List
of Exhibits

|Annual Financial Statements for the Year
      Ending December 31, 2002       
|------------------------------------------------------------------------------
|First Quarter Financials Statements for the Period Ending
      March 31, 2003

---

Consolidated Financial Statements

(Expressed in thousands of Canadian dollars)



FORBES  MEDI-TECH  INC.

Year ended December 31, 2002

Five months ended December 31, 2001

Years ended July 31, 2001, 2000















---













AUDITORS' REPORT TO THE SHAREHOLDERS



We have audited the consolidated balance sheets of Forbes Medi-Tech Inc. as at December 31, 2002 and 2001 and the consolidated statements of operations and deficit and cash flows for the year ended December 31, 2002, five months ended December 31, 2001 and for the years ended July 31, 2001, and 2000.  These financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements based on our audits.



With respect to the consolidated financial statements for the year ended December 31, 2002, the five months ended December 31, 2001, and the year ended July 31, 2001, we conducted our audits in accordance with Canadian generally accepted auditing standards and United States generally accepted auditing standards.  With respect to the consolidated financial statements for the year ended July 31, 2000, we conducted our audit in accordance with Canadian generally accepted auditing standards.  Those standards require that we plan and perform an audit to obtain reasonable assurance 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.



In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2002 and 2001 and the results of its operations and its cash flows for the year ended December 31, 2002, the five-month period ended December 31, 2001 and the years ended July 31, 2001 and 2000 in accordance with Canadian generally accepted accounting principles.



KPMG LLP (signed)



Chartered Accountants



Vancouver, Canada

March 14, 2003





---













COMMENTS BY AUDITORS

FOR U.S. READERS ON CANADA
- U.S. REPORTING DIFFERENCE



In the United States, reporting standards for auditors require the addition of an explanatory paragraph (following the opinion paragraph) when the financial statements are affected by conditions and events that cast substantial doubt on the Company's ability to continue as a going concern, such as those described in note 1 to the consolidated financial statements.  Our report to the shareholders dated March 14, 2003 is expressed in accordance with Canadian reporting standards which do not permit a reference to such events and conditions in the auditors' report when these are adequately disclosed in the consolidated financial statements.



KPMG LLP (signed)



Chartered Accountants



Vancouver, Canada

March 14, 2003





---

|FORBES
      MEDI-TECH INC.                                    |                    |                    |   |          | 
|-------------------------------------------------------------- | ------------------ | ------------------ | - | -------- | 
|Consolidated
      Balance Sheets                              |                    |                    |   |          | 
|(Expressed
      in thousands of Canadian dollars)             |                    |                    |   |          | 
|                                                               |                    |                    |   |          | 
|                                                               |                    |                    |   |          | 
|                                                               | December
      31, | December
      31, |  
|                                                               | 2002               | 2001               |  
|                                                               |                    |                    |  
|                                                               |                    |                    |   |          | 
|Assets                                                         |                    |                    |   |          | 
|                                                               |                    |                    |   |          | 
|Current
      assets:                                          |                    |                    |   |          | 
|Cash
      and cash equivalents                                | $                  | 413                | $ | 5,710    | 
|Short-term
      investments                                   |                    | -                  |   | 983      | 
|Accounts
      receivable (note 3)                             |                    | 4,190              |   | 3,225    | 
|Inventories
      (note 4)                                     |                    | 952                |   | 3,415    | 
|Prepaid
      expenses and deposits                            |                    | 537                |   | 1,190    | 
|                                                               |                    |                    |   |          | 
|                                                               |                    | 6,092              |   | 14,523   | 
|                                                               |                    |                    |   |          | 
|Property,
      plant and equipment (note 5)                   |                    | 11,932             |   | 14,305   | 
|                                                               |                    |                    |   |          | 
|Intangible
      and other assets (note 7)                     |                    | 9,393              |   | 11,156   | 
|                                                               |                    |                    |   |          | 
|                                                               |                    |                    |   |          | 
|                                                               | $                  | 27,417             | $ | 39,984   | 
|                                                               |                    |                    |   |          | 
|                                                               |                    |                    |   |          | 
|Liabilities
      and Shareholders' Equity                     |                    |                    |   |          | 
|                                                               |                    |                    |   |          | 
|Current
      liabilities:                                     |                    |                    |   |          | 
|Accounts
      payable and accrued liabilities (note 8)        | $                  | 4,740              | $ | 5,215    | 
|Deferred
      revenues and royalties payable (note 11(a))     |                    | 3,155              |   | 1,625    | 
|Demand
      loans (note 6)                                    |                    | -                  |   | 1,593    | 
|Current
      portion of long-term debt                        |                    | 1,691              |   | 133      | 
|                                                               |                    |                    |   |          | 
|                                                               |                    | 9,586              |   | 8,566    | 
|                                                               |                    |                    |   |          | 
|Long-term
      liabilities:                                   |                    |                    |   |          | 
|Long-term
      debt (note 9)                                  |                    | 217                |   | 1,353    | 
|Deferred
      revenues (note 11(a))                           |                    | -                  |   | 9,173    | 
|Tenure
      allowance (note 11(d))                            |                    | 614                |   | 878      | 
|                                                               |                    |                    |   |          | 
|                                                               |                    | 10,417             |   | 19,970   | 
|                                                               |                    |                    |   |          | 
|Shareholders'
      equity:                                    |                    |                    |   |          | 
|Share
      capital (note 10)                                  |                    | 71,472             |   | 71,273   | 
|Special
      warrants, net of issue costs of $88 (note 10(d)) |                    | 887                |   | -        | 
|Contributed
      surplus                                      |                    | 20                 |   | -        | 
|Deficit                                                        |                    | (55,379)           |   | (51,259) | 
|                                                               |                    |                    |   |          | 
|                                                               |                    | 17,000             |   | 20,014   | 
|                                                               |                    |                    |   |          | 
|                                                               |                    |                    |   |          | 
|                                                               | $                  | 27,417             | $ | 39,984   | 
|                                                               |                    |                    |   |          | 



