---

---

UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

---

FORM 10-K

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

For the fiscal year ended December 31, 2001

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(State of incorporation)

N/A(IRS Employer Identification No.)c/o Stressgen Biotechnologies, Inc.
10241 Wateridge Circle, Suite C-200
San Diego, California

92121(Zip Code)(Address of Principal Executive Offices)


Registrant's Telephone Number, including area code:(858) 202-4900

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

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

---

Indicate
by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes /x/    No / /

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

As
of March 1, 2002, the aggregate market value of the common shares held by non-affiliates of the Registrant (based on the last reported sales price of the common
shares of Cdn. $4.70, as reported on The Toronto Stock Exchange) was approximately U.S. $168,801,000 (approximately Cdn. $270,917,000). As of March 1, 2002, the Registrant had approximately
57,642,000 outstanding common shares.

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

Documents
incorporated by reference: None.

---

---

---

TABLE OF CONTENTS

|Item 1.  |  | BUSINESS                                                                              |  | 1 
|-------- |  | ------------------------------------------------------------------------------------- |  | --
|Item 2.  |  | PROPERTIES                                                                            |  | 19
|Item 3.  |  | LEGAL PROCEEDINGS                                                                     |  | 20
|Item 4.  |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                   |  | 20
|Item 5.  |  | MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                 |  | 21
|Item 6.  |  | SELECTED FINANCIAL DATA                                                               |  | 29
|Item 7.  |  | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |  | 32
|Item 7A. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                            |  | 35
|Item 8.  |  | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                           |  | 36
|Item 9.  |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE  |  | 61
|Item 10. |  | OUR DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES                                   |  | 61
|Item 11. |  | COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS                                      |  | 65
|Item 12. |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                        |  | 70
|Item 13. |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                        |  | 72
|Item 14. |  | EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K                       |  | 73

---



PART I    FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties. Such forward-looking statements are
characterized by future and conditional verbs and include statements regarding the results of product development efforts, the expansion of particular programs, the results of clinical trials, the
approval of applications for marketing of pharmaceutical products, our ability to enter into licensing and corporate partnering arrangements and the scope and success of operations. Such statements
describe only our current expectations; our actual results may differ materially from those anticipated in the forward-looking statements. Factors that may cause such differences include the
uncertainties associated with early product development, the risk that products that appeared promising in early clinical trials do not demonstrate efficacy or cause significant
side-effects in larger-scale clinical trials, the risk that we will not obtain regulatory approvals necessary to market our products, our need for additional financing and our need to
maintain, protect and expand our intellectual property position. We are not undertaking any obligation to update forward-looking statements as circumstances change.

Item 1. BUSINESS

Overview

We are a biopharmaceutical company focused on the commercialization, development and research of proprietary immunotherapeutics to treat human diseases. Our
on-going programs use a unique class of proteins, known as stress proteins or heat shock proteins so abbreviated as Hsp, fused to viral antigens. The resulting Hsp fusion proteins
stimulate the body's immune system to combat specific viral diseases. Most of our resources are devoted to developing our lead product candidate to treat conditions caused by the human papillomavirus
(HPV). This product, HspE7, which is a fusion between an Hsp and an HPV antigen called E7, is being evaluated in clinical trials. In preclinical programs we are evaluating Hsp fusions to treat chronic
hepatitis B virus infection, herpes simplex virus and HIV. The type of immune responses induced by Hsp fusions, as demonstrated in preclinical research, indicates that the Hsp fusion platform
technology may apply to the immunotherapy of other diseases, including cancer
and bacterial, fungal and parasitic infections. Nonetheless, due to the strength of the data from the HspE7 program, we are concentrating our current efforts on the treatment of viral diseases.

We
are evaluating our novel immunotherapeutic, HspE7, in clinical trials for the treatment of conditions caused by HPV. HPV causes many conditions, such as genital warts, recurrent
respiratory papillomatosis (RRP), cervical intraepithelial neoplasia (CIN), cervical cancer and anal intraepithelial neoplasia (AIN). If it is approved, HspE7 could be useful in the treatment of a
large number of patients and a broad spectrum of HPV diseases. There are approximately 5.5 million new genital HPV infections each year, and more than 20 million people in the United
States are currently infected with the virus, according to a National Institute of Allergy and Infectious Diseases (NIAID) Fact Sheet dated March 2001. An analysis of healthcare costs
associated with sexually transmitted diseases showed that the costs of HPV-related diseases ranked second only to the costs of the Human Immunodeficiency Virus, according to the U.S.
Department of Health and Human Services Centers for Disease Control and Prevention.

We
have a profitable bioreagent business, which supplies stress proteins and other bioreagents globally for use in academic, medical and commercial research. The production and sale of
bioreagents enhances the Company's business strategy by building a market presence in stress proteins and strengthening strategic relationships with other companies, academic institutions and stress
response researchers.

1

---

Business Strategy

Our business objective is to be a leader in the development and commercialization of novel immunotherapeutics for the treatment of virally-induced human disease.
Our business strategy includes the following elements:



Scientific Overview

Our technology uses Hsp covalently fused to antigens to activate the immune system.

The Immune System

The human immune system is the body's natural defense mechanism to prevent and combat disease. The immune system protects the body by specifically recognizing and
destroying invading viruses, bacteria and other pathogens. In addition, the immune system is capable of recognizing and eliminating abnormal cells from the body, such as cells infected with viruses
and to some degree precancerous and cancerous cells.

Scientists
currently describe the human immune system as using two complementary mechanisms to respond to pathogens, labeled innate and adaptive immunity. Innate immunity, which is a
"front-line" defense, includes dendritic cells, macrophages, natural killer (NK) cells and gamma delta T cells. These cells typically recognize structural components, including antigens,
common to disease-causing organisms and generate a prompt, but relatively non-specific response. Adaptive or acquired immunity, which can be triggered by an innate immune response or
operate independently, involves B cells and T cells. Adaptive immunity generates a "tailor made" or antigen-specific response.

B
cells make antibodies that prevent infection by attaching to invading pathogens and aiding in their disposal before they can infect cells. T cell responses are useful not only for
helping antibody production, but also for eradicating existing infected or diseased cells. These two types of immune defenses are called humoral (B cell) and cellular (T cell) immunity. While both
types of immune defenses may co-operate to defend against infection, scientists believe that once infection has been established, cellular immunity is required to eradicate such diseased
cells.

Induction
of a cellular immune response begins with the processing and presentation of antigens by specialized immune system cells called antigen presenting cells, such as dendritic
cells. Once inside dendritic cells, protein antigens are broken down into small fragments, called peptides. These peptides

2

---

are then presented on the dendritic cell surface. T cells continually scan the surface of dendritic cells for these peptides. When T cells recognize displayed peptides as being foreign, they
replicate rapidly and then search for and kill other diseased cells displaying those same peptides on their surface.

Peptides
are presented to T cells through two distinct pathways designated as the class I and class II pathways. Presentation of such peptides by the class I and
class II pathways activate different T cell subsets referred to as CD8+ T cells and CD4+ T cells. CD4+ T cells, which are also known as T helper (Th) cells, are further subdivided into Th1 and
Th2 cells. Activated Th1 and Th2 cells release molecules known as cytokines, which trigger other immune cells to produce either a predominantly cellular (Th1) or antibody-mediated (Th2) immune
response. Immune responses mediated by the cellular side of the immune system are characterized by the induction of CD8+ T cells called cytotoxic T lymphocytes (CTLs) or killer T-cells.
Killer T cells are capable of directly killing pathogen-infected cells and cancerous cells.

Stress or Heat Shock Proteins

Hsp are present in cells of all organisms from bacteria to mammals. Their structure and function are similar across these diverse life forms. Hsp play a major
role in the generation of immune responses and appear to activate both innate and adaptive immunity. Some scientists refer to Hsps as molecular chaperones due to their role in transporting peptides
within intracellular compartments. Hsp appear to activate both innate and adaptive immunity by interacting with newly identified Hsp receptors on antigen presenting cells such as dendritic cells.
Interaction of Hsp with such receptors may have at least two important consequences: cytokine secretion by the dendritic cell that promotes cellular immunity and internalization of the Hsp and bound
polypeptides by the dendritic cell into the class I pathway of antigen presentation.

Scientific Foundation of Stressgen Technology

Dendritic cells express receptors that specifically recognize Hsp. As a result, they should efficiently capture and process our Hsp fusions, which are Hsp
covalently linked to antigens. Hsp fusions appear to induce cellular immune responses, such as CTL, to antigens present in fusions, such as viral proteins and certain antigens expressed by cancer
cells. By providing a novel approach for inducing antigen-specific CTL responses, Hsp fusions may form the basis for a new class of therapeutic products. These immunotherapeutics would stimulate the
body's own immune system to attack a pathogen, as does a vaccine. Unlike existing preventative vaccines, Hsp fusions would trigger the immune system to respond to infected cells and cancers already
present in the body. Since preclinical research has shown that Hsp fusions induce CD8+ CTL responses in CD4+-deficient animals, even immunosuppressed individuals such as HIV+ patients and transplant
recipients, may be effectively treated by this platform technology.

Potentially,
Hsp fusions can be created with any number of disease-specific protein antigens. Our most developed product, HspE7, is a recombinant fusion protein composed of the HPV
protein E7 and a bacterial Hsp. In cells infected by HPV types that are associated with a "high risk" for cancer (such as HPV type 16), the E7 protein is involved in the malignant transformation of
epithelial cells. In all types of HPV infection, whether "low risk," including warts or "high risk," including precancer and cancer, the E7 protein theoretically provides a precise target by which the
immune system can recognize and attack HPV-infected cells. Therefore, induction of E7-specific cellular immunity by Hsp fusions offers a new approach to the immunotherapy of
HPV-associated diseases.

In
pre-clinical studies conducted using an animal model, administration of HspE7 has been shown to prevent the growth of, and cause the destruction of, tumors that express
the HPV E7 protein. Only the fusion protein induces significant tumor regression and long-term survival in these studies. Neither the E7 antigen nor the Hsp alone, nor a mixture of the
two, is effective. The requirement for a covalent attachment between the Hsp and the E7 protein may be explained by the presence of Hsp

3

---

receptors on dendritic cells. By virtue of its covalent attachment to the Hsp, the E7 protein is targeted to the dendritic cell, internalized and presented as E7 peptides by the class I
pathway to activate killer T cells. These E7-specific killer T cells may then be able to survey for and destroy E7 containing cancer cells.

Clinical
observations made in phase II trials for AIN and genital warts have indicated that treatment with HspE7 leads to disease improvement or clearance that is not restricted to
lesions containing a specific type of HPV. This originally surprising finding demonstrates the potential for HspE7 to treat diseases caused by multiple HPV types. Although the E7 protein present in
HspE7 was derived from HPV type 16, which is known to be associated with about half of all cervical cancer and a large proportion of anogenital dysplasias, which are precancerous lesions, our clinical
data strongly suggests that HspE7 can induce cross-reactive T cell responses in genital warts, which primarily are caused by HPV types 6 and 11.

Indications Caused by Human Papillomavirus

Many common diseases are caused by one of over 100 different types of HPV that researchers have detected and assigned letter-number designations. About
one-third of these HPV types is spread through sexual contact and infects only genital epithelial tissue. Low-risk types of HPV typically cause internal and external genital
warts, the most recognizable sign of genital HPV infection. Other, high-risk, types of HPV cause cervical and anal dysplasia, which are premalignant conditions graded as
low-grade or high-grade dysplasia, and cervical and anal cancer. Because HPV infection is latent in some cases, meaning that there are no visible symptoms, some infected
individuals are not aware that they have a persistent viral infection, increasing their risk of developing complications and of transmitting the virus to others. Recent data suggests that condoms do
not preclude the transmission of HPV.

Genital Warts

Genital warts are spread by sexual contact and are very contagious. Approximately two-thirds of people who have sexual contact with a partner with
genital warts will develop warts themselves, usually within three months of contact, according to the NIAID. Genital warts infect an estimated 1 million Americans each year, according to a
July 1999 NIAID Fact Sheet. Although the lesions may spontaneously regress, recurrence is typical. The lesions also frequently reappear after treatment.

Recurrent Respiratory Papillomatosis

Recurrent Respiratory Papillomatosis is caused by the same types of papillomavirus that cause genital warts. In fact, the term papillomas means warts. Over 2,000
new cases of pediatric RRP and over 3,500 new cases of adult RRP are diagnosed annually in the U.S., according to a study published in 1995 based upon a survey of members of the American Society of
Pediatric Otolaryngology, members of the American Bronchoesophagological Association and certified U.S. otolaryngologists. The papillomas in RRP are found mainly on the vocal cords but they can spread
into the trachea and lungs. Death can occur from complications of surgical treatments, airway obstruction, cancerous transformation, or the overwhelming spread of the disease. Patients die when the
papillomas spread to the lungs. Currently the only treatment available for RRP is surgery. There are no approved drugs or immunotherapies. Pediatric patients tend to have about 5 surgeries per year
and some children have hundreds of procedures.

Cervical Intraepithelial Neoplasia and Cervical Cancer

Cervical Intraepithelial Neoplasia, also known as cervical dysplasia, is characterized by the presence in the cervix of abnormal cells that often precede cervical
cancer. These abnormal cells can be

4

---

detected through regular Pap smear screening. In the United States more than 1.2 million women are diagnosed with low-grade cervical dysplasia, according to National Cancer
Institute estimates. Another 200,000 to 300,000 are diagnosed with high-grade cervical dysplasia in the U.S. each year, according to a December 1999 report of the Centers for
Disease Control. Worldwide, the incidence is much larger. The current treatment for CIN, which involves local surgical techniques, is not always effective because it may not remove all dysplastic
cells and does not treat the underlying viral infection. In addition, surgical treatments can result in complications such as reduced fertility.

CIN
often precedes cervical cancer, a global public health problem particularly in countries where routine Pap smears are not practiced. In the U.S. an estimated 13,000 new cases of
invasive cervical cancer will be diagnosed in 2002, and about 4,100 women will die of the disease, according to the American Cancer Society. Globally there are approximately 500,000 new cases of
cervical cancer
identified each year, resulting in nearly 300,000 deaths. Cervical cancer is the second most important cancer in women after breast cancer, according to a World Health Organization
February 1999 press release. Although death rates from cervical cancer have been decreasing, invasive cervical cancer remains associated with extreme morbidity.

Anal Intraepithelial Neoplasia

Anal Intraepithelial Neoplasia is characterized by the presence of abnormal cells that may precede anal cancer. High grade AIN is principally caused by HPV.
Perhaps partly because treatments for AIN, including surgical approaches, radiotherapy and chemotherapy, are ineffective, patients are not commonly screened for it. Data extrapolated from studies of
homosexual and bisexual men and the anal cancer population suggests that there may be 500,000 new cases per year in the U.S.

Indications Targeted in Early Stage Development and Research Programs

We are testing Hsp fusions for the indications described below to determine whether to advance the Hsp fusions into pre-clinical testing and clinical
trials.

Hepatitis B

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

Herpes Simplex Virus

Herpes Simplex Virus causes genital herpes. The prevalence of herpes simplex type-2 (HSV-2) has increased by 30% since the late 1970s and
is now detectable in about one in five persons 12 years of age or older in the US, according to the NIAID. An estimated 45 million Americans are already infected with genital herpes, and
there are an additional 500,000 to 1,000,000 new cases each year, the NIAID has written. Since HSV remains dormant in infected persons for their lifetime, genital herpes is a
recurrent disease, consisting of alternating episodes of virus reactivation with virus shedding, followed by resolution of the outbreak and return to virus dormancy. Some episodes of reactivation are
associated with skin blistering in the genital region, causing physical and psychological discomfort.

5

---

Because most episodes of the infection are asymptomatic, people having an outbreak may not be aware that they are transmitting herpes. As a result, HSV-2 is expected to continue to spread
rapidly. Except in newborns, genital herpes is not life-threatening. Nonetheless, it is distressing and can contribute to the spread of other sexually transmitted diseases, including HIV.

HIV

An estimated 800,000 to 900,000 people are infected with HIV in the U.S. alone, according to Centers for Disease Control and Prevention estimates. There are
approximately 40,000 new U.S. cases each year, according to the National Institutes of Health. Although there has been substantial progress in the management of HIV in recent years, significant issues
remain regarding viral resistance to current drug therapies and drug toxicity. As a result, researchers and physicians are actively seeking novel therapeutics to manage this disease.

HspE7 Development Program

Our clinical development program for HspE7 has evolved over time to take advantage of the results from clinical trials and to ensure we are addressing the
broadest potential markets. We originally focused on the potential of HspE7 to provide a non-surgical approach to reducing the risk of progression of CIN to cervical cancer. Because
surgical treatments exist for CIN and cervical cancer, we realized it would be difficult to obtain our first regulatory approval in these areas. We began focusing on AIN and anal cancer because they
are the same conditions as CIN and cervical cancer, but in a part of the body that is not effectively treated with surgery. In the course of our AIN studies, we discovered the regression of genital
warts in AIN patients who also had genital warts. Realizing that HspE7 potentially offers a more effective therapeutic for the treatment of genital warts than is currently available, and based on the
size of the genital warts market, we gave genital warts priority. To further accelerate the time to market, we sought a location in the body in which genital warts occurred for which we could receive
orphan drug status. We began looking at HspE7 as replacement for or adjunct to surgery for RRP, which is, in essence genital warts of the upper airways. As we hoped, the U.S. Food and Drug
Administration granted orphan drug status for HspE7 for the treatment of RRP. We recently chose genital warts, including RRP, as the first major market we will seek to enter with HspE7, based on the
data compiled from clinical trials to date, advice from a Clinical Advisory Board and market research. We hope to expand the indications for HspE7 to AIN, anal cancer, CIN, and cervical cancer after
the product is approved for genital warts.

The
following chart summarizes the on-going phase II and phase III clinical trials to evaluate HspE7. On-going clinical trials are conducted in the U.S. These
trials generally use a 500 ug dose given

6

---

once a month for three months, which we call the high dose, to distinguish it from a low 3x100 ug dose used in some completed clinical trials.

Clinical TrialsIndication

Phase

DescriptionGenital Warts
(including RRP)

II

Open-label RRP trial in pediatric patients requiring frequent surgery. HspE7 has orphan drug status for this indication.II

Ongoing chart review from the registry study listed below, following for a total of twenty-four months a subset of AIN patients who also had genital warts.Neoplasias
(including AIN and CIN)

III

Double-blind, placebo controlled AIN trial measuring pathological response at 6 months, followed by a blinded rollover for patients from the above trial who do not achieve partial pathological response at 6 or 9 months, or complete
pathological response at 12 months.II

Open registry of AIN patients, to follow-up from a completed low dose, double-blind, placebo controlled trial and a completed high dose open-label trial. High dose patients are followed for a total of 24 months.II

CIN study using a 4 × 500 ug dose. This study evaluates HspE7 under an IND which an independent investigator filed, cross referencing our IND and is not sponsored by Stressgen.


In
addition to the clinical trials shown on the table, we have final reports from five clinical trials, including two phase I trials and the following three phase II trials:



We
have data from a phase II up-to-18 month AIN registry which is still active. We have closed one phase II cervical cancer trial conducted in Brazil, for
which a report is in process.

Results of HspE7 Clinical Trials

Results from clinical trials to date suggests that the high dose of HspE7 is active against multiple types of HPV. The Company has announced the findings
described below from the on-going six month retrospective chart review covering AIN patients who also had genital warts, shown on the table, two completed phase II AIN trials, its
completed phase II genital warts trial and an active up-to-18 month phase II AIN registry. Because these findings include data from on-going trials, which is
only partially validated, and because the population being followed in the AIN registry is expected to increase significantly over 24 months, the results could change.



