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 March 31, 2005
or

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

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		92121
Parent of Stressgen Biotechnologies, Inc.		(zip code)
6055 Lusk Boulevard
San Diego, CA
(Address of principal executive offices)

(250) 744-2811

(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 May 6, 2005 the registrant had approximately 72,506,000 shares of Common Stock, no par value, outstanding.

Stressgen Biotechnologies Corporation

(Unaudited)

Consolidated Balance Sheet

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

	March 31,			December 31,
	2005			2004
Assets
Current assets:
Cash and cash equivalents	$	5,619		$	8,538
Short-term investments	7,869			13,040
Prepaid expenses (Note 4)	3,043			2,196
Deferred development expenses, current portion (Note 4)	81			1,747
Assets of discontinued operations (Note 10)	2,302			2,447
Other current assets	101			563
Total current assets	19,015			28,531

Plant and equipment (Note 3)	1,312			1,481
Deferred development expenses, net of current portion	142			162
	$	20,469		30,174

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued liabilities (Note 3)	$	4,965		$	7,862
Deferred revenue, current portion	644			641
Notes payable, current portion (Note 3)	361			369
Liabilities of discontinued operations (Note 10)	297			324
Total current liabilities	6,267			9,196

Long-term liabilities:
Deferred revenue, net of current portion	1,128			1,282
Notes payable, net of current portion (Note 3)	66			145
Total long-term liabilities	1,194			1,427

Total liabilities	7,461			10,623

Commitments and contingencies (Note 4)

Stockholders’ equity:
Common shares and other equity — no par value; unlimited shares authorized, 72,506,403 shares issued and outstanding at March 31, 2005 and December 31, 2004	216,412			216,412
Contributed surplus	15,667			15,488
Accumulated deficit	(219,071		)	(212,349		)
Total stockholders’ equity	13,008			19,551
	$	20,469		$	30,174

See accompanying notes to consolidated financial statements

Stressgen Biotechnologies Corporation

Consolidated Statement of Operations and Accumulated Deficit

(Unaudited)

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

	Three months ended,
	March 31,
	2005			2004
Revenue:
Collaborative R&D revenue	$	163		$	173

Operating expenses:
Research and development	5,539			5,273
Selling, general and administrative	2,006			2,095
	7,545			7,368

Operating loss	(7,382		)	(7,195		)

Other income (expenses):
Interest and other income	359			354
Net foreign exchange (loss) gain	(102		)	51
Interest expense	(14		)	(28		)
	243			377
Net loss from continuing operations	(7,139		)	(6,818		)
Net income from discontinued operations (Note 10)	417			534

Net loss	(6,722		)	(6,284		)

Accumulated deficit, beginning of period	(212,349		)	(150,294		)
Cumulative effect of change in accounting principle	—			(32,950		)
Accumulated deficit, end of period	$	(219,071	)	$	(189,528	)

Basic and diluted (loss) income per common share:
From continuing operations	$	(0.10	)	$	(0.09	)
From discontinued operations	$	0.01		$	0.00
	$	(0.09	)	$	(0.09	)

Weighted average number of common shares used to compute basic and diluted loss per common share (in thousands)	72,506			72,498

See accompanying notes to consolidated financial statements.

Stressgen Biotechnologies Corporation

Consolidated Statement of Cash Flows

(Unaudited)

(Canadian dollars in thousands)

	Three months ended March 31,
	2005			2004
Cash flows from operating activities:
Net loss	$	(6,722	)	$	(6,284	)
Net income from discontinued operations	(417		)	(534		)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation of plant and equipment	154			134
Loss on disposal of plant and equipment	—			15
Amortization of stock compensation expense	168			631
Unrealized foreign exchange loss	10			6
(Gain) loss on market value of investments	(125		)	6
Changes in operating assets and liabilities:
Collaborative accounts receivable	—			277
Prepaid expenses	(847		)	22
Deferred development expenses, current portion	1,666			(1		)
Other current assets	462			(172		)
Deferred development expenses, net of current portion	20			18
Accounts payable and accrued liabilities	(2,897		)	(295		)
Deferred revenue	(151		)	(135		)
Net cash used in operating activities of continuing operations	(8,679		)	(6,312		)
Net cash provided by discontinued operations (Note 10)	564			10
Net cash used in operating activities	(8,115		)	(6,302		)

Cash flows from investing activities:
Purchase of short-term investments	(2,572		)	(20,919		)
Sales and maturities of short-term investments	8,044			10,935
Purchase of plant and equipment	(3		)	(130		)
Net cash provided by (used in) investing activities	5,469			(10,114		)

Cash flows from financing activities:
Repayment of borrowings	(87		)	(117		)
Proceeds from issuance of common shares	—			36
Share issue costs	—			(81		)
Net cash used in financing activities	(87		)	(162		)

Effect of exchange rate changes on cash and cash equivalents	(186		)	(11		)
Decrease in cash and cash equivalents	(2,919		)	(16,589		)
Cash and cash equivalents, beginning of period	8,538			19,749
Cash and cash equivalents, end of period	$	5,619		$	3,160
See Note 8 for non-cash disclosures

See accompanying notes to consolidated financial statements.

Stressgen Biotechnologies Corporation
Notes to Consolidated Financial Statements

(Unaudited)
(Canadian dollars)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has a history of recurring losses from operations and has an accumulated deficit of $219,071,000 as of March 31, 2005. The nature of the Company’s business requires significant spending on R&D activities. Due to the history of losses, high cash burn on R&D activities and the loss of bioreagent revenue as a result of the sale of that business, the Company is closely monitoring its cash resources. Based upon the sale of its reagent business and its current business plan including the recent reduction in headcount and review of timelines regarding the HspE7 program, assuming the Company raises approximately $5,000,000, it will have sufficient resources to fund operations through the first quarter 2006. Based upon its current forecast, if the Company does not raise at least that amount of cash it may need to modify or cancel agreements with external contractors, and make further changes to staffing levels which would impact the development timelines of HspE7. Under this scenario, the Company will have resources to fund operations through the end of 2005.

Basis of presentation

The consolidated financial statements include the assets, liabilities and operating results of the Company and its wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. Prior year balances have been reclassified to conform to current year presentation as a result of the sale of the bioreagent business which has been presented as a discontinued operation (Note 10).

Financial statements and estimates

The accompanying unaudited financial statements for Stressgen for the three months ended March 31, 2005 and 2004, in the opinion of management, include all adjustments necessary for their fair presentation in conformity with Canadian generally accepted accounting principles (Canadian GAAP), and conform in material respects with accounting principles generally accepted in the United States of America (U.S. GAAP), except as discussed in Note 9. 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 31, 2004 Annual Report on Form 10-K. Certain information and footnote disclosures normally included in financial statements prepared in accordance with Canadian GAAP 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 indicative of results for the full year.

