**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, 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 June 30, 2005** |
|                                    |   |   |
| **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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**STRESSGENBIOTECHNOLOGIES CORPORATION**(Exact nameof registrant as specified in its charter) 

 
| **Yukon Territory, Canada**                                                                                                                         | ** ** | **N/A**                           |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|
| (State of incorporation)                                                                                                                            | ** ** | (IRS Employer Identification No.) |
|                                                                                                                                                |       |                              |
| **350-4243 Glanford Avenue  Victoria, British Columbia V8Z 4B9Parent of Stressgen  Biotechnologies, Inc.  6055 Lusk Boulevard  San Diego, CA** | ** ** | **92121**                         |
| (Address of principal executive offices)                                                                                                            | ** ** | (zip code)                        |

 

**(250) 744-2811**

**(858) 202-4900**(Registrant’stelephone number, including area code)

 

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

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Exchange Act). Yes ý  No o

 

   As of August 8, 2005 the registrant hadapproximately 72,506,000 shares of Common Stock, no par value, outstanding.

 

 

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**Stressgen Biotechnologies Corporation andSubsidiaries**

** **

**INDEX**

 
| **Part I — Financial Information**                              |         |
|----------------------------------------------------------------------|--------------|
|                                                                 |         |   |   |
|                                                                 | Item 1. | Condensed  Financial Statements (Unaudited) |   |
|                                                                 |         | Consolidated Balance Sheet  June 30, 2005 and December 31, 2004 |   |
|                                                                 |         | Consolidated Statements of Operations and Accumulated Deficit  Three and Six Months Ended June 30, 2005 and 2004 |   |
|                                                                 |         | Consolidated Statements of Cash Flows  Three and Six Months Ended June 30, 2005 and 2004 |   |
|                                                                 |         | Notes to Consolidated Financial Statements |   |
|                                                                 | Item 2.      | Management’s Discussion and Analysis of  Financial Condition and Results of Operations |   |
|                                                                 |         | Liquidity and Capital Resources |   |
|                                                                 |         | Results of Operations |   |
|                                                                 |         | Critical Accounting Policies |   |
|                                                                 |         | Risk Factors |   |
|                                                                 | Item 3.      | Quantitative and Qualitative Disclosures  About Market Risk |   |
|                                                                 | Item 4.      | Controls and Procedures |   |
|                                                                 |         |   |   |
| **Part II — Other Information**                                 |         |
|                                                                 |         |
| Item 1. Legal Proceedings                                            |         |
| Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds |         |
| Item 3.  Defaults Upon Senior Securities                             |         |
| Item 4.  Submission of Matters to a Vote of Security Holders         |         |
| Item 5. Other  information                                           |         |
| Item  6. Exhibits                                                    |         |
|                                                                 |         |
| SIGNATURES AND CERTIFICATIONS                                        |         |   |
|                                                                      |              |  |  |  |

 

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**StressgenBiotechnologies Corporation**

**CondensedConsolidated Balance Sheets**

(Unaudited)

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

 
| ** **                                                                                                                                                         | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------|------------|------------------|------------|
| ** **                                                                                                                                                         | ** ** | **2005**     | ** ** | **2004**         | ** ** |
| **Assets**                                                                                                                                                         |       |         |       |             |       |
| Current assets:                                                                                                                                                    |       |         |       |             |       |
| Cash and cash equivalents                                                                                                                                          |       | $            | 6,950      |             | $          | 8,538 |   |
| Short-term investments                                                                                                                                             |       | 6,280        |       | 13,040           |       |
| Receivable held in escrow (Note  10)                                                                                                                               |       | 797          |       | —           |       |
| Prepaid expenses                                                                                                                                                   |       | 337          |       | 2,196            |       |
| Deferred development expenses,  current portion                                                                                                                    |       | 82           |       | 1,747            |       |
| Other current assets                                                                                                                                               |       | 413          |       | 563              |       |
| Assets of discontinued  operations (Note 10)                                                                                                                       |       | —       |       | 2,447            |       |
| Total current assets                                                                                                                                               |       | 14,859       |       | 28,531           |       |
|                                                                                                                                                               |       |         |       |             |       |
| Property and equipment, net  (Note 3)                                                                                                                              |       | 1,229        |       | 1,481            |       |
| Deferred development expenses,  net of current portion                                                                                                             |       | 123          |       | 162              |       |
| Total Assets                                                                                                                                                       |       | $            | 16,211     |             | $          | 30,174 |   |
|                                                                                                                                                               |       |         |       |             |       |
| **Liabilities and Stockholders’  Equity**                                                                                                                     |       |         |       |             |       |
| Current liabilities:                                                                                                                                               |       |         |       |             |       |
| Accounts payable and accrued  liabilities (Note 3)                                                                                                                 |       | $            | 4,493      |             | $          | 7,862 |   |
| Deferred revenue, current  portion                                                                                                                                 |       | 653          |       | 641              |       |
| Notes payable, current portion  (Note 3)                                                                                                                           |       | 313          |       | 369              |       |
| Liabilities of discontinued  operations (Note 10)                                                                                                                  |       | —       |       | 324              |       |
| Total current liabilities                                                                                                                                          |       | 5,459        |       | 9,196            |       |
|                                                                                                                                                               |       |         |       |             |       |
| Deferred revenue, net of  current portion                                                                                                                          |       | 979          |       | 1,282            |       |
| Notes payable, net of current  portion (Note 3)                                                                                                                    |       | 27           |       | 145              |       |
| Total long-term liabilities                                                                                                                                        |       | 1,006        |       | 1,427            |       |
|                                                                                                                                                               |       |         |       |             |       |
| Total liabilities                                                                                                                                                  |       | 6,465        |       | 10,623           |       |
|                                                                                                                                                               |       |         |       |             |       |
| Commitments and contingencies  (Note 4)                                                                                                                            |       |         |       |             |       |
|                                                                                                                                                               |       |         |       |             |       |
| Stockholders’ equity (Note 5):                                                                                                                                |       |         |       |             |       |
| Common shares and other equity  — no par value; unlimited shares authorized, 72,506,403 shares issued and  outstanding at June 30, 2005 and December 31, 2004 |       | 216,412      |       | 216,412          |       |
| Contributed surplus                                                                                                                                                |       | 15,743       |       | 15,488           |       |
| Accumulated deficit                                                                                                                                                |       | (222,409     | )          | (212,349         | )          |
| Total stockholders’ equity                                                                                                                                    |       | 9,746        |       | 19,551           |       |
| Total Liabilities and  Stockholders’ Equity                                                                                                                   |       | $            | 16,211     |             | $          | 30,174 |   |

 

See accompanying notes toconsolidated financial statements.

 
| ** /s/  GREGORY McKEE**                          | ** **     |  /s/  GORDON BAREFOOT |
|-------------------------------------------------------|----------------|----------------------------|
|  Director, President and Chief Executive Officer |  Director |

 

1

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**Stressgen Biotechnologies Corporation**

**Condensed Consolidated Statements ofOperations and Accumulated Deficit**

(Unaudited)

(Canadian Dollars) (In thousands, except pershare amounts)

 
| ** **                                                                                                                    | ** ** | **Three months ended,** | ** ** | **Six months ended** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|----------------------|------------|
| ** **                                                                                                                    | ** ** | **June 30,**            | ** ** | **June 30,**         | ** ** |
| ** **                                                                                                                    | ** ** | **2005**                | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenue:                                                                                                                      |       |                    |       |                 |       |   |   |   |   |
| Collaborative R&D revenue                                                                                                 |       | $                       | 166        |                 | $          | 190 |   | $ | 329 |   | $ | 363 |   |
|                                                                                                                          |       |                    |       |                 |       |   |   |   |   |
| Operating expenses:                                                                                                           |       |                    |       |                 |       |   |   |   |   |
| Research and development                                                                                                      |       | 8,270                   |       | 5,636                |       | 13,809 |   | 10,909 |   |
| Selling, general and  administrative                                                                                          |       | 1,831                   |       | 1,742                |       | 3,837 |   | 3,837 |   |
| Restructuring (Note 11)                                                                                                       |       | 530                     |       | —               |       | 530 |   | — |   |
|                                                                                                                          |       | 10,631                  |       | 7,378                |       | 18,176 |   | 14,746 |   |
|                                                                                                                          |       |                    |       |                 |       |   |   |   |   |
| Operating loss                                                                                                                |       | (10,465                 | )          | (7,188               | )          | (17,847 | ) | (14,383 | ) |
|                                                                                                                          |       |                    |       |                 |       |   |   |   |   |
| Other income (expense):                                                                                                       |       |                    |       |                 |       |   |   |   |   |
| Interest and other income  (expense), net                                                                                     |       | 297                     |       | (75                  | )          | 642 |   | 251 |   |
| Foreign exchange (loss) gain,  net                                                                                            |       | (213                    | )          | 234                  |       | (315 | ) | 285 |   |
|                                                                                                                          |       | 84                      |       | 159                  |       | 327 |   | 536 |   |
| Net loss from continuing  operations                                                                                          |       | $                       | (10,381    | )                    | $          | (7,029 | ) | $ | (17,520 | ) | $ | (13,847 | ) |
|                                                                                                                          |       |                    |       |                 |       |   |   |   |   |
| Net income from discontinued  operations, including gain on sale of $6,710 in the three months ended June  30, 2005 (Note 10) |       | $                       | 7,043      |                 | $          | 663 |   | $ | 7,460 |   | $ | 1,197 |   |
|                                                                                                                          |       |                    |       |                 |       |   |   |   |   |
| Net loss                                                                                                                      |       | $                       | (3,338     | )                    | $          | (6,366 | ) | $ | (10,060 | ) | $ | (12,650 | ) |
|                                                                                                                          |       |                    |       |                 |       |   |   |   |   |
| Accumulated deficit, beginning  of period                                                                                     |       | (219,071                | )          | (189,528             | )          | (212,349 | ) | (150,294 | ) |
| Cumulative effect of change in  accounting principle                                                                          |       | —                  |       | —               |       | — |   | (32,950 | ) |
| Accumulated deficit, end of  period                                                                                           |       | $                       | (222,409   | )                    | $          | (195,894 | ) | $ | (222,409 | ) | $ | (195,894 | ) |
|                                                                                                                          |       |                    |       |                 |       |   |   |   |   |
| Basic and diluted (loss) income  per common share:                                                                            |       |                    |       |                 |       |   |   |   |   |
| From continuing operations                                                                                                    |       | $                       | (0.14      | )                    | $          | (0.10 | ) | $ | (0.24 | ) | $ | (0.19 | ) |
| From discontinued operations                                                                                                  |       | $                       | 0.09       |                 | $          | 0.01 |   | $ | 0.10 |   | $ | 0.02 |   |
|                                                                                                                          |       | $                       | (0.05      | )                    | $          | (0.09 | ) | $ | (0.14 | ) | $ | (0.17 | ) |
|                                                                                                                          |       |                    |       |                 |       |   |   |   |   |
| Weighted average number of  common shares used to compute basic and diluted loss per common share (in  thousands)             |       | 72,506                  |       | 72,506               |       | 72,506 |   | 72,502 |   |

 

See accompanying notes toconsolidated financial statements.

 

2

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**Stressgen Biotechnologies Corporation**

**Condensed Consolidated Statements of CashFlows**

(Unaudited)

(Canadian dollars in thousands)

 
| ** **                                                                    | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|-------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                    | ** ** | **2005**                         | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| Cash flows from operating  activities:                                        |       |                             |       |                           |       |   |   |   |   |
| Net loss                                                                      |       | $                                | (3,338     | )                              | $          | (6,366 | ) | $ | (10,060 | ) | $ | (12,650 | ) |
| Net income from discontinued  operations                                      |       | (7,043                           | )          | (663                           | )          | (7,460 | ) | (1,197 | ) |
| Adjustments to reconcile net  loss to net cash used in operating activities:  |       |                             |       |                           |       |   |   |   |   |
| Depreciation of plant and  equipment                                          |       | 83                               |       | 184                            |       | 237 |   | 318 |   |
| Loss on disposal of property  and equipment                                   |       | —                           |       | 44                             |       | — |   | 59 |   |
| Amortization of stock  compensation expense                                   |       | 74                               |       | 283                            |       | 242 |   | 914 |   |
| Unrealized foreign exchange  gain                                             |       | (760                             | )          | (228                           | )          | (750 | ) | (222 | ) |
| (Gain) loss on market value of  investments                                   |       | (576                             | )          | 304                            |       | (701 | ) | 310 |   |
|  Changes in operating  assets and liabilities:                           |       |                             |       |                           |       |   |   |   |   |
| Collaborative accounts  receivable                                            |       | —                           |       | —                         |       | — |   | 277 |   |
| Prepaid expenses                                                              |       | 2,706                            |       | 268                            |       | 1,859 |   | 290 |   |
| Other current assets                                                          |       | (312                             | )          | (95                            | )          | 150 |   | (267 | ) |
| Deferred development expenses                                                 |       | 18                               |       | 15                             |       | 1,704 |   | 32 |   |
| Accounts payable and accrued  liabilities                                     |       | (472                             | )          | (3                             | )          | (3,369 | ) | (298 | ) |
| Deferred revenue                                                              |       | (140                             | )          | (119                           | )          | (291 | ) | (254 | ) |
| Net cash used in operating  activities of continuing operations               |       | (9,760                           | )          | (6,376                         | )          | (18,439 | ) | (12,688 | ) |
| Net cash provided by  discontinued operations                                 |       | 908                              |       | 928                            |       | 1,472 |   | 938 |   |
| Net cash used in operating  activities                                        |       | (8,852                           | )          | (5,448                         | )          | (16,967 | ) | (11,750 | ) |
|                                                                          |       |                             |       |                           |       |   |   |   |   |
| Cash flows from investing  activities:                                        |       |                             |       |                           |       |   |   |   |   |
| Purchase of short-term  investments                                           |       | (14,340                          | )          | (2,000                         | )          | (16,912 | ) | (22,919 | ) |
| Sales and maturities of  short-term investments                               |       | 17,258                           |       | 12,008                         |       | 25,302 |   | 22,943 |   |
| Purchase of plant and equipment                                               |       | —                           |       | (55                            | )          | (3 | ) | (185 | ) |
| Net cash provided by (used in)  investing activities of continuing operations |       | 2,918                            |       | 9,953                          |       | 8,387 |   | (161 | ) |
| Proceeds from sale of  discontinued operations                                |       | 7,345                            |       | —                         |       | 7,345 |   | — |   |
| Net cash provided by (used in)  investing activities                          |       | 10,263                           |       | 9,953                          |       | 15,732 |   | (161 | ) |
|                                                                          |       |                             |       |                           |       |   |   |   |   |
| Cash flows from financing  activities:                                        |       |                             |       |                           |       |   |   |   |   |
| Repayment of borrowings                                                       |       | (87                              | )          | (114                           | )          | (174 | ) | (231 | ) |
| Proceeds from issuance of  common shares                                      |       | —                           |       | —                         |       | — |   | 36 |   |
| Share issue costs                                                             |       | —                           |       | —                         |       | — |   | (81 | ) |
| Net cash used in financing  activities                                        |       | (87                              | )          | (114                           | )          | (174 | ) | (276 | ) |
|                                                                          |       |                             |       |                           |       |   |   |   |   |
| Effect of exchange rate changes  on cash and cash equivalents                 |       | 7                                |       | (10                            | )          | (179 | ) | (21 | ) |
| Increase (decrease) in cash and  cash equivalents                             |       | 1,331                            |       | 4,381                          |       | (1,588 | ) | (12,208 | ) |
| Cash and cash equivalents,  beginning of period                               |       | 5,619                            |       | 3,160                          |       | 8,538 |   | 19,749 |   |
| Cash and cash equivalents, end  of period                                     |       | $                                | 6,950      |                           | $          | 7,541 |   | $ | 6,950 |   | $ | 7,541 |   |

 

See Note 8 for non-cashdisclosures

See accompanying notes toconsolidated financial statements.

