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

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FORM 10-Q

(Mark One)

|/x/ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- | ---------------------------------------------------------------------------------------

For the Quarterly Period Ended September 30, 2001

or

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

Commission file number 333-12570

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STRESSGEN BIOTECHNOLOGIES CORPORATION(Exact name of registrant as specified in its charter)

Yukon Territory, Canada(State of incorporation)

N/A(IRS Employer Identification No.)4445 Eastgate Mall, Suite 200
San Diego, CA(Address of principal executive offices)

92121(zip code)


(858) 812-5616(Registrant's telephone number, including area code)

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

As
of October 22, 2001, the registrant had 50,858,000 shares of Common Stock, no par value, outstanding.

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Stressgen Biotechnologies Corporation and Subsidiaries

INDEX

|                             |  |         |  |                                                                                                          |  | Page
|---------------------------- |  | ------- |  | -------------------------------------------------------------------------------------------------------- |  | ----
|Part IFinancial Information |  |        
|                             |  | Item 1. |  | Financial Statements                                                                                     |  |     
|                             |  |         |  | Consolidated Balance SheetSeptember 30, 2001 and December 31, 2000                                      |  | 1   
|                             |  |         |  | Consolidated Statement of Operations and DeficitThree and Nine Months Ended September 30, 2001 and 2000 |  | 2   
|                             |  |         |  | Consolidated Statement of Cash FlowsThree and Nine Months Ended September 30, 2001 and 2000             |  | 3   
|                             |  |         |  | Notes to Consolidated Financial Statements                                                               |  | 4   
|                             |  | Item 2. |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                    |  | 9   
|                             |  | Item 3. |  | Quantitative and Qualitative Disclosures About Market Risk                                               |  | 12  
|                             |  |         |  | Impact of Inflation                                                                                      |  | 12  
|                             |  |         |  | Certain Factors Affecting Future Performance                                                             |  | 12  
|Part IIOther Information    |  |        
|Item 1 through 6             |  | 20     
|SIGNATURE                    |  | 20     

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CONSOLIDATED BALANCE SHEET (Unaudited)

Stressgen Biotechnologies Corporation and Subsidiaries
(Canadian Dollars In Thousands)

|                                                  |                                                                                                                                                 | September 30,
2001         |        | December 31,
2000 |       
|------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------ | ----------------- | ------
|Assets                                            |                                                                                                                                                 |                            |        |                   |       
|Current assets:                                   |                                                                                                                                                 |                            |        |                   |       
|                                                  | Cash                                                                                                                                            |                            | $      | 1,407             |       
|                                                  | Short-term investments                                                                                                                          |                            |        | 46,021            |       
|                                                  | Accounts receivable                                                                                                                             |                            |        | 694               |       
|                                                  | Inventories                                                                                                                                     |                            |        | 751               |       
|                                                  | Other current assets                                                                                                                            |                            |        | 478               |       
|                                                  |                                                                                                                                                 |                            |        |                   |       
|                                                  |                                                                                                                                                 | Total current assets       |        |                   | 49,351
|Capital assets                                    |                                                                                                                                                 |                            | 2,825  |                   |       
|                                                  |                                                                                                                                                 |                            |        |                   |       
|                                                  |                                                                                                                                                 | $                          | 52,176 |                   | $     
|                                                  |                                                                                                                                                 |                            |        |                   |       
|Liabilities and Stockholders' Equity              |                                                                                                                                                 |                            |        |                   |       
|Current liabilities:                              |                                                                                                                                                 |                            |        |                   |       
|                                                  | Accounts payable and accrued liabilities                                                                                                        |                            | $      | 7,151             |       
|                                                  | Current portion of capital lease obligations                                                                                                    |                            |        | 578               |       
|                                                  |                                                                                                                                                 |                            |        |                   |       
|                                                  |                                                                                                                                                 | Total current liabilities  |        |                   | 7,729 
|Capital lease obligations, net of current portion |                                                                                                                                                 |                            | 657    |                   |       
|                                                  |                                                                                                                                                 |                            |        |                   |       
|                                                  |                                                                                                                                                 |                            | 8,386  |                   |       
|                                                  |                                                                                                                                                 |                            |        |                   |       
|Stockholders' equity:                             |                                                                                                                                                 |                            |        |                   |       
|                                                  | Common shares and other equityno par value; unlimited shares authorized, 50,854,273 and 49,892,271 shares issued and outstanding, respectively |                            |        | 137,729           |       
|                                                  | Accumulated deficit                                                                                                                             |                            |        | (93,939           | )     
|                                                  |                                                                                                                                                 |                            |        |                   |       
|                                                  |                                                                                                                                                 | Total stockholders' equity |        |                   | 43,790
|                                                  |                                                                                                                                                 |                            |        |                   |       
|                                                  |                                                                                                                                                 | $                          | 52,176 |                   | $     
|                                                  |                                                                                                                                                 |                            |        |                   |       

See accompanying notes to consolidated financial statements.

1

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CONSOLIDATED STATEMENT OF OPERATIONS AND DEFICIT (Unaudited)

Stressgen Biotechnologies Corporation and Subsidiaries
(Canadian Dollars In Thousands, Except Per Share Amounts)