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

Foreign currency translation

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

Revenue recognition

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

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

Clinical trial accruals

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

Stock-based compensation plan

In September 2003, the Canadian Institute of Chartered Accountants (CICA) Accounting Standards Board released revised transitional provisions for Stock-Based Compensation and Other Stock-Based Payments, Section 3870 (CICA 3870), to provide the same alternative methods of transition as is provided in the U.S. for voluntary adoption of the fair value based method of accounting. In January 2004, the Company

adopted CICA 3870. As a result the Company recorded a $32,950,000 cumulative change in accounting principle in the quarter ended March 31, 2004. This standard requires that all stock-based awards made to non-employees be measured and recognized using a fair value based method. The standard encourages the use of a fair value based method for all awards granted to employees, but only requires the use of a fair value based method for direct awards of stock, stock appreciation rights, and awards that call for settlement in cash or other assets. Awards that a company has the ability to settle in stock are recorded as equity, whereas awards that the entity is required to or has a practice of settling in cash are recorded as liabilities. No awards were made that would result in recording a liability.

The Company has two stock-based compensation plans, which are described in Note 5. The Company grants options with an exercise price equal to the fair market value of the underlying common stock. Under the principles of CICA 3870, compensation expense is recognized on a straight-line basis over the vesting period of the grant based on the estimated fair value at the time of grant using the Black-Scholes method. Any consideration paid by directors, employees and others on exercise of stock options together with the fair value of such options is credited to common shares.

The Company recorded expense of $168,000 related to continuing operations and $11,000 related to discontinued operations for the three months ended March 31, 2005, representing the amortization of the fair value of compensation based on the vesting period of stock options granted to employees and directors. The Company recorded expense of $631,000 related to continuing operations and $32,000 related to discontinued operations for the three months ended March 31, 2004. The weighted-average per-share fair values of the individual options granted during the three months ended March 31, 2005 and 2004 were $0.22 and $0.95, respectively. The fair value of the options was determined using a Black-Scholes option-pricing model with the following average assumptions:

	For the three months ended March 31,
	2005		2004
Dividend yield	0	%	0	%
Volatility	66	%	69	%
Risk-free interest rate	3.7	%	3.2	%
Expected life	4 years		4 years

Concentration of credit risk

The Company invests its excess cash principally in investment grade government and corporate debt securities. The Company has established guidelines relative to diversification and maturities that maintain safety and liquidity. These guidelines are periodically reviewed and modified to reflect changes in market conditions. The Company has not experienced any significant losses on its cash equivalents or short-term investments. However, the Company recorded write-downs of its fixed income investment portfolio in 2004 of $293,000. The write-downs were due principally to a decrease in the market value of one bond which is still held. The market value of this particular bond has been fluctuating since the initial write down was recorded in 2003. In the first quarter of 2005, approximately $128,000 of the write-downs was reversed when a portion of the securities which contributed to the write-downs was sold.

At March 31, 2005 and December 31, 2004, approximately 58% and 48% of cash, cash equivalents and short-term investments were held in U.S. dollars. At March 31, 2005 and December 31, 2004 approximately 38% and 36% of our cash, cash equivalents and short-term investments were held in British pounds.

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

Net loss per share

Net loss from continuing and discontinued operations per share is computed using the weighted average number of common shares outstanding. Basic and diluted net loss per common share amounts are equivalent for the periods presented as the inclusion of common stock equivalents (including options and warrants) in the number of shares used for the diluted computation would be anti-dilutive. For the three months ended March 31, 2005 and 2004, approximately 10,185,000 and 9,801,000, respectively, in the form of exercisable options and warrants have been excluded from the shares outstanding for the diluted computation as the inclusion would result in a smaller net loss per share.

Deferred expenses

The Company incurred costs in conjunction with its financing efforts in the fourth quarter of 2004 and first quarter of 2005. As of December 31, 2004, the costs associated with the financing were classified as deferred expenses included within “Other current assets” on the Consolidated Balance Sheet. However, in April 2005, the Company announced that it elected to withdraw the amended and restated preliminary prospectus in connection with the proposed offering of common shares. See Note 11 for further discussion of the subsequent event. Therefore, subsequent to March 31, 2005, the Company determined that it was appropriate to reflect these costs totaling approximately $550,000 as a selling, general and administrative expense on the March 31, 2005 Consolidated Statement of Operations and Accumulated Deficit.

2. COLLABORATIVE AGREEMENT

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

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

The Company recorded collaborative R&D revenue of $163,000, and $173,000 during the quarters ended March 31, 2005 and 2004, respectively. Collaborative R&D revenue during both periods relates principally to the amortization of upfront license fees in accordance with CICA Accounting Standards Board recommendations, section 3400, Revenue, and Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements.

this stage and type. Commercial success payments of up to approximately $102,816,000 become payable depending upon the aggregate net sales of either or both generations of the HspE7 products. The restructured collaboration agreement gives us the right to discuss, negotiate and execute an alternative agreement with a third-party for the development and commercialization of HspE7 through a license, partnership, joint venture or similar transaction. After March 31, 2005 and through the end of the option period, Roche can terminate this right by paying us a fee, which we expect would be either approximately $12,096,000 or $18,144,000 depending on the stage of development of the product. Management cannot determine if or when this option will be exercised. The amounts disclosed in this paragraph are reported in the Canadian dollar equivalent to the actual U.S. dollar amounts per the contract converted at exchange rates on March 31, 2005.

3. BALANCE SHEET DETAILS

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

(In thousands)	March 31, 2005
			Accumulated		Net Book
Plant and equipment:	Cost		Depreciation		Value
Laboratory equipment	$	3,584	$	2,586	$	998
Computer equipment	910		740		170
Furniture and fixtures	392		285		107
Leasehold improvements	748		711		37
	$	5,634	$	4,322	$	1,312

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

(In thousands)	March 31,		December 31,
	2005		2004
Accounts payable and accrued liabilities:
Trade accounts payable	$	1,426	$	4,072
Clinical trial accruals	1,924		2,514
Accrued compensation and benefits	1,547		1,243
Other accrued liabilities	68		33
	$	4,965	$	7,862

At March 31, 2005 the Company had outstanding term loan obligations of $427,000. In September 2003 the Company entered into a 36-month term loan agreement with Oxford Finance Corporation, collateralized by equipment owned by the Company. Interest rates on the Oxford term loan range from 11.47% to 11.48%. At March 31, 2005 and December 31, 2004 there was $427,000 and $514,000, respectively, outstanding on the loan. Under the terms of the agreement, the Company must obtain a letter

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

4. COMMITMENTS AND CONTINGENCIES

The Company’s contractual obligations consist primarily of agreements related to the development and manufacture of HspE7, operating leases for facilities, a term loan to increase working capital cash flows (Note 3) and contractual employment obligations. The Company engages several contractors working on different aspects of the work which regulatory authorities require for a biologic product, including stability testing, analytical testing, release testing and the manufacturing and fill/finish activities noted below.

