition in our target markets is intense, and developments by other companies could render our product candidates obsolete.
 
The industry that we compete in is not a static environment, and market share can change rapidly if competing products are introduced. There can be no assurance that we can avoid intense competition from other medical technology companies, pharmaceutical or biotechnology companies, universities, government agencies, or research organizations, and from other technological advances that could render our technology uneconomical or obsolete. Many of these competitors have substantially greater financial and/or other resources. Our competitors may succeed in developing technologies and products that are more effective or cheaper to use than any that we may develop. These developments could render our products obsolete and uncompetitive, which would have a material adverse effect on our business, financial condition and results of operations. In addition, there are numerous existing therapies for chronic heart failure, and neurological diseases, and others are being developed.
 
If we are unable to continue developing advanced technology, advanced versions of our existing products and new products in a timely and cost-effective manner, our ability to generate revenue and become profitable will be impaired.
 
We believe that if we are to generate revenue and become profitable, we must continue to develop advanced technology, advanced versions of our existing products and new products. These technologies and products must be developed and introduced to the market in a timely and cost-effective manner to meet both changing customer needs and technological developments. There can be no assurance that we will be able to successfully develop on a timely basis any new technology, products or advanced versions of existing products, or that any new technology, products or advanced versions of existing products will achieve acceptance in the market. If we are unable to successfully develop new technology, products or advanced versions of existing products in the future or if those technologies or products are not accepted in the market, our ability to generate significant revenues will be significantly impaired, we could experience additional significant losses and our business, financial condition and results of operations will be materially harmed.
 
We are subject to exposure to product liability claims.
 
We face an inherent business risk of exposure to product liability and other claims in the event that the development or use of our technology or prospective products or therapies results, or is alleged to have resulted, in adverse effects. While we have taken, and will continue to take, what we believe are appropriate precautions, there can be no assurance that we will avoid significant liability exposure. Although we currently carry product liability insurance, there can be no assurance that we have sufficient coverage, or can in the future obtain sufficient coverage at a reasonable cost. An inability to obtain product liability insurance at an acceptable cost or to otherwise protect against potential product liability claims could prevent or inhibit the commercialization of products we develop. A product liability claim could have a material adverse effect on our business, financial condition, and results of operations.
 
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We do not have commercial-scale manufacturing capability, and we lack commercial manufacturing experience.
 
We currently rely upon single sources for the supply of some of the components required to manufacture and use our products. For example, we currently rely on a single subcontractor for the disposable cartridges that are components of the Celacade technology. The establishment of additional or replacement suppliers for certain materials, components, subassemblies, assemblies, supplies, or finished products cannot be accomplished quickly, largely due to the regulatory approval systems and the complex nature of the manufacturing processes employed by many suppliers. The failure to obtain sufficient quantities of component materials on commercially reasonable terms could have a material adverse effect on our clinical studies, business, financial condition, and results of operations.
 
If we are successful in developing the markets for our products, including our collaboration with Ferrer, we would have to arrange for their scaled-up manufacture. At the present time, we have not arranged for the large-scale manufacture of our products. There can be no assurance that we will, on a timely basis, be able to make the transition from manufacturing clinical trial quantities to commercial production quantities successfully or be able to arrange for contract manufacturing. We believe our contractors will be able to manufacture our medical devices for commercialization in Europe.  We also believe our contractors will be able to manufacture our medical devices for initial commercialization if the products obtain FDA and other regulatory approvals, but we have not yet demonstrated the capability to manufacture the medical devices in commercial quantities. Potential difficulties experienced by us in manufacturing scale-up, including recalls or safety alerts, could have a material adverse effect on our business, financial condition, and results of operations.
 
The manufacture of our products involves a number of steps and requires compliance with stringent quality control specifications imposed by the FDA and other regulatory agencies. Moreover, our products can only be manufactured in a facility that has undergone a satisfactory inspection by the FDA and/or other relevant regulatory authorities. For these reasons, we would not be able to replace our manufacturing capacity quickly if we were unable to use our manufacturing facilities as a result of a fire, natural disaster (including an earthquake), equipment failure, or other difficulty, or if such facilities are deemed not in compliance with the regulatory requirements and the non-compliance could not be rapidly rectified. Our inability or reduced capacity to manufacture our products would have a material adverse effect on our business, financial condition, and results of operations.
 
We expect to enter into additional arrangements with contract manufacturing companies in order to meet requirements for our products or to attempt to improve manufacturing efficiency. If we choose to contract for manufacturing services and encounter delays or difficulties in establishing relationships with manufacturers to produce, package, and distribute our finished products, then clinical trials, market introduction, and subsequent sales of such products would be adversely affected. Further, contract manufacturers must also operate in compliance with the FDA and other regulatory requirements. Failure to do so could result in, among other things, the disruption of product supplies. Our potential dependence upon third parties for the design and/or manufacture of our products may adversely affect our profit margins and our ability to develop and deliver such products on a timely and competitive basis.
 
We have limited sales, marketing, and distribution experience.
 
We have limited experience in the sales, marketing, and distribution of pharmaceutical or medical device products. Except through our collaboration with Ferrer, there can be no assurance that we will be able to establish sales, marketing, and distribution capabilities or make arrangements with our collaborators, licensees, or others to perform such activities or that such efforts will be successful. If we decide to market any of our products directly, we must either acquire or internally develop a marketing and sales force with technical expertise and with supporting distribution capabilities.  The acquisition or development of a sales and distribution infrastructure would require substantial resources, which may divert the attention of our management and key personnel, and have a negative impact on our product development efforts.  If we contract with third parties for the sales and marketing of our products, our revenues will be dependent on the efforts of these third parties, whose efforts may not be successful. If we fail to establish successful marketing and sales capabilities or to make arrangements with third parties, our business, financial condition and results of operations will be materially a dversely affected.
 
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Our strategic alliance with Quest Diagnostics may not be successful.
 
To develop a potential secondary point of care for integration of our Celacade technology, we formed a strategic alliance in November 2001 with Quest Diagnostics in the United States on an exclusive basis.  The purpose of this alliance is to establish an outpatient delivery model to accommodate patient referrals outside hospital clinics and cardiology practices.  The final terms of this alliance are not yet established. Should we not finalize the terms of this strategic alliance, or should the strategic alliance not ultimately be successful, our business may be adversely affected.
 
Our operations may be adversely affected by risks associated with international business.
 
We plan to sell our products in many countries.  Therefore, we are subject to certain risks that are inherent in an international business.  These include:
 
 
varying regulatory restrictions on sales of our products to certain markets and unexpected changes in regulatory requirements;
 
 
tariffs, customs, duties and other trade barriers;
 
 
difficulties in managing foreign operations and foreign distribution partners;
 
 
longer payment cycles and problems in collecting accounts receivable;
 
 
fluctuations in currency exchange rates;
 
 
political risks;
 
 
foreign exchange controls that may restrict or prohibit repatriation of funds;
 
 
export and import restrictions or prohibitions, and delays from customs brokers or government agencies;
 
 
seasonal reductions in business activity in certain parts of the world; and
 
 
potentially adverse tax consequences.
 
Depending on the countries involved, any or all of the foregoing factors could materially harm our business, financial condition and results of operations.
 
If our products do not gain market acceptance, we may be unable to generate significant revenues.
 
We do not yet have the required clinical data and results to successfully market our Celacade technology in all of our markets of interest; future clinical or preclinical results (such as from ACCLAIM II) may be negative or insufficient to allow us to successfully market any of our product candidates; and obtaining needed data and results may take longer than planned, and may not be obtained at all.  In particular, and in light of the ACCLAIM results, penetration into the heart failure market will take longer than originally expected.
 
Even though our Celacade technology is approved for sale in the E.U., it may not be successful in the marketplace. Market acceptance of any of our products will depend on a number of factors, including demonstration of clinical effectiveness and safety; the potential advantages of our products over alternative treatments; the availability of acceptable pricing and adequate third-party reimbursement; and the effectiveness of marketing and distribution methods for the products. If our products do not gain market acceptance among physicians, patients, and others in the medical community, our ability to generate significant revenues from our products would be limited.
 
We may not achieve our projected development goals in the time frames we announce and expect.
 
We set goals for and make public statements regarding timing of the accomplishment of objectives material to our success, such as the commencement and completion of clinical trials, anticipated regulatory approval dates, and time of product launch. The actual timing of these events can vary dramatically due to factors such as delays or failures in our clinical trials, the uncertainties inherent in the regulatory approval process, and delays in achieving product development, manufacturing, or marketing milestones necessary to commercialize our products. There can be no assurance that our clinical trials will be completed, that we will make regulatory submissions or receive regulatory approvals as planned, or that we will be able to adhere to our current schedule for the scale-up of manufacturing and launch of any of our products. If we fail to achieve one or more of these milestones as planned, the price of our common shares could decline.
 
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Our business involves the use of hazardous material, which requires us to comply with environmental regulations.
 
Although we do not currently manufacture commercial quantities of our products, we produce limited quantities of such products for our clinical trials. Our research and development processes involve the controlled storage, use, and disposal of hazardous materials and hazardous biological materials. We are subject to laws and regulations governing the use, manufacture, storage, handling, and disposal of such materials and certain waste products. Although we believe that our safety procedures for handling and disposing of such materials comply with the standards prescribed by such laws and regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, we could be held liable for any damages that result, and any such liability could exceed our resources. There can be no assurance that we will not be required to incur significant costs to comply with current or future environmental laws and regulations, or that our business, financial condition, and results of operations will not be materially or adversely affected by current or future environmental laws or regulations.
 
Our insurance may not provide adequate coverage with respect to environmental matters.
 
Environmental regulation could have a material adverse effect on the results of our operations and our financial position.
 
We are subject to a broad range of environmental regulations imposed by federal, state, provincial, and local governmental authorities. Such environmental regulation relates to, among other things, the handling and storage of hazardous materials, the disposal of waste, and the discharge of contaminants into the environment. Although we believe that we are in material compliance with applicable environmental regulation, as a result of the potential existence of unknown environmental issues and frequent changes to environmental regulation and the interpretation and enforcement thereof, there can be no assurance that compliance with environmental regulation or obligations imposed thereunder will not have a material adverse effect on us in the future.
 
There are risks related to the handling of blood.
 
Our product development activities and our clinical trials involve the withdrawal of a small sample of a patient’s blood cells into our Celacade single-use disposable cartridge, exposure of such blood cells to our controlled treatment process using our proprietary Celacade therapeutic device and then re-administration of such blood cells to the patient intramuscularly.  There are risks associated with the handling of human blood that may contain infectious agents, notwithstanding the aseptic techniques employed in our clinical trials.  While we believe that our processes and safety procedures for handling human blood are adequate to ensure against infection of the patient and our clinical staff and employees, there is a risk that such procedures will fail and will result in infection.  In the event of such infection, we could be held liable for any damages that result, and any such liability could exceed our resources.
 
RISKS RELATING TO OUR SECURITIES
 
Our share price has been highly volatile and our shares could suffer a decline in value.
 
The trading price of our common shares has been highly volatile and could continue to be subject to wide fluctuations in price in response to various factors, many of which are beyond our control, including:
 
 
announcements by us of results of, and developments in, our research and development efforts, including results and adequacy of, and developments in, our clinical trials, for example, our June 2006 announcement of the ACCLAIM results;
 
 
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sales of our common shares, including in connection with further financings;
 
 
announcements regarding new or existing corporate partnerships;
 
 
announcements regarding our listing on the NASDAQ;
 
 
actual or anticipated period-to-period fluctuations in financial results;
 
 
litigation or threat of litigation;
 
 
failure to achieve, or changes in, financial estimates by securities analysts;
 
 
announcements regarding new or existing products or services or technological innovations by us or our competitors;
 
 
comments or opinions by securities analysts or members of the medical community;
 
 
conditions or trends in the pharmaceutical, biotechnology and life science industries;
 
 
announcements by us of significant acquisitions, joint ventures or capital commitments;
 
 
additions or departures of key personnel;
 
 
economic and other external factors or disasters or crises;
 
 
limited daily trading volume; and
 
 
developments regarding our patents or other intellectual property or that of our competitors.
 

In addition, the stock market in general and the market for biotechnology companies in particular, have experienced significant price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Further, there has been significant volatility in the market prices of securities of life science companies. Factors such as the results and adequacy of our preclinical studies and clinical trials, as well as those of our collaborators, or our competitors; other evidence of the safety or effectiveness of our products or those of our competitors; announcements of technological innovations or new products by us or our competitors; governmental regulatory actions; developments with our collaborators; developments (including litigation) concerning our patent or other proprietary rights or those of our competitors; concern as to the safety of our products; changes in estimates of our performance by securities analysts; market conditions for biotechnology stocks in general; and other factors not within our control could have a significant adverse impact on the market price of our common shares, regardless of our operating performance. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted. A securities class action suit against us could result in substantial costs, potential liabilities and the diversion of management’s attention and resources.
 
There may not be an active, liquid market for our common shares.
 
There is no guarantee that an active trading market for our common shares will be maintained on the NASDAQ or the Toronto Stock Exchange (“TSX”). Investors may not be able to sell their shares quickly or at the latest market price if trading in our common shares is not active.
 
We may not meet NASDAQ’s continued listing requirements.
 
Failure to meet the applicable quantitative and/or qualitative maintenance requirements of NASDAQ could result in our common shares being delisted from the NASDAQ Capital Market.  For continued listing, NASDAQ requires, among other things, that listed securities maintain a minimum bid price of not less than US$1.00 per share.  If the bid price falls below the US$1.00 minimum for more than 30 consecutive trading days, we will have 180 days to satisfy the US$1.00 minimum bid price, which must be maintained for a period of at least ten trading days in order to regain compliance.
 
In August 2006, we received a letter from the Listing Qualifications Department of The NASDAQ Stock Market stating that for the last 30 consecutive business days, the bid price of our common shares had closed below the minimum bid price of US$1.00 per share requirement for continued inclusion on the NASDAQ Global Market under Marketplace Rule 4450(a)(5) (the “Minimum Bid Price Rule”).  At the opening of business on February 9, 2007, we transferred the listing of our common shares from the NASDAQ Global Market to the NASDAQ Capital Market.  In accordance with Marketplace Rules 4310(c)(8)(D), this provided us with an additional 180-day calendar day compliance period, or until August 3, 2007, to regain compliance with the NASDAQ Minimum Bid Price Rule.
 
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On April 17, 2007, we implemented a one-for-ten consolidation of our common stock, which began trading on a split adjusted basis on the NASDAQ and TSX on April 17, 2007.  At the end of trading on April 13, 2007, we had 174,739,990 shares of common stock issued and outstanding.  When the market opened on April 17, 2007, there were approximately 17,473,999 shares issued and outstanding. As a result of this consolidation, we regained compliance with the US$1.00 per share minimum closing bid price requirement for continued listing on The NASDAQ Capital Market.  Any future failure to meet the applicable quantitative and/or qualitative maintenance requirements of NASDAQ could result in our common shares being delisted from NASDAQ.
 
If delisted from The NASDAQ Capital Market, our common shares may be eligible for trading on another market in the United States. In the event that we are not able to obtain a listing on another U.S. stock exchange or quotation service for our common shares, it may be extremely difficult or impossible for shareholders to sell their common shares in the United States.  Moreover, if we are delisted and obtain a substitute listing for our common shares in the United States, it will likely be on a market with less liquidity, and therefore potentially more price volatility, than The NASDAQ Capital Market.  Shareholders may not be able to sell their common shares on any such substitute U.S. market in the quantities, at the times, or at the prices that could potentially be available on a more liquid trading market.  As a result of these factors, if our common shares are delisted from The NASDAQ Capital Market, the price of our common shares is likely to decline.  In addition, a decline in the price our common shares will impair our ability to obtain financing in the future.
 
Future issuances of our common shares could adversely affect the trading price of our common shares and could result in substantial dilution to our shareholders.
 
We expect to issue substantial amounts of common shares in the future.  To the extent that the market price of the common shares declines, we will need to issue an increasing number of common shares per dollar of equity investment.  On November 14, 2006, we issued 4,319,149 units of the Company (the “units”) at a price of US$4.70 per unit.  Each unit consisted of one common share, 0.4 of one common share purchase warrant expiring on November 14, 2011 (a “series A warrant”) and 0.1 of one common share purchase warrant expiring on May 14, 2007 (a “series B warrant”). Each whole series A warrant represents the right, during the term of the warrant, to purchase one common share at a price of US$6.30 per common share.  Up to 1,727,659 common shares in aggregate are issuable upon due exercise of the series A warrants.  Any series A warrant which remains unexercised as at November 14, 2011 will terminate and be of no further force or effect.  The series B warrants terminated as at May 14, 2007 and are of no further force or effect.  Additionally, in connection with the offering, we issued to the placement agent 256,000 compensation warrants to purchase common shares at US$6.30 per share.  These warrants will expire on November 14, 2009.
 
On May 24, 2007, we closed a purchase agreement with institutional investors to raise US$16 million in gross proceeds through the sale of its common shares at a price of US$3.25. Under the terms of the purchase agreements, we also issued five-year warrants to purchase an additional 3.7 million common shares at an exercise price of US$3.16 per share. If all of the 3.7 million warrants are exercised, the Company will receive an additional US$11.7 million in gross proceeds.   Additionally, in connection with this offering, we issued to the placement agents 295,044 compensation warrants to purchase common shares at $US3.81 per share.  These warrants will expire on May 24, 2010.

In addition to common shares issuable in connection with the exercise of the warrants, our investors, employees, and directors hold rights to acquire substantial amounts of our common shares.  In order to obtain future financing, it is likely that we will issue additional common shares or financial instruments that are exchangeable for or convertible into common shares.  Also, in order to provide incentives to current employees and induce prospective employees and consultants to work for us, we intend to offer and issue options to purchase common shares and/or rights exchangeable for or convertible into common shares.
 
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Future issuances of substantial amounts of our common shares, or the perception that such issuances are likely to occur, could affect prevailing trading prices of our common shares. Future issuances of our common shares could result in substantial dilution to our shareholders. Capital raising activities and dilution associated with such activities could cause our share price to decline.  In addition, the existence of the notes and warrants may encourage short selling by market participants.
 
If there are substantial sales of our common shares, the market price of our common shares could decline.
 
Sales of substantial numbers of our common shares could cause a decline in the market price of our common shares.  Any sales by existing shareholders or holders of options or warrants may have an adverse effect on our ability to raise capital and may adversely affect the market price of our common shares.
 
We have not paid dividends.
 
We have never paid cash dividends on our common shares and do not anticipate paying any cash dividends in the foreseeable future. We currently intend to retain our future earnings, if any, to finance further research and the expansion of our business.
 
It may be difficult to obtain and enforce judgments against us because of our Canadian residency.
 
We are governed by the laws of Canada. Most of our directors and officers, as well as some of the experts named in this annual report, are residents of Canada or other jurisdictions outside of the United States and all or a substantial portion of our assets and the assets of such persons may be located outside of the United States. As a result, it may be difficult for shareholders to effect service of process upon us or such persons within the United States or to realize in the United States on judgments of courts of the United States predicated upon the civil liability provisions of the U.S. federal securities laws or other laws of the United States. In addition, there is doubt as to the enforceability in Canada of liabilities predicated solely upon U.S. federal securities law against us, our directors, controlling persons and officers and the experts named in this annual report who are not residents of the United States, in original actions or in actions for enforcements of judgments of U.S. courts.
 
We have adopted a shareholder rights plan.
 
We have adopted a shareholder rights plan. The provisions of such plan could make it more difficult for a third party to acquire a majority of our outstanding common shares, the effect of which may be to deprive our shareholders of a control premium that might otherwise be realized in connection with an acquisition of our common shares.
 
We are likely to be classified as a “passive foreign investment company” for U.S. income tax purposes, which could have significant and adverse tax consequences to U.S. investors.
 
We were a passive foreign investment company (“PFIC”) in our 2007 taxable year, and we believe there is a significant likelihood that we will be classified as a PFIC in our 2008 taxable year and possibly in subsequent years. Our classification as a PFIC could have significant and adverse tax consequences for U.S. holders of our common shares. It may be possible for U.S. holders of common shares to mitigate certain of these consequences by making a “qualified electing fund” election or a mark-to-market election.  See Item 9E below and consult your tax advisors.
 
Item 4.      Information on the Company
 
A.      History and Development of the Company 
 
Vasogen Inc. was incorporated under the Business Corporations Act (Ontario) and was continued under the Canada Business Corporations Act by certificate and articles of continuance dated August 9, 1999.  We have two wholly-owned subsidiaries: Vasogen, Corp., incorporated under the laws of Delaware, U.S.A. and Vasogen Ireland Limited, incorporated under the laws of the Republic of Ireland.  Vasogen Ireland Limited owns certain of our intellectual property related to our products and technologies.  Our registered principal office is located at 2505 Meadowvale Boulevard, Mississauga, Ontario, Canada L5N 5S2. We are currently a “reporting issuer” in all of the provinces and territories of Canada. Our telephone number is (905) 817-2000 and our facsimile number is (905) 569-9231. Our website is www.vasogen.com. Any information contained on our website is not, and will be deemed not to be, incorporated herein by reference.  All currency figures herein are in Canadian dollars, unless otherwise noted.
 
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For the three fiscal years ended November 30, 2007, 2006, and 2005, we spent a total of $12.0 million, $32.7 million, and $71.5 million, respectively, on research and development.  At the present time, our principal capital expenditures are focused on the commercialization of Celacade in Europe and on the advancement our research and development program.  Over the past three fiscal years, we have raised approximately $129 million in net proceeds from the issuance of debt and equity securities to investors and the exercise of options and warrants.  Our common shares are listed on the TSX under the symbol “VAS” and on the NASDAQ under the symbol “VSGN”.
 
During the last and current financial year, we have not been aware of any indications of public takeover offers by third parties in respect of the Company’s shares or by the Company in respect of other companies’ shares.
 
For additional information on key events, see Item 4B below.
 
B.      Business Overview
 
GENERAL DEVELOPMENT OF THE BUSINESS
 
We are a biotechnology company that is focused on the research and commercial development of therapies designed to target the destructive inflammatory process associated with the development and progression of cardiovascular and neurodegenerative disorders. Our lead product, Celacade, is designed to activate the immune response to apoptosis - an important physiological process that regulates inflammation.  Celacade has received European regulatory approval under the CE Mark for chronic heart failure and is being marketed in the E.U. by Ferrer.  Celacade is in late-stage clinical development for the treatment of chronic heart failure in the United States. We are also developing a new class of drugs for the treatment of certain neuro-inflammatory disorders.  VP025 is the lead drug candidate from this new class.
 
We manage the development and manufacture of our products for use in preclinical and clinical research and we continue to advance our product development program to support future commercial scale production.  Patent applications are filed to protect our products and processes.  Our policy is to file patent applications to protect inventions, technology, and improvements that are important to the development of our business and with respect to the application of our technologies to the treatment of a number of disease indications.  We own patents and patent applications relating to our products and technologies in the United States, Canada, and other jurisdictions around the world.

We may establish corporate alliances, primarily to support marketing and sales of our products, in the United States, Canada, and elsewhere.  Based on market research to date, we expect that the primary point of use of Celacade will be the outpatient hospital clinic and/or cardiology practices.

Over the past three fiscal years, we have raised approximately $129.0 million in net proceeds from the issuance of debt and equity securities to investors, and through the exercise of options and warrants. Our common shares are listed on the TSX under the symbol “VAS” and are quoted for trading on the NASDAQ Capital Market under the symbol “VSGN”.
 

 

17

 
Vasogen Development Pipeline

Product Candidate
Indication
Developmental Stage
Celacade System
Chronic Heart Failure
- Phase III results published
- Confirmatory study in planning stage for the purpose of U.S. regulatory approval
- E.U. commercialization activities ongoing
VP025
Neuro-inflammatory Conditions
- Phase I completed
VP015
Inflammatory Conditions
- Preclinical

 
DESCRIPTION OF THE BUSINESS
 
We are a biotechnology company focused on the research and commercial development of technologies targeting the chronic inflammation underlying cardiovascular and neurological disease. Our lead product, Celacade, is a device-based therapy for the treatment of chronic heart failure.  Celacade is being marketed in the E.U. and is in late-stage clinical development in the United States.  We are also developing our VP series of drugs for the treatment of inflammatory conditions.
 
 
PRODUCTS AND MARKETS
 
Celacade _ Chronic Heart Failure Program
 
Heart failure, most frequently resulting from coronary artery disease or hypertension, is a debilitating syndrome in which the heart’s ability to function as a pump is impaired. Patients with heart failure experience a continuing decline in their health, resulting in an increased frequency of hospitalization and premature death.  According to the Heart Failure Society of America, heart failure is the only major cardiovascular condition with prevalence and incidence on the rise. Heart failure, which is now often referred to as an epidemic, is estimated to affect 12 million individuals in North America and Europe. In North America alone, heart failure affects more than five million people and is associated with more than 300,000 deaths each year and the direct cost of healthcare primarily resulting from hospitalization is estimated to exceed US$34.8 billion annually.
 
Therapy utilizing our Celacade technology is designed to target the destructive inflammation underlying chronic heart failure and other cardiovascular diseases. Inflammation is a normal response of the immune system to cellular injury caused by infection, trauma, or other stimuli. During the inflammatory process, immune cells release a number of factors, including cytokines - potent chemical messengers that modulate inflammation and facilitate the healing process. While this inflammatory process is usually self-limiting, it can persist, become chronic, and lead to a number of serious medical conditions.
 
During a brief outpatient procedure, a small sample of a patient’s blood is drawn into our Celacade single-use disposable cartridge and exposed to controlled oxidative stress utilizing our proprietary Celacade medical device technology. Oxidative stress is a factor known to initiate apoptosis, a physiologic process that is inherently anti-inflammatory. The treated blood is then administered to the same patient intramuscularly. An initial course of treatment comprising three consecutive outpatient procedures is administered over a two-week period, and treatments are continued once per month thereafter.
 
Our double-blind, placebo-controlled ACCLAIM trial studied 2,408 subjects with chronic heart failure at 175 clinical centers in seven countries.  ACCLAIM was designed to assess the ability of Celacade to reduce the risk of death or first cardiovascular hospitalization.  Patients included in the study had NYHA Class II, III, or IV symptoms of heart failure with a left-ventricular ejection fraction (LVEF) of 30% or less and had been hospitalized or received intravenous drug therapy for heart failure within the previous 12 months, or had NYHA Class III/IV heart failure with a LVEF of less than 25%.

Patients in the ACCLAIM trial were receiving optimal standard-of-care therapy for heart failure, which at baseline included a number of pharmaceuticals such as diuretics (94%), ACE-inhibitors (94%) and beta-blockers (87%), as well as device therapies including automatic implantable cardioverter defibrillators (26%), and use of cardiac resynchronization therapy (10.5%).  The placebo (n=1,204 patients) and Celacade (n=1,204 patients) groups were balanced for all important baseline characteristics, including demographics, LVEF, NYHA classification, concomitant medical conditions, medications, and device therapies.

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Results from the ACCLAIM study have been published in The Lancet ( Lancet 2008 ; 371: 228-36), a world-leading medical journal.  The key findings from the ACCLAIM trial were also presented at the World Congress of Cardiology 2006 in Barcelona, Spain, and at the 10th Annual Scientific Meeting of the Heart Failure Society of America in Seattle, Washington.

The difference in time to death or first cardiovascular hospitalization, the primary endpoint of ACCLAIM, for the intent-to-treat study population was not statistically significant (p=0.22); however, the risk reduction directionally favored the Celacade group (hazard ratio=0.92).

In the ACCLAIM trial, Celacade was shown to significantly reduce the risk of death or first cardiovascular hospitalization by 39% in a pre-defined subgroup of patients with NYHA Class II heart failure at baseline (n=689 patients, 216 events, p=0.0003) and in a pre-defined subgroup of patients with no prior history of heart attack at baseline, Celacade was also shown to significantly reduce the risk of death or first cardiovascular hospitalization by 26% (n=919 patients, 243 events, p=0.02).  Furthermore, consistent with the impact of Celacade on the risk of mortality and morbidity in large subgroups within the ACCLAIM trial was the finding of a significant improvement in quality of life (as measured by the Minnesota Living with Heart Failure Questionnaire) for patients in the intent-to-treat study population (p=0.04).  Celacade was also shown to be well tolerated in the ACCLAIM patient population, and there were no significant between-group differences for any serious adverse events.

We have already received E.U. regulatory approval as a medical device under the CE Mark, which enables marketing of Celacade for the treatment of all NYHA Class II patients, as well as NYHA Class , III, and IV patients who do not have a prior history of heart attack in the 27 member countries of the E.U.

During 2007, we completed a collaboration agreement (the “Agreement”) with Ferrer to commercialize Celacade for the treatment of chronic heart failure in certain countries of the E.U. and Latin America.  Under the Agreement, Ferrer will have the exclusive rights to market Celacade for the treatment of chronic heart failure and other cardiovascular conditions in certain countries of the E.U. and Latin America.  Ferrer has also acquired the right of first negotiation with respect to the remaining countries of the E.U.  In December 2007, Ferrer received initial orders for Celacade in Germany.

Under the Agreement, the commercial launch strategy for Celacade in certain countries of the E.U. will involve an initial commercialization phase (ICP) during which Ferrer will target key physicians to build support for expanded use of Celacade within the broader medical community.  Based on Ferrer’s current plan, the ICP is expected to conclude no later than September 1, 2008.  Under the terms of the Agreement, we are responsible for the cost of delivering the Celacade technology to Ferrer, which includes the Celacade single-use disposable cartridges required for the delivery of each Celacade monthly treatment. During the ICP, Ferrer will pay us a fixed amount for the disposable cartridges and following the successful completion of the ICP, and upon the first commercial sale as defined in the Agreement, we will receive 45% of revenues generated by Ferrer through the sale of the cartridges.  After a period five years from the date of the first commercial sale on a country-specific basis, our share of the revenues will be 42%.  Following the ICP, we will also receive milestone payments, based on the first commercial sale of Celacade on a country-specific basis, and we will receive milestone payments on reaching pre-specified thresholds based on overall sales.  Also under the terms of the Agreement, Ferrer will be financially responsible for costs associated with the launch and marketing of Celacade.   Our Agreement with Ferrer is available on SEDAR and EDGAR.

At a meeting with the FDA to discuss the ACCLAIM results in May 2007, the agency strongly recommended that we conduct a confirmatory study to support a U.S. Pre-Market Approval (“PMA”) filing for Celacade for NYHA Class II heart failure patients and also recommended that we use a Bayesian statistical approach.  This approach involves a trial design methodology that may allow for the utilization of prior trial results to contribute to the statistical power of a confirmatory study and therefore potentially provides the opportunity to significantly reduce the number of required patients, as well as the cost and duration of a confirmatory study.  As a result of the FDA’s recommendations, we retained Berry Consultants and Dr. Donald A. Berry, Head, Division of Quantitative Sciences and Chairman, Department of Biostatistics, The University of Texas MD Anderson Cancer Center, and an authority in the area of Bayesian and adaptive trial design, to assist with the development of the study. 

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In September 2007, we announced our plans for ACCLAIM II, which would support an application for regulatory approval in the United States of our Celacade System for the treatment of patients with NYHA Class II heart failure.  We have been working closely with the FDA to finalize the ACCLAIM II protocol and the statistical analysis plan.  In preparation for ACCLAIM II, the FDA has been reviewing Celacade in the context of their newly issued draft document entitled ‘Guidance for Industry Regulation of Human Cells, Tissues, and Cellular and Tissue-Based Products (HCT/Ps) - Small Entity Compliance Guide’ to assess whether this draft guidance is relevant to the Celacade System.  To date, the Celacade System has been regulated as a medical device with the Center for Devices and Radiological Health (CDRH) acting as lead reviewer, with input from Center for Biologics Evaluation and Research (CBER).  The FDA has recently informed us that Celacade will remain regulated as a medical device; however, CBER will take the role of lead reviewer with CDRH providing input.  We are planning to meet with CBER to finalize their input into the design of ACCLAIM II.
 