|                                                                                     |                                     | Three months ended
September 30, |         | Nine months ended
September 30, |  
|------------------------------------------------------------------------------------ | ----------------------------------- | -------------------------------- | ------- | ------------------------------- | -
|
|Revenue:                                                                             |                                     |                                  |         |                                 |  
|                                                                                     | Bioreagent sales                    |                                  | $       | 1,190                           |  
|                                                                                     |                                     |                                  |         |                                 |  
|Operating expenses:                                                                  |                                     |                                  |         |                                 |  
|                                                                                     | Research and development            |                                  |         | 7,852                           |  
|                                                                                     | Selling, general and administrative |                                  |         | 1,569                           |  
|                                                                                     | Cost of bioreagent sales            |                                  |         | 460                             |  
|                                                                                     | Amortization                        |                                  |         | 168                             |  
|                                                                                     |                                     |                                  |         |                                 |  
|                                                                                     |                                     |                                  | 10,049  |                                 |  
|                                                                                     |                                     |                                  |         |                                 |  
|Operating loss                                                                       |                                     |                                  | (8,859  | )                               |  
|                                                                                     |                                     |                                  |         |                                 |  
|Other income (expenses):                                                             |                                     |                                  |         |                                 |  
|                                                                                     | Interest and other income, net      |                                  |         | 1,591                           |  
|                                                                                     | Interest expense                    |                                  |         | (26                             | )
|                                                                                     |                                     |                                  |         |                                 |  
|                                                                                     |                                     |                                  | 1,565   |                                 |  
|                                                                                     |                                     |                                  |         |                                 |  
|Net loss                                                                             |                                     |                                  | (7,294  | )                               |  
|Accumulated deficit, beginning of period                                             |                                     |                                  | (86,645 | )                               |  
|                                                                                     |                                     |                                  |         |                                 |  
|Accumulated deficit, end of period                                                   |                                     | $                                | (93,939 | )                               | $
|                                                                                     |                                     |                                  |         |                                 |  
|Basic and diluted loss per common share                                              |                                     | $                                | (0.14   | )                               | $
|                                                                                     |                                     |                                  |         |                                 |  
|Common shares used to compute basic and diluted loss per common share (in thousands) |                                     |                                  | 50,634  |                                 |  
|                                                                                     |                                     |                                  |         |                                 |  

See accompanying notes to consolidated financial statements.

2

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CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)

Stressgen Biotechnologies Corporation and Subsidiaries
(Canadian Dollars In Thousands)

|                                                    |                                                                             | Three months ended
September 30,         |        | Nine months ended
September 30, |       
|--------------------------------------------------- | --------------------------------------------------------------------------- | ---------------------------------------- | ------ | ------------------------------- | ------
|
|Cash flows from operating activities:               |                                                                             |                                          |        |                                 |       
|                                                    | Net loss                                                                    |                                          | $      | (7,294                          | )     
|                                                    | Adjustments to reconcile net loss to net cash used in operating activities: |                                          |        |                                 |       
|                                                    |                                                                             | Amortization                             |        |                                 | 168   
|                                                    |                                                                             | Unrealized foreign exchange loss (gain)  |        |                                 | (1,214
|                                                    | Changes in operating assets and liabilities:                                |                                          |        |                                 |       
|                                                    |                                                                             | Accounts receivable                      |        |                                 | 21    
|                                                    |                                                                             | Inventories                              |        |                                 | 30    
|                                                    |                                                                             | Other current assets                     |        |                                 | 18    
|                                                    |                                                                             | Accounts payable and accrued liabilities |        |                                 | 1,223 
|                                                    |                                                                             |                                          |        |                                 |       
|Net cash used in operating activities               |                                                                             |                                          | (7,048 | )                               |       
|                                                    |                                                                             |                                          |        |                                 |       
|Cash flows from investing activities:               |                                                                             |                                          |        |                                 |       
|                                                    | Purchase of short-term investments                                          |                                          |        | (43,839                         | )     
|                                                    | Sales and maturities of short-term investments                              |                                          |        | 49,833                          |       
|                                                    | Acquisition of capital assets                                               |                                          |        | (184                            | )     
|                                                    |                                                                             |                                          |        |                                 |       
|Net cash provided by (used in) investing activities |                                                                             |                                          | 5,810  |                                 |       
|                                                    |                                                                             |                                          |        |                                 |       
|Cash flows from financing activities:               |                                                                             |                                          |        |                                 |       
|                                                    | Proceeds on issue of common shares                                          |                                          |        | 2,275                           |       
|                                                    | Proceeds on issue of special warrants                                       |                                          |        |                                |       
|                                                    | Proceeds from borrowings                                                    |                                          |        |                                |       
|                                                    | Repayment of borrowings                                                     |                                          |        | (119                            | )     
|                                                    |                                                                             |                                          |        |                                 |       
|Net cash provided by financing activities           |                                                                             |                                          | 2,156  |                                 |       
|                                                    |                                                                             |                                          |        |                                 |       
|Effect of exchange rate changes on cash             |                                                                             |                                          | (43    | )                               |       
|                                                    |                                                                             |                                          |        |                                 |       
|Increase (decrease) in cash                         |                                                                             |                                          | 875    |                                 |       
|Cash, beginning of period                           |                                                                             |                                          | 532    |                                 |       
|                                                    |                                                                             |                                          |        |                                 |       
|Cash, end of period                                 |                                                                             | $                                        | 1,407  |                                 | $     
|                                                    |                                                                             |                                          |        |                                 |       
|Supplemental disclosures of cash flows:             |                                                                             |                                          |        |                                 |       
|                                                    | Interest paid                                                               |                                          | $      | 55                              |       
|                                                    |                                                                             |                                          |        |                                 |       
|Supplemental disclosures of financing transactions: |                                                                             |                                          |        |                                 |       
|                                                    | Common shares issued on conversion of special warrants                      |                                          | $      |                                |       
|                                                    |                                                                             |                                          |        |                                 |       

See accompanying notes to consolidated financial statements.

3

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Stressgen Biotechnologies Corporation and Subsidiaries
(Canadian Dollars)

1.  THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES

The Company

Stressgen Biotechnologies Corporation ("Stressgen" or the "Company") is a biopharmaceutical company focused on the development and commercialization of
innovative stress protein-based immunotherapeutics. The Company is developing a broad range of products for the treatment of viral infections and related cancers. In addition to targeting HspE7 in
HPV-related diseases, the Company has a program to evaluate stress protein fusions in hepatitis B and has also initiated research studies to evaluate its Hsp technology in the treatment of
several other indications. Further, Stressgen is an internationally recognized supplier of research products used by scientists worldwide for the study of cellular stress, apoptosis, oxidative stress
and neurobiology.

Basis of presentation

The consolidated financial statements include the assets, liabilities and operating results of the Company and its wholly-owned subsidiaries.