 

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***StressgenBiotechnologies Corporation*Notesto Consolidated Financial Statements**

***(Unaudited)(Canadian dollars, unless otherwise noted)***

 

**1.****                                      ORGANIZATIONAND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

Stressgen BiotechnologiesCorporation (with its subsidiaries other than discontinued operations, “Stressgen”or the “Company”) is a biopharmaceutical company that discovers, develops andseeks to commercialize therapeutic vaccines for the treatment of infectiousdiseases and cancers. The Company’s lead candidate, HspE7, targets a broadspectrum of human papilloma virus (HPV) related diseases.  It was created using the Company’sproprietary CoValTM fusion product technology, which is based oncovalently linking stress proteins (also known as heat shock proteins) todisease specific antigens. The Company has also researched using the sametechnology to develop potential treatments for hepatitis B and herpes simplex.

 

The accompanyingfinancial statements have been prepared assuming the Company will continue as agoing concern.  At June 30, 2005, theCompany had cash, cash equivalents and short-term investments totaling$13,230,000, working capital of $9,400,000 and accumulated deficit of$222,409,000.  At December 31, 2004, theCompany had cash, cash equivalents and short-term investments totaling$21,578,000, working capital of $19,335,000 and accumulated deficit of$212,349,000.  The Company incurred a netloss from continuing operations of $17,520,000 for the six months ended June30, 2005 and a net loss from continuing operations of $31,845,000 for the yearended December 31, 2004.  The Companyused $16,967,000 of net cash in operations for the six months ended June 30,2005.  Historically, the Company hasincurred significant losses from operations. Until such time as its research and development efforts arecommercialized or fully funded by third parties, of which no assurance can begiven, the Company will continue to incur operating losses.  These factors, among others, raisesubstantial doubt about the Company’s ability to continue as a going concern.

 

The Companyestimates that its current cash resources will be sufficient to fund itsoperations, including payments to third parties for the continued preparationof its clinical trials for HspE7 into the fourth quarter of 2005.  To fund operations and the Company’s drugdevelopment programs beyond 2005, the Company must enter into collaborationagreements with third parties, complete a corporate transaction and/or raise additionalfinancing.   The Company may not besuccessful in securing additional resources and if secured, such arrangementsmay not provide funds to the Company sufficient to continue to fund operationsthrough commercialization of HspE7.  Inthe absence of raising additional funds, the Company will be required to scaleback or terminate operations.

 

Even assuming theCompany is successful in securing additional sources of financing to fund itsHspE7 program and the continued development of its CoValTM technology, orotherwise enter into collaborative agreements or complete a corporatetransaction, the Company’s efforts may not result in commercially viableproducts.

 

*Basis ofpresentation*

 

The consolidatedfinancial statements include the assets, liabilities and operating results ofthe Company and its wholly-owned subsidiaries (Stressgen Biotechnologies Inc,Stressgen Development Corporation, Stressgen Bioreagents Limited Partnership,Stressgen Holding Corporation).  Intercompanyaccounts and transactions have been eliminated in consolidation.  Prior year balances have been reclassified toconform to current year presentation as a result of the sale of the bioreagentbusiness which has been presented as a discontinued operation (Note 10).

 

*Financialstatements and estimates*

 

Theaccompanying unaudited financial statements for Stressgen for the three and sixmonths ended June 30, 2005 and 2004, in the opinion of management, include alladjustments necessary for their fair presentation in conformity with Canadian generally accepted accountingprinciples (Canadian GAAP), and conform in material respects with accountingprinciples generally accepted in the United States of America (U.S.

 

4

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GAAP),except as discussed in Note 9.  Allsuch adjustments are of a normal and recurring nature.  These financial statements should be read inconjunction with the financial statements and notes thereto in the Company’sDecember 31, 2004 Annual Report on Form 10-K. Certain information and footnote disclosures normally included infinancial statements prepared in accordance with Canadian GAAP and U.S. GAAPhave been condensed or omitted pursuant to the applicable Canadian regulatoryand U.S. Securities and Exchange Commission (SEC) rules and regulations.  Interim results are not necessarilyindicative of results for the full year.

 

The preparation of financial statements in conformity with Canadian GAAPand U.S. GAAP requires management to make estimates and assumptions that affectthe reported amounts of assets, liabilities, revenue and expenses and relateddisclosures as of the date of the financial statements.  Significant estimates are used for, but notlimited to, revenue recognition, accrual of clinical trial costs, measurement ofstock-based compensation and cancellation fees related to contractualobligations.  Actual results could differfrom such estimates.

 

*Foreigncurrency translation*

 

The Company uses the Canadian dollar as its consolidated functional andreporting currency.  Monetary assets andliabilities that are denominated in U.S. dollars or British pounds aretranslated into Canadian dollars at the rates of exchange prevailing at thebalance sheet date.  Non-monetary assetsand liabilities are translated at historical exchange rates.  Revenue and expenses are translated at theaverage rate of exchange for the period of such transactions, and translationgains and losses are recognized in operations.

 

*Revenuerecognition*

 

Revenue from collaborative research and development arrangements mayinclude multiple elements within a single contract.  The Company’s accounting policy complies withthe revenue determination requirements set forth in the Canadian Institute ofChartered Accountants (CICA) Accounting Standards Board recommendations,section 3400, *Revenue*, Emerging Issues Committee (EIC) 141, *Revenue Recognition,*Staff Accounting Bulletin (SAB) No. 104, *Revenue Recognition inFinancial Statements*, EmergingIssues Task Force (EITF) 00-21, *Accounting for RevenueArrangements with Multiple Deliverables*, and EIC 142, *Revenue Arrangements with Multiple Deliverables*, relating tothe separation of multiple deliverables into individual accounting units withdeterminable fair values.  Paymentsreceived under collaborative arrangements may include the following:  non-refundable fees at inception of contractfor technology rights; funding for services performed; milestone payments forspecific achievements; and payments based upon resulting sales of products.

 

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

 

*Clinicaltrial accruals*

 

The Company recognizes expenses related toits ongoing clinical trials using a methodology designed to accrue estimatedcosts in the appropriate accounting periods when the expenses areincurred.  The

 

5

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Company recognizes clinical trial costs inthree distinct phases that correspond with the period during which the servicesare performed:  the start-up phase, thepatient accrual phase, and the close-out phase. The start up portion of the trial contract is accrued during the trialplanning and protocol writing period. The per patient accrual cost is recognized as each patient enters thetrial.  The close-out portion of the trialis recognized as the final analyses of patient data are prepared.  Based on the design of the trial includingnumber of patients, number of clinical sites, method of treatment, andfollow-up, the proportion of the cost of each phase could vary from trial totrial.  In addition the Company evaluatesthe nature and structure of each clinical trial contract and adjusts thealgorithm, if necessary, to capture expenses in the appropriate period.  As each trial continues, the Companyevaluates the total contract costs and makes adjustments accordingly. Changesto the cost estimates are charged or credited to research and development(R&D) expense in the appropriate period based on the facts and timing ofthe adjustment.

 

*Stock-basedcompensation plan*

 

In September 2003, the CICA Accounting Standards Board released revisedtransitional provisions for *Stock-Based Compensationand Other Stock-Based Payments*, Section 3870 (CICA 3870), to providethe same alternative methods of transition as is provided in the U.S. forvoluntary adoption of the fair value based method of accounting.   In January 2004, the Company adopted CICA3870.  As a result, the Company recordeda $32,950,000 cumulative change in accounting principle in the quarter endedMarch 31, 2004.  This standard requiresthat all stock-based awards made to non-employees be measured and recognizedusing a fair value based method.

 

The Company hastwo stock-based compensation plans which are described in Note 5.  The Company grants options with an exerciseprice equal to the fair market value of the underlying common stock.  Under the principles of CICA 3870,compensation expense is recognized on a straight-line basis over the vestingperiod of the grant based on the estimated fair value at the time of grant usingthe Black-Scholes method.  Anyconsideration paid by directors, employees and others on exercise of stockoptions together with the fair value of such options is credited to commonshares.

 

The Companyrecorded expense of $74,000 and $283,000 related to continuing operations and$2,000 and $18,000 related to discontinued operations for the three monthsended June 30, 2005 and 2004, respectively, representing the amortization ofthe fair value of compensation based on the vesting period of stock optionsgranted to employees and directors.  TheCompany recorded expense of $242,000 and $914,000 related to continuingoperations and $13,000 and $50,000 related to discontinued operations for thesix months ended June 30, 2005 and 2004, respectively.  The weighted-average per-share fair values ofthe individual options granted during the three and six months ended June 30,2005 were $0.09 and $0.10, respectively. The weighted-average per-share fair values of the individual optionsgranted during the three and six months ended June 30, 2004 were $0.68 and$1.05, respectively. The fair value of the options was determined using aBlack-Scholes option-pricing model with the following average assumptions:

 

| ** **              | ** ** | **For the three months  ended June 30,** | ** ** | **For the six months  ended June 30,** | ** ** |
|-------------------------|------------|------------------------------------------|------------|----------------------------------------|------------|
| ** **              | ** ** | **2005**                                 | ** ** | **2004**                               | ** ** | **2005** | ** ** | **2004** | ** ** |
| Dividend yield          |       | 0                                        | %          | 0                                      | %          | 0 | % | 0 | % |
| Volatility              |       | 79                                       | %          | 61                                     | %          | 72 | % | 65 | % |
| Risk-free interest rate |       | 3.2                                      | %          | 3.8                                    | %          | 3.5 | % | 3.5 | % |
| Expected life           |       | 4 years                                  |       | 4 years                                |       | 4 years |   | 4 years |   |

 

6

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*Concentrationof credit risk*

 

The Companyinvests its excess cash principally in investment grade government andcorporate debt securities.  The Companyhas established guidelines relative to diversification and maturities thatmaintain safety and liquidity.  Theseguidelines are periodically reviewed and modified to reflect changes in marketconditions.  The Company has notexperienced any significant losses on its cash equivalents or short-terminvestments.  However, the Company recorded write-downs ofits fixed income investment portfolio in 2004 of $293,000.  The write-downs were due principallyto a decrease in the market value of one bond which had been fluctuating since the initial write-down was recorded in 2003.

 

At June 30, 2005 and December 31, 2004, approximately 64% and 48% ofcash, cash equivalents and short-term investments were held in U.S.dollars.  At June 30, 2005 and December31, 2004, approximately 32% and 36% of cash, cash equivalents and short-terminvestments were held in British pounds.

 

The Company hasderived 100% of its collaboration revenue from F. Hoffmann-La Roche Ltd. andHoffmann-La Roche Inc. (collectively, Roche).

 

*Net income( loss) per share*

 

Net income (loss)from continuing and discontinued operations per share is computed using theweighted average number of common shares outstanding.  Basic and diluted net loss per common shareamounts are equivalent for the periods presented as the inclusion of commonstock equivalents would be anti-dilutive. The total number of shares issuable upon exercise of stock options andwarrants excluded from the calculation of diluted earnings per share since theyare anti-dilutive were 9,190,171 and 9,189,292 for the three and six monthsended June 30, 2005, respectively, and 10,847,999 and 10,749,662 for the sameperiods in 2004, respectively.

 

*Deferredexpenses*

 

The Companyincurred costs in conjunction with its financing efforts in the fourth quarterof 2004 and first quarter of 2005.  As ofDecember 31, 2004, the costs associated with the financing were classified asdeferred expenses included within “Other current assets” on the ConsolidatedBalance Sheet.  However, in April 2005,the Company announced that it elected to withdraw the amended and restatedpreliminary prospectus in connection with the proposed offering of commonshares. Therefore, the deferred financing costs totaling approximately $550,000were written off in the first quarter 2005 and included in selling, general andadministrative expense.

 

**2.****                                      COLLABORATIVEAGREEMENT**

 

On December 2,2003, the Company announced it had restructured its June 24, 2002collaboration agreement with Roche, providing for the development andcommercialization of the pharmaceutical fusion product candidate, HspE7.  Under the restructured terms, Roche wasgranted an option to license the first generation HspE7 product, a license todevelop a second generation HspE7 product, and an option to negotiate rights tothe Company’s CoValTM fusion product candidates for the treatment ofcancer and hepatitis C.

 

In connection withthe first generation HspE7 product, the restructured agreement gives theCompany the right to develop and commercialize the product for indicationsother than genital warts, including control of regulatory matters such as U.S.Investigational New Drug applications (IND). The Company may also conduct dose-ranging studies in patients withgenital warts.  In the original agreementthe Company was responsible for clinical development expenses related to therecurrent respiratory papillomatosis (RRP)

 

7

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indication.  In addition to the responsibilities in theoriginal agreement, the Company is responsible for the manufacturing and othercosts of all indications it develops under the new agreement.

 

The Companyrecorded collaborative R&D revenue of $166,000, and $190,000 during thethree months ended June 30, 2005 and 2004, respectively, and $329,000 and$363,000 during the six months ended June 30, 2005 and 2004, respectively.Collaborative R&D revenue during both periods relates principally to theamortization of upfront license fees in accordance with CICA AccountingStandards Board recommendations, section 3400, *Revenue*,and SAB No. 104, *Revenue Recognition in Financial Statements*.