We have established the Steering Committee to provide input to the ACCLAIM II final study design. James B. Young, MD, Chairman, Division of Medicine at the Cleveland Clinic Foundation and Medical Director, Kaufman Center for Heart Failure, has agreed to be the Global Principal Investigator and Chairman of the Steering Committee for the ACCLAIM II study.  Dr. Young was the Global Principal Investigator for ACCLAIM and has played a leading role in numerous other multi-center clinical trials focusing on heart failure and transplantation.


VP025 and VP Series of Drugs Development Program

We are also developing a new class of drugs that is based on synthetic three-dimensional phospholipid-based structures with specific groups of surface molecules that are designed to modulate cytokine levels and control inflammation. VP025, the lead product candidate from this new class of drugs, is being developed for the treatment of neuro-inflammatory disorders.  VP015, an additional product candidate from this new class of drugs, is being developed to treat other inflammatory conditions.

Among the many neurological conditions associated with an inflammatory response in the nervous system are Alzheimer’s disease, Parkinson’s disease, and amyotrophic lateral sclerosis (“ALS”). These conditions are characterized by increased levels of inflammatory mediators, including cytokines, leading to the death of nerve cells and the eventual loss of functional activity.  Due to the prevalence, morbidity, and mortality associated with neuro-inflammatory diseases, they represent a significant medical, social, and financial burden. It is estimated that neurological conditions, which are expected to increase in prevalence as the population ages, currently affect more than five million people in North America and generate costs of care that exceed $75 billion annually.

We have completed considerable preclinical work that has demonstrated the ability of VP025 to reduce inflammation in models of a number of neurodegenerative diseases, including Parkinson’s disease, Alzheimer’s disease, ALS, and diabetic retinopathy. We have also successfully completed a phase I clinical trial of VP025.  This double-blind, placebo-controlled, dose-escalation trial examined the safety and tolerability of three doses of VP025 in 24 healthy volunteers.  Multiple administrations of either low, mid, or high doses of VP025 were shown to be safe and well tolerated when compared to placebo, and no drug-related serious adverse events were reported. We continue to focus on optimizing the manufacture of VP025 to support further clinical development.

We plan to seek collaborations for VP025 and our VP series of drugs for one or more of the potential applications to assist with the clinical and commercial development of these products allowing us to focus our current resources on the commercialization of Celacade in the E.U. and the execution of our planned ACCLAIM II study, which we currently believe provide the best opportunities to enhance shareholder value.
 
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COMPETITIVE ENVIRONMENT

The pharmaceutical, medical device, and biotechnology industries are characterized by rapidly evolving technology and intense competition. Many companies, including major pharmaceutical as well as specialized biotechnology companies, are engaged in activities focused on medical conditions that are the same as, or similar to, those targeted by us. Many of these companies have substantially greater financial and other resources, larger research and development staff, and more extensive marketing and manufacturing organizations than we do. Many of these companies have significant experience in preclinical testing, human clinical trials, product manufacturing, marketing and distribution, and other regulatory approval procedures. In addition, colleges, universities, government agencies, and other public and private research organizations conduct research and may market commercial products on their own or through collaborative agreements.  These institutions are becoming more active in seeking patent protection and licensing arrangements to collect royalties for use of technology that they have developed. These institutions also compete with us in recruiting and retaining highly qualified scientific personnel.

MANUFACTURING
 
We maintain a quality management system that is registered to ISO13485. This quality system registration is necessary to support regulatory approvals. For entry into the U.S. market, we are also ensuring the necessary compliance of our quality system to the FDA Quality System Regulation (“QSR”). In addition, our medical devices meet the requirements of the E.U. Medical Devices Directive 93/42/EEC for CE Marking.
 
We currently rely upon subcontractors for the manufacture of our device technology. The subcontractors operate quality systems in accordance with ISO13485, and/or the FDA QSR, as necessary. Manufacturing, testing, and maintenance of our medical devices are verified and validated as appropriate to ensure conformance to defined specifications.
 
The manufacturing of VP025 is performed according to current Good Manufacturing Practice (“GMP”) at contract manufacturing organizations that have been approved by our quality assurance department, following audits in relation to the appropriate regulations.  Manufactured product is tested for conformance with product specifications prior to release by our quality assurance department.  GMP batches of VP025 are subjected to prospectively designed stability test protocols.
 

INTELLECTUAL PROPERTY
 
Because of the substantial length of time and expense associated with developing new products, the pharmaceutical, medical device, and biotechnology industries place considerable importance on obtaining patent protection for new technologies, products, and processes. Our policy is to file patent applications to protect inventions, technology, and improvements that are important to the development of our business and with respect to the application of our products and technologies to the treatment of a number of disease indications. We seek patent protection in various jurisdictions of the world. We own patents and patent applications relating to our products and technologies in the United States, Canada, Europe, and other jurisdictions around the world. We own trademark registrations and trademark applications associated with our Celacade technology in various jurisdictions, and rely on our legal rights in other jurisdictions.  The scope and duration of our intellectual property rights vary from country to country depending on the nature and extent of our intellectual property filings, the applicable statutory provisions governing the intellectual property, and the nature and extent of our legal rights.  We will continue to seek intellectual property protection as appropriate.
 
We require our employees, consultants, members of the SAB, outside scientific collaborators, and sponsored researchers to enter into confidentiality agreements with us that contain assignment of invention clauses outlining ownership of any intellectual property developed during the course of the individual’s relationship with us.
 
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REGULATORY REQUIREMENTS
 
Before medical products can be distributed commercially, a submission providing detailed information must be reviewed and approved by the applicable government or agency in the jurisdiction in which the product is to be marketed. The regulatory review and approval process varies from country to country. Similarly, we are also subject to separate regulations where we conduct clinical trials. We cannot predict or give any assurances as to whether further regulatory approvals will be received or how long the process of seeking regulatory approvals will take.
 
Europe
 
Medical products that are placed on the market in the E.U. are subject to one of two mutually exclusive regulatory regimes: either the Medical Devices Directive (“MDD”), Council Directive 93/42/EEC, for medical devices, or the Medicinal Products Directive, Council Directive 65/65/EEC for pharmaceutical products. Our Celacade technology has been classified as a medical device in the E.U.
 
We are required to demonstrate compliance with the requirements of the MDD 93/42/EEC and affix a CE Mark to our medical devices in order to place our medical device products on the market within the member states of the E.U., Norway, and Switzerland. We have CE Mark approval for our Celacade System in chronic heart failure. The CE Mark attests that our medical device products meet the “essential requirements” of the MDD relating to safety and efficacy. We must also demonstrate our regulatory compliance (“conformity assessment”) annually through a qualified third party (a “Notified Body”) selected by us. We have demonstrated our regulatory compliance with these requirements for devices placed in Europe for clinical trials, and our quality system was registered to ISO9001 and EN46001 in February 1998. In addition, our quality system was registered to ISO13485:1996 in August 2001 and to ISO 13485:2003 in September 2006.
 
We are subject to annual surveillance audits by our Notified Body and are required to report any device-related serious adverse incidents or near-incidents to the appropriate authorities.  To place a CE-Marked medical device on the market within most European jurisdictions, we are required to provide notification to national authorities.
 
United States
 
In the United States, clinical trials and commercialization of medical devices require the approval of the FDA.   We are subject to regulation by the FDA, as well as state and local authorities. Our medical devices are subject to the PMA process prior to marketing in the United States. The PMA process is a multi-step process that requires us to submit to the FDA preclinical, clinical, and design and manufacturing data, which we have been compiling to demonstrate the safety and effectiveness of our devices for the stated medical indications or uses.
 
The clinical studies that generate the clinical data for the PMA are subject to regulation under the investigational device exemption (“IDE”) regulations. Before clinical studies of our device can begin, an IDE application must be submitted to, and approved by, the FDA. In addition, before a study can commence at each participating clinical center, the center’s institutional review board (“IRB”) must approve the clinical protocol and other related documents. During the PMA review process, the FDA will conduct an inspection of the manufacturer’s facilities to ensure that the device design and manufacture are in compliance with applicable QSR requirements. The QSR requirements mandate that we manufacture our devices and maintain our documents in a prescribed manner with respect to design, manufacturing, testing, and control activities.  The FDA may also conduct inspections of the clinical trial sites and the preclinical laboratories conducting pivotal safety studies to ensure compliance with Good Clinical Practice and Good Laboratory Practice requirements and may seek the advice of one of their Advisory Committees or other Centers with the FDA.   If the FDA evaluations of the PMA application and the results of inspections are favorable, the FDA may issue an approvable letter, which usually contains a number of conditions that must be met in order to secure final approval of the PMA. Only when those conditions have been fulfilled to the satisfaction of the FDA will the FDA issue a PMA approval order, authorizing commercial marketing of the device for stated indications. The FDA also has the authority to impose certain post-approval requirements, such as post-market surveillance clinical trials, in the PMA approval order. FDA approval can be withdrawn for failure to comply with any post-approval requirements or for other reasons, such as the discovery of significant adverse effects.
 
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Canada
 
In Canada, clinical trials and the commercialization of medical products require the approval of Health Canada. The Therapeutic Products Directorate (“TPD”) of Health Canada regulates the manufacture and sale of medical devices in Canada. The Canadian Medical Device Regulations are similar to those of the United States and require that clinical studies be conducted to demonstrate the safety and effectiveness of devices prior to marketing. There must also be documented evidence that the devices are developed, manufactured, and produced under current quality system regulations and guidelines in order to ensure the quality of the product made available for sale. Approval of such technology is a multi-step process, and we are prohibited from promoting or commercializing our products prior to regulatory approval. For any clinical investigation and testing of our products in Canada, authorization by the TPD is required. In addition, before a study can commence at each participating clinical center, the center’s IRB must approve the clinical protocol and other related documents.
 
We must manufacture our devices under approved quality system conditions and must validate the performance characteristics of the devices to ensure that the devices perform safely, consistently, and reliably. The TPD has adopted ISO13485 and relies upon accredited registrars to certify manufacturers of medical devices. Our quality system was registered to ISO13485 in August 2001 and to ISO 13485:2003 in September 2006.
 
Manufacturers of marketed devices must also be licensed by Health Canada. Licensing is contingent upon successful certification by an accredited registrar.
 
In addition to the regulatory product approval framework, we are also subject to municipal, provincial, and federal laws governing occupational safety, laboratory practices, the use, handling, and disposition of biological waste, environmental protection, and hazardous substance control. We may be subject to other current and future regulations, including future regulation of the biotechnology/pharmaceutical and/or medical device industry. We believe we are in material compliance with all such existing regulations.
 
C.      Organizational Structure 
 
See Item 4A above.
 
D.      Property, Plant and Equipment
 
We lease facilities at 2505 Meadowvale Boulevard, Mississauga, Ontario Canada L5N 5S1 and at the MaRS Discovery District, 101 College Street, Toronto, Ontario, Canada M5G 1L7.  Effective January 1, 2008, the lease commitments at these premises cover a total of approximately 38,000 square feet. In addition, Vasogen Ireland Limited leases premises in Ireland totaling approximately 5,500 square feet. We continually monitor our facility requirements in the context of our needs and the results of our research and development activities, and we expect these requirements to change commensurately with our activities.
 
Item 5.      Operating and Financial Review and Prospects
 
The following discussion and analysis should be read in conjunction with the audited consolidated financial statements of the Company and notes thereto.  See “Item 18. Financial Statements” The consolidated financial statements have been prepared in accordance with Canadian GAAP, which, except as described in Note 16 to Item 18, conform in all material respects with US GAAP. All amounts are expressed in Canadian dollars unless otherwise noted. Annual references are to the Company’s fiscal years, which end on November 30.
 
A.      Operating Results
 
We are a development-stage enterprise that currently dedicates our cash resources mainly to research and development (“R&D”) activities and to the initial commercial launch of Celacade in Europe.  Our products have not yet been approved by regulatory authorities in all relevant jurisdictions. In December 2007, Ferrer received initial orders for Celacade in Germany; as such we did not generate any revenues from operations in fiscal 2007.
 
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Loss
 
The loss for the years ended November 30, 2007, 2006, and 2005, is reflected in the following table:
 
Loss (in millions of dollars, except per-share amounts)
2007
2006
(Decrease)
2006
2005
(Decrease)
Loss
$28.8
$66.4
($37.6)
$           66.4
$           93.0
($26.6)
Basic and fully diluted loss per share
$1.46
$7.05
($5.59)
$           7.05
$           11.65
($4.60)

 
The loss for 2007 has decreased when compared with 2006 and in 2006 when compared with 2005.  A key driver of this reduction is the lower costs associated with our phase III clinical programs and the corporate costs associated with supporting these programs. Another reason for the reduced loss is the reduction in expenses associated with the senior convertible notes issued in 2005 and repaid in full in April 2007.
 
Research and Development
 
The changes in R&D expense, and their key components, for the years ended November 30, 2007, 2006, and 2005, are reflected in the following table:
 
R&D expense (in millions of dollars, except percentages)
 
2007
   
2006
   
Increase
(Decrease)
   
2006
   
2005
   
Increase
(Decrease)
 
Program costs:
                                   
Direct
  $ 0.6     $ 13.1     $ (12.5 )   $ 13.1     $ 47.5     $ (34.4 )
Indirect
  $ 6.8     $ 13.6     $ (6.8 )   $ 13.6     $ 17.8     $ (4.2 )
Preclinical costs
  $ 3.1     $ 3.4     $ (0.3 )   $ 3.4     $ 3.8     $ (0.4 )
Intellectual property costs
  $ 1.4     $ 2.2     $ (0.8 )   $ 2.2     $ 1.8     $ 0.4  
Other costs
  $ 0.1     $ 0.4     $ (0.3 )   $ 0.4     $ 0.6     $ (0.2 )
Total R&D
  $ 12.0     $ 32.7     $ (20.7 )   $ 32.7     $ 71.5     $ (38.8 )
R&D expense as a percentage of the sum of R&D and General and Administration expenses
    46 %     63 %     (17 %)     63 %     77 %     (14 %)

 
Program Costs
 
The expenses related to our Celacade programs are expensed for accounting purposes and have been the key driver of our losses over the last three fiscal years.   The majority of the decrease in our R&D expenses for 2007, when compared with the same period in 2006, and for 2006, when compared with the same period in 2005, resulted from a significant reduction in the clinical trial activities relating to the completion of our phase III trials.

Direct costs to support these trials include expenses for clinical site fees, study monitoring, site close out, data management and analysis, and technology support.  For 2007, direct costs decreased significantly, as our phase III trials were completed; however, for the comparable period in 2006, these costs were still being incurred, as our phase III trials were completed in the second half of 2006.  During 2005, the number of clinical sites participating in these programs and the number of patients enrolled in these programs were a significant driver of the direct costs; however, for the comparable periods in 2006, these costs were reduced substantially, as our phase III trials were completed.

Expenses in 2007 related to further analysis of the ACCLAIM trial results and other activities in preparation for our May 2007 meeting with the FDA.

Indirect costs to support these programs consist of salaries and benefits for employees who support the Celacade program, employee termination costs, professional fees, and other support costs.    Indirect costs decreased in 2007 when compared with 2006, and in 2006 when compared with 2005, as a result of a reduced level of service and technology development activity required to support our clinical programs.  These decreases were offset somewhat by restructuring costs associated with employee terminations, which were $0.7 million for 2007, compared with $0.1 million in 2006. No restructuring costs were incurred in 2005.

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During 2007, program costs were incurred for the preparation of initial commercial development of Celacade in Europe and for planning in anticipation of a confirmatory study that is expected to support an application for regulatory approval in the United States of Celacade technology for the treatment of patients with NYHA Class II heart failure.

A more detailed summary of our clinical programs is provided below.

CELACADE Program

Inflammation is implicated in the development and progression of heart failure.  Our Celacade System targets the inflammation underlying chronic heart failure.

The double-blind, placebo-controlled ACCLAIM trial completed in 2006 studied 2,408 subjects with chronic heart failure at 175 clinical centers in seven countries.  ACCLAIM was designed to assess the ability of Celacade to reduce the risk of death or first cardiovascular hospitalization.  Patients included in the study had NYHA Class II, III, or IV heart failure with a left-ventricular ejection fraction (LVEF) of 30% or less and had been hospitalized or received intravenous drug therapy for heart failure within the previous 12 months, or had NYHA Class III/IV heart failure with a LVEF of less than 25%.

Patients in the ACCLAIM trial were receiving optimal standard-of-care therapy for heart failure, which at baseline included a number of pharmaceuticals such as diuretics (94%), ACE-inhibitors (94%) and beta-blockers (87%), as well as device therapies including automatic implantable cardioverter defibrillators (26%), and use of cardiac resynchronization therapy (10.5%).  The placebo (n=1,204 patients) and Celacade (n=1,204 patients) groups were balanced for all important baseline characteristics, including demographics, LVEF, NYHA classification, concomitant medical conditions, medications, and device therapies.

The results of the ACCLAIM trial have been published in the January 19, 2008 issue of The Lancet ( Lancet 2008; 371 : 228-36), a world-leading medical journal.    The key findings from the ACCLAIM trial were also presented at the World Congress of Cardiology 2006 in Barcelona, Spain, and at the 10th Annual Scientific Meeting of the Heart Failure Society of America in Seattle, Washington.

The difference in time to death or first cardiovascular hospitalization, the primary endpoint of ACCLAIM, for the intent-to-treat study population was not statistically significant (p=0.22); however, the risk reduction directionally favored the Celacade group (hazard ratio=0.92).

In the ACCLAIM trial, Celacade was shown to significantly reduce the risk of death or first cardiovascular hospitalization by 39% in a pre-defined subgroup of patients with NYHA Class II heart failure at baseline (n=689 patients, 216 events, p=0.0003) and in a pre-defined subgroup of patients with no prior history of heart attack at baseline, Celacade was also shown to significantly reduce the risk of death or first cardiovascular hospitalization by 26% (n=919 patients, 243 events, p=0.02).  Furthermore, consistent with the impact of Celacade on the risk of mortality and morbidity in large subgroups within the ACCLAIM trial was the finding of a significant improvement in quality of life (as measured by the Minnesota Living with Heart Failure Questionnaire) for the patients assessed for quality of life in the intent-to-treat study population (p=0.04).  Celacade was also shown to be well tolerated in the ACCLAIM patient population, and there were no significant between-group differences for any serious adverse events.

During 2007, we completed a collaboration agreement (the “Agreement”) with Ferrer to commercialize Celacade for the treatment of chronic heart failure in certain countries of the E.U. and Latin America.  Under the agreement, Ferrer will have the exclusive rights to market Celacade for the treatment of chronic heart failure and other cardiovascular conditions in certain countries of the E.U. and Latin America.  We have already received E.U. regulatory approval as a medical device under the CE Mark, which enables marketing of Celacade for the treatment of chronic heart failure in the 27 member countries of the E.U.  Ferrer has also acquired the right of first negotiation with respect to the remaining countries of the E.U.  In December 2007, Ferrer received initial orders for Celacade in Germany.

25

Under the Agreement, the commercial launch strategy for Celacade in Europe will involve an initial commercialization phase (ICP), during which Ferrer will target key physicians to build support for expanded use of Celacade within the broader medical community.  Based on Ferrer’s current plan, the ICP is expected to conclude no later than September 1, 2008.  Under the terms of the Agreement, we are responsible for the cost of delivering the Celacade technology to Ferrer, as required, based on orders received, which includes the Celacade single-use disposable cartridges required for the delivery of each Celacade monthly treatment. During the ICP, Ferrer will pay us a fixed amount for the disposable cartridges and, following the successful completion of the ICP, and upon the first commercial sale as defined in the Agreement, we will receive 45% of revenues generated by Ferrer through the sale of the cartridges.  After a period five years from the date of the first commercial sale on a country-specific basis, our share of the revenues will be 42%.  Following the ICP, we will also receive milestone payments, based on the first commercial sale of Celacade on a country-specific basis, and we will receive milestone payments on reaching pre-specified thresholds based on overall sales.  Also under the terms of the Agreement, Ferrer will be financially responsible for costs associated with the launch and marketing of Celacade.   Our agreement with Ferrer is available on SEDAR and EDGAR.

At a meeting with the FDA to discuss the ACCLAIM results in May 2007, the agency strongly recommended that we conduct a confirmatory study to support a U.S. PMA filing for Celacade for NYHA Class II heart failure patients and also recommended that we use a Bayesian statistical approach.  This approach involves a trial design methodology that may allow utilization of prior trial results to contribute to the statistical power of a confirmatory study and therefore potentially provides the opportunity to significantly reduce the number of required patients, as well as the cost and duration of the study.  As a result of the FDA’s recommendations, we retained Berry Consultants and Dr. Donald A. Berry, Head, Division of Quantitative Sciences and Chairman, Department of Biostatistics, The University of Texas MD Anderson Cancer Center, and an authority in the area of Bayesian and adaptive trial design, to assist with the development of the study. 

In September 2007, we announced our plans for a confirmatory study (ACCLAIM II) that would support an application for regulatory approval in the United States of Celacade for the treatment of patients with NYHA Class II heart failure.   We have been working with the FDA to finalize the ACCLAIM II protocol and the statistical analysis plan.  In preparation for ACCLAIM II, the FDA has been reviewing Celacade in the context of their recently issued draft document entitled ‘Guidance for Industry Regulation of Human Cells, Tissues, and Cellular and Tissue-Based Products (HCT/Ps) - Small Entity Compliance Guide’ to assess whether this draft guidance is relevant to the Celacade System.  To date, Celacade has been regulated as a medical device with the Center for Devices and Radiological Health (CDRH) acting as lead reviewer, with input from Center for Biologics Evaluation and Research (CBER).  The FDA has recently informed us that Celacade will remain regulated as a medical device; however, CBER will take the role of lead reviewer, with CDRH providing input.  We are planning to meet  with CBER to finalize their input into the design of ACCLAIM II.

We have established the Steering Committee to provide input to the ACCLAIM II final study design. James B. Young, MD, Chairman, Division of Medicine at the Cleveland Clinic Foundation and Medical Director, Kaufman Center for Heart Failure, has agreed to be the Global Principal Investigator and Chairman of the Steering Committee for the ACCLAIM II study.  Dr. Young was the Global Principal Investigator for ACCLAIM and has played a leading role in numerous other multi-center clinical trials focusing on heart failure and transplantation.

VP025 & VP Series of Drugs Program

VP025, our lead product from a new class of drugs called the VP series of drugs, is being developed to target the chronic inflammation that is associated with a number of neurological diseases.  Many neurological conditions, including Alzheimer’s disease, Parkinson’s disease, and amyotrophic lateral sclerosis (ALS, also known as Lou Gehrig’s disease), are associated with an inflammatory response in the nervous system.  These conditions are characterized by increased levels of inflammatory mediators, including cytokines, leading to the death of nerve cells and the eventual loss of functional activity.  Due to the prevalence, morbidity, and mortality associated with neuro-inflammatory diseases, they represent a significant medical, social, and financial burden.
 
We have completed a considerable amount of preclinical work that has demonstrated the ability of VP025 to reduce inflammation in models of a number of neurodegenerative diseases, including Parkinson’s disease, Alzheimer’s disease, ALS, and diabetic retinopathy. We have also successfully completed a phase I clinical trial of VP025.  This double-blind, placebo-controlled, dose-escalation trial examined the safety and tolerability of three doses of VP025 in 24 healthy volunteers.  Multiple administrations of either low, mid, or high doses of VP025 were shown to be safe and well tolerated when compared to placebo, and no drug-related serious adverse events were reported.  We continue to focus on the optimizing the manufacture of VP025 to support further clinical development.
 
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We plan to seek collaborations for one or more of these applications to assist with the clinical and commercial development of these products allowing us to focus our current resources on the commercialization of Celacade in Europe and the execution of our planned ACCLAIM II study, which we currently believe provide the best opportunities to enhance shareholder value.
 
Preclinical Costs

Our preclinical research programs are focused on developing a new class of drugs, of which VP025 is the lead candidate, and on supporting our Celacade program.
 
The R&D expenses associated with preclinical research activities during 2007, 2006, and 2005 were primarily the result of the above VP025 & VP series of drugs program studies.  Preclinical expenditures consist of salaries and benefits for employees who support the preclinical activities and costs to the medical institutions to whom our research is outsourced. Preclinical costs for 2007 decreased when compared to 2006, and in 2006 when compared to 2005, given a reduction in our preclinical activities.

Intellectual Property

Our research and development initiatives have resulted in the filing of numerous patent applications.  We own patents and pending patent applications relating to our products and technologies in the United States and other jurisdictions around the world.  Our intellectual property expenditures primarily consist of fees paid to patent offices worldwide and to external patent counsel.  These costs are included in R&D expense and are expensed as incurred.  These costs are a result of advancing our patent protection into additional countries through international patent grants, and additional patent and trademark activities associated with protecting our existing technologies, as well as new discoveries and developments resulting from our research and development programs.
 
The costs for 2007 are lower than the costs for the same period in 2006 due to a lower level of activity and the maturing of certain portions of the portfolio.  The costs for 2006 are higher than the costs for the same periods in 2005.  In addition to a higher level of activity surrounding our existing patent portfolio, we carried out additional patent activities to protect intellectual property arising from the ACCLAIM clinical trial.
 
General and Administration
 
The changes in general and administration expense, and their key components, for the years ended November 30, 2007, 2006, and 2005, are reflected in the following table:
 
General and Administration expense (in millions of dollars)
 
2007
   
2006
   
Increase
(Decrease)
   
2006
   
2005
   
Increase
(Decrease)
 
Infrastructure and other support costs
  $ 11.9     $ 16.6     $ (4.7 )   $ 16.6     $ 19.3     $ (2.7 )
Insurance
  $ 1.1     $ 1.7     $ (0.6 )   $ 1.7     $ 1.5     $ 0.2  
Professional fees
  $ 1.3     $ 1.0     $ 0.3     $ 1.0     $ 1.3     $ (0.3 )
Total General and Administration expense
  $ 14.3     $ 19.3     $ (5.0 )   $ 19.3     $ 22.1     $ (2.8 )

 
Infrastructure and other support costs include salaries and related employee costs for those employees not directly involved in research and development, facility-related and information technology expenses for all employees, and restructuring costs.  These costs decreased in 2007 when compared to 2006, and in 2006 when compared with 2005, as a result of a reduced level of activity required to support the current operations. The cost reduction is primarily driven by the decrease in full-time employees to 104 as at November 30, 2007. There were 125 full-time employees as at November 30, 2006, compared with 172 as at November 30, 2005.  The reduction in expenses was offset by restructuring costs, which consisted primarily of termination costs of $2.6 million for 2007, compared with $0.5 million in 2006; no restructuring costs were incurred in 2005.  Insurance costs decreased in 2007 when compared to 2006, and increased moderately in 2006 when compared to 2005, as a result of market conditions that impacted our insurance premiums.  Professional fees include expenses for legal, tax, accounting, and other specialized services and are comparable to the prior periods.
 
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During 2007, general and administration expenditures did not decrease in direct proportion to R&D expenditures.  This is a result of restructuring costs that were incurred, and which are being included in G&A expenditures.  In addition, expenditures associated with the European commercial launch and preparations for ACCLAIM II, which are included in R&D expenditures, were not as significant as costs incurred for the ACCLAIM trial.  G&A expenditures also include other fixed costs which are not necessarily reduced based on the level of corporate activity, such as cost associated with being a public company.
 
Foreign Exchange
 
The foreign exchange gain or loss for the years ended November 30, 2007, 2006, and 2005, is reflected in the following table:
 
Foreign Exchange
(in millions of dollars)
2007
2006
Increase
2006
2005
Increase
Foreign exchange (gain) loss
$2.0
$0.1
$1.9
$0.1
$(0.7)
$0.8

We are holding U.S. dollars directly and indirectly through forward currency contracts to make payments for R&D and operating expenditures denominated in U.S. dollars. At November 30, 2007, we held U.S. dollar denominated securities in the amount of US$0.1 million, and had a contractual obligation to purchase back US$12.9 million (see Item 5B below).  As our functional or measurement currency is the Canadian dollar, U.S. dollar exchange rate fluctuations may have a significant impact from an accounting perspective, but they do not impair or enhance our ability to pay these U.S. dollar denominated expenses.

Our statement of operations includes a foreign exchange loss for 2007 that arose as a result of the strengthening of the Canadian dollar, our functional currency, relative to the U.S. dollar, during this period.  The year-end conversion rates from the U.S. dollar to the Canadian dollar for November 30, 2007, 2006 and 2005 were 1.000, 1.1422, and 1.1669, respectively.  In 2006, losses resulting from cash being held in U.S. dollars have been partially offset by gains on liabilities that are denominated in U.S. dollars.

Investment Income
 
Investment income for the years ended November 30, 2007, 2006, and 2005, is reflected in the following table:
 
Investment Income
(in millions of dollars)
2007
 
2006
(Decrease)
2006
2005
(Decrease)
Investment income
$1.3
$2.0
     ($0.7)
$2.0
$2.3
($0.3)

Investment income for 2007 was lower when compared with 2006, and in 2006 when compared with 2005, due to a decline in the average amount of cash and cash equivalents, available for sale securities, and restricted cash on hand.
 
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Other expenses
 
Other expenses for the years ended November 30, 2007, 2006, and 2005, are reflected in the following table:
 

Other expense
(in millions of dollars)
 
2007
   
2006
   
Decrease
   
2006
   
2005
   
Increase
 
Interest expense on senior convertible notes payable
  $ 0.0     $ 0.9     $ (0.9 )   $ 0.9     $ 0.3     $ 0.6  
Accretion of the carrying value of senior convertible notes payable
  $ 0.7     $ 7.8     $ (7.1 )   $ 7.8     $ 1.7     $ 6.1  
Amortization of deferred financing costs
  $ 0.2     $ 2.5     $ (2.3 )   $ 2.5     $ 0.4     $ 2.1  
Loss on debt extinguishment
  $ 1.8     $ 5.0     $ (3.2 )   $ 5.0     $ 0.0     $ 5.0  
Change in fair value of embedded derivatives
  $ (0.8 )   $ 0.0     $ (0.8 )   $ 0.0     $ 0.0     $ 0.0  
Total
  $ 1.9     $ 16.2     $ (14.3 )   $ 16.2     $ 2.4     $ 13.8  

Except for interest expense, other expenses associated with the senior convertible notes are non-cash expenditures.  These expenses are lower for 2007, when compared to the same period in 2006, as the senior convertible notes were repaid during April 2007.
 
Except as described under Item 4 or elsewhere in this annual report, there are no governmental economic, fiscal, monetary or political policies or factors that have materially affected, or could materially affect, directly or indirectly, the Company’s operation or investments by U.S. shareholders.
 
B.      Liquidity and Capital Resources
 
Since our inception, we have financed our operations primarily from public and private sales of equity, the issuance of senior convertible notes, the exercise of warrants and stock options, and interest on funds held for future investments.
 
On May 24, 2007, we completed a public offering for net proceeds of $15.4 million (US$14.2 million), resulting in the issuance of 4.9 million common shares and 3.7 million five-year warrants to purchase common shares at US$3.16 per share.  This financing triggered the anti-dilution adjustments contained in the warrants that were issued in connection with the senior convertible notes issued on October 7, 2005, which are discussed below.
 
On November 14, 2006 we completed a public offering for gross proceeds of $23.1 million (US$20.3 million), resulting in the issuance of 4.3 million common shares, 1.7 million five-year warrants to purchase common share at US$6.30 per share and 0.4 million six-month warrants to purchase common shares at US$5.30 per share.  This financing triggered the anti-dilution adjustments contained in the senior convertible notes and warrants that were issued on October 7, 2005 which are discussed in greater detail below.
 