In
order to achieve financial reporting comparability to peer companies within the biotechnology and pharmaceutical industries, the Company performed a review of the classification of
its operating costs. As a result of this review, certain costs have been reclassified from selling, general and administrative expenses for the six months ended June 30, 2001 to research and
development and cost of bioreagent
sales of $616,000 and $205,000, respectively. Prior period balances have been reclassified to conform to the current periods' presentation.

Financial Statements and Estimates

The information at September 30, 2001 and the three month and nine month periods ended September 30, 2001 and 2000 has been prepared by the
Company and has not been audited. Such financial statements, in the opinion of management, include all adjustments necessary for their fair presentation in conformity with Canadian generally accepted
accounting principles ("Canadian GAAP"), and conform in all material respects with accounting principles generally accepted in the United States of America ("U.S. GAAP"), except as discussed in
Note 4. Certain prior periods balances have been reclassified to conform to the current periods presentation. These financial statements should be read in conjunction with the financial
statements and notes thereto in the Company's December 31, 2000 Annual Report on Form 10-K/A. Certain information and footnote disclosures normally included in financial
statements prepared in accordance with Canadian and U.S. GAAP have been condensed or omitted pursuant to the applicable Canadian regulatory and U.S. Securities and Exchange Commission rules and
regulations. Interim results are not necessarily indicative of results for the full year.

The
preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses and related disclosures as of the date of the financial statements. Actual results could differ from such estimates.

Foreign Currency Translation

The Company and its subsidiaries use the Canadian dollar as their functional currency. Monetary assets and liabilities are translated into Canadian dollars at
the rate of exchange prevailing at the

4

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balance sheet date. Non-monetary assets and liabilities are translated at historical rates. Revenues and expenses are translated at the average rate of exchange for the period of such
translations. Exchange gains and losses are recorded in the statement of operations.

2.  BALANCE SHEET DETAILS

Inventories

Inventories consist of the following components:

|(In thousands)                     |  | September 30,
2001 |     | December 31,
2000
|---------------------------------- |  | ------------------ | --- | -----------------
|Raw materials and work in progress |  | $                  | 476 |                  
|Finished goods                     |  |                    | 275 |                  
|                                   |  |                    |     |                  
|                                   |  | $                  | 751 |                  
|                                   |  |                    |     |                  

Stockholders' Equity

In 1998, the Company issued 4,000,000 Class B Warrants entitling the holder to acquire one additional common share on or before September 11,
2003. The exercise price is $3.30 for each Class B Warrant (or U.S.$2.27). At the option of the holder, the Class B Warrants may be exercised through cashless exercise, which permits the
warrant holder to deduct the strike price of the warrant from the market price of the common shares at the time of exercise, and to receive the difference in common shares valued at the market price
at the time of exercise. There were 3,256,202 Class B Warrants outstanding at September 30, 2001.

In
2000, the Company completed an offering of 7,449,000 Special Warrants at a price of $3.40 per Warrant for gross proceeds of $25,327,000. In connection with the offering, the
Company issued 744,900 underwriters' special warrants, exercisable at $3.68 per warrant into 744,900 common shares on or before August 2, 2001. During the three-month period ended
September 30, 2001, all remaining 577,298 underwriter's special warrants were exercised for gross proceeds of $2,124,500.

Stockholders'
equity includes $1,400,000 of contributed surplus resulting from the cancellation of certain warrants and redemption of certain Preference shares for nominal
consideration.

On
May 22, 2001, at the Annual General Meeting of the Company, the stockholders resolved to continue the Company under the laws of the Yukon Territory, and as a result the
authorized common share capital of the Company became unlimited common shares instead of 100,000,000 common shares. Further, the stockholders approved adoption of the 2001 Equity Incentive Plan
reserving an additional 3,500,000 new common shares for issuance pursuant to the grant of stock options.

At
October 22, 2001, there were 50,858,000 common shares issued and outstanding. At September 30, 2001, there were 4,140,449 total options issued and outstanding at
exercise prices ranging from $1.22 to $8.00 per share with remaining weighted average contractual lives of 1.0 year to 8.9 years.

5

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3.  SEGMENT INFORMATION

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

|                                                       |           | Three months ended
September 30,    |        | Nine months ended
September 30, |      
|------------------------------------------------------ | --------- | ----------------------------------- | ------ | ------------------------------- | -----
|
|Biotechnology                                          |           |                                     |        |                                 |      
|                                                       | Expenses: |                                     |        |                                 |      
|                                                       |           | Research and development            |        | $                               | 7,512
|                                                       |           | Selling, general and administrative |        |                                 | 1,258
|                                                       |           |                                     |        |                                 |      
|Segment loss                                           |           | $                                   | 8,770  |                                 | $    
|                                                       |           |                                     |        |                                 |      
|Bioreagents                                            |           |                                     |        |                                 |      
|                                                       | Sales:    |                                     |        |                                 |      
|                                                       |           | U.S.                                |        | $                               | 781  
|                                                       |           | Canada                              |        |                                 | 51   
|                                                       |           | Other                               |        |                                 | 358  
|                                                       |           |                                     |        |                                 |      
|                                                       |           |                                     | 1,190  |                                 |      
|                                                       |           |                                     |        |                                 |      
|                                                       | Expenses: |                                     |        |                                 |      
|                                                       |           | Research and development            |        |                                 | 340  
|                                                       |           | Selling, general and administrative |        |                                 | 311  
|                                                       |           | Cost of bioreagent sales            |        |                                 | 460  
|                                                       |           |                                     |        |                                 |      
|                                                       |           |                                     | 1,111  |                                 |      
|                                                       |           |                                     |        |                                 |      
|Segment income                                         |           | $                                   | 79     |                                 | $    
|                                                       |           |                                     |        |                                 |      
|Totals                                                 |           |                                     |        |                                 |      
|                                                       | Revenue   |                                     | $      | 1,190                           |      
|                                                       |           |                                     |        |                                 |      
|                                                       | Expenses: |                                     |        |                                 |      
|                                                       |           | Research and development            |        |                                 | 7,852
|                                                       |           | Selling, general and administrative |        |                                 | 1,569
|                                                       |           | Cost of bioreagent sales            |        |                                 | 460  
|                                                       |           |                                     |        |                                 |      
|                                                       |           |                                     | 9,881  |                                 |      
|                                                       |           |                                     |        |                                 |      
|Loss excluding amortization, interest and other income |           | $                                   | (8,691 | )                               | $    
|                                                       |           |                                     |        |                                 |      

The
Company does not allocate amortization, interest and other income, and interest expense, nor does it allocate capital assets, to each segment.