 

By paying additional fees, Roche can exclusively develop the secondgeneration HspE7 product.  In such case Roche would be required topay the costs of development, manufacture and commercialization of the productand to make payments to the Company upon the achievement of definedmilestones.  The Company would alsoreceive tiered, progressive sales-based payments that it believes arecompetitive with other agreements of this stage and type.  Under theagreement, commercial success payments of up to approximately $104,176,000become payable depending upon the aggregate net sales of either or both generations of the HspE7 products. The restructuredcollaboration agreement gives the Company the right to discuss, negotiate andexecute an alternative agreement with a third-party for the development andcommercialization of HspE7 through a license, partnership, joint venture orsimilar transaction.  After March 31,2005 and through the end of the option period (three months after the Companyfiles a Biologic License Application with the FDA), Roche can terminate thisright by paying the Company a fee, which it expects would be eitherapproximately $12,256,000 or $18,384,000 depending on the stage of developmentof the product. Management cannot determine if or when this option will beexercised.  The amounts disclosed in thisparagraph are reported in the Canadian dollar equivalent to the actual U.S.dollar amounts per the contract converted at the exchange rate on June 30, 2005.  Therefore any fluctuation in these amountsfrom previous filings is due to foreign exchange rate changes.

 

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

 

The followingtables provide details of selected balance sheet items of continuingoperations:

 
| ** **              | ** ** | **June 30, 2005** | ** ** |
|-------------------------|------------|-------------------|------------|
| ** **              | ** ** | ** **        | ** ** | **Accumulated** | ** ** | **Net Book** | ** ** |
| **(In  thousands)**     | ** ** | **Cost**          | ** ** | **Depreciation** | ** ** | **Value** | ** ** |
| Property and equipment: |       |              |       |   |   |   |   |
| Laboratory equipment    |       | $                 | 3,584      |   | $ | (2,638 | ) | $ | 946 |   |
| Computer equipment      |       | 910               |       | (754 | ) | 156 |   |
| Furniture and fixtures  |       | 392               |       | (291 | ) | 101 |   |
| Leasehold improvements  |       | 749               |       | (723 | ) | 26 |   |
|                    |       | $                 | 5,635      |   | $ | (4,406 | ) | $ | 1,229 |   |

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

 

8

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| **(In  thousands)**                        | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|--------------------------------------------|------------|--------------------|------------|------------------------|------------|
| ** **                                 | ** ** | ** **         | ** ** | ** **             | ** ** |
| Accounts payable and accrued  liabilities: |       |               |       |                   |       |
| Trade accounts payable                     |       | $                  | 2,893      |                   | $          | 3,742 |   |
| Accrued compensation and  benefits         |       | 795                |       | 1,243                  |       |
| Clinical trial accruals                    |       | 451                |       | 2,514                  |       |
| Other accrued liabilities                  |       | 354                |       | 363                    |       |
|                                       |       | $                  | 4,493      |                   | $          | 7,862 |   |

 

As of June 30, 2005 and December 31, 2004 the Company had outstandingterm loan obligations of $340,000 and $514,000, respectively.  In September 2003 the Company enteredinto a 36-month term loan agreement with Oxford Finance Corporation,collateralized by equipment owned by the Company.  Interest rates on the Oxford term loans rangefrom 11.47% to 11.48%.  Under the termsof the agreements, the Company must obtain a letter of credit for theoutstanding loan balances if combined cash, cash equivalents, and short-term investmentsfall below $6,000,000.

 

During the secondquarter of 2005, the Company recorded adjustments to the clinical trial accrualand to the bonus accrual.  The Company reversed $527,000 of its clinical trial accrualdue primarily to delays in process development and the manufacturing of commercial-gradeclinical supplies and other issues related to the change in the biologicalprofile of its newly manufactured HspE7, requiring the Company to re-write theprotocol and revise other aspects of the trial. Due to these factors and additional information that became availableregarding the cost components of the trial, the Company changed its estimate ofthe clinical trial accrual.  The Companyalso reversed a $980,000 accrual for 2004 management bonuses which will not bepaid as a result of a decision made in the second quarter of 2005 by the boardof directors and management.

 

**4.****                                      COMMITMENTSAND CONTINGENCIES**

 

The Company’s contractual obligations consist primarily of agreementsrelated to the development and manufacture of HspE7, operating leases forfacilities, a term loan to increase working capital cash flows and contractualemployment obligations.  TheCompany engages several contractors working on different aspects of the workwhich regulatory authorities require for a biological product, includingstability testing, analytical testing, release testing and the manufacturingand fill/finish activities noted below.

 

In January 2004 the Company entered into a biological services agreementwith Avecia, denominated in British pounds, for the process development,scale-up and manufacture of HspE7.  Inaddition, Avecia may manufacture HspE7 for commercial sale, if the product issuccessful.  The Avecia agreement is cancelable by the Company uponnotice and subject to payment of cancellation penalties owed at that time.  The cancellation fee is based on a slidingpercentage of certain future program milestones.  Accordingly, the cancellation fee is modifiedeach month during the course of the agreement, based on the timing ofactivities performed by Avecia and prepayments for those activities.  As of June 30, 2005, the Company has notcanceled any activities under this agreement, therefore, no cancellationpenalty liability has been recorded as of June 30, 2005.   As of June 30, 2005, the Company had $2,150,000in commitments payable to Avecia.

 

In October 2004 the Company entered into an agreement with CardinalHealth (Cardinal), denominated in U.S. dollars. Under this contract, Cardinal was engaged to fill and lyophilize HspE7.  This agreement with Cardinal includes cancellation provisions that could require theCompany to pay for work that was not performed or equipment that was not used if it terminates the contract whileactivities are at pre-defined stages.  During the second quarter of 2005, the Company canceled this contractwith Cardinal and therefore was subject to cancellation penalties totaling$404,000.  The Company applied aprepayment of $151,000 to the penalty and accrued the remaining balance as ofJune 30, 2005.  The Company engaged an alternatevendor to perform these activities.

 

9

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

 

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

 

*ContractualEmployment Obligations*

 

The Company has agreements with certain key employees which include paymentobligations to such employees if they are terminated without cause.  As of June 30, 2005, the aggregate amountpotentially payable pursuant to such agreements totaling either $1,498,000 or$2,368,000, depending on whether certain of such terminations were to occurafter a change of control of the Company. Additionally, in order to encourage its employees to continue theiremployment with the Company for a specified period of time after itsrestructuring in April of 2005, the Company implemented a stay bonus programpursuant to which we may be obligated to pay an aggregate amount of $497,000 inDecember 2005, of which $124,000 has been accrued as of June 30, 2005.

 

*PatentOpposition*

 

On October 22,2002 Antigenics Inc. announced that it had filed an opposition in the EuropeanPatent Office to a European patent and requests for re-examination in the U.S.Patent and Trademark Office of two U.S. patents licensed in connection with theCompany’s platform technology.  InOctober 2003 Antigenics filed an opposition in the European Patent Office to anadditional, product specific, European patent. The EPO intends to hold an oral hearing in October 2005 concerning theopposition of the product specific patent if the parties do not request achange in the date.  The Company does notknow when results from these proceedings will be obtained or what the finalresults from the opposition and re-examination processes will be.

 

*CRAReview*

 

The CanadaRevenue Agency (“CRA”) asked the Company to provide additional information withrespect to transactions between the parent company and its subsidiaries in 2001and 2002. In February 2005 CRA gave the Company a preliminary indication thatit does not agree with elements of the Company’s transfer pricing, includingthe value ascribed to intellectual property transferred to a subsidiary.  The Company believes that the preliminarydetermination has been made without regard to relevant information and hasproviding further information and clarification to CRA. Even if the CRA assessmentdoes not change, its determination will not result in a change to the Company’sfinancial statements due to the consolidated presentation of the results forthe Company and its subsidiaries and due to the fact the Company has a fullvaluation allowance against deferred tax assets; nor will additional tax becomepayable for those years. If the Company is found to have failed to providetimely and adequate information to CRA, a penalty could be levied. The Companybelieves that it has provided all relevant information within prescribed timeperiods. The Company does not believe the outcome of the discussions with theCRA will have a material impact on its financial position.

 

10

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

 

*CommonShares*

 

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

 

At the time of theoriginal collaboration agreement (see Note 2), Roche received two warrants topurchase the common stock of Stressgen. The Company allocated $1,264,000 as the fair value of the warrants.  In April 2003, Roche exercised the firstwarrant to acquire 1,413,600 common shares at $3.25, resulting in net proceedsof $4,594,000 to the Company.  Under theoriginal collaboration agreement, the Company had the right to call the secondwarrant. In connection with the restructured collaboration agreement, Roche hasa continued right to exercise the second warrant for 814,574 shares at apurchase price of $3.76 per share at any time until June 28, 2007.  The Company no longer has the right to callthe second warrant.

 

*Contributedsurplus*

 

The change incontributed surplus from December 31, 2004 is due to expense related to thefair value of stock options recorded in the first half of 2005.

 

*EmployeeShare Option Plans*

 

The followingtables summarize information related to all stock options outstanding andexercisable granted to employees, directors and non-employees under the Company’s1996 and 2001 stock-based compensation plans as of June 30, 2005.

 

The total number of options exercisable at December 31, 2004 was4,050,335.  The following tablesummarizes information related to all stock options outstanding and exercisableat June 30, 2005:

 
| ** **                    | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**                                        | ** ** |
|-------------------------------|------------|-------------------------|------------|----------------------------------------------------------------|------------|
| **Range of  Exercise Prices** | ** ** | **Number  Outstanding** | ** ** | **Weighted  Average  Remaining  Contractual Life  (in years)** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number  Exercisable** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|                          |       |                    |       |                                                           |       |   |   |   |   |   |   |
| $0.00 - $1.99                 |       | 1,598,982               |       | 6.9                                                            |       | $ | 1.16 |   | 937,737 |   | $ | 1.72 |   |
| $2.00 - $3.99                 |       | 583,829                 |       | 6.2                                                            |       | 3.23 |   | 465,492 |   | 3.33 |   |
| $4.00 - $5.99                 |       | 1,028,258               |       | 3.6                                                            |       | 4.88 |   | 1,026,048 |   | 4.88 |   |
| $6.00 - $8.00                 |       | 399,500                 |       | 4.6                                                            |       | 6.14 |   | 399,500 |   | 6.14 |   |
|                          |       | 3,610,569               |       | 5.6                                                            |       | $ | 3.10 |   | 2,828,777 |   | $ | 3.76 |   |

 

In June 2005, an amendment to the 2001 stock option incentive plan wasapproved by a majority stockholder vote. The original 2001 plan allowed for a fixed number of options in thepool.  The amendment provides that themaximum number of options in the pool should be determined by a rollingcalculation based on 10% of the issued and outstanding common shares.  Therefore as of June 30, 2005, the totalnumber of options in the pool increased from 3,500,000 to 7,250,640 and therewere 4,346,123 

 

11

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options available for future grant under the 2001 Plan.  As of August 3, 2005, there wereapproximately 3,015,064 options outstanding.

 

**6.****                                      RELATEDPARTY TRANSACTIONS**

 

TheCompany has used various affiliates of MDS, Inc., including MDSPharma Services, to provide research services.  One of the Company’s boardmembers, Ian Lennox, was an officer of MDS, Inc. through May 2004.  During the first five months of 2004, theCompany paid MDS and its affiliates an aggregate of $286,000.

 

**7.****                                      SEGMENTINFORMATION**

 

Long-lived assetsare allocated geographically as follows:

 
| **(In  thousands)** | ** ** | **June 30, 2005** | ** ** | **December 31,  2004** | ** ** |
|---------------------|------------|-------------------|------------|------------------------|------------|
| Canada              |       | $                 | 1,060      |                   | $          | 1,271 |   |
| US                  |       | 169               |       | 210                    |       |
|                |       | $                 | 1,229      |                   | $          | 1,481 |   |

 

The Companypreviously reported two segments, Biotechnology and Bioreagents.  As discussed in Note 10, in April 2005, theCompany sold certain assets and liabilities of the bioreagent business andtherefore has only one reportable segment.

 

**8.****                                      SUPPLEMENTALCASH FLOW INFORMATION**

** **
| ** **          | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|---------------------|------------|----------------------------------|------------|--------------------------------|------------|
| **(In  thousands)** | ** ** | **2005**                         | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| Interest paid       |       | $                                | 12         |                           | $          | 28 |   | $ | 26 |   | $ | 56 |   |
|                     |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |

 

12

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

 

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

 

*BalanceSheet*

 

| **(In  thousands)**                                 | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-----------------------------------------------------|------------|--------------------|------------|------------------------|------------|
| ** **                                          | ** ** | ** **         | ** ** | ** **             | ** ** |
| Current assets under Canadian  GAAP                 |       | $                  | 14,859     |                   | $          | 28,531 |   |
|                                                |       |               |       |                   |       |
| Market value gain on available  for sale securities |       | —             |       | —                 |       |
|                                                |       |               |       |                   |       |
| Current assets under U.S. GAAP                      |       | $                  | 14,859     |                   | $          | 28,531 |   |
|                                                |       |               |       |                   |       |
| Stockholders’ equity under  Canadian GAAP      |       | $                  | 9,746      |                   | $          | 19,551 |   |
|                                                |       |               |       |                   |       |
| Market value gain on available  for sale securities |       | —             |       | —                 |       |
| Adjustment to common stock (a)                      |       | (16,710            | )          | (16,455                | )          |
| Adjustment to deferred stock  compensation (a)      |       | —             |       | (104                   | )          |
| Adjustment to accumulated  deficit (a)              |       | 16,710             |       | 16,559                 |       |
|                                                |       | —             |       | —                 |       |
| Stockholders’ equity under U.S.  GAAP          |       | $                  | 9,746      |                   | $          | 19,551 |   |

 

13

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*Statementof Operations*

 
| ** **                                                                                   | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| **(In thousands  except per share amounts)**                                                 | ** ** | **2005**                         | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net loss under Canadian GAAP                                                                 |       | $                                | (3,338     | )                              | $          | (6,366 | ) | $ | (10,060 | ) | $ | (12,650 | ) |
| Reversal of unrealized foreign  exchange gain on investments                                 |       | (752                             | )          | (238                           | )          | (929 | ) | (243 | ) |
| (Gain) loss on market value of  investments (b)                                              |       | (576                             | )          | 304                            |       | (701 | ) | 310 |   |
| Reversal of stock compensation  expense (a)                                                  |       | 76                               |       | 301                            |       | 255 |   | 964 |   |
| Stock compensation expense  under APB No. 25 (a)                                             |       | —                           |       | (15                            | )          | (104 | ) | (52 | ) |
|                                                                                         |       | (1,252                           | )          | 352                            |       | (1,479 | ) | 979 |   |
|                                                                                         |       |                             |       |                           |       |   |   |   |   |
| Net loss under U.S. GAAP                                                                     |       | $                                | (4,590     | )                              | $          | (6,014 | ) | $ | (11,539 | ) | $ | (11,671 | ) |
|                                                                                         |       |                             |       |                           |       |   |   |   |   |
| Basic and diluted loss per  common share under Canadian GAAP                                 |       | $                                | (0.05      | )                              | $          | (0.09 | ) | $ | (0.14 | ) | $ | (0.17 | ) |
|                                                                                         |       |                             |       |                           |       |   |   |   |   |
| Basic and diluted loss per  common share under U.S. GAAP                                     |       | $                                | (0.06      | )                              | $          | (0.08 | ) | $ | (0.16 | ) | $ | (0.16 | ) |
|                                                                                         |       |                             |       |                           |       |   |   |   |   |
| Common shares used to compute  basic and diluted loss per share under Canadian and U.S. GAAP |       | 72,506                           |       | 72,506                         |       | 72,506 |   | 72,502 |   |

 

*Statementof Cash Flows*

 

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

 

*Differences*

 

The followingnotes outline the differences between Canadian and U.S. GAAP that affect theCompany for the three and six months ended June 30, 2005 and 2004.

