U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20594

FORM 10-K

ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

dated March 14, 2005 for the fiscal year ended December 31, 2004

Commission File No. 333-12570

STRESSGEN BIOTECHNOLOGIES CORPORATION

(Exact Name of Registrant as Specified in its Charter)

Yukon Territory, Canada		N/A
(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification No.)

350-4243 Glanford Avenue
Victoria, British Columbia V8Z 4B9

Parent of Stressgen Biotechnologies, Inc.
6055 Lusk Boulevard, San Diego, California		92121
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s Telephone Number, including area code:	(250) 744-2811
	(858) 202-4900

Securities Registered pursuant to Section 12(b) of the Act: None

Securities Registered pursuant to Section 12(g) of the Act: None

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 and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ý

As of June 30, 2004 and March 8, 2005, the aggregate market values of common shares held by non-affiliates of the Registrant were approximately Cdn. $59,455,250 and $25,739,773, respectively. These amounts represented approximately U.S. $44,356,349 (based on the June 30, 2004 closing price of Cdn. $0.82 per common share, as reported on The Toronto Stock Exchange, and 72,506,403 outstanding common shares and a U.S.-Canadian exchange rate of 1.3404) and U.S. $21,151,921 (based on the March 8, 2005 closing price of Cdn. $0.36 per common shares as reported on The Toronto Stock Exchange, 72,506,403 outstanding common shares and an U.S.-Canadian exchange rate of 1.2169). These numbers are provided only for the purposes of this report and do not represent an admission by either the Registrant or any non-affiliate as to the status of any person.

The Company’s accounts are maintained in Canadian dollars. In this Annual Report on Form 10-K, all dollar amounts are stated in Canadian dollars except where otherwise indicated.

Documents incorporated by reference: None.

TABLE OF CONTENTS

Item 1. BUSINESS

Item 2. PROPERTIES

Item 3. LEGAL PROCEEDINGS

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Items 6, 7 and 7A. SELECTED FINANCIAL DATA; MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS; QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Item 9A. CONTROLS AND PROCEDURES

Item 9B. OTHER INFORMATION

Item 10. OUR DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES

Item 11. COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

This report contains text in addition to the requirements for an Annual Report on Form 10-K to fulfill the requirements of a Canadian Annual Information Form as set forth in National Instrument 51-102 and related policies of the Canadian Securities Administrators.

PART I

FORWARD-LOOKING STATEMENTS

This Report contains forward-looking statements that involve risks and uncertainties. Our forward-looking statements, which are typically indicated by words such as “intend,” “plan,” “anticipate” and “expect,” include statements regarding the results of on-going research, development efforts and the scope of future operations. Such statements are only predictions. Actual results may differ materially from those implied by our forward-looking statements, due to factors including our need for additional capital, the risk that HspE7 does not demonstrate statistically significant results in future clinical trials, our dependence upon collaborative partners and the risk that we will not obtain approval to market our products. These and other risks are discussed in this Annual Report, including under the caption “Factors that May Affect Future Performance.” We disclaim any obligation to update forward-looking statements as circumstances change.

Item 1. BUSINESS

Overview

We are a biopharmaceutical company that discovers, develops and seeks to commercialize therapeutic vaccines for the treatment of infectious diseases and cancers. Unlike traditional preventative vaccines that need to be administered before an individual becomes infected, therapeutic vaccines are designed to stimulate the human immune system to fight existing infectious diseases and cancers.

Our lead therapeutic vaccine candidate is HspE7. HspE7 is a broad-spectrum therapeutic vaccine candidate in development for diseases caused by the human papilloma virus (“HPV”), a virus which has over 100 types. HPV infection can result in diseases including internal and external genital warts and precancerous conditions, such as cervical and anal dysplasia. Precancerous HPV-related conditions can progress into life-threatening diseases, including cervical, anal and head and neck cancers. HPV is the most common sexually transmitted disease in the U.S. Approximately 5.5 million new sexually transmitted HPV infections are reported in the U.S. each year. At least 20 million people in the U.S. are already infected. Existing estimates of annual U.S. healthcare costs associated with HPV include US$1.6 billion in direct costs and up to US$6 billion in screening for cervical cancer, making it the second most costly sexually transmitted disease after HIV infection.

We initially plan to seek approval of HspE7 for the treatment of patients suffering from an HPV-related disease called recurrent respiratory papillomatosis (“RRP”). In RRP the papillomas, commonly known as warts, grow in the upper airways of patients. They can interfere with the breathing of pediatric patients and occasionally be fatal. Over 2,300 new cases of pediatric RRP and over 3,600 new cases of adult RRP were diagnosed in a 12-month period according to the

most recent reported survey of U.S. otolaryngologists and bronchoesophagologists; the survey estimated that there were over 5,970 cases of active pediatric RRP in which surgery was required in the previous three years, and over 9,000 cases of active adult RRP in the U.S.

In February 2004 we announced the results of an open-label, single arm, multicenter RRP phase II trial in 27 patients ranging in age from two to 18 years who required frequent surgical procedures to reduce the obstruction caused by the warts. In the trial the patients experienced an aggregate of 87 fewer surgeries during the first year after treatment with HspE7. The time between post-treatment surgeries increased by a mean of 95% compared to the pre-treatment period. The mean of the first post-treatment interval after surgery increased to 106 days from an average of 55 days between surgeries before treatment with HspE7. We plan to commence a pivotal phase III clinical trial in RRP in mid-2005. The U.S. Food and Drug Administration (“FDA”) has agreed to review the protocol for the trial under a Special Protocol Assessment (“SPA”), has granted HspE7 orphan drug status for the treatment of RRP and has designated HspE7 for the treatment of RRP as a fast track product development program.

In November 2004 we announced the results of a trial of HspE7 in 21 high grade cervical dysplasia patients that was sponsored by the Norris Comprehensive Cancer Center of the University of Southern California (USC) in Los Angeles, California. Patients in the trial received HspE7, then were scheduled to undergo a surgical procedure known as LEEP (loop electrosurgical excision procedure) two months following the last dose. In the trial, 40% of the patients were considered responders at the time of the scheduled surgery, based upon a downgrading of disease from high grade to low grade or no dysplasia. After vaccination 64% (nine of fourteen) of patients tested developed a specific immune response to viral antigens related to the cause of the disease. This result is an early response rate for HspE7, since LEEP was performed only two months following the last dose of the drug.

We plan to expand the application for HspE7 to other HPV indications, so that it can be indicated for a broad range of HPV-related diseases. In addition to RRP, we are initially targeting niche patient populations for which there are serious unmet medical needs, including HIV-positive patients with HPV-associated diseases and patients with high-grade cervical dysplasia for whom the standard treatment, LEEP, has been unsuccessful. We have a strategic collaboration with F. Hoffmann-La Roche Ltd. and Hoffmann-La Roche Inc. (together, “Roche”) that could lead to further development of HspE7.

HspE7 is derived from our proprietary platform technology that enables us to covalently fuse stress proteins to antigens that invoke immune system responses. Stress proteins, also known as heat shock proteins (“Hsp”), naturally occur in the human body. Hsp play important roles in the immune system, including transporting substances within cells and activating cells of the immune system. By covalently fusing Hsp and disease-associated antigens, we believe that we can create a proprietary portfolio of CoVal™ fusion products designed to stimulate the immune system to identify, target and eliminate virus-infected and cancerous cells.

In addition to our drug development efforts, we currently produce and sell Hsp, antibodies, bioreagents and other products for research use. We plan to sell our bioreagents business in 2005 to fund our drug development program.

We have incurred significant losses since our inception and expect to incur substantial losses for the foreseeable future as we invest in our research and product development programs, including manufacturing, pre-clinical studies and clinical trials, and regulatory activities. At December 31, 2004 our accumulated deficit was $212,349,000. Historically, we have depended principally on equity financings, cash flows from our bioreagent business and funding from research collaborations to fund our business activities. We have a plan to sell our bioreagent business during 2005. While this will provide proceeds from the sale it will reduce our near term revenues. We intend to pursue additional equity financings, markets permitting, and to seek additional research collaborations to fund our business activities.

Our success will depend upon

• our ability to raise sufficient capital to further the development of HspE7

• the safety and efficacy of our immunotherapeutic products in pre-clinical studies and clinical trials, and

• obtaining regulatory approvals necessary to market our products.

The marketability of our products will be influenced by competition from alternative therapies and the degree of protection our intellectual property provides. We believe there will be significant markets for our therapeutic products should these products prove to be effective in human clinical trials.

Business Strategy

Our goal is to develop and commercialize a variety of therapeutic vaccines for the treatment of virally-induced human diseases and cancers. Key elements to our strategy include:

• Complete the development and obtain regulatory approval for HspE7 to treat RRP. We intend to bring HspE7 to market as rapidly as possible by seeking U.S. regulatory approval to market it for RRP. The FDA has granted fast track and orphan drug status to HspE7 for RRP patients and has agreed to review a protocol for this trial under a SPA. We plan to commence a phase III trial for this indication in mid-2005.

• Expand the label for HspE7 to other indications. We plan to expand the list of conditions for which HspE7 is indicated by initially targeting other patient populations with high risk forms of HPV disease, including HIV-positive patients and patients with cervical intraepithelial neoplasia (“CIN”) for whom LEEP has not been successful. In the longer term, we plan to target larger market opportunities for HPV-related diseases such as genital warts and high-risk dysplasias.

• Build a U.S. sales force. We plan to establish our own U.S. commercialization team to help us generate sales for HspE7 and subsequent products. We believe that this initiative will require a relatively small commercial sales and marketing team for the indications that we are currently targeting.

• Build a broad portfolio of product candidates. Using our proprietary platform technology, we plan to develop additional CoVal^TM fusion product candidates to treat other viral infections and cancers. We also plan to strengthen our pipeline by in-licensing complementary product candidates.

• Collaborate with established pharmaceutical and biotechnology companies. We intend to partner and collaborate with established pharmaceutical and biotechnology companies, including Roche, to speed development of our product candidates and to provide us access to global regulatory, sales and marketing infrastructures.

Background of HPV

HPV infection is extremely common, with an estimated 80% of sexually active people contracting it at some point in their lives. At least 20 million people in the U.S. are already infected with sexually transmitted HPV infections. Although HPV can remain latent or regress spontaneously in some people, it can also manifest itself physically as warts, dysplasias and cancers. More than 30 of the over 100 different types of HPV infect genital tissue. Some types also infect head, neck and anal epithelial cells. Relatively benign types of HPV cause plantar and common warts.

Warts, dysplasias and cancers result from excessive cell growth. In HPV infections, uncontrolled cell growth can be caused by proteins expressed by HPV, such as E7, which interfere with normal cell functions that usually limit cell growth. HPV infects epithelial cells, which do not present antigens efficiently for detection by the immune system. The immune system does not always recognize or eradicate HPV-infected cells which allows for warts, dysplasias and cancers to develop.

Serious HPV-related diseases include:

Recurrent Respiratory Papillomatosis

RRP is usually caused by HPV types 6 and 11 that also cause the better known condition of genital warts. Rather than infecting genital tissue, the papillomas in RRP occur in the epithelial tissue located in the larynx and airways. They can interfere with the breathing of pediatric patients and occasionally be fatal. Death can occur from airway obstruction, cancerous transformation, the overwhelming spread of the disease or complications from surgical treatments. There are two groups of RRP patients. Juvenile-onset RRP can occur in children born to mothers infected with HPV. Adult-onset RRP may arise from birth or oral sexual activity. Over 2,300 new cases of pediatric RRP and over 3,600 new cases of adult RRP were diagnosed in a 12 month period according to the most recent reported survey of U.S. otolaryngologists and bronchoesophagologists. The survey estimated that there were over 5,970 cases of active pediatric RRP in which surgery was required in the previous three years, and over 9,000 cases of active adult RRP in the U.S. Approximately 75% of diagnosed juvenile-onset cases become evident before the age of five years. No drugs are approved for RRP in the U.S. Instead, patients are typically treated with surgery using a microdebrider or a laser. Surgery is not a cure and recurrence is frequent. The average pediatric patient has approximately five surgeries per year, with some patients undergoing more than 20 procedures annually. Each surgery can cost thousands of dollars and result in complications, including the formation of scar tissue, decreased functioning of the larynx and hoarseness.

Genital Warts

Genital warts are soft, fleshy raised growths that can appear in internal and external genital areas. They are also usually caused by HPV types 6 and 11. The incidence of genital warts is an estimated one million new cases in the U.S. each year. Despite a common misperception, genital warts can be spread even when condoms are used. Although warts are generally benign, they can cause psychological distress by making patients feel ashamed and less attractive. There is no approved cure for genital warts; however, a variety of therapies are available. The choice of treatment depends on the extent and location of disease and the preferences of the physician and patient. External genital warts can be treated with topical medications. Published sustained clearance rate estimates for topical treatments range from 20% to 44%; however, the duration of follow-up in most studies is very brief. We believe that the rate of long term clearance is much lower. When topical medications are not appropriate or effective, ablative therapies are typically used. These therapies, which require office visits, include the application of trichloroacetic acid, cryotherapy (freezing with liquid nitrogen), laser surgery, electrosurgery (burning) and, particularly for internal warts, surgical excision. Recurrence is common even after treatment.

Cervical Intraepithelial Neoplasia and Failures of LEEP

CIN, also known as cervical dysplasia, is characterized by the presence in the cervix of abnormal cells that can precede and develop into cervical cancer. The primary cause of such abnormalities is infection with HPV types 16 and 18. Experts recommend screening all sexually active women for HPV. In the U.S. Pap screens, which are used to help detect HPV, are estimated to cost up to US$6 billion per year. An estimated 1.2 million women each year are diagnosed with low-grade cervical dysplasia in the U.S. Another estimated 200,000 to 300,000 women are diagnosed with high-grade cervical dysplasia in the U.S. each year. There are no FDA-approved drug therapies for CIN. Typically, high-grade CIN is treated with a type of surgery called LEEP, estimated to cost from US$400 to US$1,450 per treatment. The incidence of residual disease after LEEP varies from 20% to 30%. Potential complications include bleeding and the excessive removal of healthy tissue. LEEP is not recommended for lesions that are too deep to view with medical instruments. In those cases, widely used treatments include surgery, the cost of which varies depending upon the site of the lesion, or cold-knife cone biopsy, estimated to cost US$3,700 per treatment. None of the treatments are always effective in removing all abnormal cells. The recurrence rates of CIN have been estimated at 19% of patients treated with cryotherapy and 13% of patients treated with laser surgery or LEEP. In addition, the available treatments do not treat the underlying HPV infection.

HPV Infection in Immunocompromised Patients

Patients develop compromised immune systems for reasons including HIV infection, chemotherapy and the use of immunosuppressants following an organ transplant. Patients with compromised immune systems are particularly prone to HPV infection, including the manifestations described above and anal intraepithelial neoplasia (“AIN”), a condition similar to CIN but occurring in the anal epithelial tissue. Most treatments for HPV used in the general patient population are also used in immunocompromised patients. Recurrence of HPV-associated diseases after treatment is especially common in HIV-infected HPV patients. For example, 39% to 62% of HIV-positive women have recurrences of CIN, compared with 9% to 18% of HIV-negative women. Patients that receive highly active antiretroviral therapy (“HAART”) for HIV have better response rates than HIV patients that do not receive HAART.

However, they still experience more frequent and persistent HPV infections than people without compromised immune systems.

Cervical Cancer

Almost all cervical cancers can be attributed to four HPV types: 16, 18, 45 and 31. American Cancer Society estimates for 2003 predicted that approximately 12,200 women in the U.S. would be diagnosed with invasive cervical cancer and that about 4,100 patients would die from the disease. Globally, an estimated 400,000 new cases of cervical cancer are identified each year. Although death rates from cervical cancer have declined in developed countries, invasive cervical cancer continues to be associated with extreme morbidity. Because of the mortality rates, the World Health Organization has called cervical cancer the second most important cancer threat in women after breast cancer. There are no FDA-approved drug therapies. Patients with cancer are typically treated with surgery and radiation. If the cancer spreads, chemotherapy can be used to treat the cancer in other areas of the body.

Head and Neck Cancer

Cancers of the oral cavity, pharynx and larynx constitute a serious and increasing public health problem worldwide. In the U.S an estimated 40,000 new head and neck squamous cell carcinomas occur annually. Worldwide, there are an estimated 600,000 head and neck cancers in men and 270,000 cases in women annually. In studies HPV DNA has been found in an average of 35% of head and neck tumors. The specific percentages of cancers attributable to HPV can increase depending upon the location of the cancer. Fifty percent to 70% of oropharyngeal cancers and 60% of tonsillar carcinomas are estimated to be HPV-associated in developed Western countries. No FDA approved therapies or cures exist for HPV-related head and neck cancers. Instead, these cancers are treated with surgery and with primary radiation therapy. However, most oropharyngeal cancers are detected at a late stage, where the five-year survival rate is 50% or less, despite expensive treatments. Other complications include infections, pain, loss of taste and eating problems.

The Stressgen Solution

We are developing HspE7 as a broad-spectrum therapeutic vaccine for HPV-related conditions. HspE7 is one of our proprietary CoVal™ fusion proteins. It is made using recombinant DNA technology to covalently fuse an Hsp to a HPV E7 viral protein to form one therapeutic protein. The E7 viral protein is often poorly recognized by the immune system. By combining Hsp with E7, an E7-specific immune response can be achieved. HspE7 works by efficiently targeting the E7 antigen to dendritic cells, which have a natural affinity for Hsp. Dendritic cells are known to be the most potent cells in the body for triggering immune responses.

Dendritic cells are a type of white blood cell that educate other white blood cells, called T cells, to seek out and destroy diseased cells in the body infected by viruses or that are cancerous. Dendritic cells work by binding, engulfing and processing proteins called antigens that are expressed by viruses and cancer cells into small fragments. The dendritic cells then present these fragments on their surface to program T cells to recognize these fragments as foreign and harmful. Once T cells identify the fragments as foreign, they rapidly multiply and roam the body

to target and kill infected cells that express the antigens. These types of T cells are called killer T cells.

Coupling E7 to Hsp takes advantage of the Hsp receptors that dendritic cells express on their surface to introduce E7, as part of a larger fusion protein, into the dendritic cells. The introduction of the fusion protein appears to allow the dendritic cells to process E7 and produce specific antigens to promote a killer T cell response against infected cells that express the E7 protein. In preclinical studies conducted using a tumor animal model, administration of HspE7 has been shown to prevent the growth of and cause the destruction of tumors that express the HPV E7 protein. Only the fusion protein induces significant tumor regression and long-term survival in these studies. According to our research, neither the E7 antigen nor the Hsp alone, nor a mixture of the two, is effective.

We believe our HspE7 product candidate offers a number of advantages as a therapy for HPV because, based on our research to date, it:

• treats a broad spectrum of HPV-diseases;

• utilizes the body’s own immune system;

• acts systemically to reach HPV infections throughout the body;

• is well tolerated (based on 400 patients to date);

• is much less invasive than surgery; and

• is administered by a short series of injections, assuring patient compliance.

Our Clinical Development Programs

Our technology platform supports our building a portfolio of CoVal^TM fusion candidates. Our lead candidate is HspE7, which we are currently developing to treat RRP. External collaborators are also investigating HspE7 as a treatment for HPV-related conditions in HIV-positive patients, LEEP failures in CIN patients and genital warts.

In trials involving over 400 patients to date, HspE7 has been well tolerated. The predominant adverse experience noted from HspE7 treatment at various doses and schedules has been injection site reaction, mild to moderate in severity, clearing in hours to days without treatment. Mild to moderate flu-like symptoms also have been observed in some patients.

Recurrent Respiratory Papillomatosis

In February 2004 we reported results from an open-label, single arm, multicenter RRP phase II trial in 27 patients ages two to 18 years old requiring frequent surgical debulking. The dosing regimen was 500 mg HspE7 subcutaneously three doses over 60 days. Patients were followed for up to 60 weeks from the first dose to assess the frequency of required surgeries and the safety and tolerance of HspE7. The trial met its targeted primary endpoint of lengthening the time between surgeries following treatment with HspE7. The time between post-treatment surgeries, measured as the median post-treatment interval, increased by a mean of 95% compared to the pre-treatment period. The mean of the first post-treatment interval after surgery increased to 106 days from an average of 55 days between surgeries before treatment with HspE7 (p<0.02). The

average annual surgery rate after treatment with HspE7 decreased from approximately 8.7 to 6.5 (p<0.003). Of the 27 patients in the study, two patients required no surgery in the 48 week follow-period compared to a pre-treatment median of 63 days and 101 days respectively. The median interval of all surgeries reported following treatment suggests that the 27-child patient population experienced an aggregate of 87 fewer surgeries during the first year after treatment. Overall, these results were internally consistent and statistically significant.

We held an end-of-phase II meeting with the FDA in June 2004 to discuss the design of our planned pivotal phase III clinical trial. We plan to submit a clinical trial protocol for review by the FDA under a Special Protocol Assessment, an agreement that is typically binding on the FDA regarding the protocol design for a clinical trial to support a biologics license application (“BLA”). We intend to begin accruing patients in our pivotal phase III trial by mid-2005. Depending on the clinical and other results, we anticipate being able to submit a BLA for HspE7 to treat RRP in mid-2007. We plan to apply for priority review when we file the BLA. The FDA has granted HspE7 orphan drug status and designated it as a fast track development program for the treatment of RRP.

