---

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

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FORM 10-Q

(Mark One)

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

For the Quarter Ended March 31, 2002

or

|o | 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.)c/o Stressgen Biotechnologies, Inc.
10241 Wateridge Circle, Suite C200
San Diego, CA(Address of principal executive offices)

92121(zip code)


(858) 202-4900(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 ý    No o

As
of April 29, 2002, the registrant had 57,738,305 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 March 31, 2002 (Unaudited) and December 31, 2001                             |    | 1   
|                               | Consolidated Statement of Operations and Deficit Three Months Ended March 31, 2002 and 2001 (Unaudited) |    | 2   
|                               | Consolidated Statement of Cash Flows Three Months Ended March 31, 2002 and 2001 (Unaudited)             |    | 3   
|                               | Notes to Consolidated Financial Statements (Unaudited)                                                  |    | 4   
|Item 2.                        | Management's Discussion and Analysis of Financial Condition and Results of Operations                   |    | 10  
|Item 3.                        | Quantitative and Qualitative Disclosures About Market Risk                                              |    | 13  
|                               | Factors That Could Affect Future Performance                                                            |    | 13  
|Part II  Other Information   
|Items 1 through 6              |                                                                                                         | 20
|SIGNATURE                      |                                                                                                         | 21

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CONSOLIDATED BALANCE SHEET        Stressgen Biotechnologies Corporation and Subsidiaries        (Canadian Dollars In Thousands)

|                                                  |                                                                                                                                                                                         | March 31,
2002             |        | December 31,
2001 |       
|------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------ | ----------------- | ------
|
|Assets                                            |                                                                                                                                                                                         |                            |        |                   |       
|Current assets:                                   |                                                                                                                                                                                         |                            |        |                   |       
|                                                  | Cash and cash equivalents                                                                                                                                                               |                            | $      | 15,715            |       
|                                                  | Short-term investments                                                                                                                                                                  |                            |        | 39,071            |       
|                                                  | Accounts receivable                                                                                                                                                                     |                            |        | 716               |       
|                                                  | Inventories                                                                                                                                                                             |                            |        | 975               |       
|                                                  | Other current assets                                                                                                                                                                    |                            |        | 322               |       
|                                                  |                                                                                                                                                                                         |                            |        |                   |       
|                                                  |                                                                                                                                                                                         | Total current assets       |        |                   | 56,799
|Capital assets                                    |                                                                                                                                                                                         |                            | 3,097  |                   |       
|                                                  |                                                                                                                                                                                         |                            |        |                   |       
|                                                  |                                                                                                                                                                                         | $                          | 59,896 |                   | $     
|                                                  |                                                                                                                                                                                         |                            |        |                   |       
|Liabilities and Stockholders' Equity              |                                                                                                                                                                                         |                            |        |                   |       
|Current liabilities:                              |                                                                                                                                                                                         |                            |        |                   |       
|                                                  | Accounts payable and accrued liabilities                                                                                                                                                |                            | $      | 10,020            |       
|                                                  | Current portion of capital lease obligations                                                                                                                                            |                            |        | 493               |       
|                                                  |                                                                                                                                                                                         |                            |        |                   |       
|                                                  |                                                                                                                                                                                         | Total current liabilities  |        |                   | 10,513
|Capital lease obligations, net of current portion |                                                                                                                                                                                         |                            | 497    |                   |       
|                                                  |                                                                                                                                                                                         |                            |        |                   |       
|                                                  |                                                                                                                                                                                         |                            | 11,010 |                   |       
|                                                  |                                                                                                                                                                                         |                            |        |                   |       
|Stockholders' equity:                             |                                                                                                                                                                                         |                            |        |                   |       
|                                                  | Common shares and other equityno par value; unlimited shares authorized, 57,720,305 and 57,591,888 shares issued and outstanding at March 31, 2002 and December 31, 2001, respectively |                            |        | 165,188           |       
|                                                  | Deferred stock compensation                                                                                                                                                             |                            |        | (575              | )     
|                                                  | Accumulated deficit                                                                                                                                                                     |                            |        | (115,727          | )     
|                                                  |                                                                                                                                                                                         |                            |        |                   |       
|                                                  |                                                                                                                                                                                         | Total stockholders' equity |        |                   | 48,886
|                                                  |                                                                                                                                                                                         |                            |        |                   |       
|                                                  |                                                                                                                                                                                         | $                          | 59,896 |                   | $     
|                                                  |                                                                                                                                                                                         |                            |        |                   |       

See
accompanying notes to consolidated financial statements.