7

---



Fifty
percent of the patients on which there was data from the AIN follow-up registry at 18 months were in complete remission. Observations of complete response in
genital warts patients during the time
period 12 to 18 months from treatment, and of few or no recurrences to date, contrasts with the data for treatment of warts with surgery or topical therapy in which rapid recurrence is
extremely common.

Safety
data for treatment with HspE7 continue to be accumulated. The predominant adverse experience noted from HspE7 treatment at various doses and schedules is injection site reaction,
mild to moderate in severity, clearing in hours to days without treatment.

Early Stage Research Programs

Hsp fusions with other viral antigens are being developed using the same proprietary technology of fusing heat shock proteins to antigens used in the development
of HspE7. We are compiling preclinical data to support an Investigational New Drug filing for an Hsp fusion for the treatment of hepatitis B. We are currently evaluating, in animal models, the
potential utility of fusions composed of Hsp and a selected HBV antigen for the therapy of chronic HBV infection. In mice, these fusions have been shown to elicit cytotoxic T lymphocytes (CTL) which
recognize the HBV antigen, suggesting such T cells would be capable of killing HBV-infected cells. The T cells have also shown to produce the cytokine interferon gamma, which is known to
have anti-viral activity. The results of these preclinical studies demonstrate the potential efficacy of Hsp-HBV antigen fusions in the immunotherapy of chronic HBV infection.
The Company's management believes that its HBV program could offer hope in countering the disease's significant worldwide impact on human health.

8

---



Stressgen is currently assessing the development of Hsp fusion proteins for the immunotherapy of genital herpes. Presently, a number of HSV-2 proteins are being considered
for inclusion in Hsp fusions. These Hsp-HSV antigen fusions would be tested in animal models for induction of immune responses to the HSV antigens and for prevention and therapy of HSV
infection. An immunotherapy which can induce cellular immunity specific for HSV-2 antigens may lead to a treatment for genital herpes that reduces the number or duration of reactivation
episodes or prevents them entirely.

Scientists
at the Whitehead Institute for Biomedical Research, Stressgen's licensor, have demonstrated that an Hsp-HIV antigen fusion generates a humoral and cellular immune
response to the specific HIV antigen in mice. Investigators at Whitehead, the Massachusetts Institute of Technology (MIT) and Harvard University have applied for and received funding from the U.S.
National Institute of Health to conduct further animal studies of this therapeutic.

Intellectual Property

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

We
have a worldwide, exclusive license agreement with the Whitehead Institute for Biomedical Research for our core fusion technology, giving us rights to various patents, pending
applications, continuation-in-part applications and their foreign counterparts. Pursuant to the license agreement we fund the prosecution of the patent applications, which
currently include applications in the United States, Canada, Europe and Japan. Two U.S. patents and one European patent based on these Whitehead applications were granted in January 2002. These
patents cover Hsp fusions with viral (such as HIV) or cancer-associated antigens and their use as immunotherapeutics. Independently, we have filed additional patent applications directed to Hsp
fusions with other viral antigens, including HPV E6 and E7, and their use as immunotherapeutics. The Company also holds issued U.S. patents related to the detection of elevated levels of Hsp
expression. Our issued and exclusively licensed patents will expire on various dates between 2007 and 2019. Some of the U.S. patent applications received pre-GATT filing status.

Interpretation
and evaluation of biopharmaceutical or biotechnology patent claims present complex and often novel legal and factual questions. We cannot be sure that our pending
applications will result in issued patents, that the issued patents will be held valid and enforceable if challenged, or that a competitor will not be able to circumvent an issued patent by the
development or adoption of a competitive noninfringing product or process.

9

---

Research and Development Collaborations

We have entered into a clinical trials agreement with the United States National Cancer Institute for the co-development of our lead product, HspE7,
in the treatment of cancer. The NCI is the United States Government's principal institute for cancer research and training. Over 80% of all agents approved for the treatment of cancer by the FDA have
been tested or developed under an NCI-sponsored program. Under the terms of this agreement, the NCI will work collaboratively with us to develop a general plan for clinical development of
HspE7 for specified indications, solicit clinical research protocols from independent investigators and cooperative research groups affiliated with NCI and sponsor and fund their studies. We are
expected to provide clinical grade HspE7 for the investigators to use in their studies. The general plan and clinical protocols developed under the clinical trials agreement are independent of our
developmental plans for studies under our own sponsorship. As a result, the collaboration with the NCI allows us to test HspE7 in more clinical settings than we would be able to do independently.

We
have a number of research agreements that we believe provide us with important sources of research data and could lead to technology development opportunities. In November 1998 we
entered into a sponsored research agreement with MIT involving the examination of the mechanism by which stress proteins participate in regulating the immune system. We have the right to license
intellectual property arising from this collaboration. We have also entered into an agreement with the National Institute of Allergy and Infectious Diseases to test our hepatitis B candidate in
preclinical models, and into agreements with two institutions to study this fusion in an animal model.

Manufacturing

We contract with others for process development and manufacture of HspE7. We currently rely on one manufacturer for bulk HspE7 and have two manufacturers for the
dosage forms in vials. From these manufacturers we have obtained a quantity of HspE7 that is sufficient to complete our on-going phase II and phase III clinical trials. We
are developing a quality controlled and quality assured process for producing HspE7 that will be based on a set of standard operating procedures, analytical methods and specifications, so that HspE7
can be manufactured in commercial quantities in accordance with current good manufacturing practice and other regulations.

Bioreagent Business

Our bioreagent business supplies biomedical research reagents to researchers in not-for-profit research organizations and commercial
institutions worldwide. The primary products of the business involve antibodies, proteins, peptides, DNA products, ELISA kits, lysates and extracts, for use studying cellular stress, oxidative stress,
apoptosis, and neurobiology. Although we contract with third-party distributors in twenty-six countries, our primary markets are in North America, Europe and Asia. Sales have been
approximately 65% from the United States, 5% from Canada, 20% from Europe and 10% from the rest of the world in each of the last three years. We do not believe that any single customer is material to
our bioreagent business. Demand for our products tends to increase slightly when academic institutions in the Northern Hemisphere are in session.

We
manufacture products for inventory and ship products shortly after the receipt of orders, and anticipate that we will continue to do so in the future. Accordingly, we currently do not
have a significant backlog and do not anticipate we will develop a material backlog in the future. We believe the quantity of inventory we maintain is adequate to ensure reasonable customer service
while limiting the volatility of inventory levels. Inventory quantities can fluctuate significantly as we balance varying customer demand against fluctuating supplies of reagents available to us. We
buy materials for our products from many suppliers, and we are not dependent on any one supplier or group of suppliers. Raw materials are generally readily available at competitive prices from a
number of suppliers. We

10

---

believe that we will be able to continue to acquire and produce our products in quantities sufficient to meet our customers' current requirements.

We
require patent licenses to sell many of our products. Because our sales are spread over more than 400 products, with no class of products accounting for more than 10% of
consolidated revenues in the last three years, we believe that no individual patent or license is material to our bioreagent business.

Government Regulation and Product Approval Process

In the United States the Food and Drug Administration (FDA) regulates drugs and biological products. In Canada theFood and Drug
Act(Canada) and the rules and regulations promulgated thereunder govern the production and manufacturing of our products and our research and development activities; the
Health Products and Food Branch (HPFB) Inspectorate enforces these rules and regulations. In these and other jurisdictions, applicable drug licensing laws require carefully controlled research and
testing of products, governmental review and approval of results prior to marketing therapeutic products, licensure of manufacturing facilities and adherence to good manufacturing practices during
production.

The
principal activities which must be completed before obtaining approval for marketing in the United States and Canada are the completion of (1) development of a
well-controlled process of manufacturing, (2) preclinical studies of safety and pharmacology, and (3) studies of safety and efficacy in humans. Pre-clinical
studies are conducted to test chemistry, pharmacology and efficacy. Successful pre-clinical results, which entail achieving potentially valuable pharmacological activity combined with an
acceptably low level of toxicity, enable the manufacturer of the new drug to file an investigational new drug application to begin clinical trials involving humans. An investigational new drug
application must be filed with and accepted by the FDA or HPFB, as applicable, before human clinical trials may begin.

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

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

Upon
completion of all clinical studies, the results of these studies are submitted to the FDA as part of a biologics license application, in the case of a biological product, or to the
HPFB as part of a new drug submission, to obtain approval to commence marketing the product. In addition, we will need to file an application for an establishment license application for approval by
the FDA or HPFB to produce a product. Preparing any of these regulatory submissions involves considerable data collection, verification and analysis. There can be no assurances that any submissions or
applications will be approved on a timely basis or at all.

11

---

Even
after a marketing approval is obtained, further studies, including post-market studies, may be required to provide additional data on safety and efficacy necessary to
gain approval for the use of a product as a treatment for clinical indications other than those for which the product was initially tested. Also, the FDA or HPFB may require post-market
surveillance programs to monitor a product's side effects. Results of post-marketing programs may limit or expand the further marketing of products. A serious safety or effectiveness
problem involving an approved drug or medical device may result in FDA or HPFB action requiring withdrawal of the product from the market and possible civil action. If
we sought to have our product candidates approved as human prophylactic vaccines, the requirements would be even more onerous.

As
well as receiving pre-licensing approval, manufacturing facilities must conform on an ongoing basis with Good Manufacturing Practices, or GMP. In complying with GMP,
manufacturers must continue to expend time, money and effort in the area of production and quality control to ensure full compliance. After the establishment is licensed for the manufacture of any
product, manufacturers are subject to periodic inspections by regulatory authorities.

Whether
or not FDA or HPFB approval has been obtained, approval of a product by comparable regulatory authorities in Europe and other countries will likely be necessary prior to
commencement of marketing the product in such countries. Regulatory authorities in each country may impose their own requirements and may refuse to grant, or may require additional data before
granting, an approval even though the relevant product has been approved by another authority. The regulatory authorities in developed countries have lengthy approval processes for pharmaceutical
products. There can be no assurance that approvals will be granted on a timely basis, if at all, for any of our products.

We
are also subject to various federal, state, local and international laws, regulations and recommendations relating to safe working conditions, laboratory manufacturing practices and
the use and disposal of hazardous or potentially hazardous substances, including radioactive compounds and infectious disease agents, used in connection with our research work. We cannot predict
whether additional government regulations material to our business might result from future legislation or administrative action.

Competition

We are focused on the research and development of therapeutic products based on the intrinsic nature of stress proteins to assist the body in fighting infection,
related cancers and other diseases caused by hepatitis B virus, herpex simplex virus and HIV. Most, if not all, of the major pharmaceutical companies have significant research and product
development programs in these areas. These programs use approaches that do not employ stress proteins, but that seek to stimulate the body's immune system to recognize and to fight cancer and
infection. Other companies, such as Antigenics Inc., Peptor Ltd. and Mojave Therapeutics, Inc., have different approaches for using stress proteins to stimulate or modulate the
body's immune system.

A
variety of other approaches are being developed or have already been adopted and are routinely used for the management of diseases targeted by us. For example, genital warts are
treated by topical creams and ointments, cryosurgery, freezing, electro-cauterization and laser treatment. Papillomas and cancers caused by RRP, AIN and CIN are treated with surgeries. We expect to
encounter significant competition in the United States, Canada and foreign countries for each of the products we seek to develop. Many of our competitors have greater human and financial resources
dedicated to product development and human clinical testing than we do. While there is no current commercial product in
use that utilizes stress proteins as the recognized key component in a treatment, established treatments such as conventional drug therapy and surgery, and existing and other experimental vaccines,
will offer competition to our proposed products.

12

---

The
pharmaceutical industry is subject to rapid and substantial technological change. Technological competition from pharmaceutical and biotechnology companies, which have significantly
greater research and development capabilities, as well as substantial marketing, financial, and managerial resources, represent significant competition to us. Acquisitions of, or investments in,
competing biotechnology companies by large pharmaceutical companies could increase such competitors' financial, marketing and other resources. We cannot assure you that developments by others will not
render our proposed products or technologies non-competitive, or that we will be able to keep pace with technological developments. Competitors may have developed or may be in the process
of developing technologies that are, or in the future may be, the basis for competitive products. Some of these products may have an entirely different approach or means of accomplishing the
therapeutic effect than the products being developed by us.

Current
competition in the stress protein bioreagent market is limited but there are a few companies that have competing products. Affinity Bioreagents Inc. is a key competitor in
the stress protein bioreagent market. Several larger companies such as BD Transduction Laboratories, Upstate Biology and Santa Cruz Biotechnology Inc. have introduced a limited range of
competing products. We anticipate additional competition from other suppliers in the future but the effect on our competitive position is not yet determinable.

Human Resources

As of January 31, 2002 we employed approximately 86 personnel, of which 50 were engaged in, directly or indirectly, research and development efforts. Of
the scientific persons employed, one holds an M.D., ten hold Ph.D.s, and the balance hold either M.Sc. or B.Sc. degrees or other diplomas. Our employees are not covered by any collective bargaining
agreement. All employees are required to execute confidentiality and assignment of invention agreements as a condition of their employment.

RISK FACTORS

When evaluating our products and our business investors should carefully consider the following factors (as well as comparable risks not listed below) in addition
to the other information contained in this Annual Report on Form 10-K.

We Are At an Early Stage of Development

Our biotechnology business is still at an early stage of development. We must invest in significant additional research and development and clinical trials prior
to commercializing any of our technology. 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 only undertaken limited human clinical trials of some of our product candidates and we cannot assure you that the results obtained from laboratory or research studies
will be replicated in human studies or that such human studies will not identify undesirable side effects. We cannot assure you that any of our 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.

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

To date, we have not recorded any revenues from the sale of therapeutic products. Since inception through December 31, 2001, we have accumulated net losses
of approximately $105,247,000; we expect such losses to increase for at least the next several years as we continue research and development and

13

---

clinical trials. To become profitable, we, either alone or with one or more partners, must develop, manufacture and successfully market product candidates.

Our Product Development Programs Are Novel, So, Inherently Risky

Our business is subject to risks of failure that are inherent in our business of developing innovative immunotherapeutics. These risks include the possibilities
that:



There
is no precedent for the successful commercialization of products based on our technologies. It is possible that we will not successfully develop any therapeutic products.

Our Clinical Trials Could Take Longer to Complete Than Expected

Our forecasts regarding the commencement and completion of clinical trials can vary dramatically from the actual timing of these events due to factors including
scheduling delays, conflicts with the schedules of participating clinicians and clinical institutions and delayed patient accrual. The end points of some of our clinical trials for HspE7 require us to
determine whether it delays or prevents disease recurrence. These clinical trials are likely to take longer to complete than clinical trials involving other types of therapeutics. Our clinical trials
may not proceed on the schedules management predicts.

We
have limited experience in conducting clinical trials. We rely on corporate collaborators, academic institutions and clinical research organizations to conduct, supervise or monitor
some or all aspects of clinical trials involving our products. In addition, certain clinical trials for our products will be conducted by government-sponsored agencies and consequently will depend on
governmental participation and funding. We will have less control over the timing and other aspects of these clinical trials than if we conducted them entirely on our own. Delays in or failure to
commence or complete any planned clinical trials could reduce investors' confidence in our ability to develop products, likely causing our stock price to decrease.

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

Our manufacturing experience in bioreagents is not directly applicable to the manufacture of therapeutic products. We have not yet introduced any therapeutic
products and have no manufacturing experience for immunotherapies. Before we can be profitable, we need a cost-effective manufacturing process that produces commercial quantities of our
products in compliance with regulatory requirements. We do not currently have facilities for the production of the products we are developing. As a result, we plan initially to obtain the quantities
we require for clinical trials from contract manufacturing companies. In order to manufacture our products in commercial quantities, we will need to develop our own manufacturing facilities or
contract with third party manufacturers. Currently, we rely on a single active ingredient supplier of our HspE7 product candidate. We may not be able to enter into acceptable manufacturing
arrangements for various reasons including the possibility that manufacturers will dedicate their excess manufacturing capacity to specific vaccines and antibiotics in response to the Fall 2001
bioterrorism in the United States. If we cannot contract for large-scale manufacturing capabilities on acceptable terms, or if we encounter delays or difficulties in manufacturing, we may not be able
to conduct clinical trials as planned.

14

---

If
we seek to develop our own commercial manufacturing facilities, we will need substantial additional funds beyond what we have currently available. We would also need to hire
additional management and technical personnel with experience conducting manufacturing in accordance with applicable regulations of the U.S. Food and Drug Administration and Health Canada's Health
Products and Food Branch Inspectorate. We may not successfully develop facilities for commercial production.

Production
of our products may require raw materials which are scarce or which can be obtained from a limited number of sources. If we cannot obtain adequate supplies of such raw
materials, the development, regulatory approval and marketing of our products could be delayed.

We Must Obtain Additional Financing To Execute Our Business Plan

Our revenues from the production and sale of bioreagents are not adequate to support our therapeutic product development programs. As a result, we will require
substantial additional funds to conduct planned clinical trials, pursue further research and development, obtain regulatory approvals, establish pilot-scale manufacturing, market our products, file,
prosecute, defend and enforce our intellectual property rights and establish collaborative development and marketing arrangements. We will seek those additional funds through public or private equity
or debt financing, collaborative arrangements with pharmaceutical companies and/or from other sources. Any collaborative arrangements will likely require us to relinquish some or all of our rights to
our technology or products.

Although
we expect to seek additional funding when there are market opportunities, future funding may not be available on favorable terms or at all. If additional funding is not
obtained, the Company, to the extent necessary, will consider reducing, deferring or canceling planned initiatives or overhead expenditures. The failure to fund the Company's capital requirements
would have a material adverse effect on its business, financial condition and results of operations.

Our Success Depends On Our Ability to Protect Our Proprietary Rights and Operate Without Infringing The Proprietary Rights of Others

Our success will depend, in part, on our ability to obtain patents, maintain licenses and preserve trade secret protection. We also must operate without
infringing the proprietary rights of third parties and without third parties circumventing our rights. We have filed and are actively pursuing applications for United States and non-United
States patents. The patent positions of pharmaceutical and biotechnology firms, 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 United States Patent and Trademark
Office or enforced by the United States 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 United States is even more uncertain and is currently undergoing review and revision in many countries. The laws of other countries may not protect our
intellectual property rights to the same extent as the laws of the United States or Canada. 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. We cannot assure you that any of
our patent applications will result in the issuance of patents, that we will develop additional patentable products, that any patents issued to us will provide us with any competitive advantages, that
such patents will not be challenged by third parties, that the patents of others will not impede our ability to do business or that third parties will not be able to circumvent our patents. Other
companies may independently develop similar products and design around any patented products we develop.

15

---

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

Patent
litigation is becoming widespread in the biotechnology industry. Such litigation may affect our efforts to form collaborations, to conduct research or development, to conduct
clinical testing or to manufacture or market any products under development. We cannot assure you that our patents, if issued, would be held valid or enforceable by a court or that competitor's
technology or product would be found to infringe our patents. Our business could be materially affected by an adverse outcome to such litigation. Similarly, we might have to participate in
interference proceedings declared by the United States Patent and Trademark Office or equivalent international authorities to determine priority of invention. We could incur substantial costs and
devote significant management resources to defend our patent position or seek a declaration that the patents of others are invalid.

