UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C.  20549





FORM
20-F





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




For
the fiscal year ended December 31, 2009







Commission
file number: 000-30076








FORBES
MEDI-TECH INC.


(Exact
name of Registrant as specified in its charter)








British
Columbia


(Jurisdiction
of incorporation or organization)








200
– 750 West Pender Street


Vancouver,
British Columbia, Canada V6C 2T8


(Address
of principal executive offices)








David
Goold


200
– 750 West Pender Street


Vancouver,
British Columbia, Canada V6C 2T8


Telephone:  1-604-689-5899
Fax: 1-604-689-7641


(Name,
Telephone, Email and/or Facsimile number and Address of Company Contact
Person)




Securities
registered or to be registered pursuant to Section 12(b) of the
Act.








Title
      of each class
              Common
      Shares, without par value
            Name
      of each exchange on which registered
              Pink
      OTC Markets (“Pink Sheets”)





Securities
registered or to be registered pursuant to Section 12(g) of the
Act.


None


(Title of
Class)





Securities
for which there is a reporting obligation pursuant to Section 15(d) of the
Act.


Not
applicable


(Title of
Class)




Indicate
the number of outstanding shares of each of the issuer’s classes of capital or
common stock as of the close of the period covered by the annual
report.





4,969,813
Common Shares as at December 31, 2009.




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act


oYes   xNo




If this
report is an annual or transition report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934.





oYes   xNo


Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.




xYes   oNo





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).




oYes   oNo


Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer.  See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.  (Check one):





_______  Large
accelerated filer


_______  Accelerated
filer


X   Non-accelerated
filer





Indicate
by check mark which basis of accounting the registrant has used to prepare the
financial statements included in this filing:





________  U.S.
      GAAP


________  International
      Financial Reporting Standards as issued by the International Accounting
      Standards Board


X       Other





If
“Other” has been checked in response to the previous question, indicate by check
mark which financial statement item the registrant has elected to
follow.




o  Item
17       x Item
18





If this
is an annual report, indicated by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act).





oYes   xNo


FORBES
MEDI-TECH INC.





FORM
20-F ANNUAL REPORT


TABLE OF CONTENTS







PART I 1




ITEM
1                   Identity of
Directors, Senior Management and Advisers  1


ITEM
2                   Offer
Statistics and Expected Timetable 1


ITEM
3                    
Key
Information 1


ITEM
4                   Information on the
Company   13


ITEM
5                   Operating
and Financial Review and Prospects 25


ITEM
6                   Directors,
Senior Management and Employees37


ITEM
7                   Major
Shareholders and Related Party Transactions  51


ITEM
8                   Financial
Information  52


ITEM
9                   The Offer
and Listing  55


ITEM
10                 Additional
Information   57


ITEM
11                 Quantitative
and Qualitative Disclosures About Market Risk 71


ITEM
12                 Description
of Securities Other than Equity Securities 73




PART
II   74




ITEM
13                   Defaults,
Dividend, Arrearages and Delinquencies 74


ITEM
14                   Material
Modifications to the Rights of Security Holders and Use of Proceeds74


ITEM
15T                 Controls and
Procedures 74


ITEM
16                   [Reserved] 76


Item
16A.                  Audit
Committee Financial Expert 76


Item
16B.                  Code Of
Ethics 76


Item
16C.                  Principal
Accountant Fees And Services 76


Item
16D.                  Exemptions
from the Listing Standards for Audit Committee 77


Item
16E.                  Purchases
of Equity Securities by the Issuer and Affiliated
Purchasers  77


Item
16F.                  Changes in
Registrant’s Certifying Accountant  77


Item
16G.                  Corporate
Governance   77




PART III 77


ITEM
17                   Financial
Statements 77


ITEM
18                   Financial
Statements   77


ITEM
19                   Exhibits 77








INTRODUCTION




Forbes
Medi-Tech Inc. is organized under the British Columbia Business Corporations
Act. In this Annual Report, the “Company”, “Forbes”, “we”, “our” and “us” refer
to Forbes Medi-Tech Inc. and its subsidiaries (unless the context otherwise
requires). We refer you to the documents attached as exhibits hereto for more
complete information than may be contained in this Annual Report. Our principal
corporate offices are located at Suite 200, 750 West Pender Street, Vancouver,
B.C., V6C 2T8.  The telephone number is (604) 689 – 5899 and our
website address is www.forbesmedi.com..




Business
of Forbes Medi-Tech Inc.




Forbes
Medi-Tech Inc. is a life sciences company focused on evidence-based nutritional
solutions.  A leader in nutraceutical technology, Forbes is a provider
of value-added products and cholesterol-lowering ingredients for use in
functional foods and dietary supplements. Forbes successfully developed and
commercialized its ReducolTM plant sterol blend, which has undergone clinical
trials in various matrices and has been shown to lower "LDL" cholesterol levels
safely and naturally. Building upon established partnerships with leading
retailers and manufacturers across the globe, Forbes helps its customers to
develop private label and branded products.




Financial
and Other Information




In this
Annual Report, unless otherwise specified, all dollar amounts are expressed in
Canadian Dollars (“CDN$” or “$”). The Government of Canada permits a floating
exchange rate to determine the value of the Canadian Dollar against the U.S.
Dollar (“US$”).




Forward-Looking
Statements




This
Annual Report on Form 20-F contains forward-looking statements about Forbes
Medi-Tech Inc., which are intended to be covered by the safe harbor for
“forward-looking statements” provided by the United States Private Securities
Litigation Reform Act of 1995 and “forward-looking information” within the
meaning of applicable Canadian securities laws. Any document that has been filed
or will be filed with the United States Securities and Exchange Commission
(“SEC”), the Ontario Securities Commission (the “OSC”) or the British Columbia
Securities Commission (the “BCSC”) also may include forward-looking statements
and information. Other written or oral forward-looking statements and
information have been made and may in the future be made, from time to time, by
or on behalf of the Company.  Forward-looking statements and
information are statements and information that are not historical facts, and
include but are not limited to, financial projections and estimates and their
underlying assumptions; statements regarding plans, objectives and expectations
with respect to future operations, products and services; the impact of
regulatory initiatives on our operations; our share of new and existing markets;
general industry and macroeconomic growth rates and our performance relative to
them and statements regarding future performance.  Forward-looking
information as defined under applicable Canadian securities laws means
“disclosure regarding possible events, conditions or results of operations that
is based on assumptions about future economic conditions and courses of action
and includes future oriented financial information with respect to prospective
results of operations, financial position or cash flows that is presented either
as a forecast or a projection”.  Forward-looking statements and
information generally, but not always, are identified by the words “expects,”
“anticipates,” “believes,” “intends,” “estimates,” “projects”, “potential”,
“possible” and similar expressions, or that events or conditions “will,” “may,”
“could” or “should” occur.


The
forward-looking statements and information in this Annual Report are subject to
various risks and uncertainties, most of which are difficult to predict and
generally beyond the control of the Company, including without
limitation:






v





·
            uncertainty
      as to our ability to achieve the goals and satisfy assumptions of
      management;


·
            our
      need to complete a sale, merger, acquisition or other strategic
      alternative, and/or secure additional funds in the first half of 2010 and
      if unable to do so, our need to consider additional strategic alternatives
      which may include asset sales, winding up,  liquidation or
      dissolution;


·
            uncertainty
      as to our ability to continue operations, as indicated by the going
      concern qualification contained in our Independent Registered Public
      Accounting Firm’s Auditors’ Report to the
  Shareholders;


·
            the
      need to control costs and the possibility of unanticipated
      expenses;


·
            our
      dependence on a few customers;


·
            research
      and development risks;


·
            the
      need for regulatory approvals to market our products in various countries,
      either with specific label claims or at
all;


·
            uncertainty
      as to the successful conclusion of sales discussions currently underway,
      and of those anticipated, with third party
  purchasers;


·
            uncertainty
      related to the performance of contract obligations by buyers of
      products;


·
            uncertainty
      as to the market acceptance of our products and our ability to generate
      projected sales volumes and product
prices;


·
            uncertainties
      as to the volume and timing of sales of our
  products;


·
            risks
      associated with our patents and other intellectual
    property;


·
            the
      possibility that we will pursue additional development projects or other
      business opportunities;


·
            our
      potential need to develop additional formulations for
      the  incorporation of our phytosterols into various types of
      dietary supplements or food products in order to meet new customer
      requirements;


·
            the
      risk that our objectives will not be met within the time lines we expect
      or at all;


·
            the
      risk of exchange rate fluctuations, particularly with respect to the
      Canadian and U.S. dollars and the Euro;
and


·
            other
      factors identified under the heading “Risk Factors” in this Annual Report,
      and those that are discussed or identified in our other public filings on
      EDGAR and SEDAR.





Our
actual results, performance or achievements could differ significantly from
those expressed in, or implied by, our forward-looking statements and
information. Accordingly, we cannot assure that any of the events anticipated by
our forward-looking statements and information will occur, or if they do, what
impact they will have on our results of operations and financial
condition.





Forward-looking
statements and information are based on the beliefs, assumptions, opinions and
expectations of our management at the time they are made, and we do not assume
any obligation, except as required by law, to update our forward-looking
statements or information if those beliefs, assumptions, opinions, or
expectations, or other circumstances, should change.





For all
of the reasons set forth above, investors should not place undue reliance on
forward-looking statements and information.





Glossary
of Terms





Arrangement
            Plan
      of Arrangement, the transaction by which the Company acquired all
      outstanding shares, options, and warrants of Old Forbes for shares of New
      Forbes.  See
      Item 4 – Information on the Company – A. History and Development of the
      Company – Forbes Medi-Tech Inc.atherosclerosis
            A
      hardening of the arteries in which cholesterol, other fats and various
      blood components build up in the walls of the arteries. As atherosclerosis
      progresses, the arteries to the heart may narrow so that oxygen-rich blood
      and nutrients have difficulty reaching the heart. This condition leads to
      angina and heart attack (see coronary heart
      disease).Board
            The
      Board of Directors of the CompanyCanadian
      GAAP
            Generally
      accepted accounting principles in Canada.cardiovascular
      disease
            A
      disease of the heart or arteries supplying the heart or other
      organs.cGMP
            Current
      Good Manufacturing Practices - manufacturing practices for drugs and/or
      foods as set out in the regulations of the United States, Canada and other
      countries.cholesterol
            A
      soft, waxy substance essential for normal body functions, including the
      production of steroid-based hormones and bile acids. Cholesterol can be
      made by the body in sufficient quantities and is present in all tissues,
      including the nervous system, muscle, skin, liver, intestines and
      heart.cholesterol-lowering
      agent
            A
      therapeutic agent that is used to reduce the level of circulating
      cholesterol in the blood.coronary
      heart disease
            A
      common heart ailment caused by narrowing of the coronary arteries that
      supply oxygen and nutrients directly to the heart muscle, almost
      exclusively caused by atherosclerosis (see
      atherosclerosis).Development
      Agreement
            In
      October 2006, Forbes acquired 100% of TheraPei Pharmaceuticals, Inc.
      (“TheraPei”) of San Diego, California (now Forbes Medi-Tech (Research)
      Inc,). As part of the acquisition of TheraPei, Forbes entered into a
      development agreement which provides for the continuing development of one
      lead compound from each of two principal platforms acquired through
      TheraPei. See Item 4 -
      Information on the Company - A. History and Development of the Company –
      AcquisitionsSince
      January 1, 2006-
      Forbes Medi-Tech (Research) Inc.dietary
      supplements
            Products
      intended to supplement the diet which are ingested in dosage form and
      which may contain a nutraceutical.EU
            European
      Union.FDA
            Food
      and Drug Administration - the government agency which regulates the
      manufacture, use and sale of food, human diagnostics and therapeutic
      products in the United States.








Fayrefield
            Fayrefield
      Foods Limited, a UK company that we work with through our
      Forbes-Fayrefield joint venture.  We had previously signed a
      sales and licensing agreement with Fayrefield in November 2004 to supply
      ReducolTM for use in ReducolTM-based products.Forbes
            Forbes
      Medi-Tech Inc., the Company, as constituted on the date
      hereof.Forbes–Fayrefield
            Forbes-Fayrefield
      Ltd.  We have a 51% interest in Forbes Fayrefield Ltd. for an
      initial investment of £10,200, and Fayrefield has the remaining 49%
      interest for an initial investment of £9,800.  The Board of
      Directors of FFL consists of an equal number of nominees of Forbes and of
      Fayrefield.Old
      Forbes or Forbes Operations or FMTO
            Forbes
      Medi-Tech Operations Inc., a former wholly-owned subsidiary of Forbes.
      See Item 4 --
      Information on the Company – A. History and Development of the Company –
      Forbes Medi-Tech Inc.Forbes
      Research
            Forbes
      Medi-Tech (Research) Inc., a wholly-owned subsidiary of Forbes
      USA.Forbes
      USA
            Forbes
      Medi-Tech (USA) Inc., a wholly-owned subsidiary of Forbes .Functional
      Foods
            Conventional
      foods containing ingredients that provide health benefits beyond basic
      nutritional functions and/or reduce the risk of chronic
      disease.GRAS
            Generally
      Recognized as Safe – Refers to substances that are “generally recognized
      as safe” for consumption in the US and can be added to foods by
      manufacturers without establishing their safety by rigorous experimental
      studies.HDL
            High
      density lipoproteins - HDL contains proteins which are involved in the
      removal of cholesterol from the tissues. High levels of HDL cholesterol
      are associated with a decreased risk of coronary heart disease. HDL
      cholesterol is known as the “good” cholesterol.Health
      Canada
            The
      government agency which regulates the manufacture, use and sale of human
      diagnostics and therapeutic products in Canada.hyperlipidemia
            An
      excessive amount of lipids in the blood (i.e. elevated cholesterol,
      triglyceride or lipoprotein levels).LDL
            Low
      density lipoproteins - LDL carries the largest amount of cholesterol. High
      levels of LDL cholesterol are associated with an increased risk of
      coronary heart disease.LDL-C
            Cholesterol
      carried as a component of low density lipoprotein particles. LDL-C is
      known as the “bad” cholesterol.lipids
            Dietary
      or blood fatty substances, including cholesterol and triglycerides that
      are present in cell membranes and body tissues.lipoproteins
            Protein
      and lipid coated “packages” that transport fat and cholesterol in the
      blood. Lipoproteins are classified according to their density. Major
      lipoproteins include HDL and LDL.  
  Minimum
      Bid Price Requirement
            NASDAQ’s
      requirement for a listed company to maintain a minimum closing bid price
      of U.S. $1.00 for continued listing on NASDAQ.New
      Forbes
            Forbes
      Medi-Tech Inc., incorporated pursuant to the British Columbia Business
      Corporations Act effective January 10, 2008 under the name 0813361
      B.C. Ltd., and subsequently renamed Forbes Medi-Tech Inc. effective
      February 27, 2008.  See Item 4 -- Information on
      the Company – A. History and Development of the Company – Forbes Medi-Tech
      Inc.New
      Plan
            Rolling
      stock option plan initially approved by the Board of Directors of the
      Company on April 12, 2007 and approved by the shareholders on May 17,
      2007.  See
      Item 6 – Directors, Senior Management and Employees – E. Share Ownership –
      Stock Option Plan and Total Outstanding Stock Options.non-GMO
            Non-Genetically
      Modified Organism.nutraceutical
            Nutraceuticals
      can be generally described as ingredients extracted from natural sources
      which are incorporated into food or into capsules or other medicinal
      formats, and which have been demonstrated to have a physiological benefit
      and may help prevent disease.Pharmavite
            Pharmavite
      LLC of California.phytosterols
            A
      class of natural products bearing a common tetracyclic carbon structure.
      Found in plants, where they serve functions as constituents of cell
      membranes (e.g. sitosterol, sitostanol, campesterol, campestanol and
      stigmasterol).Plan
      of Reorganization
            The
      Plan of Reorganization described underItem 4 – Information on the
      Company – A. History and Development of the Company – Forbes Medi-Tech
      Inc.Post-Arrangement
      Basis
            This
      term refers to our common shares after giving effect to the one for eight
      reverse stock split pursuant to the Plan of
      Arrangement.   See Item 4 - Information on the
      Company - A. History and Development of the Company - Forbes Medi-Tech
      Inc.Pre-Arrangement
      Basis
            This
      term refers to our common shares before giving effect to the one for eight
      reverse stock split pursuant to the Plan of Arrangement.  See
      Item 4 - Information on
      the Company - A. History and Development of the
      Company.ReducolTM
            A
      unique blend of phytosterols and phytostanols, sold as a food and dietary
      supplement ingredient.   See Item 4 – Information on
      the Company – B. Business Overview – ReducolTM.Rights
      Plan
            Amended
      and Restated Shareholder Rights Plan Agreement made as of April 22, 2008
      between Forbes and Computershare Investor Services Inc.Staff
      Determination
            NASDAQ
      Staff Determination.  See Item 3 – Key Information –
      D. Risk Factors – Stock Exchange Minimum Listing
      Requirements.stanols
            Hydrogenated
      sterols.sterols
            An
      abbreviated name for “phytosterols”.Tall
      Oil License
            A
      license of certain laboratory level phytosterol extraction technology
      developed at UBC.  See Item 4 – Information on
      the Company – B. Business Overview – Technology Licenses Granted to the
      Company.tall
      oil pitch
            Pitch
      is the viscous, black tarry residue remaining after the volatile
      components of crude tall oil have been removed by distillation. It
      contains the non-volatile phytosterols and other higher molecular weight
      components that do not distill due to their very high boiling
      point.tall
      oil soap
            The
      upper layer formed in the vat during the caustic soda treatment of wood
      chips in the pulping process. This layer contains the water insoluble
      natural substances present in the wood. These substances are a mixture of
      phytosterols, fatty acids and fatty alcohols and terpenes.TheraPei
            TheraPei
      Pharmaceuticals, Inc., of San Diego, California, acquired by Forbes in
      October 2006 and renamed Forbes Medi-Tech (Research),
      Inc.  See Item
      4 – Information on the Company – A. History and Development of the Company
      – Dispositions Since January 1, 2007.therapeutic
            For
      treating a disease.toxicity
            The
      quality of being poisonous.triglycerides
            A
      dietary fat transported in blood as fatty acid esters of the alcohol
      glycerol.  Triglycerides are carried through the blood stream to
      the tissues where released fatty acids serve as a source of energy.
      Dietary fat is the primary source of triglycerides.UBC
            University
      of British Columbia located in Vancouver, British Columbia,
      Canada.up-scaling
            Taking
      a small scale laboratory-scale biological or chemical process and
      increasing its physical scale.US
      or U.S.
            United
      States of America.TheraPei
      Stockholders
            TheraPei
      selling shareholders.  See Item 4 – Information on
      the Company – A. History and Development of the Company – Dispositions
      Since January 1, 2007





1


PART I





ITEM 1     Identity of
Directors, Senior Management and Advisers





Not
Applicable.





ITEM 2     Offer Statistics and
Expected Timetable





Not
Applicable.





ITEM 3     Key
Information




A.           Selected
Financial Data




The
following table sets forth selected financial data regarding our consolidated
operating results and financial position.  The data has been derived
from our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in Canada (“Canadian
GAAP”).  For reconciliation to accounting principles generally
accepted in the United States see Note 26 to the consolidated financial
statements for the year ended December 31, 2009, and the years ended December
31, 2008 and 2007.  The following selected financial data should be
read in conjunction with the consolidated financial statements and notes thereto
included elsewhere in this Annual Report.  The selected financial data
is expressed in Canadian dollars.





Year
      ended
            
            
            Year
      ended
            
            
            Year
      ended
            
            
            Year
      ended
            
            
            Year
      endedCanadian
      GAAP unless otherwise noted
              (Expressed
      in '000's , except per share information)
            
            31-Dec-09
            
            
            31-Dec-08
            
            
            31-Dec-07
            
            
            31-Dec-06
            
            
            31-Dec-05Phytosterol
      revenues
            
            $
            4,626
            
            
            $
            7,844
            
            
            $
            8,904
            
            
            $
            6,115
            
            
            $
            4,020Loss
      from continuing operations
            
            
            (3,385
            )
            
            
            (7,342
            )
            
            
            (10,098
            )
            
            
            (11,969
            )
            
            
            (8,765
            )Other
      income
            
            
            4,277
            
            
            
            169
            
            
            
            364
            
            
            
            1,126
            
            
            
            461Income
      tax recovery (expense)
            
            
            (765
            )
            
            
            (17
            )
            
            
            492
            
            
            
            (158
            )
            
            
            –Net
      income / (loss) from continuing operations
            
            $
            127
            
            
            $
            (7,190
            )
            
            $
            (9,242
            )
            
            $
            (11,001
            )
            
            $
            (8,304
            )(Loss)
      / income from discontinued operations, net of tax expense
            
            
            –
            
            
            
            (463
            )
            
            
            (2,441
            )
            
            
            158
            
            
            
            (4,502
            )Net
      income / (loss) and comprehensive income / (loss)
            
            $
            127
            
            
            $
            (7,653
            )
            
            $
            (11,683
            )
            
            $
            (10,843
            )
            
            $
            (12,806
            )Net
      (loss) and comprehensive (loss) in accordance with US GAAP
            
            $
            (244
            )
            
            $
            (7,358
            )
            
            $
            (11,683
            )
            
            $
            (10,881
            )
            
            $
            (11,062
            )


2





Weighted
      average number of shares used to calculate (loss) income per share,
      basic
            
            
            4,970
            
            
            
            4,865
            
            
            
            4,801
            
            
            
            4,675
            
            
            
            4,257Weighted
      average number of shares used to calculate (loss) income per share,
      diluted
            
            
            5,033
            
            
            
            4,865
            
            
            
            4,801
            
            
            
            4,675
            
            
            
            4,257Income
      / (loss) per share from continuing operationsBasic
            
            $
            0.03
            
            
            $
            (1.48
            )
            
            $
            (1.92
            )
            
            $
            (2.35
            )
            
            $
            (1.95
            )Diluted
            
            $
            0.03
            
            
            $
            (1.48
            )
            
            $
            (1.92
            )
            
            $
            (2.35
            )
            
            $
            (1.95
            )(Loss)
      / income per share from discontinued operationsBasic
            
            $
            –
            
            
            $
            (0.09
            )
            
            $
            (0.51
            )
            
            $
            0.03
            
            
            $
            (1.06
            )Diluted
            
            $
            –
            
            
            $
            (0.09
            )
            
            $
            (0.51
            )
            
            $
            0.03
            
            
            $
            (1.06
            )Net
      income (loss) per shareBasic
            
            $
            0.03
            
            
            $
            (1.57
            )
            
            $
            (2.43
            )
            
            $
            (2.32
            )
            
            $
            (3.01
            )Diluted
            
            $
            0.03
            
            
            $
            (1.57
            )
            
            $
            (2.43
            )
            
            $
            (2.32
            )
            
            $
            (3.01
            )Basic
      income (loss) per share in accordance with US GAAP
            
            $
            (0.05
            )
            
            $
            (1.51
            )
            
            $
            (2.43
            )
            
            $
            (2.33
            )
            
            $
            (2.60
            )Diluted
      income (loss) per share in accordance with US GAAP
            
            $
            (0.05
            )
            
            $
            (1.51
            )
            
            $
            (2.43
            )
            
            $
            (2.33
            )
            
            $
            (2.60
            )Total
      assetsCanadian
      GAAP
            
            $
            4,697
            
            
            $
            9,216
            
            
            $
            12,951
            
            
            $
            25,387
            
            
            $
            35,975US
      GAAP
            
            
            4,623
            
            
            
            9,216
            
            
            
            12,951
            
            
            
            25,387
            
            
            
            36,485Total
      LiabilitiesCanadian
      GAAP
            
            $
            2,269
            
            
            $
            6,531
            
            
            $
            3,319
            
            
            $
            5,037
            
            
            $
            7,552US
      GAAP
            
            
            2,275
            
            
            
            6,640
            
            
            
            3,319
            
            
            
            5,037
            
            
            
            7,552Equity
      component of subsidiary’s convertible debentureCanadian
      GAAP
            
            
            –
            
            
            $
            399
            
            
            
            –
            
            
            
            –
            
            
            
            –US
      GAAP
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –Liability
      component of preferred sharesCanadian
      GAAP
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            $
            2,341US
      GAAP
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            2,268Shareholders
      Equity- Canadian GAAPCommon
      shares
            
            $
            2
      ,721
            
            
            $
            2,721
            
            
            $
            101,027
            
            
            $
            100,994
            
            
            $
            94,790Contributed
      surplus
            
            
            10,043
            
            
            
            10,027
            
            
            
            9,875
            
            
            
            8,943
            
            
            
            7,554Equity
      component of preferred shares
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            2,481Deficit
            
            
            (10,336
            )
            
            
            (10,462
            )
            
            
            (101,270
            )
            
            
            (89,587
            )
            
            
            (78,743
            )Shareholders
      Equity- US GAAPCommon
      shares
            
            $
            100,218
            
            
            $
            100,218
            
            
            $
            100,064
            
            
            $
            100,031
            
            
            $
            93,827Contributed
      surplus
            
            
            7,653
            
            
            
            7,637
            
            
            
            7,485
            
            
            
            6,553
            
            
            
            5,710Equity
      component of preferred shares
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            2,481Deficit
            
            
            (105,523
            )
            
            
            (105,279
            )
            
            
            (97,917
            )
            
            
            (86,234
            )
            
            
            (75,353
            )





3




Currency
Exchange Rates





Our
accounts are maintained in Canadian dollars. In this Annual Report all currency
references are expressed in Canadian dollars ($) unless otherwise indicated. The
following tables set forth, for the periods and dates indicated, certain
information concerning the exchange rates for the conversion of Canadian dollars
into United States dollars, based on the Bank of Canada nominal noon buying
rate.  The noon buying rate on March 29, 2010 as reported by the Bank
of Canada for the purchase of one United States dollar with Canadian Dollars was
Cdn$1.0203 (US$1.00 = Cdn$1.0203).





US
Dollars per Canadian Dollar





Fiscal
      Year Ended December 312009
            
            
            2008
            
            
            2007
            
            
            2006
            
            
            2005Average
      for period
            
            
            0.8757
            
            
            
            0.9381
            
            
            
            0.9309
            
            
            
            0.8818
            
            
            
            0.8254End
      of period
            
            
            0.9555
            
            
            
            0.8170
            
            
            
            1.0120
            
            
            
            0.8582
            
            
            
            0.8579





US
Dollars per Canadian Dollar





February
              2010
            
            
            January
              2010
            
            
            December
              2009
            
            
            November
              2009
            
            
            October
              2009
            
            
            September
              2009Low
      for the Month
            
            
            0.9316
            
            
            
            0.9384
            
            
            
            0.9334
            
            
            
            0.9282
            
            
            
            0.9221
            
            
            
            0.9038High
      for the Month
            
            
            0.9597
            
            
            
            0.9755
            
            
            
            0.9611
            
            
            
            0.9560
            
            
            
            0.9716
            
            
            
            0.9422





B.           Capitalization
and Indebtedness





Not
Applicable.





C.           Reasons
for the Offer and Use of Proceeds





Note
Applicable.





D.           Risk
Factors





We are
subject to significant risks and past performance is no guarantee of future
performance.  The following offers a brief overview of some of the
risk factors to be considered in relation to our business.  This list
of factors may not be exhaustive, as we operate in a rapidly changing business
environment, and new risk factors emerge from time to time. We cannot predict
such risk factors, nor can the impact of such risk factors on our business, , if
any, be assessed or the extent to which any factor, or combination of factors,
may cause actual results to differ materially from those projected in any
forward-looking statements or information.  Accordingly,
forward-looking statements or information should not be relied upon as a
prediction of actual results.





The
following summarizes what we believe are the major risks and uncertainties we
currently face:





General
Corporate Risks







Need for Additional Funds
/ M&A
Transaction    We will need to obtain additional
financing, or a suitable merger, acquisition or other strategic combination
transaction (an “M&A transaction”), by the end of the second quarter of 2010
in order to carry on our business as a going concern.  We believe our
capital resources are adequate to fund operations through the second quarter of
fiscal 2010.  This belief is based on a number of factors and
assumptions, and includes the assumption that our expenditures will not exceed
those currently planned, that there will be no material change to our
relationships with our largest customers, and our revenues for the first half of
2010 will meet or exceed our expectations.  There can be no assurance
that such assumptions and factors will be realized or met.  We have no
external sources of





4





liquidity
such as lines of credit (excluding the line of credit in Forbes-Fayrefield,
which is restricted to use by that entity). Forbes-Fayrefield has a € 50,000
line of credit to support its operations.  Security for the line of
credit is currently by way of a debenture registered over all of the assets of
Forbes-Fayrefield. No guarantees have currently been provided by us, or by
Fayrefield. The line of credit bears interest at a floating rate of the Royal
Bank of Scotland Currency Lending Rate for Euros (currently 1.0%) plus 2.0% per
annum, calculated daily. Any funds drawn under this facility are repayable on
demand, and the facility may be terminated at any time by the
Lender.  As at December 31, 2009, € nil was drawn under the facility,
and Forbes-Fayrefield was in compliance with all covenants with the
Lender.)  While management is considering all financing alternatives,
the market for both debt and equity financings for companies such as ours has
always been challenging.  We are continuing to focus our efforts on
obtaining a suitable M&A transaction.  Our future operations are
completely dependent upon our ability to complete a suitable M&A
transaction. If we cannot secure additional funds or complete a suitable M&A
transaction,, we will have to consider additional strategic alternatives which
may include, among other strategies, exploring the monetization of certain
intangible assets as well as seeking to out-license assets, potential asset
divestitures, winding up, dissolution or liquidation. The above matters raise
substantial doubt about our ability to continue to operate as currently
structured.




Going ConcernOur
financial statements are prepared on a going concern basis, which assumes that
we will continue in operation for the foreseeable future and will be able to
realize our assets and discharge our liabilities and commitments in the normal
course of business.  Certain conditions, discussed below, currently
exist which raise substantial doubt about the validity of this
assumption.




We have
sustained continuing operating losses since our formation and at December 31,
2009 had cash of $1,329,000.  Management is of the view that there are
sufficient financial resources to finance operations through the second quarter
of 2010.  This view is based on a number of factors and assumptions
and includes the assumption that our expenditures will not exceed those
currently planned, and that our revenues will meet or exceed our
expectations.





Our
future operations are completely dependent upon our ability to complete a
strategic transaction such as a merger, acquisition, sale of business or other
suitable transaction, and/or secure additional funds.  The market for
any of these activities for companies such as ours has always been
challenging.  The outcome of these matters cannot be predicted at this
time. Any possible strategic transactions to define our future may require
shareholder approval. If we are unable to close on a strategic transaction
before we exhaust our available financial resources, then we may be unable to
continue operations as a going concern and will have to consider winding up,
dissolution or liquidation. The Report Of Independent Registered Public
Accounting Firm attached contains a going concern paragraph.





We have a History of
Losses   We have a history of losses, including a net loss
from continuing operations before other income / expenses and taxes, of
$3,385,000 for the financial year ended December 31 2009. For the fiscal year
ended December 31, 2008, we reported a net loss from continuing operations
before other income / expenses and taxes, of $7,342,000 and for the financial
year ended December 31, 2007, we reported a net loss from continuing operations
before other income / expenses and taxes, of $10,098,000.  We
anticipate that we will continue to incur losses during fiscal
2010.





Future Revenues and Profitability are
UncertainOur financial results may fluctuate, and our future
revenue and profitability are uncertain. During the past three years our revenue
has declined from $8,847,117 for our fiscal year ended December 31, 2007, to
$7,839,674 for our fiscal year ended December 31, 2008, to $4,624,082 for our
fiscal year ended December 31, 2009.  There is no guarantee that our
revenue will increase in the foreseeable future.





Our
ability to achieve and maintain profitability in the foreseeable future depends
on our ability to increase sales of our products and control
costs.  Because the majority of our sales are of a nutraceutical
ingredient, we need to work with potential customers in their development of
their own new product to include our ingredient.  There can be no
assurance that our product development work with potential customers will reach
the stage of successful development and launch of new products or that any such
products will achieve market acceptance.




5




Our
future revenue is also dependent upon fulfillment of contractual obligations by
third parties, including fulfilling payment terms and meeting forecasted
purchase requirements by buyers of our products and assets.  There can
be no assurance that our revenue expectations for the current fiscal year will
be achieved.





Global Economic
Downturn  The general global economic downturn may continue to
have a negative effect on demand by consumers and others for functional foods
and dietary supplements, which would in turn have a negative affect on the
markets for our products.  Such a negative effect could reduce our
future revenues from sales of ReducolTM and
other phytosterol products.  We are dependent upon completion of an
M&A transaction to continue as a going concern.


Need for Growth and / or Merger &
Acquisition Opportunities  Our aim is to expand our sales of
ReducolTM and other value-added products, and to diversify our product line with
new types of nutraceutical products, however, there is no assurance that our
resources will be able to adequately respond to support such growth or that
there will exist a demand for such growth by our current and proposed
customers.   We also intend to build a nutraceutical base through
merger and acquisition opportunities, which may not materialize.





Dependence upon Key
PersonnelOur key management employees include Charles Butt,
Chief Executive Officer and President; David Goold, Chief Financial Officer, and
Laura Wessman, Senior Vice President, Operations. These key management employees
are primarily responsible for our day to day operations, and we believe our
ability to continue operations, increase sales, and complete a suitable M&A
transaction or secure additional financing will depend, in large part, upon our
ability to retain our key management employees and to attract and retain
additional highly qualified management personnel.  Our employment
agreements with our key management employees permit such employees to terminate
their employment on three months’ notice, in the case of Charles Butt, otherwise
on thirty days’ notice. If we lose the services of any our key personnel, we may
be unable to replace them, which could have a material adverse effect on our
business, financial condition, and ability to continue as a going
concern.





Volatility of Stock Price/Liquidity
of SharesThe market prices for the securities of companies
such as ours have historically been highly volatile, and the market has, from
time to time, experienced significant price and volume fluctuations that are
unrelated to the operating performance of particular companies. Factors such as
fluctuations in our operating results, announcements of competing or new
products by our competitors, clinical study results, governmental regulation,
developments in patent or other proprietary rights, public concern as to the
safety and efficacy of our products or those of our customers or competitors in
the phytosterol market and general market conditions, delay in achieving or
failure to achieve our previously announced milestones or goals, can have an
adverse effect on the market price of our shares. In particular, the realization
of any of the risks described herein could have a material adverse impact on
such market price. Sales of substantial amounts of our shares in the public
market, or the perception that such sales will occur, could also adversely
affect the market price of our shares and make it more difficult in the future
for us to raise funds through equity offerings.  Our common share
price has been, and is likely to continue to be, volatile.





No National Exchange
Listing  On February 18, 2010, our common shares were delisted
from the NASDAQ Stock Market and on September 11, 2009, our common shares were
delisted from the TSX.  Consequently, there is no recognized national
exchange on which are common shares are listed and actively
traded.  Our common shares are quoted on the Pink Sheets electronic
quotation service, operated by Pink OTC Markets Inc., but as a result of the
delisting from the NASDAQ Stock Market and TSX, there is limited volume in our
common shares.





Our common shares are considered
penny stock  Rule 15g-9 of the Securities Exchange Act of 1934,
as amended, generally defines "penny stock" to be any equity security that has a
market price (as defined) less than $5.00 per share or an exercise price of less
than $5.00 per share, subject to certain exceptions. Our securities are covered
by the penny stock rules, which impose additional sales practice requirements on
broker-dealers who sell to persons other than established customers and
"accredited investors". The term "accredited investor" refers generally to
institutions with assets in excess of $5,000,000 or individuals with a net worth
in excess of $1,000,000 or annual income exceeding $200,000 or $300,000








6








jointly
with their spouse. The penny stock rules require a broker-dealer, prior to a
transaction in a penny stock not otherwise exempt from the rules, to deliver a
standardized risk disclosure document in a form prepared by the Securities and
Exchange Commission which provides information about penny stocks and the nature
and level of risks in the penny stock market. The broker-dealer also must
provide the customer with current bid and offer quotations for the penny stock,
the compensation of the broker-dealer and its salesperson in the transaction and
monthly account statements showing the market value of each penny stock held in
the customer's account. The bid and offer quotations, and the broker-dealer and
salesperson compensation information, must be given to the customer orally or in
writing prior to effecting the transaction and must be given to the customer in
writing before or with the customer's confirmation. In addition, the penny stock
rules require that prior to a transaction in a penny stock not otherwise exempt
from these rules, the broker-dealer must make a special written determination
that the penny stock is a suitable investment for the purchaser and receive the
purchaser's written agreement to the transaction. These disclosure requirements
may have the effect of reducing the level of trading activity in the secondary
market for the stock that is subject to these penny stock rules. Consequently,
these penny stock rules may affect the ability of broker-dealers to trade our
securities. We believe that the penny stock rules discourage investor interest
in and limit the marketability of our common shares.





Anti-Takeover
ProvisionsOn February 9, 1998, our board of directors (the
“Board of Directors”) adopted a shareholder rights plan which was amended and
restated by our board of directors on April 28, 2003 (the “Rights
Plan”).  In December 2007, the Board of Directors extended the Rights
Plan beyond its scheduled expiry date of February 9, 2008 to the next annual
general meeting of the Company and, effective April 22, 2008, the Board of
Directors further amended, extended and restated the Rights Plan.  The
Rights Plan as so amended, extended and restated was adopted by our shareholders
at our Annual General Meeting on May 21, 2008.  The Rights Plan was
adopted in part to discourage takeover attempts that may not be in the best
interests of our shareholders. The Rights Plan is designed to give our Board of
Directors time to pursue other alternatives to maximize shareholder value in the
event of an unsolicited takeover offer for Forbes. The effect of the Rights Plan
could be to discourage a third party from attempting to acquire, or make it more
difficult to acquire, control of Forbes without first negotiating with our Board
of Directors. The Rights Plan could also limit the price that certain investors
might be willing to pay in the future for our common shares.





Directors’ and Officers’ IndemnityWe have entered into agreements pursuant to which we will indemnify our
directors and officers for any claims made against them while acting in their
capacity as such, which may adversely affect our finances.





OPERATIONAL
RISKS





Dependence Upon a Few Customers and
Products  During the year ended December 31, 2009, we had
phytosterol revenues of $4,626,000, most of which was revenue from sales with a
small portion ($2,000) attributable to licensing revenues.  Most of
our revenue was earned from sales of phytosterols to four
customers.  We anticipate that we will be dependent on these customers
for most of our revenues for the fiscal year ending December 31,
2010.  Any material change in the relationship with such customers or
in the demand for our phytosterol products will have a material effect on our
business and results of operations. Our contract for the sale of ReducolTM to
Pharmavite, one of our primary customers, will end in June, 2010, and is subject
to automatic one-year renewals unless either party provides 90 days’ prior
written notice of its intention not to renew.  While we have not
received any non-renewal notice to date, there can be no assurance that this
contract will be renewed.  Failure to renew or otherwise extend this
contract will have a material adverse effect on our product sales and revenue,
and on the sustainability of our operations and ability to
continue.  In addition, our product line is currently limited to
ReducolTM and other phytosterol products as cholesterol-lowering ingredients or
products.    Any decreases in consumer demand in Europe or
lack of increase in consumer demand, particularly in the U.S., for
phytosterol-containing consumer products, whether due to general economic market
conditions, a change in public perception about nutraceuticals in general or
phytosterol-containing products in particular, or other factors, would also have
a material adverse on our product sales and revenue, and on the sustainability
of our operations and ability to continue.




7





CompetitionThe
markets for nutraceutical ingredients and products are competitive and, as a
result, we face competition from several different sources, including
nutraceutical, food and dietary supplement companies and
manufacturers.


In the
functional foods market, our products compete with the products of, among
others, Johnson & Johnson, Unilever, Cargill Incorporated, Archer Daniels
Midland Company, Cognis and Raisio Staest Oy. These companies are more
established, benefit from greater name recognition and have greater resources
than we do.  In addition, many of our competitors have greater
experience in undertaking research and preclinical studies and human clinical
studies on, obtaining regulatory approvals for, and manufacturing, distributing
and marketing, new nutraceutical products. In addition, there are several other
companies and products with which we may compete from time to time, and which
may have better and larger resources than we do.  Accordingly, our
competitors may succeed in commercializing and marketing products more rapidly
or effectively, which could have a material adverse effect on our business,
financial condition or results of operations.


We
anticipate that we will face increased competition in the future as new products
enter the market. There can be no assurance that existing products or new
products developed by our competitors will not be more effective, or more
effectively marketed and sold, than any that may be developed or sold by us.
Competitive products may render our products obsolete and uncompetitive prior to
recovering research, development or commercialization expenses incurred with
respect to any such products.


The
dietary supplement market is very competitive as well as highly fragmented due
to the diverse nature of the supplements available. According to the Nutrition
Business Journal, dietary supplement manufacturers include companies such as
Royal Numico, Pfizer (formerly Wyeth), Bayer and Bristol Myers Squibb/Mead
Johnson.





Risks Related to Strategic
RelationshipsWe are dependent upon strategic relationships,
and in particular, on our main processor of ReducolTM to
manufacture product for supply to our customers.    The
breakdown of our relationships with our strategic partners may have a negative
effect on our future revenues and business, and such negative effect could be
material.   However, in the case of our ReducolTM,
processor, we believe that in the event that they were unable to provide us with
required supplies, we have the technology and resources to engage another
potential supplier in a timely manner and to use then existing inventories to
support our product sales.


Manufacturing
Risks   We have relied and will continue to
rely heavily on contract manufacturers for the production of product required
for our clinical studies, product formulation work, up-scaling experiments, and
commercial production.  We may not be able to obtain contract
manufacturers to produce a sufficient quantity or quality of our products to
conduct our clinical studies, product formulation work, up-scaling experiments
and commercial production.





Even if
we are successful in securing manufacture of sufficient products for our
clinical studies, product formulation work, up-scaling experiments and
commercial production, we expect to rely on the efforts of contract
manufacturers and third-party manufacturers to produce our
products.  Contract manufacturers may not be available or, if
obtained, may not be reliable in meeting our requirements for cost, quality,
quantity or schedule, or the requirements of any regulatory
agencies.  Any such failure would adversely affect our
business.





Factors
beyond our control could cause interruption in operations at the ReducolTM
manufacturing facilities, or at other contract manufacturing facilities, which
could adversely affect our ability to supply our customers and in turn could
adversely affect our reputation in the marketplace and our
business.  These facilities could suffer an interruption caused by
damage from a variety of sources, many of which are not within our control or
that of our contract manufacturers, including, fire, flood and other natural
disasters, power loss and telecommunication failure, software and hardware
errors, failures or crashes and similar disruptions.  These facilities
could also suffer interruption, suspension of operations or closure due to
global economic conditions, including the tightening of the credit markets,
reduced business or loss of business from other customers, or failure to obtain
required quantities of raw materials and other supplies from suppliers also
suffering due to the economic crisis.  Any significant interruptions
in operations could interrupt our ability to supply our customers, which in turn
could subject us to lawsuits, damage our reputation in the marketplace and have
a material adverse impact on our business and our ability to continue current
operations.




8





Risks Associated with Our
PatentsOur success will depend, in part, on our ability to
obtain, enforce and maintain patent protection for our technology and our
products, in Canada, the United States and other countries. We cannot be assured
that patents will issue from any pending applications or that claims now or in
the future, if any, allowed under issued patents will be sufficiently broad to
protect our technology and patented products.  In addition, no
assurance can be given that any patents issued to or licensed by us will not be
challenged, invalidated, infringed or circumvented, or that the rights granted
thereunder will provide continuing competitive advantages to us.  To
date, there have been challenges to some of our European patents. (See Item 8 - Financial Information -
A. Consolidated Statements and Other Financial Information - Legal
Matters.)The patent positions of companies such as ours are
generally uncertain and involve complex legal and factual questions. In
addition, it is not known whether any of our research endeavors will result in
the issuance of patents in Canada, the United States, or elsewhere, or if any
patents already issued will provide significant proprietary protection or will
be circumvented or invalidated. Moreover, we cannot be certain that we or any
licensor was the first to create inventions claimed by pending patent
applications or that we were the first to file patent applications for such
inventions. Loss of patent protection could lead to generic competition for our
products, and others in the future, which would materially and adversely affect
the financial prospects for these products and us.




There is
no assurance that our patents will be held valid or enforceable by a court or
that a competitor’s technology or product would be found to infringe such
patents. Accordingly, we may not be able to obtain and enforce effective patents
to protect our proprietary rights from use by competitors, and the patents of
other parties could require us to stop using or pay to use certain intellectual
property, and as such, our competitive position and profitability could suffer
as a result.