Dysplasias in HIV+ Patients

The U.S. National Cancer Institute (“NCI”) is sponsoring a phase I/II trial with HspE7 to treat AIN in 15 HIV-positive patients. The trial will evaluate clinical and immunological response of escalating doses of HspE7 and viral load at six months. The NCI plans to sponsor a phase II CIN trial in HIV-positive patients. We have conducted preclinical studies that demonstrate Hsp fusions induce killer T cell responses in animals that are deficient in CD4+ T helper cells, which are regulatory cells in the immune system that are best known for their ability to promote antibody production. In HIV-positive patients the number and function of T helper cells is substantially impaired. Because HspE7 activity apparently does not require T helper cells, we believe it has the potential to treat patients immunocompromised by HIV infection.

Cervical Intraepithelial Neoplasia / LEEP Failures

The NCI and a research collaborator have sponsored or are sponsoring three separate phase II CIN trials using different dosing regimens. These studies, which target the accrual of 249 patients in the aggregate, include:

• an initial single arm trial in 21 HIV-negative females with high-grade CIN to assess pathological and clinical response, HPV status and immunological markers, followed by a single arm trial in an expected 12 additional patients;

• a single arm, open-label trial in up to 66 HIV-negative females with high-grade CIN; and

• a randomized, double-blind placebo controlled trial in 150 HIV-negative females with low-grade CIN to assess pathological and clinical response, HPV status and immunological markers.

In November 2004 we announced the results of a trial of HspE7 in 21 high grade cervical dysplasia patients that was sponsored by the Norris Comprehensive Cancer Center of USC in Los Angeles, California. Patients in the trial received HspE7, then were scheduled to undergo

LEEP two months following the last dose. In the trial, 40% of the patients were considered responders at the time of the scheduled surgery, based upon a downgrading of disease from high grade to low grade or no dysplasia. After vaccination 64% (nine of fourteen) of patients tested developed a specific immune response to viral antigens related to the cause of the disease. This result is an early response rate for HspE7, since LEEP was performed only two months following the last dose of the drug.

Genital Warts

We have completed a six month phase II, multicenter, randomized, double-blind, parallel-group, placebo-controlled study in 54 male and female patients with anogenital (external genital or perianal) warts. The dosing regimen was 500 mg HspE7 administered subcutaneously three doses over 60 days. The primary objective of the study was to determine whether this regimen was more effective than placebo in reducing the total area of anogenital warts. A secondary objective of the study was to compare the safety of HspE7 to placebo in these patients. Results from this trial showed that, at six months, genital warts decreased in size by a median of 53% compared to a median of 16% in patients treated with placebo. At six months, 35% of patients treated with HspE7 had complete clearance of warts compared with 25% of patients treated with placebo. The complete response rate for patients with genital warts varied depending on the gender of the patient and location of the warts. The treatment met expectations, but the variance in size reduction was much greater than expected. As a result, we concluded that the study did not include sufficient patients for the trial results to be statistically significant.

During a study of AIN patients who received 500 mg of HspE7 administered subcutaneously three doses over 60 days, one of our investigators identified an improvement in genital warts. In a retrospective review of the data, 23 patients were identified for continuing follow-up for up to 24 months. Within the cohort, 11 of 23 patients reaching the 12 month evaluation point, 11 of 17 patients reaching the 18 month evaluation point and eight of ten patients reaching the 24 month evaluation point had complete clearance of internal and external warts.

In December 2004 we announced the completion of enrollment in a phase II clinical trial of HspE7 in 30 patients with internal genital warts, conducted by our collaborator, Stephen E. Goldstone, M.D of The Mount Sinai School of Medicine in New York City. The primary endpoint of the single arm pilot study will be complete response, measured by complete clearance of baseline internal warts. We anticipate that twelve-month data from the trial will be available at the end of 2005.

Anal Intraepithelial Neoplasia

In February 2004 we reported the results of a randomized, double-blind, placebo-controlled, multicenter non-pivotal phase III trial in AIN in 133 patients, 110 of whom continued into a blinded cross-over study. The original HspE7 dosing regimen was 500 mg HspE7 administered subcutaneously three doses over 60 days. In the cross-over study, patients who received placebo were given HspE7. Patients that had received HspE7 were given one booster from six to 12 months after the initial dose. The phase III trial did not meet its primary endpoint of demonstrating that the patients’ dysplasia downgraded from high grade to low grade or no dysplasia at six months. The results are difficult to interpret due in part to a high level of

disagreement among the pathologists as to whether the samples should be classified as high-grade, low-grade or no dysplasia. In addition, the placebo effect that we had anticipated based on a previous phase II trial and studies of the natural history of the disease doubled from the estimate used to power the study. Certain secondary endpoints, such as downgrades assessed through the physician’s observations of manifestations of the disease, did achieve statistical significance at certain observational time points.

In an earlier open-label phase II trial in 82 patients using three 500 mg subcutaneous doses of HspE7, 82.9% of previously untreated patients with high-grade AIN demonstrated a partial response 24 weeks after receiving HspE7, compared with a placebo response rate estimated from an earlier trial to be 18.6%. That trial supported the possibility that HspE7 is effective. Based on the data in AIN in the aggregate and taking into account the normal variability in the reading of biopsies, we believe that HspE7 may be active in AIN.

HPV-Related Cancers

In 2001 we suspended a study in Brazil in patients with advanced cancer after only seven of 23 projected patients received the planned five doses of HspE7, based on investigator feedback that the patients’ carcinoma was so advanced that a meaningful clinical response could not reasonably be expected in a population of the targeted size. The treatment regimen itself was judged to be well tolerated in the dosed patients.

Preclinical studies conducted in animal models have provided some evidence to suggest that HspE7 may stimulate cell-mediated immunity to fight cervical cancer. In vivo studies of tumor implantation and rejection in a murine model of cervical cancer (TC-1 tumor cells) showed:

• treatment with HspE7 promotes regression of established TC-1 tumors;

• treatment with HspE7 that leads to tumor regression also provides protection against a subsequent challenge with TC-1 tumor cells; and

• treatment with E7 alone or an admixture of Hsp and E7 does not cause regression of
TC-1 tumors.

The NCI plans to sponsor a clinical trial with HspE7 in cervical cancer pending the availability of additional clinical supplies.

Follow-on CoVal^TM Fusion Products

We have been researching other fusion proteins which, like HspE7, are made using our proprietary technology based on covalently bonding Hsp to antigens expressed by viruses or cancers. As in HspE7 the heat shock protein portion of the fusion may stimulate dendritic cells to process disease-specific antigens to enable the immune system to recognize and destroy cells presenting the antigen. We need substantial additional resources, either through raising capital or collaborations, to further the development of our follow-on products.

Hepatitis B

We have compiled preclinical data to support an Investigative New Drug (“IND”) application for a fusion of an Hsp and a selected hepatitis B virus (“HBV”) antigen. In mice our HBV fusions have been shown to elicit killer T cells that recognize the HBV antigen, suggesting such killer T cells would be capable of eliminating HBV-infected cells. The killer T cells have also been shown to produce the cytokine interferon gamma, which is known to have anti-viral activity. We expect that the results of these preclinical studies would support a filing for an IND for the Hsp-HBV antigen fusion protein in approximately 18 months after initiation of development activities.

Chronic hepatitis B is a disease of the liver caused by the hepatitis B virus. Infection with HBV is characterized by jaundice, fatigue, abdominal pain and other symptoms, with many patients developing liver cirrhosis and cancer. There are estimated to be 1,000,000 to 1,250,000 cases of chronic hepatitis B in the U.S., according to the Centers for Disease Control and Prevention. In addition, there are between 140,000 and 320,000 new cases of hepatitis B in the U.S. each year, resulting in 4,000 to 5,000 deaths according to the American Social Health Association. Worldwide, about 1,000,000 deaths are attributable to HBV infection and its complications annually, according to the World Health Organization. Due to the large infected population and small percentage of the public being vaccinated for the disease, the need for therapies for chronic hepatitis B virus infection remains, even though safe and effective preventative vaccines exist.

Herpes Simplex

We are collaborating with a university to perform preclinical studies on heat shock fusion proteins to treat genital herpes caused by herpes simplex virus type 2 (HSV-2). The university is testing a number of HSV-2 proteins in Hsp fusions as therapeutic vaccines in animal models of human genital herpes. We intend to dedicate additional effort to this project when resources permit.

An estimated 45 million Americans are already infected with genital herpes, and there are an additional estimated 500,000 to 1,000,000 new cases each year. Since HSV remains dormant in infected persons for their lifetime, genital herpes is a recurrent disease. Some episodes of reactivation are associated with skin blistering in the genital region, causing physical and psychological discomfort. Most episodes of the infection are asymptomatic, which results in people unknowingly transmitting the virus. Except in newborns, genital herpes is not life-threatening. Nonetheless, it is distressing and can contribute to the spread of other sexually transmitted diseases.

Hepatitis C

We believe our technology also offers promise for producing a therapeutic vaccine for hepatitis C. Hepatitis C causes symptoms similar to those of hepatitis B, but is caused by the hepatitis C virus. No currently available therapy can eradicate the virus or do more than delay the progression of the disease. No vaccine is available. Chronic hepatitis C can cause cirrhosis, liver failure, and liver cancer. HCV is spread through contact with blood and other bodily fluids. Currently, there are six known hepatitis C genotypes, and more than 50 subtypes. The relative

prevalence of different genotypes differs by geographic region. It is estimated that 3.9 million people in the U.S. (1.8% of the population) have been infected with HCV and that 2.7 million are chronically infected. Worldwide there is an estimated 200 million cases. In the U.S. 8,000 to 10,000 deaths each year are currently attributed to HCV. Although about 80% of patients are currently asymptomatic, researchers predict that over the next 10 to 20 years chronic hepatitis C will become a major burden on the health care system as patients progress to end-stage liver disease.

Strategic Relationships

Roche Collaboration Agreement

In December 2003, we announced a restructuring of our June 2002 collaboration agreement with Roche providing for the development and commercialization of HspE7. Under the restructured terms we granted Roche an option to license the first generation HspE7 product, a license to develop a second generation HspE7 product, and non-exclusive options to negotiate rights to CoVal^TM fusion product candidates for the treatment of cancers related to or stemming from HPV and hepatitis C. Roche can pay fees to make these options exclusive until January 1, 2007.

In connection with the first generation of HspE7, the restructured agreement gives us the right to develop and commercialize the product for indications other than genital warts, including control of regulatory matters such as IND applications. In the original agreement we were responsible for clinical expenses only for the development of RRP. In the current agreement we are responsible for the manufacturing and other costs of all indications that we develop. If Roche exercises its rights to the first generation product, it will fund all prospective development costs. Roche can exercise its rights to the first generation of HspE7 by paying a fee, in which case it would also become responsible for event-driven milestones that could result in aggregate payments to us of up to US$138,000,000. Under that scenario, we would receive the revenue from all first generation HspE7 product sales in the U.S. and Canada for three years following approval of a BLA with the FDA and would receive sales-based payments (similar to royalties) of approximately 35% of net sales in the U.S. and Canada thereafter. We would receive sales-based payments of 20% of net sales in countries other than the U.S. and Canada.

By paying additional fees, Roche can exclusively develop the second generation HspE7 product. In such case Roche would be required to pay the costs of development, manufacturing and commercialization of the product and to make payments to us upon the achievement of defined milestones. We would also receive tiered, progressive sales-based payments that we believe are competitive with other agreements of this stage and type. Commercial success payments of up to approximately US$85,000,000 become payable depending upon the aggregate net sales of either or both generations of the HspE7 products. The restructured collaboration agreement gives us the right to discuss, negotiate and execute an alternative agreement with a third-party for the development and commercialization of HspE7 through a license, partnership, joint venture or similar transaction. After March 31, 2005 and through the end of the option period Roche can terminate this right by paying us a fee, which would be either US$10,000,000 or US$15,000,000 depending on the stage of development of the product. We cannot determine if or when this option will be exercised.

Other Research and Development Collaborations

In 1999 we entered into a collaboration and signed a clinical trials agreement with the NCI’s Division of Cancer Treatment and Diagnosis to sponsor trials of HspE7 for the treatment of cancers caused by HPV. In June 2002 we signed a second agreement with the NCI’s Division of Cancer Prevention to sponsor additional clinical trials for the prevention of cancers caused by HPV.

Our clinical trials agreements allow the NCI to develop a general plan for clinical development of HspE7 for cancer-related indications, solicit clinical research protocols from independent investigators and cooperative research groups, and sponsor and fund their studies. We are expected to provide clinical grade HspE7 for the investigators to use in their studies but not to provide funding. We will receive access to data from the trials in return for providing HspE7.

We have a number of other collaborative or sponsored research agreements that could provide us with important sources of research data and lead to technology development opportunities. We have entered into an agreement with the U.S. National Institute of Allergy and Infectious Diseases to test our hepatitis B product candidate in preclinical models. We have sponsored academic institutions to evaluate our hepatitis B product candidate in animal models and to perform research with our CoVal^TM fusion protein candidates made with herpes simplex antigens.

Intellectual Property

Our intellectual property protection policy involves filing and prosecuting patent applications relevant to the inventions that we consider meaningful to our business. We also rely upon unpatented trade secrets, know-how and continuing technological innovation to develop and maintain a competitive position. We have devoted substantial management attention and resources to maintaining patents and licenses and conducting an assertive patent prosecution strategy.

We have a worldwide exclusive license agreement with the Whitehead Institute for our core fusion technology, giving us rights to various patents, pending applications, continuation-in-part applications and their foreign counterparts. Pursuant to the license agreement we fund the prosecution of the patent applications, which currently include applications in the U.S., Canada, Europe and Japan. Two U.S. patents, which will expire in 2019, and a European patent, which will expire in 2014, have been granted based on these Whitehead applications. We are vigorously defending challenges to these patents, which cover Hsp fusions with viral or cancer-associated antigens and their use as immunotherapeutics, and to our European patent directed to Hsp fusions with HPV viral antigens, including HPV E6 and E7, and their use as immunotherapeutics. We also hold issued U.S. patents related to Hsp fusions with HPV viral antigens, including HPV E6 and E7 and to the detection of elevated levels of Hsp expression. Interpretation and evaluation of biopharmaceutical or biotechnology patent claims present complex and often novel legal and factual questions. We cannot be sure that:

• our pending applications will result in issued patents;

• the issued patents will be held valid and enforceable if challenged; or

• a competitor will not be able to circumvent an issued patent by the development or adoption of a competitive non-infringing product or process.

Our bioreagents business requires intellectual property licenses to sell many of our products. However, because our bioreagents sales are spread over more than 400 products, we do not believe that any individual patent or license is material to the business. We have a plan to sell our bioreagents business in 2005. See disclosure in Note 12 to our financial statements.

Manufacturing

We are currently working with a contract manufacturer, Avecia Limited (“Avecia”), to develop a quality controlled and quality assured process for producing HspE7. Avecia has experience using standard operating procedures, analytical methods and specifications that allow biologics such as HspE7 to be manufactured in commercial quantities in accordance with current good manufacturing practices (“GMP”) and other regulations. Under the agreement Avecia will perform process development, scale-up and manufacturing of bulk active ingredient for the production of commercial-grade clinical supplies needed for our clinical trials with HspE7. We anticipate that clinical-grade supplies will be available in mid-2005. We expect the scope of services covered by the existing agreement to extend through the BLA process. If we terminate our current services agreement with Avecia, we may be required to pay a cancellation fee, which could have been up to $441,000, depending on Avecia’s ability to reschedule usage of their facility. We may also have Avecia manufacture commercial drug substance under a separate agreement. A separate contractor will perform the fill and finish operations to produce the vialed product. We expect that our dependence on contractors such as Avecia for the process development and manufacture of heat shock protein fusions will continue for the foreseeable future.

Government Regulation and Product Approval Process

We must navigate a complex regulatory process to obtain approval to market our products. In the U.S. the FDA regulates drugs and biological products. The Health Products and Food Branch (“HPFB”) Inspectorate enforces the Canadian rules and regulations governing the production and manufacturing of our products and research and development activities. In these and other jurisdictions, applicable drug licensing laws require:

• carefully controlled research and testing of products;

• governmental review and approval of results prior to marketing therapeutic products;

• licensure of manufacturing facilities; and

• adherence to GMP during production.

Pre-clinical studies must be conducted to test chemistry, pharmacology and efficacy. Successful pre-clinical results, which entail achieving potentially valuable pharmacological activity combined with an acceptably low level of toxicity, enable the manufacturer of the new drug to file an IND application to begin clinical trials involving humans. An IND application must be filed with and accepted by the FDA or HPFB, as applicable, before human clinical trials may begin.

Clinical trials typically include at least three phases. Phase I clinical trials consist of testing a product in a small number of humans for its safety (toxicity), dose tolerance and pharmacokinetic properties including absorption, distribution, metabolism and elimination. Phase II clinical trials usually involve a larger patient population than is required for phase I trials. The phase II trials are conducted to evaluate the effectiveness of a product in patients having the disease or medical condition for which the product is indicated. These trials also serve to identify possible common short-term side effects and risks in a larger group of patients. Potential dosing regimens may also be evaluated during phase II trials. Phase III clinical trials involve conducting tests in an expanded patient population at geographically dispersed sites to establish clinical safety and effectiveness. These trials usually involve comparison to a standard treatment or to no treatment. They also generate information from which the overall benefit-risk relationship relating to the drug can be determined to provide a basis for drug labeling.

Two key factors influencing the rate of progression of clinical trials are the rate at which patients can be accrued to participate in the research program and whether effective treatments are currently available for the disease the drug is intended to treat. Patient accrual can depend upon the incidence and severity of the disease and the alternative treatments available.

Upon completion of all clinical studies, the results of these studies are submitted to the U.S. FDA as part of a biologics license application or to Canada’s HPFB as part of a new drug submission, to obtain approval to commence marketing the product. The entity that will manufacture the product must submit an establishment license application for approval by the FDA or HPFB.

Before a product can receive approval for marketing in the U.S. or Canada the applicant must show:

• development of a well-controlled process of manufacturing;

• preclinical studies of safety and pharmacology; and

• studies of safety and efficacy in humans.

Even after a marketing approval is obtained, further studies, including phase IV post-market studies, may be required to provide additional data on safety and efficacy necessary to gain approval for the use of a product as a treatment for clinical indications other than those for which the product was initially tested. The FDA or HPFB may require post-market surveillance programs to monitor a product’s side effects.

In addition to obtaining pre-licensing approval, manufacturing facilities must conform on an ongoing basis with GMP. After the establishment is licensed for the manufacture of any product, manufacturers are subject to periodic inspections by regulatory authorities.

Whether or not FDA or HPFB approval has been obtained, approval of a product by comparable regulatory authorities in Europe and other jurisdictions will be necessary prior to commencement of marketing the product in such countries. Each country may impose its own requirements and may refuse to grant, or may require additional data before granting, an approval even though the relevant product has been approved by another authority.

In addition to the need to meet regulatory requirements before our products can be sold, the nature of our business requires compliance with numerous federal, provincial, state, local and international laws, regulations and recommendations. For example, we are subject to regulations covering:

• the maintenance of safe working conditions;

• laboratory manufacturing practices; and

• the use and disposal of hazardous or potentially hazardous substances, including radioactive compounds and infectious disease agents used in connection with our research work.

Competition

The diseases we are targeting are currently managed through a variety of therapeutic and surgical approaches. For example, genital warts can be treated by topical creams and ointments, cryosurgery, freezing, electro-surgery and laser treatment. Some papillomas and cancers caused by HPV can be treated surgically.

We are subject to competition from products that use different approaches or means of accomplishing a similar therapeutic effect as our CoVal^TM fusion products. Many pharmaceutical and biotechnology companies also focus their research and product development programs on the treatment of the same therapeutic indications as ours, including HPV-related diseases, HBV and cancer. For example, Merck & Co., Inc. and GlaxoSmithKline are currently conducting large phase III trials for preventative vaccines against specific types of HPV.

Potential competitors that are developing products to treat HPV indications use approaches including therapeutic vaccines, immunotherapies, immunomodulators, topical therapies and small molecule drugs. As examples, Transgene S.A. and Zycos Inc., recently acquired by MGI Pharma, Inc., are conducting clinical trials with different formulations of HPV antigens as therapeutic vaccines; Medigene AG is developing a topical treatment.

Other potential competitors are performing research and developing therapeutic products based on the intrinsic nature of stress proteins to assist the body in fighting infection and related cancers. Our technology focuses on Hsp covalently fused to antigens; however, there are other ways to potentially use Hsp to modulate immune responses. Companies including Antigenics Inc. are using stress protein-related approaches to stimulate or modulate the body’s immune system in therapeutic applications. Other companies such as Conforma Therapeutics and Vernalis plc are developing small molecule drugs to modulate Hsp expression in cells as another approach for cancer therapy.

Competition in our industry may increase over time due to rapid and substantial changes in technology and other critical inputs required for product development and commercialization. Many of our competitors have greater human and financial resources dedicated to product development and human clinical testing than we do. Our competitors may have more substantial marketing and financial resources. Acquisitions of or investments in competing pharmaceutical and biotechnology companies by other firms could increase their financial, marketing and other

resources. Technological developments could render our proposed products or technologies non-competitive.