On October 7, 2005, our wholly-owned subsidiary, Vasogen Ireland Limited, raised gross proceeds of US$40 million through the issuance of senior convertible notes (“the notes”). Costs of this transaction, including agency and legal fees and other expenses, were US$3.6 million.   The notes had a maturity date of two years from issuance and bore interest at a rate of 6.45%.  As of April 1, 2007, the principal amount under the senior convertible notes was fully repaid.    As a result of the financing that was completed on May 24, 2007, the debt agreement’s anti-dilution provisions provided that the exercise price of the 471,999 warrants outstanding to the note holders at an exercise price of US$19.90 was reduced to US$13.59 and the exercise price of the 39,000 warrants at an exercise price of US$20.60 was reduced to US$14.05.  In addition, the 0.5 million warrants outstanding can now be exercised for 1.1 million common shares, which is an increase from 0.8 million common shares.  As a result of the financing that was completed on November 14, 2006, the debt agreement’s anti-dilution provisions provided that the exercise price of the 471,999 warrants outstanding to the note holders at an exercise price of US$30.00 was reduced to US$19.90 and the exercise price of the 39,000 warrants at an exercise price of US$30.11 was reduced to US$20.60.  In addition, the 0.5 million warrants outstanding could be exercised for 0.8 million common shares, which is an increase from 0.5 million common shares.
 
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On February 2, 2005, we completed a public offering for gross proceeds of $52.5 million (US$42.3 million), resulting in the issuance of 0.9 million common shares.
 
During 2007 and 2006, we did not receive funds from the exercise of options and warrants.  In 2005, the proceeds from the exercise of options and warrants were $0.6 million. The total number of common shares outstanding at November 30, 2007 increased to 22.4 million from 15.7 million at November 30, 2006.  The comparative information for the Shareholders’ Equity section in our financial statements has been adjusted to give effect to the 10:1 share consolidation that was approved by our shareholders on April 3, 2007, and implemented on April 17, 2007, as directed by the Board of Directors.  The number of employee stock options outstanding at November 30, 2007 was 0.9 million. The conversion rate of the options is on a one-to-one basis for common shares.  The number of warrants outstanding at November 30, 2007 was 6.5 million. The conversion rate of the warrants is on a one-to-one basis for common shares, excluding 0.5 million warrants that have been issued to the note holders, which are now convertible into common shares at a rate of approximately 2.2 common shares for one warrant.
 
As at January 18, 2008, we had 22.4 million common shares outstanding; 0.9 million options to purchase common shares outstanding; and 6.5 million warrants to purchase 7.1 million common shares.
 
At November 30, 2007, our cash and cash equivalents, and restricted cash totaled $23.5 million, compared with $36.8 million at November 30, 2006.  The decrease is a result of the cash used in operations during 2007 offset by the proceeds from the financing that closed on May 24, 2007.   We were required to maintain a letter of credit in connection with the senior convertible notes payable.  The letter of credit expired on July 3, 2007 and was cancelled during the third quarter.     With the repayment of our convertible notes during the second quarter, we no longer have any restricted cash.  We invest our cash resources in liquid government and corporate debt instruments having a single “A” credit rating or greater.  We do not believe that the results of operations or cash flows would be affected to any significant degree by a sudden change in market interest rates relative to interest rates on our investments, owing to the relative short-term nature of the investments. We currently hold our cash resources in investments issued and guaranteed by major Canadian financial institutions.
 
We are exposed to changes in foreign exchange rates between the Canadian and U.S. dollars, which could affect the value of our cash and cash equivalents.  At November 30, 2007, we held U.S. dollar denominated securities in the amount of US$0.1 million, and had a contractual obligation to purchase US$12.9 million (see discussion below).
 
In November 2007, we purchased Canadian dollars totaling $12.5 million for US$12.9 million, and concurrently entered into a forward contract to purchase the U.S. dollars back in December 2007.  The Canadian dollars were acquired to enable us to invest our cash resources in Canadian investments; however, the forward contract enabled us to preserve our U.S. funds, even when converted to Canadian dollars.  Our U.S. funds will be used to cover future expenditures denominated in U.S. dollars. This forward contract matured in December 2007.
 
In November 2006, we entered into a contract to purchase Canadian dollars totaling $9.2 million (US$8.0 million), and concurrently entered into a forward contract to purchase the U.S. dollars back in December 2006.  The Canadian dollars were acquired to enable us to invest our cash resources in Canadian investments; however, the forward contract enabled us to preserve our U.S. funds, even when converted to Canadian dollars.  Our U.S. funds will be used to cover expenditures denominated in U.S. dollars. This forward contract matured in December 2006.
 
Our net cash used in operating activities for 2007 was $25.8 million, compared with $64.4 million and $74.6 million for 2006 and 2005, respectively.  Our net cash used in operating activities for the three months ended November 30, 2007 was $4.5 million.  Our net cash used in operations included restructuring costs for 2007 of $2.7 million and $0.3 million for the three months ended November 30, 2007.  Other than our losses, changes in our accounts payables and accrued liabilities within working capital had the most significant impact on our cash used in operations.  Our working capital is affected by the increase or decrease in our accounts payable and accrued liabilities as a result of certain expenses incurred in our phase III clinical trials that were not paid until certain trial milestones were reached, such as the receipt of final study reports from clinical sites at the end of the trials. In 2006, a significant number of these milestones were achieved, which resulted in the payment of cash related to the expenditures incurred in 2005 and 2004.
 
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We intend to continue to use our capital resources to fund our research and development activities, including ACCLAIM II and the commercialization of Celacade in Europe.  The amount of capital resources to be allocated to these activities will depend upon the scale of programs undertaken.

Based on our current plans, we will need to raise additional funds for ongoing operating costs, research and development activities, preclinical studies, and clinical trials necessary to bring our potential products to market, particularly for ACCLAIM II, or to potentially establish marketing, sales, and distribution capabilities.  We may endeavor to secure additional financing through strategic alliance arrangements, the exercise of options and warrants, the issuance of new share capital, and/or our European commercialization activities, as well as through other financing opportunities. There can be no assurance that additional financing will be available and, if available, will be on terms acceptable to us.  The availability of financing will be affected by the results of our preclinical and clinical research, including the ACCLAIM trial, which failed to reach its primary endpoint, our ability to advance the development of Celacade and obtain regulatory approvals, the market acceptance of our products, the state of the capital markets generally (with particular reference to biotechnology companies), strategic alliance agreements, and other relevant commercial considerations.

C.      Research and development, patents, and licenses, etc
 
We expense all R&D costs.  The majority of our research is outsourced to medical institutions, under contractual agreements, for which expenditures are settled with cash payments that are aligned with the achievement of pre-defined activities.  The costs of our prepaid clinical supplies are deferred, on the basis that these supplies have future alternative uses related to the various clinical applications of our Celacade technology, and are expensed as they are shipped to outsourced research centers or clinical sites.
 
The cost of our acquired technology, representing part of our platform medical device technology, is amortized on a straight-line basis over 20 years in recognition of the term of the acquired patent.
 
Our ability to recover the carrying value of our acquired technology and clinical supplies is impacted by several factors, including, but not limited to, the progress of clinical trials, our ongoing ability to fund clinical trials, feedback and decisions from health regulators regarding clinical trial results and reimbursement, ongoing technological improvements, technological obsolescence, the timing of product launch, the development of our patent portfolio, the ability to defend any claims made by third parties against our intellectual property, and our financial ability to challenge those third parties who may infringe our intellectual property.  Based on analysis to date, we believe that the results of the phase III ACCLAIM trial warrant efforts to advance the development of Celacade in a pre-defined sub-group and that the value of our acquired technology and the clinical supplies is recoverable.
 
For the years ended November 30, 2007, 2006, and 2005, the Company spent $12.0 million, $32.7 million, and $71.5 million, respectively, on research and development.  At the present time, the Company’s principal expenditures are focused on the advancement of the company’s research and development program.  Over the past three years, Vasogen has raised approximately $129 million in net proceeds from the issuance of equity securities and convertible notes to investors and the exercise of options and warrants.  The Company’s common shares are listed on the TSX under the symbol “VAS” and on the NASDAQ under the symbol “VSGN”.
 
D.      Trend Information
 
It is important to note that historical patterns of expenditures cannot be taken as an indication of future expenditures.  The amount and timing of expenditures and availability of capital resources vary substantially from period to period, depending on the level of research and development activity being undertaken at any one time and the availability of funding from investors and prospective commercial partners.
 
The following table presents unaudited selected financial data for each of the last eight quarters ended November 30, 2007:
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Loss for the period (000’s)
   
Basic and diluted loss per share
   
Foreign exchange gain/(loss) (000’s)
 
November 30, 2007
  $ (6,058 )   $ (0.27 )   $ (777 )
August 31, 2007
  $ (5,347 )   $ (0.24 )   $ (242 )
May 31, 2007
  $ (9,694 )   $ (0.54 )   $ (1,092 )
February 28, 2007
  $ (7,678 )   $ (0.47 )   $ 134  
November 30, 2006
  $ (10,024 )   $ (0.89 )   $ 56  
August 31, 2006
  $ (14,566 )   $ (1.55 )   $ 12  
May 31, 2006
  $ (22,438 )   $ (2.59 )   $ (169 )
February 28, 2006
  $ (19,332 )   $ (2.34 )   $ (3 )

Our quarterly losses have decreased significantly as a result of the gradual ramping down of clinical activity of our phase III clinical programs.  This reduction has also been driven by a reduction of expenses associated with the senior convertible notes.  Both of these factors are discussed in greater detail elsewhere in this annual report.  The operations of our Company are not subject to any material seasonality or cyclicality factors.  The quarterly losses for 2006 above do not include any adjustment to reflect the adoption of the recommendations of Section 3855.  We adopted this amendment on a retroactive basis, without restatement.
 
The loss in the fourth quarter of 2007 increased when compared to that in the third quarter of 2007 as a result of a foreign exchange loss that arose as a result of the strengthening of the Canadian dollar, our functional currency, relative to the U.S. dollar, during this quarter. R&D and general and administration expense for the fourth quarter was $5.6 million, compared with $5.5 million in the third quarter.
 
Except as disclosed elsewhere in this annual report, the Company knows of no trends, uncertainties, demands, commitments or events that are reasonably likely to have a material effect on the Company’s liquidity or capital resources or that would cause reported financial information not necessarily to be indicative of future operating results or financial conditions.
 
E.      Off-balance sheet arrangements
 
We have no debt, guarantees, off-balance sheet arrangements, or capital lease obligations. Other long-term obligations are discussed below.
 
F.      Contractual obligations
 
Our contractual obligations as of November 30, 2007 are as follows:
 
Contractual Obligations
(in millions of dollars)
Total
Less than 1 year
1 - 3 years
4 - 5 years
More than
5 years
Operating lease obligations
$1.0
$0.6
$0.4
nil
nil
Senior convertible notes
nil
nil
nil
nil
nil

We have granted royalties to arm’s-length third parties based on gross amounts receivable by us from future commercial sales of our Celacade technology, aggregating 1.5% on all sales, to a maximum royalty of $1.3 million per annum and an additional 2% with respect to revenue derived from certain applications of this technology, to a maximum royalty of $5.0 million per annum.  To date, no royalties are due and/or payable.  In October 2005, we issued the notes described above.   As of April 1, 2007, the principal amount under the notes was fully repaid.  In November 2007, we purchased Canadian dollars totaling $12.5 million for US$12.9 million and concurrently entered into a forward contract to purchase the U.S. dollars back in December 2007.
 
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G.      Safe Harbor
 
Certain statements contained in this annual report and in certain documents incorporated by reference herein constitute “forward-looking statements” within the meaning of the United States Private Securities Litigation Reform Act of 1995 and/or “forward-looking information” under the Securities Act (Ontario). These statements may include, without limitation, summary statements relating to results of the ACCLAIM trial in patients with chronic heart failure, plans to advance the development of Celacade, our medical device for the treatment of chronic heart failure, and VP025, statements concerning our partnering activities and discussions with health regulatory authorities, plans for health regulatory submissions, strategy, future operations, future financial position, future revenues, projected costs, prospects, plans and objectives of management.   In some cases, you can identify forward-looking statements by terminology such as “may”, “will”, “should”, “expects”, “plans”, “anticipates”, “believes”, “estimated”, “predicts”, “potential”, “continue”, “intends”, “could”, or the negative of such terms or other comparable terminology. We made a number of assumptions in the preparation of these forward-looking statements, including assumptions about the nature, size, and accessibility of the market for Celacade in the treatment of chronic heart failure, particularly in Europe, the regulatory approval process leading to commercialization, the availability of capital on acceptable terms to pursue the development of Celacade, and the feasibility of additional trials.  You should not place undue reliance on our forward-looking statements which are subject to a multitude of risks and uncertainties that could cause actual results, future circumstances, or events to differ materially from those projected in the forward-looking statements. The risks include, but are not limited to, those discussed above that could cause our actual results to differ significantly from those contained in any forward-looking statements and/or forward-looking information.  Additional risks and uncertainties relating to our Company and our business can be found in Item 3D under “Risks Relating to our Business” and “Risks Relating to our Securities”, as well as in our later public filings. The forward-looking statements are made as of the date hereof and we disclaim any intention and have no obligation or responsibility, except as required by law, to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
 
Item 6.            Directors, Senior Management and Employees
 
Directors and Senior Management
 
DIRECTORS AND OFFICERS

The names and municipalities of residence of all our directors and officers as at the date hereof, the offices presently held, principal occupations, and the year each director or officer first became a director or officer are set out below. Each director was elected to serve until the next annual meeting of our shareholders or until his successor is elected or appointed. Officers are appointed annually and serve at the discretion of the Board of Directors.
 
Name and Residence (3)
 
 
Position with the Company and Principal Occupation for the last five years
 
Other Public Company Boards
 
Director/Officer Since
 
Terrance H. Gregg (2)
Los Angeles, California, USA 
Chairman of the Board and Director of the Company.  Formerly Interim President and CEO of the Company (2007).  Mr. Gregg is the President and CEO of Dexcom Inc. Mr. Gregg is the former President of Medtronic MiniMed.
DexCom Inc.
LMS Medical Systems Limited
 
September 1999
Dr. Ronald M. Cresswell (1)
Ann Arbor, Michigan , USA
Director of the Company.  Dr. Cresswell is the former Senior Vice President and Chief Scientific Officer of Warner Lambert.
None
January 2006
Dr. Cresswell will be retiring as a director after the Company’s next Annual General Meeting.
 
 
33

 
Name and Residence (3)
 
 
Position with the Company and Principal Occupation for the last five years
 
Other Public Company Boards
 
Director/Officer Since
 
David G. Elsley
Oakville, Ontario,   Canada 
Director of the Company.  Mr. Elsley is a consultant.  Mr. Elsley was the President of the Company from 1991 to 2007, and Chief Executive Officer of the Company from 1994 to March 7, 2007
None
January 1991
Benoit La Salle (1)(4)
Montréal, Québec, Canada 
Director of the Company.  President and Chief Executive Officer of SEMAFO Inc.
LMS Medical Systems Limited
SEMAFO Inc.
20/20 Technologies Inc.
Foster Parents Plan of Canada
ART Technologies Inc.
January 1997
Mr. La Salle will be retiring as a director after the Company’s next Annual General Meeting.
Dr. Eldon R. Smith (5)  
Calgary, Alberta, Canada 
Senior Vice President, Scientific Affairs, Chief Medical Officer, and Head of Cardiovascular Development, and a Director of the Company.
Canadian Natural Resources Limited
Sernova Corp.
VentriPoint Inc.
Aston Hill Financial Inc.
July 1998
Dr. Calvin R. Stiller (2)(6)
London, Ontario , Canada
Director of the Company.  Dr. Stiller is the former Chairman and Chief Executive Officer of Canadian Medical Discoveries Fund Inc.
NPS Pharmaceuticals, Inc.,
 
January 2006
John C. Villforth (1), (2)
Gaithersburg, Maryland, USA 
Director of the Company.  Former President and Executive Director, Food and Drug Law Institute.
None
March 2001
Christopher J. Waddick, Georgetown, Ontario, Canada 
President, Chief Executive Officer and Director of the Company since 2007.  Mr. Waddick was formerly Chief Operating Officer, Executive Vice President, Chief Financial Officer, and Treasurer of the Company.
None
March 1997
Dr. Anthony E. Bolton
Bakewell, Derbyshire, England
Chief Scientific Officer of the Company.
None
January 1995
Catherine M. Bouchard
Lakefield, Ontario , Canada
Vice President, Human Resources, formerly Director of Human Resources of the Company.  Ms. Bouchard was formerly Director of Human Resources at MDS Laboratories.
None
August 2006
John Geddes
Oakville, Ontario, Canada
Vice President, Marketing and Business Development of the Company.  Mr. Geddes was previously the Director of Marketing and Business Development, for the Company.
None
October 2007
 
 
34

 
Name and Residence (3)
 
 
Position with the Company and Principal Occupation for the last five years
 
Other Public Company Boards
 
Director/Officer Since
 
Susan F.  Langlois
Bolton, Ontario, Canada 
Vice President, Regulatory Affairs and Quality Assurance of the Company.  Ms. Langlois  was formerly Vice-President, Clinical and Regulatory Affairs at Hemosol and Director, Global Regulatory Affairs at Connaught Laboratories Ltd.
None
May 2003
Dr. Anne Goodbody
Toronto , Ontario, Canada
Vice President, Drug Development of the Company.  Dr. Goodbody was previously Director of Research for the Company.
None
June 2007
Graham Neil
Brampton, Ontario, Canada
Vice President, Finance and Chief Financial Officer of the Company.  Mr. Neil was formerly Director of Finance and Controller of the Company.
None
July 2007
Dr. Michael E. Shannon
Picton, Ontario, Canada
Vice President, Medical Affairs of the Company.  Dr. Shannon was formerly Vice President, Medical Sciences for Hemosol Inc., Senior Medical Advisor and Principal for the Canadian Auditor General, and the Director General of the Laboratory Center for Disease Control, Health Canada.
None
September 2004
Notes:
 
1.
Member of the Audit Committee of the Board of Directors.
2.
Member of the Compensation, Nominating, and Corporate Governance Committee of the Board of Directors.
3.
The Company does not have an executive committee of the Board of Directors.
4 .
O n December 9, 2002, BridgePoint International Inc., a company of which Mr. Benoit La Salle was a director and chairman, announced in a press release that cease trade orders had been issued with respect to its shares by the securities regulatory authorities in each of Quebec, Ontario, Manitoba, Alberta, and British Columbia as a consequence of its default in filing its audited financial statements for the year ended June 30, 2002 within the prescribed time period. On or before April 1, 2003, all cease trade orders were revoked by these securities regulatory authorities.
5.
In May of  2002, the British Columbia Securities Commission - and in July of 2002, the Alberta Securities Commission - each issued cease trade orders for shares in BioMax Technologies Inc. for failure to file financial statements. Dr. Smith was a Director and Vice Chairman of this company at the time. He subsequently resigned and subsequent to that date, the Company was delisted for failure to file financial statements and the payment of penalties. The company has not declared bankruptcy and continues as a solvent private company.
6.
On November 14, 2007, Dr. Stiller and a group of current and former officers and directors of NPS Pharmaceuticals, Inc. were named as defendants in a purported derivative action in Utah.  The lawsuit alleges that the defendants made false and misleading statements regarding certain of NPS’ products and business. The lawsuit seeks a determination that it is an appropriate derivative action, and damages in unspecified amounts.


As of November 30, 2007, the directors and executive officers of the Company as a group beneficially owned, directly or indirectly, or exercised control or direction over 211,738   common shares (Directors’ Deferred Share Units included), representing approximately 1% of the issued common shares of the Company.
 

 
SCIENTIFIC ADVISORY BOARD
 
We have an independent Scientific Advisory Board (“SAB”) to advise management and the Board of Directors on our scientific, technical, research, development, and commercialization endeavors. Members of the SAB are entitled to an annual honorarium and reimbursement for their reasonable out-of-pocket expenses incurred in connection with our business. Members are eligible to receive stock options. Members of the SAB through their affiliation with universities, hospitals, and other centers of biomedical research may, from time to time, collaborate on or direct independent basic research, preclinical studies, and/or feasibility clinical trials involving our technologies and receive, in connection therewith, professional fees at market rates. The members of our SAB are:
 
35

Robert Roberts , MD, FRCP(C), FACC, Chairman
 
Dr. Roberts is the President and CEO of the University of Ottawa Heart Institute, one of Canada’s leading centers in cardiovascular medicine.  Dr Roberts was formerly Chief of Cardiology, Don W. Chapman Professor of Medicine, and Professor of Molecular Physiology and Biophysics at Baylor College of Medicine in Houston, Texas, one of the world’s leading centers for cardiovascular care, research, and education.  Dr. Roberts is an active clinician and researcher recognized for his groundbreaking research on cardiac creatine kinase (CK-MB), a key diagnostic marker for cardiac injury, as well as for his original contributions to the molecular biology and genetics of heart disease.  He and his research team are credited with uncovering the genetic basis for several inherited cardiac disorders.  He is the author of more than 700 scientific publications and sits on several key editorial boards and is Editor of Current Opinion in Cardiology.  He has been Associate Editor of Hurst's the Heart since 1990.  Dr. Roberts has received many honours and awards, including the prestigious American College of Cardiology’s 1998 Distinguished Scientist Award and the American Heart Association's Merit Award in 2001.  In 2002, he was awarded a member of the most cited and influential Researcher in the world.  In 2005, Dr. Robert Roberts founded The Ruddy Canadian Cardiovascular Genetics Centre which recently identified the first common gene for coronary artery disease.  In addition to his contributions to basic research, Dr. Roberts is also well recognized for his role as a principal investigator in several pivotal clinical trials related to the introduction of new therapies for heart disease.
 
Stanley H. Appel, MD
 
Dr. Appel is Chair of the Department of Neurology at the Methodist Neurological Institute, and Professor of Neurology at Weill Medical College of Cornell University.  He is also the Peggy and Gary Edwards Distinguished Endowed Chair for the Treatment and Research of ALS Chair, Dept of Neurology Methodist Neurological Institute.  He serves as the Director of the MDA/ALS Research and Clinical Center and is the former Director of the Alzheimer’s disease Research Center at Baylor College of Medicine and previously served as the Director of the Jerry Lewis Neuromuscular Research Center at Baylor College of Medicine in Houston, Texas.  Dr. Appel is a leading expert on degenerative neurological diseases, such as Parkinson’s, Alzheimer’s, and amyotrophic lateral sclerosis (ALS), also known as Lou Gehrig’s disease.  Specifically, Dr. Appel focuses on the importance of neurotrophic factors and immune mechanisms, including the role of inflammatory cytokines in these diseases.  He has served as an Advisory Board member of the Alzheimer’s disease and Related Disorders Association and as a Council member of the American Society of Neurochemistry.  For ten years, he acted as Editor-in-Chief for Current Neurology .  Dr. Appel received his medical degree from Columbia College of Physicians and Surgeons and has over 350 scientific publications to his credit.

Valentin Fuster, MD, PhD
 
Dr. Fuster serves The Mount Sinai Medical Center as Director of Mount Sinai Heart, the Zena and Michael A. Wiener Cardiovascular Institute and the Marie-Josée and Henry R. Kravis Center for Cardiovascular Health. He is also the Richard Gorlin, MD/Heart Research Foundation Professor, Mount Sinai School of Medicine. Among the positions of distinction that he holds are Past President of the American Heart Association, Immediate Past President of the World Heart Federation, a member of the Institute of Medicine of the National Academy of Sciences, a former member of the National Heart, Lung and Blood Institute Advisory Council, and former Chairman of the Fellowship Training Directors Program of the American College of Cardiology. Seventeen distinguished universities throughout the world have granted him honoris causa .  Dr. Fuster is the President of Science of the Centro Nacional de Investigaciones Cardiovasculares Carlos III (CNIC) in Madrid, Spain. Dr. Fuster is the recipient of two major ongoing NIH grants. He has published more than 700 articles on the subjects of coronary artery disease, atherosclerosis and thrombosis, and he has become the lead Editor of two major textbooks on cardiology, 'The Heart' (previously edited by Dr. J. Willis Hurst) and "Atherothrombosis and Coronary Artery Disease" (with Dr. Eric Topol and Dr. Elizabeth Nabel). Dr. Fuster has been appointed Editor-in-Chief of the Nature journal that focuses on cardiovascular medicine. Dr. Fuster is the only cardiologist to receive all four major research awards from the four major cardiovascular organizations: The Distinguished Researcher Award (Interamerican Society of Cardiology, 2005), Andreas Gruntzig Scientific Award (European Society of Cardiology, 1992), Distinguished Scientist (American Heart Association, 2003), and the Distinguished Scientist Award (American College of Cardiology, 1993). In addition, he has received the Lewis A. Conner Memorial Award by the American Heart Association, the James B. Herrick Achievement Award from the Council of Clinical Cardiology of the American Heart Association, the 1996 Principe de Asturias Award of Science and Technology (the highest award given to Spanish-speaking scientists), the Distinguished Service Award from the American College of Cardiology, the Gold Heart Award (American Heart Association's highest award), and the Gold Medal of the European Society of Cardiology (Vienna, September 2007).  In 2008, Dr. Fuster will receive the Kurt Polzer Cardiovascular Award from the European Academy of Science and Arts. After receiving his medical degree from Barcelona University and completing an internship at Hospital Clinic in Barcelona, Dr. Fuster spent several years at the Mayo Clinic, first as a resident and later as Professor of Medicine and Consultant in Cardiology. In 1981, he came to Mount Sinai School of Medicine as head of Cardiology. From 1991 to 1994, he was Mallinckrodt Professor of Medicine at Harvard Medical School and Chief of Cardiology at the Massachusetts General Hospital. He returned to Mount Sinai in 1994 as Director of the Zena and Michael A. Wiener Cardiovascular Institute and most recently, he has been named the Director of the Mount Sinai Heart.

36


 
Milton Packer,   MD
 
Dr. Packer is Professor and Chair of the Department of Clinical Sciences and the Gayle and Paul Stoffel Distinguished Chair in Cardiology, Southwestern Medical Center, University of Texas. He is the former Chief of the Division of Circulatory Physiology at the Columbia University College of Physicians and Surgeons, and the former Director of the Heart Failure Center at the Columbia-Presbyterian Medical Center in New York City. One of the leading experts in the pathophysiology and treatment of heart failure, Dr. Packer has made significant contributions to heart failure research and has been instrumental in the introduction of a number of new treatments.  The author of more than 200 papers, he has won numerous honors for teaching and has lectured around the world, including a number of prestigious named lectureships, on the treatment of heart failure.  He has served, or currently serves, on the editorial boards of many major medical journals, including Circulation and Journal of the American College of Cardiology . He has also been elected to a number of societies, including the American Society for Clinical Investigation.  He is currently on the executive committees of both the American Heart Association and the American College of Cardiology and is past-President of the Heart Failure Society of America.  Dr. Packer is a primary consultant to the National Institutes of Health and the Food and Drug Administration on the management of heart failure and on matters related to cardiovascular research and drug development and health care policy.
 
David Wofsy ,   MD
 
Dr. Wofsy is Professor of Medicine and Microbiology/Immunology at the University of California, San Francisco (UCSF).  He also serves as Associate Dean for Admissions at the UCSF School of Medicine. Dr. Wofsy is a leading authority on the cellular and molecular mechanisms underlying autoimmune diseases.  Based on extensive research, he has developed novel approaches to the use of immune modulation therapies in the treatment of this very common group of diseases.  Much of Dr. Wofsy’s research has been on systemic lupus erythematosus (SLE), an autoimmune disease, where he was the first to demonstrate the key pathological role of CD4+T cells in a standard animal model of this disease. His most recent research has extended to additional novel methods for blocking T cell activation. These approaches are currently in clinical trials.  He is the author of numerous key publications and book chapters and serves on the editorial and advisory boards of several major immunology journals. He has received many distinguished awards and his visiting professorships include Harvard University and the National Institutes of Health.
 
There are no family relationships between the directors, senior management of the Company and employees of the Company upon whose work the Company is dependent.
 
37

A.      Compensation
 
Director Compensation
 
During 2007, directors of the Company who were not full-time employees of the Company received an annual retainer of $30,000.  In addition, a fee of $1,500 was paid for each Board or Board Committee meeting attended in person, or $1,000 if the Director participated by conference call.  The chairpersons of the Audit Committee and of the Compensation, Nominating, and Corporate Governance Committee each received an additional annual retainer in the amount of $10,000 and $7,500, respectively.  The annual retainer and applicable meeting fees are all paid in Deferred Share Units (“DSUs”).  Directors are also entitled to be reimbursed for their reasonable and documented out-of-pocket expenses incurred on the business of the Company.
 
The Company implemented a Directors’ Deferred Share Unit and Stock Plan (the “DSU Plan”) effective January 1, 2004, applicable to the 2004 fiscal year and subsequent years.  Under the terms of the DSU Plan, non-employee directors are paid their directors’ fees entirely in DSUs, in lieu of any cash payment.  The DSU grants are effective as of the date of the meetings in respect of which fees are payable.  A DSU may only be converted into cash and/or shares (as determined by the Company) after a participant ceases to be a director, with each DSU at the time of conversion having a value of one common share or the equivalent market value thereof.  Because of the deferred payment feature of the DSU Plan, directors benefit only from long-term increases in the value of the Company’s shares arising over the term of their directorship thereby promoting a greater alignment of interest between the directors and the shareholders of the Company.
 
The Company has reserved a maximum of 125,000 common shares for purposes of the DSU Plan.  During fiscal 2007, the Company issued a total of 58,140 DSUs to directors in respect of aggregate fees of $0.2 million.
 
Directors of the Company are also eligible to be granted stock options.  During fiscal 2007, non-management directors of the Company, other than the Chairman of the Board, were awarded options to acquire 1,500 common shares of the Company each, and the Chairman of the Board was awarded options to acquire 2,500 common shares of the Company. During 2007, options to acquire 6,000 common shares of the Company were granted to non-management directors.
 
Executive Compensation
 
The following table sets forth all compensation for the periods indicated in respect of the individuals who were the Chief Executive Officer of the Company or the Chief Financial Officer of the Company at any time during 2007, as well as the individuals who were, as at November 30, 2007 the three other most highly compensated executive officers of the Company (“Named Executive Officers”).
 
38

2007 Summary Compensation Table
 
   
Annual Compensation
Long-Term Compensation
 
         
Awards
Payouts
 
Name and Principal
Position
Year
Salary
($)
Bonus
($)
Other
Annual
Compensation (1)
($)
Securities Under
Options/
SARs (2)
Granted
(#)
Shares
Or Units Subject to Resale Restrictions
($)
LTIP
Payouts
($)
All Other Compensation
($)
 
Chris Waddick (3)
(President & CEO)
 
2007
2006
2005
302,222
280,000
263,000
165,000
85,050
115,920
45,000 (4)
45,000 (4)
39,000 (4)
200,000
39,266
4,120
     
 
Terrance H. Gregg (5)
(Interim President &
CEO)
 
 
2007
2006
2005
 
0
n/a
n/a
 
0
n/a
n/a
 
0
n/a
n/a
 
0
2,500
1,000
     
 
David Elsley (6)
(Former President & CEO)
 
2007
2006
2005
 
  96,507
345,600
320,000
 
n/a
110,880
151,800
 
 
20,000
13,105
10,816
 
   
 
964,560
 
Graham Neil (7)
(VP of Finance & CFO)
 
2007
2006
2005
 
139,765
122,834
111,281
 
58,125
18,288
21,423
 
 
0
10,487
1,673
     
 
Paul Van Damme (8)
(Former VP, Finance & CFO)
 
2007
2006
2005
 
 
81,250
215,625
n/a
 
n/a
56,754
n/a
 
 
 
 
0
25,000
n/a
 
   
 
169,925
 
Anne Goodbody
(VP, Drug Development)
 
2007
2006
2005
 
162,709
158,306
154,000
 
61,278
41,444
54,834
 
 
0
18,944
1,990
     
 
Susan Langlois
(VP, Regulatory Affairs
& Quality Assurance)
 
 
2007
2006
2005
 
179,320
169,833
165,000
 
70,300
44,750
58,740
 
 
0
19,225
2,073
     
 
Dr. Eldon Smith
(Senior VP, Scientific Affairs)
 
2007
2006
2005
 
226,500
226,500
226,500
 
90,600
54,360
83,352
 
 
10,000
20,996
2,944
     

Notes:
 
 
1.
Except as otherwise stated, perquisites and other personal benefits do not exceed the lesser of $50,000 or 10% of the total of the annual salary and bonus for the above-named officers.
 