1

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CONSOLIDATED STATEMENT OF OPERATIONS AND DEFICIT        Stressgen Biotechnologies Corporation and Subsidiaries        (Canadian Dollars In Thousands, Except Per Share Amounts)

|                                                                                               |                                     | Three months ended March 31 |         
|---------------------------------------------------------------------------------------------- | ----------------------------------- | --------------------------- | --------
|
|
|Revenue:                                                                                       |                                     |                             |         
|                                                                                               | Bioreagent sales                    |                             | $       
|                                                                                               |                                     |                             |         
|Operating expenses:                                                                            |                                     |                             |         
|                                                                                               | Research and development            |                             |         
|                                                                                               | Selling, general and administrative |                             |         
|                                                                                               | Cost of bioreagent sales            |                             |         
|                                                                                               |                                     |                             |         
|                                                                                               |                                     |                             | 11,974  
|                                                                                               |                                     |                             |         
|Operating loss                                                                                 |                                     |                             | (10,569 
|                                                                                               |                                     |                             |         
|Other income (expenses):                                                                       |                                     |                             |         
|                                                                                               | Interest and other income, net      |                             |         
|                                                                                               | Interest expense                    |                             |         
|                                                                                               |                                     |                             |         
|                                                                                               |                                     |                             | 89      
|                                                                                               |                                     |                             |         
|Net loss                                                                                       |                                     |                             | (10,480 
|Accumulated deficit, beginning of period                                                       |                                     |                             | (105,247
|                                                                                               |                                     |                             |         
|Accumulated deficit, end of period                                                             |                                     | $                           | (115,727
|                                                                                               |                                     |                             |         
|Basic and diluted loss per common share                                                        |                                     | $                           | (0.18   
|                                                                                               |                                     |                             |         
|Weighted average shares used to compute basic and diluted loss per common share (in thousands) |                                     |                             | 57,634  
|                                                                                               |                                     |                             |         

See
accompanying notes to consolidated financial statements.

2

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CONSOLIDATED STATEMENT OF CASH FLOWS        Stressgen Biotechnologies Corporation and Subsidiaries        (Canadian Dollars In Thousands)

|                                                             |                                                                             | Three months ended
March 31,                    |        
|------------------------------------------------------------ | --------------------------------------------------------------------------- | ----------------------------------------------- | -------
|
|
|Cash flows from operating activities:                        |                                                                             |                                                 |        
|Net loss                                                     |                                                                             | $                                               | (10,480
|                                                             | Adjustments to reconcile net loss to net cash used in operating activities: |                                                 |        
|                                                             |                                                                             | Depreciation and amortization of capital assets |        
|                                                             |                                                                             | Amortization of deferred stock compensation     |        
|                                                             |                                                                             | Unrealized foreign exchange loss (gain)         |        
|                                                             |                                                                             | Loss on market value of investments             |        
|                                                             | Changes in operating assets and liabilities                                 |                                                 |        
|                                                             |                                                                             |                                                 |        
|Net cash used in operating activities                        |                                                                             |                                                 | (7,620 
|                                                             |                                                                             |                                                 |        
|Cash flows from investing activities:                        |                                                                             |                                                 |        
|                                                             | Purchase of short-term investments                                          |                                                 |        
|                                                             | Sales and maturities of short-term investments                              |                                                 |        
|                                                             | Purchase of capital assets                                                  |                                                 |        
|                                                             |                                                                             |                                                 |        
|Net cash provided by (used in) investing activities          |                                                                             |                                                 | (10,287
|                                                             |                                                                             |                                                 |        
|Cash flows from financing activities:                        |                                                                             |                                                 |        
|                                                             | Proceeds on issue of common shares                                          |                                                 |        
|                                                             | Repayment of borrowings                                                     |                                                 |        
|                                                             |                                                                             |                                                 |        
|Net cash provided by financing activities                    |                                                                             |                                                 | 269    
|                                                             |                                                                             |                                                 |        
|Effect of exchange rate changes on cash and cash equivalents |                                                                             |                                                 | 15     
|                                                             |                                                                             |                                                 |        
|Increase (decrease) in cash                                  |                                                                             |                                                 | (17,623
|Cash and cash equivalents, beginning of period               |                                                                             |                                                 | 33,338 
|                                                             |                                                                             |                                                 |        
|Cash and cash equivalents, end of period                     |                                                                             | $                                               | 15,715 
|                                                             |                                                                             |                                                 |        

See
accompanying notes to consolidated financial statements.