Nature
of operations and going concern (note 1)

Commitments
and contractual obligations (notes 6, 11 and 17)

Related
party transactions (notes 6, 8 and 14)

See accompanying notes
to consolidated financial statements.

Approved on behalf of
the Board:

"Joseph
Dunne"      Director                
"Lily Yang"Director

---

|FORBES
      MEDI-TECH INC.                                                  |  |  |  |  | 
|---------------------------------------------------------------------------- |  |  |  |  | 
|Consolidated
      Statements of Operations and Deficit                      |  |  |  |  | 
|(Expressed
      in thousands of Canadian dollars, except per share amounts) |  |  |  |  | 
|                                                                             |  |  |  |  | 

|                                                       |                    |                    | Five  |                  |       |                  |   |         
|------------------------------------------------------ | ------------------ | ------------------ | ----- | ---------------- | ----- | ---------------- | - | --------
|                                                       | Year
      ended   | months
      ended |       | Year
      ended |       | Year
      ended |  
|                                                       | December
      31, | December
      31, |       | July
      31,   |       | July
      31,   |  
|                                                       | 2002               | 2001               |       | 2001             |       | 2000             |  
|                                                       |                    |                    |       |                  |       |                  |  
|                                                       |                    |                    |       |                  |       |                  |   |         
|Revenue:                                               |                    |                    |       |                  |       |                  |   |         
|Sales                                                  | $                  | 6,852              | $     | 2,770            | $     | 3,732            | $ | -       
|Licensing                                              |                    | 941                |       | 903              |       | 2,093            |   | 1,224   
|                                                       |                    |                    |       |                  |       |                  |   |         
|                                                       |                    |                    |       |                  |       |                  |   |         
|Phytosterol
      revenues                             |                    | 7,793              |       | 3,673            |       | 5,825            |   | 1,224   
|                                                       |                    |                    |       |                  |       |                  |   |         
|Interest
      and other                               |                    | 187                |       | 212              |       | 2,036            |   | 1,755   
|                                                       |                    |                    |       |                  |       |                  |   |         
|                                                       |                    | 7,980              |       | 3,885            |       | 7,861            |   | 2,979   
|                                                       |                    |                    |       |                  |       |                  |   |         
|Expenses:                                              |                    |                    |       |                  |       |                  |   |         
|Cost
      of sales, marketing                         |                    |                    |       |                  |       |                  |   |         
|and
      product development                          |                    | 7,247              |       | 3,880            |       | 9,679            |   | 3,420   
|General
      and administrative                       |                    | 4,245              |       | 2,126            |       | 6,985            |   | 4,947   
|Research
      and development                         |                    | 3,209              |       | 2,083            |       | 7,131            |   | 5,297   
|Depreciation
      and amortization                    |                    | 2,307              |       | 955              |       | 1,073            |   | 634     
|                                                       |                    |                    |       |                  |       |                  |   |         
|                                                       |                    | 17,008             |       | 9,044            |       | 24,868           |   | 14,298  
|                                                       |                    |                    |       |                  |       |                  |   |         
|Gain
      on settlement of licensing                  |                    |                    |       |                  |       |                  |   |         
|arrangements
      (note 11(a))                        | (6,044)            |                    | -     |                  | -     |                  | - |         
|Write-down
      of leaseholds and assets (note 11(b)) | 1,136              |                    | -     |                  | -     |                  | - |         
|Write-down
      of pilot facility (note 6)            | -                  |                    | 1,302 |                  | 2,715 |                  | - |         
|                                                       |                    |                    |       |                  |       |                  |   |         
|                                                       |                    |                    |       |                  |       |                  |   |         
|Loss
      for the period                              |                    | (4,120)            |       | (6,461)          |       | (19,722)         |   | (11,319)
|                                                       |                    |                    |       |                  |       |                  |   |         
|Deficit,
      beginning of period                     |                    | (51,259)           |       | (44,798)         |       | (25,076)         |   | (13,757)
|                                                       |                    |                    |       |                  |       |                  |   |         
|                                                       |                    |                    |       |                  |       |                  |   |         
|Deficit,
      end of period                           | $                  | (55,379)           | $     | (51,259)         | $     | (44,798)         | $ | (25,076)
|                                                       |                    |                    |       |                  |       |                  |   |         
|                                                       |                    |                    |       |                  |       |                  |   |         
|Basic
      and diluted loss per share (note 12)       | $                  | (0.19)             | $     | (0.30)           | $     | (0.93)           | $ | (0.66)  

