**U.S. SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C.  20594**

 

**FORM 10-K**

 

| **ý**                                      | **ANNUAL REPORT PURSUANT TO SECTION  13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------------------------------------------------|-------------------------------------------------------------------------------------------|
|                                            |
| **For the fiscal year ended December 31, 2003** |

 

**Commission FileNo.  333-12570**

 

**STRESSGEN BIOTECHNOLOGIESCORPORATION**

(Exact Name of Registrant as Specified in its Charter)

 
| **Yukon Territory, Canada**                                                                             |   | **N/A**                           |
|---------------------------------------------------------------------------------------------------------|--------|-----------------------------------|
| (State or Other Jurisdiction of Incorporation or Organization)                                          |   | (IRS Employer Identification No.) |
|                                                                                                    |   |                              |
| **350-4243 Glanford Avenue  Victoria, British Columbia V8Z 4B9**                                        |   |                              |
|                                                                                                    |   |                              |
| **Parent of Stressgen Biotechnologies, Inc.  6055 Lusk Boulevard,**** San Diego, California**      |   | **92121**                         |
| (Address of Principal Executive Offices)                                                                |   | (Zip Code)                        |
|                                                                                                    |   |                              |
| Registrant’s  Telephone Number, including area code:  **(250) 744-2811  (858) 202-4900** |

 

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

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

 

Indicate by check mark whetherthe Registrant: (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and(2) has been subject to such filing requirements for the past 90 days.  Yes ý   No o

 

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

 

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

 

As of June 30, 2003 andFebruary 12, 2004, the common shares held by non-affiliates of the Registranthad an aggregate market value of approximately U.S. $77,830,916 and$95,621,515, respectively.  Theseamounts respectively represented approximately Cdn. $105,484,240 (based on theJune 30, 2003 closing price of Cdn. $1.71 per common share, as reported on TheToronto Stock Exchange, and 61,686,690 outstanding common shares) and$126,134,340 (based on the February 12, 2004 closing price of Cdn. $1.74 percommon shares as reported on The Toronto Stock Exchange and approximately72,491,000 outstanding common shares). These numbers are provided only for the purposes of this report and donot represent an admission by either the Registrant or any non-affiliate as tothe status of any person.

 

The Company’s accounts aremaintained in Canadian dollars.  In thisAnnual Report on Form 10-K, all dollar amounts are stated in Canadian dollarsexcept where otherwise indicated.

 

Documents incorporated byreference: None.

 

 

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**TABLE OF CONTENTS**

 
| Item 1.   | BUSINESS                                                                                    |   |
|-----------|---------------------------------------------------------------------------------------------|--------|
| Item 2.   | PROPERTIES                                                                                  |   |
| Item 3.   | LEGAL  PROCEEDINGS                                                                          |   |
| Item 4.   | SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS                                        |   |
| Item 5.   | MARKET FOR  REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                 |   |
| Item 6.   | SELECTED  FINANCIAL DATA                                                                    |   |
| Item 7.   | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |   |
| Item 7A.  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT  MARKET RISK                                 |   |
| Item 8.   | FINANCIAL  STATEMENTS AND SUPPLEMENTARY DATA                                                |   |
| Item 9.   | CHANGES IN  AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE       |   |
| Item  9A. | CONTROLS  AND PROCEDURES                                                                    |   |
| Item  10. | OUR  DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES                                        |   |
| Item 11.  | COMPENSATION  OF DIRECTORS AND EXECUTIVE OFFICERS                                           |   |
| Item 12.  | SECURITY  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                             |   |
| Item 13.  | CERTAIN RELATIONSHIPS  AND RELATED TRANSACTIONS                                             |   |
| Item 14.  | PRINCIPAL ACCOUNTING FEES AND SERVICES                                                      |   |
| Item 15.  | EXHIBITS,  FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K                            |   |

 

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**PART I**

 

**FORWARD-LOOKING STATEMENTS**

 

**This Annual Report on Form 10-K containsforward-looking statements that involve risks and uncertainties. Ourforward-looking statements, which are typically indicated by words such as“intend,” “plan,” “anticipate” and “expect,” include statements regarding theresults of on-going research, development efforts and the scope of future operations.Such statements are only predictions. Actual results may differ materially from those implied by ourforward-looking statements, due to factors including uncertainties associatedwith product development, the risk that products do not demonstratestatistically significant results in clinical trials, our dependence uponcollaborative partners, our need for additional financing and the risk that wewill not obtain approval to market our products.  These and other risks are discussed in this Form 10-K, includingunder the caption “Factors that May Affect Future Performance.” We disclaim anyobligation to update forward-looking statements as circumstances change.**

 

**Item 1****.  BUSINESS**

 

**Overview**

 

We are abiopharmaceutical company focused on the commercialization, development andresearch of proprietary immunotherapeutics to treat human diseases.  Our platform technology involves usingrecombinant DNA methods to covalently link together heat shock proteins (Hsp),also known as stress proteins, to proteins such as viral or cancerantigens.  The resulting CoValTMfusion proteins are designed to stimulate immune responses to thedisease-specific antigen present in the fusion. By targeting immune responsesto a specific antigen, CoValTM fusions use the body’s immune systemto combat infectious diseases or cancer.

 

Most of ourresources are devoted to developing our lead product candidate, which we callHspE7.  HspE7 is a fusion between an Hspand a human papillomavirus (HPV) antigen called E7.  The product is in development for indications caused by HPV suchas genital warts, recurrent respiratory papillomatosis (RRP), cervicalintraepithelial neoplasia (CIN), cervical cancer and anal intraepithelialneoplasia (AIN).

 

If HspE7 is approved, it could be useful to treat a large number ofpatients and a broad spectrum of HPV diseases. There are approximately 5.5 million new genital HPV infections eachyear;   more than 20 million people inthe U.S. are currently infected with the virus.  An analysis of healthcare costs associated with sexuallytransmitted diseases showed that the costs of HPV-related diseases rankedsecond only to the costs of HIV.  HspE7 has the potential to reduce oreliminate recurrence and treat chronic conditions in people already infectedwith HPV.

 

HspE7 is important not only as a potentialtreatment for HPV-related indications but also as a demonstration of theefficacy of CoValTM fusions. We believe that clinical results will show that fusions developed withour proprietary technology safely and effectively stimulate the immune

 

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system to recognize and fight specificdiseases.  The type of immune responsesinduced by CoValTM fusions, as demonstrated in preclinical research,indicates that the Hsp fusion platform technology may apply to theimmunotherapy of a wide spectrum of diseases, including cancer and bacterial,fungal and parasitic infections.  Robustpreclinical and encouraging clinical data from the HspE7 program have led us toconcentrate our current efforts on the treatment of viral diseases.  We are performing research studies onpotential treatments for hepatitis B (HBV) and herpes simplex and areevaluating the use of our technology to develop a fusion protein to treatinfections caused by hepatitis C (HCV).

 

In addition to ourbiopharmaceutical business, we have a profitable bioreagent business.  We supply stress proteins, antibodies andother bioreagents globally for use in academic, medical and commercialresearch.  The production and sale ofbioreagents enhances our business strategy by building a market presence instress proteins and strengthening strategic relationships with other companies,academic institutions and stress response researchers.

 

**BusinessStrategy**

** **

Ourbusiness objective is to be a leader in the development and commercializationof novel immunotherapeutics for the treatment of virally-induced humandisease.  Our strategy includes thefollowing elements:

 

•      *Commercialize HspE7*. We intend to commercialize our lead product, HspE7 for the treatment ofconditions caused by HPV.

 

•      *Develop Candidates to Treat Additional Disease Targets*.  We plan to develop promising CoValTMfusion product candidates for the treatment of additional viral diseases, aloneor with corporate partners.

 

•      *In-License Synergistic Products*.  We seek to strengthen our pipeline by in-licensing drugcandidates that will complement our product line.

 

•      *Use Our Core Competencies to Build Our Bioreagent Business*.  By producing and selling compounds used inbiotechnology research, we will generate revenue, build our market presence,further our relationship with stress response researchers, and capitalize onstrategic opportunities for product discovery and development.

 

**ScientificOverview**

 

Ourtechnology uses Hsp covalently fused to antigens to activate the immune system.

 

***The Immune System***

 

The human immune system is thebody’s natural defense mechanism to prevent and combat disease.  The immune system protects the body byspecifically recognizing and destroying invading viruses, bacteria and otherpathogens.  In addition, the immunesystem is capable of

 

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recognizing and eliminatingabnormal cells from the body, such as cells infected with viruses and to somedegree precancerous and cancerous cells.

 

Scientists currently describethe human immune system as using two complementary mechanisms to respond topathogens, labeled innate and adaptive immunity. Innate immunity, which is a“front-line” defense, includes dendritic cells, macrophages, natural killercells and gamma delta T cells.  Thesecells typically recognize structural components, including antigens, common todisease-causing organisms and generate a prompt, but relatively non-specificresponse.  Adaptive or acquiredimmunity, which can be triggered by an innate immune response or operateindependently, involves B cells and T cells. Adaptive immunity generates a “tailor-made” or antigen-specificresponse.

 

B cells make antibodies thatprevent infection by attaching to invading pathogens and aiding in theirdisposal before they can infect cells. T cell responses are useful not only forhelping antibody production, but also for eradicating existing infected ordiseased cells. These two types of immune defenses are called humoral (B cell)and cellular (T cell) immunity. While both types of immune defenses maycooperate to defend against infection, scientists believe that once infectionhas been established, cellular immunity is required to eradicate such diseasedcells.

 

Induction of a cellular immuneresponse begins with the processing and presentation of antigens by specializedimmune system cells called antigen presenting cells, such as dendritic cells.Once inside dendritic cells, protein antigens are broken down into smallfragments, called peptides. These peptides are then presented on the dendriticcell surface. T cells continually scan the surface of dendritic cells for thesepeptides. When T cells recognize displayed peptides as being foreign, theyreplicate rapidly and then search for and kill diseased cells displaying thosesame peptides on their surface.

 

Peptides are presented to Tcells through two distinct pathways designated as the class I and class IIpathways.  Presentation of such peptidesby the class I and class II pathways activate different T cell subsets referredto as CD8+ T cells and CD4+ T cells. CD4+ T cells, which are also known as Thelper (Th) cells, are further subdivided into Th1 and Th2 cells. Activated Th1and Th2 cells release molecules known as cytokines, which trigger other immunecells to produce either a predominantly cellular (Th1) or antibody-mediated(Th2) immune response. Immune responses mediated by the cellular side of theimmune system are characterized by the induction of CD8+ T cells calledcytotoxic T lymphocytes (CTLs) or killer T-cells.  Killer T cells are capable of directly killing pathogen-infectedcells and cancerous cells.

 

***Stress or Heat Shock Proteins***

 

Hsp are present in cells of allorganisms from bacteria to mammals.  Thestructure and function of Hsp are similar across these diverse life forms. Hspplay a major role in the generation of immune responses and appear to activateboth innate and adaptive immunity.  Somescientists refer to Hsp as molecular chaperones due to their role intransporting peptides within intracellular compartments. Hsp appear to activateboth innate and adaptive immunity by interacting with newly identified Hspreceptors on antigen presenting cells such as dendritic cells. Interaction ofHsp with such receptors may have at least two important consequences:

 

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cytokine secretion by thedendritic cell that promotes cellular immunity and internalization of the Hspand bound polypeptides by the dendritic cell into the class I pathway ofantigen presentation.

 

***ScientificFoundation of Stressgen Technology***

 

Dendritic cells expressreceptors that specifically recognize Hsp. As a result, they can capture and process Hsp fusions, which are Hspcovalently linked to antigens.  The Hspfusions then induce cellular immune responses to the antigen present in thefusions, such as a viral protein. Preclinical data from both in vitro and in vivo models demonstrate thatHsp fusions trigger innate immune responses; the cells from the innate responsesignal the adaptive immune system to use its protection mechanisms.  We seek to develop a new class oftherapeutic products based on this ability of Hsp fusions to induceantigen-specific CTL responses.

 

We call Hsp fusions“immunotherapeutics” based on their ability to stimulate the body’s own immunesystem to attack a pathogen, as does a vaccine.  Unlike existing preventative vaccines, Hsp fusions trigger theimmune system to respond to infected cells and cancers already present in thebody.  Since preclinical research hasshown that Hsp fusions induce CD8+ CTL responses in CD4+-deficient animals, itis possible that even immunosuppressed individuals such as HIV+ patients andtransplant recipients may be treated effectively with our platform technology.

 

Potentially, Hsp fusions can becreated with any number of disease-specific protein antigens.  Our most developed product, HspE7, is arecombinant fusion protein composed of the HPV protein E7 and a bacterialHsp.  In all types of HPV infection,whether “low risk,” including warts or “high risk,” including pre-cancer andcancer, the E7 protein theoretically provides a precise target by which theimmune system can recognize and attack HPV-infected cells. Induction ofE7-specific cellular immunity by Hsp fusions offers a new approach to theimmunotherapy of HPV-associated diseases.

 

In pre-clinical studiesconducted using an animal model, administration of HspE7 has been shown toprevent the growth of, and cause the destruction of, tumors that express theHPV E7 protein. Only the fusion protein induces significant tumor regressionand long-term survival in these studies. Neither the E7 antigen nor the Hspalone, nor a mixture of the two, is effective. The requirement for a covalentattachment between the Hsp and the E7 protein may be explained by the presenceof Hsp receptors on dendritic cells. By virtue of its covalent attachment tothe Hsp, the E7 protein is targeted to the dendritic cell, internalized andpresented 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 E7containing cancer cells.

 

Clinical observations made inphase II trials for AIN and genital warts indicate that treatment with HspE7leads to disease improvement or clearance that is not restricted to lesionscontaining a specific type of HPV.  These original and surprising findings demonstrate the potential forHspE7 to treat diseases caused by multiple HPV types.  Although the E7 protein present in HspE7 was derived from HPVtype 16, which is known to be associated with about half of all cervicalcancers and about 20% of pre-cancerous lesions known as anogenital dysplasias,our clinical data strongly suggests that HspE7 can induce cross-reactive T cellresponses in genital warts and RRP, which primarily are caused by HPV types 6and 11.

 

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***Human Papillomavirus Indications***

 

HPVindications can be easily recognizable, like genital warts, or latent.  Infected individuals with no visiblesymptoms may not be aware that they have a persistent viral infection,increasing their risk of developing complications and of transmitting the virusto others.  HPV is highly contagious andcan be spread even when condoms are used. Fifty to 75% of sexually active men and women acquire genital HPVinfection at some point in their lives.

 

Althoughthere are over 100 different types of HPV, most research focuses on the approximatelyone-third infecting genital epithelial tissue and primarily spread throughsexual contact.  Researchersdifferentiate among the HPV types using letter and number designations.  The E7 protein from high-risk HPV types(associated with a high risk of cancer) is involved in the malignanttransformation of infected epithelial cells. These HPV types causepremalignant and cancerous cervical and anal conditions, including high-gradeand low-grade dysplasias and cancer. Low-risk types of HPV typically cause internal and external genitalwarts.

 

*Genital Warts*

 

Approximatelytwo-thirds of people who have sexual contact with a partner with genital wartsdevelop warts themselves, usually within three months of contact, according tothe U.S. National Institute of Allergy and Infectious Diseases (theNIAID).  The incidence of genital wartsis an estimated 1 million new cases in the U.S. each year, according to a July1999 NIAID Fact Sheet. Of those patients, an estimated 67% are women.  Although the lesions may spontaneouslyregress, recurrence is typical.  Thelesions also frequently reappear after treatment.

 

*Recurrent Respiratory Papillomatosis*

 

RecurrentRespiratory Papillomatosis is caused by the same types of papillomavirus thatcause genital warts.  In fact, the termpapilloma means wart.  Rather thaninfecting genital tissue, the papillomas in RRP occur primarily on the vocalcords of children born to mothers infected with HPV.  The papillomas can spread into the trachea and lungs. Over 2,000new cases of pediatric RRP and over 3,500 new cases of adult RRP are diagnosedannually in the U.S., according to a study published in 1995 based upon asurvey of members of the American Society of Pediatric Otolaryngology, membersof the American Bronchoesophagological Association and certified U.S.otolaryngologists.  Patients with RRPcan die from airway obstruction, cancerous transformation, overwhelming spreadof the disease, growth of papillomas in the lungs or complications of surgicaltreatments. There are no drugs or immunotherapies approved for RRP in the U.S.Pediatric patients tend to have about 5 surgeries per year and some childrenhave hundreds of procedures during their lifetime.

 

*Cervical Intraepithelial Neoplasia and Cervical Cancer*

 

CervicalIntraepithelial Neoplasia, also known as cervical dysplasia, is characterizedby the presence in the cervix of abnormal cells that often precede cervicalcancer. The abnormal cells are associated with the malignant transformation of epithelialcells infected with HPV virus.Such cells can be detected through regular Pap smear screening.   In the U.S. more than 1.2

 

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millionwomen a year are diagnosed with low-grade cervical dysplasia, according toNational Cancer Institute estimates. Another 200,000 to 300,000 are diagnosed with high-grade cervicaldysplasia in the U.S. each year, according to a December 1999 report of theCenters for Disease Control. Worldwide, the problem is much larger. The currenttreatment for CIN, which involves local surgical techniques, is not alwayseffective.  Surgical treatment may notremove all dysplastic cells and does not treat the underlying viralinfection.  In addition, surgery canresult in complications such as reduced fertility.

 

CIN often precedes cervicalcancer, a worldwide public health problem particularly in countries whereroutine Pap smears are not practiced. American Cancer Society estimates for2002 predicted that approximately 13,000 women in the U.S. would be diagnosedwith invasive cervical cancer and that about 4,100 patients would die from thedisease.  Globally there areapproximately 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 afterbreast cancer, according to a World Health Organization February 1999 pressrelease.  Although death rates fromcervical cancer have been decreasing, invasive cervical cancer continues to beassociated with extreme morbidity.

 

*Anal Intraepithelial Neoplasia*

 

Anal Intraepithelial Neoplasiais characterized by the presence of abnormal cells that may precede analcancer.  Data extrapolated from studiesof homosexual and bisexual men and the anal cancer population suggests that theremay be 500,000 new cases per year in the U.S.  Patients are not commonly screened for AIN; however, there is increasingawareness of the condition. No standard therapies exist for AIN.

 

***Indications Targeted in Early StageDevelopment and Research Programs***

 

All of the indicationsdescribed above are associated with HPV, so are candidates for treatment withHspE7.  We are also using our platformtechnology to create fusions of heat shock proteins with antigens from othersources.  We are testing CoValTMfusions of heat shock proteins with antigens from hepatitis B and herpessimplex to determine whether to advance treatments for those indications intopre-clinical testing and clinical trials. We consider hepatitis C another logical target for a CoValTM fusion.

 

*Hepatitis B*

 

Chronic hepatitis B is adisease 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 cirrhosisand cancer. Although safe and effective preventative vaccines exist, there areestimated to be 1,000,000 to 1,250,000 cases of chronic hepatitis B in theU.S., according to the Centers for Disease Control and Prevention.  In addition, there are between 140,000 and320,000 new cases of hepatitis B in the U.S. each year, resulting in 4,000 to5,000 deaths according to the American Social Health Association.  Worldwide, about 1,000,000 deaths areattributable to HBV infection and its complications annually, according to the WorldHealth Organization. Due to the large infected population and small percentageof the public

 

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being vaccinated for thedisease, the need for new and effective therapies for chronic hepatitis B virusinfection remains great.

 

*Hepatitis C*

 

Hepatitis C causes symptoms similar to those ofhepatitis B, but is caused by the hepatitis C virus. Chronic hepatitis C cancause cirrhosis, liver failure, and liver cancer. HCV is spread through contactwith blood and other bodily fluids. Currently, there are six known hepatitis Cgenotypes, and more than 50 subtypes. The relative prevalence of different genotypes differs by geographicregion.  It is estimated that 3.9million people in the U.S. (1.8% of the population) have been infected with HCVand that 2.7 million are chronically infected. Worldwide there is an estimated 200 million cases.  In the U.S. 8,000 to 10,000 deaths each yearare currently attributed to HCV. Although about 80% of patients are currently asymptomatic, researcherspredict that over the next 10 to 20 years chronic hepatitis C will become amajor burden on the health care system as patients progress to end-stage liverdisease.  The efficacy of currenttreatments varies depending upon the genotype of the virus, but no currently availabletherapy can eradicate the virus or do more than delay the progression of thedisease.  No vaccine is available.

 

*Herpes Simplex Virus*

 

Herpes Simplex Virus causesgenital herpes.  The prevalence ofherpes simplex type-2 (HSV-2) has increased by 30% since the late 1970s and isnow detectable in about one in five persons 12 years of age or older in the US,according to the NIAID.  An estimated 45million Americans are already infected with genital herpes, and there are anadditional 500,000 to 1,000,000 new cases each year, the NIAID haswritten.  Since HSV remains dormant ininfected 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. Someepisodes of reactivation are associated with skin blistering in the genitalregion, causing physical and psychological discomfort.  Because most episodes of the infection areasymptomatic, people having an outbreak may not be aware that they aretransmitting herpes.  As a result, HSV-2is expected to continue to spread rapidly. Except in newborns, genital herpes is not life-threatening.  Nonetheless, it is distressing and cancontribute to the spread of other sexually transmitted diseases.

 

**HspE7 Development Program**

 

We are dedicating most of ourresources to commercializing HspE7 as quickly as we can.  The focus of our HspE7 development programhas evolved over time to take advantage of the results from clinical trials, toensure we are addressing the broadest potential market for the product, and tocapitalize upon the resources of third-parties interested in using HspE7 totreat specific indications.

 

We originally designed HspE7 tobe a non-surgical approach for reducing the risk of progression of CIN tocervical cancer.  Because surgicaltreatments exist for CIN and cervical cancer, we realized that it might beeasier and faster to obtain regulatory approval for other HPV indications.

 

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We began focusing on AIN, whichleads to anal cancer, based on the advice of scientific advisors, thesimilarities of those conditions to CIN and cervical cancer, the clear unmetmedical needs for the conditions and the lack of widely accepted standardtreatments for AIN. The U.S. National Cancer Institute has recognized thepotential of HspE7 to prevent cancers caused by HPV.  As a result, in 1999 its Division of Cancer Treatment and Diagnosissigned a Clinical Trials Agreement with us to sponsor clinical trials usingHspE7.

 

Our cancer-related researchindirectly led us to explore HspE7 for the treatment of genital warts.  In the course of an AIN clinical trial, wediscovered that genital warts regressed in patients with both AIN and genitalwarts. The size of the genital warts market made it more attractivecommercially than AIN or CIN.  Tofurther accelerate the time to market, we sought orphan drug status for RRP, alife-threatening condition in which the warts occur in the upper airways.  As we had hoped, the U.S. Food and DrugAdministration granted orphan drug status for HspE7 for the treatment ofRRP.  We continued to accrue clinicaltrials data regarding AIN and genital warts while we began an RRP trial.

 

Our AIN and genital warts datadrew the interest of potential collaborators. In June 2002 we signed a second agreement with the U.S. National CancerInstitute, in this case with the Division of Cancer Prevention, to sponsor additionalclinical trials.  In the same month, wesigned a collaboration agreement with Roche for the development of HspE7, whichwe restated in December 2003.  InDecember 2003, the U.S. Food and Drug Administration also designated HspE7 as aFast Track Product development program for the treatment of patients sufferingfrom RRP.

 

Wehave recently completed an open-label RRP trial in pediatric patients requiringfrequent surgery and an AIN trial; we are analyzing the results.  The AIDS Malignancy Consortium of theNational Cancer Institute is evaluating HspE7 in HIV-positive patients withhigh-grade anal dysplasia. Several other trials with HspE7 are planned.  Based on our findings from the clinicaltrials we have run to date, advice from an ad hoc clinical advisory board,market research, and our experience with the regulatory approval process, weare targeting RRP as the first market for HspE7.   We hope to expand the indications for HspE7 to some or all ofgenital warts, AIN, anal cancer, CIN, and cervical cancer after the product isapproved for RRP.

 

***Data from HspE7Clinical Trials***

 

Mostof our clinical trials have been conducted in the U.S. using a 500 ug dose ofHspE7 given once a month for a total of three doses over 60 days. We havereleased findings based on data from clinical trials including:

 

•      An interimreview of data from our open-label pediatric RRP trial in 27 patients

 

•      a 6 month low dose, double-blind placebocontrolled trial of AIN patients, most of whom then rolled-over to a 6 month 3x500 ug dose open label arm

 

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•      an open registryof AIN patients, to follow up from a completed low dose, double-blind, placebocontrolled trial and a completed 3x500ug dose open-label trial, for a total of 24 months

 

•      a chart review of patient from the registryor its predecessor trials, following for a total of 24 months a subset of AINpatients who also had genital warts

 

Theresults suggest that the 3x500 ug dose of HspE7 is active against multipletypes of HPV.  Data from these studiesshowed that:

 

•      treatmentwith HspE7 increased the time interval between required RRP surgeries andreduced the frequency of surgery in these patients with moderate and severeRRP;

 

•      44%of AIN patients achieved complete resolution of high grade anal dysplasia, aprecursor to anal cancer, by 15 months

 

•      95%of AIN patients showed pathological downgrade from high grade anal dysplasia tolow grade dysplasia or no dysplasia by 15 months, indicating that HspE7 could potentially eliminatethe need for surgery

 

•      80% of AIN patients who also had genitalwarts achieved complete remission of genital warts at 24 months, indicatingbroad-spectrum efficacy of HspE7

 

Results from a double blind placebocontrolled phase II trial in measurable external warts showed that, at sixmonths:

 

•      Genital warts decreased in size by a medianof 53% compared to a median of 16% in patients treated with placebo

 

•      The complete response rate for patientswith genital warts varied depending on the gender of the patient and locationof the warts.  Women had a 62% completeresponse rate, compared to 20% of female patients treated with placebo. Menwith anal and perianal genital warts achieved a 42% complete response rate,compared to 25% of such patients treated with placebo.  As with alternative treatments, penile wartsresponded less well than patients with warts in other locations.

 

Observations of complete response ingenital warts patients during the time period 12 to 24 months from treatment,and of few or no recurrences to date, contrasts with the data for treatment ofwarts with surgery or topical therapy in which rapid recurrence is common.

 

Safety data for treatment withHspE7 continue to be accumulated. The predominant adverse experience noted fromHspE7 treatment at various doses and schedules is injection site reaction, mildto moderate in severity, clearing in hours to days without treatment.  Mild to moderate flu-like symptoms are alsoobserved in some patients.