3

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

1.  THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES



Stressgen Biotechnologies Corporation ("Stressgen" or the "Company") is a biopharmaceutical company focused on the development and commercialization of innovative
stress protein-based immunotherapeutics. The Company is developing a broad range of products for the treatment of viral infections and related cancers. Its lead product is HspE7 which targets a broad
spectrum of human papillomavirus ("HPV") related diseases. In addition, the Company has initiated development efforts to evaluate stress protein fusions in hepatitis B and has also initiated research
studies to evaluate its Hsp technology in the treatment of herpes simplex virus and HIV. 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.



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 during 2001. As a result of this review, certain costs have been reclassified from selling, general and administrative expenses to research and development and cost of bioreagent
sales. Prior period balances have been reclassified to conform to the current period's presentation.



The information at March 31, 2002 and the three month periods ended March 31, 2002 and 2001 have been prepared by the Company and have 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. These
financial statements should be read in conjunction with the financial statements and notes thereto in the Company's December 31, 2001 Annual Report on Form 10-K. 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, revenue and expenses and related disclosures as of the date of the financial statements. Actual results could differ from such estimates.



The Company and its subsidiaries use the Canadian dollar as their functional currency. Monetary assets and liabilities that are denominated in U.S. dollars are
translated into Canadian dollars at the rate of exchange prevailing at the balance sheet date. Non-monetary assets and liabilities are translated

4

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at historical rates. Revenues and expenses are translated at the average rate of exchange for the period of such transactions. Exchange gains and losses are included in other income.



The Company has adopted the recommendations of the new CICA Handbook section 3870,Stock-Based Compensation and Other Stock-Based
Payments, effective January 1, 2002. This section establishes standards for the recognition, measurement and disclosure of stock-based compensation and other stock-based
payments made in exchange for good and services. The standard requires that all stock-based awards made to non-employees be measured and recognized using a fair value based method. The
standard encourages the use of a fair value based method for all awards granted to employees, but only requires the use of a fair value based method for direct awards of stock, stock appreciation
rights, and awards that call for settlement in cash or other assets. Awards that a company has the ability to settle in stock are recorded as equity, whereas awards that the entity is required to or
has a practice of settling in cash are recorded as liabilities.

The
Company has a stock-based compensation plan, which is described in Note 2. Under the plan, options are granted with an exercise price equal to the fair market value of the
underlying common stock. No compensation expense is recognized for options granted at fair market value under the plan when stock options are issued to directors, employees and others. Deferred stock
compensation charges arise where stock options are granted at exercise prices less than the fair value of the underlying stock and are amortized to expense over the vesting period of the option. Any
consideration paid by directors, employees and others on exercise of stock options is credited to share capital.

2.  BALANCE SHEET DETAILS

The following tables provide details of selected balance sheet items:

(In thousands)

March 31,
2002

December 31,
2001Inventories:Raw materials and work in progress

$
570

$
584Finished goods


405


331$
975

$
915Accounts payable and accrued liabilities:Trade accounts payable

$
4,998

$
3,302Clinical trial accruals


4,386


3,466Other accrued liabilities


636


989$
10,020

$
7,757




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

5

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the Company completed an offering for 6,699,100 common shares at $4.15 per share for gross proceeds of $27,801,000. The Company incurred total share issuance costs on the offering of $1,645,000.
Stockholders' equity at March 31, 2002 includes $2,200,000 of contributed surplus.

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 March 31, 2002.



In 2001, the Company issued out-of-plan stock options prior to stockholder approval of the 2001 Equity Incentive Plan (the "2001 Plan").
Between the date of grant and stockholder approval, the market price of the Company's common stock increased resulting in deferred compensation of $807,000 associated with these options. The deferred
compensation will be amortized to expense over the vesting period of the granted options, which have been applied to the 2001 Plan. The stockholders subsequently approved adoption of the 2001 Plan
reserving an additional 3,500,000 new common shares for issuance pursuant to the grant of stock options. Once the 2001 Plan was approved, the grants ceased to be considered
out-of-plan. At that time, the Company stopped granting options under the 1996 Share Incentive Plan. At March 31, 2002, there were 4,678,826 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 9.2 years, and 1,567,181 options available for
future grant under the 2001 Plan.