Much
of our know-how and technology may not be patentable, though it may constitute trade secrets. We cannot assure you that we will be able to meaningfully protect our trade
secrets. We cannot assure you that any of the existing confidentiality agreements with our employees, consultants, advisors or collaborators will provide meaningful protection for our trade secrets,
know-how or other proprietary information in the event of any unauthorized use or disclosure. Collaborators, advisors or consultants may dispute the ownership of proprietary rights to our
technology, for example by asserting that they developed it independently.

Our Success Depends On Collaborative Partners, Licensees and Other Third Parties Over Whom We Have Limited Control

Our business depends on our entering into arrangements with corporate and academic collaborators, licensors, licensees and others for the research, development,
clinical testing, manufacturing, marketing and commercialization of our products. While we have several research collaborations, we currently do not have any corporate partners or licensees involved
in the development and eventual commercialization of our product candidates. We may not be able to establish collaborations on favorable terms, if at all, and our current or future collaborations may
not be successful.

There
are a number of risks associated with our dependence on collaborative agreements with third parties. Our business could be adversely affected if any collaborative partner fails to
develop or manufacture in adequate quantities a substance we need in order to conduct clinical trials, fails to adequately perform clinical trials or fails to develop, manufacture or commercialize an
end product to which it has or we have rights. Problems of our collaborative partners could delay or halt the development or commercialization of our products. In addition, we cannot assure you that
our collaborative partners will not pursue other technologies or develop alternative products that could compete with our future products.

We
currently hold licenses from third parties for certain technologies and plan to acquire additional licenses to technologies developed by other companies and academic institutions.
Pursuant to the terms of these license agreements, we could be obligated to diligently bring potential products to market, make milestone payments that, in some instances, could be substantial, and
incur the costs of filing and prosecuting patent applications. We cannot assure you that these licenses will not terminate

16

---

or that they will be renewed. In addition, we cannot assure you that these licenses will remain in good standing. In the event of a breach of the terms of any license, the licensor may attempt to
terminate the license.

We May Not Be Able to Obtain the Regulatory Approvals or Clearances That Are Necessary to Commercialize Our Products

The United States, Canada and other countries impose significant statutory and regulatory obligations upon the manufacture and sale of human therapeutic products.
In order for our products to obtain marketing approval and clearance for each indication, our preclinical and clinical data and manufacturing facilities will need to meet complex criteria establishing
the safety and efficacy of the products.

Our
product candidates are currently in the early stages of development and 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, do not prove to be safe and effective in clinical trials or do not receive applicable regulatory approvals and clearances, or if there are delays in the process:



Governmental
and regulatory authorities may approve a product candidate for fewer indications than we request or may condition approval on the performance of post-marketing
studies for a product candidate. Even if we receive regulatory approval and clearance, our product candidates may later exhibit adverse side effects that limit or prevent their widespread use or that
force us to withdraw those product candidates from the market. In addition, any marketed product and its manufacturer will continue to be subject to strict regulation after approval. Any unforeseen
problems with an approved product or any violation of regulations could result in restrictions on the product, including its withdrawal from the market.

If
we fail to comply with applicable regulatory requirements at any stage during the regulatory process, we or our contract manufacturers may be subject to sanctions, including fines,
product recalls or seizures, injunctions, refusal of regulatory agencies to review pending market approval applications or supplements to approval applications, total or partial suspension of
production, civil penalties, withdrawals of previously approved marketing applications and criminal prosecution.

We
and our contract manufacturers will be required to comply with applicable good manufacturing practices regulations, which include requirements relating to quality control and quality
assurance as well as the corresponding maintenance records and documentation. If we or our contract manufacturers cannot comply with regulatory requirements including applicable good manufacturing
practice requirements, we may not be allowed to develop or market product candidates.

Even If We Obtain All Necessary Regulatory Approvals, Our Products May Not Gain Market Acceptance

Our products may not gain market acceptance among physicians, patients, healthcare payors and the medical community. The degree of market acceptance of any
product that we may develop will depend
on a number of factors, including establishment and demonstration of clinical efficacy and safety, cost-effectiveness of the products, their potential advantage over alternative products
and marketing and distribution support for the products.

17

---

Our
sales experience is limited to the sale of our bioreagents. To directly market and distribute any pharmaceutical products we may develop, we must build a substantial marketing and
sales force with appropriate technical expertise and supporting distribution capabilities. Alternatively, we may obtain the assistance of a more experienced pharmaceutical company or other entity. We
may not be able to establish sales, marketing and distribution capabilities of our own or enter into arrangements with third parties on terms that are acceptable to us. To the extent that we enter
into co-promotion or other licensing arrangements with respect to any products that we may develop, our product revenues will be lower than if we directly marketed and sold our products,
and any revenues that we receive will depend on potentially unsuccessful efforts of third parties.

Our Operations Involve Regulated Hazardous Materials Which Could Subject Us to Damages Resulting from Accidental Contamination or Injury

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

Competitors May Develop and Market Drugs That Are Less Expensive, More Effective or Safer, Making Our Products Obsolete or Uncompetitive

Technological competition from pharmaceutical companies and biotechnology companies is intense and is expected to increase. Many of our competitors and potential
competitors have substantially greater product development capabilities and financial, scientific, marketing and human resources than ours. Other companies have developed technologies that could be
the basis for competitive products. Some of these products have an entirely different approach or means of accomplishing the desired therapeutic effect than products being developed by us and may be
more effective and less costly than the products developed by us. Competitors may succeed in developing products earlier than us, obtaining approvals and clearances for such products more rapidly than
us, or developing products that are more effective than ours. In addition, other forms of medical treatment may be competitive with our products. Our technology or products may become obsolete or
uncompetitive.

We Have Yet to Market or Sell Any Pharmaceutical Products

Our pharmaceutical products have not been approved for sale by any regulatory agencies. Although we sell bioreagents, we have never marketed or sold any
pharmaceutical product. In order to market or co-market our product candidates, we will need to hire a significant number of people with relevant pharmaceutical experience to staff our
sales force and marketing group, or possibly obtain such capabilities through arrangements with strategic partners. If we cannot develop the required marketing and sales expertise internally or
through our partnering arrangements, our ability to generate revenue from product sales will be limited. We cannot guarantee that we will be able to enter into marketing or sales arrangements with
strategic partners on terms favorable to us, or at all. Marketing efforts by collaborators may not succeed.

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

We depend on a core management and scientific team. The loss of any of these individuals may prevent us from achieving our business objective of commercializing
our product candidates. Our future success will also depend in large part on our continued ability to attract and retain other highly

18

---

qualified scientific, technical and management personnel, as well as personnel with expertise in clinical testing and government regulation. We face competition for personnel from other companies,
universities, public and private research institutions, government entities and other organizations. If we are unsuccessful in our recruitment and retention efforts, our business operations will
suffer.

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

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

Our Product Candidates Subject Us To the Risk of Product Liability Claims for Which We May Not Be Able to Obtain Adequate Insurance Coverage

Since we conduct clinical trials on humans, our product candidates could harm the test subjects. 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. This type of insurance is expensive, difficult to obtain and may not be available in the future. If we cannot obtain sufficient insurance coverage or other protection against potential product
liability claims, we may not be able to commercialize potential products. If any liabilities from a claim exceed the limit of our insurance coverage, we may not have the resources to pay them.

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

As is typical for biotechnology companies without an FDA-approved product on the market, our share price has been highly volatile in the past and is
likely to continue to be volatile. Factors such as the announcement of technological innovations, the release of publications, the announcement of clinical trials results by us or our competitors, the
development of new commercial products, the granting of patents or exclusive licenses, changes in regulations, the release of financial results, public concerns over risks relating to biotechnology,
future issuances of shares by us or sales of shares by our shareholders and many other factors could materially affect the price of our shares.

Item 2. PROPERTIES

Most of our administrative and management functions are provided by our subsidiary, Stressgen Biotechnologies, Inc., which operates from a principal
executive office in San Diego, California and a development, clinical research and regulatory affairs office, in Collegeville, Pennsylvania. Our principal research facilities and bioreagent business
are in Victoria, British Columbia. We lease approximately 5,500 square feet of office space in San Diego under a lease that expires in January 2004. Our Collegeville, Pennsylvania lease
approximates 5,000 square feet and expires in December 2004. Our Victoria, British Columbia facilities comprise 25,000 square feet of office, research and manufacturing space
under a lease that expires at the end of 2005.

19

---

Item 3. LEGAL PROCEEDINGS

As of the date hereof, we are not a party to any material legal proceedings. From time to time we are involved in certain litigation arising out of our
operations.

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

We did not submit any matters to a vote of security holders, through the solicitation of proxies or otherwise, during the quarter ended December 31, 2001.

20

---



PART II

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

Common Share Information

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

High

Low2001Fourth Quarter

4.85

3.15Third Quarter

5.80

2.77Second Quarter

6.92

4.55First Quarter

7.19

4.302000Fourth Quarter

7.85

6.65Third Quarter

10.00

7.10Second Quarter

7.60

4.35First Quarter

13.35

2.55


The
last reported sale price of our common shares on The Toronto Stock Exchange on March 1, 2002 was $4.70.

As
of March 1, 2002, we had 85 registered holders of our common shares, 20 of whom were residents of the United States. Of the approximately 57,641,000 common shares outstanding,
the portion held by registered holders resident in the United States was approximately 6,139,000, or 10.6%.

Dividend Policy

We have not declared or paid any dividends on our common shares since inception. We anticipate that all available cash will be needed to finance the expansion of
our business and have no plans to pay dividends in the foreseeable future.

Changes in Securities

In December 2001, we issued a total of 6,699,100 common shares in a Canadian offering which was exempt from U.S. registration requirements under
Regulation S. The offering was made by a syndicate of underwriters co-led by Raymond James Ltd. and BMO Nesbitt Burns Inc. and including Yorkton Securities Inc.
The common shares were issued at the price of $4.15 each, for gross proceeds of approximately $27,801,000. Of these common shares, 580,000 were issued to "Qualified Institutional Buyers" as defined in
Rule 144A under the Securities Act of 1933, as amended.

We
paid to the underwriters and incurred share issue costs of approximately $1,645,000 in consideration of services rendered by them in connection with the offering. We also agreed to
indemnify the underwriters and their broker/dealer affiliates against certain liabilities, including liabilities under the
United States securities laws and under Canadian securities legislation and to contribute to payments that the underwriters may be required to make in respect thereof. In addition, we agreed not to
issue or enter into agreement to issue any common shares or any securities

21

---

convertible into or exchangeable for common shares without the prior consent of the underwriters, such consent not to be unreasonably withheld, until the date which is 90 days after the
closing of the offering, except:



The
common shares issued to Qualified Institutional Buyers as described above may be transferred only:



We
intend to use the net proceeds of the financing primarily to fund product development activities planned for HspE7, and for research and development, working capital and general
corporate purposes.

Exchange Controls and Other Limitations Affecting Holders of Common Shares

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

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

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

The
acquisition of a majority of the voting interests of an entity or of a majority of the undivided ownership interests in the voting shares of an entity that is a corporation is deemed
to be acquisition of control of that entity. The acquisition of less than a majority but one-third or more of the voting shares of a corporation or of an equivalent undivided ownership
interest in the voting shares of the

22

---

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



The
ICA was amended with theAct to Implement the Agreement Establishing the World Trade Organization(Canada) to provide for special
review thresholds for World Trade Organization member country investors. Under the ICA, as amended, an investment in our common shares by an investor from a country which is a member of the WTO would
be reviewable only if it were an investment to acquire control of the Company and the value of the assets of the Company was equal to or greater than a specified amount, which increases in stages. The
review threshold is currently $209 million. This amount is subject to an annual adjustment on the basis of a prescribed formula in the ICA to reflect inflation and real growth within Canada.

Certain Canadian Federal Income Tax Information for United States Residents

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

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

23

---

obtained from Canada Customs and Revenue Agency to confirm the tax consequences of any of the transactions described herein.

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

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

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

Amounts
in respect of common shares paid or credited or deemed to be paid or credited as, on account or in lieu of payment of, or in satisfaction of, dividends to a U.S. Resident will
generally be subject to Canadian non-resident withholding tax at the rate of 25%. Currently, under the Convention the rate of Canadian non-resident withholding tax will
generally be reduced to: (i) 5% of the gross amount of dividends if the beneficial owner is a company (other than a limited liability company) that is resident in the United States and that
owns at least 10% of the voting stock of the Company; or (ii) 15% of the gross amount of dividends if the beneficial owner is a resident of the United States but does not qualify for the 5%
withholding rate.

United States Federal Income Tax Considerations

The following summary is a general description of the material United States federal income tax consequences of the purchase, ownership and disposition of common
shares by U.S. Holders (as defined below). The tax consequences of an investment in the common shares by persons who are not

24

---

U.S. Holders may be expected to differ substantially from the tax consequences discussed herein. This summary does not address all potentially relevant U.S. federal income tax matters. This
description is intended for general information purposes only and is based on the United States Internal Revenue Code of 1986, as amended (the "Code"), Treasury regulations promulgated thereunder, and
judicial and administrative interpretations thereof, all as in effect on the date hereof and all of which are subject to change. Any such change, which may or may not be retroactive, could alter the
tax considerations discussed herein. This summary does not consider the potential effects, both adverse and beneficial, of any recently proposed legislation, which, if enacted, could be applied,
possibly on a retroactive basis, at any time. The tax treatment of a holder of common shares may vary depending upon his particular situation. Certain holders (including, but not limited to, persons
that are not U.S. Holders, banks, insurance companies, tax-exempt organizations, financial institutions, persons subject to the alternative minimum tax, real estate investment trusts,
regulated investment companies, persons or entities that have a "functional currency" other than the U.S. dollar, shareholders who acquired their stock through the exercise of employer stock options,
and broker-dealers) may be subject to special rules not discussed below. The following summary is limited to U.S. Holders who will hold the common shares as "capital assets" within the meaning of
Section 1221 of the Code, and do not actually or constructively own 10% or more of the voting stock of the Company. The discussion below does not address the effect of any state, local or
foreign tax law on a holder of the common shares.

This
summary is for general information only and it is not intended to be, nor should it be construed to be, legal or tax advice to any particular U.S. Holder of common shares. No
opinion or representation with respect to the United States federal income tax consequences to any such U.S. Holder is made. Accordingly, prospective investors should consult their own tax advisors
about the federal, state, local, and foreign tax consequences of purchasing, owning and disposing of common shares.

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

Subject
to the discussion of the "passive foreign investment company" rules below, for United States federal income tax purposes, the gross amount of a distribution with respect to
common shares will
include the amount of any Canadian federal income tax withheld, and will be treated as a taxable dividend to the extent of the Company's current and accumulated earnings and profits. For U.S. foreign
tax credit purposes, the source of the dividends will be based in general on the source of the earnings that give rise to the distributions. See Code Section 861(a)(2). U.S. source income can
adversely affect a U.S. Holders' ability to utilize foreign tax credits. U.S. corporate holders generally will not be allowed a deduction for dividends received in respect of distributions on common
shares. To the extent that distributions exceed current or accumulated earnings and profits of the Company, they will be treated first as a return of capital up to the U.S. Holder's adjusted basis in
the common shares and thereafter as gain from the sale or exchange of the common shares.

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

25

---

Subject
to the limitations set forth in the Code, as modified by the United States-Canada income tax treaty, U.S. Holders may elect to claim a credit against their United States federal
income tax liability for Canadian income tax withheld from dividends received in respect of common shares. U.S. Holders should be aware that dividends paid by the Company generally will constitute
"passive income" for purposes of the foreign tax credit, which could reduce the amount of foreign tax credit available to a U.S. Holder. The rules relating to the determination of the foreign tax
credit are complex. U.S. Holders should consult their personal tax advisors to determine whether and to what extent they would be entitled to such credit. U.S. Holders that do not elect to claim
foreign tax credits may instead claim a deduction for Canadian income tax withheld.

Subject
to the discussion of the "passive foreign investment company" rules below, the sale of common shares will generally result in the recognition of gain or loss in an amount equal
to the difference between the amount realized on the sale and the holder's adjusted basis in such common shares. Gain or loss upon the sale of the common shares will be long-term or
short-term capital gain or loss, depending on whether or not the common shares were held for more than one year prior to the sale. Preferential tax rates for long-term net
capital gains are applicable to a U.S. Holder that is an individual, estate or trust. There are currently no preferential tax rates for long-term capital gains for a U.S. Holder that is a
corporation. Short-term capital gains, however, are generally taxed at ordinary income tax rates. Gain realized by a U.S. Holder that is a United States resident as defined in
Section 865 of the Code on the sale or other disposition of common shares generally will be treated as U.S. source and, under Treasury Regulations adopted on January 8, 1999 and amended
on December 27, 2001, any loss will also generally be treated as U.S. source, subject to exceptions relating to unamortized bond premium, accrued interest, offsetting positions and other
situations.

Deductions
for net capital losses are subject to significant limitations. For U.S. Holders that are individuals, any unused portion of such net capital loss may be carried over to be
used in later tax years until such net capital loss is thereby exhausted. For U.S. Holders that are corporations (other
than corporations subject to Subchapter S of the Code), an unused net capital loss may be carried back three years from the loss year and carried forward for the five years succeeding from the loss
year to be offset against capital gains.

Special
rules are applicable to U.S. Holders that hold stock of a "passive foreign investment company" ("PFIC"). A foreign corporation is a PFIC if at least 75% of its gross income for
the taxable year is passive income or if at least 50% by value of the assets it holds during the taxable year produce or are held for the production of passive income. For publicly traded corporations
such as the Company, the asset test is met if the fair market value of passive income-producing assets equals or exceeds 50% of the sum of the corporation's liabilities plus the value of its
outstanding stock. U.S. Holders of common shares can be significantly affected by the PFIC rules if they hold or have held the Company's common shares in a year in which the Company has or had PFIC
status. Because PFIC status depends on the character of the Company's income and assets in each year, there can be no assurance with respect to whether the Company will qualify as a PFIC in future
years. Therefore, each prospective investor is urged to consult with a tax advisor with respect to how the PFIC rules would affect its tax situation.

If
the Company is or was a PFIC in any taxable year in which a U.S. Holder holds (or is deemed to have held) its shares, there are generally adverse tax consequences unless the U.S.
Holder elects one of two alternative United States federal income taxation treatments. The tax regime that applies to a U.S. Holder that does not make an election for alternative treatment (a
"Non-electing U.S. Holder") is described below. In general, a Non-electing U.S. Holder would be required to prorate all gains realized on the disposition of such U.S. Holder's
common shares and all "excess distributions" (as such term is defined by Section 1291) over the entire holding period for the common shares, beginning with the first taxable year of the
Company. All gains or excess distributions allocated to prior years (other than years during such U.S. Holder's holding period that are prior to the first taxable year in which the Company

26

---

was a PFIC) would be taxed at the highest tax rate for each such prior year applicable to ordinary income. The Non-electing U.S. Holder also would be liable for interest on the foregoing
tax liability for each such prior year calculated as if such tax liability had come due in each such prior year. A Non-electing U.S. Holder that is not a corporation must treat this
interest charge as "personal interest" which is wholly non-deductible. The balance of the gain or the excess distribution will be treated as ordinary income in the year of the disposition
or distribution, and no interest charge will be incurred with respect to such balance. In addition, the tax basis of the common shares held by a Non-electing U.S. Holder who is an
individual would not be stepped-up to fair market value upon his death. If a Non-electing U.S. Holder holds the Company's stock in a year the Company is a PFIC, it must
continue to treat the Company as a PFIC, even if the Company no longer meets the definition of a PFIC, unless the Non-electing U.S. Holder makes a "deemed disposition" election under
Section 1298(b)(1) of the Code.