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

These financial statements have been prepared in accordance with Canadian GAAP which conform, except as set out below, in all material respects with U.S. GAAP.

6

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Effect on the consolidated financial statements:

Balance Sheet

|(In thousands)                                                                                        |  | September 30,
2001 |        | December 31,
2000
|----------------------------------------------------------------------------------------------------- |  | ------------------ | ------ | -----------------
|Current assets under Canadian GAAP                                                                    |  | $                  | 49,351 |                  
|Adjustment to carrying value of short-term investments classified as available-for-sale securities(a) |  |                    | 90     |                  
|                                                                                                      |  |                    |        |                  
|Current assets under U.S. GAAP                                                                        |  | $                  | 49,441 |                  
|                                                                                                      |  |                    |        |                  
|Stockholders' equity under Canadian GAAP                                                              |  | $                  | 43,790 |                  
|Unrealized holding gains on available-for-sale securities(a)                                          |  |                    | 90     |                  
|                                                                                                      |  |                    |        |                  
|Stockholders' equity under U.S. GAAP                                                                  |  | $                  | 43,880 |                  
|                                                                                                      |  |                    |        |                  

Statement of Operations

|                                                                                 |  | Three months ended
September 30, |        | Nine months ended
September 30, |  
|-------------------------------------------------------------------------------- |  | -------------------------------- | ------ | ------------------------------- | -
|
|Net loss under Canadian GAAP                                                     |  | $                                | (7,294 | )                               | $
|Reversal of unrealized foreign exchange gain on available-for-sale securities(a) |  |                                  | (1,257 | )                               |  
|Reversal of write-down of short term Investments                                 |  |                                  |       |                                 |  
|Stock-based compensation expense on escrow shares(b)                             |  |                                  |       |                                 |  
|Stock-based compensation expense on stock options(c)                             |  |                                  | (66    | )                               |  
|                                                                                 |  |                                  |        |                                 |  
|Net loss under U.S. GAAP                                                         |  | $                                | (8,617 | )                               | $
|                                                                                 |  |                                  |        |                                 |  
|Basic loss per common share under Canadian GAAP                                  |  | $                                | (0.14  | )                               | $
|                                                                                 |  |                                  |        |                                 |  
|Basic loss per common share under U.S. GAAP                                      |  | $                                | (0.17  | )                               | $
|                                                                                 |  |                                  |        |                                 |  
|Common shares used to compute basic loss per share under Canadian and U.S. GAAP  |  |                                  | 50,634 |                                 |  
|                                                                                 |  |                                  |        |                                 |  

Statement of Cash Flows

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

Differences

As disclosed in Note 12 to the financial statements in the Company's December 31, 2000 Annual Report on Form 10-K/A,
differences exist for the Company between Canadian and U.S. GAAP.

The
following outlines the differences that affect the Company for the nine month periods ended September 30, 2001 and 2000.

7

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|                                             |                                                                                                       | Three months ended
September 30, |        | Nine months ended
September 30, |  
|-------------------------------------------- | ----------------------------------------------------------------------------------------------------- | -------------------------------- | ------ | ------------------------------- | -
|
|Net loss under U.S. GAAP                     |                                                                                                       | $                                | (8,617 | )                               | $
|Other comprehensive income                   |                                                                                                       |                                  |        |                                 |  
|                                             | Adjustment to unrealized foreign exchange and market (losses) gains on available-for-sale investments |                                  |        | 1,347                           |  
|                                             |                                                                                                       |                                  |        |                                 |  
|Comprehensive net loss under U.S. GAAP       |                                                                                                       | $                                | (7,270 | )                               | $
|                                             |                                                                                                       |                                  |        |                                 |  
|Comprehensive loss per share under U.S. GAAP |                                                                                                       | $                                | (0.14  | )                               | $
|                                             |                                                                                                       |                                  |        |                                 |  

Recent pronouncements

In July 1999, the FASB announced a delay of the effective date of SFAS No. 133,Accounting for Derivative Instruments and
Hedging Activitiesto the first quarter of 2001. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires companies to recognize all derivatives as either assets or liabilities on the balance sheet and measure those
instruments at fair value. Under SFAS No. 133, gains or losses resulting from changes in the values of those derivatives are accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. The Company adopted SFAS No. 133 for U.S. GAAP purposes on January 1, 2001 with no material effect on the Company's financial position or results of
operations.

8

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

The Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risk and
uncertainties. The predictions described in these statements may not materialize if management's current expectations regarding our future performance prove incorrect; our results could also be
affected by factors including, but not limited to, the risks described below under "Certain Factors Affecting Future Performance". The forward-looking statements are based on currently available
information; we have no obligation to update them.

The
following information should be read in conjunction with our September 30, 2001 consolidated financial statements and related notes therein, which include adjustments
necessary for their fair presentation in accordance with Canadian generally accepted accounting principles or Canadian GAAP. For the Company, these principles differ in certain respects from
accounting principles generally accepted in the United States or U.S. GAAP. The differences, as they affect our consolidated financial statements, are described in Note 4 to our
September 30, 2001 consolidated financial statements. All amounts following are expressed in Canadian dollars unless otherwise indicated.

Overview

Our activities are focused primarily on the research and development of a unique class of proteins, called stress proteins, to regulate the body's own immune
response to combat infectious diseases. We believe that the use of stress proteins, genetically combined with various antigens derived from disease-causing organisms, will likely yield novel
therapeutic products.