Pro
forma information regarding net loss is required by the new CICA Handbook section 3870, and has been determined as if the Company had accounted for its employee stock options
under the fair value method of that statement for all options granted since inception. Had compensation cost for the Company's stock-based employee compensation plans been determined under the fair
value method, the Company's net loss would have increased by $930,000 to $11,410,000 and net loss per share would have increased to $0.20.

The
fair value of each option grant is estimated as of the date of grant using the Black Scholes options pricing model. The following weighted average assumptions were used for grants in
the three month period ended March 31, 2002: expected dividend yield of 0%; expected volatility of 60%; risk-free interest rate of 5.5%; and expected life of 4 years. The
weighted average fair value of options granted in the three month period ended March 31, 2002 amounted to $2.50. The Company has included those options outstanding on the date of adoption of
CICA 3870 in the calculation of its pro forma earnings per share.

6

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3.  SEGMENT INFORMATION

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

Three months ended
March 31,(In thousands)

2002

2001BiotechnologyExpenses:Research and development

$
9,045

$
10,313Selling, general and administrative


1,949


1,411Operating loss

$
10,994

$
11,724BioreagentsSales:U.S.

$
887

$
889Canada


79


65Other


439


4861,405


1,440Expenses:Research and development


238


109Selling, general and administrative


346


346Cost of bioreagent sales


396


313980


768Operating income

$
425

$
672TotalsRevenue

$
1,405

$
1,440Expenses:Research and development


9,283


10,422Selling, general and administrative


2,295


1,757Cost of bioreagent sales


396


31311,974


12,492Operating Loss

$
(10,569
)
$
(11,052
)


The
Company does not allocate interest and other income and interest expense, or capital assets between the segments.

7

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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, except as set out below, conform in all material respects to U.S. GAAP.

Effect
on the consolidated financial statements:



For all periods presented, there are no significant differences under Canadian and U.S. GAAP for current assets or stockholders' equity.



Three months ended
March 31,(In thousands, except per share amounts)

2002

2001Net loss under Canadian GAAP

$
(10,480
)
$
(9,127
)Reversal of unrealized foreign exchange (gain) loss on available-for-sale securities (a)


51


(545
)Reversal of write-down of short term investments


385


Stock-based compensation expense on stock options (b)





(21
)Net loss under U.S. GAAP

$
(10,044
)
$
(9,693
)Basic loss per common share under Canadian GAAP

$
(0.18
)
$
(0.18
)Basic loss per common share under U.S. GAAP

$
(0.17
)
$
(0.19
)Common shares used to compute basic loss per share under Canadian and U.S. GAAP


57,634


49,991




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.



As disclosed in Note 12 to the financial statements in the Company's December 31, 2001 Annual Report on Form 10-K, differences
exist for the Company between Canadian and U.S. GAAP.

The
following outlines the differences that affect the Company for the three month periods ended March 31, 2002 and 2001.





8

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Three months ended
March 31,(In thousands, except per share amounts)

2002

2001Net loss under U.S. GAAP

$
(10,044
)
$
(9,693
)Other comprehensive incomeAdjustment to unrealized foreign exchange and market gains (losses) on available-for-sale investments


(436
)

422Comprehensive net loss under U.S. GAAP

$
(10,480
)
$
(9,271
)Comprehensive loss per share under U.S. GAAP

$
(0.18
)
$
(0.19
)




5.  SUPPLEMENTAL CASH FLOW INFORMATION

The changes in operating assets and liabilities are as follows:

Three months ended
March 31,(In thousands)

2002

2001Accounts receivable

$
(107
)
$
(205
)Inventories


(60
)

(53
)Other current assets


98


Accounts payable and accrued liabilities


2,263


1,636$
2,194

$
1,378Supplemental disclosures of cash flows:Interest paid

$
21

$
29


9

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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 "Factors That Could Affect 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 March 31, 2002 consolidated financial statements and related notes therein, which include adjustments necessary
for 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 March 31, 2002 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, including genital warts,
recurrent respiratory papillomatosis, or RRP, anal dysplasia, cervical dysplasia and cervical cancer. The U.S. Food and Drug Administration has granted HspE7 orphan drug status for the treatment of
RRP. We currently have a number of clinical trials ongoing, including one phase III trial and several phase II trials. We also have a development program to evaluate stress protein fusions in
hepatitis B, and have initiated research studies to evaluate our Hsp technology in herpes simplex virus and HIV. 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 March 31, 2002, our accumulated deficit was $115,727,000. We have been dependent
principally upon equity financings to fund our business activities.