 

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**Statusof Early Stage Research Programs**

 

We are using our proprietarytechnology of fusing heat shock proteins to antigens to create Hsp fusions withantigens other than E7. Our most active early stage programs involve therapiesfor chronic hepatitis B infection and herpes simplex virus.  We are compiling preclinical data to supportan Investigational New Drug filing for a fusion of an Hsp and a selected HBVantigen.  In mice our HBV fusions havebeen shown to elicit cytotoxic T lymphocytes (CTL) that recognize the HBVantigen, suggesting such T cells would be capable of killing HBV-infectedcells.  The T cells have also shown toproduce the cytokine interferon gamma, which is known to have anti-viralactivity. The results of these preclinical studies demonstrate the potentialefficacy of Hsp-HBV antigen fusions in the immunotherapy of chronic HBVinfection.  We believe that our HBVprogram could offer hope in countering the disease’s significant worldwideimpact on human health.

 

We are assessing thedevelopment of Hsp fusion proteins for the immunotherapy of genitalherpes.  Presently, we are including anumber of HSV-2 proteins in Hsp fusions and testing them in animal models forinduction of immune responses to the HSV antigens. An immunotherapy that caninduce cellular immunity specific for HSV-2 antigens may lead to a treatmentfor genital herpes to reduce the number or duration of reactivation episodes orprevent them entirely.

 

**Intellectual Property**

 

Our intellectual propertyprotection policy is to file and prosecute patent applications relevant to theinventions that we consider meaningful to our business. We also rely uponunpatented trade secrets, know-how and continuing technological innovation todevelop and maintain a competitive position. We devote substantial management attention and resources to maintainingpatents and licenses and conducting an assertive patent prosecution strategy.

 

We have a worldwide, exclusivelicense agreement with the Whitehead Institute for our core fusion technology,giving us rights to various patents, pending applications, continuation-in-partapplications and their foreign counterparts. Pursuant to the license agreement we fund the prosecution of the patentapplications, which currently include applications in the U.S., Canada, Europeand Japan.  Two U.S. patents, which willexpire in 2019, and a European patent, which will expire in 2014, have beengranted based on these Whitehead applications. We are vigorously defending challenges to these patents, which cover Hspfusions with viral or cancer-associated antigens and their use asimmunotherapeutics.  Independently, wehave filed additional patent applications directed to Hsp fusions with otherviral antigens, including HPV E6 and E7, and their use asimmunotherapeutics.    U.S. and Europeanpatents based on these applications were granted in 2003.   We also hold issued U.S. patents related tothe detection of elevated levels of Hsp expression. Some of the U.S. patentapplications received pre-GATT filing status, meaning that their terms extendfor 17 years after the date of grant, rather than 20 years from the earliestdate of filing.

 

Interpretation and evaluationof biopharmaceutical or biotechnology patent claims present complex and oftennovel legal and factual questions. We cannot be sure that our pendingapplications will result in issued patents, that the issued patents will beheld valid and 

 

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enforceable if challenged, orthat a competitor will not be able to circumvent an issued patent by thedevelopment or adoption of a competitive non-infringing product or process.

 

**Research and Development Collaborations**

 

We have two clinical trialsagreements with the U.S. National Cancer Institute for the co-development ofour lead product, HspE7, in the treatment of cancer. The NCI is the U.S.government’s principal institute for cancer research and training.  The clinical trials agreements allow the NCIto develop a general plan for clinical development of HspE7 for cancer-relatedindications, solicit clinical research protocols from independent investigatorsand cooperative research groups, and sponsor and fund their studies. We areexpected to provide clinical grade HspE7 for the investigators to use in theirstudies but do not provide funding.  Thefirst clinical trial sponsored by the NCI, testing HspE7 in HIV-positivepatients with high-grade anal dysplasia, began in December 2002. Thecollaboration with the NCI enables studies of HspE7 for the treatment ofdysplasias and cancer to progress, while we focus on RRP.

 

A third-party investigator froma university is running a phase I/II trial of HspE7 in cervical dysplasia underthe investigator’s investigational new drug application.  As with the NCI trials, we have access todata from the trial in return for providing HspE7.

 

We have a number ofcollaborative or sponsored research agreements that we believe provide us withimportant sources of research data and could lead to technology development opportunities.      We have entered into an agreement withthe National Institute of Allergy and Infectious Diseases to test our hepatitisB candidate in preclinical models.  We arealso sponsoring academic institutions to evaluate our hepatitis B candidate inanimal models and to perform herpes simplex research with our CoValTMfusions.

 

**Manufacturing**

 

We are currently working withan independent contractor to develop a quality controlled and quality assuredprocess for producing HspE7, based on a set of standard operating procedures,analytical methods and specifications that will allow HspE7 to be manufacturedin commercial quantities in accordance with current good manufacturing practiceand other regulations. We expect that our dependence on third-parties for theprocess development and manufacture of heat shock protein fusions will continuefor the foreseeable future.

 

**BioreagentBusiness**

 

Our bioreagent businesssupplies biomedical research reagents to researchers in not-for-profit researchorganizations and commercial institutions worldwide. The primary products ofthe business involve antibodies, proteins, DNA products, ELISA kits, lysatesand extracts, for use in studying cellular stress response pathways, includingoxidative stress, apoptosis, neurobiology and more.  Although we contract with third-party distributors in thirty-fivecountries, our primary markets are in North America, Europe and Asia.  Sales have been approximately 65% from theU.S., 5% from Canada, 20% from Europe and 10% from the rest of the world, ineach of the last three years. We do not believe that any single customer ismaterial to our bioreagent

 

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business.  Demand for our products tends to increaseslightly when academic institutions in the Northern Hemisphere are in session.

 

We manufacture products forinventory and ship products shortly after the receipt of orders, and anticipatethat we will continue to do so in the future. Accordingly, we currently do nothave a significant backlog and do not anticipate that we will develop amaterial backlog in the future. We believe the quantity of inventory wemaintain is adequate to ensure reasonable customer service while limiting thevolatility of inventory levels. Inventory quantities can fluctuate significantly as we balance varyingcustomer demand against fluctuating supplies of reagents available to us.  We buy materials for our products from manysuppliers, and we are not dependent on any one supplier or group of suppliers.Raw materials are generally readily available at competitive prices from anumber of suppliers.  We believe that wewill be able to continue to acquire and produce our products in quantitiessufficient to meet our customers’ current requirements.

 

We require patent licenses tosell many of our products.  However,because our sales are spread over more than 400 products, we believe that noindividual patent or license is material to our bioreagent business.   In each of the last three years, threeproduct groups have contributed more than 15% of the revenue of the bioreagentbusiness: monoclonal antibodies have contributed approximately 30% of revenue;polyclonal antibodies have contributed approximately 35% of revenue andproteins have contributed approximately 20% of revenue.

 

**GovernmentRegulation and Product Approval Process**

 

In the U.S. the Food and Drug Administration (FDA) regulates drugs andbiological products.  In Canada the *Food andDrug Act* (Canada), and the rules and regulations promulgatedthereunder, govern the production and manufacturing of our products and ourresearch and development activities; the Health Products and Food Branch (HPFB)Inspectorate enforces these rules and regulations.  In these and other jurisdictions, applicable drug licensing lawsrequire carefully controlled research and testing of products, governmentalreview and approval of results prior to marketing therapeutic products,licensure of manufacturing facilities and adherence to good manufacturingpractices during production.

 

The principal activities which must be completed before obtainingapproval for marketing in the U.S. and Canada are the completion of (1)development of a well-controlled process of manufacturing, (2) preclinicalstudies of safety and pharmacology, and (3) studies of safety and efficacy inhumans. Pre-clinical studies are conducted to test chemistry, pharmacology andefficacy. Successful pre-clinical results, which entail achieving potentiallyvaluable pharmacological activity combined with an acceptably low level oftoxicity, enable the manufacturer of the new drug to file an investigationalnew drug application to begin clinical trials involving humans.  An investigational new drug application mustbe filed with and accepted by the FDA or HPFB, as applicable, before humanclinical trials may begin.

 

Phase I clinical trials consist of testing a product in a small numberof humans for its safety (toxicity), dose tolerance and pharmacokineticproperties including absorption, distribution, metabolism and elimination.  Phase II clinical trials usually involve alarger patient population than is required for phase I trials and are conductedto evaluate the effectiveness of a product in

 

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patients  having the disease ormedical condition for which the product is indicated.  These trials also serve to identify possible common short-termside effects and risks in a larger group of patients.  Potential dosing regimens may also be evaluated during phase IItrials.  Phase III clinical trialsinvolve conducting tests in an expanded patient population at geographicallydispersed sites to establish clinical safety and effectiveness.  These trials usually involve comparison to astandard treatment or to no treatment. These trials also generate informationfrom which the overall benefit-risk relationship relating to the drug can bedetermined and provide a basis for drug labeling.

 

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

 

Upon completion of all clinical studies, the results of these studiesare submitted to the U.S. FDA as part of a biologics license application, inthe case of a biological product, or to Canada’s HPFB as part of a new drugsubmission, to obtain approval to commence marketing the product. Anestablishment license application to produce a product must also be submittedfor approval by the FDA or HPFB. Additional requirements would apply for an application to market a humanprophylactic vaccine.

 

After a marketing approval is obtained, further studies, includingpost-market studies, may be required to provide additional data on safety andefficacy necessary to gain approval for the use of a product as a treatment forclinical indications other than those for which the product was initiallytested.  Also, the FDA or HPFB mayrequire post-market surveillance programs to monitor a product’s side effects.

 

As well as receiving pre-licensing approval, manufacturing facilitiesmust conform on an ongoing basis with Good Manufacturing Practices, or GMP.After the establishment is licensed for the manufacture of any product,manufacturers are subject to periodic inspections by regulatory authorities.

 

Whether or not FDA or HPFB approval has been obtained, approval of aproduct by comparable regulatory authorities in Europe and other countries willbe necessary prior to commencement of marketing the product in suchcountries.  Each country may impose theirown requirements and may refuse to grant, or may require additional data beforegranting, an approval even though the relevant product has been approved byanother authority.

 

We are also subject to various federal, state, local and internationallaws, regulations and recommendations relating to safe working conditions,laboratory manufacturing practices and the use and disposal of hazardous orpotentially hazardous substances, including radioactive compounds andinfectious disease agents, used in connection with our research work.

 

**Competition**

 

We are subject to competition from productsthat use different approaches or means of accomplishing a similar therapeuticeffect as our CoValTM fusion products.  Many pharmaceutical and biotechnology companies also focustheir  research and product development 

 

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programs on the treatment of the sametherapeutic indications as ours, including HPV, hepatitis B virus, hepatitis Cvirus, herpes simplex virus and cancer.

 

Potential competitors that are developingproducts to treat HPV indications use approaches including therapeuticvaccines, immunotherapies, immunomodulators, topical therapies and smallmolecule drugs. For example, Transgene S.A., Zycos Inc. and Xenova Group plcare conducting clinical trials with different formulations of HPV antigens astherapeutic vaccines and immunotherapies.

 

Other potential competitors are performingresearch and developing therapeutic products based on the intrinsic nature ofstress proteins to assist the body in fighting infection and relatedcancers.  While our technology focuseson heat shock proteins covalently fused to antigens, there are other ways topotentially use heat shock proteins to modulate immune responses. Companiesincluding Antigenics Inc. and Mojave Therapeutics, Inc. are using stressprotein-related approaches to stimulate or modulate the body’s immune system intherapeutic applications.  Othercompanies such as Conforma Therapeutics and Vernalis plc are developing smallmolecule drugs to modulate heat shock protein expression in cells as anotherapproach for cancer therapy.

 

Competition in our industry may increase overtime due to rapid and substantial changes in technology, and other criticalinputs required for product development and commercialization.  Many of our competitors have greater humanand financial resources dedicated to product development and human clinicaltesting than we do, as well as substantial marketing and financial resources.  Acquisitions of, or investments in,competing pharmaceutical and biotechnology companies by other firms couldincrease such competitors’ financial, marketing and other resources.  Technological developments could render ourproposed products or technologies non-competitive.

 

The diseases we are targeting are currentlymanaged through a variety of therapeutic and surgical approaches.  For example, genital warts can be treated bytopical creams and ointments, cryosurgery, freezing, electro-cauterization andlaser treatment.  Some papillomas andcancers caused by HPV can be treated surgically.

 

In the stress protein bioreagent marketcurrent direct competition is limited. A few companies have a broad line ofcompeting products, such as Affinity Bioreagents Inc.; several larger companieshave introduced a limited range of similar products as ours.  Many of our product licenses arenon-exclusive, so competition from other suppliers could increase in thefuture.

 

**HumanResources**

 

Asof January 31, 2004 we employed approximately 95 personnel, of which over 50were engaged in, directly or indirectly, research and development efforts.  Of the scientific persons employed, two holdan M.D., twelve hold Ph.D.s, and the balance hold either M.Sc. or B.Sc. degreesor other diplomas.  Our employees arenot covered by any collective bargaining agreement.  All employees are required to execute confidentiality andassignment of invention agreements as a condition of their employment.

 

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**Availabilityof Information**

 

Our annual report on Form 10-Kand quarterly reports on Form 10-Q are available on our website,www.stressgen.com, free of charge, as soon as reasonably practicable after suchmaterial is filed with the U.S. and Canadian securities regulatory authorities.  Our website also provides links for users tofind our filings on the websites maintained by the U.S. and Canadian securitiesregulatory authorities.  We considerthose sites to be the appropriate sources for reports that are filed with thesecurities regulatory authorities of only the U.S. or only Canada, rather thanwith both countries.  Paper copies ofour most recent filings are available from our Investor Relations departmentfree of charge upon request.

 

**FACTORSTHAT MAY AFFECT FUTURE PERFORMANCE**

 

**Before investing in our common stock youshould carefully consider the following risk factors, the other informationincluded herein and the information included in our other reports andfilings.  Our business, financialcondition, and the trading price of our common stock could be adverselyaffected by these and other risks.**

 

**We are an Early StageDevelopment Company**

 

Our biotechnology business is still at an earlystage of development.  Significantadditional research and development and clinical trials must be completed beforeour technology can be commercialized. We have not completed the development of any therapeutic products and,therefore, have not begun to market or generate revenues from thecommercialization of any therapeutic products. We have undertaken only limited human clinical trials for HspE7 andcannot assure you that subsequent trials will generate comparable results, thatthe results obtained from laboratory or research studies for our other productswill be replicated in human studies, that our human studies will demonstrateefficacy or that our studies and trials will not identify undesirable sideeffects of our products.  There are noassurances that any of our therapeutic products will:

 

•      meetapplicable health regulatory standards

 

•      obtainrequired regulatory approvals or clearances

 

•      beproduced in commercial quantities at reasonable costs

 

•      besuccessfully marketed or

 

•      beprofitable enough that we will recoup the investment made in such productcandidates.

 

None of our therapeutic product candidates areexpected to be commercially available for several years.  It is possible that we will not successfullydevelop any therapeutic products.

 

**We Have a History of Operating Losses and MayNever Become Profitable**

 

We have not recorded any revenues from the saleof therapeutic products and have accumulated

 

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substantial net losses.  We expect we will incur continued losses forat least the next several years while our primary activities are research, development,and clinical trials.  To becomeprofitable we, either alone or with one or more partners, must develop,manufacture and successfully market therapeutic product candidates.

 

**We Must Obtain Additional Financing toExecute Our Business Plan**

 

The revenues from theproduction and sale of bioreagents and the projected revenues fromcollaborators are not adequate to support either the development of HspE7 underthe restructured Roche Collaboration Agreement or our other therapeutic productdevelopment programs.  We will needsubstantial additional funds to pursue further research and development; carryout clinical trials; obtain regulatory approvals; file, prosecute, defend andenforce our intellectual property rights and market our products.  We will seek additional funds through publicor private equity or debt financing, strategic transactions and/or from othersources.  We could enter intocollaborative arrangements for the development of particular products thatwould lead to our relinquishing some or all rights to the related technology orproducts.

 

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

 

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

 

Due to the complexity of theprocess of developing therapeutics, our core business depends on arrangementswith pharmaceutical companies, corporate and academic collaborators, licensors,licensees and others for the research, development, clinical testing,technology rights, manufacturing, marketing and commercialization of ourproducts. We have various research collaborations and outsource many otherbusiness functions, including clinical trials and manufacturing.  Our license agreements could obligate us todiligently bring potential products to market, make milestone payments androyalties that, in some instances, could be substantial, and incur the costs offiling and prosecuting patent applications. There are no assurances that we will be able to establish or maintaincollaborations that are important to our business on favorable terms, or atall.

 

A number of risks arise from our dependence oncollaborative agreements with third parties. Product development and commercialization efforts could be adverselyaffected if any collaborative partner:

 

•      terminatesor suspends its agreement with us

 

•      causesdelays

 

•      failsto timely develop or manufacture in adequate quantities a substance needed inorder to conduct clinical trials

 

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•      failsto adequately perform clinical trials

 

•      determinesnot to develop, manufacture or commercialize a product to which it has rightsor

 

•      otherwisefails to meet its contractual obligations.

 

Our collaborative partners could pursue othertechnologies or develop alternative products that could compete with theproducts we are developing.

 

**The Profitability of Our Products Will Dependin Part on Our Ability to Protect Proprietary Rights and Operate WithoutInfringing the Proprietary Rights of Others**

 

The profitability of our products will dependin part on our ability to obtain and maintain patents and licenses and preservetrade secrets, and the period our intellectual property remains exclusive.  We must also operate without infringing theproprietary rights of third parties and without third parties circumventing ourrights. The patent positions of pharmaceutical and biotechnology enterprises,including ours, are uncertain and involve complex legal and factual questionsfor which important legal principles are largely unresolved.  For example, no consistent policy hasemerged regarding the breadth of biotechnology patent claims that are grantedby the U.S. Patent and Trademark Office or enforced by the U.S. federalcourts.  In addition, the scope of theoriginally claimed subject matter in a patent application can be significantlyreduced before a patent is issued.  Thebiotechnology patent situation outside the U.S. is even more uncertain, iscurrently undergoing review and revision in many countries, and may not protectour intellectual property rights to the same extent as the laws of theU.S.  Because patent applications aremaintained in secrecy in some cases, we cannot be certain that we or ourlicensors are the first creators of inventions described in our pending patentapplications or patents or the first to file patent applications for suchinventions.

 

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

 

•      anyof our patent applications will result in the issuance of patents

 

•      wewill develop additional patentable products

 

•      thepatents we have been issued will provide us with any competitive advantages

 

•      thepatents of others will not impede our ability to do business or

 

•      thirdparties will not be able to circumvent our patents.

 

On October 22, 2002 Antigenics Inc. announcedthat it had filed an opposition in the European Patent Office to a Europeanpatent and requests for re-examination in the U.S. Patent and Trademark Officeof two U.S. patents we licensed in connection with our platformtechnology.  In October 2003 Antigenicsfiled an opposition in the European Patent Office to an additional, productspecific, European patent.  It couldtake several years to obtain results from these proceedings.  Until we receive final results from theopposition and re-examination processes,

 

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we will not be able to assure investors of thesuccess of our planned vigorous defense of the patents.

 

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

 

Patent litigation is becomingwidespread in the biotechnology industry. Such litigation may affect our efforts to form collaborations, toconduct research or development, to conduct clinical testing or to manufactureor market any products under development. There are no assurances that our patents would be held valid orenforceable by a court or that a competitor’s technology or product would befound to infringe our patents in the event of patent litigation.  Our business could be materially affected byan adverse outcome to such litigation. Similarly, we may need to participate in interference proceedingsdeclared by the U.S. Patent and Trademark Office or equivalent internationalauthorities to determine priority of invention.  We could incur substantial costs and devote significantmanagement resources to defend our patent position or to seek a declarationthat another company’s patents are invalid.

 

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

 

**We May Encounter Difficulties inManufacturing our Products**

 

Our manufacturing experience in bioreagents isnot directly applicable to the manufacture of therapeutic products.  We have not yet introduced any therapeuticproducts and have no experience manufacturing immunotherapeuticsourselves.  Before our products can beprofitable, they must be produced in commercial quantities in a cost-effectivemanufacturing process that complies with regulatory requirements, includingGMP, production and quality control regulations.  Because we do not have facilities for the production oftherapeutic products such as HspE7, we contract with third parties for processdevelopment, the scale-up of manufacturing our products from the laboratorybench to commercial quantities, manufacturing of bulk materials, productcharacterization, filling the product into vials, packaging and relatedprocesses.  If we cannot arrange for ormaintain commercial-scale manufacturing on acceptable terms, or if there aredelays or difficulties in transitioning our products between the contractorsperforming different aspects of the manufacturing process, we may not be ableto conduct clinical trials, obtain regulatory approval or meet demand for ourproducts.

 

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

 

**We Could Need More Clinical Trials or TakeMore Time to Complete Our Clinical Trials Than We Have Planned**

 

Clinical trials vary in design by factorsincluding dosage, end points, length, controls, and numbers and types ofpatients enrolled.  We may need toconduct a series of trials to demonstrate the safety and efficacy of ourproducts.  The results of these trialsmay not demonstrate safety or efficacy sufficiently for regulatory authoritiesto approve our products.

 

Regulatory authorities may require us todetermine whether our products delay or prevent disease recurrence.  Clinical trials to show that a disease doesnot recur take longer to complete than clinical trials that end when patientsstop having specific symptoms.  Theactual schedules for our clinical trials could vary dramatically from theforecasted schedules due to factors including changes in trial design,conflicts with the schedules of participating clinicians and clinicalinstitutions, delayed patient accrual and changes affecting product suppliesfor clinical trials.

 

We rely on collaborators, including academicinstitutions, governmental agencies and clinical research organizations, toconduct, supervise, monitor and design some or all aspects of clinical trialsinvolving our products.  The NationalCancer Institute is sponsoring some HspE7 clinical trials.  Since these trials depend on governmentalparticipation and funding, we have less control over their timing and designthan trials we sponsor.  Delays in orfailure to commence or complete any planned clinical trials could delay theultimate timelines for product release. Such delays could reduce investors’ confidence in our ability to developproducts, likely causing our share price to decrease.

 

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

 

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

 

Our product candidates, some of which arecurrently in the early stages of development, will require significantadditional development and pre-clinical and clinical testing prior to theircommercialization. These steps and the process of obtaining required approvalsand clearances can be costly and time-consuming.  If our potential products are not successfully developed, cannotbe proven to be safe and effective through clinical trials, or do not receiveapplicable

 

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regulatory approvals and clearances, or ifthere are delays in the process:

 

•      the commercialization of ourproducts could be adversely affected;

 

•      any competitive advantagesof the products could be diminished; and

 

•      revenues or collaborativemilestones from the products could be reduced or delayed.

 

Governmental and regulatoryauthorities may approve a product candidate for fewer indications or narrowercircumstances than requested or may condition approval on the performance ofpost-marketing studies for a product candidate.  Even if a product receives regulatory approval and clearance, itmay later exhibit adverse side effects that limit or prevent its widespread useor that force us to withdraw the product from the market.

 

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

 

The manufacturers of ourproducts will be required to comply with applicable good manufacturingpractices regulations, which include requirements relating to quality controland quality assurance, as well as the maintenance of records anddocumentation.  If the manufacturerscannot comply with regulatory requirements, including applicable goodmanufacturing practice requirements, we may not be allowed to develop or marketthe product candidates.  If we or ourmanufacturers fail to comply with applicable regulatory requirements at anystage during the regulatory process, we may be subject to sanctions, includingfines, product recalls or seizures, injunctions, refusal of regulatory agenciesto review pending market approval applications or supplements to approveapplications, total or partial suspension of production, civil penalties,withdrawals of previously approved marketing applications and criminalprosecution.

 

**Competitors May Develop and Market Drugs ThatAre Less Expensive, More Effective or Safer, Making Our Products Obsolete orUncompetitive**

 

Many competitors and potential competitors havesubstantially greater product development capabilities and financial,scientific, marketing and human resources than we do.  Technological competition from pharmaceutical companies andbiotechnology companies is intense and is expected to increase.  Other companies have developed technologiesthat could be the basis for competitive products.  Some of these products have an entirely different approach ormeans of accomplishing the desired therapeutic effect than products we aredeveloping.  Alternative products may bedeveloped that are more effective, work faster and are less costly than ourproducts.  Competitors may succeed indeveloping products earlier than us, obtaining approvals and clearances forsuch products more rapidly than us, or developing products that are more effectivethan ours.  In addition, other forms ofmedical treatment, such as surgery, may be competitive with our products. Overtime, our technology or products may become obsolete or

 

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uncompetitive.

 

**Our Products May Not Gain Market Acceptance**

 

Products such as HspE7 may not gain marketacceptance among physicians, patients, healthcare payors and the medicalcommunity.  The degree of marketacceptance of any product depends on a number of factors, includingestablishment and demonstration of clinical efficacy and safety,cost-effectiveness, clinical advantages over alternative products, andmarketing and distribution support for the products.  Limited information regarding these factors is available in connectionwith our products or products that may compete with ours.

 

Our sales experience is limited to the sale of bioreagents.  To directly market and distribute anypharmaceutical products, we or our collaborators will need a marketing andsales force with appropriate technical expertise and supporting distributioncapabilities.  We may not be able toestablish sales, marketing and distribution capabilities or enter intoarrangements with third parties on acceptable terms.  If we or our partners cannot successfully market and sell ourproducts, our ability to generate revenue will be limited.

 

**Our Operations and the Use of Our ProductsCould Subject Us to Damages Relating to Injuries or Accidental Contamination**

 

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

 

Our research and development processes involvethe controlled use of hazardous and radioactive materials.  We are subject to federal, provincial andlocal laws and regulations governing the use, manufacture, storage, handlingand disposal of such materials and waste products.  The risk of accidental contamination or injury from handling anddisposing of such materials cannot be completely eliminated. In the event of anaccident involving hazardous or radioactive materials, we could be held liablefor resulting damages.  We are notinsured with respect to this liability. Such liability could exceed ourresources.  In the future we could incursignificant costs to comply with environmental laws and regulations.

 

**Our Success Depends On Attracting andRetaining Qualified Personnel**

 

We depend on a core management and scientificteam.  The loss of any of theseindividuals could prevent us from achieving our business objective ofcommercializing our product candidates. Our future success will depend in large part on our continued ability toattract and retain other highly qualified scientific, technical and managementpersonnel, as well as personnel with expertise in clinical testing andgovernment regulation.  We facecompetition for personnel from other companies, universities, public andprivate research 

institutions, government entities

 

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and other organizations.  If our recruitment and retention efforts areunsuccessful, our business operations could suffer.