The
Internal Revenue Service has issued proposed regulations under Section 1291(f) of the Code that would treat as taxable certain transfers of PFIC stock by
Non-electing U.S. Holders that are generally not otherwise taxed, including transfers at death, exchanges pursuant to corporate reorganizations and gifts, subject to certain exceptions.
Certain special, generally adverse, rules will apply with respect to the common shares while the Company is a PFIC whether or not it is treated as a qualified electing fund, as described below. For
example, under Section 1298(b)(6) of the Code, a U.S. Holder who uses
PFIC stock as security for a loan (including a margin loan) will, except as may be provided in the regulations, be treated as having made a taxable disposition of such stock.

Under
one alternative tax regime, a U.S. Holder can elect to treat the Company as a qualified electing fund (a "QEF"). A U.S. Holder that makes this election (an "Electing U.S. Holder")
in a timely manner will be subject to current federal income tax for any taxable year in which the Company qualifies as a PFIC on his pro rata share of the Company's (i) "net capital gain" (the
excess of net long-term capital gain over net short-term capital loss), which will be taxed as long-term capital gain to the Electing U.S. Holder and
(ii) "ordinary earnings" (the excess of earnings and profits over net capital gain), which will be taxed as ordinary income to the Electing U.S. Holder, regardless of whether such amounts are
actually distributed. An effective QEF election also allows the Electing U.S. Holder to (a) generally treat any gain realized on the disposition of its common shares (or deemed to be realized
on the pledge of his shares) as capital gain; (b) treat its share of the Company's net capital gain, if any, as long-term capital gain instead of ordinary income; and
(c) make an annual election, subject to certain limitations, to defer payment of current taxes on its share of the Company's undistributed annual realized net capital gain and ordinary earnings
subject, however, to an interest charge. Special adjustments are provided to prevent inappropriate taxation of amounts included in a U.S. Holder's income upon a subsequent distribution or disposition
of stock. If the Electing U.S. Holder is not a corporation, such an interest charge would be treated as "personal interest" that is not deductible at all in taxable years beginning after 1990. When a
timely QEF election is made, if the Company no longer qualifies as a PFIC in a subsequent year, normal Code rules apply.

The
procedure a U.S. Holder must comply with in making an effective QEF election will depend on whether the year of the election is the first year in the U.S. Holder's holding period in
which the Company is a PFIC. A QEF election made in such first year is considered a timely QEF election, and can be made by simply filing the appropriate documents (currently Internal Revenue Service
Form 8621) at the time the U.S. Holder files a tax return for such first year. A QEF election must be filed by the due date (taking into account extensions) for filing the U.S. Holder's income
tax return for the tax year for which the election is made. A separate election would be required for each non-U.S. subsidiary of the Company that qualifies as a PFIC. In the case of stock
owned through a U.S. entity, the election generally must be made at the entity level. Once made, the election is effective for the shareholder's taxable year for which it is made and all subsequent
taxable years, and may not be revoked without consent of the Secretary of the Treasury.

27

---

If
the U.S. Holder files a QEF election after the first year in the U.S. Holder's holding period in which the Company qualified as a PFIC, then the election is not considered timely. In
addition to filing documents, such U.S. Holder must elect to recognize (i) under the rules of Section 1291 of the Code (discussed below) any gain that he would otherwise recognize if the
U.S. Holder sold his stock on the application date or (ii) if the Company is a controlled foreign corporation (a "CFC"), the U.S. Holder's pro rata share of the Company's earnings and profits
as of the application date. By electing to recognize such gain or earnings and profits, the U.S. Holder will be deemed to have made a timely QEF election.

So
that U.S. Holders may, at their option, file a QEF election, the Company intends to (i) provide timely and accurate information as to the status of the Company and its
subsidiaries as PFICs and the manner in which the QEF election can be made and (ii) comply with all record-keeping, reporting and other requirements. At the request of a U.S. Holder the Company
will provide a "PFIC Annual Information Statement" pursuant to the Treasury Regulations issued by the Internal Revenue Service, if practicable. Nonetheless, if meeting the record-keeping and reporting
requirements becomes onerous, the Company may decide, in its sole discretion, that such compliance is impractical and will so notify U.S. Holders.

Under
a second alternative tax regime, a U.S. Holder may make a mark-to-market election with respect to the stock of the PFIC if such stock is "marketable" as
defined below. The mark-to-market elections provisions apply to tax years of U.S. persons beginning after December 31, 1997, and to tax years of foreign corporations
ending with or within such tax years of U.S. persons. As a result of a mark-to-market election, any excess of the fair market value of the PFIC stock at the close of the tax
year over the shareholder's adjusted basis in the stock would be included in the shareholder's income. The shareholder may deduct any excess of the adjusted basis of the PFIC stock over its fair
market value at the close of the tax year. However, deductions are limited to the net mark-to-market gains on the stock that the shareholder included in income in prior tax
years, or so called "unreversed inclusions." For purposes of the election, PFIC stock is marketable if it is regularly traded on (i) a national securities exchange that is registered with the
Securities and Exchange Commission, (ii) the national market system established under Section 11A of the Securities and Exchange Act of 1934, as amended, or (iii) an exchange or
market that the IRS determines has rules sufficient to ensure that the market price represents legitimate and sound fair market value. The Company believes its common shares are marketable securities
under this test.

A
U.S. Holder's adjusted basis of PFIC stock is increased by the income recognized under the mark-to-market election and decreased by the deductions allowed under
the election. If a U.S. Holder owns PFIC stock indirectly through a foreign entity, the basis adjustments apply to the basis of the PFIC stock in the hands of the foreign entity for the purpose of
applying the PFIC rules to the tax treatment of the U.S. owner. Similar basis adjustments are made to the basis of the property through which the U.S. persons hold the PFIC stock.

Income
recognized under the mark-to-market election and gain on the sale of PFIC stock with respect to which an election is made is treated as ordinary income.
Deductions allowed under the election and loss on the sale of PFIC stock with respect to which an election is made, to the extent that the amount of loss does not exceed the net
mark-to-market gains previously included, are treated as ordinary losses. The United States or foreign source of any income or losses is determined as if the amount were a gain
or loss from the sale of stock in the PFIC.

The
rules of Section 1291 of the Code applicable to nonqualified funds generally do not apply to a shareholder for tax years for which a mark-to-market
election is in effect. If Section 1291 is applied and a mark-to-market election was in effect for any prior tax year, the shareholder's holding period for the PFIC stock
is treated as beginning immediately after the last tax year of the election. However, if a taxpayer makes a mark-to-market election for PFIC stock that is a nonqualified fund
after the

28

---

beginning of a taxpayer's holding period for such stock, a coordination rule applies to ensure that the taxpayer does not avoid the interest charge with respect to amounts attributable to periods
before the election.

If
more than 50% of the voting power of all classes of stock or the total value of the stock of the Company is owned, directly or indirectly, by citizens or residents of the United
States, United States domestic partnerships and corporations or estates or trusts other than foreign estates or trusts, each of whom own 10% or more of the total combined voting power of all classes
of stock of the Company ("10% U.S. Shareholders"), the Company could be treated as a CFC under Subpart F of the Code. If in 1998 or thereafter the Company qualifies as a CFC, 10% U.S. Shareholders are
generally not required to apply the PFIC rules, provided that, in some cases, complex tax elections are made. The classification of the Company as a CFC would effect many complex results including the
required inclusion by 10% of U.S. Shareholders' in income of their pro rata shares of Subpart F income of the Company. In addition, under Section 1248 of the Code, gain from the sale or
exchange of stock by a holder of the Company's shares who is or was a 10% U.S. Shareholder at any time during the five-year period ending with the sale or exchange is treated as ordinary
dividend income to the extent of earnings and profits of the Company attributable to the stock sold or exchanged. Because of the complexity of Subpart F, and because it is not clear that Subpart F
would apply to the holders of the Company's shares, taxpayers that may be 10% U.S. Holders are urged to consult with their tax advisors to determine the applicable rules.

The
foregoing discussion is based on currently effective provisions of the Code, existing and proposed regulations thereunder, and current administrative rulings and court decisions, all
of which are subject to change. Any such change could affect the validity of this discussion. In addition, the implementation of certain aspects of the PFIC rules requires the issuance of regulations
which in some instances have not been promulgated and which may have retroactive effect. There can be no assurance that any of these regulations will be enacted or promulgated, and if so, the form
they will take or the effect that they may have on this discussion. Accordingly, and due to the complexity of the PFIC rules, U.S. persons who are shareholders of the Company are strongly urged to
consult their own tax advisors concerning the impact of these rules on their investment in the Company.

Item 6. SELECTED FINANCIAL DATA

Annual Financial Data

Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles in Canada ("Canadian GAAP"). These principles
differ in certain respects from generally accepted accounting principles in the United States ("U.S. GAAP"). The differences as they
affect our financial statements are described in Note 12 to our audited consolidated financial statements filed as part of Item 8 hereof. Because we report on a consolidated basis, our results
include those of our subsidiaries, including a U.S. subsidiary, which provides management, research and development services, and a Barbados subsidiary, which is becoming increasingly responsible for
product development.

29

---

Consolidated Statement of Operations Data

|                                        |                        | Year ended December 31 |  
|--------------------------------------- | ---------------------- | ---------------------- | -
|
|
|Net revenues                            |                        |                        |  
|                                        | Canadian and U.S. GAAP |                        | $
|Research and development expenses       |                        |                        |  
|                                        | Canadian and U.S. GAAP |                        |  
|Net loss(1)                             |                        |                        |  
|                                        | Canadian GAAP          |                        |  
|                                        | U.S. GAAP              |                        |  
|Basic and diluted loss per common share |                        |                        |  
|                                        | Canadian GAAP          |                        |  
|                                        | U.S. GAAP              |                        |  

Consolidated Balance Sheet Data

|                                |               | As of December 31
|------------------------------- | ------------- | -----------------
|
|
|Cash and short-term investments |               |                  
|                                | Canadian GAAP |                  
|                                | U.S. GAAP     |                  
|Total assets(2)                 |               |                  
|                                | Canadian GAAP |                  
|                                | U.S. GAAP     |                  
|Long-term obligations(3)        |               |                  
|                                | Canadian GAAP |                  
|                                | U.S. GAAP     |                  

The information set forth above is not necessarily indicative of the results of future operations and should be read in conjunction with the
consolidated financial statements and related notes thereto and with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included as part of this
Form 10-K.



30

---



Currency Exchange Rates

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

The
table below shows relevant exchange rates which approximate the noon buying rates in New York City as reported by the Federal Reserve Bank of New York for cable transfers expressed
in Canadian dollars for the five most recent fiscal years of the Company. The average rate means the average of the exchange rates on the last day of each month during a year.

|           |  | Fiscal Year Ended December 31,
|---------- |  | ------------------------------
|
|High       |  | $                             
|Low        |  |                               
|Average    |  |                               
|Period End |  |                               

As of March 1, 2002, the noon buying rate in New York City for cable transfers in Canadian dollars as certified for customs purposes by the
Federal Reserve Bank of New York was U.S.$1.5955 = Cdn.$1.00 (equivalent to U.S.$1.00 = Cdn.$0.6267).

31

---



Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following information should be read in conjunction with our 2001 consolidated financial statements and related notes therein, which are prepared in
accordance with Canadian GAAP. These principles differ in certain respects from U.S. GAAP. The differences, as they affect our consolidated financial statements, are described in Note 12 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 bioreagents. Although we have 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 core, exclusively licensed technology involves the fusion of heat shock proteins with viral or cancer-associated antigens. The lead product candidate developed with this
technology, HspE7, targets a variety of human papillomavirus-related diseases. In preclinical programs we are evaluating Hsp fusions to treat chronic hepatitis B virus infection, herpes simplex virus
and HIV.

We
have incurred significant losses since our inception and expect to incur substantial losses for the foreseeable future as we invest in our research and product development programs,
including manufacturing, pre-clinical studies and clinical trials, and regulatory activities. At December 31, 2001, our accumulated deficit was $105,247,000. We have been dependent
principally on equity financings to fund our business activities.

Our
success depends upon the safety and efficacy of our products in pre-clinical studies and clinical trials, and also on 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 will also need
to recruit and retain personnel skilled in the product development process to obtain our objectives. We believe there will be significant markets for our therapeutic products should these products
prove to be effective in human clinical trials.

We
plan to reduce product development risk by seeking partners to assist in the development, funding and marketing of our products. We anticipate that future collaborations will enable
us to develop additional product candidates and exploit new applications for our technology, resulting in greater product opportunities.

During
the period encompassed herein, we have devoted substantially all of our resources to our HspE7 product development program. Our lead product, HspE7, is currently being evaluated
in phase II and phase III clinical trials. HspE7 is being tested as a treatment for genital warts, recurrent respiratory papillomatosis, anal intraepithelial neoplasia, cervical
intraepithelial neoplasia and cervical cancer.

Liquidity and Capital Resources

Since inception we have relied principally on equity financings to fund our research and development programs, operations and capital expenditures, coupled with
cash flows generated from our bioreagent business. To date, we have raised net equity proceeds of $164,794,000, principally through our public issuances of stock and the exercise of warrants issued
since 1996. We believe that our current capital resources are sufficient to maintain our current and planned operations beyond 2002. This belief is based on current research and clinical development
plans, the current regulatory

32

---

environment, historical industry experience in the development of therapeutics and general economic conditions.

At
December 31, 2001, we had $62,682,000 of cash and short-term investments, which decreased by $7,885,000 during 2001 due principally to net losses of $35,939,000
offset by equity financings of $29,248,000. Net proceeds from 2001 equity financings were principally due to a public offering of common shares for $26,156,000. At December 31, 2001,
approximately 47% of cash, cash equivalents and short-term investments were held in U.S. dollars.

During
2001, capital expenditures totalled $1,783,000 compared with $394,000 and $571,000 during 2000 and 1999 respectively, of which $102,000, and $529,000 during 2001, and 1999
respectively, were financed through capital lease obligations. In 2001, we made significant improvements to our laboratory facilities and purchased additional laboratory equipment to support our
ongoing research and bioreagent manufacturing activities. Capital expenditures during 2002 are expected to decrease to levels that reflect strategic investments in laboratory equipment needed to
preserve our current level of manufacturing and research capabilities.

We
have in place credit facilities totaling $2,000,000 with two Canadian chartered banks. At December 31, 2001, $1,036,000 was outstanding under these facilities in the form of
fixed rate capital leases. Security has been provided in the form of a charge over the specific equipment as well as security interests in certain of our short-term investments.

We
will require additional capital to fund future research and product development activities beyond 2002. We expect to seek additional funds from various sources, including research and
development collaborations with corporate partners, and public and private equity financing. We cannot assure you that additional financing will be available when needed or on satisfactory terms. If
we raise additional funds by issuing equity securities, substantial dilution to our existing shareholders may result. If adequate funds are not available, we may be required to delay, reduce the scope
of, or eliminate one or more of our research or development programs. We may need to obtain funds through collaborative arrangements with others that are on unfavorable terms. We may also have to
relinquish rights to certain of our technologies, product candidates or products that we would otherwise seek to develop ourselves.

Results of Operations

During 2001, we realized a net loss of $35,939,000 or $0.70 per common share. These results compare with a net loss of $25,407,000 in 2000 and $16,738,000 in 1999
($0.63 and $0.58 per share, respectively).

Bioreagent sales

The production and sale of bioreagents supports our business strategy by building our market presence in stress proteins and strengthening our strategic
relationships with companies, academic institutions and stress response researchers. Our products are sold directly to end-users and through third party distributors. Bioreagent sales
increased by 30% to $5,419,000 in 2001 due to growing demand for stress protein and antibody bioreagents, complementary new product introductions and increased prices. 2000 sales increased 27% to
$4,156,000 from $3,274,000 in 1999 due to growing demand for stress protein bioreagents and complementary new product introductions. We anticipate bioreagent sales will grow by 15% to 25% in 2002.

Research and development

Research and development, or R&D, spending increased by approximately 50% to $35,906,000 in 2001 compared with $23,961,000 in 2000 and $14,322,000 in 1999. The
2001 and 2000 spending

33

---

increases were largely attributed to increased expenditures for human clinical trial activities and manufacturing scale-up associated with our leading product candidate, HspE7, and
increased staffing to support our expanded business activities. R&D expenses consist principally of outside services and employee labor costs in support of our HspE7 clinical trials and product
development. We anticipate that R&D spending will increase in 2002 compared to 2001 as the development of HspE7 advances. The consummation of a strategic alliance for the development of HspE7 could
dramatically increase the resources available for R&D, and the breadth of our commercialization efforts.

Selling, general and administrative expenses

Selling, general and administrative expenses, or SG&A, represented approximately 17% of total operating expenses in 2001, compared with 21% in 2000 and 22% in
1999, respectively. SG&A, expenses increased by 19% to $7,782,000 in 2001 compared with $6,538,000 in 2000 and $4,153,000 in 1999. The increase in SG&A in 2001 was due principally to enhanced business
activities, costs associated with our expanded North American operations, and the addition of key executive personnel. SG&A expense grew in 2000 over 1999 due to the addition of executive and
corporate development personnel. We anticipate that 2002 SG&A spending as a percentage of total operating expenses will approximate 17 to 22%.

Cost of bioreagent sales

The aggregate cost of bioreagent sales as a percentage of bioreagent sales was approximately 29% in 2001, 21% in 2000, and 24% in 1999 resulting in gross margins
of 71%, 79%, and 76% respectively. In 2001, the gross margin was lower than in 2000 due to write-offs of obsolete inventory and aging and slow moving products. During 2001, we increased
the anticipated future profitability of our reagent business by pruning several low-margin products. In 2002, we believe the gross margin will be between 73% and 77%.

Interest and other income

Interest and other income increased by 105% to $4,009,000 in 2001 compared with $1,953,000 in 2000 and $782,000 in 1999. The increased interest and other income
levels in 2001 were due principally to a significant foreign exchange rate impact accounting for $1,808,000 of the increase in 2001 over 2000. The strengthening of the United States dollar during 2001
is the principle driver of the foreign exchange gain since the Company holds a significant portion of its cash and cash equivalents in U.S. dollars and U.S. dollar denominated investments. The largest
part of the Company's future expenditures is expected to be in U.S. dollars. The year 2000 interest and income levels exceeded 1999 amounts due principally to higher average portfolio balances
resulting from issuances of public stock and warrants.

Basic and diluted loss per share

The 41% increase in net loss to $35,939,000 in 2001 compared with $25,407,000 in 2000 and $16,738,000 in 1999 was diluted by increases in the weighted average
number of common shares outstanding in each year, resulting in basic and diluted loss per share of $0.70 in 2001 compared with $0.63 in 2000 and $0.58 in 1999.

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.

34

---

To
conform to U.S. GAAP, our net loss would increase by $402,000 in 2001, $10,359,000 in 2000 and $2,777,000 in 1999. In 2001, the principal difference in our net loss using U.S. GAAP
rather than Canadian GAAP is due to the reversal of $541,000 in unrealized foreign exchange gain recorded under Canadian GAAP. In 2000, the release of escrow shares resulting in stock based
compensation expense of $9,093,000, combined with a $372,000 in unrealized foreign exchange loss on available-for-sale securities, caused the principal differences between U.S.
GAAP and Canadian GAAP. In 1999, the principal component of the difference was $2,061,000 caused by the release of escrow shares, which resulted in stock based compensation under U.S. GAAP, and a net
loss of $768,000 due to dissolution of a joint venture. A complete discussion of these and other less significant differences between U.S. GAAP and Canadian GAAP are described in Note 12 to our
consolidated financial statements.