See accompanying notes
to consolidated financial statements.

---

FORBES MEDI-TECH
INC.

Consolidated
Statements of Cash Flows (Expressed in thousands of Canadian dollars)

|                                                 |                    |                    | Five    |                  |         |                  |      |         |         
|------------------------------------------------ | ------------------ | ------------------ | ------- | ---------------- | ------- | ---------------- | ---- | ------- | --------
|                                                 | Year
      ended   | months
      ended |         | Year
      ended |         | Year
      ended |     
|                                                 | December
      31, | December
      31, |         | July
      31,   |         | July
      31,   |     
|                                                 | 2002               | 2001               |         | 2001             |         |                  | 2000 |        
|                                                 |                    |                    |         |                  |         |                  |      |        
|                                                 |                    |                    |         |                  |         |                  |      |         |         
|Cash
      provided by (used in):                |                    |                    |         |                  |         |                  |      |         |         
|Operations:                                      |                    |                    |         |                  |         |                  |      |         |         
|Loss
      for the period                        | $                  | (4,120)            | $       | (6,461)          | $       | (19,722)         |      | $       | (11,319)
|Adjustment
      to reconcile net loss to        |                    |                    |         |                  |         |                  |      |         |         
|cash
      flow provided by operations:          |                    |                    |         |                  |         |                  |      |         |         
|Depreciation
      and amortization              |                    | 2,307              |         | 955              |         | 1,073            |      |         | 634     
|Amortization
      of deferred license           |                    |                    |         |                  |         |                  |      |         |         
|revenues                                         |                    | (941)              |         | (903)            |         | (2,093)          |      |         | (1,372) 
|Gain
      on settlement of licensing            |                    |                    |         |                  |         |                  |      |         |         
|arrangements
      (note 11(a))                  |                    | (6,044)            |         | -                |         | -                |      |         | -       
|Gain
      on disposal of pilot facility         |                    | (63)               |         | -                |         | -                |      |         | -       
|Gain
      on sale of investment in              |                    |                    |         |                  |         |                  |      |         |         
|joint
      venture                              |                    | -                  |         | (167)            |         | -                |      |         | -       
|Loss
      on disposal of fixed assets           |                    | 31                 |         | -                |         | -                |      |         | -       
|Write-down
      of leaseholds and assets        | 1,136              |                    | -       |                  | -       |                  |      | -       |         
|Write-down
      of pilot facility               |                    | -                  |         | 1,302            |         | 2,715            |      |         | -       
|Stock-based
      compensation expense           | 20                 |                    | -       |                  | -       |                  |      | -       |         
|Changes
      in:                                |                    |                    |         |                  |         |                  |      |         |         
|Accounts
      receivable                        | (106)              |                    | (1,658) |                  | 5       |                  |      | (1,013) |         
|Inventories                                      | 2,463              |                    | 1,477   |                  | (3,040) |                  |      | (1,792) |         
|Prepaid
      expenses and deposits              | 804                |                    | (86)    |                  | (695)   |                  |      | (490)   |         
|Accounts
      payable and accrued liabilities   | 837                |                    | (799)   |                  | (3,061) |                  |      | 2,754   |         
|Increase
      (decrease) in tenure allowance    |                    |                    |         |                  |         |                  |      |         |         
|in
      excess of amounts funded                | (233)              |                    | 104     |                  | 78      |                  |      | 358     |         
|Deferred
      revenues                          |                    | -                  |         | -                |         | -                |      |         | 12,253  
|Other                                            |                    | 95                 |         | -                |         | -                |      |         | -       
|                                                 |                    |                    |         |                  |         |                  |      |         |         
|                                                 |                    | (3,814)            |         | (6,236)          |         | (24,740)         |      |         | 13      
|Investments:                                     |                    |                    |         |                  |         |                  |      |         |         
|Acquisition
      of property, plant and         |                    |                    |         |                  |         |                  |      |         |         
|equipment                                        | (1,566)            |                    | (2,142) |                  | (3,698) |                  |      | (3,394) |         
|Acquisition
      of intangible and other assets | -                  |                    | (3,315) |                  | (3,999) |                  |      | -       |         
|Investment
      in joint venture (net of        |                    |                    |         |                  |         |                  |      |         |         
|cash
      received)                             |                    | (1,222)            |         | -                |         | (2,850)          |      |         | -       
|Disposal
      of investment in joint venture    |                    | -                  |         | 200              |         | -                |      |         | -       
|Proceeds
      on disposal of pilot plant        |                    | 385                |         | -                |         | -                |      |         | -       
|Proceeds
      on disposal of fixed assets       |                    | 22                 |         | 185              |         | -                |      |         | -       
|Short-term
      investments                     |                    | 983                |         | 9,155            |         | 32,378           |      |         | (23,434)
|                                                 |                    |                    |         |                  |         |                  |      |         |         
|                                                 |                    | (1,398)            |         | 4,083            |         | 21,831           |      |         | (26,828)
|Financing:                                       |                    |                    |         |                  |         |                  |      |         |         
|Issuance
      of common shares                  | 199                |                    | 12      |                  | 734     |                  |      | 32,446  |         
|Issuance
      of special warrants               | 887                |                    | -       |                  | 633     |                  |      | -       |         
|Increase
      in (repayment of) notes payable   | 422                |                    | (51)    |                  | (96)    |                  |      | -       |         
|Increase
      in (repayment of) demand loans    | (1,593)            |                    | 63      |                  | (12)    |                  |      | 156     |         
|                                                 |                    |                    |         |                  |         |                  |      |         |         
|                                                 |                    | (85)               |         | 24               |         | 1,259            |      |         | 32,602  
|                                                 |                    |                    |         |                  |         |                  |      |         |         
|                                                 |                    |                    |         |                  |         |                  |      |         |         
|Increase
      (decrease) in cash and            |                    |                    |         |                  |         |                  |      |         |         
|cash
      equivalents                           |                    | (5,297)            |         | (2,129)          |         | (1,650)          |      |         | 5,787   
|                                                 |                    |                    |         |                  |         |                  |      |         |         
|Cash
      and cash equivalents,                 |                    |                    |         |                  |         |                  |      |         |         
|beginning
      of period                        |                    | 5,710              |         | 7,839            |         | 9,489            |      |         | 3,702   
|                                                 |                    |                    |         |                  |         |                  |      |         |         
|                                                 |                    |                    |         |                  |         |                  |      |         |         
|Cash
      and cash equivalents,                 |                    |                    |         |                  |         |                  |      |         |         
|end
      of period                              | $                  | 413                | $       | 5,710            | $       | 7,839            | $    | 9,489   |         
|                                                 |                    |                    |         |                  |         |                  |      |         |         