 

**Our Revenues Will Depend Upon theAvailability of Reimbursement from Third-Party Payors That Are IncreasinglyChallenging the Price and Examining the Cost Effectiveness of Medical Productsand Services**

 

Sales of therapeutic products depends in partupon the availability of reimbursement from third-party payors, includinggovernment health administration authorities, managed care providers, privatehealth insurers and other organizations. These third-party payors increasingly attempt to contain costs bychallenging the price of products and services and limiting the coverage andlevel of reimbursement for pharmaceutical products.  Third party reimbursement for our products may be inadequate toenable us to maintain prices that provide a return on our product developmentinvestment.  Governments continue topropose and pass legislation designed to reduce healthcare costs.  This legislation could further limit reimbursement.  If government and third-party payors do notadequately reimburse patients for the costs of our products, the market for ourproducts may be limited.

 

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

 

As is typical forbiotechnology companies without an approved product on the market, our shareprice has been highly volatile in the past and is likely to continue to bevolatile. The price of our shares could be materially affected by factorsincluding:

 

•      theannouncement of clinical trials results by us or our competitors

 

•      regulatoryactions

 

•      safetyissues

 

•      changesaffecting patents or exclusive licenses

 

•      futureissuances of shares

 

•      theannouncement of technological innovations

 

•      therelease of publications

 

•      thedevelopment of new commercial products

 

•      changesin regulations

 

•      therelease of financial results

 

•      publicconcerns over risks relating to biotechnology

 

•      salesof shares by existing shareholders and

 

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•      changesin analyst recommendations.

 

The volatility of ourshares may be heightened while it is traded primarily on the TSX, whichattracts primarily Canadian shareholders. Because some institutional investors invest in TSX-listed companies inproportion to their weight on that index, changes within the S&P/TSXComposite Index may also increase volatility in our share price.  Although management continues to explore across-listing on the NASDAQ or a U.S. exchange, it can provide no assurancesregarding the timing or ultimate results of such a transaction.

 

**Item 2****.  PROPERTIES**

 

Our principal research facilities are in Victoria, British Columbia,together with our Stressgen Bioreagents Limited Partnership operations.  Our two Victoria businesses shareapproximately 25,000 square feet of office, research and manufacturing space undera lease that expires at the end of 2005.

 

Most of our executive, clinical research, regulatory affairs andfinancial functions are provided by our subsidiary, Stressgen Biotechnologies,Inc., which has offices in San Diego, California and Collegeville,Pennsylvania.  We lease approximately10,600 square feet of office space in San Diego under a lease that expires inDecember 2005.  Our Collegeville leaseapproximates 5,000 square feet and expires in December 2004.  Personnel from both the parent corporationand Stressgen Biotechnologies, Inc. support the development of HspE7, for whichour subsidiary Stressgen Development Corporation has primary responsibility.

 

**Item 3****.  LEGALPROCEEDINGS**

 

As of the date hereof, we arenot a party to any material legal proceedings. From time to time we are involved in certain litigation arising out ofour operations.

 

**Item 4****.  SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

We did not submit any mattersto a vote of security holders, through the solicitation of proxies orotherwise, during the quarter ended December 31, 2003.

 

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**PARTII**

 

**Item 5****.  MARKET FORREGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**

 

**Common Share Information**

 

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

 
|            |   | **High** |   | **Low** |   |
|-----------------|--------|----------|--------|---------|--------|
| **2003**        |   |     |   |    |   |
|            |   |     |   |    |   |
| Fourth  Quarter |   | 2.23     |   | 1.56    |   |
| Third  Quarter  |   | 2.43     |   | 1.44    |   |
| Second  Quarter |   | 2.78     |   | 1.40    |   |
| First  Quarter  |   | 2.12     |   | 1.31    |   |
|            |   |     |   |    |   |
| **2002**        |   |     |   |    |   |
|            |   |     |   |    |   |
| Fourth  Quarter |   | 2.75     |   | 1.25    |   |
| Third  Quarter  |   | 4.05     |   | 2.26    |   |
| Second  Quarter |   | 4.59     |   | 3.25    |   |
| First  Quarter  |   | 5.79     |   | 3.92    |   |

 

On February12, 2004, the closing price of our common shares as reported by The TorontoStock Exchange was $1.74 per share.  Wehad 132 registered holders, 25 of whom were residents of the U.S.  Of the approximately 72,491,000 commonshares outstanding, the portion held by registered holders in the U.S. wasapproximately 6,554,000 or 9%.

 

There wereapproximately 13,000 holders of our common shares as of the most recent annualgeneral meeting of shareholders on May 6, 2003.

 

**Dividend Policy**

 

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

 

**Equity Compensation Plans**

 

We have two equity compensationplans, a 1996 Share Incentive Plan and a 2001 Equity Incentive Plan. Both planswere approved by our shareholders.   Thefollowing table aggregates the data from the two plans as of December 31, 2003:

 

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| **Number of securities to be  issued upon exercise of  outstanding options** |   | **Weighted-average exercise  price of outstanding options** |   | **Number of securities  remaining available for future  issuance under equity  compensation plans  (excluding securities reflected  in column (a))** |    |
|------------------------------------------------------------------------------|--------|-------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------|---------|
| **(a)**                                                                      |   | **(b)**                                                     |   | **(c)**                                                                                                                                              |    |
| 4,978,118                                                                    |   | $                                                           | 4.21   |                                                                                                                                                 | 358,986 |   |
|                                                                              |        |                                                             |        |                                                                                                                                                      |         |  |

 

**ExchangeControls and Other Limitations Affecting Holders of Common Shares**

 

Thereis no law, governmental decree or regulation in Canada that restricts theexport or import of capital, or which would affect our remittance of dividendsor other payments to non-resident holders of our common shares, other thanwithholding tax requirements.

 

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

 

The ICA requires eachindividual, government or agency thereof, corporation, partnership, trust orjoint venture that is not a “Canadian” as defined in the ICA who commences anew business activity in Canada or acquires control of an existing Canadianbusiness, where the establishment or acquisition of control is not a reviewabletransaction, to file a notification with Industry Canada. The ICA generallyprohibits implementation of a reviewable transaction by a non-Canadian unlessafter review the minister responsible for the ICA is satisfied that theinvestment is likely to be of net benefit to Canada. An investment in ourcommon shares by a non-Canadian would be reviewable under the ICA if it were aninvestment to acquire control of Stressgen and the value of our assets of was$5 million or more. Higher limits apply for acquisitions by or from World TradeOrganization member country investors.

 

The acquisition of a majorityof the voting interests of an entity or of a majority of the undividedownership interests in the voting shares of an entity that is a corporation isdeemed to be acquisition of control of that entity.  The acquisition of less than a majority but one-third or more ofthe voting shares of a corporation or of an equivalent undivided ownershipinterest in the voting shares of the corporation is presumed to be acquisitionof control of that corporation unless it can be established that, upon theacquisition, the corporation is not controlled in fact by the acquiror throughthe ownership of voting shares. The acquisition of less than one-third of thevoting shares of a corporation or of an equivalent undivided ownership interestin the voting shares of the corporation is deemed not to be acquisition of controlof that corporation. Certain transactions in relation to our common shareswould be exempt from review from the ICA, including an:

 

•      acquisition of common sharesby a person in the ordinary course of that person’s business as a trader ordealer in securities;

 

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

 

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

 

The ICA was amended with the *Act toImplement the Agreement Establishing the World Trade Organization*(Canada)to provide for special review thresholds for World Trade Organization membercountry investors. Under the ICA, as amended, an investment in our commonshares by an investor from a country which is a member of the WTO would bereviewable only if it were an investment to acquire control of the company andthe value of the assets of the company was equal to or greater than a specifiedamount, which increases in stages. As at December 31, 2003, the reviewthreshold was $223,000,000. This amount is subject to an annual adjustment onthe basis of a prescribed formula in the ICA to reflect inflation and realgrowth within Canada.

 

**Certain Canadian Federal Income TaxInformation for United States Residents**

 

The following is a summary ofcertain Canadian federal income tax considerations generally applicable toholders 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 withStressgen, hold such shares as capital property, do not use or hold, and arenot deemed to use or hold, the common shares in connection with a trade orbusiness carried on, or deemed to be carried on, in Canada at any time, havenot been at any time residents of Canada for purposes of the Canadian Tax Actand are residents of the United States of America (“U.S. Residents”) under theCanada-U.S. Income Tax Convention (1980) (the “Convention”).  The common shares will generally beconsidered to be capital property of holders unless such shares are held in thecourse of carrying on a business, or in an adventure or concern in the natureof trade.  Furthermore, this summarydoes not apply to any holder which carries on an insurance business in Canadaand elsewhere, in respect of the common shares that are effectively connectedwith the holder’s Canadian insurance business or that are “designated insuranceproperty” as defined in the Canadian Tax Act.

 

This summary is of a generalnature 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 prospectiveholder of common shares and no opinion or representation with respect to anytax consequences, including, but not limited to, Canadian federal, Canadianprovincial or U.S. tax consequences, is made to any particular holder of commonshares or prospective holder of common shares. Accordingly, holders of commonshares and prospective holders of common shares should consult with their owntax advisers for advice with respect to the tax consequences to them havingregard to their own particular circumstances, including any consequences ofpurchasing, owning or disposing of common shares arising under Canadianfederal, Canadian provincial, U.S. Federal, U.S. state or local tax laws or taxlaws of jurisdictions outside the U.S. or Canada. No advance income tax rulinghas been requested or obtained from the Canada Customs and Revenue Agency toconfirm the tax consequences of any of the transactions described herein.

 

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

 

This summary is not exhaustiveof all possible Canadian federal income tax consequences for U.S. Residents anddoes not take into account or anticipate any changes in law, whether bylegislative, administrative, governmental or judicial decision or action, nordoes it take into account Canadian provincial, U.S. or foreign taxconsiderations which may differ significantly from those discussed herein. Noassurances can be given that subsequent changes in law or administrative policywill not affect or modify the opinions expressed herein.

 

A holder will not be subject totax under the Canadian Tax Act in respect of any capital gain on a disposition ordeemed disposition of common shares (including the death of the holder) unlessat the time of such disposition such shares constitute taxable Canadianproperty of the holder for purposes of the Canadian Tax Act and such holder isnot entitled to relief under an applicable tax treaty.  The common shares will generally notconstitute taxable Canadian property of a holder at the time of a dispositionof such shares provided (1) such shares are listed on a prescribed stockexchange (which includes the Toronto Stock Exchange and would currently includethe American Stock Exchange or NASDAQ), (2) the holder does not use or hold oris not deemed to use or hold, such shares in connection with carrying on abusiness in Canada, and (3) the holder, persons with whom such holder does notdeal at arm’s length, or the holder and such persons, has not owned 25% or moreof the issued shares of any class or series of our share capital at any timewithin the 5 years preceding the date of disposition.  In any event, under the Convention, gains derived by a holder whois a resident of the U.S. (within the meaning of the Convention) from thedisposition of common shares will generally not be taxable in Canada unless thevalue of the common shares is derived principally from real property situatedin Canada.  If the common shares held bya holder do not constitute taxable Canadian property or if a capital gain inrespect of the common shares would because of a tax treaty be exempt from taxunder the Canadian Tax Act, any capital loss arising upon the disposition ofthe common shares will not be available to be used to offset a capital gainrealized in respect of another property, which may be subject to tax under theCanadian Tax Act.  To the extent thecommon shares disposed of constitute taxable Canadian property; the holder willbe required to file a Canadian tax return, even if the gain arising from such adisposition is exempt from tax because of a tax treaty.

 

Amounts in respect of commonshares paid or credited or deemed to be paid or credited as, on account or inlieu of payment of, or in satisfaction of, dividends to a U.S. Resident willgenerally be subject to Canadian non-resident withholding tax at the rate of25%. Currently, under the Convention the rate of Canadian non-residentwithholding tax will generally be reduced to: (i) 5% of the gross amount ofdividends if the beneficial owner is a company (other than a limited liabilitycompany) that is resident in the U.S. and that owns at least 10% of our votingstock; or (ii) 15% of the gross amount of dividends if the beneficial owner isa resident of the U.S. (and is not a limited liability company) but does notqualify for the 5% withholding rate.

 

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**United States Federal Income TaxConsiderations**

 

The following summary is ageneral description of the material United States federal income taxconsequences of the purchase, ownership and disposition of common shares byU.S. Holders (as defined below). This summary does not address all potentiallyrelevant U.S. federal income tax matters. This description is intended forgeneral information purposes only and does not constitute an opinion regardingtax consequences.  It is based on the UnitedStates Internal Revenue Code of 1986, as amended (the “Code”), Treasuryregulations promulgated thereunder, and judicial and administrativeinterpretations thereof, all as in effect on the date hereof and all of whichare subject to change, prospectively or retroactively.

 

The tax treatment of a holderof common shares may vary depending upon his particular situation. Certainholders (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 “functionalcurrency” other than the U.S. dollar, shareholders who acquired their stockthrough the exercise of employer stock options, and broker-dealers) may besubject to special rules not discussed below. The following summary is limitedto U.S. Holders who will hold the common shares as “capital assets” within themeaning of Section 1221 of the Code, and do not actually or constructively own10% or more of our voting stock. The discussion below does not address theeffect of any state, local or foreign tax law on a holder of the common shares.

 

Prospective investors shouldconsult their own tax advisors about the federal, state, local, and foreign taxconsequences 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 UnitedStates, (ii) a partnership, corporation or other entity organized in or under(or treated for federal income tax purposes as organized in or under) the lawsof the United States or any state thereof, (iii) an estate subject to UnitedStates 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 overthe trust’s administration and (b) one or more U.S. fiduciaries have theauthority 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 aU.S. Holder.

 

***DividendIncome***

 

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

 

To the extent thatdistributions exceed our current or accumulated earnings and profits, they willbe treated first as a return of capital up to the U.S. Holder’s adjusted basisin the common shares and thereafter as gain from the sale or exchange of thecommon shares.

 

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

 

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

 

Subject to the limitations setforth 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 federalincome tax liability for Canadian income tax withheld from dividends receivedin respect of common shares. For purposes of calculating the credit for theCanadian taxes paid against the United States taxes imposed, the dividendshould be foreign source income.  Therules relating to the determination of the foreign tax credit are complex. U.S.Holders should consult their personal tax advisors to determine whether and towhat extent they would be entitled to such credit. U.S. Holders that do notelect to claim foreign tax credits may instead claim a deduction for Canadianincome tax withheld.

 

***Saleof Common Stock***

 

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

 

Gain or loss upon the sale ofthe 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 yearprior to the sale. Preferential tax rates for long-term net capital gains areapplicable to a U.S. Holder that is an individual, estate or trust. There arecurrently no preferential tax rates for long-term capital gains for a U.S.Holder that is a corporation. Short-term capital gains are generally taxed atordinary income tax rates.  Deductionsfor net capital losses are subject to significant limitations.

 

***PFICStatus***

 

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

 

In general, a U.S. Holder ofcommon shares in a PFIC is required to prorate all gains realized on thedisposition of such U.S. Holder’s common shares and all “excess distributions”(as such term

 

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is defined by Section 1291)over the entire holding period for the common shares (excluding any periodprior to the first year during which we were a PFIC). All gains or excessdistributions allocated to such prior years are taxed at the highest tax ratefor each such prior year applicable to ordinary income. The U.S. Holder alsowould be liable for interest on the foregoing tax liability for each such prioryear calculated as if such tax liability had come due in each such prior year.  However, if the U.S. Holder makes a timelyelection to treat a PFIC as a qualified electing fund (“QEF”) with respect tosuch holder’s interest therein, the above-described rules generally will notapply.  Instead, the electing U.S.Holder would include annually in his gross income his pro rata share of thePFIC’s ordinary earnings and net capital gain regardless of whether such incomeor gain was actually distributed.  AU.S. Holder of a QEF can, however, elect to defer the payment of U.S. federalincome tax on such income inclusions, but would then be obligated to interestto the government on the deferred payment. In addition, subject to certain limitations, U.S. Holders owningmarketable stock in a PFIC are permitted to elect to mark that stock to marketannually.  Amounts included in ordeducted from income under the mark to market alternative (and actual gains andlosses realized upon disposition, subject to certain limitations) will betreated as ordinary gains or losses.

 

We believe that Stressgen wasnot a PFIC for the year 2003 or prior years. However, because PFIC status depends on the character of our income andassets in each year, there can be no assurance with respect to whether we willqualify as a PFIC in future years. Further, there can be no assurance that our determination concerning ourPFIC status will not be challenged by the IRS. If we determine that Stressgen is a PFIC we will determine at that timewhether we will provide sufficient information for a U.S. Holder to make theQEF election.  Therefore, eachprospective investor is urged to consult with a tax advisor with respect to howthe PFIC rules would affect its tax situation.

 

***ControlledForeign Corporation Status***

 

If more than 50% of the votingpower of all classes of stock or the total value of our stock is owned,directly or indirectly, by citizens or residents of the United States, UnitedStates domestic partnerships and corporations or estates or trusts other thanforeign estates or trusts, each of whom own 10% or more of the total combinedvoting power of all classes of stock of the Company (“10% U.S. Shareholders”),Stressgen could be treated as a CFC under Subpart F of the Code. If in 1998 orthereafter Stressgen qualifies as a CFC, 10% U.S. Shareholders are generallynot required to apply the PFIC rules, provided that, in some cases, complex taxelections are made. The classification of Stressgen as a CFC would effect manycomplex results including the required inclusion by 10% of U.S. Shareholders’in income of their pro rata shares of our Subpart F income. In addition, gainfrom the sale or exchange of stock by a holder of our shares who is or was a10% U.S. Shareholder at any time during the five-year period ending with thesale or exchange is treated as ordinary dividend income to the extent of ourearnings and profits attributable to the stock sold or exchanged. Because ofthe complexity of Subpart F, and because it is not clear that Subpart F wouldapply to the holders of our shares, a 10% U.S. Holder is urged to consult with theirtax advisors to determine the applicable rules.

 

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

 

**Changesin Securities**

 

In December 2003, we issued atotal of 10,638,298 units in a Canadian offering which was exempt from U.S.registration requirements under Regulation S. Each unit was comprised of one common share and one-half of one purchasewarrant. Each whole warrant entitles the holder to purchase one additionalcommon share for a period of 36 months from December 23, 2003 at a price of$2.44 per common share.  The offeringwas made by a syndicate of underwriters co-led by Canaccord Capital Corporationand Raymond James Ltd. and including Desjardins Securities Inc., OrionSecurities Inc. and Dlouhy Merchant Group Inc. The units were issued at the price of $1.88 each, for net proceeds ofapproximately $18,700,000.

 

We paid to the underwriters andincurred share issue costs of approximately $1,300,000 in consideration ofservices rendered by them in connection with the offering.  We also agreed to indemnify the underwritersand their broker/dealer affiliates against certain liabilities, includingliabilities under the United States securities laws and under Canadiansecurities legislation and to contribute to payments that the underwriters maybe required to make in respect thereof. In addition, we agreed not to issue or enter into agreement to issue anycommon shares or any securities convertible into or exchangeable for commonshares without the prior consent of the underwriters, such consent not to beunreasonably withheld, until the date which is 90 days after the closing of theoffering, except pursuant to our stock option plan, employee purchase plans andany convertible securities that are outstanding on the date hereof

 

We intend to use the net proceeds of the financingprimarily for general corporate purposes, including for the manufacturing andclinical development of HspE7 and working capital.

 

**Item 6****.  SELECTEDFINANCIAL DATA**

 

**AnnualFinancial Data**

 

Our consolidated financialstatements have been prepared in accordance with generally accepted accountingprinciples in Canada (“Canadian GAAP”). These principles differ in certainrespects from generally accepted accounting principles in the United States ofAmerica (“U.S. GAAP”).  The differencesas they affect our financial statements are described in Note 11 to our auditedconsolidated 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 Barbadossubsidiary, which is responsible for the development of HspE7.

 

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**ConsolidatedStatement of Operations Data**

 
|                                           |   | **Year ended December 31**                                        |   |
|------------------------------------------------|--------|-------------------------------------------------------------------|--------|
|                                           |   | **2003**                                                          |   | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
|                                           |   | **(In thousands of Canadian dollars, except per share  amounts)** |   |
| Net  revenues                                  |   |                                                              |   |   |   |   |   |   |   |   |   |
| Canadian  and U.S. GAAP                        |   | $                                                                 | 13,419 |   | $ | 14,042 |   | $ | 5,419 |   | $ | 4,156 |   | $ | 3,274 |   |
| Research  and development expenses             |   |                                                              |   |   |   |   |   |   |   |   |   |
| Canadian  and U.S. GAAP                        |   | 20,865                                                            |   | 33,675 |   | 35,906 |   | 23,961 |   | 14,322 |   |
| Net  loss (1)                                  |   |                                                              |   |   |   |   |   |   |   |   |   |
| Canadian  GAAP                                 |   | (16,245                                                           | )      | (28,802 | ) | (35,939 | ) | (25,407 | ) | (16,738 | ) |
| U.S.  GAAP                                     |   | (15,298                                                           | )      | (28,922 | ) | (36,341 | ) | (35,766 | ) | (19,515 | ) |
| Basic  and diluted loss per common share  |   |                                                              |   |   |   |   |   |   |   |   |   |
| Canadian  GAAP                                 |   | (0.26                                                             | )      | (0.49 | ) | (0.70 | ) | (0.63 | ) | (0.58 | ) |
| U.S.  GAAP                                     |   | (0.25                                                             | )      | (0.49 | ) | (0.71 | ) | (0.88 | ) | (0.67 | ) |
|                                                |        |                                                                   |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**ConsolidatedBalance Sheet Data**

 
|                             |   | **As of December 31**                  |   |
|----------------------------------|--------|----------------------------------------|--------|
|                             |   | **2003**                               |   | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
|                             |   | **(In thousands of Canadian dollars)** |   |
| Cash  and short-term investments |   |                                   |   |   |   |   |   |   |   |   |   |
| Canadian  GAAP                   |   | $                                      | 52,090 |   | $ | 46,013 |   | $ | 62,682 |   | $ | 70,567 |   | $ | 16,477 |   |
| U.S.  GAAP                       |   | 52,090                                 |   | 46,013 |   | 62,682 |   | 70,710 |   | 16,477 |   |
| Total  assets (2)                |   |                                   |   |   |   |   |   |   |   |   |   |
| Canadian  GAAP                   |   | 56,430                                 |   | 54,815 |   | 67,789 |   | 74,325 |   | 19,852 |   |
| U.S.  GAAP                       |   | 56,430                                 |   | 54,815 |   | 67,789 |   | 74,468 |   | 19,852 |   |
| Long-term  obligations           |   |                                   |   |   |   |   |   |   |   |   |   |
| Canadian  GAAP                   |   | 2,672                                  |   | 3,606 |   | 578 |   | 1,036 |   | 1,467 |   |
| U.S.  GAAP                       |   | 2,672                                  |   | 3,606 |   | 578 |   | 1,036 |   | 1,467 |   |
|                                  |        |                                        |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The information set forth aboveis not necessarily indicative of the results of future operations and should beread in conjunction with the consolidated financial statements and relatednotes thereto and with “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” included as part of this Form 10-K.

 

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(1)           Toconform with U.S. GAAP, our net loss would decrease by $947,000 in 2003 andincrease by $120,000 in 2002, $402,000 in 2001, $10,359,000 in 2000, and$2,777,000 in 1999.  In 2003, the

 

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principaldifference in our net loss under U.S. GAAP rather than Canadian GAAP was due tothe reversal of $541,000 in unrealized foreign exchange losses and the reversalof a $406,000 previously recorded adjustment to short-term investments.  In 2002, the principal difference in our netloss under U.S. GAAP rather than Canadian GAAP was due to the reversal of$69,000 in unrealized foreign exchange gain and the reversal of a $51,000previously recorded adjustment to short-term investments.  In 2001, the principal difference in our netloss under U.S. GAAP rather than Canadian GAAP was due to unrealized foreignexchange gain on available for sale securities of $541,000 offset by net$139,000 of other items.  In 2000, theprincipal difference in our net loss was due to the release of escrow shares of$9,093,000, stock based compensation expenses including non-compensatory coststo non-employees of $1,674,000, and changes related to unrealized losses onavailable for sale securities totaling $372,000.  In 1999, the principal difference was due to the release ofescrow shares totaling $2,061,000 and a net loss of $768,000 resulting from thedissolution of the joint venture.

 

(2)           AtDecember 31, 2003, 2002, 2001 and 1999, there were no differences in totalassets under U.S. GAAP relative to Canadian GAAP.  At December 31, 2000, the difference in total assets under U.S.GAAP relative to Canadian GAAP was $143,000, due to an increase in market valueon available-for-sale securities.

 

**Currency Exchange Rates**

 

Ouraccounts are maintained in Canadian dollars. In this Annual Report on Form 10-K, all dollar amounts are stated inCanadian dollars except where otherwise indicated.

 

Thetable below shows relevant exchange rates which approximate the noon buyingrates in New York City as reported by the Federal Reserve Bank of New York forcable transfers expressed in Canadian dollars for our five most recent fiscalyears.  The average rate means theaverage of the exchange rates on the last day of each month during a year.

 

Fiscal Year Ended December 31,

 
|       |   | **2003** |   | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
|------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|
| High       |   | $        | 1.5747 |     | $      | 1.6128   |   | $        | 1.6023 |     | $      | 1.5600 |   | $ | 1.5302 |   |
| Low        |   | 1.2924   |   | 1.5108   |   | 1.4933   |   | 1.4350   |   | 1.4440   |   |
| Average    |   | 1.4015   |   | 1.5702   |   | 1.5518   |   | 1.4855   |   | 1.4858   |   |
| Period End |   | 1.2924   |   | 1.5800   |   | 1.5925   |   | 1.4995   |   | 1.4440   |   |
|            |        |          |        |          |        |          |        |          |        |          |        |  |  |  |  |  |

 

As of February 12, 2004, thenoon buying rate in New York City for cable transfers in Canadian dollars ascertified for customs purposes by the Federal Reserve Bank of New York wasU.S.$0.76 = Cdn.$1.00 (equivalent to U.S.$1.00 = Cdn.$1.3191).

