UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 2003
For the Quarter Ended June 30, 2004
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 333-12570

Commission file number 333-12570

STRESSGEN BIOTECHNOLOGIES CORPORATION

(Exact name of registrant as specified in its charter)

Yukon Territory, Canada		N/A
(State of incorporation)		(IRS Employer Identification No.)
350-4243 Glanford Avenue Victoria, British Columbia V8Z 4B9 Parent of Stressgen Biotechnologies, Inc.10241 Wateridge Circle, Suite C200 San Diego, CA		92121
350-4243 Glanford Avenue Victoria, British Columbia V8Z 4B9 Parent of Stressgen Biotechnologies, Inc. 6055 Lusk Boulevard San Diego, CA		92121
(Address of principal executive offices)		(zip code)
(250) 744-2811
(250) 744-2811(858) 202-4900
(858) 202-4900
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý No o

As of ~~October~~ 27July 30, ~~2003,~~2004 the registrant had approximately 6172,~~706~~506,000 shares of Common Stock, no par value, outstanding.

Stressgen Biotechnologies Corporation and Subsidiaries

INDEX

			Page
Part I — Financial Information
	Item 1.	Financial Statements (Unaudited)
		Consolidated Balance Sheet September 30, 2003 (Unaudited) and December 31, 2002	1
		Consolidated Balance Sheet June 30, 2004 and December 31, 2003
		Consolidated Statement of Operations and Accumulated Deficit Three and Nine Months Ended September 30, 2003 and 2002 (Unaudited)	2
		Consolidated Statement of Operations and Accumulated Deficit Three and Six Months Ended June 30, 2004 and 2003
		Consolidated Statement of Cash FlowsThree and Nine Months Ended September 30, 2003 and 2002 (Unaudited)	3
		Consolidated Statement of Cash Flows Three and Six Months Ended June 30, 2004 and 2003
		Notes to Consolidated Financial Statements (Unaudited)	4
		Notes to Consolidated Financial Statements
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
		Factors That Could Affect Future Performance	17
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	22
	Item 4.	Controls and Procedures	23
Part II — Other Information
Items 1 through 6			23
SIGNATURES AND CERTIFICATIONS			24

CONSOLIDATED BALANCE SHEET

~~Stressgen Biotechnologies Corporation and Subsidiaries~~ (~~Canadian dollars in thousands, except share information~~Unaudited)

	September 30, 2003			December 31, 2002
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	1,706		$	31,202
Short-term investments	36,875			14,811
Accounts receivable, net	1,011			4,279
Inventories	632			838
Other current assets	603			518
Total current assets	40,827			51,648
Capital assets	2,350			2,746
Deferred expenses, net of current portion	270			421
	$	43,447		$	54,815
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued liabilities	$	5,682		$	8,833
Current portion of deferred revenue	953			1,115
Current portion of notes payable	608			318
Total current liabilities	7,243			10,266
Long-term liabilities:
Deferred revenue, net of current portion	2,143			3,344
Notes payable, net of current portion	736			262
Total long-term liabilities	2,879			3,606
Total liabilities	10,122			13,872
Stockholders’ equity:
Common shares and other equity – no par value; unlimited shares authorized, 61,701,789 and 60,209,989 shares issued and outstanding at September 30, 2003 and December 31, 2002, respectively	180,092			175,384
Deferred stock compensation	(235		)	(392		)
Accumulated deficit	(146,532		)	(134,049		)
Total stockholders’ equity	33,325			40,943
	$	43,447		$	54,815

Stressgen Biotechnologies Corporation and Subsidiaries

(Canadian dollars in thousands, except share information)

	June 30, 2004			December 31, 2003
Assets
Current assets:
Cash and cash equivalents	$	7,888		$	19,996
Short-term investments	32,003			32,094
Accounts receivable, net	575			733
Inventories	659			639
Other current assets	492			512
Total current assets	41,617			53,974

Plant and equipment	1,983			2,196
Deferred expenses, net of current portion	225			260
	$	43,825		$	56,430

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued liabilities	$	3,586		$	3,975
Current portion of deferred revenue	714			688
Current portion of notes payable and leases	522			518
Total current liabilities	4,822			5,181

Long-term liabilities:
Deferred revenue, net of current portion	1,785			2,065
Notes payable and leases, net of current portion	372			607
Total long-term liabilities	2,157			2,672

Total liabilities	6,979			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 June 30, 2004 and December 31, 2003, respectively	216,412			196,849
Contributed surplus	16,328			2,207
Deferred stock compensation (Note 2)	—			(185		)
Accumulated deficit (Note 2)	(195,894		)	(150,294		)
Total stockholders’ equity	36,846			48,577
	$	43,825		$	56,430

See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT

(Unaudited)

Stressgen Biotechnologies Corporation and ~~Subsidiaries (Canadian~~ ~~dollars in thousands, except per share amounts)~~Subsidiaries

	Three months ended September 30,						Nine months ended September 30,
	2003			2002			2003			2002
Revenue:
Collaborative R&D revenue	$	855		$	4,332		$	7,584		$	4,332
Bioreagent sales	1,316			1,494			4,108			4,390
Total revenue	2,171			5,826			11,692			8,722
Operating expenses:
Research and development	6,009			7,447			17,293			26,508
Selling, general and administrative	1,510			1,904			5,666			6,570
Cost of bioreagent sales	296			419			1,049			1,228
	7,815			9,770			24,008			34,306
Operating loss	(5,644		)	(3,944		)	(12,316		)	(25,584		)
Other income (expenses):
Interest and other income, net	41			777			499			1,059
Net foreign exchange (loss) gain	(12		)	902			(638		)	(164		)
Interest expense	(8		)	(15		)	(28		)	(54		)
	21			1,664			(167		)	841
Net loss	(5,623		)	(2,280		)	(12,483		)	(24,743		)
Accumulated deficit, beginning of period	(140,909		)	(127,710		)	(134,049		)	(105,247		)
Accumulated deficit, end of period	$	(146,532	)	$	(129,990	)	$	(146,532	)	$	(129,990	)
Basic and diluted loss per common share	$	(0.09	)	$	(0.04	)	$	(0.20	)	$	(0.42	)
Weighted average shares used to compute basic and diluted loss per common share (in thousands)	61,692			60,179			61,048			58,573

(Canadian dollars in thousands, except per share amounts)

	Three months ended June 30,						Six months ended June 30,
	2004			2003			2004			2003
Revenue:
Bioreagent sales	$	1,446		$	1,373		$	2,898		$	2,792
Collaborative R&D revenue	190			1,508			363			6,729
Total revenue	1,636			2,881			3,261			9,521

Operating expenses:
Research and development	5,973			4,791			11,542			11,284
Selling, general and administrative	1,892			1,866			4,245			4,156
Cost of bioreagent sales	306			388			662			753
	8,171			7,045			16,449			16,193

Operating loss	(6,535		)	(4,164		)	(13,188		)	(6,672		)

Other income (expenses):
Interest and other income, net	(48		)	255			302			458
Net foreign exchange gain (loss)	244			(485		)	291			(626		)
Interest expense	(27		)	(9		)	(55		)	(20		)
	169			(239		)	538			(188		)

Net loss	(6,366		)	(4,403		)	(12,650		)	(6,860		)

Accumulated deficit, beginning of period	(189,528		)	(136,506		)	(150,294		)	(134,049		)
Cumulative effect of change in accounting policy (Note 2)	—			—			(32,950		)	—
Accumulated deficit, end of period	$	(195,894	)	$	(140,909	)	$	(195,894	)	$	(140,909	)

Basic and diluted net loss per common share	$	(0.09	)	$	(0.07	)	$	(0.17	)	$	(0.11	)

Weighted average shares used to compute basic and diluted loss per common share (in thousands)	72,506			61,198			72,502			60,721

See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

Stressgen Biotechnologies Corporation and ~~Subsidiaries (Canadian~~ ~~dollars in thousands)~~Subsidiaries

	Three months ended September 30,						Nine months ended September 30,
	2003			2002			2003			2002
Cash flows from operating activities:
Net loss	$	(5,623	)	$	(2,280	)	$	(12,483	)	$	(24,743	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization of capital assets	206			204			550			586
Amortization of deferred stock compensation	50			57			157			173
Unrealized foreign exchange (gain) loss	(15		)	(1,235		)	493			(17		)
Loss (gain) on market value of investments	284			(498		)	336			(113		)
Changes in operating assets and liabilities	1,243			(1,319		)	(974		)	1,052
Net cash used in operating activities	(3,855		)	(5,071		)	(11,921		)	(23,062		)
Cash flows from investing activities:
Purchase of short-term investments	—			(13,975		)	(31,191		)	(57,754		)
Sales and maturities of short-term investments	3,715			24,342			8,577			57,195
Purchase of capital assets	(100		)	(151		)	(154		)	(319		)
Net cash provided by (used in) investing activities	3,615			10,216			(22,768		)	(878		)
Cash flows from financing activities:
Proceeds on issue of common shares	22			1,498			4,720			10,604
Proceeds from term loan	1,004			—			1,004			—
Repayment of borrowings	(78		)	(211		)	(240		)	(458		)
Stock subscription receivable	(12		)	480			(12		)	—
Net cash provided by financing activities	936			1,767			5,472			10,146
Effect of exchange rate changes on cash and cash equivalents	(109		)	345			(279		)	(68		)
Decrease in cash and cash equivalents	587			7,257			(29,496		)	(13,862		)
Cash and cash equivalents, beginning of period	1,119			12,219			31,202			33,338
Cash and cash equivalents, end of period	$	1,706		$	19,476		$	1,706		$	19,476

(Canadian dollars in thousands)

	Three months ended June 30,						Six months ended June 30,
	2004			2003			2004			2003
Cash flows from operating activities:
Net loss	$	(6,366	)	$	(4,403	)	$	(12,650	)	$	(6,860	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization of plant and equipment	204			171			342			344
Loss on disposal of plant and equipment	44			—			59			—
Amortization of stock compensation expense	301			52			964			107
Unrealized foreign exchange (gain) loss	(232		)	178			(222		)	508
Loss on market value of investments	304			15			310			52
Changes in operating assets and liabilities	(15		)	2,140			(450		)	(2,217		)
Net cash used in operating activities	(5,760		)	(1,847		)	(11,647		)	(8,066		)

Cash flows from investing activities:
Purchase of short-term investments	(2,000		)	(8,767		)	(22,919		)	(31,191		)
Sales and maturities of short-term investments	12,008			4,264			22,943			4,862
Purchase of plant and equipment	(58		)	(42		)	(188		)	(54		)
Net cash provided by (used in) investing activities	9,950			(4,545		)	(164		)	(26,383		)

Cash flows from financing activities:
Proceeds on issuance of common shares	—			4,639			36			4,698
Share issue costs	—			—			(81		)	—
Repayment of borrowings	(114		)	(82		)	(231		)	(162		)
Net cash (used in) provided by financing activities	(114		)	4,557			(276		)	4,536

Effect of exchange rate changes on cash and cash equivalents	(6		)	(12		)	(21		)	(170		)

Increase (decrease) in cash and cash equivalents	4,070			(1,847		)	(12,108		)	(30,083		)
Cash and cash equivalents, beginning of period	3,818			2,966			19,996			31,202
Cash and cash equivalents, end of period	$	7,888		$	1,119		$	7,888		$	1,119

See accompanying notes to consolidated financial statements.

Stressgen Biotechnologies Corporation

Notes to Consolidated Financial Statements

(Canadian dollars)

(Unaudited)

1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES

The Company

Stressgen Biotechnologies Corporation (with its subsidiaries, “Stressgen” or the “Company”) is a biopharmaceutical company focused on the development and commercialization of innovative stress protein-based immunotherapeutics. The Company is developing a broad range of products for the treatment of viral infections and related cancers. Its lead product is HspE7, ~~which~~ targets a broad spectrum of human papillomavirus (“HPV”) related diseases. The Company has also initiated research studies to evaluate stress protein (also known as heat shock protein) fusions, made through its ~~proprietary~~ proprietary CoValTM technology, for the treatment of hepatitis B and ~~herpes~~ herpes simplex and is targeting hepatitis C. Further, Stressgen has an internationally recognized ~~research product~~bioreagents ~~supply~~ business with sales to scientists worldwide for the study of cellular stress, apoptosis, oxidative stress and neurobiology.

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.

Financial statements and estimates

The information at ~~September~~ June 30, ~~2003~~2004 and for the three and ~~nine~~six month periods ended ~~September~~ June 30, ~~2003~~2004 and ~~2002~~2003 has been prepared by the Company and has not been audited. 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 ~~all~~ material respects with accounting principles generally accepted in the United States of America (“U.S. GAAP”), except as discussed in Note 57. ~~These~~All such adjustments are of a normal and recurring nature. These financial statements should be read in conjunction with the financial statements and notes thereto in the Company’s ~~December~~ December 31, ~~2002~~2003 Annual Report on Form 10-K. and March 31, 2004 Quarterly Report on Form 10-Q. Certain information and footnote disclosures normally included in financial statements prepared in accordance with Canadian and U.S. GAAP have been condensed or omitted pursuant to the applicable Canadian regulatory and U.S. Securities and Exchange Commission rules and regulations. Interim results are not ~~necessarily~~ necessarily indicative of results for the full year.

The preparation of financial statements in conformity with ~~generally~~Canadian ~~accepted~~GAAP ~~accounting~~and ~~principles~~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, ~~reporting~~ revenue recognition, accrual of clinical trial costs, measurement of stock-based compensation, and the allocation of indirect costs between research and development (R&D), selling, general and administrative (SG&A) and cost of bioreagent sales. 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 ~~rate~~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 product sales of the Company’s 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.