We
are evaluating the potential of HspE7, our first product candidate, as a broad-based therapeutic for diseases caused by the human papillomavirus, or HPV. We currently have a number
of clinical trials ongoing, including one phase III trial and several phase II trials to treat various indications including genital warts, anal dysplasia, cervical dysplasia and cervical cancer.
Further, we will soon initiate a clinical trial to evaluate HspE7 for the treatment of another serious HPV-related disease, recurrent respiratory papillomatosis, or RRP, for which the U.S.
Food and Drug Administration recently granted us orphan drug status. We also have a program to evaluate stress protein fusions in hepatitis B, and have initiated research studies to evaluate our Hsp
technology in several other indications. Through our bioreagent business, we also supply research products to scientists worldwide for the study of cellular stress, apoptosis, oxidative stress and
neurobiology.

We
have incurred significant losses since our inception and expect to incur substantial losses for the foreseeable future as we invest in our research and product development
programs, including manufacturing, pre-clinical studies and clinical trials, and regulatory activities. At September 30, 2001, our accumulated deficit was $93,939,000. We have been
dependent principally upon equity financings to fund our business activities.

Results of Operations

For the three and nine months ended September 30, 2001, our net loss increased by approximately 75% and 72%, respectively, to $7,294,000 and
$24,631,000, respectively, due principally to increased investment in our clinical validation and product development program for our broad-spectrum lead therapeutic candidate, HspE7.

In
order to achieve financial reporting comparability to peer companies within the biotechnology and pharmaceutical industries, we recently performed a review of the classification of
our operating costs. As a result of this review, certain costs have been reclassified from selling, general and administrative expenses for the six months ended June 30, 2001 to research and
development and cost

9

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of bioreagent sales of $616,000 and $205,000, respectively. Prior period balances have been reclassified to conform to the current periods' presentation.

Bioreagent sales

Bioreagent sales for the three and nine month periods ended September 30, 2001, increased by approximately 5% and 30% to $1,190,000 and $3,769,000,
respectively, compared to the same periods in the prior year. This increase was attributed to growing demand for our stress protein bioreagents, complementary new product introductions, and increased
prices.

Research and development

Research and development, or R&D, spending increased by approximately 71% and 88% to $7,852,000 and $25,174,000 for the three and nine month periods ended
September 30, 2001 over the same periods in the prior year, due principally to increased clinical trial activities and manufacturing scale-up costs associated with our leading
product candidate, HspE7.

Selling, general and administrative expenses

Selling, general and administrative, or SG&A, expenses represented approximately 16% and 17% of total operating expenses during the three and nine month
periods ended September 30, 2001, compared with 17% and 23% over the same periods in the prior year. SG&A spending increased by approximately 58% and 25% to $1,569,000 and $5,299,000 for the
three and nine month periods ended September 30, 2001 over the same periods in the prior year, due principally to enhanced business development activities, costs associated with our expanded
North American operations, and the addition of key executive personnel.

Cost of bioreagent sales

Based on management's ongoing review of product demand and inventory balances on-hand, a provision of $214,000 for phased out and discontinued
product was recorded in the current quarter.

The
aggregate cost of bioreagent sales as a percentage of bioreagent sales, excluding the provision, was approximately 21% for both the three and nine month periods ended
September 30, 2001 resulting in gross margins of 79%, respectively, compared with 86% and 85% in 2000. The decrease in the gross margin percentage for the nine month period ended
September 30, 2001 compared to the same period in the prior year principally reflects the impact of current year inventory write-offs.

Amortization

Amortization expense increased by 33% and 14% to $168,000 and $425,000 for the three and nine month periods ended September 30, 2001 from the same
periods in the prior year due principally to the expansion of our Victoria research facility and acquisition of laboratory equipment to support our advanced HspE7 development activities.

Interest and other income

Interest and other income increased by 191% and 172% to $1,591,000 and $3,589,000 for the three and nine month period ended September 30, 2001 from the
same periods in the prior year. The increased income is due principally to $1,119,000 and $1,390,000, respectively, of unrealized gains from foreign currency exchange on U.S. investments. Further, the
Company's 2001 interest income has increased due to higher average investment portfolio balance resulting from the public issuance of stock and exercise of warrants in 2000.

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Basic and diluted loss per share

The impact of the 75% and 72% increase in net loss to $7,294,000 and $24,631,000 in the three and nine month periods ended September 30, 2001 compared
with the same periods in the prior year was diluted by increases in the weighted average number of common shares outstanding in each year. The basic and diluted loss per share of was $0.14 and $0.49
for the three and nine month periods ended September 30, 2001 compared with $0.10 and $0.38 for the same periods in the prior year.

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

Our consolidated financial statements include adjustments necessary for their fair presentation in accordance with Canadian GAAP. Certain adjustments would be
required if these statements were to be prepared in all material respects, in accordance with U.S. GAAP.

Conformed
to U.S. GAAP, our net loss would increase by $1,323,000 and $1,714,000 for the three and nine month periods ended September 30, 2001, respectively, and would increase
by $790,000 and $10,067,000 for the corresponding periods in 2000, respectively. The principal differences under U.S. versus Canadian GAAP for the three and nine month periods were due to unrealized
foreign currency exchange gain of $1,257,000 and $1,566,000 on U.S. investments in 2001, and the final release of escrow shares resulting in stock based compensation expense of $9,093,000 in 2000.

Net
loss under U.S. GAAP would have been $8,617,000 and $26,345,000 for the three and nine month periods ended September 30, 2001, and $4,956,000 and $24,395,000 in the
corresponding periods in 2000, respectively. In addition, at September 30, 2001 our current assets under U.S. GAAP would have been $49,441,000 and our stockholders' equity under U.S. GAAP would
have been $43,880,000 whereas at December 31, 2000 under U.S. GAAP our current assets would have been $72,467,000 and our stockholders' equity would have been $65,574,000.