 

**Item 7****.  MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

TheManagement’s Discussion and Analysis of Financial Condition and Results ofOperations contains forward-looking statements that involve risk anduncertainties.  The predictionsdescribed in these statements may not materialize if management’s currentexpectations regarding our future performance prove incorrect. Our resultscould also be affected by factors including, but not limited to, our relianceon collaborative partners and other risks described

 

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aboveunder “Factors That May Affect Future Performance.”  The forward-looking statements are based on currently availableinformation; we disclaim any obligation to update them.

 

The following information should be read in conjunction with our 2003consolidated financial statements and related notes therein, which are preparedin accordance with Canadian GAAP.  Theseprinciples differ in certain respects from U.S. GAAP.  The differences, as they affect our consolidated financialstatements, are described in Note 11 to our consolidated financial statements.  All amounts following are expressed inCanadian dollars unless otherwise indicated.

 

**Overview**

 

From our inception in 1990 to 1993, our corebusiness involved the sale of bioreagents. Although we have retained and expanded our bioreagent businessworldwide, our primary focus since 1993 has been the research and developmentof innovative stress protein-based fusion products that will stimulate thebody’s immune system to combat viral infections and related cancers.  Our core, exclusively licensed technologyinvolves the fusion of heat shock proteins with viral or cancer-associatedantigens.  The lead product candidatedeveloped with this technology, HspE7, targets a variety of humanpapillomavirus-related diseases.  We arealso performing research studies on potential treatments for hepatitis B andherpes simplex and are evaluating whether our technology could produce a fusionprotein to treat infections caused by hepatitis C.

 

We have incurred significant losses since our inception and expect toincur substantial losses for the foreseeable future as we invest in ourresearch and product development programs, including manufacturing,pre-clinical studies and clinical trials, and regulatory activities.  At December 31, 2003 our accumulated deficitwas $150,294,000.  Historically, we havedepended principally on equity financings to fund our business activities.  We intend to pursue additional equityfinancings to fund our business activities, markets permitting.

 

During the period encompassed herein, we have devoted over 60% of ourresources to our HspE7 product development program.  HspE7 is being developed as a treatment for conditions caused byHPV, including genitalwarts, recurrent respiratory papillomatosis, anal intraepithelial neoplasia,cervical intraepithelial neoplasia and cervical cancer.  The balance of our resources were devoted toour on-going research programs involving the fusion of heat shock proteins withviral or cancer associated antigens and research in support of our bioreagentbusiness.

 

Our success depends upon the safety and efficacy of our products inpre-clinical studies and clinical trials, and also on obtaining the necessaryregulatory approvals to market our products. The marketability of our products will be influenced by competition fromalternative therapies and the degree of protection our intellectual propertyprovides. We will also need to recruit and retain personnel skilled in theproduct development process to obtain our objectives.  We believe there will be significant markets for our therapeuticproducts should these products prove to be effective in human clinical trials.

 

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*Restructured Roche Agreement*

 

On December 2, 2003, we announced a restructuring of our June 24,2002 collaboration agreement with F. Hoffmann-La Roche Ltd and Hoffmann-LaRoche Inc. (together, “Roche”), providing for the development andcommercialization of our pharmaceutical fusion product candidate, HspE7.  By regaining control of the HspE7manufacturing program, we expect the restructured agreement to betterfacilitate our clinical development of HspE7 in recurrent respiratorypapillomatosis and additional indications caused by the human papillomavirus,while allowing Roche to develop a second generation HspE7 product targetinggenital warts.  We have resumed allresponsibility for all manufacturing and other costs of the indications wechoose to develop.

 

Roche may pay a fee and event-driven milestones aggregating up to$207,000,000 (US$138,000,000) to obtain exclusive rights to the firstgeneration HspE7 product, in which case it will become responsible for relatedcosts.  Assuming this fee is paid andall HspE7 development and commercial milestones are achieved and Rocheexercises its rights to certain other CoValTM fusion productcandidates, the payments to us, excluding sales-based payments (similar toroyalties), could approximate $340,500,000 (U.S.$227,000,000), beyond theapproximately $32,250,000 (U.S.$21,500,000) we have received from Rocherelating to the development of a first generation HspE7 product to date. UntilMarch 31, 2005 we can elect, under defined circumstances, to terminate Roche’sexclusive rights to the first generation HspE7 product.

 

Once the first generation HspE7 product is on themarket, we can elect to launch a sales force in the U.S. and Canada and recordsales for three years after regulatory approval in those countries.  In that case we will pay Roche a mid-singledigit percentage or a low double-digit percentage of our net sales, dependingupon the timing and occurrence of Roche’s exercise.  Under these conditions, no earlier than three years after marketlaunch of HspE7, Roche can begin recording sales in the U.S. and Canada.  Once Roche begins recording sales in thosecountries, we will receive sales-based payments, which are expected toapproximate 35% of Roche’s net HspE7 product sales.  In the rest of the world, Roche will record sales immediatelyafter market launch and we will receive sales-based payments of 20% of Roche’snet sales.

 

Roche can also obtain exclusive rights to develop asecond generation HspE7 product upon payment of a license fee.  In such case, we will receive alternativemilestones based upon the clinical and regulatory development of the secondgeneration product.  Roche will assumeresponsibility for manufacturing and all costs of its development program.  After commercialization of the secondgeneration HspE7 product, we will receive tiered, progressive sales-basedpayments from Roche at levels that we believe are competitive with otheragreements of this stage and type.  Rochecan credit a portion of its milestone payment against the sales-based paymentson the second generation product.

 

Roche is obligated to make additional commercialsuccess payments of up to $127,500,000 (US$85,000,000) depending upon theaggregate net sales of either or both generations of the HspE7 product.  In addition Roche has separate non-exclusiverights to negotiate licenses to our CoValTM  fusion product candidates for the treatmentof cancer and hepatitis C.  By payingadditional fees, Roche can make these rights exclusive to January 1, 2007.

 

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**Liquidityand Capital Resources**

 

Sinceinception we have relied principally on equity financings, coupled with cashflows generated from our bioreagents business, to fund our research anddevelopment programs, operations and capital expenditures.  ThroughDecember 31, 2003 we have raised net equity proceeds of $199,056,000, includingapproximately $18,700,000 of net proceeds from an equity financing in December2003.

 

Underthe terms of our restructured collaboration agreement with Roche, wemay receive approximately $15,000,000 to $22,500,000 (US$10,000,000 toUS$15,000,000) in 2005.  We have assumed responsibilityfor all manufacturing costs of producing first generation HspE7 product alongwith any additional incremental costs of pursuing the indications we choose todevelop, including RRP. At this time, we do nothave internal manufacturing capabilities to supply material for clinical trialsor provide commercial quantities of HspE7 and therefore we will needsignificant additional funds.  Ifadequate funds are not available, we may be required to delay, reduce the scopeof, or eliminate the development of HspE7 or other research or developmentprograms.

 

Webelieve that our current capital resources are sufficient to fund operationsinto 2005.  This belief is based on ourresearch and development plans, the current regulatory environment, ourhistorical industry experience in the development of therapeutics and generaleconomic conditions.

 

Weemploy a financial performance measurement system designed to ensure ourrevenues and expenses are consistent with management’s operational objectivesand budgetary constraints.  Our cash utilization in 2004 is dependent uponseveral factors, including the timing and progress of clinical development ofHspE7 and the cost of manufacturing clinical supplies.

 

At December 31, 2003, we had $52,090,000 of cash, cash equivalents andshort-term investments. The $6,077,000 increase over 2002 is due principally to$18,700,000 raised through an equity financing along with $4,594,000 of netproceeds from an equity investment by Roche, offset by net losses of$16,245,000.  At December 31, 2003 and2002, approximately 24% and 13% of cash, cash equivalents and short-terminvestments were held in U.S. dollars.

 

During 2003, capital expenditures totaled $165,000 compared with$380,000 and $1,783,000 during 2002 and 2001 respectively.  The 2003 reduction in capital spending isdue to management’s investment policy limiting purchases to those required topreserve our current level of manufacturing and research capabilities. The 2002reduction in capital expenditures compared to 2001 was due to the completion ofsignificant improvements to our laboratory facilities and additional purchasesof laboratory equipment to support our ongoing research and bioreagentmanufacturing activities in 2001. Capital expenditures during 2004 are expected to remain consistent at2003 levels, reflecting management’s strategic investment policy.

 

At December 31, 2003 and 2002 we had outstanding principal balances of,$1,125,000 and $580,000, respectively, in the form of fixed rate capital leasesand term loan agreements.  In September2003 we entered into a term loan agreement with Oxford Finance Corporation,

 

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collateralized by equipment we own. At December 31, 2003 there was$906,000 outstanding on the loan.  Underthe terms of the agreement, we must issue a letter of credit for theoutstanding loan balance if combined cash, cash equivalents, and short-terminvestments fall below $6,000,000**.**

 

The following table summarizes our contractual obligations as ofDecember 31, 2003.  The table does notinclude items such as contracts with outside parties as the commitment to paydoes not exist until completion of work.

** **
|                         |   | **Payments due by period (including  interest)** |      |
|------------------------------|--------|--------------------------------------------------|-----------|
| **Contractual  Obligations** |   | **Total**                                        |      | **Less than 1  year** |   | **1 –3 years** |   | **3 –5  years** |   | **More than  5 years** |   |
| Term loan                    |   | $                                                | 1,040,000 |   | $ | 440,000 |   | $ | 600,000 |   | — |   | — |   |
| Capital lease obligations    |   | $                                                | 231,000   |   | $ | 176,000 |   | $ | 55,000 |   | — |   | — |   |
| Operating lease  obligations |   | $                                                | 1,694,000 |   | $ | 875,000 |   | $ | 819,000 |   | — |   | — |   |

 

We will require additionalcapital to fund future research and product development activities.  We expect to seek additional funds fromvarious sources, including corporate partners that enter into research anddevelopment collaborations with us, and public and private equityfinancings.  We cannot assure you that additionalfinancing will be available when needed or on satisfactory terms.  If we raise additional funds by issuingequity securities, substantial dilution to our existing shareholders mayresult.  We may need to obtain fundsthrough collaborative arrangements with others that are on unfavorableterms.  We may also have to relinquishrights to certain of our technologies, product candidates or products that wewould otherwise seek to develop ourselves.

 

**Resultsof Operations**

 

During 2003, we realized a netloss of $16,245,000 or $ 0.26 per common share.  These results compare with a net loss of $28,802,000 in 2002 and$35,939,000 in 2001 ($0.49 and $0.70 per share, respectively).  The $12,557,000 improvement in our net lossposition during 2003 compared to 2002 is due principally to decreased spendingon research and development (“R&D”) activities related to manufacturingdevelopment spending that was funded by Roche, along with the timing ofexpenses related to our ongoing clinical trials.

 

***Collaborative R&D revenue***

 

We recorded collaborative R&D revenueof $8,094,000 and $8,370,000 in 2003 and 2002, respectively, relating todevelopment activities in support of Roche’s activities under the June 2002collaboration agreement and amortization of up-front license fees in accordancewith Staff Accounting Bulletin (“SAB”) No 101 “Revenue Recognition in FinancialStatements.”  Collaborative R&Drevenue in 2003 includes $4,912,000 for development activities, $2,214,000

 

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for a time based milestone payment and$968,000 for the amortization of upfront license fees.  Collaborative R&D revenue in 2002includes $7,815,000 for development activities and $555,000 from theamortization of upfront license fees. Under the terms of the restructured HspE7 collaboration agreement, weexpect future collaborative R&D revenue to include amortization of theinitial up-front license fee, which was adjusted to reflect the increaseddevelopment period, and recognition of future milestone revenues.

 

***Bioreagent sales***

 

The production and sale of bioreagents supports our business strategyby building our market presence in stress proteins and strengthening ourstrategic relationships with companies, academic institutions and stressresponse researchers. Our products are sold directly to end-users and throughthird party distributors.  In 2003, anoverall economic slowdown in North America caused industry-wide demand forbioreagents to slow.  These eventscombined with the weakening U.S. dollar compared to the Canadian dollar,decreased our 2003 bioreagent sales by 6% to $5,325,000 compared to 2002. Theeffect of the weakening U.S. dollar on our reported sales results totaledapproximately $625,000 for the year ended December 31, 2003.  These impacts were partially offset by theintroduction of several higher priced kit-based research products.  Our bioreagent sales increased by 5% in2002, compared to 2001, attributed principally to increased demand for stressprotein and antibody bioreagents, increased prices and complementary newproduct introductions.

 

***Research and development***

 

Research and development, or R&D, includes costs associated withclinical studies, product development, and ongoing exploratory research.  In order to optimize our financialflexibility, we employ clinical research organizations to conduct our clinicaltrials and engage contract manufacturers to assist us with product developmentand manufacturing.

 

R&D spending decreased by approximately 38% to $20,865,000 in 2003,compared with $33,675,000 in 2002. The 2003 decrease is due to the reduction inmanufacturing development spending and timing of expenses recorded for ouron-going clinical trials as compared to 2002. During 2002, R&D spending decreased by approximately 6% to$33,675,000, compared with $35,906,000 in 2001.  The 2002 decrease reflects a mid-2002 cost shift ofHspE7 manufacturing scale-up costs and other product development efforts toRoche under the now superceded June 2002 Roche collaboration agreement.

 

Our R&D spending in 2003 consisted principally of in-house researchactivities, spending to support the final stages of our clinical trials, andactivities to support our collaboration with Roche.  During 2003, our clinical program focused on our RRP phase IItrial and AIN phase III trials.  Wereleased interim data on the RRP phase II trial in 2003.  Final data related to both the RRP and AINtrials is expected in 2004.  During 2003over 60% of our R&D spending related to efforts developing HspE7 ascompared with over 80% in 2002.  Theremaining spending related to exploratory research focusing on our follow-on CoValTM fusion productcandidates and research in support of our bioreagent business. During 2004, weexpect to devote approximately 90% of planned R&D spending to support HspE7development.  We anticipate that R&D

 

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spending will increase in 2004 due to our assumption of HspE7manufacturing and development activities from Roche and preparation for additionalclinical trials.

 

***Selling, general and administrative expenses***

 

Selling, general and administrative expenses, or SG&A, includesexecutive management, business development, investor relations, legal supportand general administration.

 

SG&A expenses decreased by 13% to $7,303,000 in 2003 compared with$8,409,000 in 2002, and $7,782,000 in 2001. The fluctuations between 2003, 2002, and 2001 are due principally toincreased 2002 spending on business development activities associated withconsummating our original collaboration agreement with Roche.  We anticipate that in 2004 SG&A spendingwill be consistent with that of 2003.

 

***Cost of bioreagent sales***

 

The aggregate cost of bioreagent sales as a percentage of bioreagentsales was approximately 25% in 2003 and 29% in 2002 and 2001, resulting ingross margins of 75% in 2003 and 71% in 2002 and 2001.  The 2002 and 2001 gross margins were lowerthan in 2003 due principally to write-offs of obsolete and slow moving inventory.  We continually review sales trends indetermining the realizable value of inventories and make adjustments, asnecessary.  In 2004, we anticipate thatthe gross margin will be between 72% and 76%.

 

***Interest and other income***

 

Interest and otherincome decreased in 2003 by 45% to $702,000 compared with $1,267,000 in2002.   Lower market interest ratesapplied to a lower investment portfolio balance contributed to thedecline.  Also, a temporary loss ofmarket value on investments was recorded in 2003, which is expected to reversein the first half of 2004.

 

Interest and other income decreased by 49% to $1,267,000 in 2002compared with $2,507,000 in 2001.  Ourreduced cash and short term investment balances and lower interest ratesavailable in 2002, compared to 2001, resulted in less interest income.

 

***Net foreign exchange gain/loss***

 

In 2003 foreign exchange loss increased by 158% to $833,000 from$323,000 in 2002.  During the past twoyears, the U.S. and Canadian dollar exchange rate has fluctuated dramatically,causing gains and losses from quarter to quarter.  We have reduced this foreign exchange volatility, in part, byensuring that the majority of our investments are denominated in Canadiandollars.

 

In 2002 we incurred a $323,000 loss compared to a $1,502,000 gain in2001.  This loss resulted from thevolatility of currency markets and the weakening of the U.S. dollar compared tothe Canadian dollar during 2002.

 

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***Basic and diluted loss per share***

 

The 44% decrease in net loss to $16,245,000 in 2003 compared with$28,802,000 in 2002, was diluted by a 4% increase in the weighted averagenumber of common shares outstanding, resulting in basic and diluted loss pershare of $0.26 in 2003 and $0.49 in 2002.

 

The 20% decrease in net loss to $28,802,000 in 2002, compared with$35,939,000 in 2001, was diluted by a 15% increase in the weighted averagenumber of common shares outstanding, resulting in basic and diluted loss pershare of $ 0.49 in 2002, compared with $0.70 in 2001.

 

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

 

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

 

To conform to U.S. GAAP, our net loss would decrease by $947,000 in2003 and increase by $120,000 in 2002 and $402,000 in 2001.  In 2003, the principal difference in our netloss using U.S. GAAP rather than Canadian GAAP is due to the reversal of anunrealized foreign exchange loss on available-for-sale securities of $541,000,coupled with a $406,000 reversal of previous adjustments to short-terminvestments.  Under U.S. GAAP,adjustments to the market value of our investment portfolio would be recordedas a component of stockholders’ equity. Under Canadian GAAP, unfavorable market value adjustments are recordedas a component of retained earnings.

 

Similarly, in 2002, the principal difference in our net loss using U.S.GAAP rather than Canadian GAAP is due to the reversal of $69,000 in unrealizedforeign exchange gain on available for sale securities and a $51,000 reversalof market value adjustments previously made to short term investments recordedunder Canadian GAAP.   In 2001, the principaldifference in our net loss using U.S. GAAP rather than Canadian GAAP is due tothe reversal of $541,000 in unrealized foreign exchange gain recorded underCanadian GAAP.  A complete discussion ofthese and other less significant differences between U.S. GAAP and CanadianGAAP are described in Note 11 to our consolidated financial statements.

 

Net loss per common share under U.S. GAAP would have been $0.25, $0.49and $0.71 in 2003, 2002 and 2001, respectively.  There are no differences under Canadian and U.S. GAAP withrespect to our current assets and our stockholders’ equity at December 31, 2003and 2002.

 

**CriticalAccounting Policies**

 

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

 

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***Revenue recognition***

 

Revenue from collaborative R&D arrangements may include multipleelements within a single contract.  Ouraccounting policy complies with the revenue determination requirements setforth in EITF 00-21 “Accounting for Revenue Arrangements with MultipleDeliverables,” and EIC 142 “Revenue Arrangements with Multiple Deliverable,”relating to the separation of multiple deliverables into individual accountingunits with determinable fair values.  Wehave estimated the fair value of deliverables in the Roche agreement usingstandard industry techniques.  Changesin the determination of fair values or performance periods relating to certaindeliverables, and associated milestones, could impact the timing of futurerevenue streams.

 

***Clinical trial accruals***

 

Clinical trial costs constitute a significant portion of R&Dexpense.  We recognize expenses relatedto our ongoing clinical trials using a methodology designed to accrue estimatedcosts in the appropriate accounting periods. Clinical trials can span multiple accounting periods.  We recognize clinical trial costs in threedistinct phases:  start-up phase, patientaccrual phase, and close-out phase.  Ourexpenses related to clinical trials could vary based on patient availability,additional statistical analysis requirements, and decisions to extend thepatient evaluation period.  Using ourcurrent trial accrual methodology, our liability for clinical trials as ofDecember 31, 2003 is $1,409,000, including the estimated effect of anywork-in-process terminated at the end of the reporting period.  Alternately, if we utilized a percentage ofcompletion approach and used an operational estimate of the actual workcompleted as of December 31, 2003 compared to the total contract value, ourclinical trial liability would decrease by approximately $270,000.

 

***Stock-based compensation***

 

In September 2003, the CICA Accounting Standards Board released revisedtransitional provisions for *Stock-BasedCompensation and Other Stock-Based Payments*, Section 3870, toprovide the same alternative methods of transition as is provided in the U.S.for voluntary adoption of the fair value based method of accounting.  The AcSB has also amended Section 3870 torequire that all transactions whereby goods and services are received inexchange for stock-based compensation and other payments result in expensesthat should be recognized in financial statements, and that this requirementwould be applicable for financial periods beginning on or after January 1,2004.  Section 3870 requires thatshare-based transactions should be measured on a fair value basis. The Companywill adopt the provisions of AcSB Section 3870 beginning January 1, 2004.

 

**Item 7A****.  QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

We use the Canadian dollar as our measurement and functionalcurrency.  As a result, we are exposedto foreign currency fluctuations through our operations because a substantialamount of our contract research and development spending has been transacted inother currencies, principally in U.S. dollars. However, since approximately 95% of our bioreagent product sales are inU.S. dollars, there is partial matching of U.S. dollar denominated expenses andrevenues.  We translate monetary assetsand liabilities into Canadian dollars using the rate of exchange prevailing atour balance sheet date. We record the resulting exchange gains and losses inour

 

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statement of operations. Although we do not currently engage in hedging or other activities toreduce foreign currency risk, beyond matching investments proportionately withanticipated spending, we may do so in the future if conditions change.

 

A hypothetical change in foreign exchangerates by applying a 10% change to our year-end foreign exchange rate, thenapplying that rate to our average level of U.S. investments during the year,would result in a $286,000 impact.  Ifthe value of the Canadian dollar relative to the U.S. dollar were to increaseby 10%, our net loss would decrease by $286,000.  Further, if the value of the Canadian dollar relative to the U.S.dollar were to decrease by 10%, our net loss would increase by $286,000.

 

We are also exposed to interest rate risk, because we maintain cashequivalent and short-term investment portfolio holdings of various issuers,types, and maturity dates with large banks and investment bankinginstitutions.  We occasionally holdshort-term investments beyond 120 days. The market value of these short-terminvestments on any day during the investment term may vary as a result ofmarket interest rate fluctuations.

 

A hypothetical change in interest rates comparable to a 10% change toour average rate of return would result in a $77,000 impact.  If interest rates were to increase by 10%,our net loss would decrease by $77,000. Further, if interest rates were to decrease by 10%, our net loss would increaseby $77,000.

 

We have not used derivative financial instruments in our investmentportfolio.  We classify our investmentsas available-for-sale or held-to-maturity at the time of purchase andre-evaluate this designation as of each balance sheet date. We had $52,090,000in cash, cash equivalents and short-term investments as of December 31, 2003.

 

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**Item 8****.  FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

 

**REPORT OFMANAGEMENT**

 

Management is responsible forthe preparation of the consolidated financial statements and all relatedinformation appearing in this Annual Report. The consolidated financial statements and notes have been prepared inconformity with Canadian generally accepted accounting principles and includecertain amounts that are estimates based upon currently available informationand management’s judgment of current conditions and circumstances.

 

To provide reasonable assurancethat assets are safeguarded against losses from unauthorized use or dispositionand that accounting records are a reliable source for financial statementpreparation, management maintains a system of accounting and othercontrols.  Even an effective internalcontrol system, no matter how well designed, has inherent limitations —including the possibility of circumvention or overriding of controls — andtherefore can provide only reasonable assurance with respect to financialstatement presentation.  We seek toimprove and modify our internal control system in response to changes inbusiness conditions, operations and prevailing practices and recommendationsmade by our independent auditors.

 

The Audit Committee of the boardof directors, which is composed of independent directors, meets periodicallywith management, and the independent auditors to review auditing, internalcontrols and financial reporting matters. The independent auditors periodically meet with the Audit Committee andhave access to its individual members.

 

The Company engaged Deloitte& Touche LLP, independent accountants, to audit the consolidated financialstatements in accordance with auditing standards generally accepted in Canadaand the United States of America, which includes consideration of the internalcontrol structure.

 
| /s/ Daniel L. Korpolinski                                            |   |                                                                                                | /s/ Gregory M. McKee |   |
|----------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------|----------------------|--------|
|      President  and Chief Executive Officer |   |      Vice  President of Corporate Development  and Chief Financial Officer |

 

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**INDEPENDENTAUDITORS’ REPORT**

** **

To the Stockholders of StressgenBiotechnologies Corporation:

 

We have audited the accompanyingconsolidated balance sheet of Stressgen Biotechnologies Corporation andsubsidiaries (the “Company”) as of December 31, 2003 and 2002 and the relatedconsolidated statements of operations, stockholders’ equity and cash flows foreach of the three years in the period ended December 31, 2003.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financial statementsbased on our audits.

 

We conducted our audits inaccordance with auditing standards generally accepted in Canada and in theUnited States of America.  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that ouraudits provide a reasonable basis for our opinion.

 

In our opinion, suchconsolidated financial statements present fairly, in all material respects, thefinancial position of Stressgen Biotechnologies Corporation and subsidiaries asof December 31, 2003 and 2002 and the results of their operations and theircash flows for each of the three years in the period ended December 31, 2003 inaccordance with accounting principles generally accepted in Canada.