 
39

 
 
2.
To date, no stock appreciation rights (“SARs”) have been granted.
 
 
3.
Mr. Waddick became the CEO on June 20, 2007.  Mr. Waddick was previously the Chief Operating Officer of the Company and Executive Vice President and Chief Financial Officer of the Company.
 
 
4.
Other annual compensation was provided to Mr. Waddick in connection with a Company-required relocation, net of applicable taxes.
 
 
5.
Mr. Gregg, who is the Chairman of the Board of Directors, also served as Interim President and CEO of the Company from March 7, 2007 to June 20, 2007, at which time Mr. Waddick was appointed as President and CEO.  Upon his appointment as Interim President and CEO, and in lieu of cash compensation, Mr. Gregg received 52,631 restricted stock units, with an exercise price of $4.50 and 30,000 stock options.  The units and options were cancelled upon the appointment of Mr. Waddick as President and CEO of the Company, and no compensation was thereby realized by Mr. Gregg.
 
 
6.
Mr. Elsley ceased to be the President and CEO on March 7, 2007, and received “other compensation” in 2007 in accordance with the terms of his employment agreement.
 
 
7.
Mr. Neil became the Vice President of Finance and CFO on July 10, 2007.
 
 
8.
Mr. Van Damme ceased to be the CFO on April 10, 2007, and received “other compensation” in 2007 in accordance with the terms of his employment agreement.
 

Employment Contracts
 
The Company entered into an employment agreement with Chris Waddick as of June 20, 2007. Pursuant to this agreement, Mr. Waddick serves the Company as its President and CEO. The agreement provides for an annual reviewable remuneration of $330,000.  The agreement is terminable at the option of the Company; however, if the agreement is terminated other than for cause, Mr. Waddick is entitled to a lump-sum payment equal to two years’ cash compensation, and any options then outstanding shall remain in full force and effect until their expiry. The agreement contains standard non-competition and non-solicitation provisions.
 
The Company entered into an employment agreement with Graham Neil as of July 10, 2007. Pursuant to this agreement, Mr. Neil serves the Company as its Vice President of Finance and Chief Financial Officer. The agreement provides for an annual reviewable remuneration of $155,000.  The Company entered into an employment agreement with Dr. Anne Goodbody as of April 28, 2003. Pursuant to this agreement, Dr. Goodbody serves the Company as its Vice President of Drug Development. The agreement provides for an annual reviewable remuneration of $165,617.  The Company entered into an employment agreement with Susan Langlois as of November 10, 2005. Pursuant to this agreement, Ms. Langlois serves the Company as its Vice President, Regulatory Affairs and Quality Assurance. The agreement provides for an annual reviewable remuneration of $185,000.   The Company entered into an employment agreement with Eldon R. Smith & Associates Ltd. as of February 01, 2007. Pursuant to this agreement, Eldon R. Smith & Associates Ltd. provides the services of Eldon Smith as the Company’s Vice President, Scientific Affairs. The agreement provides for an annual reviewable remuneration of $226,500.
 
In the case of each of the agreements with Mr. Neil, Dr. Goodbody, and Ms. Langlois, the agreement is terminable at the option of the Company; however, if the agreement is terminated other than for cause, the employee is entitled to a lump-sum payment equal to 6 months cash compensation plus one month for each year of service to a maximum of 12 months.  Each agreement contains standard non-competition and non-solicitation provisions.
 
There are no amounts set aside or accrued by the Company or its subsidiaries to provide pension, retirement or similar benefits.
 

40

 
B.      Board Practices
 
Board of Directors
 
See Items 6A and 6B.
 
Committees of the Board of Directors
 
AUDIT COMMITTEE
 
The Audit Committee of the Board monitors our financial activities, policies, and internal control procedures.  The audit committee is comprised of three independent directors: Benoit La Salle, John Villforth and Ronald Cresswell.
 
Mr. La Salle is a chartered accountant and is a member of the Quebec Order of Chartered Accountants and the Canadian Institute of Chartered Accountants. He holds a Commerce degree from McGill University and a Master of Business Administration from IMEDE, Switzerland.  In 1980, he founded Grou La Salle & Associés, Chartered Accountants.  Mr. La Salle joined our Board of Directors in 1997.
 
Rear Admiral Villforth is the Past-President and Executive Director of the Food and Drug Law Institute and the former Director of the FDA Center for Devices and Radiological Health.  He has almost three decades of experiences as a commissioned officer in the U.S. Public Health Service in the Department of Health and Human Services.  Mr. Villforth retired from the public service sector with the rank of Assistant Surgeon General (Rear Admiral).
 
Dr. Cresswell brings over three decades of research and commercial development experience in cardiovascular and other therapeutic areas.  In his capacity of Senior Vice President and Chief Scientific Officer of Warner-Lambert, he developed an understanding of accounting principles and, in particular, gained experience in the analysis and evaluation of financial statements, particularly as relates to health product related research and development activities and the internal controls and procedures relevant to such activities.  Dr. Cresswell joined our Board of Directors in 2006.
 
Under the SEC rules implementing the Sarbanes-Oxley Act of 2002, Canadian issuers filing reports in the United States must disclose whether their audit committees have at least one “audit committee financial expert”. The Board has determined that Benoit La Salle qualifies as a financial expert under such rules.  In addition, all members of the Audit Committee are considered financially literate under applicable Canadian laws.
 
The Audit Committee assists the Board in fulfilling its oversight responsibility to shareholders, potential shareholders, the investment community and others with respect to the Company’s financial statements, financial reporting process, systems of internal accounting and disclosure controls, performance of the external auditors and risk assessment and management.  The Committee has the power to conduct or authorize investigations into any matters within its scope of responsibilities, with full access to all books, records, facilities and personnel of the Company, its auditors and its legal advisors. In connection with such investigations or otherwise in the course of fulfilling its responsibilities under this charter, the Committee has the authority to independently retain special legal, accounting, or other consultants to advise it.
 
The Audit Committee reviewed with the independent auditor, who is responsible for expressing an opinion on the conformity of the Company’s audited financial statements with US GAAP, their judgments as to the quality, not just the acceptability, of the Company’s accounting principles and such other matters as are required to be discussed with the Audit Committee under Canadian and United States generally accepted auditing standards. In addition, the Audit Committee has discussed with the independent auditor the auditor’s independence from management and the Company including the matters in the written disclosures provided to the Audit Committee by the independent auditor and considered the compatibility of non-audit services with the auditor’s independence.
 
The Company’s independent auditor is accountable to the Board of Directors and to the Audit Committee. The Board of Directors, through the Audit Committee, has the ultimate responsibility to evaluate the performance of the independent auditor, and through the shareholders, to appoint, replace and compensate the independent auditor. Under the Sarbanes-Oxley Act of 2002, the independent auditor of a public company is prohibited from performing certain non-audit services.  The Audit Committee has adopted procedures and policies for the pre-approval of non-audit services, as described in the audit committee charter.  Under the terms of such policies and procedures, the Audit Committee has adopted a list of pre-approved services, including audit and audit-related services and tax services, and a list of prohibited non-audit services deemed inconsistent with an auditor’s independence .
 
41

The list of Pre-Approved Services includes:
 
1.           Audit Services
 
 
 
Audits of the Company’s consolidated   financial statements;
 
 
 
Statutory audits of the financial statements of the Company’s subsidiaries;
 
 
 
Reviews of the quarterly consolidated   financial statements of the Company;
 
 
 
Services associated with registration statements, prospectuses, periodic reports and other documents filed with securities regulatory bodies (such as the SEC and OSC) or other documents issued in connection with securities offerings (e.g., comfort letters and consent letters) and assistance in responding to comment letters from securities regulatory bodies;
 
 
 
Special attest services as required by regulatory and statutory requirements;
 
 
 
Regulatory attestation of management reports on internal controls as required by the regulators; and
 
 
 
Consultations with the Company’s management as to the accounting or disclosure treatment of transactions or events and/or the actual or potential impact of final or proposed rules, standards or interpretations by the securities regulatory authorities, accounting standard setting bodies (such as the FASB or CICA), or other regulatory or standard setting bodies.
 
 
 
2.
Audit-Related Services
 
 
 
Presentations or training on accounting or regulatory pronouncements;
 
 
 
Due diligence services related to accounting and tax matters in connection with potential acquisitions / dispositions;
 
 
 
Advice and documentation assistance with respect to internal controls over financial reporting and disclosure controls and procedures of the Company;
 
 
3.           Tax Services
 
 
a.           Compliance Services
 
 
 
Assistance with the preparation of corporate income tax returns and related schedules for the Company and its subsidiaries;
 
 
 
Assistance with the preparation of Scientific Research & Experimental Development investment tax credit claims and amended tax returns of the company; and
 
 
 
Assistance in responding to Canada Revenue Agency or Internal Revenue Service on proposed reassessments and other matters.
 
 
b.           Canadian & International Planning Services
 
 
 
Advice with respect to cross-border/transfer pricing tax issues;
 
 
42

 
 
Advice related to the ownership of corporate intellectual property in jurisdictions outside of Canada;
 
 
 
Assistance in interpreting and understanding existing and proposed domestic and international legislation, and the administrative policies followed by various jurisdictions in administering the law, including assisting in applying for and requesting advance tax rulings or technical interpretations;
 
 
 
Assistance in interpreting and understanding the potential impact of domestic and foreign judicial tax decisions;
 
 
 
Assistance and advising on routine planning matters; and
 
 
 
Assistance in advising on the implications of the routine financing of domestic and foreign operations, including the tax implications of using debt or equity in structuring such financing, the potential impact of non-resident withholding tax and the taxation of the repatriation of funds as a return of capital, a payment of a dividend, or a payment of interest.
 
 
c.           Commodity Tax Services
 
 
 
Assistance regarding GST/PST/Customs/Property Tax filings and assessments;
 
 
 
Commodity tax advice and compliance assistance with business reorganizations;
 
 
 
Advice and assistance with respect to government audits/assessments;
 
 
 
Advice with respect to other provincial tax filings and assessments; and
 
 
 
Assistance with interpretations or rulings.
 
 
The list of Prohibited Services includes:
 
 
1.
Bookkeeping or other services related to the preparation of accounting records or financial statements.
 
 
2.
Financial information systems design and implementation.
 
 
3.
Appraisal or valuation services for financial reporting purposes.
 
 
4.
Actuarial services for items recorded in the financial statements.
 
 
5.
Internal audit outsourcing services.
 
 
6.
Management functions.
 
 
7.
Human resources.
 
 
8.
Certain corporate finance and other services.
 
 
9.
Legal services.
 
 
10.
Certain expert services unrelated to the audit.
 
 
The Audit Committee also discussed with the Company’s independent auditor the overall scope and plans for their audit.  The Audit Committee meets with the independent auditor, with and without management present, to discuss the results of their examination, their evaluations of the Company’s internal controls, and the overall quality of the Company’s financial reporting. The Audit Committee held four meetings during the twelve-month period ended November 30, 2007.
 
In reliance on the reviews and discussions referred to above, the Audit Committee recommended to the Board of Directors (and the Board of Directors approved) that the audited consolidated financial statements be included in the Annual Report for the twelve month period ended November 30, 2007 for filing with the Canadian provincial securities commissions and the United States Securities and Exchange Commission.
 
43

The charter of the Audit Committee can also be found on our website at www.vasogen.com.
 
Report Submitted by the Audit Committee:
 
Benoit La Salle
Ronald Cresswell
John Villforth


COMPENSATION, NOMINATING, AND CORPORATE GOVERNANCE COMMITTEE
 
The Compensation, Nominating, and Corporate Governance Committee of the Board of Directors (the “Committee”) is charged with the responsibility of reviewing the Company’s compensation policies and practices, compensation of officers (including the Chief Executive Officer), succession planning, and corporate governance practices. As appropriate, recommendations regarding these issues are made to the Board of Directors (the “Board”).   The Committee consists of three independent and unrelated directors, Terrance H. Gregg, Ronald Cresswell and John C. Villforth.  The Chief Executive Officer absents himself from Board and Committee meetings during voting and deliberation on the Chief Executive Officer’s compensation.
 
The objectives of the Company’s compensation policies and programs for executive officers are to:
 
(a)           motivate and reward executive officers for the achievement of corporate and functional objectives;
 
 
(b)
recruit and retain executive officers of a high caliber by offering compensation that is competitive with that offered for comparable positions in other biotechnology companies; and
 
 
(c)
align the interests of the executive officers with the long-term interests of shareholders and the intermediate and long-term objectives of the Company.
 
C.      Employees 
 
The number of employees for each of last three fiscal years is as follows:
 
 
2007
2006
2005
Number of Employees
104
125
172

Our employees are not governed by a collective agreement.  We have not experienced a work stoppage and believe our employee relations are satisfactory.
 
D.      Share Ownership 
 
The following table states the names of the directors and officers of the Company, the positions within the Company now held by them, and the approximate number of shares of the Company beneficially owned or over which control or direction is exercised by each of them as of February 5, 2008.  The following table includes DSUs, but does not reflect shares that may be acquired pursuant to the exercise of stock options.
 
44


 
Name
 
 
Position with the Company
 
Number of Shares Owned
Terrance H. Gregg (1)
 
Chairman of the Board and Director of the Company.
17,702
 
Dr. Ronald M.  Cresswell
 
Director of the Company.
35,026
David G. Elsley
 
Director of the Company.
31,269
Benoit La Salle
 
Director of the Company.
25,022
Dr. Eldon R. Smith
Senior Vice President, Scientific Affairs and Director of the Company.
7,131
 
Dr. Calvin R. Stiller  
 
Director of the Company.
15,191
John C. Villforth  
 
Director of the Company.
21,325
Dr. Anthony E. Bolton
 
Chief  Scientific Officer of the Company
28,214
Catherine M. Bouchard
 
Vice President, Human Resources of the Company
1,020
John A. Geddes
 
Vice President Marketing and Business Development of the Company
0
Anne Goodbody
 
Vice President, Drug Development of the Company
550
Susan F. Langlois
 
Vice President, Regulatory Affairs and Quality Assurance of the Company
244
Graham D. Neil
 
Vice President, Finance and Chief Financial Officer of the Company
190
Christopher J. Waddick
 
President and Chief Executive Officer of the Company
38,026

As of February 5, 2008, the directors and executive officers of the Company as a group beneficially owned, directly or indirectly, or exercised control or direction over 220,910   common shares (DSUs included), representing approximately 1% of the issued common shares of the Company.
 
  (1) The number of common shares for Mr. Gregg includes shares owned in the Gregg Family Trust.

Stock Option Plans
 
2003 Employee Stock Option Plan
 
The objectives of the Company’s compensation policies and programs are to motivate and reward officers, other employees, and consultants upon the achievement of significant corporate and functional objectives, to recruit and retain employees of a high caliber by offering compensation that is competitive with that offered for comparable positions in other biotechnology companies across Canada and the United States, and to align employee interests with the long-term interests of shareholders and the intermediate and long-term objectives of the Company.  The 2003 Plan is an integral part of achieving these objectives as it provides officers, employees, and consultants of the Company and its subsidiaries, with the opportunity to participate in the growth and development of the Company.
 
45

The 2003 Plan was approved by the Board of Directors on March 15, 2003.  It was approved by the shareholders of the Company at the Annual and Special Meeting of Shareholders held on May 7, 2003.  Two hundred thousand common shares were initially reserved for issuance under the 2003 Plan.  Upon approval by the shareholders in 2003, the 2003 Plan replaced the Company’s previous stock option plan (the “Previous Plan”), and no new options have been granted under the Previous Plan since May 2003.  At the March 2005 Annual and Special Meeting of Shareholders, the number of options authorized for issuance under the 2003 Plan was increased by 300,000 from 200,000 to 500,000. At the March 2006 Annual and Special Meeting of Shareholders, the number of options authorized for issuance under the 2003 Plan was increased by 300,000 from 500,000 to 800,000. At the March 2007 Annual and Special Meeting of the Shareholders, the number of options authorized for issuance under the 2003 Plan was increased by 1,000,000 from 800,000 to 1,800,000.
 
As of February 5, 2008, the Company currently has options authorized under the 2003 Plan and the Previous Plan to purchase a maximum of 850,702 shares.
 
Individuals who are eligible to participate in the 2003 Plan are employees, officers, consultants, and members of the Scientific Advisory Board (“SAB”) of the Company.  Directors who are also officers or employees of the Company are eligible participants. Eligible employee and officer participants have the opportunity to be granted options on an annual basis, through the achievement of both key corporate and individual objectives.
 
The number of common shares reserved for issuance under the Plans at any time to any one person shall not exceed 5% of the number of common shares then issued and outstanding.
 
The Board of Directors is responsible for granting of options under the Plans, and does so upon the recommendation of the Compensation, Nominating, and Corporate Governance Committee of the Board of Directors.  Under the terms of the Plans, the exercise price for the options is fixed by the Board of Directors. For shares listed on the TSX, the exercise price of the options shall not be less than the closing sale price of the shares on the TSX on the last trading day prior to the grant of the option. The vesting terms of the options are determined by the Board of Directors.  The period for exercising an option shall not exceed ten years beyond the date of grant of the option.
 
In the event that a participant ceases to be an officer, employee, or consultant of the Company due to reason of resignation or by reason of discharge for cause, then the options shall terminate and cease to be exercisable on the earliest to occur of (a) the effective date upon which the person ceased to be an officer, employee or consultant and (b) the date that notice of dismissal is provided to the person.
 
The Previous Plan
 
The Company’s previous stock option plan (the “Plan”), pursuant to which a maximum of 540,000 options or such greater number as shall have been duly approved by the Board of Directors and if required, by any exchange or over-the-counter market on which the common shares may be listed or quoted for trading or any security regulatory authority, and by the shareholders of the Company, may be granted by the Board of Directors to executive officers, directors, employees, consultants and members of the Scientific Advisory Board of the Company in such numbers, for such periods of time, and at exercise prices as the Board may approve and according to the rules and regulations of any stock exchange or dealing network on which the Common Shares may be listed or quoted for trading from time to time.
 
The amount of shares from time to time reserved under the Plan is not reflective of the number of options that are outstanding at any given time because options that are exercised over time do not replenish the number reserved, but is merely an indication of the number of shares or potential shares in respect of which a listing fee has been paid to the stock exchanges upon which the Company’s shares are listed.
 
To our knowledge, none of our securities are held in escrow.
 
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Item 7.      Major Shareholders and Related Party Transactions
 
A.      Major Shareholders 
 
To our knowledge, based on U.S. securities regulatory filings, as of January 31, 2008, no shareholders held more than 5% of the Company’s outstanding common shares.  Renaissance Technologies LLC,  filed a 13G with the Securities Exchange Commission on February 13, 2008, indicating that they held 1,306,680 Vasogen common shares or 5.84% of the Company’s outstanding shares.  Based on records maintained by our transfer agent and a geographic analysis of beneficial shareholders, as of November 28, 2007, the percentage of common shares held in the U.S. is estimated to be 73% and the number of record holders in the U.S. is 36.
 
To the best of the Company’s knowledge, the Company is not directly or indirectly owned or controlled by another corporation or foreign government or by any other natural or legal entity.
 
There are no arrangements, known to the Company, the operation of which may at a subsequent date result in a change in control of the Company.
 
B.      Related Party Transactions 
 
Since the beginning of the Company’s preceding three financial years to the date hereof, there have been no transactions or proposed transactions which are material to the Company or to any associate, holder of ten percent of the Company’s outstanding shares, director or officer or any transactions that are unusual in their nature or conditions to which the Company or any of its subsidiaries was a party.
 
Item 8.      Financial Information
 
A.      Consolidated Statements and Other Financial Information
 
Reference is made to “Item 18. Financial Statements ” for the financial statements included in this annual report.
 
There are no outstanding legal proceedings or regulatory actions to which we are party nor, to our knowledge, are any such proceedings or actions contemplated.
 
The Company has not paid, and has no current plans to pay, dividends on its common shares.  We currently intend to retain future earnings, if any, to finance the development of our business.  Any future dividend policy will be determined by the Board of Directors, and will depend upon, among other factors, our earnings, if any, financial condition, capital requirements, any contractual restrictions with respect to the payment of dividends, the impact of the distribution of dividends on our financial condition, tax liabilities, and such economic and other conditions as the Board of Directors may deem relevant.
 
B.      Significant changes
 
No significant changes occurred since the date of our annual consolidated financial statements included elsewhere in this annual report.
 
Item 9.      Offer and Listing
 
Not Applicable, except for Item 9A (4) and Item 9C.
 
Our common shares are listed on the TSX and quoted for trading on the NASDAQ Capital Market.  Prior to February 9, 2007, our common shares were traded on the NASDAQ Global Market.   Prior to December 17, 2003, our common shares were listed on the American Stock Exchange.
 
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The following table sets forth, for the periods indicated, the reported high and low prices (in Canadian dollars) of our common shares on the TSX.  Amounts in this table have been adjusted to reflect our April 17, 2007 share consolidation (reverse split):
 
 
YEAR/QUARTER/
MONTH
 
HIGH
 
LOW
2003
  85.60
 30.50
2004
100.60
 47.00
2005
  73.40
 20.80
2006
  39.70
   3.20
2007
    5.70
   1.35
Q1 2006
  39.70
 22.00
Q2 2006
  39.30
 21.20
Q3 2006
  24.00
   3.20
Q4 2006
    8.50
  4.30
Q1 2007
    5.70
  3.65
Q2 2007
    5.20
  2.45
Q3 2007
    3.01
  2.26
Q4 2007
    2.49
  1.35
Aug 07
     2.65
     2.31
Sep 07
     2.49
    2.06
Oct 07
     2.26
    1.70
Nov 07
     1.84
    1.35
Dec 07
    2.56
  1.52
Jan 08
    2.70
   1.50

The following is a summary of trading of the Company’s Shares on the NASDAQ and AMEX. The prices represent trading on AMEX prior to December 17, 2003, and trading on NASDAQ on and after that date. In December 2003, a high of US$7.50 occurred on NASDAQ, while a low of US$5.31 occurred on the AMEX. The  table sets forth, for the periods indicated, the reported high and low prices (in United States dollars) of our common shares traded on the NASDAQ Global Market and the NASDAQ Capital Market.  Amounts in this table have been adjusted to reflect our share consolidation (reverse split).
 
 
YEAR/QUARTER/
MONTH
 
HIGH
 
LOW
2003
  65.00
 18.50
2004
  78.00
 36.80
2005
  60.80
 17.50
2006
  34.50
   2.70
Q1 2006
  34.50
 19.00
Q2 2006
  33.90
 18.90
Q3 2006
 21.50
   2.70
Q4 2006
    7.60
   3.80
Q1 2007
   4.90
   3.00
Q2 2007
    4.60
   2.26
Q3 2007
    2.90
   2.10
 
 
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YEAR/QUARTER/
MONTH
 
HIGH
 
LOW
Q4 2007
2.40
1.41
Aug 07
2.50
2.15
Sep 07
2.40
2.11
Oct 07
2.34
1.82
Nov 07
1.86
1.41
Dec 07
2.59
1.55
Jan 08
2.68
1.61
 
Variations from Certain NASDAQ Rules
 
NASDAQ listing rules permit the Company to follow certain home country practices in lieu of compliance with certain NASDAQ corporate governance rules.  Set forth below are the requirements of Marketplace Rule 4350 that the Company does not follow and the home country practices that it follows in lieu thereof.
 
Distribution of Annual and Interim Reports :  NASDAQ’s Marketplace Rule 4350(b) requires each issuer, among other things, to distribute to shareholders copies of an annual report containing audited financial statements of the company and its subsidiaries.  The report must be distributed to shareholders a reasonable period of time prior to the company’s annual meeting of shareholders and must be filed on NASDAQ at the time it is distributed to shareholders.  Under the exemption available to Foreign Private Issuers under Marketplace Rule 4350(a)(1), the Company does not follow this NASDAQ rule.  Instead, and in accordance with the NASDAQ exemption, the Company complies with applicable TSX rules and applicable Canadian corporate and securities regulatory requirements.
 
Shareholder Approval in Connection with Certain Transactions :  NASDAQ’s Marketplace Rule 4350(i) requires each issuer to obtain shareholder approval prior to certain dilutive events, including a transaction other than a public offering involving the sale of 20% or more of the issuer’s common shares outstanding prior to the transaction.  Under the exemption available to Foreign Private Issuers under Marketplace Rule 4350(a)(1), the Company does not follow this NASDAQ rule.  Instead, and in accordance with the NASDAQ exemption, the Company complies with applicable TSX rules and applicable Canadian corporate and securities regulatory requirements.
 
 
Item 10.      Additional Information 
 
A.      Share Capital
 
Not Applicable.
 
B.      Memorandum and Articles of Association
 
Common Shares
 
The Company’s authorized capital consists of an unlimited number of common shares, without par value (“Shares”).
 
On April 3, 2007, the Company received shareholder approval to consolidate its issued and outstanding common shares on the basis of one post-consolidated common share for every ten pre-consolidated common shares.  The consolidation was implemented on April 17, 2007.  All references to number of common shares issued and outstanding, stock options, deferred share units and warrants, have been amended to give effect to the share consolidation.
 
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At January 31, 2008, there were 22.4 million shares issued and outstanding.  All issued and outstanding Shares are fully paid and non-assessable.
 
An additional 8.0 million shares have been allotted and reserved for issuance pursuant to outstanding options and warrants.
 
All shares are entitled to one vote per share at all meetings of shareholders, rank equally as to dividends and as to the distribution of the Company's assets available for distribution in the event of a liquidation, dissolution, or winding up of the Company. There are no preemptive, conversion, or exchange rights and no provision for redemption, purchase for cancellation, surrender or sinking or purchase funds.
 
Provisions as to the modification, amendment or variation of such rights and provisions are contained in the Canada Business Corporations Act (the "Act") and the regulations promulgated thereunder. Certain fundamental changes to the articles of the Company will require the approval of two-thirds of the votes cast on a resolution submitted to a special meeting of the Company's shareholders called for the purpose of considering the resolution. These items include (i) an amendment to the provisions relating to the outstanding capital of the Company, (ii) a sale of all or substantially all of the assets of the Company, (iii) an amalgamation of the Company with another company, other than a subsidiary, (iv) a winding-up of the Company, (v) a continuance of the Company into another jurisdiction, (vi) a statutory court approved arrangement under the Act (essentially a corporate reorganization such as an amalgamation, sale of assets, winding-up, etc.), or (vii) a change of name.
 
Under the Act, a corporation cannot repurchase its shares or declare dividends if there are reasonable grounds for believing that (a) the corporation is, or after payment would be, unable to pay its liabilities as they become due, or (b) after the payment, the realizable value of the corporation's assets would be less than the aggregate of (i) its liabilities and (ii) its stated capital of all classes of its securities. Generally, stated capital is the amount paid on the issuance of a share.
 
ARTICLES AND BY-LAWS
 
The following presents a description of certain terms and provisions of the Company's articles and by-laws.
 
General
 
The Company was incorporated under the Business Corporations Act (Ontario) by articles of incorporation dated January 10, 1980, as amended by certificate and articles of amendment dated September 19, 1985, June 15, 1988, and April 21, 1994, and was continued under the Canada Business Corporations Act by certificate and articles of continuance dated August 9, 1999.
 
The Company's corporate objectives and purpose are unrestricted.
 
Directors
 
The Company's by-laws provide that a director who is a party to, or who is a director or officer of or has a material interest in any person who is a party to, a material contract or transaction or proposed material contract or transaction with the Company shall disclose the nature and extent of that interest and shall not vote on any resolution to approve such contract or transaction.
 
The Company's by-laws provide that the directors shall be paid such remuneration for their services as the Board of Directors may from time to time determine.
 
The Company's by-laws provide that the Board may from time to time on the Company's behalf, without authorization of shareholders:
 
 
borrow money upon credit;
 
 
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issue, reissue, sell or pledge bonds, debentures, notes or other evidences of indebtedness or guarantee of us, whether secured or unsecured;
 
 
to the extent permitted by the Canada Business Corporations Act, give directly or indirectly financial assistance to any person by means of a loan, a guarantee or otherwise on our behalf to secure performance of any present or future indebtedness, liability or obligation of any person; and
 
 
mortgage, hypothecate, pledge or otherwise create a security interest in all or any or currently owned or subsequently acquired real or personal, movable or immovable, property including book debts, rights, powers, franchises and undertakings, to secure any of our bonds, debentures, notes or other evidences of indebtedness or guarantee or any other present or future indebtedness, liability or obligation.
 
 
The Company's by-laws provide that no person shall be qualified for election as a director if such person is less than 18 years of age. There is no provision in the Company's by-laws relating to retirement or non-retirement of directors under an age limit requirement. A director need not be a shareholder. A majority of directors must be resident Canadians and at least one-third of the directors must not be officers or employees of the Company or of any of the Company's affiliates.
 
Annual and Special Meetings
 
The annual meeting and special meetings of shareholders are held at such time and place as the Board of Directors shall determine. Notice of meetings are sent out to shareholders not less than 21 nor more than 50 days before the date of such meeting. All shareholders at the record date are entitled to notice of the meeting and have the right to attend the meeting. The directors do not stand for re-election at staggered intervals.
 
There are no by-law provisions governing the ownership threshold above which shareholder ownership must be disclosed.
 
There are no provisions in either the Company's articles of incorporation or by-laws that would have the effect of delaying, deferring or preventing a change in control of the Company and that would operate only with respect to a merger, acquisition or corporate restructuring involving the Company or its subsidiary, other than as described in the Shareholder Rights Plan below.
 
Adoption of Shareholder Rights Plan
 
The Board of Directors of the Company adopted a shareholder rights plan as of November 22, 2000 (the "Rights Plan") and amended May 7, 2003 and March 22, 2006.
 
The Rights Plan was effective immediately upon its adoption by the Board, but it had to be confirmed by shareholders to remain in effect, which occurred at the Company's Annual and Special Meeting of Shareholders held on May 2, 2001. The Rights Plan was not adopted by the Board of Directors in response to, or in anticipation of, any offer or takeover bid.
 
Purpose of the Rights Plan
 
The Rights Plan is designed to give the Company’s shareholders sufficient time to properly assess a take-over bid without undue pressure and to give the Company’s Board of Directors time to consider alternatives to allow the Company’s shareholders to receive full and fair value for their common shares.  Additionally, the Rights Plan is designed to provide shareholders of the Company with equal treatment in a take-over bid.  The desire to ensure that the Company is able to address unsolicited take-over bids for its common shares during the term of the Rights Plan stems from a concern that Canadian take-over bid rules for companies that are subject to unsolicited take-over bids provide too short a response time to ensure that shareholders are offered full and fair value for their shares.
 
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In recent years, shareholder rights plans have been adopted by many Canadian companies, and the terms of such plans have evolved to reflect changes in investor attitudes, standards of corporate governance, requirements of securities regulatory authorities, and the views of third-party commentators.  The Rights Plan reflects this evolution.
 
Summary of the Rights Plan
 
The following is a summary of the principal terms of the Rights Plan, as amended, which is qualified in its entirety by reference to the text of the Rights Plan, a copy of which is available from the Company upon request.
 
Term
 
Subject to the approval of the proposed amendment to the Rights Plan, the Rights Plan and the share purchase rights (“Rights”) issued thereunder will expire at the close of the Company’s annual meeting of shareholders to be held in 2009, unless the Rights are terminated, redeemed, or exchanged earlier by the Board of Directors.
 