Risks Associated with Our
Intellectual Property RightsOur success is dependent not only
on our ability to protect our intellectual property rights, but also upon the
protection of rights of third parties from which we have licensed intellectual
property rights.  We hold, directly or indirectly, rights to various
patents and trade marks and rights to various pending patent and trade mark
applications in Canada, the United States, and other
jurisdictions.  In addition, we rely upon certain other technologies,
ideas, know-how, secrets or other information, which we may not be able to
protect.  Notwithstanding precautions we may take to protect our
rights, third parties may copy or obtain and use our proprietary and licensed
technologies, ideas, know-how, secrets and other proprietary information without
authorization or independently develop technologies similar or superior to our
proprietary and licensed technologies.  We enter into confidentiality
and restriction on use agreements with our employees, strategic partners and
others; however, these agreements may not provide meaningful protection of our
proprietary and licensed technologies or other intellectual property in the
event of unauthorized use or disclosure.  Policing unauthorized use of
such technologies and intellectual property is extremely difficult, and the cost
of enforcing our rights through litigation may be
prohibitive.  Further, the laws of jurisdictions other than Canada and
the United States may not provide meaningful protection of our and such third
parties’ intellectual property rights.




Risks Associated with Claims of
Infringement of Proprietary Rights of OthersThe nutraceutical
industry increasingly relies on intellectual property rights for the
manufacture, use and sale of new products that may be the subject of conflicting
proprietary rights.  As a result, there is a substantial risk that we,
or our licensors, may become subject to litigation alleging that our or such
licensors’ products and technologies infringe on the proprietary rights of third
parties.  Whether or not our or such licensors’ products or
technologies infringe on the proprietary rights of third parties, we or such
licensors could incur significant expenses in defending allegations of
infringement of proprietary rights. Further, we or such licensors may be
required to modify our or their products or obtain licenses for intellectual
property rights as a result of any alleged proprietary
infringement.  We or such licensors may not be able to modify ours or
their products or obtain licenses on commercially reasonable terms, in a timely
manner, or at all, any of which could adversely affect our
business.  There can be no assurance that third-party claims will not
in the future adversely affect our business, financial condition, and results of
operations.




9





Risk of Market
AcceptanceThere can be no assurance that any of our products
in development or products recently launched will achieve or sustain market
acceptance.  Further, there can be no assurance that products launched
by third parties containing ReducolTM or
any of our other phytosterol products will achieve sustained market
acceptance.


The
degree of market acceptance for our products, and those of our customers, will
depend upon a number of factors, including competitive pricing, the extent to
which the products fulfill customers’ expectations and demands, the receipt of
regulatory approvals, the establishment and demonstration of the clinical
efficacy and safety of the products, the establishment and demonstration of the
potential advantages over competing products and the acceptance of the listing
of the product and appropriate distribution with large retailers. There can be
no assurance that consumers, distributors, retailers or suppliers in general
will accept and utilize any existing or new products that may be developed by
us.




Development of Additional
Nutraceutical ProductsTo achieve sustained, profitable
operations, we must successfully develop, obtain regulatory approvals for, and
profitably manufacture and market nutraceutical products in addition to ReducolTM
and our other phytosterol products. There can be no assurance that we will
successfully develop other products.  The development and
commercialization of new products is subject to a number of significant risks
and uncertainties, particularly in the emerging nutraceutical industry which is
highly speculative in nature.  Potential products that appear to be
promising in various stages of development, may not reach the market, or if
reached (such as ReducolTM), may not achieve profitable sales levels, for a
number of reasons such as:







·
            the
      discovery of unexpected toxicities or lack of sufficient efficacy of
      products which make them unattractive or unsuitable for human
      use;


·
            preliminary
      results may not be substantiated in later clinical studies or other
      further testing;


·
            manufacturing
      costs or other factors, such as the need for new manufacturing processes,
      may make manufacturing of products impractical, non-competitive or
      delayed;


·
            proprietary
      rights of third parties or competing products or technologies may preclude
      commercialization;


·
            inability
      to receive necessary regulatory approvals from local and international
      government and regulators to manufacture, label, advertise, make claims
      and sell our products;


·
            unacceptability
      of the products in the market
place;


·
            inability
      to protect our intellectual property rights necessary for the research and
      development, manufacture and sale of our products
      or  commercialization obstacles imposed by patents held by third
      parties;


·
            the
      termination, expiry or inability to use proprietary processes, products or
      information owned by third parties needed for the manufacture and sale of
      products developed or acquired by
us;


·
            the
      risk of obsolescence of our
technology;


·
            insufficient
      availability of raw materials and the inability to obtain raw materials on
      acceptable terms; and


·
            other
      factors that may become apparent during the course of research, up-scaling
      or manufacturing which may result in the discontinuation of research and
      other critical projects.





Products
that we may develop will never have been manufactured on a commercial scale, and
there can be no assurance that such products can be manufactured at a cost or in
a quantity to render such products commercially viable. Production of our
products may require the development of new manufacturing technologies and
expertise. The impact on our business in the event that new manufacturing
technologies and expertise are required to be developed is uncertain. There can
be no assurance that we will successfully meet any of these technological
challenges, or others that may arise in the course of development.





Risks Related to Clinical Claims and
Studies





Clinical
claims regarding the efficacy of our products can be advantageous to distinguish
finished nutraceutical products from their conventional
counterparts.  Clinical studies of ReducolTM conducted by or for us in
the US, Europe and Canada have demonstrated a significant LDL cholesterol
lowering effect, between 10 to 15%, using various food matrices such as
vegetable spreads and oils, yogurts, chocolate, and milk
drinks.  These studies have been conducted under




10









Risk of Technical
ObsolescenceThe nutraceutical industry is characterized by
rapidly changing markets, technology, emerging industry standards and frequent
introduction of new products.  The introduction of new products
embodying new technologies, including new manufacturing processes, and the
emergence of new industry standards may render our products obsolete, less
competitive or less marketable.  The process of developing our
products is extremely complex and requires significant continuing development
efforts and third party commitments.  Our failure to develop new
technologies and products and the obsolescence of existing technologies could
adversely affect our business.




Because
the nutraceutical industry is characterized by rapid technology change and
obsolescence, we may be unable to anticipate changes in our current and
potential customer requirements that could make our existing technology
obsolete. Our success will depend, in part, on our ability to continue to
enhance our existing products and services, develop new technology that
addresses the increasing sophistication and varied needs of our current and
future customers, license leading technologies and respond to technological
advances and emerging industry standards and practices on a timely and
cost-effective basis. The development of our proprietary technology and
investing in certain niche markets entails significant technical and business
risks. We may not be successful in using our new technologies or exploiting our
niche markets effectively or adapting our businesses to evolving customer or
medical requirements or preferences or emerging industry standards.




Government Regulation
GenerallySome products manufactured by us will have to comply
with the FDA’s current Good Manufacturing Practices (“cGMP”) and other FDA and
local government guidelines and regulations, including other international
regulatory requirements and guidelines.  Additionally, certain of our
customers may require the manufacturing facilities contracted by us to adhere to
additional manufacturing standards, even if not required by the FDA. Compliance
with cGMP regulations requires manufacturers to expend time, money and effort in
production, and to maintain precise records and quality control to ensure that
the product meets applicable specifications and other requirements. The FDA and
other regulatory bodies periodically inspect drug-manufacturing facilities to
ensure compliance with applicable cGMP requirements. If the manufacturing
facilities contracted by us fail to comply with the cGMP requirements, the
facilities may become subject to possible FDA or other regulatory action and
manufacturing at the facility could consequently be suspended.  We may
not be able to contract suitable alternative or back-up manufacturing facilities
on terms acceptable to us or at all.




The FDA
or other regulatory agencies may also require the submission of any lot of a
particular product for inspection. If the lot product fails to meet the FDA
requirements, then the FDA could take any of the following actions: (i) restrict
the release of the product; (ii) suspend manufacturing of the specific lot of
the product; (iii) order a recall of the lot of the product; or (iv) order a
seizure of the lot of the product.




We are
subject to regulation by governments in many jurisdictions and, if we do not
comply with food, manufacturing and environmental regulations, among others, our
existing and future operations may be curtailed, and we could be subject to
liability.




In
addition to the regulatory approval process, we may be subject to regulations
under local, provincial, state, federal and foreign law, including requirements
regarding occupational health safety, laboratory practices, environmental
protection and hazardous substance control, and may be subject to other present
and future local, provincial, state, federal and foreign regulations, including
possible future regulations of the food ingredient, dietary supplement and
pharmaceutical industries.




11




We cannot
predict the time required for regulatory approval, or the extent of clinical
testing and documentation that may be required by regulatory
authorities.  We may not be able to obtain the approval of regulatory
authorities in any country to market our products or make appropriate label
claims, or if obtained, that the approval will be given in a timely manner or
that such approval will not later be revoked.  Any delays in
obtaining, or failure to obtain regulatory approvals in the United States,
Europe, or other countries would significantly delay or prevent the development
of our markets and products and would therefore adversely and severely affect
our business.




Government Regulation of Functional
FoodsThe regulatory process for the approval of functional
foods in a number of countries is currently in a state of uncertainty, which may
negatively impact the marketing of our phytosterol products.  For
example, prior to June, 2001, Australia had no regulations governing functional
foods.  However, in June of 2001, the Australia New Zealand Food
Authority (ANZFA) regulations governing novel foods, including foods containing
plant sterols, came into force with the result that previously unregulated novel
foods, including products enriched with ReducolTM, were voluntarily withdrawn
from the market pending regulatory approval.





In 2004,
regulations for Natural Health Products (NHP) were passed in Canada. This
regulatory route allows the marketing of phytosterols in standard dosage forms
such as tablets, capsules, and syrups. Therapeutic and health claims for
phytosterols in Natural Health Products are permitted under these regulations.
Separate applications have been made to NHP to sell ReducolTM in tablets, soft
gelatin capsules and in soft gelatin capsules with ReducolTM/Omega-3-fatty
acids.  The Natural Health Products Directorate currently has
a very large backlog of applications.  The time required for
approval is expected to be lengthy.





In the
United States, our phytosterols are currently permitted to be included in food
or as dietary supplements and the FDA has issued a letter to us allowing us to
use a heart-health claim for our phytosterols.  There can be no
assurance that the current regulations will not be modified or that such
modifications will not have an adverse effect on our ability to continue to
distribute or advertise such products in the United States with the heart-health
claim for our phytosterols.





In the
EU, we have received approval to market ReducolTM in a variety of approved food
groups (See Item 4 – Information on the Company
– B. Business Overview – Our Nutraceuticals - ReducolTM and Functional
Foods).  There can be no assurance that such approval will not
be modified in a manner adverse to our business, or will not be revoked in its
entirety.





Restrictions on Product Labeling and
AdvertisingThe FDA, which regulates product labeling, has
issued a letter allowing us to use a heart-health claim for our phytosterol
products.  There can be no assurance that the FDA will not revoke the
permission granted to us to make the claim.  Regulatory agencies in
Europe and other countries may regulate claims made regarding functional foods
and their efficacy. Similarly, the United States Federal Trade Commission and
its counterparts in other countries may place restrictions on our ability to
make claims regarding the efficacy of our products in advertising. Restrictions
on product claims may impede our efforts to gain general market acceptance for
our products at a premium price, which would adversely affect our business.
Currently, the pricing of functional foods generally exceeds the pricing of
similar conventional foods, and clinical claims are necessary to maintain the
competitive position of functional foods.





Product Liability, Negative Publicity
and InsuranceThe sale of our phytosterol products, or the use
of our nutraceutical products in clinical studies, may expose us to liability
claims which could adversely affect us.  Such claims might be made
directly by consumers, healthcare providers or by manufacturers or distributors
of finished goods incorporating our products, or by others selling or consuming
such products.  Our insurance may not cover any potential claim or if
coverage is available, may not provide sufficient coverage to protect us against
loss.  We may not be able to maintain or obtain commercially
reasonable product liability insurance for future products, and any claims under
any insurance policies may adversely affect our ability to maintain existing
policies or to obtain new insurance on existing or future products. Further,
even if sufficient insurance coverage is available to cover any potential claim,
publicity associated with any such claim could adversely affect public opinion
regarding the safety or efficacy of our products. As a result, any product
liability claim or recall could seriously adversely affect our
business.




12





Risks Relating to Supply and Sale of
Raw MaterialsWe rely on the availability of raw materials,
such as phytosterols, at commercially reasonable prices for the production and
development of our sterol-based products and technology.  We may not
be able to obtain adequate supplies of raw materials in a timely fashion or at
acceptable quality, quantity, timing or prices to satisfy our complete long-term
requirements.  Our inability to obtain raw materials at acceptable
qualities, quantities, timing or prices would adversely affect our
business.





No Assurance Regarding Licensing of
Proprietary Technology Owned by OthersThe manufacture and
sale of any products we have developed may involve the use of proprietary
processes, products or information, which are owned by third parties. Although
we have obtained licenses or rights with regard to the use of certain of such
processes, products and information as best we can, there is no assurance that
such licenses or rights will not be terminated or expire during critical
periods, that we will be able to obtain licenses or other rights which may be
important to us, or, if obtained, that such licenses will be obtained on
favorable terms. Some of these licenses provide for limited periods of
exclusivity that may be extended only with the consent of the licensor. There is
no assurance that extensions will be granted on any or all such licenses. This
same restriction may be contained in licenses obtained in the
future.


To
maintain these agreements in good standing, we must abide by the terms of such
agreements, and the loss of any of such agreements due to default could have a
materially adverse impact on our operations.  There are no assurances
that we will be able to renew or renegotiate the licensing agreements on
acceptable terms if and when the agreements terminate.


Risk of Side
EffectsThere is a risk that an individual could experience
side effects, yet to be determined, through consumption of foods and dietary
supplements containing ReducolTM or our other phytosterol products.  We
could face future liability for unknown side effects and any such liability
could exceed our resources.





Political and Economic
RisksWe rely in part on third parties located in the United
States and other foreign countries for the development and manufacture of our
products.  The current political and economic climate in these
countries may be considered less predictable than in Canada.  Changes
in government, economic and political policies may adversely affect our business
and operating results.  Inflation or other changes in economic
conditions that affect demand for nutraceutical products could adversely affect
our revenue. Uncertainty about current global economic conditions poses a risk
as consumers and our customers may postpone spending in response to a number of
factors such as tighter credit markets, negative financial news, declines in
investment values or income, negative changes in employment compensation, or
suspension or loss of employment or anticipation thereof, and other economic
factors affecting consumer spending.  These and other economic factors
could have a material adverse effect on demand for our products and on our
financial condition and operating results.





Environmental
RisksResearch, development and commercial processes involve
use of materials which may result in by-products that may be
hazardous.  The Company, our strategic partners, distributors,
manufacturers, sales agents and others involved in handling materials are
subject to laws and regulations governing the use, manufacture, storage,
handling and disposal of such materials and certain waste products. There is a
risk of accidental contamination or injury from these materials which cannot be
eliminated. We could be liable for any resulting damages and any such liability
could exceed our resources. We may also be required to obtain permits to
transport and dispose of hazardous waste under applicable environmental laws. We
may not be able to obtain such permits, which would adversely affect our ability
to efficiently manufacture or transport our products. We, our strategic
partners, distributors, sales agents, manufacturers and others involved in
handling materials may be required to incur significant costs to comply with
environmental laws and regulations in the future or to remediate environmental
violations.  We may be adversely affected by current or future
environmental laws or regulations.  Any failure by us to comply with
the present or future environmental laws in Canada and the United States, or
elsewhere, could result in any of the following: (i) cessation of portions or
all of our operations; (ii) imposition of fines; (iii) restrictions on our
ability to carry on or expand operations; (iv) significant




13









Foreign Currency and
ExchangeOur functional currency is the Canadian
dollar.  We operate and intend to continue operating in several
foreign markets.  As such, cash flows from such foreign operations
will be subject to fluctuations in the foreign exchange rate of the applicable
currency.





Risks Related to Material Contractual
Obligations  We have obligations under a number of contracts,
and failure to meet our obligations under any of our material contracts may have
a material adverse effect on our operations and financial
condition.  In particular, but without limitation, failure to meet our
obligations under the Pharmavite License & Supply Agreement and the
Forbes-Fayrefield Joint Venture Agreement may adversely affect our assets and
business. (See Item 10 -
Additional Information – C. Material
Contracts).  Alternatively, failure on the part of the other
party to each material contract to meet their respective obligations may also
adversely affect our operations and finances.  There exists the
possibility that any or all of our material contracts may be renegotiated,
amended, terminated, or not renewed, and there is no guarantee that such action
will be favourable to us.





Risks Related to Legal
ProceedingsAny costs associated with legal proceedings,
including, but not limited to, attorney fees, filing fees, and damages, may
adversely affect our assets and business, whether the outcome of the proceedings
is favourable to us or not.  (See Item 8 – Financial Information –
A. Legal Matters).





Adherence to Time
Frames  We set goals and make public statements regarding our
expected timing of meeting our objectives, such as the identification of lead
compounds. The actual timing of these forward looking events can vary
dramatically due to a number of factors, including other risk factors identified
herein.  There can be no assurance that our objectives will be met
within the time lines we expect or at all.





ITEM 4      Information on the
Company





We are a
life sciences company focused on evidence-based nutritional solutions. We
provide value-added products and cholesterol-lowering ingredients for use in
functional foods and dietary supplements, or nutraceuticals. We successfully
developed and commercialized our ReducolTM plant sterol blend, which has
undergone clinical studies in various food matrices and has been shown to lower
"LDL" cholesterol levels safely and naturally. Building upon established
partnerships with leading retailers and manufacturers across the globe, we help
our customers to develop private label and branded products.





A.           History
and Development of the Company





Forbes
Medi-Tech Inc.





The
Company (sometimes referred to in this Annual Report as “New Forbes”) was
incorporated on January 10, 2008 pursuant to the British ColumbiaBusiness Corporations Actas0813361 B.C.
Ltd.On February 27, 2008, the Company changed its name to
Forbes Medi-Tech Inc.





The
predecessor company to New Forbes, Old Forbes was incorporated pursuant to the
provisions of the Company Act(British Columbia) on September 17, 1985 as Amber Resources
Ltd.  In 1992, Old Forbes changed its focus from mining exploration to
pharmaceutical research and development and, accordingly, changed its name to
“Forbes Medi-Tech Inc.” on July 8, 1992.  Old Forbes was continued
under the federal laws of Canada pursuant to the Canada Business Corporation
Act on April 11, 2001 and its previous Memorandum and Articles were
replaced by Articles of Continuance and By-Laws. As a result of a Plan of
Arrangement (as described following), on February 27, 2008, Old Forbes changed
its name from “Forbes Medi-Tech Inc.” to “Forbes Medi-Tech Operations Inc.” As
required by the Plan of Reorganization (see Other Important Events – Plan of
Reorganizationbelow) on May 12, 2008, Old Forbes changed its name from
“Forbes Medi-Tech Operations Inc.” to “3887685 Canada Inc.” and subsequently, on
February 9, 2009 Old Forbes changed its name from “3887685 Canada Inc.” to
“Deans Knight Income Corporation”.




14





On
February 14, 2008 at a Special General Meeting of Old Forbes securityholders,
being the shareholders, optionholders and warrantholders of Old Forbes, three
resolutions were approved in respect of a corporate reorganization. The
resolutions passed at the Special General Meeting included a 'Reduction in
Stated Capital', a 'Name Change' and the 'Plan of Arrangement' (the
"Arrangement"). The Arrangement was subsequently approved by the Supreme Court
of British Columbia on February 15, 2008.  The Arrangement was
designed to allow us to accommodate and capitalize on certain financing
opportunities that may arise in the future, such as the proposed Non-Dilutive
Financing (see Other Important
Events – Plan of Reorganizationbelow), and to achieve NASDAQ’s Minimum
Bid Price Requirement (see Other Important Events –
NASDAQ below).





On
February 27, 2008, the closing of the Arrangement, the shareholders of Old
Forbes exchanged eight of their existing common shares for one common share of
New Forbes; holders of options and warrants of Old Forbes became entitled to
receive, on exercise of the options or warrants, one common share of New Forbes
for each eight common shares of Old Forbes. The exercise price for each common
share of New Forbes became eight times the exercise price for one existing
common share of New Forbes.   As a result of the exchange of
shares referred to above, Old Forbes became a wholly owned subsidiary of New
Forbes; shareholders, optionholders and warrantholders became shareholders,
optionholders and warrantholders of New Forbes; Old Forbes changed its name from
"Forbes Medi-Tech Inc." to "Forbes Medi-Tech Operations Inc." and New Forbes
changed its name from "0813361 B.C. Ltd." to "Forbes Medi-Tech Inc.". The shares
of New Forbes began to trade on the TSX and NASDAQ in substitution for the
shares of Old Forbes on Monday, March 3, 2008.





The
Arrangement affected all shareholders, optionholders and warrantholders
uniformly and did not affect any securityholders' existing percentage ownership
interests or proportionate voting power in the Company or the existing
percentage of the number of common shares of New Forbes that could be acquired
upon the exercise of an option or a warrant. After giving effect to the
Arrangement, there were approximately 4,801,512 issued and outstanding common
shares of New Forbes, warrants to purchase 259,083 common shares of New Forbes
at a price of US $16.48 per share and options to purchase a total of 363,296
common shares of New Forbes at prices between $4.24 and $8.00 per
share.





Unless
otherwise specified, all common share amounts referred to in this Annual Report
are on a Post-Arrangement basis.





Our
Notice of Articles currently authorizes us to issue an unlimited number of
common shares without par value and an unlimited number of preferred shares
without par value.





Our head
office, as well as our registered and records office, is Suite 200, 750 West
Pender Street, Vancouver, B.C., V6C 2T8.  The telephone number of the
registered office is (604) 689 – 5899.





Our
principal acquisitions and dispositions, and principal capital expenditures from
continuing operations, since the beginning of our last three financial years to
date, and certain important events in our development since January 1, 2009,
were as follows:





Acquisitions
since January 1, 2007





Not
Applicable.





Dispositions
since January 1, 2007





Historically,
we have been involved in pharmaceutical research and development. On May 15,
2008, we announced a plan to focus exclusively on our revenue-generating
nutraceutical business, to cease all in-house drug development activities and to
reduce our total workforce in effect prior to the restructuring by approximately
one-third, affecting employees in the U.S. and Canada. We retained core team
members and are continuing to target key merger and/or acquisition opportunities
in order to build a strong nutraceutical business base.




15





In August
of 2008, we sold our former pharmaceutical business unit and assets based in San
Diego, California to Transition Therapeutics Inc.
(“Transition”).  Terms of the sale included an upfront payment of
US$1,000,000 (Cdn$1,054,400) in cash paid at closing to us along with potential
future payments of up to US$6,000,000, in cash or shares of Transition, based
upon Transition reaching certain developmental and regulatory milestones as
outlined in the sale agreement.





We
originally acquired these pharmaceutical assets in October 2006 as part of our
acquisition of TheraPei Pharmaceuticals, Inc. (“TheraPei”). In October 2006, we
acquired 100% of TheraPei, and subsequently changed the name of TheraPei to
Forbes Medi-Tech (Research) Inc. (“Forbes Research”). TheraPei was a privately
held company formed with technology ‘spun-out’ of Sequenom, Inc. and is focused
on developing novel pharmaceuticals directed at the underlying causes of type II
diabetes and related metabolic diseases.





Pursuant
to the Assignment Agreement dated August 15, 2008 (the “Assignment Agreement”)
between Forbes Research and Transition, Forbes Research assigned certain
pharmaceutical intellectual property to Transition in consideration of the
following:





a)
            US$910,000
      (Cdn$959,500) on the closing of the
transaction.





b)
            Contingent
      consideration totaling US$1,000,000 upon the dosing of the first patient
      in the first FDA Phase II clinical trial, for any compound disclosed in an
      assigned patent or derived from or included in assigned intellectual
      property.





c)
            Contingent
      consideration totaling US$1,000,000 upon the filing and acceptance of the
      first NDA filed with the FDA for any compound disclosed in an assigned
      patent or derived from or included in assigned intellectual
      property.





Each
contingent consideration payment in (b) and (c) above will only be payable once
in respect of each of the three compound classes described in the Assignment
Agreement and hence contingent consideration shall never exceed US$6,000,000 in
the aggregate.  Such contingent consideration may be in the form of
cash or shares of Transition (or a combination thereof) at the sole discretion
of Transition.





Pursuant
to an Asset Purchase Agreement dated August 15, 2008 between Forbes Research and
Transition Therapeutics (USA) Inc. (“Transition USA”), Forbes Research sold its
tangible pharmaceutical assets to Transition USA for US$90,000
(Cdn$94,900).





Pursuant
to a Payment, Amendment and Release Agreement dated August 15, 2008 among the
Company, Forbes Research and the former TheraPei Stockholders, Forbes Research
has agreed to pay to the former TheraPei Stockholders 20% of the amounts
received by it pursuant to the Assignment Agreement in consideration for the
assignment thereunder.





Accordingly,
we made payments to the former TheraPei Stockholders of US$182,000 (Cdn$192,000)
which was comprised of 168,322 Forbes’ common shares valued at US$145,600
(Cdn$154,500) and cash of US$36,400 (Cdn$38,600).





All
amounts payable to the former TheraPei Stockholders are to be paid as to 20% in
cash and as to 80% in common shares of the Company, subject to the Company’s
right to elect to pay cash in lieu of shares in certain
circumstances.  In consideration of the agreement to make these
payments, the former TheraPei Stockholders have released the Company and Forbes
Research from all obligations under the Development Agreement, have terminated
the Development Agreement, and have released and discharged the Company and
Forbes Research from any obligation to make future milestone payments, licensing
revenue and/or royalties pursuant to a prior merger agreement.




16





Deans
Knight Income Corporation


In
February 2009, we announced that 3887685 Canada Inc., whose name was changed to
“Deans Knight Income Corporation” (“Deans Knight”) on February 6, 2009, had
filed a prospectus in connection with a public offering (the
“Offering”).  On March 18, 2009, the Offering was completed with Deans
Knight issuing 10,036,890 Voting Common Shares at a price of $10 per share for
gross proceeds of $100,368,900.  As a requirement of the closing of
the Offering, the holder of the Convertible Debenture issued by Old Forbes,
exercised the conversion feature of the Convertible Debenture.




On March
18, 2009, as a result of the completion of the Offering and the conversion of
the Convertible Debenture, our ownership in Deans Knight was diluted from 100%
to approximately 1%. This loss of control resulted in a dilution gain of
approximately $4,148,000.  Our remaining interest in Deans Knight was
valued at approximately $789,000 which we disposed of in April 2009, to the
original Investor, for proceeds of $789,000.





Other
Principal Capital Expenditures Since January 1, 2007





For the
years ended December 31, 2009, 2008, and 2007, we acquired capital assets, for
continuing operations, in the amounts of $nil, $10,000, and
$99,000,  respectively, primarily for office equipment and furniture
and leasehold improvements.





Other
Important Events Since January 1, 2009





ReducolTM


We have
contracted with Pharmavite, LLC for the sale of ReducolTM since
2002.  Pharmavite incorporates ReducolTM into one of its leading
dietary supplements, Nature Made’s® Cholest-OffTM.  In March, 2003, we
announced that we had extended our supply and licensing contract with Pharmavite
for up to three years, and on June 11, 2009 we announced that we had again
extended our supply and licensing contract with Pharmavite until mid
2010.  Under the terms of the agreement, the contract is subject to
automatic one-year renewals unless either party provides 90 days’ prior written
notice of its intention not to renew.  While we have not received
notice of non-renewal to date, there can be no assurance that the contract will
be further renewed or otherwise extended.





In
October 2009, we announced that the European Union had approved a health claim
for plant sterols in free or esterified form.





In
December 2009, we announced the launch of Del Monte Heart Smart Pineapple Juice
containing ReducolTM in the Philippines.





NASDAQ


On
January 22, 2008 we received a NASDAQ Staff Determination, (the “Staff
Determination”) indicating that we failed to comply with the U.S. $1.00 Minimum
Bid Price Requirement for continued listing set forth in Marketplace Rule
4310(c)(4), and that our securities were, therefore, subject to delisting from
The NASDAQ Capital Market. Following a hearing before a NASDAQ Listing
Qualifications Panel to review the Staff Determination and a subsequent
extension request, we were afforded until June 30, 2008 to regain compliance
with NASDAQ’s Minimum Bid Price Requirement. We regained compliance on June 17,
2008.





On
September 19, 2008, we announced that we had received a NASDAQ Staff Deficiency
Letter dated September 19, 2008 indicating that the bid price for our common
stock has closed below the minimum of U.S. $1.00 per share for the previous 30
consecutive trading days, as required by Marketplace Rule 4320(e)(2)(E)(ii).
NASDAQ provided us with 180 calendar days, or until March 18, 2009, to regain
compliance with this rule.




17





In
October 2008, we announced that we had received a letter from The NASDAQ Stock
Market stating that with an effective date of October 16, 2008, NASDAQ had
decided to temporarily suspend enforcement of the minimum bid price and minimum
market value of publicly held shares rules, given the extraordinary market
conditions. In January 2009, we announced that NASDAQ had extended its
suspension of the bid price and market value of publicly held shares
requirements. Additional extensions were announced by NASDAQ on March 23, 2009
and July 13, 2009. As a result of these extensions, our compliance deadline was
extended to January 4, 2010.





On April
14, 2009 we received a NASDAQ Staff Deficiency Letter indicating that we did not
meet the minimum requirements regarding stockholders’ equity for continued
listing on the NASDAQ Capital Market as required by Listing Rule 5550(b)(1). We
submitted a letter demonstrating our plan to meet compliance with the
requirements and after reporting stockholders’ equity as of March 31, 2009 of
$5,290,947, or approximately US $4,200,000, NASDAQ issued us a NASDAQ Staff
Letter dated May 15, 2009 confirming that we once again met the minimum
requirements regarding stockholders’ equity (US$2,500,000) for continued listing
on the NASDAQ Capital Market.





In
January 2010, we received a Nasdaq Staff Deficiency Letter indicating that we
did not meet the NASDAQ initial listing standard set forth in Listing Rule 5505
and unless we requested an appeal of the Staff’s determination, our common
shares would be suspended at the opening of business on January 15, 2010, and a
Form 25-NSE would be filed with the Securities and Exchange Commission which
would remove our common shares from listing and registration on The NASDAQ Stock
Market. On January 14, 2010 we announced that we had provided the NASDAQ with a
notice of appeal of the NASDAQ Staff Deficiency determination to a Hearings
Panel (“Panel”). On February 16, 2010 we received notice that the Panel had
reviewed our appeal and had determined to delist our common shares from The
NASDAQ Stock Market, effective with the open of business on February 18,
2010.





We were
advised by Pink OTC Markets Inc, which operates an electronic quotation service
for securities traded over-the-counter, commonly known as the Pink Sheets, that
our common shares were immediately eligible for quotation effective with the
open of business on February 18, 2010.  Our common shares continue to
trade on the Pink Sheet under the symbol FMTI.





TSX


On
January 14, 2009, we announced that we had received notice from the Toronto
Stock Exchange ("TSX"), indicating that the TSX was reviewing the eligibility of
our common shares for continued listing on the TSX. The delisting review
announced by the TSX related to our market capitalization, which had fallen
below the designated TSX threshold. Pursuant to the TSX's Remedial Review
Process, we were given 210 days -- until August 12, 2009 -- to regain compliance
with the TSX continued listing requirements.





On August
12, 2009, we announced that we had received notice from the TSX that our common
shares would be delisted at the close of market on September 11, 2009. The
delisting decision announced by the TSX related to the Company’s market
capitalization, which remained below the TSX designated minimum, $3,000,000
market capitalization threshold for continued listing. On September 11, 2009, as
we had not regained compliance with the TSX listing requirements, we were
delisted from the TSX.





B.           Business
Overview





We are a
life sciences company focused on evidence-based nutritional solutions. We
provide value-added products and cholesterol-lowering ingredients for use in
functional foods and dietary supplements, or nutraceuticals. We successfully
developed and commercialized ReducolTM, a proprietary plant sterol and stanol
blend, which has undergone clinical studies in various food matrices and has
been shown to lower "LDL" cholesterol (LDL-C) levels safely and naturally.
Building upon established partnerships with leading retailers and manufacturers
across the globe, we help our customers to develop private label and branded
products.




18





Background
on Cardiovascular Disease





Cardiovascular
Disease


The
cardiovascular disease market continues to be one of the largest, with
increasing prevalence in the developed and developing worlds.





A major
symptom of cardiovascular disease is a build-up of atherosclerotic plaque in the
arteries, which can lead to heart attack or stroke. Angioplasty and by-pass
surgery are often used to treat severe cases. Sufferers of cardiovascular
disease also manifest a higher incidence of diabetes, obesity, Alzheimer’s and a
number of other debilitating illnesses.





Cardiovascular
Disease and Cholesterol


It is
well recognized that an elevated level of LDL-C is an independent risk factor
for cardiovascular disease, and that the reduction of LDL-C can significantly
reduce that risk.





About
Cholesterol


Cholesterol
is a substance found among the fats (often referred to as lipids) in the
bloodstream and in the body’s cells. Lipids are an important part of a healthy
body because they are a constituent of cell membranes and are used to form
certain hormones. Cholesterol and other lipids cannot dissolve in the blood as
they have to be transported to and from tissues by special carriers called
lipoproteins. There are several types of lipoproteins, but the primary focus is
on low-density lipoprotein (“LDL” or “bad”) cholesterol and high-density
lipoprotein (“HDL” or “good”) cholesterol.





LDL is a
major cholesterol carrier in the blood. When a person has a high amount of LDL
cholesterol circulating in the blood, cholesterol can slowly build-up within the
walls of the arteries that feed the heart and brain. Together with other
substances, it can form an atherosclerotic plaque, a thick, hard deposit that is
often referred to as hardening of the arteries. The formation of a clot in the
region of this plaque can block the flow of blood to parts of the heart muscle
and cause a heart attack. That is why LDL cholesterol is often called “bad”
cholesterol.





HDL
carries about one-fourth to one-third of blood cholesterol. Medical experts
think HDL tends to carry cholesterol away from the arteries and back to the
liver, where it is excreted from the body. Some experts believe HDL removes
excess cholesterol from atherosclerotic plaques and thus slow their growth. HDL
is known as “good” cholesterol because a high level of HDL protects against
heart attack and stroke.





Our
Nutraceuticals


An
increasingly active population, the pursuit of healthier lifestyles and the
desire to live longer has given rise to a category of products known as
nutraceuticals. This category includes functional foods, which are conventional
foods containing ingredients that provide additional health or nutritional
benefits leading to possible risk reduction of contracting chronic diseases. A
second niche within the nutraceuticals category is dietary supplements,
healthful products derived from natural and synthetic food sources and delivered
in a medicinal form.





Our lead
product in the nutraceutical area is ReducolTM, our branded, clinically proven
food and dietary supplement ingredient that helps lower LDL, or “bad”
cholesterol, safely and naturally. LDL-C is generally recognized as a
significant risk factor for cardiovascular disease.





In
Europe, ReducolTM can now be found in yogurt, yogurt drinks, and margarine.
Worldwide, ReducolTM can also be found in such items as milk, yogurt drinks and
dietary supplements.  To date, the majority of our revenue has derived
from the sale of ReducolTM as an ingredient.  However, in June 2006 we
established a joint venture, Forbes Fayrefield Ltd., with Fayrefield Foods
Limited of Crewe, U.K. (“Fayrefield”), to support the growth and distribution of
finished products containing ReducolTM directly to retail customers in Europe. We
also sell sterol esters and other phytosterol products as phytosterol functional
food ingredients.




19





The
estimated global market for functional foods has reached more than US$30
billion. The US market alone contributes US$15 billion annually to this, and the
Nutrition Business Journal estimates it will grow to US$34 billion by 2010. The
nutraceuticals category also includes dietary supplements, which are healthful
products derived from natural and synthetic food sources and delivered in a
medicinal form. Dietary supplements accounted for approximately 34% of the
US$47.6 billion nutrition market, according to a Health Business Partners study
that was published in 2000.





In 2005,
the US functional food market represented US$26.5 billion and dietary
supplements accounted for US$21.3 billion.  We believe that the growth
in this industry is fuelled by factors such as: (i) increased awareness of the
link between diet and health; (ii) aging populations in developed countries;
(iii) governments seeking to reduce healthcare costs; (iv) food and beverage
manufacturers seeking product differentiation; and (v) scientific studies
linking ingredients to health benefits.





The
current credit crisis and general global economic downturn appears to have had a
negative effect on demand by consumers and others for functional foods, which
would in turn have a negative effect on the markets for such
products.  At this time we are unable to assess what impact, if any,
the credit crisis and economic downturn may continue to have on our sales of
ReducolTM and other phytosterol products.





ReducolTM





Clinical
studies have shown that, when added to certain foods, ReducolTM can reduce both
total and LDL-C. In 1997, a clinical human study was conducted over a 30-day
period with 32 male subjects with high cholesterol levels in which half received
a placebo margarine and half received ReducolTM-enhanced margarine in their
diet.  The key finding was that the ReducolTM test group showed a 24.4%
reduction in LDL-C compared to an 8.9% reduction for the control group. Both
groups were on a standardized, prudent North American diet.  During
this study, no clinically significant adverse events were observed and the level
of HDL (good) cholesterol remained unchanged.





As a
cholesterol-lowering agent, we believe that there are a number of positive
aspects to ReducolTM such as:




• the
ability to help reduce total cholesterol and LDL-C;




• a
favorable safety profile;




• an
absence of taste and odor;




• the
ability to be incorporated into a wide variety of fatty, low-fat and no-fat
foods and beverages;




• its
origin from natural and non-genetically modified plant constituents;
and




• the
ability to be incorporated into certain foods without
esterification.







We
believe that cholesterol-lowering nutraceutical products are proving attractive,
not only to those people with confirmed high cholesterol levels, but also to a
large population of consumers concerned about their overall health regardless of
their cholesterol levels, since these kinds of products may have value in the
prevention and risk reduction of cardiovascular disease.





As an
ingredient, ReducolTM does not change the sensory properties of foods, and can be
formulated alone, or in combination with other active ingredients, for dietary
supplements.





ReducolTM
and Functional Foods





Our
phytosterols can be incorporated into a wide variety of foods, including low-fat
and no-fat foods.  We have developed technology for the use of our
phytosterols in the following broad food categories: cereal bars, bread, fruit
juices, cheese, yogurt, milk and other dairy products, cooking oils, salad
dressings, fat spreads and confectionary items.




20





We
initially commenced supplying ReducolTM for use in functional foods in Europe
following our November 2004 announcement that we had signed a sales and
licensing agreement with Fayrefield of Crewe, U.K. to supply ReducolTM for use in
milk-based drinks.  This announcement followed the approval, announced
earlier that month, by the European Commission for the use of ReducolTM in
milk-based beverages.  Fayrefield specializes in the production and
marketing of dairy products and powders throughout Europe, the Middle East and
North America.   In 2006, we entered into a joint venture with
Fayrefield, to establish a new U.K. company, Forbes Fayrefield Ltd., for the
purpose of expanding the distribution of finished products containing ReducolTM
in Europe.





Subsequent
to entering into our initial agreement with Fayrefield in late 2004, we worked
closely with Fayrefield to develop products incorporating ReducolTM for
distribution and sale by Tesco Stores Ltd. in the U.K. On December 20, 2005, we
announced that ReducolTM had been launched in the U.K. by Tesco, the U.K.’s
largest retailer, under their own private label.





In
November 2004, we announced that we had agreed to supply ReducolTM for use in
milk-based drinks to Scanvit Ltd., a Finnish healthcare company focusing on the
prevention of cardiovascular diseases. Scanvit's core competency is in
developing new markets for dietary supplements and functional foods in
Scandinavia, the Baltic countries and Russia. As a result of our relationship
with Scanvit, in May 2005 we announced that Kesko of Finland had launched a
range of yogurts incorporating ReducolTM. The yogurt is sold under the “Pirkka”
premium brand name.





Since
2004, we have been working with a number of other manufacturers, suppliers and
agents to develop additional ReducolTM-containing functional foods. Those
currently being marketed include:







§
            a
      margarine spread, yogurt and yogurt drinks marketed by Albert Heijn B.V.
      of the Netherlands, under the Albert Heijn private label
      brand;




§
            a
      range of dairy products marketed by Jeronimo Martins of Portugal under the
      Salutare private label brand;




§
            a
      cholesterol-lowering milk drink marketed by Uni-President Enterprises
      Corporation of Taiwan,  under the UPEC brand;
  and




§
            a
      yogurt drink under the under the Vital+ brand, marketed by CONAPROLE, the
      main dairy exporter in Uruguay and Latin
  America.




§
            a
      pineapple juice drink under the under the Del Monte brand, marketed by Del
      Monte Pacific of the Philippines.




§
            a
      milk drink under the under the Lanitis brand, marketed by Lanitis Bros, a
      division of the Coca Cola Co. in
Cyprus.







We are
also continuing to work with various U.S. food manufacturers but the completion
of the product development stage and the timing of product launches is unclear
at this point.  We will update our shareholders in the event of a
product launch.





ReducolTM
and Dietary Supplements





ReducolTM
has been incorporated by Pharmavite LLC of California into its nationally
distributed dietary supplements, Nature Made® Cholest-OffTM. These supplements
are sold through mass-market channels including food, drug and mass
merchandising stores. Our renewed contract with Pharmavite will end in June
2010, and is subject to automatic one-year renewals unless either party provides
90 days’ prior written notice of its intention not to renew.  To date,
we have not received any notice of non-renewal.  Failure to renew or
otherwise extend this contract would have a material adverse effect on our
product sales and revenue.





Phytosterol
and Other Revenue





Revenues
from continuing operations for the year ended December 31, 2009 include our
proportionate share of the revenue generated by our joint venture,
Forbes-Fayrefield.




21





Our Total
Revenues can be broken down as follows:





Summary:
              (thousands
      of $)
            
            Year
      ended
              December
      31, 2009
            
            
            Year
      ended
              December
      31, 2008
            
            
            Year
      ended
              December
      31, 2007Sales-phytosterol
      products
            
            $
            4,264
            
            
            $
            7,108
            
            
            $
            7,717Sales-finished
      goods
            
            
            360
            
            
            
            732
            
            
            
            1,130Licensing
            
            
            2
            
            
            
            4
            
            
            
            57Phytosterol
      revenues
            
            $
            4,626
            
            
            $
            7,844
            
            
            $
            8,904





Our
Phytosterol revenues can be broken down geographically as follows:





Annual
      Export Sales by Product
            
            Year
      ended
              December
      31, 2009
            
            
            Year
      ended
              December
      31, 2008
            
            
            Year
      ended
              December
      31, 2007(percentage
      of total phytosterol revenues)Sterol
      IngredientNorth
      America
            
            
            51
            %
            
            
            51
            %
            
            
            49
            %Europe
            
            
            28
            %
            
            
            38
            %
            
            
            37
            %Other
            
            
            13
            %
            
            
            1
            %
            
            
            1
            %Finished
      Goods With SterolsNorth
      America
            
            
            –
            
            
            
            –
            
            
            
            –Europe
            
            
            8
            %
            
            
            10
            %
            
            
            13
            %Other
            
            
            –
            
            
            
            –
            
            
            
            –





All of
our phytosterol revenues were derived from sales to arms-length
customers.


For the
year ended December 31, 2009, the majority of the Company’s revenue was
generated from four customers (year ended December 31, 2008 – four customers,
year ended December 31, 2007 – four customers).  Customer A accounted
for 44% (2008 – 47%, 2007 – 40%), Customer B accounted for 15% (2008 – 11%, 2007
– 10%), Customer C accounted for 9% (2008 – 20%, 2007 – 15%), and Customer D
accounted for 8% (2008 – 9%, 2007 – 13%) of revenue.  51% of sales are
recorded in the USA, 36% of sales are recorded in Europe and the balance in rest
of the world.





Competition





The
markets for nutraceutical ingredients and products are competitive and, as a
result, we face competition from several different sources, including
nutraceutical, food and dietary supplement companies and
manufacturers.   For a further discussion of our competition, see
above Item 3 Key Information –
D. Risk Factors – Operational Risks - Competition.





Marketing
Activities





We are
continuing to concentrate our marketing efforts for ReducolTM primarily in
Europe, which we believe remains the most mature market internationally in terms
of consumer acceptance of, and demand for, phytosterol – containing
foods.   Accordingly, we plan to continue our marketing efforts
in Europe with a view to growing both our product and customer
base.  At the same time, we also continue to look to markets outside
Europe, primarily in the U.S. and Asia-Pacific countries, as the functional food
markets in those regions continue to mature. In the dietary supplement market,
our focus will continue to be on the United States.





Technology
License Granted to the Company





In 1995,
we obtained a license of certain laboratory level phytosterol extraction
technology developed at UBC (the “Tall Oil License”).  This license
relates to the preparation and purification of sterol compositions from tall oil
soap, the actual compositions of the sterols, and the use of these compositions
and derivatives thereof as agents to prevent or treat lipid disorders. Pursuant
to the Tall Oil License, as amended, we have agreed to:




22





•
            issue
      to UBC 6,250 Common Shares (of which 3,125 Common Shares have been issued
      and 3,125 Common Shares are to be issued after the first sale of any
      product derived from the technology);
and


•
            pay
      to UBC a royalty of 1% of gross revenue earned from sales of products by
      us and our licensees derived from the
  technology.





The Tall
Oil License grants us the exclusive worldwide right to manufacture, distribute,
market, sell, license or sublicense any products derived from or developed from
the technology.  The Tall Oil License continues until the later of the
expiration of the 20-year term and the expiration of the last registered patent
subject to the Tall Oil License.