In the bioreagent market there are numerous suppliers. Direct competition is more limited in the stress protein area in which we specialize. A few companies have a broad line of competing products, such as Affinity Bioreagents Inc. Several larger companies have introduced a limited range of products similar to ours. Many of our bioreagent product licenses are non-exclusive. As a result competition from other suppliers could increase in the future.

Human Resources

As of March 8, 2005 we employed 103 personnel, of which over 50 were engaged in, directly or indirectly, research and development efforts. Twenty-five of those employees are employed by the bioreagents business that we are planning to sell and that we decided to report as a discontinued operation at December 31, 2004. Of the scientific persons employed, two hold an M.D., twelve hold Ph.D.s, and the balance hold either M.Sc. or B.Sc. degrees or other diplomas. Our employees are not covered by any collective bargaining agreement. All employees are required to execute confidentiality and assignment of invention agreements as a condition of their employment.

Availability of Information

Our annual report on Form 10-K and quarterly reports on Form 10-Q are available on our website, www.stressgen.com, free of charge, as soon as reasonably practicable after such material is filed with the U.S. and Canadian securities regulatory authorities. Our website also provides links for users to find our filings on the websites maintained by the U.S. and Canadian securities regulatory authorities, www.sec.gov and www.sedar.com. We consider those sites to be the appropriate sources for reports that are filed with the securities regulatory authorities of only the U.S. or only Canada, rather than with both countries. We include information regarding directors’ and officers’ remuneration, principal holders of our securities and securities authorized for issuance under our equity compensation plans in our annual information circulars for our general meetings of shareholders involving the election of directors. Our annual financial information is provided in our financial statements and Management’s Discussion and Analysis, incorporated in this document. Paper copies of our most recent filings are available from our Investor Relations department free of charge upon request.

Our transfer agent is Computershare Trust Company of Canada, Toronto, Ontario.

FACTORS THAT MAY AFFECT FUTURE PERFORMANCE

Before investing in our common stock you should carefully consider the following risk factors, the other information included herein and the information included in our other reports and filings. Our business, financial condition, and the trading price of our common stock could be adversely affected by these and other risks.

We require additional financing to execute our business plan

We expect to need US$50,000,000 to operate the company, commercialize HspE7 and retain a prudent amount of cash on hand. This estimate assumes that:

• we will not enter into a collaboration agreement that will cover the costs of the services still required for the HspE7 program;

• our previously issued warrants are exercised; and

• we obtain the proceeds expected from a sale of our bioreagents business.

If we receive less capital than we require, the amount of proceeds allocated to the development and commercialization of HspE7 will be reduced. This will likely result in delays in our manufacturing, clinical and regulatory timelines and may require us to change our long-term business strategy. Even if we raise US$50,000,000 we may need additional funds to:

• pursue further research and development;

• conduct clinical trials;

• obtain regulatory approvals;

• file, prosecute, defend and enforce our intellectual property rights; and

• market our products.

We may seek additional funds through public or private equity or debt financing, strategic transactions and/or from other sources. If we fund our programs through equity financings and if the price of the shares ultimately sold in that offering is less than the net tangible book value of your common shares, you will suffer dilution. Depending upon the amount of capital we raise through the sale of equity, the dilution may be substantial. We could enter into collaborative arrangements for the development of particular products that would lead to our relinquishing some or all rights to the related technology or products.

There are no assurances that future funding will be available on favorable terms or at all. If adequate funding is not obtained, we will need to reduce, defer or cancel development programs, planned initiatives or overhead expenditures, to the extent necessary. The failure to fund our capital requirements would have a material adverse effect on our business, financial condition and results of operations.

We are an early stage development company

Our biotechnology business is still at an early stage of development. Significant additional research and development and clinical trials must be completed before our technology can be commercialized. We have not completed the development of any therapeutic products and, therefore, have not begun to market or generate revenues from the commercialization of any therapeutic products. We have undertaken only limited human clinical trials for HspE7 and cannot assure you that subsequent trials will generate favourable results, that the results obtained from laboratory or research studies for our other products will be replicated in human studies, that our human studies will demonstrate efficacy or that our studies and trials will not identify undesirable side effects of our products. There are no assurances that any of our therapeutic products will:

• meet applicable health regulatory standards;

• obtain required regulatory approvals or clearances;

• be produced in commercial quantities at reasonable costs;

• be successfully marketed; or

• be profitable enough that we will recoup the investment made in such product candidates.

None of our therapeutic product candidates are expected to be commercially available for several years. It is possible that we will not successfully develop any therapeutic products.

We have a history of operating losses and may never become profitable

We have not recorded any revenues from the sale of therapeutic products and have accumulated substantial net losses. We expect we will continue to incur losses for at least the next several years while our primary activities are research, development and clinical trials. If we sell our bioreagents business, we would exchange a source of on-going revenue for immediate cash. Once the proceeds from the sale have been exhausted, we could incur larger operating losses in future fiscal periods than we incurred during comparable periods in 2003 or 2004. To become profitable we, either alone or with one or more partners, must develop, manufacture and successfully market therapeutic product candidates.

Our success depends on collaborative partners, licensees and other third parties over whom we have limited control

Due to the complexity of the process of developing therapeutics, our core business depends on arrangements with pharmaceutical companies, corporate and academic collaborators, licensors, licensees and others for the research, development, clinical testing, technology rights, manufacturing, marketing and commercialization of our products. We have various research collaborations and outsource many other business functions, including clinical trials and manufacturing. Our license agreements could obligate us to diligently bring potential products to market, make milestone payments and royalties that, in some instances, could be substantial, and incur the costs of filing and prosecuting patent applications. There are no assurances that we will

be able to establish or maintain collaborations that are important to our business on favorable terms, or at all.

A number of risks arise from our dependence on collaborative agreements with third parties. Product development and commercialization efforts could be adversely affected if key collaborative partners:

• terminate or suspend their agreements with us;

• cause delays;

• fail to timely develop or manufacture in adequate quantities a substance needed in order to conduct clinical trials;

• fail to adequately perform clinical trials;

• determine not to develop, manufacture or commercialize a product to which they have rights; or

• otherwise fail to meet their contractual obligations.

Also, our collaborative partners could pursue other technologies or develop alternative products that could compete with the products we are developing.

The profitability of our products will depend in part on our ability to protect proprietary rights and operate without infringing the proprietary rights of others

The profitability of our products will depend in part on our ability to obtain and maintain patents and licenses and preserve trade secrets, and the period our intellectual property remains exclusive. We must also operate without infringing the proprietary rights of third parties and without third parties circumventing our rights. The patent positions of pharmaceutical and biotechnology enterprises, including ours, are uncertain and involve complex legal and factual questions for which important legal principles are largely unresolved. For example, no consistent policy has emerged regarding the breadth of biotechnology patent claims that are granted by the U.S. Patent and Trademark Office or enforced by the U.S. federal courts. In addition, the scope of the originally claimed subject matter in a patent application can be significantly reduced before a patent is issued. The biotechnology patent situation outside the U.S. is even more uncertain, is currently undergoing review and revision in many countries, and may not protect our intellectual property rights to the same extent as the laws of the U.S. Because patent applications are maintained in secrecy in some cases, we cannot be certain that we or our licensors are the first creators of inventions described in our pending patent applications or patents or the first to file patent applications for such inventions.

Other companies may independently develop similar products and design around any patented products we develop. We cannot assure you that:

• any of our patent applications will result in the issuance of patents;

• we will develop additional patentable products;

• the patents we have been issued will provide us with any competitive advantages;

• the patents of others will not impede our ability to do business; or

• third parties will not be able to circumvent our patents.

On October 22, 2002 Antigenics Inc. announced that it had filed an opposition in the European Patent Office (“EPO”) to a European patent and requests for re-examination in the U.S. Patent and Trademark Office of two U.S. patents we licensed in connection with our platform technology. In October 2003 Antigenics filed an opposition in the European Patent Office to an additional, product specific, European patent. The EPO may hold an oral hearing as early as this fall if the parties do not request a change in the date. We do not know when we will obtain results from these proceedings. Until we receive final results from the opposition and re-examination processes, we will not be able to assure investors of the success of our planned vigorous defense of the patents.

A number of pharmaceutical, biotechnology, research and academic companies and institutions have developed technologies, filed patent applications or received patents on technologies that may relate to our business. If these technologies, applications or patents conflict with ours, the scope of our current or future patents could be limited or our patent applications could be denied. Our business may be adversely affected if competitors independently develop competing technologies, especially if we do not obtain, or obtain only narrow, patent protection. If patents that cover our activities are issued to other companies, we may not be able to: obtain licenses at a reasonable cost, or at all; develop our technology; or introduce, manufacture or sell the products we have planned.

Patent litigation is becoming widespread in the biotechnology industry. Such litigation may affect our efforts to form collaborations, to conduct research or development, to conduct clinical testing or to manufacture or market any products under development. There are no assurances that our patents would be held valid or enforceable by a court or that a competitor’s technology or product would be found to infringe our patents in the event of patent litigation. Our business could be materially affected by an adverse outcome to such litigation. Similarly, we may need to participate in interference proceedings declared by the U.S. Patent and Trademark Office or equivalent international authorities to determine priority of invention. We could incur substantial costs and devote significant management resources to defend our patent position or to seek a declaration that another company’s patents are invalid.

Much of our know-how and technology may not be patentable, though it may constitute trade secrets. There are no assurances that we will be able to meaningfully protect our trade secrets. We cannot assure you that any of our existing confidentiality agreements with employees, consultants, advisors or collaborators will provide meaningful protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use or disclosure. Collaborators, advisors or consultants may dispute the ownership of proprietary rights to our technology, for example by asserting that they developed the technology independently.

We may encounter difficulties in manufacturing our products

Our manufacturing experience in bioreagents is not directly applicable to the manufacture of therapeutic products. We have not yet introduced any therapeutic products and have no experience manufacturing therapeutic vaccines ourselves. Before our products can be profitable, they must be produced in commercial quantities in a cost-effective manufacturing process that complies with regulatory requirements, including good manufacturing practices (“GMP”), production and quality control regulations. Because we do not have facilities for the production of therapeutic products such as HspE7, we contract with third parties for process development, the scale-up of manufacturing our products from the laboratory bench to commercial quantities, manufacturing of bulk materials, product characterization, filling the product into vials, packaging and related processes. If there are delays or difficulties in developing a commercial manufacturing process, performing manufacturing or transferring HspE7 between contractors performing different aspects of the manufacturing process, we may not be able to conduct clinical trials, obtain regulatory approval or meet demand for our products.

Production of future products could require raw materials which are scarce or which can be obtained only from a limited number of sources. If our manufacturers were unable to obtain adequate supplies of such raw materials, the development, regulatory approval and marketing of our products could be delayed.

We could need additional clinical trials or take more time to complete our clinical trials than we have planned

Clinical trials vary in design by factors including dosage, end points, length, controls, and numbers and types of patients enrolled. We may need to conduct a series of trials to demonstrate the safety and efficacy of our products. The results of these trials may not demonstrate safety or efficacy sufficiently for regulatory authorities to approve our products.

Regulatory authorities may require us to determine whether our products delay or prevent disease recurrence. Clinical trials to show that a disease does not recur take longer to complete than clinical trials that end when patients stop having specific symptoms. The actual schedules for our clinical trials could vary dramatically from the forecasted schedules due to factors including changes in trial design, conflicts with the schedules of participating clinicians and clinical institutions, delayed patient accrual and changes affecting product supplies for clinical trials.

We rely on collaborators, including academic institutions, governmental agencies and clinical research organizations, to conduct, supervise, monitor and design some or all aspects of clinical trials involving our products. The U.S. National Cancer Institute is sponsoring some HspE7 clinical trials. Since these trials depend on governmental participation and funding, we have less control over their timing and design than trials we sponsor. Delays in or failure to commence or complete any planned clinical trials could delay the ultimate timelines for product release.

We may not be able to obtain the regulatory approvals or clearances that are necessary to commercialize our products

The U.S., Canada and other countries impose significant statutory and regulatory obligations upon the manufacture and sale of human therapeutic products. Each regulatory authority typically has a lengthy approval process in which it examines pre-clinical and clinical data and the facilities in which the product is manufactured. Regulatory submissions must meet complex criteria to demonstrate the safety and efficacy of the ultimate products. Addressing these criteria requires considerable data collection, verification and analysis. We may spend time and money preparing regulatory submissions or applications without assurances as to whether they will be approved on a timely basis or at all.

Our product candidates, some of which are currently in the early stages of development, will require significant additional development and pre-clinical and clinical testing prior to their commercialization. These steps and the process of obtaining required approvals and clearances can be costly and time-consuming. If our potential products are not successfully developed, cannot be proven to be safe and effective through clinical trials, or do not receive applicable regulatory approvals and clearances, or if there are delays in the process:

• the commercialization of our products could be adversely affected;

• any competitive advantages of the products could be diminished; and

• revenues or collaborative milestones from the products could be reduced or delayed.

Governmental and regulatory authorities may approve a product candidate for fewer indications or narrower circumstances than requested or may condition approval on the performance of post-marketing studies for a product candidate. Similarly, phase IV clinical trials could be a condition to regulatory approval. Even if a product receives regulatory approval and clearance, it may later exhibit adverse side effects that limit or prevent its widespread use or that force us to withdraw the product from the market.

Any marketed product and its manufacturer will continue to be subject to strict regulation after approval. Results of post-marketing programs may limit or expand the further marketing of products. Unforeseen problems with an approved product or any violation of regulations could result in restrictions on the product, including its withdrawal from the market and possible civil actions.

The manufacturers of our products will be required to comply with applicable GMP regulations, which include requirements relating to quality control and quality assurance, as well as the maintenance of records and documentation. If the manufacturers cannot comply with regulatory requirements, including applicable GMP requirements, we may not be allowed to develop or market the product candidates. If we or our manufacturers fail to comply with applicable regulatory requirements at any stage during the regulatory process, we may be subject to sanctions, including fines, product recalls, product seizures, injunctions, refusal of regulatory agencies to review pending market approval applications or supplements to approve applications,

total or partial suspension of production, civil penalties, withdrawals of previously approved marketing applications and criminal prosecution.

Competitors may develop and market drugs that are less expensive, more effective or safer, making our products obsolete or uncompetitive

Many competitors and potential competitors have substantially greater product development capabilities and financial, scientific, marketing and staffing resources than we do. Technological competition from pharmaceutical companies and biotechnology companies is intense and is expected to increase. Other companies have developed technologies that could be the basis for competitive products. Some of these products have an entirely different approach or means of accomplishing the desired therapeutic effect than products we are developing. Alternative products may be developed that are more effective, work faster and are less costly than our products. Competitors may succeed in developing products earlier than us, obtaining approvals and clearances for such products more rapidly than us, or developing products that are more effective than ours. In addition, other forms of medical treatment, such as surgery, are competitive with our products. Over time, our technology or products may become obsolete or uncompetitive. See “Business of the Corporation - Competition.”

Our products may not gain market acceptance

Products such as HspE7, our lead therapeutic vaccine candidate, may not gain market acceptance among physicians, patients, healthcare payors and the medical community. The degree of market acceptance of any product depends on a number of factors, including establishment and demonstration of clinical efficacy and safety, cost-effectiveness, clinical advantages over alternative products, and marketing and distribution support for the products. Limited information regarding these factors is available in connection with our products or products that may compete with ours.

Our sales experience is limited to the sale of bioreagents. We do not have experience selling therapeutics such as HspE7. To directly market and distribute any pharmaceutical products, we or our collaborators will need a marketing and sales force with appropriate technical expertise and supporting distribution capabilities. We may not be able to establish sales, marketing and distribution capabilities or enter into arrangements with third parties on acceptable terms. If we or our partners cannot successfully market and sell our products, our ability to generate revenue will be limited.

Our operations and the use of our products could subject us to damages relating to injuries or accidental contamination

The human clinical trials we conduct, including trials in children, may have unforeseen long-term health implications. We have only limited amounts of product liability insurance for our clinical trials. We may not correctly anticipate or be able to maintain on acceptable terms the level of insurance coverage that would adequately cover potential liabilities from proposed clinical trials and eventual commercial sales. Product liability insurance is expensive, difficult to obtain and may not be available in the future. If we cannot obtain sufficient insurance coverage or other protection against potential product liability claims, the commercialization of our

products may become financially infeasible. If any liabilities from a claim exceed the limit of insurance coverage, we may not have the resources to pay them.

Our research and development processes involve the controlled use of hazardous and radioactive materials. We are subject to federal, state, provincial and local laws and regulations governing the use, manufacture, storage, handling and disposal of such materials and waste products. The risk of accidental contamination or injury from handling and disposing of such materials cannot be completely eliminated. In the event of an accident involving hazardous or radioactive materials, we could be held liable for resulting damages. We are not insured with respect to this liability. Such liability could exceed our resources. In the future we could incur significant costs to comply with environmental laws and regulations.

Our success depends on attracting and retaining qualified personnel

We depend on a core management and scientific team. The loss of one or more of these individuals could cause delays or prevent us from achieving our business objective of commercializing our product candidates. Our future success will depend in large part on our continued ability to attract and retain other highly qualified scientific, technical and management personnel, as well as personnel with expertise in clinical testing and government regulation. We face competition for personnel from other companies, universities, public and private research institutions, government entities and other organizations. If our recruitment and retention efforts are unsuccessful, our business operations could suffer.

Our revenues will depend upon the availability of reimbursement from third-party payors that are increasingly challenging the price and examining the cost effectiveness of medical products and services

Sales of therapeutic products depend in part upon the availability of reimbursement from third-party payors, including government health administration authorities, managed care providers, private health insurers and other organizations. These third-party payors increasingly attempt to contain costs by challenging the price of products and services and limiting the coverage and level of reimbursement for pharmaceutical products. Third party reimbursement for our products may be inadequate to enable us to maintain prices that provide a return on our product development investment. Governments continue to propose and pass legislation designed to reduce healthcare costs. This legislation could further limit reimbursement. If government and third-party payors do not adequately reimburse patients for the costs of our products, the market for our products may be limited.

Our share price has been and is likely to continue to be highly volatile

Our share price has been highly volatile in the past and is likely to continue to be volatile. The price of our shares could be materially affected by factors including:

• the announcement of clinical trials results by us or our competitors;

• regulatory actions;

• safety issues;

• changes affecting patents or exclusive licenses;

• future issuances of shares;

• the announcement of technological innovations;

• the release of technical, financial, research and other publications;

• the development of new commercial products;

• changes in regulations;

• the release of financial results;

• public concerns over risks relating to biotechnology;

• sales of shares by existing shareholders; and

• changes in analyst recommendations.

Item 2. PROPERTIES

We do not own any real property. Our principal research facilities are in Victoria, British Columbia, as are the operations of Stressgen Bioreagents Limited Partnership, a British Columbia limited partnership. The two Victoria businesses share approximately 25,000 square feet of office, research and manufacturing space under a lease that expires at the end of 2005.

The office address of Stressgen Biotechnologies Corporation is 350-4243 Glanford Avenue, Victoria, British Columbia V8Z 4B9. It is a corporation continued under the laws of the Yukon Territory, with a registered office address of Lackowicz & Shier, Suite 300, 204 Black Street, Whitehorse, YT Y1A 2M9 Canada.

Stressgen Biotechnologies Corporation holds all the common stock of three subsidiaries:

• Stressgen Biotechnologies, Inc., a Delaware corporation

• Stressgen Development Corporation, a Barbados corporation and

• Stressgen Holdings Corporation, a corporation continued under the laws of the Yukon Territory (the general partner of Stressgen Bioreagents Limited Partnership).

Executive, clinical research, regulatory affairs and financial functions are provided by Stressgen Biotechnologies, Inc., which leases space in San Diego, California and Collegeville, Pennsylvania.

Item 3. LEGAL PROCEEDINGS

As of the date hereof, we are not a party to any material legal proceedings. From time to time we are involved in disputes arising out of our normal course of business.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

We did not submit any matters to a vote of security holders, through the solicitation of proxies or otherwise, during the quarter ended December 31, 2004.

PART II

Common Share Information

Our common shares are listed and posted for trading in Canada on The Toronto Stock Exchange under the symbol “SSB.” The following table sets forth, for the periods indicated, the high and low sales prices of the common shares, as reported on the Toronto Stock Exchange. All amounts following are expressed in Canadian dollars unless otherwise indicated.

	Price Per Share
Calendar Period	High	Low
	$	$
2003
First Quarter	2.12	1.31
Second Quarter	2.78	1.40
Third Quarter	2.43	1.44
Fourth Quarter	2.23	1.56

			Volume
2004
January	1.84	1.56	6,490,759
February	2.06	1.22	10,192,148
March	1.30	1.00	6,511,349
April	1.17	0.96	4,333,870
May	1.07	0.75	2,610,429
June	1.08	0.76	2,620,304
July	0.94	0.76	1,709,158
August	0.82	0.63	1,171,672
September	0.82	0.65	3,594,035
October	0.75	0.51	2,671,592
November	0.55	0.37	3,117,827
December	0.47	0.36	3,582,417

On March 8, 2005, the closing price of our common shares as reported by The Toronto Stock Exchange was $0.36 per share. We had 142 registered holders, 20 of whom were residents of the

U.S. Of the approximately 72,506,000 common shares outstanding, the portion held by registered holders in the U.S. was approximately 6,554,000 or 9%.