Revenue from collaborative research and development ~~(“R&D”)~~ 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~~ 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 ~~received~~are inrecorded ~~advance~~as ofdeferred ~~performance or~~revenue ~~delivery~~if they are ~~recorded~~received asin advance ~~deferred~~of ~~revenue~~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~~ ~~total~~The ~~estimated~~start up portion of the trial ~~cost~~contract is ~~divided~~accrued ~~into~~during ~~these~~the ~~three~~trial ~~phases~~planning and ~~based~~protocol onwriting ~~the~~period. The per ~~tasks~~patient ~~involved~~accrual incost ~~conducting~~is recognized as each patient enters the trial. ~~Based~~ The onclose-out ~~the~~portion ~~design~~ of the trial, ~~the~~is recognized ~~cost~~as ofthe ~~each~~final ~~phase~~analyses ~~could~~of ~~vary~~patient ~~from trial~~data toare ~~trial~~prepared. ~~Upon~~Based ~~start~~on the design of the trial including number of patients, ~~the~~number ~~start~~of clinical sites, method of treatment, and follow-up, ~~portion~~the proportion of the ~~trial~~cost ~~contract~~of iseach ~~accrued~~phase could vary from trial to trial. As ~~patients~~each ~~enter~~trial continues, the Company ~~trial,~~evaluates the ~~patient accrual~~total ~~cost~~contract iscosts ~~ratably~~and ~~recognized~~makes adjustments accordingly. ~~Once~~Changes to the ~~study~~cost isestimates ~~complete~~are ~~and~~charged ~~analysis~~to ofexpense in the ~~patient~~appropriate ~~data has been~~period ~~initiated,~~based on the ~~close-out~~facts ~~portion~~and timing of the ~~trial is recognized~~adjustment.

Stock-based compensation plan

~~Multiple~~In ~~standards~~September 2003, the ~~are~~CICA inAccounting ~~use~~Standards ~~regarding~~Board ~~the~~released ~~recognition,~~revised ~~measurement~~transitional provisions ~~and~~for ~~disclosure~~Stock-Based ofCompensation ~~stock~~and Other Stock-~~based~~Based ~~compensation~~Payments, ~~and~~Section 3870 ~~other~~(CICA ~~stock-based~~3870), ~~payments.~~to ~~The~~provide the ~~Company~~same ~~has~~alternative ~~adopted~~methods of transition as is provided in the ~~recommendations~~U.S. for voluntary adoption of the ~~CICA~~fair ~~Handbook~~value ~~section~~based ~~3870,~~method ~~Stock-Based~~of ~~Compensation~~accounting. In ~~and~~January 2004, ~~Other~~the ~~Stock-Based~~Company adopted ~~Payments,~~the ~~effective~~recommendations ~~January~~of 1,the ~~2002~~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.~~

~~The~~Awards ~~Company’s~~that ~~accounting~~a ~~methods for~~company ~~stock-based compensation plans also materially follow the guidance under~~has the ~~recognition~~ability ~~and measurement principles of APB Opinion No. 25, Accounting for Stock Issued~~ to ~~Employees, and~~settle ~~related~~in ~~interpretations. The Company has two~~ stock~~-based~~ ~~compensation plans, which~~ are ~~described~~recorded inas ~~Note 3. New~~equity, ~~option~~whereas ~~grants~~awards ~~are~~that ~~made with an exercise price equal to~~ the ~~fair market value of the underlying common~~ ~~stock. No~~entity ~~compensation expense~~ is ~~recognized~~ ~~for~~required ~~options granted at fair market value under the plan when stock options are issued~~ to ~~directors~~or ~~and~~has ~~employees. Deferred~~a ~~stock~~practice ~~compensation charges arise where stock options are granted at exercise prices less than the fair value~~ of ~~the~~settling ~~underlying~~in ~~stock~~cash ~~and~~ are ~~amortized~~recorded ~~to expense over the vesting period of the option. Any consideration paid by directors,~~as ~~employees and others on exercise of stock options is credited to share capital~~liabilities.

The ~~following~~Company ~~table~~has ~~summarizes~~two stock-based compensation plans, which are described in Note 5. The Company typically grants options with an exercise price equal to the fair ~~effect~~market onvalue ~~net~~of ~~loss~~the ~~and~~underlying ~~loss~~common ~~per~~stock. Under ~~share~~the ifprinciples of CICA 3870, compensation expense is recognized over the ~~Company~~vesting ~~had~~period ~~applied~~of the grant based on the estimated fair value ~~recognition~~at ~~provisions~~the time of grant using the ~~Financial~~Black-Scholes ~~Accounting~~method. Any ~~Standards~~consideration ~~Board~~paid by directors, ~~(“FASB”)~~employees ~~Statement~~and ~~No.~~others ~~123,~~on ~~Accounting~~exercise ~~for Stock-Based~~of ~~Compensation,~~stock options is credited to ~~stock-based~~common ~~employee~~shares. See ~~compensation~~further discussion of the change in accounting policy in Note 2.

	For the three months ended September 30,						For the nine months ended September 30,
(in thousands, except per share amounts)	2003			2002			2003			2002
	(unaudited)						(unaudited)
Net loss under Canadian GAAP	$	(5,623	)	$	(2,280	)	$	(12,483	)	$	(24,743	)
Net loss under U.S. GAAP (See Note 5 for reconciliation to Canadian GAAP)	$	(5,463	)	$	(3,668	)	$	(11,933	)	$	(24,941	)
Employee stock compensation included in net loss under Canadian and U.S. GAAP	$	50		$	57		$	157		$	173
Stock-based employee compensation expense under the fair value method	(628		)	(907		)	(1,796		)	(2,721		)
Pro forma net loss under Canadian GAAP	$	(6,201	)	$	(3,130	)	$	(14,122	)	$	(27,291	)
Pro forma net loss under U.S. GAAP	$	(6,041	)	$	(4,518	)	$	(13,572	)	$	(27,489	)
Pro forma basic loss per common share under Canadian GAAP	$	(0.10	)	$	(0.05	)	$	(0.23	)	$	(0.47	)
Pro forma basic loss per common share under U.S. GAAP	$	(0.10	)	$	(0.08	)	$	(0.22	)	$	(0.47	)

Accounting pronouncements

The ~~weighted-average~~Emerging ~~per~~Issues Task Force (EITF) recently deliberated regarding Issue 03-~~share~~01, ~~fair~~“The ~~values~~Meaning of ~~the~~Other-Than-Temporary Impairment ~~individual~~and ~~options granted~~Its ~~during~~Application to Certain Investments.” The Issue is intended to address the ~~three~~meaning of other-than-temporary impairment and ~~nine~~its ~~month~~application ~~periods~~to ~~ended~~certain ~~September~~investments held ~~30,~~at ~~2003~~cost. The ~~were~~EITF reached a $1consensus regarding disclosure requirements concerning unrealised losses on available-for-sale debt and equity securities accounted for under SFAS No.00 115 “Accounting for Certain Investments in Debt and $1Equity Securities” and SFAS No.06 124, ~~respectively~~“Accounting for Certain Investments Held for Not-for-Profit Organizations.” The guidance for evaluating whether an investment is other-than-temporarily impaired is to be applied in reporting periods beginning after June 15, ~~compared~~2004. The disclosure requirements apply to $1annual financial statements for fiscal years ending after December 15, 2003 for investments accounted for under SFAS Nos.74 115 and $2124.63 For ~~for~~all other investments within the ~~same~~scope of ~~periods~~this Issue, the disclosure requirements apply to fiscal years ending after inJune 15, ~~2002~~2004. Additional disclosure requirements for cost method investments apply to fiscal years ending after June 15, 2004. The ~~fair~~Issue ~~values~~does ofnot affect the current ~~options~~period. The Company is ~~were~~currently ~~determined~~evaluating ~~using~~the aeffect ~~Black-Scholes~~of ~~option-pricing~~this ~~model~~pronouncement ~~with~~on ~~the~~its ~~following~~financial ~~assumptions:~~statements.

	For the three months ended September 30,				For the nine months ended September 30,
(unaudited)	2003		2002		2003		2002
Dividend yield	0	%	0	%	0	%	0	%
Volatility	78	%	60	%	80	%	60	%
Risk-free interest rate	2.7	%	5.5	%	2.5	%	5.5	%
Expected life	4 years		4 years		4 years		4 years

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 recommendation 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.

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

The FASB issued SFAS No. 148, Accounting for Stock-Based Compensation, Transition and Disclosure in December 2002. SFAS No. 148 provides alternative transition methods for entities that voluntarily elect to adopt the fair value recognition provisions of the FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation. In addition, SFAS No. 148 requires more prominent pro forma disclosures of the effect on net income and earnings per share if the company had applied these fair value recognition provisions. The transition and annual disclosure provisions of SFAS No. 148 are effective for fiscal years ending after December 15, 2002. While we have not elected to adopt the provisions in SFAS 123, we have disclosed our pro forma financial results in Note 1 of the accompanying financial statements.

(in thousands, except per share amounts)	Three months ended June 30, 2003			Six months ended June 30, 2003

Net loss under Canadian GAAP	$	(4,403	)	$	(6,860	)

Stock-based compensation expense under intrinsic value method	52			107
Stock-based employee compensation expense under the fair value method	(841		)	(1,559		)
Pro forma net loss under Canadian GAAP	$	(5,192	)	$	(8,312	)
Pro forma basic loss per common share under Canadian GAAP	$	(0.08	)	$	(0.14	)

2To implement the fair value method for stock-based compensation beginning January 1, 2004, the Company recorded an adjustment to beginning accumulated deficit of $32,950,000, comprised of $17,105,000 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 principles of APB Opinion No. ~~COLLABORATIVE~~ 25, Accounting for Stock Issued to Employees. Under the principles of CICA 3870, the ~~AGREEMENT~~Company reclassified $3,174,000 from contributed surplus to common stock related to the historical exercise of employee stock options. The Company recorded expense of $301,000 and $964,000 for the three and six month periods ended June 30, 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 three month periods ended June 30, 2004 and 2003 were $0.50 and $1.60, respectively. The weighted-average per-share fair values of the individual options granted during the six month periods ended June 30, 2004 and 2003 were $0.68 and $1.05. The fair value of the options was determined using a Black-Scholes option-pricing model with the following assumptions:

In June 2002 the Company entered into a collaboration agreement for the co-development and global commercialization of the Company’s innovative proprietary CoValTM fusion product candidate, HspE7, with F. Hoffmann-La Roche and Hoffmann-La Roche Inc. (collectively, “Roche”). Under the terms of the agreement, Roche has the worldwide exclusive right to manufacture, market and sell the HspE7 product and the Company has the right to co-promote the product in the U.S. to certain physician specialties. For the three and nine months ended September 30, 2003, the Company recognized collaborative R&D revenue of $855,000 and $7,584,000, respectively, including $2,214,000 related to a development milestone earned in March 2003. Further, in July 2002 and April 2003, Roche made equity investments (see Note 3) in the Company totaling $7,657,000 and $4,594,000, respectively.

	For the three months ended June 30,				For the six months ended June 30,
	2004		2003		2004		2003
Dividend yield	0	%	0	%	0	%	0	%
Volatility	61	%	88	%	65	%	74	%
Risk-free interest rate	3.8	%	2.2	%	3.5	%	2.5	%
Expected life	4 years		4 years		4 years		4 years

~~Upon~~The FASB ~~receiving~~issued ~~the~~SFAS ~~upfront~~No. ~~license fee payment from Roche in 2002~~148, ~~the~~Accounting for ~~Company~~Stock-Based ~~recorded a $634~~Compensation,~~320~~ ~~payable~~Transition ~~due to MIT/Whitehead~~ and aDisclosure ~~related~~(SFAS ~~deferred expense~~148) in December 2002. ~~The~~SFAS ~~payment~~148 ~~was~~provides ~~made~~alternative intransition ~~January~~methods ~~2003. The~~for ~~Company~~entities ~~recognizes the~~that ~~related~~voluntarily ~~deferred~~elect ~~expense~~to ~~over~~adopt the ~~development~~fair value ~~period. At~~recognition ~~September~~provisions ~~30,~~of ~~2003~~FASB ~~and~~Statement ~~December~~No. 31123, ~~2002, the~~Accounting ~~Company~~for ~~had~~Stock-Based aCompensation ~~total of $390~~(SFAS 123),~~116~~ ~~and $561,778, respectively, of deferred expense related~~ to ~~this~~stock-based ~~payment~~employee compensation. ~~Upon receiving~~Under the ~~$2,214,000~~provisions ~~milestone~~of SFAS ~~payment~~123, infair ~~April~~value ~~2003~~accounting ~~(see~~is ~~Note~~required ~~2),~~for ~~the Company~~all ~~recorded~~grants anmade ~~additional~~on ~~$221~~or after January 1,~~000~~ ~~payable~~1995. The ~~due~~Company has not elected to ~~MIT/Whitehead~~adopt ~~and~~the ~~a related~~provisions ~~deferred~~of ~~expense~~SFAS 123. AtSee ~~September 30,~~Note ~~2003~~7 ~~all~~for ~~payments~~the ~~due~~reconciliation tobetween ~~MIT/Whitehead~~Canadian ~~have~~and ~~been made~~U.S. GAAP.

3. BALANCE SHEET DETAILS

In September 2003, the Company entered into a 36 month term loan agreement collateralized by equipment owned by the Company. At September 30, 2003, there was $1,004,000 outstanding on the loan. Under the terms of the agreement, the Company must issue a letter of credit for the outstanding loan balance if combined cash, cash equivalents, and short-term investments fall below $6,000,000.