Nutraceutical
Research, Development and Support





In the
functional food and nutraceuticals area, we are currently focusing on ReducolTM
product formulations to assist food manufacturers with potential launches of
cholesterol-lowering products.





For the
years indicated below, our expenses related to nutraceutical research,
development and support were:





Period
            
            Expenses
      for Year(thousands
      of $)Year
      ended December 31, 2009
            
            $
            734Year
      ended December 31, 2008
            
            $
            1,213Year
      ended December 31, 2007
            
            $
            1,775





Our
Nutraceutical research, development and support expenses for the year ended
December 31, 2009, totaled $734,000 compared with $1,213,000 for the year ended
December 31, 2008 and $1,775,000 for the year ended December 31,
2007.  In 2009, nutraceutical research, development and support
expenditures prior to the allocation of stock based compensation decreased
mainly due to severance costs associated with our restructuring in May, 2008,
and a decrease in regulatory and patent costs.  In 2008, nutraceutical
research, development and support expenditures prior to the allocation of stock
based compensation decreased primarily due to reduced patent costs and clinical
work relating to functional foods offset by severance costs.





Government
Regulation





Nutraceuticals  The
sale of ReducolTM and non-branded sterols and their incorporation into foods and
dietary supplements is regulated in most countries.  Described below
for general information purposes are some regulatory highlights.





United
States (“US”)


The
United States is one of the world’s largest markets for nutraceuticals and has
less stringent requirements for the market approval of nutraceuticals than some
jurisdictions such as Canada and Europe. The US regulations allow phytosterols
to be marketed either as a food ingredient under the GRAS notification process
or as a dietary supplement.





GRAS
(Generally Recognized As Safe) notification process:  Currently, the
FDA is requiring that phytosterol food products be cleared for marketing by the
GRAS notification process. In April 2000, the FDA responded to a notification
filed for ReducolTM thus permitting our phytosterols to be marketed in the US in
food products.





Dietary
Supplements:  ReducolTM and other phytosterol dietary supplements can
be sold in the United States under the Dietary Supplement Health Education Act
of 1994. Dietary supplements are not food additives but are discrete dosage
forms such as pills or capsules. The Act requires filing a notification with the
FDA 75 days prior to marketing.




23





In
February 2003, we received a letter from the FDA allowing the use of the
phytosterol heart-health claim previously approved by the FDA in an interim
final ruling to be applied to our range of phytosterol products.  This
enables the food industry to include statements about the heart health benefits
of our cholesterol-lowering phytosterol ingredients in a variety of food
products and dietary supplements.  Previously, the interim final
ruling authorized a heart health claim for only plant sterol esters and plant
stanol esters.  A final ruling by the FDA regarding the use of the
health claim with respect to our phytosterols remains pending.





We cannot
assure you that the current regulations will not be modified or that such
modifications will not have an adverse effect on our ability to continue to
distribute or advertise such products in the US, or that the final ruling will
continue to allow us to use the heart-health claim for our
phytosterols.





European
Union (“EU”)


Novel
Foods Regulations:  We received an approval under the Novel Foods
Regulations to market ReducolTM in milk-based drinks in November 2004. In 2005
and 2006, the Novel Food Board of Finland determined that the use of ReducolTM in
milk-based drinks was substantially equivalent to the use of ReducolTM in other
food groups approved to contain phytosterols and these are: yellow fat spreads
(margarine), fermented milk type products, soy drinks, low-fat cheese type
products, yoghurt type products, spicy sauces, salad dressings and rye bread.
Marketing of these products with ReducolTM can now proceed in the EU. In February
2005, the Novel Food Board of Finland also provided an opinion that the
esterified form of our phytosterols was equivalent to sterol esters approved for
sale in the European Union. In addition to ReducolTM, our sterol esters can be
marketed in the EU in the nine food categories outlined above.





On April
14, 2004, we announced that the European Commission had published regulations
concerning the labeling of foods and food ingredients with added phytosterols,
phytostanols or their respective esters. The regulation will allow consumers to
choose different food formats containing phytosterol ingredients, including
ReducolTM. The recommended intake of phytosterols/stanols is within a range of 1
to 3 grams per day.





There can
be no assurance that the Novel Foods approval will not be modified in a manner
adverse to our business, or will not be revoked in its
entirety.  There can be no assurance that ReducolTM will be approved
for use in the EU in any additional food groups.





Health
Claim for Plant Sterols In December 2009, a Regulation (EC 983/2009) was passed
which allows the Health Claim "Plant sterols have been proven to lower/reduce
blood cholesterol significantly. Blood cholesterol lowering has been proven to
reduce the risk of (coronary) heart disease". The claim can be used only for
food which ensures a daily intake of at least 2 g plant sterols. The
ReducolTM  ingredient is authorized to make the above health
claim.





Australia


Novel
Foods:  The Australian New Zealand Food Authority approved our sterols
for use in vegetable oil spreads in May, 2002.  An application for use
of ReducolTM in milk was filed with the Food Authority in May
2003.  The application was approved in December 2006.





On
February 19, 2010, applications A1019 and A1024 were approved by FSANZ and
forwarded to the ministerial council for final approval. If the applications
progress to gazettal, ReducolTM will be approved for use in breakfast cereals and
yoghurts. ReducolTM  would also be approved for use in the esterified
form in vegetable oil spreads and other food products that currently have
approval to contain sterol esters. Five formulation additives would also be
approved for use in liquid milk with ReducolTM, providing greater flexibility in
the manufacture of milk product.  However, there is no assurance that
these applications will receive final approval by the ministerial council in the
near future.




24





Dietary
Supplements:  Our sterols received approval for marketing as a
complementary medicine by the Office of Complementary Medicines in July 2001.
ReducolTM tablet products have been on the Australian/New Zealand market since
2002.





Canada


Novel
Foods: Currently, applications for approval of food products containing ReducolTM
must be made under the Novel Foods regulations. Seven applications have been
submitted for food products. The approval process by this route is expected to
be lengthy as any claims such as, “reduction of cholesterol”, will require an
amendment to the Canadian Food & Drug Act.  To date, no food
products from any food manufacturer in Canada, have been approved to include
added phytosterols ingredients.





Dietary
Supplements:  In 2004, regulations for Natural Health Products (NHP)
were passed in Canada. This regulatory route allows the marketing of
phytosterols in standard dosage forms such as tablets, capsules, and syrups.
Therapeutic and health claims for phytosterols in Natural Health Products are
permitted under these regulations. Separate applications have been made to NHP
to sell ReducolTM in tablets, soft gelatin capsules, soft gelatin capsules with
ReducolTM/Omega-3-fatty acids, and gummies.  The Natural Health
Products Directorate currently has a very large backlog of
applications. NHP has only actively reviewed Forbes applications submitted in
2006; more recent applications have not received active
review.   The time required to complete the review process is
unknown. There is no assurance that any of the filed applications will be
approved.





Brazil


In 2007,
ReducolTM was approved for use in food products by the Brazilian National Health
Surveillance Agency, ANVISA.  Each new food product in Brazil with
ReducolTM, however, requires a separate petition from a local food
manufacturer.  A petition has been filed for ReducolTM in milk.
However, there is no assurance that the Brazilian food manufacturer will market
the product when and if approved.





Malaysia


ReducolTM  in
ester form is approved to use foods and can make a U.S. style Health Claim. An
application is on file to use ReducolTM l powder in foods and make the same
Health Claim. There is no assurance that the application will be approved or
that food manufacturers will market products with either the powder or ester
forms.





Taiwan


ReducolTM
was approved for use in milk in Taiwan in 2007; commercial sales of milk product
with ReducolTM have continued from that time.





Uruguay


ReducolTM
was approved for use in yoghurt drinks in 2008; commercial sales of the yoghurt
product have continued from that time.





Intellectual
Property





Patents,
trademarks and other proprietary rights are important to us. Our strategy is to
build a strong patent portfolio to protect technology that we consider important
to the development of our business, and to adopt, register, promote and protect
our trademarks for our branded products.  We also rely upon trade
secrets to maintain our competitive position.





Our
patent portfolio includes patents and patent applications comprising therapeutic
applications or indications for sterol compositions, formulations and delivery
vehicles comprising sterol compositions, sterol-based derivatives, additional
therapeutic indications for these derivatives, sterol-based combinations for use
in lowering serum cholesterol,  compositions comprising sterols,
additional components to assist in food and nutraceutical formulations, and
sterol extraction, process and manufacturing methods.  We have patents
issued in the United States and Europe.




25





Notices
of Opposition have been filed against certain patents allowed in Europe. (See
Item 8 – Financial Information – A. Legal Matters – Patent
Oppositions)





C.           Organizational
Structure





SubsidiariesWe
have two wholly-owned subsidiaries as follows:





·
            Forbes Medi-Tech (USA)
      Inc. (“Forbes USA”) was incorporated under the laws of the state of
      Delaware on December 8, 2000 and holds our 100% interest in Forbes
      Medi-Tech (Research) Inc.





·
            Forbes Medi-Tech (Research)
      Inc. (“Forbes Research”), a wholly owned subsidiary of Forbes
      Medi-Tech (USA) Inc. was acquired as TheraPei Pharmaceuticals, Inc., and
      then the name was changed on October 26, 2006 to Forbes Medi-Tech
      (Research) Inc.  The original company, TheraPei Pharmaceuticals,
      Inc., was incorporated under the laws of the state of Delaware on August
      9, 2004.





We also
have a 51 % interest in the following entity:





·
            Forbes-Fayrefield Limited(“Forbes-Fayrefield”) is a company limited by shares and
      incorporated in England under the English Companies Act
      1985.  Forbes-Fayrefield purchases and resells food products
      containing Forbes’ proprietary ingredient, ReducolTM throughout the
      European Union.  We have an initial 51% interest in
      Forbes-Fayrefield for an initial investment of £10,200, and Fayrefield has
      the remaining 49% initial interest for an initial investment of
      £9,800.  The Board of Directors of Forbes-Fayrefield consists,
      and under the agreement with Fayrefield will continue to consist, of an
      equal number of nominees of Forbes and of
  Fayrefield.





D.           Property,
Plants and Equipment





We lease
approximately 9,500 square feet of office space at executive offices located in
Vancouver, British Columbia at an annual cost of approximately
$294,000.  We have sublet approximately 3,600 square feet of this
office space to a third party for annual proceeds of approximately
$115,000.





We,
through our interest in Forbes-Fayrefield, pay our 51% proportionate share of
office operating costs to Fayrefield Foods Limited.





ITEM 4A   Unresolved Staff
Comments




Not
Applicable.




ITEM
5      Operating and Financial Review and
Prospects





Overview





Except
for historical information, this review contains forward-looking statements
which involve known and unknown risks, delays, uncertainties and other factors
not under our control.  (See Note Regarding Forward Looking
Statements and Item 3 – Key Information – D. Risk
Factors).





The
following discussion is based on the consolidated financial statements included
in this Annual Report which have been prepared in accordance with accounting
principles generally accepted in Canada.  These principles differ in
certain material respects from those accounting principles generally accepted in
the United States.  These differences are described in note 25 of our
consolidated financial statements.





In the
ordinary course of business, we have made a number of estimates and assumptions
relating to the reporting of results of operations and financial position in the
preparation of our financial statements in conformity with accounting principles
generally accepted in Canada.  Actual results could differ
significantly from those estimates under different assumptions and
conditions.




26





There are
several accounting policies that we believe are critical to the presentation of
our consolidated financial statements.  Note 5 - “Significant
accounting policies” to our consolidated financial statements summarizes each of
our significant accounting policies.  Those accounting policies should
be read in conjunction with the other notes to our consolidated financial
statements and management’s discussion and analysis of results of operations and
financial condition described in this “Operating and Financial Review and
Prospects.”





We
believe that the following discussion addresses our most critical accounting
policies, which are those that are most important to the portrayal of our
financial condition and results of operations and require management's most
difficult, subjective and complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently
uncertain.  Set out below are certain of our accounting policies that
we believe are critical to the presentation of our consolidated financial
statements.





Critical
Accounting Policies and Estimates




Our
consolidated financial statements are prepared in accordance with Canadian
generally accepted accounting principles (“Canadian GAAP”).  A
reconciliation of amounts presented in accordance with United States generally
accepted accounting principles (“U.S. GAAP”) is described in Note 25 to the
consolidated financial statements for the year ended December 31,
2009.




Critical
accounting policies and estimates are those policies, assumptions and estimates
most important in the preparation of our consolidated financial statements.
Selection of policies requires Management’s subjective and complex judgment from
many alternatives and estimates involving matters that are inherently uncertain.
Management believes that those policies, assumptions and estimates are
reasonable, based on the information available. Those policies, assumptions and
estimates affect the reported amounts of assets and liabilities at the date of
the financial statements and revenues and expenses during the period
represented.




The
preparation of our financial statements requires estimates and judgments that
affect the reported amounts of assets, liabilities, equity, and revenues and
expenses, and related disclosure of contingencies. Management evaluates the
assumptions and estimates, including those related to sales, inventories and
intangible assets. Management bases its estimates on historical experience and
on various other assumptions believed to be reasonable under the circumstances.
The results of those estimates form the basis for making judgments about the
carrying values of assets and liabilities that are not readily apparent from
other sources. The actual results might differ materially from these estimates
under different assumptions or conditions. The methodologies used and
assumptions selected by management in making these estimates, as well as the
related disclosures, have been reviewed by and discussed with the Audit
Committee of the Board of Directors. Management believes the following critical
accounting policies affect the more significant judgments and estimates used in
the preparation of the consolidated financial statements. Notes 4 and 5 to the
consolidated financial statements for the year ended December 31, 2009 should be
read in conjunction with this Management Discussion and Analysis for a more
comprehensive outline of our significant accounting policies.





Revenue
recognition  We recognize revenue from product sales at the
time the product is shipped or upon delivery, which is when title passes to the
customer, and when all significant contractual obligations have been satisfied
and collection is reasonably assured.




Revenue
from licensing agreements is recognized when persuasive evidence of an
arrangement exists, delivery has occurred or services have been rendered, the
amount is determinable and collectability is reasonably assured. License fees
are deferred and amortized over the life of the relevant
agreements.




InventoriesRaw
materials inventory is valued at the lower of cost and replacement
cost.  Finished goods and work-in-process inventories are valued at
the lower of cost and net realizable value.  Cost is determined using
average cost. Inventory is reviewed on a product-by-product basis, and any
valuation allowances are written off to cost of sales.




27




We
regularly review our inventories for obsolescence and valuation issues. Should
selling prices and demand for our inventory decline, additional provisions for
obsolescence and valuation may be necessary.  In the year ended
December 31, 2009, our inventory valuation allowance amounted to $819,000
(December 31, 2008 - $247,000) of inventory reserves on excess
inventories




For the
year ended December 31, 2009, $nil (2008-$1,424,000) was recognized as a
provision for losses on future inventory purchase commitments.




Stock-based
compensationWe have a stock-based compensation plan for our
employees, officers, directors and consultants and for those of our
affiliates.  We account for employee stock options to include the
recognition of compensation expense for stock options granted to employees,
based on the fair value of the stock options issued.




We
account for all options granted to non-employees under the fair value based
method.  Under this method, options granted to non-employees are
measured at their fair value and are recognized as the options are earned and
the services are provided.




We use
the Black-Scholes option-pricing model to calculate stock option values, which
requires certain assumptions related to the expected life of the option,
forfeiture rate, future stock-price volatility, risk-free interest rate, and
dividend yield. The expected life of an option is based on a maximum up to two
years vesting period of the stock option plan. The basis of future stock-price
volatility is historical volatility of our common shares over the expected life
of the option. The basis of the risk-free interest rate is the zero-coupon
Canadian government bond rate with a term equal to the expected life of the
option. The basis of the dividend yield is on the option’s exercise price and
expected annual dividend rate at the time of grant. We have not paid dividends
in the past, nor have any plans to pay dividends. Changes to any of these
estimates or assumptions, or the use of a different option-pricing model could
produce a different fair value for stock-based compensation expense, which could
have a material effect on the results of operations.




Income taxes
Income taxes are reported using the asset and liability method, whereby future
income tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases, and operating
loss and tax credit carry forwards.  Income taxes are recorded based
on enacted or substantially enacted income tax rates.  A valuation
allowance is recorded for the portion of the future income tax assets for which
the realization of value is not considered to be more likely than
not.




CHANGES
IN ACCOUNTING POLICIES INCLUDING INITIAL ADOPTION





Current
year adoption of new accounting standards





Effective
on January 1, 2009, the Company adopted the recommendation of CICA Handbook
Section 3064, Goodwill and Intangible Assets (Section 3064), Section 3862,
Financial Instruments (Section 3862).





Section
3064 replaced Handbook Section 3062, Goodwill and Intangible Assets, and
Handbook Section 3450, Research and Development. The new standard provides
guidance on the recognition, measurement, presentation and disclosure of
goodwill and intangible assets.  This standard is effective for
interim and annual financial statements relating to fiscal years beginning on or
after October 1, 2008 and was applicable for our first quarter of fiscal
2009.  The adoption of this new standard did not have an impact on our
financial position or results of operations.





Section
3862 was amended which entailed disclosures to include additional disclosure
requirements about fair value measurements of financial instruments and enhanced
liquidity risk disclosure requirements. We adopted these amendments that require
the classification of fair value measurements of financial instruments using a
three level hierarchy reflecting the significance of the inputs used in
estimating these fair value measurements. The fair value hierarchy consists of
the following levels:




i)
            financial
      assets and liabilities measured at estimated fair values determined using
      quoted prices in active markets for identical assets or
      liabilities.




28









ii)
            financial
      assets and liabilities measured at estimated fair values determined using
      inputs other than quoted prices that are observable for the asset or
      liability either directly (as prices) or indirectly (derived from
      prices).


iii)
            financial
      assets and liabilities measured at estimated fair values determined using
      inputs that are not based on observable market
  data.





Classification
of the fair value measurements is determined on the basis of the lowest level
input that is significant to the fair value measurement in its
entirety.





Future
changes in accounting standards





International financial reporting
standardsIn 2006, the Canadian Accounting Standards Board
(“AcSB”) published a new strategic plan that will significantly affect financial
reporting requirements for Canadian companies. The AcSB strategic plan outlines
the convergence of Canadian GAAP with IRFS over an expected five year
transitional period. In February 2008 the AcSB announced that 2011 is the
changeover date for the publicly-listed companies to use IFRS, replacing
Canada’s own GAAP. The date is for interim and annual financial statements
relating to fiscal years beginning on or after January 1, 2011. The Company’s
first year end under IFRS will be December 31, 2011. The transition date for us
will be January 1, 2011 and may require the restatement for comparative purposes
of amounts reported by us for the year ended December 31, 2010.





During
the year ended December 31, 2009, we began to prepare an IFRS conversion plan
and we are now assessing the impact of various IFRS standards on our financial
statements. In 2009 we reviewed potential differences between IFRS and our
current accounting policies.  During 2010 we will be assessing the
financial reporting impact, and analyzing alternative policies, which could be
adopted. Throughout 2010 we will continue to review standards for their
application to our operations, carry out impact assessments, and continue to
monitor and evaluate current IFRS pronouncements.





Although
our impact assessment activities are underway, continued progress is necessary
before we can prudently increase the specificity of the disclosure of the
impacts of IFRS.





Business
combinationsIn January 2009, the CICA issued Handbook Section
1582, Business Combinations, which replaces the existing standards. This section
establishes the standards for the accounting of business combinations, and
states that all assets and liabilities of an acquired business will be recorded
at fair value. Obligations for contingent considerations and contingencies will
also be recorded at fair value at the acquisition date. The standard also states
that acquisition-related costs will be expensed as incurred and that
restructuring charges will be expensed in the periods after the acquisition
date. This standard is effective for business combinations with acquisition
dates on or after January 1, 2011. Earlier adoption is permitted. We are
currently assessing the impact this standard will have on its financial position
and results of operations.





Consolidated financial
statementsIn January 2009, the CICA issued Handbook Section
1601, Consolidated Financial Statements, which replaces the existing standards.
This section establishes the standards for preparing consolidated financial
statements and is effective for the Company on December 1, 2011. Earlier
adoption is permitted. We are currently assessing the impact this standard will
have on its financial position and results of operations.





Non-controlling
interests  In January 2009, the CICA issued Handbook Section
1602, Non-controlling Interests, which establishes standards for the accounting
of non-controlling interests of a subsidiary in the preparation of consolidated
financial statements subsequent to a business combination, and is effective for
the Company on December 1, 2011. We are currently assessing the impact this
standard will have on its financial position and results of
operations.




29





A.           Operating
Results





Basis of
Presentation





Our
December 31, 2009 consolidated financial statements include the assets,
liabilities and operating results of the Company, its wholly-owned subsidiaries,
Forbes Medi-Tech (Research) Inc., Forbes Medi-Tech (USA) Inc., and its 51%
venture interest in Forbes-Fayrefield Ltd. (“Forbes-Fayrefield”).  We
account for our interest in Forbes-Fayrefield using the proportionate
consolidation method.  In May 2008 we ceased operation of
pharmaceutical research and development, to focus on our nutraceutical
operations.   Our management’s discussion and analysis of results
of operations and financial condition described in this “Operating and Financial
Review and Prospects.” focuses on our continuing operations and we present
separately the expenses associated with our pharmaceutical research and
development programs, under “Discontinued Operations”.  Material
inter-company balances and transactions have been eliminated in these
consolidated financial statements.





For the
fiscal year ended December 31, 2009, we reported a net income of $127,000 ($0.03
per share basic and diluted) compared with a net loss of $7,653,000 ($1.57 per
share basic and diluted) for the year ended December 31, 2008, and a net loss of
$11,683,000 ($2.43 per share basic and diluted) for the year ended December 31,
2007.





In May
2008, we announced our decision to discontinue our pharmaceutical research and
development programs and to focus on our nutraceutical operations.  In
accordance with CICA Handbook Section 3475, the activities relating to our
pharmaceutical research and development have been presented as discontinued
operations in the consolidated financial statements ended December 31, 2009 and
in the following analysis. Results for the year ended December 31, 2008 and 2007
have also been reclassified to reflect this treatment.





For the
fiscal year ended December 31, 2009, we reported a net income from continuing
operations of $127,000 ($0.03 per share basic and diluted) compared with a net
loss from continuing operations of $7,190,000 ($1.48 per share basic and
diluted) for the year ended December 31, 2008, and a net loss from continuing
operations of $9,242,000 ($1.92 per share basic and diluted) for the year ended
December 31, 2007.





For the
year ended December 31, 2009 we reported a net loss from continuing operations,
before other income / expenses of $3,385,000. The Company has not, since
inception, reported year-end profitable operating earnings.  The
Company has regularly reported year end losses. We anticipate that we will
continue to incur significant losses.  At December 31, 2009 our
accumulated deficit was $10,336,000.





Results
of Continuing Operations





Selected
Annual Information





Summary:
                (thousands
      of $ except per share values and number of shares)
              
              Year
      ended
                December
      31, 2009
              
              
              Year
      ended
                December
      31, 2008
              
              
              Year
      ended
                December
      31, 2007Phytosterol
      revenues
              
              $
              4,626
              
              
              $
              7,844
              
              
              $
              8,904Cost
      of sales
              
              
              (4,230
              )
              
              
              (6,713
              )
              
              
              (8,664
              )Change
      in inventory and purchase commitment
                allowances
              
              
              852
              
              
              
              (830
              )
              
              
              (491
              )1,248
              
              
              
              301
              
              
              
              (251
              )Expenses
              
              
              (4,633
              )
              
              
              (7,643
              )
              
              
              (9,847
              )Other
      income
              
              
              4,277
              
              
              
              169
              
              
              
              364Income
      / (loss) from continuing
                operations
              
              
              892
              
              
              
              (7,173
              )
              
              
              (9,734
              )Income
      tax (expense) /  recovery
              
              
              (765
              )
              
              
              (17
              )
              
              
              492Net
      income / (loss) from continuing
                operations
              
              
              127
              
              
              
              (7,190
              )
              
              
              (9,242
              )Income
      / (loss) from discontinued operations
              
              
              ―
              
              
              
              (463
              )
              
              
              (2,441
              )
  30
   Summary:
                (thousands
      of $ except per share values and number of shares)
              
              
              Year
      ended
                December
      31, 2009
              
              
              
              Year
      ended
                December
      31, 2008
              
              
              
              Year
      ended
                December
      31, 2007Net
      income / (loss) for the period
              
              $
              127
              
              
              $
              (7,653
              )
              
              $
              (11,683
              )Weighted
      average number of shares, basic
              
              
              4,969,813
              
              
              
              4,865,131
              
              
              
              4,800,923Basic
      income / (loss) per share from continuing operations
              
              $
              0.03
              
              
              $
              (1.48
              )
              
              $
              (1.92
              )Basic
      loss per share from discontinued operations
              
              $
              ―
              
              
              $
              (0.09
              )
              
              $
              (0.51
              )Diluted
      income / (loss) per share
              
              $
              0.03
              
              
              $
              (1.57
              )
              
              $
              (2.43
              )Weighted
      average number of shares, diluted
              
              
              5,032,539
              
              
              
              4,865,131
              
              
              
              4,800,923Diluted
      income / (loss) per share from continuing operations
              
              $
              0.03
              
              
              $
              (1.48
              )
              
              $
              (1.92
              )Diluted
      loss per share from discontinued operations
              
              
              ―
              
              
              $
              (0.09
              )
              
              $
              (0.51
              )Diluted
      income / (loss) per share
              
              $
              0.03
              
              
              $
              (1.57
              )
              
              $
              (2.43
              )








ASSETS:Current
      assets
            
            $
            4,571
            
            
            $
            9,058
            
            
            $
            12,052Property
      plant and equipment
            
            
            103
            
            
            
            140
            
            
            
            387Intangibles
      and other assets
            
            
            23
            
            
            
            18
            
            
            
            512Total
      assets
            
            
            4,697
            
            
            
            9,216
            
            
            
            12,951LIABILITIES:Current
      liabilities
            
            $
            612
            
            
            $
            2,671
            
            
            $
            2,379Convertible
      debenture
            
            
            –
            
            
            
            2,856
            
            
            
            –Long
      term liabilities
            
            
            1,657
            
            
            
            1,005
            
            
            
            940Equity
      component of subsidiary’s convertible debenture
            
            
            –
            
            
            
            399
            
            
            
            –SHAREHOLDERS
      EQUITY:Share
      capital
            
            $
            2,721
            
            
            $
            2,721
            
            
            $
            101,027Contributed
      Surplus
            
            
            10,043
            
            
            
            10,027
            
            
            
            9,875Deficit
            
            
            (10,336
            )
            
            
            (10,462
            )
            
            
            (101,270
            )





Net
income for the year ended December 31, 2009 resulted primarily from other
income, the majority of which resulted from the one time gain related to the
completion of the Offering and conversion of the convertible
debenture.  These events resulted in our recognition of a gain of
approximately $4,148,000.  In addition, the reversal of the provision
for losses on purchase commitments amounting to $1,424,000 in the second quarter
of 2009 had a one-time positive impact on net income.





Revenues
/ Cost of Sales


Revenues
from continuing operations for the year ended December 31, 2009 include our
proportionate share of the revenue generated by our joint venture,
Forbes-Fayrefield.


31





Summary:
              (thousands
      of $)
            
            Year
      ended
              December
      31, 2009
            
            
            Year
      ended
              December
      31, 2008
            
            
            Year
      ended
              December
      31, 2007Sales-phytosterol
      products
            
            $
            4,264
            
            
            $
            7,108
            
            
            $
            7,717Sales-finished
      goods
            
            
            360
            
            
            
            732
            
            
            
            1,130Licensing
            
            
            2
            
            
            
            4
            
            
            
            57Phytosterol
      revenues
            
            
            4,626
            
            
            
            7,844
            
            
            
            8,904Cost
      of sales
            
            
            4,230
            
            
            
            6,713
            
            
            
            8,664Inventory
      and purchase commitment  allowances
            
            
            (852
            )
            
            
            830
            
            
            
            491$
            1,248
            
            
            $
            301
            
            
            $
            (251
            )





Phytosterol revenues include
direct sales of phytosterol products (branded – ReducolTM, non-branded sterol
esters and sterols), sales of finished products containing ReducolTM and license
fees received.  Phytosterol revenues for the year ended December 31,
2009 totaled $4,626,000 compared with $7,844,000 for the year ended December 31,
2008.   The decreases are primarily due to re-alignment of
inventories by one of our major customers in the first six months of 2009. This
customer returned to its prior purchasing patterns in the second half of
2009.  Also, our sales to our European customers have shown a
decrease, primarily due to the effect of the economic downturn. In addition,
sales by Forbes-Fayrefield of finished products to key European markets also
decreased, in part as a result of a switch from revenue to commission based
sales. As a result of these events this year’s revenues were significantly below
our prior year’s level.





We are in
negotiation with potential customers internationally to expand our customer
base.





Phytosterol
revenues include direct sales of phytosterol products (branded – ReducolTM,
non-branded sterol esters and sterols), sales of finished products containing
ReducolTM and amortization of previously received license fees in accordance with
our revenue recognition policies.  Phytosterol revenues for the year
ended December 31, 2008 totaled $7,844,000 compared with $8,904,000 for the year
ended December 31, 2007.   This decrease was due to a decrease in
our sales of certain sterols and in sales by Forbes-Fayrefield of finished
products, such as margarine spread, spoonable yogurt, and yogurt drinks offset
by an increase in sales of ReducolTM.





Concentration
of sales and segmented disclosure


In the
year ended December 31, 2009, the majority of our revenue was generated from
four customers (December 31, 2008 – four customers, December 31, 2007 – four
customers).  Customer A accounted for 44% (2008 – 47%, 2007 – 40%),
Customer B accounted for 15% (2008 – 11%, 2007 – 10%), Customer C accounted for
9% (2008 – 20%, 2007 – 15%), and Customer D accounted for 8% (2008 – 9%, 2007 –
13%) of revenue. For 2009, 51% (2008 – 51%, 2007 – 49%) of sales are recorded in
the USA, 36% (2008 – 48%, 2007 – 50%) of sales are recorded in Europe and the
balance in other international markets.





Cost of Sales (“Cost of
Sales”) Cost of Sales for the year ended December 31, 2009 totaled $
4,230,000 on phytosterol revenues of $4,624,000, or 91% of phytosterol revenues,
for the year ended December 31, 2008 totaled $6,713,000 on phytosterol revenues
of $7,840,000, or 86% of phytosterol revenues.  The margins decreased
primarily due to selling higher cost product offset by favorable exchange
rates.





Cost of
Sales for the year ended December 31, 2008 totaled $ 6,713,000 on phytosterol
revenues of $7,840,000, or 86% of phytosterol revenues, for the year ended
December 31, 2007 totaled $8,664,000 on phytosterol revenues of $8,847,000, or
98% of phytosterol revenues.  The margins increased primarily due to
sale of excess inventories at reduced prices in 2007 and less favorable foreign
exchange rates in 2008.





Inventory and purchase commitment
allowances for the year ended December 31, 2009, amounted to $(852,000).
(December 31, 2008 - $830,000, December 31, 2007 - $491,000).  This
amount is attributable to a reversal of $1,424,000 (December 31, 2008 -
$1,033,000 recognition, December 31, 2007 - $391,000 recognition) of provision
for losses on future purchase commitments offset by recognition $572,000
(December 31, 2008 - $203,000 reversal, December 31, 2007 - $100,000
recognition) of inventory valuation reserves on excess inventories.





In the
second quarter of 2009, we renegotiated a supply agreement which eliminated our
requirement to purchase minimum inventory quantities or incur a take or pay
penalty.




32





We
regularly review inventory quantities on hand and record an estimated provision
for excess inventory based primarily on our historical sales and expectations
for future use. To the extent we have excess inventory, we recognize a reserve
for such excess inventories based on the expected realizable value of inventory.
Actual demand and market conditions may be different from those projected by us.
This could have a material effect on our operating results and financial
position. If we were to make different judgments or utilize different estimates,
the amount and timing of our revaluation of inventories could be materially
different.




Excess
inventory remains saleable. Sales of excess inventory may have the effect of
increasing the gross profit margin beyond that which would otherwise occur,
because of previous write-downs.





Operating
Expenses





Summary:
              (thousands
      of $)
            
            Year
      ended
              December
      31, 2009
            
            
            Year
      ended
              December
      31, 2008
            
            
            Year
      ended
              December
      31, 2007General
      and administrative
            
            $
            3,043
            
            
            $
            5,282
            
            
            $
            4,875Nutraceutical
      research, development and support
            
            
            734
            
            
            
            1,213
            
            
            
            1,775Marketing,
      sales & product development
            
            
            682
            
            
            
            1,528
            
            
            
            1,606Depreciation/amortization
            
            
            37
            
            
            
            76
            
            
            
            160Foreign
      exchange losses / (gains)
            
            
            137
            
            
            
            (456
            )
            
            
            1,431Total
      operating expenses
            
            $
            4,633
            
            
            $
            7,643
            
            
            $
            9,847







General and
administrative  General and administrative expenditures
(“G&A”) for fiscal year 2009 totaled $3,043,000, compared with $5,282,000 in
fiscal year 2008 and with $4,875,000 in fiscal year 2007.  By type of
costs incurred, G&A for 2009 consists of professional services - $404,000
(2008 - $1,167,000, 2007 - $845,000); salaries and benefits - $1,220,000 (2008 -
$1,605,000, 2007 - $1,745,000); travel - $121,000 (2008 - $233,000, 2007 -
$265,000); occupancy costs - $327,000 (2008 - $310,000, 2007 - $298,000); and
operations - $959,000 (2008 - $1,875,000, 2007 - $1,303,000).  The
allocation of stock based compensation to G&A was $11,000 (2008 - $92,000,
2007 - $419,000).  In 2009, the decrease in G&A is mainly
attributable to a decrease in financing and professional fees which in 2008 were
incurred in connection with the Special General Meeting, the NASDAQ hearing, and
the non dilutive financing, a decrease in wages mainly attributable to a
decrease in staff, a decrease in insurance expense mainly attributable to
insurance expense which in 2008 was incurred in connection with the non dilutive
financing, a decrease in interest accretion expense associated with the
convertible debenture, a decrease in travel expenses and a decrease in other
operating expenses mainly attributable to cost savings measures.  In
2008, the increase in G&A from 2007 was primarily attributable to an
increase in professional fees incurred to complete the Plans of Arrangement and
Reorganization, and an increase in professional fees and filing fees associated
with the NASDAQ hearing.  Also, a substantial portion of the increase
in fiscal 2008 was due to interest accretion associated with the convertible
debenture.




We
continue to reduce operating expenses wherever possible.




Related party
transactions Nancy Glaister, the former Corporate Secretary
of the Company, is a partner of the law firm Cawkell Brodie Glaister LLP,
Business Lawyers, which also provided legal services to the
Company.  For the  period ending September 29, 2009 (date of
resignation), Cawkell Brodie Glaister LLP billed the Company $63,000 (12 months
ended December 31, 2008 - $122,000; 12 months ended December 31, 2007 -$204,000)
excluding GST, PST and disbursements, for legal services.




Nutraceutical research, development
and support   Our Nutraceutical research, development and
support expenses for the year ended December 31, 2009, totaled $734,000 compared
with $1,213,000 for the year ended December 31, 2008 and $1,775,000 for the year
ended December 31, 2007.  In 2009, nutraceutical research, development
and support expenditures prior to the allocation of stock based compensation
decreased mainly due to severance costs associated with our restructuring in
May, 2008, and a decrease in regulatory and patent costs.  In 2008,
nutraceutical research, development and support expenditures prior to the
allocation of stock based compensation decreased from 2007 primarily due to
reduced patent costs and clinical work relating to functional foods offset by
severance costs.




33




Marketing, sales & product
development (“Marketing”)totaled $682,000 for 2009 compared with
$1,528,000 incurred in 2008 and $1,606,000 in 2007.  The decrease is
mainly attributable to severance costs incurred in 2008, decrease in wages, and
a reduction in promotional material, product samples, travel, and IP insurance
expense. The decrease in 2008 from 2007 is attributable to a reduction in
promotional material, product samples and travel costs offset by severance
costs.




Foreign exchange lossestotaled $137,000 for the year ended December 31, 2009 compared with
$456,000 in gains in year ended December 31, 2008.  Of the foreign
exchange losses for the year ended December 31, 2009, $141,000 (2008 - $529,000
exchange gains) is attributable to unrealized foreign exchange losses and $4,000
relates to realized exchange gains (2008 - $73,000 exchange
losses).




Foreign
exchange gains totaled $456,000 for the year ended December 31, 2008 compared
with $1,431,000 in losses in year ended December 31, 2007.  Of the
foreign exchange gains for the year ended December 31, 2008, $529,000 (2007 -
$1,170,000 exchange losses) is attributable to unrealized foreign exchange gains
and $73,000 relates to realized exchange losses (2007 - $261,000 exchange
losses).




The
unrealized foreign exchange losses result primarily from the translation of
non-Canadian dollar denominated assets and liabilities into Canadian dollars and
realized foreign exchange losses are recognized on settling of non-Canadian
dollar transactions at different rates than those originally
booked.




Stock-based compensation
Stock-based compensation expense totaled $16,000 for the year ended December 31,
2009 compared with $152,000 for 2008 and with $958,000 for 2007.  Of
the $16,000 of stock-based compensation expense recorded in 2009, $16,000 (2008
- $150,000, 2007 - $840,000) relates to employee and an insignificant amount
(2008 - $2,000, 2007 - $118,000) to non-employee option grants. The fluctuations
in these values are dependent upon the Company’s stock prices as listed on such
stock exchange or over the counter market at the grant or valuation date, the
stock’s volatility for the option life or vesting term, and the number of
options granted in a given period.




For the
years December 31, 2009, 2008 and 2007, this compensation expense was allocated
to nutraceutical research, development and support expenses, general and
administrative expenses, and marketing, sales and product development expenses
on the same basis as for the allocations of cash compensation as summarized
below:





Stock based
      compensation
              (thousands
      of $)
            
            Year
      ended
              December
      31, 2009
            
            
            Year
      ended
              December
      31, 2008
            
            
            Year
      ended
              December
      31, 2007General
      and administrative
            
            $
            11
            
            
            $
            92
            
            
            $
            419Marketing,
      sales and product development
            
            
            3
            
            
            
            31
            
            
            
            189Nutraceutical
      research, development and support
            
            
            2
            
            
            
            29
            
            
            
            350$
            16
            
            
            $
            152
            
            
            $
            958





Discontinued
Operations





The
following tables reflect our loss from discontinued operations relating to our
pharmaceutical research and development, for the years ended December 31, 2009,
2008 and 2007.


34








Discontinued operations
              (thousands
      of $)
            
            Year
      ended
              December
      31, 2009
            
            
            Year
      ended
              December
      31, 2008
            
            
            Year
      ended
              December
      31, 2007Discontinued
      Operations – Pharmaceuticals
              Research
      & DevelopmentLoss
      from discontinued operations
            
            $
            ―
            
            
            $
            (1,231
            )
            
            $
            (2,441
            )Gain
      on disposal of discontinued operations
            
            
            ―
            
            
            
            768
            
            
            
            ―Loss
      from discontinued operations
            
            $
            ―
            
            
            $
            (463
            )
            
            $
            (2,441
            )







In May
2008, we announced our decision to discontinue our pharmaceutical research and
development programs and to focus on our nutraceutical operations.  In
August 2008, we completed an agreement for the sale of our pharmaceutical assets
and business unit based in San Diego, California to Transition Therapeutics Inc.
(“Transition”).  Terms of the sale included an upfront payment of
$1,054,000 (US $1,000,000) in cash paid at closing to us with potential future
payments of up to US $6,000,000 payable in cash or Transition shares, based upon
Transition reaching certain developmental and regulatory
milestones.  We originally acquired these pharmaceutical assets in
October 2006 as a part of our acquisition of TheraPei.  Of the amounts
received from the sale transaction, we will pay 20 percent to the former
TheraPei shareholders, in cash and common shares of Forbes.





Quarterly
Financial Information





2009
            
            
            2008(thousands of  $
      except per share amounts)
              (unaudited)
            
            
            Q4
            
            
            
            Q3
            
            
            
            Q2
            
            
            
            Q1
            
            
            
            Q4
            
            
            
            Q3
            
            
            
            Q2
            
            
            
            Q1Revenues
            
            $
            1,604
            
            
            $
            1,279
            
            
            $
            1,018
            
            
            $
            725
            
            
            $
            1,196
            
            
            $
            1,927
            
            
            $
            2,691
            
            
            $
            2,030(Loss)
      / income from continuing operations
            
            
            (1,596
            )
            
            
            (1,379
            )
            
            
            113
            
            
            
            2,989
            
            
            
            (2,316
            )
            
            
            (1,430
            )
            
            
            (2,347
            )
            
            
            (1,097
            )(Loss)
      / income from   discontinued operations
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (5
            )
            
            
            785
            
            
            
            (683
            )
            
            
            (559
            )Net
      income / (loss) for period
            
            $
            (1,596
            )
            
            $
            (1,379
            )
            
            $
            113
            
            
            $
            2,989
            
            
            $
            (2,321
            )
            
            $
            (645
            )
            
            $
            (3,030
            )
            
            $
            (1,656
            )Basic
      (loss) / income per share from continuing operations
            
            $
            (0.31
            )
            
            $
            (0.28
            )
            
            $
            0.02
            
            
            $
            0.60
            
            
            $
            (0.48
            )
            
            $
            (0.29
            )
            
            $
            (0.48
            )
            
            $
            (0.23
            )Basic
      income / (loss) per share from  discontinued
      operations
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            0.16
            
            
            
            (0.14
            )
            
            
            (0.11
            )Basic
      net (loss) / income per share
            
            $
            (0.31
            )
            
            $
            (0.28
            )
            
            $
            0.02
            
            
            $
            0.60
            
            
            $
            (0.48
            )
            
            $
            (0.13
            )
            
            $
            (0.62
            )
            
            $
            (0.34
            )Diluted
      (loss) / income per share from continuing operations
            
            $
            (0.31
            )
            
            $
            (0.28
            )
            
            $
            0.02
            
            
            $
            0.60
            
            
            $
            (0.48
            )
            
            $
            (0.29
            )
            
            $
            (0.48
            )
            
            $
            (0.23
            )Diluted
      income / (loss) per share from  discontinued
      operations
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            0.16
            
            
            
            (0.14
            )
            
            
            (0.11
            )Diluted
      net (loss) / income per share
            
            $
            (0.31
            )
            
            $
            (0.28
            )
            
            $
            0.02
            
            
            $
            0.60
            
            
            $
            (0.48
            )
            
            $
            (0.13
            )
            
            $
            (0.62
            )
            
            $
            (0.34
            )





Revenues
over the most recent eight quarters include primarily the revenues from sales of
our nutraceutical product, ReducolTM, and since Q2/2006, revenue also includes
our proportionate share of the Forbes-Fayrefield revenue from the sale of
finished goods containing ReducolTM. The decreases in revenues from Q4/2008
through Q2/2009 are primarily due to re-alignment of inventories by one of our
major customers.. This customer returned to its prior purchasing patterns
starting in Q3/2009.  Also, our sales to our European customers have
shown a decrease, primarily due to the effect of the economic downturn. As a
result of these events this year’s revenues were significantly below our prior
year’s level.





The
income / (loss) from continuing operations over the most recent eight quarters
has been affected largely by the following significant events.





In
Q1/2009 we realized a dilution gain of $4,148,000, resulting from the completion
of the Plan of Reorganization.




35





Also
included in our operating results are write-downs and reversals of write-downs
attributable to the net realizable value of inventory as
follows:   Q1/2008 $193,000 write-down, Q2/2008 $164,000 reversal
of write-down, Q3/2008 $138,000 write-down, Q4/2008 $370,000 reversal of
write-down, Q1/2009 $6,000 reversal of write-down, Q2/2009 $532,000 write-down,
Q3/2009 $389,000 write-down, and Q4/2009 $343,000 reversal of write-down. In
addition, included in the operating results are provisions and reversals of
provisions for losses attributable to future inventory purchase commitments as
follows:   Q1/2008 $266,000 reversal of provision, Q2/2008
$119,000 increase of provision, Q3/2008 $44,000 increase of provision, Q4/2008
$1,136,000 increase of provision, Q1/2009 $nil, Q2/2009 $1,424,000 reversal of
provision, Q3/2009 $nil, and Q4/2009 $nil.





In
addition, we realized foreign exchange gains and losses as
follows:  Q1/2008 - $318,000 gain, Q2/2008 - $64,000 loss, Q3/2008 -
$28,000 loss, Q4/2008 - $127,000 gain, Q1/2009 - $8,000 gain, Q2/2009 - $23,000
loss, Q3/2009 - $73,000 loss, and Q4/2009 $49,000 loss.





Also
included in the quarterly operating results is the interest accretion expense as
follows: Q2/2008 $54,000, Q3/2008 $97,000, Q4/2008 $144,000 and Q1/2009
$104,000.