There were approximately 16,000 holders of our common shares as of the most recent annual general meeting of shareholders on May 12, 2004.

Dividend Policy

We have not declared or paid any dividends on our common shares since inception. We have no plans to pay dividends in the foreseeable future.

Exchange Controls and Other Limitations Affecting Holders of Common Shares

There is no law, governmental decree or regulation in Canada that restricts the export or import of capital, or which would affect our remittance of dividends or other payments to non-resident holders of our common shares, other than withholding tax requirements.

There is no limitation imposed by Canadian law or the charter or other constituent documents of Stressgen on the right of non-residents to hold or vote our common shares, other than those imposed by the Investment Canada Act (Canada), or the ICA.

The ICA requires each individual, government or agency thereof, corporation, partnership, trust or joint venture that is not a “Canadian” as defined in the ICA who commences a new business activity in Canada or acquires control of an existing Canadian business, where the establishment or acquisition of control is not a reviewable transaction, to file a notification with Industry Canada. The ICA generally prohibits implementation of a reviewable transaction by a non-Canadian unless after review the minister responsible for the ICA is satisfied that the investment is likely to be of net benefit to Canada. An investment in our common shares by a non-Canadian would be reviewable under the ICA if it were an investment to acquire control of Stressgen and the value of our assets of was $5 million or more. Higher limits apply for acquisitions by or from World Trade Organization member country investors.

The acquisition of a majority of the voting interests of an entity or of a majority of the undivided ownership interests in the voting shares of an entity that is a corporation is deemed to be acquisition of control of that entity. The acquisition of less than a majority but one-third or more of the voting shares of a corporation or of an equivalent undivided ownership interest in the voting shares of the corporation is presumed to be acquisition of control of that corporation unless it can be established that, upon the acquisition, the corporation is not controlled in fact by the acquiror through the ownership of voting shares. The acquisition of less than one-third of the voting shares of a corporation or of an equivalent undivided ownership interest in the voting shares of the corporation is deemed not to be acquisition of control of that corporation. Certain transactions in relation to our common shares would be exempt from review from the ICA, including an:

• acquisition of common shares by a person in the ordinary course of that person’s business as a trader or dealer in securities;

• acquisition of control of Stressgen in connection with the realization of security granted for a loan or other financial assistance and not for any purpose related to the provisions of the Investment Act; and

• acquisition of control of Stressgen by reason of an amalgamation, merger, consolidation or corporate reorganization following which the ultimate direct or indirect control in fact of Stressgen, through the ownership of voting interests, remains unchanged.

The ICA was amended with the Act to Implement the Agreement Establishing the World Trade Organization (Canada) to provide for special review thresholds for World Trade Organization member country investors. Under the ICA, as amended, an investment in our common shares by an investor from a country which is a member of the WTO would be reviewable only if it were an investment to acquire control of the company and the value of the assets of the company was equal to or greater than a specified amount, which increases in stages. As at December 31, 2004, the review threshold was Cdn. $237,000,000. This amount is subject to an annual adjustment on the basis of a prescribed formula in the ICA to reflect inflation and real growth within Canada.

Certain Canadian Federal Income Tax Information for United States Residents

The following is a summary of certain Canadian federal income tax considerations generally applicable to holders of common shares who, for purposes of the Income Tax Act (Canada) (the “Canadian Tax Act”), deal at arm’s length and are not affiliated with Stressgen, hold such shares as capital property, do not use or hold, and are not deemed to use or hold, the common shares in connection with a trade or business carried on, or deemed to be carried on, in Canada at any time, have not been at any time residents of Canada for purposes of the Canadian Tax Act and are residents of the United States of America (“U.S. Residents”) under the Canada-U.S. Income Tax Convention (1980) (the “Convention”). The common shares will generally be considered to be capital property of holders unless such shares are held in the course of carrying on a business, or in an adventure or concern in the nature of trade. Furthermore, this summary does not apply to any holder which carries on an insurance business in Canada and elsewhere, in respect of the common shares that are effectively connected with the holder’s Canadian insurance business or that are “designated insurance property” as defined in the Canadian Tax Act.

This summary is of a general nature only and is not intended to be, and should not be construed to be, legal, business or tax advice to any holder of common shares or prospective holder of common shares and no opinion or representation with respect to any tax consequences, including, but not limited to, Canadian federal, Canadian provincial or U.S. tax consequences, is made to any particular holder of common shares or prospective holder of common shares. Accordingly, holders of common shares and prospective holders of common shares should consult with their own tax advisers for advice with respect to the tax consequences to them having regard to their own particular circumstances, including any consequences of purchasing, owning or disposing of common shares arising under Canadian federal, Canadian provincial, U.S. Federal, U.S. state or local tax laws or tax laws of jurisdictions outside the U.S. or Canada.

No advance income tax ruling has been requested or obtained from the Canada Customs and Revenue Agency to confirm the tax consequences of any of the transactions described herein.

This summary is based on the current provisions of the Canadian Tax Act and the regulations thereunder (the “Regulations”), proposed amendments to the Canadian Tax Act and/or Regulations publicly announced by the Minister of Finance (Canada) prior to the date hereof (the “Proposed Amendments”), and the provisions of the Convention as in effect on the date hereof. No assurance can be given that the Proposed Amendments will be entered into law in the manner proposed, or at all.

This summary is not exhaustive of all possible Canadian federal income tax consequences for U.S. Residents and does not take into account or anticipate any changes in law, whether by legislative, administrative, governmental or judicial decision or action, nor does it take into account Canadian provincial, U.S. or foreign tax considerations which may differ significantly from those discussed herein. No assurances can be given that subsequent changes in law or administrative policy will not affect or modify the opinions expressed herein.

A holder will not be subject to tax under the Canadian Tax Act in respect of any capital gain on a disposition or deemed disposition of common shares (including the death of the holder) unless at the time of such disposition such shares constitute taxable Canadian property of the holder for purposes of the Canadian Tax Act and such holder is not entitled to relief under an applicable tax treaty. The common shares will generally not constitute taxable Canadian property of a holder at the time of a disposition of such shares provided (1) such shares are listed on a prescribed stock exchange (which includes the Toronto Stock Exchange and would currently include the American Stock Exchange or NASDAQ), (2) the holder does not use or hold or is not deemed to use or hold, such shares in connection with carrying on a business in Canada, and (3) the holder, persons with whom such holder does not deal at arm’s length, or the holder and such persons, has not owned 25% or more of the issued shares of any class or series of our share capital at any time within the 5 years preceding the date of disposition. In any event, under the Convention, gains derived by a holder who is a resident of the U.S. (within the meaning of the Convention) from the disposition of common shares will generally not be taxable in Canada unless the value of the common shares is derived principally from real property situated in Canada. If the common shares held by a holder do not constitute taxable Canadian property or if a capital gain in respect of the common shares would because of a tax treaty be exempt from tax under the Canadian Tax Act, any capital loss arising upon the disposition of the common shares will not be available to be used to offset a capital gain realized in respect of another property, which may be subject to tax under the Canadian Tax Act. To the extent the common shares disposed of constitute taxable Canadian property; the holder will be required to file a Canadian tax return, even if the gain arising from such a disposition is exempt from tax because of a tax treaty.

Amounts in respect of common shares paid or credited or deemed to be paid or credited as, on account or in lieu of payment of, or in satisfaction of, dividends to a U.S. Resident will generally be subject to Canadian non-resident withholding tax at the rate of 25%. Currently, under the Convention the rate of Canadian non-resident withholding tax will generally be reduced to: (i) 5% of the gross amount of dividends if the beneficial owner is a company (other than a limited liability company) that is resident in the U.S. and that owns at least 10% of our voting stock; or

(ii) 15% of the gross amount of dividends if the beneficial owner is a resident of the U.S. (and is not a limited liability company) but does not qualify for the 5% withholding rate.

United States Federal Income Tax Considerations

The following summary is a general description of the material United States federal income tax consequences of the purchase, ownership and disposition of common shares by U.S. Holders (as defined below). This summary does not address all potentially relevant U.S. federal income tax matters. This description is intended for general information purposes only and does not constitute an opinion regarding tax consequences. It is based on the U.S. Internal Revenue Code of 1986, as amended (the “Code”), Treasury regulations promulgated thereunder, and judicial and administrative interpretations thereof, all as in effect on the date hereof and all of which are subject to change, prospectively or retroactively.

The tax treatment of a holder of common shares may vary depending upon his particular situation. Certain holders (including, but not limited to, persons that are not U.S. Holders, banks, insurance companies, tax-exempt organizations, financial institutions, persons subject to the alternative minimum tax, real estate investment trusts, regulated investment companies, persons or entities that have a “functional currency” other than the U.S. dollar, shareholders who acquired their stock through the exercise of employer stock options, and broker-dealers) may be subject to special rules not discussed below. The following summary is limited to U.S. Holders who will hold the common shares as “capital assets” within the meaning of Section 1221 of the Code, and do not actually or constructively own 10% or more of our voting stock. The discussion below does not address the effect of any state, local or foreign tax law on a holder of the common shares.

Prospective investors should consult their own tax advisors about the federal, state, local, and foreign tax consequences of purchasing, owning and disposing of common shares.

As used herein, the term “U.S. Holder” means (i) an individual who is a citizen or resident of the U.S., (ii) a partnership, corporation or other entity organized in or under (or treated for federal income tax purposes as organized in or under) the laws of the U.S. or any state thereof, (iii) an estate subject to U.S. federal income taxation without regard to the source of its income, and (iv) a trust if (a) a U.S. court is able to exercise primary supervision over the trust’s administration and (b) one or more U.S. fiduciaries have the authority to control all of the trust’s substantial decisions. The term “Non-U.S. Holder” shall mean the beneficial owner of common shares other than a U.S. Holder.

Dividend Income

Subject to the discussion of the “passive foreign investment company” rules below, for United States federal income tax purposes, the gross amount of a distribution with respect to common shares will include the amount of any Canadian federal income tax withheld, and will be treated as a taxable dividend to the extent of our current and accumulated earnings and profits.

To the extent that distributions exceed our current or accumulated earnings and profits, they will be treated first as a return of capital up to the U.S. Holder’s adjusted basis in the common shares and thereafter as gain from the sale or exchange of the common shares.

If a dividend distribution is paid in Canadian dollars, the amounts includable in income will be the U.S. dollar value, on the date of receipt, of the Canadian dollar amount distributed. Any subsequent gain or loss in respect of such Canadian dollars arising from exchange rate fluctuations will be ordinary income or loss.

U.S. Holders who are individuals are currently subject to a maximum federal income tax rate of 15% on dividends received from foreign corporations that are “qualified foreign corporations”, as defined by the Code. We believe that the Company is a qualified foreign corporation.

Subject to the limitations set forth in the Code, as modified by the U.S.-Canada income tax treaty, U.S. Holders may elect to claim a credit against their U.S. federal income tax liability for Canadian income tax withheld from dividends received in respect of common shares. For purposes of calculating the credit for the Canadian taxes paid against the U.S. taxes imposed, the dividend should be foreign source income. The rules relating to the determination of the foreign tax credit are complex. U.S. Holders should consult their personal tax advisors to determine whether and to what extent they would be entitled to such credit. U.S. Holders that do not elect to claim foreign tax credits may instead claim a deduction for Canadian income tax withheld.

Sale of Common Stock

Subject to the discussion of the “passive foreign investment company” rules below, the sale of common shares will generally result in the recognition of gain or loss in an amount equal to the difference between the amount realized on the sale and the holder’s adjusted basis in such common shares.

Gain or loss upon the sale of the common shares will be long-term or short-term capital gain or loss, depending on whether or not the common shares were held for more than one year prior to the sale. Preferential tax rates for long-term net capital gains are applicable to a U.S. Holder that is an individual, estate or trust. There are currently no preferential tax rates for long-term capital gains for a U.S. Holder that is a corporation. Short-term capital gains are generally taxed at ordinary income tax rates. Deductions for net capital losses are subject to significant limitations.

PFIC Status

Special rules are applicable to U.S. Holders that hold stock of a “passive foreign investment company” (“PFIC”). A foreign corporation is a PFIC if at least 75% of its gross income for the taxable year is passive income or if at least 50% by value of the assets it holds during the taxable year produce or are held for the production of passive income. For publicly traded corporations such as Stressgen, the asset test is met if the fair market value of passive income-producing assets equals or exceeds 50% of the sum of the corporation’s liabilities plus the value of its outstanding stock. U.S. Holders of common shares can be adversely affected by the PFIC rules if they hold or have held our common shares in a year in which we have or had PFIC status.

In general, a U.S. Holder of common shares in a PFIC is required to prorate all gains realized on the disposition of such U.S. Holder’s common shares and all “excess distributions” (as such term is defined by Section 1291) over the entire holding period for the common shares (excluding any period prior to the first year during which we were a PFIC). All gains or excess distributions allocated to such prior years are taxed at the highest tax rate for each such prior year applicable to ordinary income. The U.S. Holder also would be liable for interest on the foregoing tax liability for each such prior year calculated as if such tax liability had come due in each such prior year. However, if the U.S. Holder makes a timely election to treat a PFIC as a qualified electing fund (“QEF”) with respect to such holder’s interest therein, the above-described rules generally will not apply. Instead, the electing U.S. Holder would include annually in his gross income his pro rata share of the PFIC’s ordinary earnings and net capital gain regardless of whether such income or gain was actually distributed. A U.S. Holder of a QEF can, however, elect to defer the payment of U.S. federal income tax on such income inclusions, but would then be obligated to pay interest to the government on the deferred payment. In addition, subject to certain limitations, U.S. Holders owning marketable stock in a PFIC are permitted to elect to mark that stock to market annually. Amounts included in or deducted from income under the mark to market alternative (and actual gains and losses realized upon disposition, subject to certain limitations) will be treated as ordinary gains or losses.

We believe that Stressgen was not a PFIC for the year 2004 or prior years. However, because PFIC status depends on the character of our income and assets in each year, there can be no assurance with respect to whether we will qualify as a PFIC in future years. Further, there can be no assurance that our determination concerning our PFIC status will not be challenged by the IRS. If we determine that Stressgen is a PFIC we will determine at that time whether we will provide sufficient information for a U.S. Holder to make the QEF election. Therefore, each prospective investor is urged to consult with a tax advisor with respect to how the PFIC rules would affect its tax situation.

Controlled Foreign Corporation Status

If more than 50% of the voting power of all classes of stock or the total value of our stock is owned, directly or indirectly, by citizens or residents of the U.S., U.S. domestic partnerships and corporations or estates or trusts other than foreign estates or trusts, each of whom own 10% or more of the total combined voting power of all classes of stock of the Company (“10% U.S. Shareholders”), Stressgen could be treated as a CFC under Subpart F of the Code. If in 1998 or

thereafter Stressgen qualifies as a CFC, 10% U.S. Shareholders are generally not required to apply the PFIC rules, provided that, in some cases, complex tax elections are made. The classification of Stressgen as a CFC would effect many complex results including the required inclusion by 10% U.S. Shareholders in income of their pro rata shares of our Subpart F income. In addition, gain from the sale or exchange of stock by a holder of our shares who is or was a 10% U.S. Shareholder at any time during the five-year period ending with the sale or exchange is treated as ordinary dividend income to the extent of our earnings and profits attributable to the stock sold or exchanged. Because of the complexity of Subpart F, and because it is not clear that Subpart F would apply to the holders of our shares, a 10% U.S. Holder is urged to consult with their tax advisors to determine the applicable rules.

Due to the complexity of the tax rules, U.S. persons who are shareholders of Stressgen are strongly urged to consult their own tax advisors concerning the impact of these rules on their investment in our shares.

Items 6, 7 and 7A. SELECTED FINANCIAL DATA; MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS; QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Annual Financial Data

Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles in Canada (“Canadian GAAP”). These principles differ in certain respects from generally accepted accounting principles in the United States of America (“U.S. GAAP”). The differences as they affect our financial statements are described in Note 11 to our audited consolidated financial statements filed as part of Item 8 hereof. Because we report on a consolidated basis, our results include those of our subsidiaries, including a U.S. subsidiary, which provides management, regulatory and research and development services, and a Barbados subsidiary, which is responsible for the development of HspE7.

Consolidated Statement of Operations Data

	Years Ended December 31,
	2004			2003			2002			2001			2000
	(Canadian dollars) (In thousands, except per share amounts)
Net revenues, Canadian and U.S. GAAP from continuing operations	$	700		$	8,094		$	8,370		$	—		$	—
Research and development expenses from continued operations, Canadian and U.S. GAAP	25,913			19,533			32,735			35,214			23,666
Net (loss) income, Canadian GAAP (1)
From continuing operations	(31,845		)	(17,663		)	(30,826		)	(38,224		)	(26,781		)
From discontinued operations (3)	1,580			1,418			2,024			2,285			1,374
Basic and diluted (loss) income per common share, Canadian GAAP (1) (4)
From continuing operations	(0.44		)	(0.29		)	(0.52		)	(0.75		)	(0.66		)
From discontinued operations (3)	0.02			0.03			0.03			0.05			0.03
Net loss, U.S. GAAP (1)	(28,021		)	(15,298		)	(29,016		)	(36,341		)	(35,766		)
Basic and diluted loss per common share, U.S. GAAP (1) (4)	(0.39		)	(0.25		)	(0.49		)	(0.71		)	(0.88		)

Consolidated Balance Sheet Data

	As of December 31,
	2004			2003			2002			2001			2000
	(In thousands of Canadian dollars)
Cash and short-term investments, Canadian GAAP
Of continuing operations	$	21,578		$	51,843		$	46,013		$	62,682		$	70,567
Of discontinued operations (3)	1,066			247			—			—			—
Cash and short-term investments, U.S. GAAP
Of continuing operations	21,578			51,843			46,013			62,682			70,710
Of discontinued operations (3)	1,066			247			—			—			—
Total assets (2)
Canadian GAAP	30,174			56,430			54,815			67,789			74,325
U.S. GAAP	30,174			56,430			54,815			67,789			74,468
Long-term obligations, Canadian and U.S. GAAP
Of continuing operations	$	1,427		$	2,672		$	3,606		$	578		$	1,036
Of discontinued operations (3)	—			—			—			—			—

The information set forth above is not necessarily indicative of the results of future operations and should be read in conjunction with the consolidated financial statements and related notes thereto and with our fiscal 2004 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

(1) To conform to U.S. GAAP, our net loss would, decrease by $2,244,000 in 2004 and $947,000 in 2003 and increase by $214,000 in 2002, $402,000 in 2001 and $10,359,000 in 2000. The principal differences under U.S. GAAP as opposed to Canadian GAAP in 2004 were the reversal of an unrealized foreign exchange loss on investments of $800,000, a reversal of a loss on market value of investments of $241,000 and the reversal of stock compensation expense totaling $1,284,000 related to fair value stock option accounting adopted beginning January 1, 2004, offset by stock compensation expense of $81,000 that would be recorded under APB Opinion No. 25. In 2003, the principal difference in our net loss under U.S. GAAP rather than Canadian GAAP was due to the reversal of $541,000 in unrealized foreign exchange loss on investments and the reversal of a $406,000 loss on market value of investments. In 2002, the principal difference in our net loss under U.S. GAAP rather than Canadian GAAP was due to the reversal of $69,000 in unrealized foreign exchange gain on investments and the reversal of a $145,000 gain on market value of investments. In 2001, the principal difference in our net loss under U.S. GAAP rather than Canadian GAAP was due to the reversal of an unrealized foreign exchange gain on investments of $541,000 offset by net $139,000 of other items. In 2000, the principal difference in our net loss was due to the release of escrow shares of $9,093,000, stock-based compensation expenses including non-compensatory costs to non-employees of $1,674,000, and changes related to unrealized losses on available for sale securities totaling $372,000. See Note 11 to our financial statement for further disclosure.

(2) At December 31, 2004, 2003, 2002 and 2001, there were no differences in total assets under U.S. GAAP relative to Canadian GAAP. At December 31, 2000, the difference in total assets under U.S. GAAP relative to Canadian GAAP was $143,000, due to an increase in market value on available-for-sale securities.

(3) See Management’s Discussion and Analysis and Note 12 to our financial statements for further disclosure on our discontinued operations.

(4) No cash dividends were declared.

Summary of Quarterly Results

The following is a summary of the unaudited quarterly results of operations for the years ended December 31, 2004 and 2003.