 

(a)                             As discussed in Note 1, on January 1, 2004,the Company adopted fair value accounting for all stock options as requiredby CICA 3870.  The Company is required torecord the expense of the fair value of all stock options over their respectivevesting term.  The Company used the “Retrospectivemethod without Restatement.”  This methodrequires the Company to record the cumulative expense as an adjustment toaccumulated deficit for the period beginning January 1, 1995 through December31, 2003 and begin recording the expense to accumulated deficit in 2004.

 

14

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The Financial Accounting Standards Board (FASB) issued Statement ofFinancial Accounting Standards (SFAS) No. 148, *Accountingfor Stock-Based Compensation, Transition and Disclosure*(SFAS No.148)**in December 2002.  SFAS No. 148 provides alternative transitionmethods for entities that voluntarily elect to adopt the fair value recognitionprovisions of FASB Statement No. 123, *Accounting for Stock-BasedCompensation*(SFAS No. 123)*,*tostock-based employee compensation.  Underthe provisions of SFAS No. 123, fair value accounting is required for allgrants made on or after January 1, 1995. The Company has not elected to adopt the recognition provisions of SFASNo. 123 for U.S. reporting purposes, which would require fair value basedaccounting for grants made on or after January 1, 1995, but follows theintrinsic value method under APB Opinion No. 25.

 

Under theprinciples of SFAS No. 123, the Company would have recorded approximately$17,825,000 of deferred compensation related to the total fair value for stockoptions granted between January 1, 1995 and June 30, 2005.  The following table illustrates the effect onnet loss and loss per share under U.S. GAAP if the Company had applied the fairvalue accounting provisions of SFAS No. 123 to employee stock basedcompensation:  

 
| ** **                                                    | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| **(In  thousands except per share amounts)**                  | ** ** | **2005**                         | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2005** | ** ** |
| Net loss under U.S. GAAP                                      |       | $                                | (4,590     | )                              | $          | (6,014 | ) | $ | (11,539 | ) | $ | (11,671 | ) |
|                                                          |       |                             |       |                           |       |   |   |   |   |
| Stock-based compensation under  APB No. 25                    |       | —                           |       | 15                             |       | 104 |   | 52 |   |
| Stock-based compensation  expense recorded under SFAS No. 123 |       | (76                              | )          | (301                           | )          | (255 | ) | (964 | ) |
| Pro forma net loss under U.S.  GAAP                           |       | $                                | (4,666     | )                              | $          | (6,300 | ) | $ | (11,690 | ) | $ | (12,583 | ) |
|                                                          |       |                             |       |                           |       |   |   |   |   |
| Pro forma loss per common share                               |       | $                                | (0.06      | )                              | $          | (0.09 | ) | $ | (0.16 | ) | $ | (0.17 | ) |

 

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

 

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

 

15

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

 
| ** **                                                     | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| **(In  thousands)**                                            | ** ** | **2005**                         | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net loss under U.S. GAAP                                       |       | $                                | (4,590     | )                              | $          | (6,014 | ) | $ | (11,539 | ) | $ | (11,671 | ) |
| Other comprehensive income                                     |       |                             |       |                           |       |   |   |   |   |
| Adjustment of unrealized  foreign exchange gain on investments |       | 752                              |       | 238                            |       | 929 |   | 243 |   |
| Market value gain (loss) on  investments                       |       | 514                              |       | (304                           | )          | 341 |   | (310 | ) |
| Comprehensive net loss under  U.S. GAAP                        |       | $                                | (3,324     | )                              | $          | (6,080 | ) | $ | (10,269 | ) | $ | (11,738 | ) |

 

At March 31,2005 and December 31, 2004, the Company reported the bioreagent business as adiscontinued operation pursuant to the requirements of CICA 3475, *Disposal of Long-lived Assets and Discontinued Operations*(CICA 3475), SFAS No. 144, *Accounting for theImpairment or Disposal of Long-Lived Assets* (SFAS No. 144), and EITF03-13, *Applying the Conditions in Paragraph 42 of FASBStatement No. 144 in Determining Whether to Report Discontinued Operations*.  The Company sold certain assets andliabilities related to its bioreagent business in second quarter 2005. See Note10 for further disclosure.

 

**New U.S. GAAP Accounting Pronouncement**

 

*Share-based payment*

 

In December2004, the FASB, issued SFAS No. 123(R), “*Share-BasedPayment,*” which is a revision of SFAS No. 123, “*Accounting for Stock-Based Compensation*”.SFAS No. 123(R) requires that the compensation cost relating to share-basedpayment transactions be recognized in financial statements. The compensationcost will be measured based on the fair value of the equity or liabilityinstruments issued. On April 14, 2005, the SEC announced that the effectivedate of SFASNo. 123(R) will be postponed until January 1, 2006 for calendar year companies.The Company will adopt SFAS No. 123(R) on January 1, 2006. The Company has notdetermined the impact of adopting SFAS No. 123(R) on the footnotes. Further theCompany does not yet know the impact that any future share-based paymenttransactions will have on its financial statements.

 

In March 2005, the SEC issued SAB No. 107, *Share-BasedPayment*, in which the staff expresses its views regarding thevaluation of share-based payment arrangements. SAB No. 107 is intended to assist issuers in their initialimplementation of SFAS No. 123R and enhance the information received byinvestors and other users of financial statements.

 

**10.****                               DISCONTINUEDOPERATION**

 

At December 31,2004, the Company reported itsbioreagent business as a discontinued operation pursuant to the requirements ofCICA 3475, *Disposal of Long-lived Assets and DiscontinuedOperations* (CICA 3475), SFAS No. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets* (SFAS No. 144),and EITF 03-13, *Applying the Conditions in Paragraph 42 ofFASB Statement No. 144 in Determining*

 

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*Whetherto Report Discontinued Operations*.  The bioreagent business produces and sellsbioreagents to researchers and researchorganizations worldwide.  The productssold by the bioreagent business include antibodies, proteins, DNA products,ELISA kits and extracts for use in studying cellular stress response pathways,including oxidative stress, apoptosis, neurobiology and more.

 

In April 2005, theCompany signed a definitive agreement to sell the bioreagent business for cashto allow it to focus its corporate strategy, manage resources and provideworking capital to further fund the development and commercialization ofHspE7.  The sale of the bioreagentbusiness was effective April 29, 2005. The Company sold certain assets andliabilities associated with its bioreagent business including all inventory,accounts receivable, property and equipment, accounts payable and certain otherintangible assets that were not previously capitalized by the Company.

 

The Companyrecorded a $6,710,000 gain associated with the sale.  Under the terms of the Asset PurchaseAgreement (APA), the Company received a $7,345,000 cash payment on the day thetransaction closed, and an additional $817,000 deposited into a third partyescrow account for satisfying any indemnification claims of the buyer resultingfrom debts, liabilities, or claims not expressly assumed by the buyer orresulting from any breach by us of any obligation, representation, warranty,covenant or agreement made by us in connection with the transaction.  The Company will receive the escrow funds oneyear after the closing, in April 2006, subject to the conditions in theAPA.  The Company believes it willreceive the entire amount held in escrow and therefore the $6,710,000 gainincludes the $817,000 escrow payment. The initial cash payment and the escrow cash payment were made in U.S.dollars and converted into Canadian dollars at the foreign exchange rate atApril 29, 2005, the date of the transaction.

 

In conjunctionwith the APA, the Company also entered into a Transition Services Agreement(TSA) to provide temporary administrative services to the purchaser such asaccounting, human resources, IT, and other facility costs.  The Company earned approximately $170,000during the second quarter of 2005 under the terms of the TSA, which is recordedin other income.   The TSA expires upon60 day notice given by either party.

 

The operatingresults of the bioreagent business have been separately classified and reportedas discontinued operations in the consolidated financial statements.  A summaryof the components of discontinued operations in the Consolidated Statement ofOperations is as follows:

 
| ** **                               | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| **(In  thousands)**                      | ** ** | **2005**                         | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| Bioreagent sales                         |       | $                                | 584        |                           | $          | 1,446 |   | $ | 2,165 |   | $ | 2,898 |   |
| Operating expenses                       |       | (416                             | )          | (793                           | )          | (1,587 | ) | (1,703 | ) |
| Gain on sale                             |       | 6,710                            |       | —                         |       | 6,710 |   | — |   |
| Other income (expenses)                  |       | 165                              |       | 10                             |       | 172 |   | 2 |   |
| Net income from discontinued  operations |       | $                                | 7,043      |                           | $          | 663 |   | $ | 7,460 |   | $ | 1,197 |   |

 

The bioreagentbusiness was previously reported in the segment disclosure of our quarterly andannual filings.  The income reported above does not include internal overhead andadministrative overhead expense allocations that were assigned to this segmentand which will continue to be incurred by the continuing entity.

 

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A summary of the components of assets andliabilities of discontinued operations on the Consolidated Balance Sheets is as follows:

 
| ** **                                    | ** ** | **December 31,** | ** ** |
|-----------------------------------------------|------------|------------------|------------|
| **(In  thousands)**                           | ** ** | **2004**         | ** ** |
| Assets of discontinued  operations:           | ** ** | ** **       | ** ** |
| Cash and cash equivalents                     |       | $                | 551        |   |
| Short-term investments                        |       | 515              |       |
| Accounts receivable, net                      |       | 589              |       |
| Inventories                                   |       | 561              |       |
| Prepaid expenses                              |       | 15               |       |
| Other current assets                          |       | 60               |       |
| Plant and equipment, net                      |       | 156              |       |
| Total assets of discontinued  operations      |       | $                | 2,447      |   |
|                                          |       |             |       |
| Liabilities of discontinued  operations       |       |             |       |
| Accounts payable                              |       | $                | 324        |   |
| Total liabilities of  discontinued operations |       | $                | 324        |   |

 

**11.****                            RESTRUCTURING**

 

In April 2005,the Company took steps to restructure its operations, which allows the Companyto focus its resources on the advancement of HspE7.  Under the restructuring plan, 31 employeeswere involuntarily terminated including research and administrative staff.  The terminated employees were offeredone-time termination benefits totaling $530,000 which were paid or accrued inthe second quarter of 2005, the cost of which is included in restructuring onthe Statement of Operations.  Of the $530,000of restructuring expense, $366,000 was paid in the second quarter 2005 and theremaining balance was accrued as of June 30, 2005.

 

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# **MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

# ** **

This“Management’s Discussion and Analysis of Financial Condition and Results ofOperations” is dated as of August 3, 2005. It contains forward-looking statements that involve risk anduncertainties.  The predictions describedin these statements may not materialize if management’s current expectationsregarding our future performance prove incorrect.  Our results could also be affected by factorsincluding, but not limited to, our ability to continue as a going concern, ourability to enter into corporate partnering relationships, difficulties inherentin the manufacture of commercial grade clinical supplies, regulatory approvalrequirements, clinical trial uncertainties, the effect of our limited cashresources and the application of available resources among competing potentialuses and other risks described in our annual report under the heading “RiskFactors.”  Our forward-looking statementsare based on currently available information; we disclaim any obligation toupdate them.

 

Thefollowing information should be read in conjunction with our June 30, 2005consolidated quarterly financial statements and related notes therein, whichare prepared in accordance with Canadian GAAP. These principles differ in certain respects from U.S. GAAP.  The differences, as they affect ourconsolidated financial statements, are described in Note 9 to our consolidatedfinancial statements.  All amountsfollowing are expressed in Canadian dollars unless otherwise indicated.

 

## **Overview**

## ** **

Fromour inception in 1990 to 1993, our core business involved the sale ofbioreagent products.  Our primary focussince 1993 has been the research and development of innovative stressprotein-based fusion products that will stimulate the body’s immune system tocombat viral infections and related cancers. Our lead therapeutic vaccinecandidate is HspE7.  HspE7 is abroad-spectrum therapeutic vaccine candidate in development for diseases causedby the human papilloma virus.  HspE7 isderived from our proprietary platform technology that enables us to covalentlyfuse stress proteins to antigens that invoke immune system responses.  By covalently fusing HspE7 anddisease-associated antigens, we believe that we can create a proprietaryportfolio of CoValTM fusion products designed to stimulate the immune system toidentify, target and eliminate virus-infected and cancerous cells.

 

Wehave incurred significant losses since our inception and expect to incursubstantial losses for the foreseeable future as we invest in our research andproduct development programs, including manufacturing, pre-clinical studies andclinical trials, and regulatory activities. At June 30, 2005 our accumulated deficit was $222,409,000.  Historically, we have depended principally onequity financings, cash flows from our bioreagent business and funding fromresearch collaborations to fund our business activities.  In April 2005, we completed thesale of certain assets and liabilities of our bioreagent business for cashwhich resulted in a $6,710,000 gain, including a $817,000 payment subject toescrow until April 2006.  We intend to seek additional researchcollaborations to fund our business activities and pursue additional equityfinancings, markets permitting.

 

Oursuccess will depend upon the safety and efficacy of our immunotherapeuticproducts in pre-clinical studies and clinical trials, and upon obtaining thenecessary regulatory approvals to market our products.  The marketability of our products will beinfluenced by competition from alternative therapies and the degree ofprotection our intellectual property provides. We believe there will besignificant markets for our therapeutic products should these products prove tobe effective in human clinical trials.