The following tables provide details of selected balance sheet items:

(In thousands)	September 30, 2003			December 31, 2002
	(unaudited)
Accounts receivable:
Trade accounts receivable	$	614		$	527
Collaborative receivable	435			3,790
Less: allowance for doubtful accounts	(38		)	(38		)
	$	1,011		$	4,279
Inventories:
Raw materials, net	$	226		$	417
Work in progress, net	105			145
Finished goods, net	301			276
	$	632		$	838
Accounts payable and accrued liabilities:
Clinical trial accruals	$	2,932		$	3,133
Trade accounts payable	1,633			3,607
Accrued compensation and benefits	1,007			1,274
Royalty payable	—			634
Other accrued liabilities	110			185
	$	5,682		$	8,833

3. COLLABORATIVE AGREEMENT

	September 30, 2003 (unaudited)						December 31, 2002
(In thousands)	Cost		Accumulated Depreciation		Net Book Value		Net Book Value
Capital Assets:
Laboratory equipment	$	4,395	$	2,678	$	1,717	$	1,932
Computer equipment	1,025		702		323		393
Furniture and fixtures	561		375		186		240
Leasehold improvements	716		592		124		181
	$	6,697	$	4,347	$	2,350	$	2,746

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 develop the first generation HspE7, 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.

~~Stockholders’~~In connection ~~equity~~with the first generation of HspE7, 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. The Company can 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 the new agreement the Company is responsible for the manufacturing and other costs of all indications it develops.

InThe ~~June~~Company recorded ~~2002~~collaborative ~~the~~R&D ~~Company~~revenue ~~issued~~of 2$190,~~036,436~~000 ~~common~~and ~~shares for~~ $71,~~657~~508,000 ~~pursuant~~during to the ~~collaboration agreement with Roche (see Note~~ ~~2). The~~three ~~equity~~month ~~was~~periods ~~issued~~ended atJune 30, a2004 ~~per share~~and ~~price~~2003, ~~determined by the weighted average price of common shares of the~~respectively. ~~Company~~Collaborative ~~during~~R&D ~~the~~revenue ~~ten~~for ~~business days prior to~~ the ~~Roche~~six ~~transaction. The~~month ~~Company~~periods ~~also~~ended ~~issued~~June 30, ~~two warrants to~~2004 ~~acquire~~and ~~between~~2003 2was $363,~~036,435~~000 and 2$6,~~356~~729,000, ~~additional common shares~~respectively. ~~The~~Collaborative ~~Company~~R&D ~~allocated~~revenue ~~$1,264,000~~during as the ~~fair value~~three ofand ~~the~~six ~~warrants,~~month periods asin ~~determined~~2004 byrelates anprincipally ~~independent~~to ~~valuation expert. In April 2003~~ the ~~Company~~amortization ~~provided notice for Roche to exercise one~~ of ~~the~~upfront ~~warrants;~~license ~~Roche subsequently purchased~~fees ~~1,413,600~~in ~~common~~accordance ~~shares~~with atStaff ~~$3.25,~~Accounting ~~resulting~~Bulletin in(SAB) ~~net~~No. ~~proceeds~~101 of“Revenue ~~$4,594,000 to~~Recognition ~~the~~in ~~Company~~Financial Statements.” ~~An exercise of the second~~Collaborative ~~warrant~~R&D ~~would~~revenue ~~result~~for in the ~~future~~six ~~issuance~~month ofperiod ~~between~~ended ~~814~~June 30,~~574~~ ~~and~~2003 ~~942,400~~includes ~~additional common shares~~$4,003,000 atfor andevelopment ~~exercise~~activities, ~~price~~a ~~ranging~~time-based ~~from~~development payment of $~~3.76~~2,214,000 toand $~~3.25 per share~~512,000 ~~depending~~from ~~upon whether~~ the ~~Company~~amortization ~~calls the warrant and upon the price~~ of ~~the~~upfront ~~Company’s~~license ~~common stock~~fees. ~~Roche may exercise the second warrant until June 28, 2007.~~

4. SIGNIFICANT CONTRACTUAL ACTIVITY

On January 28, 2004, the Company entered into a biological services agreement with Avecia Limited for manufacturing and process development of HspE7. Under the terms of the contract, payments are due in British pounds. The contract is a multi-year agreement for process development and manufacturing of clinical supplies, and may also include the manufacturing of commercial drug substance. The Company purchased British pounds in anticipation of making payments in that currency. The services agreement contains cancellation fees based on a sliding percentage of certain future program milestones. The cancellation fee as of June 30, 2004 would have been $4,290,000.

5. BALANCE SHEET DETAILS

At June 30, 2004 the Company had outstanding principal balances of $894,000 and $1,125,000, respectively, in the form of fixed rate capital leases and term loans including the September 2003 term loan with Oxford Finance Corporation (Oxford). At June 30, 2004 the outstanding principal balance was $761,000 on the Oxford loan. Under the terms of the Oxford loan, the Company 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.

~~Stockholders’~~The ~~equity at September 30, 2003 and December 31, 2002~~following ~~includes~~tables ~~$2,174,000~~provide ~~and~~details ~~$2,179,000, respectively~~ of ~~contributed~~selected ~~surplus. At~~balance ~~September~~sheet ~~30, 2003 and December 31, 2002, there were 66,088,170 and 68,541,541 fully diluted (exercisable) common shares, respectively.~~items:

Employee share option plan

(In thousands)	June 30, 2004			December 31, 2003
Accounts receivable:
Trade accounts receivable	$	610		$	492
Collaborative receivable	—			277
Less: allowance for doubtful accounts	(35		)	(36		)
	$	575		$	733

Inventories:
Raw materials, net of $26 provision for obsolescence	$	204		$	202
Work in progress, net of $156 provision for obsolescence	178			146
Finished goods, net of $142 provision for obsolescence	277			291
	$	659		$	639

Accounts payable and accrued liabilities:
Trade accounts payable	$	1,856		$	1,461
Accrued compensation and benefits	1,161			1,009
Clinical trial accruals	528			1,409
Other accrued liabilities	41			96
	$	3,586		$	3,975

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 is amortized as an expense over the vesting period of the granted options. The stockholders subsequently approved adoption of the 2001 Plan, reserving an additional 3,500,000 new common shares for issuance pursuant to the grant of stock options. Once the 2001 Plan was approved, the 2001 grants ceased to be considered out-of plan. In addition, the Company stopped granting options under its pre-existing 1996 Share Incentive Plan. At September 30, 2003, there were 329,423 options available for future grant under the 2001 Plan.

	June 30, 2004 (unaudited)						December 31, 2003
(In thousands)	Cost		Accumulated Depreciation		Net Book Value		Net Book Value
Plant and equipment:
Laboratory equipment	$	4,154	$	2,683	$	1,471	$	1,626
Computer equipment	1,054		818		236		292
Furniture and fixtures	437		294		143		172
Leasehold improvements	795		662		133		106
	$	6,440	$	4,457	$	1,983	$	2,196

~~The following table summarizes information related to all stock options~~Stockholders’ ~~outstanding and exercisable as of September 30, 2003.~~equity

	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
$ 1.22 - $1.99	1,521,464	7.54	$	1.70	853,677	$	1.74
$ 2.00 - $3.99	625,333	8.91	$	3.25	285,933	$	3.50
$ 4.00 - $5.99	1,489,100	7.67	$	4.87	1,015,932	$	4.86
$ 6.00 - $8.00	1,544,600	6.69	$	6.19	1,416,265	$	6.19
	5,180,497				3,571,807

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 ~~October~~time 27of 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, determined by independent valuation. In April 2003, ~~there~~Roche ~~were~~exercised ~~approximately~~the 5first warrant to acquire 1,~~177~~413,600 common shares at $3.25, resulting in net proceeds of $4,594,000 ~~options~~to the Company. ~~outstanding~~Under the original collaboration agreement, the Company had the right to call the second warrant resulting in an issuance of a range of shares and exercise price depending upon the price of the Company’s common stock. In connection with the restructured collaboration agreement, Roche has a continued right to exercise the second warrant for

4814,574 shares at a purchase price of $3. ~~SEGMENT~~76 per share at any time until June 28, ~~INFORMATION~~2007. The Company no longer has the right to call the second warrant.

~~The~~Employee ~~Company~~share ~~manages~~option its operations in two reportable segments, Biotechnology and Bioreagents. Revenues are allocated to countries based on customer locations. The Company does not allocate interest and other income, foreign exchange losses or interest on capital lease obligations to each segment.plan

	Three months ended September 30,						Nine months ended September 30,
(in thousands)	2003			2002			2003			2002
	(unaudited)						(unaudited)
Biotechnology
Collaborative R&D revenue	$	855		$	4,332		$	7,584		$	4,332
Expenses:
Research and development	5,569			7,159			16,099			25,651
Selling, general and administrative	1,151			1,536			4,394			5,432
	6,720			8,695			20,493			31,083
Operating loss	$	(5,865	)	$	(4,363	)	$	(12,909	)	$	(26,751	)
Bioreagents
Revenue:
U.S.	$	908		$	1,030		$	2,763		$	2,913
Canada	66			75			192			220
Other	342			389			1,153			1,257
	1,316			1,494			4,108			4,390
Expenses:
Research and development	440			288			1,194			857
Selling, general and administrative	359			368			1,272			1,138
Cost of bioreagent sales	296			419			1,049			1,228
	1,095			1,075			3,515			3,223
Operating income	$	221		$	419		$	593		$	1,167
Totals
Revenue:
Collaborative R&D revenue	$	855		$	4,332		$	7,584		$	4,332
Bioreagent sales	1,316			1,494			4,108			4,390
Total revenue	2,171			5,826			11,692			8,722
Expenses:
Research and development	6,009			7,447			17,293			26,508
Selling, general and administrative	1,510			1,904			5,666			6,570
Cost of bioreagent sales	296			419			1,049			1,228
	7,815			9,770			24,008			34,306
Operating loss	$	(5,644	)	$	(3,944	)	$	(12,316	)	$	(25,584	)

The following table summarizes information related to all stock options outstanding and exercisable under the Company’s 1996 and 2001 stock-based compensation plans as of June 30, 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

$0.98 - $1.99	1,377,395	7.6	$	1.70	885,197	$	1.74
$2.00 - $3.99	618,500	8.1	$	3.24	378,963	$	3.39
$4.00 - $5.99	1,215,095	7.0	$	4.91	1,056,395	$	4.90
$6.00 - $8.00	1,527,100	5.7	$	6.19	1,526,411	$	6.19
	4,738,090				3,846,966

At June 30, 2004, there were 581,514 options available for future grant under the 2001 Plan. At July 30, 2004 there were approximately 4,729,000 options outstanding.

56. ~~THE~~ SEGMENT ~~EFFECT OF APPLYING ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE U.S.~~INFORMATION

~~These~~The ~~financial~~Company ~~statements~~manages ~~have~~its ~~been~~operations ~~prepared~~ in ~~accordance with~~two ~~Canadian~~reportable ~~GAAP which~~segments, ~~except~~Biotechnology asand ~~set~~Bioreagents. Revenues ~~out~~are ~~below,~~allocated ~~conform~~to incountries ~~all~~based ~~material~~on ~~respects~~customer ~~to U~~locations.~~S. GAAP.~~

Effect on the consolidated financial statements:

	Three months ended June 30,						Six months ended June 30,
(In thousands)	2004			2003			2004			2003
Bioreagents
Revenue:
U.S.	$	998		$	947		$	1,956		$	1,855
Canada	58			69			131			126
Other	390			357			811			811
	1,446			1,373			2,898			2,792
Operating expenses:
Research and development	492			435			933			754
Selling, general and administrative	222			425			577			913
Cost of bioreagent sales	306			388			662			753
	1,020			1,248			2,172			2,420
Operating income	$	426		$	125		$	726		$	372

Biotechnology
Collaborative R&D revenue	$	190		$	1,508		$	363		$	6,729

Operating expenses:
Research and development	5,481			4,356			10,609			10,530
Selling, general and administrative	1,670			1,441			3,668			3,243
	7,151			5,797			14,277			13,773
Operating loss	$	(6,961	)	$	(4,289	)	$	(13,914	)	$	(7,044	)

Totals
Revenue:
Bioreagent sales	$	1,446		$	1,373		$	2,898		$	2,792
Collaborative R&D revenue	190			1,508			363			6,729
Total revenue	1,636			2,881			3,261			9,521

Expenses:
Research and development	5,973			4,791			11,542			11,284
Selling, general and administrative	1,892			1,866			4,245			4,156
Cost of bioreagent sales	306			388			662			753
	8,171			7,045			16,449			16,193

Operating loss	$	(6,535	)	$	(4,164	)	$	(13,188	)	$	(6,672	)

The Company does not allocate interest and other income, or interest on capital lease obligations to each segment.

At June 30, 2004 and December 31, 2003, respectively, $1,814,000 and $2,006,000 of plant and equipment supported the Biotechnology operating segment while the remaining $169,000 and $190,000 supported the Bioreagent operating segment.

7. 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. Effect on the consolidated financial statements:

Balance Sheet

For all periods presented there are no significant balance sheet differences under Canadian and U.S. GAAP.