Issue of Rights
 
Under the Rights Plan, one Right was issued for each common share outstanding as at 5:00 p.m. (Toronto time) on November 22, 2000 (the “Record Time”) and for each common share issued subsequent to the Record Time (but prior to the earlier of the Separation Time (as defined below) and the redemption or expiration of the Rights).  The Company has entered into a rights plan agreement dated as of November 22, 2000, as amended as of May 7, 2003, which was further amended by agreement effective March 22, 2006, with CIBC Mellon Trust Company of Canada, as rights agent, which provides for the exercise of the Rights, the issue of certificates evidencing the Rights, and other related matters including those described in this annual report.
 
Rights Exercise Privilege
 
The Rights separate from the Company’s common shares and become exercisable eight trading days after a person publicly discloses that it has acquired 20% or more of, or commences or announces a take-over bid for, the Company’s outstanding Voting Shares (defined to include the common shares and any other shares that the Company may issue that carry voting rights relating to the election of directors), in each case other than pursuant to a Permitted Bid or a Competing Permitted Bid (each as defined below).  Where a person becomes a beneficial owner of 20% or more of the Company’s common shares and thereby becomes an “Acquiring Person”, this is referred to as a “Flip-in Event.”
 
Any rights held by an Acquiring Person become void upon the occurrence of the Flip-in Event.  By making any take-over bid other than a Permitted Bid or a Competing Permitted Bid prohibitively expensive for an Acquiring Person, the Rights Plan is designed to require any person interested in acquiring more than 20% of the Company’s common shares to do so by way of a Permitted Bid or a Competing Permitted Bid or to make a take-over bid that the Board of Directors considers to represent the full and fair value of the Company’s common shares.
 
Prior to the Rights being triggered, they will have no value and no dilutive effect on the Company’s common shares.
 
Flip-In Event
 
Upon the occurrence of the Flip-in Event, each Right (except for Rights beneficially owned by the Acquiring Person and certain other persons specified below) shall thereafter constitute the right to purchase from the Company for the Exercise Price upon exercise thereof in accordance with the terms of the Rights Plan, that number of common shares of the Company having an aggregate Market Price (as defined in the Rights Plan) equal to twice the Exercise Price (as defined in the Rights Plan).  For example, if one assumes a market price at the time of a Flip-in Event of $10 per share, then a current holder of one Right could purchase 40 shares for $200 (being the exercise price per right), effectively acquiring the shares at half of the current market price.
 
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The Rights Plan provides that Rights that are beneficially owned by (i) an Acquiring Person or any affiliate or associate of an Acquiring Person, or any person acting jointly or in concert with an Acquiring Person, or any affiliate or associate of such Acquiring Person; or (ii) a transferee or other successor in title of Rights of an Acquiring Person (or any affiliate or associate of an Acquiring Person or of any person acting jointly or in concert with an Acquiring Person or any associate or affiliate of an Acquiring Person) who becomes a transferee or successor in title concurrently with or subsequent to the Acquiring Person becoming an Acquiring Person shall become null and void without any further action, and any holder of such Rights (including transferees or successors in title) shall not have any right whatsoever to exercise such Rights under any provision of the Rights Plan.
 
Acquiring Person
 
An “Acquiring Person” is a person who Beneficially Owns (as defined in the Rights Plan) twenty percent (20%) or more of the outstanding Voting Shares of the Company.  An Acquiring Person does not, however, include the Company or any subsidiary of the Company, or any person who becomes the Beneficial Owner of twenty percent (20%) or more of the outstanding Voting Shares of the Company as a result of Permitted Bids, Competing Permitted Bids, and certain other exempt transactions.
 
Permitted Bids and Competing Permitted Bids
 
A “Permitted Bid” is a take-over bid made by a take-over bid circular in compliance with the following additional provisions:
 
 
(1)
the bid must be made to all holders of record of common shares;
 
 
(2)
the bid must be open for a minimum of 60 days following the date of the bid, and no shares may be taken up prior to such time;
 
 
(3)
take-up and payment for shares may not occur unless the bid is accepted by persons holding more than fifty percent (50%) of the outstanding common shares exclusive of shares held by the person responsible for triggering the Flip-in Event or any person who has announced an intention to make, or who has made, a take-over bid for the shares of the Company and the respective affiliates and associates of such persons and persons acting jointly or in concert with such persons;
 
 
(4)
shares may be deposited into or withdrawn from the bid at any time prior to the take-up date; and
 
 
(5)
if the bid is accepted by the requisite percentage specified in (3) above, the bidder must extend the bid for a period of 10 business days to allow other shareholders to tender into the bid, should they so wish, and must make a public announcement to such effect.
 
A “Competing Permitted Bid” is a take-over bid that satisfies all of the criteria of a Permitted Bid except that it is made after a Permitted Bid has been made, the minimum deposit period and the time period for the take-up of and payment for shares tendered under a Competing Bid is not 60 days, but is instead the greater of 35 days (the minimum permitted by law) and the 60th day after the date on which the Permitted Bid then in existence was made.
 
Neither a Permitted Bid nor a Competing Permitted Bid need be approved by the Board of Directors and may be taken directly to the shareholders of the Company.  Acquisitions of common shares made pursuant to a Permitted Bid or a Competing Permitted Bid do not give rise to a Flip-in Event.
 
Certificates and Transferability
 
Prior to separation, the Rights will be evidenced by a legend imprinted on the common share certificates of the Company and will not be transferable separately from the common shares.  Common share certificates do not need to be exchanged to entitle a shareholder to these Rights.  The legend will be on all new certificates issued by the Company.  From and after separation, the Rights will be evidenced by Rights certificates and will be transferable separately from the Company’s common shares.
 
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Redemption and Waiver
 
The Board of Directors may, at any time prior to the occurrence of a Flip-in Event and subject to shareholder approval, elect to redeem all but not less than all of the Rights at a redemption price of $0.0001 per Right (the “Redemption Price”), appropriately adjusted in certain events.  Rights will be deemed to be automatically redeemed at the Redemption Price where a person who has made a Permitted Bid, a Competing Permitted Bid, or a take-over bid otherwise exempted by the Board of Directors takes up and pays for the Company’s shares under the terms of the bid.  If the Board of Directors elects or is deemed to have elected to redeem the Rights, the right to exercise the Rights will terminate, and each Right will, after redemption, be null and void, and the only right thereafter of the holders of Rights shall be to receive the Redemption Price.  Under the Rights Plan, the Board of Directors has discretion to waive application of the Rights Plan to a take-over bid, subject to an automatic waiver with respect to all other take-over bids make while the waived take-over bid is outstanding.  The Board of Directors of the Company may also waive the application of the Rights Plan to a Flip-in Event that occurs through inadvertence, subject to the “inadvertent” Acquiring Person reducing its holding of the Company’s shares within an agreed time.  Other waivers of the Rights Plan will require shareholder approval.
 
Amendment
 
Amendments or supplements to the terms of the Rights Plan (other than for clerical errors or to maintain the Rights Plan’s validity as a result of changes in legislation) require prior shareholder approval.  Changes arising from changes in applicable legislation will require subsequent shareholder ratification.
 
C.      Material Contracts
 
We have not, during our financial year ended November 30, 2007, entered into any material contracts other than contracts in the ordinary course of business, our agreement with Ferrer dated April 18, 2007, and contracts in connection with the issuance of the common shares and warrants on May 24, 2007 for gross proceeds of US$16,000,000.  The common shares and warrants are described under “Capital Structure”.
 
On May 24, 2007, we closed purchase agreements with institutional investors to raise US$16 million in gross proceeds through the sale of our common shares at a price of US$3.25. Under the terms of the purchase agreements, we also issued five-year warrants to purchase an additional 3.7 million common shares at an exercise price of US$3.16 per share. If all of the 3.7 million warrants are exercised, we will receive an additional US$11.7 million in gross proceeds.  Pursuant to  engagement agreements, with Rodman & Renshaw LLP and JMP Securities LLC, as placement agents, we paid  an aggregate commission equal to 6.25% of the gross proceeds of the sale of units in the offering and issued compensation warrants to purchase common shares equal to 6% of the aggregate number of common shares sold in the offering. The placement agents in  this transaction together received 295,044 three-year warrants to purchase common shares at US$3.81 per share.
 
On November 14, 2006, we closed purchase agreements with institutional investors to raise approximately US$20.3 million in gross proceeds through the sale of our common shares at a price of US$4.70 per unit, with each unit consisting of one common share, 0.4 of a series A warrant and 0.1 of a series B warrant.  Each whole series A warrant represents the right, during the term of the warrant, to purchase one common share at a price of US$6.30 per common share.  The series B warrants terminated as at May 14, 2007 and are of no further force or effect.  Pursuant to an engagement agreement with Rodman & Renshaw, LLC, as placement agent, we paid the placement agent an aggregate commission equal to 6% of the gross proceeds of the sale of units in the offering (other than on sales to one former securityholder of ours in respect of which the commission was 3%) and issued compensation warrants to purchase common shares equal to 6% of the aggregate number of common shares sold in the offering (other than on sales to one former securityholder of ours in respect of which the compensation warrants were to purchase common shares equal to 3% of the aggregate number of common shares sold to such former securityholder).  The compensation warrants were substantially on the same terms as the warrants offered, except that the compensation warrants have an exercise price equal to US$6.30, which will expire on November 14, 2009, and will otherwise comply with NASD Rule 2710.
 
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D.      Exchange Controls
 
Canada has no system of currency exchange controls.  There are no governmental laws, decrees or regulations in Canada that restrict the export or import of capital, including but not limited to, foreign exchange controls, or that affect the remittance of dividends, interest or other payments to non-resident holders of the company’s securities.
 
E.      Taxation 
 
United States Taxation
 
Certain Material United States Federal Income Tax Considerations
 
The following summary is based on the advice of Paul, Weiss, Rifkind, Wharton & Garrison LLP and describes certain material United States federal income tax consequences of the ownership and disposition of our common shares that are generally applicable to a United States person that holds our common shares as capital assets (a “U.S. Holder”) within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended (the “Code”). This discussion does not address holders of other securities, including holders of our warrants.  This discussion assumes that we are not a “controlled foreign corporation” for U.S. federal income tax purposes.  The following discussion does not purport to be a complete analysis of all of the potential United States federal income tax  considerations that may be  relevant to  particular holders of our common shares in light of their particular  circumstances nor does it deal with persons  that are  subject to special  tax rules,  such as  brokers,  dealers in securities  or  currencies,   financial  institutions,  insurance companies, tax-exempt organizations,  persons liable for alternative minimum tax, U.S. expatriates, partnerships or other pass-through entities, U.S. Holders who own (directly, indirectly or by attribution) ten percent or more of the total combined voting power of all classes of stock entitled to vote, persons holding our common shares as part of a straddle, hedge or conversion transaction or as part of a synthetic security or other integrated  transaction, traders in securities  that elect to use a  mark-to-market  method of accounting  for their securities  holdings,  holders whose “functional  currency” is not the United States dollar, and holders who are not U.S. Holders.  In addition, the discussion below does not address the tax consequences of the law of any state, locality or foreign jurisdiction or United States federal tax consequences (e.g., estate or gift tax) other than those pertaining to the income tax.  There can be no assurance that the United States Internal Revenue Service (the “IRS”) will take a similar view as to any of the tax consequences described in this summary.
 
The following is based on currently existing provisions of the Code, existing and proposed Treasury regulations under the Code and current administrative rulings and court decisions.  Everything listed in the previous sentence may change, possibly on a retroactive basis, and any change could affect the continuing validity of this discussion.
 
Each U.S. Holder and each holder of common shares that is not a U.S. Holder should consult its tax adviser regarding the United States federal income tax consequences of holding our common shares applicable to such holder in light of its particular situation, as well as any tax consequences that may arise under the laws of any  other relevant foreign, state, local, or other taxing jurisdiction.
 
As used in this section, the term “United States person” means a beneficial owner of our common shares that is:
 
(i) a citizen or an individual resident of the United States;
 
(ii) a  corporation  (or an entity  taxable as a  corporation  for United States federal  income tax  purposes)  created or organized in or under the laws of the United States or any political subdivision of the United States;
 
(iii) an estate the income of which is subject to United States federal income taxation regardless of its source; or
 
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(iv) a trust  which (A) is  subject  to the  supervision  of a court  within the United  States and the control of a United States person as described in Section 7701(a)(30) of the Code; or (B) is subject to a valid election under applicable Treasury Regulations to be treated as a United States person.
 
If a partnership (including for this purpose any entity treated as a partnership for U.S. federal income tax purposes) holds our common shares, the United States federal income tax treatment of a partner generally will depend on the status of the partner and the activities of the partnership.  A United States person that is a partner of the partnership holding our common shares should consult its own tax adviser.
 
Passive Foreign Investment Company
 
Special, generally unfavorable rules apply to the ownership and disposition of the stock of a passive foreign investment company (“PFIC”).  As discussed below, however, it may well be possible to mitigate these consequences by making a so-called qualified electing fund (“QEF”) election.
 
For United States federal income tax purposes, a foreign corporation is classified as a PFIC for each taxable year in which either:
 
 
at least  75% of its gross  income is  “passive”  income  (referred  to as the “income test”); or
 
 
at least 50% of the average value of its assets is attributable to assets that produce  passive  income  or are  held  for the  production  of  passive  income (referred to as the “asset test”).
 
For purposes of the income test and the asset  test,  if a foreign  corporation owns  directly  or  indirectly  at least 25% (by  value) of the stock of another corporation,  that  foreign  corporation  will  be  treated  as if it  held  its proportionate share of the assets of the other corporation and received directly its  proportionate  share of the income of that  other  corporation.  Also, for purposes of the income test and the asset test,  passive income does not include any income that is interest, a dividend or a rent or royalty,  which is received or accrued from a related person to the extent that amount is properly allocable to the income of the related person that is not passive income.
 
We were a PFIC in the 2007 taxable year and we believe there is a significant likelihood that we will be classified as a PFIC in the 2008 taxable year and possibly in subsequent years. In any event, PFIC status is fundamentally factual in nature, generally cannot be determined until the close of the taxable year in question and is determined annually.
 
Under applicable attribution rules, if Vasogen is a PFIC, U.S. Holders of common shares will be treated as holding  for certain  purposes of the PFIC rules, stock of Vasogen's subsidiaries (including Vasogen Ireland Limited) that are PFICs. In such case, certain dispositions of, and distributions on, stock of such subsidiaries may have consequences under the PFIC rules directly to U.S. Holders.
 
In the  absence of any  election,  a U.S. Holder of a PFIC will be taxed under the generally unfavorable rules described below, including loss of favorable capital gains rates and the imposition of an interest  charge,  that apply if the holder recognizes  gain on the sale or other  disposition of the PFIC stock or receives certain  distributions  with  respect  to the stock (see  “-- The  “No  Election” Alternative - Taxation  of Excess  Distributions”).  U.S. Holders may avoid most of these consequences by making a QEF Election with respect to Vasogen,  which will have the consequences described in “-- The QEF Election Alternative.” A U.S. Holder may also consider making an election to mark the common shares to market (a “Mark to Market Election”).
 
U.S.  HOLDERS  ARE  URGED  TO  CONSULT  THEIR  TAX  ADVISORS  ABOUT  THE  POSSIBLE APPLICABILITY OF THE PFIC RULES AND THE AVAILABILITY OF MAKING A QEF ELECTION TO AVOID ADVERSE U.S. TAX CONSEQUENCES.
 

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The QEF Election Alternative
 
A U.S. Holder who elects (an  “Electing  U.S. Holder”)  in a timely  manner to treat Vasogen  as a QEF (a “QEF  Election”)  would  include  in gross  income  (and be subject to current  U.S.  federal  income tax on) the U.S. dollar  value of both its pro rata  share of  Vasogen's  ordinary  earnings,  as ordinary  income,  and its pro rata share of Vasogen 's net capital gains, as long-term capital gain, during any  taxable  years  of the U.S.  Holder in which we are classified as a PFIC, regardless of whether such amounts are actually distributed.  An Electing U.S. Holder may further elect, in any given taxable year, to defer payment of the taxes owing as a result of including our ordinary earnings and net capital gains currently in income, subject to certain limitations.  However, if deferred, the taxes will be subject to an interest charge, which will be non-deductible to U.S. Holders that are not corporations.  Distributions  paid out of  earnings  and profits  that  previously  were  taxed to the  Electing  U.S. Holder  shall not be subject to tax again upon distribution.
 
We believe that we will not have any earnings and profits (as computed for U.S. federal income tax purposes) for the current taxable year and little, if any, earnings and profits for any future taxable year in which our company is a PFIC. In that event, a QEF Election with respect to our common shares would subject a U.S. Holder to correspondingly little, if any, current taxation.  However, there can be no assurance as to these matters.
 
Similarly,  if Vasogen  Ireland  Limited were  classified as a PFIC, a U.S. Holder that makes a timely QEF Election with respect to Vasogen  Ireland  Limited would be subject to the QEF rules as  described  above  with  respect to the  holder's pro rata share of the ordinary  earnings and net capital gains of Vasogen Ireland Limited.  Earnings of Vasogen  (or  Vasogen  Ireland  Limited)  attributable  to distributions  from Vasogen Ireland Limited that had previously been included in the income of an Electing U.S. Holder under the QEF rules would  generally  not be taxed to the Electing U.S. Holder again.
 
Upon the sale or other  disposition of common shares,  an Electing U.S. Holder who makes a QEF Election for the first  taxable year in which he owns common  shares will  recognize  capital  gain or loss for U.S. federal  income tax purposes in an amount  equal  to  the  difference  between  the  net  amount  realized  on  the disposition  and the U.S. Holder's  adjusted tax basis in the common shares.  Such gain or loss will be capital gain or loss, which will be long-term capital gain or loss if the U.S. Holder's holding period in the common shares is more than one year and otherwise   will be short-term   capital gain or loss.  The deductibility of capital losses is subject to certain limitations.  If the U.S. Holder is a United  States  resident  (as  defined in section  865 of the Code), gains realized upon  disposition  of a common share by such U.S. Holder  generally will be U.S. source income,  and disposition losses generally will be allocated to reduce U.S. source income.
 
A QEF Election must be made in a timely manner as specified in applicable Treasury regulations. Generally, the QEF Election must be made in a timely filed federal  income  tax  return of a U.S. Holder  for the first  taxable  year of the foreign  corporation  during  which  the  corporation  was at any  time a  PFIC. Although a QEF Election may be made after the PFIC's first taxable year that was included in the  Electing U.S. Holder's  holding  period,  the  Electing U.S. Holder would continue to be subject to the excess  distribution  rules  described below (see “-- The “No Election” Alternative - Taxation of Excess Distributions”) unless the  holder  makes a Mark to Market  Election,  which  would  result in a deemed disposition of the PFIC stock to which the excess distribution rules may apply.
 
The QEF Election is made on a shareholder-by-shareholder basis and can be revoked only with the consent of the IRS. A shareholder  makes a QEF Election by attaching  a  completed  IRS Form  8621,  including  a PFIC  annual  information statement,  to a timely filed United States federal income tax return. Even if a QEF Election is not made, a shareholder in a PFIC who is a U.S. person must file a completed IRS Form 8621 every year.
 
We intend to make available to U.S. Holders timely and accurate information as to our status as a PFIC and intend to comply with all applicable record keeping, reporting and other requirements  so that each U.S. Holder may elect to treat our company as a QEF.
 
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The “No Election” Alternative - Taxation of Excess Distributions
 
 If we are  classified  as a PFIC for any year during  which a U.S. Holder has held common  shares and that  holder has not made a QEF  Election or a Mark to Market Election,  special  rules may subject  that holder to increased  tax  liability, including  loss of  favorable  capital  gains  rates  and the  imposition  of an interest charge, upon the sale or other disposition of the common shares or upon the receipt of any excess distribution (as defined below). Under these rules:
 
 
the gain or excess distribution will be allocated ratably over the U.S. Holder's holding period;
 
 
the amount  allocated  to the current  taxable  year and any year prior to the first  year in which  we are a PFIC  will be taxed  as  ordinary  income  in the current year;
 
 
the amount allocated to each of the other taxable years will be subject to tax at the highest  rate of tax in effect for the  applicable  class of taxpayer for that year; and
 
 
an interest charge for the deemed deferral benefit will be imposed with respect to the resulting tax attributable to each of the other taxable years.
 
These rules will continue to apply to the holder even after we cease to meet the definition of a PFIC, unless the holder elects to be treated as having sold our common shares on the last day of the last taxable year in which we qualified as a PFIC.
 
An “excess  distribution,”  in general,  is any  distribution  on common  shares received  in a taxable  year by a US  Holder  that is  greater  than 125% of the average  annual  distributions  received by that  holder in the three  preceding taxable years or, if shorter, that holder's holding period for common shares.
 
Any portion of a distribution paid to a U.S. Holder that does not constitute an excess distribution will be treated as ordinary dividend income to the extent of our current and accumulated earnings and profits (as computed for U.S. federal income tax purposes).  Such dividends generally will not qualify for the dividends-received deduction otherwise available to U.S. corporations. Any amounts treated  as  dividends  paid by a PFIC  do not  constitute  “qualified  dividend income”  within the meaning of Section  1(h)(11) of the Code, and will therefore be ineligible  for taxation at the maximum rate of 15% applicable to individuals who  receive  such  income.  Any such  amounts  in  excess  of our  current  and accumulated  earnings  and  profits  will be applied  against  the  Electing  U.S. Holder's tax basis in the common shares and, to the extent in excess of such tax basis, will be treated as gain from a sale or exchange of such common shares. It is possible that any such gain might be treated as an excess distribution.
 
 
Mark to Market Election Alternative
 
Assuming  that our common shares are treated as  marketable  stock,  a U.S. Holder that  does not make a QEF  Election  may  avoid the  application  of the  excess distribution  rules,  at least in part, by electing to mark the common shares to market  annually,  recognizing  as  ordinary  income or loss each year an amount equal to the  difference  as of the close of the taxable  year  between the fair market  value of its common  shares and the  holder's  adjusted tax basis in the common shares. Any mark to market loss is treated as an ordinary deduction, but only to the extent of the ordinary income that the holder has included pursuant to the election in prior tax years. The electing U.S. Holder's basis in its common shares would be adjusted to reflect any of these income or loss amounts.  Any gain on a disposition of our common shares by an electing U.S. Holder would be treated as ordinary income.  Any loss on such a disposition would be treated as an ordinary deduction, but only to the extent of the ordinary income that the holder has included pursuant to the election in prior tax years. For purposes of making this election, stock of a foreign corporation is “marketable” if it is regularly traded on certain qualified exchanges.  Under applicable Treasury regulations, a “qualified exchange” includes a national securities exchange that is registered with the SEC or the national market system established under the Securities Exchange Act of 1934, as amended (the “1934 Act”) and certain foreign securities exchanges.  Currently, our common shares are traded on a “qualified exchange.” Under applicable Treasury Regulations, PFIC stock traded on a qualified exchange is regularly traded on such exchange for any calendar year during which such stock is traded, other than in de minimis quantities, on at least 15 days during each calendar quarter.  We cannot assure U.S. Holders that our common shares will be treated as regularly traded stock.
 
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With respect to its direct ownership of common shares, a U.S. Holder that receives a  distribution  with  respect to its common  shares will avoid the  unfavorable consequences  applicable to excess  distributions  described above if the holder has made a timely  Mark to  Market  Election  in the first  year of its  holding period during which we are treated as a PFIC. Such distribution would instead be taxed under the rules described in the final paragraph of the above section (“ - The “No Election” Alternative - Taxation of Excess Distributions”).  If a U.S. Holder has held common  shares for one or more taxable years during which we are treated  as a PFIC  and does not make a  timely  Mark to  Market  Election  with respect  to  the  common  shares  held  during  the  first  of  those  years,  a coordination  rule applies to ensure that a later Mark to Market  Election  does not cause the holder to avoid the interest charge on excess  distributions  with respect to amounts attributable to periods before the election.
 
An election to mark to market applies to the year for which the election is made and the following years unless the PFIC stock ceases to be marketable or the IRS consents to the revocation of the election.  In addition, a U.S. Holder that has made a Mark to Market Election does not include mark to market gains, or deduct mark to market losses, for years when the corporation ceases to be treated as a PFIC.  If a timely QEF Election were made by a U.S. Holder, the mark to market rules would not apply.
 
The mark to market rules do not appear to prevent the application of the excess distribution rules in respect of stock of Vasogen Ireland Limited in the event that Vasogen Ireland Limited were a considered PFIC. Accordingly, if Vasogen and Vasogen Ireland Limited were both considered PFICs, and a U.S. Holder made a Mark to Market Election with respect to its common shares, the U.S. Holder may remain subject to the excess distribution rules described above with respect to its indirectly owned Vasogen Ireland Limited stock.
 
Foreign Tax Credits
 
Regardless of which of the above alternatives applies to a U.S. Holder, any tax withheld by Canadian taxing authorities with respect to distributions on our common shares may, subject to a number of complex limitations, be claimed as a foreign tax credit against a U.S. Holder's United States federal income tax liability or may be claimed as a deduction for United States federal income tax purposes.  The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income.  For this purpose, dividends we distribute with respect to our common shares will be “passive income” or “general income.” Because of the complexity of those limitations, each U.S. Holder should consult its own tax adviser with respect to the amount of foreign taxes that may be claimed as a credit.
 
Information Reporting and Backup Withholding
 
In general, information reporting requirements will apply to certain payments of dividends on the common shares and to certain payments of proceeds from the sale or exchange of common shares made to U.S. Holders  other than  certain  exempt recipients (such as  corporations).  A U.S. Holder that is not an exempt recipient will  generally be subject to backup  withholding with respect to such payments (currently at a rate of 28%, which rate will be replaced by a 31% rate beginning in 2011) unless the U.S. Holder  provides  an  accurate  taxpayer  identification number and otherwise  complies  with  applicable requirements of the backup withholding rules.
 
Any amounts  withheld  under the backup  withholding  rules will be allowed as a credit  against the U.S. Holder's  United States  federal  income tax liability or refundable  to the extent that it exceeds such  liability.  A U.S. Holder who does not provide a correct taxpayer identification number may be subject to penalties imposed by the IRS.
 

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Canadian Federal Income Tax Considerations
 
Taxation
 
The following summary describes the principal Canadian federal income tax considerations generally applicable to a holder of the Company’s Shares who, for purposes of the Income Tax Act (Canada) (the “Canadian Tax Act”) and the Convention between Canada and the United States of America with Respect to Taxes on Income and on Capital (the “Convention”) and at all relevant times, is resident in the United States and was not and is not resident in Canada, deals at arm’s length and is not affiliated with the Company, holds the Company’s Shares as capital property, does not use or hold and is not deemed to use or hold the Company’s Shares in or in the course of carrying on business in Canada and is not a non-resident insurer and who otherwise qualifies for the full benefit of the Convention (a “United States Holder”).
 
This following summary is based on the current provisions of the Convention, the Canadian Tax Act and the regulations thereunder, all specific proposals to amend the Canadian Tax Act and the regulations announced by the Minister of Finance (Canada) prior to the date hereof and the Company’s understanding of the administrative practices published in writing by the Canada Revenue Agency prior to the date hereof.  On September 21, 2007, the Minister of Finance (Canada) and the United States Secretary of the Treasury signed the fifth protocol to the Convention (the “Protocol”) which includes amendments to many of the provisions of the Convention, including significant amendments to the limitation on benefits provision and treatment of fiscally transparent entities such as some United States limited liability companies.  The Protocol will enter into force once it is ratified by the United States government (it was ratified by the Canadian government in 2007) and will have effect in some cases from the first day of the calendar year in which the Protocol enters into force.  United States Holders are urged to consult their own tax advisors to determine the impact of the Protocol and their entitlement to relief under the Convention based on their particular circumstances.  This summary does not take into account or anticipate any other changes in the governing law, whether by judicial, governmental or legislative decision or action, nor does it take into account the tax legislation or considerations of any province, territory or non-Canadian (including U.S.) jurisdiction, which legislation or considerations may differ significantly from those described herein.
 
For the purposes of the Canadian Tax Act, the Canadian tax results of a United States Holder are to be determined using Canadian currency based on the relevant exchange rate applicable thereto.
 
This summary is of a general nature only and is not intended to be, and should not be interpreted as legal or tax advice to any prospective purchaser or holder of the Company’s Shares and no representation with respect to the Canadian federal income tax consequences to any such prospective purchaser is made.  Accordingly, prospective purchasers and holders of the Company’s shares should consult their own tax advisors with respect to their individual circumstances.
 
Dividends on the Company’s Shares
 
Generally, dividends paid by Canadian corporations to non-resident shareholders are subject to a withholding tax of 25% of the gross amount of such dividends.  Pursuant to the Convention, the withholding tax rate on the gross amount of dividends paid to United States Holders is reduced to 15% or, in the case of a United States Holder that is a U.S. corporation which beneficially owns at least 10% of the voting stock of the Canadian corporation paying the dividends, to 5% of the gross amount of such dividends.
 
Pursuant to the Convention, certain tax-exempt entities that are United States Holders may be exempt from Canadian withholding taxes, including any withholding tax levied in respect of dividends received on the Company’s Shares.
 

 

 
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Disposition of the Company’s Shares
 
In general, a United States Holder will not be subject to Canadian income tax on capital gains arising on the disposition of the Company’s Shares, unless such shares are “taxable Canadian property” within the meaning of the Canada Tax Act and no relief is afforded under the Convention.  Generally, the shares of the Company would be taxable Canadian property of a United States Holder if at any time during the sixty month period immediately preceding a disposition by the United States Holder of such shares, not less than 25% of the issued shares of any class or series of a class of shares of the Company belonged to the United States Holder, to persons with whom the United States Holder did not deal at arm’s length (within the meaning of the Canadian Tax Act), or to the United States Holder and persons with whom the non-resident did not deal at arm’s length (within the meaning of the Canadian Tax Act).  Under the Convention, a capital gain realized by a United States Holder will not be subject to Canadian tax unless the value of the Company’s Shares is derived principally from real property (as defined in the Convention) situated in Canada.
 
F.      Dividends and Paying Agents
 
Not Applicable.
 
G.      Statement by Experts
 
Not Applicable.
 
H.      Documents on Display
 
Copies of the documents referred to in this annual report may be inspected, during normal business hours, at the Company’s headquarters located at 2505 Meadowvale Boulevard, Mississauga, Ontario, L5N 1S2, Canada.
 
We are required to file reports and other information with the SEC under the Securities Exchange Act of 1934. Reports and other information filed by us with the SEC may be inspected and copied at the SEC’s public reference facilities described above. As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of proxy statements and our officers, Directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. Under the Exchange Act, as a foreign private issuer, we are not required to publish financial statements as frequently or as promptly as United States companies.
 
I.      Subsidiary Information
 
See Item 4.A. of this annual report.
 
Item 11.      Qualitative and Quantitative Disclosures about Market Risk
 
The Company's primary market risk exposures are interest rate risk and foreign currency risk.  The Company is exposed to interest rate risk on its cash and cash equivalents.
 
The Company's reporting currency is the Canadian dollar. The Company is exposed to foreign exchange risk associated with purchases from U.S. suppliers, cash and cash equivalents.  Gains and losses resulting from the effects of changes in the U.S. dollar to Canadian dollar exchange rate are recorded in income.
 
The Company does not utilize derivative financial instruments to hedge its interest rate or foreign currency rate risks.
 
Interest rate risk
 
We invest our cash resources in liquid government and corporate debt instruments having a single "A" credit rating or greater.  We do not believe that the results of operations or cash flows would be affected to any significant degree by a sudden change in market interest rates relative to interest rates on our investments, owing to the relative short-term nature of the investments.
 
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Credit risk
 
Financial instruments potentially exposing us to a concentration of credit risk consist principally of cash and cash equivalents.  We  manage this credit risk by maintaining bank accounts with Schedule I banks and investing only in highly rated Canadian and U.S. corporations with securities that are traded on active markets and are capable of prompt liquidation.  We currently hold our cash resources in investments issued and guaranteed by major Canadian financial institutions.
 