(In thousands except per share amounts)

	Quarter ended (b)
2004	March 31		June 30		September 30		December 31
Net revenues, Canadian and U.S. GAAP
From continuing operations	173		190		174		163

Research and development expenses, Canadian and U.S. GAAP from continuing operations	5,273		5,636		6,422		8,582

Net (loss) income, Canadian GAAP
From continuing operations	(6,818	)	(7,029	)	(8,367	)	(9,631	)
From discontinued operations	534		663		410		(27	)
Net loss, Canadian GAAP	(6,284	)	(6,366	)	(7,957	)	(9,658	)

Basic and diluted (loss) income per common share, Canadian GAAP
From continuing operations (a)	(0.09	)	(0.10	)	(0.12	)	(0.13	)
From discontinued operations (a)	(0.00	)	0.01		0.01		(0.00	)
Total basic and diluted loss per common share	(0.09	)	(0.09	)	(0.11	)	0.13

Net loss, U.S. GAAP (c)	(5,657	)	(6,014	)	(6,519	)	(9,831	)

Basic and diluted loss per common share, U.S. GAAP (a) (c)	(0.08	)	(0.08	)	(0.09	)	(0.14	)

	Quarter ended (b)
2003	March 31		June 30		September 30		December 31
Net revenues, Canadian and U.S. GAAP
From continuing operations	5,221		1,508		855		510

Research and development expenses, Canadian and U.S. GAAP from continuing operations	6,231		4,408		5,636		3,258

Net (loss) income, Canadian GAAP
From continuing operations	(2,881	)	(4,677	)	(6,034	)	(4,071	)
From discontinued operations	424		274		411		309
Net loss, Canadian GAAP	(2,457	)	(4,403	)	(5,623	)	(3,762	)

Basic and diluted (loss) income per common share, Canadian GAAP
From continuing operations (a)	(0.05	)	(0.08	)	(0.10	)	(0.06	)
From discontinued operations (a)	0.01		0.01		0.01		0.00
Total basic and diluted loss per common share	(0.04	)	(0.07	)	(0.09	)	(0.06	)

Net loss, U.S. GAAP (c)	(2,248	)	(4,222	)	(5,463	)	(3,365	)

Basic and diluted loss per common share, U.S. GAAP (a) (C)	(0.04	)	(0.07	)	(0.09	)	(0.05	)

(a) Income (loss) per share is computed independently for each of the quarters presented and therefore may not sum to the total for the year.

(b) Amounts for the first, second and third quarters of 2004 and all quarters in 2003 have been

reclassified to conform to the presentation of the bioreagent business as discontinued operations.

(c) To conform to U.S. GAAP certain adjustments must be made. The nature of the principal difference is disclosed in the notes to our 2004 and 2003 audited financial statements. See Note 11 to the financial statements for further disclosure.

Our financial results over the past eight quarters were affected principally by our Roche collaboration and our R&D spending. See the discussion under the captions “Results of Operations—Collaborative R&D Revenue” and “Results of Operations—Research and Development” for additional information.

Fourth Quarter 2004 Results

Our net losses from continuing operations for the three months ended December 31, 2004 and 2003 were $9,631,000 and $4,071,000, respectively. The increase in our fourth quarter 2004 net loss over the same period in the previous year is related to an increase in our 2004 R&D spending in support of our efforts to develop HspE7.

Net revenues earned in the three months ended December 31, 2004 declined to $163,000 compared to $510,000 for the same period in 2003. The 2004 decline in net revenue is related to collaborative R&D revenue from Roche in 2003 that we did not receive in 2004.

Spending on R&D activities increased to $8,582,000 for the three months ended December 31, 2004 compared to $3,258,000 for the same period in 2003. The increase in R&D expense in 2004 is attributed to spending at Avecia to support the development activities of HspE7.

Currency Exchange Rates

Our accounts are maintained in Canadian dollars. In this report, all dollar amounts are stated in Canadian dollars except where otherwise indicated.

The table below shows relevant exchange rates which approximate the noon buying rates in Canada as reported by the Bank of Canada for our five most recent fiscal years. The average rate means the average of the exchange rates on the last day of each month during a year.

Year Ended December 31,	2004		2003		2002		2001		2000
High	$	1.4003	$	1.5747	$	1.6128	$	1.6023	$	1.5600
Low	1.1746		1.2924		1.5108		1.4933		1.4350
Average	1.3015		1.4015		1.5702		1.5518		1.4855
Period End	1.2036		1.2924		1.5800		1.5925		1.4995

As of March 8, 2005, the noon buying rate in Canada as reported by the Bank of Canada was US$0.82 = Cdn.$1.00 (equivalent to US$1.00 = Cdn.$1.2169).

Management’s Discussion and Analysis

This Management’s Discussion and Analysis of Financial Condition and Results of Operations is dated as of March 8, 2005. It contains forward-looking statements that involve risk and uncertainties. The predictions described in these statements may not materialize if management’s current expectations regarding our future performance prove incorrect. Our results could also be affected by factors including, but not limited to, our reliance on collaborative partners and other risks described in our annual report under the heading “Factors That May Affect Future Performance.” Our forward-looking statements are based on currently available information; we disclaim any obligation to update them.

The following information should be read in conjunction with our 2004 consolidated financial statements and related notes therein, which are prepared in accordance with Canadian GAAP. These principles differ in certain respects from U.S. GAAP. The differences, as they affect our consolidated financial statements, are described in Note 11 to our consolidated financial statements. All amounts following are expressed in Canadian dollars unless otherwise indicated.

Overview

From our inception in 1990 to 1993, our core business involved the sale of bioreagent products. Although we retained and expanded our bioreagent business worldwide, our primary focus since 1993 has been the research and development of innovative stress protein-based fusion products that will stimulate the body’s immune system to combat viral infections and related cancers. Our lead therapeutic vaccine candidate is HspE7. HspE7 is a broad-spectrum therapeutic vaccine candidate in development for diseases caused by the human papilloma virus. HspE7 is derived from our proprietary platform technology that enables us to covalently fuse stress proteins to antigens that invoke immune system responses. By covalently fusing Hsp and disease-associated antigens, we believe that we can create a proprietary portfolio of CoVal™ fusion products designed to stimulate the immune system to identify, target and eliminate virus-infected and cancerous cells.

We have incurred significant losses since our inception and expect to incur substantial losses for the foreseeable future as we invest in our research and product development programs, including manufacturing, pre-clinical studies and clinical trials, and regulatory activities. At December 31, 2004 our accumulated deficit was $212,349,000. Historically, we have depended principally on equity financings, cash flows from our bioreagent business and funding from research collaborations to fund our business activities. In 2005, we plan to sell our bioreagent business for cash to focus our management resources on our clinical programs and to ensure our resources are adequate to fund our drug development business activities. We intend to pursue additional equity financings, markets permitting, and to seek additional research collaborations to fund our business activities.

Our success will depend upon the safety and efficacy of our immunotherapeutic products in pre-clinical studies and clinical trials, and upon obtaining the necessary regulatory approvals to market our products. The marketability of our products will be influenced by competition from alternative therapies and the degree of protection our intellectual property provides. We believe there will be significant markets for our therapeutic products should these products prove to be effective in human clinical trials.

Restructured Roche Agreement

In December 2003, we announced a restructuring of our June 2002 collaboration agreement with Roche providing for the development and commercialization of HspE7. Under the restructured terms we granted Roche an option to license the first generation HspE7 product, a license to develop a second generation HspE7 product, and non-exclusive options to negotiate rights to CoVal^TM fusion product candidates for the treatment of cancers and hepatitis C. Roche can pay fees to make these options exclusive until January 1, 2007.

In connection with the first generation of HspE7, the restructured agreement gives us the right to develop and commercialize the product for indications other than genital warts, including control of regulatory matters such as IND applications. In the original agreement we were responsible for clinical expenses only for the development of RRP. In the new agreement we are responsible for the manufacturing and other costs of all indications that we develop. If Roche exercises its rights to the first generation product, it will fund all prospective development costs. Roche can exercise its rights to the first generation of HspE7 by paying a fee, in which case it would also become responsible for event-driven milestones that could result in aggregate payments to us of up to US$138,000,000. Under that scenario, we would receive the revenue from all first generation HspE7 product sales in the U.S. and Canada for three years following approval of a BLA with the FDA and would receive sales-based payments (similar to royalties) of approximately 35% of net sales in the U.S. and Canada thereafter. We would receive sales-based payments of 20% of net sales in countries other than the U.S. and Canada.

By paying additional fees, Roche can exclusively develop the second generation HspE7 product. In such case Roche would be required to pay the costs of development, manufacturing and commercialization of the product and to make payments to us upon the achievement of defined milestones. We would also receive tiered, progressive sales-based payments that we believe are competitive with other agreements of this stage and type. Commercial success payments of up to approximately US$85,000,000 become payable depending upon the aggregate net sales of either or both generations of the HspE7 products. The restructured collaboration agreement gives us the right to discuss, negotiate and execute an alternative agreement with a third-party for the development and commercialization of HspE7 through a license, partnership, joint venture or similar transaction. After March 31, 2005 and through the end of the option period, Roche can terminate this right by paying us a fee, which would be either US$10,000,000 or US$15,000,000 depending on the stage of development of the product. We cannot determine if or when this option will be exercised.

Liquidity and Capital Resources; Proposed Transactions

Since inception we have relied principally on equity financings, coupled with cash flows generated from our bioreagents business, to fund our research and development programs, operations and capital expenditures. Through December 31, 2004 we have raised net equity proceeds of $198,238,000, including approximately $18,619,000 of net proceeds from an equity financing in December 2003.

In February 2004, we filed an amended preliminary prospectus in Canada for the sale of common shares of the Company. Management and the board of directors are reviewing alternative sources of revenue and strategic transactions in connection with our financial needs.

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. We have a history of recurring losses from operations and have an accumulated deficit of $212,349,000 as of December 31, 2004. The nature of our business requires significant spending on R&D activities. Due to our history of losses, high cash burn on R&D activities and the planned loss of bioreagent revenue as a result of the planned sale of that business, we are closely monitoring our cash resources. We have developed various operational plans which depend upon the outcome of the financing options available. Assuming we raise approximately $15,000,000 and sell the bioreagent business we will have sufficient resources to fund operations into 2006 at our current spending levels. If we do not raise at least that amount of cash we may need to modify or cancel our agreements with external contractors, and make changes to our staffing level which would impact the development timelines of HspE7. Regardless of the funding we receive, we will execute the operational plan necessary to fund operations into 2006.

We employ a financial performance measurement system designed to ensure our revenues and expenses are consistent with management’s operational objectives and budgetary constraints. Our cash utilization in 2005 will be dependent upon several factors, including the timing and progress of clinical development of HspE7, the cost of manufacturing clinical supplies and the sale of our bioreagent business.

At December 31, 2004 and 2003, we had $21,578,000 and $51,843,000, respectively, of cash, cash equivalents and short-term investments. The $30,265,000 decrease is due principally to spending related to the development of HspE7. At December 31, 2004 and 2003, approximately 48% and 24% of cash, cash equivalents and short-term investments were held in U.S. dollars. During 2004, we purchased British pounds to fund payments under our Avecia contract. At December 31, 2004 approximately 36% of our cash, cash equivalents and short-term investments were held in British pounds. Periodically we may purchase additional British pounds based on future anticipated financial obligations in that currency.

During 2004, 2003 and 2002, we reported $28,722,000, $18,661,000 and $28,750,000, respectively net cash used in operating activities from continuing operations. The increase in 2004 over 2003 is due to an increase in net losses recorded which was offset by stock compensation expense recorded in 2004 that was not recorded in 2003.

During 2004, purchases of plant and equipment by continuing operations totaled $203,000 compared with $131,000 and $380,000 during 2003 and 2002 respectively. Spending during 2004 consisted of tenant improvements on our facilities, laboratory equipment, and computer related hardware. Our capital spending during the past three years has been consistent other than in 2001 when we made a significant upgrade to our research facility. We expect our 2005 capital spending to include purchases required to preserve our current level of manufacturing, research and administrative capabilities.

At December 31, 2003 we had obligations of $1,125,000 in the form of fixed rate capital leases and term loans. At December 31, 2004 we had an outstanding term loan obligation of $514,000. In September 2003 we entered into a 36-month term loan with Oxford Finance Corporation (Oxford). At December 31, 2004 and 2003, respectively, the outstanding principal balances were $514,000 and $906,000 on the Oxford loan. Under the terms of the Oxford loan, we must

issue a letter of credit for the outstanding loan balance if our combined cash, cash equivalents, and short-term investments fall below $6,000,000.

We expect to seek additional funds from various sources, including corporate partners that enter into research and development collaborations with us, and public and private equity financings. If we raise additional funds by issuing equity securities, substantial dilution to our existing shareholders may result. We may need to obtain funds through collaborative arrangements with others that are on unfavorable terms. We may also have to relinquish rights to certain of our technologies, product candidates or products that we would otherwise seek to develop ourselves.

Contractual Obligations

Our contractual obligations consist primarily of agreements related to the development and manufacture of HspE7, operating leases for facilities, a term loan to increase working capital cash flows and contractual employment obligations. We have several contractors working on different aspects of the work regulatory authorities require for a biologic product, including stability testing, analytical testing, release testing and the manufacturing and fill/finish activities noted below.

In January 2004 we entered into a biological services agreement with Avecia for the process development, scale-up and manufacture of HspE7. In addition, we may have Avecia manufacture commercial drug substance. Under the terms of the agreement, we are required to make prepayments for future services and use of the facility. We were invoiced for two prepayments totaling $3,204,000 in 2004 for services to be rendered and space utilized in 2005. We made one of these prepayments in 2004. The other prepayment was not made until 2005 and therefore is included in deferred development expenses, current portion and accrued liabilities.

The Avecia agreement is cancelable subject to specified termination conditions. The cancellation fee is based on a sliding percentage of certain future program milestones. Accordingly, the cancellation fee is modified each month during the course of the agreement, based on the timing of activities performed by Avecia and prepayments for those activities. The cancellation fee as of December 31, 2004 could have been up to $441,000, depending on Avecia’s ability to reschedule usage of their facility.

In October 2004 we entered into an agreement with Cardinal Health (“Cardinal”) in the ordinary course of our business. Cardinal will perform fill/finish activities to prepare HspE7 for distribution to clinical trial patients. At December 31, 2004, we were contractually obligated to make a prepayment of $293,000 for future services to be rendered in 2005. However, this prepayment was not made until early 2005 and therefore is included in deferred development expenses, current portion and accrued liabilities. The agreement with Cardinal includes cancellation provisions that could require us to pay for work that was not performed or equipment that was not used if we terminate the contract while activities are at pre-defined stages. The cancellation fee of $127,000 would have been offset against the prepayment made in 2005.

To retain a flexible development program, we typically negotiate termination provisions so that our financial obligations are limited to paying for work performed up to the termination date and in some cases, pre-established cancellation fees. Except as disclosed above we currently do not

have other significant research and development contracts subject to cancellation fees. We have not entered into any minimum supply agreements with any service vendors or contract manufacturers.

We have employment agreements with certain members of management which include specific severance packages. We would be contractually obligated to pay $2,871,000 over the next twelve months and an additional $314,000 would be payable during the following year, depending upon individual employment agreements.

The following table summarizes our contractual obligations as of December 31, 2004. The table does not include items such as contracts with independent contractors when the commitment to pay does not exist until completion of work.

	Payments due by period
	Total		Less than 1 year		1 – 3 years		3 – 5 years		More than 5 years
Operating lease obligations (b)	$	1,005,000	$	966,000	$	38,000	$	1,000	—
Term loan (a)	559,000		409,000		150,000		—		—
Contractual obligations (b)	—		—		—		—		—

(a) Payments disclosed above include interest. Interest rates on the Oxford term loan range from 11.47% to 11.48%.

(b) Our contracts tend to be cancelable and require payments related to specific work. As a result they are not discussed in this table. A discussion of such contractual obligations is included above and in Note 5 to our financial statements.

Off-Balance Sheet Arrangements

We did not enter into any off balance sheet arrangements during the year ended December 31, 2004.

Related Party Transactions

Until the annual meeting in 2002 an independent contractor who is a researcher in the area of heat shock proteins also served as a director. In 2002, this individual received consulting fees of $50,000.

We have used various affiliates of MDS, Inc., including MDS Pharma Services, to provide research services. Through May 2004 and the years ended 2003 and 2002 we paid the various MDS entities an aggregate of $286,000, $235,000 and $139,000, respectively. One of the Company’s board members was an officer of MDS, Inc. through May 2004.

Discontinued Operations

Our bioreagent business produces and sells bioreagents to researchers and research organizations worldwide. The products sold by the bioreagent business include antibodies, proteins, DNA products, ELISA kits and extracts for use in studying cellular stress response pathways, including oxidative stress, apoptosis, neurobiology and more.

At December 31, 2004, we decided to report the bioreagent business as a discontinued operation pursuant to the requirements of CICA 3475, Disposal of Long-lived Assets and Discontinued Operations (CICA 3475), SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144), and EITF 03-13, Applying the Conditions in Paragraph 42 of FASB Statement No. 144 in Determining Whether to Report Discontinued Operations. We are reporting the business as a discontinued operation because we have evaluated our intentions for the future of the bioreagent business, formulated a plan for sale and have taken steps to execute that plan.

We plan to sell the bioreagent business in 2005 so we can focus on our corporate strategy, manage resources and provide working capital to fund further development and commercialization of HspE7. We cannot determine the amount of any gain or loss, if any, that would be realized on the sale of the bioreagent business. If we complete a sale of the business we will report the gain or loss in our quarterly filings as required by the CICA 3475 and SFAS 144. We will continue to evaluate our plan for the bioreagent business and disclose it appropriately per the Canadian and U.S. standards.

During 2004 the bioreagent business contributed net income of $1,580,000 as compared to $1,418,000 in 2003 and $2,024,000 in 2002 ($0.02, $0.03, and $0.03 per share, respectively). The increase in net income from discontinued operations in 2004 compared to 2003 is due principally to revenue growth resulting from new product introductions, a sales price increase and enhanced marketing initiatives. The reduction in net income from discontinued operations in 2003 compared to 2002 is due principally to variations in product sales revenue driven by an industry-wide decline in the demand for research reagents and exchange rate fluctuations affecting U.S. dollar denominated sales, which constitute approximately 95% of our sales transactions.

The income reported above does not include internal overhead and administrative overhead expense allocations that were assigned to this segment and which will continue to be incurred by the continuing entity. After we sell the bioreagent business we will not have this contribution of net income thereafter. We could enter into a contract with the buyer to provide temporary administrative support for a transition period.

Results of Continuing Operations

During 2004, we realized a net loss from continuing operations of $31,845,000 or $ 0.44 per common share. These results compare with a net loss from continuing operations of $17,663,000 in 2003 and $30,826,000 in 2002 ($0.29 and $0.52 per share, respectively). The $14,182,000 increase in our net loss during 2004 is due principally to incremental spending on research and development (R&D) activities related to manufacturing development previously funded by Roche and a time based development payment earned in March 2003. Separately, our

third party spending to further the development of HspE7 increased in 2004 compared to 2003. The $13,163,000 improvement in our net loss position from 2002 to 2003 was driven by increased collaboration revenue and Roche’s funding of R&D activities related to manufacturing development in 2003. In addition, the timing of activities in our ongoing clinical trials resulted in less expense recorded in 2003 compared to 2002.

Collaborative R&D revenue

We recorded collaborative R&D revenue of $700,000, $8,094,000 and $8,370,000 in 2004, 2003 and 2002, respectively. Collaborative R&D revenue during 2004 relates principally to the amortization of upfront license fees in accordance with CICA Accounting Standards Board recommendations, section 3400, Revenue, and Staff Accounting Bulletin (SAB) No. 101 Revenue Recognition in Financial Statements. Collaborative R&D revenue in 2003 includes $4,912,000 for development activities, $2,214,000 for a time based milestone payment and $968,000 for the amortization of upfront license fees. Collaborative R&D revenue in 2002 includes $7,815,000 for development activities and $555,000 from the amortization of upfront license fees. Under the terms of the restructured HspE7 collaboration agreement, we expect future collaborative R&D revenue to include only amortization of the initial up-front license fee.

Research and development

Research and development in our continuing operations includes costs associated with therapeutic product development, clinical studies and ongoing exploratory research. In order to optimize our financial flexibility, we employ clinical research organizations to conduct our clinical trials and engage contract manufacturers to assist us with product development and manufacturing.

R&D spending in our continuing operations increased by approximately 33% to $25,913,000 during the year ended December 31, 2004, compared with $19,533,000 for the same period in 2003. This increase is due principally to spending at Avecia, which began early in 2004; in contrast, our 2003 third-party spending focused on Roche-requested manufacturing initiatives, which are complete. Our spending at Avecia is expected to continue to be a major component of our R&D spending through 2005 as we transition from process development activities to initial production runs of bulk drug substance for our upcoming pivotal trial. During 2003, R&D spending decreased by 40% from $32,735,000 in 2002. R&D expense in 2002 included manufacturing development spending at third party vendors and service providers. In 2003 these activities were primarily performed and paid for by Roche. Separately, the timing of expenses recorded for our on-going clinical trials contributed to the change in R&D expense in 2003 as compared to 2002.

Our R&D spending during 2004 was devoted principally to our effort to further develop HspE7, including process development and manufacturing activities, preparation for our pivotal phase III RRP trial, the close out on our AIN trials, and initiation of a phase II GW trial. During 2004 approximately 91% of our R&D spending related to efforts developing HspE7, compared to approximately 67% for the same period in 2003. The remaining spending relates to exploratory research involving our follow-on CoVal^TM fusion proteins.

We held an end-of-phase II meeting with the FDA in June 2004 to present the design of our planned pivotal phase III clinical trial to treat RRP. We are working with the FDA to review our pivotal clinical trial protocol under a Special Protocol Assessment (“SPA”), an agreement with the FDA that is typically binding regarding the protocol design for a clinical trial to support a biologics license application (“BLA”). We hope to obtain concurrence of our SPA by the FDA, in the second quarter of 2005, following review of the Chemistry, Manufacturing, and Controls (“CMC”) information. We believe that we have reached an understanding with the FDA on the significant clinical issues.