(In thousands)	June 30, 2004			December 31, 2003
Current assets under Canadian GAAP	$	41,617		$	53,974
Adjustments to Canadian GAAP	—			—
Current assets under U.S. GAAP	$	41,617		$	53,974

Stockholders’ equity under Canadian GAAP	$	36,846		$	48,577

Adjustment to common stock (a)	(17,295		)	—
Adjustment to deferred stock compensation (a)	(133		)	—
Adjustment to accumulated deficit (a)	17,428			—
	—			—
Stockholders’ equity under U.S. GAAP	$	36,846		$	48,577

Statement of Operations

	Three months ended September 30,						Nine months ended September 30,
	Three months ended June 30,						Six months ended June 30,
(In thousands except per share amounts)	~~2003~~2004			~~2002~~2003			~~2003~~2004			~~2002~~2003
	(unaudited)						(unaudited)
Net loss under Canadian GAAP	$	(6,366	)	$	(4,403	)	$	(12,650	)	$	(6,860	)
Net loss under Canadian GAAP	$	(5,623	)	$	(2,280	)	$	(12,483	)	$	(24,743	)
Reversal of unrealized foreign exchange (gain) loss on investments (b)	(238		)	166			(243		)	338
Reversal of unrealized foreign exchange (gain) loss on available-for-sale securities (*)	(124		)	(890		)	214			(85		)
Loss on market value of investments (b)	304			15			310			52
Reversal of write-down (up) of short-term investments (*)	284			(498		)	336			(113		)
Reversal of stock compensation expense (a)	301			—			964			—
	160			(1,388		)	550			(198		)
Stock compensation expense under APB No. 25 (a)	(15		)	—			(52		)	—
Net loss under U.S. GAAP	$	(5,463	)	$	(3,668	)	$	(11,933	)	$	(24,941	)
	352			181			979			390
Basic loss per common share under Canadian GAAP	$	(0.09	)	$	(0.04	)	$	(0.20	)	$	(0.42	)
Net loss under U.S. GAAP	$	(6,014	)	$	(4,222	)	$	(11,671	)	$	(6,470	)
Basic loss per common share under U.S. GAAP	$	(0.09	)	$	(0.06	)	$	(0.20	)	$	(0.43	)
Basic and diluted loss per common share under Canadian GAAP	$	(0.09	)	$	(0.07	)	$	(0.17	)	$	(0.11	)
Common shares used to compute basic loss per share under Canadian and U.S. GAAP	61,692			60,179			61,048			58,573
Basic and diluted loss per common share under U.S. GAAP	$	(0.08	)	$	(0.07	)	$	(0.16	)	$	(0.11	)
Common shares used to compute basic and diluted loss per share under Canadian and U.S. GAAP	72,506			61,198			72,502			60,721

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

As disclosed in Note 11 to the ~~financial~~ financial statements in the Company’s December 31, ~~2002~~2003 Annual Report on Form 10-K, differences exist for the Company between Canadian and U.S. GAAP.

The following ~~outlines~~notes outline the differences that affect the Company for the three and ~~nine~~six month periods ended ~~September~~ June 30, ~~2003~~ 2004 and ~~2002~~2003.

(*a) ~~Under~~ As ~~U.S.~~discussed ~~GAAP~~in ~~Statement~~Note of2, ~~Financial~~on ~~Accounting~~January 1, ~~Standards~~2004, ~~(“SFAS”)~~the ~~No.~~Company ~~115,~~adopted ~~Accounting~~fair value accounting for all ~~Certain~~stock ~~Investments~~options inas ~~Debt~~required ~~and~~by ~~Equity~~CICA 3870. ~~Securities,~~The Company is required to record the ~~Company~~expense ~~has~~of ~~classified~~the ~~certain~~fair value of ~~its~~all stock ~~short-~~options over their respective vesting term. The Company used the “Retrospective method without ~~securities~~Restatement.” This method requires the Company to record the cumulative expense as ~~available-~~an adjustment to accumulated deficit for~~-sale~~ ~~and~~the period beginning January 1, ~~accordingly~~1995 through December 31, 2003 ~~has~~and ~~included~~begin recording the ~~changes~~expense to retained earnings in ~~net~~ ~~unrealized~~2004. The ~~holding~~Company ~~gains~~has ornot ~~losses~~adopted onSFAS ~~these~~123 ~~securities~~for U.S. asreporting apurposes, ~~component~~which ofwould require fair value based accounting for ~~stockholders’~~grants ~~equity~~made ~~rather~~on ~~than~~or inafter ~~operations~~January 1, 1995.

11Under the principles of SFAS 123, the Company would have recorded $19,277,000 of deferred compensation related to the total fair value for stock options granted between January 1, 1995 and June 30, 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:

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

	Three months ended June 30,						Six months ended June 30,
(In thousands except per share amounts)	2004			2003			2004			2003
Net loss under U.S. GAAP	$	(6,014	)	$	(4,222	)	$	(11,671	)	$	(6,470	)

Stock-based compensation under APB No. 25	15			52			52			107
Stock-based compensation expense recorded under SFAS 123	(301		)	(841		)	(964		)	(1,559		)
Pro forma net loss under U.S. GAAP	$	(6,300	)	$	(5,011	)	$	(12,583	)	$	(7,922	)

Pro forma loss per common share	$	(0.09	)	$	(0.08	)	$	(0.17	)	$	(0.13	)

	Three months ended September 30,						Nine months ended September 30,
(In thousands except per share amounts)	2003			2002			2003			2002
	(unaudited)						(unaudited)
Net loss under U.S. GAAP	$	(5,463	)	$	(3,668	)	$	(11,933	)	$	(24,941	)
Other comprehensive income
Adjustment to unrealized foreign exchange and market gains (losses) on available-for-sale investments	(160		)	1,388			(550		)	198
Comprehensive net loss under U.S. GAAP	$	(5,623	)	$	(2,280	)	$	(12,483	)	$	(24,743	)
Comprehensive loss per share under U.S. GAAP	$	(0.09	)	$	(0.04	)	$	(0.20	)	$	(0.42	)

(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.

~~6. SUPPLEMENTAL CASH FLOW INFORMATION~~13

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:

	Three months ended June 30,						Six months ended June 30,
(In thousands)	2004			2003			2004			2003

Net loss under U.S. GAAP	$	(6,014	)	$	(4,222	)	$	(11,671	)	$	(6,470	)
Other comprehensive income
Adjustment to unrealized foreign exchange gain (loss) on investments	238			(166		)	243			(338		)
Adjustment of market losses on investments	(304		)	(15		)	(310		)	(52		)
Comprehensive net loss under U.S. GAAP	$	(6,080	)	$	(4,403	)	$	(11,738	)	$	(6,860	)

8. SUPPLEMENTAL CASH FLOW INFORMATION

The changes in operating assets and liabilities are as follows:

	Three months ended September 30,						Nine months ended September 30,
	Three months ended June 30,						Six months ended June 30,
(In thousands)	~~2003~~2004			~~2002~~2003			~~2003~~2004			~~2002~~2003
	(unaudited)						(unaudited)
Collaborative receivable	$	—		$	3,867		$	277		$	2,710
Collaborative receivable	$	645		$	(3,673	)	$	3,355		$	(3,673	)
Trade receivables	26			(38		)	(119		)	(158		)
Trade receivables	71			24			(87		)	(82		)
Inventories	(59		)	145			(20		)	141
Inventories	65			(15		)	206			(44		)
Other current assets	165			241			20			184
Other current assets	(269		)	(121		)	(85		)	(347		)
Deferred expenses, net of current portion	17			58			35			120
Deferred expenses, net of current portion	31			(459		)	151			(459		)
Accounts payable and accrued liabilities	(45		)	(1,592		)	(389		)	(4,101		)
Accounts payable and accrued liabilities	950			(1,830		)	(3,151		)	902
Deferred revenue	(119		)	(541		)	(254		)	(1,113		)
Deferred revenue	(250		)	4,755			(1,363		)	4,755
	$	(15	)	$	2,140		$	(450	)	$	(2,217	)
	$	1,243		$	(1,319	)	$	(974	)	$	1,052
Supplemental disclosures of cash flows:
Interest paid	$	828		$	159		$	2856		$	5420
Supplemental disclosures of non-cash transactions
Reversal of deferred compensation related to terminated employees	$	4		$	—		$	4		$	28
Reversal of deferred compensation	$	—		$	—		$	185		$	—

1214

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

~~The~~ This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” ~~contains~~is ~~forward-looking~~dated ~~statements~~as ~~that~~of ~~involve~~July 30, ~~risks and uncertainties~~2004. ~~The predictions~~It should ~~described~~be read in ~~these~~conjunction ~~statements~~with ~~may~~our ~~not~~June 30, ~~materialize~~2004 ifconsolidated ~~management’s current~~financial ~~expectations~~statements ~~regarding~~and ~~our~~related ~~future~~notes ~~performance~~therein, ~~prove~~which ~~incorrect.~~are ~~Our~~prepared ~~results could~~in ~~also~~accordance bewith Canadian ~~affected~~GAAP byand ~~factors~~with ~~including~~our December 31, ~~but~~2003 ~~not~~Annual ~~limited~~Report ~~to,~~on ~~our~~Form ~~reliance~~10-K. The differences from U.S. GAAP, onas ~~collaborative~~they ~~partners~~affect ~~and~~our ~~other~~consolidated ~~risks~~financial ~~described~~statements, ~~below~~are ~~under~~described ~~“Factors~~in ~~That~~Note 7 ~~Could~~to ~~Affect~~our ~~Future~~consolidated ~~Performance.” The forward-looking~~quarterly financial statements ~~are~~and ~~based~~in onNote ~~currently~~11 ~~available~~to ~~information;~~our weForm ~~disclaim~~10-K. All ~~any~~amounts ~~obligation~~following toare ~~update~~expressed in ~~them~~Canadian dollars unless otherwise indicated.

The ~~following information~~discussion ~~should~~contains beforward-looking ~~read~~statements that ininvolve ~~conjunction~~risk ~~with~~and ~~our~~uncertainties. The ~~September~~predictions ~~30,~~described ~~2003 consolidated~~in ~~financial~~these statements ~~and~~may ~~related~~not ~~notes~~materialize ~~therein, which are prepared~~if inmanagement’s ~~accordance~~current ~~with~~expectations ~~Canadian~~regarding ~~generally~~our ~~accepted~~future ~~accounting~~performance ~~principles or~~prove ~~Canadian GAAP~~incorrect. ~~These~~ ~~principles~~Our ~~differ in~~results ~~certain~~could ~~respects~~also ~~from~~be ~~accounting~~affected ~~principles~~by ~~generally~~factors ~~accepted~~including, inbut ~~the United~~not ~~States~~limited ~~or U.S. GAAP. The differences~~to, as ~~they affect~~ our ~~consolidated~~reliance ~~financial~~on ~~statements,~~collaborative ~~are~~partners ~~described~~and inother ~~Note~~risks 5described tobelow ~~our~~under ~~September~~“Factors ~~30,~~That ~~2003~~May ~~consolidated~~Affect ~~financial~~Future ~~statements~~Performance.” ~~All~~The ~~amounts~~forward-looking ~~following~~statements are ~~expressed~~based inon ~~Canadian~~currently ~~dollars~~available ~~unless~~information; ~~otherwise~~we ~~indicated~~disclaim any obligation to update them.

Overview

~~Our~~From ~~activities~~our inception in 1990 ~~are~~to ~~focused~~1993, ~~primarily~~our oncore ~~the~~business ~~research~~involved ~~and~~the ~~development~~sale of abioreagent ~~unique~~products. Although ~~class~~we ofhave retained and expanded our ~~proteins~~bioreagent business worldwide, ~~called~~our ~~stress~~primary ~~proteins~~focus orsince ~~heat~~1993 ~~shock~~has ~~proteins,~~been tothe research ~~regulate~~and development of innovative stress protein-based fusion products that will stimulate the body’s ~~own~~ immune ~~response~~system to combat ~~infectious~~viral ~~diseases~~infections and related ~~cancer~~cancers. WeOur ~~believe~~core, ~~that~~exclusively licensed technology involves the ~~use~~fusion of ~~stress~~heat shock proteins, with viral or ~~genetically~~cancer-associated ~~combined~~antigens. The lead product candidate developed with ~~various~~this ~~antigens~~technology, ~~derived~~HspE7, ~~from~~targets ~~disease~~a variety of human papillomavirus-~~causing~~related diseases, including genital warts, recurrent ~~organisms~~respiratory orpapillomatosis, ~~cancer~~anal ~~cells~~intraepithelial neoplasia, ~~can~~cervical intraepithelial ~~yield~~neoplasia ~~novel~~and ~~therapeutic~~cervical ~~products~~cancer, among others. We are also performing research studies on potential treatments for hepatitis B and herpes simplex and are evaluating fusion proteins to treat infections caused by hepatitis C.

InWe ~~June~~have ~~2002~~incurred significant welosses ~~entered~~since ~~into~~our ainception ~~strategic~~and ~~collaboration~~expect ~~with~~to F.incur ~~Hoffmann-La~~substantial ~~Roche~~losses for the foreseeable future as we invest in our research and product development ~~Hoffmann~~programs, including manufacturing, pre-Laclinical ~~Roche~~studies ~~Inc.~~and ~~(collectively~~clinical trials, and ~~“Roche”)~~regulatory ~~for~~activities. At June 30, ~~the~~2004 ~~development~~our ofaccumulated ~~our product~~deficit ~~for~~was ~~the~~$195,894,000. Historically, ~~treatment~~we ofhave ~~human~~depended ~~papilloma~~principally on ~~virus~~equity financings, ~~known~~cash asflows ~~HspE7. This~~from ~~partnership~~our bioreagent business and ~~future~~funding ~~partnerships~~from ~~could~~research ~~enable~~collaborations us to ~~develop~~fund our ~~product~~business ~~candidates~~activities. We ~~and~~intend ~~exploit~~to ~~new~~pursue ~~applications~~additional equity ~~for~~financings, ~~our~~markets ~~technology~~permitting, ~~resulting~~and into seek additional ~~product~~research ~~opportunities~~collaborations to fund our business activities.