Supplementary
information (note 13)

See accompanying notes
to consolidated financial statements.

---



FORBES MEDI-TECH INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of Canadian dollars, except per share amounts)



Year ended December 31, 2002

Five months ended December 31, 2001

Years ended July 31, 2001 and 2000





1.

Nature of operations and going concern:

Forbes Medi-Tech Inc. (the
"Company") is a biopharmaceutical company dedicated to the research, development and commercialization of innovative prescription pharmaceutical and nutraceutical products for the prevention and treatment of cardiovascular and related diseases.  The Company's scientific platform is based on core sterol technology.  By extracting plant sterols from wood pulping by-products, Forbes has developed cholesterol-lowering agents used as both pharmaceutical therapeutics and functional food ingredients.  The Company has commenced operations in the nutraceutical/functional food ingredient market in the USA and some international markets.

The Company requires regulatory approvals for its pharmaceutical products.  The eventual profitability of the Company is dependent on many factors, including, among other things, successful development and market acceptance of its products and services, receiving regulatory approvals, the successful operation of its manufacturing activities and 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 and pharmaceutical industries are subject to rapid and 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.  The Company is listed on the NASDAQ SmallCap market stock exchange as at December 31, 2002 and had received notice that their listing was in violation of minimum listing standards of US $1.00 minimum per share bid price requirement.  Compliance was to be regained by April 14, 2003; however, the Company will apply for an additional 90 days (July 14, 2003) to regain compliance with NASDAQ's listing requirements.

The Company has a working capital deficiency and deficit of $3,494 and $55,379 as at December 31, 2002 (2001
- working capital of $5,957 and deficit of $51,259).  In addition, the Company has incurred negative cash flows from operating activities of $3,814, $6,236 and $24,740 in the periods ended December 31, 2002, December 31, 2001 and July 31, 2001 respectively.  Further, the Company has residual commitments to fund its Phyto-Source joint venture (note 6), to fund research agreements (note 11(e)) and to fund its ongoing research and development activities.









---

FORBES MEDI-TECH INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of Canadian dollars, except per share amounts)



Year ended December 31, 2002

Five months ended December 31, 2001

Years ended July 31, 2001 and 2000





1.