In
Q2/2008 we incurred $500,000 of costs, primarily severance pay, associated with
our corporate restructuring announced in May 2008. In addition in Q2/2008, we
incurred $470,000 of costs associated with securing our non dilutive convertible
debenture financing which closed in May 2008.





Loan
Commitments, Capital Lease and Guarantees





Forbes-Fayrefield
has a € 50,000 line of credit to support its operations.  Security for
the line of credit is currently by way of a debenture registered over all of the
assets of Forbes-Fayrefield. No guarantees have currently been provided by us,
or by Fayrefield. The line of credit bears interest at a floating rate of the
Royal Bank of Scotland Currency Lending Rate for Euros (currently 1.0%) plus
2.0% per annum, calculated daily. Any funds drawn under this facility are
repayable on demand, and the facility may be terminated at any time by the
Lender.  As at December 31, 2009, € nil was drawn under the facility,
and Forbes-Fayrefield was in compliance with all covenants with the
Lender.





We do not
have any loan commitments, capital leases or guarantees (See “Plan of
Reorganization”).





B.           Liquidity
and Capital Resources




Since
inception, we have financed our operations and capital expenditures primarily
through debt and equity offerings, sales revenues (since 2002), proceeds from
disposition of assets, and, to a lesser extent, license revenues and government
grants.




Our net
cash and cash equivalents as of December 31, 2009 totaled $1,329,000 compared
with $1,377,000 as at December 31, 2008.  We had working capital of
$3,960,000 at December 31, 2009 (December 31, 2008 – working capital
$3,531,000).




Cash used
in continuing operating activities was $837,000 in fiscal 2009, compared to
$7,934,000 in fiscal 2008 and $10,101,000 in fiscal 2007. Net cash used in
continuing operations for 2009 was primarily due to the net income adjustment
for the gain on dilution of interest in subsidiary offset by a decrease in
non-cash operating assets which includes a decrease in inventories, a decrease
in accounts receivable, and an increase in tax provision offset by a decrease in
accounts payable.  Net cash used in continuing operations for 2008 was
primarily a result of the net loss of $7,653,000 for the period, adjusted for
non-cash items and an increase in non-cash operating items of $120,000,
primarily relating to increases in inventories and accounts receivable offset by
a decrease in life insurance cash surrender value and an increase in accounts
payable and accrued liabilities.  Net cash used in continuing
operations for 2007 was primarily a result of the net loss of $11,683,000 for
the period adjusted for non-cash items and increases in non-cash operating items
of $291,000, primarily relating to a decrease in accounts payable and accrued
liabilities offset by a decrease in inventories.




36





Investing
activities in the year ended December 31, 2009 realized $789,000, which is
attributable to the disposition of our investment in Deans Knight Income
Corporation.  Cash realized from investing activities in year ended
December 31, 2008 was $1,116,000 resulting primarily from the proceeds of
$1,017,000 realized on the disposal of the discontinued pharmaceutical
operations. Cash realized from investing activities in the year ended December
31, 2007 was $41,000 relating to proceeds from long-term note receivable offset
by the acquisition of capital assets.




In fiscal
2009, financing activities were $nil, compared with $2,960,000 in 2008 and
$7,000 in 2007. In 2008, funds generated from financing activities resulted from
the proceeds from the convertible debenture. In 2007, funds generated from
financing activities resulted from the exercise of options and
warrants.




The going
concern basis of presentation assumes that we will continue in operation for the
foreseeable future and will be able to realize our assets and discharge our
liabilities and commitments in the normal course of business.  Certain
conditions, discussed below, currently exist which raise substantial doubt about
the validity of this assumption.




We have
sustained continuing operating losses since our formation and at December 31,
2009 had cash of $1,329,000.  Management is of the view that there are
sufficient financial resources to finance operations through the second quarter
of 2010.  This view is based on a number of factors and assumptions
and includes the assumption that our expenditures will not exceed those
currently planned, and that our revenues will meet or exceed our
expectations.




Our
future operations are completely dependent upon our ability to complete a
strategic transaction such as a merger, acquisition, sale of business or other
suitable transaction, and/or our ability to secure additional
funds.  The market for any of these activities for companies such as
ours has always been challenging.  The outcome of these matters cannot
be predicted at this time. Any possible strategic transactions to define our
future may require shareholder approval. If we are unable to close on a
strategic transaction before we exhaust our available financial resources, then
we may be unable to continue operations as a going concern and will have to
consider winding up, dissolution or liquidation.




We have
no material off-balance sheet arrangements. We have no material trading
activities involving non-exchange traded contracts accounted for at fair value.
We have no material relationships and transaction terms that would not be
available from clearly independent third parties on an arm’s length
basis.





C.           Research
and Development, Patent and Licenses, etc.





During
the past three financial years, we have been involved in both pharmaceutical and
nutraceutical research and development.   In 2008, we ceased all
pharmaceutical activities and sold our former pharmaceutical business unit and
assets based in San Diego, California.   (See Item 4 - Information on the
Company” – A. History and Development of the Company – Dispositions Since
January 1, 2007.)  For information regarding the amount spent during
the last three financial years on research and development for both our
continuing and discontinued operations,seeItem 5 - Operating and
Financial Review and Prospects.




D.           Trend
Information





Since our
latest financial year, there have been no material changes in any trend with
respect to our sales, inventory, or selling prices.  Our cost of
products is scheduled to decrease slightly this year.   Our sales
fluctuate depending on customer requirements, and there can be no assurance that
sales revenue in 2010 will meet or exceed our revenue for 2009, and such revenue
could be less.   We are of the view that our capital resources
will be sufficient to finance operations through the second quarter of
2010.  This view is based on a number of factors and
assumptions.  (See Item 5
- Operating and Financial Review and Prospects - Liquidity and Capital
Resources.)





E.           Off-balance
Sheet Arrangements





We have
no material off-balance sheet arrangements. We have no material trading
activities involving non-exchange traded contracts accounted for at fair value.
We have no material relationships and transaction terms that would not be
available from clearly independent third parties on an arm’s length
basis.




37








F.           Tabular
Disclosure of Contractual Obligations





Payments
      due by periodAs
      at December 31, 2009
              (thousands
      of $)
            
            Total
            
            
            Less
      than
              1
      year
            
            
            1
      – 3 years
            
            
            3
      – 5 years
            
            
            More
      than
              5
      yearsOperating
      lease obligations (i)
            
            $
            408
            
            
            $
            315
            
            
            $
            52
            
            
            $
            41
            
            
            
            –Purchase
      obligation (ii)
            
            
            1,256
            
            
            
            697
            
            
            
            474
            
            
            
            85
            
            
            
            –Total
            
            $
            1,664
            
            
            $
            1,012
            
            
            $
            526
            
            
            $
            126
            
            
            
            –


(i)
            Operating
      leases comprise our long-term leases of rental properties, photocopiers,
      and postage meter.


(ii)
            Purchase
      obligations reflect our obligations under our inventory supply
      agreement





For a
discussion of our commitments, contractual obligations and contingencies, see
Note 16 to our consolidated financial statements and Item 5 - Operating and Financial
Review and Prospects - Liquidity and Capital Resources.





G.           Safe
Harbor





See Introduction - Forward-Looking Statementsabove.





ITEM 6      Directors,
Senior Management and Employees





A.           Directors
and Senior Management





The
following table sets forth the name, age, and the positions and offices held by
our directors and senior management with us as of March 30, 2010, their
respective business experience, functions and areas of experience in the
Company, and the period during which each director or executive officer has
served as such.  Each director of our Company holds office until the
next annual general meeting or until his or her successor is duly elected or
appointed, unless his or her office is earlier vacated by resignation, death,
removal or otherwise, or he or she becomes disqualified to act as a director.
Each executive officer holds office at the discretion of the Board of
Directors.






38





Name, Age, and Office Held with
      the Company(1)
            Business Experience, Functions
      and Areas of Experience in the Company(1)
            Period
      ServedCharles
      A. Butt, B.Comm.
              59
              Director,
      President and Chief Executive Officer
            President
      of the Company since May 2001 and Chief Executive Officer since March
      2002.  Previously, he was Executive Vice President & Chief
      Operating Officer, and Senior Vice President, Commercial Operations of the
      Company.
            Director
      since September 9, 1999
              President
      since May, 2001
              Chief
      Executive Officer since March, 2002Joe
      Dunne, B.Sc., Ph.D. (2) (3)
      (4)
              67
              Director
            Dr.
      Dunne is an independent consultant to the food
      industry.  Director of Westgate Biologicals Ltd., a start-up
      company in the Health Sciences area, 1999 to present; Chairman of the
      Board and Chief Executive Officer of Westgate Biological Ltd. June 1999 to
      December 2003; President, Cultor Food Science 1997 to 1999; President of
      Quest (Food) International NA 1993 to 1997.   Joe Dunne is
      an independent director of the Company.
            Director
      since December 13, 2000Nitin
      Kaushal, B.Sc., CA  (2)  (3)
      (4)
              44
              Director
            Managing
      Director Desjardins Securities July 2005 to March 2010, Institutional
      Sales Orion Securities January 2005 to July 2005, Managing Director,
      McFarlane Gordon/ Vengate Capital, a Life Sciences and Healthcare
      Investment Banking & Advisory Firm based in Toronto, July 2001 to
      January 2005; Managing Director, HSBC Securities from June 1997 to July
      2001.  Nitin Kaushal is an independent director of the
      Company.
            Director
      since September 15, 2003Greg
      Anderson, B.A., CA (2) (3)
      (4)
              63
              Director
            Retired
      as Vice-President, Human Resources for Janssen-Ortho Inc. in December
      2006, having completed a 31-year career with the Johnson & Johnson
      Corporation.  Director for 26 years with three Johnson &
      Johnson affiliate companies, namely Ortho Pharmaceutical (Canada) Ltd.,
      Ortho-McNeil Inc., and finally Janssen-Ortho Inc.  Greg Anderson
      is an independent director of the Company.
            Director
      since May 21, 2008Laura
      Wessman, B.A.Sc, B.Sc, M.B.A.
              43
              Senior
      Vice President, Operations
            Senior
      Vice President, Operations, January 2006 to present; Senior Vice
      President, Corporate Development of the Company January 2004 to January
      2006; Vice President, Business Development of the Company October 2002 to
      January 2004; Marketing Manager December 2000 to October 2002; Plant
      Manger, Cominco Engineering Services Ltd., May 1996 to November
      1999.
            Senior
      VP, Operations since January 2006David
      Goold, CA
              55
              Chief
      Financial Officer
            Chief
      Financial Officer of the Company October 2004 to present; Vice President,
      Finance and Chief Financial Officer of B.C. Research Inc. and Vizon SciTec
      Inc. (a related group of companies) 1998 to 2004.
            CFO
      since October 2004David
      Stewart
              69
              Vice
      President, Regulatory Affairs
            Vice-President,
      Regulatory Affairs of the Company, 1997 to present; Regulatory Affairs
      Associate, Biovail Corporation International, 1996 to
1997.
            Vice
      President, Regulatory Affairs since May
1997


1  The
information as  to the age and business experience is not within our
knowledge and has been furnished by the respective Directors and Officers
individually.


2  Member
of Audit Committee.


3  Member
of Compensation Committee.


4Member of Nomination and Corporate Governance Committee.





Charles A. Butt – Director, President and Chief
Executive Officer  Mr. Butt has been a director of the Company
since September 1999, the President of the Company since May 2001 and the CEO
since March 2002. He was formerly the Executive Vice President and Chief
Operating Officer and the Senior Vice President, Commercial Operations of the
Company.  Mr. Butt has extensive international and North American
experience in business management, marketing and sales in the healthcare
industry. Prior to joining Forbes as Senior Vice President, Mr. Butt served as
President of The Charson Group Inc., a healthcare consulting company,
specializing in strategic planning and new product introductions, based in
Toronto. Before moving into consulting, Mr. Butt headed up the Consumer Health
Products Division for Lederle Laboratories (Canada), where he was responsible
for the initiation and development of the Consumer Health Products Group. Mr.
Butt has also worked in a variety of marketing and sales roles at Shulton Inc.
in Europe, Africa and the Middle East as well as Colgate-Palmolive
(UK).  Educated in the UK, Mr. Butt holds a HND (B Comm.) Business
Studies from Bristol Polytechnic (School of Business), a Post Graduate Diploma
International Marketing Management from North East London Polytechnic (Graduate
School), and he attended the Executive Business Administration Program at
Queen’s University, School of Business, Kingston, Ontario.




39





Dr. Joe Dunne – Chairman of the Board and
Director  Dr. Dunne has been a director of the Company since
November 2000 and Chairman of the Board since May, 2008.   He is
currently an independent consultant to the food industry.  Dr. Dunne
was Chairman of the Board and CEO of Westgate Biological Ltd., a startup company
in the Health Sciences area from June, 1999 to December 2003.  Dr.
Dunne has had a distinguished career in the multi-billion dollar food ingredient
industry. During his career, Dr. Dunne served as the President of Cultor Food
Science from 1997 to 1999 with responsibility for global manufacturing and
research & development as well as a worldwide network of sales offices and
distributors. As President of Quest (Food) International from 1993 to 1997, Dr.
Dunne managed the company’s Flavor and Food Ingredient activities in the USA,
Canada and Mexico.  He is a director of Westgate Biologicals Ltd.
Since December, 2008, he has been Chairman of the Board of "Food for Health
Ireland", a largely government funded research and development consortium based
at University College Cork, Ireland.  Educated in Ireland, Dr. Dunne
holds a B.Sc. and Ph.D. in Biochemistry from University College, Dublin and was
a Postdoctoral Fellow at the University of California in San Diego and at the
Max Planck Institute in Dortmund, West Germany.  As an independent
director and Chairman of the Board, Joe Dunne supervises management, ensures the
mandate of the Board is carried out, helps to ensure compliance with corporate
governance policies and standards, and serves as a liaison between the Company’s
executive management and the Board.





Nitin Kaushal– Director  Mr.
Kaushal has been a director of the Company since September 2003 and is a member
of the Audit Committee of the Board . He was employed with Desjardins Securities
as Managing Director from July 2005 to March 2010 and was Institutional
Salesperson of Orion Securities Inc. from January 2005 to July 2005. Mr. Kaushal
was Managing Director of McFarlane Gordon / Vengate Capital, a Life Sciences and
healthcare investment banking and advisory firm based in Toronto from July 2001
to January 2005 and Managing Director, HSBC Securities from June 1997 to July
2001.  Mr. Kaushal is also a director of Genizon Biosciences, Victhom
Human Bionics and DRM Ventures Inc.  Mr. Kaushal holds a Bachelor of
Science in Chemistry from the University of Toronto and is member of the
Canadian Institute of Chartered Accountants.  As an independent
director, Nitin Kaushal supervises management and helps to ensure compliance
with corporate governance policies and standards.





Greg Anderson– Director  Mr.
Anderson has been a director of the Company since May 2008.  He
completed a 31-year career with the Johnson & Johnson Corporation, retiring
as Vice-President, Human Resources for Janssen-Ortho Inc. in December
2006.  He served on the Board of Directors for 26 years with three
Johnson & Johnson affiliate companies, namely Ortho Pharmaceutical (Canada)
Ltd., Ortho-McNeil Inc., and finally Janssen-Ortho Inc.  He was a key
leader in the management of two successful mergers and the resultant
re-organizations. Mr. Anderson graduated with a B.A. from Queen’s University. He
is also a Member of the Ontario Institute of Chartered
Accountants.  As an independent director, Greg Anderson supervises
management and helps to ensure compliance with corporate governance policies and
standards.





Laura Wessman – Senior Vice President,
OperationsMs. Wessman has been Senior Vice President,
Operations since January 2006.  Ms. Wessman was also our Senior Vice
President, Corporate Development from January 2004 to January 2006; Vice
President, Business Development of the Company October 2002 to January 2004 and
Marketing Manager December 2000 to October 2002.Ms. Wessman joined us
in December 2000 and has been involved in both the nutraceutical and
pharmaceutical divisions of the Company.  Ms. Wessman is responsible
for chartering our growth through in-house development as well as licensing and
acquisitions. Prior to joining Forbes, Ms. Wessman held positions of increasing
responsibility at North Aegean Petroleum and Cominco in the areas of process
engineering and project management. Ms. Wessman holds undergraduate degrees in
Chemical Engineering and Bio-Chemistry from the University of British Columbia
and an MBA from Simon Fraser University, Vancouver, BC.





David Goold – Chief Financial
Officer  Mr. Goold has been Chief Financial Officer of the
Company since October 2004.  Mr. Goold was formerly Vice President,
Finance and Chief Financial Officer of B.C. Research Inc. and Vizon SciTec Inc.
(a related group of companies) from 1998 to 2004.  Mr. Goold has
worked for other public and private corporations, in Canada and internationally,
since obtaining his Chartered Accountant designation with Price Waterhouse in
1982.  Mr. Goold was with Price Waterhouse in their Vancouver and
Johannesburg offices for nine years.  Mr. Goold holds a Bachelor of
Commerce (AMIS) from the University of British Columbia, and attends
professional development courses on an ongoing basis.  Mr. Goold is a
member of the Institute of Chartered Accountants of British
Columbia.




40





Dr. David Stewart – Vice President, Regulatory
Affairs  Dr. Stewart has successively been the Vice-President,
Director, and Manager of Regulatory Affairs of the Company since May
1997.  Dr. Stewart has over 25 years experience in pharmaceutical
research within the pharmaceutical and biotechnology industries specializing in
regulatory affairs, drug approvals, quality assurance and laboratory management.
Previously, Dr. Stewart was in Regulatory Affairs at Toronto-based Biovail
Corporation International. Dr. Stewart has also held positions as Assistant
Professor at the University of Toronto in the Department of Pharmacology,
Faculty of Medicine, and Regulatory Affairs Associate for QLT Phototherapeutics
Inc., in Vancouver, BC. Dr. Stewart has published 39 scientific papers in the
areas of cell membrane biochemistry, addiction research and drug metabolism. Dr.
Stewart holds a pharmaceutical patent and is the inventor of 4 additional United
States Patents.   Dr. Stewart holds a B.Sc. degree in Zoology
(with Honors) from the University of British Columbia and a Doctorate in
Endocrinology from the University of California.





The
Nature of Any Family Relationship Between Any Director or Member of Senior
Management





None of
our directors, members of senior management or employees are
related.





Any
Arrangement or Understanding Pursuant to Which Any Director or Member of Senior
Management was Selected





There are
no such arrangements or understandings.





B.         
Compensation





The
following table sets forth the annual and long-term compensation for the fiscal
years 2009, 2008, and 2007 of our senior management (collectively, the “Named
Executive Officers”).






41




Summary
      Compensation Table




Name
      and principal position
            Year
            Salary
              ($)
            Share-based
      awards ($)
            Option-based
      awards(1)
              ($)
            Non-equity
      incentive plan compensation
              ($)
            Pension
      value
              ($)
            All
      other compen-sation(4)
              ($)
            Total
      compen-sation
              ($)Annual
      incentive plans(2)
            Long-term
      incentive plans(3)Butt,
      Charles
              President
      and Chief Executive Officer
            2009
            378,804
            Nil
            1,575
            Nil
            Nil
            Nil
            24,736
            405,1152008
            378,804
            Nil
            22,954
            Nil
            Nil
            Nil
            20,838
            422,5962007
            370,650
            Nil
            200,945
            37,065
            Nil
            Nil
            19,941
            628,601Goold,
      David, CA
              Chief Financial
      Officer
            2009
            187,793
            Nil
            1,050
            Nil
            Nil
            Nil
            13,421
            202,2642008
            187,793
            Nil
            11,477
            Nil
            Nil
            Nil
            9,147
            208,4172007
            183,750
            Nil
            33,398
            16,078
            Nil
            Nil
            9,105
            242,331Nestor,
      John, Dr.
              Chief Scientific
      Officer(5)
            2009
            Nil
            Nil
            Nil
            Nil
            Nil
            Nil
            Nil
            Nil2008
            96,302
            Nil
            Nil
            Nil
            Nil
            Nil
            278,133
            374,4352007
            241,695
            Nil
            13,833
            16,919
            Nil
            Nil
            6,257
            278,704Wessman,
      Laura
              Senior
      Vice-President, Operations
            2009
            202,867
            Nil
            1,050
            Nil
            Nil
            Nil
            17,555
            221,4722008
            202,867
            Nil
            14,346
            Nil
            Nil
            Nil
            13,168
            230,3812007
            198,500
            Nil
            71,209
            17,369
            Nil
            Nil
            13,290
            300,368Motley,
      Jeff
              Vice-President, Marketing and
      Sales(6)
            2009
            Nil
            Nil
            Nil
            Nil
            Nil
            Nil
            Nil
            Nil2008
            60,745
            Nil
            Nil
            Nil
            Nil
            Nil
            248,815
            309,5602007
            158,500
            Nil
            58,806
            9,510
            Nil
            Nil
            16,527
            243,343Stewart,
      David Dr.
              Vice-President,
      Regulatory Affairs
            2009
            140,576
            Nil
            656
            Nil
            Nil
            Nil
            10,418
            151,6502008
            137,787
            Nil
            5,739
            Nil
            Nil
            Nil
            9,936
            153,4622007
            130,367
            Nil
            37,498
            3,881
            Nil
            Nil
            9,536
            181,282








(1)
            For
      a description of the outstanding options for each Named Executive Officers
      see “Outstanding
      Share-Based and Option-Based Awards”following.  The
      fair value of each granted option was determined using the Black-Scholes
      option pricing model, according to Section 3870 of the Handbook of the
      Canadian Institute of Chartered
Accountants.


(2)
            Amounts
      paid pursuant to our Bonus Plan.   For a description of
      this Plan see Bonus Planbelow.


(3)
            We
      do not provide non-equity incentive plan compensation related to a period
      longer than one year.


(4)
            For
      the years ended December 31, 2007 through December 31, 2009, “All Other
      Compensation” consists of vacation payout in 2009 for Messrs. Butt, Goold,
      Little of $2,914, $2,889, $3,142 respectively and $3,901 for Ms. Wessman,
      car allowance for Messrs. Butt ($500 per month), company portion of RRSP
      contribution for Messrs. Butt, Goold, Stewart, and Ms. Wessman, company
      paid parking for Messrs. Butt, Goold, Stewart and Ms. Wessman, life
      insurance premiums for Messrs. Butt, Goold, Stewart and Ms.
      Wessman.  For Jeff Motley, “All Other Compensation” consists of
      severance of $242,981, car allowance ($500 per month), company portion of
      RRSP, company paid parking, and life insurance premiums. For Dr. John
      Nestor, “All Other Compensation” consists of severance of $269,843, and
      the Company’s portion of 401k contributions and life insurance premiums,
      which have been converted to Canadian funds at the average US / CDN
      exchange rates.


(5)
            Dr.
      John Nestor ceased to be employed by the Company effective May 31,
      2008.  Dr. Nestor commenced employment with the Company on Oct
      25, 2006 with an annual salary of US$225,000. Dr. Nestor’s salary
      compensation for 2008 was US$94,575, which has been converted to Canadian
      funds at the average US / CDN exchange rates.  Dr. Nestor’s 2008
      bonus was $nil.  For Dr. John Nestor, “All Other Compensation”
      consists of severance of $269,843, and the Company’s portion of 401k
      contributions and life insurance premiums, which have been converted to
      Canadian funds at the average US / CDN exchange
  rates.


(6)
            Mr.
      Motley ceased to be employed by the Company effective May 15,
      2008.  For Mr. Motley, “All Other Compensation” consists of
      severance of $242,981, car allowance ($500 per month), company portion of
      RRSP, company paid parking, and life insurance
  premiums.





Outstanding Share-Based and
Option-Based Awards





The
following table sets out incentive option-based awards held by each Named
Executive Officer as of the financial year end December 31,
2009.  There are no share-based awards.




42




Outstanding
      Share-based and Option-based Awards




Option-based
      Awards
            Share-based
      AwardsName
            Number
      of underlying unexercised options
              (#)
              (1)(4)
            Option
      exercise price
              ($)
              (3)
            Options
      Expiration Date
            Value
      of unexercised in-the-money options
              ($)
              (5)
            Number
      of shares or units of shares that have not vested
              (#)
              (2)
            Market
      or payout value of share-based awards that have not vested
              ($)Butt,
      Charles
            7,500
              71,300
              40,000
              12,000
            8.00
              8.00
              0.97
              0.20
            17-Jan-2012
              31-Mar-2012
              30-Jun-2013
              31-Dec-2013
            Nil
              Nil
              Nil
              2,372
            n/a
              n/a
              n/a
              n/a
            n/aGoold,
      David
            5,000
              7,000
              20,000
              8,000
            8.00
              8.00
              0.97
              0.20
            17-Jan-2012
              31-Mar-2012
              30-Jun-2013
              31-Dec-2013
            Nil
              Nil
              Nil
              1,582
            n/a
              n/a
              n/a
              n/a
            n/aWessman,
      Laura
            5,000
              23,400
              25,000
              8,000
            8.00
              8.00
              0.97
              0.20
            17-Jan-2012
              31-Mar-2012
              30-Jun-2013
              31-Dec-2013
            Nil
              Nil
              Nil
              1,582
            n/a
              n/a
              n/a
              n/a
            n/aStewart,
      David
            3,750
              10,650
              10,000
              5,000
            8.00
              8.00
              0.97
              0.20
            17-Jan-2012
              31-Mar-2012
              30-Jun-2013
              31-Dec-2013
            Nil
              Nil
              Nil
              989
            n/a
              n/a
              n/a
              n/a
            n/a


(1)
            All
      securities under option are Common
Shares.


(2)
            The
      Company has not granted any SARs.


(3)
            Exercise
      Prices are determined as the closing price of our Common Shares on the day
      prior to the date of grant.




(4)
            All
      figures are presented on a Post-Arrangement Basis (See Item 4 – Information on
      the Company –A. History and Development of the Company – Forbes Medi-Tech
      Inc.).




(5)
            This
      value is calculated by multiplying the difference between the Company’s
      closing stock price on December 31, 2009 (US$0.38) on Nasdaq Stock Market
      converted to Canadian Dollars based on December 31, 2009 exchange rate and
      the option exercise price by the number of in-the-money unexercised
      options.








The
following table sets out the incentive plan awards value vested to each Named
Executive Officer during our financial year ended December 31,
2009.




Outstanding
      Share-based and Option-based Awards




Name
            Option-based
      awards – Value vested during the year
              ($)
            Share-based
      awards – Value vested during the year
              ($)
            Non-equity
      incentive plan compensation – Value vested during the
      year
              ($)Butt,
      Charles
            Nil
            n/a
            n/aGoold,
      David
            Nil
            n/a
            n/aWessman,
      Laura
            Nil
            n/a
            n/aStewart,
      David
            Nil
            n/a
            n/a







43










Defined
Benefit or Actuarial Plan Disclosure





We do not
maintain a Defined Benefit or Actuarial Plan for our officers or
directors.  Pursuant to his previous employment agreement with us,
between the ages of 60 and 85, Tazdin Esmail, former Chief Executive Officer,
will be entitled to receive an annual reward for tenure allowance of
$65,000.  We have not set aside any of our assets to cover our
obligation under the reward for tenure arrangement.  At December 31,
2009, we have accrued $978,500 in our consolidated financial statements towards
our obligations under these arrangements.  In addition, prior to his
resignation as Chief Executive Officer, we purchased a whole life insurance
policy on Mr. Esmail.





Termination
and Change of Control Benefits





We have
entered into service contracts with our senior management, or “Named Executive
Officers”, as follows:





Charles
Butt has acted as our President since May, 2001 and as our Chief Executive
Officer since March, 2002.  The employment agreement entered into by
the Company with Charles Butt, as Amended and Restated as of September 8, 2004,
and as subsequently amended, provides for a base annual salary of $378,804 as of
January 1, 2009, a monthly car allowance of $500, annual salary reviews, and
bonuses to be determined by the Compensation Committee based on milestones
achieved by the Company or by Mr. Butt.  In the event of termination
by the Company without cause, or termination by Mr. Butt within 6 months
following a change of control of the Company (other than a hostile change of
control), Mr. Butt will be entitled to receive an amount equal to the aggregate
of two times his annual salary and car allowance; two times all other
compensation, including bonuses, paid to Mr. Butt during the previous 12 months;
the amount of any bonus approved but not yet paid; and all expenses incurred and
not previously reimbursed.  In the event of termination by Mr. Butt
for the Company’s breach, or termination by the Company or Mr. Butt within 6
months following a hostile change of control, Mr. Butt will be entitled to
receive an amount equal to the aggregate of three times Mr. Butt’s annual salary
and car allowance; three times all other compensation, including bonuses, paid
to Mr. Butt during the previous 12 months; the amount of any bonus approved but
not yet paid; and all expenses incurred by Mr. Butt and not previously
reimbursed.





Our
employment agreements with each of our Named Executive Officers generally
provide for a base annual salary, group life, long-term disability, extended
health and dental insurance, director’s and officer’s liability insurance, where
applicable, four weeks paid vacation each year, reimbursement for all reasonable
expenses, stock options from time to time, and eligibility for annual bonuses,
based on the achievement of certain milestones.  The Company also
contributes to each Named Executive Officer’s RRSP.  With respect only
to Mr. Butt, in the event that the Named Executive Officer dies or becomes
disabled the Company will pay the salary and car allowance accrued to the date
of deemed termination and for one year subsequent to the termination, plus a
pro-rated portion of the annual bonus most recently paid to the Named Executive
Officer.   Mr. Butt also receives an annual car allowance. The
employment agreements of the Named Executive Officers have no fixed
term.





The
Employment Agreements of Laura Wessman, David Goold and David Stewart require 18
months’ notice of termination without cause, or a severance payment instead of
notice of 18 months’ annual base salary, or a combination of both.  In
the event that the Company or any of these individuals terminates his or her
employment within 6 months following a change of control or for the Company’s
breach, the individual will be entitled to receive an amount equal to 18 months’
annual base salary. Jeff Motley ceased to be employed by the Company effective
May 15, 2008.  Dr. John Nester ceased to be employed by the Company
effective May 31, 2008.








44





combination
of persons, acting in concert by virtue of an agreement, arrangement, commitment
or understanding, which holds in total a sufficient number of the voting rights
attached to all outstanding voting securities of the Company to affect
materially the control of the Company, and, if a person or combination of
persons holds more than 20% of the voting rights attached to all outstanding
voting securities of the Company, the person or combination of persons is
deemed, in the absence of evidence to the contrary, to hold a sufficient number
of the voting rights to affect materially the control of the
Company.





A
“hostile change of control” will occur if (i) a person becomes a control person
or, having become a control person, acquires additional securities of the
Company (in either case, whether by way of take-over bid or otherwise), at any
time following a public written statement of the Board either that the Board is
unable to make a recommendation whether an offer to acquire securities made by
or on behalf of such a person should be accepted, or that the Board is
recommending that such offer be rejected;  or (ii) a majority of the
directors elected at any annual or special general meeting of shareholders of
the Company are not individuals nominated by the Company's then-incumbent Board,
and such election occurs following the distribution, by a person or persons
other than the management of the Company, of a proxy statement, information
circular or other document soliciting proxies in respect of the meeting at which
the change of control occurred.





Pursuant
to the terms of our 2007 Stock Option Plan, upon a change of control, all
options granted under the 2007 Plan shall immediately vest, notwithstanding any
contingent vesting provision to which such options may have otherwise been
subject.





Bonus
Plan





In
January, 2006, we established a formal bonus plan for all of our employees,
including our executive officers (the “Bonus Plan”).  The Bonus Plan
provides for the payment to each executive officer (a “Bonus Payment”), as of
the end of the current fiscal year, of up to a specified percentage of the
executive officer’s salary as determined by the Compensation
Committee.  The Bonus Payment actually awarded is dependent on the
achievement by the Company of specified Company objectives and by the employee
of specified employment objectives personal to the particular
employee.





There
were no bonuses granted in respect of the 2008 and 2009 financial
years.  The payment of bonuses granted in respect of the 2007
financial year occurred in April 2008.





Compensation
of Directors





In the
fiscal year ended December 31, 2009, Charles Butt, a director and the President
and Chief Executive Officer of the Company, received the compensation set out in
the Summary Compensation Table above.





Effective
as of July 1, 2006, the independent directors (See below Independent Director
Compensation Fiscal 2009) each receive an annual retainer of $20,000. In
addition, the Chairman receives an additional $24,000 annually in respect of his
services provided outside Board meetings, the Chair of the Audit Committee
receives an additional $8,000 annually in respect of his Audit Committee
services provided outside the committee meetings, and all Committee Chairs
receive an additional $2,500 annually in respect of their service as Chair.
Annual retainers are paid quarterly for the period July 1 through June
30.  In addition to the annual retainer, the independent directors are
compensated in cash in the amount of $2,000 per meeting for in-person attendance
at board meetings; $2,000 per meeting for in-person attendance at board
committee meetings; and $750 for meetings attended by phone.  The
independent directors also receive, on an annual basis, options to purchase a
minimum of 1,650 common shares of the Company, subject to the Board determining
that such number of options is readily available under our then current stock
option plan.  The fees of the independent directors were reduced by
20% commencing January 1, 2009, and continuing until such time as economic
circumstances improve.




45





During
the most recently completed financial year ended December 31, 2009, the
independent Directors were granted the following options, earned the following
Board and Board Committee meeting attendance fees, and were paid the following
amounts as retainer, consulting fees and/or Audit Committee Service
Fees:




Independent
      Director Compensation Fiscal 2009




Director
            Fees
      Earned
              ($)
            Share-based
      awards
              ($)
            Option-based
      awards
              ($)
              (2)
            Non-equity
      incentive plan compensation
              ($)
            Pension
      value
              ($)
            All
      other compensation ($)
            Total
              ($)Dunne,
      Joe
            52,800
            Nil
            394
            Nil
            Nil
            Nil
            53,194Kaushal,
      Nitin
            39,400
            Nil
            394
            Nil
            Nil
            Nil
            39,794Anderson, Greg(1)
            33,000
            Nil
            394
            Nil
            Nil
            Nil
            33,394




(1)
            All
      securities under option are Common Shares.  Exercise Prices are
      determined as the closing price of our Common Shares on the day prior to
      the date of grantThe fair value of
      each granted option was determined using the Black-Scholes option pricing
      model, according to Section 3870 of the Handbook of the Canadian Institute
      of Chartered Accountants, which is the model used by the Company for
      financial statement presentation.  The assumptions for
      estimating the fair value of each option granted were:  (i)
      risk-free interest rate of 1.07%; (ii) volatility of 133% (iii) expected
      dividend yield of nil; and (iv) expected life of 2
      years.   Options were granted to Joe Dunne, Nitin Kaushal
      and Greg Anderson in January 2009 at an exercise price of $0.20 per common
      share expiring December 31, 2013. .  For further details
      seebelow
      Item 6 – Directors,
      Senior Management and Employees – E. Share
    Ownership.




(2)
            All
      Options are presented on a Post-Arrangement Basis. (See Item 4 – Information on
      the Company –A. History and Development of the Company – Forbes Medi-Tech
      Inc.)







The
independent directors of the Company do not receive benefits upon termination of
their position as directors, but are entitled to exercise all options granted to
them prior to such termination until the earlier of (i) the original expiry date
of the option; and (ii) the expiry of that period of time following the
independent director’s termination which is equal to the length of the
independent director’s term of service with us, but in no event less than 1
year.




Directors’
& Officers’ Liability Insurance





We
maintain directors’ and officers’ liability insurance coverage through a policy
covering us and our subsidiaries, which has an annual aggregate policy limit of
US$5,000,000, subject to a deductible of up to US$250,000 per
loss.  This insurance provides coverage for indemnity payments made by
us to our directors and officers as required or permitted by law for losses,
including legal costs, incurred by officers and directors in their capacity as
such. This policy also provides coverage directly to individual directors and
officers if they are not indemnified by us. The insurance coverage for directors
and officers has customary exclusions, including libel and slander, and those
acts determined to be uninsurable under law, or deliberately fraudulent or
dishonest or to have resulted in personal profit or advantage. The current term
(February 26, 2010 to February 25, 2011) premiums aggregating US$130,000 are
paid entirely by us.





C.           Board
Practices





Date of expiration of current term of
office, if applicable, and the period during which the person has served in that
office. Each director of our Company holds office until the
next annual general meeting or until his or her successor is duly elected or
appointed, unless his or her office is earlier vacated by resignation, death,
removal or otherwise, or he or she becomes disqualified to act as a director.
The current members of our Board of Directors were each elected at our 2009
annual general meeting held on May 21, 2009.  Each executive officer
holds office at the discretion of the Board of Directors, subject to the terms
of his or her employment contract.   See Item 6 Directors, Senior Management
and Employees – B. Compensation above.  For periods during
which our Directors and Named Executive Officers have served in such capacities
see Item 6 Directors, Senior
Management and Employees – A. Directors and Senior Management
above.




46





Service
Contracts. We do not have any formal service contracts
with our directors in their capacities as such.  For a discussion of
compensation paid to our directors during fiscal 2009, see Item 6 Directors, Senior Management
and Employees – B. Compensation.





Audit
Committee





The
Company has a separately designated standing Audit Committee established in
accordance with Rule 10A-3 of the Exchange Act.  Pursuant to its
charter, the Audit Committee shall:





1.           Provide
for an open avenue of communications between the independent auditors,
management and the Board and, at least once annually, meet with the independent
auditors independently of management.  The independent auditors shall
report directly to the Committee.





2.           Be
directly responsible for the compensation and oversight of the work of the
independent auditors, including resolution of disagreements between management
and the independent auditors regarding financial reporting, for the purpose of
issuing an audit report or related work.





3.           Have
the sole authority to appoint or replace the independent auditors (subject, if
applicable, to shareholder ratification) and regarding the selection, fee
arrangements, appointment or termination of the independent auditors. The
independent auditors shall be ultimately accountable to the Board and the
Committee, as representatives of the shareholders.





4.           Obtain
and review, on at least an annual basis, a formal written statement from the
independent auditors regarding (a) the independent auditors’ internal
quality-control procedures, (b) any material issues raised by the most recent
internal quality-control review, or peer review, of the firm, or by any inquiry
or investigation by governmental or professional authorities within the
preceding five years respecting one or more independent audits carried out by
the firm, (c) any steps taken to deal with any such issues, and (d) all
relationships between the independent auditors and us.  Evaluate the
qualifications, performance and independence of the independent auditors,
including considering whether the auditor’s quality controls are adequate and
the provision of permitted non-audit services is compatible with maintaining the
auditor’s independence, taking into account the opinions of management and
internal auditors.  The Committee shall present its conclusions with
respect to the independent auditors to the Board.





5.           Review
and approve the independent auditors' annual engagement letter.





6.           Review
and pre-approve audit and permitted non-audit related services as outlined in
the Company’s Audit Pre-approval Policy.





7.           Review
with the independent auditors the matters required to be discussed by Statement
on Auditing Standards No. 61 relating to the conduct of the audit, including (a)
the proposed scope of their examination with emphasis on accounting and
financial areas where the Committee, the independent auditors or management
believe special attention should be directed; (b) the results of their audit,
including their audit findings report and resulting letter, if any, of
recommendations for management; (c) their evaluation of the adequacy and
effectiveness of our internal controls over financial reporting; (d) significant
areas of disagreement, if any, with management; (e) cooperation received from
management in the conduct of the audit; (f) significant accounting, reporting,
regulatory or industry developments affecting us; and (g) significant changes to
our auditing and accounting principles, policies, controls, procedures and
practices proposed or contemplated by the independent auditors or
management.





8.           Discuss
with management and the independent auditors any issues and disclosure
requirements regarding (a) the use of “pro forma” or “adjusted” non-GAAP
information, as well as financial information and earnings guidance provided to
analysts and rating agencies, (b) any off-balance sheet arrangements, and (c)
significant business risks or exposures and management’s assessment of the steps
taken to monitor, control and minimize such risk.




47





9.           Review
with management and the independent auditors our audited annual consolidated
financial statements and make a recommendation to the Board as to approval
thereof.





10.           Review
with management and, when reviewed by the independent auditors, with the
independent auditors, our unaudited quarterly financial statements and make a
recommendation to the Board as to approval thereof.





11.           Review
and discuss with management and the independent auditors significant reporting
issues and judgments made in connection with the preparation of our financial
statements, including estimates, reserves, accruals, write downs, judgmental
areas, audit adjustments, difficulties encountered in performing any audit, and
such other review as may be appropriate.





12.           Review
and discuss with management and the independent auditors significant issues
regarding auditing and accounting principles, including critical accounting
policies, and any significant changes in our selection or application of such
accounting principles and policies.





13.           Review
and discuss with senior management, the senior audit executive and the
independent auditors our internal controls report and the independent auditors’
attestation report prior to filing our annual report with the SEC.





14.           Monitor
the audit partners’ rotation as required by law.





15.           Obtain
from the independent auditors assurance that Section 10A(b) of the Exchange Act
has not been implicated.





16.           Review
and reassess the adequacy of this Charter annually and recommend any proposed
changes to the Board.





17.           Annually
review the Committee’s own performance.





18.           Perform
such other functions as assigned by law, our bylaws or as the Board deems
necessary and appropriate.





The Audit
Committee is comprised of three independent (as determined under the rules of
the NASDAQ Capital Market and Rule 10A-3 of the Exchange Act) and financially
literate directors: Nitin Kaushal (Chair), Joe Dunne and Greg
Anderson.   For a brief description of the education and
experience of each of our Audit Committee members that is relevant to the
performance of his or her responsibilities as such a member, see Item 6 Directors, Senior Management
and Employees – A. Directors and Senior Management above.





All audit
and non-audit services performed by our auditors for the twelve-month period
ended December 31, 2009 were pre-approved by our Audit Committee. It is our
policy that all audit and non-audit services performed by our auditors will
continue to be pre-approved by our Audit Committee.





Compensation
Committee





Our
remuneration committee, called our “Compensation Committee”, is comprised of Joe
Dunne (Chair), Greg Anderson and Nitin Kaushal.  The Compensation
Committee is mandated to review and recommend to the Board for approval the
remuneration of directors and officers, and meets at least once
annually.  The Compensation Committee considers time commitment,
comparative fees, qualifications and responsibilities in determining
remuneration levels.  All members of the Compensation Committee are
independent directors (as determined pursuant to Rule 5605(a)(2) of the NASDAQ
Capital Market and Rule 10A-3 of the Exchange Act).




48





The
Compensation Committee evaluates the compensation of our executive officers and
assures that they are compensated fairly in a manner consistent with our
compensation strategy, internal equity considerations, and the competitive
environment.  The Compensation Committee shall also communicate to the
shareholders regarding our compensation policies and the reasoning behind such
policies, as required by the applicable securities regulatory
bodies.  In addition, the Compensation Committee shall evaluate and
make recommendations to the Board regarding the compensation of the outside
directors.





Specifically,
the Compensation Committee is charged with the following
responsibilities:





·
            Disclosing
      its policies applicable to our executive officers in the manner required
      by the applicable securities authorities' rules and regulations, and
      reviewing all other executive compensation disclosure before we publicly
      disclose this information.


·
            Making
      recommendations to the Board with respect to non-CEO officer and director
      compensation, incentive-compensation plans and equity-based
      plans.


·
            Granting
      incentive stock options to purchase our common stock under our stock
      option plan.


·
            Amending
      and otherwise administering our stock option
  plan.


·
            Reviewing
      and approving the corporate goals and objectives relevant to CEO
      compensation, evaluating the CEO’s performance in light of those corporate
      goals and objectives, and determining the CEO’s compensation level based
      on this evaluation.





Nomination
and Corporate Governance Committee





We also
have a Nomination and Corporate Governance Committee of the Board composed of
Greg Anderson (Chair), Joe Dunne, and Nitin Kaushal.  All three
directors are independent directors (as determined pursuant to Rule 5605(a)(2)
of the NASDAQ Capital Market and Rule 10A-3 of the Exchange Act).





The
Nomination and Corporate Governance Committee has the responsibility to identify
and recommend candidates for election to the Board, to advise the Board on all
matters relating to corporate governance, and to annually assess the
effectiveness of the Board, each director and each Committee.  The
Committee also has responsibility to make recommendations relating to the
membership of committees of the Board, to make recommendations with respect to
succession planning, and to approve procedures designed to provide that adequate
orientation and training are provided to new members of the Board.





D.           Employees





As of
December 31, 2007 we employed 27 full-time management, scientific and
administrative employees situated in Vancouver, British Columbia, and 4
full-time management and scientific employees situated in La Jolla,
California.





By May
31, 2008 we reduced our total employees from 31 to 18 as the result of a
corporate restructuring.





As of
December 31, 2008 we employed 15 full-time management, scientific and
administrative employees situated in Vancouver, British Columbia.





As of
December 31, 2009 we employed 12 full-time management, scientific and
administrative employees situated in Vancouver, British Columbia.








We are
not a party to any collective bargaining agreement, and have no involvement with
labor unions.  We also do not employ a significant number of temporary
employees.




49








E.           Share
Ownership





Except as
indicated in the footnotes below, as of March 30, 2010 the Directors and those
Named Executive Officers of the Company referred to in Item 6.B above who
remained in office as of such date held the following common shares and options
to purchase common shares of the Company.