Results of Operations

For the three months ended March 31, 2002, our net loss increased by approximately 15% to $10,480,000 due principally to decreases in
non-operating income, specifically, a $975,000 reduction in interest income caused by reduced market rates from the same period in the prior year, coupled with a $385,000 temporary loss on
the market value of investments. In addition, foreign exchange gain decreased $869,000 due to less favorable currency exchange rates on U.S. investments.

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 during 2001. As a result of this review, certain costs have been reclassified from selling, general and administrative expenses to research and development and cost of bioreagent
sales. Prior period balances have been reclassified to conform to the current period's presentation.

10

---

Bioreagent sales

Bioreagent sales for the three months ended March 31, 2002 decreased by approximately 2% to $1,405,000, compared to $1,440,000 during the same period in
the prior year. The higher value for the three months ended March 31, 2001, was principally attributed to a grant fund recovery received during the first quarter of 2001.

Research and development

Research and development, or R&D, spending decreased by approximately 11% to $9,283,000 for the three months ended March 31, 2002 from the same period in
the prior year, due principally to the timing of our later stage clinical trial program for our lead product candidate HspE7.

Selling, general and administrative expenses

Selling, general and administrative, or SG&A, expenses represented approximately 19% of total operating expenses during the three months ended March 31,
2002, compared with 14% over the same period in the prior year. SG&A spending increased by approximately 31% to $2,295,000 for the three months ended March 31, 2002 over the same period in the
prior year, due principally to enhanced business development activities, costs associated with our expanded North American operations, the addition of key executive personnel, and amortization of
deferred compensation.

Cost of bioreagent sales

The aggregate cost of bioreagent sales as a percentage of bioreagent sales was approximately 28% for the three months ended March 31, 2002 resulting in a
gross margin of 72%, compared with 78% during the same period in 2001. The decrease in the gross margin percentage for the three months ended March 31, 2002 compared to the same period in the
prior year principally reflects the impact of the current period increase to the inventory provision of $89,000.

Interest and other income, net

Interest and other income, net decreased by 94% to $110,000 for the three months ended March 31, 2002 from the same period in the prior year. The decrease
is due principally to a $975,000 reduction in interest income caused by reduced market rates from the same period in the prior year, coupled with a $385,000 temporary loss on the market value of
investments which is expected to reverse during the third quarter of 2002, upon maturity. In addition, foreign exchange gain decreased $869,000 due to less favorable currency exchange rates on U.S.
investments.



The basic and diluted loss per share was $0.18 for the three months ended March 31, 2002 and 2001, respectively. The impact of the 15% increase in net loss
to $10,480,000 in the three months ended March 31, 2002 compared with the same period in the prior year was diluted by increases in the weighted average number of common shares outstanding.

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

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

To
conform to U.S. GAAP, our net loss would decrease by $436,000 for the three month period ended March 31, 2002, and would increase by $566,000 for the corresponding period in
2001. The

11

---

principal differences under U.S. as opposed to Canadian GAAP for the three month period ended March 31, 2002 was due to the reversal of a write-down of $385,000 on U.S. investments
in 2002.

Net
loss per common share under U.S. GAAP would have been $0.17 and $0.19 in the three month periods ended March 31, 2002 and 2001, respectively. Our current assets and
stockholders' equity under U.S. GAAP would have been the same as under Canadian GAAP at March 31, 2002 and 2001, respectively.

Liquidity and Capital Resources

At March 31, 2002, we had cash, cash equivalents and short-term investments of $54,786,000, a decrease of $7,896,000 from December 31,
2001. During the three months ended March 31, 2002, we used cash and cash equivalents primarily to finance our clinical development and commercial manufacturing scale-up activities
associated with our lead product candidate, HspE7. At March 31, 2002, approximately 60% of cash, cash equivalents and short-term investments were held in U.S. dollars. Considering
both the first quarter's net loss and anticipated proceeds from "in-the-money" warrants expiring in 2003, the Company had approximately 19 months of cash, cash
equivalents and short-term investments at March 31, 2002.

During
the three months ended March 31, 2002, capital expenditures, associated principally with the laboratory expansion in our Victoria, B.C. research facility decreased 16% to
$124,000 compared with $148,000 during the same period in 2001, as the expansion is nearing completion.