Nature of operations and going concern (continued):

The Company's future operations are dependent on its ability to obtain third party financing in the form of debt and equity and ultimately to generate future profitable operations.  The Company is currently seeking additional funds through future debt or equity financing and joint venture partners to offset future cash flow deficiencies.  Such financing may not be available or may not be available on reasonable terms.  The resolution of this going concern issue is dependent on the realization of management's plans.

These financial statements have been prepared on a going concern basis, which assumes the Company will continue in operation throughout the next fiscal year and into the foreseeable future and will be able to realize its assets and discharge its liabilities and commitments in the normal course of business.  These consolidated financial statements do not include any adjustments related to the recoverability of assets and classification of assets and liabilities that might be necessary should the Company be unable to continue as a going concern.



2.

Significant accounting policies

(a)

Basis of presentation:

These consolidated financial statements include the assets, liabilities and operating results of the Company, its wholly-owned subsidiaries, Forbes Research & Manufacturing Inc., Forbes Medi-Tech Capital Inc., Forbes Medi-Tech (USA) Inc., and its 50% interests in Phyto-Venture LLC ("PhytoVenture") and PhytoSource LP ("PhytoSource").  The Company accounts for its interests in PhytoVenture and PhytoSource 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 a term to maturity of less than or equal to three months when acquired.

(c)

Short-term investments:

Short-term investments consist principally of investment grade commercial paper, bankers' acceptances and treasury bills with maturities of between three months to one year from the date of purchase and are recorded at the lower of cost or market value.  The carrying value of the short-term investments approximates their market value.

(d)

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 average cost.







---

FORBES MEDI-TECH INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of Canadian dollars, except per share amounts)



Year ended December 31, 2002

Five months ended December 31, 2001

Years ended July 31, 2001 and 2000





2.

Significant accounting policies (continued):

(e)

Property, plant and equipment and intangible assets:

Property, plant and equipment is recorded at cost and amortized over their estimated useful lives.  Amortization is provided for using the following methods and annual rates:



Asset                                                                                  
Basis                                                              
Rate



Building and infrastructure

Declining-balance

5%

Production equipment

Declining-balance

20%

Office equipment

Declining-balance

20%

Computer equipment

Declining-balance

30%

Computer software

Declining-balance

100%

Leasehold improvements

Straight-line

lease term





Significant property, plant and equipment additions are amortized when placed into use.

Intangible assets, comprised of intellectual properties, are recorded at acquisition cost and are amortized on a straight-line basis over their useful lives, not exceeding ten years.

(f)

Impairment of long-lived assets and long-lived assets to be disposed of:

Effective January 1, 2002, the Company adopted the new Recommendation of the Canadian Institute of Chartered Accountants Handbook ("CICA Handbook") Section 3063, (Impairment of Long-Lived Assets).  Long-lived assets, such as property, plant and equipment and intangible assets with finite useful lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to future undiscounted net cash flows expected to be generated by the assets.  If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.  Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.  This change in accounting policy did not result in any impairment charge for the year ended December 31, 2002.

(g)

Stock-based compensation plan:

The Company has a stock-based compensation plan, which is described in note 10(f).  Effective January 1, 2002, the Company adopted the new Recommendations of the CICA Handbook Section 3870, Stock-based Compensation and Other Stock-based Payments.  The Company applies Section 3870 prospectively to all stock-based payments to employees and non-employees granted on or after January 1, 2002.







---

FORBES MEDI-TECH INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of Canadian dollars, except per share amounts)



Year ended December 31, 2002

Five months ended December 31, 2001

Years ended July 31, 2001 and 2000





2.

Significant accounting policies (continued):

(g)

Stock-based compensation plan (continued):

The Company accounts for all options granted to employees, including directors, under the settlement method, whereby no compensation cost is recorded for options granted to employees.  Consideration paid by employees as the exercise of stock options is recorded as share capital.  The Company discloses the pro-forma effect of accounting for these awards to employees under the fair value based method (note 10(g)).

The Company accounts 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.

(h)

Research and development:

All costs of research activities are recorded as expenses in the period incurred.  Development costs are charged as an expense in the period incurred unless the Company believes a development project meets stringent criteria for deferral and amortization.  No development costs have been deferred to date.

(i)

Revenue recognition:

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

Contract research payments and milestone payments are generally recognized over the life of the technology license agreement to which they relate, unless the payments clearly have no relationship to potential future production, royalty, or other related arrangements.

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

(j)

Cost of sales, marketing and product development:

Cost of sales, marketing and product development include all costs pertaining to the sales of marketable nutraceutical and pharmaceutical end-products, all costs related to identifying and developing a market for the Company's products, costs related to the manufacturing development and upscaling of the Company's product lines until a market has been established and the products are sold, and any write-down of start-up inventory to net realizable value.