WeOur ~~have incurred~~success ~~significant~~will ~~losses~~depend ~~since our inception and expect to incur substantial~~upon ~~losses for~~ the ~~foreseeable~~safety ~~future~~and asefficacy weof ~~invest in~~ our ~~research~~immunotherapeutic ~~and~~products ~~product development~~in ~~programs, including manufacturing,~~ pre-clinical studies and clinical trials, and ~~regulatory~~upon ~~activities. At~~obtaining ~~September~~the ~~30,~~necessary ~~2003~~regulatory approvals ~~our~~to ~~accumulated~~market ~~deficit~~our ~~was $146,532,000~~products. ~~Historically,~~The marketability weof ~~have~~our ~~depended~~products ~~principally~~will be influenced by competition from onalternative ~~equity~~therapies ~~financings~~and tothe ~~fund~~degree of protection our ~~business~~intellectual ~~activities~~property provides. We ~~intend~~believe tothere ~~pursue~~will ~~additional~~be ~~equity~~significant ~~financings~~markets tofor ~~fund~~ our therapeutic ~~business~~products ~~activities,~~should ~~markets~~these ~~permitting~~products prove to be effective in human clinical trials.

Restructured Roche Agreement

On December 2, 2003, we announced a restructuring of our 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 our pharmaceutical fusion product candidate, HspE7. Under the restructured terms we granted Roche an option to develop the first generation HspE7, a license to develop a second generation HspE7 product, and an option to negotiate rights to our CoVal^TM fusion product candidates for the treatment of cancer and hepatitis C.

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 U.S. Investigational New Drug applications. We can conduct dose-ranging studies in patients with genital warts. In the original agreement we were responsible for clinical development expenses related to the recurrent respiratory papillomatosis (RRP) indication. In the new agreement we are responsible for the manufacturing and other costs of all indications 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 Stressgen of up to $207,000,000 (US $138,000,000). Under that scenario Stressgen would record first generation HspE7 product sales in the U.S. and Canada for three years following approval of a Biologics License Application (BLA) with the U.S. Food and Drug Administration, would receive sales-based payments of approximately 35% in the U.S. and Canada thereafter, and would receive sales-based payments (similar to royalties) of 20% of sales in countries outside the US 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 pay us 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 $127,500,000 (US $85,000,000) become payable depending upon the aggregate net sales of either or both generations of the HspE7 product.

The restructured collaboration agreement gives Stressgen 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. Roche can terminate this right by paying us a fee, which in 2005 would be $15,000,000 or $22,500,000 (US$10,000,000 or US$15,000,000).

Roche has separate non-exclusive rights to negotiate licenses to our CoVal^TM fusion product candidates for the treatment of cancer and hepatitis C. Roche can pay additional fees to make these rights exclusive until January 1, 2007.

As part of our financial responsibility for manufacturing we pay Avecia Limited (Avecia) for process development, scale-up and manufacturing of clinical supplies under a contract discussed below.

Liquidity and Capital Resources

Since inception we have relied principally on equity financings, ~~coupled~~research ~~with~~collaborations and cash flows generated from our bioreagents business, to fund our research and development programs, operations and capital expenditures. Through ~~September~~ June 30, ~~2003~~2004 we have raised net ~~equity~~ proceeds of $~~180~~198,~~092~~238,000~~, principally~~ through ~~our public issuances of stock, the exercise of warrants and~~equity ~~stock options issued since 1996 and, more recently, the issuance of stock and warrants to Roche in connection with the collaboration agreement~~transactions. We employ a financial performance measurement system designed to ensure our revenues and expenses are consistent with management’s operational objectives and budgetary constraints. The variability of anticipated cash utilization is dependent upon several factors, including the timing and extent of clinical development of HspE7. We believe that our current capital resources are sufficient to fund operations into 2005. This belief is based on our evolving research and development plans, the current regulatory environment, our historical industry experience in the development of therapeutics and general economic conditions. Under our collaborative agreement, Roche is obligated to fund process development and manufacture HspE7 for clinical development and commercialization. At this time, we do not have

13We will need to obtain significant additional funds through financings or strategic transactions to continue product development, manufacturing and commercialization. If adequate funds are not available from those sources, we will be required to delay, reduce the scope of, or eliminate the development of HspE7 or other research or development programs. Based on our current spending to support our research and development programs, as well as the existing regulatory environment and general economic conditions, our current capital resources are sufficient to fund operations for over twelve months.

~~internal~~We ~~manufacturing~~employ ~~capabilities~~a tofinancial ~~supply clinical~~performance ~~trials~~measurement orsystem designed ~~commercial~~to ~~quantities~~ensure ofour ~~HspE7. If~~revenues weand expenses are ~~required~~consistent orwith ~~choose to manufacture HspE7 for clinical~~management’s ~~trials~~operational orobjectives onand abudgetary ~~commercial scale, we will need significant additional funds~~constraints. IfOur ~~adequate~~cash ~~funds~~utilization ~~are not~~in ~~available,~~2004 weis ~~may~~dependent beupon ~~required~~several ~~to delay~~factors, ~~reduce~~including the ~~scope~~timing ~~of,~~and orprogress ~~eliminate the~~of clinical development of HspE7 orand ~~other~~the ~~research~~cost orof ~~development~~manufacturing ~~programs~~clinical supplies.

At ~~September~~ June 30, ~~2003~~2004, we had $39,891,000 of cash, cash equivalents and short-term investments. of The $3812,~~581~~199,000 decrease since December 31, a2003 ~~decrease~~is due principally to spending related to the development of $7HspE7. At June 30,~~432,000~~ ~~from~~2004 ~~December~~and December 31, ~~2002. Approximately~~ 232003, approximately 30% and 24%, respectively, of cash, cash equivalents and short-term investments were held in U.S. dollars. During asthe offirst ~~September~~half ~~30,~~of ~~2003~~2004, ~~compared~~we purchased British pounds to ~~approximately~~fund ~~13%~~payments asmade ofto ~~December~~Avecia. At 31June 30, ~~2002.~~2004 approximately 6% of our

During the three and nine months ended September 30, 2003, capital expenditures totaled $100,000 and $154,000 respectively compared with $151,000 and $319,000 for the same periods in 2002. Capital purchases in 2003 are consistent with management’s investment policy limiting purchases to those required to preserve our current level of manufacturing and research capabilities.16

~~We have a credit facility for $2~~cash,~~000,000~~ ~~with~~cash aequivalents ~~Canadian chartered bank. At September 30, 2003~~ and ~~December~~short-term ~~31,~~investments ~~2002, $328,000 and $541,000, respectively~~ were ~~used~~held ~~and outstanding under this facility~~ in ~~the~~British ~~form of fixed rate capital leases~~pounds. In Periodically ~~September 2003~~ we ~~entered~~may ~~into~~purchase aadditional ~~term loan~~British ~~agreement~~pounds ~~with~~based ~~Oxford Finance Corporation, collateralized by equipment owned by the Company. At September 30, 2003 there was $1,004,000 outstanding~~ on ~~the loan. Under the terms of the agreement, the Company must issue a letter~~ offuture ~~credit~~anticipated ~~for~~payments ~~the~~in ~~outstanding~~that ~~loan balance if combined cash, cash equivalents, and short-term investments fall below $6,000,000~~currency.

WeOur ~~will require additional~~ capital toexpenditures totaled ~~fund~~$58,000 ~~future research~~ and ~~product~~$42,000 ~~development activities. We~~during ~~expect~~the tothree ~~seek additional~~month ~~funds~~periods ~~from~~ended ~~various sources~~June 30, ~~including corporate partners that enter~~ ~~into~~2004 ~~research~~ and ~~development collaborations with us~~2003, ~~and public and private equity financings~~respectively. WeFor ~~cannot assure you~~the ~~that~~six ~~additional~~month ~~financing~~periods ~~will~~ended beJune 30, ~~available~~2004 ~~when~~and ~~needed~~2003 orcapital onexpenditures ~~satisfactory~~were ~~terms. If~~$188,000 weand ~~raise~~$54,000, ~~additional funds by~~respectively. ~~issuing~~Spending ~~equity~~in ~~securities,~~the ~~substantial~~first ~~dilution~~half toof ~~our~~2004 ~~existing~~consisted ~~shareholders may~~of ~~result. We~~tenant ~~may~~improvements ~~need to obtain funds~~on ~~through~~our ~~collaborative~~facilities, ~~arrangements~~laboratory ~~with~~equipment, ~~others~~and ~~that~~computer ~~are~~related ~~on unfavorable terms~~hardware. WeCapital ~~may~~expenditures ~~also~~are ~~have~~expected to decrease ~~relinquish~~during ~~rights~~the ~~to certain~~remainder of ~~our technologies~~2004, ~~product~~although ~~candidates~~additional orpurchases ~~products~~are planned ~~that~~to wesupport ~~would otherwise~~our ~~seek~~research, todevelopment ~~develop~~and ~~ourselves~~regulatory requirements.

At June 30, 2004 and December 31, 2003 we had outstanding principal balances of $894,000 and $1,125,000, respectively, in the form of fixed rate capital leases and term loans including our September 2003 term loan with Oxford Finance Corporation (Oxford). At June 30, 2004 and December 31, 2003 the outstanding principal balances were $761,000 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.

Contractual Obligations

Our contractual obligations consist of operating leases for facilities, capital leases to finance equipment and a term loan to increase working capital cash flows. Details of these commitments are described in our 2003 Annual Report on Form 10-K under the section “Liquidity and Capital Resources.” In January 2004 we entered into a biological services agreement with Avecia that is cancellable subject to specified termination conditions. The services agreement, which is further discussed below, specifies cancellation fees based on a sliding percentage of certain future program milestones. The cancellation fee as of June 30, 2004 would have been $4,290,000. During the three and six month periods ended June 30, 2004 there were no material changes to our contractual obligations.

We have entered into various contracts for research, process development and limited product manufacturing to further the development of HspE7. Due to our goal 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 if applicable, 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 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.

Results of Operations

For the three ~~and~~ ~~nine~~month ~~months~~ periods ended ~~September~~ June 30, 2004 and 2003, our net loss was $56,~~623~~366,000 and $124,~~483~~403,000, respectively, or $0.09 and $0.20 07 per common share, respectively. ~~This~~Our ~~compares~~net ~~with~~losses afor the six month periods ~~net~~ended ~~loss~~June 30, of2004 and 2003 were $212,~~280~~650,000 and $246,~~743~~860,000, respectively, or $0.0417 and $0.4211 per common share, ~~for the same periods in 2002~~respectively. Our increased net loss during the current quarter and the first half of 2004 compared to the same ~~quarter~~periods in ~~2002~~2003 is due, inprincipally ~~part,~~ to spending ~~the~~on ~~timing of~~ research and development (“R&D”) activities~~, including~~ ~~the~~related ~~current quarter’s completion of phase III AIN and phase II RRP~~to ~~clinical~~manufacturing ~~studies,~~development ~~together~~that ~~with~~was apreviously ~~reduction~~funded ~~in collaboration revenue generated~~ by ~~R&D activities reimbursable by~~ Roche. ~~The aggregate improvement during the nine month period in 2003 over 2002 is also attributed to the extent of collaboration revenue and timing of HspE7 clinical trials.~~

Collaborative R&D revenue

~~Collaborative R&D~~We ~~revenue~~recorded ~~was $855,000 and $7,584,000 for the three and nine months ended~~collaborative ~~September 30, 2003, compared with $4,332,000 for the same periods in 2002. Collaborative~~ R&D revenue ~~for~~of ~~the nine months ended September 30, 2003 includes~~ $4190,~~615,~~000 ~~for~~and ~~development activities in support of Roche, a time-based development payment of~~ $21,~~214~~508,000, ~~and $755,000~~during ~~from~~ the ~~amortization of up-front license fees in accordance with SAB No. 101, Revenue Recognition in Financial Statements. Collaborative R&D revenue declined in the current~~ three month ~~period~~periods ~~due to fewer research activities being performed by the Company compared to the period immediately after the consummation of the collaboration agreement.~~ended

1417

~~Bioreagent~~June 30, ~~sales~~2004 and 2003, respectively. Collaborative R&D revenue for the six month periods ended June 30, 2004 and 2003 was $363,000 and $6,729,000, respectively. Collaborative R&D revenue during both periods in 2004 relates principally to the amortization of upfront license fees in accordance with Staff Accounting Bulletin (SAB) No. 101 “Revenue Recognition in Financial Statements.” Collaborative R&D revenue for the six month period ended June 30, 2003 includes $4,003,000 for development activities, a time-based development payment of $2,214,000 and $512,000 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 amortization of the initial up-front license fee, which reflects the anticipated development period of HspE7 and recognition of future milestone revenues.