In January 2004 the Company entered into a biological services agreement with Avecia for the process development, scale-up and manufacture of HspE7. In addition, the Company may have Avecia manufacture commercial drug substance. Under the terms of the agreement, the Company is required to make upfront payment for future services and use of the facility. The Company made prepayments totaling $3,175,000 for services to be rendered and space utilized in 2005. At March 31, 2005, a portion of the work related to these prepayments has been completed. The Company made a $1,814,000 prepayment in 2004. The other prepayment of $1,361,000 was not made until 2005 and therefore was included in deferred development expenses, current portion and accrued liabilities in the December 31, 2004 Consolidated Balance Sheet.

The Avecia agreement is cancelable subject to specified termination conditions. The cancellation fee is based on a sliding percentage of certain future program milestones. Accordingly, the cancellation fee is modified each month during the course of the agreement, based on the timing of activities performed by Avecia and prepayments for those activities. However, as of March 31, 2005 there would have been no cancellation penalty.

In October 2004 the Company entered into an agreement with Cardinal Health (Cardinal) in the ordinary course of business. Cardinal will perform activities to prepare and distribute HspE7 to clinical trial sites. In 2005 the Company made a prepayment of $295,000 for future services to be rendered in 2005. At March 31, 2005 a portion of the work has been completed related to these prepayments. The Company was contractually obligated to make this prepayment as of December 31, 2004; however the payment was not made until early 2005. Therefore the amount was included in deferred development expenses, current portion and accrued liabilities in the December 31, 2004 Consolidated Balance Sheet and has been reclassified to prepaid assets as of March 31, 2005.

The agreement with Cardinal includes cancellation provisions that could require the Company to pay for work that was not performed or equipment that was not used if it terminates the contract while activities are at pre-defined stages. The contract is subject to a cancellation fee of approximately $139,000 which would be offset against any remaining prepaid balance.

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

The Company has not entered into any minimum supply agreements with any service vendors or contract manufacturers.

Contractual Employment Obligations

The Company has employment agreements with certain members of management which include specific severance packages. As discussed in Note 11, in conjunction with the appointment of a new President and Chief Executive Officer (CEO), the Company paid the former President and CEO approximately $884,000 in April 2005 which will be included in the Statement of Operations for the second quarter of 2005. In addition to the amount paid to the former CEO in April 2005 and considering the impact of the April 2005 sale of the bioreagent business and the restructuring (see Note 11), the Company is contractually obligated to pay $1,878,000 per employment agreements of certain remaining executives.

Patent Opposition

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

CRA Review

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

5. STOCKHOLDERS’ EQUITY

Common Shares

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

At the time of the original collaboration agreement, Roche received two warrants to purchase the common stock of Stressgen. The Company allocated $1,264,000 as the fair value of the warrants. In April 2003, Roche exercised the first warrant to acquire 1,413,600 common shares at $3.25, resulting in net proceeds of $4,594,000 to the Company. Under the original collaboration agreement, the Company had the right to call the second warrant. In connection with the restructured collaboration agreement, Roche has a continued

right to exercise the second warrant for 814,574 shares at a purchase price of $3.76 per share at any time until June 28, 2007. The Company no longer has the right to call the second warrant.

Contributed surplus

The change in contributed surplus from December 31, 2004 is due to expense related to the fair value of stock options recorded in the first quarter of 2005.

Employee Share Option Plans

The following tables summarize information related to all stock options outstanding and exercisable granted to employees, directors and non-employees under the Company’s 1996 and 2001 stock-based compensation plans as of March 31, 2005.

The total number of options exercisable at December 2004 was 4,050,335. The following table summarizes information related to all stock options outstanding and exercisable at March 31, 2005:

			Options Outstanding				Options Exercisable
				Weighted
				Average	Weighted			Weighted
				Remaining	Average			Average
Range of			Number	Contractual Life	Exercise		Number	Exercise
Exercise Prices			Outstanding	(in years)	Price		Exercisable	Price
$		0.30 - $1.99	1,386,467	7.1	$	1.61	1,023,665	$	1.71
$		2.00 - $3.99	604,000	7.4	3.24		445,241	3.34
$		4.00 - $5.99	1,165,213	6.3	4.91		1,157,244	4.91
$	6.00 - $8.00		1,439,900	5.2	6.18		1,439,816	6.18
			4,595,580				4,065,966

At March 31, 2005, there were 688,907 options available for future grant under the 2001 Plan. At May 6 2005, there were approximately 3,200,000 options outstanding. The number of options outstanding decreased from March 31, 2005 to May 6, 2005 due to the restructuring as discussed in Note 11.

6. RELATED PARTY TRANSACTIONS

The Company has used various affiliates of MDS, Inc., including MDS Pharma Services, to provide research services. During the first quarter of 2004, the Company paid the various MDS entities an aggregate of $37,000. One of the Company’s board members was an officer of MDS, Inc. through May 2004.

Long-lived assets are allocated geographically as follows:

(In thousands)	March 31, 2005		December 31, 2004
Canada	$	1,122	$	1,271
US	190		210
	$	1,312	$	1,481

The Company previously reported two segments, Biotechnology and Bioreagents. As discussed in Note 10, at March 31, 2005 and December 31, 2004, the Company has presented the bioreagent business as a discontinued operation and therefore has only one reportable segment.

8. SUPPLEMENTAL CASH FLOW INFORMATION

(In thousands)	Three months ended March 31,
	2005		2004
Interest paid	$	14	$	28
Sale of assets from continuing operations to discontinued operations	$	18	$	—
Reversal of deferred stock compensation	$	—	$	185

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

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

Balance Sheet

(In thousands)
	March 31,			December 31,
	2005			2004

Current assets under Canadian GAAP	$	19,015		$	28,531

Market value gain on available for sale securities	69			—

Current assets under U.S. GAAP	$	19,084		$	28,531

Stockholders’ equity under Canadian GAAP	$	13,008		$	19,551

Market value gain on available for sale securities	69			—
Adjustment to common stock (a)	(16,634		)	(16,455		)
Adjustment to deferred stock compensation (a)	—			(104		)
Adjustment to accumulated deficit (a)	16,634			16,559
	69			—
Stockholders’ equity under U.S. GAAP	$	13,077		$	19,551

Statement of Operations

(In thousands except per share amounts)	Three months ended
	March 31,
	2005			2004
Net loss under Canadian GAAP	$	(6,722	)	$	(6,284	)
Reversal of unrealized foreign exchange (gain) loss on investments ^(b)	(177		)	(5		)
(Gain) loss on market value of investments ^(b)	(125		)	6
Reversal of stock compensation expense ^(a)	179			663
Stock compensation expense under APB No. 25 ^(a)	(104		)	(37		)
	(227)			627

Net loss under U.S. GAAP	$	(6,949	)	$	(5,657	)

Basic and diluted loss per common share under Canadian GAAP	$	(0.09	)	$	(0.09	)

Basic and diluted loss per common share under U.S. GAAP	$	(0.10	)	$	(0.08	)

Common shares used to compute basic and diluted loss per share under Canadian and U.S. GAAP	72,506			72,498

Statement of Cash Flows

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

Differences

The following notes outline the differences between Canadian and U.S. GAAP that affect the Company for the three months ended March 31, 2005 and 2004.