 

 
| /s/ Deloitte & Touche LLP |   |
|-------------------------------|--------|
|                          |
| February 12, 2004             |
| San Diego, California         |

 

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**STRESSGENBIOTECHNOLOGIES CORPORATIONCONSOLIDATED BALANCE SHEET**

**(Canadiandollars in thousands, except share information)**

 
|                                                                                                                                                                                         |   | **December 31,  2003** |   | **December 31,  2002** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|--------|------------------------|--------|
|                                                                                                                                                                                         |   |                   |   |                   |   |
| **Assets**                                                                                                                                                                                   |   |                   |   |                   |   |
| Current assets:                                                                                                                                                                              |   |                   |   |                   |   |
| Cash and cash equivalents                                                                                                                                                                    |   | $                      | 19,996 |                   | $      | 31,202 |   |
| Short-term investments                                                                                                                                                                       |   | 32,094                 |   | 14,811                 |   |
| Accounts receivable, net                                                                                                                                                                     |   | 733                    |   | 4,279                  |   |
| Inventories                                                                                                                                                                                  |   | 639                    |   | 838                    |   |
| Other current assets                                                                                                                                                                         |   | 512                    |   | 518                    |   |
| Total current assets                                                                                                                                                                         |   | 53,974                 |   | 51,648                 |   |
|                                                                                                                                                                                         |   |                   |   |                   |   |
| Plant and equipment                                                                                                                                                                          |   | 2,196                  |   | 2,746                  |   |
| Deferred expenses, net of current portion                                                                                                                                                    |   | 260                    |   | 421                    |   |
|                                                                                                                                                                                         |   | $                      | 56,430 |                   | $      | 54,815 |   |
|                                                                                                                                                                                         |   |                   |   |                   |   |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                |   |                   |   |                   |   |
| Current liabilities:                                                                                                                                                                         |   |                   |   |                   |   |
| Accounts payable and accrued liabilities                                                                                                                                                     |   | $                      | 3,975  |                   | $      | 8,833 |   |
| Current portion of deferred revenue                                                                                                                                                          |   | 688                    |   | 1,115                  |   |
| Current portion of notes payable                                                                                                                                                             |   | 518                    |   | 318                    |   |
| Total current liabilities                                                                                                                                                                    |   | 5,181                  |   | 10,266                 |   |
|                                                                                                                                                                                         |   |                   |   |                   |   |
| Long-term liabilities:                                                                                                                                                                       |   |                   |   |                   |   |
| Deferred revenue, net of current portion                                                                                                                                                     |   | 2,065                  |   | 3,344                  |   |
| Notes payable, net of current portion                                                                                                                                                        |   | 607                    |   | 262                    |   |
| Total long-term liabilities                                                                                                                                                                  |   | 2,672                  |   | 3,606                  |   |
|                                                                                                                                                                                         |   |                   |   |                   |   |
| Total liabilities                                                                                                                                                                            |   | 7,853                  |   | 13,872                 |   |
|                                                                                                                                                                                         |   |                   |   |                   |   |
| Stockholders’ equity:                                                                                                                                                                   |   |                   |   |                   |   |
| Common shares and other equity – no par value; unlimited shares  authorized, 72,491,403 and  60,209,989  shares issued and outstanding at December 31, 2003 and 2002, respectively |   | 199,056                |   | 175,384                |   |
| Deferred stock compensation                                                                                                                                                                  |   | (185                   | )      | (392                   | )      |
| Accumulated deficit                                                                                                                                                                          |   | (150,294               | )      | (134,049               | )      |
| Total stockholders’ equity                                                                                                                                                              |   | 48,577                 |   | 40,943                 |   |
|                                                                                                                                                                                         |   | $                      | 56,430 |                   | $      | 54,815 |   |

 

See accompanying notes to consolidated financial statements

 
| /S/ DANIEL  L. KORPOLINSKI                      |     | /S/ KEN  GALBRAITH |   |
|-------------------------------------------------|----------|--------------------|--------|
| Director, President and Chief Executive Officer | Director |

 

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**STRESSGENBIOTECHNOLOGIES CORPORATIONCONSOLIDATED STATEMENT OF OPERATIONS**

**(Canadiandollars in thousands, except per share amounts)**

 
|                                                                                            |   | **Years ended December 31,** |    |
|-------------------------------------------------------------------------------------------------|--------|------------------------------|---------|
|                                                                                            |   | **2003**                     |    | **2002** |   | **2001** |   |
|                                                                                            |   |                         |    |   |   |   |   |
| Revenue:                                                                                        |   |                         |    |   |   |   |   |
| Collaborative R&D revenue                                                                   |   | $                            | 8,094   |   | $ | 8,370 |   | $ | — |   |
| Bioreagent sales                                                                                |   | 5,325                        |    | 5,672 |   | 5,419 |   |
| Total revenue                                                                                   |   | 13,419                       |    | 14,042 |   | 5,419 |   |
|                                                                                            |   |                         |    |   |   |   |   |
| Operating expenses:                                                                             |   |                         |    |   |   |   |   |
| Research and development                                                                        |   | 20,865                       |    | 33,675 |   | 35,906 |   |
| Selling, general and administrative                                                             |   | 7,303                        |    | 8,409 |   | 7,782 |   |
| Cost of bioreagent sales                                                                        |   | 1,312                        |    | 1,635 |   | 1,573 |   |
|                                                                                            |   | 29,480                       |    | 43,719 |   | 45,261 |   |
|                                                                                            |   |                         |    |   |   |   |   |
| Operating loss                                                                                  |   | (16,061                      | )       | (29,677 | ) | (39,842 | ) |
|                                                                                            |   |                         |    |   |   |   |   |
| Other income (expenses):                                                                        |   |                         |    |   |   |   |   |
| Interest and other income                                                                       |   | 702                          |    | 1,267 |   | 2,507 |   |
| Net foreign exchange (loss) gain                                                                |   | (833                         | )       | (323 | ) | 1,502 |   |
| Interest expense                                                                                |   | (53                          | )       | (69 | ) | (106 | ) |
|                                                                                            |   | (184                         | )       | 875 |   | 3,903 |   |
| Net loss                                                                                        |   | $                            | (16,245 | ) | $ | (28,802 | ) | $ | (35,939 | ) |
|                                                                                            |   |                         |    |   |   |   |   |
| Basic and diluted loss per common share                                                         |   | $                            | (0.26   | ) | $ | (0.49 | ) | $ | (0.70 | ) |
|                                                                                            |   |                         |    |   |   |   |   |
| Weighted average shares used to compute basic and diluted loss per  common share (in thousands) |   | 61,458                       |    | 58,986 |   | 51,205 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

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**STRESSGENBIOTECHNOLOGIES CORPORATIONCONSOLIDATED STATEMENT OF CASH FLOWS**

**(Canadiandollars in thousands)**

 
|                                                                         |   | **Years ended December 31,** |    |
|------------------------------------------------------------------------------|--------|------------------------------|---------|
|                                                                         |   | **2003**                     |    | **2002** |   | **2001** |   |
| Cash flows from operating activities:                                        |   |                         |    |   |   |   |   |
| Net loss                                                                     |   | $                            | (16,245 | ) | $ | (28,802 | ) | $ | (35,939 | ) |
| Adjustments to reconcile net loss to net cash used in operating  activities: |   |                         |    |   |   |   |   |
| Depreciation and amortization                                                |   | 715                          |    | 797 |   | 621 |   |
| Compensation expense related to stock option grants                          |   | 207                          |    | 224 |   | 177 |   |
| Unrealized foreign exchange loss (gain)                                      |   | 1,054                        |    | (20 | ) | (1,462 | ) |
| Loss (gain) on market value of investments                                   |   | 406                          |    | (145 | ) | — |   |
| Changes in operating assets and liabilities                                  |   | (2,652                       | )       | 1,423 |   | 143 |   |
| Net cash used in operating activities                                        |   | (16,515                      | )       | (26,523 | ) | (36,460 | ) |
|                                                                         |   |                         |    |   |   |   |   |
| Cash flows from investing activities:                                        |   |                         |    |   |   |   |   |
| Purchase of short-term investments                                           |   | (33,255                      | )       | (76,641 | ) | (37,095 | ) |
| Sales and maturities of short-term investments                               |   | 15,025                       |    | 91,388 |   | 78,346 |   |
| Purchase of plant and equipment                                              |   | (165                         | )       | (380 | ) | (1,783 | ) |
| Net cash (used in) provided by investing activities                          |   | (18,395                      | )       | 14,367 |   | 39,468 |   |
|                                                                         |   |                         |    |   |   |   |   |
| Cash flows from financing activities:                                        |   |                         |    |   |   |   |   |
| Proceeds from issuance of common shares                                      |   | 23,672                       |    | 10,604 |   | 29,248 |   |
| Proceeds from borrowings                                                     |   | 1,004                        |    | — |   | 102 |   |
| Repayment of borrowings                                                      |   | (459                         | )       | (535 | ) | (454 | ) |
| Net cash provided by financing activities                                    |   | 24,217                       |    | 10,069 |   | 28,896 |   |
|                                                                         |   |                         |    |   |   |   |   |
| Effect of exchange rate changes on cash and cash equivalents                 |   | (513                         | )       | (49 | ) | 921 |   |
|                                                                         |   |                         |    |   |   |   |   |
| Increase (decrease) in cash and cash equivalents                             |   | (11,206                      | )       | (2,136 | ) | 32,825 |   |
| Cash and cash equivalents, beginning of year                                 |   | 31,202                       |    | 33,338 |   | 513 |   |
| Cash and cash equivalents, end of year                                       |   | $                            | 19,996  |   | $ | 31,202 |   | $ | 33,338 |   |

 

See accompanying notes to consolidated financial statements.

 

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**STRESSGEN BIOTECHNOLOGIES CORPORATION**

**CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY**

**(Canadian dollars in thousands, except sharedata)**

 
|                                                                                      |   | **Common  shares  and other equity** |       | **Warrants** |       | **Def Stock  Comp** |      | **Accumulated  Deficit** |   | **Total** |   |
|-------------------------------------------------------------------------------------------|--------|--------------------------------------|------------|--------------|------------|---------------------|-----------|--------------------------|--------|-----------|--------|
| **Number**                                                                                |   | **Amount**                           | **Number** |         | **Amount** |
|                                                                                      |   |                                 |       |         |       |                |      |                     |   |      |   |   |   |   |   |
| Balance at January 1, 2001                                                                |   | 49,892,271                           |       | $            | 134,739    |                | 3,833,500 |                     | $      | —    |   | $ | — |   | $ | (69,308 | ) | $ | 65,431 |   |
| Issued for cash on  exercise of stock options                                             |   | 423,219                              |       | 973          |       | —              |      | —                   |   | —    |   | — |   | 973 |   |
| Issued for cash on  exercise of Warrants                                                  |   | 577,298                              |       | 2,119        |       | (577,298            | )         | —                   |   | —    |   | — |   | 2,119 |   |
| Issued for cash, net of  issue costs                                                      |   | 6,699,100                            |       | 26,156       |       | —              |      | —                   |   | —    |   | — |   | 26,156 |   |
| Deferred stock  compensation                                                              |   | —                               |       | 807          |       | —              |      | —                   |   | (807      | )      | — |   | — |   |
| Compensation expense  related to stock option grants                                      |   | —                               |       | —       |       | —              |      | —                   |   | 177       |   | — |   | 177 |   |
| Net loss                                                                                  |   | —                               |       | —       |       | —              |      | —                   |   | —    |   | (35,939 | ) | (35,939 | ) |
| Balance at December 31,  2001                                                             |   | 57,591,888                           |       | 164,794      |       | 3,256,202           |      | —                   |   | (630      | )      | (105,247 | ) | 58,917 |   |
| Issued for cash on  exercise of stock options                                             |   | 575,902                              |       | 1,706        |       | —              |      | —                   |   | —    |   | — |   | 1,706 |   |
| Conversion of warrants to  common shares                                                  |   | 3,963                                |       | —       |       | (25,057             | )         | —                   |   | —    |   | — |   | — |   |
| Warrants issued in  connection with Roche Collaboration                                   |   | —                               |       | —       |       | 2,036,435           |      | 1,264                    |   | —    |   | — |   | 1,264 |   |
| Issued for cash in  connection with Roche Collaboration                                   |   | 2,036,436                            |       | 7,657        |       | —              |      | —                   |   | —    |   | — |   | 7,657 |   |
| Other, net                                                                                |   | 1,800                                |       | (37          | )          | —              |      | —                   |   | 28        |   | — |   | (9 | ) |
| Compensation expense  related to stock option grants                                      |   | —                               |       | —       |       | —              |      | —                   |   | 210       |   | — |   | 210 |   |
| Net loss                                                                                  |   | —                               |       | —       |       | —              |      | —                   |   | —    |   | (28,802 | ) | (28,802 | ) |
| Balance at December 31,  2002                                                             |   | 60,209,989                           |       | 174,120      |       | 5,267,580           |      | 1,264                    |   | (392      | )      | (134,049 | ) | 40,943 |   |
| Issued for cash on  exercise of stock options                                             |   | 229,516                              |       | 375          |       | —              |      | —                   |   | —    |   | — |   | 375 |   |
| Issued for cash, net of  issue costs                                                      |   | 10,638,298                           |       | 17,796       |       | 5,319,149           |      | 904                      |   | —    |   | — |   | 18,700 |   |
| Adjustment due to price  difference in warrant transaction related to Roche Collaboration |   | —                               |       | —       |       | 191,739             |      | —                   |   | —    |   | — |   | — |   |
| Conversion of warrants to  common shares in connection with Roche Collaboration           |   | 1,413,600                            |       | 5,352        |       | (1,413,600          | )         | (758                     | )      | —    |   | — |   | 4,594 |   |
| Expiration of warrants                                                                    |   | —                               |       | —       |       | (3,231,145          | )         | —                   |   | —    |   | — |   | — |   |
| Other, net                                                                                |   | —                               |       | 3            |       | —              |      | —                   |   | 4         |   | — |   | 7 |   |
| Compensation expense related  to stock option grants                                      |   | —                               |       | —       |       | —              |      | —                   |   | 203       |   | — |   | 203 |   |
| Net loss                                                                                  |   | —                               |       | —       |       | —              |      | —                   |   | —    |   | (16,245 | ) | (16,245 | ) |
| Balance at December 31,  2003                                                             |   | 72,491,403                           |       | $            | 197,646    |                | 6,133,723 |                     | $      | 1,410     |   | $ | (185 | ) | $ | (150,294 | ) | $ | 48,577 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

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**Stressgen Biotechnologies Corporation**

**Notes to Consolidated Financial Statements**

**(Canadian dollars)**

 

**1.****            ****ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES**

 

Stressgen BiotechnologiesCorporation (with its subsidiaries, “Stressgen” or the “Company”) is abiopharmaceutical company focused on the development and commercialization ofinnovative stress protein-based immunotherapeutics. The Company is developing abroad range of products for the treatment of viral infections and relatedcancers. Its lead product is HspE7, which targets a broad spectrum of humanpapillomavirus (“HPV”) related diseases. The Company has also initiated research studies to evaluate stressprotein (also known as heat shock protein) fusions, made through itsproprietary CoValTM technology, for the treatment of hepatitis B andherpes simplex and is targeting hepatitis C. Further, Stressgen has an internationally recognized research productsupply business with sales to scientists worldwide for the study of cellularstress, apoptosis, oxidative stress and neurobiology.

 

*Basis of presentation*

 

Theconsolidated financial statements include the assets, liabilities and operatingresults of the Company and its wholly-owned subsidiaries.  Intercompany accounts and transactions havebeen eliminated in consolidation. Certain prior year balances have beenreclassified to conform to current year presentation.

 

*Financialstatements and estimates*

 

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

 

The preparation of financial statements in conformitywith generally accepted accounting principles requires management to makeestimates and assumptions that affect the reported amounts of assets,liabilities, revenue and expenses and related disclosures as of the date of thefinancial statements.  Significantestimates are used for, but not limited to, reporting revenue recognition,clinical trial costs, stock based compensation and the allocation of indirectcosts.  Actual results could differ fromsuch estimates.

 

*Foreign currencytranslation*

 

The Company and its subsidiaries use theCanadian dollar as their functional currency. Monetary assets and liabilities that are denominated in U.S. dollars aretranslated into Canadian dollars at the rate of exchange prevailing at thebalance sheet date.  Non-monetary assetsand liabilities are translated at historical rates.  Revenues and expenses are translated at the average rate ofexchange for the period of such transactions.

 

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*Revenuerecognition*

 

Revenue from product sales isrecognized upon delivery to customers when persuasive evidence of anarrangement exists, the price is fixed or determinable and collection isreasonably assured.  Revenue alsoincludes amounts charged for shipping and handling costs.

 

Revenue from collaborativeresearch and development (“R&D”) arrangements may include multiple elementswithin a single contract.  The Company’saccounting policy complies with the revenue determination requirements setforth in EITF 00-21, *Accounting for RevenueArrangements with Multiple Deliverables*, and EIC 142, *Revenue Arrangements with Multiple Deliverables,*relating to the separation of multiple deliverables into individual accountingunits with determinable fair values. Payments received under collaborative arrangements may include thefollowing:  non-refundable fees atinception of contract for technology rights; funding for services performed;milestone payments for specific achievements; and payments based upon resultingsales of products.

 

The Company recognizes collaborative research and development revenuesas services are rendered consistent with the performance requirements of thecontract.  Revenue from non-refundablecontract fees where the Company has continuing involvement through research anddevelopment collaborations or other contractual obligations, less the fairmarket value of any related warrants, is recognized ratably over thedevelopment period or the period for which Stressgen continues to have aperformance obligation.  The period ofdevelopment is evaluated on a regular basis. During December 2003, the Company increased the development period toreflect management’s research and development plan.  Revenue from performance milestones is recognized upon theachievement of the milestones as specified in the agreement, provided paymentis proportionate to the effort expended. Payments are recorded as deferred revenue if they are received inadvance of performance or delivery.

 

*Clinical trial accruals*

 

The Company recognizes expenses related to its ongoingclinical trials using a methodology designed to accrue estimated costs in theappropriate accounting periods.  TheCompany recognizes clinical trial costs in three distinct phases:  the start-up phase, the patient accrualphase, and the close-out phase.  Thetotal estimated trial cost is divided into these three phases based on the tasksinvolved in conducting the trial.  Basedon the design of the trial, the cost of each phase could vary from trial totrial.  Upon the start of the trial, thestart-up portion of the trial contract is accrued.  As patients enter the trial, the patient accrual cost is ratablyrecognized.  Once the study is completeand analysis of the

 

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patient data has been initiated, the close-out portionof the trial is recognized.

 

*Stock-based compensation plan*

 

Multiple standards exist regarding the recognition,measurement and disclosure of stock-based compensation and other stock-basedpayments. The Company has adopted the recommendations of the CICA Handbooksection 3870, *Stock-Based Compensation andOther Stock-Based Payments*, effective January 1, 2002.  This standard requires that all stock-basedawards made to non-employees be measured and recognized using a fair valuebased method.  The standard encouragesthe use of a fair value based method for all awards granted to employees, butrequires the use of a fair value based method only for direct awards of stock,stock appreciation rights, and awards that call for settlement in cash or otherassets.  Awards that a company has theability to settle in stock are recorded as equity, whereas awards that theentity is required to or has a practice of settling in cash are recorded asliabilities.

 

The Company’s accounting methods for stock-basedcompensation plans also materially follow the guidance under the recognition andmeasurement principles of APB Opinion No. 25, *Accountingfor Stock Issued to Employees*, and related interpretations.  The Company has two stock-based compensationplans, which are described in Note 5. New option grants are made with an exercise price equal to the fairmarket value of the underlying common stock. No compensation expense is recognized for options granted at fair marketvalue under the plan when stock options are issued to directors and employees.  Deferred stock compensation charges arisewhere stock options are granted at exercise prices less than the fair value ofthe underlying stock and are amortized to expense over the vesting period ofthe option.  Any consideration paid bydirectors, employees and others on exercise of stock options is credited toshare capital.

 

The following table summarizes the effect on net lossand loss per share if the Company had applied the fair value recognitionprovisions of the Financial Accounting Standards Board (“FASB”) Statement No.123, *Accounting for Stock-Based Compensation*,to stock-based employee compensation.

 

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|                                                                               |   | **Years ended December 31,** |    |
|------------------------------------------------------------------------------------|--------|------------------------------|---------|
| **(In thousands, except per share  amounts)**                                      |   | **2003**                     |    | **2002** |   | **2001** |   |
|                                                                               |   |                         |    |   |   |   |   |
| Net loss under Canadian GAAP                                                       |   | $                            | (16,245 | ) | $ | (28,802 | ) | $ | (35,939 | ) |
|                                                                               |   |                         |    |   |   |   |   |
| Net loss under U.S. GAAP (See Note 11 for  reconciliation to Canadian GAAP)        |   | $                            | (15,298 | ) | $ | (28,922 | ) | $ | (36,341 | ) |
|                                                                               |   |                         |    |   |   |   |   |
| Employee stock compensation expense  included in net loss under Canadian GAAP |   | 207                          |    | 224 |   | 177 |   |
|                                                                               |   |                         |    |   |   |   |   |
| Employee stock compensation expense  included in net loss under U.S. GAAP     |   | 207                          |    | 224 |   | 258 |   |
|                                                                               |   |                         |    |   |   |   |   |
| Additional employee compensation expense  under the fair value method              |   | (2,419                       | )       | (2,850 | ) | (3,232 | ) |
|                                                                               |   |                         |    |   |   |   |   |
| Pro forma net loss under Canadian GAAP                                             |   | $                            | (18,457 | ) | $ | (31,428 | ) | $ | (38,994 | ) |
|                                                                               |   |                         |    |   |   |   |   |
| Pro forma net loss under U.S. GAAP                                                 |   | $                            | (17,510 | ) | $ | (31,548 | ) | $ | (39,315 | ) |
|                                                                               |   |                         |    |   |   |   |   |
| Pro forma basic loss per common share under  Canadian GAAP                         |   | $                            | (0.30   | ) | $ | (0.53 | ) | $ | (0.76 | ) |
|                                                                               |   |                         |    |   |   |   |   |
| Pro forma basic loss per common share under  U.S. GAAP                             |   | $                            | (0.28   | ) | $ | (0.53 | ) | $ | (0.77 | ) |

 

The weighted-average per-share fair values of theindividual options granted during 2003, 2002 and 2001 were $1.06, $2.63 and$2.50, respectively.

 

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

 
|                    |   | **Years  ended December 31,** |   |
|-------------------------|--------|-------------------------------|--------|
|                    |   | **2003**                      |   | **2002** |   | **2001** |   |
| Dividend yield          |   | 0                             | %      | 0 | % | 0 | % |
| Volatility              |   | 75                            | %      | 78 | % | 55 | % |
| Risk-free interest rate |   | 2.54                          | %      | 3.50 | % | 3.57 | % |
| Expected life           |   | 4 years                       |   | 4 years |   | 4 years |   |

 

*Cash, cash equivalents and short-term investments*

 

Cash and cash equivalents consist of cash and highlyliquid investments, including investment grade corporate debt securities withoriginal maturities when acquired of three months or less.  Short-term investments consist of investmentgrade securities, which are capable of prompt liquidation and are carried atthe lower of cost plus accrued interest or quoted market value.

 

52

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*Inventories*

 

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

 

*Plant and equipment*

 

Plant and equipment are recorded at cost anddepreciated over their estimated useful lives on a declining-balance basis, exceptfor leasehold improvements, which are amortized on a straight-line basis overthe lesser of the lease term or the estimated useful life.  The approximate annual depreciation andamortization rates are as follows:

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

 

*Impairment of long-lived assets*

 

The Company assesses potentialimpairment to its long-lived assets when there is evidence that events orchanges in circumstances exist.  Therecoverability of long-lived assets is determined by evaluating whether thecarrying value of such assets can be recovered from estimated undiscountedfuture operating cash flows.  Should animpairment exist, the impairment loss would be measured based on the excess ofthe carrying value of the assets over the present value of the future operatingcash flows.  The Company has notidentified any such impairment losses to date.

 

*Fair value of financial instruments*

 

Management believes that thecarrying 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 maturitiesof these instruments.  The carryingvalue of fixed rate capital leases and term loan obligations approximate fairvalue, as the imputed interest rate is approximately equivalent to the marketrates charged on similar arrangements.

 

*Concentration of credit risk*

 

The Company invests its excesscash principally in investment grade government and corporate debtsecurities.  The Company has establishedguidelines relative to diversification and maturities that maintain safety andliquidity.  These guidelines areperiodically reviewed and modified to reflect changes in marketconditions.  The

 

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Company has not experienced anysignificant losses on its cash equivalents or short-term investments.

 

The Company extends credit on anuncollateralized basis primarily to its customers in the U.S.  The Company has not experienced significantcredit losses on customer’s accounts. The Company has derived 100% of its collaboration revenue from Roche.

 

*Research and development costs*

 

Research anddevelopment costs associated with the Company’s various research anddevelopment programs consist of direct and indirect expenditures, including areasonable allocation of overhead expenses. Overhead expenses are comprised of general and administrative supportprovided to the research and development programs. These expenses include costsassociated with support activities such as information technology, finance andhuman resources as well as for the use of facilities.  Research and development costs are expensed as incurred, unlessthey meet generally accepted accounting criteria for deferral andamortization.  The Company reassesseswhether it has met the relevant criteria for deferral and amortization at eachreporting date.  To date, no researchand development costs have been deferred.

 

*Income taxes*

 

Future income tax assets andliabilities relate to the expected future tax consequences of differencesbetween the carrying amount of balance sheet items and their corresponding taxvalues, and for loss carry-forwards and other deductions.  Future tax assets, if any, are recognizedonly to the extent that, in the opinion of management, it is more likely thannot that the future income tax assets will be realized.  Future income tax assets and liabilities areadjusted for the effects of changes in tax laws and rates on the date ofenactment or substantive enactment.

 

*Net loss per share*

 

Net loss per share is computed using the weighted average number ofcommon shares outstanding.  Basic anddiluted net loss per common share amounts are equivalent for the periodspresented as the inclusion of common stock equivalents (options and warrants)in the number of shares used for the diluted computation would beanti-dilutive.

 

*NewAccounting Pronouncements*

 

In September 2003, the AcSB released revised transitional provisionsfor Stock-Based Compensation and Other Stock-Based Payments, Section 3870, toprovide the same

 

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alternative methods of transition as is provided in the US forvoluntary adoption of the fair value based method of accounting. Theseprovisions permit either retroactive (with or without restatement) orprospective application of the recognition provisions to awards not previouslyaccounted for at fair value. Prospective application is only available toenterprises that elect to apply the fair value based method of accounting tothat type of award for fiscal years beginning before January 1, 2004.

 

The AcSB has also amended Section 3870 to require that all transactionswhereby goods and services are received in exchange for stock-basedcompensation and other payments result in expenses that should be recognized infinancial statements, and that this requirement would be applicable forfinancial periods beginning on or after January 1, 2004.  Section 3870 requires that share-basedtransactions should be measured on a fair value basis. The Company will adoptthe provisions of AcSB Section 3870 beginning January 1, 2004.

 

The FASB issued SFAS No. 148, *Accountingfor Stock-Based Compensation, Transition and Disclosure*in December2002.  SFAS No. 148 provides alternativetransition methods for entities that voluntarily elect to adopt the fair value recognitionprovisions of FASB Statement No. 123, *Accountingfor Stock-Based Compensation,*to stock-based employeecompensation.  In addition, SFAS No. 148requires more prominent pro forma disclosures of the effect on net income andearnings per share if the company had applied these fair value recognitionprovisions.  The transition and annualdisclosure provisions of SFAS No. 148 are effective for fiscal years endingafter December 15, 2002.  While theCompany has not elected to adopt the provisions in SFAS 123, pro formafinancial results are discussed in Note 1.