---

FORBES MEDI-TECH INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of Canadian dollars, except per share amounts)



Year ended December 31, 2002

Five months ended December 31, 2001

Years ended July 31, 2001 and 2000





2.

Significant accounting policies (continued):

(k)

Government assistance:

Government assistance is accounted for using the cost-reduction method when receipt of the government assistance is reasonably assured.  During the year ended December 31, 2002, the Company received $12 (five-month period ended December 31, 2001 - $63; years ended July 31, 2001 - $455; 2000 - $399) of government assistance which has been offset against research and development expense.

(a)

Income taxes:

Income taxes are reported using the asset and liability method, whereby future 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 tax assets for which the realization of value is not considered to be more likely than not.

(m)

Foreign currency translation:

The Company's functional and reporting currency is the Canadian dollar. Foreign currency denominated transactions are translated into Canadian dollars at the rate of exchange in effect at the date of the transaction.  Monetary assets and liabilities denominated in foreign currencies have been translated into Canadian dollars at the rates of exchange in effect at the balance sheet date.  Any gains or losses resulting on translation have been included in the determination of income.

(n)

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, plant and equipment 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.

(o)

Common shares to be issued contingent upon future sales:

Under the UBC license agreements (note 7(e)), 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.









---

FORBES MEDI-TECH INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of Canadian dollars, except per share amounts)



Year ended December 31, 2002

Five months ended December 31, 2001

Years ended July 31, 2001 and 2000





2.

Significant accounting policies (continued):

(p)

Fair value of financial instruments:

Carrying values of the Company's financial instruments, including cash and cash equivalents, short-term investments, accounts receivable, and accounts payable and accrued liabilities, demand loans, and notes payable, approximate fair value due to their short maturities.  The carrying value of the tenure allowance is equal to fair value being the present value of future payments discounted at the current market rate of interest.

(q)

Loss per share:

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

Diluted loss per share is computed similar to basic loss per share except that the weighted average shares outstanding are increased to include additional shares from the assumed exercise of stock options, if dilutive.  The number of additional shares is calculated by assuming that outstanding stock options were exercised and that the proceeds from such exercises were used to acquire shares of common stock at the average market price during the reporting period.

(r)

Comparative figures:

Certain comparative figures have been reclassified to conform with the financial statement presentation adopted for the current year.



3.

Accounts receivable:



December 31,                     
December 31,

2002                                   
2001



Due from joint venture partner

$

2,857

$

1,729

Trade receivables

614

1,198

Note receivable (note 6)

459

-

Taxes recoverable

30

177

Interest and other receivables

230

121



$

4,190

$

3,225



4.

Inventories:



December 31,                      
December 31,

2002                                   
2001



Raw materials and supplies

$

687

$

537

Finished goods

265

2,878



$

952

$

3,415











---

FORBES MEDI-TECH INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of Canadian dollars, except per share amounts)



Year ended December 31, 2002

Five months ended December 31, 2001

Years ended July 31, 2001 and 2000





5.

Property, plant and equipment:

Accumulated                        
Net book

December 31, 2002                                       
                
                 
Cost                       
amortization                             
value



Land

$

77

$

-

$

77

Building and infrastructure

1,725

(10)

1,715

Leasehold improvements

1,310

(1,304)

6

Production equipment

10,616

(669)

9,947

Office equipment

155

(66)

89

Computer equipment

262

(164)

98

Computer software

-

-

-



$

14,145

$

(2,213)

$

11,932







Accumulated                        
Net book

December 31, 2002                                       
                
                 
Cost                       
amortization                             
value



Land

$

177

$

-

$

177

Buildings and infrastructure

3,483

(42)

3,441

Leasehold improvements

1,290

(373)

917

Production equipment

9,645

(430)

9,215

Office equipment

444

(121)

323

Computer equipment

390

(169)

221

Computer software

115

(104)

11



$

15,544

$

(1,239)

$

14,305



6.

Joint ventures:

The Company conducts certain of its businesses through incorporated and unincorporated joint ventures.

In January 2001 the Company entered into a Formation and Contribution Agreement and on July 17, 2001 formally entered into a 50-50 joint venture (collectively referred to as the
"Agreements") with Chusei (U.S.A.) Inc. ("Chusei") to form PhytoSource LP, to construct and operate a dedicated phytosterol manufacturing facility near Houston, Texas.

Under these Agreements, the Company was required to contribute US$7,100 towards the construction of a phytosterol manufacturing facility and US$1,000 towards working capital. In addition, the Company agreed to: (a) loan PhytoSource LP US$4,000 for acquisition of technology from Chusei and, (b) to transfer inventory of raw materials and finished goods priced at US$3,500. As of December 31, 2001, the Company had contributed US$6,750 for construction and working capital, transferred the inventory and advanced the US$4,000 loan.  The remaining US$1,350 cash contribution is due when called upon by the joint venture.