Net
loss per common share under U.S. GAAP would have been $0.71, $0.88 and $0.67 in 2001, 2000, and 1999, respectively. In addition, our current assets under U.S. GAAP would have been
$64,626,000 and $72,467,000 at December 31, 2001 and 2000, respectively, and our stockholders' equity under U.S. GAAP would have been $58,917,000 and $65,574,000 at December 31, 2001 and
2000, respectively.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to foreign currency fluctuations through our operations in the United States since a substantial amount of our contract research and development
spending is transacted in United States dollars. However, since approximately 95% of our bioreagent product sales are in U.S. dollars, there is partial matching of U.S. currency expenses and revenues.
We use the Canadian dollar as our measurement and functional currency. As a result, we translate monetary assets and liabilities into
Canadian dollars at the rate of exchange prevailing at our balance sheet date and include resulting exchange gains and losses in other income. We do not currently engage in hedging or other activities
to reduce exchange risk, beyond matching investments proportionately with anticipated spending, but may do so in the future under certain conditions. A substantial amount of our receivables and
payables are denominated in U.S. dollars. We include resulting exchange gains and losses in operations.

Our
sales and contract research and development expenses are denominated in U.S. dollars and produce a price risk from exposure to fluctuations in the U.S. exchange rate. We do not
believe this will have a material impact on our results of operations in the foreseeable future. We maintain cash equivalent and short-term investment portfolio holdings of various
issuers, types, and maturity dates with various banks and investment banking institutions. We occasionally hold short-term investments beyond 120 days, and the market value of these
investments on any day during the investment term may vary as a result of market interest rate fluctuations. A hypothetical 1% change in foreign currency exchange and interest rates during the year
ended December 31, 2001 would have resulted in approximately $173,000 and $50,000, respectively, changes in net loss. We have not used derivative financial instruments in our investment
portfolio. We classify our investments as available-for-sale or held-to-maturity at the time of purchase and re-evaluate this designation as
of each balance sheet date. We had $62,682,000 in cash, cash equivalents and short-term investments as of December 31, 2001.

35

---



Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF MANAGEMENT

Management is responsible for the preparation of the consolidated financial statements and all related information appearing in this Annual Report. The
consolidated financial statements and notes have been prepared in conformity with Canadian generally accepted accounting principles and include certain amounts that are estimates based upon currently
available information and management's judgement of current conditions and circumstances.

To
provide reasonable assurance that assets are safeguarded against losses from unauthorized use or disposition and that accounting records are reliable for preparing financial
statements, management maintains a system of accounting and other controls. Even an effective internal control system, no matter how well designed, has inherent limitationsincluding the
possibility of circumvention or overriding of controlsand therefore can provide only reasonable assurance with respect to financial statement presentation. The system of accounting and
other controls is improved and modified in response to changes in business conditions and operations and recommendations made by the independent auditors.

The
Audit Committee of the board of directors, which is composed of independent directors, meets periodically with management, and the independent auditors to review auditing, internal
controls and financial reporting matters. The independent auditors periodically meet with the Audit Committee and have access to its individual members.

The
Company engaged Deloitte & Touche LLP, independent accountants, to audit the consolidated financial statements in accordance with auditing standards generally accepted in
Canada and the United States of America, which includes consideration of the internal control structure.

|/s/ Daniel L. Korpolinski             |  | /s/ Donald D. Tartre                      
|------------------------------------- |  | ------------------------------------------
|President and Chief Executive Officer |  | Vice President and Chief Financial Officer

36

---

INDEPENDENT AUDITORS' REPORT

To the Stockholders of Stressgen Biotechnologies Corporation:

We
have audited the accompanying consolidated balance sheet of Stressgen Biotechnologies Corporation and subsidiaries as of December 31, 2001 and 2000 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In
our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Stressgen Biotechnologies Corporation and subsidiaries as of
December 31, 2001 and 2000 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in accordance with accounting
principles generally accepted in Canada.

/s/
Deloitte & Touche LLP

January 28,
2002
San Diego, California

37

---



STRESSGEN BIOTECHNOLOGIES CORPORATION        CONSOLIDATED BALANCE SHEET    (Canadian dollars in thousands)

|                                                  |                                                                                                                                                                               | December 31,               |       
|------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------
|
|Assets                                            |                                                                                                                                                                               |                            |       
|Current assets:                                   |                                                                                                                                                                               |                            |       
|                                                  | Cash and cash equivalents                                                                                                                                                     |                            | $     
|                                                  | Short-term investments                                                                                                                                                        |                            |       
|                                                  | Accounts receivable                                                                                                                                                           |                            |       
|                                                  | Inventories                                                                                                                                                                   |                            |       
|                                                  | Other current assets                                                                                                                                                          |                            |       
|                                                  |                                                                                                                                                                               |                            |       
|                                                  |                                                                                                                                                                               | Total current assets       |       
|Capital assets                                    |                                                                                                                                                                               |                            | 3,163 
|                                                  |                                                                                                                                                                               |                            |       
|                                                  |                                                                                                                                                                               | $                          | 67,789
|                                                  |                                                                                                                                                                               |                            |       
|Liabilities and Stockholders' Equity              |                                                                                                                                                                               |                            |       
|Current liabilities:                              |                                                                                                                                                                               |                            |       
|                                                  | Accounts payable and accrued liabilities                                                                                                                                      |                            | $     
|                                                  | Current portion of capital lease obligations                                                                                                                                  |                            |       
|                                                  |                                                                                                                                                                               |                            |       
|                                                  |                                                                                                                                                                               | Total current liabilities  |       
|Capital lease obligations, net of current portion |                                                                                                                                                                               |                            | 578   
|                                                  |                                                                                                                                                                               |                            |       
|                                                  |                                                                                                                                                                               |                            | 8,872 
|                                                  |                                                                                                                                                                               |                            |       
|Commitments and contingencies                     |                                                                                                                                                                               |                            |       
|Stockholders' equity:                             |                                                                                                                                                                               |                            |       
|                                                  | Common shares and other equityno par value; unlimited shares authorized, 57,591,888 and 49,892,271 shares issued and outstanding at December 31, 2001 and 2000, respectively |                            |       
|                                                  | Deferred stock compensation                                                                                                                                                   |                            |       
|                                                  | Accumulated deficit                                                                                                                                                           |                            |       
|                                                  |                                                                                                                                                                               |                            |       
|                                                  |                                                                                                                                                                               | Total stockholders' equity |       
|                                                  |                                                                                                                                                                               |                            |       
|                                                  |                                                                                                                                                                               | $                          | 67,789
|                                                  |                                                                                                                                                                               |                            |       

See
accompanying notes to consolidated financial statements.

38

---

STRESSGEN BIOTECHNOLOGIES CORPORATION        CONSOLIDATED STATEMENT OF OPERATIONS        (Canadian dollars in thousands, except per share amounts)

|                                                                                     |                                     | Years ended December 31, |        
|------------------------------------------------------------------------------------ | ----------------------------------- | ------------------------ | -------
|
|Revenue:                                                                             |                                     |                          |        
|                                                                                     | Bioreagent sales                    |                          | $      
|                                                                                     |                                     |                          |        
|Operating expenses:                                                                  |                                     |                          |        
|                                                                                     | Research and development            |                          |        
|                                                                                     | Selling, general and administrative |                          |        
|                                                                                     | Cost of bioreagent sales            |                          |        
|                                                                                     |                                     |                          |        
|                                                                                     |                                     |                          | 45,261 
|                                                                                     |                                     |                          |        
|Operating loss                                                                       |                                     |                          | (39,842
|                                                                                     |                                     |                          |        
|Other income (expenses):                                                             |                                     |                          |        
|                                                                                     | Interest and other income, net      |                          |        
|                                                                                     | Interest expense                    |                          |        
|                                                                                     | Loss on joint venture               |                          |        
|                                                                                     |                                     |                          |        
|                                                                                     |                                     |                          | 3,903  
|                                                                                     |                                     |                          |        
|Net loss                                                                             |                                     | $                        | (35,939
|                                                                                     |                                     |                          |        
|Basic and diluted loss per common share                                              |                                     | $                        | (0.70  
|                                                                                     |                                     |                          |        
|Common shares used to compute basic and diluted loss per common share (in thousands) |                                     |                          | 51,205 
|                                                                                     |                                     |                          |        

See
accompanying notes to consolidated financial statements.

39

---



STRESSGEN BIOTECHNOLOGIES CORPORATION        CONSOLIDATED STATEMENT OF CASH FLOWS        (Canadian dollars in thousands)

|                                                             |                                                                             | Years ended December 31,                        |        
|------------------------------------------------------------ | --------------------------------------------------------------------------- | ----------------------------------------------- | -------
|
|Cash flows from operating activities:                        |                                                                             |                                                 |        
|                                                             | Net loss                                                                    |                                                 | $      
|                                                             | Adjustments to reconcile net loss to net cash used in operating activities: |                                                 |        
|                                                             |                                                                             | Depreciation and amortization of capital assets |        
|                                                             |                                                                             | Amortization of deferred stock compensation     |        
|                                                             |                                                                             | Unrealized foreign exchange (gain) loss         |        
|                                                             |                                                                             | Loss on sale and leaseback of capital assets    |        
|                                                             |                                                                             | Loss on joint venture                           |        
|                                                             | Changes in operating assets and liabilities                                 |                                                 |        
|                                                             |                                                                             |                                                 |        
|Net cash used in operating activities                        |                                                                             |                                                 | (36,460
|                                                             |                                                                             |                                                 |        
|Cash flows from investing activities:                        |                                                                             |                                                 |        
|                                                             | Purchase of short-term investments                                          |                                                 |        
|                                                             | Sales and maturities of short-term investments                              |                                                 |        
|                                                             | Purchase of capital assets                                                  |                                                 |        
|                                                             | Foreign currency translation adjustment                                     |                                                 |        
|                                                             |                                                                             |                                                 |        
|Net cash provided by (used in) investing activities          |                                                                             |                                                 | 39,468 
|                                                             |                                                                             |                                                 |        
|Cash flows from financing activities:                        |                                                                             |                                                 |        
|                                                             | Proceeds on issuance of common shares                                       |                                                 |        
|                                                             | Proceeds on issuance of special warrants                                    |                                                 |        
|                                                             | Proceeds from borrowings                                                    |                                                 |        
|                                                             | Repayment of borrowings                                                     |                                                 |        
|                                                             |                                                                             |                                                 |        
|Net cash provided by financing activities                    |                                                                             |                                                 | 28,896 
|                                                             |                                                                             |                                                 |        
|Effect of exchange rate changes on cash and cash equivalents |                                                                             |                                                 | 921    
|                                                             |                                                                             |                                                 |        
|Increase (decrease) in cash and cash equivalents             |                                                                             |                                                 | 32,825 
|Cash and cash equivalents, beginning of year                 |                                                                             |                                                 | 513    
|                                                             |                                                                             |                                                 |        
|Cash and cash equivalents, end of year                       |                                                                             | $                                               | 33,338 
|                                                             |                                                                             |                                                 |        

See
accompanying notes to consolidated financial statements.

40

---



STRESSGEN BIOTECHNOLOGIES CORPORATION    CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY(Canadian dollars in thousands)

|                             |                                                      |         |          |   |     | Common shares
and other equity |            |           |   |         |        |           |            |   |     |         |  
|---------------------------- | ---------------------------------------------------- | ------- | -------- | - | --- | ------------------------------ | ---------- | --------- | - | ------- | ------ | --------- | ---------- | - | --- | ------- | -
|
|
|
|Balance at January 1, 1999   |                                                      | 300,000 |          | $ | 900 |                                | 29,756,540 |           | $ | 52,460  |        | 5,572,728 |            | $ | 500 |         | $
|                             | Issued for cash on exercise of stock options         |         |         |   |     |                               |            | 3,667     |   |         | 4      |           |           |   |     |        |  
|                             | Issued on buyout of joint venture                    |         |         |   |     |                               |            | 3,015,687 |   |         | 5,000  |           |           |   |     |        |  
|                             | Redeemed or cancelled for nominal consideration      |         | (300,000 | ) |     | (900                           | )          |          |   |         | 1,400  |           | (300,000   | ) |     | (500    | )
|                             | Net loss                                             |         |         |   |     |                               |            |          |   |         |       |           |           |   |     |        |  
|                             |                                                      |         |          |   |     |                                |            |           |   |         |        |           |            |   |     |         |  
|Balance at December 31, 1999 |                                                      |        |          |   |    |                                | 32,775,894 |           |   | 58,864  |        | 5,272,728 |            |   |    |         |  
|                             | Issued for cash on exercise of stock options         |         |         |   |     |                               |            | 593,550   |   |         | 1,010  |           |           |   |     |        |  
|                             | Special Warrants issued for cash, net of issue costs |         |         |   |     |                               |            |          |   |         |       |           | 7,449,000  |   |     | 23,112  |  
|                             | Issued on Special Warrants offering                  |         |         |   |     |                               |            |          |   |         |       |           | 744,900    |   |     |        |  
|                             | Issued on exercise of Special Warrants               |         |         |   |     |                               |            | 7,449,000 |   |         | 23,112 |           | (7,449,000 | ) |     | (23,112 | )
|                             | Issued for cash on exercise of Warrants              |         |         |   |     |                               |            | 2,169,727 |   |         | 7,254  |           | (2,169,727 | ) |     |        |  
|                             | Expiration of Class A Warrants                       |         |         |   |     |                               |            |          |   |         |       |           | (14,401    | ) |     |        |  
|                             | Issued for cash, net of issue costs                  |         |         |   |     |                               |            | 6,904,100 |   |         | 44,499 |           |           |   |     |        |  
|                             | Net loss                                             |         |         |   |     |                               |            |          |   |         |       |           |           |   |     |        |  
|                             |                                                      |         |          |   |     |                                |            |           |   |         |        |           |            |   |     |         |  
|Balance at December 31, 2000 |                                                      |        |          |   |    |                                | 49,892,271 |           |   | 134,739 |        | 3,833,500 |            |   |    |         |  
|                             | Issued for cash on exercise of stock options         |         |         |   |     |                               |            | 423,219   |   |         | 973    |           |           |   |     |        |  
|                             | Issued for cash on exercise of Warrants              |         |         |   |     |                               |            | 577,298   |   |         | 2,119  |           | (577,298   | ) |     |        |  
|                             | Issued for cash, net of issue costs                  |         |         |   |     |                               |            | 6,699,100 |   |         | 26,156 |           |           |   |     |        |  
|                             | Deferred stock compensation                          |         |         |   |     |                               |            |          |   |         | 807    |           |           |   |     |        |  
|                             | Amortization of deferred stock compensation          |         |         |   |     |                               |            |          |   |         |       |           |           |   |     |        |  
|                             | Net loss                                             |         |         |   |     |                               |            |          |   |         |       |           |           |   |     |        |  
|                             |                                                      |         |          |   |     |                                |            |           |   |         |        |           |            |   |     |         |  
|Balance at December 31, 2001 |                                                      |        |          | $ |    |                                | 57,591,888 |           | $ | 164,794 |        | 3,256,202 |            | $ |    |         | $
|                             |                                                      |         |          |   |     |                                |            |           |   |         |        |           |            |   |     |         |  

See accompanying notes to consolidated financial statements.

41

---



Stressgen Biotechnologies Corporation        Notes to Consolidated Financial Statements        (Canadian dollars)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Stressgen Biotechnologies Corporation ("Stressgen" or the "Company") is a biopharmaceutical company focused on the development and commercialization of innovative
stress protein-based immunotherapeutics. The Company's core, exclusively licensed technology involves the fusion of heat shock proteins with viral or cancer-associated antigens. The Company is
currently applying its core technology on developing treatments for virally-induced human diseases and related cancers. The Company's lead product candidate, HspE7, targets human
papillomavirus-related diseases. The Company has also initiated development efforts to evaluate Hsp fusions to treat hepatitis B and research studies regarding Hsp fusions to treat herpes simplex
virus and HIV. Through its bioreagent business, the Company also supplies research products to scientists worldwide for the study of cellular stress, apoptosis, oxidative stress and neurobiology.

These
consolidated financial statements of Stressgen have been prepared in accordance with Canadian generally accepted accounting principles ("Canadian GAAP"), and reflect the policies
outlined below. These policies conform, in all material respects, with accounting principles generally accepted in the United States of America ("U.S. GAAP"), except as discussed in Note 12.

Basis of presentation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries and, until December 1999, its participation in
a joint venture with Genzyme LLC. Intercompany accounts and transactions have been eliminated in consolidation.

In
order to achieve financial reporting comparability to peer companies within the biotechnology and pharmaceutical industries, the Company performed a review of the classification of
its operating costs. Certain prior year balances have been reclassified to conform to the current year's presentation.

Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that
affect amounts reported in the financial statements and disclosures made in the accompanying notes to the consolidated financial statements. Significant estimates are made for, but not limited to, the
allowance for doubtful accounts, contract development accruals, amortization, income taxes and contingencies. Actual results may differ from those estimates.

Foreign currency translation

The Company and its subsidiaries use the Canadian dollar as their functional currency. Monetary assets and liabilities that are denominated in U.S. dollars are
translated into Canadian dollars at the rate of exchange prevailing at the balance sheet date. Non-monetary assets and liabilities are translated at historical rates. Revenues and expenses
are translated at the average rate of exchange for the month of such transactions. Exchange gains and losses are included other income.

42

---

Joint venture

The Company used the proportionate consolidation method in accounting for its investment in a joint venture, which conducted research and development activities
until it was dissolved in December 1999.

Cash, cash equivalents and short-term investments

Cash and cash equivalents consists of cash and highly liquid investments which include investment grade corporate debt securities with original maturities when
acquired of three months or less. Short-term investments consist of investment grade securities, which are capable of prompt liquidation and are carried at the lower of cost plus accrued
interest or quoted market value. Included in short-term investments at December 31, 2001 and 2000 are $2,000,000 of investments pledged as security for capital lease financing.

Inventories

Inventories are valued at the lower of average cost or net realizable value.

Capital assets

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

Equipment under capital lease

20 - 30%Furniture and equipment

20%Computer equipment

30%Leasehold improvements

the lesser of the lease term or the estimated useful life


Impairment of long-lived assets

The Company assesses potential impairment to its long-lived assets when there is evidence that events or changes in circumstances have made recovery
of the asset's carrying value unlikely. The recoverability of its long-lived assets is determined by evaluating whether the carrying value of such assets can be recovered from estimated
undiscounted future operating cash flows. Should an impairment exist, the impairment loss would be measured based on the excess of the carrying value of the assets over the asset's net realizable
value. The Company has not identified any such impairment losses to date.

Fair value of financial instruments

Management believes that the carrying values of financial instruments, including cash and cash equivalents, short-term investments, accounts
receivable, accounts payable, and accrued liabilities approximate fair value as a result of the short-term maturities of these instruments. The carrying value

43

---

of the capital lease obligations approximate fair value, as the imputed interest rate is approximately equivalent to the market rates charged on similar arrangements.

Concentration of credit risk

The Company invests its excess cash principally in investment grade 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.

The
Company extends credit on an uncollateralized basis primarily to its customers in the U.S. The Company has not experienced significant credit losses on customer's accounts.

Revenue recognition

Revenues from product sales are recognized upon delivery to customers when persuasive evidence of an arrangement exists, the price is fixed or determinable and
collection is reasonably assured. Revenue also includes amounts charged for shipping and handling costs.