 

### *RestructuredRoche Agreement*

### * *

In December 2003,we announced a restructuring of our June 2002 collaboration agreement withRoche providing for the development and commercialization of HspE7.  Under the restructured terms, we grantedRoche an option to license the first generation HspE7 product, a license todevelop a second generation HspE7 product, and non-exclusive options tonegotiate rights to CoValTM fusion product candidates for the

 

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treatmentof cancers and hepatitis C.   Roche canpay fees to make these options exclusive until January 1, 2007.

 

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

 

Bypaying additional fees, Roche can exclusively develop the second generationHspE7 product.  In such case Roche would be required to pay the costsof development, manufacture and commercialization of the product and to makepayments to us upon the achievement of defined milestones. We would alsoreceive tiered, progressive sales-based payments that we believe arecompetitive with other agreements of this stage and type.  Under theagreement, commercial success payments of up to approximately US$85,000,000become payable depending upon the aggregate net sales of either or bothgenerations of the HspE7 products. The restructured collaboration agreement givesus the right to discuss, negotiate and execute an alternative agreement with athird-party for the development and commercialization of HspE7 through alicense, partnership, joint venture or similar transaction.  After March 31, 2005 and through the endof the option period (three months after we file a Biologic LicenseApplication), Roche can terminate this right by paying us a fee, which weexpect would be either US$10,000,000 or US$15,000,000 depending on the stage ofdevelopment of the product.  We cannotdetermine if or when this option will be exercised.

 

## **Liquidity and Capital Resources**

## ** **

Sinceinception we have relied principally on equity financings, cash flows from ourbioreagent business, and funding from research collaborations, to fund ourresearch and development programs, operations and capital expenditures. Through June 30, 2005 we have raised net equity proceeds of $198,238,000.

 

The accompanyingfinancial statements have been prepared assuming we will continue as a goingconcern.  At June 30, 2005, we hadcash, cash equivalents and short-term investments totaling $13,230,000, workingcapital of $9,400,000 and accumulated deficit of $222,409,000.  At December 31, 2004, we had cash, cashequivalents and short-term investments totaling $21,578,000, working capital of$19,335,000 and accumulated deficit of $212,349,000.  We incurred a net loss from continuingoperations of $17,520,000 for the six months ended June 30, 2005 and a netloss from continuing operations of $31,845,000 for the year ended December 31,2004.  We used $16,967,000 of net cash inoperations for the six months ended June 30, 2005.  Historically, we have incurred significantlosses from operations.  Until such time,if ever, as our research and development efforts are commercialized or fullyfunded by third parties, of which no assurance can be given, we will continueto incur operating losses.  Thesefactors, among others, raise substantial doubt about our ability to continue asa going concern.

 

We estimate that ourcurrent cash resources will be sufficient to fund our operations, includingpayments to third parties for the continued preparation of our clinical trialsfor HspE7 into the fourth quarter of 2005. To fund operations and our drug development programs beyond 2005, we mustenter into collaboration agreements with third parties, complete a corporatetransaction and/or raise additional financing. The Company may not be successful in securing additional resources andif secured, such arrangements may not provide funds sufficient to continue tofund operations through commercialization of HspE7.  In the absence of raising additional funds,we will be required to scale back or terminate operations.

 

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Even assuming we are successfulin securing additional sources of financing to fund our HspE7 program and thecontinued development of our CoValTM technology, or otherwise enter intocollaborative agreements or complete a corporate transaction, our efforts maynot result in commercially viable products.

 

At June 30,2005 and December 31, 2004, we had $13,230,000 and $21,578,000,respectively, of cash, cash equivalents and short-term investments. The$8,348,000 decrease was due principally to spending related to the developmentof HspE7 and costs associated with our April 2005 corporate restructuring,offset by the sale proceeds of certain assets and liabilities associated withour bioreagent business.

 

Duringthe three months ended June 30, 2005 and 2004, we reported $9,760,000 and$6,376,000, respectively, of net cash used in operating activities fromcontinuing operations.  The increase in2005 over 2004 is primarily due to the payments to our third party vendors andpayments related to our April 2005 restructuring.

 

Duringthe six months ended June 30, 2005 and 2004, we reported $18,439,000 and$12,688,000, respectively, of net cash used in operating activities fromcontinuing operations.  The increase in2005 over 2004 is primarily due to the payments to our third party vendors andpayments related to our April 2005 restructuring.

 

Duringthe three months ended June 30, 2005, we did not make any purchases ofplant and equipment as compared with purchases of $55,000 during the sameperiod in 2004.  Spending during thesecond quarter of 2004 consisted of laboratory equipment and computer relatedhardware.

 

Duringthe six months ended June 30, 2005, purchases of plant and equipment bycontinuing operations totaled $3,000 as compared with purchases of $185,000during the same period in 2004.  Spendingduring 2004 consisted of tenant improvements on our facilities, laboratoryequipment and computer related hardware.

 

Wedo not expect our capital spending in the second half of 2005 to besignificant.

 

In September 2003we entered into a 36-month term loan with Oxford Finance Corporation(Oxford).  Under the terms of the Oxfordloans, we must issue a letter of credit for the outstanding loan balance if ourcombined cash, cash equivalents, and short-term investments fall below$6,000,000.  At June 30, 2005 and December 31,2004 we had an outstanding term loan obligation under the Oxford loan of$340,000 and $514,000, respectively

 

Weexpect to seek additional funds from various sources, including, but notlimited to, corporate partners that enter into research and developmentcollaborations with us, and public and private equity financings.  If we raise additional funds by issuingequity securities, substantial dilution to our existing shareholders may result.  We may need to obtain funds throughcollaborative arrangements with others that are on unfavorable terms.  We may also have to relinquish rights tocertain of our technologies, product candidates or products that we wouldotherwise seek to develop ourselves.  Wemay not be successful in raising additional funds.  We may not be successful in raisingadditional funds.

 

### *ContractualObligations*

### * *

In January 2004,we entered into a biological services agreement with Avecia, denominated inBritish pounds, for the process development, scale-up and manufacture of HspE7for our clinical trials.  In addition,Avecia may manufacture HspE7 for commercial sale, if our product is successful.

 

TheAvecia agreement is cancelable by usupon notice and subject to payment of cancellation penalties owed at that time.The cancellation fee is based on a sliding percentage of certain future programmilestones.  Accordingly, thecancellation fee is modified each month during the course of the agreement,based on the timing of activities performed by Avecia and prepayments for thoseactivities.  As of June 30, 2005,the Company has not canceled any activities under this agreement, therefore, nocancellation penalty

 

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liabilityhas been recorded as of June 30, 2005. As of June 30, 2005, the Company had $2,150,000 in commitmentspayable to Avecia.

 

In October 2004we entered into an agreement with Cardinal Health (Cardinal), denominated inU.S. dollars.  Under this contract,Cardinal was engaged to fill and lyophilize HspE7.  This agreement with Cardinal includes cancellation provisions that could requirepayment by us to Cardinal for work that was not performed or equipment that wasnot used if we terminate thecontract while activities are at pre-defined stages.  During the second quarter of 2005, wecanceled this contract with Cardinal and therefore were subject to cancellationpenalties totaling $404,000.  We applieda prepayment of $151,000 to the penalty and accrued the remaining balance as ofJune 30, 2005.  We engaged analternate vendor to perform these activities.

 

Toretain a flexible development program, we typically negotiate terminationprovisions so that financial obligations are limited to paying for workperformed up to the termination date and in some cases, a cancellation feedetermined under a pre-established formula. Except as disclosed above, we currently do not have any othersignificant research and development contracts subject to cancellation fees.

 

Wehave agreements with certain key employees which include payment obligations tosuch employees if they are terminated without cause.  As of June 30, 2005, the aggregateamount potentially payable pursuant to such agreements totaling either$1,498,000 or $2,368,000, depending on whether certain of such terminationswere to occur after a change of control of the Company.  Additionally, in order to encourage ouremployees to continue their employment with us for a specified period of timeafter our restructuring in April of 2005, we implemented a stay bonusprogram pursuant to which we may be obligated to pay an aggregate amount of$497,000, of which $124,000 has been accrued as of June 30, 2005.

 

Therehave been no other changes in our future contractual obligations from theamounts reported as of December 31, 2004.

 

### ***Off-Balance SheetArrangements***

### * *

We have not entered intoany off-balance sheet arrangements.

 

### ***Related Party Transactions***

### * *

We have used variousaffiliates of MDS, Inc., including MDS Pharma Services, to provideresearch services.  One of our board members, Ian Lennox was anofficer of MDS, Inc. through May 2004.  During the first five months of 2004, we paidMDS and its affiliates an aggregate of $286,000.

 

### ***Discontinued Operations***

### * *

At December 31,2004, we reported our bioreagent business as a discontinued operation pursuantto the requirements of CICA 3475, *Disposal of Long-livedAssets and Discontinued Operations* (CICA 3475), SFAS No. 144, *Accounting for the Impairment or Disposal of Long-Lived Assets*(SFAS No. 144), and EITF 03-13, *Applying the Conditions inParagraph 42 of FASB Statement No. 144 in Determining Whether to ReportDiscontinued Operations*.  Thebioreagent business produces and sells bioreagents to researchers and research organizations worldwide.  The products sold by the bioreagent businessinclude antibodies, proteins, DNA products, ELISA kits and extracts for use instudying cellular stress response pathways, including oxidative stress,apoptosis, neurobiology and more.

 

In April 2005, wesigned a definitive agreement to sell the bioreagent business for cash to focusour corporate strategy, manage resources and provide working capital to furtherfund the development and commercialization of HspE7.  The sale of the bioreagent business was effectiveApril 29, 2005. We sold certain assets and liabilities associated with ourbioreagent business including all inventory, accounts receivable, property andequipment, accounts payable and certain other intangible assets that were notpreviously capitalized.

 

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We recorded a $6,710,000gain associated with the sale.  Under theterms of the Asset Purchase Agreement (APA), we received a $7,345,000 cashpayment on the day the transaction closed, and an addition $817,000  deposited into a third party escrow accountfor satisfying any indemnification claims of the buyer resulting from debts,liabilities, or claims not expressly assumed by the buyer or resulting from anybreach by us of any obligation, representation, warranty, covenant or agreementmade by us in connection with the transaction. We will receive the escrow funds one year after the closing, in April 2006,subject to the conditions in the APA.  Webelieve we will receive the entire amount held in escrow and therefore the$6,710,000 gain includes the $817,000 escrow payment.  The initial cash payment and the escrow cashpayment were made in U.S. dollars and converted into Canadian dollars at theforeign exchange rate at April 29, 2005, the date of the transaction.

 

In conjunction with theAPA, we also entered into a Transition Services Agreement (TSA) to providetemporary administrative services to the purchaser such as accounting, humanresources, IT, and other facility costs. The Company earned approximately $170,000 during the second quarter of2005 under the terms of the TSA, which is recorded in other income.  The TSA expires upon 60 day notice given byeither party.

 

Thegain reported above does not include internal overhead and administrativeoverhead expense allocations that were assigned to this segment and which willcontinue to be incurred by the continuing entity.

 

**CorporateRestructuring**

 

In April 2005, wetook steps to restructure our operations to focus our resources on theadvancement of HspE7.  Under therestructuring plan, 31 employees were involuntarily terminated includingresearch and administrative staff.  Theterminated employees were offered one-time termination benefits totaling$530,000 which were paid or accrued in the second quarter of 2005, the cost ofwhich is included in restructuring on the Statement of Operations.  Of the $530,000 of restructuring expense,$366,000 was paid in the second quarter 2005 and the balance was accrued.

 

## **Results of Continuing Operations**

## ** **

Duringthe three months ended June 30, 2005, we realized a net loss fromcontinuing operations of $10,381,000 or $0.14 per common share as compared to$7,029,000 or $0.10 for the same period in 2004. During the six months ended June 30,2005, we realized a net loss from continuing operations of $17,520,000 or $0.24per common share as compared to $13,847,000 or $0.19 for the same period in2004.  The $3,352,000 and $3,673,000increases in our net loss for the three and six months ended June 30,2005, as compared to the same periods in 2004 are due principally toincremental third party activity to further the development of HspE7, $530,000of expense associated with our corporate restructuring and severance paymentsof $848,000 made in the second quarter 2005 to our former Chief ExecutiveOfficer.

 

### *CollaborativeR&D revenue*

### * *

Werecorded collaborative R&D revenue of $166,000 and $190,000 in the threemonths ended June 30, 2005 and 2004, respectively.  During the six months ended June 30,2005 and 2004, respectively, we recorded collaborative R&D revenue of$329,000 and $363,000.  CollaborativeR&D revenue relates principally to the amortization of upfront license feesin accordance with CICA Accounting Standards Board recommendations, section 3400,*Revenue,* and Staff Accounting Bulletin(SAB) No. 104, *Revenue Recognition inFinancial Statements*.

 

### *Researchand development*

### * *

Researchand development in our continuing operations includes costs associated withtherapeutic product development and clinical studies related to HspE7.  In order to optimize our financialflexibility, we employ clinical research organizations (CRO) to conduct ourclinical trials and engage contract manufacturers to assist us with productdevelopment and manufacturing.  Duringthe second quarter of

 

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2005,primarily all of our R&D spending related to efforts developing HspE7.  Beginning in mid-2004, we focused themajority of our resources on developing HspE7. In periods prior to mid-2004, we allocated some of our R&D spendingto exploratory research involving our follow-on CoValTM fusionproteins.

 

R&Dspending in our continuing operations increased by approximately 47% to$8,270,000 during the three months ended June 30, 2005, compared to$5,636,000 for the same period in 2004.  OurR&D spending in continuing operations increased by approximately 27% to$13,809,000 during the six months ended June 30, 2005, compared to$10,909,000 for the same period in 2004.

 

Theincreases in R&D expense in current periods over prior periods are due principallyto spending at Avecia and other key vendors to further develop HspE7, includingprocess development and manufacturing activities in preparation for our PhaseIII trial of HspE7 for the treatment of patients suffering from recurrentrespiratory papillomatosis, or RRP.  Thisspending was offset in the second quarter of 2005 by the $527,000 reversal ofour clinical trial accrual related to our RRP pivotal trial, savings realizedfrom our April 2005 restructuring and the reversal of 2004 accrued managementbonuses.  We reversed a portion of ourclinical trial accrual due in part to delays in process development and themanufacturing of commercial-grade clinical supplies and other issues related tothe change in the biological profile of our newly manufactured HspE7, requiringus to re-write the protocol and revise other aspects of the trial.  We also reversed a $542,000 accrual for 2004management bonuses which will not be paid as a result of a decision made in thesecond quarter of 2005 by our board of directors and management.