The
Company's cash requirements may vary materially from budgeted amounts 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 is likely to 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.

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.

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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 60% are currently 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 three months ended
March 31, 2002 would have resulted in a change in net loss of approximately $266,000 and $137,000, respectively. 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, 2001.

FACTORS THAT COULD AFFECT 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

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

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

To date, we have not recorded any revenues from the sale of therapeutic products. Since inception through March 31, 2002, we have accumulated net losses of
approximately $115,727,000; we expect to incur continued losses for at least the next several years as we continue research and development and clinical trials. To become profitable, we, either alone
or with one or more partners, must develop, manufacture and successfully market product candidates.

Our Product Development Programs Are Novel, So, Inherently Risky

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



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

Our Clinical Trials Could Take Longer to Complete Than Expected

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

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

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

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

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

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

We Must Obtain Additional Financing To Execute Our Business Plan

Our revenues from the production and sale of bioreagents are not adequate to support our therapeutic product development programs. As a result, we will require
substantial additional funds to conduct planned clinical trials, pursue further research and development, obtain regulatory approvals,

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establish pilot-scale manufacturing, market our products, file, prosecute, defend and enforce our intellectual property rights and establish collaborative development and marketing arrangements. We
will seek those additional funds through public or private equity or debt financing, collaborative arrangements with pharmaceutical companies and/or from other sources. Any collaborative arrangements
will likely require us to relinquish some or all of our rights to our technology or products.

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

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

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

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

Patent
litigation is becoming widespread in the biotechnology industry. Such litigation may affect our efforts to form collaborations, to conduct research or development, to conduct
clinical testing or to manufacture or market any products under development. We cannot assure you that our patents, if issued, would be held valid or enforceable by a court or that competitor's
technology or product would be found to infringe our patents. Our business could be materially affected by an adverse outcome to such litigation. Similarly, we might have to participate in
interference proceedings declared by the

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United States Patent and Trademark Office or equivalent international authorities to determine priority of invention. We could incur substantial costs and devote significant management resources to
defend our patent position or seek a declaration that the patents of others are invalid.

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

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

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

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

We
currently hold licenses from third parties for certain technologies and plan to acquire additional licenses to technologies developed by other companies and academic institutions.
Pursuant to the terms of these license agreements, we could be obligated to diligently bring potential products to market, make milestone payments that, in some instances, could be substantial, and
incur the costs of filing and prosecuting patent applications. We cannot assure you that these licenses will not terminate or that they will be renewed. In addition, we cannot assure you that these
licenses will remain in good standing. In the event of a breach of the terms of any license, the licensor may attempt to terminate the license.

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

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

Our
product candidates are currently in the early stages of development and will require significant additional development and pre-clinical and clinical testing prior to
their commercialization. These steps and the process of obtaining required approvals and clearances can be costly and time-consuming. If our potential products are not successfully
developed, do not prove to be safe and effective in

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



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

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

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

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

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

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

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

Our research and development processes involve the controlled use of hazardous and radioactive materials. We are subject to federal, provincial and local laws and
regulations governing the use, manufacture, storage, handling and disposal of such materials and certain waste products. The risk of

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accidental contamination or injury from handling and disposing of such materials cannot be completely eliminated. In the event of an accident involving these materials, we could be held liable for
any damages that result. Such liability could exceed our resources. We are not insured with respect to this liability. In the future we may be required to incur significant costs to comply with
environmental laws and regulations.

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

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

We Have Yet to Market or Sell Any Pharmaceutical Products

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

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

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

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

Sales of our products will depend in part upon the availability of reimbursement from third-party payors, including government health administration authorities,
managed care providers, private health insurers and other organizations. These third-party payors increasingly attempt to contain costs by challenging the price of products and services and limiting
the coverage and level of reimbursement for pharmaceutical products. Third-party reimbursement for our products may be inadequate to enable us to maintain prices that provide a return on our product
development investment. Governments continue to propose and pass legislation designed to reduce healthcare costs. This legislation could

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further limit reimbursement. If government and third-party payors do not adequately reimburse patients for purchasing our products, there may not be a market for the products.

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

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

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

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

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PART IIOTHER INFORMATION

Items 1 through 5:

Not Applicable

Item 6

Reports on 8-K

None.

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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: May 2, 2002 |  | /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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