Stock-based compensation plan

The Company has stock-based compensation plans, which are described in Note 5. Under the plans, options are granted with an exercise price equal to the
fair market value of the underlying common stock. No compensation expense is recognized for options granted at fair market value under the plans when stock options are issued to directors, employees
and others. Deferred stock compensation charges arise where stock options are granted at exercise prices less than the fair value of the underlying stock and are amortized to expense over the vesting
period of the option. Any consideration paid by directors, employees and others on exercise of stock options is credited to share capital.

Research and development costs

Research costs are expensed as incurred. Development costs are expensed as incurred unless they meet certain criteria for deferral and amortization under Canadian
GAAP. To date, no development costs have been deferred.

Income taxes

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

44

---

Net loss per share

Net loss per share is computed using the weighted average number of common shares outstanding. Basic and diluted net loss per common share amounts are equivalent
for the periods presented as the inclusion of common stock equivalents (options and warrants) in the number of shares used for the diluted computation would be anti-dilutive. Contingently
issuable (escrow) shares of common stock of 1,212,301 have been excluded from the computation of net loss per share for the year ended December 31, 1999.

2. SHORT-TERM INVESTMENTS

The following table provides the carrying value of short-term investments:

December 312001

2000(In thousands)Certificates of deposit

$


$
8,132Corporate debt securities


29,344


52,588U.S. government agencies debt securities





9,334$
29,344

$
70,054


At
December 31, 2001 and 2000, short-term investments had a market value of $29,344,000 and $70,200,000, respectively.

45

---

3. BALANCE SHEET DETAILS

The following tables provide details of selected balance sheet items:

December 312001

2000(In thousands)Accounts receivable:Trade accounts receivable

$
649

$
665Less: allowance for doubtful accounts


(40
)

(39
)$
609

$
626Inventories:Raw materials and work in process

$
464

$
359Finished goods


451


374$
915

$
733Capital assets:Equipment under capital lease

$
2,672

$
2,570Laboratory equipment


2,157


1,050Furniture and fixtures


298


174Computer equipment


624


359Leasehold improvements


515


3306,266


4,483Less accumulated depreciation and amortization


(3,103
)

(2,482
)$
3,163

$
2,001Accounts payable and accrued liabilites:Trade accounts payable

$
6,764

$
6,400Accrued liabilities


993


1,027$
7,757

$
7,427


4. COMMITMENTS AND CONTINGENCIES

Leases

The Company has entered into operating lease agreements expiring at various times through 2005 for office and laboratory space, which require the Company to make
minimum lease payments, plus a share of operating costs, taxes, insurance and maintenance.

The
Company also leases certain equipment under capital lease agreements. At December 31, 2001, $1,115,000 was outstanding under these agreements in the form of fixed rate capital
leases. Capital lease obligations are repayable in monthly installments of $48,000 including interest at rates that vary from 6.25% to 8.45% (20007.50% and 8.45%) and are secured by
specific equipment and certain short-term investments. At December 31, 2001 and 2000, equipment under capital lease had a

46

---

net book value of $1,192,000 and $1,404,000 net of accumulated amortization of $1,480,000 and $1,166,000, respectively.

Total
future minimum lease commitments under operating and capital leases are as follows:

|                         |                                         | Operating |   | Capital | 
|------------------------ | --------------------------------------- | --------- | - | ------- | 
|
|Year ending December 31, |                                         |           |   |         | 
|                         | 2002                                    |           | $ | 687     | 
|                         | 2003                                    |           |   | 720     | 
|                         | 2004                                    |           |   | 563     | 
|                         | 2005                                    |           |   | 397     | 
|                         |                                         |           |   |         | 
|                         | Total                                   |           | $ | 2,367   | 
|                         |                                         |           |   |         | 
|                         | Less: amount representing interest      |           |   |         | 
|                         |                                         |           |   |         | 
|                         | Present value of minimum lease payments |           |   |         | 
|                         | Less: current portion                   |           |   |         | 
|                         |                                         |           |   |         | 
|                         | Long term capital lease obligations     |           |   |         | 
|                         |                                         |           |   |         | 

Patent License Agreement

The Company has a worldwide, exclusive license agreement with Massachusetts Institute of Technology and the Whitehead Institute for Biomedical Research. The
patents and patent applications covered by this license agreement include various pending applications and continuation-in-part applications and their foreign counterparts,
including patent applications filed in the United States, Canada and Japan in 1994 for the use of Hsp fusions with viral or cancer-associated antigens as immunotherapeutics.

5. STOCKHOLDERS' EQUITY

Common Shares

In 2001, the stockholders resolved to continue the Company under the laws of the Yukon Territory and, as a result, the authorized common share capital of the
Company became unlimited.

1998 Special Warrants

In 1998, the Company completed an offering of 4,000,000 Special Warrants at a price of $3.30 each for gross proceeds of $13,200,000; the Company also completed
the sale of 3,030,303 Special Warrants at a price of U.S. $2.27 each for gross proceeds of $10,000,000 (U.S. $6,878,000). The Company incurred total share issue costs of $1,143,000 on the offerings.
Each Special Warrant was converted into one fully paid common share of the Company, 0.25 of a Class A Warrant and 0.5 of a Class B Warrant. The Class A Warrants expired in 2000.

Each
whole Class B Warrant entitles the holder to acquire one additional common share on or before June 11, 2003. The exercise price is $3.30 for each Class B
Warrant (or U.S. $2.27). At the

47

---

option of the holder, the Class B Warrants may be exercised through cashless exercise, which permits the warrant holder to deduct the strike price of the warrant from the market price of the
common shares at the time of exercise, and to receive the difference in common shares valued at the market price at the time of exercise. At December 31, 2001, 3,256,202 Class B Warrants
remained outstanding.

2000 Special Warrants

In 2000, the Company completed an offering of 7,449,000 Special Warrants at a price of $3.40 per Warrant for gross proceeds of $25,327,000. The Company incurred
total share issue costs on the offering of $2,215,000. Each Special Warrant was converted into one common share of the Company without additional payment. In connection with the offering, the Company
issued 744,900 underwriters' special warrants, exercisable at $3.68 per warrant into 744,900 common shares on or before August 2, 2001. In 2001, the Company received approximately $2,119,000 on
the exercise of the remaining 577,298 Special Warrants.

Common Share Financings

In 2000, the Company completed an offering for 6,904,100 common shares at $7.00 per share for gross proceeds of $48,329,000. The Company incurred total share
issue costs on the offering of $3,830,000. In 2001, the Company completed an offering for 6,699,100 common shares at $4.15 per share for gross proceeds of $27,801,000. The Company incurred total share
issue costs on the offering of $1,645,000.

Escrow Shares

Included in the issued share capital at December 31, 1999 were 1,212,301 common shares, which were held in trust pursuant to an escrow agreement. The
relevant regulatory authorities approved the release of these escrowed common shares during 2000 as the Company initiated a Phase II clinical trial for one of its product candidates.

Employee Share Option Plans

Under the 1996 Incentive Stock Option Plan (the "1996 Plan"), the Company may grant options to directors, employees and certain other individuals. Under the terms
of the 1996 Plan, the number of common shares reserved for issuance pursuant to the grant of options may not exceed 4,000,000 common shares. The Company does not intend to make future grants of stock
options under the 1996 Plan.

In
2001, the Company issued out-of-plan stock options prior to stockholder approval of the 2001 Equity Incentive Plan (the "2001 Plan"). Between the date of grant
and stockholder approval, the market price of the Company's common stock increased resulting in deferred compensation of $807,000 associated with these options. The deferred compensation will be
amortized to expense over the vesting period of the granted options, which have been applied to the 2001 Plan. The stockholders approved adoption of the 2001 Plan reserving an additional 3,500,000 new
common shares for issuance pursuant to the grant of stock options. At December 31, 2001, the Company had available an aggregate of 2,241,741 shares for future grants of stock options under the
2001 Plan.

48

---

The
following table summarizes stock option activity under the Plans:

Number of
Shares

Weighted
Average
Exercise PriceBalance at January 1, 1999

2,009,160

$
2.45Granted

916,400


1.78Exercised

(3,667
)

1.12Cancelled

(409,593
)

2.75Balance at December 31, 1999

2,512,300


2.16Granted

1,556,500


6.05Exercised

(593,550
)

1.70Cancelled

(101,073
)

1.63Balance at December 31, 2000

3,374,177


4.05Granted

1,415,000


5.24Exercised

(423,219
)

2.30Cancelled

(190,375
)

4.92Balance at December 31, 2001

4,175,583

$
4.59


The
following table summarizes information related to all stock options outstanding and exercisable at December 31, 2001:

|  |            | Options Outstanding |           | Options Exercisable
|- | ---------- | ------------------- | --------- | -------------------
|
|$ | 1.22-$1.97 |                     | 693,822   |                    
|$ | 2.30-$2.85 |                     | 248,110   |                    
|$ | 3.01-$3.65 |                     | 444,225   |                    
|$ | 4.10-$5.85 |                     | 1,010,426 |                    
|$ | 6.00-$8.00 |                     | 1,779,000 |                    
|  |            |                     |           |                    
|  |            |                     | 4,175,583 |                    
|  |            |                     |           |                    

49

---



Stressgen Biotechnologies Corporation        Notes to Consolidated Financial Statements        (Canadian dollars)

6. INCOME TAXES

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

|                                                             |  | Years ended December 31, |       
|------------------------------------------------------------ |  | ------------------------ | ------
|
|
|Canadian basic statutory tax rates                           |  |                          | 45    
|                                                             |  |                          |       
|Expected income tax recovery                                 |  | $                        | 6,287 
|Foreign tax rate differences                                 |  |                          | 456   
|Losses producing current benefit                             |  |                          | (7,412
|Losses producing no current tax benefit                      |  |                          | 1,611 
|Non-deductible expenses and other deductions                 |  |                          | 136   
|Research and development tax credits                         |  |                          | (193  
|Benefit of temporary differences (recognized) not recognized |  |                          | (885  
|                                                             |  |                          |       
|                                                             |  | $                        |      
|                                                             |  |                          |       

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

|                                                 |                                                         | December 31, |        
|------------------------------------------------ | ------------------------------------------------------- | ------------ | -------
|
|
|Future income tax assets:                        |                                                         |              |        
|                                                 | Tax loss carry-forwards                                 |              | $      
|                                                 | Research and development expenses                       |              |        
|                                                 | Book and tax base differences on assets and liabilities |              |        
|                                                 |                                                         |              |        
|Total future income tax assets                   |                                                         |              | 20,839 
|Valuation allowance for future income tax assets |                                                         |              | (20,839
|                                                 |                                                         |              |        
|Net future income tax assets                     |                                                         | $            |       
|                                                 |                                                         |              |        
|Future income tax liabilities:                   |                                                         |              |        
|                                                 | Book and tax base differences on assets and liabilities |              | $      
|                                                 |                                                         |              |        
|Net future income tax liabilities                |                                                         | $            |       
|                                                 |                                                         |              |        

Due
to the uncertainty surrounding the realization of the future income tax assets, the Company has a 100% valuation allowance against its future income tax assets. The valuation
allowance decreased by $8,491,000 during the year 2001.

At
December 31, 2001, the Company has approximately $11,110,000 of scientific research and experimental development expenditures available for unlimited carry forward, $34,163,000
of non-capital losses expiring between 2006 and 2007 and $4,137,000 of unclaimed investment tax credits

50

---

expiring between 2002 and 2011, all of which may be used to reduce future Canadian income taxes otherwise payable. In addition, the Company has U.S. $3,000,000 of net operating losses expiring
between 2011 and 2021, which may be used to reduce future U.S. income taxes otherwise payable. Approximately $50,000,000 of Canadian non-capital loss carryforwards were utilized in 2001
due to a license of intellectual property to a new wholly-owned subsidiary, which falls outside the Canadian tax jurisdiction. Through the operations of this new subsidiary, the Company is expected to
further the commercialization of HspE7 and other potential future products.

7. RELATED PARTY TRANSACTIONS

In 2001, the Company paid to certain directors consulting fees of $50,000 (2000$70,833; 1999$100,000).

51

---

8. SEGMENTED INFORMATION

The Company manages its operations in two reportable segments, Biotechnology and Bioreagents. Revenues are allocated to the countries based on customer locations.

|                 |                | Years ended December 31,             |        
|---------------- | -------------- | ------------------------------------ | -------
|
|
|Biotechnology    |                |                                      |        
|                 | Expenses:      |                                      |        
|                 |                | Research and development             |        
|                 |                | Selling, general and administrative  |        
|                 |                |                                      |        
|Operating loss   |                | $                                    | (41,216
|                 |                |                                      |        
|Bioreagents      |                |                                      |        
|                 | Sales:         |                                      |        
|                 |                | U.S.                                 |        
|                 |                | Canada                               |        
|                 |                | Other                                |        
|                 |                |                                      |        
|                 |                |                                      | 5,419  
|                 |                |                                      |        
|Expenses:        |                |                                      |        
|                 |                | Research and development             |        
|                 |                | Selling, general and administratiove |        
|                 |                | Cost of bioreagent sales             |        
|                 |                |                                      |        
|                 |                |                                      | 4,045  
|                 |                |                                      |        
|Operating income |                | $                                    | 1,374  
|                 |                |                                      |        
|Totals           |                |                                      |        
|                 | Revenues       |                                      | $      
|                 |                |                                      |        
|                 | Expenses:      |                                      |        
|                 |                | Research and development             |        
|                 |                | Selling, general and administrative  |        
|                 |                | Cost of bioreagent sales             |        
|                 |                |                                      |        
|                 |                |                                      | 45,261 
|                 |                |                                      |        
|                 | Operating loss |                                      | $      
|                 |                |                                      |        

The
Company does not allocate interest and other income, and interest on capital lease obligations, nor does it allocate capital assets, to each segment.

52

---

Long-lived
capital assets are allocated geographically as follows:

|       |  | December 31,
|------ |  | ------------
|
|
|U.S.   |  | $           
|Canada |  |             
|       |  |             
|       |  | $           
|       |  |             

9. JOINT VENTURE

In 1997, the Canadian Medical Discoveries Fund ("CMDF") provided initial financing of $10,000,000 for the Stressgen/Genzyme LLC joint venture (the "JV") through a
loan and equity investment. Under the terms of the agreement, CMDF had the right to require the Company and Genzyme (the "joint venturers") to repay the CMDF investment plus interest at bank prime
rate plus 1%. Such repayments could be made at the Company's option, in cash, shares or both.

In
1999, CMDF exercised its Repayment Right and the joint venturers acquired CMDF's investment in the JV. The Company paid for its share of CMDF's investment plus interest thereon by
issuing 3,015,687 common shares at a value of $5,000,000 resulting in a loss of $1,400,000. In addition, the Company cancelled the CMDF warrants and redeemed the Series 1 Preference shares for
nominal consideration, and recorded contributed surplus of $1,400,000. Also in 1999, the joint venturers dissolved the JV and distributed its net assets, and the Company included total operating
expenses of $908,000 and cash flows of $1,077,000, reflecting their proportionate share of the JV to the date of dissolution, in the consolidated statements of operations and cash flows.

53

---

10. SUPPLEMENTAL CASH FLOW INFORMATION

The change in operating assets and liabilities:

|                                                                           |                                                                    | December 31, |     
|-------------------------------------------------------------------------- | ------------------------------------------------------------------ | ------------ | ----
|
|
|Accounts receivable                                                        |                                                                    | $            | 17  
|Inventories                                                                |                                                                    |              | (182
|Other current assets                                                       |                                                                    |              | (22 
|Accounts payable and accrued liabilities                                   |                                                                    |              | 330 
|                                                                           |                                                                    |              |     
|                                                                           |                                                                    | $            | 143 
|                                                                           |                                                                    |              |     
|Supplemental disclosures of cash flows:                                    |                                                                    |              |     
|                                                                           | Interest paid                                                      |              | $   
|                                                                           |                                                                    |              |     
|Supplemental disclosures of non-cash investing and financing transactions: |                                                                    |              |     
|                                                                           | Deferred stock compensation                                        |              | $   
|                                                                           | Common shares issued on acquisition of investment in joint venture |              |     
|                                                                           | Redemption of Series I Preference shares                           |              |     
|                                                                           | Cancellation of warrants                                           |              |     
|                                                                           | Common shares issued on conversion of Special Warrants             |              |     

54

---

11. INTERIM FINANCIAL INFORMATION (UNAUDITED)

The following is a summary of the unaudited quarterly results of operations for the years ended December 31, 2001 and 2000.

|                                  |                        | Quarter ended |  
|--------------------------------- | ---------------------- | ------------- | -
|
|
|2001                              |                        |               |  
|Net Revenues                      |                        |               |  
|                                  | Canadian and U.S. GAAP |               | $
|Research and development expenses |                        |               |  
|                                  | Canadian and U.S. GAAP |               |  
|Net Loss                          |                        |               |  
|                                  | Canadian GAAP          |               |  
|                                  | U.S. GAAP              |               |  
|Basic loss per common share       |                        |               |  
|                                  | Canadian GAAP          |               | $
|                                  | U.S. GAAP              |               | $
|2000                              |                        |               |  
|Net Revenues                      |                        |               |  
|                                  | Canadian and U.S. GAAP |               | $
|Research and development expenses |                        |               |  
|                                  | Canadian and U.S. GAAP |               |  
|Net Loss                          |                        |               |  
|                                  | Canadian GAAP          |               |  
|                                  | U.S. GAAP              |               |  
|Basic loss per common share       |                        |               |  
|                                  | Canadian GAAP          |               | $
|                                  | U.S. GAAP              |               | $

12. 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.