Named
      Executive Officers, Directors
            Options(1)(2)
            Shares Owned(1)
      (3)
              (Common
      Shares)No.
      of Shares Optioned
            Exercise
      Price per Share
            Expiry
      DateCharles A. ButtPresident, CEO and
      Director
            7,500
            $8.00
            January
      17, 2012
            5,587(4)71,300
            $8.00
            March
      31, 201240,000
            $0.97
            June
      30, 201312,000
            $0.20
            December
      31, 2013Laura
      Wessman
              Senior
      Vice President, Operations
            5,000
            $8.00
            January
      17, 2012
            625
      (4)23,400
            $8.00
            March
      31, 201225,000
            $0.97
            June
      30, 20138,000
            $0.20
            December
      31, 2013David
      Goold
              Chief
      Financial Officer
            5,000
            $8.00
            January
      17, 2012
            1,250(4)7,000
            $8.00
            March
      31, 201220,000
            $0.97
            June
      30, 20138,000
            $0.20
            December
      31, 2013David StewartVice-President, Regulatory
      Affairs
            3,750
            $8.00
            January
      17, 2012
            500(4)10,650
            $8.00
            March
      31, 201210,000
            $0.97
            June
      30, 20135,000
            $0.20
            December
      31, 2013Greg
      Anderson
              Director
            3,000
            $0.97
            June
      30, 2013
            Nil3,000
            $0.20
            December
      31, 2013Joe
      Dunne
              Director
            1,500
            $6.56
            March
      31, 2012
            4,480(4)13,725
            $8.00
            March
      31, 201210,000
            $0.97
            June
      30, 20133,000
            $0.20
            December
      31, 2013Nitin
      Kaushal
              Director
            1,500
            $6.56
            March
      31, 2012
            Nil8,400
            $8.00
            March
      31, 20127,500
            $0.97
            June
      30, 20133,000
            $0.20
            December
      31, 2013TOTAL
            329,325




(1)
            All
      Shares Optioned, Shares Owned and Exercise Price per Shares are presented
      on a Post-Arrangement Basis. (See Item 4 – Information on the
      Company –A. History and Development of the Company – Forbes Medi-Tech
      Inc.)




(2)
            All
      securities under option are Common Shares.  Exercise Prices are
      determined as the closing price of our Common Shares on the TSX on the day
      prior to the date of grant.




(3)
            Shares
      Owned are based on Insider Reports filed with Canadian Securities
      Regulatory Authorities.




(4)
            Constitutes
      less than 1% of the outstanding common shares of the
    Company.






Stock
Option Plan and Total Outstanding Stock Options





Our
existing Stock Option Plan (the “2007 Plan”) was initially approved by our Board
of Directors on April 12, 2007 and was also approved by shareholders at our
Annual General and Special Meeting held May 17, 2007.  The 2007 Stock
Option Plan was implemented on June 29, 2007, and replaced our previous stock
option plan.





Following
is a brief summary of the 2007 Plan:





Administration


The Board
of Directors has delegated authority for administration of the 2007 Plan to the
Compensation Committee of the Board (the “Committee”).




50





Eligibility


Options
to purchase our common shares may be granted to directors, officers, employees
or consultants of the Company or its affiliates (“Eligible
Persons”).





Shares Issued, Issuable and
Currently Made Subject to Option


Under the
2007 Plan, options may be granted to purchase up to 10% of our outstanding
shares from time to time. Based on our current 4,969,813 common shares issued
and outstanding (on a Post-Arrangement Basis), options to purchase up to 496,981
common shares may currently be granted under the 2007
Plan.    Options to purchase up to 461,615 common shares, or
9.3% of our current outstanding shares, are currently outstanding under the 2007
Plan, with options to purchase up to 35,366 common shares, or 0.7% of our
current outstanding shares, remaining available for grant.





Reloading:  Under
the 2007 Plan, the number of common shares under options which have been
exercised, as well as the number under those unexercised options which have
expired or been cancelled, can be the subject of another option grant (a
“reload”).





Limitations on Grants to a
Single Person and to Insiders


The
number of common shares which may be subject to options granted to any one
person under the Plan may not exceed 5% of the issued and outstanding common
shares of the Company, or currently 248,490 common shares.  The number
of common shares issuable to insiders, at any time, under the 2007 Plan and all
other security based compensation arrangements of the Company, cannot exceed 10%
of our issued and outstanding common shares (such 10% currently being 496,981
common shares).  The number of common shares issued to insiders,
within any one year period, under the 2007 Plan and all other security based
compensation arrangements of the Company, cannot exceed 10% of our issued and
outstanding common shares.





Exercise
Price


The
Committee establishes the exercise price of all options granted, which price may
not be less than the closing price of our common shares on such stock exchange
or over-the-counter market as may be selected for such purpose by the Committee
on the trading day immediately preceding the date of grant of the
option.





Vesting


Options
may be subject to such vesting requirements, if any, as are determined by the
Committee.  Upon a change of control of the Company, all unvested
options shall immediately vest.





Termination and
Adjustments


Each
option shall expire at such time as is determined by the Committee on the grant
of such option, but in no event more than 10 years from the date of grant. In
the event that an Option’s expiry date falls during the period of any trading
blackout period self-imposed by the Company or within four business days
thereafter, such Options may be exercised until the end of the fifth business
day following the expiry of the blackout period.  Subject to the
foregoing, all options will terminate on the earliest of the following
dates:




(i)
              the
      expiry date specified for such option in the option agreement with the
      Company evidencing such option;
 (ii)
              where
      the optionee’s position as an Eligible Person is removed or terminated for
      just cause, the date of such termination for just
  cause;
 (iii)
              where
      the optionee’s position as an Eligible Person, other than an independent
      director, terminates due to the death or Disability of the optionee, one
      year following such termination;
 (iv)
              where
      the optionee’s position as an Eligible Person, other than an independent
      director, terminates for a reason other than the optionee’s disability,
      death, or termination for just cause (termination for such other reason
      being hereinafter referred to as a “Voluntary Termination”), and the
      optionee has no continuing business relationship with the Company or an
      affiliate of the Company as an Eligible Person in any other
      capacity:




51













a.
            where
      the optionee held the position of a director, the President, Chief
      Executive Officer, Executive Vice President or a Senior Vice President of
      the Company, one year after the date of Voluntary Termination;
      or


b.
            where
      the optionee held any other position with the Company, including a Vice
      President position other than Executive or Senior Vice President, (a
      “Non-Executive Optionee”), such period of time after the date of Voluntary
      Termination, which shall be not less than 30 days nor more than one year,
      as is determined by the Compensation Committee at the time the option is
      granted, subject to extension by the Compensation Committee in its sole
      discretion, at any time during the duration of the option, up to but not
      beyond one year following the date of Voluntary
    Termination;


(v)
            where
      the optionee’s position as an independent director terminates due to death
      or disability, or for a reason other than termination for just cause, the
      expiry of that period of time following termination which is equal to the
      period of time the independent director continuously served the Company in
      the capacity of an independent director, but in no event less than 1
      year.





The
retirement of an independent director at a meeting of shareholders pursuant to
the constating documents of the Company and the re-election of such director at
such meeting is deemed not to be a retirement, or termination of the position
of, such director.





Assignability


Options
are non-transferable and non-assignable.





Amendment


The
Committee may amend the 2007 Plan or any option agreement in order to make
changes of a clerical nature or changes to clarify the meaning of existing
provisions; change the vesting provisions of an option; reflect any requirements
of applicable regulatory bodies or stock exchanges; extend the term of an option
held by an Eligible Person who is not an insider; reduce the option price of an
option held by an Eligible Person who is not an insider (subject to a minimum
option price of not less than market value of the common shares at the time of
the grant of the option); and change the categories of Persons who are Eligible
Persons.  Under the 2007 Plan, the Committee shall not, without the
approval of the shareholders of the Company, have the right to amend an option
agreement in order to increase the number of common shares which may be issued
pursuant to any option granted; reduce the option exercise price of any option
granted then held by an insider; or extend the term of any option granted then
held by an insider.





Other


There is
no ability for the Company to transform an option into a stock appreciation
right involving an issuance of securities from treasury.  The Company
has not provided any financial assistance to any optionee to facilitate the
exercise of options.




ITEM 7      Major Shareholders
and Related Party Transactions





A.           Major
Shareholders





To the
best of our knowledge, there are no current shareholders who beneficially own 5%
or more of the outstanding common shares of the Company. From January 1, 2007 to
March 30, 2010, significant changes in share ownership as filed on EDGAR were as
follows:





2007





As filed
on January 11, 2007, Cantor Fitzgerald collectively owned zero common shares of
the Company.





As filed
on February 14, 2007, Palo Alto Investors collectively owned 1,567,540 common
shares of the Company, accounting for 4.1% of the total number of voting
securities (share balances on a Pre-Arrangement Basis).




52





2008





No
changes in share ownership were filed on EDGAR.





2009





No
changes in share ownership were filed on EDGAR.





2010





No
changes in share ownership were filed on EDGAR.





The
shareholders listed above held common shares of the Company which did not have
different voting rights from any other common shares.





To the
best of our knowledge, we are not directly owned or controlled by another
corporation, foreign government, or any other natural or legal person severally
or jointly.   We are not currently aware of any arrangements the
operation of which may at a subsequent date result in a change in control of the
Company.





United
States Shareholders





Record
Holders:  According to our register of shareholders, as of
March 26, 2010, 14 registered shareholders (out of a total of 17, or 82% of our
total shareholders) had addresses in the United States, holding a combined
2,044,230 common shares (or 41% of our outstanding common shares).  We
believe that the number of beneficial owners is substantially greater than the
number of record holders, because a large portion of our common shares are held
of record in broker “street names”.





B.           Related
Party Transactions





Nancy E.
Glaister, our former Corporate Secretary of the Company, is a partner of the law
firm Cawkell Brodie Glaister LLP, Business Lawyers, which also provided legal
services to us.  For the period ending September 29, 2009 (date of
resignation), Cawkell Brodie Glaister LLP billed us $63,000 (12 months ended
December 31, 2008 - $122,000; 12 months ended December 31, 2007 -$204,000)
excluding GST, PST and disbursements, for legal services.





C.           Interest
of Experts and Counsel





Not
applicable.





ITEM 8      Financial
Information





A.           Consolidated
Statements and Other Financial Information





Attached
to this Annual Report, under Item 18, are the Company’s consolidated financial
statements audited by independent auditors and accompanied by an audit report
consisting of the following:





·
            Independent
      Registered Public Accounting Firm Auditors’ Report to the
      Shareholders;


·
            Consolidated
      Balance Sheets as at December 31, 2009 and
2008;


·
            Consolidated
      Statements of Operations, Comprehensive Income / (Loss) and Deficit for
      the fiscal years ended December 31, 2009, 2008 and
  2007;


·
            Consolidated
      Statements of Cash Flows for the fiscal years ended December 31, 2009,
      2008 and 2007; and


·
            Notes
      to Consolidated Financial
Statements.








53


Export
Sales





For the
fiscal years ended December 31, 2009, December 21, 2008 and December 21, 2007,
all of our sales constituted export sales.


Annual
      Export Sales by Product(in
      thousands of $)Sterol
      Ingredient2009
            
            
            2008
            
            
            2007North
      America
            
            $
            2,351
            
            
            $
            3,953
            
            
            $
            4,360Europe
            
            
            1,317
            
            
            
            3,004
            
            
            
            3,272Other
            
            
            596
            
            
            
            151
            
            
            
            85Finished
      Goods With Sterols2009
            
            
            
            2008
            
            
            
            2007North
      America
            
            
            -
            
            
            
            -
            
            
            
            -Europe
            
            
            360
            
            
            
            732
            
            
            
            1,130Other
            
            
            -
            
            
            
            -
            
            
            
            -Total
            
            $
            4,624
            
            
            $
            7,840
            
            
            $
            8,847Annual
      Export Sales by Product(percentage
      of total sales)Sterol
      Ingredient2009
            
            
            
            2008
            
            
            
            2007North
      America
            
            
            51
            %
            
            
            51
            %
            
            
            49
            %Europe
            
            
            28
            %
            
            
            38
            %
            
            
            37
            %Other
            
            
            13
            %
            
            
            1
            %
            
            
            1
            %Finished
      Goods With Sterols2009
            
            
            
            2008
            
            
            
            2007North
      America
            
            
            -
            
            
            
            -
            
            
            
            -Europe
            
            
            8
            %
            
            
            10
            %
            
            
            13
            %Other
            
            
            -
            
            
            
            -
            
            
            
            -





Legal
Matters





Patent
Oppositions


We
received Notices of Opposition to our European Patent 0783514 (Sterol
Compositions) from two parties: (i) Raisio Benecol Ltd. and (ii) UPM-Kymmene
Oyj.  We prepared defense submissions and arguments in reply to these
oppositions in November 2003.  Subsequent to our defense submissions,
UPM-Kymmene Oy withdrew its opposition.  The written proceedings
culminated in a hearing before the Opposition Division of the European Patent
Office in La Hague in June 2006.  We were successful on some of the
parent claims covering to “medications” comprising the sterol compositions, with
very specific ratios of the three main sterol/stanol components. Raisio did not
appeal. As these granted medication claims are not as broad as required for
current commercial specifications, at this time, we filed a divisional
application which claims foods and vitamin supplements with the a broader sterol
composition. We expect that these latter claims, if and when granted, will be
similarly and vigorously opposed by Raisio.




54





We have
received Notices of Opposition to our European Patent 1148793 (Method of
Preparing Microparticles of Phytosterols or Phytostanols) from two parties: (i)
Raisio Benecol Ltd. and (ii) McNeil-PPC, Inc.  We prepared defense
submissions and arguments in reply to these oppositions in December
2004.  These written proceedings culminated in a hearing before the
Opposition Division of the European Patent Office in Munich in June 2006. While
we were successful on novelty arguments, we did not prevail on inventiveness and
the patent was revoked. The Company appealed, with new arguments and data,
however, subsequently decided to withdraw the appeal, so the patent stands
revoked.





We
received a Notice of Opposition to our European Patent 1056767 (Method for the
Preparation of Phytosterols from Tall Oil Pitch) from Raisio Benecol
Ltd.  We prepared defense submissions and arguments in reply to this
opposition in January 2005.  These written proceedings culminated in a
hearing before the Opposition Division in December 2007. A decision was rendered
by the Opposition Division rendered their decision on January 14, 2008 to revoke
the patent on the basis of 100(c) EPC that the content extended beyond the
content of application as filed. We filed a notice of appeal and grounds of
appeal on March 13, 2008 and May 23, 2008, respectively. A date for oral
proceedings has not yet been set.





We
received a Notice of Opposition to the Company’s European Patent 1227734
(Compositions comprising edible oils or fats and phytosterols and/or
phytostanols substantially dissolved therein, method of making the same, and use
thereof in treating or preventing cardiovascular disease and its underlying
conditions) from Kao Corporation.  We prepared defense submissions and
arguments in reply to this opposition by April 2006.  Kao Corporation
replied to the Company’s defense submissions and we made further reply
submissions.  A date for oral proceedings was set, but we decided to
withdraw from them. As such, the Opposition Division of the European Patent
Office rendered its decision on September 18, 2009 to revoke the patent. No
appeal was filed, so the patent stands revoked.





NASDAQ
Hearing


See Item 4 – Information on the Company
– A. History and Development of the Company – Other Important Events Since
January 1, 2009, above.





TSX
Review


See Item 4 – Information on the Company
– A. History and Development of the Company – Other Important Events Since
January 1, 2009, above.





Dividend
Policy





No
dividends have been declared or paid on the Common Shares since incorporation
and it is not anticipated that any dividends will be declared or paid on the
Common Shares in the immediate or foreseeable future.  Any decision to
pay dividends on the Common Shares will be made by the board of directors on the
basis of our earnings, financial requirements and other conditions existing at
such future time.





B.           Significant
Changes





Since
December 31, 2009, the significant events described below have
occurred.  For a more detailed description of these events, see Item 4 – Information on the Company
– A. History and Development of the Company - Other Important Events Since
January 1, 2009above.





On
January 8, 2010 we announced that we had received a Nasdaq Staff Deficiency
Letter indicating that we did not meet The NASDAQ Capital Market initial listing
standard set forth in Listing Rule and our common shares were subject to
suspension.




55





On
January 14, 2010 we announced that we provided the NASDAQ with a notice of
appeal of the Nasdaq Staff Deficiency determination to a Hearings Panel
("Panel").The NASDAQ
determination indicated that we did not meet The NASDAQ Capital Market initial
listing (see “Exchange Listings” below).





In
February 2010 we announced that we had received notification that a NASDAQ
Listing Qualifications Panel has determined to delist the Company's securities
from The NASDAQ Stock Market, effective February 18, 2010. With the delisting,
our common shares were immediately eligible for quotation effective on the
quotation service for securities traded over-the-counter, commonly known as the
Pink Sheets (see “Exchange Listings” below). (See Item 4 – Information on the
Company – A. History and Development of the Company - Other Important Events
Since January 1, 2009).





ITEM 9     The Offer and
Listing





A.           Offer
and Listing Details





Price
History





The
following tables set forth in Canadian dollars for the TSX tables and US dollars
for the NASDAQ tables, for each of the periods indicated, the high and low
closing market prices of our common shares on the Toronto Stock Exchange (TSX)
through to September 11, 2009 (we were delisted from the TSX effective at the
closing of business on September 11, 2009), on NASDAQ (our listing transferred
from The NASDAQ Global Market to The NASDAQ Capital Market effective at the
opening of business on July 23, 2007) on the Pink Sheets (we were delisted from
The NASDAQ Capital Market effective at the opening of business on February 18,
2010)





As
discussed above, (See
Item 4 - Information on the
Company - A. History and Development of the Company - Forbes Medi-Tech
Inc.), in February 2008 we undertook a one for eight reverse stock split,
with an effective trading day of March 3, 2008.  The following tables
are presented on a Post-Arrangement Basis.








(a)
For the five most recent full financial years: the annual high and low market
prices;





TSX: FMI(1)
            $CDN
            $CDNYear
            High
            Low2005
            25.20
            15.202006
            25.04
            6.722007
            8.64
            2.082008
            2.08
            0.192009
            0.58
            0.12





NASDAQ: FMTI(2)
            $US
            $USYear
            High
            Low2005
            21.04
            12.882006
            21.44
            5.762007
            6.80
            2.082008
            2.00
            0.142009
            0.49
            0.08




(1)
            On
      September 11, 2009, as we had not regained compliance with the TSX listing
      requirements, we were delisted from the
TSX.




(2)
            All
      high and low sale prices up to July 22, 2007 represent prices of our
      common shares on The NASDAQ Global Market.  All high and low
      sale prices from July 23, 2007 represent prices of our common shares on
      The NASDAQ Capital Market.












56




(b)
For the two most recent full financial years and any subsequent period: the high
and low market prices for each full financial quarter;







TSX: FMI(1)
            $CDN
            $CDNYear
            High
            Low2008Q1/08
            2.08
            0.86Q2/08
            1.27
            0.93Q3/08
            1.08
            0.55Q4/08
            0.67
            0.192009Q1/09
            0.27
            0.12Q2/09
            0.58
            0.20Q3/09
            n/a
            n/aQ4/09
            n/a
            n/a





NASDAQ: FMTI(2)
            $US
            $USYear
            High
            Low2008Q1/08
            2.00
            0.85Q2/08
            1.23
            0.85Q3/08
            1.05
            0.56Q4/08
            0.55
            0.142009Q1/09
            0.22
            0.08Q2/09
            0.45
            0.13Q3/09
            0.40
            0.29Q4/09
            0.49
            0.26




(1)
            On
      September 11, 2009, as we had not regained compliance with the TSX listing
      requirements, we were delisted from the
TSX.




(2)
            All
      high and low sale prices up to July 22, 2007 represent prices of our
      common shares on The NASDAQ Global Market.  All high and low
      sale prices from July 23, 2007 represent prices of our common shares on
      The NASDAQ Capital Market.








(c)
For the most recent six months: the high and low market prices for each
month;





NASDAQ/
      PINK SHEETS: FMTI
            $US
            $USMonth
            High
            LowSep-09
            0.40
            0.29Oct-09
            0.49
            0.33Nov-09
            0.39
            0.30Dec-09
            0.38
            0.26Jan-10
            0.40
            0.28Feb-10(1)
            0.37
            0.21Feb-10(2)
            0.24
            0.18




(1)
            All
      high and low sale prices up to February 17, 2010 represent prices of our
      common shares on The NASDAQ Capital
Market.




(2)
            All
      high and low sale prices from February 18, 2010 represent prices of our
      common shares on the Pink Sheets.





B.           Plan
of Distribution





Not
Applicable.


57





C.           Markets





The
common shares of the Company trade on the Pink OTC Markets Inc, which operates
an electronic quotation service for securities traded over-the-counter, commonly
known as the Pink Sheets.  Our common shares trade on the Pink Sheets
under the symbol FMTI.      See “Item 4 - Information on the Company
- A. History and Development of the Company - NASDAQ” and “Item 4 - Information on the Company
- A. History and Development of the Company - TSX”.





For
further information, see “Item
4 - Information on the Company - A. History and Development of the Company -
NASDAQ” above.





D.           Selling
Shareholders





Not
Applicable.





E.           Dilution





Not
Applicable.





F.           Expenses
of the Issue





Not
Applicable.





ITEM 10   Additional
Information




A.           Share
Capital





Not
Applicable.




B.           Memorandum
and Articles of Association





1)
Notice of Articles and Articles


Our
Notice of Articles is on file with the British Columbia Registrar of Companies
under incorporation number BC0813361.  The Notice of Articles and
Articles do not include a stated purpose and do not place any restrictions on
the business that the Company may carry on.





2)Directors


The
number of directors of the Company is currently fixed at four (4).  A
director of the Company is not required to hold shares issued by the
Company.  Under the British Columbia Business
Corporations Act, directors are not required to be a resident of British
Columbia or Canada.  In order to serve as a director, a person must be
a natural person at least 18 years of age, of sound mind,  not
bankrupt, not convicted in or out of British Columbia of an offence in
connection with the promotion, formation or management of a corporation or
unincorporated business, or of an offence involving fraud, unless (i) the court
orders otherwise; (ii) five years has elapsed since the expiration of the period
set for suspension of the passing of sentence without a sentence having been
passed, or the imposition of a fine, or the conclusion of the term of any
imprisonment or the conclusion of the term of any probation period; and (iii) a
pardon was granted or issued under the Criminal Records Act
(Canada). Neither the Notice of Articles, the Articles, nor the British Columbia Business
Corporations Act (the “Act”) impose any mandatory retirement requirements
for directors.




58





A
director or senior officer who is a party to, or who is a director or officer
(or an individual acting in a similar capacity) of, or has a material interest
in any person who is a party to, a material contract or transaction or proposed
material contract or transaction with the Company must disclose to the Company
the nature and extent of his or her interest at the time and in the manner
provided by the Act. However, a director or senior officer does not have a
disclosable interest in a contract or transaction merely because:





·
            both
      the Company and the other party are wholly owned subsidiaries of the same
      corporation;


·
            the
      Company is a wholly owned subsidiary of the other
  party;


·
            the
      other party is a wholly owned subsidiary of the
  Company;


·
            the
      director or senior officer is the sole shareholder of the Company or a
      corporation of which the Company is a wholly owned
    subsidiary;


·
            security
      is granted by the Company for money loaned to, or obligations undertaken
      by the director or senior officer for the benefit of the Company or an
      affiliate;


·
            the
      contract or transaction relates primarily to his or her remuneration as a
      director, officer, employee or agent of the Company or an
      affiliate;


·
            the
      contract or transaction is for indemnity or insurance for director’s
      liability as permitted by the Act;


·
            the
      director or senior officer is a guarantor to some or all of a loan to the
      Company; or


·
            the
      contract or transaction is with an
affiliate.





A
director or senior officer who holds a disclosable interest in a contract or
transaction into which the Company has entered or proposes to enter is not
entitled to vote on any director’s resolution to approve that contract or
transaction, unless all the directors have a disclosable interest in that
contract or transaction, in which case any or all of those directors may vote on
such resolution.





The Board
of Directors may, on behalf of the Company and without authorization of our
shareholders:





·
            borrow
      money upon the credit of the
Company;


·
            issue
      bonds, debentures and other debt obligations either outright or as
      security for any liability or obligation of the
  Company;


·
            give
      a guarantee on behalf of the Company for the repayment of money or
      performance of any obligation of any person;
and


·
            mortgage,
      charge, whether by way of specific or floating charge, grant a security
      interest in, or give other security on, the whole or any part of the
      present and future assets and undertaking of the
  Company.





These
borrowing powers may be varied by our Articles, however, our Articles do not
contain any restrictions on or variations of these borrowing
powers.





3) Share Capitalization


Our
Notice of Articles authorizes the issuance of an unlimited number of common
shares without par value and an unlimited number of preferred shares without par
value.





Common
Shares


The
holders of the common shares of the Company are entitled to receive notice of
and to attend all meetings of the shareholders of the Company and have one vote
for each common share held at all meetings of shareholders except general
meetings at which only holders of a specified class of shares are entitled to
vote. The directors are elected at each annual meeting of shareholders and do
not stand for re-election at staggered intervals.





Subject
to the rights of the holders of the Preferred Shares, the Common Shares shall be
entitled to a dividend from time to time as determined by the
directors.





Subject
to the rights of the holders of the Preferred Shares, in the event of the
liquidation, dissolution or winding-up of the Company whether voluntary or
involuntary, or any other distribution of the assets of the Company among its
shareholders for the purpose of winding up its affairs, the holders of the
Common Shares shall be entitled to receive the remaining property of the
Company.




59





Preferred Shares as a
Class





The
Preferred Shares are issuable from time to time in one or more series, ranking
equally on winding-up, to repayment of the amount paid up on such shares, and to
carry and be subject to, as a class, the following special rights and
restrictions:


1.           each
series of Preferred Shares may consist of such number of shares as may before
the issue thereof be fixed by resolution of the directors;


2.           the
directors of the Company shall by resolution duly passed before the issue of any
Preferred Shares of any series determine the special rights and restrictions
attaching to the Preferred Shares of such series, including but without limiting
or restricting the generality of the foregoing:


a.
            the
      provision, if any, with respect to the rights of holders of such series to
      receive notice of and to attend and vote at any general meeting of the
      Company;


b.
            the
      rights and obligations, if any, relating to the purchase or redemption by
      the Company of the Preferred Shares of such series and the consideration
      for and the terms and conditions of such purchase or
      redemption;


c.
            the
      right, if any, to convert any Preferred Shares of such series into shares
      of another class;


d.
            the
      terms and conditions of any share purchase plan or sinking fund;
      and


e.
            the
      restrictions, if any, respecting payment of dividends on any shares
      ranking junior to the Preferred
Shares.





The
Preferred Shares shall rank on a parity with each other and with any other
shares by their terms ranking equally therewith with respect to, on winding-up,
repayment of the amount paid up on such shares of the Company, and shall rank
prior to the Common Shares or any other shares ranking junior with respect to,
on winding-up, repayment of the amount paid up on such shares.





4)
Action Necessary to Change Rights of Shareholders


In order
to change the rights of our shareholders, the Company would need to amend our
Notice of Articles and Articles to effect the change. Such an amendment would
require the approval of holders of two-thirds of the common shares, and any
other shares carrying the right to vote at any general meeting of the
shareholders of the Company, cast at a duly called special meeting. For certain
amendments such as those creating a class of preferred shares, a shareholder is
entitled under the British
Columbia Business Corporations Act to dissent in respect of such a
resolution amending the Notice of Articles and Articles and, if the resolution
is adopted and the Company implements such changes, demand payment of the fair
value of our common shares.  In addition, for certain amendments, the
separate approval of holders of two-thirds of one or more classes of shares, or
in some cases, of one or more series of shares, is required.





5)
Meetings of Shareholders


An annual
meeting of shareholders is held at least once in each calendar year and not more
than 15 months after the annual reference date for the preceding calendar year
for the purpose of considering the financial statements presented to the
meeting, any reports of the directors or auditor, setting or changing of the
number of directors, election or appointment of directors, appointing an
auditor, setting the remuneration of an auditor and for the business arising out
of a report of the directors or transaction of other business as may be brought
before the meeting not requiring the passing of a special resolution or an
exceptional resolution. The Board has the power to call a special meeting of
shareholders at any time.  The Board must call a general meeting of
shareholders if requisitioned to do so by not less than holders of five percent
of the issued shares of the company that carry the right to vote at a meeting,
for the purpose stated in the shareholder requisition.




60





Notice of
the date, time and location of each meeting of shareholders must be given not
less than 21 days but not more than two months, before the date of each meeting
to each director, to the auditor and to each shareholder who at the close of
business on the record date for notice is entered in the securities register as
the holder of one or more shares carrying the right to vote at the meeting.
Notice of a meeting of shareholders called for any other purpose other than
consideration of the minutes of an earlier meeting, financial statements,
reports of the directors or auditor, setting or changing the number of
directors, the election of directors and reappointment of the incumbent auditor,
must state the general nature of the special business in sufficient detail to
permit the shareholder to form a reasoned judgment on, must state the text of
any special resolution to be submitted to the meeting, and must, if the special
business includes considering, approving, ratifying, adopting or authorizing any
document or the signing of or giving of effect to any document, have attached to
it, a copy of the document or state that a copy of the document will be
available for inspection by shareholders at the Company’s records office or such
other accessible location in British Columbia.





The only
persons entitled to be present at a meeting of shareholders are those entitled
to vote, the directors of the Company and the auditor of the Company. Any other
person may be admitted only on the invitation of the chairman of the meeting or
with the consent of the meeting. In circumstances where a court orders a meeting
of shareholders, the court may direct how the meeting may be held, including who
may attend the meeting.





6)
Limitations on Right to Own Securities


Neither
Canadian law nor our Notice of Articles or Articles limit the right of a
non-resident to hold or vote common shares of the Company, other than as
provided in the Investment Canada Act (the “Investment Act”), as amended by the
World Trade Organization Agreement Implementation Act and by the Budget
Implementation Act, 2009. The Investment Act generally prohibits implementation
of a direct reviewable investment by an individual, government or agency
thereof, corporation, partnership, trust or joint venture that is not a
“Canadian,” as defined in the Investment Act (a “non-Canadian”), unless, after
review, the minister responsible for the Investment Act is satisfied that the
investment is likely to be of net benefit to Canada. An investment in the common
shares of the Company by a non-Canadian (other than a “WTO Investor,” as defined
below) would be reviewable under the Investment Act if it were an investment to
acquire direct control of the Company, and the value of the assets of the
Company were CDN$5.0 million or more (provided that immediately prior to the
implementation of the investment the Company was not controlled by WTO
Investors). An investment in common shares of the Company by a WTO Investor (or
by a non-Canadian other than a WTO Investor if, immediately prior to the
implementation of the investment the Company was controlled by WTO Investors)
would be reviewable under the Investment Act if it were an investment to acquire
direct control of the Company and the enterprise value of the assets of the
Company, calculated in the manner prescribed by the regulations made pursuant to
the Investment Act, equaled or exceeded C$600 million. Notwithstanding the
above, an investment in the common shares of the Company by a non-Canadian would
be reviewable under the Investment Act, regardless of the size or value of such
investment, if it were an investment to acquire direct control or to otherwise
acquire all or a part of the Company, and if the Minister had reasonable grounds
to believe that such investment could be injurious to national security. A
non-Canadian, whether a WTO Investor or otherwise, would be deemed to acquire
control of the Company for purposes of the Investment Act if he or she acquired
a majority of the common shares of the Company. The acquisition of less than a
majority, but at least one-third of the shares, would be presumed to be an
acquisition of control of the Company, unless it could be established that the
Company is not controlled in fact by the acquirer through the ownership of the
shares. In general, an individual is a WTO Investor if he or she is a “national”
of a country (other than Canada) that is a member of the World Trade
Organization (“WTO Member”) or has a right of permanent residence in a WTO
Member. A corporation or other entity will be a “WTO Investor” if it is a “WTO
Investor-controlled entity,” pursuant to detailed rules set out in the
Investment Act. The United States is a WTO Member. Certain transactions
involving our common shares would be exempt from the Investment Act,
including:





·
            an
      acquisition of the shares if the acquisition were made in the ordinary
      course of that person’s business as a trader or dealer in
      securities;


·
            an
      acquisition of control of the Company in connection with the realization
      of a security interest granted for a loan or other financial assistance
      and not for any purpose related to the provisions of the Investment Act;
      and


·
            an
      acquisition of control of the Company by reason of an amalgamation,
      merger, consolidation or corporate reorganization, following which the
      ultimate direct or indirect control in fact of the Company, through the
      ownership of voting interests, remains
  unchanged.






61


7)
Impediments to Change of Control


There are
no provisions of our Notice of Articles or our Articles that would have an
effect of delaying, deferring or preventing a change in control of the Company
and that would operate only with respect to a merger, acquisition or corporate
restructuring involving the Company.





Shareholder
Rights Plan


We have
adopted an Amended and Restated Shareholder Rights Plan made as of April 22,
2008 between Forbes and Computershare Investor Services Inc. as Rights
Agent.





The following is a summary of the
principal terms of the Rights Plan which is qualified in its entirety by
reference to the text of the Rights Plan.  A shareholder or any
other interested party may obtain a copy of the agreement governing the Rights
Plan by contacting the Corporate Secretary of the Company or by accessing it on
the Company’s SEDAR profile at www.sedar.com, or by
accessing it on EDGAR at www.sec.gov/edgar.shtml.





Purpose of Rights
Plan


The
primary objective of a rights plan is to provide the Board of Directors with
sufficient time to explore and develop all options for maximizing shareholder
value if a take-over bid is made for the Company and to provide every
shareholder with an equal opportunity to participate in such a bid. The Rights
Plan encourages a potential acquirer to proceed either by way of a Permitted Bid
(as defined in the Rights Plan), which requires the take-over bid to satisfy
certain minimum standards designed to promote fairness, or with the concurrence
of the Board of Directors.





Term


The term
of the Rights Plan expires 10 years from April 22, 2008, subject to the
shareholders reconfirming such plan by a majority vote at every third annual
meeting of the Company after its annual meeting in 2008. On this basis, the
Rights Plan will be considered again at the Company’s annual meetings in 2011
and 2014 for reconfirmation. If any such approval is not obtained, the Rights
Plan will then cease to have effect.





Issue of
Rights


On the
Effective Date of the Rights Plan, one right (“Right”) was issued and attached
to each common share and will attach to each common share subsequently
issued.





Rights Exercise
Privilege


The
Rights will separate from the common shares and will be exercisable 10 days (the
“Separation Time”) after a person has acquired, or commenced a take-over bid to
acquire, 20% or more of the common shares, other than by an acquisition pursuant
to a take-over bid permitted by the Rights Plan (a “Permitted
Bid”).





The
acquisition by any person (an “Acquiring Person”) of 20% or more of the common
shares, other than by way of a Permitted Bid is referred to as a “Flip-in
Event”. Any Rights held by an Acquiring Person will become void upon the
occurrence of a Flip-in Event. Ten business days after the occurrence of the
Flip-in Event, each Right (other than those held by an Acquiring Person), will
permit the purchase by holders of Rights (other than an Acquiring Person) of
common shares at a 50% discount to their market price.





The issue
of the Rights is not initially dilutive. Upon a Flip-in Event occurring and the
Rights separating from the common shares, reported earnings per share of the
Company on a diluted or non-diluted basis may be affected. Holders of Rights not
exercising their Rights upon the occurrence of a Flip-in Event may suffer
substantial dilution.





Lock-Up
Agreements


A bidder
may enter into lock-up agreements with shareholders whereby such shareholders
agree to tender their common shares to the take-over bid without a Flip-in Event
(as referred to above) occurring. Any such agreement must permit the shareholder
to withdraw the common shares to tender to another take-over bid or to support
another transaction that exceeds the value of the subject bid by 7% or
more.




62





Certificates and
Transferability


Prior to
the Separation Time, the Rights are evidenced by a legend imprinted on
certificates for the common shares and are not to be transferable separately
from the common shares. From and after the Separation Time, the Rights will be
evidenced by Rights certificates, which will be transferable and traded
separately from the common shares.





Permitted Bid
Requirements


The
requirements for a Permitted Bid include the following:


i.
            the
      take-over bid must be made by way of a take-over bid
    circular;


ii.
            the
      take-over bid must be made to all holders of common
  shares;


iii.
            the
      take-over bid must be outstanding for a minimum period of 60 days and
      common shares tendered pursuant to the take-over bid may not be taken up
      prior to the expiry of the 60 day period and only if at such time more
      than 50% of the common shares held by independent shareholders have been
      tendered to the take-over bid and not withdrawn;
  and


iv.
            if
      more than 50% of the common shares held by Independent Shareholders are
      tendered to the take-over bid within the 60 day period, the bidder must
      make a public announcement of that fact and the take-over bid must remain
      open for deposits of common shares for not less than 10 business days from
      the date of such public
announcement.





The
Rights Plan allows for a competing Permitted Bid (a “Competing Permitted Bid”)
to be made while a Permitted Bid is in existence. A Competing Permitted Bid must
satisfy all the requirements of a Permitted Bid except that it may expire on the
same date as the Permitted Bid, subject to the requirement that it be
outstanding for a minimum period of 35 days.





Waiver


The Board
of Directors, acting in good faith, may, prior to the occurrence of a Flip-in
Event, waive the application of the Rights Plan to a particular Flip-in Event
(an “Exempt Acquisition”) or to avoid inadvertent triggering of the
Rights.





Redemption


The Board
of Directors with the approval of a majority of votes cast by the Independent
Shareholders (or the holders of Rights if the Separation Time has occurred)
voting in person or by proxy at a meeting may redeem the Rights at $0.000001 per
common share. Rights will be deemed to have been redeemed by the Board of
Directors following completion of a Permitted Bid, Competing Permitted Bid or
Exempt Acquisition.





Amendment


The Board
of Directors may amend the Rights Plan with the approval of a majority of the
votes cast by Independent Shareholders (or the holders of Rights if the
Separation Time has occurred) voting in person or by proxy at a meeting duly
called for that purpose. The Board of Directors without such approval may
correct clerical or typographical errors and, subject to approval as noted above
at the next meeting of the holders of common shares (or the holders of Rights,
as the case may be), may make amendments to the Rights Plan to maintain its
validity due to changes in applicable legislation.





Board of
Directors


The
Rights Plan will not detract from or lessen the duty of the Board of Directors
to act honestly and in good faith with a view to the best interests of the
Company. The Board of Directors, when a Permitted Bid is made, will continue to
have the duty and power to take such actions and make such recommendations to
shareholders as are considered appropriate.





Exemption for Investment
Managers


Investment
managers (for client accounts), fund managers (for mutual funds), trust
companies (acting in their capacities as trustees and administrators), statutory
bodies whose business includes the management of funds and administrators of
registered pension plans acquiring greater than 20% of the common shares are
exempted from triggering a Flip-in Event, provided that they are not making, or
are not part of a group making, a take-over bid.




63





8)
Stockholder Ownership Disclosure Threshold


Our
Notice of Articles and Articles do not contain a provision governing the
ownership threshold above which shareholder ownership must be disclosed.
However, the power of the Board of Directors to issue additional Common Shares
or preference shares (although subject to restrictions imposed by applicable law
and regulatory requirements) could be used to dilute the share ownership of
persons seeking to obtain control of the Company.





9)
Canadian / US Differences


With
respect to items 2 through 8 above, the corporation law applicable to the
Company is not significantly different from that provided under the corporation
law statutes in most U.S. jurisdictions.





10)
Special Conditions for Changes in Capital


The
conditions imposed by the Company’s Notice of Articles are not more stringent
than required under the British Columbia Business Corporations
Act.





C.           Material
Contracts





The
following is a summary of our material contracts:




Pharmavite
LLC


By an
agreement dated January 1, 2006, the Company entered into a ReducolTM License
& Supply Agreement with Pharmavite LLC. Pursuant to the terms of the
agreement, Pharmavite must purchase a certain minimum quantity of ReducolTM. In
accordance with the terms of the agreement, the agreement was extended for an
additional year commencing July 1, 2008. The contract terminates by its terms on
June 30, 2010 and is subject to automatic one-year renewals unless either party
provides 90 days’ prior written notice of its intention not to
renew.  To date, we have not received any notice of
non-renewal.  Failure to renew the agreement would have a material
adverse effect on our revenue.




Plan
of Arrangement




On
February 27, 2008, we closed a Plan of Arrangement dated February 15, 2008, as
amended.  On closing, among other things, the shareholders of Old
Forbes exchanged eight of their existing common shares for one common share of
New Forbes and holders of options and warrants of Old Forbes became entitled to
receive, on exercise of the options or warrants, one common share of New Forbes
for each eight common shares of Old Forbes.  (See Item 4 - Information on the
Company - A. History and Development of the Company - Forbes Medi-Tech
Inc.).




Investment
Agreement




On March
19, 2008, as part of our reorganization plan, we entered into an agreement (the
“Investment Agreement”), as amended, with a private investor (the "Investor") to
reorganize Forbes Medi-TechOperations Inc. (Old
Forbes) The Investor made an initial investment of $2,960,000 in a convertible
debenture of Old Forbes.   (See Item 4 - Information on the
Company - A. History and Development of the Company - Other Important Events
Since January 1, 2009 - Plan of Reorganization).




Convertible
Debenture




On May 9,
2008, our subsidiary, Old Forbes, issued a convertible debenture for proceeds of
$2,960,000 which was convertible or callable for one year to May 9,
2009.  The debenture was convertible into 20,683,685 voting common
shares (representing 35% of the voting common shares after conversion) and
123,818,901 non-voting common shares (representing 100% of the non-voting common
shares after conversion) of Old Forbes, representing 79% of the issued and
outstanding common shares of Old Forbes at the time of issue of the debenture.
The convertible debenture was converted on March 18, 2009.  (See Item 4 - Information on the
Company - A. History and Development of the Company - Other Important Events
Since January 1, 2009 - Plan of Reorganization).




64




Assignment
Agreement




On August
15, 2008, we entered into an agreement with Transition Therapeutics Inc. (the
“Transition Agreement”) to sell, assign and transfer all of our right, title and
interest in certain pharmaceutical intellectual properties. The intellectual
properties were those acquired in the 2006 TheraPei transaction and further
developed in our now closed San Diego based operations (See Item 4 - Information on the
Company - A. History and Development of the Company – Acquisitions Since January
1, 2007 / Dispositions Since January 1, 2007).




Payment,
Amendment and Release Agreement




On August
15, 2008, we entered into a Payment, Amendment and Release Agreement with the
former TheraPei Stockholders (the “PAR Agreement”) in connection with our sale
of assets to Transition. Pursuant to the PAR Agreement we are required to pay
the former TheraPei Stockholders 20% of the amounts received by us pursuant to
the Transition Agreement. (See
Item 4 - Information on the Company - A. History and Development of the Company
– Acquisitions Since January 1, 2007 / Dispositions Since January 1,
2007).




Transition
Asset Purchase Agreement




On August
15, 2008, we entered into an agreement with Transition Therapeutics (USA) Inc.
to sell capital assets located in our now closed San Diego based operations
(See Item 4 - Information on
the Company - A. History and Development of the Company – Acquisitions Since
January 1, 2007  / Dispositions Since January 1,
2007).




Management
Contracts





We have
entered into employment agreements with our senior
executives.   For a description of these agreements, see Item 6 Directors, Senior Management
and Employees – B. Compensation.




D.           Exchange
Controls





There is
no governmental law or decree, regulation or other legislation in Canada that
affects the export or import of capital, or the remittance of dividends,
interest or other payments to a non-resident holder of common shares of the
Company, other than withholding tax requirements (See “Taxation”
below).  There are no limits on the rights of non-Canadians to
exercise voting rights on their common shares of the Company.





E.           Taxation





Certain
United States Federal Income Tax Considerations




The
following is a general summary of certain material U.S. federal income tax
considerations applicable to a U.S. Holder (as defined below) arising from and
relating to the acquisition, ownership, and disposition of common shares of the
Company.




This
summary is for general information purposes only and does not purport to be a
complete analysis or listing of all potential U.S. federal income tax
considerations that may apply to a U.S. Holder arising from and relating to the
acquisition, ownership, and disposition of common shares.  In
addition, this summary does not take into account the individual facts and
circumstances of any particular U.S. Holder that may affect the U.S. federal
income tax consequences to such U.S. Holder, including specific tax consequences
to a U.S. Holder under an applicable tax treaty.  Accordingly, this
summary is not intended to be, and should not be construed as, legal or U.S.
federal income tax advice with respect to any U.S. Holder.  Each U.S.
Holder should consult its own tax advisor regarding the U.S. federal, U.S.
federal alternative minimum, U.S. federal estate and gift, U.S. state and local
tax, and foreign tax consequences relating to the acquisition, ownership and
disposition of common shares.