Liquidity and Capital Resources

At September 30, 2001, we had cash and short-term investments of $47,428,000, a decrease of $23,139,000 from December 31, 2000.
During the nine months ended September 30, 2001, we used cash
primarily to finance our clinical development and commercial manufacturing scale-up activities associated with our lead product candidate, HspE7. At September 30, 2001,
approximately 69% of cash and short-term investments were held in U.S. dollars.

During
the nine months ended September 30, 2001 capital expenditures, associated principally with the laboratory expansion in our Victoria, B.C. research facility, rose 349% to
$1,249,000 compared with $278,000 during the same period in 2000, of which $102,000 and $nil, respectively, have been financed through capital lease obligations.

The
Company's cash requirements may vary materially from those now planned because of the results and scope of clinical trials and other research and development activities, the time
required to obtain regulatory approvals, the cost of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights, and its ability to establish collaborative
development and marketing arrangements. As a result of these factors, it is difficult to predict accurately the times additional cash will be needed and the amounts of future cash required.

The
Company may pursue the issuance of additional equity securities, and pursue corporate collaborative agreements, as required, to meet its cash requirements. The issuance of
additional equity securities, if any, could result in substantial dilution to the Company's stockholders. There can be no assurance that additional funding will be available on terms acceptable to the
Company, if at all. If the additional funding is not obtained, the Company will seek alternative sources of debt and/or equity financing and, to the extent necessary, will consider deferring,
canceling or reducing planned initiatives or overhead expenditures.

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The Company has never paid a cash dividend on its common stock and does not contemplate the payment of cash dividends on its common stock in the foreseeable future.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's exposure to market risk is principally confined to its cash and short-term investments. The Company maintains a
non-trading investment portfolio of investment grade, liquid debt securities that limits the amount of credit exposure to any one issue, issuer or type of instrument. The securities in the
Company's portfolio, of which approximately 68% are invested in the U.S., are not leveraged, are classified as available-for-sale and are therefore subject to foreign exchange
and interest rate risk. The Company currently does not hedge foreign exchange or interest rate exposure. A hypothetical 1% change in foreign currency exchange and interest rates during the quarter
ended September 30, 2001 would have resulted in approximately a $277,000 and $23,000, respectively, change in net loss. The
Company has not used derivative financial instruments in its investment portfolio. There have been no significant changes in the types or maturities of investments held from December 31, 2000.

IMPACT OF INFLATION

The impact of inflation on the operations of the Company for the quarters ended September 30, 2001, and 2000 was not material.

CERTAIN FACTORS AFFECTING FUTURE PERFORMANCE

In addition to the other information in this report, the following factors (as well as other factors not listed) have the potential to
materially affect the Company's future operations.

We Are At An Early Stage Of Development

We are still at an early stage of development in our biotechnology business. We have not completed the development of any therapeutic products and, therefore,
have not begun to market or generate revenues from the commercialization of any therapeutic products. We must make significant additional investment in research and development and clinical trials
prior to the commercialization of any of our technology. We have only undertaken limited human clinical trials of some of our product candidates and we cannot assure you that the results obtained from
laboratory or research studies will be replicated in human studies or that such human studies will not identify unwanted side effects. We cannot assure you that any of our products will meet
applicable health regulatory standards, obtain required regulatory approvals or clearances, be capable of being produced in commercial quantities at reasonable costs, be successfully marketed or that
the investment made in such product candidates will be recouped through sales. None of our therapeutic product candidates are expected to be commercially available for a number of years.

We Have A History Of Operating Losses And We May Never Become Profitable

To date, we have not recorded any revenues from the sale of therapeutic products. Since inception we have accumulated net losses of over $93,939,000; we expect
such losses to increase as we continue our research and development and clinical trials. We expect to continue to incur substantial operating losses for at least the next several years. To become
profitable, we, either alone or with one or more partners, must develop, manufacture and successfully market product candidates.

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Our Product Development Programs Are Novel And, Thus, Inherently Risky

Our business is subject to the risks of failure inherent in the development of product candidates based on new technology. These risks include the possibility
that:



There
is no precedent for the successful commercialization of products based on our technologies. It is possible that none of our therapeutic products will be successfully developed.

Our Clinical Trials Could Take Longer To Complete Than Expected

Although for planning purposes we forecast the commencement and completion of clinical trials, the actual timing of these events can vary dramatically due to
factors such as scheduling delays or conflicts with the schedules of participating clinicians and clinical institutions and the rate of patient accruals. Certain of our clinical trials for our most
advanced product candidate, HspE7, involve delaying or preventing the recurrence of disease. As a result, these clinical trials are likely to take longer to complete than clinical trials involving
other types of therapeutics. Our clinical trials may not proceed on the schedules management predicts.

We
have limited experience in conducting clinical trials. We rely on corporate collaborators, academic institutions or clinical research organizations to conduct, supervise or monitor
some or all aspects of clinical trials involving our products. In addition, certain clinical trials for our products will be
conducted by government-sponsored agencies and consequently will be dependent on governmental participation and funding. We will have less control over the timing and other aspects of these clinical
trials than if we conducted them entirely on our own. These trials may not progress as we expect and may not be conducted successfully. Failure to commence or complete, or delays in, any planned
clinical trials could reduce investors' confidence in our ability to develop products which would likely cause our stock price to decrease.

We Must Obtain Additional Financing To Execute Our Business Plan

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

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

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Our Success Depends On Our Ability To Protect Our Proprietary Rights And Operate Without Infringing The Proprietary Rights Of Others

Our success will depend, in part, on our ability to obtain patents, maintain licenses and trade secret protection and operate without infringing on the
proprietary rights of third parties or having third parties circumvent our rights. We have filed and are actively pursuing applications for United States and non-United States patents. The
patent positions of pharmaceutical and biotechnology firms, including ours, are uncertain and involve complex legal and factual questions for which important legal principles are largely unresolved.
For example, no consistent policy has emerged regarding the breadth of biotechnology patent claims that are granted by the United States Patent and Trademark Office or enforced by the United States
federal courts. In addition, the scope of the originally claimed subject matter in a patent application can be significantly reduced before a patent is issued. The biotechnology patent situation
outside the United States is even more uncertain and is currently undergoing review and revision in many countries. The laws of certain non-United States countries may not protect our
intellectual property rights to the same extent as the laws of the United States. Thus, we cannot assure you that any of our patent applications will result in the issuance of patents, that we will
develop additional proprietary products that are patentable, that any patents issued to us will provide us with any competitive advantages or that such patents will not be challenged by any third
parties, that the patents of others will not impede our ability to do business or that third parties will not be able to circumvent our patents. Furthermore, others may independently develop similar
products that duplicate one or more of our products and, if patents are issued to us, others may design around the patented products we develop.