Exchange rate sensitivity
 
The functional currency of the Company is the Canadian dollar.  Accordingly, monetary items denominated in a foreign currency are translated into Canadian dollars at exchange rates in effect at the balance sheet dates and non-monetary items are translated at rates of exchange in effect when the assets were acquired or obligations incurred.  Revenue and expenses are translated at rates in effect at the time of the transactions.  Foreign exchange gains and losses are included in the determination of loss for the period.
 
As our functional or measurement currency is the Canadian dollar, U.S. dollar exchange rate fluctuations may have a significant impact from an accounting perspective, but they do not impair or enhance our ability to pay these U.S. dollar denominated R&D expenses.
 
In November 2007, the Company entered into a forward foreign exchange contract to purchase, in aggregate, U.S. $12.9 million for $12.5 million in December 2007.  The fair value of this instrument at November 30, 2007 was an asset of $0.4 million.  The related gain was recorded in foreign exchange loss (gain) in the statement of operations, deficit and comprehensive income.

 
Limitations
 
The above discussion includes only those exposures that exist as of November 30, 2007 and as a result, does not consider exposures or positions that could arise after that date. The Company's ultimate realized gain or loss with respect to interest rate and exchange rate fluctuations would depend on the exposures that arise during the period and interest and foreign exchange rates.
 
Item 12.      Description of Securities Other than Equity Securities.
 
Not Applicable.
 

 
PART II.
 
Item 13.      Defaults, Dividends Arrearages and Delinquencies
 
There have been no material defaults in the payment of any principal or interest owing.  Neither the Company nor its subsidiaries has any preferred shares outstanding.
 
Item 14.      Material Modifications to the Rights of Security Holders and Use of Proceeds
 
There has been no material modification of the instruments defining the rights of holders of any class of registered securities.  There has been no withdrawal or substitution of assets securing any class of registered securities.  The trustees for our registered securities have not changed during the last financial year.
 
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Item 15.      Controls and Procedures
 
INTERNAL CONTROL OVER FINANCIAL REPORTING
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as required under applicable Canadian and U.S. securities regulatory requirements.

Our internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
 
Under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, management conducted an evaluation of the effectiveness of our internal control over financial reporting, as of November 30, 2007, based on the framework set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on its evaluation under this framework, management concluded that our internal control over financial reporting was effective as of that date.
 
 
KPMG LLP, our independent registered public accounting firm, has issued an attestation report on our internal control over financial reporting as of November 30, 2007.  The attestation report is included as Exhibit 15.2 to this annual report.
 
 
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
 
There have been no chang es in our internal controls over financial reporting during the fourth quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.  During the second quarter, we implemented additional controls surrounding the US GAAP reconciliation.  Based on the results of our testing, these controls were found to be operating effectively at November 30, 2007.

The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of certain events.  There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, including conditions that are remote.

DISCLOSURE CONTROLS AND PROCEDURES
 
Disclosure controls and procedures are designed to provide reasonable assurance that all material information required to be publicly disclosed by a public company is gathered and communicated to management, including the certifying officers, on a timely basis so that the appropriate decisions can be made regarding public disclosure.  As at November 30, 2007, the certifying officers and other members of management evaluated the effectiveness of our disclosure controls and procedures (as this term is defined in the rules adopted by Canadian securities regulatory authorities and the United States Securities and Exchange Commission).  This evaluation included a review of our existing disclosure policy, compliance with regard to that policy, the disclosure controls currently in place surrounding our interim and annual financial statements, MD&A, and other required documents and discussions with management surrounding the process of communicating material information to management and in turn the certifying officers and all procedures taking into consideration the size of the company and the number of employees.  Based on the evaluation described above, the certifying officers have concluded that, as at November 30, 2007, the disclosure controls and procedures were effective to provide reasonable assurance that the information we are required to disclose on a continuous basis in annual and interim filings and other reports is recorded, processed, summarized, and reported or disclosed on a timely basis as required.
 
63

Item 16A.      Audit Committee Financial Expert
 
Under the SEC rules implementing the Sarbanes-Oxley Act of 2002, Canadian issuers filing reports in the United States must disclose whether their audit committees have at least one “audit committee financial expert”. The Board has determined that Benoit La Salle qualifies as a financial expert under such rules.  In addition, all members of the Audit Committee are considered financially literate under applicable Canadian laws.
 
Item 16B.      Code of Ethics
 
The Board of Directors’ Code of Conduct and the Employee Code of Conduct for our employees have been implemented. These may be viewed on our website at www.vasogen.com or at www.sedar.com.  No waivers or requests for exemptions from the Codes of Conduct were either requested or granted.
 
Item 16C.      Principal Accountant Fees and Services
 
The aggregate amounts billed by our auditors to us for each of the fiscal years ended November 30, 2007 and November 30, 2006 for audit fees, audit-related fees, tax fees and all other fees are set forth below:

 
Year Ended
November 30, 2007
Year Ended
November 30, 2006
Audit Fees (1)
$504,665
$616,869
Audit-Related Fees (2)
$75,000
$4,500
Tax Fees (3)
$133,510
$78,114
All Other Fees
Nil
Nil
     
Totals
$713,175
$699,483

NOTES:
 
(1) Audit fees represent fees for our audited annual financial statements, reviews of quarterly interim financial statements, and reviews in connection with our statutory and regulatory filings and with financings completed during 2006 and 2007.
 
(2) Audit-related fees related to advice and documentation assistance with respect to internal controls over financial reporting
 
(3) Tax fees consist of fees for tax consultation and tax compliance services for Vasogen Inc., Vasogen Corp., and Vasogen Ireland Limited.
 

Our auditor is KPMG LLP, Chartered Accountants, Yonge Corporate Centre, 4100 Yonge Street, Toronto, Ontario M2P 2H3.  KPMG LLP has confirmed that it is independent with respect to the Company within the meaning of the Rules of Professional Conduct of the Institute of Chartered Accountants of Ontario.  

KPMG provides tax, financial advisory, and other non-audit services to the Company and its subsidiaries.  Our Audit Committee has concluded that the provision of these non-audit services by KPMG is compatible with KPMG maintaining its independence.

Item 16D.      Exemptions from the Listing Standards for Audit Committees
 
Not Applicable.
 
Item 16E.      Purchases of Equity Securities by the Issuer and Affiliated Purchasers
 
Neither the Company nor, to our knowledge, any affiliated purchaser has made any purchases of our registered shares during the last financial year.
 
64

PART III.
 
Item 17.      Financial Statements
 
See Item 18 below.
 
Item 18.      Financial Statements
 
 
 
 
 
65

 
 
 


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

 
 

 
 
 
66

 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
To the Board of Directors of Vasogen Inc.
 
  We have audited the accompanying consolidated balance sheets of Vasogen Inc. ("the Company") as of November 30, 2007 and 2006 and the related consolidated statements of operations, deficit and comprehensive income and cash flows for each of the years in the three-year period ended November 30, 2007 and for the period from December 1, 1987 to November 30, 2007. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
 
We conducted our audits in accordance with Canadian generally accepted auditing standards. We have also audited the accompanying consolidated balance sheets of the Company as of November 30, 2007 and 2006 and the related consolidated statements of operations, deficit and comprehensive income and cash flows for each of the years in the three-year period ended November 30, 2007 in accordance with the standards of the Public Company Accounting Oversight Board (United States). We did not audit the consolidated statements of operations, deficit and comprehensive income and cash flows for the period from inception on December 1, 1987 to November 30, 2007 in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States) require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of November 30, 2007 and 2006 and the results of its operations and its cash flows for each of the years in the three-year period ended November 30, 2007 and for the period from December 1, 1987 to November 30, 2007 in conformity with Canadian generally accepted accounting principles.
 
Canadian generally accepted accounting principles vary in certain significant respects from US generally accepted accounting principles. Information relating to the nature and effect of such differences is presented in Note 16 to the consolidated financial statements.
 
On December 1, 2006, the Company adopted retrospectively, without restatement, the new recommendations of CICA Handbook Section 1530, Comprehensive Income, Section 3855, Financial Instruments - Recognition and Measurement, Section 3861, Financial Instruments - Disclosure and Presentation and Section 3251, Equity.  The effect of those changes is discussed in Note 2(p)(ii) to the consolidated financial statements.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of November 30, 2007, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated January 18, 2008 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
 
/s/ KPMG, LLP, Licensed d Public Accountants
 
Toronto, Canada
January 18, 2008

67


VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Consolidated Balance Sheets
(In thousands of Canadian dollars)

November 30, 2007 and 2006
             
   
2007
   
2006
 
Assets
           
Current assets:
           
     Cash and cash equivalents (note 3)
  $ 23,545     $ 30,427  
     Restricted cash (note 4)
    -       6,403  
     Clinical supplies
    1,363       1,211  
     Tax credits recoverable
    1,565       1,327  
     Prepaid expenses and deposits
    787       1,384  
     Change in fair value of forward foreign exchange contracts (note 11)
    376       -  
      27,636       40,752  
Property and equipment (note 5)
    414       615  
                 
Acquired technology (note 6)
    -       253  
                 
Deferred financing costs (note 7)
    -       150  
                 
    $ 28,050     $ 41,770  
                 
Liabilities and Shareholders' Equity
               
                 
Current liabilities:
               
     Accounts payable
  $ 1,175     $ 3,369  
     Accrued liabilities
    3,519       5,067  
     Current portion of senior convertible notes payable (note 7)
    -       8,754  
      4,694       17,190  
                 
Shareholders' equity (notes 8 and 17):
               
     Share capital:
               
           Authorized:
               
                 Unlimited common shares, without par value
               
           Issued and outstanding:
               
                 22,391,386 common shares (2006 - 15,665,134)
    365,670       344,217  
     Warrants
    16,725       11,390  
     Contributed surplus
    22,744       20,347  
     Deficit
    (381,783 )     (351,374 )
      23,356       24,580  
                 
Commitments and contingencies (note 13)
               
Basis of presentation - future operations (note 1)
               
                 
    $ 28,050     $ 41,770  
 
See accompanying notes to consolidated financial statements.
 
On behalf of the Board:

/s/ Benoit La Salle
 
Director
/s/ Ronald M. Cresswell
 
Director
 
Benoit L Salle     Ronald M. Cresswell    

68


VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Consolidated Statements of Operations, Deficit and Comprehensive Income
(In thousands of Canadian dollars, except per share amounts)
                         
                     
Period from
 
                     
December 1,
 
                     
1987 to
 
   
Years ended November 30,
   
November 30,
 
   
2007
   
2006
   
2005
   
2007
 
Expenses:
                       
                         
     Research and development (note 15)
  $ 12,039     $ 32,732     $ 71,421     $ 238,917  
     General and administration
    14,259       19,251       22,126       117,228  
     Foreign exchange loss (gain)
    1,977       104       (719 )     10,970  
                                 
Loss before the undernoted
    (28,275 )     (52,087 )     (92,828 )     (367,115 )
                                 
Interest expense on senior convertible notes payable
    (5 )     (930 )     (344 )     (1,279 )
                                 
Accretion in carrying value of senior convertible notes payable
    (728 )     (7,824 )     (1,742 )     (10,294 )
                                 
Amortization of deferred financing costs
    (154 )     (2,495 )     (408 )     (3,057 )
                                 
Loss on extinguishment of senior convertible notes payable
    (1,754 )     (4,995 )     -       (6,749 )
                                 
Investment income
    1,310       1,971       2,274       13,325  
                                 
Change in fair value of embedded derivatives
    829       -       -       829  
                                 
Loss and comprehensive loss for the period
    (28,777 )     (66,360 )     (93,048 )     (374,340 )
                                 
Deficit, beginning of period:
                               
     As originally reported
    (351,374 )     (284,719 )     (187,665 )     (1,510 )
     Impact of change in accounting for stock-based compensation (note 2(l))
    -       -       (4,006 )     (4,006 )
     Impact of change in accounting for financial instruments on December 1, 2006 (note 2(p)(ii))
    (1,632 )     -       -       (1,632 )
     As revised
    (353,006 )     (284,719 )     (191,671 )        
                                 
Charge for acceleration payments on equity component of senior convertible notes payable
    -       (295 )     -       (295 )
                                 
Deficit, end of period
  $ (381,783 )   $ (351,374 )   $ (284,719 )   $ (381,783 )
                                 
Basic and diluted loss per common share (notes 9 and 17)
  $ (1.46 )   $ (7.05 )   $ (11.65 )        

 
See accompanying notes to consolidated financial statements.

69


VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

Consolidated Statements of Cash Flows
(In thousands of Canadian dollars)
                         
                     
Period from
 
                     
December 1,
 
                     
1987 to
 
   
Years ended November 30,
   
November 30,
 
   
2007
   
2006
   
2005
   
2007
 
Cash provided by (used in):
                       
                         
Operating activities:
                       
     Loss for the period
  $ (28,777 )   $ (66,360 )   $ (93,048 )   $ (374,340 )
     Items not involving cash:
                               
           Amortization
    503       782       589       6,160  
           Accretion in carrying value of senior convertible notes payable
    728       7,824       1,742       10,294  
           Amortization of deferred financing costs
    154       2,495       408       3,057  
           Loss on extinguishment of senior convertible notes payable
    1,754       4,995       -       6,749  
           Change in fair value of embedded derivatives
    (829 )     -       -       (829 )
           Stock-based compensation
    1,995       3,083       3,615       9,579  
           Common shares issued for services
    -       36       -       2,485  
           Unrealized gain on forward foreign exchange contract
    (376 )     -       -       (376 )
           Unrealized foreign exchange loss (gain)
    2,566       (65 )     (542 )     11,543  
           Other
    -       -       -       (35 )
     Change in non-cash operating working capital (note 10(a))
    (3,535 )     (17,158 )     12,634       951  
      (25,817 )     (64,368 )     (74,602 )     (324,762 )
                                 
Financing activities:
                               
     Shares and warrants issued for cash
    17,345       23,106       52,502       326,358  
     Warrants exercised for cash
    -       -       -       16,941  
     Options exercised for cash
    -       -       627       7,669  
     Share issue costs
    (1,440 )     (2,221 )     (3,720 )     (24,646 )
     Issue (repayment) of senior convertible notes payable, net (note 7)
    (924 )     (3,976 )     42,790       38,512  
     Cash released from (placed under) restriction
    6,403       5,298       (11,701 )     -  
     Paid to related parties
    -       -       -       (234 )
      21,384       22,207       80,498       364,600  
                                 
Investing activities:
                               
     Purchases of property and equipment
    (49 )     (23 )     (490 )     (2,465 )
     Purchases of acquired technology
    -       -       -       (1,283 )
     Purchases of marketable securities
    -       (80 )     (22,999 )     (244,846 )
     Settlement of forward foreign exchange contracts
    10       (102 )     (4,732 )     (4,824 )
     Maturities of marketable securities
    -       23,079       67,651       240,677  
      (39 )     22,874       39,430       (12,741 )
                                 
Foreign exchange loss on cash held in foreign currency
    (2,410 )     (807 )     (141 )     (3,552 )
                                 
Increase (decrease) in cash and cash equivalents
    (6,882 )     (20,094 )     45,185       23,545  
                                 
Cash and cash equivalents, beginning of period
    30,427       50,521       5,336       -  
                                 
Cash and cash equivalents, end of period
  $ 23,545     $ 30,427     $ 50,521     $ 23,545  

Supplemental cash flow information (note 10)
 
See accompanying notes to consolidated financial statements.

70


 
 
 
VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

Years ended November 30, 2007, 2006, 2005 and
period from December 1, 1987 to November 30, 2007

 
1.
Basis of presentation - future operations:
 
Since its inception, the Company has been engaged in the research and commercial development of product candidates for the treatment of disease and has had no commercial operations.  The operations of the Company are not subject to any seasonality or cyclicality factors.
 
The consolidated financial statements presented have been prepared on the basis that the Company is considered a development stage enterprise and, accordingly, the consolidated statements of operations, deficit and comprehensive income and cash flows also reflect the cumulative amounts from December 1, 1987 (the date development operations commenced) to November 30, 2007.
 
The Company's future operations are dependant upon its ability to finance the commercialization of its lead product, Celacade™, and the continued development of its product candidate, VP025.  While the Company's ACCLAIM Phase III trial of Celacade did not reach the primary endpoint of significantly reducing the risk of death and cardiovascular hospitalization in the total patient population, this endpoint was met for certain large pre-defined subgroups.  In September 2007, the Company announced plans for a confirmatory study that would support an application for regulatory approval in the United States of its Celecade technology for the treatment of patients with NYHA Class II heart failure.  The Company has received CE Mark regulatory approval for its Celacade medical device technology in the European Union and, in April 2007, entered into a collaborative agreement necessary to commence commercialization in that market.
 
The Company's commercialization efforts of Celacade and continued development of VP025 are dependent upon its ability to raise additional financing through a combination of equity or debt financing, payments from strategic partners, or upon strategic partners funding directly some or all of the costs of commercialization.  Management believes that the Company currently has sufficient cash and cash equivalents to fund planned expenditures for at least the next 12 months.

71


VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

Years ended November 30, 2007, 2006, 2005 and
period from December 1, 1987 to November 30, 2007


 
2.
Significant accounting policies:
 
These consolidated financial statements are prepared in accordance with accounting principles generally accepted in Canada ("Canadian GAAP"), which, except as described in note 16, conform, in all material respects, with accounting principles generally accepted in the United States ("United States GAAP").
 
         (a)
Principles of consolidation:
 
These consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Vasogen Ireland Limited (Irish-incorporated entity established in 1998) and Vasogen Corp. (Delaware-incorporated entity established in 2004).  The functional currency of both subsidiaries is the Canadian dollar.  All intercompany balances and transactions have been eliminated.
 
         (b)
Cash and cash equivalents:
 
The Company considers unrestricted cash on hand, in banks, in term deposits and in highly liquid government and corporate bonds with original maturities of three months or less as cash and cash equivalents.
 
         (c)
Concentration of credit risk:
 
Financial instruments potentially exposing the Company to a concentration of credit risk consist principally of cash and cash equivalents.  The Company manages this credit risk by maintaining bank accounts with Schedule I banks and investing only in highly rated Canadian and U.S. corporations with securities that are traded on active markets and are capable of prompt liquidation.

72

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

Years ended November 30, 2007, 2006, 2005 and
period from December 1, 1987 to November 30, 2007


 
2.
Significant accounting policies (continued):
 
         (d)
Property and equipment:
 
Property and equipment are recorded at cost less any impairment losses recognized in accordance with note 2(g) and amortized on a straight-line basis over their estimated useful lives as follows:
   
Testing equipment
5 years
Computer and other equipment
5 years
Leasehold improvements
Over term of lease
 
       (e)     Acquired technology:
 
Acquired technology, representing part of the Company's platform medical device technology, was stated at amortized cost less any impairment losses recognized in accordance with note 2(g).  Amortization was provided on a straight-line basis over 20 years, representing the term of the acquired patent.
 
 
(f)
Deferred financing costs:
 
Deferred financing costs were comprised primarily of the placement fee and professional fees associated with the issuance of the Company's senior convertible notes payable.  Deferred financing costs were amortized over the term of the convertible notes using the effective yield method.  As a consequence of adopting The Canadian Institute of Chartered Accountants' ("CICA") Handbook Section 3855, Financial Instruments - Recognition and Measurement ("Section 3855"), as described in note 2(p)(ii), deferred financing costs are accounted for as part of the financial liabilities' carrying value at inception.

73

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

Years ended November 30, 2007, 2006, 2005 and
period from December 1, 1987 to November 30, 2007


 
2.
Significant accounting policies (continued):
 
         (g)
Impairment of long-lived assets:
 
The Company periodically reviews the useful lives and the carrying values of its long-lived assets.  The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable.  If the sum of the undiscounted expected future cash flows expected to result from the use and eventual disposition of an asset is less than its carrying amount, it is considered to be impaired.  An impairment loss is measured as the amount by which the carrying amount of the asset exceeds its fair value, which is estimated as the expected future cash flows discounted at a rate commensurate with the risks associated with the recovery of the asset.  As at November 30, 2007 and 2006, no such impairment losses were recorded.
 
         (h)
Research and development:
 
Research costs are expensed as incurred.  Development costs are expensed as incurred unless they meet the criteria under Canadian GAAP for deferral and amortization.  The Company has not capitalized any such development costs to date.  Total research and development tax credits netted against research and development expenses on the consolidated statements of operations, deficit and comprehensive income are $0.3 million (2006 - $0.8 million; 2005 - $0.2 million; December 1, 1987 to November 30, 2007 - $3.3 million).
 
Tax credits recoverable include the Ontario Innovation Tax Credits, the Goods and Services Tax credits and other recoverable tax amounts.  These amounts are recoverable after the filing of various tax returns and the completion of various tax audits.
 
Clinical supplies represent the devices and disposables on hand at year end that will be consumed in the Company's future research and clinical trials.  These supplies are carried at the lower of cost, on a first-in-first-out basis, and replacement cost, adjusted for any impairment in value due to obsolescence and are expensed as research and development expenses when shipped to outsourced research centres or clinical sites.

74

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

Years ended November 30, 2007, 2006, 2005 and
period from December 1, 1987 to November 30, 2007


 
2.
Significant accounting policies (continued):
 
 
(i)
Derivative financial instruments:
 
The Company is party to forward foreign exchange contracts in order to pursue its investment objectives without changing its foreign currency exposure.  These financial instruments are measured at fair value, which is determined based on amounts quoted by the Company's banker to realize favourable contracts or to settle unfavourable contracts, taking into account foreign exchange rates and the duration of each contract.  The unrealized gain or loss arising from changes in fair value of the forward foreign exchange contracts is included in the determination of loss for the period as the instruments are not considered hedging instruments.
 
 
(j)
Translation of foreign currency:
 
The functional currency of the Company is the Canadian dollar.  Accordingly, monetary items denominated in a foreign currency are translated into Canadian dollars at exchange rates in effect at the balance sheet dates and non-monetary items are translated at rates of exchange in effect when the assets were acquired or obligations incurred.  Revenue and expenses are translated at rates in effect at the time of the transactions.  Foreign exchange gains and losses are included in the determination of loss for the period.
 
         (k)
Income taxes and investment tax credits:
 
The Company accounts for income taxes by the asset and liability method.  Under the asset and liability method, future income tax assets and liabilities are recognized for the future income taxes attributable to temporary differences between the financial statement carrying values of existing assets and liabilities and their respective tax carrying values.  Future income tax assets and liabilities are measured using enacted or substantively enacted tax rates expected to apply to taxable income in the period in which those temporary differences are expected to be recovered or settled.  The effect on future income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the substantive enactment date.

75

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

Years ended November 30, 2007, 2006, 2005 and
period from December 1, 1987 to November 30, 2007


 
2.
Significant accounting policies (continued):
 
Future income tax assets recognized are reduced by a valuation allowance.  Management has provided a valuation allowance equivalent to the net future income tax asset balances, given that the Company's activities are in the development stage and the uncertainty that it will generate sufficient income for tax purposes to utilize the tax losses in the carryforward period.
 
The benefits of tax credits for scientific research and development expenditures are recognized in the period the qualifying expenditures are made, provided there is reasonable assurance of recoverability.  The tax credits reduce the cost of property and equipment or research costs, as applicable.
 
 
(l)
Stock-based compensation plans:
 
The Company has two stock-based compensation plans, described in note 8(c).  Prior to December 1, 2004, stock-based awards granted to employees, directors and officers were accounted for using the settlement method.  On December 1, 2004, the Company adopted the fair value method of accounting for stock-based awards to employees, directors and officers granted or modified after December 1, 2002.  This method requires the Company to measure, as compensation cost, the fair value of all employee stock-based awards granted or modified since December 1, 2002 and to amortize this cost over the vesting period of the awards.  Fair value is determined using the Black-Scholes option pricing model.  The Company estimates forfeitures for each grant and incorporates this estimate into the calculation of compensation cost recorded each period.
 
Stock options and warrants awarded to non-employees are accounted for using the fair value method and expensed as the service or product is received.  The fair value of performance-based options is recognized over the estimated period to achievement of performance conditions.
 
         (m)
Deferred share units plan:
 
The Company has a deferred share units ("DSU") plan, as described in note 8(d).  On the date of grant, the fair value of each DSU, being the fair market value of the Company's common shares at that date, is recorded as a liability on the Company's consolidated balance sheets.  The value of the DSU liability is adjusted to reflect changes in the market value of the Company's common shares at each period end.

76

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

Years ended November 30, 2007, 2006, 2005 and
period from December 1, 1987 to November 30, 2007


 
2.
Significant accounting policies (continued):
 
         (n)
Basic and diluted loss per common share:
 
Basic loss per common share is computed by dividing loss for the period by the weighted average number of common shares outstanding during the reporting period.  Diluted loss per common share is computed similarly to basic loss per common share, except that the weighted average number of common shares outstanding is increased to include additional shares from the assumed exercise of stock options and warrants and the conversion of the senior convertible notes payable, if dilutive.  The number of additional shares is calculated by assuming that outstanding stock options and warrants were exercised and that proceeds from such exercises were used to acquire shares of common stock at the average market price during the reporting period.  The additional shares would also include those shares issuable upon the assumed conversion of the senior convertible notes payable, with an adjustment to loss for the period to add back any interest paid to the note holders.  These common share equivalents are not included in the calculation of the weighted average number of common shares outstanding for diluted loss per common share when the effect would be anti-dilutive.
 
         (o)
Measurement uncertainty:
 
The preparation of financial statements in accordance with Canadian GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the period.  Actual results could differ from those estimates.
 
The Company has estimated the useful lives of all depreciable assets and the recoverability of property and equipment using estimates of future cash flows and other measures of fair values.  Significant changes in the assumptions with respect to future business plans could result in impairment of property and equipment.

77

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

Years ended November 30, 2007, 2006, 2005 and
period from December 1, 1987 to November 30, 2007


 
2.
Significant accounting policies (continued):
 
         (p)
Changes in accounting policy:
 
 
(i)
Accounting changes:
 
In July 2006, the Accounting Standards Board ("AcSB") issued a replacement of CICA Handbook Section 1506, Accounting Changes ("Section 1506").  The new standard allows for voluntary changes in accounting policy only when they result in the financial statements providing reliable and more relevant information, requires changes in accounting policy to be applied retroactively unless doing so is impracticable, requires prior period errors to be corrected retroactively and calls for enhanced disclosures about the effects of changes in accounting policies, estimates and errors on the financial statements.  The adoption of Section 1506, effective December 1, 2006, has no impact on these consolidated financial statements.
 
 
   (ii)
Financial instruments:
 
Effective on December 1, 2006, the Company adopted the recommendations of CICA Handbook Section 1530, Comprehensive Income ("Section 1530"); Section 3855; Section 3861, Financial Instruments - Disclosure and Presentation ("Section 3861"); and Section 3251, Equity.  These sections provide standards for recognition, measurement, disclosure and presentation of financial assets, financial liabilities and non-financial derivatives.  Section 1530 provides standards for the reporting and presentation of comprehensive income, which represents the change in equity from transactions and other events and circumstances from non-owner sources.  Other comprehensive income refers to items recognized in comprehensive income that are excluded from net income calculated in accordance with Canadian GAAP.

78

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

Years ended November 30, 2007, 2006, 2005 and
period from December 1, 1987 to November 30, 2007


 
2.
Significant accounting policies (continued):
 
Upon adoption of the new standards on December 1, 2006, the Company continued to account for cash equivalents held at that date as held-to-maturity investments, recorded at cost and accrued interest.  The Company designates all new cash equivalents acquired subsequent to December 1, 2006 as held-for-trading investments measured at fair value and the resulting gain or loss is recognized in the consolidated statement of operations, deficit and comprehensive income.  The effect of the change in accounting for cash equivalents is not material.
 
Accounts payable and accrued liabilities are classified as other financial liabilities.  The senior convertible notes payable were also accounted for as an other financial liability and were accounted for at amortized cost using the effective interest method, which was consistent with the Company's accounting policy prior to the adoption of Section 3855.
 
Section 3855 requires that the Company identify embedded derivatives that require separation from the related host contract and measure those embedded derivatives at fair value.  Subsequent changes in the fair value of embedded derivatives are recognized in the consolidated statement of operations, deficit and comprehensive income in the period the change occurs.  Freestanding derivatives not designated as hedging items are also measured at fair value with subsequent changes in fair value recognized in the consolidated statement of operations, deficit and comprehensive income in the period the change occurs.
 
Transactions costs that are directly attributable to the acquisition or issuance of financial assets or liabilities are accounted for as part of the respective asset or liability's carrying value at inception.

79

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

Years ended November 30, 2007, 2006, 2005 and
period from December 1, 1987 to November 30, 2007


 
2.
Significant accounting policies (continued):
 
The Company identified and measured all embedded derivatives that required separation and determined the fair value of those embedded derivatives at December 1, 2006.  As a result, the Company was required to revise the initial allocation of the proceeds received in connection with the issuance of the senior convertible notes payable, the warrants and the equity classified conversion option on October 7, 2005 and to remeasure any subsequent transactions affecting these items in accordance with Section 3855.  Prior to the adoption of Section 3855, the proceeds received were allocated on a relative fair value basis to the liability component, being the senior convertible notes payable; and to the equity components, being the warrants and the conversion option.  As a consequence of adopting Section 3855, the proceeds initially allocated to the senior convertible notes payable were further allocated to the embedded derivatives at their fair value and the residual amount to the senior convertible notes payable.  Any subsequent transactions affecting the carrying amount of the senior convertible notes payable, the embedded derivatives, the warrants and the equity conversion option were also remeasured in accordance with Section 3855.
 
As a result of adopting Section 3855, retrospectively without restatement, the Company recorded an increase of $1.6 million to deficit as at December 1, 2006, a decrease in the carrying amount of the senior convertible notes payable of $0.1 million, the initial recognition of an embedded derivatives liability of $0.8 million and an increase in share capital of $0.9 million at December 1, 2006.
 


80

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

Years ended November 30, 2007, 2006, 2005 and
period from December 1, 1987 to November 30, 2007


 
2.
Significant accounting policies (continued):
 
         (q)
Recent accounting pronouncements issued and not yet applied:
 
 
(i)
Financial instruments and capital disclosure:
 
In October 2006, the AcSB approved disclosure and presentation requirements for financial instruments that revise and enhance the disclosure requirements of Section 3861.  These requirements are included in Section 3862, Financial Instruments - Disclosure ("Section 3862"), which replaces Section 3861, and Section 1535, Capital Disclosures ("Section 1535"), which establishes standards for disclosing information about an entity's capital and how it is managed.
 
Section 1535 requires disclosure of an entity's objectives, policies and processes for managing capital, quantitative data about what the entity regards as capital and whether the entity has complied with any capital requirements and, if it has not complied, the consequences of such non-compliance.  This standard is effective for the Company for interim and annual financial statements beginning on December 1, 2007.
 
Section 3862 requires disclosures, by class of financial instrument, that enables users to evaluate the significance of financial instruments for an entity's financial position and performance, including disclosures about fair value.  In addition, disclosure is required of qualitative and quantitative information about exposure to risks arising from financial instruments, including specified minimum disclosures about credit risk, liquidity risk and market risk.  The quantitative disclosures must also include a sensitivity analysis for each type of market risk to which an entity is exposed, showing how net income and other comprehensive income would have been affected by reasonably possible changes in the relevant risk variable.  This standard is effective for the Company for interim and annual financial statements beginning on December 1, 2007.
 
The Company is currently assessing the impact that Section 3862 and Section 1535 will have on the consolidated financial statements.

81

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

Years ended November 30, 2007, 2006, 2005 and
period from December 1, 1987 to November 30, 2007


 
2.
Significant accounting policies (continued):
 
 
   (ii)
Financial instruments presentation:
 
In October 2006, the AcSB approved Section 3863, Financial Instruments - Presentation ("Section 3863"), which replaces Section 3861.  The existing requirements on presentation of financial instruments have been carried forward unchanged to Section 3863.
 
This standard is effective for the Company for interim and annual financial statements beginning on December 1, 2007 and is expected to have no impact on the Company's consolidated financial statements.
 