65


No legal
opinion from U.S. legal counsel or ruling from the Internal Revenue Service (the
“IRS”) has been requested, or will be obtained, regarding the U.S. federal
income tax consequences of the acquisition, ownership, and disposition of common
shares.  This summary is not binding on the IRS, and the IRS is not
precluded from taking a position that is different from, and contrary to, the
positions taken in this summary.  In addition, because the authorities
on which this summary is based are subject to various interpretations, the IRS
and the U.S. courts could disagree with one or more of the positions taken in
this summary.




Scope
of this Summary




Authorities




This
summary is based on the Internal Revenue Code of 1986, as amended (the “Code”),
Treasury Regulations (whether final, temporary, or proposed), published rulings
of the IRS, published administrative positions of the IRS, U.S. court decisions,
the Convention Between Canada and the United States of America with Respect to
Taxes on Income and on Capital, signed September 26, 1980, as amended (the
“Canada-U.S. Tax Convention”), and U.S. court decisions that are applicable and,
in each case, as in effect and available, as of the date of this
document.  Any of the authorities on which this summary is based could
be changed in a material and adverse manner at any time, and any such change
could be applied on a retroactive or prospective basis which could affect the
U.S. federal income tax considerations described in this
summary.  This summary does not discuss the potential effects, whether
adverse or beneficial, of any proposed legislation that, if enacted, could be
applied on a retroactive or prospective basis.




U.S.
Holders




For
purposes of this summary, the term "U.S. Holder" means a beneficial owner of
common shares that is for U.S. federal income tax purposes:




·
            an
      individual who is a citizen or resident of the
  U.S.;




·
            a
      corporation (or other entity taxable as a corporation for U.S. federal
      income tax purposes) organized under the laws of the U.S., any state
      thereof or the District of
Columbia;




·
            an
      estate whose income is subject to U.S. federal income taxation regardless
      of its source; or




·
            a
      trust that (1) is subject to the primary supervision of a court within the
      U.S. and the control of one or more U.S. persons for all substantial
      decisions or (2) has a valid election in effect under applicable Treasury
      regulations to be treated as a U.S.
person.




Non-U.S.
Holders




For
purposes of this summary, a “non-U.S. Holder” is a beneficial owner of common
shares that is not a U.S. Holder.  This summary does not address the
U.S. federal income tax consequences to non-U.S. Holders arising from and
relating to the acquisition, ownership, and disposition of common
shares.  Accordingly, a non-U.S. Holder should consult its own tax
advisor regarding the U.S. federal, U.S. federal alternative minimum, U.S.
federal estate and gift, U.S. state and local tax, and foreign tax consequences
(including the potential application of and operation of any income tax
treaties) relating to the acquisition, ownership, and disposition of common
shares.




66


U.S. Holders Subject to
Special U.S. Federal Income Tax Rules Not Addressed




This
summary does not address the U.S. federal income tax considerations applicable
to U.S. Holders that are subject to special provisions under the Code, including
the following U.S. Holders:  (a) U.S. Holders that are tax-exempt
organizations, qualified retirement plans, individual retirement accounts, or
other tax-deferred accounts; (b) U.S. Holders that are financial institutions,
underwriters, insurance companies, real estate investment trusts, or regulated
investment companies; (c) U.S. Holders that are dealers in securities or
currencies or U.S. Holders that are traders in securities that elect to apply a
mark-to-market accounting method; (d) U.S. Holders that have a “functional
currency” other than the U.S. dollar; (e) U.S. Holders that own common shares as
part of a straddle, hedging transaction, conversion transaction, constructive
sale, or other arrangement involving more than one position; (f) U.S. Holders
that acquired common shares in connection with the exercise of employee stock
options or otherwise as compensation for services; (g) U.S. Holders that hold
common shares other than as a capital asset within the meaning of Section 1221
of the Code (generally, property held for investment purposes); (h) partnerships
and other pass-through entities (and investors in such partnerships and
entities); or (j) U.S. Holders that own or have owned  (directly,
indirectly, or by attribution) 10% or more of the total combined voting power of
the outstanding shares of the Company.  This summary also does not
address the U.S. federal income tax considerations applicable to U.S. Holders
who are (a) U.S. expatriates or former long-term residents of the U.S. subject
to Section 877 of the Code, (b) persons that have been, are, or will be a
resident or deemed to be a resident in Canada for purposes of the Tax Act; (c)
persons that use or hold, will use or hold, or that are or will be deemed to use
or hold common shares in connection with carrying on a business in Canada; (d)
persons whose common shares constitute “taxable Canadian property” under the Tax
Act; or (e) persons that have a permanent establishment in Canada for the
purposes of the Canada-U.S. Tax Convention.  U.S. Holders that are
subject to special provisions under the Code, including U.S. Holders described
immediately above, should consult their own tax advisor regarding the U.S.
federal, U.S. federal alternative minimum, U.S. federal estate and gift, U.S.
state and local tax, and foreign tax consequences relating to the acquisition,
ownership and disposition of common shares.




If an
entity that is classified as a partnership for U.S. federal income tax purposes
holds common shares, the U.S. federal income tax consequences to such
partnership and the partners of such partnership generally will depend on the
activities of the partnership and the status of such
partners.  Partners of entities that are classified as partnerships
for U.S. federal income tax purposes should consult their own tax advisor
regarding the U.S. federal income tax consequences arising from and relating to
the acquisition, ownership, and disposition of common shares.




Tax Consequences Not
Addressed




This
summary does not address the U.S. state and local, U.S. federal estate and gift,
U.S. federal alternative minimum tax or foreign tax consequences to U.S. Holders
of the acquisition, ownership, and disposition of common shares.  Each
U.S. Holder should consult its own tax advisor regarding the U.S. state and
local, U.S. federal estate and gift, U.S. federal alternative minimum tax and
foreign tax consequences of the acquisition, ownership, and disposition of
common shares.




U.S.
Federal Income Tax Consequences of the Acquisition, Ownership, and Disposition
of Common Shares




If the
Company is not considered a “passive foreign investment company” (a “PFIC”, as
defined below) at any time during a U.S. Holder’s holding period, the following
sections will generally describe the U.S. federal income tax consequences to
U.S. Holders of the acquisition, ownership, and disposition of the Company’s
common shares.




Distributions on Common
Shares




A U.S.
Holder that receives a distribution, including a constructive distribution, with
respect to the Company’s common shares will be required to include the amount of
such distribution in gross income as a dividend (without reduction for any
foreign income tax withheld from such distribution) to the extent of the current
or accumulated “earnings and profits” of the Company.  To the extent
that a distribution exceeds the current and accumulated “earnings and profits”
of the Company, such distribution will be treated (a) first, as a tax-free
return of capital to the extent of a U.S. Holder’s tax basis in the common
shares and, (b) thereafter, as gain from the sale or exchange of such
common shares (see “Disposition of Common Shares” below).  However,
the Company does not intend to maintain the calculations of earnings and profits
in accordance with U.S. federal income tax principles, and each U.S. Holder
should therefore assume that any distribution by the Company with respect to
common shares will constitute ordinary dividend income.  Dividends
paid on common shares generally will not be eligible for the “dividends received
deduction.”






67


For
taxable years beginning before January 1, 2011, a dividend paid by the Company
generally will be taxed at the preferential tax rates applicable to long-term
capital gains if (a) the Company is a “qualified foreign corporation” (as
defined below), (b) the U.S. Holder receiving such dividend is an
individual, estate, or trust, and (c) certain holding period requirements
are met.  The Company generally will be a “qualified foreign
corporation” under Section 1(h)(11) of the Code (a “QFC”) if (a) the
Company is eligible for the benefits of the Canada-U.S. Tax Convention, or
(b) common shares of the Company are readily tradable on an established
securities market in the U.S.  However, even if the Company satisfies
one or more of such requirements, the Company will not be treated as a QFC if
the Company is a PFIC for the taxable year during which the Company pays a
dividend or for the preceding taxable year.  (See the section below
under the heading "Passive Foreign Investment Company Rules").




If the
Company is QFC, but a U.S. Holder otherwise fails to qualify for the
preferential tax rate applicable to dividends discussed above, a dividend paid
by the Company to a U.S. Holder, including a U.S. Holder that is an individual,
estate, or trust, generally will be taxed at ordinary income tax rates (and not
at the preferential tax rates applicable to long-term capital
gains).  The dividend rules are complex, and each U.S. Holder should
consult its own tax advisor regarding the dividend rules.




Disposition of Common
Shares




A U.S.
Holder will recognize gain or loss on the sale or other taxable disposition of
common shares in an amount equal to the difference, if any, between (a) the
amount of cash plus the fair market value of any property received and
(b) such U.S. Holder’s tax basis in the common shares sold or otherwise
disposed of.  Subject to the PFIC rules discussed below, any such gain
or loss generally will be capital gain or loss, which will be long-term capital
gain or loss if common shares are held for more than one year.




Gain or
loss recognized by a U.S. Holder on the sale or other taxable disposition of
Common Shares generally will be treated as “U.S. source” for purposes of
applying the U.S. foreign tax credit rules unless the gain is subject to tax in
Canada and is resourced as “foreign source” under the Canada-U.S. Tax Convention
and such U.S. Holder elects to treat such gain or loss as “foreign
source.”




Preferential
tax rates apply to long-term capital gains of a U.S. Holder that is an
individual, estate, or trust.  There are currently no preferential tax
rates for long-term capital gains of a U.S. Holder that is a
corporation.  Deductions for capital losses are subject to significant
limitations under the Code.




Receipt of Foreign
Currency




The
amount of any distribution paid in foreign currency to a U.S. Holder in
connection with the ownership of common shares, or on the sale, exchange or
other taxable disposition of common shares, generally will be equal to the U.S.
dollar value of such foreign currency based on the exchange rate applicable on
the date of receipt (regardless of whether such foreign currency is converted
into U.S. dollars at that time).  A U.S. Holder that receives foreign
currency and converts such foreign currency into U.S. dollars at a conversion
rate other than the rate in effect on the date of receipt may have a foreign
currency exchange gain or loss, which generally would be treated as U.S. source
ordinary income or loss.  If the foreign currency received is not
converted into U.S. dollars on the date of receipt, a U.S. Holder will have a
basis in the foreign currency equal to its U.S. dollar value on the date of
receipt.  Each U.S. Holder should consult its own U.S. tax advisor
regarding the U.S. federal income tax consequences of receiving, owning, and
disposing of foreign currency.




68




Foreign Tax
Credit




A U.S.
Holder who pays (whether directly or through withholding) foreign income tax
with respect to dividends paid on common shares generally will be entitled, at
the election of such U.S. Holder, to receive either a deduction or a credit for
such foreign income tax paid.  Generally, a credit will reduce a U.S.
Holder’s U.S. federal income tax liability on a dollar-for-dollar basis, whereas
a deduction will reduce a U.S. Holder’s income subject to U.S. federal income
tax.  This election is made on a year-by-year basis and applies to all
foreign taxes paid (whether directly or through withholding) by a U.S. Holder
during a year.




Complex
limitations apply to the foreign tax credit, including the general limitation
that the credit cannot exceed the proportionate share of a U.S. Holder’s U.S.
federal income tax liability that such U.S. Holder’s “foreign source” taxable
income bears to such U.S. Holder’s worldwide taxable income.  In
applying this limitation, a U.S. Holder’s various items of income and deduction
must be classified, under complex rules, as either “foreign source” or “U.S.
source.”  In addition, this limitation is calculated separately with
respect to specific categories of income.  Dividends paid by the
Company generally will constitute “foreign source” income and generally will be
categorized as “passive income.”




Subject
to specific rules, foreign taxes paid with respect to any distribution in
respect of stock in a PFIC are generally eligible for the foreign tax
credit.  The rules relating to distributions by a PFIC and their
eligibility for the foreign tax credit are complicated, and a U.S. Holder should
consult with their own tax advisor regarding the availability of the foreign tax
credit with respect to distributions by a PFIC.




The
foreign tax credit rules are complex, and each U.S. Holder should consult its
own tax advisor regarding the foreign tax credit rules.




Information Reporting;
Backup Withholding Tax For Certain Payments




Under
U.S. federal income tax law and regulations, certain categories of U.S. Holders
must file information returns with respect to their investment in, or
involvement in, a foreign corporation.  Penalties for failure to file
certain of these information returns are substantial.  U.S. Holders of
common shares should consult with their own tax advisors regarding the
requirements of filing information returns, and if applicable, any
“mark-to-market election” or “QEF election” (each as defined
below).




Payments
made within the U.S., or by a U.S. payor or U.S. middleman, of dividends on, and
proceeds arising from certain sales or other taxable dispositions of, common
shares generally will be subject to information reporting and backup withholding
tax, at the rate of 28%, if a U.S. Holder (a) fails to furnish such U.S.
Holder’s correct U.S. taxpayer identification number (generally on Form W-9),
(b) furnishes an incorrect U.S. taxpayer identification number, (c) is
notified by the IRS that such U.S. Holder has previously failed to properly
report items subject to backup withholding tax, or (d) fails to certify,
under penalty of perjury, that such U.S. Holder has furnished its correct U.S.
taxpayer identification number and that the IRS has not notified such U.S.
Holder that it is subject to backup withholding tax.  However, U.S.
Holders that are corporations generally are excluded from these information
reporting and backup withholding tax rules.  Any amounts withheld
under the U.S. backup withholding tax rules will be allowed as a credit against
a U.S. Holder’s U.S. federal income tax liability, if any, or will be refunded,
if such U.S. Holder furnishes required information to the IRS on a timely
basis.  Each U.S. Holder should consult its own tax advisor regarding
the information reporting and backup withholding tax rules.




Passive
Foreign Investment Company Rules




If the
Company were to constitute a PFIC (as defined below) for any year during a U.S.
Holder’s holding period, then certain different and potentially adverse tax
consequences would apply to such U.S. Holder’s acquisition, ownership and
disposition of common shares.  Under the recently enacted Hiring
Incentives to Restore Employment Act, each United States person who is a
shareholder of a PFIC is required to file an annual report with the
IRS.




69




The
Company generally will be a PFIC under Section 1297 of the Code if, for a
taxable year, (a) 75% or more of the gross income of the Company for such
taxable year is passive income or (b) 50% or more of the assets held by the
Company either produce passive income or are held for the production of passive
income, based on the quarterly average of the fair market value of such
assets.  “Gross income” generally means all revenues less the cost of
goods sold, and “passive income” includes, for example, dividends, interest,
certain rents and royalties, certain gains from the sale of stock and
securities, and certain gains from commodities transactions.  Active
business gains arising from the sale of commodities generally are excluded from
passive income if substantially all of a foreign corporation’s commodities are
(a) stock in trade of such foreign corporation or other property of a kind which
would properly be included in inventory of such foreign corporation, or property
held by such foreign corporation primarily for sale to customers in the ordinary
course of business, (b) property used in the trade or business of such foreign
corporation that would be subject to the allowance for depreciation under
Section 167 of the Code, or (c) supplies of a type regularly used or consumed by
such foreign corporation in the ordinary course of its trade or
business.




In
addition, for purposes of the PFIC income test and asset test described above,
if the Company owns, directly or indirectly, 25% or more of the total value of
the outstanding shares of another corporation, the Company will be treated as if
it (a) held a proportionate share of the assets of such other corporation and
(b) received directly a proportionate share of the income of such other
corporation.  In addition, for purposes of the PFIC income test and
asset test described above, “passive income” does not include any interest,
dividends, rents, or royalties that are received or accrued by the Company from
a “related person” (as defined in Section 954(d)(3) of the Code), to the extent
such items are properly allocable to the income of such related person that is
not passive income.




Under
certain attribution rules, if the Company is a PFIC, U.S. Holders will be deemed
to own their proportionate share of any subsidiary of the Company which is also
a PFIC (a ‘‘Subsidiary PFIC’’), and will be subject to U.S. federal income tax
on (i) a distribution on the shares of a Subsidiary PFIC or (ii) a disposition
of shares of a Subsidiary PFIC, both as if the holder directly held the shares
of such Subsidiary PFIC.




The
Company does not believe that it was a PFIC for the tax year ended December 31,
2009.   The determination of whether the Company will be a PFIC
for a taxable year depends, in part, on the application of complex U.S. federal
income tax rules, which are subject to differing interpretations.  In
addition, whether the Company will be a PFIC for its current taxable year
depends on the assets and income of the Company over the course of each such
taxable year and, as a result, cannot be predicted with certainty as of the date
of this document.  Consequently, there can be no assurance regarding
the Company’s PFIC status for any taxable year during which U.S. Holders hold
common shares, and there can be no assurance that the IRS will not challenge the
determination made by the Company concerning its PFIC status.




Under the
default PFIC rules, a U.S. Holder would be required to treat any gain recognized
upon a sale or disposition of our common shares as ordinary (rather than
capital), and any resulting U.S. federal income tax may be increased by an
interest charge which is not deductible by non-corporate U.S.
Holders.  Rules similar to those applicable to dispositions will
generally apply to distributions in respect of our common shares which exceed a
certain threshold level.




While
there are U.S. federal income tax elections that sometimes can be made to
mitigate these adverse tax consequences (including, without limitation, the “QEF
Election” and the “Mark-to-Market Election”), such elections are available in
limited circumstances and must be made in a timely manner.  U.S.
Holders are urged to consult their own tax advisers regarding the potential
application of the PFIC rules to the ownership and disposition of our common
shares, and the availability of certain U.S. tax elections under the PFIC
rules.




U.S.
Holders should be aware that, for each taxable year, if any, that the Company or
any Subsidiary PFIC is a PFIC, the Company can provide no assurances that it
will satisfy the record keeping requirements of a PFIC, or that it will make
available to U.S. Holders the information such U.S. Holders require to make a
QEF Election under Section 1295 of the Code with respect of the Company or any
Subsidiary PFIC.  Each U.S. Holder should consult its own tax advisor
regarding the availability of, and procedure for making, a QEF Election with
respect to the Company and any Subsidiary PFIC.




70







Canadian
Federal Income Tax Consequences




The
following is a general discussion of all material Canadian federal income tax
consequences, under current law, generally applicable to a holder (a “Holder”)
of one or more common shares of the Company who for the purposes of the Income
Tax Act (Canada) (the “Act”) is a non-resident of Canada, holds his common
shares as capital property and deals at arm’s length with the Company, and is
restricted to such circumstances.




Dividends




A Holder
will be subject to Canadian withholding tax (“Part XIII Tax”) equal to 25%, or
such lower rate as may be available under an applicable tax treaty, of the gross
amount of any dividend paid or deemed to be paid on the common shares.
 Under the 1995 Protocol amending the Canada-U.S. Income Tax Convention
(1980) (the “Treaty”) the rate of Part XIII Tax applicable to a dividend on
common shares paid to a Holder who is a resident of the United States is reduced
from the 25% rate.  Under the Treaty, the Company will be required to
withhold Part XIII Tax at 15% from each dividend so paid and remit the withheld
amount directly to the Receiver General for Canada for the account of the
Holder. The 15% rate is further reduced to 5% if the shareholder is a company
owning at least 10% of the outstanding common shares of the
Company.




Disposition of Common
Shares




A Holder,
who disposes of a common share, including by deemed disposition on death, will
not be subject to Canadian tax on any capital gain (or capital loss) thereby
realized unless the common share constituted “taxable Canadian property” as
defined by the Act. Generally, a common share will not constitute taxable
Canadian property of a Holder unless he held the common shares as capital
property used by him carrying on a business (other than an insurance business)
in Canada, or he or persons with whom he did not deal at arm’s length alone or
together hold or held options to acquire, at any time within the five years
preceding the disposition, 25% or more of the shares of any class of the capital
stock of the Company.  The disposition of a common share that constitutes
“taxable Canadian property” of a Holder could also result in a capital loss,
which cannot be used to reduce all taxable income (only that portion of taxable
income derived from a capital gain).




A capital
gain occurs when proceeds from the disposition of a share of other capital
property exceeds the original cost.  A capital loss occurs when the
proceeds from the disposition of a share are less than the original cost.
 Under the Act, a capital gain is effectively taxed at a lower rate as only
50% of the gain is effectively included in the Holder’s taxable income.




A Holder
who is a resident of the United States and realizes a capital gain on
disposition of a common share that was taxable Canadian property will
nevertheless, by virtue of the Treaty, generally be exempt from Canadian tax
thereon unless (a) more than 50% of the value of the common share is
derived from, or forms an interest in, Canadian real estate, including Canadian
mineral resource properties, (b) the common share formed part of the
business property of a permanent establishment that the Holder has or had in
Canada within the 12 months preceding disposition, or (c) the Holder
(i) was a resident of Canada at any time within the ten years immediately,
and for a total of 120 months during the 20 years, preceding the disposition,
and (ii) owned the common share when he ceased to be resident in
Canada.




A Holder
who is subject to Canadian tax in respect of a capital gain realized on
disposition of a common share must include one half of the capital gain (taxable
capital gain) in computing his taxable income earned in Canada.  This
Holder may, subject to certain limitations, deduct one half of any capital loss
(allowable capital loss) arising on disposition of taxable Canadian property
from taxable capital gains realized in the year of disposition in respect to
taxable Canadian property.  To the extent the capital loss is not
deductible in the current year the taxpayer may deduct the capital loss (after
taking into account the inclusion rate of a previous year) from such taxable
capital gains of any of the three preceding years or any subsequent
year.




71




F.           Dividends
and Paying Agents





Not
Applicable.





G.           Statement
by Experts





Not
Applicable.





H.           Documents
on Display





The
Company is subject to the information requirements of the U.S. Securities
Exchange Act of 1934, as amended. In accordance with these requirements, the
Company files reports and other information with the United States Securities
and Exchange Commission. These materials, including this Annual Report and the
exhibits thereto, may be inspected and copied (at prescribed rates) at the
Commission’s Public Reference Room at One Station Place, 100 F Street NE,
Washington, D.C., 20549. The public may obtain information on the operation of
the Commission’s Public Reference Room by calling the Commission in the United
States at 1-800-SEC-0330. In addition, material filed by the Company can be
inspected on the Canadian Securities Administrators’ electronic filing system,
SEDAR®, accessible at the web site www.sedar.com, or by accessing it on EDGAR at
www.sec.gov/edgar.shtml.





I.           Subsidiary
Information





Not
Applicable.




ITEM 11   Quantitative and Qualitative
Disclosures About Market Risk





Financial
risk management


The
Company is exposed to a variety of financial risks by virtue of its activities:
market risk (including currency risk and interest rate risk), credit risk and
liquidity risk.  The overall risk management program focuses on the
unpredictability of financial markets and seeks to minimize potential adverse
effects on financial performance.  We do not engage in any foreign
currency hedging activities.





Market
risk





Currency
risk


We
operate internationally and are exposed to foreign exchange risk from various
currencies, primarily US dollars.  Foreign exchange risk arises from
purchase transactions as well as recognized financial assets and liabilities
denominated in foreign currencies. Our main objective in managing our foreign
exchange risk is to maintain US cash on hand to support US. forecasted cash
flows.  To achieve this objective we monitor forecasted cash flows in
foreign currencies and attempt to mitigate the risk by modifying the nature of
cash and cash equivalents held.





Balances
in foreign currencies at December 31, 2009 are as follows:




US
            
            
            
            
            
            British(thousands
      of $)
            
            Dollars
            
            
            Euros
            
            
            poundsCash
      and cash equivalents
            
            $
            771
            
            
            €
            46
            
            
            £
            66Accounts
      receivable
            
            
            635
            
            
            
            97
            
            
            
            51Accounts
      payable and accrued liabilities
            
            
            (136
            )
            
            
            (36
            )
            
            
            (24
            )Tax
      provision
            
            
            (711
            )
            
            
            ―
            
            
            
            ―$
            559
            
            
            €
            107
            
            
            £
            93  
  
 US
              
              
              
              
              
              British(thousands
      of $)
              
              Dollars
              
              
              Euros
              
              
              poundsCash
      and cash equivalents
              
              $
              435
              
              
              €
              40
              
              
              £
              56Accounts
      receivable
              
              
              329
              
              
              
              166
              
              
              
              58Accounts
      payable and accrued liabilities
              
              
              (1,593
              )
              
              
              (9
              )
              
              
              (58
              )Tax
      provision
              
              
              ―
              
              
              
              ―
              
              
              
              ―$
              (829
              )
              
              €
              197
              
              
              £
              56








72





Balances
in foreign currencies at December 31, 2008 are as follows:




US
              
              
              
              
              
              British(thousands
      of $)
              
              Dollars
              
              
              Euros
              
              
              poundsCash
      and cash equivalents
              
              $
              435
              
              
              €
              40
              
              
              £
              56Accounts
      receivable
              
              
              329
              
              
              
              166
              
              
              
              58Accounts
      payable and accrued liabilities
              
              
              (1,593
              )
              
              
              (9
              )
              
              
              (58
              )Tax
      provision
              
              
              ―
              
              
              
              ―
              
              
              
              ―$
              (829
              )
              
              €
              197
              
              
              £
              56





Our
measurement currency is Canadian dollars however certain of our revenues and
expenses are denominated in US dollars, the European Union Euro (“Euros”), and
the Great Britain Pound (“GBP”).  Foreign currency risk reflects the
risk that our earnings will be impacted by fluctuations in exchange
rates.  During the year ended December 31, 2009 approximately 66% of
our sales were made in US dollars and approximately 49% of expenses were
incurred in US dollars.  With all other variables held constant, a ten
percentage point increase in the value of the US dollar relative to the Canadian
dollar during the year would have decreased our net income by approximately
$95,000 for the year ended December 31, 2009.





During
the year ended December 31, 2009 approximately 26% of our sales were made in
Euros and an insignificant amount of expenses were incurred in
Euros.  With all other variables held constant, a ten percentage point
increase in the value of the Euro relative to the Canadian dollar would have
increased our net income by approximately $86,000 for the year ended December
31, 2009.




During
the year ended December 31, 2009 approximately 8% of our sales were made in GBP
and approximately 4% of expenses were incurred in GBP.  With all other
variables held constant, a ten percentage point increase in the value of the GBP
relative to the Canadian dollar would have increased our net income by
approximately $2,000 for the year ended December 31, 2009.





At
December 31, 2009, we had US dollar, Euro, and GBP denominated accounts payable
which are partially offset by US dollar, Euro and GBP accounts
receivable.  Foreign exchange gains and losses arising from the
revaluation of these balances are included in the net income.  With
all other variables held constant, a ten percentage point increase in the value
of the US dollar, Euro or GBP relative to the Canadian dollar would have
(decreased)/increased the net income by approximately $(21,000), $6,000 and
$3,000, respectively, at December 31, 2009.





Fluctuations
in the US dollar exchange rate could have a potentially significant impact on
our results from operations. However, they would not impair or enhance our
ability pay our foreign currency-denominated expenses as such items would be
similarly affected.





Interest rate
risk


Interest
rate risk is the risk that the future cash flows of a financial instrument will
fluctuate because of changes in market interest rates. Financial assets with
variable interest rates expose us to cash flow interest rate risk. Our cash and
cash equivalents include bank accounts that earn interest at market rates. We
manage our interest rate risk by maximizing the interest income earned on excess
funds while maintaining the liquidity necessary to conduct operations on a
day-to-day basis. Our policy limits the investing of excess funds to interest
earning bank accounts, liquid government Treasury Bills or Bankers Acceptance.
Fluctuations in market rates of interest do not have a significant impact on our
results of operations due to the short term to maturity of the investments
held.




In
addition, although the interest rate fluctuation impacts the interest expense
relating to the tenure allowance, the amount of the tenure allowance payments
are a fixed amount until the end of the arrangement.  A 1% increase in
the Government of Canada’s long-term bond rate would decrease the tenure
allowance liability and related interest expense by approximately
$89,000.




73




Credit
risk





Credit
risk is the risk of a financial loss to us if a customer or counterparty to a
financial instrument fails to meet its contractual obligation. Our maximum
exposure to credit risk at period end is the carrying value of our cash and cash
equivalents and accounts receivable. We manage credit risk by maintaining bank
accounts with Schedule I banks. Cash and cash equivalents of $1,329,000
(December 31, 2008 - $1,377,000) are held with a Canadian chartered bank, an
affiliated US bank and a UK bank. Our cash is not subject to any external
restrictions.





The
following table sets forth details of the age of receivables that are not
overdue as well as an analysis of overdue amounts and related allowance for the
doubtful accounts.







(thousands
      of $)
            
            December
      31, 2009Trade
      accounts receivable
            
            $
            897Other
      receivables
            
            
            50Total
      accounts receivable
            
            $
            947Current
            
            $
            766Past
      due for less than:30
      days
            
            
            8160
      days
            
            
            4690
      days
            
            
            -Past
      due for 90 days or greater
            
            
            4Total
      trade accounts receivable, net
            
            $
            897







Liquidity
risk





Liquidity
risk is the risk that we will not be able to meet our obligations as they fall
due. We manage our liquidity risk by forecasting cash flows from operations and
anticipated investing and financing activities.





The
following are the contractual maturities of the undiscounted cash flows of
financial liabilities as at December 31, 2009:





(thousands
      of $)
            
            Less
      than
              3
      months
            
            
            3
      - 6
              months
            
            
            6-12
              months
            
            
            Greater
      than
              1
      yearAccounts
      payable and accrued liabilities
            
            $
            547
            
            
            $
            ―
            
            
            $
            ―
            
            
            $
            ―Tenure
      allowance
            
            
            16
            
            
            
            16
            
            
            
            33
            
            
            
            1,446$
            563
            
            
            $
            16
            
            
            $
            33
            
            
            $
            1,446





Commodity
Price Sensitivity


We have
secured long term supply agreements for the supply of ReducolTM and other sterol
ingredients, with fixed prices through fiscal 2011. In addition, we may source
alternative supplies of the sterol products,. As we have secured this long term
agreement, we do not have material exposure to commodity price
risk.




74





ITEM 12    Description of
Securities Other than Equity Securities





A. Debt
Securities


Not
Applicable





B.
Warrants and Rights


Not
Applicable





C. Other
Securities


Not
Applicable





D.
American Depository Shares


The
Company’s common shares are not represented by American Depository
Receipts.


PART
II





ITEM 13    Defaults, Dividend,
Arrearages and Delinquencies





Not
applicable.





ITEM 14    Material Modifications
to the Rights of Security Holders and Use of Proceeds





A.           Modification
of Instruments Defining Rights of Security Holders





We have
adopted an Amended and Restated Shareholder Rights Plan made as of April 22,
2008 between Forbes and Computershare Investor Services Inc. as Rights
Agent.  (See Item 10
– Additional Information – B. Memorandum and Articles of Association 7)
Impediments to Change of Control - Shareholder Rights Plan and See Item 4 -
Information on the Company - A. History and Development of the Company - Forbes
Medi-Tech Inc.).





B.           Modification
or Issuance of Other Class of Securities





None.





C.           Withdrawal
or Substitution of Security





None.





D.           Change
of Trustee or Paying Agent





None.





E.           Use
of Proceeds





Not
applicable.





ITEM 15T  Controls and
Procedures





Management’s
Statement of Responsibility for Financial Reporting


The
accompanying consolidated financial statements have been prepared by management
and approved by the Board of Directors of the Company. The consolidated
financial statements were prepared in accordance with accounting principles
generally accepted in Canada and, where appropriate, reflect management's best
estimates and judgments. Where alternative accounting methods exist, management
has chosen those methods deemed most appropriate in the circumstances.
Management is responsible for the accuracy, integrity and objectivity of the
consolidated financial statements within reasonable limits of materiality, and
for the consistency of financial data included in the text of the Annual Report
with that contained in the consolidated financial statements.




75





To assist
management in the discharge of these responsibilities, the Company maintains a
system of internal control over financial reporting as described in "Management's Annual Report of
Internal Control Over Financial Reporting"below.





Our Audit
Committee is appointed by the Board of Directors annually and is comprised
exclusively of outside, independent directors. The Audit Committee meets with
management as well as with the independent auditors to satisfy itself that
management is properly discharging its financial reporting responsibilities and
to review the consolidated financial statements and the independent auditors'
report. The Audit Committee reports its findings to the Board of Directors for
consideration in approving the consolidated financial statements for
presentation to the shareholders. The Audit Committee considers, for review by
the Board of Directors and approval by the shareholders, the engagement or
reappointment of the independent auditors. KPMG LLP has direct access to the
Audit Committee of the Board of Directors.





The
consolidated financial statements have been independently audited by KPMG LLP,
Chartered Accountants, on behalf of the shareholders, in accordance with the
standards of the Public Company Accounting Oversight Board (United
States).  Their report is attached to the Consolidated Financial
Statements.





A.           Disclosure
Controls and Procedures





Our
disclosure controls and procedures are designed to ensure that information
required to be disclosed in our reports filed with securities regulatory
authorities is recorded, processed, summarized, and reported within prescribed
time periods and is accumulated and communicated to our management, including
our Chief Executive Officer and our Chief Financial Officer, as appropriate, to
allow timely decisions regarding required disclosure.





An
evaluation was carried out under the supervision of, and with the participation
of, our management, including our Chief Executive Officer and our Chief
Financial Officer, of the effectiveness of our disclosure controls and
procedures as of December 31, 2009. Based on that evaluation, our Chief
Executive Officer and our Chief Financial Officer concluded that our disclosure
controls and procedures were effective as of the end of such
period.





B.           Management's
Annual Report on Internal Control Over Financial Reporting





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Rules 13a-15(f) and
15d-15(f) under the U.S.Securities Exchange Act
of 1934, as amended.





Our
internal control over financial reporting includes those policies and procedures
that: (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of our assets;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that our receipts and expenditures are being made
only in accordance with authorizations of our management and directors; and (3)
provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have a
material effect on the financial statements.





Under the
supervision and with the participation of our Chief Executive Officer and our
Chief Financial Officer, management conducted an evaluation of the effectiveness
of our internal control over financial reporting, as of December 31, 2009, based
on the framework set forth in Internal Control-Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Based on its evaluation under this framework,
management concluded that our internal control over financial reporting was
effective as of that date.





The
Annual Report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
Management’s report in this Annual Report.




76





C.           Changes
in Internal Controls Over Financial Reporting





There has
been no change in our internal control over financial reporting during the year
ended December 31, 2009 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.





ITEM 16    [Reserved]





Item
16A.              Audit
Committee Financial Expert


Our Board
of Directors has determined that Nitin Kaushal satisfies the requirements of an
audit committee financial expert pursuant to the criteria prescribed by the
Securities and Exchange Commission and has designated him as an audit committee
financial expert for the Audit Committee.  Our Board of Directors has
determined that Mr. Kaushal meets the requirements for independence pursuant to
Rule 5605(a)(2) of the NASDAQ Capital Market and Rule 10A-3 of the Exchange
Act.








Item
16B.              Code
Of Ethics


The
Company has adopted a Code of Business Conduct and Ethics applicable to all
directors, officers and employees including our Chief Executive Officer, Chief
Financial Officer and Controller.  A copy of our Code of Business
Conduct and Ethics is attached as Exhibit 99.6 to our Form 40-F dated March 29,
2006 which was filed on EDGAR on April 3, 2006.





All
amendments to the Code of Business Conduct and Ethics, and all waivers of such
code with respect to any of the officers covered by it, will be posted on our
web site, submitted on Form 6-K and provided in print to any shareholder who
requests them.  Our website is located at www.forbesmedi.com.





Item
16C.              Principal
Accountant Fees And Services


The
aggregate fees billed our independent auditor, KPMG LLP for the years ended
December 31, 2009 and December 31, 2008 are set forth below:





Years
      ended December 312009
            
            
            2008Audit
      Fees
            
            $
            85,000
            
            
            $
            269,135Audit-Related
      Fees
            
            Nil
            
            
            NilTax
      Fees
            
            Nil
            
            
            NilAll
      Other Fees
            
            Nil
            
            
            NilTotal
            
            $
            85,000
            
            
            $
            269,135





"Audit
Fees" are the aggregate fees billed by KPMG LLP for the audit of the Company’s
consolidated annual financial statements, reviews of interim financial
statements and attestation services including review of statutory filings and
registration statements containing the Company’s consolidated annual and interim
financial statements that are provided in connection with audit
services.





"Audit-Related
Fees" are the aggregate fees billed by KPMG LLP for assurance and related
services that are reasonably related to the performance of the audit or review
of the Company’s financial statements and are not reported under "Audit
Fees."





"Tax
Fees" are the aggregate fees billed for professional services rendered by KPMG
LLP for tax compliance and tax advice on actual or contemplated
transactions.





No fees
were paid to KPMG LLP for services that would be disclosed under the category
"All Other Fees", as defined in Item 16C of Form 20-F




77





All
services described in the table above were approved by the Audit Committee
pursuant to paragraph c(7)(i)(C) of Rule 2-01 of Regulation S-X.




Pre-Approval of Audit And Non-Audit
Services Provided By Independent Auditors




The Audit
Committee pre-approves all audit services to be provided to us by our
independent auditors.  The Audit Committee’s policy regarding the
pre-approval of non-audit services to be provided to us by our independent
auditors is that all such services shall be pre-approved by the Audit
Committee.  Non-audit services that are prohibited to be provided to
us by our independent auditors may not be pre-approved.  In addition,
prior to the granting of any pre-approval, the Audit Committee must be satisfied
that the performance of the services in question will not compromise the
independence of the independent auditors.




Item
16D.                      Exemptions
from the Listing Standards for Audit Committee





Not
applicable.





Item
16E.                      Purchases
of Equity Securities by the Issuer and Affiliated Purchasers





Not
applicable.





Item
16F.                      Changes
in Registrant’s Certifying Accountant





Not
applicable.





Item
16G.                      Corporate
Governance





None.


PART
III





ITEM
17            Financial
Statements





The
Company has elected to provide financial statements pursuant to Item
18.





ITEM
18            Financial
Statements





The
Consolidated Financial Statements were prepared in accordance with Canadian GAAP
and are presented in Canadian dollars.  There are differences between
United States and Canadian GAAP.  A reconciliation of the financial
statements to United States GAAP is set forth in Note 25 to the Consolidated
Financial Statements.





The
Financial Statements and related schedules attached hereto are included in this
Item and form part of this Annual Report:





·
            Independent
      Registered Public Accounting Firm Auditors’ Report to the
      Shareholders;


·
            Consolidated
      Balance Sheets as at December 31, 2009 and
2008;


·
            Consolidated
      Statements of Operations, Comprehensive Income Loss and Deficit for the
      years ended December 31, 2009, 2008 and
2007;


·
            Consolidated
      Statements of Cash Flows for the years ended December 31, 2009, 2008 and
      2007; and


·
            Notes
      to the Consolidated Financial
Statements.





78





ITEM
19          Exhibits





Exhibit No.
            DescriptionF-1
            Audited
      Annual Consolidated Financial Statements for the years ended December 31,
      2009, 2008 and 2007, together with the Auditor’s report
      thereon.1.1(1)
            Certificate
      of Name Change dated February 27, 20081.2(1)
            Certificate
      of Incorporation dated January 10, 20081.3(1)
            Articles
      of the Company dated January 10, 20081.4(2)
            Court
      Order and Plan of Arrangement dated February 15, 20081.5(7)
            Notice
      of Articles of the Company dated May 23, 20082.1(7)
            Amended
      and Restated Shareholder Rights Plan Agreement made as of April 22,
      20082.2(6)
            2007
      Stock Option Plan4.1*(4)
            License
      Agreement with UBC (re: Phytosterols) dated July 4,
19954.10(5)
            Separate
      Registration Rights Agreements dated October 25, 2004 between Forbes
      Medi-Tech Inc. and various purchasers of our Series B Convertible
      Preferred Shares4.11(5)
            Class
      D Warrant Certificates4.12(3)
            Settlement
      Agreement dated May 26, 2004 between Forbes Medi-Tech Inc., Tazdin Esmail
      and Vestco Enterprises Inc.4.13(12)
            Amended
      and Restated Employment Agreement with Charles Butt dated September 8,
      20044.14(12)
            Amended
      and Restated Employment Agreement with Jeff Motley dated January 1,
      20054.15(12)
            Amended
      and Restated Employment Agreement with Laura Wessman dated January 1,
      20054.18(12)
            Amended
      and Restated Employment Agreement with David Goold dated January 1,
      20064.19(8)
            Amended
      and Restated Employment Agreement with David Stewart dated January 1,
      20054.25*
              4.26*
              4.28(13)
              4.29(13)
              4.30(13)
            Investment
      Agreement with Matco Capital Ltd. dated March 19, 2008
              Convertible
      Debenture issued by Old Forbes to Matco Capital Ltd. dated May 9,
      2008
              Asset
      Purchase Agreement with Transition dated August 15, 2008
              Assignment
      Agreement with Transition dated August 15, 2008
              Payment,
      Amendment and Release Agreement with the TheraPei Stockholders dated
      August 15, 20088.1
            List
      of Subsidiaries See Item
      4 Information on the Company - C. Organizational
      Structure12.1
            Section
      302 Certification of Chief Executive Officer12.2
            Section
      302 Certification of Chief Financial Officer13.1
            Certification
      of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
      Pursuant to Section 906 of the Sarbanes-Oxley Act of
  200213.2
            Certification
      of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
      Pursuant to Section 906 of the Sarbanes-Oxley Act of
  200299.6
      (10)
              99.7(8)
            Code
      of Ethics
              Audit
      Committee Charter


(1)
            Incorporated
      herein by reference from the Company’s Form 6-K filed with the SEC on
      March 6, 2008.


(2)
            Incorporated
      herein by reference from the Company’s Form 6-K filed with the SEC on
      February 28, 2008


(3)
            Incorporated
      herein by reference from the Company’s Form 6-K filed with the SEC on
      April 1, 2005.


(4)
            Incorporated
      herein by reference from the Exhibits to the Company’s Report on Form 20-F
      for the year ended July 31, 2001.


(5)
            Incorporated
      herein by reference from the Company’s Form 6-K filed with the SEC on
      October 28, 2005 and the Company's Form 6-K's filed on November 23,
      2005.


(6)
            Incorporated
      herein by reference from the Company’s Form 6-K filed with the SEC on July
      5, 2007.


(7)
            Incorporated
      herein by reference from the Company’s Form 6-K filed with the SEC on May
      27, 2008.


(8)
            Incorporated
      herein by reference from the Exhibits to the Company’s Report on Form 20-F
      for the year ended December 31, 2008 submitted to the SEC on April 2,
      2009.


(9)
            Incorporated
      herein by reference from the Company’s Form 6-K filed with the SEC on
      April 2, 2008.


(10)
            Incorporated
      herein by reference from the Company’s Form 6-K filed with the SEC on
      April 3, 2006.


(11)
            Incorporated
      herein by reference from the Exhibits to the Company’s Report on Form 20-F
      for the year ended December 31, 2006 submitted to the SEC on April 4,
      2007.


(12)
            Incorporated
      herein by reference from the Exhibits to the Company’s Amended Report on
      Form 20-F/A for the year ended December 31, 2006 submitted to the SEC on
      April 5, 2007.


(13)
            Incorporated
      herein by reference from the Company’s Form 6-K filed with the SEC on
      August 25, 2008.







* The
Company has requested and / or received confidential treatment with respect to
certain portions of this Agreement, which have been omitted, pursuant to Rule
24b-2 of the Securities Exchange Act of 1934, as amended.


79





SIGNATURES





The
registrant hereby certifies that it meets all of the requirements for filing on
Form 20-F and that it has duly caused and authorized the undersigned to sign
this annual report on its behalf.







FORBES
      MEDI-TECH INC.(Registrant)(signed)
      “Charles Butt”CHARLES
      BUTT
              CHIEF
      EXECUTIVE OFFICER





Dated:   April
2, 2010











































Consolidated
Financial Statements


(Expressed
in Canadian dollars)









FORBES
MEDI-TECH INC.





Years
ended December 31, 2009, 2008 and 2007






































MANAGEMENT’S
STATEMENT OF RESPONSIBILITY






The
accompanying consolidated financial statements have been prepared by management
and approved by the Board of Directors of the Company. The consolidated
financial statements were prepared in accordance with accounting principles
generally accepted in Canada and, where appropriate, reflect management's best
estimates and judgments. Where alternative accounting methods exist, management
has chosen those methods deemed most appropriate in the circumstances.
Management is responsible for the accuracy, integrity and objectivity of the
consolidated financial statements within reasonable limits of materiality, and
for the consistency of financial data included in the text of the Annual Report
with that contained in the consolidated financial statements.






To assist
management in the discharge of these responsibilities, the Company maintains a
system of internal controls over financial reporting as described in
"Management's Annual Report of Internal Control Over Financial Reporting" on
page 15 of the December 31, 2009 Management‘s Discussion and
Analysis.






The
Company's Audit Committee is appointed by the Board of Directors annually and is
comprised exclusively of outside, independent directors. The Audit Committee
meets with management as well as with the independent auditors to satisfy itself
that management is properly discharging its financial reporting responsibilities
and to review the consolidated financial statements and the independent
auditors' report. The Audit Committee reports its findings to the Board of
Directors for consideration in approving the consolidated financial statements
for presentation to the shareholders. The Audit Committee considers, for review
by the Board of Directors and approval by the shareholders, the engagement or
reappointment of the independent auditors. KPMG LLP has direct access to the
Audit Committee of the Board of Directors.