55

---

Effect
on the consolidated financial statements:



December 31,2001

2000(In thousands)Current assets under Canadian GAAP

$
64,626

$
72,324Adjustment to carrying value of short-term investments classified as available-for-sale securities(b)





143Current assets under U.S. GAAP

$
64,626

$
72,467Stockholders' equity under Canadian GAAP

$
58,917

$
65,431Unrealized holding gains on available-for-sale securities(b)





143Stockholders' equity under U.S. GAAP

$
58,917

$
65,574




|                                                                                        |  | Years ended December 31, |        
|--------------------------------------------------------------------------------------- |  | ------------------------ | -------
|
|
|Net loss under Canadian GAAP                                                            |  | $                        | (35,939
|Adjustment to equity loss of joint venture(a)                                           |  |                          |       
|Dissolution of joint venture(a)                                                         |  |                          |       
|Reversal of unrealized foreign exchange (gain) loss on available-for-sale securities(b) |  |                          | (541   
|Reversal of write-down of short-term investments(b)                                     |  |                          | 220    
|Stock-based compensation expense on escrow shares(c)                                    |  |                          |       
|Gain on redemption of preferance shares(d)                                              |  |                          |       
|Stock-based compensation expense on stock options(e)                                    |  |                          | (81    
|                                                                                        |  |                          |        
|Net loss under U.S. GAAP                                                                |  | $                        | (36,341
|                                                                                        |  |                          |        
|Basic loss per common share under
Canadian GAAP                                         |  | $                        | (0.70  
|                                                                                        |  |                          |        
|Basic loss per common share under
U.S. GAAP                                             |  | $                        | (0.71  
|                                                                                        |  |                          |        
|Common shares used to compute basic loss
per share under Canadian and U.S. GAAP         |  |                          | 51,205 
|                                                                                        |  |                          |        

56

---



|                                                                        |  | December 31, |        
|----------------------------------------------------------------------- |  | ------------ | -------
|
|
|Net cash used in operating activities under Canadian GAAP               |  | $            | (36,460
|Equity interest in joint venture(a)                                     |  |              |       
|                                                                        |  |              |        
|Net cash used in operating activities under U.S. GAAP                   |  | $            | (36,460
|                                                                        |  |              |        
|Net cash provided by (used in) investing activities under Canadian GAAP |  | $            | 39,468 
|Equity interest in joint venture(a)                                     |  |              |       
|                                                                        |  |              |        
|Net cash provided by (used in) investing activities under U.S. GAAP     |  | $            | 39,468 
|                                                                        |  |              |        
|Net cash provided by financing activities under Canadian and U.S. GAAP  |  | $            | 28,896 
|                                                                        |  |              |        



57

---



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

Years ended December 31,2001

2000

1999(In thousands, except per share amounts)Net loss under U.S. GAAP

$
(36,341
)
$
(35,766
)
$
(19,515
)Other comprehensive incomeAdjustment to unrealized foreign exchange and market gains (losses) on available-for-sale investments


178


(265
)

(240
)Comprehensive net loss under U.S. GAAP

$
(36,163
)
$
(36,031
)
$
(19,755
)Comprehensive loss per share under U.S. GAAP

$
(0.71
)
$
(0.89
)
$
(0.68
)




58

---



SFAS
No. 123 requires presentation of pro forma information as if the Company had accounted for its employee stock option grants under the fair value method. The effects of
applying SFAS No. 123 for providing pro forma disclosures are not likely to be representative of the effects on reported net income for future years. For purposes of pro forma disclosure, the
estimated fair value of the options at the date of the grant is amortized to expense over the vesting period. Under the fair value method, the Company's net loss and loss per share would have
increased as follows:

|                                                      |  | Years ended December 31, |        
|----------------------------------------------------- |  | ------------------------ | -------
|
|
|Net loss under U.S. GAAP                              |  | $                        | (36,341
|                                                      |  |                          |        
|Pro forma net loss                                    |  | $                        | (40,973
|                                                      |  |                          |        
|Basic loss per common share under U.S. GAAP           |  | $                        | (0.71  
|                                                      |  |                          |        
|Pro forma basic loss per common share under U.S. GAAP |  | $                        | (0.80  
|                                                      |  |                          |        

The
weighted-average per-share fair values of the individual options granted during 2001, 2000 and 1999 were as follows on the date of grant:

Years ended December 31,2001

2000

1999$
2.50

$
4.47

$
1.30


The
fair values of the options were determined using a Black-Scholes option-pricing model with the following assumptions:

|                        |  | Years ended December 31, |  
|----------------------- |  | ------------------------ | -
|
|Dividend yield          |  | 0                        | %
|Volatility              |  | 55                       | %
|Risk-free interest rate |  | 3.57                     | %
|Expected life           |  | 4 years                  |  



59

---



60

---





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

None.

PART III

Item 10. OUR DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES

Certain information about our directors and executive officers, the positions held by them and their ages as of March 1, 2002 are as follows:

|Name                              |  | Age |  | Position                                                
|--------------------------------- |  | --- |  | --------------------------------------------------------
|William A. Cochrane, M.D., (1)(2) |  | 75  |  | Director and Chairman of the Board of Directors         
|Joann Data, M.D., Ph.D.           |  | 57  |  | Director                                                
|Darrell Elliott (3)               |  | 55  |  | Director                                                
|Kenneth Galbraith (3)             |  | 39  |  | Director                                                
|Yad Garcha (3)                    |  | 43  |  | Director                                                
|Richard M. Glickman (1)           |  | 43  |  | Director and Vice-Chairman of the Board of Directors    
|Steven C. Mendell (2)             |  | 60  |  | Director                                                
|Jay M. Short, Ph.D. (1)           |  | 43  |  | Director                                                
|Richard A. Young                  |  | 47  |  | Director                                                
|Daniel L. Korpolinski             |  | 59  |  | Director, President and Chief Executive Officer         
|John R. Neefe, M.D.               |  | 58  |  | Vice President, Clinical Research and Regulatory Affairs
|Marvin I. Siegel, Ph.D.           |  | 55  |  | Executive Vice President, Research and Development      
|Donald D. Tartre                  |  | 41  |  | Vice President & Chief Financial Officer                

---

WILLIAM A. COCHRANE, M.D.has served as one of our directors since March 1994. Dr. Cochrane has been President of W.A.
Cochrane & Associates Inc., a company specializing in health products investment consulting, since June 1989. He is an Officer of the Order of Canada and a recipient of the Queens
Jubilee Medal. From September 1978 to December 1988, Dr. Cochrane was the Chief Executive Officer and Chairman of Connaught Laboratories Ltd., a vaccine developer and
manufacturer. His previous experience includes serving as the Deputy Minister of Health Services for the Province of Alberta, as President and Vice-Chancellor of the University of Calgary
and as the Dean of Medicine at the University of Calgary. He has also served on the board of directors of a number of companies including Connaught Laboratories Ltd., Monsanto
Canada Inc. and Fluor/Daniel Canada Inc. Dr. Cochrane received his M.D. from the University of Toronto.

61

---

JOANN L. DATA, M.D., PH.D.joined the Stressgen board of directors effective October 1, 2001. She has served at Amylin
Pharmaceuticals, Inc. as Senior Vice president of Regulatory Affairs and Quality Assurance since August 1999. Dr. Data previously served as Executive Vice President, Product
Development and Regulatory Affairs for CoCensys. Her prior experience includes several positions at the Upjohn Company, including Corporate Vice President for Pharmaceutical Regulatory Affairs and
Project Management, and a number of positions at Hoffmann-La Roche, including Vice President of Clinical Research and Development. Dr. Data has been an adjunct assistant professor
in medicine and pharmacology at Duke University Medical Center since 1982 and at Cornell Medical Center since 1986. She earned her M.D. from Washington University School of Medicine and her Ph.D. in
Pharmacology from Vanderbilt University.

DARRELL ELLIOTThas served as one of our directors since December 1999. Since August 1999, he has been Senior Vice President
for MDS Capital Corp., a health care venture capital organization. He has extensive board experience and has served on the board of directors of several Canadian public and private companies,
including Inex Pharmaceuticals Corp. since August 1995, Star Biotech Inc. since
January 1998, Cardiome Pharma Corp since January 1999, Chromos Molecular Systems Inc. since July 1999, GenSci Regeneration Sciences Inc. since December 1999,
Neuromed Technologies Inc. since December 2000, Cognetix, Inc. since August 2001 and Protiva Biotherapeutics Inc. since November 2001. Mr. Elliott was
Regional Vice President of Royal Bank Capital Corporation (RBCC) from December 1989 to January 1994 and from August 1994 to August 1998. He was also founder and Managing
Director of RBCCs Life Sciences fund in 1994. Mr. Elliott received his BA Economics degree from the University of South Africa (Pretoria).

KENNETH GALBRAITHhas served as one of our directors since May 2000. Mr. Galbraith has been the President of Gigha
Consulting Ltd., a technology consulting and investment management company, since October 2000. Mr. Galbraith has served as a director of several private and public biotechnology
companies, including Micrologix Biotech Inc. since March 2001, Angiotech Pharmaceuticals since March 2000, Kinetek Pharmaceuticals since October 2000, Active Pass
Pharmaceuticals since October 1999 and Neuro Discovery Inc. since November 2001. From February 1988 to October 2000 he was employed by QLT Inc., a
biotechnology company, where he progressed to the position of Executive Vice President and Chief Financial Officer. Mr. Galbraith was a founding Director and Chairman of the B.C. Biotechnology
Alliance and a former Chair of one of Canada's Centres of Excellence Networks, the Canadian Bacterial Diseases Network. He is also a director of the Michael Smith Foundation for Health Research.
Mr. Galbriath received his B.Com.(Honours) degree from the University of British Columbia and was admitted in British Columbia as a Chartered Accountant in 1988.

YAD GARCHAhas served as one of our directors since June 1995. Since January 2000, he has been a Senior Vice President with
GrowthWorks Capital Ltd., which is the manager of the Working Opportunity Fund (EVCC) Ltd., a Labor-sponsored venture capital fund. Mr. Garcha has also managed investments in
Angiotech Pharmaceuticals since September 1996, Synapse Technologies since March 1998 and Active Pass Pharmaceuticals since July 1998. He received his MBA from the University of
Western Ontario.

RICHARD M. GLICKMAN,one of our co-founders, has served as one of our directors since April 1990 and has been
Vice-Chairman of our Board of Directors since May 2000. Mr. Glickman has been the Chief Executive Officer and the Chairman of Aspreva Pharmaceuticals Corp., a pharmaceutical
company, since January 2002. He has been a Director of Kinexus Bioinformatics Corp., a bioinformatics company, since April 2001, a Director of TheraMed Capital Corp., a capital pool
company, since January 2001, a Director of Epic Biosonics Incorporated, a medical device company, since Fall 2000, and the Chairman of Vigil Health Management, a behavior informatics company,
since June 2000. He has served as a member of the Board of Directors of the Genetic Diseases Network, a Canadian National Centre of Excellence since Spring 1995 and has served on the British
Columbia

62

---

Knowledge Development Fund, a government granting agent, since Spring 2000. Mr. Glickman was our President and Chief Executive Officer from April 1990 to May 2000.
Mr. Glickman was also a founder of Probtec Corporation, a national drug design and molecular genetics company, where he served as Vice-President of Corporate Development from the
Fall of 1986 to Fall 1989. Additional experience of Mr. Glickman includes his service as the Chairman of the British Columbia Biotechnology Alliance and as a member of the Canadian federal
government's National Biotechnology Advisory Committee. Mr. Glickman graduated from the Department of Immunology and Microbiology at McGill University, Montreal.

STEVEN C. MENDELLhas served as one of our directors since December 1996. Mr. Mendell has been President and Chief Executive
Officer of LMA North America Inc. and LMA International N.V., leaders in the marketing and sale of devices for anesthesia and airway management, since June 1999 and December 2000,
respectively. From February 1998 to June 1999, Mr. Mendell served as Chairman and President of Selective Genetics, Inc. From April 1993 to July 1998, he was
President and Chief Executive Officer of Prizm Pharmaceuticals, Inc., a private company engaged in the development of gene therapy products for tissue regeneration and repair which became
Selective Genetics, Inc. through a merger. From 1986 to April 1992, Mr. Mendell was Chief Executive Officer and Chairman of Xoma Corporation, a biopharmaceutical company, a
company where he has served as a director since 1984. Mr. Mendell also served as a director of Ciblex Corporation, a private company engaged in the development of small molecules to block the
release of disease-causing proteins. His previous experience includes senior domestic and international positions with Becton Dickinson and Co., a public medical supply and device company.
Mr. Mendell graduated from the University of California, Santa Barbara, is a member of the Foundation Board of Directors, and received a graduate degree from the American Graduate School of
International Management.

JAY M. SHORT, PH.D.has served as one of our directors since March 1994. Dr. Short has been President, Chief Executive
Officer, Chief Technology Officer, and a director for Diversa Corporation, a biotechnology company, since September 1994. Since February 1995 Dr. Short has also served as a
director for Invitrogen Corporation, a biotechnology company. He previously served at biotechnology companies Stratacyte, Inc., as President and Strategene Cloning Systems from
September 1985 to September 1994 as Vice President of Research and Development and Operations. Dr. Short received a Ph.D. in biochemistry from Case Western Reserve University.

RICHARD A. YOUNG, PH.D.has served as one of our directors since June 1995. Dr. Young has been a Professor in the Department
of Biology, MIT and a member of the Whitehead Institute of Biomedical Research since September 1984. Dr. Young is an expert in recombinant vaccine development and a researcher in the
immunology of stress proteins and their uses in vaccine preparation and therapy. Dr. Young received his Ph.D. in molecular biophysics and biochemistry from Yale University and conducted
extensive post-doctoral research at the Swiss Institute for Experimental Cancer Research and at Stanford University.

DANIEL L. KORPOLINSKIhas served as our President and Chief Executive Officer, U.S. Operations, since March 2000, and as one of our
directors and our President and Chief Executive Officer since May 2000. Mr. Korpolinski was President and CEO of Copley Pharmaceutical Inc., a generic pharmaceutical company, from
September 1998 until the company was acquired by Teva Pharmaceutical Industries Ltd. in September 1999, and was one of the directors of Copley from August 1998 until it was
acquired. Mr. Korpolinski served as President and Chief Executive Officer of Prodromics On Line, a software company, from June 1997 until August 1998. Mr. Korpolinski
served as the President and Chief Executive Officer of CoCensys Inc., a biotechnology company, from October 1991 to October 1996. From 1988 to 1991, Mr. Korpolinski was
President of Adria Laboratories North America, an oncology company. Mr. Korpolinski received his B.S. from Niagra University in New York.

63

---

JOHN R. NEEFE, M.D.has served as our Vice President, Clinical Research and Regulatory Affairs since December 1998. Prior to
joining Stressgen in 1998 Dr. Neefe served as Vice President, Clinical Oncology and International Director of Clinical Oncology at Sanofi Research Division, Sanofi Pharmaceuticals from
mid-1995 to December 1998. From 1993 until its acquisition by Sanofi in 1995, Dr. Neefe was Senior Director of Sterling-Winthrop, leading the company's clinical oncology drug
development unit. Dr. Neefe has also held a position as director of Clinical Research at Centocor, has attained academic appointments at the University of Kentucky and at Georgetown University
and held a research position at the National Cancer Institute. Dr. Neefe received his B.A. from Harvard University and his M.D. from the University of Pennsylvania School of Medicine.

MARVIN I. SIEGEL, PH.D.has served as our Executive Vice President, Research & Development since March 1997.
Dr. Siegel was a director of Delta Pharmaceuticals, Inc., a Chapel Hill, North Carolina pharmaceutical company from the first quarter of 1997 through the first quarter of 1999. From
February 1995 to February 1997, Dr. Siegel was Vice President in charge of science and research and development, Terrapin Technologies Inc., a South San Francisco,
California private company specializing in drugs for allergy, oncology and diabetes, which is now a public company known as Telik Inc. Dr. Siegel was a senior executive with
Schering-Plough Research Institute in Kenilworth, N.J., from May 1982 to February 1994 where he was responsible for biological research in immunology and allergy. From August 1975
to May 1982 Dr. Siegel was a research scientist at Burroughs Wellcome Company in Research Triangle Park, NC. He has attained academic appointments at Rutgers University and at the School
of Medicine of the University of North Carolina at Chapel Hill. Dr. Siegel received his B.S. from Lafayette College, his M.A. from Columbia University and his Ph.D. from The Johns Hopkins
University School of Medicine in 1973. He is a Fellow of the American Academy of Asthma, Allergy and Immunology and of the American Institute of Chemists.

DONALD D. TARTREhas served as our Vice President and Chief Financial Officer since March 2001. Mr. Tartre previously served
as Vice President, Finance and Planning and Corporate Controller with Agouron Pharmaceuticals, Inc., formerly a public biotechnology company engaged in the discovery, development and marketing
of pharmaceutical products that became a subsidiary of Pfizer Inc. in 2000, from June 1997 to March 2001. He served as Controller of Gen-Probe Incorporated, a
bioscience company in the medical diagnostics industry from February 1990 to June 1997. Before entering the pharmaceutical/biotechnology industry, Mr. Tartre provided accounting,
audit and consulting services to publicly traded healthcare and technology companies while serving with Ernst & Young for seven years. Mr. Tartre is a Certified Public Accountant and a
Certified Management Accountant, and received a B.S. in business administration from the University of Southern California.

Each
officer serves at the discretion of our Board of Directors. Our Articles permit the authorized number of directors to range from three to fifteen directors. We currently have eleven
directors authorized, including one vacant position.

Board Committees

Our Board of Directors has established three standing committees, the Audit Committee, the Compensation Committee and our Governance Committee. Our Board of
Directors has delegated certain responsibilities to each of these Committees and has also instructed each of them to perform certain advisory functions and make recommendations and report to our Board
of Directors. Where considered prudent, certain matters falling under the responsibility of these Committees are at times dealt with at a meeting of the entire Board of Directors. Additional
committees are established from time to time for particular purposes.

The
Audit Committee meets with our financial management and the independent auditors to review and inquire into matters affecting financial reporting matters, the system of internal
accounting

64

---

and financial controls and procedures and audit procedures and plans. This Committee also makes recommendations to our Board of Directors regarding the appointment of independent auditors. In
addition, the Audit Committee reviews and recommends for approval to our Board of Directors our annual financial statements, annual report and certain other documents regulatory authorities require.
The Audit Committee is also responsible for approving the policies under which our financial management may invest the funds in excess of those required for current operations. In 2001, the Audit
Committee met five times. This committee is composed of three directors: Yad Garcha, Kenneth Galbraith and Darrell Elliott, none of whom is one of our current or former officers.

The
Compensation Committee is responsible for establishing and monitoring our long range plans and programs for attracting, training, developing and motivating employees. This Committee
reviews recommendations for the appointment of persons to senior executive positions, considers terms of employment, including succession planning and matters of compensation and recommends awards
under our 2001 Equity Incentive Plan. In 2001, this committee met four times. The Compensation Committee is composed of three directors: William A. Cochrane, M.D, Richard M. Glickman and Jay M. Short,
Ph.D.

The
Governance Committee is responsible for identifying, evaluating and recommending nominees for our Board of Directors and reviewing incumbent directors for re-election to
our Board of Directors. Incumbent and potential new directors are evaluated by this Committee with the objective of obtaining a balanced mix of Board members with the experience and expertise to
ensure that our Board of Directors is composed of individuals who will best serve our interests and assist management in reaching our strategic goals. This committee met once in 2001. The Governance
Committee is composed of three directors: William A. Cochrane, M.D., Steven C. Mendell and Richard A. Young, Ph.D.

Item 11. COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS

William A. Cochrane, M.D. is entitled to receive $15,000 annually per year for his service as the Chairman of our Board, and an additional fee of $2,000 per
meeting attended. Each of our other non-employee directors is entitled to receive $6,000 per year for such person's service as a director, and $1,500 per meeting attended. In addition,
directors who serve on the Audit and Compensation Committees receive one-half the normal meeting fee for each committee meeting attended. We also reimburse directors for expenses incurred
on our behalf, including expenses associated with attendance at meetings of our Board of Directors.

Our
non-employee directors receive options to acquire 10,000 shares annually after the annual general meeting of shareholders, other than the Chairman of the Board, who
receives an option to acquire 15,000 shares. In early 2001 Mr. Galbraith, Mr. Garcha and Mr. Elliott each received an option to acquire 50,000 shares and in late 2001
Dr. Data received an option to acquire 30,000 shares, in consideration for these directors' initial years of service on the Board of Directors. The exercise price per share of options granted
for service on the board of directors is the fair market value of our common stock on the date of grant (based on the closing sales price reported on the Toronto Stock Exchange for the day before the
date of grant).

Compensation Committee Interlocks and Insider Participation

Our former President and Chief Executive Officer, Mr. Glickman, who was a director throughout the year, served on the Compensation Committee during 2001.

Report of Compensation Committee

The Compensation Committee is currently composed of William A. Cochrane, M.D., Richard M. Glickman and Jay M. Short, Ph.D., all directors who are not employees.
The Compensation Committee

65

---

is responsible for establishing and administering our executive compensation policies and programs as well as salary and benefit levels. The Committee makes recommendations to our Board of Directors,
which gives final approval in compensation matters.