 

Inaddition to clinical trial spending, our spending with Avecia is expected tocontinue through 2005 as we transition from process development activities toinitial production runs of bulk drug substance for our upcoming clinicaltrials.  We will also incur additionalcosts with other third party providers for validation and other activitiesassociated with the preparation of HspE7 to be used in clinical trials.

 

We intend to dedicate ourstrategic and financial resources to support the further advancement ofHspE7.  We will continue to focus onpre-validation of our manufacturing process and other activities associatedwith preparing for our planned Phase III study in patients with RRP.  We will also continue our activities associatedwith developing HspE7 combined with an adjuvant to prepare for our plannedPhase I/II proof-of-concept study.  Wewill need to raise additional funds to begin and continue to conduct thosetrials.

 

### *Selling,general and administrative expenses*

### * *

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

 

SG&Aspending through continuing operations increased by approximately 5% to $1,831,000for the three months ended June 30, 2005, from $1,742,000 for the sameperiod in 2004.  Our SG&A spending incontinuing operations remained unchanged at $3,837,000 for the six months endedJune 30, 2005 and 2004.  SG&Afor both the three and six months ended June 30, 2005 includes severancepayments made in the second quarter 2005 to our former Chief Executive Officertotaling approximately $848,000, offset by savings realized in the April 2005restructuring and the $438,000 reversal of accrued 2004 management bonuseswhich will not be paid based on a decision made in the second quarter of 2005by the board of directors and management. Additionally, SG&A for the six months ended June 30, 2005includes approximately $550,000 of expense incurred in the first quarter 2005related to our withdrawn financing.  Weanticipate that SG&A spending during the remainder of 2005 will beconsistent with current spending.

 

*Restructuring expense*

 

Employees terminatedthrough our April 2005 corporate restructuring were offered one-timetermination benefits which were paid or accrued in the second quarter of 2005,the cost of which is included in restructuring on the Statement of Operations.

 

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### *Interestand other income (expense)*

### * *

Interestand other income from continuing operations increased for the three monthsended June 30, 2005 to $297,000 of income compared to $75,000 of interestand other expense recorded for the same period in 2004.  During the six months ended June 30,2005, interest and other income from continuing operations increased to$642,000 from $251,000 for the same period in 2004.  The increases were partially due to $170,000of income during the second quarter of 2005 under the TSA associated with our discontinuedoperations.  The remaining difference isdue to the reversal of write-downs related to the decrease in the marketvalue of one bond which has beenfluctuating since the initial write down was recorded in 2003.

 

### *Netforeign exchange gain/loss*

### * *

Duringthe three months ended June 30, 2005 we reported a foreign exchange lossfrom continuing operations of $213,000, compared to $234,000 of foreignexchange gain for the same period in 2004. During the six months ended June 30, 2005 we reported a foreignexchange loss from continuing operations of $315,000, compared to $285,000 offoreign exchange gain for the same period in 2004.  During the second half of 2004 through thesecond quarter of 2005, the Canadian dollar strengthened against the U.S.dollar and the British pound compared to the first half of 2004.  Since approximately 96% of our cash, cashequivalents and short term investments are held in currencies other than theCanadian dollar, we experienced a foreign exchange loss.

 

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

## ** **

Ourfinancial statements have been prepared in accordance with Canadian GAAP.  Certain adjustments would be required ifthese statements were to be prepared in all material respects in accordancewith U.S. GAAP.

 

Toconform to U.S. GAAP, our net loss would increase by $1,252,000 and decrease by$352,000 for the three months ended June 30, 2005 and 2004,respectively.  The principaldifferences under U.S. GAAP compared to Canadian GAAP for the three monthsended June 30, 2005 were the reversal of an unrealized foreign exchangegain on investments of $752,000, a reversal of a gain on market value ofinvestments of $576,000 and the reversal of stock compensation expense totaling$76,000 related to fair value stock option accounting adopted beginning January 1,2004.  U.S. GAAP does not currentlyrequire fair value accounting on stock-based compensation.  Further, under U.S. GAAP, adjustments to themarket value of our investment portfolio would be recorded as a component ofstockholders’ equity.  Under CanadianGAAP unfavorable market value adjustments are recorded as a component ofoperations.

 

Toconform to U.S. GAAP, our net loss would increase by $1,479,000 and decrease by$979,000 for the six months ended June 30, 2005 and 2004,respectively.  The principaldifferences under U.S. GAAP compared to Canadian GAAP for the six months ended June 30,2005 were the reversal of an unrealized foreign exchange gain on investments of$929,000, a reversal of a gain on market value of investments of $701,000 andthe reversal of stock compensation expense totaling $255,000 related to fairvalue stock option accounting adopted beginning January 1, 2004, offset bystock compensation expense of $104,000 that would be recorded under APB OpinionNo. 25.  U.S. GAAP does notcurrently require fair value accounting on stock-based compensation.  Therefore, under the provisions of APBOpinion No. 25, no expense is recorded for options granted with anexercise price equal to the fair value of the stock on the day of grant.  Under APB Opinion No. 25 expense isincurred when stock options are granted at exercise prices less than the fairvalue of the underlying stock.  Further,under U.S. GAAP, adjustments to the market value of our investment portfoliowould be recorded as a component of stockholders’ equity.  Under Canadian GAAP unfavorable market valueadjustments are recorded as a component of operations.

 

To conform to U.S. GAAP, our net loss would decrease by $352,000 and$979,000 for the three and six month periods ended June 30, 2004.  The principal differences under U.S. GAAPcompared to Canadian GAAP for the three and six month periods ended June 30,2004 were the reversal of an unrealized foreign exchange gain on investments of$238,000 and $243,000, a reversal of a loss on market value of investments of$304,000 and $310,000 and the reversal of stock compensation expense totaling$301,000

 

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and $964,000 related to fair value stock option accounting adoptedbeginning January 1, 2004, offset by stock compensation expense of $15,000and $52,000 that would be recorded under APB Opinion No. 25.  U.S. GAAP does not currently require fairvalue accounting on stock based compensation. Therefore, under the provisions of APB Opinion No. 25, no expenseis recorded for options granted with an exercise price equal to the fair valueof the stock on the day of grant.  UnderAPB Opinion No. 25 expense is incurred when stock options are granted atexercise prices less than the fair value of the underlying stock.  Further, under U.S. GAAP, adjustments to themarket value of our investment portfolio would be recorded as a component ofstockholders’ equity.  Under CanadianGAAP unfavorable market value adjustments are recorded as a component ofretained earnings.

 

Netloss per common share under U.S. GAAP would have been $0.06 and $0.08 for thethree months ended June 30, 2005 and 2004, respectively.  Net loss per common share under U.S. GAAPwould have been $0.16 and $0.16 for the six months ended June 30, 2005 and2004, respectively.  There were no netbalance sheet differences between U.S. and Canadian GAAP as of June 30,2005 and December 31, 2004.

 

**Summary ofQuarterly Results**

 
| ** **                                                                            | ** ** | **Quarter  ended (b)**  | ** ** |
|---------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                            | ** ** | **September  30, 2004** | ** ** | **December  31, 2004** | ** ** | **March 31,  2005** | ** ** | **June 30,  2005** | ** ** |
| Net revenues, Canadian and U.S. GAAP From continuing operations                       |       | 174                     |       | 163 |   | 163 |   | 166 |   |
|                                                                                  |       |                    |       |   |   |   |   |   |   |
| Research and development expenses, Canadian and U.S. GAAP from  continuing operations |       | 6,422                   |       | 8,582 |   | 5,539 |   | 8,270 |   |
|                                                                                  |       |                    |       |   |   |   |   |   |   |
| Net (loss) income, Canadian GAAP                                                      |       |                    |       |   |   |   |   |   |   |
| From continuing operations                                                            |       | (8,367                  | )          | (9,631 | ) | (7,139 | ) | (10,381 | ) |
| From discontinued operations                                                          |       | 410                     |       | (27 | ) | 417 |   | 7,043 |   |
| Net loss, Canadian GAAP                                                               |       | (7,957                  | )          | (9,658 | ) | (6,722 | ) | (3,338 | ) |
|                                                                                  |       |                    |       |   |   |   |   |   |   |
| Basic and diluted (loss) income per common share, Canadian GAAP                       |       |                    |       |   |   |   |   |   |   |
| From continuing operations (a)                                                        |       | (0.12                   | )          | (0.13 | ) | (0.10 | ) | (0.14 | ) |
| From discontinued operations (a)                                                      |       | 0.01                    |       | (0.00 | ) | 0.01 |   | 0.09 |   |
| Total basic and diluted loss per common share                                         |       | (0.11                   | )          | 0.13 |   | (0.09 | ) | (0.05 | ) |
|                                                                                  |       |                    |       |   |   |   |   |   |   |
| Net loss, U.S. GAAP (c)                                                               |       | (6,519                  | )          | (9,831 | ) | (6,949 | ) | (4,590 | ) |
|                                                                                  |       |                    |       |   |   |   |   |   |   |
| Basic and diluted loss per common share, U.S. GAAP (a) (c)                       |       | (0.09                   | )          | (0.14 | ) | (0.10 | ) | (0.06 | ) |

 

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| ** **                                                                            | ** ** | **Quarter  ended (b)**  | ** ** |
|---------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                            | ** ** | **September  30, 2003** | ** ** | **December  31, 2003** | ** ** | **March 31,  2004** | ** ** | **June 30,  2004** | ** ** |
| Net revenues, Canadian and U.S. GAAP From continuing operations                       |       | 855                     |       | 510 |   | 173 |   | 190 |   |
|                                                                                  |       |                    |       |   |   |   |   |   |   |
| Research and development expenses, Canadian and U.S. GAAP from  continuing operations |       | 5,636                   |       | 3,258 |   | 5,273 |   | 5,636 |   |
|                                                                                  |       |                    |       |   |   |   |   |   |   |
| Net (loss) income, Canadian GAAP                                                      |       |                    |       |   |   |   |   |   |   |
| From continuing operations                                                            |       | (6,034                  | )          | (4,071 | ) | (6,818 | ) | (7,029 | ) |
| From discontinued operations                                                          |       | 411                     |       | 309 |   | 534 |   | 663 |   |
| Net loss, Canadian GAAP                                                               |       | (5,623                  | )          | (3,762 | ) | (6,284 | ) | (6,366 | ) |
|                                                                                  |       |                    |       |   |   |   |   |   |   |
| Basic and diluted (loss) income per common share, Canadian GAAP                       |       |                    |       |   |   |   |   |   |   |
| From continuing operations (a)                                                        |       | (0.10                   | )          | (0.06 | ) | (0.09 | ) | (0.10 | ) |
| From discontinued operations (a)                                                      |       | 0.01                    |       | 0.00 |   | (0.00 | ) | 0.01 |   |
| Total basic and diluted loss per common share                                         |       | (0.09                   | )          | (0.06 | ) | (0.09 | ) | (0.09 | ) |
|                                                                                  |       |                    |       |   |   |   |   |   |   |
| Net loss, U.S. GAAP  (c)                                                         |       | (5,463                  | )          | (3,365 | ) | (5,657 | ) | (6,014 | ) |
|                                                                                  |       |                    |       |   |   |   |   |   |   |
| Basic and diluted loss per common share, U.S. GAAP (a) (c)                       |       | (0.09                   | )          | (0.05 | ) | (0.08 | ) | (0.08 | ) |

 

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(a)         Income (loss) per shareis computed independently for each of the quarters presented and therefore maynot sum to the total for the year.

(b)         Amounts for the first,second and third quarters of 2004 and all quarters in 2003 have beenreclassified to conform to the presentation of the bioreagent business asdiscontinued operations.

(c)          To conform to U.S. GAAPcertain adjustments must be made.  Thenature of the principal difference is disclosed in the notes to our 2004 and2003 audited financial statements.  SeeNote 9 to the June 30, 2005 quarterly financial statements for furtherdisclosure.

 

Ourquarterly financial results over the past eight quarters were principallyaffected by variations in revenues from our Roche collaboration and variationsin R&D spending.  Our collaborativeR&D revenues have decreased over time due principally to our December 2003restructured Roche agreement under which we are not reimbursed for R&Dspending related to HspE7.  Thefluctuation of R&D expense over the most recent eight quarters relates totiming of spending associated with our clinical trials, process development andmanufacturing of HspE7.  See the discussionunder the captions “Results of Operations — Collaborative R&D revenue” and “Resultsof Operations — Research and Development” for additional information.

 

## **Critical Accounting Policies**

## ** **

Oursignificant accounting policies are disclosed in Note 1 to our consolidatedfinancial statements herein and our 2004 Annual Report on Form 10-K.  Certain of our policies require theapplication of management judgment in making estimates and assumptions thataffect the amounts reported in the consolidated financial statements anddisclosures made in the accompanying notes. Those estimates and assumptions are based on historical experience andvarious other factors deemed applicable and reasonable under the circumstances.  The use of judgment in determining such estimatesand assumptions is, by nature, subject

 

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

 

### *Revenuerecognition*

### * *

Revenuefrom collaborative R&D arrangements may include multiple elements within asingle contract.  Our accounting policycomplies with the revenue determination requirements set forth in CICAAccounting Standards Board recommendations, section 3400, *Revenue*, EIC 141, *Revenue Recognition*,Staff Accounting Bulletin (SAB) No. 101, *RevenueRecognition in Financial Statements,* EITF 00-21 *Accounting for Revenue Arrangements withMultiple Deliverables*, and EIC 142 *RevenueArrangements with Multiple Deliverable*, relating to the separationof multiple deliverables into individual accounting units with determinablefair values.  We estimate the fair valueof deliverables in collaboration agreements using standard industry techniques.  Changes in the determination of fair valuesor performance periods relating to certain deliverables, and associatedmilestones, could impact the timing of future revenue streams.

 

### *Clinicaltrial accruals*

### * *

Clinicaltrial costs constitute a significant portion of R&D expense.  We recognize expenses related to our ongoingclinical trials using a methodology designed to accrue estimated costs in theappropriate accounting periods in which the expenses are incurred.  We recognize clinical trial costs in threedistinct phases that correspond with the period during which the services areperformed:  the start-up phase, thepatient accrual phase, and the close-out phase. Based on the design of thetrial, including the number of patients, number of clinical sites, method oftreatment, and follow-up, the allocation of trial costs to each phase couldvary from trial to trial.  Using ourcurrent trial accrual methodology, our liability for clinical trials as of June 30,2005 is $451,000, which includes the estimated effect of any work-in-processterminated at the end of the reporting period. Alternatively, if we utilized a percentage of completion approach andused an operational estimate of the actual work completed as of June 30,2005 compared to the total contract value, our clinical trial liability woulddecrease by approximately $95,000.