A
number of pharmaceutical and biotechnology companies and research and academic institutions have developed technologies, filed patent applications or received patents on various
technologies that may be related to our business. Some of these technologies, applications or patents may conflict with our technologies, patent applications or patents. Such conflict could limit the
scope of our current patents or the patents, if any, that we may be able to obtain or result in the denial of our patent applications. In addition, if patents that cover our activities are issued to
other companies, we cannot assure you that we would be able to obtain licenses to these patents at a reasonable cost, or at all, or be able to develop or obtain alternative technology. If we do not
obtain such licenses, we could encounter delays in the introduction of products, or could find that the development, manufacture or sale of products requiring such licenses is prohibited. In addition,
we could incur substantial costs in defending our patent position in suits brought against us or in prosecuting suits against others to have third-party patents declared invalid.

Patent
litigation is becoming widespread in the biotechnology industry. Such litigation may affect our efforts to form collaborations, to conduct research or development, to conduct
clinical testing or to manufacture or market any products under development. If we become involved in patent litigation, it could consume a substantial portion of our financial and management
resources. If the outcome of any such litigation were to be adverse, our business could be materially affected.

Since
patent applications in the United States are maintained in secrecy until the patents issue or non-United States counterparts, if any, publish and since publication
of discoveries in the scientific or patent literature often lags behind actual discoveries, we cannot be certain that we or any licensor was the first creator of inventions described in our pending
patent applications or patents or that we or such licensor was the first to file patent applications for such inventions. Moreover, we might have to participate in interference proceedings declared by
the United States Patent and Trademark Office to determine priority of invention, which could result in substantial cost to us, even if the eventual outcome were in our favor. An adverse outcome could
subject us to significant liabilities to third parties and require us to license disputed rights from third parties or cease using the technology. We cannot assure you that our patents, if issued,
would be held valid or enforceable by a court or that a competitor's technology or product would be found to infringe our patents. Furthermore, even if we are

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successful in such lawsuits, we could incur substantial costs to enforce our patent rights against apparent infringers,.

Much
of our know-how and technology may not be patentable, though it may constitute trade secrets. We cannot assure you that we will be able to meaningfully protect our
trade secrets. We cannot assure you that any of the existing confidentiality agreements with our employees, consultants, advisors or collaborators will provide meaningful protection for our trade
secrets, know-how or other proprietary information in the event of any unauthorized use or disclosure. In addition, to the extent that collaborators, advisors or consultants apply
technological information developed independently by them or by others to our projects or apply our technology to other projects, disputes may arise as to the ownership of proprietary rights to such
technology. Further, our business may be adversely affected by competitors who independently develop competing technologies, especially if we do not obtain, or only obtain narrow, patent protection.

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

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

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

We
currently hold licenses from third parties for certain technologies. We cannot assure you that these licenses will not terminate or that they will be renewed. In addition, we
cannot assure you that these licenses will remain in good standing. In the event of a breach of the terms of any license, the licensor may attempt to terminate the license.

We
also plan to acquire additional licenses to technologies developed by other companies and academic institutions. Pursuant to the terms of these license agreements, we could be
obligated to exercise diligence in bringing potential products to market and to make certain milestone payments that, in some instances, could be substantial. We also are obligated to make royalty
payments on the sales, if
any, of products resulting from licensed technology and, in some instances, are responsible for the costs of filing and prosecuting patent applications.

We May Not Be Able To Obtain The Regulatory Approvals Or Clearances That Are Necessary To Commercialize Our Products

The manufacture and sale of human therapeutic products in the United States, Canada and other countries is governed by a variety of statutes and regulations in
each country. These laws require approval of manufacturing facilities, controlled research and testing of products and government review

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and approval and clearance of a submission containing manufacturing, preclinical and clinical data in order to obtain marketing approval and clearance based on establishing the safety and efficacy of
the product for each use sought.

Our
product candidates are currently in the early stages of development and will require significant development, pre-clinical and clinical testing and investment of
significant funds prior to their commercialization. The process of obtaining required approvals and clearances can be costly and time-consuming and our potential products may not be
successfully developed, prove to be safe and effective in clinical trials or receive applicable regulatory approvals and clearances. Any delay in obtaining such approvals and clearances may:



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

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

We
and our contract manufacturers will be required to comply with applicable good manufacturing practices regulations, which include requirements relating to quality control and
quality assurance as well as the corresponding maintenance records and documentation. Manufacturing facilities must be approved before we can use them in commercial manufacturing of our products and
are subject to inspection by regulatory agencies. Our contract manufacturers and we may not be able to comply with the applicable good manufacturing practice requirements and other regulatory
requirements, which could prevent us from developing any of our product candidates.

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

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

Our
sales experience is limited to the sale of our bioreagents. To directly market and distribute any pharmaceutical products we may develop, we must build a substantial marketing and
sales force with appropriate technical expertise and supporting distribution capabilities. Alternatively, we may obtain the assistance of a more experienced pharmaceutical company or other entity. We
may not be able to

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establish sales, marketing and distribution capabilities of our own or enter into arrangements with third parties on terms that are acceptable to us. To the extent that we enter into
co-promotion or other licensing arrangements with respect to any products that we may develop, our product revenues will be lower than if we directly marketed and sold our products, and
any revenues that we receive will depend on the efforts of third parties, which efforts may not be successful.