 

**2.****            ****COLLABORATIVE AGREEMENT**

 

On December 2, 2003, the Company announced that it had restructured itsJune 24, 2002 collaboration agreement with F. Hoffmann-La Roche Ltd andHoffmann-La Roche Inc. (together, “Roche”), providing for the development andcommercialization of Stressgen’s pharmaceutical fusion product candidate,HspE7.  The parties agreed torestructure the agreement to facilitate the clinical development by Stressgenof HspE7 in recurrent respiratory papillomatosis and additional indicationscaused by the human papillomavirus, while providing Roche an opportunity topurchase a license to develop a second generation HspE7 product targetinggenital warts. Roche may pay a fee to obtain exclusive rights to the first generationHspE7 product.  Assuming this fee ispaid and all HspE7 development and commercial milestones are achieved and Rocheexercises its rights to certain other CoValTM fusion productcandidates, payments to the Company, excluding sales-based payments (similar toroyalties), could approximate $340,500,000,

 

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beyond the approximately $32,250,000 received from Roche relating tothe development of a first generation HspE7 product to date.

 

Under the terms of therestructured collaboration agreement, the extent of control that the Companyoriginally retained for developing and marketing the first generation HspE7product for RRP will expand to all indications other than genital warts.  Stressgen will assume all responsibility forall manufacturing and other costs of the indications it chooses todevelop.  In addition Roche can obtainexclusive rights to the first generation HspE7 product by paying Stressgen afee and event-driven milestones aggregating up to $207,000,000.  Until March 31, 2005 Stressgen can elect,under defined circumstances, to terminate Roche’s exclusive rights to the firstgeneration HspE7 product.

 

If Roche exercises itsexclusive rights to the first generation HspE7 product, it will fund allprospective costs for the first generation product.  Further, the Company can elect to launch a sales force in theU.S. and Canada and record sales for three years after regulatory approval inthose countries, in which case we will pay Roche a mid single-digit percentageor a low double-digit percentage of net sales, depending upon the timing andoccurrence of Roche’s exercise.  Underthese conditions, no earlier than three years after market launch of HspE7,Roche can begin recording sales in the U.S. and Canada.  Once Roche begins recording sales in thosecountries, the Company will receive sales-based payments, which are expected toapproximate 35% of Roche’s net HspE7 product sales.  In the rest of the world, Roche will record sales immediatelyafter market launch and the Company will receive sales-based payments of 20% ofRoche’s net sales.

 

For the years ended December31, 2003 and 2002, the Company recognized collaborative R&D revenue of$8,094,000 and $8,370,000, respectively, relating to development activities insupport of Roche’s activities under the June 2002 collaboration agreement andamortization of up-front license fees in accordance with SAB No. 101 “RevenueRecognition in Financial Statements.” Collaborative R&D revenue in 2003 includes $4,912,000 fordevelopment activities, $2,214,000 for a time based milestone payment and$968,000 for the amortization of upfront license fees.  Collaborative R&D revenue in 2002includes $7,815,000 for development activities and $555,000 from theamortization of up-front license fees.

 

**3.****             BALANCESHEET DETAILS**

 

At December 31, 2003 and 2002, our short-term investments consisted ofcorporate debt securities and government issued debt securities, which had anet book value and market value of $32,094,000 and $14,811,000, respectively.

 

The MIT/Whitehead license agreement discussed in Note 4 requirescertain license maintenance fees and royalty payments.  Upon receiving the upfront license feepayment

 

56

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from Roche in 2002, the Company recorded a $634,320 payable due toMIT/Whitehead and a related deferred expense. The payment was made in January 2003. The Company recognizes the related deferred expense over the developmentperiod, which was adjusted in conjunction with the restructured Rochecollaborative agreement.  At December31, 2003 and 2002 the Company had a total of $347,000 and $561,778 of deferredexpense related to this payment.

 

The Company recorded an additional $221,000 payable due toMIT/Whitehead related to the $2,214,000 milestone payment received from Rochein April 2003.  The payment was made toMIT/Whitehead during the third quarter of 2003.

 

The following tables provide details of selected balance sheet items:

 
|                   |   | **December  31,** |       |
|------------------------|--------|-------------------|------------|
|                   |   | **2003**          |       | **2002** |   |
| **(In thousands)**     |   | **Cost**          |       | **Accumulated  Depreciation** |   | **Net Book  Value** |   | **Net Book  Value** |   |
|                   |   |              | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Plant and equipment:   |   |              |       |   |   |   |   |   |   |
| Laboratory equipment   |   | $                 | 4,397      |   | $ | 2,771 |   | $ | 1,626 |   | $ | 1,932 |   |
| Computer equipment     |   | 1,025             |       | 733 |   | 292 |   | 393 |   |
| Furniture and fixtures |   | 563               |       | 391 |   | 172 |   | 240 |   |
| Leasehold improvements |   | 716               |       | 610 |   | 106 |   | 181 |   |
|                   |   |              |       |   |   |   |   |   |   |
|                   |   | $                 | 6,701      |   | $ | 4,505 |   | $ | 2,196 |   | $ | 2,746 |   |

 

57

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|                                     |   | **December 31,** |   |
|------------------------------------------|--------|------------------|--------|
| **(In thousands)**                       |   | **2003**         |   | **2002** |   |
|                                     |   |             |   |   |   |
| Accounts receivable:                     |   |             |   |   |   |
| Trade accounts receivable                |   | $                | 492    |   | $ | 527 |   |
| Collaborative receivable                 |   | 277              |   | 3,790 |   |
| Less: allowance for doubtful accounts    |   | (36              | )      | (38 | ) |
|                                     |   | $                | 733    |   | $ | 4,279 |   |
| Inventories:                             |   |             |   |   |   |
| Raw materials, net                       |   | $                | 202    |   | $ | 417 |   |
| Work in process, net                     |   | 146              |   | 145 |   |
| Finished goods, net                      |   | 291              |   | 276 |   |
|                                     |   | $                | 639    |   | $ | 838 |   |
|                                     |   |             |   |   |   |
| Accounts payable and accrued liabilites: |   |             |   |   |   |
| Trade accounts payable                   |   | $                | 1,461  |   | $ | 3,607 |   |
| Clinical trial accruals                  |   | 1,409            |   | 3,133 |   |
| Accrued compensation and benefits        |   | 1,009            |   | 1,274 |   |
| Royalty payable                          |   | —           |   | 634 |   |
| Other accrued liabilities                |   | 96               |   | 185 |   |
|                                     |   | $                | 3,975  |   | $ | 8,833 |   |

 

**4.****             COMMITMENTS ANDCONTINGENCIES**

 

*Leases*

 

The Company has entered into operating leaseagreements for office and laboratory space that expire at various times through2005. These leases require the Company to make minimum lease payments, plus ashare of operating costs, taxes, insurance and maintenance.

 

At December 31, 2003 and 2002, $1,125,000 and$580,000, respectively, were used and outstanding in the form of fixed ratecapital leases and term loan agreements.  In September 2003 the Company entered into a 36-month term loanagreement with Oxford Finance Corporation, collateralized by equipment owned bythe Company.  At December 31, 2003 therewas $906,000 outstanding on the loan. Under the terms of the agreement, the Company must issue a letter ofcredit for the outstanding loan balance if combined cash, cash equivalents, andshort-term investments fall below $6,000,000.

 

At December 31, 2003 total future minimum leasecommitments under operating leases; fixed rate capital leases and term loanagreements are as follows:

 

58

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(In thousands)

 
| **Year ending December 31,**       |   | **Operating** |   | **Capital** |   | **Term loan** |   | **Total  Capital  and term loan** |   |
|------------------------------------|--------|---------------|--------|-------------|--------|---------------|--------|-----------------------------------|--------|
| 2004                               |   | $             | 875    |        | $      | 176           |   | $                                 | 440    |   | $ | 616 |   |
| 2005                               |   | 819           |   | 55          |   | 439           |   | 494                               |   |
| 2006                               |   | —        |   | —      |   | 161           |   | 161                               |   |
| Total                              |   | $             | 1,694  |        | 231    |          | 1,040  |                              | 1,271  |   |
| Less: amount representing interest |   |          |   |        |   |          |   | (146                              | )      |
| Present value of minimum payments  |   |          |   |        |   |          |   | 1,125                             |   |
| Less: current portion              |   |          |   |        |   |          |   | (518                              | )      |
| Long term notes payable            |   |          |   |        |   |          |   | $                                 | 607    |   |
|                                    |        |               |        |             |        |               |        |                                   |        |  |  |  |  |

 

*Patent LicenseAgreement*

 

The Company has a worldwide, exclusive licenseagreement with Massachusetts Institute of Technology and the WhiteheadInstitute for Biomedical Research.  Thepatents and patent applications covered by this license agreement includevarious pending applications and continuation-in-part applications and theirforeign counterparts, including patent applications filed in the U.S., Canadaand Japan in 1994 for the use of Hsp fusions with viral or cancer-associatedantigens as immunotherapeutics.   Historically, the Company’s patent-related costs are related totherapeutic products that have not obtained regulatory approval and are notmarketable. As a result, the Company has treated such costs as costs for whichrecoverability cannot be determined, and has expensed them as incurred.

 

**5.****            ****STOCKHOLDERS’ EQUITY**

 

*Common Shares*

 

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

 

At the time of the original collaboration agreement, Roche received twowarrants to purchase the common stock of Stressgen.  The Company allocated $1,264,000 as the fair value of thewarrants, determined by an independent valuation expert.  In April 2003 Roche exercised the firstwarrant to acquire 1,413,600 common shares at $3.25, resulting in net proceedsof $4,594,000 to the Company.  Under theoriginal collaboration agreement, the Company had the right to call the secondwarrant resulting in an issuance

 

59

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of a range of shares and exercise price depending upon the price of theCompany’s common stock. In connection with the restructured collaborationagreement, Roche has a continued right, but not an obligation, to exercise the secondwarrant for 814,574 shares at a purchase price of $3.76 per share at any timeuntil June 28, 2007.

 

The Companyhas unlimited authorized common share capital.

 

*Common Share Financings*

 

In December 2003, the Companycompleted an offering of 10,638,298 units at a price of $1.88 per Unit forgross proceeds of $20,000,000.  Eachunit consists of one common share in the capital of the Company and one-half ofone common share purchase warrant.  TheCompany incurred total share issue costs on the offering of approximately$1,300,000.  Under the conditions of the offering, theCompany agreed to indemnify the underwriters and their broker/dealer affiliatesagainst certain liabilities, including liabilities under the United Statessecurities laws and under Canadian securities legislation and to contribute topayments that the underwriters may be required to make in respect thereof.

 

In 2001, the Company completedan offering for 6,699,100 common shares at $4.15 per share for gross proceedsof $27,801,000.  The Company incurredtotal share issue costs on the offering of $1,645,000.

 

Stockholders’equity at December 31, 2003 and 2002 includes $2,207,000 and $2,179,000,respectively, of contributed surplus.

 

*1998 Special Warrants*

 

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

 

*Employee Share Option Plans*

 

In 2001, the Company issued out-of-plan stock optionsprior to stockholder approval of the 2001 Equity Incentive Plan (the “2001Plan”).  Between the date of grant andstockholder approval, the market price of the Company’s common stock increased,resulting in deferred compensation of $807,000 associated with theseoptions.  The deferred compensation hasbeen amortized to expense over the vesting period of the granted options.  Atthat time, the Company stopped granting options under its pre-

 

60

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existing 1996 ShareIncentive Plan.  At December 31, 2003,there were 4,978,118 total options issued and outstanding under the two plans,at exercise prices ranging from $1.22 to $8.00 per share with remainingweighted average contractual lives of 7 years to 9 years, and 358,986 optionsavailable for future grant under the 2001 Plan.

 

The following table summarizes stock option activityunder the Plans:

 
|                         |   | **Number of  Shares** |   | **Weighted  Average  Exercise Price** |   |
|------------------------------|--------|-----------------------|--------|---------------------------------------|--------|
|                         |   |                  |   |                                  |   |
| Balance at January 1, 2001   |   | 3,374,177             |   | $                                     | 4.05   |   |
| Granted                      |   | 1,415,000             |   | 5.24                                  |   |
| Exercised                    |   | (423,219              | )      | 2.30                                  |   |
| Cancelled                    |   | (190,375              | )      | 4.92                                  |   |
| Balance at December 31, 2001 |   | 4,175,583             |   | 4.59                                  |   |
| Granted                      |   | 1,092,250             |   | 4.41                                  |   |
| Exercised                    |   | (575,902              | )      | 2.96                                  |   |
| Cancelled                    |   | (387,368              | )      | 5.46                                  |   |
| Balance at December 31, 2002 |   | 4,304,563             |   | 4.69                                  |   |
| Granted                      |   | 1,157,500             |   | 1.80                                  |   |
| Exercised                    |   | (229,516              | )      | 1.63                                  |   |
| Cancelled                    |   | (254,429              | )      | 3.66                                  |   |
| Balance at December 31, 2003 |   | 4,978,118             |   | $                                     | 4.21   |   |

 

The following table summarizesinformation related to all stock options outstanding and exercisable atDecember 31, 2003:

 
|                          |   | **Options  Outstanding** |   | **Options  Exercisable**                                       |   |
|-------------------------------|--------|--------------------------|--------|----------------------------------------------------------------|--------|
| **Range of  Exercise Prices** |   | **Number  Outstanding**  |   | **Weighted  Average  Remaining  Contractual Life  (in years)** |   | **Weighted  Average  Exercise  Price** |   | **Number  Exercisable** |   | **Weighted  Average  Exercise  Price** |   |
|                          |   |                     |   |                                                           |   |   |   |   |   |   |   |
| $1.22 - $1.99                 |   | 1,353,453                |   | 8.1                                                            |   | $ | 1.71 |   | 750,414 |   | $ | 1.76 |   |
| $2.00 - $3.99                 |   | 626,000                  |   | 8.7                                                            |   | 3.24 |   | 304,525 |   | 3.50 |   |
| $4.00 - $5.99                 |   | 1,464,565                |   | 7.5                                                            |   | 4.87 |   | 1,082,770 |   | 4.87 |   |
| $6.00 - $8.00                 |   | 1,534,100                |   | 6.5                                                            |   | 6.19 |   | 1,473,661 |   | 6.19 |   |
|                          |   | 4,978,118                |   |                                                           |   |   |   | 3,611,370 |   |   |   |
|                               |        |                          |        |                                                                |        |  |  |  |  |  |  |  |  |

 

61

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**6.****            ****INCOME TAXES**

 

The reported income tax recoverydiffers from the amount computed by applying the Canadian basic statutory ratesto the net loss.  The reasons for thisdifference and the related tax effects are as follows:

 
|                                                          |   | **Years  ended December 31,** |   |
|---------------------------------------------------------------|--------|-------------------------------|--------|
| **(In thousands)**                                            |   | **2003**                      |   | **2002** |   | **2001** |   |
|                                                          |   |                          |   |   |   |   |   |
| Canadian basic statutory tax rates                            |   | 35.6                          | %      | 39.6 | % | 45.0 | % |
|                                                          |   |                          |   |   |   |   |   |
| Expected income tax recovery                                  |   | $                             | (5,786 | ) | $ | (11,411 | ) | $ | (16,173 | ) |
| Foreign tax rate differences                                  |   | 1,669                         |   | (2,080 | ) | 22,208 |   |
| Prior year losses producing current benefit                   |   | —                        |   | (125 | ) | (7,412 | ) |
| Losses producing no current tax benefit                       |   | 2,232                         |   | 13,682 |   | 2,361 |   |
| Non-deductible expenses and other  deductions                 |   | 21                            |   | (54 | ) | 94 |   |
| Research and development expenses                             |   | 2,143                         |   | 900 |   | (193 | ) |
| Benefit of temporary differences  (recognized) not recognized |   | (279                          | )      | (912 | ) | (885 | ) |
|                                                          |   | $                             | — |   | $ | — |   | $ | — |   |

 

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

 
|                                                     |   | **December 31,** |   |
|----------------------------------------------------------|--------|------------------|--------|
| **(In thousands)**                                       |   | **2003**         |   | **2002** |   |
|                                                     |   |             |   |   |   |
| Future income tax assets:                                |   |             |   |   |   |
| Tax loss carry-forwards                                  |   | $                | 20,001 |   | $ | 27,055 |   |
| Tax credits                                              |   | 7,450            |   | — |   |
| Research and development expenses                        |   | 8,000            |   | 5,857 |   |
| Book and tax base differences on assets and  liabilities |   | 1,192            |   | 1,472 |   |
| Total future income tax assets                           |   | 36,643           |   | 34,384 |   |
|                                                     |   |             |   |   |   |
| Valuation allowance for future income tax  assets        |   | (36,643          | )      | (34,384 | ) |
| 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 therealization of the future income tax assets, the

 

62

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Company has a 100% valuation allowanceagainst its future income tax assets. The valuation allowance increased by $2,259,000 during the year 2003.

 

At December 31, 2003, the Company hasapproximately $22,460,000 of scientific research and experimental developmentexpenditures available for unlimited carry forward, $51,975,680 of non-capitallosses expiring between 2006 and 2010 and $7,450,000 of unclaimed tax creditsexpiring between 2004 and 2012, all of which may be used to reduce futureCanadian income taxes otherwise payable.  In addition, the Company hasU.S. $930,000 of net operating losses expiring between 2011 and 2023, which maybe used to reduce future U.S. income taxes otherwise payable.

 

**7.****            ****RELATED PARTY TRANSACTIONS**

 

Until the annual meeting in 2002 anindependent contractor who is a researcher in the area of heat shock proteinsalso served as a director of the Company. In 2002 and 2001, this individual received consulting fees of$50,000.  There were no related partytransactions in 2003.

 

63

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**8.****            ****SEGMENT INFORMATION**

 

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

 
|                                |   | **Years ended December 31,** |    |
|-------------------------------------|--------|------------------------------|---------|
| **(In thousands)**                  |   | **2003**                     |    | **2002** |   | **2001** |   |
| **Biotechnology**                   |   |                         |    |   |   |   |   |
| Collaborative R&D revenue       |   | $                            | 8,094   |   | $ | 8,370 |   | $ | — |   |
|                                |   |                         |    |   |   |   |   |
| Operating expenses:                 |   |                         |    |   |   |   |   |
| Research and development            |   | 19,289                       |    | 32,353 |   | 34,906 |   |
| Selling, general and administrative |   | 5,602                        |    | 6,656 |   | 6,310 |   |
|                                |   | 24,891                       |    | 39,009 |   | 41,216 |   |
| Operating loss                      |   | $                            | (16,797 | ) | $ | (30,639 | ) | $ | (41,216 | ) |
|                                |   |                         |    |   |   |   |   |
| **Bioreagents**                     |   |                         |    |   |   |   |   |
| Revenues:                           |   |                         |    |   |   |   |   |
| U.S.                                |   | $                            | 3,461   |   | $ | 3,733 |   | $ | 3,514 |   |
| Canada                              |   | 213                          |    | 272 |   | 276 |   |
| Other                               |   | 1,651                        |    | 1,667 |   | 1,629 |   |
|                                |   | 5,325                        |    | 5,672 |   | 5,419 |   |
| Operating expenses:                 |   |                         |    |   |   |   |   |
| Research and development            |   | 1,576                        |    | 1,322 |   | 1,000 |   |
| Selling, general and administrative |   | 1,701                        |    | 1,753 |   | 1,472 |   |
| Cost of bioreagent sales            |   | 1,312                        |    | 1,635 |   | 1,573 |   |
|                                |   | 4,589                        |    | 4,710 |   | 4,045 |   |
| Operating income                    |   | $                            | 736     |   | $ | 962 |   | $ | 1,374 |   |
|                                |   |                         |    |   |   |   |   |
| **Totals**                          |   |                         |    |   |   |   |   |
| Revenue:                            |   |                         |    |   |   |   |   |
| Collaborative R&D revenue       |   | $                            | 8,094   |   | $ | 8,370 |   | $ | — |   |
| Bioreagent sales                    |   | 5,325                        |    | 5,672 |   | 5,419 |   |
| Total revenue                       |   | 13,419                       |    | 14,042 |   | 5,419 |   |
|                                |   |                         |    |   |   |   |   |
| Operating expenses:                 |   |                         |    |   |   |   |   |
| Research and development            |   | 20,865                       |    | 33,675 |   | 35,906 |   |
| Selling, general and administrative |   | 7,303                        |    | 8,409 |   | 7,782 |   |
| Cost of bioreagent sales            |   | 1,312                        |    | 1,635 |   | 1,573 |   |
|                                |   | 29,480                       |    | 43,719 |   | 45,261 |   |
| Operating loss                      |   | $                            | (16,061 | ) | $ | (29,677 | ) | $ | (39,842 | ) |

 

64

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The Company does not allocateinterest and other income, and interest on capital lease obligations to eachsegment.

 

Long-lived assets are allocated geographically as follows:

 
|               |   | **December 31,** |   |
|--------------------|--------|------------------|--------|
| **(In thousands)** |   | **2003**         |   | **2002** |   |
|               |   |             |   |   |   |
| Canada             |   | $                | 1,953  |   | $ | 2,432 |   |
| US                 |   | 243              |   | 314 |   |
|               |   | $                | 2,196  |   | $ | 2,746 |   |

 

At December 31, 2003 $2,006,000 of plant and equipment support theBiotechnology operating segment while the remaining $190,000 support theBioreagent operating segment.

 

**9.****            ****SUPPLEMENTAL CASH FLOW INFORMATION**

 
|                                             |   | **December 31,** |   |
|--------------------------------------------------|--------|------------------|--------|
| **(In thousands)**                               |   | **2003**         |   | **2002** |   | **2001** |   |
| The change in operating assets and  liabilities: |   |             |   |   |   |   |   |
| Collaborative receivable                         |   | $                | 3,513  |   | $ | (3,790 | ) | $ | — |   |
| Trade receivables                                |   | 33               |   | 120 |   | 17 |   |
| Inventories                                      |   | 199              |   | 77 |   | (182 | ) |
| Other current assets                             |   | 6                |   | (98 | ) | (22 | ) |
| Deferred expenses, net of current portion        |   | 161              |   | (421 | ) | — |   |
| Deferred revenue                                 |   | (1,706           | )      | 4,459 |   | — |   |
| Accounts payable and accrued liabilities         |   | (4,858           | )      | 1,076 |   | 330 |   |
|                                             |   | $                | (2,652 | ) | $ | 1,423 |   | $ | 143 |   |

 
|                                                                        |   | **Years ended December 31,** |   |
|-----------------------------------------------------------------------------|--------|------------------------------|--------|
| **(In thousands)**                                                          |   | **2003**                     |   | **2002** |   | **2001** |   |
|                                                                        |   |                         |   |   |   |   |   |
| Supplemental disclosures of cash flows:                                     |   |                         |   |   |   |   |   |
| Interest paid                                                               |   | $                            | 53     |   | $ | 69 |   | $ | 106 |   |
|                                                                        |   |                         |   |   |   |   |   |
| Supplemental disclosures of non-cash  investing and financing transactions: |   |                         |   |   |   |   |   |
| Reversal of deferred compensation related  to terminated employees          |   | $                            | 4      |   | $ | 28 |   | $ | — |   |
| Deferred stock compensation                                                 |   | —                       |   | — |   | 807 |   |

 

65

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**10.****         ****INTERIM FINANCIALINFORMATION (UNAUDITED)**

 

The following is a summary of the unaudited quarterly results ofoperations for the years ended December 31, 2003 and 2002.

 

(In thousands except per share amounts)

 
|                              |   | **Quarter  ended** |   |
|-----------------------------------|--------|--------------------|--------|
| **2003**                          |   | **March 31**       |   | **June 30** |   | **September  30** |   | **December  31** |   |
| Net revenues                      |   |               |   |   |   |   |   |   |   |
| Canadian and U.S. GAAP            |   | $                  | 6,640  |   | $ | 2,881 |   | $ | 2,171 |   | $ | 1,727 |   |
|                              |   |               |   |   |   |   |   |   |   |
| Research and development expenses |   |               |   |   |   |   |   |   |   |
| Canadian and U.S. GAAP            |   | 6,493              |   | 4,791 |   | 6,009 |   | 3,572 |   |
|                              |   |               |   |   |   |   |   |   |   |
| Net loss                          |   |               |   |   |   |   |   |   |   |
| Canadian GAAP                     |   | (2,457             | )      | (4,403 | ) | (5,623 | ) | (3,762 | ) |
| U.S. GAAP                         |   | (2,248             | )      | (4,222 | ) | (5,463 | ) | (3,365 | ) |
|                              |   |               |   |   |   |   |   |   |   |
| Basic loss per common share       |   |               |   |   |   |   |   |   |   |
| Canadian GAAP                     |   | $                  | (0.04  | ) | $ | (0.07 | ) | $ | (0.09 | ) | $ | (0.06 | ) |
| U.S. GAAP                         |   | $                  | (0.04  | ) | $ | (0.07 | ) | $ | (0.09 | ) | $ | (0.05 | ) |

 
|                              |   | **Quarter  ended** | ** ** |
|-----------------------------------|--------|--------------------|------------|
| **2002**                          |   | **March 31**       | ** ** | **June 30** | ** ** | **September  30** | ** ** | **December  31** | ** ** |
| Net revenues                      |   |               |       |   |   |   |   |   |   |
| Canadian and U.S. GAAP            |   | $                  | 1,405      |   | $ | 1,491 |   | $ | 5,826 |   | $ | 5,320 |   |
|                              |   |               |       |   |   |   |   |   |   |
| Research and development expenses |   |               |       |   |   |   |   |   |   |
| Canadian and U.S. GAAP            |   | 9,283              |       | 9,778 |   | 7,447 |   | 7,167 |   |
|                              |   |               |       |   |   |   |   |   |   |
| Net loss                          |   |               |       |   |   |   |   |   |   |
| Canadian GAAP                     |   | (10,480            | )          | (11,983 | ) | (2,280 | ) | (4,059 | ) |
| U.S. GAAP                         |   | (10,044            | )          | (11,229 | ) | (3,668 | ) | (3,981 | ) |
|                              |   |               |       |   |   |   |   |   |   |
| Basic loss per common share       |   |               |       |   |   |   |   |   |   |
| Canadian GAAP                     |   | $                  | (0.18      | ) | $ | (0.21 | ) | $ | (0.04 | ) | $ | (0.07 | ) |
| U.S. GAAP                         |   | $                  | (0.17      | ) | $ | (0.19 | ) | $ | (0.06 | ) | $ | (0.07 | ) |

 

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**11.****         ****THE EFFECT OF APPLYING ACCOUNTINGPRINCIPLES GENERALLY ACCEPTED IN THE U.S.**

 

These financial statements have been prepared in accordance withCanadian GAAP which, except as set out below, conform, in all materialrespects, to U.S. GAAP.