~~The~~Bioreagent production and sale of bioreagents supports our business strategy by building our market presence in stress proteins and strengthening our strategic relationships with companies, academic institutions and stress response researchers. Our products are sold directly to end-users and through third party distributors. The overall economic slowdown in North America caused industry-wide demand for bioreagents to slow; consequently, our bioreagent sales have declined to $1,316,000 and $4,108,000 for the three and nine months ended September 30, 2003, respectively, compared with $1,494,000 and $4,390,000, for the same periods in 2002. Foreign exchange fluctuations between the U.S. and Canadian dollar also had an unfavorable effect on our reported sales results, totaling approximately $168,000 and $393,000 during the three and nine month periods ended September 30, 2003 compared to last year’s foreign currency exchange during the same periods. ~~These impacts were partially offset by the introduction of several higher priced kit-based research products.~~

~~Research~~The production and sale of ~~development~~bioreagents supports our business strategy by building our market presence in stress proteins and strengthening our strategic relationships with companies, academic institutions and stress response researchers. Our products are sold directly to end-users and through third party distributors. For the three month periods ended June 30, 2004 and 2003, we reported a 5% increase in bioreagent sales to $1,446,000 from $1,373,000. Bioreagent sales increased by 4% to $2,898,000 during the six month period ended June 30, 2004 from $2,792,000 during the same period in 2003. U.S. and Canadian dollar denominated sales in the first half of 2004 compared to the same period in 2003 increased by 11% and 10%, respectively, aided by the introduction of new products and several higher priced kit-based research products. The foreign exchange rate applied to U.S. denominated sales was lower in the first half of 2004 compared to the first half of 2003, thereby diluting the reported improvement in U.S. dollar sales.

Research and ~~development,~~ ~~or R&D, includes costs associated with clinical studies, product~~ development, 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 our product development and manufacturing.

~~R&D spending~~Research ~~decreased by approximately 19%~~ and ~~35% to $6,009,000 and $17,293,000,~~development ~~respectively,~~includes ~~for~~costs ~~the~~associated ~~three~~with ~~and~~therapeutic ~~nine~~product ~~months ended September 30~~development, ~~2003, compared~~clinical ~~with $7~~studies,~~447,000~~ ~~and~~ongoing ~~$26,508,000~~exploratory ~~for~~research ~~the~~and ~~same~~bioreagent ~~periods~~product ~~in 2002~~development. ~~The decrease~~In ~~for~~order ~~the~~to ~~nine~~optimize ~~month~~our ~~period in 2003 reflects the cost shift of HspE7~~financial ~~manufacturing scale-up costs and other product development efforts to Roche~~flexibility, ~~partially~~ ~~offset~~we byemploy ~~the timing of HspE7~~ clinical ~~trials. Approximately~~research ~~65%~~organizations ~~of our R&D spending related~~ to ~~efforts~~conduct ~~developing~~our ~~HspE7 during the nine months ended September 30,~~clinical ~~2003,~~trials ~~while~~and ~~most~~engage ofcontract ~~the~~manufacturers ~~remaining spending related~~ to ~~exploratory~~assist ~~research, including~~us ~~our~~with ~~follow-on CoValTM fusion~~ product ~~candidates~~development and manufacturing.

~~Selling~~Our R&D spending during the first half of 2004 was devoted principally to activities in support of developing HspE7, ~~general~~including in-house research activities, spending to support the final stages of our clinical trials, and ~~administrative~~activities ~~expenses~~to support the process development and manufacturing of HspE7. During the first half of 2004 approximately 80% of our R&D spending related to efforts developing HspE7, compared to approximately 60% for the same period in 2003. The remaining spending relates to research supporting our bioreagent business and exploratory research involving our follow-on CoValTM fusion proteins.

~~Selling~~On June 30, 2004 we held an End of Phase II/Pre-Phase III meeting with the ~~general~~U.S. Food and ~~administrative~~Drug ~~expense,~~Administration or(FDA) ~~SG&A,~~for ~~includes~~HspE7 ~~executive~~to ~~management,~~discuss a path forward for ~~business~~the clinical development of HspE7 for recurrent respiratory papillomatosis (RRP). Following the FDA’s recommendation, ~~investor~~we ~~relations~~will be submitting a final pivotal clinical trial protocol for a Special Protocol Assessment (SPA). Under a SPA, ~~legal~~the ~~support~~sponsor and ~~general~~the FDA formally agree to the details of ~~administrative~~the ~~activities~~study protocol. After our meeting with the FDA, we continue to believe that in mid-2007 we may be able to submit a Biologics License Application to the FDA for RRP as the first indication for HspE7.

~~SG&A~~In ~~spending~~January 2004, ~~decreased~~we byentered ~~approximately~~into ~~21%~~a ~~and~~biological ~~14%~~services toagreement ~~$1,510,000~~with Avecia. The ~~and~~contract ~~$5,666,000,~~is a multi-year ~~respectively,~~agreement for ~~the~~process ~~three~~development, scale-up and ~~nine~~manufacturing ~~months~~of ~~ended~~clinical supplies. Although ~~September~~the ~~30,~~timelines ~~2003, compared~~may ~~with~~change ~~$1,904,000~~for ~~and~~specific ~~$6,570,000~~manufacturing ~~for~~events covered by the ~~same~~contract, ~~periods~~such inas ~~2002. The~~GMP bulk ~~decline~~release, incell ~~spending~~paste isproduction ~~attributed~~and tofill/finish, ~~significant~~we believe clinical-grade ~~business~~supplies ~~development~~will ~~costs~~be ~~incurred~~available in ~~2002~~the tosecond ~~consummate~~quarter ~~the~~of ~~Roche~~2005. We may also have Avecia ~~collaboration~~manufacture ~~agreement~~commercial drug substance.

~~Cost~~R&D ofspending ~~bioreagent~~increased by ~~sales~~approximately 25% to $5,973,000 during the three months ended June 30, 2004, compared with $4,791,000 for the same period in 2003. For the six months ended June 30, 2004, R&D spending increased by approximately 2% to $11,542,000 from $11,284,000 for the same period in 2003. This increase is due principally to increased spending at Avecia, which began early in 2004; in

The aggregate cost of bioreagent sales as a percentage of bioreagent sales was approximately 22% and 26% for the three and nine months ended September 30, 2003, resulting in gross margins of 78% and 74% compared with 72% for the same periods in 2002. The improvement compared to the prior period is due principally to improved efficiency in the manufacturing process and related allocated overhead.18

~~Interest~~contrast, ~~and~~in ~~other~~2003 ~~income~~our third-party spending focused on Roche-requested manufacturing initiatives, which ~~net~~are complete. Our spending at Avecia is expected to increase during the second half of 2004 as we transition from process development activities to initial production runs of bulk drug substance for our upcoming pivotal trial.

~~Interest~~During ~~and other income, net decreased to $41,000 and $499,000 for~~ the ~~three~~second ~~and~~half ~~nine~~of ~~months ended September 30~~2004, ~~2003~~we ~~compared~~expect to ~~$777,000~~continue ~~and~~to ~~$1,059,000~~devote in the ~~same periods~~majority inof ~~the~~planned ~~prior~~R&D ~~year. The reduction~~spending into ~~interest~~support ~~and~~HspE7 ~~other income in the current three month period compared to the~~development. We ~~same~~anticipate ~~period~~that ~~last~~R&D ~~year~~spending iswill ~~principally~~continue ~~due~~ to aincrease ~~temporary~~during ~~loss on~~ the ~~market~~second ~~value~~half of ~~investments,~~2004 ~~which~~due ~~is expected~~ to ~~reverse~~our ~~during~~planned ~~the~~HspE7 ~~fourth~~manufacturing ~~quarter~~and ~~of 2003. Further,~~development ~~lower market interest~~activities ~~rates~~and ~~applied~~the tostart-up aof ~~lower~~additional ~~investment~~clinical ~~portfolio balance contributed to the decline~~trials.

15Selling, general and administrative expenses

~~Net~~Selling, ~~realized~~general ~~foreign~~and ~~exchange~~administrative ~~loss~~expense, or SG&A, includes executive management, business development, investor relations, legal support and general administrative activities.

~~During~~SG&A ~~the three~~spending ~~and~~increased ~~nine~~by approximately ~~months~~1% ~~ended~~to ~~September 30~~$1,892,000 ~~2003~~for ~~and~~the ~~2002,~~three ~~the~~month USperiods ~~dollar~~ended ~~weakened~~June 30, ~~against~~2004 ~~the~~from ~~Canadian~~$1,866,000 ~~dollar. Our~~for ~~loss due~~the tosame ~~foreign~~period ~~exchange~~in ~~rate~~2003. For ~~fluctuation during~~ the ~~three~~six ~~and~~month ~~nine~~periods ~~months~~ ended ~~September~~ June 30, ~~2003,~~2004 ~~was $12,000~~ and ~~$638~~2003,~~000 respectively, compared to a~~ ~~foreign~~SG&A ~~exchange~~spending ~~gain~~was of $~~902~~4,245,000 and ~~a loss of~~ $~~164~~4,156,000, respectively~~, in 2002~~. During the past several quarters, the U.S. and Canadian dollar exchange rate has fluctuated dramatically, causing gains and losses from quarter to quarter. We have attempted to minimize this foreign exchange volatility by ensuring that the majority of our investments are denominated in Canadian dollars.

Cost of bioreagent sales

The aggregate cost of bioreagent sales as a percentage of bioreagent sales was approximately 21% and 28% for the three month periods ended June 30, 2004 and 2003, respectively, resulting in gross margins of 79% and 72%, respectively. For the six month periods ended June 30, 2004 and 2003 the aggregate cost of sales was approximately 23% and 27%, respectively, resulting in gross margins of 77% and 73%, respectively. Our improved gross margin during the three and six month periods ended June 30, 2004 as compared to 2003 is due principally to fewer adjustments to inventory reserves in the first half of 2004 and initiatives to bring kit manufacturing in-house.

Interest and other income

Interest and other income decreased during the three month periods ended June 30, 2004 by 119% to a loss of $48,000 compared with income of $255,000 during the same period in 2003. During the six month periods ended June 30, 2004 and 2003 interest and other income decreased by 34% to $302,000 from $458,000, respectively. The decrease is due principally to a $293,000 temporary write-down of our fixed income investment portfolio recorded in the second quarter 2004.

Net foreign exchange gain/loss

For the three month period ended June 30, 2004 we recorded a net foreign exchange gain of $244,000 compared with a loss of $485,000 for the same period in 2003. During the first half of 2004, we recorded foreign exchange a gain of $291,000 compared to a loss of $626,000 for the same period in 2003. The volatility of the U.S. dollar compared to the Canadian dollar in 2003 caused the 2003 foreign exchange loss.

The ~~147~~45% increase ~~and 50% decrease~~ in net loss to $56,~~623~~366,000 ~~and $12,483,000~~ for the three ~~and~~month ~~nine~~periods ~~months~~ ended ~~September~~ June 30, ~~2003, respectively,~~2004 compared with to $24,~~280~~403,000 ~~and~~for ~~$24,743,000~~the same period in ~~2002~~2003, was diluted by a 3% ~~and 4~~18% increase in the weighted average number of common shares outstanding ~~for the three and nine months ended September 30~~, ~~2003,~~resulting ~~respectively. This improvement resulted~~ in a basic ~~and~~ and diluted loss per share of $0.09 in 2004 and $0.2007 ~~for~~in ~~the~~2003. The ~~three~~84% ~~and~~increase ~~nine~~in net loss to $12,650,000 for the six month periods ended ~~September~~ June 30, 2004 compared with $6,860,000 for the same period in 2003, aswas ~~compared~~diluted ~~with~~by ~~$0.04~~a 19% increase in the weighted average number of common shares outstanding, resulting in basic and diluted loss per share of $0.4217 ~~for~~in ~~the~~2004 ~~same~~and ~~periods~~ $0.11 in ~~2002~~2003.

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

Our consolidated financial statements include adjustments necessary for their fair presentation 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 $~~160~~352,000 and $~~550~~979,000 for the three and ~~nine~~six ~~months~~month periods ended ~~September~~ June 30, ~~2003~~2004. The principal differences under U.S. GAAP as opposed to Canadian GAAP for the three and ~~nine~~six month periods ~~in 2003,~~ended ~~respectively~~June 30, 2004 were the reversal of an unrealized foreign exchange gain on ~~available-for-sale~~investments ~~securities~~ of $~~124~~238,000 and $243,000, a reversal of a loss on market value of investments of $~~214~~304,000 and $310,000 ~~coupled~~and ~~with~~the reversal of stock compensation expense atotaling $~~284~~301,000 and $~~336~~964,000 ~~reversal~~related to fair value stock option accounting adopted beginning January 1, 2004, offset by stock compensation expense of $15,000 aand ~~write-down~~$52,000 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 ~~short-term~~APB ~~investments~~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~~ 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 retained earnings.

~~Similarly,~~To to conform to U.S. GAAP ~~for the three and nine months ended September 30, 2002,~~ our net loss would ~~increase~~decrease by $1181,~~388,~~000 and $~~198~~390,000 for the three and six month periods ended June 30, ~~respectively~~2003. The principal differences under U.S. GAAP as ~~compared~~opposed to Canadian GAAP for the current quarter and first half of 2003, respectively, were the reversal of unrealized foreign exchange ~~gains~~ loss on investments ~~available-for-sale securities~~ of $~~890~~166,000 and $85338,000 ~~for the same periods in 2002~~, coupled with a $~~498~~15,000 and $~~113~~52,000 reversal of a ~~write-up~~loss ~~of short-term~~on ~~investments~~market invalue ~~those~~of ~~same periods~~investments.

Basic net loss per common share under U.S. GAAP would have been $0.0908 and $0.2016 in the three and ~~nine~~six ~~months~~month periods ended ~~September~~ June 30, ~~2003~~2004, ~~compared~~respectively. Basic tonet loss per common share under U.S. GAAP would have been $0.06 07 and $0.~~43 during~~11 in the ~~same~~three ~~periods~~and insix ~~the~~month ~~prior~~periods ~~year.~~ended June 30, 2003, respectively. Our current assets and stockholders’ equity at ~~September~~ June 30, ~~2003~~2004 are the same under U.S. GAAP and Canadian GAAP~~: $40,827,000 and $33,325,000, respectively~~.