Our Operations Involve Hazardous Materials Which Require Us To Comply With Regulatory Requirements And Which Could Subject Us To Damages Resulting From Accidental Contamination
Or Injury

Our research and development processes involve the controlled use of hazardous and radioactive materials. We are subject to federal, provincial and local laws
and regulations governing the use, manufacture, storage, handling and disposal of such materials and certain waste products. Although we believe that our safety procedures for handling and disposing
of such materials comply with the standards prescribed by such laws and regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event
of an accident involving these materials, we could be held liable for any damages that result and any such liability could exceed our resources. We are not insured with respect to this liability.
Although we believe that we are in compliance in all material respects with applicable environmental laws and regulations and currently do not expect to make material capital expenditures for
environmental control facilities in the near-term, we may be required to incur significant costs to comply with environmental laws and regulations in the future.

Our Competitors May Develop And Market Drugs That Are Less Expensive, More Effective Or Safer Which May Diminish Or Eliminate The Commercial Success Of Any Products We May
Commercialize Or Render Our Products Obsolete

Technological competition from pharmaceutical companies and biotechnology companies is intense and is expected to increase. Many of our competitors and
potential competitors have substantially greater product development capabilities and financial, scientific, marketing and human resources than ours. Other companies may succeed in developing products
earlier than us, obtaining approvals and clearances for such products from agencies such as the U.S. Food and Drug Administration and the Health Protection Branch of the Department of Health and
Welfare Canada more rapidly than us, or in developing products that are more effective than those ultimately developed by us, if any. While we will seek to expand our technological capabilities in
order to remain competitive, we cannot assure you that research and development by others will not render our technology or products obsolete or non-competitive or result in treatments or
cures superior to any therapy developed by us, or that any therapy we develop will be preferred to any existing or newly developed technologies.

The
biotechnology and pharmaceutical industries are subject to rapid and substantial technological change. We cannot assure you that developments by others will not render our
products or technologies non-competitive or that we will be able to keep pace with technological developments. Other companies have developed technologies that could be the basis for
competitive products. Some of these products have an entirely different approach or means of accomplishing the desired therapeutic effect than products being developed by us and may be more effective
and less costly than the products developed by us. In addition, other forms of medical treatment may be competitive with our products.

We Will Incur Substantial Costs To Develop Manufacturing Capabilities and Facilities or Seek Contracts for Manufacturing With Third Parties Over Whom We Will Have Limited
Control

While we have manufacturing experience in bioreagents, this experience is not directly applicable to the manufacture of therapeutic products. We have not yet
introduced any therapeutic products and have no manufacturing experience for therapeutic products. To be successful, our products must be manufactured in commercial quantities in compliance with
regulatory requirements and at acceptable

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costs. We do not currently have facilities for the production of our products under development and will initially obtain the small amount of products we require for clinical trials from contract
manufacturing companies. In order to manufacture our products in commercial quantities, we will need to develop our own manufacturing facilities or contract with third parties to manufacture our
products, as is currently the case for HspE7. We may not be able to reach satisfactory arrangements with any third party manufacturers in the future. Currently, we have one active ingredient supplier
of our HspE7 product candidate. If for any reason delays by that manufacturer restrict the supply of HspE7, we may have to delay clinical trials. Alternate manufacturers may not be available for
reasons including the possibility that the government will request manufacturers to dedicate their excess manufacturing capacity to specific vaccines and antibiotics in response to the bioterrorism
that began Fall 2001. If we cannot contract for large-scale manufacturing capabilities on acceptable terms, or if we encounter delays or difficulties with manufacturers, we may not be able to conduct
clinical trials as planned.

If
we were to develop our own commercial manufacturing facilities, substantial additional funds beyond what we have currently available would be required. Additional management and
technical personnel who have manufacturing experience would also have to be retained. All manufacturing facilities for products to be marketed in the U.S. and Canada must comply with applicable
regulations of the U.S. Food and Drug Administration and the Health Protection Branch of the Department of Health and Welfare Canada. We may not be able to make the transition to commercial
production. In addition, production of our products may require raw materials for which the sources and amount of supply are limited. An inability to obtain adequate supplies of such raw materials
could significantly delay the development, regulatory approval and marketing of our products.

We Have Yet To Market Or Sell Any Pharmaceutical Products

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

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

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

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

Sales of our products will depend in part upon the availability of reimbursement from third-party payors, including government health administration
authorities, managed care providers, private health insurers and other organizations. These third-party payors are increasingly attempting to contain costs by challenging the price and examining the
cost effectiveness of products and services and limiting the coverage and level of reimbursement for new pharmaceutical products. Adequate third-party reimbursement may not be available to enable us
to maintain price levels sufficient to realize an appropriate return on our investment in product development. Governments continue to propose and pass legislation designed to reduce the cost of
healthcare. This legislation could further limit reimbursement. If the government and third-party payors fail to provide adequate coverage for our products, the market acceptance of our products may
be adversely affected.

Our Product Candidates Subject Us To The Risk Of Product Liability Claims For Which We May Not Be Able To Obtain Adequate Insurance Coverage

Since we conduct clinical trials on humans, we face the risk that use of our product candidates could result in harm to the test subjects. We have only limited
amounts of product liability insurance for our clinical trials. We may not correctly anticipate or be able to maintain on acceptable terms the level of insurance coverage that would adequately cover
potential liabilities from proposed clinical trials. This
type of insurance is expensive, difficult to obtain and may not be available in the future. If we cannot obtain sufficient insurance coverage or other protection against potential product liability
claims, we may not be able to commercialize potential products. If any liabilities from a claim exceed the limit of our insurance coverage, we may not have the resources to pay them.

Our Share Price Has Been And Is Likely To Continue To Be Highly Volatile

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

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PART IIOTHER INFORMATION

Items 1 through 5:Not Applicable

Item 6

Reports
on 8-K

None.

SIGNATURES

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

|                       |  | Stressgen Biotechnologies Corporation                                                                                                                                                      
|---------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Date: October 30, 2001 |  | /s/DONALD D. TARTREDonald D. Tartre
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer duly authorized to sign this report on behalf of the registrant)

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