 
   (iii)
Inventories:
 
In May 2007, the AcSB issued Section 3031, Inventories, which supersedes existing guidance on inventories in Section 3030, Inventories.  This standard introduces significant changes to the measurement and disclosure of inventories, including the requirement to measure inventories at the lower of cost and net realizable value, the allocation of overhead based on normal capacity, the use of the specific cost method for inventories that are not ordinarily interchangeable or goods and services produced for specific purposes, and the reversal of previous write-downs to net realizable value when there is a subsequent increase in the value of inventories.  Inventory policies, carrying amounts, amounts recognized as an expense, write-downs and the reversals of write-downs are required to be disclosed.
 
This standard is effective for the Company for interim and annual financial statements beginning on December 1, 2008.  The Company is currently assessing the impact that this section will have on its financial position and results of operations.

82

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

Years ended November 30, 2007, 2006, 2005 and
period from December 1, 1987 to November 30, 2007


 
2.
Significant accounting policies (continued):
 
 
   (iv)
General standards of financial statement presentation:
 
In May 2007, the AcSB amended Section 1400, General Standards of Financial Statement Presentation, to change the guidance related to management's responsibility to assess the ability of the entity to continue as a going concern.  Management is required to make an assessment of an entity's ability to continue as a going concern and should take into account all available information about the future, which is at least, but is not limited to, 12 months from the balance sheet dates.  Disclosure is required of material uncertainties related to events or conditions that may cast significant doubt upon the entity's ability to continue as a going concern.
 
These amendments are effective for the Company for interim and annual periods beginning on December 1, 2008.
 
3.
Cash and cash equivalents:
 
As at November 30, 2007, the Company held $23.3 million (2006 - $29.9 million) of cash equivalents, of which $0.1 million (U.S. $0.1 million) (2006 - $1.0 million (U.S. $0.9 million)) are denominated in U.S. dollars.  Cash equivalents consist of highly liquid government and corporate bonds having a single "A" rating or greater.
 
4.
Restricted cash:
 
As at November 30, 2006, the Company had restricted cash of $6.4 million (U.S. $5.6 million).  Restricted cash represented cash on deposit to secure the letter of credit provided as security to the holders of the senior convertible notes payable.  The senior convertible notes payable were repaid in full in April 2007 and the letter of credit expired on July 3, 2007.  The obligation to retain a balance in restricted cash ceased at that time.

83

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

Years ended November 30, 2007, 2006, 2005 and
period from December 1, 1987 to November 30, 2007


 
5.
Property and equipment:
 
                   
         
Accumulated
   
Net book
 
2007
 
Cost
   
amortization
   
value
 
                   
Testing equipment
  $ 936     $ 820     $ 116  
Computer and other equipment
    611       440       171  
Leasehold improvements
    366       239       127  
                         
    $ 1,913     $ 1,499     $ 414  

                   
         
Accumulated
   
Net book
 
2006
 
Cost
   
amortization
   
value
 
                   
Testing equipment
  $ 936     $ 715     $ 221  
Computer and other equipment
    562       369       193  
Leasehold improvements
    366       165       201  
                         
    $ 1,864     $ 1,249     $ 615  
 
In 2007, amortization expense was $0.3 million (2006 - $0.5 million; 2005 - $0.3 million).
 
6.
Acquired technology:
 
             
   
2007
   
2006
 
             
Cost
  $ 4,081     $ 4,081  
Less accumulated amortization
    4,081       3,828  
                 
Net book value
  $ -     $ 253  
 
In 2007, amortization expense was $0.3 million (2006 - $0.3 million; 2005 - $0.3 million).

84

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

Years ended November 30, 2007, 2006, 2005 and
period from December 1, 1987 to November 30, 2007


 
7.
Senior convertible notes payable:
 
On October 7, 2005, the Company, through its wholly owned subsidiary, Vasogen Ireland Limited, issued 6.45% U.S. $40.0 million senior convertible notes payable and 0.3 million common share purchase warrants for net proceeds of $42.8 million (gross proceeds of $47.0 million (U.S. $40.0 million) less issuance costs of $4.2 million).  The notes were repaid on April 1, 2007.
 
As a consequence of adopting Section 3855 effective December 1, 2006 as described in note 2, the Company revised previously reported amounts related to the senior convertible notes payable as follows:
                   
   
As originally
             
   
reported,
   
Effect of
   
As revised,
 
   
November 30,
   
adopting
   
December 1,
 
   
2006
   
Section 3855
   
2006
 
                   
Current liabilities:
                 
     Senior convertible notes payable
  $ 8,754     $ (104 )   $ 8,650  
     Embedded derivative instruments
    -       829       829  
Non-current asset:
                       
     Deferred financing costs
    150       4       154  
 
During the year ended November 30, 2007, the Company repaid and extinguished the senior convertible notes payable by issuing a total of 1.8 million common shares having an aggregate fair value of $10.4 million, and paying cash of $0.9 million.  The Company recorded a loss on extinguishment of senior convertible notes payable of $1.8 million.  The equity conversion option of the senior convertible notes expired unexercised and was reduced by $1.6 million to nil.
 
The Company recorded nominal interest expense for the year ended November 30, 2007.  Interest was settled in cash.

85

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

Years ended November 30, 2007, 2006, 2005 and
period from December 1, 1987 to November 30, 2007


 
7.
Senior convertible notes payable (continued):
 
The following table sets out the continuity of the senior convertible notes payable since November 30, 2005:
                   
               
Impact on
 
               
senior
 
   
Number of
         
convertible
 
   
common
   
Number of
   
notes
 
   
shares
   
warrants
   
payable
 
                   
Balance, November 30, 2005
    -       -     $ 35,454  
December 1, 2005 instalment payment in advance applied
    77       -       (2,122 )
Instalment payments settled in cash
    -       -       (3,976 )
Instalment payments settled in shares
    2,697       -       (19,849 )
Acceleration payments settled in common shares and warrants
    411       178       (7,265 )
Conversion by note holder to common shares
    10       -       (263 )
Accretion in carrying value
    -       -       7,824  
Impact of foreign exchange
    -       -       (1,049 )
                         
Balance, November 30, 2006, as originally reported
    3,195       178       8,754  
Change in accounting for senior convertible notes as a result of adopting Section 3855 (note 2)
    -       -       (104 )
                         
Balance, November 30, 2006, as revised
    3,195       178       8,650  
December 1, 2006 instalment payment in advance applied
    -       -       (1,872 )
Instalment payments settled in cash
    -       -       (924 )
Instalment payments settled in shares
    1,809       -       (6,437 )
Adjustment for twelve-day weighted average share price
    -       -       (313 )
Accretion in carrying value
    -       -       728  
Impact of foreign exchange
    -       -       168  
                         
Balance, November 30, 2007
    5,004       178     $ -  

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


 

 

86


VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

Years ended November 30, 2007, 2006, 2005 and
period from December 1, 1987 to November 30, 2007

 
 
8.
Shareholders' equity:
 
 
        (a)
Consolidated statement of shareholders' equity:
 
                                           
         
Common
                           
Period from
 
         
shares'
                           
December 1,
 
         
average
                           
1987 to
 
   
Number
   
share
   
Share
   
Contributed
               
November 30,
 
   
of shares
   
price
   
capital
   
surplus
   
Warrants
   
Deficit
   
2007
 
                                           
Balance, December 1, 1987
    103           $ 1,213     $ -     $ -     $ (1,510 )   $ (297 )
Shares issued  for cash
    13       15.00       195       -       -       -       195  
Shares issued for services
    1       17.00       17       -       -       -       17  
Shares issued to acquire a license
    157       15.13       2,375       -       -       -       2,375  
Loss
    -               -       -       -       (755 )     (755 )
                                                         
Balance, November 30, 1988
    274               3,800       -       -       (2,265 )     1,535  
Loss
    -               -       -       -       (601 )     (601 )
                                                         
Balance, November 30, 1989
    274               3,800       -       -       (2,866 )     934  
Shares issued for cash
    25       42.44       1,061       -       -       -       1,061  
Options exercised
    5       21.00       105       -       -       -       105  
Shares issued for services
    1       45.00       45       -       -       -       45  
Debt conversion
    18       11.11       200       -       -       -       200  
Loss
    -               -       -       -       (725 )     (725 )
                                                         
Balance, November 30, 1990
    323               5,211       -       -       (3,591 )     1,620  
Shares issued for cash
    68       13.36       909       -       -       -       909  
Options exercised
    2       15.00       30       -       -       -       30  
Shares issued for services
    9       18.66       168       -       -       -       168  
Shares issued to acquire a license
    7       14.28       100       -       -       -       100  
Loss
    -               -       -       -       (593 )     (593 )
                                                         
Balance, November 30, 1991
    409               6,418       -       -       (4,184 )     2,234  



87

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

Years ended November 30, 2007, 2006, 2005 and
period from December 1, 1987 to November 30, 2007


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



88

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

Years ended November 30, 2007, 2006, 2005 and
period from December 1, 1987 to November 30, 2007


 
8.
Shareholders' equity (continued):
 
                                           
         
Common
                           
Period from
 
         
shares'
                           
December 1,
 
         
average
                           
1987 to
 
   
Number
   
share
   
Share
   
Contributed
               
November 30,
 
   
of shares
   
price
   
capital
   
surplus
   
Warrants
   
Deficit
   
2007
 
                                           
Balance, November 30, 1994
    606             9,169       -       -       (6,907 )     2,262  
Shares issued for cash
    346       10.00       3,460       -       -       -       3,460  
Share issue costs
    -       -       (294 )     -       -       -       (294 )
Warrants exercised
    19       4.89       93       -       -       -       93  
Options exercised
    12       5.00       60       -       -       -       60  
Shares issued for services
    24       10.25       246       -       -       -       246  
Loss
    -               -       -       -       (2,323 )     (2,323 )
                                                         
Balance, November 30, 1995
    1,007               12,734       -       -       (9,230 )     3,504  
Shares issued for cash
    356       10.99       3,913       -       -       -       3,913  
Share issue costs
    -       -       (962 )     -       -       -       (962 )
Warrants exercised
    340       13.35       4,539       -       -       -       4,539  
Options exercised
    39       6.28       245       -       -       -       245  
Shares issued for services
    63       11.87       748       -       -       -       748  
Shares issued  to acquire license
    27       12.00       324       -       -       -       324  
Loss
    -               -       -       -       (4,862 )     (4,862 )
                                                         
Balance, November 30, 1996
    1,832               21,541       -       -       (14,092 )     7,449  
Shares issued for cash
    306       24.92       7,625       -       -       -       7,625  
Share issue costs
    -       -       (312 )     -       -       -       (312 )
Warrants exercised
    135       12.00       1,621       -       -       -       1,621  
Options exercised
    49       9.84       482       -       -       -       482  
Shares issued for services
    12       17.92       215       -       -       -       215  
Loss
    -               -       -       -       (7,991 )     (7,991 )
                                                         
Balance, November 30, 1997
    2,334               31,172       -       -       (22,083 )     9,089  



89

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

Years ended November 30, 2007, 2006, 2005 and
period from December 1, 1987 to November 30, 2007


 
8.
Shareholders' equity (continued):
 
                                           
         
Common
                           
Period from
 
         
shares'
                           
December 1,
 
         
average
                           
1987 to
 
   
Number
   
share
   
Share
   
Contributed
               
November 30,
 
   
of shares
   
price
   
capital
   
surplus
   
Warrants
   
Deficit
   
2007
 
                                           
Balance, November 30, 1997
    2,334             31,172       -       -       (22,083 )     9,089  
Shares issued for cash
    288       17.50       5,043       -       -       -       5,043  
Share issue costs
    -       -       (479 )     -       -       -       (479 )
Warrants exercised
    23       11.00       253       -       -       -       253  
Options exercised
    10       9.50       95       -       -       -       95  
Shares issued for services
    3       18.33       55       -       -       -       55  
Loss
    -               -       -       -       (7,312 )     (7,312 )
                                                         
Balance, November 30, 1998
    2,658               36,139       -       -       (29,395 )     6,744  
Shares issued for cash
    659       14.90       9,825       -       -       -       9,825  
Share issue costs
    -       -       (934 )     -       -       -       (934 )
Warrants exercised
    163       10.67       1,739       -       -       -       1,739  
Options exercised
    59       12.27       724       -       -       -       724  
Shares issued for services
    21       12.33       259       -       -       -       259  
Loss
    -               -       -       -       (7,915 )     (7,915 )
                                                         
Balance, November 30, 1999
    3,560               47,752       -       -       (37,310 )     10,442  
Shares issued for cash
    374       95.32       35,650       -       -       -       35,650  
Share issue costs
    -       -       (1,812 )     -       -       -       (1,812 )
Warrants exercised
    398       17.33       6,898       -       -       -       6,898  
Options exercised
    139       14.85       2,064       -       -       -       2,064  
Shares issued for services
    4       58.25       233       -       -       -       233  
Loss
    -               -       -       -       (9,961 )     (9,961 )
                                                         
Balance, November 30, 2000
    4,475               90,785       -       -       (47,271 )     43,514  



90

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

Years ended November 30, 2007, 2006, 2005 and
period from December 1, 1987 to November 30, 2007


 
8.
Shareholders' equity (continued):
 
                                           
         
Common
                           
Period from
 
         
shares'
                           
December 1,
 
         
average
                           
1987 to
 
   
Number
   
share
   
Share
   
Contributed
               
November 30,
 
   
of shares
   
price
   
capital
   
surplus
   
Warrants
   
Deficit
   
2007
 
                                           
Balance, November 30, 2000
    4,475             90,785       -       -       (47,271 )     43,514  
Shares issued for cash
    140       85.29       11,941       -       -       -       11,941  
Share issue costs
    -       -       (121 )     -       -       -       (121 )
Options exercised
    22       19.50       429       -       -       -       429  
Loss
    -               -       -       -       (14,389 )     (14,389 )
                                                         
Balance, November 30, 2001
    4,637               103,034       -       -       (61,660 )     41,374  
Shares issued for cash
    515       48.54       25,000       -       -       -       25,000  
Share issue costs
    -       -       (1,901 )     -       -       -       (1,901 )
Options exercised
    41       13.17       540       -       -       -       540  
Loss
    -               -       -       -       (19,507 )     (19,507 )
                                                         
Balance, November 30, 2002
    5,193               126,673       -       -       (81,167 )     45,506  
Shares issued for cash
    948       53.45       50,669       -       -       -       50,669  
Share issue costs
    -       -       (5,898 )     -       -       -       (5,898 )
Warrants exercised
    25       53.88       1,347       -       -       -       1,347  
Options exercised
    36       16.36       589       -       -       -       589  
Fair value of stock options and warrants issued to consultants
    -       -       -       744       1,456       -       2,200  
Loss
    -               -       -       -       (31,948 )     (31,948 )
                                                         
Balance, November 30, 2003
    6,202               173,380       744       1,456       (113,115 )     62,465  



91

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

Years ended November 30, 2007, 2006, 2005 and
period from December 1, 1987 to November 30, 2007


 
8.
Shareholders' equity (continued):
 
                                           
         
Common
                           
Period from
 
         
shares'
                           
December 1,
 
         
average
                           
1987 to
 
   
Number
   
share
   
Share
   
Contributed
               
November 30,
 
   
of shares
   
price
   
capital
   
surplus
   
Warrants
   
Deficit
   
2007
 
                                           
Balance, November 30, 2003
    6,202             173,380       744       1,456       (113,115 )     62,465  
Shares issued for cash
    978       78.64       76,913       -       -       -       76,913  
Share issue costs
    -       -       (6,128 )     -       -       -       (6,128 )
Options exercised
    53       24.53       1,300       -       -       -       1,300  
Fair value of stock options issued to consultants
    -       -       -       455       -       -       455  
Loss
    -               -       -       -       (74,550 )     (74,550 )
                                                         
Balance, November 30, 2004, as originally reported
    7,233               245,465       1,199       1,456       (187,665 )     60,455  
Change in accounting for stock-based compensation
    -       -       55       3,951       -       (4,006 )     -  
                                                         
Balance, November 30, 2004, as revised
    7,233               245,520       5,150       1,456       (191,671 )     60,455  




92

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

Years ended November 30, 2007, 2006, 2005 and
period from December 1, 1987 to November 30, 2007


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



93

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

Years ended November 30, 2007, 2006, 2005 and
period from December 1, 1987 to November 30, 2007


 
8.
Shareholders' equity (continued):
 
                                           
         
Common
                           
Period from
 
         
shares'
                           
December 1,
 
         
average
                           
1987 to
 
   
Number
   
share
   
Share
   
Contributed
               
November 30,
 
   
of shares
   
price
   
capital
   
surplus
   
Warrants
   
Deficit
   
2007
 
                                           
Balance, November 30, 2005
    8,226             295,007       16,674       5,345       (284,719 )     32,307  
Public offering (b)
    4,319       4.19       18,082       -       5,024       -       23,106  
Fair value of broker warrants (b)
    -       -       -       -       705       -       705  
Share issue costs (b)
    -       -       (2,376 )     -       (550 )     -       (2,926 )
Shares issued for deferred share units
    2       18.00       36       -       -       -       36  
Fair value of stock options granted
    -       -       -       3,682       -       -       3,682  
Shares issued for instalment payments on senior convertible notes payable
    2,697       8.70       23,481       -       -       -       23,481  
Shares and warrants issued for acceleration payments on senior convertible notes payable
    411       23.66       9,723       (807 )     2,322       (295 )     10,943  
Holders' conversion of notes
    10       32.20       322       (59 )     -       -       263  
December 1, 2006 instalment payment made in advance
    -       -       (2,090 )     -       -       -       (2,090 )
December 1, 2005 instalment payment in advance applied
    -       -       2,032       -       -       -       2,032  
Reversal of forfeited unvested options
    -       -       -       (599 )     -       -       (599 )
Transfer of forfeited and expired vested warrants
    -       -       -       1,456       (1,456 )     -       -  
Loss
    -               -       -       -       (66,360 )     (66,360 )
                                                         
Balance, November 30, 2006, as originally reported
    15,665               344,217       20,347       11,390       (351,374 )     24,580  



94

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

Years ended November 30, 2007, 2006, 2005 and
period from December 1, 1987 to November 30, 2007


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



95

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

Years ended November 30, 2007, 2006, 2005 and
period from December 1, 1987 to November 30, 2007


 
8.
Shareholders' equity (continued):
 
         (b)
Share issuances:
 
On May 24, 2007, the Company issued 4.9 million common shares and 3.7 million five-year warrants for gross cash proceeds of $17.3 million (U.S. $16.0 million) (net proceeds of $15.4 million after costs of issuance of $1.9 million).  In addition, the Company issued 0.3 million broker warrants to the placement agent in connection with the financing.  The terms of the warrants are described in note 8(e).  The proceeds were allocated to the common shares and warrants based on their relative fair values.  The fair value of the warrants was estimated using the Black-Scholes option pricing model using the following assumptions:
             
   
Five-year
   
Broker
 
   
warrants
   
warrants
 
             
Dividend yield
    -       -  
Risk-free interest rates
    4.41 %     4.43 %
Volatility
    93 %     115 %
Expected life of warrants
 
5.0 years
   
3.0 years
 
                 

On November 14, 2006, the Company issued 4.3 million common shares, 1.7 million five-year warrants and 0.4 million six-month warrants to purchase common shares for gross cash proceeds of $23.1 million (U.S. $20.3 million) (net proceeds of $20.2 million after cost of issuance of $2.9 million).  In addition, the Company issued 0.3 million broker warrants to the placement agent in connection with the financing.  The terms of the warrants are described in note 8(e).  The proceeds were allocated to the common shares and warrants based on their relative fair values.

96

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

Years ended November 30, 2007, 2006, 2005 and
period from December 1, 1987 to November 30, 2007


 
8.
Shareholders' equity (continued):
 
 
        (c)
Stock-based compensation plans:
 
In May 2003, the Company adopted two new stock option plans (the "2003 Employee Plan" and the "2003 Director Plan") to eventually replace the Company's existing stock option plan (the "Existing Plan").  All grants of options after May 2003 are made from the new plans and no further option grants will be made under the Existing Plan.  The Company reserved for issuance 200,000 common shares under the 2003 Employee Plan and 25,000 common shares under the 2003 Director Plan.  In March 2005, the Company's shareholders approved increasing the maximum number of common shares under the 2003 Employee Plan to 500,000.  In March 2006, the Company's shareholders also approved increasing the maximum number of common shares under the 2003 Employee Plan to 800,000 and the 2003 Director Plan to 50,000.  In April 2007, the Company's shareholders approved increasing the maximum number of common shares under the 2003 Employee Plan to 1,800,000.  In addition, the Company's shareholders approved amending the 2003 Employee Plan to allow restricted stock units to be granted.  No restricted stock units were issued or outstanding as at November 30, 2007.  Each option granted allows the holder to purchase one common share at an exercise price not less than the closing price of the Company's common shares on The Toronto Stock Exchange on the last trading day prior to the grant of the option.  Options granted under these plans have a maximum term of 10 years and generally vest over a period of up to three years.
 
As at November 30, 2007, there were 1.0 million (2006 - 0.2 million; 2005 - 0.3 million) options and restricted stock units available for grant.
                   
   
2007
   
2006
   
2005
 
         
Weighted
         
Weighted
         
Weighted
 
         
average
         
average
         
average
 
   
Number of
   
exercise
   
Number of
   
exercise
   
Number of
   
exercise
 
   
options
   
price
   
options
   
price
   
options
   
price
 
Outstanding, beginning of year
    812     $ 30.30       431     $ 56.00       352     $ 60.10  
Issued
    404       3.19       502       13.80       130       46.50  
Exercised
    -       -       -       -       (15 )     43.20  
Expired or cancelled
    (337 )     22.97       (121 )     53.00       (36 )     67.30  
Outstanding, end of year
    879       20.67       812       30.30       431       56.00  
Exercisable, end of year
    402               313               259          

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

97

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

Years ended November 30, 2007, 2006, 2005 and
period from December 1, 1987 to November 30, 2007


 
8.
Shareholders' equity (continued):
 
The following table provides information on options outstanding and exercisable as of November 30, 2007:
               
     
Options outstanding
   
Options exercisable
 
               
Weighted
           
         
Weighted
   
average
       
Weighted
 
         
average
   
remaining
       
average
 
Exercise
   
Number
 
exercise
   
contractual
   
Number
 
exercise
 
price
   
outstanding
   
price
   
life (years)
   
exercisable
   
price
 
                                 
$ 2.12 - $ 4.29       218     $ 2.12       9.8       17     $ 2.12  
$ 4.30 - $ 4.90       126       4.56       8.8       49       4.84  
$ 4.91 - $ 7.50       180       6.48       8.6       63       6.50  
$ 7.51 - $32.10       136       27.41       6.9       71       28.11  
$ 32.11 - $92.10       219       55.93       2.7       202       56.28  
          879       20.67       7.2       402       34.99  

The aggregate intrinsic value of exercisable options as at November 30, 2007 and 2006 was nil.
 
The weighted average remaining contractual life of exercisable options is 5.1 years.
 
The fair value of stock-based compensation was estimated using the Black-Scholes option pricing model at the grant date using the following assumptions:
                   
   
2007
   
2006
   
2005
 
Dividend yield
    -       -       -  
Weighted average risk-free interest rate
    4.19 %     4.10 %     3.77 %
Volatility factor of the expected market price of the Company's common shares
    95.3 %     87.3 %     73.2 %
Weighted average expected life of the employment options
 
6.0 years
   
5.9 years
   
4.7 years
 


 


98

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

Years ended November 30, 2007, 2006, 2005 and
period from December 1, 1987 to November 30, 2007


 
8.
Shareholders' equity (continued):
 
The resulting weighted average fair value per share at the grant date of the employee and non-employee stock-based compensation issued in fiscal 2007 is $2.34 (2006 - $9.60; 2005 - $29.60).
 
Total compensation cost for stock-based compensation arrangements recognized in income in fiscal 2007 was $2.0 million (2006 - $3.1 million; 2005 - $3.6 million).
 
On exercise of options, the Company's policy is to issue shares from treasury.
 
         (d)
Deferred share units:
 
Effective January 1, 2004, the Company established a plan to grant DSUs to its non-management directors and reserved a maximum of 25,000 common shares for issuance under the plan.  In April 2007, the Company's shareholders approved increasing the maximum number of common shares under the DSU plan to 125,000.  Under the plan, the directors will defer any cash remuneration that they would have otherwise received for services rendered and in lieu thereof will receive the number of DSUs which is equivalent in value to the remuneration deferred.  A DSU is a unit equivalent in value to one common share of the Company based on the trading price of the Company's common shares on The Toronto Stock Exchange.  Upon termination of board service, the director will be able to redeem DSUs based upon the then market price of the Company's common shares on the date of redemption in exchange for any combination of cash or common shares as the Company may determine.
 
The Company recorded $0.2 million (2006 - $0.3 million; 2005 - $0.3 million) in compensation expense relating to 58,140 (2006 - 14,476; 2005 - 5,202) DSUs granted in 2007 for services rendered during the year.  As at November 30, 2007, 78,049 (2006 - 19,909) DSUs are issued and outstanding with a value of $0.1 million (2006 - $0.1 million) based upon the market value of the Company's common shares at November 30, 2007.  No DSUs were exercised in 2007.

99

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

Years ended November 30, 2007, 2006, 2005 and
period from December 1, 1987 to November 30, 2007


 
8.
Shareholders' equity (continued):
 
         (e)
Warrants:
 
As at November 30, the warrants which are outstanding and exercisable are as follows:
                   
   
2007
   
2006
   
2005
 
Outstanding, beginning of year
    2,927       431       98  
Issued
    3,983       2,594       333  
Exercised
    -       -       -  
Expired
    (432 )     (98 )     -  
Outstanding, end of year
    6,478       2,927       431  
Exercisable, end of year
    6,478       2,927       431  
 
The following table provides information on warrants outstanding as of November 30, 2007:
       
Exercise
Number
 
Shares issuable
price
outstanding
Expiry
upon exercise
U.S. $13.59
333
October 7, 2010
736
U.S. $14.05
39
February 28, 2011
86
U.S. $13.59
39
March 31, 2011
86
U.S. $13.59
39
April 30, 2011
86
U.S. $ 13.59
61
May 31, 2011
134
U.S. $ 6.30
1,728
November 14, 2011
1,728
U.S. $ 6.30
256
November 14, 2009
256
U.S. $ 3.16
3,688
May 24, 2012
3,688
U.S. $ 3.81
295
May 24, 2010
295
 
6,478
 
7,095


 


100

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

Years ended November 30, 2007, 2006, 2005 and
period from December 1, 1987 to November 30, 2007


 
9.
Loss per share:
 
The computations for basic and diluted loss per share are as follows:
                   
   
2007
   
2006
   
2005
 
Loss for the year
  $ (28,777 )   $ (66,360 )   $ (93,048 )
                         
Weighted average number of common shares outstanding:
                       
     Basic and diluted
    19,717       9,408       7,987  
                              
Loss per common share:
                       
     Basic and diluted
  $ (1.46 )   $ (7.05 )   $ (11.65 )
 
The options and warrants to purchase common shares and the senior convertible notes payable are not included in the calculation of diluted loss per share because the Company has a loss for each period presented and to do so would be anti-dilutive.
 
10.
Consolidated statements of cash flows:
 
         (a)
Change in non-cash operating working capital:
 
                         
                   
Period from
 
                   
December 1,
 
                     
1987 to
 
   
Years ended November 30,
 
November 30,
 
   
2007
   
2006
   
2005
   
2007
 
                         
Decrease (increase) in:
                       
     Clinical supplies
  $ (152 )   $ 651     $ 942     $ (1,363 )
     Tax credits recoverable
    (238 )     (197 )     466       (1,565 )
     Prepaid expenses and deposits
    597       239       227       (755 )
Increase (decrease) in:
                               
     Accounts payable and accrued liabilities
    (3,742 )     (17,851 )     10,999       4,634  
    $ (3,535 )   $ (17,158 )   $ 12,634     $ 951  



101

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

Years ended November 30, 2007, 2006, 2005 and
period from December 1, 1987 to November 30, 2007


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



102

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

Years ended November 30, 2007, 2006, 2005 and
period from December 1, 1987 to November 30, 2007


 
10.
Consolidated statements of cash flows (continued):
 
         (c)
Supplemental cash flow information:
                         
                     
Period from
 
                     
December 1,
 
                     
1987 to
 
   
Years ended November 30,
   
November 30,
 
   
2007
   
2006
   
2005
   
2007
 
                         
Interest received
  $ 1,328     $ 2,119     $ 1,147     $ 13,301  
Interest paid
    5       930       344       1,279  
Income taxes paid
    -       -       -       -  
 
11.
Fair values of financial instruments:
 
Financial instruments potentially exposing the Company to a concentration of credit risk and interest rate risk consist principally of cash and cash equivalents.  The Company manages credit risk by maintaining bank accounts with Schedule I banks and investing only in highly rated Canadian and U.S. corporations with securities that are traded on active markets and are capable of prompt liquidation.
 
The Company does not believe that the results of operations or cash flows would be affected to any significant degree by a sudden change in market interest rates relative to interest rates on the investments, owing to the relative short-term nature of the investments.
 
Financial instruments potentially exposing the Company to foreign exchange risk consist principally of cash and cash equivalents.  The Company manages foreign exchange risk by maintaining U.S. cash on hand to support U.S. forecasted cash outflows over an 18-month horizon.
 
In November 2007, the Company entered into a forward foreign exchange contract to purchase, in aggregate, U.S. $12.9 million for $12.5 million in December 2007.  The fair value of this instrument at November 30, 2007 was an asset of $0.4 million.  The related gain was recorded in foreign exchange loss (gain) in the statement of operations, deficit and comprehensive income.

103

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

Years ended November 30, 2007, 2006, 2005 and
period from December 1, 1987 to November 30, 2007


 
11.
Fair values of financial instruments (continued):
 
In November 2006, the Company entered into a forward foreign exchange contract to purchase U.S. $8.0 million for $9.2 million in December 2006.  This transaction created a nominal exchange loss.
 
The Company believes that the results of operations and cash flows would be affected by a sudden change in foreign exchange rates, but would not impair or enhance its ability to pay its U.S. dollar-denominated obligations.
 
The carrying values of cash and cash equivalents, restricted cash, accounts payable and accrued liabilities approximate their fair values due to the relatively short periods to maturity of these financial instruments.
 
12.
Income taxes:
 
The provision for income taxes differs from the amount computed by applying the statutory income tax rate to loss before income taxes.  The sources and tax effects of the differences are as follows:
                   
   
2007
   
2006
   
2005
 
Statutory income tax rate
    36.12 %     36.12 %     35.0 %
Basic rate applied to loss before income taxes
  $ (10,394 )   $ (23,969 )   $ (32,567 )
Adjustments resulting from:
                       
     Foreign losses affected at lower rates
    4,959       10,383       23,234  
     Permanent differences
    1,950       1,998       (74 )
     Change in valuation allowance
    2,329       10,982       9,489  
     Change in enacted income tax rates
    556       710       -  
     Other
    600       (104 )     (82 )
    $ -     $ -     $ -  


 


104

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

Years ended November 30, 2007, 2006, 2005 and
period from December 1, 1987 to November 30, 2007


 
12.
Income taxes (continued):
 
The tax effect of temporary differences that give rise to significant components of the Company's future tax assets and future tax liabilities at November 30 are presented below:
             
   
2007
   
2006
 
             
Future tax assets:
           
     Non-capital losses
  $ 38,010     $ 37,811  
     Deductible share issue costs
    1,823       2,646  
     Excess of tax value of capital assets over book value
    147       174  
     SR&ED expenditure pool, net of refundable tax credits
    9,776       8,198  
     Other, including net capital losses
    2,862       1,460  
      52,618       50,289  
Valuation allowance
    (52,618 )     (50,289 )
Net future tax asset
  $ -     $ -  

The Company's subsidiary, Vasogen Ireland Limited, has losses of approximately $297.4 million (2006 - $291.5 million) included in the consolidated non-capital losses, available indefinitely to reduce future taxable income, the benefit of which will be recognized in the accounts when realized.
 