We intend to begin accruing patients in our pivotal phase III trial to treat RRP by mid-2005. We expect the trial will be a randomized, double-blind, placebo controlled study with approximately 130 patients. The pivotal trial is expected to have the median post surgical interval as the primary end point. We have begun identifying clinical sites, primarily in the U.S. with additional sites in Canada and Europe. Accordingly, we recorded the expense related to the start-up portion of the pivotal trial in the fourth quarter of 2004 pursuant to our accounting policy discussed in Note 1 to our consolidated financial statements. Depending on the clinical and other results, we anticipate being able to submit a BLA for HspE7 to treat RRP in mid-2007. We plan to apply for priority review when we file the BLA. The FDA has granted HspE7 orphan drug status and designated it as a fast track development program for the treatment of RRP.

In September 2004, we were issued a U.S. patent covering a method of treating a patient with RRP using a fusion protein comprised of a heat shock protein from the Hsp60 family and an HPV type 16 E7 antigen. This patent provides additional patent exclusivity through mid-2021 for the use of HspE7 to treat patients with RRP.

In December 2004, we announced the completion of enrollment in a single arm pilot Phase II clinical trial to investigate HspE7 in patients with internal genital warts. Patients are under evaluation for a period of up to one year. We expect data from this trial in the fourth quarter of 2005.

During 2005, we expect to continue to devote the majority of planned R&D spending to support HspE7 development, produce clinical trial supplies and begin patient accrual activities for our RRP pivotal trial.

Selling, general and administrative expenses

Selling, general and administrative expense, or SG&A, includes executive management, business development, investor relations, legal support and general administrative activities.

SG&A spending through continuing operations increased by approximately 3% to $6,385,000 for the year ended December 31, 2004 from $6,170,000 for the same period in 2003. This increase is primarily due to the use of external consultants and additional fees for attestation services over internal controls over financial reporting to ensure compliance with requirements of Sarbanes-Oxley regulations. During 2003, SG&A expenses decreased by 16% from $7,326,000 in 2002 due principally to higher 2002 spending on business development activities associated with consummating our original collaboration agreement with Roche. We anticipate that in 2005 SG&A spending will be consistent with that of 2004.

Interest and other income

Interest and other income from continuing operations increased in 2004 to $787,000 compared with $700,000 in 2003. In 2004 and 2003 we recorded write-downs of our fixed income investment portfolio of $293,000 and $284,000, respectively.

Interest and other income decreased by 45% in 2003 from $1,266,000 in 2002 compared with $700,000 in 2003. Lower market interest rates applied to a lower investment portfolio balance contributed to the decline. Also, a temporary loss of market value on investments was recorded in 2003.

Net foreign exchange gain/loss

In 2004 foreign exchange loss from continuing operations increased by 34% to $938,000 from $701,000 in 2003. During the third and fourth quarters of 2004, the Canadian dollar strengthened against the U.S. dollar and the British pound compared to the first half of 2004 and 2003. Since approximately 84% of our cash, cash equivalents and short term investments are held in currencies other than the Canadian dollar, we experienced a foreign exchange loss.

In 2003 our foreign exchange loss increased by 111% to $701,000 from $332,000 in 2002 reflecting, the beginning of an overall strengthening trend of the Canadian dollar against the U.S. dollar.

Basic and diluted loss per share

The 80% increase in net loss from continuing operations to $31,845,000 in 2004, compared with $17,663,000 in 2003, was diluted by an 18% increase in the weighted average number of common shares outstanding. As a result, in basic and diluted loss from continuing operations per share was $0.44 in 2004 and $0.29 in 2003.

The 43% decrease in net loss from continuing operations to $17,663,000 in 2003 compared with $30,826,000 in 2002, was diluted by a 4% increase in the weighted average number of common shares outstanding, resulting in basic and diluted loss from continuing operations per share of $0.29 in 2003 and $0.52 in 2002.

Differences between Canadian and U.S. generally accepted accounting principles

Our financial statements have been prepared in accordance with Canadian GAAP. Certain adjustments would be required if these statements were to be prepared in all material respects in accordance with U.S. GAAP.

To conform to U.S. GAAP, our net loss would decrease by $2,244,000 in 2004, $947,000 in 2003 and increase by $214,000 in 2002. The principal differences under U.S. GAAP as opposed to Canadian GAAP in 2004 were the reversal of an unrealized foreign exchange loss on investments of $800,000, a reversal of a loss on market value of investments of $241,000 and the reversal of stock compensation expense totaling $1,284,000 related to fair value stock option accounting adopted beginning January 1, 2004, offset by stock compensation expense of $81,000 that would be recorded under APB Opinion No. 25. U.S. GAAP does not currently require fair value accounting on stock based compensation. Therefore, under the provisions of APB Opinion

No. 25, no expense is recorded for options granted with an exercise price equal to the fair value of the stock on the day of grant. Under APB Opinion No. 25 expense is incurred when stock options are granted at exercise prices less than the fair value of the underlying stock. Further, under U.S. GAAP, adjustments to the market value of our investment portfolio would be recorded as a component of stockholders’ equity. Under Canadian GAAP unfavorable market value adjustments are recorded as a component of operations.

Similarly, in 2003, the principal difference in our net loss using U.S. GAAP rather than Canadian GAAP is due to the reversal of an unrealized foreign exchange loss on investments of $541,000, coupled with a $406,000 reversal of a loss on market value of investments. In 2002, the principal difference in our net loss using U.S. GAAP rather than Canadian GAAP is due to the reversal of $69,000 in unrealized foreign exchange gain on investments and a $145,000 reversal of gain on market value of investments. A complete discussion of these differences between U.S. GAAP and Canadian GAAP are described in Note 11 to our consolidated financial statements.

Net loss per common share under U.S. GAAP would have been $0.39, $0.25 and $0.49 in 2004, 2003 and 2002, respectively. Our current assets and our total stockholders’ equity are the same at December 31, 2004 and 2003.

Critical Accounting Policies

Our significant accounting policies are disclosed in Note 1 to our consolidated financial statements herein. Certain of our policies require the application of management judgment in making estimates and assumptions that affect the amounts reported in the consolidated financial statements and disclosures made in the accompanying notes. Those estimates and assumptions are based on historical experience and various other factors deemed applicable and reasonable under the circumstances. The use of judgment in determining such estimates and assumptions is, by nature, subject to a degree of uncertainty. Accordingly, actual results could differ from the estimates made. Our critical accounting policies include:

Revenue recognition

Revenue from collaborative R&D arrangements may include multiple elements within a single contract. Our accounting policy complies with the revenue determination requirements set forth in EITF 00-21 Accounting for Revenue Arrangements with Multiple Deliverables, and EIC 142 Revenue Arrangements with Multiple Deliverable, relating to the separation of multiple deliverables into individual accounting units with determinable fair values. We estimate the fair value of deliverables in collaboration agreements using standard industry techniques. Changes in the determination of fair values or performance periods relating to certain deliverables, and associated milestones, could impact the timing of future revenue streams.

Clinical trial accruals

Clinical trial costs constitute a significant portion of R&D expense. We recognize expenses related to our ongoing clinical trials using a methodology designed to accrue estimated costs in the appropriate accounting periods in which the expenses are incurred. We recognize clinical trial costs in three distinct phases that correspond with the period during which the services are performed: the start-up phase, the patient accrual phase, and the close-out phase. Based on the

design of the trial, including the number of patients, number of clinical sites, method of treatment, and follow-up, the allocation of trial costs to each phase could vary from trial to trial. Using our current trial accrual methodology, our liability for clinical trials as of December 31, 2004 is $2,514,000, which includes the estimated effect of any work-in-process terminated at the end of the reporting period. Alternatively, if we utilized a percentage of completion approach and used an operational estimate of the actual work completed as of December 31, 2004 compared to the total contract value, our clinical trial liability would decrease by approximately $2,375,000.

New Canadian GAAP Accounting Pronouncement

Impairment of Long-Lived Assets

CICA Section 3063, Impairment of Long-Lived Assets, establishes standards for the recognition, measurement and disclosure of the impairment of long-lived assets by profit oriented enterprises, and replaces the write-down provisions of Section 3061, Property, Plant and Equipment.

Impairment of long-lived assets held for use is determined by a two-step process. The first step determines when an impairment is recognized and the second step measures the amount of the impairment. An impairment loss is recognized when the carrying amount of a long-lived asset exceeds the sum of the undiscounted cash flows expected to result from its use and eventual disposition. An impairment loss is measured as the amount by which the long-lived asset’s carrying amount exceeds its fair value.

The new standard is effective for fiscal years beginning on or after April 1, 2003. Application is prospective. We will continue to monitor potential impairment of long-lived assets.

Stock-based compensation

In September 2003 the CICA Accounting Standards Board released revised transitional provisions for Stock-Based Compensation and Other Stock-Based Payments, Section 3870, to provide the same alternative methods of transition as is provided in the U.S. for voluntary adoption of the fair value based method of accounting. The AcSB has also amended Section 3870 to require that all transactions whereby goods and services are received in exchange for stock-based compensation and other payments result in expenses that should be recognized in financial statements, and that this requirement would be applicable for financial periods beginning on or after January 1, 2004. Section 3870 requires that share-based transactions should be measured on a fair value basis. We retroactively adopted the provisions of CICA Section 3870 beginning January 1, 1995. See the detail at Note 2 in the financial statements included herein.

New U.S. GAAP Accounting Pronouncement

Other than temporary impairment

to certain investments held at cost. The EITF reached a consensus regarding disclosure requirements concerning unrealized losses on available-for-sale debt and equity securities accounted for under SFAS No. 115. The guidance for evaluating whether an investment is other-than-temporarily impaired has been deferred. The disclosure requirements apply to annual financial statements for fiscal years ending after December 15, 2003 for investments accounted for under SFAS No. 115. For all other investments within the scope of this Issue, the disclosure requirements have been deferred. Additional disclosure requirements for cost method investments apply to fiscal years ending after June 15, 2004. We continue to evaluate the effect of this pronouncement on our financial statements.

Share-based payment

In January 2005, the FASB issued Statement No. 123R, Share-Based Payment (SFAS 123R), which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. SFAS 123R establishes accounting standards for transactions around stock based compensation in exchange for employee services. Similar to CICA 3870, SFAS 123R requires fair-value-based method for accounting for stock based compensation and eliminates the intrinsic method under APB Opinion 25. This statement is effective beginning in the second quarter of 2005; however as discussed in the Critical Accounting Policies and Note 2 in the financial statements, we adopted CICA 3870 which also requires the fair-value based method. We will evaluate the impact of SFAS 123R on our current accounting policies and make the necessary changes and disclosures in the notes to our financial statements in third quarter 2005.

Disclosure of Outstanding Share Data

The following table contains information regarding our outstanding equity as of March 8, 2005:

Common shares outstanding		72,506,403
Roche warrants		814,574
Warrants under 2003 Financing		5,304,149
Stock options outstanding		4,671,424

Quantitative and Qualitative Disclosures About Market Risk

We use the Canadian dollar as our measurement and functional currency. As a result, we are exposed to foreign currency fluctuations through our operations because a substantial amount of our contract research and development spending has been transacted in other currencies, principally in U.S. dollars and British pounds. We hold investment balances in the currencies in which we have expenditures planned during the foreseeable future. At December 31, 2004 and 2003, approximately 48% and 24% of cash, cash equivalents and short-term investments were held in U.S. dollars. During 2004, we purchased British pounds to mitigate our currency exposure based on spending plans with Avecia. At December 31, 2004 approximately 36% of our cash, cash equivalents and short-term investments were held in British pounds. We translate monetary assets and liabilities into Canadian dollars using the rates of exchange prevailing at our balance sheet date. We record the resulting exchange gains and losses in our statement of operations. Although we do not currently engage in hedging or other activities to reduce foreign

currency risk, beyond matching investments proportionately with anticipated spending, we may do so in the future if conditions change.

A hypothetical change in foreign exchange rates by applying a 10% change to our year-end foreign exchange rate, then applying that rate to our average level of U.S. investments during the year, would result in an $858,000 impact. If the value of the Canadian dollar relative to the U.S. dollar were to increase by 10%, our net loss would decrease by $858,000. Further, if the value of the Canadian dollar relative to the U.S. dollar were to decrease by 10%, our net loss would increase by $858,000.

A hypothetical change in foreign exchange rates by applying a 10% change to our year-end foreign exchange rate, then applying that rate to our average level of British pound investments during the year, would result in a $285,000 impact. If the value of the Canadian dollar relative to the British pound were to increase by 10%, our net loss would decrease by $285,000. Further, if the value of the Canadian dollar relative to the British pound were to decrease by 10%, our net loss would increase by $285,000.

We are also exposed to interest rate risk because we maintain cash equivalents and short-term investment portfolio holdings of various issuers, types, and maturity dates with large banks and investment banking institutions. The market value of these short-term investments on any day during the investment term may vary as a result of market interest rate fluctuations.

To differentiate between the affect of a change in the market valuation of securities caused by market interest rate changes versus a change in the annual rate of interest we could earn on a security, we calculated that a hypothetical change in interest rates comparable to a 10% change to our average rate of return would result in a $64,000 impact. If interest rates were to increase by 10%, our net loss would decrease by $64,000. Further, if interest rates were to decrease by 10%, our net loss would increase by $64,000.

We have not used derivative financial instruments in our investment portfolio. We classify our investments as available-for-sale at the time of purchase and re-evaluate this designation as of each balance sheet date. We had $21,578,000 in cash, cash equivalents and short-term investments as of December 31, 2004.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Stressgen Biotechnologies Corporation

We have audited the accompanying consolidated balance sheets of Stressgen Biotechnologies Corporation and subsidiaries (the “Company”) as of December 31, 2004 and 2003, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in Canada and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in Canada.

As discussed in Note 2 to the financial statements, in 2004 the Company changed its method of accounting for stock based compensation to conform to Certified Institute of Chartered Accountants 3870, retroactively without restatement.

As discussed in Note 12 to the financial statements, the Company committed to a plan to discontinue the bioreagent segment of its operations in December 2004.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company’s recurring losses from operations, stockholders’ deficit and difficulty in generating sufficient cash flow to meet its obligations and sustain its operations, raise substantial doubt about its ability to continue as a going concern. Management’s plans concerning these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004, based on the criteria established in Internal

Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 14, 2005 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ DELOITTE & TOUCHE LLP
San Diego, California
March 14, 2005

STRESSGEN BIOTECHNOLOGIES CORPORATION

CONSOLIDATED BALANCE SHEET

(CANADIAN DOLLARS) (IN THOUSANDS, EXCEPT SHARE INFORMATION)

	December 31,			December 31,
	2004			2003

Assets
Current assets:
Cash and cash equivalents	$	8,538		$	19,749
Short-term investments	13,040			32,094
Collaborative accounts receivable	—			277
Prepaid expenses (Note 5)	2,196			290
Deferred development expenses, current portion (Notes 4 and 5)	1,747			87
Assets of discontinued operations (Note 12)	2,447			1,582
Other current assets	563			85
Total current assets	28,531			54,164

Plant and equipment	1,481			2,006
Deferred development expenses, net of current portion	162			260
	$	30,174		$	56,430

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued liabilities	$	7,862		$	3,567
Deferred revenue, current portion	641			688
Notes payable, current portion	369			518
Liabilities of discontinued operations (Note 12)	324			408
Total current liabilities	9,196			5,181

Long-term liabilities:
Deferred revenue, net of current portion	1,282			2,065
Notes payable, net of current portion	145			607
Total long-term liabilities	1,427			2,672

Total liabilities	10,623			7,853

Stockholders’ equity:
Common shares and other equity – no par value; unlimited shares authorized, 72,506,403 and 72,491,403 shares issued and outstanding at December 31, 2004 and 2003, respectively	216,412			196,849
Contributed surplus	15,488			2,207
Deferred stock compensation	—			(185		)
Accumulated deficit	(212,349		)	(150,294		)
Total stockholders’ equity	19,551			48,577
	$	30,174		$	56,430

See accompanying notes to consolidated financial statements

/s/ DANIEL L. KORPOLINSKI		/s/ GORDON BAREFOOT
Director, President and Chief Executive Officer		Director

STRESSGEN BIOTECHNOLOGIES CORPORATION

CONSOLIDATED STATEMENT OF OPERATIONS

(Canadian dollars) (In thousands, except per share amounts)

	Years ended December 31,
	2004			2003			2002

Revenue:
Collaborative R&D revenue	$	700		$	8,094		$	8,370

Operating expenses:
Research and development	25,913			19,533			32,735
Selling, general and administrative	6,385			6,170			7,326
	32,298			25,703			40,061

Operating loss	(31,598		)	(17,609		)	(31,691		)

Other income (expenses):
Interest and other income	787			700			1,266
Net foreign exchange loss	(938		)	(701		)	(332		)
Interest expense	(96		)	(53		)	(69		)
	(247		)	(54		)	865
Net loss from continuing operations	(31,845		)	(17,663		)	(30,826		)

Net income from discontinued operations (Note 12)	1,580			1,418			2,024

Net loss	$	(30,265	)	$	(16,245	)	$	(28,802	)

Basic and diluted (loss) income per common share:
From continuing operations	$	(0.44	)	$	(0.29	)	$	(0.52	)
From discontinued operations	$	0.02		$	0.03		$	0.03
	$	(0.42	)	$	(0.26	)	$	(0.49	)

Weighted average shares used to compute basic and diluted loss per common share (in thousands)	72,504			61,458			58,986

See accompanying notes to consolidated financial statements.

STRESSGEN BIOTECHNOLOGIES CORPORATION

CONSOLIDATED STATEMENT OF CASH FLOWS

(Canadian dollars in thousands)

	Years ended December 31,
	2004			2003			2002
Cash flows from operating activities:
Net loss	$	(30,265	)	$	(16,245	)	$	(28,802	)
Net income from discontinued operations	(1,580		)	(1,418		)	(2,024		)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation of plant and equipment	513			632			797
Loss on disposal of plant and equipment	215			—			—
Amortization of stock compensation expense	1,213			192			207
Unrealized foreign exchange loss (gain)	1,145			1,030			(20		)
Loss (gain) on market value of investments	241			406			(145		)
Changes in operating assets and liabilities:
Collaborative accounts receivable	277			3,513			(3,790		)
Prepaid expenses	(1,906		)	(8		)	(41		)
Deferred development expenses, current portion	(1,660		)	53			(140		)
Other current assets	(478		)	(5		)	94
Deferred development expenses, net of current portion	98			161			(421		)
Accounts payable and accrued liabilities	4,295			(5,266		)	1,076
Deferred revenue	(830		)	(1,706		)	4,459
Net cash used in operating activities of continuing operations	(28,722		)	(18,661		)	(28,750		)
Net cash provided by discontinued operations	702			1,841			2,227
Net cash used in operating activities	(28,020		)	(16,820		)	(26,523		)

Cash flows from investing activities:
Purchase of short-term investments	(38,928		)	(33,255		)	(76,641		)
Sales and maturities of short-term investments	56,983			15,025			91,388
Purchase of plant and equipment	(203		)	(131		)	(380		)
Net cash provided by (used in) investing activities	17,852			(18,361		)	14,367

Cash flows from financing activities:
Proceeds from issuance of common shares	36			23,672			10,604
Share issue costs	(81		)	—			—
Repayment of borrowings	(611		)	(459		)	(535		)
Proceeds from borrowings	—			1,004			—
Net cash (used in) provided by financing activities	(656		)	24,217			10,069

Effect of exchange rate changes on cash and cash equivalents	(387		)	(489		)	(49		)
Decrease in cash and cash equivalents	(11,211		)	(11,453		)	(2,136		)
Cash and cash equivalents, beginning of year	19,749			31,202			33,338
Cash and cash equivalents, end of year	$	8,538		$	19,749		$	31,202

See Note 10 for non-cash disclosures
See accompanying notes to consolidated financial statements.