---

FORBES MEDI-TECH INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of Canadian dollars, except per share amounts)



Year ended December 31, 2002

Five months ended December 31, 2001

Years ended July 31, 2001 and 2000





6.

Joint ventures (continued):

Under these agreements, the Company in some instances, is the selling party for certain phytosterol products from PhytoSource and will be receiving benefit for undertaking this activity.  In addition, Chusei is restricted from separately undertaking sterol selling or manufacturing activities.

A demand loan payable to a customer in the amount of $3,060 was also transferred to the joint venture. The Company's proportionate share of this loan was recorded as demand loans payable in these consolidated financial statements at December 31, 2001 and was paid in full in June 2002.

As a result of the formation of the JV, operations at the Company's Amqui pilot facility in Quebec were wound down, and the carrying value of the facility was written down to $1,500 at December 31, 2001.  On August 9, 2002, the Amqui pilot facility was sold to a third party for a total of $1,631 resulting in a gain on the sale of $63, net of disposal costs of $68.  On closing, Forbes received proceeds of $332, net of transaction costs and a note receivable of $1,200 payable in one lump-sum payment of $350 plus interest on May 9, 2003, with the remainder paid by monthly installments beginning September 2002 and ending August 2009.

On September 4, 2001, the Company disposed of its 50% interest in Biopharmaceutical Research Inc. ("BRI").

Condensed balance sheets and statements of operations reflecting the Company's proportionate interests in joint venture operations:



December 31,                   
December 31,

2002                                 
2001

PhytoSource                    
PhytoSource



Current assets

$

1,348

$

2,676

Property, plant and equipment

11,093

10,011

Intangible and other assets

6,310

7,631



$

18,751

$

20,318



Current liabilities

$

2,248

$

1,117

Demand loans

-

1,593



$

2,248

$

2,710











---

FORBES MEDI-TECH INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of Canadian dollars, except per share amounts)



Year ended December 31, 2002

Five months ended December 31, 2001

Years ended July 31, 2001 and 2000





6.

Joint ventures (continued):



January 1,                 
August 1,        August 1,             
July 17,             
August 1,

2002 to                       
2000               
2000                   
2001                   
1999

Dec. 31,               
to Dec. 31,        to July 31,           
to July 31,        to July 31,

2002                       
2001               
2001               
2001                       
2000

PhytoSource               
PhytoSource            BRI               
PhytoSource            BRI



Revenue

$

3,877

$

1,850

$

197

$

354

$

482

Expenses

5,460

2,619

534

323

456



Net earnings (loss)

$

(1,583)

$

(769)

$

(337)

$

31

$

26



7.

Intangible and other assets:



Accumulated

Net book

December 31, 2002

Cost

amortization

value



Technology (notes 7(b) and (c))

$

6,655

$

(956)

$

5,699

Supply agreements (note 7(d))

1,530

(919)

611

Other

35

(15)

20

8,220

(1,890)

6,330



Long-term receivable (note 7(a))

2,106

Note receivable, long-term portion (note 6)

716

Tenure allowance

151

Other

90



$

9,393







Accumulated

Net book

December 31,
2001

Cost

amortization

value



Technology (notes 7(b) and (c))

$

6,655

$

(284)

$

6,371

Supply agreements (note 7(d))

1,530

(269)

1,261

Other

35

(13)

22

8,220

(566)

7,654



Long-term receivable (note 7(a))

3,185

Tenure allowance

182

Other

135



$

11,156











---

FORBES MEDI-TECH INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of Canadian dollars, except per share amounts)



Year ended December 31, 2002

Five months ended December 31, 2001

Years ended July 31, 2001 and 2000





7.

Intangible and other assets (continued):

(a)

The long-term receivable represents the long-term portion of the amount due to the Company from the joint venture partner for amounts loaned by the Company to the joint venture under the Agreements.  The estimated current portion of $1,053 has been included in accounts receivable (note 3).  Interest is charged on the loan equal to prime rates and repayments are over 36 months commencing January 2003.

(b)

In January 2001, the Company acquired certain technology related to the extraction of phytosterols from tall oil pitch for total consideration of $3,500, consisting of a $2,500 cash payment and the issuance of a $1,000 convertible debenture (note 9).  In July 2001, this technology and know-how was licensed on a semi-exclusive basis to PhytoSource as part of the formation of the joint venture.  This technology is being amortized over ten years.

(c)

As part of the formation of the joint venture, PhytoSource acquired from Chusei certain technology related to the manufacture of phytosterols from tall oil pitch for total consideration of $9,945.  This will be amortized over ten years.  The Company's proportionate share of this technology of $4,973 is reflected in these financial statements.

(d)

As part of its contribution to the joint venture, Chusei assigned to PhytoSource a supply agreement with a certain customer, at an agreed value of $3,060.  The Company's proportionate share totals $1,530.  This will be amortized over the life of the agreement.