 

Effect on the consolidated financial statements:

 

*Balance Sheet*

 
|                                                                                                    |   | **December  31,** |   |
|---------------------------------------------------------------------------------------------------------|--------|-------------------|--------|
| **(In thousands)**                                                                                      |   | **2003**          |   | **2002** |   |
|                                                                                                    |   |              |   |   |   |
| Current assets under Canadian GAAP                                                                      |   | $                 | 53,974 |   | $ | 51,648 |   |
| Adjustment to carrying value of short-term  investments classified as available-for-sale securities (a) |   | —            |   | — |   |
| Current assets under U.S. GAAP                                                                          |   | $                 | 53,974 |   | $ | 51,648 |   |
|                                                                                                    |   |              |   |   |   |
| Stockholders’ equity under Canadian GAAP                                                           |   | $                 | 48,577 |   | $ | 40,943 |   |
| Unrealized holding gains on  available-for-sale securities (a)                                          |   | —            |   | — |   |
| Stockholders’ equity under U.S. GAAP                                                               |   | $                 | 48,577 |   | $ | 40,943 |   |

 

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*Statement of Operations*

 
|                                                                                      |   | **Years  ended December 31,** |    |
|-------------------------------------------------------------------------------------------|--------|-------------------------------|---------|
| **(In thousands, except per share  amounts)**                                             |   | **2003**                      |    | **2002** |   | **2001** |   |
|                                                                                      |   |                          |    |   |   |   |   |
| Net loss under Canadian GAAP                                                              |   | $                             | (16,245 | ) | $ | (28,802 | ) | $ | (35,939 | ) |
| Reversal of unrealized foreign exchange  (gain) loss on available-for-sale securities (a) |   | 541                           |    | (69 | ) | (541 | ) |
| Reversal of previous adjustment to  short-term investments (a)                            |   | 406                           |    | (51 | ) | 220 |   |
| Stock-based compensation expense on stock  options (b)                                    |   | —                        |    | — |   | (81 | ) |
| Net loss under U.S. GAAP                                                                  |   | $                             | (15,298 | ) | $ | (28,922 | ) | $ | (36,341 | ) |
|                                                                                      |   |                          |    |   |   |   |   |
| Basic loss per common share under Canadian  GAAP                                          |   | $                             | (0.26   | ) | $ | (0.49 | ) | $ | (0.70 | ) |
|                                                                                      |   |                          |    |   |   |   |   |
| Basic loss per common share under U.S. GAAP                                               |   | $                             | (0.25   | ) | $ | (0.49 | ) | $ | (0.71 | ) |
|                                                                                      |   |                          |    |   |   |   |   |
| Common shares used to compute basic loss  per share under Canadian and U.S. GAAP          |   | 61,458                        |    | 58,986 |   | 51,205 |   |

 

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*Statement of Cash Flows*

 
|                                                                              |   | **Years  ended December 31,** |    |
|-----------------------------------------------------------------------------------|--------|-------------------------------|---------|
| **(In thousands)**                                                                |   | **2003**                      |    | **2002** |   | **2001** |   |
|                                                                              |   |                          |    |   |   |   |   |
| Net cash used in operating activities under  Canadian and U.S. GAAP               |   | $                             | (16,515 | ) | $ | (26,523 | ) | $ | (36,460 | ) |
|                                                                              |   |                          |    |   |   |   |   |
| Net cash (used in) provided by investing  activities under Canadian and U.S. GAAP |   | $                             | (18,395 | ) | $ | 14,367 |   | $ | 39,468 |   |
|                                                                              |   |                          |    |   |   |   |   |
| Net cash provided by financing activities  under Canadian and U.S. GAAP           |   | $                             | 24,217  |   | $ | 10,069 |   | $ | 28,896 |   |

 

*Differences*

 

*(a)*          Under U.S. GAAP, Statement of Financial AccountingStandards (“SFAS”) No. 115, *Accounting for Certain Investments in Debt and EquitySecurities*, the Company has classified certain of its short-termsecurities as available-for-sale and, accordingly, has included the changes innet unrealized holding gains or losses on these securities in othercomprehensive income rather than in operations.

 

SFAS No. 130, *Reporting Comprehensive Income* establishesstandards for the reporting and display of comprehensive income and itscomponents (revenue, expenses, gains and losses) in a full set ofgeneral-purpose financial statements.

 

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|                                                                                                                               |   | **Years ended December 31,** |    |
|------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|---------|
| **(In thousands, except per share  amounts)**                                                                                      |   | **2003**                     |    | **2002** |   | **2001** |   |
|                                                                                                                               |   |                         |    |   |   |   |   |
| Net loss under U.S. GAAP                                                                                                           |   | $                            | (15,298 | ) | $ | (28,922 | ) | $ | (36,341 | ) |
| Other comprehensive income Adjustment to  unrealized foreign exchange and market gains (losses) on available-for-sale  investments |   | (947                         | )       | 120 |   | 178 |   |
| Comprehensive net loss under U.S. GAAP                                                                                             |   | $                            | (16,245 | ) | $ | (28,802 | ) | $ | (36,163 | ) |
|                                                                                                                               |   |                         |    |   |   |   |   |
| Comprehensive loss per share under U.S.  GAAP                                                                                      |   | $                            | (0.26   | ) | $ | (0.49 | ) | $ | (0.71 | ) |

 

*(b)**         *As permitted by SFAS No. 123, *Accountingfor Stock-Based Compensation*, the Company has elected to follow APBOpinion No. 25, *Accounting for Stock Issued to Employees*,**andrelated interpretations in accounting for its stock options.  Under APB Opinion No. 25, if the exerciseprice of the Company’s employee stock options equals or exceeds the fair marketvalue of the underlying stock on the date of grant, no compensation expense isrecognized.  When the exercise price ofthe employee stock options is less than the fair value of the underlying stockon the date of grant, the Company records deferred stock compensation for thedifference and amortizes this amount to expense over the vesting period of theoptions.  Options or stock awards issuedto non-employees are recorded at their fair value as determined in accordancewith SFAS No. 123 and Emerging Issues Task Force (“EITF”) 96-18, and recognizedover the related service period.  InMarch 2000, the Financial Accounting Standards Board (“FASB”) issuedInterpretation No. 44 (FIN No. 44), *Accounting for Certain Transactions Involving StockCompensation - an interpretation of APB 25*.  The compensation expense of $81,000 in 2001results from former employees becoming independent contractors and from optiongrants to non-employees.  In 2003 and2002 compensation expense was included in net income under Canadian GAAP.

 

See Note 1 for additional pro forma informationrelated to stock compensation using the fair value method.

 

(*)           In accordance with the provisions ofAccounting Principle Board (“APB”) Opinion No. 25 for recording the value ofcontingently issuable (escrow) shares, the Company has recorded compensationexpense on the release of these shares

 

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based upon the excess of the market value over cost ofthe common shares on the dates that release was assured over their paid upamount.  At December 31, 2003 there wereno common shares held in escrow.

 

* (**)**      *SFAS No. 109, *Accounting for Income Taxes*, requires the Company tocalculate its future income taxes using only enacted tax rates.  This differs from Canadian GAAP, which usessubstantially enacted tax rates.  Sinceany change in the carrying value of the Company’s future income tax assetswould be offset by a 100% valuation allowance, there would be no effect on theCompany’s financial position or results of operations.

 

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**Item 9****.****          CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTSON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

None.

 

**Item 9A.****       CONTROLS AND PROCEDURES**

 

We have carried out anevaluation, under the supervision and with the participation of management,including our President and Chief Executive Officer and our Vice President,Corporate Development and Chief Financial Officer, of the effectiveness of thedesign and operation of the Company’s disclosure controls and procedures, asdefined in the Securities Exchange Act of 1934 as amended, as of December 31,2003.  Based upon that evaluation, ourPresident and Chief Executive Officer and our Vice President, CorporateDevelopment and Chief Financial Officer concluded that our disclosure controlsand procedures are effective in enabling us to record, process, summarize andreport information required to be included in our periodic SEC filings withinthe required time period.  There havebeen no significant changes in our internal controls or in other factors thatcould significantly affect internal controls subsequent to the date we carriedout this evaluation.  

 

**PART III**

 

**Item 10.****        OURDIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES**

 

Certain information about ourdirectors and executive officers, the positions held by them and their ages asof February 12, 2004 are as follows:

 
| **Name**                          |   | **Age** |   | **Position**                                                       |
|-----------------------------------|--------|---------|--------|--------------------------------------------------------------------|
| Joann Data,  M.D., Ph.D. (1), (2) |   | 59      |   | Director                                                           |
|                              |   |    |   |                                                               |
| Kenneth  Galbraith (3)            |   | 41      |   | Director                                                           |
|                              |   |    |   |                                                               |
| Elizabeth M.  Greetham (3)        |   | 54      |   | Director                                                           |
|                              |   |    |   |                                                               |
| Ian Lennox  (1, 3)                |   | 50      |   | Director                                                           |
|                              |   |    |   |                                                               |
| Margot  Northey, Ph. D. (2)       |   | 64      |   | Director                                                           |
|                              |   |    |   |                                                               |
| Jay M.  Short, Ph.D. (1)          |   | 45      |   | Director                                                           |
|                              |   |    |   |                                                               |
| Daniel L.  Korpolinski            |   | 61      |   | Director,  President and Chief Executive Officer                   |
|                              |   |    |   |                                                               |
| Howard T.  Holden, Ph.D.          |   | 59      |   | Vice  President, Regulatory Affairs and Compliance                 |
|                              |   |    |   |                                                               |
| Gregory M.  McKee                 |   | 40      |   | Vice  President, Corporate Development and Chief Financial Officer |
|                              |   |    |   |                                                               |
| John R.  Neefe, M.D.              |   | 60      |   | Senior Vice  President, Clinical Research                          |
|                              |   |    |   |                                                               |
| Marvin I.  Siegel, Ph.D.          |   | 57      |   | Executive  Vice President, Research and Development                |

 

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(1) Member of the Compensation Committee

(2) Member of the Governance Committee

(3) Member of the Audit Committee

 

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***JOANN L. DATA, M.D., PH.D.***joinedthe 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 sinceAugust 1999.   While at Amylin, sheprovided regulatory and clinical consulting services to Cortex Pharmaceuticals,Inc. in 2002 and 2003 and to Allergan Pharmaceutics in 2003.  Dr. Data previously served as Executive VicePresident, Product Development and Regulatory Affairs for CoCensys.  Her prior experience includes severalpositions at the Upjohn Company, including Corporate Vice President forPharmaceutical Regulatory Affairs and Project Management, and a number of positionsat Hoffmann-La Roche, including Vice President of Clinical Research andDevelopment.  Dr. Data has been anadjunct assistant professor in medicine and pharmacology at Duke UniversityMedical Center since 1982 and at Cornell Medical Center since 1986.  She earned her M.D. from WashingtonUniversity School of Medicine and her Ph.D. in Pharmacology from VanderbiltUniversity.

 

***KENNETHGALBRAITH***has served as one of our directors sinceMay****2000.  Mr. Galbraith has been the President ofGigha Consulting Ltd., a technology consulting and investment managementcompany, since October 2000.  Mr.Galbraith has served as a director of several private and public biotechnologycompanies, including Micrologix Biotech Inc. since March 2001, AngiotechPharmaceuticals since March 2000, Cardiome Pharma Inc. since May 2003 and Neuro Discovery Inc. since November 2001.  From February1988 to October 2000 he was employed by QLT Inc., a biotechnology company,where he progressed to the position of Executive Vice President and ChiefFinancial Officer.  Mr. Galbraith was afounding Director and Chairman of the B.C. Biotechnology Alliance and a formerChair of one of Canada’s Centres of Excellence Networks, the Canadian BacterialDiseases Network.  He is also a directorof the Michael Smith Foundation for Health Research and the Fraser HeathAuthority.  Mr. Galbriath received hisB.Com. (Honours) degree from the University of British Columbia in 1985 and wasadmitted in British Columbia as a Chartered Accountant in 1988.

 

***ELIZABETH M. GREETHAM***hasserved as a Stressgen director since September 2002.  Since December 2003 she has been the Chief Executive Officer andPresident of ACCL Financial Consultants. From August 2000 to October 2003 she served as the Chief ExecutiveOfficer and Chairman of the Board of DrugAbuse Sciences, Inc., a privatebiopharmaceutical company in Hayward, California. From March 1999 to October2003 she worked at the same entity as Chief Financial Officer and Senior VicePresident, Business Development.  Beforejoining DrugAbuse Sciences, Ms. Greetham spent nearly a decade as a portfoliomanager for Weiss, Peck & Greer, an institutional investment managementfirm.  She managed the WPG Life SciencesFunds, L.P., which invests in select biotechnology stocks.  She has over 25 years of investmentexperience as a portfolio manager and healthcare analyst in the U.S. andEurope.  Ms. Greetham also serves as amember of the Board of Directors of publicly traded Guilford Pharmaceuticalsand King Pharmaceuticals, Inc.  Herprior board experience includes service on the boards of directors of SangstatMedical Corporation, PathoGenesis Corporation and CliniChem Development Inc.Ms. Greetham earned a BSc and a MA (Hons.) from the University of Edinburgh,Scotland.

 

***R. IAN LENNOX*****has served as one of our directors sinceMay 2002.  He is President and ChiefExecutive Officer of Pharmaceutical & Biotechnology Markets, MDS Inc.,where he has served since April 2000. Prior to joining MDS Inc., Mr. Lennox was President and Chief ExecutiveOfficer of Phoenix International Life Sciences from 1999 to 2000, and Presidentand Chief Executive Officer of Drug Royalty Corporation Inc. from 1997 to1999.  Mr. Lennox also held

 

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many positions with MonsantoCompany beginning in 1978, including President and Chief Executive Officer ofMonsanto Company (Canada) Inc. from 1991-1997. Mr. Lennox currently serves on the board of directors and audit committeeof KBSH Capital Management Inc. and as the Chairman of the Board and on theaudit committee of MDS Proteomics.  Inthe past he served on various boards of directors, including as the Chairman ofthe Boards of Drug Royalty Corporation Inc. and the Mississauga HospitalFoundation, and as director of Hemosol Inc., GenSci Regeneration Sciences Inc.,Marsulex Inc. and the Mississauga Hospital. Mr. Lennox attended the Columbia University School of Business andreceived his Masters of Business and HSBc. in Physiology and Pharmacology fromthe University of Western Ontario.

 

***MARGOTNORTHEY, M.A., PH.D.***joined the Stressgen board of directors inJune 2002. Dr. Northey was a professor and the dean of Queen’s School ofBusiness, Queen’s University in Kingston, Ontario, from September 1995 to June2002. She is also the author of several best-selling books on communications.Dr. Northey currently serves on diverse corporate boards, including the boardsof public companies Aliant Inc., Nexfor Inc. and Alliance Atlantis, andprivately held British Columbia Transmission Corp. and Wawanesa Insurance. Sheis a graduate of University of Toronto, with a M.A. and Ph.D. from YorkUniversity.

 

***JAYM. SHORT, PH.D.***has served as one of our directorssince March 1994.  Dr. Short has beenPresident, Chief Executive Officer, Chief Technology Officer, and a directorfor Diversa Corporation, a biotechnology company, since September 1994.  Since February 1995 Dr. Short has also served as a director forInvitrogen Corporation, a biotechnology company.  He previously served at biotechnology companies Stratacyte, Inc.,as President and Strategene Cloning Systems from September 1985 to September1994 as Vice President of Research and Development and Operations.  Dr.Short received a Ph.D. in biochemistry from Case Western Reserve University andhis B.A. in chemistry from Taylor University.

 

***DANIELL. KORPOLINSKI***has served as our President andChief Executive Officer, U.S. Operations, since March 2000, and as one of ourdirectors and our President and Chief Executive Officer since May 2000. Mr.Korpolinski was President and CEO of Copley Pharmaceutical Inc., a genericpharmaceutical company, from September 1998 until the company was acquired byTeva Pharmaceutical Industries Ltd. in September 1999. He was also a directorof Copley from August 1998 until its acquisition.  Mr. Korpolinski served as President and Chief Executive Officerof Prodromics On Line, a softwarecompany, from June 1997 untilAugust 1998.  Between 1991 and 1996 Mr.Korpolinski served as the President and Chief Executive Officer of CoCensysInc., a biotechnology company specializing in the development of therapeuticsfor the central nervous system.  From1988 to 1991, Mr. Korpolinski was President of Adria Laboratories NorthAmerica, an oncology company.  Mr. Korpolinskistarted his career in the pharmaceutical industry with the Upjohn Company,where he spent 24 years, ultimately in the capacity as an Executive Director ofseveral pharmaceutical business groups. He received his B.S. from NiagraUniversity in New York.

 

***HOWARD T. HOLDEN,PH.D.*** hasserved as Vice President, Regulatory Affairs and Compliance since July 1,2002.  He served as Vice President,Regulatory Affairs and Compliance with Ligand Pharmaceuticals from September1992 until he joined Stressgen. Prior to his employment with Ligand, Dr. Holdenwas Senior Director, Worldwide Regulatory Affairs at Parke-Davis PharmaceuticalResearch Division of the Warner-Lambert Company (now Pfizer,

 

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Inc.).Dr. Holden also spent 14 years at the National Cancer Institute as SectionHead/Senior Investigator in the Cancer Therapy Evaluation Program and theBiological Response Modifiers Program. He received a Ph.D. in microbiology fromthe University of Miami and a B.A. in zoology from Drew University.

 

***GREGORY M. McKEE*** has served as our Vice President,Corporate Development and Chief Financial Officer since January 15, 2004.  From June 2003 to mid-January, 2004, he wasour Vice President, Corporate Development and Strategic Planning.  From July 2000 through June 2003 Mr. McKeeserved as Senior Director, Corporate Development for Valentis, Inc., a SanFrancisco based gene therapy company. Prior to his employment with Valentis,from June 1996 through December 1999, Mr. McKee served in several managementpositions at Genzyme Corporation, a biotechnology company. Mr. McKee also spent5 years in investment banking. Mr. McKee earned an MBA from The Wharton School,a Masters of Arts in International Studies from The Joseph H. Lauder Instituteat the University of Pennsylvania and graduated with a Bachelor of Arts degreein Economics from the University of Washington.

 

***JOHNR. NEEFE, M.D.***became our Senior Vice PresidentClinical Research in mid-2002, after serving as our Vice-President, ClinicalResearch and Regulatory Affairs starting in December 1998.  Prior to joining Stressgen in 1998 Dr. Neefeserved as Vice President, Clinical Oncology and International Director ofClinical Oncology at Sanofi Research Division, Sanofi Pharmaceuticals from mid-1995****to December 1998.  From 1993 untilits acquisition by Sanofi in 1995, Dr. Neefe was Senior Director ofSterling-Winthrop, leading the company’s clinical oncology drug developmentunit.  Dr. Neefe has also held aposition as director of Clinical Research at Centocor, has attained academicappointments at the University of Kentucky and at Georgetown University andheld a research position at the National Cancer Institute.  Dr. Neefe received his B.A. from HarvardUniversity and his M.D. from the University of Pennsylvania School of Medicine.

 

***MARVINI. SIEGEL, PH.D.***has served as our Executive VicePresident, Research & Development since March 1997.  Dr. Siegel was a director of DeltaPharmaceuticals, Inc., a Chapel Hill, North Carolina pharmaceutical companybetween 1997 and 1999.  From February1995 to February 1997, Dr. Siegel was Vice President in charge of science andresearch and development, Terrapin Technologies Inc., a South San Francisco, Californiaprivate company specializing in drugs for allergy, oncology and diabetes, whichis now a public company known as Telik Inc. Dr. Siegel was a senior executive with Schering-Plough ResearchInstitute in Kenilworth, N.J., from May 1982 to February 1994 where he wasresponsible for biological research in immunology and allergy.  From August 1975 to May 1982 Dr. Siegel wasa research scientist at Burroughs Wellcome Company in Research Triangle Park,NC.  He has attained academicappointments at Rutgers University and at the School of Medicine of theUniversity of North Carolina at Chapel Hill. Dr. Siegel received his B.S. fromLafayette College, his M.A. from Columbia University and his Ph.D. from TheJohns Hopkins University School of Medicine in 1973. He is a Fellow of theAmerican Academy of Asthma, Allergy and Immunology and of the AmericanInstitute of Chemists.

 

Each officer serves at the discretion ofour Board of Directors.  Our Articlespermit the authorized number of directors to range from three to fifteendirectors.  We currently have sevendirectors and no vacancies.

 

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## **Board Committees**

## ** **

Our Board of Directors has established three standing committees, theAudit Committee, the Compensation Committee and our Governance Committee, whichalso acts as a nominating committee. Our Board of Directors has delegatedcertain responsibilities to each of these Committees and has also instructedeach of them to perform certain advisory functions and make recommendations andreport to our Board of Directors.  Whereconsidered prudent, certain matters falling under the responsibility of theseCommittees are at times dealt with at a meeting of the entire Board ofDirectors.  Additional committees areestablished from time to time for particular purposes.

 

The Audit Committee meets withour financial management and the independent auditors to review and inquireinto matters affecting financial reporting matters, the system of internalaccounting and financial controls and procedures and audit procedures andplans.  This Committee also makesrecommendations to our Board of Directors regarding the appointment ofindependent auditors.  In addition, theAudit Committee reviews and recommends for approval to our Board of Directorsour annual financial statements, annual report and certain other documentsregulatory authorities require.  TheAudit Committee is also responsible for approving the policies under which ourfinancial management may invest the funds in excess of those required forcurrent operations.  In 2003, the AuditCommittee met four times.  The currentmembers of the committee are Kenneth Galbraith, Elizabeth Greetham and IanLennox, none of whom is one of our current or former officers.  The Board of Directors has determined thatall three members of the Audit Committee are audit committee financial expertsand are “unrelated directors” under Toronto Stock Exchange guidelines.

 

The Governance Committee isresponsible for identifying, evaluating and recommending nomineesfor our Board of Directors and reviewing incumbent directors for re-election toour Board of Directors.  Incumbent andpotential new directors are evaluated by this Committee with the objective of obtaining abalanced mix of Board members with the experience and expertise to ensure thatour Board of Directors is composed of individuals who will best serve ourinterests and assist management in reaching our strategic goals. The Governance Committee met once in 2003. The current members of theGovernance Committee are Margot Northey and Joann Data.  The Governance Committee will considernominees for directors that are recommended by shareholders.  Submissions should be directed to theGovernance Committee in care of our corporate secretary and general counsel atthe address set forth on the cover of this report.

 

The Compensation Committee isresponsible for establishing and monitoring our long range plans and programsfor attracting, training, developing and motivating employees.  This Committee reviews recommendations for theappointment of persons to senior executive positions, considers terms ofemployment, including succession planning and matters of compensation andrecommends any awards of over 20,000 shares to one individual under our 2001Equity Incentive Plan.  The Compensation Committee also reviews allcompensation for executive officers reporting directly to the Chief ExecutiveOfficer, including the Named Executive Officers, for market comparability andreasonableness in light of the performance and realization of pre-establishedobjectives of the executive officers. In 2003, this committee met threetimes.  The current members of thecommittee are Joann Data, Ian Lennox and Jay Short.

 

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**Code of Ethics**

 

We have adopted a code of ethicsthat applies to all of our employees including the Named Executive Officersdefined below.  Copies of our currentCode of Ethics may be requested from our corporate secretary and generalcounsel at the address set forth on the cover of this report for no charge.

 

**Item 11****. COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS**

 

We hold annual elections for the members ofthe Board of Directors. Each of our non-employee directors is entitled toreceive $10,000 other than the Chairman of the Board, who is entitled toreceive $25,000.  In addition, the headof our Audit Committee receives $5,000, and the heads of our Compensation andGovernance Committees receive $2,500 annually. Each director receives $1,000 for board or committee meetings attended inperson, or $500 for meetings attended by teleconference. Board compensation ispaid annually after the annual general meeting of shareholders. We alsoreimburse directors for expenses incurred on our behalf, including expensesassociated with attendance at meetings of our Board of Directors.  In 2003 it was established that new boardmembers would receive an option to acquire 30,000 shares.  After the 2003 annual general meeting, wegranted existing board members an option to acquire 15,000 shares, other thanthe Chairman, who was awarded an option to acquire 25,000 shares.  The Board agreed it would not receive anannual option grant in 2004.

 

***Compensation of the Chief Executive Officer***

 

Mr. Korpolinski’s 2003 basesalary was determined based on an evaluation of the salaries of Chief ExecutiveOfficers of comparable companies and Mr. Korpolinski’s experience, inaccordance with the policies noted above. His bonuses have been determined based upon an evaluation of hisperformance against criteria established annually by the Compensation Committeeand the Chairman of the Board based on the current circumstances of theCompany, including the company’s level of operations, financial position,development of HspE7, bioreagent sales, and operations within budget.

 

**Compensation of Executive Officers**

 

The following table sets forth, in U.S. dollars, all compensationawarded or paid to and earned by, our Chief Executive Officer, the four mosthighly compensated executive officers who were serving as executive officers atthe end of 2003 and an individual that became an executive officer in 2004(collectively, the “Named Executive Officers”) for services rendered during theyears ended December 31, 2003, 2002 and 2001.