STRESSGEN BIOTECHNOLOGIES CORPORATION

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Canadian dollars) (In thousands, except share information)

	Common shares and other equity				Warrants					Deferred Stock			Accumulated
	Number	Amount			Number		Amount			Comp			Deficit			Total
Balance at January 1, 2002	57,591,888	$	164,794		3,256,202		$	—		$	(630	)	$	(105,247	)	$	58,917
Issued for cash on exercise of stock options	575,902	1,706			—		—			—			—			1,706
Conversion of warrants to common shares	3,963	—			(25,057	)	—			—			—			—
Warrants issued in connection with Roche Collaboration	—	—			2,036,435		1,264			—			—			1,264
Issued for cash in connection with Roche Collaboration	2,036,436	7,657			—		—			—			—			7,657
Other, net	1,800	(37		)	—		—			28			—			(9		)
Compensation expense related to stock option grants	—	—			—		—			210			—			210
Net loss	—	—			—		—			—			(28,802		)	(28,802		)
Balance at December 31, 2002	60,209,989	174,120			5,267,580		1,264			(392		)	(134,049		)	40,943
Issued for cash on exercise of stock options	229,516	375			—		—			—			—			375
Issued for cash, net of issue costs	10,638,298	17,796			5,319,149		904			—			—			18,700
Adjustment due to price difference in warrant transaction related to Roche Collaboration	—	—			191,739		—			—			—			—
Conversion of warrants to common shares in connection with Roche Collaboration	1,413,600	5,352			(1,413,600	)	(758		)	—			—			4,594
Expiration of warrants	—	—			(3,231,145	)	—			—			—			—
Other, net	—	3			—		—			4			—			7
Compensation expense related to stock option grants	—	—			—		—			203			—			203
Net loss	—	—			—		—			—			(16,245		)	(16,245		)
Balance at December 31, 2003	72,491,403	197,646			6,133,723		1,410			(185		)	(150,294		)	48,577
Issued for cash on exercise of warrants	15,000	38			(15,000	)	(2		)	—			—			36
Retroactive adjustment related to adoption of CICA 3870 (Note 2)	—	32,379			—		—			—			(32,379		)	—
Reversal of deferred stock compensation related to adoption of CICA 3870 (Note 2)	—	(774		)	—		—			185			589			—
Amortization of fair value of stock option expense of continued operations	—	1,213			—		—			—			—			1,213
Amortization of fair value of stock option expense of discontinued operations	—	71			—		—			—			—			71
Adjustment to share issues costs	—	(81		)	—		—			—			—			(81		)
Net loss	—	—			—		—			—			(30,265		)	(30,265		)
Balance at December 31, 2004	72,506,403	$	230,492		6,118,723		$	1,408		$	—		$	(212,349	)	$	19,551

See accompanying notes to consolidated financial statements.

Stressgen Biotechnologies Corporation

Notes to Consolidated Financial Statements

(Canadian dollars)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Stressgen Biotechnologies Corporation (with its subsidiaries other than discontinued operations, “Stressgen” or the “Company”) is a biopharmaceutical company that discovers, develops and seeks to commercialize therapeutic vaccines for the treatment of infectious diseases and cancers. The Company’s lead candidate, HspE7, targets a broad spectrum of human papilloma virus (HPV) related diseases. It was created using the Company’s proprietary CoVal fusion product technology, which is based on covalently linking stress proteins (also known as heat shock proteins) to disease specific antigens. The Company has been researching use of the same technology to develop potential treatments for hepatitis B, herpes simplex and hepatitis C.

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has a history of recurring losses from operations and have an accumulated deficit of $212,349,000 as of December 31, 2004. The nature of the Company’s business requires significant spending on R&D activities. Due to a history of losses, high cash burn on R&D activities and the planned loss of bioreagent revenue as a result of the planned sale of that business, the Company is closely monitoring cash resources. The Company has developed various operational plans which depend upon the outcome of the financing options available. Assuming the Company raises approximately $15,000,000 and sells the bioreagent business the Company will have sufficient resources to fund operations into 2006 at current spending levels. If the Company does not raise at least that amount of cash it may need to modify or cancel agreements with external contractors, and make changes to staffing level which would impact the development timelines of HspE7. Regardless of the funding the Company receives, it will execute the operational plan necessary to fund operations into 2006.

Basis of presentation

The consolidated financial statements include the assets, liabilities and operating results of the Company and its wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. Prior year balances have been reclassified to conform to current year presentation as a result of adoption of Canadian Institute of Chartered Accountants (CICA) 3870 and disclosure regarding the Company’s discontinued operation.

Financial statements and estimates

The financial statements, in the opinion of management, include all adjustments necessary for their fair presentation in conformity with Canadian generally accepted accounting principles (“Canadian GAAP”), and conform in material respects with accounting principles generally accepted in the United States of America (“U.S. GAAP”), except as discussed in Note 11.

The preparation of financial statements in conformity with Canadian GAAP and U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosures as of the date of the financial statements. Significant estimates are used for, but not limited to, revenue recognition, accrual of clinical trial costs, measurement of stock-based compensation, cancellation fees related to contractual obligations and the allocation of indirect costs between research and development (R&D) and selling, general and administrative (SG&A). Actual results could differ from such estimates.

Foreign currency translation

The Company uses the Canadian dollar as its consolidated functional currency. Monetary assets and liabilities that are denominated in U.S. dollars or British pounds are translated into Canadian dollars at the rates of exchange prevailing at the balance sheet date. Non-monetary assets and liabilities are translated at historical exchange rates. Revenue and expenses are translated at the average rate of exchange for the period of such transactions.

Revenue recognition

Revenue from collaborative research and development arrangements may include multiple elements within a single contract. The Company’s accounting policy complies with the revenue determination requirements set forth in EITF 00-21, Accounting for Revenue Arrangements with Multiple Deliverables, and EIC 142, Revenue Arrangements with Multiple Deliverables, relating to the separation of multiple deliverables into individual accounting units with determinable fair values. Payments received under collaborative arrangements may include the following: non-refundable fees at inception of contract for technology rights; funding for services performed; milestone payments for specific achievements; and payments based upon resulting sales of products.

The Company recognizes collaborative research and development revenues as services are rendered consistent with the performance requirements of the contract. Revenue from non-refundable contract fees where the Company has continuing involvement through research and development collaborations or other contractual obligations, less the fair market value of any related warrants, is recognized ratably over the development period or the period for which Stressgen continues to have a performance obligation. The period of development is evaluated on a regular basis. In December 2003, the Company increased the development period by one year to reflect management’s research and development plan. Revenue from performance milestones is recognized upon the achievement of the milestones as specified in the agreement, provided payment is proportionate to the effort expended. Payments are recorded as deferred revenue if they are received in advance of performance or delivery.

Clinical trial accruals

The Company recognizes expenses related to its ongoing clinical trials using a methodology designed to accrue estimated costs in the appropriate accounting periods when the expenses are incurred. The Company recognizes clinical trial costs in three distinct phases that correspond with the period during which the services are performed: the start-up phase, the patient accrual phase, and the close-out phase. The start up portion of the trial contract is accrued during the trial planning and protocol writing period. The per patient accrual cost is recognized as each patient enters the trial. The close-out portion of the trial is recognized as the final analyses of patient data are prepared. Based on the design of the trial including number of patients, number of clinical sites, method of treatment, and follow-up, the proportion of the cost of each phase could vary from trial to trial. As each trial continues, the Company evaluates the total contract costs and makes adjustments accordingly. Changes to the cost estimates are charged to R&D expense in the appropriate period based on the facts and timing of the adjustment.

Stock-based compensation plan

In September 2003, the CICA Accounting Standards Board released revised transitional provisions for Stock-Based Compensation and Other Stock-Based Payments, Section 3870 (CICA 3870), to provide the same alternative methods of transition as is provided in the U.S. for voluntary adoption of the fair value based method of accounting. In January 2004, the Company adopted CICA 3870. This standard requires that all stock-based awards made to non-employees be measured and recognized using a fair value based method. The standard encourages the use of a fair value based method for all awards granted to employees, but only requires the use of a fair value based method for direct awards of stock, stock appreciation rights, and awards that call for settlement in cash or other assets. Awards that a company has the ability to settle in stock are recorded as equity, whereas awards that the entity is required to or has a practice of settling in cash are recorded as liabilities. No awards were made that would result in recording a liability.

The Company has two stock-based compensation plans, which are described in Note 6. The Company grants options with an exercise price equal to the fair market value of the underlying common stock. Under the principles of CICA 3870, compensation expense is recognized on a straight-line basis over the vesting period of the grant based on the estimated fair value at the time of grant using the Black-Scholes method. Any consideration paid by directors, employees and others on exercise of stock options is credited to common shares. See further discussion of the change in accounting policy in Note 2.

Cash, cash equivalents and short-term investments

Cash and cash equivalents consist of cash and highly liquid investments, including investment grade corporate debt securities with original maturities when acquired of three months or less. Short-term investments consist of investment grade securities, which are capable of prompt liquidation and are carried at the lower of cost plus accrued interest or quoted market value.

Plant and equipment

Plant and equipment are recorded at cost and depreciated over their estimated useful lives on a declining-balance basis using the half year convention, except for leasehold improvements, which are depreciated on a straight-line basis over the lesser of the lease term or the estimated useful life. The approximate annual depreciation rates are as follows:

Laboratory equipment	20%
Computer equipment	30%
Furniture and equipment	20%
Leasehold improvements	the lesser of the lease term or the estimated useful life

Impairment of long-lived assets

The Company assesses potential impairment to its long-lived assets when there is evidence that events or changes in circumstances exist. The recoverability of long-lived assets is determined by evaluating whether the carrying value of such assets can be recovered from estimated undiscounted future operating cash flows. Should an impairment exist, the impairment loss would be measured based on the excess of the carrying value of the assets over the present value of the future operating cash flows.

Fair value of financial instruments

Management believes that the carrying values of financial instruments, including cash and cash equivalents, short-term investments, accounts receivable, accounts payable, and
accrued liabilities approximate fair value as a result of the short-term maturities of these instruments. The carrying value of fixed rate capital leases and term loan obligations approximate fair value, as the imputed interest rate is approximately equivalent to the market rates charged on similar arrangements.

Concentration of credit risk

The Company invests its excess cash principally in investment grade government and corporate debt securities. The Company has established guidelines relative to

diversification and maturities that maintain safety and liquidity. These guidelines are periodically reviewed and modified to reflect changes in market conditions. The Company has not experienced any significant losses on its cash equivalents or short-term investments. However, the Company recorded write-downs of its fixed income investment portfolio in 2004 and 2003 of $293,000 and $284,000, respectively. The write-downs were due principally to a decrease in the market value of one bond which we still hold. The market value of this particular bond has been fluctuating since we recorded a write down in 2003.

At December 31, 2004 and 2003, approximately 48% and 24% of cash, cash equivalents and short-term investments were held in U.S. dollars. During 2004, the Company purchased British pounds. At December 31, 2004 approximately 36% of our cash, cash equivalents and short-term investments were held in British pounds.

The Company has derived 100% of its collaboration revenue from Roche.

Patent License Agreement

The Company has a worldwide, exclusive license agreement with Massachusetts Institute of Technology and the Whitehead Institute for Biomedical Research. The patents and patent applications covered by this license agreement include various pending applications and continuation-in-part applications and their foreign counterparts, including patent applications filed in the U.S., Canada and Japan in 1994 for the use of Hsp fusions with viral or cancer-associated antigens as immunotherapeutics. Historically, the Company’s patent-related costs are related to therapeutic products that have not obtained regulatory approval and are not marketable. As a result, the Company has treated such costs as costs for which recoverability cannot be determined, and has expensed them to R&D expense as incurred.

Research and development costs

Research and development costs associated with the Company’s various research and development programs consist of direct and indirect expenditures, including a reasonable allocation of overhead expenses. Overhead expenses are comprised of general and administrative support provided to the research and development programs. These expenses include costs associated with support activities such as information technology, finance and human resources as well as for the use of facilities. Research and development costs are expensed as incurred, unless they meet criteria for deferral and amortization. The Company reassesses whether it has met the relevant criteria for deferral and amortization at each reporting date. To date, no research and development costs have been deferred.

Income taxes

Future income tax assets and liabilities relate to the expected future tax consequences of differences between the carrying amount of balance sheet items and their corresponding tax values, and for loss carry-forwards and other deductions. Future tax assets, if any, are recognized only to the extent that, in the opinion of management, it is more likely than not that the future income tax assets will be realized. Future income tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment or substantive enactment.

Net loss per share

Net loss from continued and discontinued operations per share is computed using the weighted average number of common shares outstanding. Basic and diluted net loss per common share amounts are equivalent for the periods presented as the inclusion of common stock equivalents (options and warrants) in the number of shares used for the diluted computation would be anti-dilutive. Approximately, 10,169,000, 9,745,000 and 8,140,000 in the form of exercisable options and warrants have been excluded from the shares outstanding for the diluted computation as the inclusion would result in a smaller net loss per share.

New Canadian GAAP Accounting Pronouncements

Impairment of Long-Lived Assets

The new standard is effective for fiscal years beginning on or after April 1, 2003. Application is prospective. The Company continues to monitor potential impairment of long-lived assets.

Stock-based compensation

As discussed in Note 2 in the financial statements, the Company adopted CICA 3870.

2. CHANGE IN ACCOUNTING POLICY

In January 2004 the Company changed its accounting policy relating to stock based compensation awards, retroactive to January 1, 1995, in accordance with the recommendations of CICA 3870. As permitted by the September 30, 2003 transitional provisions issued by the CICA Accounting Standards Board related to CICA 3870, the Company has applied this change using the retroactive method without restatement. Expense related to stock-based compensation awards is calculated using the Black-Scholes option pricing model and recognized over the vesting period of the grant. Previously, the Company used the intrinsic value method for valuing stock-based compensation awards granted to employees and directors where compensation expense was recognized for the excess, if any, of the quoted market price of Company’s common shares over the compensation award exercise price on the day that options were granted.

The following pro forma information presents the net loss and the basic loss per common share had CICA 3870 been retroactively applied:

	Years ended December 31,
(in thousands, except per share amounts)	2003			2002

Net loss under Canadian GAAP	$	(16,245	)	$	(28,802	)

Stock-based compensation expense under the intrinsic value method	207			224

Stock-based employee compensation expense under the fair value method	(2,675		)	(2,764		)

Pro forma net loss under Canadian GAAP	$	(18,713	)	$	(31,342	)

Pro forma basic loss per common share under Canadian GAAP	$	(0.30	)	$	(0.53	)

To implement the fair value method for stock-based compensation beginning January 1, 2004, the Company recorded an adjustment to beginning accumulated deficit of $31,790,000, comprised of $15,945,000 related to the fair value expense calculated on options granted on or after January 1, 1995, $16,434,000 related to compensation expense on the release of contingently issuable shares completed in 1999, offset by a $589,000 reversal of previously recorded expense under the intrinsic value method. Under the principles of CICA 3870, the Company reclassified $3,174,000 from contributed

surplus to common shares related to the historical exercise of employee stock options. The Company recorded expense of $1,213,000 related to continuing operations and $71,000 related to discontinued operations for the year ended December 31, 2004, representing the amortization of the fair value of compensation based on the vesting period of stock options granted to employees and directors. The weighted-average per-share fair values of the individual options granted during the years ended December 31, 2004, 2003 and 2002 were $0.43, $1.06 and $2.63, respectively. The fair value of the options was determined using a Black-Scholes option-pricing model with the following average assumptions:

	Years ended December 31,
	2004		2003		2002
Dividend yield	0	%	0	%	0	%
Volatility	67	%	75	%	78	%
Risk-free interest rate	3.69	%	2.54	%	3.50	%
Expected life	4 years		4 years		4 years

3. COLLABORATIVE AGREEMENT

On December 2, 2003, the Company announced it had restructured its June 24, 2002 collaboration agreement with F. Hoffmann-La Roche Ltd and Hoffmann-La Roche Inc. (together, “Roche”), providing for the development and commercialization of the pharmaceutical fusion product candidate, HspE7. Under the restructured terms Roche was granted an option to license the first generation HspE7 product, a license to develop a second generation HspE7 product, and an option to negotiate rights to the Company’s CoVal^TM fusion product candidates for the treatment of cancer and hepatitis C.

In connection with the first generation HspE7 product, the restructured agreement gives the Company the right to develop and commercialize the product for indications other than genital warts, including control of regulatory matters such as U.S. Investigational New Drug applications (IND). The Company may also conduct dose-ranging studies in patients with genital warts. In the original agreement the Company was responsible for clinical development expenses related to the recurrent respiratory papillomatosis (RRP) indication. In addition to the responsibilities in the original agreement, the Company is responsible for the manufacturing and other costs of all indications it develops under the new agreement.

The Company recorded collaborative R&D revenue of $700,000, $8,094,000 and $8,370,000 during the years ended December 31, 2004, 2003 and 2002, respectively. Collaborative R&D revenue during 2004 relates principally to the amortization of upfront license fees in accordance with CICA Accounting Standards Board recommendations, section 3400, Revenue, and Staff Accounting Bulletin (SAB) No. 101 Revenue Recognition in Financial Statements. Collaborative R&D revenue in 2003 includes

$4,912,000 for development activities, $2,214,000 for a time based milestone payment and $968,000 for the amortization of upfront license fees. Collaborative R&D revenue in 2002 includes $7,815,000 for development activities and $555,000 from the amortization of up-front license fees.

By paying additional fees, Roche can exclusively develop the second generation HspE7 product. In such case Roche would be required to pay the costs of development, manufacturing and commercialization of the product and to make payments to us upon the achievement of defined milestones. We would also receive tiered, progressive sales-based payments that we believe are competitive with other agreements of this stage and type. Commercial success payments of up to approximately $102,306,000 become payable depending upon the aggregate net sales of either or both generations of the HspE7 products. The restructured collaboration agreement gives us the right to discuss, negotiate and execute an alternative agreement with a third-party for the development and commercialization of HspE7 through a license, partnership, joint venture or similar transaction. After March 31, 2005 and through the end of the option period, Roche can terminate this right by paying us a fee, which would be either $12,036,000 or $18,054,000 depending on the stage of development of the product. Management cannot determine if or when this option will be exercised.

4. BALANCE SHEET DETAILS

At December 31, 2004 and 2003, our short-term investments consisted of corporate debt securities and government issued debt securities, which had a net book value and fair market value of $13,040,000 and $32,094,000, respectively.

The MIT/Whitehead license agreement discussed in Note 1 requires certain license maintenance fees and royalty payments. Upon receiving the upfront license fee payment from Roche in 2002, the Company recorded a $634,320 payable due to MIT/Whitehead and a related deferred expense. The payment was made in January 2003. The Company recognizes the related deferred expense over the development period, which was adjusted in conjunction with the restructured Roche collaborative agreement. At December 31, 2004 and 2003 the Company had a total of $242,000 and $347,000 of deferred expense related to this payment.

The following tables provide details of selected balance sheet items of continuing operations:

	December 31, 2004
(In thousands)	Cost		Accumulated Depreciation		Net Book Value
Plant and equipment:
Laboratory equipment	$	3,648	$	2,517	$	1,131
Computer equipment	910		727		183
Furniture and fixtures	392		282		110
Leasehold improvements	749		692		57
	$	5,699	$	4,218	$	1,481

	December, 31 2003
(In thousands)	Cost		Accumulated Depreciation		Net Book Value
Plant and equipment:
Laboratory equipment	$	4,127	$	2,688	$	1,439
Computer equipment	1,021		732		289
Furniture and fixtures	563		390		173
Leasehold improvements	716		611		105
	$	6,427	$	4,421	$	2,006

(In thousands)	December 31, 2004		December 31, 2003

Accounts payable and accrued liabilities:
Trade accounts payable	$	4,072	$	1,147
Clinical trial accruals	2,514		1,409
Accrued compensation and benefits	1,243		915
Other accrued liabilities	33		96
	$	7,862	$	3,567

At December 31, 2004 the Company had outstanding term loan obligations of $514,000. In September 2003 the Company entered into a 36-month term loan agreement with Oxford Finance Corporation, collateralized by equipment owned by the Company. Interest rates on the Oxford term loan range from 11.47% to 11.48%. At December 31, 2004 and 2003 there was $514,000 and $906,000, respectively, outstanding on the loan. Under the terms of the agreement, the Company must obtain a letter of credit for the outstanding loan balance if combined cash, cash equivalents, and short-term investments fall below $6,000,000.

At December 31, 2004 total future minimum payments under term loan agreements are as follows:

(In thousands)
Year ending December 31,
2005	$	409
2006	150
Total	559
Less: amount representing interest	(45		)
Present value of minimum payments	514
Less: current portion	(369		)
Long term notes payable	$	145

5. COMMITMENTS AND CONTINGENCIES

The Company’s contractual obligations consist primarily of agreements related to the development and manufacture of HspE7, operating leases for facilities, a term loan to increase working capital cash flows (Note 4) and contractual employment obligations. The Company engages several contractors working on different aspects of the work regulatory authorities require for a biologic product, including stability testing, analytical testing, release testing and the manufacturing and fill/finish activities noted below.

In January 2004 the Company entered into a biological services agreement with Avecia for the process development, scale-up and manufacture of HspE7. In addition, the Company may have Avecia manufacture commercial drug substance. Under the terms of the agreement, the Company is required to make prepayments for future services and use of the facility. The Company was invoiced for two prepayments totaling $3,204,000 in 2004 for services to be rendered and space utilized in 2005. The Company made one of these prepayments in 2004. The other prepayment was not made until 2005 and therefore is included in deferred development expenses, current portion and accrued liabilities.

In October 2004 the Company entered into an agreement with Cardinal Health (Cardinal) to perform fill/finish activities to prepare HspE7 for distribution to clinical trial patients in the ordinary course of its business. At December 31, 2004, the Company was contractually obligated to make a prepayment of $293,000 for future services to be

rendered in 2005. However, this prepayment was not made until early 2005 and therefore is included in deferred development expenses, current portion and accrued liabilities.

The agreement with Cardinal includes cancellation provisions that could require the Company to pay for work that was not performed or equipment that was not used if it terminates the contract while activities are at pre-defined stages. The cancellation fee of $127,000 would have been offset against the prepayment made in 2005.

To retain a flexible development program, the Company typically negotiates termination provisions so that financial obligations are limited to paying for work performed up to the termination date and in some cases, a cancellation fee determined under a pre-established formula. Except as disclosed above the Company currently does not have other significant research and development contracts subject to cancellation fees. The Company has not entered into any minimum supply agreements with any service vendors or contract manufacturers.