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

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

Under the principles of SFAS No. 123, the Company would have recorded $17,957,000 of deferred compensation related to the total fair value for stock options granted between January 1, 1995 and March 31, 2005. 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 No. 123 to employee stock based compensation:

(In thousands except per share amounts)	Three months ended
	March 31,
	2005				2004
Net loss under U.S. GAAP	$		(6,949	)	$	(5,657		)

Stock-based compensation under APB No. 25	104				37
Stock-based compensation expense recorded under SFAS No. 123	(179			)	(663			)
Pro forma net loss under U.S. GAAP	$	(7,024		)	$		(6,283	)

Pro forma loss per common share	$	(0.10		)	$		(0.09	)

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

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

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

(In thousands)	Three months ended
	March 31,
	2005			2004
Net loss under U.S. GAAP	$	(6,949	)	$	(5,657	)
Other comprehensive income
Adjustment of unrealized foreign exchange gain on investments	177			5
Market value loss on investments	(173		)	(6		)
Comprehensive net loss under U.S. GAAP	$	(6,945	)	$	(5,658	)

^(c) At March 31, 2005 and December 31, 2004, the Company decided to report the bioreagent business as a discontinued operation pursuant to the requirements of CICA 3475, Disposal of Long-lived Assets and Discontinued Operations (CICA 3475), SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144), and EITF 03-13, Applying the Conditions in Paragraph 42 of FASB Statement No. 144 in Determining Whether to Report Discontinued Operations. See Note 10 for further disclosure and subsequent events in Note 11.

New U.S. GAAP Accounting Pronouncement

Share-based payment

In December 2004, the Financial Accounting Standards Board, or FASB, issued SFAS No. 123(R), “Share-Based Payment,” which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation”. SFAS No. 123(R) requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. The compensation cost will be measured based on the fair value of the equity or liability instruments issued. On April 14, 2005, the SEC announced that the effective date of SFAS No. 123(R) will be postponed until January 1, 2006 for calendar year companies. The Company will adopt SFAS No. 123(R) on January 1, 2006. The Company has not determined the impact of adopting SFAS No. 123(R) on the footnotes. Further the Company does not yet know the impact that any future share-based payment transactions will have on its financial statements.

In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (SAB No. 107), Share-Based Payment, in which the staff expresses its views regarding the valuation of share-based payment arrangements. SAB No. 107 is intended to assist issuers in their initial implementation of SFAS No. 123R and enhance the information received by investors and other users of financial statements.

10. DISCONTINUED OPERATION

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

At March 31, 2005 and December 31, 2004, the Company is reporting the bioreagent business as a discontinued operation pursuant to the requirements of CICA 3475, Disposal of Long-lived Assets and Discontinued Operations (CICA 3475), SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144), and EITF 03-13, Applying the Conditions in Paragraph 42 of FASB Statement No. 144 in Determining Whether to Report Discontinued Operations. The Company is reporting the business as a discontinued operation after evaluating intentions for the future of the bioreagent business, formulating a plan for sale and taking steps to execute that plan.

The significant accounting principles discussed in Note 1 were applied to all discontinued operation transactions. In addition, inventories are valued at the lower of cost or net realizable value.

In April 2005, the Company signed a definitive agreement to sell the bioreagent business to allow it to focus its corporate strategy, manage resources and provide working capital to further fund the development and commercialization of HspE7. The sale of the bioreagent business was closed effective April 29, 2005. The Company will report any gain realized on the sale in the second quarter of 2005 on the sale of the bioreagent business as prescribed by CICA 3475 and SFAS No. 144 (Note 11).

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

(In thousands)	Three months ended
	March 31,
	2005			2004
Bioreagent sales	$	1,581		$	1,452
Operating expenses	(1,171		)	(910		)
Other income (expenses)	7			(8		)
Net income from discontinued operations	$	417		$	534

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

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

	March 31,		December 31,
(In thousands)	2005		2004
Assets of discontinued operations:
Cash and cash equivalents	$	252	$	551
Short-term investments	582		515
Accounts receivable, net	679		589
Inventories	570		561
Prepaid expenses	9		15
Other current assets	36		60
Plant and equipment, net	174		156
Total assets of discontinued operations	$	2,302	$	2,447

Liabilities of discontinued operations
Accounts payable	$	297	$	324
Total liabilities of discontinued operations	$	297	$	324

A summary of the components of cash flows for discontinued operations was as follows:

(In thousands)	Three months ended
	March 31,
	2005		2004
Net cash flows (used in) provided by operating activities	$(233	)	$411
Net cash flows used in investing activities	(66	)	—
Net cash flows provided by financing activities	—		—
Net (decrease) increase in cash	(299	)	411
Cash and cash equivalents at the beginning of the period	551		247
Cash and cash equivalents at the end of the period	$252		$658

11. SUBSEQUENT EVENTS

In April 2005, the Company announced that it signed a definitive agreement to sell the bioreagent business to Stressgen Bioreagents Corporation, a newly-formed company funded by Ampersand Ventures (Ampersand), for approximately $8,000,000 (See Note 10). As part of the agreement, the Company will provide transitional administrative service, which will provide the Company with additional funding. The Company completed the sale of the bioreagent business on April 29, 2005.

As discussed in Note 1, in April 2005, the Company also announced that it elected to withdraw the amended and restated preliminary prospectus dated February 24, 2005, in connection with a proposed offering of common shares in Canada. In conjunction with this news and the sale of the bioreagent business, the Company will be pursuing several corporate initiatives that will allow for development of HspE7 and also preserve cash.

Also in April 2005, the Company announced the appointment of a new President and CEO. See Note 4 for discussion of severance paid to the former President and CEO in April 2005.

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

This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” is dated as of May 6, 2005. It contains forward-looking statements that involve risk and uncertainties. The predictions described in these statements may not materialize if management’s current expectations regarding our future performance prove incorrect. Our results could also be affected by factors including, but not limited to, our reliance on collaborative partners and other risks described in our annual report under the heading “Factors That May Affect Future Performance.” Our forward-looking statements are based on currently available information; we disclaim any obligation to update them.

The following information should be read in conjunction with our March 31, 2005 consolidated quarterly financial statements and related notes therein, which are prepared in accordance with Canadian GAAP. These principles differ in certain respects from U.S. GAAP. The differences, as they affect our consolidated financial statements, are described in Note 9 to our consolidated financial statements. All amounts following are expressed in Canadian dollars unless otherwise indicated.