Summary of Quarterly Results

The following is a summary of the unaudited quarterly results of operations for the previous eight quarters beginning with the quarter ended June 30, 2004.

	Quarter ended
(In thousands except per share amounts)	June 30, 2004			March 31, 2004			December 31, 2003			September 30, 2003
Net revenues
Canadian and U.S. GAAP	$	1,636		$	1,625		$	1,727		$	2,171

Research and development expenses
Canadian and U.S. GAAP	5,973			5,569			3,572			6,009

Net loss (1)
Canadian GAAP	(6,366		)	(6,284		)	(3,762		)	(5,623		)
U.S. GAAP	(6,014		)	(5,657		)	(3,365		)	(5,463		)

Basic loss per common share
Canadian GAAP	$	(0.09	)	$	(0.09	)	$	(0.06	)	$	(0.09	)
U.S. GAAP	$	(0.08	)	$	(0.08	)	$	(0.05	)	$	(0.09	)

	Quarter ended
	June 30, 2003			March 31, 2003			December 31, 2002			September 30, 2002
Net revenues
Canadian and U.S. GAAP	$	2,881		$	6,640		$	5,320		$	5,826

Research and development expenses
Canadian and U.S. GAAP	4,791			6,493			7,167			7,447

Net loss (1)
Canadian GAAP	(4,403		)	(2,457		)	(4,059		)	(2,280		)
U.S. GAAP	(4,222		)	(2,248		)	(3,981		)	(3,668		)

Basic loss per common share
Canadian GAAP	$	(0.07	)	$	(0.04	)	$	(0.07	)	$	(0.04	)
U.S. GAAP	$	(0.07	)	$	(0.04	)	$	(0.07	)	$	(0.06	)

(1) To conform these results to U.S. GAAP, certain adjustments would be made. The principal differences between U.S. GAAP and Canadian GAAP are described in detail in the notes to our 2003 and 2002 financial statements and our March 31, 2004 and June 30, 2004 interim financial statements.

Our quarterly financial results over the past eight quarters were principally affected by variations in revenues from our Roche collaboration and variations in R&D spending. Our collaborative R&D revenues have decreased over time due principally to our December 2003 restructured Roche agreement under which we are not reimbursed for R&D spending related to HspE7. Another variation in our revenues occurred in the first quarter of 2003 when we received a time based development milestone. There have not been any milestone payments since that time. The fluctuation of R&D expense over the most recent eight quarters relates to timing of spending associated with our clinical trials, process development and manufacturing of HspE7. See the discussion under the captions “Results of Operations—Collaborative R&D Revenue” and “Results of Operations—Research and Development” for additional information.

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:

1621

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. ~~Under~~We ~~the~~estimate ~~guidance of EIT 00-21, we have estimated~~ the fair value of deliverables in ~~the~~collaboration ~~Roche~~agreements ~~agreement~~ 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~~ costs constitute a significant portion of R&D expense. ~~The~~We ~~Company~~recognize ~~recognizes~~ expenses related to ~~its~~ our ongoing clinical trials using a methodology designed to accrue estimated costs in the appropriate accounting ~~periods.~~ ~~Clinical~~periods ~~trials~~in ~~can~~which ~~span~~the ~~multiple~~expenses ~~accounting~~are ~~periods~~incurred. ~~The~~ We ~~Company~~recognize ~~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. ~~Our~~ ~~expenses~~Based ~~related~~on tothe ~~clinical~~design ~~trials~~of ~~vary~~the ~~based~~trial, onincluding ~~patient~~the ~~availability~~number of patients, ~~additional~~number ~~statistical~~of ~~analysis~~clinical ~~requirements~~sites, method of treatment, and ~~decisions~~follow-up, the allocation of trial costs to ~~extend~~ ~~the~~each ~~patient~~phase ~~evaluation~~could ~~period.~~ vary from trial to trial. Using our current trial accrual methodology, our liability for clinical trials as of ~~September~~ June 30,~~2003~~ 2004 is $2528,~~932,~~000, ~~including~~which includes the estimated effect of any work -in -process terminated at the end of the reporting period. ~~Alternately~~ Alternatively, if we utilized a percentage of completion approach and used an operational estimate of the actual work completed as of ~~September~~ June 30, 2004 ~~2003~~ compared to the total contract value, our clinical trial liability would decrease by approximately $172,~~100,~~000.

~~FACTORS THAT~~Stock-based ~~COULD AFFECT FUTURE PERFORMANCE~~compensation

~~Before~~In ~~investing~~September 2003 inthe CICA ~~our~~Accounting ~~common~~Standards ~~stock~~Board ~~you~~released revised transitional provisions for Stock-Based Compensation and Other Stock-Based ~~should~~Payments, ~~carefully~~Section 3870, ~~consider~~to provide the ~~following~~same ~~risk~~alternative ~~factors,~~methods of transition as is provided in the ~~other~~U.S. ~~information~~for voluntary adoption of the fair ~~included~~value ~~herein~~based method of accounting. The AcSB has also amended Section 3870 to require that all transactions whereby goods and ~~the~~services ~~information~~are ~~included~~received in ~~our~~exchange ~~other~~for ~~reports~~stock-based compensation and ~~filings. Our~~other ~~business,~~payments result in expenses that should be recognized in financial ~~condition~~statements, and ~~the~~that ~~trading~~this ~~price~~requirement ofwould ~~our~~be ~~common~~applicable ~~stock~~for ~~could~~financial periods beginning on or after January 1, 2004. Section 3870 requires that share-based transactions should be measured ~~adversely~~on ~~affected~~a fair value basis. We retroactively adopted the provisions of CICA bySection 3870 ~~these~~beginning ~~and~~January 1, ~~other~~1995. See ~~risks~~the detail at Note 2 in the financial statements included herein.

WeNew Accounting ~~Are At an Early Stage of Development~~Pronouncement

~~Our~~The ~~biotechnology~~Emerging ~~business~~Issues isTask ~~still~~Force at(EITF) ~~an early stage of~~recently ~~development. Significant~~deliberated ~~additional research~~regarding ~~and~~Issue ~~development~~03-01, ~~and~~“The ~~clinical~~Meaning ~~trials~~of ~~must~~Other-Than-Temporary Impairment beand ~~completed~~Its ~~before~~Application ~~our technology~~to ~~can~~Certain ~~be commercialized~~Investments.” ~~We have~~The ~~not~~Issue ~~completed~~is ~~the~~intended ~~development~~to ofaddress ~~any~~the ~~therapeutic~~meaning of ~~products~~other-than-temporary impairment and, ~~therefore, have~~its ~~not~~application ~~begun~~ to ~~market~~certain ~~or generate revenues from the commercialization of any~~investments ~~therapeutic~~held ~~products~~at cost. WeThe ~~have undertaken~~EITF ~~only~~reached ~~limited~~a consensus ~~human~~regarding ~~clinical~~disclosure ~~trials~~requirements ~~for~~concerning ~~some~~unrealised oflosses ~~our product~~on ~~candidates~~available-for-sale debt and weequity ~~cannot~~securities ~~assure~~accounted ~~you~~for ~~that~~under ~~the~~SFAS ~~results~~No. ~~obtained from laboratory~~115 or“Accounting ~~research~~for ~~studies~~Certain ~~will~~Investments ~~be replicated~~ in ~~human~~Debt ~~studies~~and orEquity ~~that~~Securities” ~~such~~and ~~human~~SFAS No. ~~studies~~124, ~~will~~“Accounting ~~not~~for ~~identify~~Certain ~~undesirable~~Investments ~~side~~Held ~~effects~~for Not-for-Profit Organizations.” WeThe ~~cannot~~guidance ~~assure~~for evaluating ~~you~~whether ~~that~~an ~~any~~investment ofis ~~our~~other-than-temporarily ~~products~~impaired ~~will~~is ~~meet~~to be ~~applicable~~applied ~~health~~in ~~regulatory~~reporting ~~standards,~~periods ~~obtain~~beginning ~~required~~after ~~regulatory approvals or clearances~~June 15, be2004. The ~~produced~~disclosure inrequirements ~~commercial~~apply ~~quantities~~to ~~at reasonable costs, be~~annual ~~successfully~~financial ~~marketed~~statements orfor befiscal ~~profitable~~years ~~enough~~ending ~~that~~after weDecember 15, ~~will~~2003 ~~recoup the~~for ~~investment~~investments ~~made~~accounted infor ~~such~~under ~~product~~SFAS ~~candidates~~Nos. ~~None~~ of115 ~~our~~and ~~therapeutic~~124. For ~~product~~all ~~candidates~~other ~~are~~investments ~~expected~~within tothe bescope ~~commercially~~of ~~available~~this ~~for~~Issue, ~~several~~the ~~years. There~~disclosure isrequirements noapply ~~precedent~~to ~~for~~fiscal ~~the~~years ~~successful~~ending ~~commercialization of products~~after ~~based~~June 15, ~~on our CoValTM fusion technology~~2004. ItAdditional disclosure isrequirements ~~possible~~for ~~that~~cost wemethod ~~will~~investments ~~not~~apply ~~successfully~~to ~~develop~~fiscal ~~any~~years ~~therapeutic~~ending ~~products~~after June 15, 2004. The

We Have a History of Operating Losses and We May Never Become Profitable

We have not recorded any revenues from the sale of therapeutic products and have accumulated substantial net losses. We expect to incur continued losses for at least the next several years as we continue research and development, and clinical trials. To become profitable we, either alone or with one or more partners, must develop, manufacture and successfully market our product candidates.

We Must Obtain Additional Financing to Execute Our Business Plan

Our revenues from the production and sale of bioreagents and the projected revenues and expense reimbursements from our HspE7 collaboration are not adequate to support the therapeutic product development programs. We will need substantial additional funds to pursue further research and development; carry out clinical trials; obtain regulatory approvals; file, prosecute, defend and enforce our intellectual property rights and market our products. We will seek additional funds through public or private equity or debt financing, strategic transactions and/or from other sources. We could enter into collaborative arrangements for the development of particular products that would lead to our relinquishing some or all of our rights to the related technology or products.

Although we expect to seek additional funding when there are market opportunities, future funding may not be available on favorable terms or at all. If additional funding were not obtained, we would 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 its business, financial condition and results of operations.

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 our arrangements with pharmaceutical companies, corporate and academic collaborators, licensors, licensees and others for the research, development, clinical testing, manufacturing, marketing and commercialization of our products. We have various research collaborations and outsource many other business functions, including clinical trials and manufacturing. We may not be able to establish or maintain collaborations that are important to our business on favorable terms, if at all. The Roche partnership currently requires further information concerning the mechanism of action of the HspE7 product. We are working with Roche to address these questions.

A number of risks arise from our dependence on collaborative agreements with third parties. Our product development and commercialization efforts could be adversely affected if any collaborative partner, including Roche, terminates or suspends its agreement with us, causes delays, fails to timely develop or manufacture in adequate quantities a substance we need in order to conduct clinical trials, fails to adequately perform clinical trials, determines not to develop, manufacture or commercialize a product to which it has or we have rights, or otherwise fails to meet its contractual obligations. Our collaborative partners could pursue other technologies or develop alternative products that could compete with our future products.

We license technologies and materials from third parties for our therapeutic and our bioreagent businesses. We plan to acquire additional licenses from other companies and academic institutions. Pursuant to the terms of our license agreements, we could be obligated to diligently bring potential products to market, make milestone payments that, in some instances, could be substantial, and incur the costs of filing and prosecuting patent applications. We cannot assure you that these licenses will not terminate or that they will be renewed. In addition, we cannot assure you that these licenses will remain in good standing. Our licensors may attempt to terminate our licenses for their own business reasons.

The Profitability of Our Products Will Depend On Our Ability to Protect Our Proprietary Rights and Operate Without Infringing the Proprietary Rights of Others

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, that we will develop additional patentable products, that the patents we have been issued will provide us with any competitive advantages, that the patents of others will not impede our ability to do business or that 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 to a European patent and requests for re-examination in the U.S. Patent Office of two U.S. patents we have licensed. Until we receive final results from the opposition and re-examination processes, we will not be able to assure you 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 only obtain 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, or develop alternative technology. If we are blocked from using our current technologies we may not be able to introduce, manufacture or sell our planned products.

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. We cannot assure you that our patents would be held valid or enforceable by a court or that competitor’s technology or product would be found to infringe our patents. Our business could be materially affected by an adverse outcome to such litigation. Similarly, we may 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 seek a declaration that the patents of others are invalid.

Much of our know-how and technology may not be patentable, though it may constitute trade secrets. We cannot assure you that we will be able to meaningfully protect our trade secrets. We cannot assure you that any of the existing confidentiality agreements with our 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 it independently.

We May Encounter Difficulties in Developing Manufacturing Capabilities and Facilities or Entering into Contracts for Manufacturing with Third Parties

will depend on the manufacturing capabilities of collaborators. If we cannot arrange for or maintain commercial-scale manufacturing on acceptable terms, or if there are delays or difficulties in manufacturing, we may not be able to conduct clinical trials, obtain regulatory approval or meet demand for our products.

Production of our products could require raw materials which are scarce or which can be obtained 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 would be delayed.

We Could Need to Conduct More Clinical Trials or Take More Time to Complete Our Clinical Trials Than We Originally Plan

Clinical trials vary in design by factors including their 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. In addition, we may be required 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 conflicts with the schedules of participating clinicians and clinical institutions, delayed patient accrual and changes affecting supplies for clinical trials. For example, on June 10, 2003, we announced that we would delay the start of a pivotal Phase III study of pediatric recurrent respiratory papillomatosis until we can use pilot final commercial grade material in the study.