Leases

The Company has entered into operating lease agreements for office space and laboratory space that expire at various times through 2005. These leases require the Company to make minimum lease payments, plus a share of facility maintenance costs, taxes, insurance and maintenance. In addition the Company has entered into various other operating leases primarily for office equipment that expire during 2009.

At December 31, 2004 total future minimum lease commitments under operating leases are as follows:

(In thousands)
Year ending December 31,
2005	$	966
2006	23
2007	12
2008	3
2009	1
Total	$	1,005

Contractual Employment Obligations

The Company has employment agreements with certain members of management which include specific severance packages. The Company would be contractually obligated to pay $2,871,000 over the next twelve months and an additional $314,000 would be payable during the following year, depending upon individual employment agreements.

Patent Opposition

On October 22, 2002 Antigenics Inc. announced that it had filed an opposition in the European Patent Office to a European patent and requests for re-examination in the U.S. Patent and Trademark Office of two U.S. patents we licensed in connection with the Company’s platform technology. In October 2003 Antigenics filed an opposition in the European Patent Office to an additional, product specific, European patent. The EPO may hold an oral hearing as early as this fall if the parties do not request a change in the date. The Company does not know when results from these proceedings will be obtained. Until the Company receives final results from the opposition and re-examination processes, the Company will not be able to assure investors of the success of planned vigorous defense of the patents. However, management does not expect that this will have a material impact to its financial statements.

6. STOCKHOLDERS’ EQUITY

Common Shares

In June 2002 the Company issued 2,036,436 common shares for $7,657,000 pursuant to the collaboration agreement with Roche (see Note 3). The equity was issued at a per share price determined by the weighted average price of common shares of the Company during the ten business days prior to the Roche transaction.

At the time of the original collaboration agreement, Roche received two warrants to purchase the common stock of Stressgen. The Company allocated $1,264,000 as the fair value of the warrants. In April 2003, Roche exercised the first warrant to acquire 1,413,600 common shares at $3.25, resulting in net proceeds of $4,594,000 to the Company. Under the original collaboration agreement, the Company had the right to call the second warrant. In connection with the restructured collaboration agreement, Roche has a continued right to exercise the second warrant for 814,574 shares at a purchase price of $3.76 per share at any time until June 28, 2007. The Company no longer has the right to call the second warrant.

The Company has unlimited authorized common share capital.

Contributed surplus

Stockholders’ equity balances at December 31, 2004, 2003 and 2002 includes $15,488,000, $2,207,000 and $2,179,000, respectively, if contributed surplus. The increase in contributed surplus in 2004 over 2003 is due to a retroactive adjustment of $15,945,000 related fair value expense of options granted between January 1, 1999 through December 31, 2003 and $1,284,000 of fair value expense of options granted in 2004 offset by $3,174,000 related to the reclassification to common shares of fair value expense on options exercised and $774,000 related to the reversal of deferred stock

compensation. The decrease in contributed surplus from 2002 to 2003, primarily relates to the change of status of an employee to a consultant.

Common Share Financings

In December 2003, the Company completed an offering of 10,638,298 units at a price of $1.88 per Unit for gross proceeds of $20,000,000. Each unit consists of one common share in the capital of the Company and one-half of one common share purchase warrant. The Company incurred total share issue costs on the offering of approximately $1,381,000. Under the conditions of the offering, the Company agreed to indemnify the underwriters and their broker/dealer affiliates against certain liabilities, including liabilities under the United States securities laws and under Canadian securities legislation and to contribute to payments that the underwriters may be required to make in respect thereof.

1998 Special Warrants

In 1998 the Company issued Class B Warrants to purchase 4,000,000 shares for $3.30 per share or pursuant to a cashless exercise provision. The unexercised Class B Warrants expired on June 12, 2003. As a result the Company no longer has the obligation to issue up to 3,231,145 common shares that had been reserved for issuance upon exercise of the Class B Warrants.

Employee Share Option Plans

In 2001, the Company issued out-of-plan stock options prior to stockholder approval of the 2001 Equity Incentive Plan (the “2001 Plan”). Between the date of grant and stockholder approval, the market price of the Company’s common stock increased, resulting in deferred compensation of $807,000 associated with these options. The deferred compensation has been amortized to expense over the vesting period of the granted options. However, as discussed in Note 2, this treatment has been reversed as of January 1, 2004 as a result of the adoption of fair value accounting for stock based compensation. Once the 2001 Plan was approved, the Company stopped granting options under its pre-existing 1996 Share Incentive Plan. The following tables summarize information related to all stock options outstanding and exercisable granted to employees, directors and non-employees under the Company’s 1996 and 2001 stock-based compensation plans as of December 31, 2004.

The following table summarizes stock option activity under the Plans:

	Number of Shares		Weighted Average Exercise Price

Balance at January 1, 2002	4,175,583		$	4.59
Granted	1,092,250		4.41
Exercised	(575,902	)	2.96
Cancelled	(387,368	)	5.46
Balance at December 31, 2002	4,304,563		4.69
Granted	1,157,500		1.80
Exercised	(229,516	)	1.63
Cancelled	(254,429	)	3.66
Balance at December 31, 2003	4,978,118		4.21
Granted	164,250		0.81
Exercised	—		—
Cancelled	(444,769	)	4.51
Balance at December 31, 2004	4,697,599		$	4.07

The total number of options exercisable at December 2004 was 4,050,335. There were 3,611,370 and 2,872,233 options exercisable as of December 31, 2003 and 2002, respectively.

The following table summarizes information related to all stock options outstanding and exercisable at December 31, 2004:

	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number Outstanding	Weighted Average Remaining Contractual Life (in years)	Weighted Average Exercise Price		Number Exercisable	Weighted Average Exercise Price

$0.42 - $1.99	1,451,194	7.0	$	1.61	1,029,102	$	1.71
$2.00 - $3.99	605,822	7.7	3.24		422,191	3.35
$4.00 - $5.99	1,193,588	6.4	4.91		1,152,256	4.91
$6.00 - $8.00	1,446,995	5.4	6.18		1,446,786	6.18
	4,697,599				4,050,335

7. INCOME TAXES

The reported income tax recovery differs from the amount computed by applying the Canadian basic statutory rates to the net loss. The reasons for this difference and the related tax effects are as follows:

	Years ended December 31,
(In thousands)	2004			2003			2002

Canadian basic statutory tax rates	35.6		%	35.6		%	39.6		%

Expected income tax recovery	$	(10,781	)	$	(5,786	)	$	(11,411	)
Foreign tax rate differences	7,722			1,669			(2,080		)
Prior year losses producing current benefit	—			—			(125		)
Losses producing no current tax benefit	1,737			2,232			13,682
Non-deductible expenses and other deductions	738			21			(54		)
Research and development expenses	678			2,143			900
Benefit of temporary differences (recognized)	—
not recognized	308			(279		)	(912		)
Other	(402		)	—			—
	$	—		$	—		$	—

Future income taxes result principally from temporary differences in the recognition of certain revenue and expense items for financial and income tax reporting purposes. Significant components of the Company’s future tax assets and liabilities are as follows:

	December 31,
(In thousands)	2004			2003

Future income tax assets:
Tax loss carry-forwards	$	21,738		$	20,001
Tax credits	8,431			7,450
Research and development expenses	8,678			8,000
Book and tax base differences on assets and liabilities	1,500			1,192
Total future income tax assets	40,347			36,643

Valuation allowance for future income tax assets	(40,347		)	(36,643		)
Net future income tax assets	$	—		$	—

Future income tax liabilities:
Book and tax base differences on assets and liabilities	$	—		$	—
Net future income tax liabilities	$	—		$	—

Due to the uncertainty surrounding the realization of the future income tax assets, the Company has a 100% valuation allowance against its future income tax assets. The valuation allowance increased by $3,704,000 during 2004.

At December 31, 2004, the Company has approximately $24,364,000 of scientific research and experimental development expenditures available for unlimited carry forward, $55,869,000 of non-capital losses expiring between 2006 and 2014 and $8,431,000 of unclaimed tax credits expiring between 2005 and 2013, all of which may be used to reduce future Canadian income taxes otherwise payable. In addition, the Company has US$11,549,000 of net operating losses expiring in 2013, which may be used to reduce future income taxes in California otherwise payable.

The Canada Revenue Agency (“CRA”) has asked us to provide additional information with respect to transactions between us and our subsidiaries in 2001 and 2002. In February 2005 CRA gave us a preliminary indication that it does not agree with elements of our transfer pricing, including the value ascribed to intellectual property transferred to a subsidiary. We believe that the preliminary determination has been made without regard to relevant information and are in the process of clarifying it and providing further information to CRA. Even if the CRA assessment does not change, its determination will not result in a change to our financial statements due to the consolidated presentation of the results for us and our subsidiaries; nor will additional tax become payable for those years. If we are found to have failed to provide timely and adequate information to CRA, a penalty could be levied. We believe that we have provided all relevant information within prescribed time periods. We do not believe the outcome of the discussions with the CRA will have a material impact on our financial position.

8. RELATED PARTY TRANSACTIONS

Until the annual meeting in 2002 an independent contractor who is a researcher in the area of heat shock proteins also served as a director of the Company. In 2002, this individual received consulting fees of $50,000.

The Company has used various affiliates of MDS, Inc., including MDS Pharma Services, to provide research services. Through May 2004 and the years ended 2003 and 2002 the Company paid the various MDS entities an aggregate of $286,000, $235,000 and $139,000, respectively. One of the Company’s board members was an officer of MDS, Inc. through May 2004.

9. SEGMENT INFORMATION

Long-lived assets are allocated geographically as follows:

	December 31,
(In thousands)	2004		2003

Canada	$	1,271	$	1,763
US	210		243
	$	1,481	$	2,006

The Company previously reported two segments, Biotechnology and Bioreagents. As discussed in Note 12, at December 31, 2004, the Company has disclosed the bioreagent business as a discontinued operation and therefore has only one reportable segment.

10. SUPPLEMENTAL CASH FLOW INFORMATION

	Years ended December 31,
(In thousands)	2004		2003		2002

Supplemental disclosures of cash flows:
Interest paid	$	96	$	53	$	69

Supplemental disclosures of non-cash investing and financing transactions:
Reversal of deferred stock compensation	$	185	$	4	$	28

11. THE EFFECT OF APPLYING ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE U.S.

These financial statements have been prepared in accordance with Canadian GAAP which, except as set out below, conform, in all material respects, to U.S. GAAP. The effect of applying U.S. GAAP instead of Canadian GAAP on the consolidated financial statements would be as follows:

Balance Sheet

(In thousands)

	December 31, 2004			December 31, 2003
Current assets under Canadian GAAP	$	28,531		$	54,164
Adjustments to Canadian GAAP	—			—
Current assets under U.S. GAAP	$	28,531		$	54,164

Stockholders’ equity under Canadian GAAP	$	19,551		$	48,577

Adjustment to common stock (a)	(16,455		)	—
Adjustment to deferred stock compensation (a)	(104		)	—
Adjustment to accumulated deficit (a)	16,559			—
	—			—
Stockholders’ equity under U.S. GAAP	$	19,551		$	48,577

Statement of Operations

	Years ended December 31,
(In thousands except per share amounts)	2004			2003			2002
Net loss under Canadian GAAP	$	(30,265	)	$	(16,245	)	$	(28,802	)

Reversal of unrealized foreign exchange loss (gain) on investments (b)	800			541			(69		)
Loss (gain) on market value of investments (b)	241			406			(145		)
Reversal of stock compensation expense (a)	1,284			—			—
Stock compensation expense under APB No. 25 (a)	(81		)	—			—
	2,244			947			(214		)

Net loss under U.S. GAAP	$	(28,021	)	$	(15,298	)	$	(29,016	)

Basic and diluted loss per common share under Canadian GAAP	$	(0.42	)	$	(0.26	)	$	(0.49	)

Basic and diluted loss per common share under U.S. GAAP	$	(0.39	)	$	(0.25	)	$	(0.49	)

Common shares used to compute basic and diluted loss per share under Canadian and U.S. GAAP	72,504			61,458			58,986

Statement of Cash Flows

For all periods presented there are no significant differences under Canadian and U.S. GAAP in net cash (used in) provided by operating, investing and financing activities.

Differences

The following notes outline the differences between Canadian and U.S. GAAP that affect the Company for the years ended December 31, 2004, 2003, and 2002.

(a) As discussed in Note 2, on January 1, 2004, the Company adopted fair value accounting for all stock options as required by CICA 3870. The Company is required to record the expense of the fair value of all stock options over their respective vesting term. The Company used the “Retrospective method without Restatement.” This method requires the Company to record the cumulative expense as an adjustment to accumulated deficit for the period beginning January 1, 1995 through December 31, 2003 and begin recording the expense to accumulated deficit in 2004.

The FASB issued SFAS No. 148, Accounting for Stock-Based Compensation, Transition and Disclosure (SFAS 148) in December 2002. SFAS 148 provides alternative transition methods for entities that voluntarily elect to adopt the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation (SFAS 123), to stock-based employee compensation. Under the provisions of SFAS 123, fair value accounting is required for all grants made on or after January 1, 1995. The Company has not elected to adopt the provisions of SFAS 123 for U.S. reporting purposes, which would require fair value based accounting for grants made on or after January 1, 1995.

Under the principles of SFAS 123, the Company would have recorded $17,958,000 of deferred compensation related to the total fair value for stock options granted between January 1, 1995 and December 31, 2004. The following table illustrates the effect on net loss and loss per share under U.S. GAAP if the Company had applied the fair value accounting provisions of SFAS 123 to employee stock based compensation:

	Years ended December 31,
(In thousands except per share amounts)	2004			2003			2002
Net loss under U.S. GAAP	$	(28,021	)	$	(15,298	)	$	(29,016	)

Stock-based compensation under APB No. 25	81			207			224
Stock-based compensation expense recorded under SFAS 123	(1,284		)	(2,675		)	(2,764		)
Pro forma net loss under U.S. GAAP	$	(29,224	)	$	(17,766	)	$	(31,556	)

Pro forma loss per common share	$	(0.40	)	$	(0.29	)	$	(0.53	)

(b) Under U.S. GAAP Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities, the Company would have classified certain of its short-term securities as available-for-sale and, accordingly, would have included the changes in net unrealized holding gains or losses on these securities as a component of stockholders’ equity rather than in operations.

The Emerging Issues Task Force (EITF) recently deliberated regarding Issue 03-01, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. The Issue is intended to address the meaning of other-than-temporary impairment and its application to certain investments held at cost. The EITF reached a consensus regarding disclosure requirements concerning unrealized losses on available-for-sale debt and equity securities accounted for under SFAS No. 115. The guidance for evaluating whether an investment is other-than-temporarily impaired has been deferred. The disclosure requirements apply to annual financial statements for fiscal years ending after December 15, 2003 for investments accounted for under SFAS No. 115. For all other investments within the scope of this Issue, the disclosure requirements have been deferred. Additional disclosure requirements for cost method investments apply to fiscal years ending after June 15, 2004. The Company continues to evaluate the effect of this pronouncement on its financial statements.

SFAS No. 130, Reporting Comprehensive Income, establishes standards for the reporting and display of comprehensive loss and its components in a full set of general-purpose financial statements. Comprehensive loss is as follows:

	Years ended December 31,
(In thousands)	2004			2003			2002
Net loss under U.S. GAAP	$	(28,021	)	$	(15,298	)	$	(29,016	)
Other comprehensive income
Adjustment of unrealized foreign exchange (loss) gain on investments	(800		)	(541		)	69
Market value adjustments on investments	(241		)	(406		)	145
Comprehensive net loss under U.S. GAAP	$	(29,062	)	$	(16,245	)	$	(28,802	)

(c) At December 31, 2004, the Company decided to report the bioreagent business as a discontinued operation pursuant to the requirements of CICA 3475, Disposal of Long-lived Assets and Discontinued Operations (CICA 3475), SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144), and EITF 03-13, Applying the Conditions in Paragraph 42 of FASB Statement No. 144 in Determining Whether to Report Discontinued Operations. See Note 12 for further disclosure.

New U.S. GAAP Accounting Pronouncement

Share-based payment

In January 2005, the FASB issued Statement No. 123R, Share-Based Payment (SFAS 123R), which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. SFAS 123R establishes accounting standards for transactions around stock based compensation in exchange for employee services. Similar to CICA 3870, SFAS 123R requires fair-value-based method for accounting for stock based compensation and eliminates the intrinsic method under APB Opinion 25. This statement is effective beginning in the second quarter of 2005; however as discussed in the Critical Accounting Policies and Note 2 in the financial statements, the Company adopted CICA 3870 which also requires the fair-value based method. The Company will evaluate the impact of SFAS 123R on current accounting policies and make the necessary changes and disclosures in the notes to the financial statements in third quarter 2005.

12. DISCONTINUED OPERATION

The Company’s bioreagent business produces and sells bioreagents to researchers and research organizations worldwide. The products sold by the bioreagent business include antibodies, proteins, DNA products, ELISA kits and extracts for use in studying cellular stress response pathways, including oxidative stress, apoptosis, neurobiology and more.

At December 31, 2004, the Company decided to report the bioreagent business as a discontinued operation pursuant to the requirements of CICA 3475, Disposal of Long-lived Assets and Discontinued Operations (CICA 3475), SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144), and EITF 03-13, Applying the Conditions in Paragraph 42 of FASB Statement No. 144 in Determining Whether to Report Discontinued Operations. The Company is reporting the business as a discontinued operation after evaluating intentions for the future of the bioreagent business, formulating a plan for sale and taking steps to execute that plan.

The Company plans to sell the bioreagent business in 2005 so it can focus on the corporate strategy, manage resources and provide working capital to fund further development and commercialization of HspE7. The Company cannot determine the amount of any gain or loss, if any, that would be realized on the sale of the bioreagent business. When a sale of the business is completed the gain or loss on the sale will be reported in quarterly filings as required by the CICA 3475 and SFAS 144. The Company continues to evaluate the plan for the bioreagent business and disclose it appropriately per the Canadian and U.S. standards.

The significant accounting principles discussed in Note 1 were applied to all discontinued operation transactions. In addition, the following accounting principals are specific to the bioreagent business transactions. Revenue from product sales of the bioreagent business is recognized upon delivery to customers when persuasive evidence of an arrangement exists, the price is fixed or determinable and collection is reasonably assured. Revenue also includes amounts charged for shipping and handling costs.

Inventories are valued at the lower of cost or net realizable value. Assets initially purchased in 2003 by the bioreagent business are depreciated on a straight-line basis over the estimated useful life. All other plant and equipment are recorded and depreciated as described in Note 1.

The operating results of the bioreagent business have been separately classified and reported as discontinued operations in the consolidated financial statements. A summary of the components of discontinued operations in the Consolidated Statement of Operations was as follows:

(In thousands)	2004			2003			2002
Bioreagent sales	$	5,772		$	5,325		$	5,672
Operating expenses	(4,074		)	(3,777		)	(3,658		)
Other (expenses) income	(118		)	(130		)	10
Net income from discontinued operations	$	1,580		$	1,418		$	2,024

The bioreagent business was previously reported in the segment disclosure of our quarterly and annual filings. The income reported above does not include internal overhead and administrative overhead expense allocations that were assigned to this segment and which will continue to be incurred by the continuing entity.

A summary of the components of assets and liabilities of discontinued operations on the Consolidated Balance Sheets at December 31 was as follows:

(In thousands)	2004		2003
Assets of discontinued operations:
Cash and cash equivalents	$	551	$	247
Short term investments	515		—
Accounts receivable, net	589		456
Inventories	561		639
Prepaid expenses	15		28
Other current assets	60		22
Plant and equipment	156		190
Total assets of discontinued operations	$	2,447	$	1,582

Liabilities of discontinued operations
Accounts payable	$	324	$	408
Total liabilities of discontinued operations	$	324	$	408

A summary of the components of cash flows for discontinued operations for the years ended December 31 was as follows:

(In thousands)	2004			2003			2002
Net cash flows provided by operations activities	$	909		$	281		$	—
Net cash flows used in investing activities	(605		)	(34		)	—
Net cash flows provided by financing activities	—			—			—
Net increase in cash	304			247			—
Cash and cash equivalents at the beginning of the period	247			—			—
Cash and cash equivalents at the end of the period	$	551		$	247		$	—

13. INTERIM FINANCIAL INFORMATION – UNAUDITED

The following is a summary of the unaudited quarterly results of operations for the years ended December 31, 2004 and 2003.

(In thousands except per share amounts)

		Quarter ended (b)
2004		<

Item 1. BUSINESS

Government Regulation and Product Approval Process

Competition

Human Resources

Item 2. PROPERTIES

Item 3. LEGAL PROCEEDINGS

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Items 6, 7 and 7A. SELECTED FINANCIAL DATA; MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS; QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Consolidated Statement of Operations Data

Overview

Liquidity and Capital Resources; Proposed Transactions

Results of Continuing Operations

Research and development

Selling, general and administrative expenses

Interest and other income

Differences between Canadian and U.S. generally accepted accounting principles

Critical Accounting Policies

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

STRESSGEN BIOTECHNOLOGIES CORP 10-K