Compensation Philosophy

We believe that a competitive, goal-oriented compensation policy is critically important to the creation of value for stockholders. To that end, we
have created an incentive compensation program intended to reward outstanding individual performance. The goals of the compensation program are to align compensation with business objectives and
performance to enable us to attract and retain the highest
quality executive officers and other key employees, reward them for our progress and motivate them to enhance long-term stockholder value. Our compensation program is intended to implement
the following principles:



While
compensation opportunities are based in part upon individual contribution, the actual amounts earned by executives in variable compensation programs are also based upon how we
perform. The executive compensation for the Chief Executive Officer and all other executives is based upon three components, each of which is intended to serve our compensation principles.

Our
compensation policies and programs are designed to be competitive with similar biotechnology companies and to recognize and reward executive performance consistent with the success
of our business. These policies and programs are intended to attract and retain capable and experienced people.

Base Salary

Base salary is targeted at the competitive median for similar U.S. and Canadian companies in the biotechnology industry. For the purpose of establishing these
levels, the Compensation Committee reviews competitive market data.

Based
upon its reviews of industry data, the Compensation Committee determined that the base salaries of the Chief Executive Officer and all other executive officers were appropriate and
necessary to attract individuals of such high caliber within the biotechnology industry. The Compensation Committee reviews the salaries of the Chief Executive Officer and other executive officers
each year and such salaries may be increased based upon (i) the individual's performance and contribution and (ii) increases in median competitive pay levels.

Annual Incentives

We have a cash bonus program whereby bonus amounts are determined based upon the achievement of corporate goals and individual performance. Any bonus is based, in
part, upon our performance and in part on individual performance. The Compensation Committee believes bonus amounts are similar to those paid by other companies in the biotechnology industry.

66

---

Long-Term Incentives

Long-term incentive compensation is provided through grants of options to purchase shares of our common stock to the Chief Executive Officer, other
executive officers and other employees. The stock options are intended to retain and motivate all employees to improve our long-term performance. It is common in the biotechnology industry
to grant stock options to all employees. Stock options have been granted to all of our full-time employees. Executives and other employees receive value from these grants only if our
common stock appreciates over the long-term. The Compensation Committee believes the amount and value of such grants are based upon levels similar to other companies in the biotechnology
industry. Generally, stock options are granted with an exercise price equal to prevailing market value. The stock options generally vest in increments over a period of years.

Compensation of the Chief Executive Officer

Mr. Korpolinski's base salary of U.S. $367,500 in 2001 was determined based on an evaluation of the salaries of Chief Executive Officers of comparable
companies and Mr. Korpolinski's experience, in accordance with the policies noted above. His bonuses of U.S. $140,000 in March 2001 relating to his performance from March 2000 to
March 2001 and of $128,625 in January 2002 relating to his performance from March 2001 to December 31, 2001 were determined based upon an evaluation of his performance
against criteria established after his first twelve months as an employee by the Compensation Committee, including the company's level of operations, development of HspE7, increased biochemical sales,
and operations within budget.

Compensation of Executive Officers

The following table sets forth, in U.S. dollars, all compensation awarded or paid to and earned by, our Chief Executive Officer during the fiscal years ended
December 31, 2001, 2000 and 1999 as well as the
three executive officers whose salary and bonus were in excess of U.S. $100,000 for services rendered to us during the years ended December 31, 2001, 2000 and 1999.

Summary Compensation Table, in U.S. Dollars

|                                                                           |  | Annual compensation |  | Long term
Compensation
Securities
Underlying
Options |                        
|-------------------------------------------------------------------------- |  | ------------------- |  | ---------------------------------------------------- | -----------------------
|
|Daniel L. Korpolinski
President and Chief Executive Officer(1)             |  | 2001
2000           |  | $                                                    | 364,583
277,083        
|John R. Neefe, M.D.
Vice President, Clinical and Regulatory Affairs        |  | 2001
2000
1999      |  |                                                      | 275,000
253,472
199,493
|Marvin I. Siegel, Ph.D.
Executive Vice President, Research and Development |  | 2001
2000
1999      |  |                                                      | 251,450
235,000
206,696
|Donald D. Tartre
Vice President and Chief Financial Officer(10)            |  | 2001                |  |                                                      | 185,795                

---

|(1) | Mr. Korpolinski commenced employment on March 13, 2000.                                                                                                                                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Amount represents a bonus granted in March 2001, which related to Mr. Korpolinski's performance from March 13, 2000 to March 13, 2001, but excludes a $128,625 bonus granted in January 2002, which
related to Mr. Korpolinski's performance from March 13, 2001 through December 31, 2001.

67

---

|(3)  | Amount includes medical premiums, life insurance premiums, housing and automobile costs, and amounts paid under Mr. Korpolinski's contract to compensate for the differential between the Canadian and U.S. effective
tax rates.
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(4)  | Amount excludes 100,000 options granted in January 2002 relating to Mr. Korpolinski's 2001 performance.                                                                                                                         
|(5)  | Amount excludes a $68,750 bonus granted in January 2002 relating to Dr. Neefe's performance from December 14, 2000 through December 31, 2001.                                                                                   
|(6)  | Amount excludes 50,000 options granted in January 2002 relating to Dr. Neefe's 2001 performance.                                                                                                                                
|(7)  | Amount excludes a $50,290 bonus granted in January 2002 relating to Dr. Siegel's performance from February 5, 2001 through December 31, 2001.                                                                                   
|(8)  | Amount excludes 30,000 options granted in January 2002 relating to Mr. Siegel's 2001 performance.                                                                                                                               
|(9)  | Amount includes extended medical premiums, long-term disability premiums and a moving allowance.                                                                                                                                
|(10) | Mr. Tartre commenced employment on March 5, 2001.                                                                                                                                                                               
|(11) | Amount includes a signing bonus but excludes a $46,875 bonus granted in January 2002 relating to Mr. Tartre's performance from March 5, 2001 through December 31, 2001.                                                         
|(12) | Amount includes sign-on options but excludes 40,000 options granted in January 2002 relating to Mr. Tartre's 2001 performance.                                                                                                  

Stock Option Grants And Exercises In Last Fiscal Year

We grant options to our executive officers to purchase our common stock under our 2001 Equity Incentive Plan. Once the 2001 Plan was approved by our shareholders
we ceased to grant options under our 1996 Share Incentive Plan. As of December 31, 2001, options to purchase a total of 1,258,259 shares were issued and outstanding under the 2001 Plan and
2,917,324 shares were outstanding under the 1996 Plan. Options to purchase 2,241,741 shares remained available for grant under the 2001 Plan. The following table sets forth certain information
regarding options granted during the fiscal year ended December 31, 2001 to our executive officers named in the summary compensation table:

|                        |  | Individual Grants |     |      |   |   |      | 
|----------------------- |  | ----------------- | --- | ---- | - | - | ---- | 
|
|
|
|
|
|John Neefe, M.D.        |  | 50,000            | (3) | 3.5  | % | $ | 6.10 | 
|Marvin I. Siegel, Ph.D. |  | 50,000            | (3) | 3.5  | % |   | 6.10 | 
|Donald D. Tartre        |  | 200,000           | (4) | 14.1 | % |   | 4.60 | 

---

68

---

Aggregated Option Exercises In Last Fiscal Year  And Fiscal Year-End Option Values

The following table sets forth certain information as of December 31, 2001, regarding options held by our executive officers named in the summary
compensation table. There were no stock appreciation rights outstanding on December 31, 2001.

|                        |  |   |  |   |   | Number of Shares
Underlying Unexercised
Options
at FY-End (#) |         |  |         | 
|----------------------- |  | - |  | - | - | ------------------------------------------------------------- | ------- |  | ------- | 
|
|
|
|Daniel L. Korpolinski   |  |  |  | $ |  |                                                               | 465,625 |  | 534,375 | 
|John R. Neefe, M.D.     |  |  |  |   |  |                                                               | 129,722 |  | 31,945  | 
|Marvin I. Siegel, Ph.D. |  |  |  |   |  |                                                               | 223,055 |  | 46,945  | 
|Donald D. Tartre        |  |  |  |   |  |                                                               |        |  | 200,000 | 

Employment Contracts and Termination of Employment and Change-in-Control Arrangements

Our President and Chief Executive Officer, Daniel L. Korpolinski, is employed under an employment agreement dated March 8, 2000. In addition to his base
salary of U.S. $367,500, the agreement specifies that Mr. Korpolinski is eligible to receive additional incentive compensation of up to 40% of his base salary in any 12 month fiscal year
if he meets individual objectives established annually by the board of directors. In the event that Mr. Korpolinski is terminated without just cause, he is entitled to severance payments equal
to 12 months' base salary. Mr. Korpolinski is also entitled to severance payments equal to 12 months' base salary in the event that, within 12 months after an acquisition
of more than 50% of our issued voting shares, Mr. Korpolinski is terminated or experiences a change in his title or responsibilities. Within 6 months after such a change in control, if
Mr. Korpolinski terminates the employment agreement, he is entitled to severance payments equal to 12 months' of his current base salary. Mr. Korpolinski's stock option agreement
under the 2001 Plan provides that the vesting and exercisability of his options will accelerate in full in the event his employment is involuntarily terminated without cause or voluntarily terminated
for specified reasons within twenty-four (24) months after a specified change in control. Stock options granted under the 1996 Plan become fully exercisable after a specified change
in control. In order to permit Mr. Korpolinski to maintain homes near more
than one Stressgen office, the board has also approved his receiving reimbursement for up to U.S. $3,500 per month for housing and incidental expenses.

69

---



Our Vice President, Clinical and Regulatory Affairs, John R. Neefe, M.D., is employed under an employment agreement dated December 14, 1998, as amended on December 16,
1999. In 2001 Dr. Neefe's base salary was U.S. $275,000 under this agreement; he also is eligible for a bonus of up to 20% of his base salary based on performance. In order to terminate
Dr. Neefe's employment for other than just cause, we must provide Dr. Neefe with 12 month' prior notice. Dr. Neefe is also entitled to severance payments equal to his last
two years' compensation in the event of termination within 12 months' after a change in ownership of our common stock within any 3 month period of at least 50% which results in a change
in the majority of the members of our Board. Dr. Neefe's stock option agreements under the 2001 Plan provide that the vesting and exercisability of his options will accelerate in full in the
event his employment is involuntarily terminated without cause or voluntarily terminated for specified reasons within twenty-four (24) months after a specified change in control.
Stock options granted under the 1996 Plan become fully exercisable after a specified change in control.

Our
Executive Vice President, Research and Development, Marvin I. Siegel, Ph.D., is employed under an employment agreement dated February 5, 1997, as amended on January 11,
1999. In 2001 Dr. Siegel's base salary was U.S. $251,450 under this agreement; he also is eligible for a bonus based on exemplary service. In the event that Dr. Siegel is terminated
without cause, he is entitled to 12 months notice or severance payments. Dr. Siegel is also entitled to severance payments equal to 24 months base salary in the event of
termination within 12 months after an acquisition of more than 50% of our outstanding shares as a result of which a majority of the members of our Board change within 3 months.
Dr. Siegel's stock option agreements under the 2001 Plan provide that the vesting and exercisability of his options will accelerate in full in the event his employment is involuntarily
terminated without cause or voluntarily terminated for specified reasons within twenty-four (24) months after a specified change in control. Stock options granted under the 1996
Plan become fully exercisable after a specified change in control.

Our
Vice President and Chief Financial Officer, Donald D. Tartre, is employed under an employment agreement dated March 5, 2001. In 2001 Mr. Tartre's base salary was U.S.
$225,000 under this agreement; he is also eligible for a bonus of up to 25% of his base salary based upon pre-established objectives and exemplary performance. In the event that
Mr. Tartre is terminated without cause, he is entitled to 9 months notice or severance payments. Mr. Tartre is also entitled to severance payments equal to 9 months base
salary in the event of a termination or constructive termination within two years after a change in control. Mr. Tartre's stock option agreements under the 2001 Plan provide that the vesting
and exercisability of his options will accelerate in full in the event his employment is involuntarily terminated without cause or voluntarily terminated for specified reasons within
twenty-four (24) months after a specified change in control.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information as of January 31, 2002 with respect to (i) each stockholder known to us to be the beneficial owner of
more than 5% of our outstanding common stock, (ii) each director, (iii) our Chief Executive Officer and our other executive officers and (iv) all of

70

---

our directors and executive officers as a group. Except as set forth below, each of the named persons and members of the group has sole voting and investment power with respect to the shares shown.

|Beneficial Owner of Common Stock (1)                                                    |  | Amount and Nature of
Beneficial Ownership of
Common Stock (2)(3) |     | Percent of Class of
Common Stock (2) |  
|--------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------- | --- | ------------------------------------ | -
|RBC Investments
P.O. Box 7500, Station "A"
77 King Street West
Toronto, Ontario M5W 1P9 |  | 4,891,700                                                        |     | 8.1                                  | %
|TAL Investment Counsel
3100-1000 de la Gauchetiere West
Montrel, Quebec H3B 4WH         |  | 3,520,000                                                        |     | 5.8                                  | %
|William A. Cochrane, M.D.                                                               |  | 195,000                                                          | (4) | *                                    |  
|Joann L. Data, M.D., Ph.D.                                                              |  | 14,166                                                           |     | *                                    |  
|Darrell Elliott                                                                         |  | 987,177                                                          | (5) | 1.6                                  | %
|Kenneth Galbraith                                                                       |  | 65,000                                                           | (6) | *                                    |  
|Yad Garcha.                                                                             |  | 2,347,346                                                        | (7) | 3.9                                  | %
|Richard M. Glickman                                                                     |  | 251,600                                                          | (8) | *                                    |  
|Steven C. Mendell                                                                       |  | 140,000                                                          |     | *                                    |  
|Jay M. Short, Ph.D.                                                                     |  | 92,000                                                           |     | *                                    |  
|Richard A. Young, Ph.D.                                                                 |  | 346,600                                                          |     | *                                    |  
|Daniel L. Korpolinski                                                                   |  | 530,555                                                          |     | *                                    |  
|John R. Neefe, M.D.                                                                     |  | 156,999                                                          |     | *                                    |  
|Marvin I. Siegel, Ph.D                                                                  |  | 260,888                                                          |     | *                                    |  
|Donald D. Tartre                                                                        |  | 52,222                                                           |     | *                                    |  
|All Directors and Executive Officers as a Group (13 persons)                            |  | 5,439,553                                                        |     | 9.0                                  | %

---

*Less
than one percent

71

---

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Employment Contracts and Termination of Employment and Change-in-Control Arrangements

We have entered into an employment agreement with certain of our executive officers, as described under the caption "Employment Contracts and Termination of
Employment and Change-in-Control Arrangements." We have granted stock options to certain of our executive officers, as described under the caption "Executive Compensation."

Subject
to theBusiness Corporations Act(Yukon Territory), if specific preconditions are met, we will indemnify persons including a
director, officer, former director or officer, person who has undertaken any liability on behalf of the corporation, and his or her heirs against losses reasonably incurred by reason of such status.
Indemnification covers losses, charges and expenses incurred as a result of actions in such capacities. We are also empowered under our By-laws and the BCA (Yukon Territory) to purchase
insurance on behalf of any person who we are required or permitted to indemnify. Pursuant to this provision, we currently maintain directors and officers insurance coverage. In addition, we have
entered into indemnity agreements with our directors and officers and intend to enter into similar agreements with future directors and officers. These agreements could require us to indemnify those
officers and directors against liabilities that arise by reason of their status or service as officers or directors. In certain circumstances the agreements would also require us to advance the
expenses an officer or director incurs in legal proceedings. We believe that the provisions in our By-laws and contractual indemnification are necessary to attract and retain qualified
persons as directors and officers. At present, there is no pending litigation or proceeding involving any of our directors, officers, employees or agents where indemnification will be required or
permitted. We are not aware of any threatened litigation or proceeding that may result in a claim for indemnification.

72

---

PART IV

Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

Our
financial statements are included herein as required under Item 8 of this Annual Report on Form 10-K.

Financial
statement schedules have been omitted since they are either not required, not applicable, or the information is otherwise included.

|Exhibit No. |  | Description                                                                                                                 
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------
|3.9*        |  | Articles of Continuance of the Company                                                                                      
|3.10*       |  | By-Laws of the Company                                                                                                      
|4.4*        |  | Form of Stock Certificate                                                                                                   
|10.1**      |  | License Agreement dated November 29, 1992 among Whitehead Institute for Biomedical Research, MIT and the Company, as amended
|10.2**      |  | Lease for the Company's offices in Victoria, British Columbia                                                               
|10.3**      |  | Employment Agreement dated March 8, 2000 between the Company and Daniel Korpolinski                                         
|10.10**     |  | 1996 Share Incentive Plan                                                                                                   
|10.12***    |  | 2001 Equity Incentive Plan                                                                                                  
|10.13       |  | Form of Executive Stock Option Agreement                                                                                    
|21.2        |  | List of Subsidiaries                                                                                                        
|23.1        |  | Consent of Deloitte & Touche LLP                                                                                            
|24.1        |  | Power of Attorney (Included on the signature page of this Annual Report on Form 10-K)                                       

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

**
Incorporated by reference to the Company's Form 10-K for the year ended December 31, 2000, as filed with the Commission on April 2, 2001

***
Incorporated by reference to Exhibit 99.1 of the Company's Registration Statement on Form S-8, as filed with the Commission on May 30, 2001

On
December 4, 2001 we issued a report on Form 8-K containing a December 3, 2001 press release to the effect that we had entered into an agreement with a
syndicate of Canadian underwriters, on a bought deal basis, to issue and sell common shares for gross proceeds of approximately Canadian $25,000,000.

On
December 18, 2001 we issued a report on Form 8-K containing a November 29, 2001 press release announcing the latest results compiled from six data
sets from five key phase II clinical trials involving our lead fusion product, HspE7.

73

---



SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.

|                     |  | STRESSGEN BIOTECHNOLOGIES CORPORATION
|-------------------- |  | -------------------------------------
|Date: March 19, 2002 |  | By:                                  

74

---

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Daniel L. Korpolinski and Donald D. Tartre, as his
true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign
any and all amendments to this Annual Report on Form 10-K, and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and full power and authority to do and performance each and every act and thing requisite and necessary to
be done in connection therewith, as fully to intents and purposes as he might or could do in person,
hereby ratifying and confirming that all said attorneys-in-fact and agents, or any of them or their or his substitute or resubstitute, may lawfully do or cause to be done by
virtue hereof.

Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following person on behalf of the Registrant and in the
capacities and on the dates indicated.

|Signature                                       |  | Title                                                                                   |  | Date          
|----------------------------------------------- |  | --------------------------------------------------------------------------------------- |  | --------------
|                                                |  |                                                                                         |  |               
|/s/DANIEL L. KORPOLINSKIDaniel L. Korpolinski   |  | Chief Executive Officer, President and Director
(Principal Executive Officer)           |  | March 19, 2002
|/s/DONALD D. TARTREDonald D. Tartre             |  | Vice President and Chief Financial Officer
(Principal Financial and
Accounting Officer) |  | March 19, 2002
|/s/WILLIAM A. COCHRANEWilliam A. Cochrane, M.D. |  | Director, Chairman of the Board                                                         |  | March 19, 2002
|/s/JOANN L. DATAJoann L. Data, M.D., Ph.D.      |  | Director                                                                                |  | March 19, 2002
|/s/DARRELL ELLIOTTDarrell Elliott               |  | Director                                                                                |  | March 19, 2002
|/s/KENNETH GALBRAITHKenneth Galbraith           |  |                                                                                         |  | March 19, 2002
|/s/RICHARD M. GLICKMANRichard M. Glickman       |  | Director                                                                                |  | March 19, 2002
|/s/STEVEN C. MENDELLSteven C. Mendell           |  | Director                                                                                |  | March 19, 2002

75

---

QuickLinks