 

## **New U.S. GAAP Accounting Pronouncement**

## ** **

### *Share-basedpayment*

### * *

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

 

In March 2005, the SEC issued StaffAccounting Bulletin No. 107 (SAB No. 107), *Share-BasedPayment*, in which the staff expresses its views regarding thevaluation of share-based payment arrangements. SAB No. 107 is intended to assist issuers in their initialimplementation of SFAS No. 123R and enhance the information received byinvestors and other users of financial statements.

 

## **Disclosure of Outstanding Share Data**

## ** **

The following tablecontains information regarding our outstanding equity as of August 3,2005:

 
| Common  shares outstanding     |   | 72,506,403 |   |
|--------------------------------|--------|------------|--------|
| Roche  warrants                |   | 814,574    |   |
| Warrants  under 2003 Financing |   | 5,304,149  |   |
| Stock  options outstanding     |   | 3,015,064  |   |

 

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In February 2005,the audit committee pre-approved non-audit services related to tax servicesincluding, tax returns, responses to tax authority inquires, and other specifictax matters.

 

**RISKFACTORS**

 

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

 

**We may not continue as a going concern, wehave a history of operating losses and may never become profitable**

 

Historically, we have incurred significant losses fromoperations, including net losses from continuing operations of $17,520,000 forthe six months ended June 30, 2005 and $31,845,000 for the year ended December 31,2004.  As of June 30, 2005, ouraccumulated deficit was $222,409,000. Until such time, if ever, as our research and development efforts arecommercialized or fully funded by third parties, of which no assurance can begiven, we will continue to incur operating losses.  These factors, among others, raisesubstantial doubt about the Company’s ability to continue as a goingconcern.  Our biotechnology business is still at anearly stage of development.  Significantadditional research and development and clinical trials must be completedbefore our technology can be commercialized. We have not completed the development of any therapeutic products and,therefore, have not begun to market or generate revenues from thecommercialization of any therapeutic products. We have undertaken only limited human clinical trials for HspE7, ourvaccine product candidate.  Our futurecontinuance and success will depend on many factors, including but notlimited to:

 

**•**                  our ability to raise funds throughcollaborations or equity financings;

 

**•**                  the interest of qualified thirdparties in the research, development, clinical testing, technology rights,manufacturing, marketing and commercialization of our products and our abilityto negotiate and execute favorable collaboration agreements, including forHspE7;

 

**•**                  successful completion of drugdevelopment, clinical testing and regulatory review and approval of HspE7;

 

**•**                  ourability to produce commercial quantities of any product we may successfullydevelop at reasonable costs;

 

**•**                  success in gaining market acceptanceof any our product we may develop; and

 

**•**                  our ability to protect ourproprietary rights and operate without infringing the proprietary rights ofothers;

 

Many of these factors will depend on circumstancesbeyond our control.  We may never have aproduct approved by the FDA or bring any product to market includingHspE7.  Even if we are successful indoing so, we may not become profitable.

 

**We require additional financingto execute our business plan**

 

We currently have no committed sources of capital.  We estimate that our current cash resourceswill be sufficient to fund our operations, including payments to third partiesfor the continued preparation of our clinical trials for HspE7 into the fourthquarter of 2005.  To fund operations andour drug development programs beyond 2005, we must enter into collaborationagreements with third parties, complete a corporate transaction and/or raiseadditional financing.  The Company maynot be successful in securing additional resources and if secured, sucharrangements may not provide funds sufficient to continue to fund operationsthrough commercialization of HspE7.  Inthe absence of raising additional funds, we will be required to scale back orterminate operations.

 

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Even assuming we are successful in securing additionalsources of financing to fund our HspE7 program and the continued development ofour CoValTM technology, or otherwise enter into collaborative agreements orcomplete a corporate transaction, our efforts may not result in commerciallyviable products.

 

We will seek additional funds through strategiccollaborations and public or private equity or debt financing.  If we fund our programs through equityfinancings and if the price of the shares sold in the offering is less than thenet tangible book value of your common shares, you will suffer dilution.  Depending upon the amount of capital we raisethrough the sale of equity, the dilution may be substantial.  We may also be required to enter intocollaborative arrangements for the development of particular products thatwould lead to our relinquishing some or all rights to the related technology orproducts.  The failure to fund our capitalrequirements would have a material adverse effect on our business, financialcondition and results of operations and our ability to continue our operations.

 

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

 

Due to the complexity of the process ofdeveloping therapeutics and our limited resources, our core business depends onour arrangements with pharmaceutical companies, contractors, corporate andacademic collaborators, licensors, licensees and others for the research,development, clinical testing, technology rights, manufacturing, marketing andcommercialization of our product candidates. We have various researchcollaborations and outsource many other business functions, including clinicaltrials and manufacturing.  Our licenseagreements could obligate us to diligently bring potential products to market,make milestone payments and royalties that, in some instances, could besubstantial, and incur the costs of filing and prosecuting patentapplications.  We may not be able toestablish or maintain collaborations that are important to our business onfavorable terms, or at all.

 

A number of risks arise fromour dependence on collaborative agreements with third parties.  Product development and commercializationefforts could be adversely affected if key collaborative partners orthird-party contractors, including Roche, Avecia or Cardinal:

 

**•**                  terminateor suspend their agreements with us;

 

**•**                  causedelays;

 

**•**                  failto timely develop or manufacture adequate quantities of HspE7 or othercompounds needed in order to conduct our clinical trials;

 

**•**                  failto adequately perform our clinical trials;

 

**•**                  otherwisefail to meet their contractual obligations; or

 

**•**                  pursueother technologies or develop alternative products that could compete with theproducts we are developing.

 

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**Intellectual property rights on which we relyto protect the technologies underlying our products may be inadequate toprevent third parties from using our technologies or developing competingproducts**

 

Our success will depend onour ability to obtain patent protection for, or maintain the secrecy of, ourproprietary products, processes and other technologies.  We have 16 United States patents and 61foreign patents, however, these patents, or any patents that we may own orlicense in the future, may not afford meaningful protection for our technologyand products.  The pursuit and assertionof a patent right, particularly in areas like biotechnology, involve complexdeterminations and, therefore, are characterized by substantialuncertainty.  In addition, the lawsgoverning patentability and the scope of patent coverage continue to evolve,particularly in biotechnology.  As aresult, patients might not issue from certain of our patent applications orfrom applications licensed to us.  Ourlast patent to expire will expire on August 25, 2022 and any patents wemay obtain in the future will expire over time.

 

The scope of any of ourissued patents may not be broad enough to offer meaningful protection.  In addition, others may challenge our currentpatents or patents we may obtain in the future and, as a result, these patentscould be narrowed, invalidated or rendered unenforceable, or we may be forcedto stop using the technology covered by these patents or to license technologyfrom third parties.

 

Moreover, the laws of someforeign countries may not protect our proprietary rights to the same extent asdo the laws of the United States.  Anypatents issued to us or our strategic partners may not provide us with anycompetitive advantages, and the patents held by other parties may limit ourfreedom to conduct our business or use our technologies.  Our efforts to enforce and maintain ourintellectual property rights may not be successful and may result insubstantial costs and diversion of management time.  Even if our rights are valid, enforceable andbroad in scope, competitors may develop products based on technology that isnot covered by our patents.

 

In addition to patentprotection, we also rely on copyright and trademark protection, trade secrets,know-ho, continuing technological innovation and licensing opportunities.  In an effort to maintain the confidentialityand ownership of our trade secrets and proprietary information, we require ouremployees, consultants, advisors and others to whom we disclose confidentialinformation to execute confidentiality and proprietary informationagreements.  However, it is possible thatthese agreements may be breached, invalidated or rendered unenforceable, and ifso, there may not be an adequate corrective remedy available.  Furthermore, like many companies in ourindustry, we may from time to time hire scientific personnel formerly employedby other companies involved in one or more areas similar to the activities weconduct.  In some situations, ourconfidentiality and proprietary information agreements may conflict with, or besubject to, the rights of third parties with whom our employees, consultants oradvisors have prior employment or consulting relationships.  Although we require our employees andconsultants to maintain the confidentiality of all confidential information ofprevious employers, we or these individuals may be subject to allegations of tradesecret misappropriation or other similar claims as a result of their prioraffiliations.  Finally, others mayindependently develop substantially equivalent proprietary information andtechniques, or otherwise gain access to our trade secrets.  Our failure to protect our proprietaryinformation and techniques may inhibit or limit our ability to exclude certaincompetitors from the market and execute our business strategies.

 

**The biotechnology industry has ahistory of patent and other intellectual property litigation, and we may beinvolved in costly intellectual property lawsuits.**

 

The biotechnology industryhas a history of patent and other intellectual property litigation, and theselawsuits likely will continue.  We arecurrently facing a patent opposition and may face in the future face patentinfringement suits by companies that control patents alleging infringement oftheir intellectual property rights.  Inorder to protect or enforce our intellectual property rights, we may have toinitiate legal proceedings against third parties.  Legal proceedings relating to intellectualproperty typically are expensive, take significant time and divert management’sattention from other business

 

31

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concerns.  The cost of this litigation could adverselyaffect our business.  further, if we donot prevail in an infringement lawsuit brought against us, we might have to paysubstantial damages, including treble damages, and we could be required to stopthe infringing activity or obtain a license to use the patented technology.

 

On October 22, 2002, Antigenics Inc. announcedthat it had filed an opposition in the European Patent Office to a Europeanpatent and requests for re-examination in the U.S. Patent and Trademark Officeof two U.S. patents we licensed from the Massachusetts Institute of Technology(“M.I.T”) and the Whitehead Institute for Biomedical Research in connectionwith our platform technology.  In October 2003,Antigenics filed an opposition in the European Patent Office, or EPO, to anadditional, product specific, European patent held by us.  The EPO has advised us that it intends tohold an oral hearing in October 2005 concerning the opposition of theproduct specific patent if the parties do not request a change in thedate.  We do not know when results fromthese proceedings will be obtained or what the final results from theopposition and re-examination processes will be.  An adverse result could materially harm ourbusiness.

 

**We may encounter difficulties inmanufacturing our products**

 

We have not yet introducedany therapeutic products and have no experience manufacturing therapeuticvaccines ourselves.  Before any of ourproducts, including our HspE7 vaccine candidate, can be profitable, they mustbe produced in commercial quantities in a cost-effective manufacturing processthat complies with regulatory requirements, including good manufacturingpractices, or GMP, production and quality control regulations.  Because we do not have facilities for the productionof therapeutic products, including our HspE7 vaccine product, we contract withthird parties, such as Avecia, for process development, the scale-up ofmanufacturing our products from the laboratory bench to commercial quantities,manufacturing of bulk materials, product characterization, filling the productinto vials, packaging and related processes. If there are delays or difficulties in developing a commercialmanufacturing process, performing manufacturing or transferring HspE7 betweencontractors performing different aspects of the manufacturing process, we maynot be able to conduct clinical trials, obtain regulatory approval or meetdemand for our products.

 

**Our clinical trials could take longer tocomplete than we project or may not be completed at all.**

 

Clinical trials vary indesign by factors including dosage, end points, length, controls, and numbersand types of patients enrolled.  Althoughfor planning purposes we project the commencement, continuation and completionof clinical trials for HspE7, the actual timing of these events may be subjectto significant delays relating to various causes, including schedulingconflicts with participating clinical institutions, difficulties in identifyingand enrolling patients who meet trial eligibility criteria, and shortages ofavailable drug supply.  We may notcomplete clinical trials involving HspE7 as projected.

 

We rely on third partiesincluding, academic institutions and clinical research organizations toconduct, supervise or monitor some or all aspects of clinical trials involvingHspE7.  We will have less control overthe timing and other aspects of these clinical trials than if we conducted thementirely on our own.  In addition, we maysuffer a delay in the completion of any one of our clinical trials because ofrequests from the FDA to revise the size or scope of the clinical trial.  Failure to commence or complete, or delaysin, any of our planned clinical trials would prevent us from commercializingHspE7, and thus seriously harm our business.

 

In addition, the U.S. NationalCancer Institute is sponsoring some HspE7 clinical trials.  Since these trials depend on governmentalparticipation and funding, we have less control over their timing and designthan trials we sponsor.

 

32

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**We are subject to regulatory requirementsthat are necessary to commercialize our products**

 

The U.S., Canada and othercountries impose significant statutory and regulatory obligations upon themanufacture and sale of human therapeutic products.  Each regulatory authority typically has alengthy approval process in which it examines pre-clinical and clinical dataand the facilities in which the product is manufactured.  Regulatory submissions must meet complex criteriato demonstrate the safety and efficacy of a product.  Addressing these criteria requiresconsiderable data collection, verification and analysis including Phase I,Phase II and Phase III clinical trials in humans.

 

Our product candidates,including HspE7, require significant additional development and clinicaltesting prior to commercialization. The process of obtaining required approvalsand clearances is costly and time-consuming. If our potential products, including HspE7, cannot be proven to be safeand effective through clinical trials, or do not receive applicable regulatoryapprovals and clearances, or if there are delays in the process:

 

**•**                  the commercialization of our productswould be adversely affected;

 

**•**                  any competitive advantages of ourpotential products could be diminished; and

 

**•**                  revenues or collaborative milestonesfrom our potential products could be reduced or delayed.

 

Governmental and regulatory authorities mayapprove a product candidate for fewer indications or narrower circumstancesthan requested or may condition approval on the performance of post-marketingstudies for a product candidate. Similarly, phase IV clinical trials could be required even afterregulatory approval.  Even if a productreceives regulatory approval and clearance, it may later exhibit adverse sideeffects that limit or prevent its widespread use or that force us to withdrawthe product from the market.

 

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

 

In addition, manufacturers of our productswill be required to comply with applicable GMP regulations, which includerequirements relating to quality control and quality assurance, as well as themaintenance of records and documentation. If the manufacturers cannot comply with regulatory requirements,including applicable GMP requirements, we may not be allowed to develop ormarket the product candidates.  If we orour manufacturers fail to comply with applicable regulatory requirements at anystage during the regulatory process, we may be subject to sanctions, includingfines, product recalls, product seizures, injunctions, refusal of regulatoryagencies to review pending market approval applications or supplements toapprove applications, total or partial suspension of production, civilpenalties, withdrawals of previously approved marketing applications andcriminal prosecution.