We have limited experience in conducting clinical trials. We rely on corporate collaborators such as Roche, academic institutions and clinical research organizations to conduct, supervise, monitor and design some or all aspects of clinical trials involving our products. In addition, the NCI is sponsoring some HspE7 clinical trials. Since these trials depend on governmental participation and funding, we have less control over their timing and design. Delays in or failure to commence or complete any planned clinical trials could delay the ultimate timelines for product release. Such delays could reduce investors’ confidence in our ability to develop products, likely causing our stock price to decrease.

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. In order for our products to obtain marketing approval and clearance for each indication, our preclinical and clinical data and manufacturing facilities will need to meet complex criteria establishing the safety and efficacy of the ultimate products.

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 our clinical trials, or do not receive applicable regulatory approvals and clearances, or if there are delays in the process:

• the successful commercialization of our products could be adversely affected;

• our competitive advantages could be diminished; and

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

Governmental and regulatory authorities may approve a product candidate for fewer indications or narrower circumstances than we request or may condition approval on the performance of post-marketing studies for a product candidate. Even if we receive regulatory approval and clearance, our product candidates may later exhibit adverse side effects that limit or prevent their widespread use or that force us

to withdraw those product candidates from the market. In addition, any marketed product and its manufacturer will continue to be subject to strict regulation after approval. Any unforeseen problems with an approved product or any violation of regulations could result in restrictions on the product, including its withdrawal from the market.

The manufacturers of our products will be required to comply with applicable good manufacturing practices regulations, which include requirements relating to quality control and quality assurance as well as the corresponding maintenance records and documentation. If the manufacturers cannot comply with regulatory requirements including applicable good manufacturing practice requirements, we may not be allowed to develop or market our 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 or seizures, injunctions, refusal of regulatory agencies to review pending market approval applications or supplements to approval 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 of our competitors and potential competitors have substantially greater product development capabilities and financial, scientific, marketing and human resources than ours. 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 being developed by us. Alternative products may be developed that are more effective and less costly than the products developed by us. 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 may be competitive with our products. Our technology or products may become obsolete or uncompetitive.

Our Products May Not Gain Market Acceptance

Our products may not gain market acceptance among physicians, patients, healthcare payors and the medical community. The degree of market acceptance of any product that we may develop will depend 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.

Our sales experience is limited to the sale of our bioreagents. To directly market and distribute any pharmaceutical products we may develop, 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 of our own or enter into arrangements with third parties on terms that are acceptable to us. If we or our partners cannot successfully market and sell our products, our ability to generate revenue will be limited.

Our Operations Involve Risks Which Could Subject Us to Damages Resulting from Accidental Contamination or Injury

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. 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, we may not be able to commercialize our products. If any liabilities from a claim exceed the limit of our 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, provincial and local laws and regulations governing the use, manufacture, storage, handling and disposal of such materials and certain waste products. The risk of accidental contamination or injury from handling and disposing of such materials cannot be completely eliminated. In the event of or an accident involving hazardous or radioactive materials, we could be held liable for any damages that result. We are not insured with respect to this liability. Such liability could exceed our resources. In the future we may be required to incur significant costs to comply with environmental laws and regulations.

Our Success Depends On Our Ability to Attract and Retain Qualified Personnel

We depend on a core management and scientific team. The loss of any of these individuals may prevent us from achieving our business objective of commercializing our product candidates. Our future success will also 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 we are unsuccessful in our recruitment and retention efforts, our business operations will suffer.

We Will Depend Upon the Availability of Reimbursement from Third-Party Payors Who Are Increasingly Challenging the Price and Examining the Cost Effectiveness of Medical Products and Services

Sales of our products will 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 our products, there may not be a market for the products.

Our Share Price Has Been and Is Likely to Continue to Be Highly Volatile

As is typical for biotechnology companies without an approved product on the market, 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 technological innovations, the release of publications, the announcement of clinical trials results by us or our competitors, the development of new commercial products, changes affecting patents or exclusive licenses, changes in regulations, the release of financial results, public concerns over risks relating to biotechnology, future issuances of shares by us, sales of shares by our shareholders and changes in analyst recommendations.

The volatility of our stock may be heightened while it is traded primarily on the Toronto Stock Exchange, which attracts primarily Canadian shareholders. Because some institutional investors invest in Toronto Stock Exchange companies in proportion to their weight on that index, changes within the S&P/TSX Composite Index may also increase volatility in our share price. We continue to explore a cross-listing on the Nasdaq or a U.S. exchange, but can provide no assurances regarding the timing or ultimate results of such a transaction.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to foreign currency fluctuations through our operations in the U.S. because a substantial amount of our contract research and development spending is transacted in U.S. dollars.

~~However,~~Issue ~~since~~does ~~approximately 95%~~not ofaffect ~~our bioreagent product sales are in U.S. dollars, there is partial matching of U.S. currency expenses and revenues. We use~~ the ~~Canadian~~current ~~dollar as our measurement and functional currency~~period. As a result, we translate monetary assets and liabilities into Canadian dollars at the rate of exchange prevailing at our balance sheet date and include resulting exchange gains and losses in the other income line item. We doare ~~not~~ currently ~~engage~~ inevaluating ~~hedging or other activities to reduce foreign currency risk, beyond matching investments proportionately with anticipated spending, but may do so in~~ the ~~future~~effect ~~under certain conditions. A substantial amount~~ of ~~our receivables~~ ~~and~~this ~~payables~~pronouncement ~~are~~on ~~denominated in U.S. dollars. We record resulting exchange gains and losses in~~ our ~~statement~~financial ~~of operations~~statements.

~~Our sales and~~FACTORS ~~contract~~THAT ~~research~~MAY ~~and~~AFFECT ~~development~~FUTURE expenses are denominated in U.S. dollars. Because our financial statements are stated in Canadian dollars, we are exposed to fluctuations of the U.S. exchange rate. We do not believe this currency risk will have a material impact on our results of operations in the foreseeable future.PERFORMANCE

WeBefore ~~maintain cash~~investing ~~equivalent~~in ~~and~~our ~~short-term~~common ~~investment~~stock ~~portfolio~~you ~~holdings~~should ~~of various~~carefully ~~issuers,~~consider ~~types,~~the ~~and~~following ~~maturity~~risk ~~dates~~factors, ~~with~~the ~~large~~other ~~banks~~information ~~and~~included ~~investment~~herein ~~banking~~and ~~institutions. Typically,~~the ~~75%~~information ofincluded ~~our investments are~~ in ~~government~~our ~~bonds~~other ~~rated~~reports ~~AAA~~and filings. Our Webusiness, ~~occasionally~~financial ~~hold short-term investments beyond 120 days~~condition, and the trading ~~market~~price ~~value~~ of ~~these~~our ~~investments~~common ~~during the~~stock ~~investment~~could ~~term~~be ~~varies~~adversely asaffected aby ~~result~~these ofand ~~market interest rate fluctuations~~other risks.

We maintainare a non-tradingan investmentEarly portfolio. Our marketStage riskDevelopment exposure is limited to interest rate risk and foreign exchange rate risk. We computed a hypothetical change in interest rates by applying a 10% change to our average rate of return, resulting in a $82,000 impact. If interest rates were to increase by 10%, our net loss would decrease by $82,000. Further, if interest rates were to decrease by 10%, our net loss would increase by $82,000. In addition, we computed a hypothetical change in foreign exchange rates by applying a 10% change to our year-end foreign exchange rate and then applied that rate to our average level of U.S. investments during the year, resulting in a $542,000 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 $542,000. 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 $542,000. We have not used derivative financial instruments in our investment portfolio. We classify our investments as available-for-sale or held-to-maturity at the time of purchase and re-evaluate this designation as of each balance sheet date. We had $38,581,000 in cash, cash equivalents and short-term investments as of September 30, 2003.Company

~~Item~~Our 4biotechnology 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. ~~CONTROLS~~We ~~AND~~have not completed the development of any ~~PROCEDURES~~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 comparable 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:

~~Our~~• meet ~~chief financial officer and chief executive officer concluded as of~~applicable ~~September~~health ~~30,~~regulatory 2003 that our disclosure controls and procedures (as defined in Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended) are effective and designed to alert them to material information relating to Stressgen and its consolidated subsidiaries, based on the evaluation of these controls and procedures as required by paragraph (b) of Rule 15d-15.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 incur continued losses for at least the next several years while our primary activities are research, development, and clinical trials. To become profitable we, either alone or with one or more partners, must develop, manufacture and successfully market therapeutic product candidates.

We Must Obtain Additional Financing to Execute Our Business Plan

The revenues from the production and sale of bioreagents and the projected revenues from collaborators are not adequate to support either the development of HspE7 under the restructured Roche Collaboration Agreement or our other therapeutic product development programs. We will need substantial 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 will seek additional funds through public or private equity or debt financing, strategic transactions and/or from other sources. 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 additional 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.

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 any collaborative partner:

• terminates or suspends its agreement with us

• causes delays

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

• fails to adequately perform clinical trials

• determines not to develop, manufacture or commercialize a product to which it has rights or

• otherwise fails to meet its contractual obligations.

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 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. It could take several years to 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 immunotherapeutics 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 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 our 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 More 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 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. Such delays could reduce investors’ confidence in our ability to develop products, likely causing our share price to decrease.

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. 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 good manufacturing practices 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 good manufacturing practice 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 or 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 human 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, may be competitive with our products. Over time, our technology or products may become obsolete or uncompetitive.

Our Products May Not Gain Market Acceptance

Products such as HspE7 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. 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, 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 any of these individuals could 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 depends 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

• 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 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.

The market for our shares, which are traded on the Toronto Stock Exchange, may be more limited than it would be if they were traded on NASDAQ or a U.S. exchange.

Item 3. 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. During the first half of 2004, we purchased British pounds to mitigate our currency exposure based on spending plans with Avecia. Our U.S. dollar denominated expenses and revenues are partially matched by our bioreagent product sales, 95% of which are in U.S. dollars. 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 U.S dollar exchange rates by applying a 10% change to our June 30, 2004 foreign exchange rate, then applying that rate to our average level of U.S. investments during 2004, would result in a $890,000 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 $890,000. 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 $890,000.

A hypothetical change in British pound exchange rates by applying a 10% change to our June 30, 2004 foreign exchange rate, then applying that rate to our average level of British pound investments during the year, would result in a $106,000 impact. If the value of the Canadian dollar relative to the British pound were to increase by 10%, our net loss would decrease by $106,000. Further, if the value of the Canadian dollar relative to the British pound were to decrease by 10%, our net loss would increase by $106,000.

We are also exposed to interest rate risk, because we maintain cash equivalent 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. Changing market interest rates during the quarter affected our fixed income security valuations, resulting in a temporary write-down of our investment portfolio during the second quarter of $293,000.

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 $86,000 impact. If interest rates were to increase by 10%, our net loss would decrease by $86,000. Further, if interest rates were to decrease by 10%, our net loss would increase by $86,000.

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 $39,891,000 in cash, cash equivalents and short-term investments as of June 30, 2004.

Item 4. CONTROLS AND PROCEDURES

Our chief financial officer and chief executive officer concluded as of June 30, 2004 that our disclosure controls and procedures (as defined in Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended) are effective and designed to alert them to material information relating to Stressgen and its consolidated subsidiaries, based on the evaluation of these controls and procedures as required by paragraph (b) of Rule 15d-15.

PART II—OTHER INFORMATION

Item 64. EXHIBITS ANDSUBMISSION REPORTSOF ONMATTERS FORMTO 8-KA VOTE OF SECURITIES HOLDERS

~~(a) Exhibits:~~On ~~For~~May a12, ~~list~~2004 ofwe ~~exhibits~~held ~~filed~~our ~~with~~annual ~~this~~general ~~report,~~meeting. The ~~refer~~shareholders toelected the ~~Index~~six todirectors ~~Exhibits~~listed ~~set forth~~below. In ~~after~~each case, over 99% of the ~~signature~~shareholders that ~~page~~voted ~~hereto~~cast their votes in favor of the candidate. The specific number of votes for and withheld from each candidate are specified below:

23Joann Data – 28,747,616 for (27,413 withheld)

Elizabeth Greetham – 28,746,616 for (28,413 withheld)

Daniel Korpolinski – 28,661,466 for (113,563 withheld)

Ian Lennox – 28,749,676 for (25,353 withheld)

Margot Northey – 28,747,326 for (27,703 withheld)

Jay Short – 28,731,216 for (43,813 withheld)

In addition, Deloitte & Touche LLP was reappointed as our independent auditor by a vote of 28,745,954 shares (29,075 withheld).

Item 6. EXHIBITS AND REPORTS ON FORM 8-K

On May 7, 2004 we filed a report on Form 8-K containing our financial results for the first quarter of 2004.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Stressgen Biotechnologies Corporation
Date: October 27, 2003	/s/ Donald D. Tartre
Date: August 5, 2004	/s/ Gregory M. McKee
	Donald D. Tartre
	Gregory M. McKee
	Vice President and Chief Financial Officer
	Vice President, Corporate Development and Chief Financial Officer (Principal Financial and Accounting Officer duly authorized to sign this report on behalf of the registrant)
	(Principal Financial and Accounting Officer duly authorized to sign this report on behalf of the registrant)

2431

INDEX OF EXHBITS

Exhibit No.		Description
3.9*		Articles of Continuance of the Company
3.10*		By-Laws of the Company
4.4*		Form of Stock Certificate
31.1		Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
31.2		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
32		Section 1350 Certification

* Incorporated by reference to the Company’s Form 10-Q for the quarter ended June 30, 2001, as filed with the Commission on August 2, 2001

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