The
consolidated financial statements have been independently audited by KPMG LLP,
Chartered Accountants, on behalf of the shareholders. Their report outlines the
nature of their audit and expresses their opinion on the consolidated financial
statements of the Company.
















“Charles
A.
Butt”                                                                                     “David
Goold”







CHARLES
A.
BUTT                                                                                   DAVID
GOOLD, CA


President
and Chief Executive
Officer                                                      Chief
Financial Officer








1













REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM






To the
Board of Directors of


Forbes
Medi-Tech Inc.




We have
audited the accompanying consolidated balance sheets of Forbes Medi-Tech Inc.
and subsidiaries as of December 31, 2009 and 2008, and the related
consolidated statements of operations, comprehensive income (loss) and deficit
and cash flows for each of the years in the three-year period ended
December 31, 2009.  These consolidated financial statements are
the responsibility of the Company's management.  Our responsibility is
to express an opinion on these consolidated financial statements based on our
audits.




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




In our
opinion, these consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Forbes Medi-Tech
Inc. and its subsidiaries as of December 31, 2009 and 2008, and the results
of its operations and its cash flows for each of the years in the three-year
period ended December 31, 2009 in accordance with Canadian generally
accepted accounting principles.




The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern.  As discussed in note 2
to the consolidated financial statements, the Company has suffered recurring
losses from operations and has a deficit that raise substantial doubt about its
ability to continue as a going concern.  Management’s plans in regard
to these matters are also described in note 2.  The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.




Canadian
generally accepted accounting principles vary in certain significant respects
from accounting principles generally accepted in the United States of
America.  Information relating to the nature and effect of such
differences is presented in note 25 to the consolidated financial
statements.









SIGNED
“KPMG LLP”






Chartered
Accountants





Vancouver,
Canada


February
      23, 2010




KPMG LLP
is a Canadian limited liability partnership and a member firm of the
KPMG network of
independent member firms affiliated with KPMG International Cooperative (“KPMG
International”), a Swiss entity. KPMG
Canada provides services to KPMG LLP.







2





FORBES
      MEDI-TECH INC.


Consolidated
      Balance Sheets


(Expressed
      in Canadian dollars)





December
      31, 2009 and 2008


2009
            
            
            2008AssetsCurrent
      assets:Cash
      and cash equivalents
            
            $
            1,329,176
            
            
            $
            1,376,575Accounts
      receivable (note 7)
            
            
            946,823
            
            
            
            1,446,561Inventories
      (note 8 )
            
            
            2,117,159
            
            
            
            5,992,748Prepaid
      expenses and deposits
            
            
            178,287
            
            
            
            241,7844,571,445
            
            
            
            9,057,668Capital
      assets (note 10)
            
            
            102,813
            
            
            
            139,843Other
      assets (note 12)
            
            
            23,210
            
            
            
            18,376$
            4,697,468
            
            
            $
            9,215,887Liabilities
      and Shareholders’ EquityCurrent
      liabilities:Accounts
      payable and accrued liabilities (note 13)
            
            $
            546,848
            
            
            $
            2,598,488Income
      tax liability
            
            
            ―
            
            
            
            6,838Convertible
      debenture (note 6)
            
            
            ―
            
            
            
            2,856,272Current
      portion tenure allowance payable (note 15(a))
            
            
            65,000
            
            
            
            65,000611,848
            
            
            
            5,526,598Long-term
      liabilities:Tax
      provison
            
            
            744,000
            
            
            
            ―Tenure
      allowance (note 15(a))
            
            
            913,464
            
            
            
            1,005,0292,269,312
            
            
            
            6,531,627Equity
      component of subsidiary’s convertible debenture (note 6)
            
            
            ―
            
            
            
            398,615Shareholders’
      equity:Share
      capital (note 14(b))
            
            
            2,720,992
            
            
            
            2,720,992Contributed
      surplus (note 14(c))
            
            
            10,042,877
            
            
            
            10,026,964Deficit
            
            
            (10,335,713
            )
            
            
            (10,462,311
            )2,428,156
            
            
            
            2,285,645$
            4,697,468
            
            
            $
            9,215,887









Nature
      of operations (note 1)


Going
      concern (note 2)


Commitments
      and contractual obligations (notes 15 and
21)


Related
      party transactions (note 18)





See
      accompanying notes to consolidated financial
  statements.





Approved
      on behalf of the Board:





“Joe
      Dunne”
            “Nitin
      Kaushal”


Director
            
            
            Director





JOE
      DUNNE                                                                                NITIN
      KAUSHAL









3





FORBES
      MEDI-TECH INC.


Consolidated
      Statements of Operations, Comprehensive Income / (Loss) and
      Deficit


(Expressed
      in Canadian dollars)





Years
      ended December 31, 2009, 2008 and
2007







2009
            
            
            2008
            
            
            2007Revenue:Sales
            
            $
            4,624,082
            
            
            $
            7,839,674
            
            
            $
            8,847,117Licensing
            
            
            2,168
            
            
            
            4,097
            
            
            
            57,324Phytosterol
      revenues
            
            
            4,626,250
            
            
            
            7,843,771
            
            
            
            8,904,441Cost
      of sales
            
            
            4,229,889
            
            
            
            6,712,878
            
            
            
            8,663,915Change
      in inventory and purchase commitment
      allowances       (note
    9)
            
            
            (852,000
            )
            
            
            830,000
            
            
            
            491,0001,248,361
            
            
            
            300,893
            
            
            
            (250,474
            )Expenses:General
      and administrative
            
            
            3,043,056
            
            
            
            5,281,976
            
            
            
            4,875,102Nutraceutical
      research, development and support
            
            
            734,232
            
            
            
            1,213,554
            
            
            
            1,774,932Marketing,
      sales and product development
            
            
            681,498
            
            
            
            1,527,766
            
            
            
            1,605,985Depreciation
      and amortization
            
            
            37,030
            
            
            
            75,584
            
            
            
            160,178Foreign
      exchange loss (gain)
            
            
            137,446
            
            
            
            (456,027
            )
            
            
            1,431,0694,633,262
            
            
            
            7,642,853
            
            
            
            9,847,266Loss
      from continuing operations before other income (expenses)
              and
      taxes
            
            
            (3,384,901
            )
            
            
            (7,341,960
            )
            
            
            (10,097,740
            )Other
      income (expenses):Gain
      on dilution of interest in subsidiary (note 3)
            
            
            4,147,975
            
            
            
            ―
            
            
            
            ―Interest
      and other
            
            
            128,857
            
            
            
            168,930
            
            
            
            456,924Impairment
      charge for capital assets
            
            
            ―
            
            
            
            ―
            
            
            
            (92,848
            )4,276,832
            
            
            
            168,930
            
            
            
            364,076Income
      / (loss) from continuing operations before taxes
            
            
            891,931
            
            
            
            (7,173,030
            )
            
            
            (9,733,664
            )Income
      tax recovery / (expense) (note 20(a))
            
            
            (765,333
            )
            
            
            (16,538
            )
            
            
            491,454Net
      income / (loss) from continuing operations for the year
            
            
            126,598
            
            
            
            (7,189,568
            )
            
            
            (9,242,210
            )Discontinued
      Operations (note 24)Loss
      from discontinued operations
            
            
            ―
            
            
            
            (462,931
            )
            
            
            (2,440,918
            )Net
      income / (loss) and comprehensive income / (loss) for the
    year
            
            
            126,598
            
            
            
            (7,652,499
            )
            
            
            (11,683,128
            )Deficit,
      beginning of year
            
            
            (10,462,311
            )
            
            
            (101,269,812
            )
            
            
            (89,586,684
            )Reduction
      of deficit and stated share capital
            
            
            ―
            
            
            
            98,460,000
            
            
            
            ―Deficit,
      end of year
            
            $
            (10,335,713
            )
            
            $
            (10,462,311
            )
            
            $
            (101,269,812
            )Weighted
      average number of common shares outstanding, basic (note
    17)
            
            
            4,969,813
            
            
            
            4,865,131
            
            
            
            4,800,923Basic
      income / (loss) per share
            
            $
            0.03
            
            
            $
            (1.57
            )
            
            $
            (2.43
            )Weighted
      average number of common shares outstanding, diluted (note
    17)
            
            
            5,032,539
            
            
            
            4,865,131
            
            
            
            4,800,923Diluted
      income / (loss) per share
            
            $
            0.03
            
            
            $
            (1.57
            )
            
            $
            (2.43
            )





See
      accompanying notes to consolidated financial
  statements.







4





FORBES
      MEDI-TECH INC.


Consolidated
      Statements of Cash Flows


(Expressed
      in Canadian dollars)





Years
      ended December 31, 2009, 2008 and
2007





2009
            
            
            2008
            
            
            2007Cash
      provided by (used in):Operations:Net
      income / (loss) for the year
            
            $
            126,598
            
            
            $
            (7,652,499
            )
            
            $
            (11,683,128
            )Adjustment
      for:Depreciation
      and amortization
            
            
            37,030
            
            
            
            86,617
            
            
            
            213,007Stock-based
      compensation
            
            
            15,913
            
            
            
            151,608
            
            
            
            958,324Accretion
      of interest
            
            
            103,728
            
            
            
            294,887
            
            
            
            ―Loss
      on disposal of fixed assets
            
            
            ―
            
            
            
            73,288
            
            
            
            ―Impairment
      charge for goodwill, intellectual property and capital
    assets
            
            
            ―
            
            
            
            ―
            
            
            
            759,047Amortization
      of deferred license revenues
            
            
            ―
            
            
            
            ―
            
            
            
            (57,324
            )Gain
      on disposal of discontinued operations, net of taxes
            
            
            ―
            
            
            
            (767,603
            )
            
            
            ―Gain
      on dilution of interest in subsidiary
            
            
            (4,147,975
            )
            
            
            ―
            
            
            
            ―Net
      change in non-cash operating items (note 16)
            
            
            3,027,947
            
            
            
            (119,859
            )
            
            
            (290,871
            )Net
      cash used in continuing operations
            
            
            (836,759
            )
            
            
            (7,933,561
            )
            
            
            (10,100,945
            )Investments:Proceeds
      on disposal of short-term investment
            
            
            789,360
            
            
            
            ―
            
            
            
            ―Net
      proceeds on disposal of discontinued operations
            
            
            ―
            
            
            
            1,016,966
            
            
            
            ―Proceeds
      from long-term note receivable
            
            
            ―
            
            
            
            98,559
            
            
            
            140,075Proceeds
      on disposal of fixed assets
            
            
            ―
            
            
            
            10,453
            
            
            
            ―Acquisition
      of property, plant and equipment
            
            
            ―
            
            
            
            (9,885
            )
            
            
            (98,695
            )789,360
            
            
            
            1,116,093
            
            
            
            41,380Financing:Debenture
            
            
            ―
            
            
            
            2,960,000
            
            
            
            ―Issuance
      of common shares
            
            
            ―
            
            
            
            ―
            
            
            
            6,600―
            
            
            
            2,960,000
            
            
            
            6,600(Decrease)
      in cash and cash equivalents
            
            
            (47,399
            )
            
            
            (3,857,468
            )
            
            
            (10,052,965
            )Cash
      and cash equivalents, beginning of year
            
            
            1,376,575
            
            
            
            5,234,043
            
            
            
            15,287,008Cash
      and cash equivalents, end of year
            
            $
            1,329,176
            
            
            $
            1,376,575
            
            
            $
            5,234,043









2009
            
            
            2008
            
            
            2007Supplementary
      cash flow information:Interest
      paid
            
            $
            ―
            
            
            $
            1
            
            
            $
            2,598Income
      taxes paid
            
            
            28,294
            
            
            
            39,132
            
            
            
            12,271Non-cash
      financing and investing activities:Issuance
      of common shares on disposal ofdiscontinued
      operations (note 24)
            
            
            ―
            
            
            
            154,467
            
            
            
            ―Transfer
      from contributed surplus for options exercised
            
            
            ―
            
            
            
            ―
            
            
            
            26,276






See
      accompanying notes to consolidated financial
  statements.







5




FORBES
      MEDI-TECH INC. Notes
      to Consolidated Financial
Statements
 (Expressed
      in Canadian dollars)
 
 Years
      ended December 31, 2009 and
2008





1.      Nature
of operations:




Forbes
Medi-Tech Inc. (“Forbes” or the “Company”) is a life sciences company focused on
evidence-base nutritional solutions.  Forbes is a provider of
value-added products and cholesterol-lowering ingredients for use in functional
foods and dietary supplements.  The company has operations in the
nutraceutical/functional food ingredient market in the USA, Europe and other
international markets.




The
eventual profitability of the Company is dependent on many factors, including,
but not limited to, successful development and market acceptance of its products
and services, receiving the required regulatory approvals, the conclusion and
implementation of applicable strategic and other alliances and adequate
financing on a timely basis.  There can be no assurance that required
regulatory approvals will be received or, if received, will be received on a
timely basis.  In addition, the nutraceutical industry is subject to
substantial technological change, which could reduce the marketability of the
Company’s products or technology, and which requires ongoing issuance and
maintenance of patents as well as continued investment in research and
development.  It is not possible to predict the outcome of the
Company’s future research and development activities or the financing
thereof.








2.
            Going
      Concern:




The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern, which assumes that the Company
will continue in operations for the foreseeable future and be able to realize
its assets and discharge its liabilities and commitments in the normal course of
business.  Certain conditions, discussed below, currently exist which
raise substantial doubt about the validity of this assumption.




The
Company has sustained continuing operating losses since its formation and at
December 31, 2009 had cash of $1,329,176. The Company’s management is of the
view that there are sufficient financial resources to finance operations through
the second quarter of 2010.  This view is based on a number of factors
and assumptions and includes the assumption that the Company’s expenditures will
not exceed those currently planned, and that its revenues will meet or exceed
its expectations.




The
Company's future operations are completely dependent upon its ability to
complete a strategic transaction such as a merger, acquisition, sale of business
or other suitable transaction, and/or secure additional funds.  The
market for any of these activities for companies such as Forbes have always been
challenging.  If the Company cannot complete one or more of these
activities, the Company will have to consider winding up, dissolution or
liquidation of the Company.  The financial statements do not include
any adjustments that might result form the outcome of this
uncertainty.  If the Company is unable to continue as a going concern,
assets and liabilities would require restatement on a liquidation basis, which
would differ materially from the going concern basis.










6





FORBES
      MEDI-TECH INC. Notes
      to Consolidated Financial
Statements
 (Expressed
      in Canadian dollars)
 
 Years
      ended December 31, 2009 and
2008


3.
            Plan
      of Arrangement and Reorganization:




On
February 14, 2008, at a Special General Meeting, the Company’s securityholders,
being the shareholders, optionholders and warrantholders, approved three
resolutions in respect of a corporate reorganization. The resolutions passed at
the Special General Meeting included a 'Reduction in Stated Capital', a 'Name
Change' and the 'Plan of Arrangement' (the "Arrangement").  On
February 27, 2008, the closing of the Arrangement, the shareholders of Forbes
Medi-Tech Inc., (“Old Forbes”) exchanged eight of their existing common shares
for one common share of 0813361 BC Ltd. ("New Forbes"), a company incorporated
under the British Columbia Business Corporations Act; holders of options and
warrants of Old Forbes became entitled to receive, on exercise of the options or
warrants, one common share of New Forbes for each eight common shares of Old
Forbes.   As a result of the exchange of shares referred to
above, Old Forbes became a wholly owned subsidiary of New Forbes; shareholders,
optionholders and warrantholders became shareholders, optionholders and
warrantholders of New Forbes; Old Forbes changed its name from "Forbes Medi-Tech
Inc." to "Forbes Medi-Tech Operations Inc." and New Forbes changed its name from
"0813361 B.C. Ltd." to "Forbes Medi-Tech Inc.".  Subsequently Old
Forbes changed its name to “3887685 Canada Inc.” and then to Deans Knight Income
Corporation (“Deans Knight”).




On March
20, 2008, the Company announced that as part of its continuing reorganization
plan, the Company entered into an agreement with a private investor (the
"Investor") to reorganize Old Forbes.  As announced on May 12, 2008,
the first phase of this reorganization transaction was completed when the
Investor made an investment of $2,960,000 by way of a convertible debenture of
Old Forbes.  All of the assets, liabilities and operations of Old
Forbes, including the proceeds from the issue of the convertible debenture, were
transferred to New Forbes.  The debenture was convertible into 35% of
the voting common shares and all of the non-voting common shares of Old Forbes,
representing 79% of the issued and outstanding common shares of Old Forbes at
the time of completion of the first phase of the transaction.




In first
quarter of 2009, the Company’s old subsidiary, 3887685 Canada Inc. retained GMP
Securities L.P. and a syndicate of agents in connection with an offering of its
Voting Common Shares to the public (the "Offering").   3887685
Canada Inc. changed its name to Deans Knight. On March 9, 2009, Deans Knight
filed a final prospectus relating to the Offering of these
securities.  On March 18, 2009, the Offering was completed with Deans
Knight issuing 10,036,890 Voting Common Shares at a price of $10 per share for
gross proceeds of $100,368,900.  As a requirement of the closing of
the Offering, the holder of the Convertible Debenture issued by Old Forbes,
exercised the conversion feature of the Convertible Debenture.




On March
18, 2009, as a result of the completion of the Offering and the conversion of
the Convertible Debenture, the Company’s ownership in Deans Knight was diluted
from 100% to approximately 1%. This loss of control resulted in a dilution gain
of $4,147,975.  The dilution gain is comprised of a gain on the
conversion of convertible debenture of $2,960,000, gain on dilution of interest
in Old Forbes resulting from the Offering of $789,360, and a gain on the
derecognition of the equity component of subsidiary’s convertible debenture in
the amount of $398,615.  In the second quarter of 2009, the Company
disposed of its short-term investment in Deans Knight for proceeds of
$789,360.















7


FORBES
      MEDI-TECH INC.


Notes
      to Consolidated Financial
Statements


(Expressed
      in Canadian dollars)





Years
      ended December 31, 2009 and
2008


3.
            Plan
      of Arrangement and Reorganization
(continued):




As a
result of this transaction approximately $48,523,600 of non-capital losses,
$34,398,700 of scientific research and experimental development expenditures and
$7,096,900 of unclaimed federal investment tax credits attributable to 3887685
Canada Inc. (Old Forbes), are no longer available for utilization by the Company
(note 20).




These
consolidated financial statements give effect to the reorganization under the
Arrangement as a reorganization under common control and a continuity of
interests in Old Forbes. These consolidated financial statements reflect the
pre-reorganization historical results of Old Forbes with the exception of basic
and diluted loss per share amounts, descriptions and amounts of all common
stock, stock options and warrants and their corresponding exercise prices where
applicable; which have been recast, on a retroactive basis, to reflect the one
for eight common share exchange effected by the Arrangement.




4.
            Changes
      in accounting standards :




(a)   Current
year adoption of new accounting standards:




Effective
on January 1, 2009, the Company adopted the recommendation of CICA Handbook
Section 3064, Goodwill and Intangible Assets (Section 3064) and Section 3862,
Financial Instruments (Section 3862).




Section
3064 replaced Handbook Section 3062, Goodwill and Intangible Assets, and
Handbook Section 3450, Research and Development. The new standard provides
guidance on the recognition, measurement, presentation and disclosure of
goodwill and intangible assets.  This standard is effective for
interim and annual financial statements relating to fiscal years beginning on or
after October 1, 2008 and was applicable for the Company’s first quarter of
fiscal 2009.  The adoption of this new standard did not have an impact
on the Company’s financial position and results of operations.




Section
3862 was amended which entailed disclosures to include additional disclosure
requirements about fair value measurements of financial instruments and enhanced
liquidity risk disclosure requirements. We adopted these amendments that require
the classification of fair value measurements of financial instruments using a
three level hierarchy reflecting the significance of the inputs used in
estimating these fair value measurements. The fair value hierarchy consists of
the following levels:




(i)
            financial
      assets and liabilities measured at estimated fair values determined using
      quoted prices in active markets for identical assets or
      liabilities.




(ii)
            financial
      assets and liabilities measured at estimated fair values determined using
      inputs other than quoted prices that are observable for the asset or
      liability either directly (as prices) or indirectly (derived from
      prices).




(iii)
            financial
      assets and liabilities measured at estimated fair values determined using
      inputs that are not based on observable market
  data.




Classification
of the fair value measurements is determined on the basis of the lowest level
input that is significant to the fair value measurement in its
entirety.










8


FORBES
      MEDI-TECH INC.


Notes
      to Consolidated Financial
Statements


(Expressed
      in Canadian dollars)





Years
      ended December 31, 2009 and
2008


4.
            Changes
      in accounting standards
(continued):




(b)      Future
changes in accounting standards:




(i)
            International
      financial reporting standards
(“IFRS”):




In 2006,
the Canadian Accounting Standards Board (“AcSB”) published a new strategic plan
that will significantly affect financial reporting requirements for Canadian
companies. The AcSB strategic plan outlines the convergence of Canadian GAAP
with IRFS over an expected five year transitional period. In February 2008 the
AcSB announced that 2011 is the changeover date for the publicly-listed
companies to use IFRS, replacing Canada’s own GAAP. The date is for interim and
annual financial statements relating to fiscal years beginning on or after
January 1, 2011. The Company’s first year end under IFRS will be December 31,
2011. The transition date for the Company will be January 1, 2011 and may
require the restatement for comparative purposes of amounts reported by the
Company for the year ended December 31, 2010. While the Company has begun
assessing the adoption and impact of IFRS for 2011, the financial reporting
impact of the transition to IFRS cannot be reasonably estimated at this
time.  Throughout 2010 the Company will continue to assess the
financial reporting impact and review standards for their application to the
Company’s operations.





(ii)
            Business
      combinations:




In
January 2009, the CICA issued Handbook Section 1582, Business Combinations,
which replaces the existing standards. This section establishes the standards
for the accounting of business combinations, and states that all assets and
liabilities of an acquired business will be recorded at fair value. Obligations
for contingent considerations and contingencies will also be recorded at fair
value at the acquisition date. The standard also states that acquisition-related
costs will be expensed as incurred and that restructuring charges will be
expensed in the periods after the acquisition date. This standard is effective
for business combinations with acquisition dates on or after January 1, 2011.
Earlier adoption is permitted. The Company is currently assessing the impact
this standard will have on its financial position and results of
operations.




(iii)
            Consolidated
      financial statements:




In
January 2009, the CICA issued Handbook Section 1601, Consolidated Financial
Statements, which replaces the existing standards. This section establishes the
standards for preparing consolidated financial statements and is effective for
the Company on December 1, 2011. Earlier adoption is permitted. The Company is
currently assessing the impact this standard will have on its financial position
and results of operations.




(iv)
            Non-controlling
      interests:




In
January 2009, the CICA issued Handbook Section 1602, Non-controlling Interests,
which establishes standards for the accounting of non-controlling interests of a
subsidiary in the preparation of consolidated financial statements subsequent to
a business combination, and is effective for the Company on December 1, 2011.
The Company is currently assessing the impact this standard will have on its
financial position and results of operations.







9


FORBES
      MEDI-TECH INC.


Notes
      to Consolidated Financial
Statements


(Expressed
      in Canadian dollars)





Years
      ended December 31, 2009 and
2008


5.      Significant
accounting policies:




(a)     
 Basis of consolidation:




These
consolidated financial statements include the assets, liabilities and operating
results of the Company, its wholly-owned subsidiaries, Forbes Medi-Tech
(Research) Inc., Forbes Medi-Tech (USA) Inc., and its 51% venture interest in
Forbes-Fayrefield Ltd. (“Forbes-Fayrefield”).  The Company accounts
for its interest in Forbes-Fayrefield using the proportionate consolidation
method.  Material intercompany balances and transactions have been
eliminated in these consolidated financial statements.




(b)  
   Cash and cash equivalents:




Cash and
cash equivalents include cash and term deposits with initial maturities of three
months or less when acquired.  Cash and cash equivalents are carried
at fair value and are designated as held for trading.




(c)       
Inventories:




Raw materials inventory is valued at the lower of cost and replacement
cost.  Finished goods and work-in-process inventories are valued at
the lower of cost and net realizable value.  Cost is determined using
weighted average cost.




(d)      
Capital and intangible assets:




Capital assets are recorded at cost and amortized over their estimated useful
lives using the following methods and annual rates:







Asset
            Basis
            RateOffice
      and laboratory equipment
            Declining-balance
            20%Computer
      equipment
            Declining-balance
            30%Computer
      software
            Declining-balance
            100%Leasehold
      improvements
            Straight-line
            Lease
      term




Capital additions are amortized when
placed into use.




The
Company reviews its long-lived assets for impairment when events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable.  If impairment indicators are present and the estimated future
undiscounted cash flows are less than the carrying value of the assets, the
carrying values are reduced to the estimated fair value.















10


FORBES
      MEDI-TECH INC.


Notes
      to Consolidated Financial
Statements


(Expressed
      in Canadian dollars)





Years
      ended December 31, 2009 and
2008




5.      Significant
accounting policies (continued):




(e)      Stock-based
compensation plan:




The
Company has a stock-based compensation plan for employees, officers, directors
and consultants of the Company and of affiliates of the
Company.  Stock-based compensation expense is recorded for stock
options issued to employees and non-employees using the fair value method with a
corresponding increase in contributed surplus.  Any consideration
received on exercise of stock options or the purchase of stock is credited to
share capital.




Under the
fair value based method, options granted to non-employees are measured at their
fair value and are recognized as the options are earned and the services are
provided.  The fair value of employee stock options are valued at the
grant date and amortized over the vesting period.




(f)       
Revenue recognition:




The
Company recognizes revenue from product sales at the time the product is shipped
or upon delivery, which is when title passes to the customer, and when all
significant contractual obligations have been satisfied and collection is
reasonably assured.




License
fees and royalty advances are deferred and amortized over the life of the
relevant agreements.




(g)      
Cost of sales:




Cost of
sales includes all costs pertaining to the sales of marketable nutraceutical
products, costs related to the manufacturing, and any revaluation of
inventory.




(h)      
Income taxes:




Income
taxes are reported using the asset and liability method, whereby future income
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases, and operating
loss and tax credit carry forwards.  Income taxes are recorded based
on enacted or substantively enacted income tax rates.  A valuation
allowance is recorded for the portion of the future income tax assets for which
the realization of value is not considered to be more likely than
not.




(i)       
Foreign currency translation:




The
Company’s functional and reporting currency is the Canadian
dollar.  The Company’s foreign subsidiaries are integrated foreign
operations for which monetary assets and liabilities denominated in US dollars
or Pound Sterling are translated into Canadian dollars at the rates of exchange
in effect at the balance sheet date; non-monetary assets and liabilities at the
rate in effect on the transaction date; and revenues and expenses at the average
rate for the period.  Gains and losses on translation are included in
results from operations.










11


FORBES
      MEDI-TECH INC.


Notes
      to Consolidated Financial
Statements


(Expressed
      in Canadian dollars)





Years
      ended December 31, 2009 and
2008
   5.      Significant
accounting policies (continued):




(j)       
Use of estimates:




The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, particularly the recoverability of
accounts receivable, property, capital and intangible and other assets, and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period.  Actual results
could differ from these estimates.




(k)       
Common shares to be issued contingent upon future sales:




Under the
UBC license agreements (note 15(b)) certain common shares of the Company may be
issued at a future date contingent upon future sales.  The Company
follows a policy of attributing no value to these shares until the obligation
for issuance exists, and at that time will value the shares at their market
value on issuance.




(l)       
Fair value of financial instruments:




Financial
instruments must be classified into one of five categories: held for trading,
held-to-maturity investments, loans and receivables, available-for-sale
financial assets or other financial liabilities.  All financial
instruments, including derivatives, are measured in the balance sheet at fair
value except for loans and receivables, held to maturity investments and other
financial liabilities which are measured at amortized
cost.  Subsequent measurement and changes in fair value will depend on
their initial classification, as follows:  held-for-trading financial
assets are measured at fair value and changes in fair value are recognized in
net earnings; available-for-sale financial instruments are measured at fair
value with changes in fair value recorded in other comprehensive income until
the investment is derecognized or impaired at which time the amounts would be
recorded in net earnings.




The
Company has designated its cash and cash equivalents as held-for-trading, which
is measured at fair value using level 1 inputs.  Accounts receivable
are classified as loans and receivables, which are measured at amortized
cost.  Accounts payable and accrued liabilities and the tenure
allowance are classified as other financial liabilities, which are measured at
amortized cost.  The tenure allowance is equal to its respective fair
values being the present value of future payments discounted at the current
market rate of interest.  The life insurance cash surrender value is
carried at fair value and is designated as held for trading.




(m)      Income
/ (loss) per share:




Basic
income / (loss) per share is computed by dividing net income / (loss) by the
weighted average number of common shares outstanding during the reporting
period.




Diluted
net income / (loss) per common share is computed in accordance with the treasury
stock method which uses the weighted average number of common shares outstanding
during the period and also includes the dilutive effect of potentially issuable
common stock from outstanding stock options and warrants.







12


FORBES
      MEDI-TECH INC.


Notes
      to Consolidated Financial
Statements


(Expressed
      in Canadian dollars)





Years
      ended December 31, 2009 and 2008




6.
              Convertible
      Debenture:
   The
convertible debenture was issued May 9, 2008 by 3887685 Canada Inc. (“Old
Forbes”), a former wholly owned subsidiary of the Company, and was convertible
or callable for one year to May 9, 2009.  The convertible debenture
was convertible into 35% of the voting common shares and all of the non-voting
common shares of Old Forbes, representing 79% of the issued and outstanding
common shares of Old Forbes.
  For
accounting purposes, this convertible debenture was considered to have both a
debt and equity component. As the convertible debenture was convertible into
shares of a subsidiary company, the equity component of $398,615 was recorded as
equity component of subsidiary’s convertible debenture and relates to the fair
value of the call option and to the embedded conversion feature at the date of
issuance of the debenture. The fair value of the liability component was
calculated as the present value of the debenture’s issue price discounted at the
Company’s estimated incremental borrowing rate of 15% for the period from May 9,
2008 for the expected remaining life of the debenture.  The equity
component was allocated the residual value. The carrying value of the liability
portion was being accreted to its redemption value of $2,960,000, over a period
from the date of issuance to its estimated conversion date of March 31, 2009, or
until conversion of the convertible debenture into common shares of Old
Forbes.  Interest accretion of $103,728 was charged to the statement
of operations as interest expense for the quarter ended March 31,
2009.
  On March
18, 2009, as a condition of the completion of the Offering the holder of the
Convertible Debenture exercised the conversion feature of the debenture and
54,147 voting common shares and 345,671 of non-voting common shares of Old
Forbes were issued.   As a result of the conversion, the
Company’s ownership in the former subsidiary, Old Forbes, was diluted from 100%
to approximately 21% (see Plan of Arrangement and Reorganization - note
3).
  7.      Accounts
receivable:
 
 2009
              
              
              2008Trade
      receivables
              
              
              896,744
              
              
              
              791,154Other
      sales taxes recoverable
              
              
              49,579
              
              
              
              138,780Other
      receivables
              
              
              500
              
              
              
              516,627$
              946,823
              
              
              $
              1,446,561
 
  13
 FORBES
      MEDI-TECH INC.
 Notes
      to Consolidated Financial
Statements
 (Expressed
      in Canadian dollars)
 
 Years
      ended December 31, 2009 and
2008
 8.
              Inventories:
 
 2009
              
              
              2008Raw
      materials, supplies and work in progress
              
              $
              1,197,490
              
              
              $
              2,332,049Finished
      goods
              
              
              1,738,669
              
              
              
              3,907,6992,936,159
              
              
              
              6,239,748Valuation
      allowances
              
              
              (819,000
              )
              
              
              (247,000
              )$
              2,117,159
              
              
              $
              5,992,748
  During the year ended December 31,
2009, changes in raw materials and finished goods recognized as cost of sales
amounted to $4,229,889 (December 31, 2008, - $6,712,878).
   9.     
Inventory and purchase commitment allowances:
  
 2009
              
              
              2008Purchase
      commitment allowance(i)
              
              $
              1,424,000
              
              
              $
              1,033,000
              )Inventory
      allowance(ii)
              
              
              (572,000
              )
              
              
              203,000Change
      in inventory and purchase commitment allowances
              
              $
              852,000
              
              
              $
              (830,000
              )
  (i) The
Company records allowances for losses relating to future year purchase
commitments on inventory. In the second quarter of 2009, the Company
renegotiated a supply agreement which eliminated future losses on certain
purchase commitments for inventory. The provision for losses on future purchase
commitment of $1,424,000 included in Accounts payable and accrued liabilities,
at December 31, 2008 was reversed in the quarter ended June 30,
2009.  As at December 31, 2009 the provision for losses on future
inventory purchase commitments was $nil.
  (ii) The
Company regularly reviews inventory quantities on hand and records an estimated
provision for excess inventory based primarily on its historical sales and
expectations for future use. To the extent the Company has excess inventory, it
recognizes a reserve for such excess inventories based on the expected
realizable value of inventory (see Inventories - note 8).
  10.     
Capital assets:
 
 
 Accumulated
              
              
              Net
      book2009
              
              Cost
              
              
              amortization
              
              
              valueLeasehold
      improvements
              
              $
              66,16
              
              
              $
              66,162
              
              
              $
              ―Office
      equipment
              
              
              139,639
              
              
              
              (90,293
              )
              
              
              49,346Computer
      equipment and software
              
              
              279,656
              
              
              
              (226,189
              )
              
              
              53,467$
              485,457
              
              
              $
              (382,644
              )
              
              $
              102,813
 
  14
 FORBES
      MEDI-TECH INC.
 Notes
      to Consolidated Financial
Statements
 (Expressed
      in Canadian dollars)
 
 Years
      ended December 31, 2009 and
2008
  10.     Capital
assets (continued):
 
 Accumulated
              
              
              Net
      book2008
              
              Cost
              
              
              amortization
              
              
              valueLeasehold
      improvements
              
              $
              66,162
              
              
              $
              (66,162
              )
              
              $
              ―Office
      equipment
              
              
              139,639
              
              
              
              (79,266
              )
              
              
              60,373Computer
      equipment and software
              
              
              279,656
              
              
              
              (200,186
              )
              
              
              79,470$
              485,457
              
              
              $
              (345,614
              )
              
              $
              139,843
  Amortization
expense amounted to $37,030 in the year ended December 31, 2009 (2008 - $67,352,
2007 - $151,720).
   11.
              Joint
      venture:
  In June
2006 the Company entered into an Agreement with Fayrefield Foods Ltd.
(“Fayrefield”) to establish a 51-49% venture, Forbes-Fayrefield Ltd.
(“Forbes-Fayrefield”), to broaden the distribution of finished products
containing the Company’s proprietary ingredients. These ReducolTM containing
products are sold directly to retail customers in the European Union, excluding
certain retailers in the United Kingdom and Ireland.
  Forbes-Fayrefield
has arranged a €50,000 line of credit to support the operations. The line of
credit bears interest at a floating rate of the Royal Bank of Scotland Currency
Lending Rate for Euros (currently 1.0%) plus 2.0% per annum, calculated daily.
Any funds drawn under this facility are repayable on demand, and the facility
may be terminated at any time by the Lender.  As at December 31, 2009,
€nil was drawn under the facility, and Forbes-Fayrefield was in compliance with
all covenants with the Lender. Security for the line of credit is currently by
way of a debenture registered over all of the assets of Forbes-Fayrefield. No
guarantees have currently been provided by Forbes Medi-Tech Inc., or by
Fayrefield.
  Condensed
balance sheets and statement of operations reflecting the Company’s
proportionate interests in the venture operations:
  
 
 December
      31
              
              
              December
      312009
              
              
              2008AssetsCurrent
      assets
              
              $
              198,299
              
              
              $
              205,362Office
      equipment
              
              
              2,002
              
              
              
              3,781$
              200,301
              
              
              $
              209,143LiabilitiesAccounts
      payable, overdraft and accrued liabilities
              
              $
              38,707
              
              
              $
              87,822Equity
              
              $
              161,594
              
              
              $
              121,321
 
  15
 FORBES
      MEDI-TECH INC.
 Notes
      to Consolidated Financial
Statements
 (Expressed
      in Canadian dollars)
 
 Years
      ended December 31, 2009 and
2008
  11.
              Joint
      venture (continued):
 
 2009
              
              
              2008EarningsRevenue
              
              $
              360,223
              
              
              
              732,069Cost
      of goods sold
              
              
              321,265
              
              
              
              651,791Expenses
              
              
              (1,315
              )
              
              
              75,498Net
      earnings
              
              $
              40,273
              
              
              $
              4,780
   
 2009
              
              
              2008Cash FlowOperating
      activities
              
              $
              12,247
              
              
              $
              59,482Financing
      activities
              
              
              ―
              
              
              
              ―Investing
      activities
              
              
              ―
              
              
              
              ―Increase
      in cash flow
              
              $
              12,247
              
              
              $
              59,482
  
 12.     
 Other assets:
  Accumulated
              
              
              Net
      book2009
              
              Cost
              
              
              amortization
              
              
              valueCapitalized
      license fees
              
              $
              46,100
              
              
              $
              (46,100
              )
              
              $
              ―Restricted
      cash funds in trust account
              
              
              
              
              
              
              
              
              
              
              23,210-
              
              
              
              -
              
              
              $
              23,210
 
 Accumulated
              
              
              Net
      book2008
              
              Cost
              
              
              amortization
              
              
              valueCapitalized
      license fees
              
              $
              46,100
              
              
              $
              (46,100
              )
              
              $
              ―Restricted
      cash funds in trust account
              
              
              --
              
              
              
              --
              
              
              
              18,376--
              
              
              
              --
              
              
              $
              18,376
  Amortization
expense amounted to $nil in the year ended December 31, 2009 (2008 - $8,232,
2007 - $8,458).
  
  
  16
 FORBES
      MEDI-TECH INC.
 Notes
      to Consolidated Financial
Statements
 (Expressed
      in Canadian dollars)
 
 Years
      ended December 31, 2009 and
2008
  13.           Accounts
payable and accrued liabilities:
 
 2009
              
              
              2008Trade
      payables
              
              $
              327,715
              
              
              $
              910,501Other
      payables
              
              
              219,133
              
              
              
              263,987Provision
      for loss on inventory purchase commitment
              
              
              ―
              
              
              
              1,424,000$
              546,848
              
              
              $
              2,598,488
  In the
year ended December 31, 2009, $1,424,000 (2008 - $1,033,000 recognized) was
reversed as a result of reversing the provision for loss on purchase commitments
for inventory (see note 9(i)).
 
  14.           Share
capital:
  (a)
              Authorized:
  Authorized
share capital of the Company consists of an unlimited number of common shares
without par value and unlimited preferred shares without par
value.  As explained in note 3, descriptions and amounts of all common
stock, stock options and warrants and their corresponding exercise prices where
applicable and the basic and diluted loss per share amounts have been recast, on
a retroactive basis, to reflect the one for eight common share exchange effected
by the Arrangement.
  
  
  17
 FORBES
      MEDI-TECH INC.
 Notes
      to Consolidated Financial
Statements
 (Expressed
      in Canadian dollars)
 
 Years
      ended December 31, 2009 and
2008
  14.           Share
capital (continued):
  (b)
              Common
      shares issued and allotted and contributed surplus:
                
                As a condition of implementing the Arrangement (note 3), the
      Company reduced its stated Share Capital and Deficit by the amount of
      $98,460,000 so that, on the date of the Special General Meeting held on
      February 14, 2008, the realizable value of the assets of the Company was
      greater than the aggregate of its liabilities and stated Share Capital (as
      amended). After the reduction of the stated capital, the stated capital
      was $2,566,525.
 Share
      Capital
              
              
              Contributed
      SurplusNumber
      of
                Common
      Shares
              
              
              Amount
              
              
              AmountBalance,
      December 31, 2006
              
              
              4,800,241
              
              
              $
              100,993,649
              
              
              $
              7,069,099Issued
      during the year upon:Exercise
      of stock options for cash proceeds
              
              
              1,250
              
              
              
              6,600
              
              
              
              ―Employee
      stock-based compensation expense
              
              
              ―
              
              
              
              ―
              
              
              
              839,851Non-employee
      stock-based compensation expense
              
              
              ―
              
              
              
              ―
              
              
              
              118,473Transfer
      from contributed surplus for options exercised:Non-employee
      stock-options
              
              
              ―
              
              
              
              26,276
              
              
              
              (26,276
              )Balance,
      December 31, 2007
              
              
              4,801,491
              
              
              $
              101,026,525
              
              
              $
              8,001,147Issuance
      of common shares pursuant to agreement (note 24)
              
              
              168,322
              
              
              
              154,467
              
              
              
              ―Employee
      stock-based compensation expense
              
              
              ―
              
              
              
              ―
              
              
              
              149,947Non-employee
      stock-based compensation expense
              
              
              ―
              
              
              
              ―
              
              
              
              1,661Reduction
      of stated share capital
              
              
              ―
              
              
              
              (98,460,000
              )
              
              
              ―Balance,
      December 31, 2008
              
              
              4,969,813
              
              
              $
              2,720,992
              
              
              $
              8,152,755Employee
      stock-based compensation expense
              
              
              ―
              
              
              
              ―
              
              
              
              15,907Non-employee
      stock-based compensation expense
              
              
              ―
              
              
              
              ―
              
              
              
              6Balance,
      December 31, 2009
              
              
              4,969,813
              
              
              $
              2,720,992
              
              
              $
              8,168,668
     18
 FORBES
      MEDI-TECH INC.
 Notes
      to Consolidated Financial
Statements
 (Expressed
      in Canadian dollars)
 
 Years
      ended December 31, 2009 and
2008
  14.  Share
capital (continued):
 
 (c)
              Contributed
      surplus relating to:
 
 
 2009
              
              
              2008Surplus
      relating to stock compensation, warrants and options associated with
      common shares (note 14(b))
              
              $
              8,168,668
              
              
              $
              8,152,755Surplus
      relating to warrants associated with the Series B Convertible Preferred
      Shares
              
              
              1,874,209
              
              
              
              1,874,209$
              10,042,877
              
              
              $
              10,026,964
  (d)
              Share purchase warrants
  As part
of the November 2005 Private Placement, 227,265 warrants were issued. Each
warrant entitles the holder to purchase one common share of the Company at
US$16.48, subject to adjustment, for five years from the date of
closing.  The warrants may be exercised on a cashless basis at the
option of the holder.  The Company also issued 31,818 brokers’
warrants, which have the same terms as the warrants issued to the
investors.  A balance of 227,265 warrants and 31,818 brokers’ warrants
remain outstanding as at December 31, 2009 and expire on October 26, 2010. No
warrants were exercised in the year ended December 31, 2009.
 