Overview

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

We have incurred significant losses since our inception and expect to incur substantial losses for the foreseeable future as we invest in our research and product development programs, including manufacturing, pre-clinical studies and clinical trials, and regulatory activities. At March 31, 2005 our accumulated deficit was $219,071,000. Historically, we have depended principally on equity financings, cash flows from our bioreagent business and funding from research collaborations to fund our business activities. In April 2005, we signed a definitive agreement to sell the bioreagent business to allow us to focus our corporate strategy, manage resources and provide working capital to further fund the development and commercialization of HspE7. We completed the sale of that business effective April 29, 2005. We intend to pursue additional equity financings, markets permitting, and to seek additional research collaborations to fund our business activities.

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

Restructured Roche Agreement

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

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

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

Liquidity and Capital Resources

Since inception we have relied principally on equity financings, coupled with cash flows generated from our bioreagents business, to fund our research and development programs, operations and capital expenditures. Through March 31, 2005 we have raised net equity proceeds of $198,238,000.

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. We have a history of recurring losses from operations and have an accumulated deficit of $219,071,000 as of March 31, 2005. The nature of our business requires significant spending on R&D activities. Due to our history of losses, high cash burn on R&D activities and the loss of bioreagent revenue as a result of the sale of that business, we are closely monitoring our cash resources. Based upon the sale of our reagent business and our current business plan including the recent reduction in headcount and review of our timelines regarding the HspE7 program, assuming we raise approximately $5,000,000, we will have sufficient resources to fund operations through the first quarter 2006. Based on our current forecast, if we do not raise at least that amount of cash we may need to modify or cancel agreements with external contractors, and make further changes to our staffing level which would impact the development timelines of HspE7. Under this scenario, we will have resources to fund operations through the end of 2005.

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

At March 31, 2005 and December 31, 2004, we had $13,488,000 and $21,578,000, respectively, of cash, cash equivalents and short-term investments. The $8,090,000 decrease is due principally to spending related to the development of HspE7. At March 31, 2005 and December 31, 2004, approximately 58% and 48% of cash, cash equivalents and short-term investments were held in U.S. dollars. During 2004, we purchased British pounds to fund payments under our Avecia contract. At March 31, 2005 and December 31, 2004 approximately 38% and 36% of our cash, cash equivalents and short-term investments were held

in British pounds. Periodically we may purchase additional British pounds based on future anticipated financial obligations in that currency.

During the three months ended March 31, 2005 and 2004, we reported $8,679,000 and $6,312,000, respectively net cash used in operating activities from continuing operations. The increase in 2005 over 2004 is primarily due to the prepayments to our third party vendors.

During the three months ended March 31, 2005, purchases of plant and equipment by continuing operations totaled $3,000 compared with $130,000 during the same period in 2004. Spending during 2004 consisted of tenant improvements on our facilities, laboratory equipment and computer related hardware. We expect our 2005 capital spending to include purchases required to preserve our current level of manufacturing, research and administrative capabilities.

At March 31, 2005 and December 31, 2004 we had an outstanding term loan obligation of $427,000 and $514,000, respectively. In September 2003 we entered into a 36-month term loan with Oxford Finance Corporation (Oxford). Under the terms of the Oxford loan, we must issue a letter of credit for the outstanding loan balance if our combined cash, cash equivalents, and short-term investments fall below $6,000,000.

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

Contractual Obligations

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

In January 2004 we entered into a biological services agreement with Avecia for the process development, scale-up and manufacture of HspE7. In addition, we may have Avecia manufacture commercial drug substance. Under the terms of the agreement, we are required to make upfront payment for future services and use of the facility. We made prepayments totaling $3,175,000 for services to be rendered and space utilized in 2005. At March 31, 2005, a portion of the work related to these prepayments has been completed. We made a $1,814,000 prepayment in 2004. The other prepayment of $1,361,000 was not made until 2005 and therefore was included in deferred development expenses, current portion and accrued liabilities in the December 31, 2004 Consolidated Balance Sheet.

In October 2004, we entered into an agreement with Cardinal Health (Cardinal) in the ordinary course of our business. Cardinal will perform activities to prepare and distribute HspE7 to clinical trial sites. In 2005 we made a prepayment of $295,000 for future services to be rendered in 2005. At March 31, 2005 a portion of the work has been completed related to these prepayments. We were contractually obligated to make this prepayment as of December 31, 2004; however the payment was not made until early 2005. Therefore the amount was included in deferred development expenses, current portion and accrued

liabilities in the December 31, 2004 Consolidated Balance Sheet and has been reclassified to prepaid assets as of March 31, 2005.

The agreement with Cardinal includes cancellation provisions that could require us to pay for work that was not performed or equipment that was not used if we terminate the contract while activities are at pre-defined stages. The contract is subject to a cancellation fee of approximately $139,000 which would be offset against any remaining prepaid balance.

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

We have employment agreements with certain members of management which include specific severance packages. As discussed in Note 11 to our consolidated financial statements, in conjunction with the appointment of a new President and Chief Executive Officer (CEO), we paid the former President and CEO approximately $884,000 in April 2005 which will be included in the Consolidated Statement of Operations for the second quarter of 2005. In addition to the amount paid to the former CEO in April 2005 and considering the impact of the April 2005 sale of the bioreagent business and the restructuring (Note 11), we are contractually obligated to pay $1,878,000 per employment agreements of certain remaining executives.

There have been no other changes in our future contractual obligations from the amounts reported as of December 31, 2004.

Off-Balance Sheet Arrangements

We did not enter into any off balance sheet arrangements during the three months ended March 31, 2005 and 2004.

Related Party Transactions

We have used various affiliates of MDS, Inc., including MDS Pharma Services, to provide research services. During the first quarter of 2004, we paid the various MDS entities an aggregate of $37,000. One of the Company’s board members was an officer of MDS, Inc. through May 2004.

Discontinued Operations

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

At March 31, 2005 and December 31, 2004, we decided to report the bioreagent business as a discontinued operation pursuant to the requirements of CICA 3475, Disposal of Long-lived Assets and Discontinued Operations (CICA 3475), SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144), and EITF 03-13, Applying the Conditions in Paragraph 42 of FASB Statement No. 144 in Determining Whether to Report Discontinued Operations. We are reporting the business as a discontinued operation because we have evaluated our intentions for the future of the bioreagent business, formulated a plan for sale and have taken steps to execute that plan.

In April 2005, we signed a definitive agreement to sell the bioreagent business to allow us to focus our corporate strategy, manage resources and provide working capital to further fund the development and commercialization of HspE7. We completed the sale of the bioreagent business effective April 29, 2005. We will report any gain realized on the sale in the second quarter of 2005 on the sale of the bioreagent business as prescribed by CICA 3475 and SFAS No. 144.

During the three months ended March 31, 2005 the bioreagent business contributed net income of $417,000 as compared to $534,000 for the same period in 2004 ($0.01 and $0.00 per share, respectively). The decrease in net income from discontinued operations for the three months ended March 31, 2005 compared to the same period in 2004 was due principally to increased spending related to sales and marketing efforts. This spending was partially offset by improved contributions from revenue.