The Company's other subsidiary, Vasogen Corp., also has losses of approximately $2.1 million (2006 - $3.4 million) included in the consolidated non-capital losses, which begin to expire in 2025, the benefit of which will be recognized in the accounts when realized.
 
Under the Income Tax Act (Canada), certain expenditures are classified as Scientific Research & Experimental Development ("SR&ED") expenditures and, for tax purposes, are grouped into a pool, which is 100% deductible in the year incurred.  This SR&ED expenditure pool can also be carried forward indefinitely and deducted in full in any subsequent year.
 
The balance of the SR&ED expenditure pool at November 30, 2007 is approximately $32.4 million (2006 - $27.1 million) for federal income tax purposes and $26.9 million (2006 - $21.7 million) for Ontario tax purposes.

105

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

Years ended November 30, 2007, 2006, 2005 and
period from December 1, 1987 to November 30, 2007


 
12.
Income taxes (continued):
 
The Company also has $13.6 million of investment tax credits ("ITCs") on SR&ED expenditures which have not been recognized in the accounts. These ITCs are available to be applied against federal taxes otherwise payable in future years.  The eligibility of the Company for provincial refundable research tax credits depends on the Company's compliance with the provincial tax legislation. The amount of tax credits ultimately received by the Company is dependent upon review by taxation authorities of the technical and financial aspects of the claims.  The ITCs will expire as follows:
       
2008
  $ 222  
2009
    438  
2010
    605  
2011
    951  
2012
    960  
2013
    1,497  
2014
    2,343  
2015
    2,062  
2026
    2,582  
2027
    1,932  
         
    $ 13,592  
 
13.
Commitments and contingencies:
 
         (a)
Royalty commitments:
 
The Company agreed to pay royalties to arm's-length third parties based on gross amounts receivable by the Company from future commercial sales of its products, aggregating 1.5% on all sales to a maximum royalty of $1.3 million per annum and an additional 2% with respect to revenue derived from certain applications of the Company's Celacade technology to a maximum royalty of $5.0 million per annum.  To date, no royalties are due and/or payable.

106

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

Years ended November 30, 2007, 2006, 2005 and
period from December 1, 1987 to November 30, 2007


 
13.
Commitments and contingencies (continued):
 
         (b)
Commitments:
 
Under the terms of operating lease agreements for its operating facilities, the Company is committed to make payments as follows for the years ending November 30:
       
2008
  $ 627  
2009
    368  
         
    $ 995  

Rent expense under operating leases, for the year ended November 30, 2007, is $0.7 million (2006 - $0.8 million; 2005 - $0.9 million).
 
         (c)
Contingencies:
 
There exist certain claims and potential claims against the Company, none of which are expected to have a material adverse effect on the consolidated financial statements.
 
14.
Segment information:
 
The Company operates in one business segment:  the development of treatments and related products addressing chronic inflammatory disease.  The primary property and equipment are located in Canada.  The acquired technology, which as at November 30, 2007 was fully amortized, is in Ireland.

107

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

Years ended November 30, 2007, 2006, 2005 and
period from December 1, 1987 to November 30, 2007


 
15.
Research and development projects:
 
The Company has undertaken the following significant research and development projects:
 
         (a)
Platform technology:
 
The Company is focused on the research and development of treatments targeting the chronic inflammation underlying cardiovascular, neurological and other chronic inflammatory diseases.  The purpose of this project is to advance the development of these treatments and the associated product technology, enhance the value of the intellectual property, identify new approaches to treatment and new disease indications for clinical development, and when deemed appropriate, initiate research in these indications.
 
         (b)
Celacade technology - cardiovascular program:
 
The Company's Celacade technology is being developed to target the chronic inflammation associated with cardiovascular disease.  The Company has completed preclinical and clinical studies targeted at various areas of cardiovascular disease.  While the Company's ACCLAIM Phase III trial of Celacade did not reach the primary endpoint of significantly reducing the risk of death and cardiovascular hospitalization in the total patient population, this endpoint was met for certain large, pre-defined subgroups.  In September 2007, the Company announced plans for a confirmatory study that would support an application for regulatory approval in the United States of its Celacade technology for the treatment of patients with NYHA Class II heart failure.  The Company also has CE Mark regulatory approval for its Celacade medical device technology in the European Union and, in April 2007, entered into a collaborative agreement necessary to commence commercialization in that market.
 
         (c)
Celacade technology - autoimmune program:
 
The Company has completed preclinical and early-stage clinical studies with its Celacade technology in autoimmune disease.  Although autoimmune diseases may be candidates for future clinical development, the Company is currently not focusing any significant resources in this area.

108

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

Years ended November 30, 2007, 2006, 2005 and
period from December 1, 1987 to November 30, 2007


 
15.
Research and development projects (continued):
 
         (d)
VP025 - neuro-inflammatory program:
 
The Company is also developing a new class of drugs, designed to interact with immune cells, leading to the modulation of cytokines - potent chemical messengers that regulate and control inflammation.  VP025, the lead product candidate from this new class of drugs, is in development for the treatment of neuro-inflammatory disorders.
 
The following table outlines research and development costs expensed for the Company's significant research and development projects:
                         
                     
Period from
 
                     
December 1,
 
                     
1987 to
 
   
  Years ended November 30,
   
November 30,
 
   
2007
   
2006
   
2005
   
2007
 
Research and development costs expensed:
                       
     Platform technology
  $ 2,156     $ 2,472     $ 1,947     $ 43,257  
     Cardiovascular program
    7,224       25,813       64,444       173,598  
     Autoimmune program
    -       -       -       4,565  
     VP025
    2,659       4,447       5,030       17,497  
                                 
Total research and development costs expensed
  $ 12,039     $ 32,732     $ 71,421     $ 238,917  
                                 
Acquired technology:
                               
     Celacade platform
  $ -     $ -     $ -     $ 4,081  



109

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

Years ended November 30, 2007, 2006, 2005 and
period from December 1, 1987 to November 30, 2007


 
16.
Differences between generally accepted accounting principles in Canada and the United States:
 
The Company's consolidated financial statements are prepared in accordance with Canadian GAAP, which differ in certain respects from United States GAAP.  The following tables present the impact of material differences between Canadian GAAP and United States GAAP on the Company's consolidated financial statements:
 
 
         (a)
Consolidated statements of operations, deficit and comprehensive income:
 
                         
                     
Period from
 
                     
December 1,
 
                     
1987 to
 
      Years ended November 30,    
November 30,
 
   
2007
   
2006
   
2005
   
2007
 
Loss per Canadian GAAP
  $ (28,777 )   $ (66,360 )   $ (93,048 )   $ (374,340 )
Acquired technology costs (b)(i)
    -       -       -       (4,081 )
Technology amortization (b)(i)
    253       253       253       4,081  
Non-employee stock options (b)(ii)
    -       (58 )     (101 )     (3,476 )
Employee stock options (b)(iii)
    -       -       2,879       2,879  
Performance-based options (b)(iii)
    -       -       31       (278 )
Warrants issued to acquire technology (b)(iv)
    -       -       -       (61 )
Accretion of senior convertible notes payable (b)(v)
    799       (2,373 )     (281 )     (1,855 )
Amortization of deferred financing costs (b)(v)
    (298 )     (963 )     (145 )     (1,406 )
Loss on debt extinguishment (b)(v)
    (1,426 )     (1,131 )     -       (2,557 )
Fair value adjustment on embedded derivatives and warrants (b)(v)
    3,394       9,711       3,032       16,111  
Fair value adjustment on warrants from November 2006 financing (b)(vi)
    4,623       -       -       4,649  
Fair value adjustment on warrants from May 2007 financing (b)(vi)
    3,256       -       -       3,256  
                                 
Loss and comprehensive loss per United States GAAP
  $ (18,176 )   $ (60,921 )   $ (87,380 )   $ (357,078 )
                                 
Weighted average number of common shares under United States GAAP:
                               
     Basic and diluted
    19,717       9,408       7,987          
                                 
Basic and diluted loss per common share under United States GAAP
  $ (0.92 )   $ (6.48 )   $ (10.94 )        


 


110

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

Years ended November 30, 2007, 2006, 2005 and
period from December 1, 1987 to November 30, 2007


 
16.
Differences between generally accepted accounting principles in Canada and the United States (continued):
 
         (b)
Consolidated balance sheets:
                         
   
2007
   
2006
 
         
United
         
United
 
   
Canada
   
States
   
Canada
   
States
 
                         
Assets:
                       
     Acquired technology (i)
  $ -     $ -     $ 253     $ -  
     Deferred financing costs (v), (vi)
    -       1,039       150       648  
Liabilities:
                               
     Current portion of senior convertible notes payable (v)
    -       -       8,754       8,553  
     Senior convertible notes payable (v)
    -       -       -       -  
     Embedded derivatives (v)
    -       -       -       914  
     Warrants (v), (vi)
    -       5,893       -       7,859  
Shareholders' equity:
                               
     Share capital (iv)
    365,670       364,867       344,217       343,906  
     Contributed surplus (ii), (iii), (v)
    22,744       12,223       20,347       10,228  
     Warrants
    16,725       -       11,390       -  
     Deficit, end of period (i), (ii), (iii), (iv), (v), (vi)
    (381,783 )     (358,588 )     (351,374 )     (340,412 )
     Deficit accumulated during development stage (i), (ii), (iii), (iv), (v), (vi)
    (380,273 )     (357,078 )     (349,864 )     (338,902 )
 
 
   (i)
Acquired technology:
 
Canadian GAAP requires the capitalization and amortization of acquired technology costs.  Under United States GAAP, such acquired technology costs are charged to expense when incurred if, at the acquisition date, the technological feasibility of this technology has not yet been established and no future alternative uses existed. Accordingly, for United States GAAP purposes, the costs would have been expensed at the date of acquisition and the amortization recorded under Canadian GAAP would be reversed.

111

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

Years ended November 30, 2007, 2006, 2005 and
period from December 1, 1987 to November 30, 2007


 
16.
Differences between generally accepted accounting principles in Canada and the United States (continued):
 
 
   (ii)
Stock-based compensation to non-employees:
 
Under Canadian GAAP, the Company accounts for stock-based compensation granted to non-employees on or after December 1, 2002 at fair value.  The fair value of any awards to non-employees granted prior to December 1, 2002 is not required to be recorded or presented under Canadian GAAP.
 
Under United States GAAP, the Company accounted for stock-based compensation, including options and warrants granted to non-employees on or after December 15, 1995, at fair value in accordance with FASB Statement of Financial Accounting Standards No. 123, Accounting for Stock-based Compensation.  Effective December 1, 2005, the Company adopted FASB Statement of Financial Accounting Standards No. 123 (Revised 2004), Share-based Payments ("SFAS No. 123R").  There was no impact on the accounting for stock-based awards issued to non-employees in exchange for services as a result of this change.
 
There exists a difference between Canadian and United States GAAP for the fair value of options granted to non-employees after December 15, 1995 and prior to December 1, 2002, which are recorded at fair value under United States GAAP and which have not been recorded under Canadian GAAP.
 
 
   (iii)
Stock-based compensation to employees:
 
Under Canadian GAAP, effective December 1, 2004, the Company accounts for stock-based compensation granted to employees, officers and directors on or after December 1, 2002 at fair value which is measured using the Black-Scholes option pricing model.  Compensation cost is recognized over the service period.  Prior to December 1, 2004, the Company accounted for stock-based awards to employees, officers and directors using the settlement method.

112

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

Years ended November 30, 2007, 2006, 2005 and
period from December 1, 1987 to November 30, 2007


 
16.
Differences between generally accepted accounting principles in Canada and the United States (continued):
 
Under United States GAAP, the Company accounted for stock-based compensation, including options and warrants granted to employees prior to December 1, 2005, using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25").  In addition, the Company granted performance-based options to employees.  In accordance with APB 25, these awards were accounted for using variable plan accounting.  At each reporting date, compensation cost was measured based on an estimate of the number of options that vest considering the performance criteria and the difference between the market price of the underlying stock and the exercise price on that date.  Compensation cost was recognized over the performance period.
 
Effective December 1, 2005, the Company adopted SFAS No. 123R using the modified prospective transition approach whereby the fair value of awards granted or modified on or after December 1, 2005 are measured at fair value.  The Company's awards have graded vesting conditions.  The compensation cost for each award is recognized on a straight-line basis over the service period of the entire award.
 
There exists a difference between Canadian and United States GAAP for the intrinsic and variable plan measurement for employee and performance-based options granted to employees prior to December 1, 2005 under United States GAAP and for the fair value measurement of such awards under Canadian GAAP.
 
 
   (iv)
1996 warrants:
 
In 1996, 10,000 warrants were issued as part of the technology acquisition consideration.  United States GAAP requires these acquired technology costs to be recorded in an amount approximating the fair value of the warrants issued, estimated at their grant date using the Black-Scholes option pricing model, and expensed as research and development expenses.

113

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

Years ended November 30, 2007, 2006, 2005 and
period from December 1, 1987 to November 30, 2007


 
16.
Differences between generally accepted accounting principles in Canada and the United States (continued):
 
 
   (v)
Senior convertible notes payable and warrants:
 
Prior to December 1, 2006 and the adoption of Section 3855 under Canadian GAAP, the common share purchase warrants and the equity component of the senior convertible notes payable were presented separately as components of shareholders' equity.  The Company allocated the gross proceeds received on the issuance of the senior convertible notes payable on a relative fair value basis between the three elements: the equity and debt components of the senior convertible notes payable and the warrants.  Issuance costs were allocated on a pro rata basis among the three elements.  Prior to December 1, 2006, Canadian GAAP did not permit separate accounting for embedded derivatives.
 
Effective December 1, 2006, with the adoption of Section 3855, Canadian GAAP requires recognition of embedded derivatives at fair value.  The Company adopted Section 3855 retrospectively, without restatement.  As a result of the adoption of Section 3855, the gross proceeds allocated to the debt component of the senior convertible notes payable was further allocated between the embedded derivatives, at fair value, and the debt component at the residual amount.  The embedded derivatives identified on December 1, 2006 were consistent with those previously recognized under United States GAAP.
 
Under United States GAAP, SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, requires that an embedded derivative included in a debt arrangement for which the economic characteristics and risks are not clearly and closely related to the economic characteristics of the debt host contract be measured at fair value and presented as a liability.  Changes in fair value of the embedded derivative are recorded in the consolidated statements of operations, deficit and comprehensive income at each reporting date.  Embedded derivatives that met the criteria for bifurcation from the senior convertible notes payable and that were, therefore, measured at fair value consisted of the holders' conversion right, the instalment payment mechanism and the holders' contingent redemption and conversion rights in the event of a change in control or an event of default.  Under Canadian GAAP, the conversion option was an equity instrument that did not need to be remeasured.  As the conversion option expired unexercised, the amounts allocated to it were reclassified to contributed surplus.

114

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

Years ended November 30, 2007, 2006, 2005 and
period from December 1, 1987 to November 30, 2007


 
16.
Differences between generally accepted accounting principles in Canada and the United States (continued):
 
Under United States GAAP, the warrants are presented as a liability because they do not meet the criteria of Emerging Issues Task Force Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock ("EITF 00-19"), for equity classification.  Subsequent changes in fair value are recorded in the consolidated statements of operations, deficit and comprehensive income.  Under Canadian GAAP, the warrants are considered equity instruments and are not remeasured.
 
Under United States GAAP, the Company allocated the residual amount of the gross proceeds received to the senior convertible notes payable after the separate fair value measurement of the warrants and embedded derivatives.  All of the issuance costs related to the transaction were recognized as deferred financing costs under United States GAAP and were amortized to the consolidated statements of operations, deficit and comprehensive income using the effective interest yield method over the period to maturity.  The senior convertible notes payable carried an effective interest rate of 42%.  Differences in United States GAAP and Canadian GAAP result from the initial allocation differences and the subsequent accretion expense and amortization of deferred financing costs.  Differences in United States GAAP also result from the fair value remeasurement of the warrants and the conversion option as liabilities each reporting period.
 
Subsequent to December 1, 2006 for Canadian GAAP and United States GAAP, the twelve-day weighted average share price adjustment represented a derivative that was measured at fair value and changes in fair value were recorded in the consolidated statements of operations, deficit and comprehensive income as extinguishment loss.  The settlement of the twelve-day weighted average share price adjustment was accounted for as either a settlement of additional debt, if an asset, or as the proceeds to issue additional shares if a liability.  Prior to the adoption of Section 3855, under Canadian GAAP, there was no recognition of the twelve-day weighted average share price adjustment as a derivative.  Adjustments to the number of shares issued or debt exchanged were accounted for as adjustments to share capital at no value.

115

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

Years ended November 30, 2007, 2006, 2005 and
period from December 1, 1987 to November 30, 2007


 
16.
Differences between generally accepted accounting principles in Canada and the United States (continued):
 
During the year, the Company recorded certain corrections related to the accounting for the senior convertible notes payable under United States GAAP.  The corrections relate to fiscal 2006, are not considered to be material to that period and are not material with respect to the net loss for fiscal 2007 or to trends in the consolidated statement of operations, deficit and comprehensive income.  The Company has increased share capital by $0.9 million, decreased accretion expense by $0.9 million, increased the loss on extinguishment of the senior convertible notes payable by $1.5 million and increased the gain on the change in the fair value of warrants and embedded derivatives by $2.2 million.
 
The net impact of these adjustments was to increase share capital by $0.9 million, to reduce the deficit by $1.6 million and to decrease basic and diluted loss per share for the year ended November 30, 2007 by $0.08.
 
 
   (vi)
Warrants:
 
Under Canadian GAAP, the common shares and the warrants issued on November 14, 2006 and on May 24, 2007 are presented separately as components of shareholders' equity.  The Company allocated the gross proceeds received on a relative fair value basis between the common shares and the warrants.  The related issuance costs were allocated on a pro rata basis to the common shares and the warrants.
 
Under United States GAAP, the warrants are presented as a liability because they do not meet the criteria of EITF 00-19 for equity classification.  As a result, the Company allocated the residual amount of the gross proceeds received to the common shares after the separate fair value measurement of the liability-classified warrants.  Subsequent changes in the fair value of the warrants are recorded in the consolidated statements of operations, deficit and comprehensive income.  Under Canadian GAAP, the related issuance costs were allocated on a pro rata basis to the common shares and the warrants and recorded in shareholders' equity.  However, under United States GAAP, the amount of issuance costs allocated to the warrants is recognized as deferred financing costs and is amortized to the consolidated statements of operations, deficit and comprehensive income over the term of the warrants.

116

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

Years ended November 30, 2007, 2006, 2005 and
period from December 1, 1987 to November 30, 2007


 
16.
Differences between generally accepted accounting principles in Canada and the United States (continued):
 
         (c)
Consolidated statements of cash flows:
 
Cash from operations under United States GAAP includes the adjustments to loss for the year outlined in note 16(b).  Cash used in investments under United States GAAP excludes amounts representing acquired technology (note 16(b)(i)).
 
         (d)
Income taxes:
 
Under Canadian GAAP, investment tax credits and other research and development credits are deducted from research and development expense for items of a current nature, and deducted from property and equipment for items of a capital nature.  Under United States GAAP, these tax credits would be reclassified as a reduction of income tax expense.  Total research and development tax credits netted against research and development expenses on the consolidated statements of operations, deficit and comprehensive income are set out in note 2(h).
 
         (e)
Pro forma information:
 
On December 1, 2005, the Company adopted the fair value-based method for measurement and cost recognition of employee share-based compensation arrangements under the provisions of SFAS No. 123R, using the modified prospective application transitional approach.

117

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

Years ended November 30, 2007, 2006, 2005 and
period from December 1, 1987 to November 30, 2007


 
16.
Differences between generally accepted accounting principles in Canada and the United States (continued):
 
Under the modified prospective application transitional approach, the fair value of the cost of share-based compensation is recognized for awards granted, modified, repurchased or cancelled subsequent to the adoption of SFAS No. 123R.  In addition, share-based compensation is recognized, subsequent to the adoption of SFAS No. 123R, for the remaining portion of the vesting period, if any, for outstanding awards granted prior to the date of adoption.  Accordingly, on a modified prospective basis, there is no difference in the recognition of stock-based compensation awards under Section 3870 and SFAS No. 123R for employee and performance-based options.  Prior periods have not been adjusted and the Company continues to provide pro form disclosures as if it had accounted for employee share-based payments in all periods presented under the fair value provisions of SFAS No. 123, Accounting for Stock-based Compensation, which is presented below:
       
   
2005
 
       
Loss for the year - United States GAAP
  $ (87,380 )
Compensation cost - employees (16(b)(iii))
    (2,879 )
Compensation expense (16(b)(iii))
    (192 )
         
Pro forma loss for the year - United States GAAP
  $ (90,451 )
         
Pro forma basic and diluted loss per share - United States GAAP
  $ (11.32 )


 


118

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

Years ended November 30, 2007, 2006, 2005 and
period from December 1, 1987 to November 30, 2007



 
16.
Differences between generally accepted accounting principles in Canada and the United States (continued):
 
 
(f)
Consolidated statement of shareholders' equity in accordance with United States GAAP:
                                           
         
Common
                           
Period from
 
         
shares'
                           
December 1,
 
         
average
         
Additional
               
1987 to
 
   
Number
   
share
   
Share
   
paid-in
               
November 30,
 
   
of shares
   
price
   
capital
   
capital
   
Warrants
   
Deficit
   
2007
 
                                           
Balance, November 30, 2004
    7,233           $ 245,526     $ 4,825     $ 1,456     $ (192,111 )   $ 59,696  
Shares issued for cash
    901       58.27       52,502       -       -       -       52,502  
Share issue costs
    -       -       (3,720 )     -       -       -       (3,720 )
Options exercised
    15       41.80       627       -       -       -       627  
Fair value of stock options granted
    -       -       -       837       -       -       837  
Shares issued in advance for instalment payment on senior convertible notes payable
    77       26.42       2,034       -       -       -       2,034  
Instalment payment in advance
    -       -       (2,032 )     -       -       -       (2,032 )
Performance-based options
    -       -       -       (31 )     -       -       (31 )
Loss and comprehensive loss
    -               -       -       -       (87,380 )     (87,380 )
                                                         
Balance, November 30, 2005
    8,226               294,937       5,631       1,456       (279,491 )     22,533  


 


119

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

Years ended November 30, 2007, 2006, 2005 and
period from December 1, 1987 to November 30, 2007


 
16.
Differences between generally accepted accounting principles in Canada and the United States (continued):
                                           
         
Common
                           
Period from
 
         
shares'
                           
December 1,
 
         
average
         
Additional
               
1987 to
 
   
Number
   
share
   
Share
   
paid-in
               
November 30,
 
   
of shares
   
price
   
capital
   
capital
   
Warrants
   
Deficit
   
2007
 
                                                       
Balance, November 30, 2005
    8,226             294,937       5,631       1,456       (279,491 )     22,533  
Shares issued for cash
    4,319       4.12       17,779       -       -       -       17,779  
Shares issued for services
    2       18.00       36       -       -       -       36  
Share issue costs
    -       -       (2,329 )     -       -       -       (2,329 )
Shares and warrants issued for instalment payments and acceleration payments on senior convertible notes payable
    3,108       10.27       31,913       -       -       -       31,913  
Holders' conversion of notes
    10       32.20       322       -       -       -       322  
Instalment payment made in advance
    -       -       (2,090 )     -       -       -       (2,090 )
Instalment payment in advance applied
    -       -       2,032       -       -       -       2,032  
Fair value of stock options granted
    -       -       -       3,141       -       -       3,141  
Value of embedded derivatives on holders' conversion
    -       -       1,306       -       -       -       1,306  
Fair value of vested options/warrants forfeited and expired
    -       -       -       1,456       (1,456 )     -       -  
Loss and comprehensive loss
    -               -       -       -       (60,921 )     (60,921 )
                                                         
Balance, November 30, 2006
    15,665               343,906       10,228       -       (340,412 )     13,722  



120

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

Years ended November 30, 2007, 2006, 2005 and
period from December 1, 1987 to November 30, 2007


 
16.
Differences between generally accepted accounting principles in Canada and the United States (continued):
                                           
         
Common
                           
Period from
 
         
shares'
                           
December 1,
 
         
average
         
Additional
               
1987 to
 
   
Number
   
share
   
Share
   
paid-in
               
November 30,
 
   
of shares
   
price
   
capital
   
capital
   
Warrants
   
Deficit
   
2007
 
                                           
Balance, November 30, 2006
    15,665             343,906       10,228       -       (340,412 )     13,722  
Shares issued for cash
    4,917       2.20       10,827       -       -       -       10,827  
Share issue costs
    -       -       (1,184 )     -       -       -       (1,184 )
Debt conversion
    1,809       6.26       11,318       -       -       -       11,318  
Fair value of stock options granted
    -       -       -       1,995       -       -       1,995  
Loss and comprehensive loss
    -               -       -       -       (18,176 )     (18,176 )
                                                         
Balance, November 30, 2007
    22,391             $ 364,867     $ 12,223     $ -     $ (358,588 )   $ 18,502  
 
 
       (g)
Changes in accounting policy:
 
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections ("SFAS No. 154"), which replaces Accounting Principles Board Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements.  SFAS No. 154 provides guidance on the accounting for, and reporting of, changes in accounting principles and error corrections.  SFAS No. 154 requires retrospective application to prior period's financial statements of voluntary changes in accounting principles and changes required by new accounting standards when the standard does not include specific transition provisions, unless it is impracticable to do so.  Certain disclosures are also required for restatements due to correction of an error.  SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005, and was adopted by the Company on December 1, 2006.  The adoption of SFAS No. 154 had no impact on the Company's results of operations and financial condition.

121

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

Years ended November 30, 2007, 2006, 2005 and
period from December 1, 1987 to November 30, 2007



 
16.
Differences between generally accepted accounting principles in Canada and the United States (continued):
 
         (h)
Recent accounting pronouncements issued and not yet adopted:
 
 
(i)
Fair value measurements:
 
In September 2006, the FASB approved SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in GAAP and enhances disclosures about fair value measurements.  This statement applies when other accounting pronouncements require fair value measurements.  It does not require new fair value measurements.  This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those years, specifically December 1, 2007 for the Company.  The Company does not expect the adoption of this standard to have a material impact on its consolidated financial position and results of operations.
 
 
   (ii)
Accounting for uncertainty in income taxes:
 
In June 2006, the FASB approved FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109 ("FIN 48").  FIN 48 clarifies the criteria for recognizing tax benefits under FASB Statement No. 109, Accounting for Income Taxes.  It also requires additional financial statement disclosures about uncertain tax positions.  FIN 48 is effective for interim and annual financial statements issued by the Company after December 1, 2007.  The Company is evaluating the impact of this standard on its consolidated financial position and results of operations.

122

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

Years ended November 30, 2007, 2006, 2005 and
period from December 1, 1987 to November 30, 2007


 
16.
Differences between generally accepted accounting principles in Canada and the United States (continued):
 
 
   (iii)
Fair value option:
 
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities ("SFAS No. 159").  Under the provisions of SFAS No. 159, companies may choose to account for eligible financial instruments, warranties and insurance contracts at fair value on a contract-by-contract basis.  Changes in fair value will be recognized in earnings each reporting period.  SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years.  The Company is required to adopt the provisions of SFAS No. 159 effective December 1, 2007.  The Company is currently assessing the impact of the adoption of SFAS No. 159.
 
 
   (iv)
Considering the effect of prior year misstatements:
 
In September 2006, the U.S. Securities and Exchange Commission issued Staff Accounting Bulletin 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements ("SAB 108").  SAB 108 addresses how the effects of prior year uncorrected misstatements should be considered when quantifying misstatements in current year financial statements.
 
SAB 108 requires registrants to quantify misstatements using both the balance sheet ("iron curtain") and income statement ("rollover") approaches and to evaluate whether either approach results in an error that is material in light of relevant quantitative and qualitative factors.
 
SAB 108 was adopted by the Company on December 1, 2006.

123

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

Years ended November 30, 2007, 2006, 2005 and
period from December 1, 1987 to November 30, 2007


 
16.
Differences between generally accepted accounting principles in Canada and the United States (continued):
 
 
   (v)
Accounting for advance payments for research and development activities:
 
In June 2007, the EITF reached a consensus on EITF Issue No. 07-3, Accounting for Advance Payments for Goods or Services to be Received for Use in Future Research and Development Activities ("EITF 07-3").  EITF 07-3 provides clarification surrounding the accounting for non-refundable research and development advance payments, whereby such payments should be recorded as an asset when the advance payment is made and recognized as an expense when the research and development activities are performed.  The Company is currently assessing the impact of EITF 07-3 on its results of operations and financial condition.
 
 
   (vi)
Collaborative arrangements:
 
In September 2007, the EITF reached a consensus on EITF Issue No. 07-1, Collaborative Arrangements ("EITF 07-1").  EITF 07-1 addresses the accounting for arrangements in which two companies work together to achieve a commercial objective, without forming a separate legal entity.  The nature and purpose of a company's collaborative arrangements are required to be disclosed, along with the accounting policies applied and the classification and amounts for significant financial activities related to the arrangements.  The Company is currently assessing the impact of EITF 07-1 on its results of operations and financial condition.
 
17.
Common share consolidation:
 
On April 3, 2007, the Company received shareholder approval to consolidate its issued and outstanding common shares on the basis of one post-consolidated common share for every 10 pre-consolidated common shares.  The consolidation was implemented on April 17, 2007.  The comparative number of common shares issued and outstanding, warrants, basic and diluted loss per common share and the information in notes 7, 8, 9, 16(a), 16(b)(iv), 16(e) and 16(f) has been amended to give effect to the share consolidation.

124

VASOGEN INC.
(A DEVELOPMENT STAGE COMPANY)

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

Years ended November 30, 2007, 2006, 2005 and
period from December 1, 1987 to November 30, 2007


 
18.
Comparative figures:
 
Certain comparative figures have been reclassified to conform with the financial statement presentation adopted in 2007.
 
 
 
 
 
 
 
125

Item 19.      Exhibits
 
EXHIBIT INDEX

Number
Exhibit
1
Articles of Incorporation and By-laws
1.1
Articles of Incorporation of Vasogen and Amendments thereto (incorporated by reference to Exhibit 1 of Vasogen’s Registration Statement on Form 20-F filed on July 2, 1997, File No. 000-29350).
1.2
By-laws of Vasogen (incorporated by reference to Exhibit H-1 of Vasogen’s Notice of 2007 Annual and Special meeting of shareholders and Management Proxy Circular, filed as Exhibit 99.1 to Form 6-k filed on March 1, 2007.
4
Material Contracts and Agreements
4.1
Distribution and License Agreement, dated April 18, 2007, by and among Vasogen Inc., Vasogen Ireland Limited and Grupo Ferrer Internacional S.A. (incorporated by reference to Exhibit 99.1 to Form 6-K filed on April 19, 2007).
4.2
Engagement Agreement, dated May 3, 2007, among Vasogen, Rodman & Renshaw LLC and JMP Securities LLC (incorporated by reference to Exhibit 99.5 to Form 6-K filed on May 2007.
4.3
Engagement Agreement, dated November 3, 2006, between Vasogen and Rodman & Renshaw LLC (incorporated by reference to Exhibit 99.1 to Form 6-K filed on November 16, 2006).
8.1
Subsidiaries of Vasogen (list included in Item 4C of this annual report).
11.1
Employee Code of Conduct (incorporated by reference to Exhibit 99.1 to Form 6-K filed on July 5, 2006).
11.2
Board of Directors’ Code of Conduct (incorporated by reference to Exhibit 99.1 to Form 6-K filed on January 26, 2007).
12.1
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
12.2
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
13.1
Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
13.2
Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
15
Additional Exhibits
15.1
Consent of KPMG, LLP, independent chartered accountants
15.2
Report of independent registered public accounting firm


126

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

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

February 27, 2008
 
 
127
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