  (e)
              Option Plan:
  Under the
2007 Stock Option Plan, the Company may grant options to its employees,
officers, directors, and consultants (optionees) for up to 10 % of the
outstanding common shares of the Company. At December 31, 2009, the Company
could grant options for up to 496,981 common shares.
  (f)
              Outstanding Options (continued):
  Stock
options outstanding as at December 31, 2009:
 
 Options
      outstanding
              
              
              Options
      exercisableRange
      of
                Exercise
      prices
              
              
              Number
      outstanding at December 31, 2009
              
              
              Weighted
      average remaining contractual life
              
              
              Weighted
      average exercise price
              
              
              Number
      exercisable at December 31, 2009
              
              
              Weighted
      average exercise price$
              <1.00
              
              
              
              212,000
              
              
              
              3.64
              
              
              $
              0.73
              
              
              
              212,000
              
              
              $
              0.73$
              1.00-$7.28
              
              
              
              7,900
              
              
              
              2.25
              
              
              $
              6.54
              
              
              
              7,900
              
              
              $
              6.54$
              8.00
              
              
              
              241,715
              
              
              
              2.20
              
              
              $
              8.00
              
              
              
              241,715
              
              
              $
              8.00461,615
              
              
              
              2.86
              
              
              $
              4.63
              
              
              
              461,615
              
              
              $
              4.63
 
 
  19
 FORBES
      MEDI-TECH INC.
 Notes
      to Consolidated Financial
Statements
 (Expressed
      in Canadian dollars)
 
 Years
      ended December 31, 2009 and
2008
 14.   
 Share capital (continued):
  (f)
              Outstanding
      Options (continued):
  Company's
Stock Option Plan as at and changes for the years ended December 31, 2009, 2008
and 2007:
  
 Number
      of
                Optioned
      Shares
              
              
              Weighted
      Average Exercise PriceBalance,
      December 31, 2006
              
              
              571,451
              
              
              $
              19.36Options
      granted
              
              
              88,937
              
              
              
              8.00Options
      exercised
              
              
              ―
              
              
              
              ―Options
      forfeited
              
              
              (75,156
              )
              
              
              15.44Balance,
      April 12, 2007
              
              
              585,232
              
              
              $
              18.16Options
      cancelled due to adoption of New Plan
              
              
              (475,203
              )
              
              
              20.08Options
      issued on adoption of New Plan
              
              
              271,438
              
              
              
              8.00Options
      granted
              
              
              9,088
              
              
              
              6.24Options
      exercised
              
              
              (1,250
              )
              
              
              5.28Options
      forfeited
              
              
              (12,619
              )
              
              
              17.92Balance,
      December 31, 2007
              
              
              367,686
              
              
              $
              7.93Options
      granted
              
              
              156,000
              
              
              
              0.97Options
      forfeited
              
              
              (96,971
              )
              
              
              7.81Balance,
      December 31, 2008
              
              
              426,715
              
              
              $
              5.41Options
      granted
              
              
              70,000
              
              
              
              0.20Options
      forfeited
              
              
              (35,100
              )
              
              
              5.23Balance,
      December 31, 2009
              
              
              461,615
              
              
              $
              4.63
  
  
  20
 FORBES
      MEDI-TECH INC.
 Notes
      to Consolidated Financial
Statements
 (Expressed
      in Canadian dollars)
 
 Years
      ended December 31, 2009 and
2008
 14.    
Share capital (continued):
  (f)
              Outstanding Options (continued):
  A summary
of the non-vested stock options as at and changes for the year ended December
31, 2009 are as follows:
 
 Options
      outstanding
              
              
              Non-vested
      optionsWeighted
              
              
              Weighted
              
              
              
              
              
              Weightedaverage
              
              
              average
              
              
              
              
              
              Averageexercise
              
              
              years
      to
              
              
              
              
              
              Grant
      dateShares
              
              
              price
              
              
              expiration
              
              
              Shares
              
              
              fair
      valueOutstanding,beginning
      of year
              
              
              426,715
              
              
              $
              5.41
              
              
              
              3.69
              
              
              
              8,909
              
              
              $
              3.29Granted
              
              
              70,000
              
              
              
              0.20
              
              
              
              4.00
              
              
              
              70,000
              
              
              
              0.13Exercised
              
              
              ―
              
              
              
              ―
              
              
              
              ―
              
              
              
              ―
              
              
              
              ―Forfeited
              
              
              (35,100
              )
              
              
              5.23
              
              
              
              2.75
              
              
              
              ―
              
              
              
              ―Vested
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (78,909
              )
              
              
              0.51Outstanding
      atDecember
      31, 2009
              
              
              461,615
              
              
              $
              4.63
              
              
              
              2.86
              
              
              
              ―
              
              
              
              ―Options
      exercisable
              
              
              461,615
              
              
              $
              4.63
              
              
              
              2.86
              
              
              
              N/A
              
              
              
              N/A
 
 The above
noted stock options expire at various dates from January 17, 2012 to December
31, 2013.
  The
aggregate intrinsic value represents the pre-tax intrinsic value, based on the
Company’s closing stock price on December 31, 2009 of US$0.38 ($0.40 in Canadian
Dollars based on the December 31, 2009 exchange rate) on the Nasdaq Stock
Market, which would have been received by option holders had they exercised
their options at that date. The aggregate intrinsic values of all vested stock
options outstanding at December 31, 2009, 2008 and 2007 were $13,246, $nil and
$nil, respectively The total fair value of stock options that vested during the
year ended December 31, 2009, 2008 and 2007 were $40,207, $93,612 and $362,719,
respectively. The total intrinsic values of the stock options exercised during
the years ended December 31, 2009, 2008 and 2007 were $nil, $nil and $1,100
respectively.
  
  21
 FORBES
      MEDI-TECH INC.
 Notes
      to Consolidated Financial
Statements
 (Expressed
      in Canadian dollars)
 
 Years
      ended December 31, 2009 and
2008
  14.Share
capital (continued):
  (g)
              Stock Based Compensation:
  Stock-based
compensation recorded for the year ended December 31, 2009, 2008 and 2007 is
summarized below:
  2009
              
              
              2008
              
              
              2007Employee
      stock-based compensation expense
              
              $
              15,907
              
              
              $
              149,947
              
              
              $
              839,851Non-employee
      stock-based compensation expense
              
              
              6
              
              
              
              1,661
              
              
              
              118,473$
              15,913
              
              
              $
              151,608
              
              
              $
              958,324
 
 For the
years ended December 31, 2009, 2008 and 2007, this compensation expense was
allocated to nutraceutical research, development and support expenses, general
and administrative expenses, and marketing, sales and product development
expenses on the same basis as for the allocations of cash compensation as
summarized below:
 
 2009
              
              
              2008
              
              
              2007General
      and administrative
              
              $
              11,470
              
              
              $
              92,023
              
              
              $
              418,909Nutraceutical
      research, development and support
              
              
              1,827
              
              
              
              28,733
              
              
              
              350,121Marketing,
      sales and product development
              
              
              2,616
              
              
              
              30,852
              
              
              
              189,294$
              15,913
              
              
              $
              151,608 $
              
              
              
              958,324
  At
December 31, 2009 there is no balance of unamortized stock based compensation
expense.
  The fair
value of each employee stock option grant was estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions:
  
 2009
              
              
              2008
              
              
              2007Expected
      dividend yield
              
              
              0
              %
              
              
              0
              %
              
              
              0
              %Expected
      volatility
              
              
              133
              %
              
              
              114
              %
              
              
              81
              %Risk-free
      interest rate
              
              
              1.1
              %
              
              
              2.9
              %
              
              
              4.5
              %Expected
      lives
              
              2
      years
              
              
              2
      years
              
              
              2
      years
 
 There is
no dividend yield because the Company does not pay, and does not plan to pay,
cash dividends on common shares. The expected stock price volatility is based on
the historical volatility of the Company’s average daily stock closing prices
over a period equal to the expected life of each option grant. The risk-free
interest rate is based on yields from Canadian Government Bond yields with a
term equal to the expected term of the options being valued. The expected life
of options represents the period of time that the options are expected to be
outstanding based on historical data of option holder exercise and termination
behavior.  The effect of actual forfeitures is recognized as it
occurs.
   22
 FORBES
      MEDI-TECH INC.
 Notes
      to Consolidated Financial
Statements
 (Expressed
      in Canadian dollars)
 
 Years
      ended December 31, 2009 and
2008
  14.Share capital (continued):
  (g)
              Stock Based Compensation
(continued):
  The fair
value of each non-employee stock option grant was estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions:
  
 2009
              
              
              2008
              
              
              2007Expected
      dividend yield
              
              
              n/a
              
              
              
              0
              %
              
              
              0
              %Expected
      volatility
              
              
              n/a
              
              
              
              96
              %
              
              
              92
              %Risk-free
      interest rate
              
              
              n/a
              
              
              
              3.1
              %
              
              
              4.5
              %Expected
      lives
              
              
              n/a
              
              
              4
      years
              
              
              4
      years
   (h)
              Shareholder rights plan:
  The
Company has adopted a shareholder rights plan (the “Rights Plan”) to protect its
shareholders from unfair, abusive or coercive take-over
strategies.  Under the Rights Plan, holders of common shares are
entitled to one share purchase right (a "Right") for each common share
held.  If any person or group makes a take-over bid, other than a bid
permitted under the plan, or acquires 20% or more of the Company's outstanding
common shares without complying with the Rights Plan.  Each Right
entitles the registered holder thereof to purchase, in effect, $40 equivalent of
common shares at 50% of the prevailing market price.
  15.     Commitments,
contractual obligations and contingencies:
  (a)      Tenure allowance:
  In
January of 1999, the shareholders approved agreements with three key executive
officers ("Executives") that provided for tenure allowances for services
provided to the Company.  The agreements entitled each Executive to
receive an allowance provided the Executive had continued to provide his service
to the Company to specified qualification dates, which ranged from March 1, 2002
to January 1, 2006.  By 2002, two of these executives had resigned
from the Company prior to the date that the tenure allowance would have
vested.  In 2004, the third Executive resigned, however he had reached
his qualification date and has qualified for his tenure
allowance.  The Company recorded the cost of this allowance over the
term from the date of shareholders' approval to the applicable qualification
date.
  The
Company is obligated to pay $65,000 per annum for 25 years, which began March 1,
2008.  As at December 31, 2009 the current portion of the tenure
allowance is $65,000 and the long-term portion is $913,464.  As the
tenure allowance has not been fully funded, the net interest accretion expense
on the allowance for the year ended December 31, 2009 is $(20,564) (2008 –
$109,433; 2007 – $48,832).  The interest rate used to calculate the
allowance is based on the Government of Canada 25-year bond rate.
   23
 FORBES
      MEDI-TECH INC.
 Notes
      to Consolidated Financial
Statements
 (Expressed
      in Canadian dollars)
 
 Years
      ended December 31, 2009 and
2008
  15.     Commitments,
contractual obligations and
contingencies
  (b)     University of British Columbia:
  Pursuant to
a license agreement with the University of British Columbia (“UBC”)
effective September 15, 1995 (as amended), the Company acquired rights
to  certain technology related to the preparation and
purification of phytosterols from tall oil soap.  The Company may be
required to issue to UBC up to 3,125 shares after the sale of any products
derived from this technology.  In addition, the Company agreed to
pay royalties on gross revenues of 1% to 1.5% on sales of any products derived
from thus technology.
  (c)       
Inventory supply agreement
  During
the year ended December 31, 2009 the Company entered into a purchase agreement
with an inventory supplier through December 31, 2013.  The agreement
requires the Company to purchase a minimum level of inventory based on the
initial order.  As at December 31, 2009, the Company is committed to
purchase inventory with an estimated value of $697,000 in 2010, $311,000 in
2011, $163,000 in 2012 and $85,000 in 2013.  The Company expects to
use this inventory in the normal course of business.
  (d)
              Under
      the terms of the agreement with the former TheraPei Pharmaceuticals Inc.
      (“TPP”) shareholders, 20% of contingent future payments received from the
      sale will be paid to the former TPP shareholders on a basis of 80% Forbes’
      shares and 20% cash (see Discontinued operations - note
    24).
 
  16.   
Net change in non-cash operating items:
  
 2009
              
              
              2008
              
              
              2007Accounts
      receivable
              
              $
              499,738
              
              
              $
              (169,676
              )
              
              $
              268,738Inventories
              
              
              3,875,589
              
              
              
              (675,963
              )
              
              
              776,054Prepaid
      expenses and deposits
              
              
              57,498
              
              
              
              (17,580
              )
              
              
              374,050Accounts
      payable and accrued liabilities
              
              
              (2,051,640
              )
              
              
              304,289
              
              
              
              (1,191,820
              )Current
      income tax liability
              
              
              (6,838
              )
              
              
              (23,840
              )
              
              
              (508,411
              )Decrease
      / (increase) in life insurance cash surrender value
              
              
              5,999
              
              
              
              389,390
              
              
              
              (33,290
              )(Decrease)
      / increase in tenure liability
              
              
              (91,565
              )
              
              
              76,133
              
              
              
              39,572Increase
      in Tax provision
              
              
              744,000
              
              
              
              ―
              
              
              
              ―Other
              
              
              (4,834
              )
              
              
              (2,612
              )
              
              
              (15,764
              )$
              3,027,947
              
              
              $
              (119,859
              )
              
              $
              (290,871
              )
   17.  
Basic and diluted net income / (loss) per share:
  Basic net
income (loss) per common share is computed using the weighted average number of
common shares outstanding during the period.  Diluted net income
(loss) per common share is computed in accordance with the treasury stock method
which uses the weighted average number of common shares outstanding during the
period and also includes the dilutive effect of potentially issuable common
stock from outstanding stock options.
  
  24
  FORBES
      MEDI-TECH INC. Notes
      to Consolidated Financial
Statements
 (Expressed
      in Canadian dollars)
 
 Years
      ended December 31, 2009 and
2008
 17.     
Basic and diluted net income / (loss) per share (continued):
  The
following table sets out the computation of basic and diluted net income (loss)
per common share:
  
 2009
              
              
              2008
              
              
              2007Net
      income / (loss) from continuing operations for the year
              
              $
              126,598
              
              
              $
              (7,189,568
              )
              
              $
              (9,242,210
              )Loss
      from discontinued operations
              
              
              ―
              
              
              
              (462,931
              )
              
              
              (2,440,918
              )Net
      income / (loss) and comprehensive income / (loss) for the
    year
              
              $
              126,598
              
              
              $
              (7,652,499
              )
              
              $
              (11,683,128
              )Weighted
      average number of common shares outstanding, basic
              
              
              4,969,813
              
              
              
              4,865,131
              
              
              
              4,800,923Basic
      income / (loss) per share from continuing operations
              
              $
              0.03
              
              
              $
              (1.48
              )
              
              $
              (1.92
              )Basic
      loss per share from discontinued operations
              
              $
              ―
              
              
              $
              (0.09
              )
              
              $
              (0.51
              )Basic
      income / (loss) per share
              
              $
              0.03
              
              
              $
              (1.57
              )
              
              $
              (2.43
              )Weighted
      average number of common shares outstanding, diluted
              
              
              5,032,539
              
              
              
              4,865,131
              
              
              
              4,800,923Diluted
      income / (loss) per share from continuing operations
              
              $
              0.03
              
              
              $
              (1.48
              )
              
              $
              (1.92
              )Diluted
      loss per share from discontinued operations
              
              $
              ―
              
              
              $
              (0.09
              )
              
              $
              (0.51
              )Diluted
      income / (loss) per share
              
              $
              0.03
              
              
              $
              (1.57
              )
              
              $
              (2.43
              )
 
  For the
year ended December 31, 2009, 62,726 shares related to stock options were
included in the calculation of diluted net income (loss) per common
share.  For the years ended December 31, 2008 and 2007, nil, 4,339
shares, respectively, related to stock options were excluded from the
calculation of diluted net income (loss) per common share because their effect
was anti-dilutive.
  18.       Related
party transactions:
  Nancy
Glaister, the former Corporate Secretary of the Company, is a partner of the law
firm Cawkell Brodie Glaister LLP, Business Lawyers, which also provided legal
services to the Company.  For the period ending September 29, 2009
(date of resignation), Cawkell Brodie Glaister LLP billed the Company $63,000
(12 months ended December 31, 2008 - $122,000; 12 months ended December 31, 2007
-$204,000) excluding GST, PST and disbursements, for legal
services.
  These
transactions are in the normal course of operations and are measured at the
exchange amount of consideration established and agreed to by the related
parties. These expenditures are included in general and administrative
expenses.
   25
 FORBES
      MEDI-TECH INC.
 Notes
      to Consolidated Financial
Statements
 (Expressed
      in Canadian dollars)
 
 Years
      ended December 31, 2009 and
2008
 19.      Concentration
of sales and segmented disclosure:
  For the
years ended December 31, 2009, 2008 and 2007 the majority of the Company’s
revenue was generated from four customers. Customer A accounted for 44% (2008 –
47%, 2007 – 40%), Customer B accounted for 15% (2008 – 11%, 2007 – 10%),
Customer C accounted for 9% (2008 – 20%, 2007 – 15%), and Customer D accounted
for 8% (2008 – 9%, 2007 – 13%) of revenue.  51% of sales are recorded
in the USA, 36% of sales are recorded in Europe and the balance in rest of the
world.
  The
Company has operated in a single business segment developing, selling and
licensing nutraceutical products to customers in the United States and the
European Union.  Revenues consist almost entirely of sales of
nutraceutical products and related license revenues.
  As of
December 31, 2009, 2008 and 2007, the Company’s long-lived assets used in
continuing operations are primarily located in Canada.
  20.       Income
taxes
  (a)
              The reconciliation of income tax attributable to continuing operations
      computed at the statutory tax rates to income tax expense using a
      30.00%,  (2008 – 31.00%, 2007 – 34.12%), statutory rate
      is:
  
 2009
              
              
              2008
              
              
              2007Income
      tax expense (recovery) at statutory rates
              
              $
              267,579
              
              
              $
              (2,223,639
              )
              
              $
              (3,321,127
              )Change
      in valuation allowance
              
              
              304,233
              
              
              
              260,158
              
              
              
              (5,929,087
              )Impact
      of substantially enacted income tax rate
                on
      the valuation allowance
              
              
              86,830
              
              
              
              852,862
              
              
              
              8,357,000Permanent
      differences and other
              
              
              106,691
              
              
              
              1,127,157
              
              
              
              401,760Income
      tax expense (recovery)
              
              $
              765,333
              
              
              $
              16,538
              
              
              $
              (491,454
              )
  
  (b)  
      The tax effects of temporary differences that give rise to significant
      components of the future income tax assets are presented
      below:
 
 
 2009
              
              
              2008Future
      tax assets:Non-capital
      loss carry-forwards
              
              $
              1,938,003
              
              
              $
              14,268,765Property,
      plant and equipment and intangible assets
              
              
              431,173
              
              
              
              1,038,551Research
      and development expenditures
              
              
              ―
              
              
              
              8,943,658Share
      issue costs
              
              
              ―
              
              
              
              41,629Other
              
              
              244,616
              
              
              
              278,208Total
      gross future tax assets
              
              
              2,613,792
              
              
              
              24,570,811Valuation
      allowance
              
              
              (2,613,792
              )
              
              
              (24,570,811
              )Total
      future tax assets
              
              $
              ―
              
              
              $
              ―
 
  26
 FORBES
      MEDI-TECH INC.
 Notes
      to Consolidated Financial
Statements
 (Expressed
      in Canadian dollars)
 
 Years
      ended December 31, 2009 and
2008
 20.        Income
taxes (continued)
  (b)
              The
      tax effects of temporary differences that give rise to significant
      components of the future income tax assets are presented below
      (continued):
  Realization
of the future income tax assets is dependent on generating sufficient taxable
income prior to the expiration of any loss carry forward balance for tax
purposes.  Due to the Company's state of development and operations,
the Company has not met the test that it is more likely than not that the future
income tax assets will be realized.  Accordingly, a valuation
allowance has been provided, equal to the net future income tax
asset.  The valuation allowance is reviewed periodically and when the
more likely than not criterion is met, the valuation allowance will be adjusted
accordingly by a credit or charge to earnings in that period.
  The
Company is subject to assessments by various taxation authorities which may
interpret tax legislations and tax filing positions differently from the
Company.  The Company provides for such differences when it is likely
that a taxation authority will not sustain the Company’s filing position and the
amount of the tax exposure can be reasonably estimated.  As at
December 31, 2009, the Company has accrued a non-current tax provision $744,000
(December 31, 2008 - $6,838 short-term) of various tax matters.
  As at
December 31, 2009, the Company has accumulated non-capital losses in the amount
of $7,560,136 (2008 – $53,424,500). The Canadian non-capital losses for income
tax purposes expire as follows:
  
 Non-capital
      lossesYear
      of expiry2028
              
              $
              4,674,3552029
              
              
              2,885,781$
              7,560,136
   In March
2009, former wholly owned subsidiary company, 3887685 Canada Inc (Old Forbes)
was disposed of and as a result, approximately $48,523,600 of non-capital
losses, $34,398,700 of scientific research and experimental development
expenditures and $7,096,900 of unclaimed federal investment tax credits
attributable to Old Forbes, are no longer available for utilization by the
Company (note 3).
  The
Company also has net operating loss carry forwards for U.S. federal and state
income tax purposes of approximately $141,000 (US$134,400) which begin to expire
in 2014.  Due to the change in control of the subsidiary company, now
known as Forbes Medi-Tech (Research) Inc., during the year ended December 31,
2006, the future utilization of certain net operating loss carry forwards that
were incurred by this subsidiary prior to the acquisition by the Company, will
be restricted and subject to annual limitations.
  
  27
 FORBES
      MEDI-TECH INC.
 Notes
      to Consolidated Financial
Statements
 (Expressed
      in Canadian dollars)
 
 Years
      ended December 31, 2009 and
2008
  21.      
Lease commitments:
  The
Company is committed under operating lease agreements for premises and office
equipment, for lease payments in the following amounts:
 
 2010
              
              $
              314,8832011
              
              
              26,0852012
              
              
              26,0852013
              
              
              26,0852013
      and thereafter
              
              
              15,216$
              408,354
   22.    
 Capital risk management:
  The
Company's objectives when managing capital is to maintain its ability to
continue as a going concern in order to provide returns for shareholders and
benefits for other stakeholders.  The Company includes equity,
comprised of issued common shares, contributed surplus, warrants and deficit, in
the definition of capital. The Company's primary objective with respect to its
capital management is to ensure that it has sufficient cash resources to finance
its operations through the second quarter of 2010 and complete a strategic
transaction, such as a merger, acquisition, sale of business or other suitable
transaction so that it can continue to maintain ongoing
operations.  Management is attempting to seek available alternatives,
including a strategic transaction under which the Company might acquire
sustainable assets or business operations.  To secure the additional
capital necessary to pursue these plans, the Company may attempt to raise
additional funds through the issuance of debt, equity and warrants or by
securing strategic partners.  The Company is not subject to externally
imposed capital requirements and there has been no change with respect to the
overall capital risk management strategy during the year ended December 31,
2009.
  As at
December 31, 2009 total managed capital shareholders’ equity was
$2,428,156.
  23.     
Financial risk management:
  The
Company is exposed to a variety of financial risks by virtue of its activities:
market risk (including currency risk and interest rate risk), credit risk and
liquidity risk.  The overall risk management program focuses on the
unpredictability of financial markets and seeks to minimize potential adverse
effects on financial performance. Risk management is carried out by the finance
department under policies approved by the Board of Directors. This department
identifies and evaluates financial risks in close cooperation with
management.  The finance department is charged with the responsibility
of establishing controls and procedures to ensure that financial risks are
mitigated in accordance with the approved policies.
  
  28
 FORBES
      MEDI-TECH INC.
 Notes
      to Consolidated Financial
Statements
 (Expressed
      in Canadian dollars)
 
 Years
      ended December 31, 2009 and
2008
   23.     
 Financial risk management (continued):
  (a)     
Market risk:
  (i) 
 Currency risk:
  The
Company operates internationally and is exposed to foreign exchange risk from
various currencies, primarily US dollars.  Foreign exchange risk
arises from purchase transactions as well as recognized financial assets and
liabilities denominated in foreign currencies. The Company’s main objective in
managing our foreign exchange risk is to maintain US cash on hand to support US
forecasted cash flows.  To achieve this objective the Company monitor
forecasted cash flows in foreign currencies and attempts to mitigate the risk by
modifying the nature of cash and cash equivalents held.
  Balances
in foreign currencies at December 31, 2009 are as follows:
 
 US
      Dollars
              
              
              Euros
              
              
              British
      PoundsCash
      and cash equivalents
              
              $
              770,632
              
              
              €
              45,600
              
              
              £
              66,071Accounts
      receivable
              
              
              635,033
              
              
              
              97,373
              
              
              
              51,141Accounts
      payable and accrued liabilities
              
              
              (136,013
              )
              
              
              (36,442
              )
              
              
              (23,895
              )Tax
      provision
              
              
              (711,000
              )
              
              
              ―
              
              
              
              ―$
              558,652
              
              
              €
              106,531
              
              
              £
              93,317
 
 Balances in foreign currencies at
December 31, 2008 are as follows:
 
 US
      dollars
              
              
              Euros
              
              
              British
      poundsCash
      and cash equivalents
              
              $
              434,915
              
              
              €
              40,091
              
              
              £
              55,617Accounts
      receivable
              
              
              329,059
              
              
              
              165,864
              
              
              
              58,113Accounts
      payable and accrued liabilities
              
              
              (1,592,728
              )
              
              
              (9,155
              )
              
              
              (57,508
              )Tax
      provision
              
              
              ―
              
              
              
              ―
              
              
              
              ―$
              (828,754
              )
              
              €
              196,800
              
              
              £
              56,222
  The
Company’s functional currency is Canadian dollars however certain of our
revenues and expenses are denominated in US dollars, the European Union Euro
(“Euros”), and the Great Britain Pound (“GBP”).  Foreign currency risk
reflects the risk that the Company’s earnings will be impacted by fluctuations
in exchange rates.  During the year ended December 31, 2009
approximately 66% of the Company’s sales were made in US dollars and
approximately 49% of expenses were incurred in US dollars.  With all
other variables held constant, a ten percentage point increase in the value of
the US dollar relative to the Canadian dollar during the year would have
decreased the Company’s net income by approximately $95,000 for the year ended
December 31, 2009.
  
  29
  FORBES
      MEDI-TECH INC. Notes
      to Consolidated Financial
Statements
 (Expressed
      in Canadian dollars)
 
 Years
      ended December 31, 2009 and
2008
 
 23.     
 Financial risk management (continued):
  (a)     
Market risk:
 (i)    
Currency risk (continued):
  During
the year ended December 31, 2009 approximately 26% of the Company’s sales were
made in Euros and an insignificant amount of expenses were incurred in
Euros.  With all other variables held constant, a ten percentage point
increase in the value of the Euro relative to the Canadian dollar would have
increased the Company’s net income by approximately $86,000 for the year ended
December 31, 2009.
  During
the year ended December 31, 2009 approximately 8% of the Company’s sales were
made in GBP and approximately 4% of expenses were incurred in
GBP.  With all other variables held constant, a ten percentage point
increase in the value of the GBP relative to the Canadian dollar would have
increased the Company’s net income by approximately $2,000 for the year ended
December 31, 2009.
  At
December 31, 2009, the Company had US dollar, Euro, and GBP denominated accounts
payable which are partially offset by US dollar, Euro and GBP accounts
receivable.  Foreign exchange gains and losses arising from the
revaluation of these balances are included in the net income.  With
all other variables held constant, a ten percentage point increase in the value
of the US dollar, Euro or GBP relative to the Canadian dollar would have
(decreased)/increased net income by approximately $(21,000), $6,000 and $3,000,
respectively, at December 31, 2009.
  Fluctuations
in the US dollar exchange rate could have a potentially significant impact on
the Company’s results from operations. However, they would not impair or enhance
the Company’s ability pay our foreign currency-denominated expenses as such
items would be similarly affected.
  (ii)  
Interest rate risk:
  Interest
rate risk is the risk that the future cash flows of a financial instrument will
fluctuate because of changes in market interest rates.  Financial
assets with variable interest rates expose the Company to cash flow interest
rate risk.  The Company's cash and cash equivalents include bank
accounts that earn interest at market rates.  The Company manages its
interest rate risk by maximizing the interest income earned on excess funds
while maintaining the liquidity necessary to conduct operations on a day-to-day
basis.  The Company's policy limits the investing of excess funds to
interest earning bank accounts, liquid government Treasury Bills or Bankers
Acceptance.  Fluctuations in market rates of interest do not have a
significant impact on the Company's results of operations due to the short term
to maturity of the investments held.
  In
addition, although the interest rate fluctuation impacts the interest expense
relating to the tenure allowance, the amount of the tenure allowance payments is
a fixed amount until the end of the arrangement.  A 1% increase in the
Government of Canada’s long-term bond rate would decrease the tenure liability
and related interest expense by $88,907.
  
  
  30
 FORBES
      MEDI-TECH INC.
 Notes
      to Consolidated Financial
Statements
 (Expressed
      in Canadian dollars)
 
 Years
      ended December 31, 2009 and
2008
 23.  Financial
risk management (continued):
  (b)   
Credit risk:
  Credit
risk is the risk of a financial loss to the Company if a customer or
counterparty to a financial instrument fails to meet its contractual obligation.
The Company’s maximum exposure to credit risk at period end is the carrying
value of our cash and cash equivalents and accounts receivable. The Company
manages credit risk by maintaining bank accounts with Schedule I banks. Cash and
cash equivalents of $1,329,176 (December 31, 2008 - $1,376,575) are held with a
Canadian chartered bank, an affiliated US bank and a UK bank. The Company’s cash
is not subject to any external restrictions.
  The
following table sets forth details of the age of receivables that are not
overdue as well as an analysis of overdue amounts.
  December
      31, 2009Trade
      accounts receivable
              
              $
              896,744Other
      receivables
              
              
              50,079Total
      accounts receivable
              
              $
              946,823Current
              
              $
              765,721Past
      due for less than:30
      days
              
              
              81,01860
      days
              
              
              46,17090
      days
              
              
              -Past
      due for 90 days or greater
              
              
              3,835Total
      trade accounts receivable, net
              
              $
              896,744
  
 Other
accounts receivable include amounts for use tax receivable and the Company
believes that the risk of collection of such receivables is low because
government agencies carry low credit risk.
  (c)
              Liquidity risk:
  Liquidity
risk is the risk that the Company will not be able to meet its obligations as
they fall due.  The Company manages its liquidity risk by forecasting
cash flows from operations and anticipated investing and financing
activities.  Senior management is also actively involved in the review
and approval of planned expenditures.
  
  31
 FORBES
      MEDI-TECH INC.
 Notes
      to Consolidated Financial
Statements
 (Expressed
      in Canadian dollars)
 
 Years
      ended December 31, 2009 and
2008




The
following are the contractual maturities of the undiscounted cash flows of
financial liabilities as at December 31, 2009:
 
 Less
      than
                3
      months
              
              
              3
      - 6
                months
              
              
              6-12
                months
              
              
              Greater
      than
                1
      yearAccounts
      payable and accrued liabilities
              
              $
              546,848
              
              
              $
              ―
              
              
              $
              ―
              
              
              $
              ―Tenure
      allowance
              
              
              16,250
              
              
              
              16,250
              
              
              
              32,500
              
              
              
              1,446,250$
              563,098
              
              
              $
              16,250
              
              
              $
              32,500
              
              
              $
              1,446,250
   
 FORBES
      MEDI-TECH INC.
 Notes
      to Consolidated Financial
Statements
 (Expressed
      in Canadian dollars)
 
 Years
      ended December 31, 2009 and 2008
 
 24.Discontinued operations:
  In May
2008, the Company announced its decision to discontinue its pharmaceutical
research and development programs and to focus on its nutraceutical operations.
Accordingly, all expenses, related to the pharmaceutical research and
development programs have been classified as discontinued operations for 2008
and 2007.   The Company did not generate any revenue from its
discontinued pharmaceutical R&D programs.
  In August
2008, the Company completed an agreement for the sale of its pharmaceutical
assets and business unit based in San Diego, California to Transition
Therapeutics Inc. (“Transition”).  Terms of the sale included an
upfront payment of $1,054,400 (US $1,000,000) in cash paid at closing to the
Company with potential future payments of up to US $6,000,000 payable in cash or
Transition shares, based upon Transition reaching certain developmental and
regulatory milestones as outlined in the agreement.
  The
proceeds from sale included $959,504 (US $910,000) for intellectual property
less payments to former shareholders of TheraPei Pharmaceuticals Inc. (“TPP”),
of $191,901 (US $182,000) which comprised of 168,322 Forbes’ common shares
valued at $154,467 (US $145,600) and cash of $38,613 (US $36,400) for a gain of
$767,603 (US $728,000).  Under the terms of the agreement with the
former TPP shareholders, the value of the 168,322 common shares issued was
determined based on the average of the Nasdaq stock exchange high and low
trading price of Forbes common shares on the closing date.  Also, the
proceeds of sale included $94,896 (US $90,000) for capital assets, which
resulted in a loss of $1,145 (US $1,086).  Under the terms of the
agreement with the former TPP shareholders, 20% of contingent future payments
received from the sale, as noted above, will be paid to the former TPP
shareholders on a basis of 80% Forbes’ shares and 20% cash.
  The
following tables reflect our loss from discontinued operations relating to our
pharmaceutical research and development programs for the years ended December
31, 2009, 2008 and 2007.
 
 
 2009
              
              
              2008
              
              
              2007ExpensesPharmaceutical
      administrative
              
              $
              ―
              
              
              $
              133,044
              
              
              $
              245,216Pharmaceutical
      research & development
              
              
              ―
              
              
              
              1,097,490
              
              
              
              1,529,504Write-down
      of assets
              
              
              ―
              
              
              
              ―
              
              
              
              666,198$
              ―
              
              
              $
              (1,230,534
              )
              
              $
              (2,440,918
              )Gain
      on disposal of discontinued operations
              
              $
              ―
              
              
              $
              767,603
              
              
              $
              ―Loss
      from discontinued operations
              
              $
              ―
              
              
              $
              ($462,931
              )
              
              $
              (2,440,918
              )
  
  32
 FORBES
      MEDI-TECH INC.
 Notes
      to Consolidated Financial
Statements
 (Expressed
      in Canadian dollars)
 
 Years
      ended December 31, 2009 and
2008
  25.United States
generally accepted accounting principles:
  These
consolidated financial statements are prepared in accordance with generally
accepted accounting principles in Canada (“Canadian GAAP") which differ in
certain respects from accounting principles generally accepted in the United
States (“United States GAAP”) and pursuant to the rules and regulations of the
Securities and Exchange Commission.  Material issues that could give
rise to differences to these consolidated financial statements are as
follows:
  (a)    Stock-based
compensation:
  Under
Canadian GAAP, all stock-based compensation granted to employee and
non-employees on or after January 1, 2002 is accounted for at fair value. The
value of any options granted prior to January 1, 2002 is not required to be
recorded or presented under Canadian GAAP.
  Under
United States GAAP, and prior to January 1, 2006, the Company followed Financial
Accounting Standards Board ("FASB") Statement of Financial Accounting Standards
123, Accounting for Stock-based Compensation ("SFAS No. 123"), which requires
the recognition of compensation costs for stock options issued after December
15, 1995 to non-employees, such as members of the Scientific Advisory Board and
other consultants and advisors, at fair value.
  As a
result, the fair value of any options granted to non-employees prior to January
1, 2002 and subsequent to December 15, 1995 has not been recorded under Canadian
GAAP. Under United States GAAP, the value of these options is recorded in
accordance with SFAS No. 123.
  For
United States GAAP, prior to January 1, 2006, the Company elected to account for
employee share-based compensation using the intrinsic value method based upon
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees ("APB 25"). In most cases the application of the intrinsic value
method by the Company did not result in compensation expense under United States
GAAP.
  GAAP
differences between intrinsic measurement under United States GAAP for employee
and fair value measurement under Canadian GAAP prior to January 1, 2006 are
presented in the United States GAAP reconciliation.
  On
January 1, 2006 under United States GAAP, the Company adopted the fair
value-based method for measurement and cost recognition of employee share-based
compensation arrangements under the provisions of FASB Statement of Accounting
Standards No. 123 (Revised 2004), Share-Based Payment ("SFAS No. 123R"), using
the modified prospective application transition approach.
  As a
result there were no longer significant differences between Canadian and United
States GAAP for accounting for stock-based compensation for employee and
non-employee awards.
  Under
Canadian GAAP, the Company records stock-based compensation expense as if all
instruments granted that are subject only to a service requirement are expected
to vest. The effect of actual forfeitures is recognized as it
occurs.
   33
 FORBES
      MEDI-TECH INC.
 Notes
      to Consolidated Financial
Statements
 (Expressed
      in Canadian dollars)
 
 Years
      ended December 31, 2009 and
2008
 25.  United
States generally accepted accounting principles:
  (a)   Stock-based
compensation (continued):
  Under
United States GAAP, the Company is required to estimate the number
of forfeitures expected in the year. Based on historical experience,
forfeitures were estimated based on the preceding two years actual forfeitures,
which approximates the actual number of forfeitures incurred. The Company
has elected to record the actual number of forfeitures incurred.  The
Company has determined that the effect of estimated forfeitures upon the
adoption on stock compensation expense, including the effect of estimating
forfeitures on options granted, but not fully vested, prior to the adoption of
SFAS No. 123R, is not material.
  (b)   Reduction
of stated share capital and deficit:
  Under
United States GAAP, reductions in Stated Share Capital and Accumulated Deficit
are not permitted. Under Canadian GAAP, the Stated Share Capital and Deficit was
reduced.
  (c)   Joint
ventures:
  Under
United States GAAP, the Company's interest in joint ventures would be accounted
for using the equity method of accounting as opposed to the proportionate
consolidation method.  However, reconciliation of this difference may
and has been omitted in accordance with SEC rules and regulations.
  The
equity method of accounting requires the investment in the joint venture to be
recorded at cost and adjusted to recognize the investor's share of the earnings
or losses of the investee after the date of acquisition.
  Condensed
balance sheets and statements of operations reflecting the Company’s
proportionate interests in its joint venture, in Forbes-Fayrefield, are
disclosed in note 11.
  (d)  Convertible
debenture:
  As
described in note 3, on March 20, 2008, the Company entered into an agreement
with a private investor (the "Investor") to reorganize a wholly owned subsidiary
company, 3887685 Canada Inc. (“Old Forbes"). Old Forbes issued a convertible
debenture to the Investor for proceeds of $2,960,000.
  Under
United States GAAP, debt issued by a consolidated subsidiary that is convertible
into that subsidiary's stock is accounted for in accordance with APB 14 as a
combined instrument and classified as a liability. No portion of the proceeds
from the issuance of the convertible debt is attributable to the conversion
feature, since the convertible debt was not issued with a beneficial conversion
feature. The Company recorded this convertible debenture for United States GAAP
purposes at the issue price of $2,960,000.
  Under
Canadian GAAP, the convertible debenture was considered to have both a debt and
equity component, and was classified as non-controlling interest on the “Equity
component of subsidiary’s convertible debenture”, as described in note
6.
  (e)    Share
issuance costs:
  Under
United States GAAP, share issuance costs pertaining to the beneficial conversion
feature are recorded as deferred financing costs and are amortized over the
maturity period.  Under Canadian GAAP, the share issuance costs are
charged to equity.
  
  34
 FORBES
      MEDI-TECH INC.
 Notes
      to Consolidated Financial
Statements
 (Expressed
      in Canadian dollars)
 
 Years
      ended December 31, 2009 and
2008
  25.United States generally accepted
accounting principles (continued):
 
 (f)    Warrants:
  On
January 1, 2009 under United States GAAP, the Company adopted, Emerging Issues
Task Force Issues No. 07-5, Determining Whether an Instrument (or an Embedded
Feature) is Indexed to an Entity’s Own Stock (ETIF 07-5).
  As
described in note 14(d), the Company has a balance of 227,265 warrants
outstanding as at December 31, 2009 and expiring on October 26,
2010.  Under EITF 07-5, and effective January 1, 2009, the Company was
required under United States GAAP to recognize the embedded derivative relating
to the strike price of the warrant being denominated in US dollars while the
Company’s functional currency is the Canadian dollar.  The embedded
derivative is recognized at fair value based on the Black-Scholes
method.  The movement in fair value for the year ended December 31,
2009 is recorded in the consolidated statement of operations and
deficit.  Under Canadian GAAP, no such requirement
exists.
  EITF 07-5
requires that this be accounted for prospectively with a cumulative effective
adjustment of $4,967 recognizing the liability and adjustment to equity as of
January 1, 2009.  During the year ended December 31, 2009, $488 was
recognized as an adjustment to the consolidated statements of operations and
deficit.
 
 (g)
              Inventory:
 
 Under
United States GAAP, reversals of inventory valuation provisions are not
permitted. Under Canadian GAAP, such reversals are permitted. During the year
ended December 31, 2009 inventory valuation allowances of $75,000 were
reversed.
     35
 FORBES
      MEDI-TECH INC.
 Notes
      to Consolidated Financial
Statements
 (Expressed
      in Canadian dollars)
 
 Years
      ended December 31, 2009 and
2008
 25.United States generally accepted
accounting principles (continued):
  (h)      Impact
of differences:
  (i)  Consolidated
statement of operations and comprehensive income / (loss) and
deficit:
  2009
              
              
              2008
              
              
              2007Net
      income / (loss) in accordance with Canadian GAAP
              
              $
              126,598
              
              
              $
              (7,652,499
              )
              
              $
              (11,683,128
              )Difference
      in gain on dilution of interest in subsidiary (note 25(d))
              
              
              (398,615
              )Difference
      in interest accretion (note 25(d))
              
              
              103,728
              
              
              
              294,887
              
              
              
              ―Reversal
      of inventory write-down under Canadian GAAP  (note
      25(g))
              
              
              (75,000
              )Recognition
      of liability component of
                warrants
      (note 25(f))
              
              
              (488
              )
              
              
              ―
              
              
              
              ―Net
      loss and comprehensive loss in accordance with United States
      GAAP
              
              
              (243,777
              )
              
              
              (7,357,612
              )
              
              
              (11,683,128
              )Deficit,
      beginning of period, United States GAAP
              
              
              (105,279,439
              )
              
              
              (97,916,860
              )
              
              
              (86,233,732
              )Adjustment
      of cumulative impact of recognition of liability component of warrants
      (note 25(f))
              
              
              ―
              
              
              
              (4,967
              )
              
              
              ―Deficit,
      end of period, United States GAAP
              
              $
              (105,523,216
              )
              
              $
              (105,279,439
              )
              
              $
              (97,916,860
              )Weighted
      average number of
                shares
      outstanding, basic
              
              
              4,969,813
              
              
              
              4,865,131
              
              
              
              4,800,923Basic
      loss per share
              
              $
              (0.05
              )
              
              $
              (1.51
              )
              
              $
              (2.43
              )Weighted
      average number of
                shares
      outstanding, diluted
              
              
              5,032,539
              
              
              
              4,865,131
              
              
              
              4,800,923Diluted
      income / (loss) per share
              
              $
              (0.05
              )
              
              $
              (1.51
              )
              
              $
              (2.43
              )
  
 (ii)
              Consolidated
      balance sheet:
 
 2009
              
              
              2008Canadian
              
              
              United
      States
              
              
              Canadian
              
              
              United
      StatesGAAP
              
              
              GAAP
              
              
              GAAP
              
              
              GAAPCurrent
      assets
              
              $
              4,571,445
              
              
              $
              4,496,445
              
              
              $
              9,057,668
              
              
              $
              9,057,668Capital
      assets
              
              
              102,813
              
              
              
              102,813
              
              
              
              139,843
              
              
              
              139,843Intangible
      and other assets
              
              
              23,210
              
              
              
              23,210
              
              
              
              18,376
              
              
              
              18,376Current
      and Long-term liabilities
              
              
              2,269,312
              
              
              
              2,274,767
              
              
              
              6,531,627
              
              
              
              6,640,322Equity
      Component of subsidiary’s convertible debenture
              
              
              ―
              
              
              
              ―
              
              
              
              398,615
              
              
              
              ―Shareholders’
      equity:Common
      Shares
              
              
              2,720,992
              
              
              
              100,218,121
              
              
              
              2,720,992
              
              
              
              100,218,121Contributed
      Surplus
              
              
              10,042,877
              
              
              
              7,652,796
              
              
              
              10,026,964
              
              
              
              7,636,883Deficit
              
              
              (10,335,713
              )
              
              
              (105,523,216
              )
              
              
              (10,462,311
              )
              
              
              (105,279,439
              )
  
  36
 FORBES
      MEDI-TECH INC.
 Notes
      to Consolidated Financial
Statements
 (Expressed
      in Canadian dollars)
 
 Years
      ended December 31, 2009 and
2008
  25.  United
States generally accepted accounting principles (continued):
 
  (i)       
Other disclosures:
  The
following additional information would be presented if these consolidated
financial statements were presented in accordance with United States
GAAP:
  (i)   
Advertising expense:
  Advertising
expenses are recorded as an expense in the period they are
incurred.
  (iii)  Other
disclosure items:
 
 2009
              
              
              2008
              
              
              2007Depreciation
              
              $
              37,030
              
              
              $
              67,352
              
              
              $
              151,720Amortization
              
              
              ―
              
              
              
              8,232
              
              
              
              8,458Depreciation-discontinued
      operations
              
              
              ―
              
              
              
              11,032
              
              
              
              18,971Amortization-
      discontinued operations
              
              
              ―
              
              
              
              ―
              
              
              
              33,858Operating
      lease expense
              
              $
              329,760
              
              
              $
              337,985
              
              
              $
              338,907Operating
      lease expense – discontinued operations
              
              
              ―
              
              
              
              99,215
              
              
              
              ―
 
  (j)
              Recent
      accounting pronouncements:
 
 In April
2009, the FASB issued FSP FAS No. 107-1 and APB 28-1, Interim Disclosures about
Fair Value of Financial Instruments, amend FASB Statement No. 107, Disclosures
about Fair Value of Financial Instruments and Accounting Principle Board Opinion
No. 28, Interim Financial Reporting, to require disclosures about fair value of
financial instruments in interim financial statements.  The Company
has provided the required disclosures in note 25(f).
  In April
2009, the FASB issued FSP FAS No. 115-2 and FAS No. 124-2, Recognition and
Presentation of Other-than-Temporary Impairments, or FSP FAS No.
115-2.  FSP FAS No. 115-2 amends the impairment guidance for certain
debt securities and will require an investor to assess the likelihood of selling
the security prior to recovering the cost basis.  If the
investor  is able to meet the criteria to assert that it will not have
to sell the security before recovery, impairment charges related to non-credit
losses would be reflected in other comprehensive income.  FASP FAS
115-2 is effective for interim periods beginning after June 15,
2009.  We anticipate no impact from this pronouncement.
  In April
2009, the FASB issued FSP FAS No. 157-4, Determining Fair Value When the Volume
and Level of Activity for the Asset or Liability Have Significantly Decreased
and Identifying Transactions That Are Not Orderly.   This
standard is related to determining fair value when volume and level of activity
for the asset or liability have significantly decreased and identifying
transactions that are not orderly amends existing accounting standards to
provide additional guidance on estimating fair value when there has not been a
significant decrease in the volume and level of activity for the asset or
liability in relation to the normal market activity for the asset or liability.
In addition, the new standard provides additional guidance on situation that may
indicate that a transaction for the asset or liability is not
orderly.
   37