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

Results of Continuing Operations

During the three months ended March 31, 2005, we realized a net loss from continuing operations of $7,139,000 or $0.10 per common share as compared to $6,818,000 or $0.09 for the same period in 2004. The $321,000 increase in our net loss for the first quarter 2005 as compared to the first quarter 2004 is due principally to incremental third party spending to further the development of HspE7.

Collaborative R&D revenue

We recorded collaborative R&D revenue of $163,000 and $173,000 in the three months ended March 31, 2005 and 2004, respectively. Collaborative R&D revenue relates principally to the amortization of upfront license fees in accordance with CICA Accounting Standards Board recommendations, section 3400, Revenue, and Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements.

Research and development

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

R&D spending in our continuing operations increased by approximately 5% to $5,539,000 during the three month periods ended March 31, 2005, compared with $5,273,000 for the same period in 2004. This increase is due principally to spending at Avecia, which began early in 2004 along with additional spending with other vendors to manufacture HspE7 in preparation for our phase III pivotal trial. Our spending at Avecia is expected to continue to be a major component of our R&D spending through 2005 as we transition from process development activities to initial production runs of bulk drug substance for our upcoming pivotal trial.

Our R&D spending during the three month periods ended March 31, 2005 was devoted principally to our effort to further develop HspE7, including process development and manufacturing activities, preparation for our pivotal phase III RRP trial. During the first quarter of 2005, primarily all of our R&D spending related to efforts developing HspE7. Beginning in mid-2004, we focused the majority of our resources on developing HspE7. In periods prior to mid-2004, we allocated some of our R&D spending to exploratory research involving our follow-on CoVal^TM fusion proteins.

In March 2005 we announced that data from a phase II study in high grade cervical dysplasia using HspE7 was presented by Mark Einstein, M.D, of Albert Einstein College of Medicine on behalf of the New York phase II Consortium and under the sponsorship of the National Cancer Institute (NCI) at the Society of Gynecologic Oncologists Annual Meeting on Women’s Cancer ^TM. This NCI phase II trial was designed to evaluate the efficacy and safety of HspE7 against CIN III. There were 31 women who completed the trial and of the 31 patients, 10 had a complete pathologic response; 12 had a partial response, and 9 had stable disease. No patient had progressive disease. The overall response rate was 71%. These data from the

NCI-sponsored trial, along with the data of Dr. Jeffery Weber announced in November 2004, will be used to guide our phase III development plans.

Over the next several months, we intend to dedicate our strategic and financial resources to support the further advancement of HspE7. We will continue to focus on process development and the manufacture of commercial-grade HspE7, a requirement that must be met prior to beginning the planned pivotal Phase III study of HspE7 in patients with recurrent respiratory papillomatosis (RRP). We will also need to raise additional funds to begin and continue to conduct that trial. Due to recent technical developments regarding the manufacture of commercial-grade HspE7, there is uncertainty as to whether we will be able to manufacture material satisfactory to begin our pivotal Phase III study. If we are able to do so, the earliest we could initiate the planned pivotal Phase III trial in RRP is at the beginning of the fourth quarter of 2005. If certain manufacturing runs do not produce satisfactory material, we may need to invest additional time and resources into the program, which could lead to further delays in the initiation of any Phase III trial. We will provide an update on our progress by the end of July 2005.

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

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

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

Selling, general and administrative expenses

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

SG&A spending through continuing operations decreased by approximately 4% to $2,006,000 for the three months ended March 31, 2005 from $2,095,000 for the same period in 2004. We anticipate that in 2005 SG&A spending will be consistent with that of 2004.

We incurred costs in conjunction with its financing efforts in the fourth quarter of 2004 and first quarter of 2005. As of December 31, 2004, the costs associated with the financing were classified as deferred expenses included within “Other current assets” on the Consolidated Balance Sheet. However, in April 2005, we announced that we elected to withdraw the amended and restated preliminary prospectus in connection with the proposed offering of common shares. Therefore, subsequent to March 31, 2005, we determined that it was appropriate to reflect these costs totaling approximately $550,000 as a selling, general and administrative expense on the March 31, 2005 Consolidated Statement of Operations and Accumulated Deficit.

Interest and other income

Interest and other income from continuing operations decreased for the three months ended March 31, 2005 to $359,000 compared with $354,000 in for the same period in 2004.

Net foreign exchange gain/loss

During the three months ended March 31, 2005 we reported a foreign exchange loss from continuing operations of $102,000 compared to a reported $51,000 foreign exchange gain for the same period in 2004. During the second half of 2004 through the first quarter of 2005, the Canadian dollar strengthened against the U.S. dollar and the British pound compared to the first half of 2004. Since approximately 96% of our cash, cash equivalents and short term investments are held in currencies other than the Canadian dollar, we experienced a foreign exchange loss.

Basic and diluted loss per share

We reported a 5% increase in net loss from continuing operations to $7,139,000 for the three months ended March 31, 2005, compared with $6,818,000 for the same period in 2004. There was a nominal change in average number of common shares outstanding since the beginning of 2004. Therefore there was consistent dilution of the net loss from continuing operations resulting in $0.10 net loss from continuing operations per common share for the three months ended March 31, 2005 as compared to $0.09 for the same period in 2004.

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

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

To conform to U.S. GAAP, our net loss would increase by $227,000 and decrease by $627,000 for the three months ended March 31, 2005 and 2004, respectively. The principal differences under U.S. GAAP as opposed to Canadian GAAP for the three months ended March 31, 2005 were the reversal of an unrealized foreign exchange gain on investments of $177,000, a reversal of a gain on market value of investments of $125,000 and the reversal of stock compensation expense totaling $179,000 related to fair value stock option accounting adopted beginning January 1, 2004, offset by stock compensation expense of $104,000 that would be recorded under APB Opinion No. 25. U.S. GAAP does not currently require fair value accounting on stock-based compensation. Therefore, under the provisions of APB Opinion No. 25, no expense is recorded for options granted with an exercise price equal to the fair value of the stock on the day of grant. Under APB Opinion No. 25 expense is incurred when stock options are granted at exercise prices less than the fair value of the underlying stock. Further, under U.S. GAAP, adjustments to the market value of our investment portfolio would be recorded as a component of stockholders’ equity. Under Canadian GAAP unfavorable market value adjustments are recorded as a component of operations.

Similarly, the principal differences under U.S. GAAP as opposed to Canadian GAAP for the three months ended March 31, 2004 were the reversal of an unrealized foreign exchange gain on investments of $5,000, a reversal of a loss on market value of investments of $6,000 and the reversal of stock compensation expense totaling $663,000 related to fair value stock option accounting adopted beginning January 1, 2004, offset by stock compensation expense of $37,000 that would be recorded under APB Opinion No. 25. These differences between U.S. GAAP and Canadian GAAP are described in Note 9 to our consolidated financial statements.