 

**Competitors may develop and market drugs thatare less expensive, more effective or safer, making our products obsolete oruncompetitive**

 

The diseases we aretargeting are currently managed through a variety of therapeutic and surgicalapproaches.  For example, genital wartscan be treated by topical creams and ointments, cryosurgery, freezing, electro-surgeryand laser treatment.  Some papillomas andcancers caused by HPV can be

 

33

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treated surgically.  We are subject to competition from productsthat use different approaches or means of accomplishing a similar therapeuticeffect as our CoValTM  fusion products.  Many pharmaceutical and biotechnologycompanies also focus their research and product development programs on thetreatment of the same therapeutic indications as ours, including HPV-relateddiseases, HBV and cancer.  For example,Merck & Co., Inc. and GlaxoSmithKline are currently conductinglarge phase III trials for preventative vaccines against specific types of HPV.

 

Potential competitors thatare developing products to treat HPV indications use approaches includingtherapeutic vaccines, immunotherapies, immunomodulators, topical therapies andsmall molecule drugs.  As examples,Transgene S.A. and Zycos Inc., recently acquired by MGI Pharma, Inc., areconducting clinical trials with different formulations of HPV antigens astherapeutic vaccines; Medigene AG is developing a topical treatment.

 

Other potential competitorsare performing research and developing therapeutic products based on theintrinsic nature of stress proteins to assist the body in fighting infectionand related cancers.  Our technologyfocuses on Hsp covalently fused to antigens; however, there are other ways topotentially use Hsp to modulate immune responses.  Companies including Antigenics Inc. are usingstress protein-related approaches to stimulate or modulate the body’s immunesystem in therapeutic applications. Other companies such as Conforma Therapeutics and Vernalis plc aredeveloping small molecule drugs to modulate Hsp expression in cells as anotherapproach for cancer therapy.

 

Competition in our industry may increase over time dueto rapid and substantial changes in technology and other clinical inputsrequired or product development and commercialization.  Many of our competitors have greater humanand financial resources dedicated to product development and human clinicaltesting than we do.  Our competitors havemore substantial marketing and financial resources.  Acquisitions of or investments in competingpharmaceutical and biotechnology companies by other firms could increase theirfinancial, marketing and other resources. Technological developments could render our proposed products ortechnologies non-competitive.

 

**Our products may not gain marketacceptance**

 

Products such as HspE7, ourlead therapeutic vaccine candidate, may not gain market acceptance even if wesuccessfully develop it, among physicians, patients, healthcare payors and themedical community.  The degree of marketacceptance of any product depends on a number of factors, including establishmentand demonstration of clinical efficacy and safety, cost-effectiveness, clinicaladvantages over alternative products, and marketing and distribution supportfor the products.

 

**We haveno sales or marketing expertise**

 

We do not have experienceselling therapeutics such as HspE7.  Todirectly market and distribute any pharmaceutical products, we or ourcollaborators will need a marketing and sales force with appropriate technicalexpertise and supporting distribution capabilities.  We may not be able to establish sales,marketing and distribution capabilities or enter into arrangements with thirdparties on acceptable terms for our HspE7 product candidate if it issuccessfully developed.  If we or ourpartners cannot successfully market and sell our products, our business will beharmed.

 

**Our operations and the use of our productscould subject us to damages relating to injuries**

 

The human clinical trials weconduct, including trials in children, may have unforeseen long-term healthimplications.  We have only limitedamounts of product liability insurance for our clinical trials.  We may not correctly anticipate or be able tomaintain on acceptable terms the level of insurance coverage that wouldadequately cover potential liabilities from proposed clinical trials andeventual commercial sales.  Productliability insurance is expensive, difficult to obtain and may not be availablein the future.  If we cannot obtainsufficient insurance coverage or other protection against potential productliability claims, the commercialization of our products may become financiallyinfeasible.  If

 

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any liabilities from a claimexceed the limit of insurance coverage, we may not have the resources to paythem.

 

**We deal with hazardous materialsand must comply with environmental laws and regulations, which can be expensiveand restrict how we do business**

 

Our research and developmentprocesses involve the controlled use of hazardous and radioactivematerials.  We are subject to federal,state, provincial and local laws and regulations governing the use,manufacture, storage, handling and disposal of such materials and wasteproducts.  The risk of accidentalcontamination or injury from handling and disposing of such materials cannot becompletely eliminated. In the event of an accident involving hazardous orradioactive materials, we could be held liable for resulting damages.  We are not insured with respect to thisliability.  Any such liability for thistype of risk could exceed our resources. In the future we could incur significant costs to comply withenvironmental laws and regulations.

 

**Our success depends on upon retainingqualified personnel**

 

We depend on a coremanagement and scientific team.  The lossof one or more of these individuals could cause delays or prevent us fromachieving our business objective of commercializing HspE7.  Additionally, employee uncertainty resultingfrom our reduction in force in April 2005 may adversely affect ourability to retain employees necessary to implement our strategies and maydisrupt our operations.

 

**Our revenues will depend upon theavailability of reimbursement from third-party payors that are increasinglychallenging the price and examining the cost effectiveness of medical productsand services**

 

Sales of therapeuticproducts depend in part upon the availability of reimbursement from third-partypayors, including government health administration authorities, managed careproviders, private health insurers and other organizations.  These third-party payors increasingly attemptto contain costs by challenging the price of products and services and limitingthe coverage and level of reimbursement for pharmaceutical products.  Third party reimbursement for any products wemay develop, including HspE7, may be inadequate to enable us to maintain pricesthat provide a return on our product development investment.  Governments continue to propose and passlegislation designed to reduce healthcare costs.  This legislation could further limitreimbursement.  If government and third-partypayors do not adequately reimburse patients for the costs of products wesuccessfully develop, the market for our products may be limited.

 

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

 

Ourshare price has been highly volatile in the past and is likely to continue tobe volatile. The price of our shares could be materially affected by factorsincluding, but not limited to:

 

**•**                  ourability to raise additional funds;

 

**•**                  resultsof clinical trials for HspE7;

 

**•**                  theannouncement of clinical trials results by potential competitors;

 

**•**                  terminationsof existing collaborations agreements or entry by us into new ones;

 

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**•**                  regulatoryactions;

 

**•**                  safetyissues;

 

**•**                  changesaffecting patents or exclusive licenses;

 

**•**                  delaysor difficulties in manufacturing clinical or commercial grade material;

 

**•**                  issuancesof stock or debt;

 

**•**                  theannouncement of technological innovations or new products by third parties;

 

**•**                  therelease of technical, financial, research and other publications;

 

**•**                  thedevelopment of new commercial products;

 

**•**                  changesin regulations;

 

**•**                  therelease of our financial results;

 

**•**                  publicconcerns over risks relating to biotechnology;

 

**•**                  salesof shares by existing shareholders; and

 

**•**                  changesin analyst recommendations.

 

## **Item 3. Quantitative and Qualitative Disclosures About Market Risk**

## ** **

We use the Canadiandollar as our measurement and functional currency.  As a result, we are exposed to foreigncurrency fluctuations through our operations because a substantial amount ofour contract research and development spending has been transacted in othercurrencies, principally in U.S. dollars and British pounds.  We hold investment balances in the currenciesin which we have expenditures planned during the foreseeable future.  At June 30,2005, approximately 64% of cash, cash equivalents and short-term investmentswere held in U.S. dollars.  At June 30,2005 approximately 32% of our cash, cash equivalents and short-term investmentswere held in British pounds.  Wetranslate monetary assets and liabilities into Canadian dollars using the ratesof exchange prevailing at our balance sheet date. We record the resultingexchange gains and losses in our statement of operations.  Although we do not currently engage inhedging or other activities to reduce foreign currency risk, beyond matchinginvestments proportionately with anticipated spending, we may do so in thefuture if conditions change.

 

A hypothetical change inforeign exchange rates by applying a 10% change to our quarter-end foreignexchange rate, then applying that rate to our average level of U.S. investmentsduring the year, would result in a $636,000 impact.  If the value of the Canadian dollar relativeto the U.S. dollar were to increase by 10%, our net loss would decrease by$636,000.  Further, if the value of theCanadian dollar relative to the U.S. dollar were to decrease by 10%, our netloss would increase by $636,000.

 

A hypothetical change inforeign exchange rates by applying a 10% change to our year-end foreignexchange rate, then applying that rate to our average level of British poundinvestments during the year,

 

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would result in a$482,000 impact.  If the value of theCanadian dollar relative to the British pound were to increase by 10%, our netloss would decrease by $482,000. Further, if the value of the Canadian dollar relative to the Britishpound were to decrease by 10%, our net loss would increase by $482,000.

 

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

 

To differentiate betweenthe affect of a change in the market valuation of securities caused by marketinterest rate changes versus a change in the annual rate of interest we couldearn on a security, we calculated that a hypothetical change in interest ratescomparable to a 10% change to our average rate of return would result in a$23,000 impact.  If interest rates wereto increase by 10%, our net loss would decrease by $23,000.  Further, if interest rates were to decreaseby 10%, our net loss would increase by $23,000.

 

We have not usedderivative financial instruments in our investment portfolio.  We classify our investments as available-for-saleat the time of purchase and re-evaluate this designation as of each balancesheet date. We had $13,230,000 in cash, cash equivalents and short-terminvestments as of June 30, 2005.

 

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**Item4.  Controls and Procedures**

** **

Based on the evaluation of our disclosurecontrols and procedures (as defined in Rules 13a-15(e) and 15d-15(e) ofthe Securities Exchange Act of 1934, as amended (the “Exchange Act”)) requiredby Rules 13a-15(b) or 15d-15(b) of the Exchange Act, our chieffinancial officer and chief executive officer have concluded that as of June 30,2005, our disclosure controls and procedures were sufficiently effective toensure that the information required by Company in the reports that it files underthe Exchange Act is gathered, analyzed and disclosed with adequate timeliness,accuracy and completeness.

 

Other than the elimination of certaincontrols and procedures previously required in connection with our bioreagentbusiness which are no longer necessary based on current operations, there havebeen no changes in our internal controls over financial reporting during theperiod covered by this report that have materially affected, or are reasonablylikely to materially affect, our internal control over financial reporting.

 

The Company’s management, including our chiefexecutive officer and chief financial officer, does not expect that ourdisclosure controls and procedures or our internal controls will prevent allerror and all fraud. A control system, no matter how well conceived andoperated, can provide only reasonable, not absolute, assurance that theobjectives of the control system are met. Further, the design of a controlsystem must reflect the fact that there are resource constraints, and thebenefits of controls must be considered relative to their costs. Because of theinherent limitations in all control systems, no evaluation of controls canprovide absolute assurance that all control issues and instances of fraud, ifany, within the company have been detected. These inherent limitations includethe realities that judgments in decision-making can be faulty, and thatbreakdowns can occur because of simple error or mistake. Additionally, controlscan be circumvented by the individual acts of some persons, by collusion of twoor more people or by management override of the control. The design of anysystem of controls also is based in part upon certain assumptions about thelikelihood of future events, and there can be no assurance that any design willsucceed in achieving its stated goals under all potential future conditions;over time, controls may become inadequate because of changes in conditions, orthe degree of compliance with the policies or procedures may deteriorate.Because of the inherent limitations in a cost-effective control system,misstatements due to error or fraud may occur and not be detected. Accordingly,our disclosure controls and procedures are designed to provide reasonable, notabsolute, assurance that the objectives of our disclosure control system aremet and, as set forth above, our chief executive officer and chief financialofficer have concluded, based on their evaluation, that our disclosure controlsand procedures were sufficiently effective as of the end of the period coveredby this report to provide reasonable assurance that the objectives of ourdisclosure control system were met.

 

#### **PART II—OTHERINFORMATION**

#### ** **

###### ***Item 1.  Legal Proceedings – None***

###### * *

**Item 2.  Unregistered Sales ofEquity Securities and Use of Proceeds -None**

 

**Item 3.  Defaults Upon SeniorSecurities - None**

 

**Item 4.  Submission of Matters toVote of Security Holders**

 

On June 21, 2005 we held our annual general meeting.  The following matters were voted on at themeeting:

 

1.              The stockholderselected seven directors listed below.  Ineach case 100% of the stockholders who voted cast their votes in favor of thecandidate.  The specific number of votesfor and withheld from each candidate are specified below.

 

Gordon Barefoot – 20,510,825 for (68,028withheld)

Joanne Data – 16,997,967 for (3,580,886withheld)

 

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Elizabeth Greetham – 17,048,217 for(3,530,636 withheld)

Ian Lennox – 17,067,477 for (3,511,376withheld)

Gregory McKee – 20,512,663 for (66,190 withheld)

Margot Northey – 17,038,689 for (3,540,164withheld)

Jay Short – 17,042,779 for (3,536,074withheld)

 

2.              The stockholdersratified the appointment of our external auditors Deloitte and Touche by a voteof 20,545,488 for, 33,365 abstentions, no against votes and no brokernon-votes.

 

*3.**             *The stockholdersvoted to amend our 2001 stock option plan to provide that the maximum number ofoptions in the pool would be equal to 10% of the common shares outstanding by avote of 12,229,871 for, 8,248,982 against, no abstentions and no broker non-votes.

 

**Item5.  Other Information - None**

 

###### ***Item 6.  Exhibits -***

###### * *

INDEX OF EXHIBITS

 
| **Exhibit No.** | ** ** | **Description**                                                              |
|----------------------|------------|------------------------------------------------------------------------------|
| 3.9*                 |       | Articles of  Continuance of the Company                                      |
| 3.10*                |       | By-Laws of  the Company                                                      |
| 4.4*                 |       | Form of  Stock Certificate                                              |
| 31.1                 |       | Rule 13a-14(a)/15d-14(a) Certification  of Chief Financial Officer |
| 31.2                 |       | Rule 13a-14(a)/15d-14(a) Certification  of Chief Executive Officer |
| 32                   |       | Section 1350  Certification                                             |

 

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

 

 

## **SIGNATURE**

## ** **

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|                      | Stressgen Biotechnologies Corporation                                                                                                                                                                                      |
|---------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                      |                                                                                                                                                                                                                       |
| Date: August 8, 2005 | /s/ Gregory M. McKee                                                                                                                                                                                                       |   |
|                      | Gregory M. McKee                                                                                                                                                                                                           |
|                      | President and Chief Executive Officer,  Vice President, Corporate Development  and Chief Financial Officer  (Principal Financial and Accounting  Officer duly authorized to sign  this report on behalf of the registrant) |

 

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