 

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**Summary CompensationTable, in U.S. Dollars**

 
|                                                                                  |     |                     |       |   |                      |      |                     |                    |                   | **Long term  compensation  Securities  Underlying  Options** |                    |
|---------------------------------------------------------------------------------------|----------|--------------------------|------------|--------|---------------------------|-----------|--------------------------|-------------------------|------------------------|--------------------------------------------------------------|-------------------------|
|                                                                                  |     |                     |       |   |                      |      |                     |                    |                   |                                                         |
|                                                                                  |     | **Annual  compensation** |       |   |
| **Name and Principal  Position**                                                      |     |                     |       |   |                      |      |                     | **Other  Compensation** |                   |                                                         |
|                                                                                  | **Year** |                     | **Salary** |   | **Bonus**                 |      |                     |                    |
| Daniel L. Korpolinski  President and Chief  Executive Officer                         |     | 2003  2002  2001         |       | $      | 395,200  380,000  364,583 |      | —  136,800  128,625 | (1)                     | $                      | 106,269  143,832  125,131                                    | (2)  (2)  (2)           | 150,000  100,000  — | (9) |
| Howard T. Holden, Ph.D.Vice President,  Regulatory  Affairs and Compliance            |     | 2003  2002               |       | $      | 270,300  132,500          | (3)       | —  63,125           | (1)  (4)                | —  —         |                                                         | 30,000  100,000         | (9) |
| Gregory M. McKee  Vice President, Corporate  Development and Chief  Financial Officer |     | 2003                     |       | $      | 115,312                   | (5)       | —                   | (1)                     | $                      | 28,823                                                       | (6)                     | 175,000 |   |
| John R. Neefe, M.D.  Senior Vice President,  Clinical Research                        |     | 2003  2002  2001         |       | $      | 294,600  286,000  275,000 |      | —60,000  68,750     | (1)                     | —  —  — |                                                         | 50,000  50,000  50,000  | (9) |
| Marvin I. Siegel, Ph.D.  Executive Vice President,  Research and Development          |     | 2003  2002  2001         |       | $      | 269,400  261,500  251,450 |      | —42,500  50,290     | (1)                     | $                      | 1,983  2,078  —                                         | (7)  (7)                | 30,000  30,000  50,000 | (9) |
| Donald D. TartreFormer Vice President  and  Chief Financial Officer                   |     | 2003  2002  2001         |       | $      | 241,800  232,500  185,795 | (8)  | —50,000  46,875     |                    | —  —  — |                                                         | 50,000  40,000  200,000 | (9) |

 

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(1)   Amounts exclude bonuses, if any, which thecompensation committee may award based on the performance of the namedexecutive officers from January 1, 2003 through December 31, 2003.

(2)   Amount includes medical premiums, life insurancepremiums, housing and automobile costs, and amounts paid under Mr.Korpolinski’s contract to compensate for the differential between the Canadianand U.S. effective tax rates.

(3)   Dr. Holden commenced employment on July 1, 2002.

(4)   Amount includes a $30,000 signing bonus and a$33,125 bonus granted in February 2003 relating to Dr. Holden’s performancefrom July 1, 2002 through December 31, 2002.

(5)  Mr. McKee commenced employment on June 9, 2003.

(6)  Amount includes relocation costs.

(7)  Amount includes long-term disability premiums.

 

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(8)  Mr. Tartre commenced employment on March 5, 2001.

(9)  Granted in 2003 based on 2002 performance.

 

**StockOption Grants and Exercises in Last Fiscal Year**

** **

We grant options to ourexecutive officers to purchase our common stock under our 2001 Equity IncentivePlan.  Once the 2001 Plan was approvedby our shareholders, we ceased to grant options under our 1996 Share IncentivePlan.  As of December 31, 2003, optionsto purchase a total of 3,137,065 shares were issued and outstanding under the2001 Plan and 1,841,053 shares were outstanding under the 1996 Plan.  Options to purchase 358,986 shares remainedavailable for grant under the 2001 Plan. The following table sets forth certain information regarding optionsgranted during the fiscal year ended December 31, 2003 to the Named ExecutiveOfficers:
|                        |   | **Individual  Grants**                       |   |                                                                |   |                                     |   |                   |     |
|-----------------------------|--------|----------------------------------------------|--------|---------------------------------------------------------------------|--------|------------------------------------------|--------|------------------------|----------|
| **Name**                    |   | **Shares  Underlying  Options  Granted (#)** |   | **% of Total  Options  Granted to  Employees in  Fiscal  Year (%)** |   | **Exercise  Price Per  Share  (Cdn. $)** |   | **Expiration****Date** |     | **Potential Realizable Value at  Assumed Annual Rates of  Stock Appreciation for Option  Term (Cdn. $)** |   |
| **5%**                      |   | **10%**                                      |
| Daniel L.  Korpolinski |   | 150,000                                      | (1)    | 14                                                                  | %      | $                                        | 1.63   |                   | 2/4/2013 |   | $ | 153,765 |   | $ | 389,670 |   |
| Howard T.  Holden, Ph.D.    |   | 30,000                                       | (1)    | 3                                                                   | %      | $                                        | 1.63   |                   | 2/4/2013 |   | 30,753 |   | 77,934 |   |
| Gregory M.  McKee           |   | 175,000                                      | (2)    | 17                                                                  | %      | $                                        | 2.60   |                   | 6/8/2013 |   | 286,147 |   | 725,153 |   |
| John Neefe,  M.D.           |   | 50,000                                       | (1)    | 5                                                                   | %      | $                                        | 1.63   |                   | 2/4/2013 |   | 51,255 |   | 129,890 |   |
| Donald D.  Tartre           |   | 50,000                                       | (1)    | 5                                                                   | %      | $                                        | 1.63   |                   | 2/4/2013 |   | 51,255 |   | 129,890 |   |
| Marvin I.  Siegel, Ph.D.    |   | 30,000                                       | (1)    | 3                                                                   | %      | $                                        | 1.63   |                   | 2/4/2013 |   | 30,753 |   | 77,934 |   |
|                             |        |                                              |        |                                                                     |        |                                          |        |                        |          |  |  |  |  |  |  |  |

 

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(1)           Such options vest 1/36th permonth over a 36 month period on the monthly anniversary of the vestingcommencement date.

(2)           Such options vest 1/4th on June9, 2004, then 1/48th per month over the following 36 months

 

**Aggregated Option Exercises in Last FiscalYearAnd Fiscal Year-End Option Values**

 

The following table sets forth certaininformation as of December 31, 2003, regarding options held by the NamedExecutive Officers.  There were no stockappreciation rights outstanding on December 31, 2003.

 

79

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| **Name**                |       | **Shares  Acquired on  Exercise** | ** ** | **Aggregate  Value  Realized (Cdn. $)** |       | **Number of  Shares  Underlying Unexercised  Options  at FY-End (#)** |    | **Value of  Unexercised  In-The-Money Options  as of FY-End (Cdn. $)** |   |
|-------------------------|------------|-----------------------------------|------------|-----------------------------------------|------------|-----------------------------------------------------------------------|---------|------------------------------------------------------------------------|--------|
|                    |
| **Exercisable**         | ** ** | **Unexercisable**                 | ** ** | **Exercisable**                         | ** ** | **Unexercisable**                                                     |
| Daniel L. Korpolinski   |       | —                            |       | —                                  |       | 1,046,179                                                             |    | 203,821                                                                |   | $ | 67,916 |   | $ | 176,584 |   |
| Howard T. Holden, Ph.D. |       | —                            |       | —                                  |       | 43,749                                                                |    | 86,251                                                                 |   | $ | 13,583 |   | $ | 35,317 |   |
| Gregory M. McKee        |       | —                            |       | —                                  |       | —                                                                |    | 175,000                                                                |   | — |   | — |   |
| John R. Neefe, M.D.     |       | 56,667                            |       | $                                       | 93,501     |                                                                  | 140,832 |                                                                   | 54,168 |   | $ | 22,637 |   | $ | 58,863 |   |
| Marvin I. Siegel, Ph.D. |       | —                            |       | —                                  |       | 122,499                                                               |    | 32,501                                                                 |   | $ | 13,583 |   | $ | 35,317 |   |
| Donald D. Tartre        |       | —                            |       | —                                  |       | 163,053                                                               |    | 126,947                                                                |   | — |   | — |   |
|                         |            |                                   |            |                                         |            |                                                                       |         |                                                                        |        |  |  |  |  |  |  |  |

 

**Employment Contracts and Termination ofEmployment and Change-in-Control Arrangements**

 

Our President and ChiefExecutive Officer, Daniel L. Korpolinski, is employed under an employmentagreement dated March 8, 2000.  Inaddition to his 2003 base salary of U.S. $395,200, the agreement specifies thatMr. Korpolinski is eligible to receive additional incentive compensation of upto 40% of his base salary in any 12 month fiscal year if he meets individualobjectives established annually by the board of directors.  In the event that Mr. Korpolinski isterminated without just cause, he is entitled to severance payments equal to 12months’ base salary.  Mr. Korpolinski isalso entitled to severance payments equal to 12 months’ base salary in theevent that, within 12 months after an acquisition of more than 50% of ourissued voting shares, Mr. Korpolinski is terminated or experiences a change inhis title or responsibilities.  Within 6months after such a change in control, if Mr. Korpolinski terminates theemployment 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 thevesting and exercisability of his options will accelerate in full in the eventhis employment is involuntarily terminated without cause or voluntarilyterminated for specified reasons within twenty-four (24) months after aspecified change in control.  Stockoptions granted under the 1996 Plan become fully exercisable after a specifiedchange in control.  Stressgen rents acondominium in San Diego for Mr. Korpolinski for U.S. $2,650 per month andreimburses him approximately U.S. $5,000 per year for supplemental lifeinsurance, together with income taxes on such amounts.

 

Dr. Howard Holden, our VicePresident, Regulatory Affairs and Compliance, is employed under an agreementdated May 8, 2002.  In 2003, Dr. Holden received a base salary of U.S. $270,300 under this agreement.  He also is eligible for a bonus of up to 25% of his base salary,depending upon the achievement of corporate goals and the measure of hisindividual performance. In the eventthat Dr. Holden is terminated without cause, he is entitled to 6 months ofseverance payments.  Dr. Holden is alsoentitled to 12 months of severance payments in the event of termination orsignificant change in title or responsibilities within 12 months after aspecified change in control.   Dr.Holden’s stock option agreements under the 2001 Plan provide that the vestingand exercisability of his options will accelerate in full in the event hisemployment is involuntarily terminated without cause or voluntarily terminatedfor specified reasons within 24 months after a specified change in control.

 

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Mr. Gregory McKee, our VicePresident, Corporate Development and Chief Financial Officer, is employed underan agreement dated June 9, 2003.  In2003, Mr. McGee received a basesalary of U.S. $205,000 under this agreement; he also received arelocation allowance of up to U.S. $30,000. Mr. McKee is eligible for a bonus of up to 25% of his base salary, depending upon the achievementof corporate goals and the measure of his individual performance. In the event that Mr. McKee is terminatedwithout cause, he is entitled to 9 months of severance payments.  Mr. McKee is also entitled to severance payments equal to 9 monthsbase salary in the event of a termination or constructive termination withintwo years after a change in control. Mr. McKee stock optionagreements under the 2001 Plan provide that the vesting and exercisability ofhis options will accelerate in full in the event his employment isinvoluntarily terminated without cause or voluntarily terminated for specifiedreasons within 24 months after a specified change in control.

 

Our Senior Vice President,Clinical Research, John R. Neefe, M.D., is employed under an employmentagreement dated December 14, 1998, as amended on December 16, 1999.  In 2003 Dr. Neefe’s base salary was U.S.$294,600 under this agreement; he also is eligible for a bonus of up to 20% ofhis 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 severancepayments equal to his last two years’ compensation in the event of terminationwithin 12 months’ after a change in ownership of our common stock within any 3month period of at least 50% which results in a change in the majority of themembers of our Board.  Dr. Neefe’s stockoption agreements under the 2001 Plan provide that the vesting andexercisability of his options will accelerate in full in the event hisemployment is involuntarily terminated without cause or voluntarily terminatedfor specified reasons within 24 months after a specified change incontrol.  Stock options granted underthe 1996 Plan become fully exercisable after a specified change in control.

 

Marvin I. Siegel, Ph.D., ourExecutive Vice President, Research and Development, is employed under anemployment agreement dated February 5, 1997, as amended on January 11,1999.  In 2003 Dr. Siegel’s base salarywas U.S. $269,400 under this agreement; he also is eligible for a bonus basedon exemplary service and supplemental disability insurance.  In the event that Dr. Siegel is terminatedwithout cause, he is entitled to 12 months notice or severance payments.  Dr. Siegel is also entitled to severancepayments equal to 24 months base salary in the event of termination within 12months after an acquisition of more than 50% of our outstanding shares as aresult of which a majority of the members of our Board change within 3months.  Dr. Siegel’s stock optionagreements under the 2001 Plan provide that the vesting and exercisability ofhis options will accelerate in full in the event his employment isinvoluntarily terminated without cause or voluntarily terminated for specifiedreasons within 24 months after a specified change in control.  Stock options granted under the 1996 Planbecome fully exercisable after a specified change in control.

 

Our Vice President and ChiefFinancial Officer, Donald D. Tartre, was employed under an employment agreementdated March 5, 2001, under which he was eligible for a base salary of $241,800in 2003 and a bonus of up to 25% of his base salary, depending upon theachievement of corporate goals and the measure of his individualperformance.  Mr. Tartre left Stressgenon January 14, 2004.

 

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Subject to the *Business Corporations Act*(Yukon Territory), if specific preconditions are met, we will indemnify personsincluding a director, officer, former director or officer, person who hasundertaken any liability on behalf of the corporation, and his or her heirsagainst losses reasonably incurred by reason of such status.  Indemnification covers losses, charges andexpenses incurred as a result of actions in such capacities.  We are also empowered under our By-laws andthe BCA (Yukon Territory) to purchase insurance on behalf of any person who weare required or permitted to indemnify. Pursuant to this provision, we currently maintain directors and officersinsurance coverage.  In addition, wehave entered into indemnity agreements with our directors and officers andintend to enter into similar agreements with future directors and officers.These agreements could require us to indemnify those officers and directorsagainst liabilities that arise by reason of their status or service as officersor directors. In certain circumstances the agreements would also require us toadvance the expenses an officer or director incurs in legal proceedings. Webelieve that the provisions in our By-laws and contractual indemnification arenecessary to attract and retain qualified persons as directors and officers. Atpresent, there is no pending litigation or proceeding involving any of ourdirectors, officers, employees or agents where indemnification will be requiredor permitted. We are not aware of any threatened litigation or proceeding thatmay result in a claim for indemnification.

 

**Item 12****.  SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**

 

The following table sets forth informationas of January 31, 2003 with respect to (i) each stockholder known to us to bethe beneficial owner of more than 5% of our outstanding common stock, (ii) eachdirector, (iii) our Chief Executive Officer, our four most highly compensatedexecutive officers other than the Chief Executive Officer who were serving asexecutive officers at the end of the last completed fiscal year and anindividual who was not serving as an executive officer of the registrant at theend of the last completed fiscal year but who currently is one of our four mosthighly compensated executive officers other than the Chief Executive Officer(together, the “Named Executive Officers”) and (iv) all of our directors andexecutive officers as a group.  Exceptas set forth below, each of the named persons has sole voting and investmentpower 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)(3)** |   |
|-------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------|--------|-----------------------------------------------|--------|
|                                                                          |   |                                                                          |   |                                          |   |
| Roche Finance Ltd.  Grenzacherstrasse 124, CH – 4070  Basel, Switzerland |   | 4,392,436                                                                     | (4)    | 6.0                                           | %      |
| FMR Corp.  82 Devonshire Street  Boston, MA 02109                             |   | 6,694,170                                                                     | (5)    | 9.2                                           | %      |

 

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| **Beneficial Owner of Common Stock  (1)**                                                                                                          |   | **Amount and  Nature of  Beneficial Ownership of  Common Stock (2)(3)** |   | **Percent of  Class of  Common Stock (2)(3)** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------|--------|-----------------------------------------------|--------|
|                                                                                                                                               |   |                                                                    |   |                                          |   |
| RBC Asset Management, Inc.  Royal Trust Tower, Suite 3800  P.O. Box 121, Toronto Dominion Centre  77 King Street West  Toronto, ON M5K 1H4  Canada |   | 8,641,400                                                               |   | 11.9                                          | %      |
| Joann L. Data, M.D., Ph.D.                                                                                                                         |   | 55,000                                                                  |   |                                          | *      |
| Ian Lennox                                                                                                                                         |   | 53,333                                                                  |   |                                          | *      |
| Kenneth  Galbraith (6)                                                                                                                             |   | 100,000                                                                 |   |                                          | *      |
| Elizabeth Greetham                                                                                                                                 |   | 40,000                                                                  |   |                                          | *      |
| Margot Northey                                                                                                                                     |   | 41,666                                                                  |   |                                          | *      |
| Jay M. Short, Ph.D (7).                                                                                                                            |   | 117,000                                                                 |   |                                          | *      |
| Daniel L.  Korpolinski                                                                                                                             |   | 1,134,332                                                               |   | 1.5                                           | %      |
| Howard  Holden, Ph.D.                                                                                                                              |   | 55,415                                                                  |   |                                          | *      |
| John R.  Neefe, M.D.                                                                                                                               |   | 160,276                                                                 |   |                                          | *      |
| Marvin I.  Siegel, Ph.D                                                                                                                            |   | 146,165                                                                 |   |                                          | *      |
| Donald D. Tartre                                                                                                                                   |   | 50,000                                                                  |   |                                          | *      |
|                                                                                                                                               |   |                                                                    |   |                                          |   |
| All Directors and Executive Officers as a  Group (12 persons)                                                                                      |   | 1,953,187                                                               |   | 2.6                                           | %      |

 

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*Less than one percent

 

(1)           This table is based upon information knownto Stressgen or supplied by its officers, directors and principalshareholders.  Except as shown otherwisein the table, the address of each person listed is in the care of StressgenBiotechnologies, Inc., 6055 Lusk Boulevard, San Diego, California 92121.

 

(2)           Except as otherwise indicated in thefootnotes of this table and pursuant to applicable community property laws, thepersons named in the table have sole voting and investment power with respectto all shares of common stock. Beneficial ownership is determined in accordance with the rules of theCommission and generally includes voting or investment power with respect tosecurities. Shares of common stock subject to options or warrants exercisablewithin 60 days of February 12, 2004 are deemed outstanding for computing thepercentage of the person or entity holding such options or warrants but are notdeemed outstanding for computing the percentage of any other person.

 

(3)           In the case of the individuals listed below,the number of shares beneficially owned includes a specified number of sharesissuable upon exercise of stock options exercisable within 60 days of February12, 2004: Dr. Data (55,000); Mr. Lennox (53,333); Mr. Galbraith (85,000); Ms.Greetham (40,000); Ms. Northey (41,666); Dr. Short (95,000); Mr. Korpolinski(1,133,332); Dr. Holden (55,415); Dr. Neefe (151,943); Dr. Siegel (129,165);and  Mr. Tartre (50,000).  Percentage of beneficial ownership is basedupon 72,491,403 shares of our common stock deemed outstanding as of February12, 2004.

 

(4)           Includes 2,036,436 common shares and up to2,356,000 common shares issuable upon the exercise of a warrant, which RocheFinance Ltd. may exercise in its discretion through June 28, 2007.

 

(5)           Represents holdings by FMR Corp. and itsdirectly and indirectly owned subsidiaries, in the context of passiveinvestment activities only, for the investment accounts they manage on adiscretionary basis.

 

(6)           Mr. Galbraith disclaims beneficial ownershipof 15,000 shares of common stock, which are held by Mrs. Shelley Galbraith onbehalf of two minor children.

 

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(7)           Mr. Short disclaims beneficial ownership of22,000 shares of common stock, which are held by the Ryco 2001 Family Trust onbehalf of Mr. Short and his immediate family.

 

**Item 13****.  CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS**

 

None.

 

**Item 14****.  PRINCIPALACCOUNTING FEES AND SERVICES**

 

The information presented below is denominated in U.S. dollars unlessotherwise noted.

 

**AuditFees**

 

During the years ended December 31, 2003 and 2002, we paid Deloitte& Touche LLP (“Deloitte”) aggregate fees and related expenses for the auditof our financial statements for the year and for the reviews of the our interimfinancial statements of approximately $108,000 and $106,000, respectively.  Of these amounts, $20,000 and $10,000related to translation services performed in 2003 and 2002 respectively.

** **

**Audit-RelatedFees**

 

# **We paid Deloitte approximately $4,000 and $16,000 during the years ended December31, 2003 and 2002, respectively, related to audit-related services.**

 

**Tax Fees**

 

During the years ended December31, 2003 and 2002, we paid Deloitte aggregate fees and related expenses of$64,000 and $46,000 for preparation of our income tax returns and other taxconsulting.

 

**All Other Fees**

 

We incurred fees for otherprofessional services rendered by Deloitte of approximately $57,000 and $58,000during the years ended December 31, 2003 and 2002, respectively.  In 2003, these services related primarily tosupport of our fourth quarter equity offering. In 2002, these services primarily related to design and implementationof global tax strategies.

 

Generally, before we engage Deloitte to render audit or non-auditservices, the engagement is approved by our audit committee.  Our audit committee reviews writtenengagement letters prepared by Deloitte for engagements such as the annualaudit.  It has also pre-approved theengagement of Deloitte for tax matters including the preparation of federal,provincial and state income tax returns pursuant to specific pre-approvalguidelines established by the audit committee. In 2003, 26% of the services were approved by the audit committeeretroactively. Management engaged Deloitte to perform these services in compliancewith audit committee policy, and informed the audit committee of each suchservice thereafter.

 

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**PART IV**

 

**Item 15****.  EXHIBITS,FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K**

 

(1)  Financial Statements

 

Our financial statements areincluded herein under Item 8 of this Annual Report on Form 10-K.

 

(2)  Financial Statement Schedules

 

Financial statement scheduleshave been omitted since they are either not required, not applicable, or theinformation is otherwise included.

 

(3)  Exhibits

 
| **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+          |   | Articles of  Continuance of the Company                                                                                                                                                    |
| 10.15           |   | Restructured and Restated HspE7 Collaboration  Agreement dated December 1, 2003 among the Company, Stressgen Development  Corporation, F.Hoffmann-La Roche Ltd. and Hoffmann-La Roche Inc. |
| 21.3++          |   | List of  Subsidiaries                                                                                                                                                                      |
| 23.1            |   | Independent Auditors’  Consent                                                                                                                                                        |
| 24.1            |   | Power of  Attorney (Included on the signature page of this Annual Report on Form 10-K)                                                                                                     |
| 31.1            |   | Rule  13a-14(a)/15d-14(a) Certification of Chief Financial Officer                                                                                                                         |
| 31.2            |   | Rule  13a-14(a)/15d-14(a) Certification of Chief Executive Officer                                                                                                                         |
| 32              |   | Section 1350  Certification                                                                                                                                                                |

 

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

 

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

 

*** Incorporated by referenceto Exhibit 99.1 of the Company’s Registration Statement on Form S-8, as filedwith the Commission on May 30, 2001

 

+ Incorporated by reference tothe Company’s Form 10-K for the year ended December 31, 2001, as filed with theCommission on March 19, 2002

 

++ Incorporated by reference tothe Company’s Form 10-K for the year ended December 31, 2002, as filed with theCommission on February 10, 2003

 

85

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(b)           Reports on Form 8-K

 

OnDecember 2, 2003 we filed with the Securities and Exchange Commission a reporton Form 8-K describing under “Item 5 — Other Events” our restructuredcollaboration agreement with Roche.

 

**Supplemental Information to beFurnished with Reports Filed Pursuant to Section 15(d) of the Act byRegistrants Which Have Not Registered Securities Pursuant to section 12 of theAct.**

 

Asof the date hereof, no annual report for the 2003 fiscal year or proxymaterials have been sent to our shareholders. An annual report and proxy materials will be furnished to shareholdersand the Securities and Exchange Commission on or about April 12, 2004.

 

 

###### **SIGNATURES**

 

Pursuant tothe 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 itsbehalf by the undersigned, thereunto duly authorized.

 

 
|                          | STRESSGEN  BIOTECHNOLOGIES CORPORATION |
|-------------------------------|----------------------------------------|
|                          |                                   |
| Date:  February 19, 2004 | BY:                                    | /s/ Daniel  L. Korpolinski |
|                          |                                   | Daniel L.  Korpolinski |
|                          |                                   | President  and Chief Executive Officer |

 

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**POWEROF ATTORNEY**

** **

KNOW ALLPERSONS BY THESE PRESENTS, that each person whose signature appears belowconstitutes and appoints Daniel L. Korpolinski and Gregory M. McKee, as histrue and lawful attorneys-in-fact and agents, with full power of substitutionand resubstitution, for him and in his name, place and stead, in any and allcapacities, 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 inconnection therewith, with the Securities and Exchange Commission, grantingunto said attorneys-in-fact and agents, and full power and authority to do andperformance each and every act and thing requisite and necessary to be done inconnection therewith, as fully to intents and purposes as he might or could doin person, hereby ratifying and confirming that all said attorneys-in-fact andagents, or any of them or their or his substitute or resubstitute, may lawfullydo or cause to be done by virtue hereof.

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, as amended, thisreport has been signed below by the following person on behalf of theRegistrant and in the capacities and on the dates indicated.

 
| **Signature**               |   | **Title**                                                                                      |   | **Date**           |
|-----------------------------|--------|------------------------------------------------------------------------------------------------|--------|--------------------|
|                        |   |                                                                                           |   |               |
| /s/ Daniel  L. Korpolinski  |   | Chief  Executive Officer, President and Director                                               |   | February 19,  2004 |
| Daniel L.  Korpolinski      |   | *(Principal Executive Officer)*                                                                |   |               |
|                        |   |                                                                                           |   |               |
| /s/ Gregory  M. McKee       |   | Vice  President, Corporate Development and Chief Financial Officer (*Principal  Financial and* |   | February 19,  2004 |
| Gregory M.  McKee           |   | *Accounting Officer)*                                                                          |   |               |
|                        |   |                                                                                           |   |               |
| /s/ Joann L.  Data          |   | Director                                                                                       |   | February 19,  2004 |
| Joann L.  Data, M.D., Ph.D. |   |                                                                                           |   |               |
|                        |   |                                                                                           |   |               |
| /s/ Kenneth  Galbraith      |   | Director                                                                                       |   | February 19,  2004 |
| Kenneth  Galbraith          |   |                                                                                           |   |               |
|                        |   |                                                                                           |   |               |
| /s/  Elizabeth Greetham     |   | Director                                                                                       |   | February 19,  2004 |
| Elizabeth  Greetham         |   |                                                                                           |   |               |
|                        |   |                                                                                           |   |               |
| /s/ Ian  Lennox             |   | Chairman of  the Board of Directors                                                            |   | February 19,  2004 |
| R. Ian  Lennox              |   |                                                                                           |   |               |
|                        |   |                                                                                           |   |               |
| /s/ Margot  Northey         |   | Director                                                                                       |   | February 19,  2004 |
| Margot  Northey             |   |                                                                                           |   |               |
|                        |   |                                                                                           |   |               |
| /s/ Jay  Short              |   | Director                                                                                       |   | February 19,  2004 |
| Jay Short                   |   |                                                                                           |   |               |

 

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