Net loss per common share under U.S. GAAP would have been $0.10 and $0.08 for the three months ended March 31, 2005 and 2004, respectively. Our current assets and stockholders’ equity under Canadian GAAP as of March 31, 2005 would have increased by $69,000 under U.S. GAAP as a result of market value adjustments on available for sale securities. There were no balance sheet differences between U.S. and Canadian GAAP as of December 31, 2004.

Summary of Quarterly Results

	Quarter ended (b)
	June 30,		September 30,		December 31,		March 31,
	2004		2004		2004		2005
Net revenues, Canadian and U.S. GAAP From continuing operations	190		174		163		163

Research and development expenses, Canadian and U.S. GAAP from continuing operations	5,636		6,422		8,582		5,539

Net (loss) income, Canadian GAAP
From continuing operations	(7,029	)	(8,367	)	(9,631	)	(7,139	)
From discontinued operations	663		410		(27	)	417
Net loss, Canadian GAAP	(6,366	)	(7,957	)	(9,658	)	(6,722	)

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

Net loss, U.S. GAAP (c)	(6,014	)	(6,519	)	(9,831	)	(6,949	)

Basic and diluted loss per common share, U.S. GAAP (a) (c)	(0.08	)	(0.09	)	(0.14	)	(0.10	)

	Quarter ended (b)
	June 30,		September 30,		December 31,		March 31,
	2003		2003		2003		2004
Net revenues, Canadian and U.S. GAAP From continuing operations	1,508		855		510		173

Research and development expenses, Canadian and U.S. GAAP from continuing operations	4,408		5,636		3,258		5,273

Net (loss) income, Canadian GAAP
From continuing operations	(4,677	)	(6,034	)	(4,071	)	(6,818	)
From discontinued operations	274		411		309		534
Net loss, Canadian GAAP	(4,403	)	(5,623	)	(3,762	)	(6,284	)

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

Net loss, U.S. GAAP (c)	(4,222	)	(5,463	)	(3,365	)	(5,657	)

Basic and diluted loss per common share, U.S. GAAP (a) (c)	(0.07	)	(0.09	)	(0.05	)	(0.08	)

(a)		Income (loss) per share is computed independently for each of the quarters presented and therefore may not sum to the total for the year.
(b)		Amounts for the first, second and third quarters of 2004 and all quarters in 2003 have been reclassified to conform to the presentation of the bioreagent business as discontinued operations.
(c)		To conform to U.S. GAAP certain adjustments must be made. The nature of the principal difference is disclosed in the notes to our 2004 and 2003 audited financial statements. See Note 9 to the March 30, 2005 quarterly financial statements for further disclosure.

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. 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 and our 2004 Annual Report on Form 10-K. Certain of our policies require the application of management judgment in making estimates and assumptions that affect the amounts reported in the consolidated financial statements and disclosures made in the accompanying notes. Those estimates and assumptions are based on historical experience and various other factors deemed applicable and reasonable under the circumstances. The use of judgment in determining such estimates and assumptions is, by nature, subject

to a degree of uncertainty. Accordingly, actual results could differ from the estimates made. Our critical accounting policies include:

Revenue recognition

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

Clinical trial accruals

Clinical trial costs constitute a significant portion of R&D expense. We recognize expenses related to our ongoing clinical trials using a methodology designed to accrue estimated costs in the appropriate accounting periods in which the expenses are incurred. We recognize clinical trial costs in three distinct phases that correspond with the period during which the services are performed: the start-up phase, the patient accrual phase, and the close-out phase. Based on the design of the trial, including the number of patients, number of clinical sites, method of treatment, and follow-up, the allocation of trial costs to each phase could vary from trial to trial. Using our current trial accrual methodology, our liability for clinical trials as of March 31, 2005 is $1,924,000, which includes the estimated effect of any work-in-process terminated at the end of the reporting period. Alternatively, if we utilized a percentage of completion approach and used an operational estimate of the actual work completed as of March 31, 2005 compared to the total contract value, our clinical trial liability would decrease by approximately $660,000.

New U.S. GAAP Accounting Pronouncement

Share-based payment

In December 2004, the Financial Accounting Standards Board, or FASB, issued SFAS No. 123(R), “Share-Based Payment,” which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation”. SFAS No. 123(R) requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. The compensation cost will be measured based on the fair value of the equity or liability instruments issued. On April 14, 2005, the SEC announced that the effective date of SFAS No. 123(R) will be postponed until January 1, 2006 for calendar year companies. We will adopt SFAS No. 123(R) on January 1, 2006. We have not determined the impact of adopting SFAS No. 123(R) on the footnotes. Further we do not yet know the impact that any future share-based payment transactions will have on its financial statements.

Subsequent Events

In April 2005, we announced that we signed a definitive agreement to sell the bioreagent business to Stressgen Bioreagents Corporation, a newly-formed company funded by Ampersand Ventures (Ampersand), for approximately $8,000,000 (See Note 10). As part of the agreement, we will provide transitional administrative service, which will provide the Company with additional funding. We completed the sale of the bioreagent business on April 29, 2005.

In April 2005, we also announced that we elected to withdraw the amended and restated preliminary prospectus dated February 24, 2005, in connection with a proposed offering of common shares in Canada. In conjunction with this news and the sale of the bioreagent business, we will be pursuing several corporate initiatives that will allow for development of HspE7 and also preserve cash.

Also in April 2005, we announced the appointment of a new President and CEO

In April 2005, we announced a restructuring that will allow us to focus its resources on the advancement of HspE7. As a result of the restructuring, we reduced our workforce by approximately 49% and are redirecting its research efforts in order to reduce our annual cash expenditures.

Disclosure of Outstanding Share Data

The following table contains information regarding our outstanding equity as of May 6, 2005:

Common shares outstanding		72,506,403
Roche warrants		814,574
Warrants under 2003 Financing		5,304,149
Stock options outstanding		3,200,051

FACTORS THAT MAY AFFECT FUTURE PERFORMANCE

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

We require additional financing to execute our business plan

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

There are no assurances that future funding will be available on favorable terms or at all. If 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.

We are an early stage development company

Our biotechnology business is still at an early stage of development. Significant additional research and development and clinical trials must be completed before our technology can be commercialized. We have not completed the development of any therapeutic products and, therefore, have not begun to market or generate revenues from the commercialization of any therapeutic products. We have

undertaken only limited human clinical trials for HspE7 and cannot assure you that subsequent trials will generate favourable results, that the results obtained from laboratory or research studies for our other products will be replicated in human studies, that our human studies will demonstrate efficacy or that our studies and trials will not identify undesirable side effects of our products. There are no assurances that any of our therapeutic products will:

• meet applicable health regulatory standards;

• obtain required regulatory approvals or clearances;

• be produced in commercial quantities at reasonable costs;

• be successfully marketed; or

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

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

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

We have not recorded any revenues from the sale of therapeutic products and have accumulated substantial net losses. We expect we will continue to incur losses for at least the next several years while our primary activities are research, development and clinical trials. On April 29, 2005, we sold our bioreagents business, which had been a source of on-going revenue for us. Once the proceeds from the sale have been exhausted, we could incur larger operating losses in future fiscal periods than we incurred during comparable periods in 2003 or 2004. To become profitable we, either alone or with one or more partners, must develop, manufacture and successfully market therapeutic product candidates.

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

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

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

• terminate or suspend their agreements with us;

• cause delays;

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

• fail to adequately perform clinical trials;

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

• otherwise fail to meet their contractual obligations.

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

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

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

The reduction in the number of employees as the result of our reduction in force in April 2005 could adversely affect our ability to obtain and maintain patents and licenses and preserve trade secrets, and the period our intellectual property remains exclusive.

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.

from the opposition and re-examination processes, the Company will not be able to assure investors of the success of planned vigorous defense of the patents. However, management does not expect that this will have a material impact to its financial statements.

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

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

The reduction in the number of employees as the result of our reduction in force in April 2005 could adversely affect our ability to successfully work 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.

Production of future products could require raw materials which are scarce or which can be obtained only from a limited number of sources. If our manufacturers were unable to obtain adequate supplies

of such raw materials, the development, regulatory approval and marketing of our products could be delayed.

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

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

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

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

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

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

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

• the commercialization of our products could be adversely affected;

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

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

Governmental and regulatory authorities may approve a product candidate for fewer indications or narrower circumstances than requested or may condition approval on the performance of post-marketing studies for a product candidate. Similarly, phase IV clinical trials could be a condition to regulatory approval. Even if a product receives regulatory approval and clearance, it may later exhibit

adverse side effects that limit or prevent its widespread use or that force us to withdraw the product from the market.

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

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

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

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

Our products may not gain market acceptance

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

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

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

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

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

Our success depends on attracting and retaining qualified personnel

We depend on a core management and scientific team. The loss of one or more of these individuals could cause delays or prevent us from achieving our business objective of commercializing our product candidates. Our future success will depend in large part on our continued ability to attract and retain other highly qualified scientific, technical and management personnel, as well as personnel with expertise in clinical testing and government regulation. We face competition for personnel from other companies, universities, public and private research institutions, government entities and other organizations. Employee uncertainty resulting from our reduction in force in April 2005 may adversely affect our ability to attract and retain employees necessary to implement our strategies and may disrupt our operations. If our recruitment and retention efforts are unsuccessful, our business operations could suffer.

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

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

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

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

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

• regulatory actions;

• safety issues;

• changes affecting patents or exclusive licenses;

• delays or difficulties in manufacturing clinical or commercial grade material;

• future issuances of shares;

• the announcement of technological innovations;

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

• the development of new commercial products;

• changes in regulations;

• the release of financial results;

• public concerns over risks relating to biotechnology;

• sales of shares by existing shareholders; and

• changes in analyst recommendations.

Quantitative and Qualitative Disclosures About Market Risk

We use the Canadian dollar as our measurement and functional currency. As a result, we are exposed to foreign currency fluctuations through our operations because a substantial amount of our contract research and development spending has been transacted in other currencies, principally in U.S. dollars and British pounds. We hold investment balances in the currencies in which we have expenditures planned during the foreseeable future. At March 31, 2005, approximately 58% of cash, cash equivalents and short-term investments were held in U.S. dollars. At March 31, 2005 approximately 38% of our cash, cash equivalents and short-term investments were held in British pounds. We translate monetary assets and liabilities into Canadian dollars using the rates of exchange prevailing at our balance sheet date. We record the resulting exchange gains and losses in our statement of operations. Although we do not currently engage in hedging or other activities to reduce foreign currency risk, beyond matching investments proportionately with anticipated spending, we may do so in the future if conditions change.

A hypothetical change in foreign exchange rates by applying a 10% change to our quarter-end foreign exchange rate, then applying that rate to our average level of U.S. investments during the year, would result in an $922,000 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 $922,000. 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 $922,000.

A hypothetical change in foreign exchange rates by applying a 10% change to our year-end foreign exchange rate, then applying that rate to our average level of British pound investments during the year, would result in a $283,000 impact. If the value of the Canadian dollar relative to the British pound were to increase by 10%, our net loss would decrease by $283,000. Further, if the value of the Canadian dollar relative to the British pound were to decrease by 10%, our net loss would increase by $283,000.

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

To differentiate between the affect of a change in the market valuation of securities caused by market interest rate changes versus a change in the annual rate of interest we could earn on a security, we calculated that a hypothetical change in interest rates comparable to a 10% change to our average rate of return would result in a $24,000 impact. If interest rates were to increase by 10%, our net loss would decrease by $24,000. Further, if interest rates were to decrease by 10%, our net loss would increase by $24,000.

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 $13,488,000 in cash, cash equivalents and short-term investments as of March 31, 2005.

Item 4. CONTROLS AND PROCEDURES

Our chief financial officer and chief executive officer concluded as of March 31, 2005 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.

	Stressgen Biotechnologies Corporation
Date: May 10, 2005	/s/ Gregory M. McKee
	Gregory M. McKee
	President and Chief Executive 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)

Exhibit No.		Description
3.9*		Articles of Continuance of the Company
3.10*		By-Laws of the Company
4.4*		Form of Stock Certificate
10.19		Fourth Amendment to the License Agreement dated November 29, 1992 among Whitehead Institute, MIT and the Company.
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

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

Overview

Restructured Roche Agreement

Liquidity and Capital Resources

Contractual Obligations

Off-Balance Sheet Arrangements

Related Party Transactions

Discontinued Operations

Results of Continuing Operations

Collaborative R&D revenue

Research and development

Selling, general and administrative expenses

Interest and other income

Net foreign exchange gain/loss

Basic and diluted loss per share

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

Critical Accounting Policies

Revenue recognition

Clinical trial accruals

New U.S. GAAP Accounting Pronouncement

Share-based payment

Disclosure of Outstanding Share Data

Quantitative and Qualitative Disclosures About Market Risk

PART II—OTHER INFORMATION

Item 6. EXHIBITS

SIGNATURES

Part I — Financial Information		Page

Item 1.	Financial Statements (Unaudited)
	Consolidated Balance Sheet March 31, 2005 and December 31, 2004	1
	Consolidated Statement of Operations and Accumulated Deficit Three Months Ended March 31, 2005 and 2004	2
	Consolidated Statement of Cash Flows Three Months Ended March 31, 2005 and 2004	3
	Notes to Consolidated Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
	Liquidity and Capital Resources	21
	Results of Operations	24
	Critical Accounting Policies	28
	Factors That Could Affect Future Performance	30
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38
Item 4.	Controls and Procedures	38

Part II — Other Information

Items 1 through 6		38

SIGNATURES AND CERTIFICATIONS		39