(e)

By agreements with the University of British Columbia ("UBC") effective September 15, 1995 (as amended), the Company acquired rights to the preparation and purification of phytosterols from tall oil soap and to the fermentation of phytosterols to AD and ADD.  Under the two sets of license agreements, the Company issued a total of 50,000 shares in fiscal 1996 and may issue up to an additional 50,000 shares after the sale of any products derived from these technologies.  No additional shares had been issued to December 31, 2002.  Subsequent to year end, the Company issued an additional 2,650 shares to UBC.  In addition, the Company agreed to pay royalties on gross revenue of 1% to 1.5% except for revenues derived from the MLA with Novartis (note 11(a)), where the Company agreed to pay 5% of gross margin received by the Company on direct sales to Novartis and 5% of net sub-licensing fees and royalties received by Forbes from Novartis.  During the year, the Company terminated the MLA with Novartis, therefore, no further royalties will become payable in the future in respect of the MLA.









---

FORBES MEDI-TECH INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of Canadian dollars, except per share amounts)



Year ended December 31, 2002

Five months ended December 31, 2001

Years ended July 31, 2001 and 2000





8.

Accounts payable and accrued liabilities:



December 31,

December 31,

2002

2001



Due to joint venture partner (note 6)

$

1,067

$

2,289

Trade payables

2,741

2,631

Royalties payable

267

-

Other payables

665

295



$

4,740

$

5,215



9.

Long-term debt:



December 31,                   
December 31,

2002                                 
2001



Convertible debenture (note 7(b))

$

1,000

$

1,000

Promissory note

355

486

PhytoSource demand loan

553

-

1,908

1,486



Current portion

1,691

133



$

217

$

1,353



The convertible debenture is repayable on December 31, 2003 and bears interest at the rate of 8.5%, payable quarterly.  The convertible debenture carries certain conversion rights whereby the holder shall have the right prior to December 31, 2003, to convert all but not less than all of the principal sum into shares at a price of $6.18 per share.  This conversion price was not less than the market price of the Company's common shares at the agreement's date.  The Company may, at its option at any time after the market price of the common shares of the Company for 20 consecutive business days has exceeded $9.00, as adjusted for certain future issuances, repay the principal in full, together with any accrued and unpaid interest.  Given its insignificance, no portion of the convertible debenture has been recorded as equity.

The promissory note relates to the lease of the Company's laboratory facilities, and bears interest at the Canadian prime rate plus 1.75% calculated semiannually.  The promissory note is repayable in monthly installments of $13.

The PhytoSource demand loan consists of the Company's proportionate share of a note payable to a U.S. bank in the amount of US$700, at an interest rate the lesser of prime plus 1% or 6% but not less than 6% payable monthly, repayable in ten equal monthly installments of US$70 beginning January 31, 2003.  The amount is secured by property, plant and equipment, and guarantees from each of Forbes (USA) and Chusei.









---

FORBES MEDI-TECH INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of Canadian dollars, except per share amounts)



Year ended December 31, 2002

Five months ended December 31, 2001

Years ended July 31, 2001 and 2000





10.

Share capital:

(a)

Authorized:

Authorized share capital of the Company consists of 200,000,000 common shares with no par value and 50,000,000 preferred shares with no par value.

(b)

Issued and allotted:



Number of

common shares

Amount



Balance, July 31, 1999

16,620,083

$

38,082



Issued during the fiscal year for cash upon:

Private placement

3,000,000

27,750

Exercise of stock options

563,250

1,378

Exercise of warrants

634,642

5,077

Exercise of compensation options

60,714

425

Share issue costs

-

(2,185)



Balance, July 31, 2000

20,878,689

70,527



Exercise of stock options

341,800

734



Balance, July 31, 2001

21,220,489

71,261



Exercise of stock options

4,700

12



Balance, December 31, 2001

21,225,189

71,273



Issued during the fiscal year for cash upon:

Private placement

324,861

211

Share issue costs

-

(12)



Balance, December 31, 2002

21,550,050

$

71,472



(c)

Private placement:

During August 2002, the Company through a private placement issued 324,861 common shares for $0.65 per share for cash proceeds of $211 net of financing costs of $12.

(d)

Special warrants:

Special warrant financing of:



Number

Amount



$975 (net of issue costs of $88)

1,500,000

$

887











---

FORBES MEDI-TECH INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of Canadian dollars, except per share amounts)



Year ended December 31, 2002

Five months ended December 31, 2001

Years ended July 31, 2001 and 2000





10.

Share capital (continued):

(d)

Special warrants (continued):

On September 25, 2002, the Company issued 1,500,000 special warrants at a price of $0.65 per special warrant for cash proceeds net of financing costs of $887.  Each special warrant was exercisable without payment of additional consideration for one common share of the Company on the earlier of January 24, 2003 and three business days following the issuance of receipts from the B.C. or Ontario Securities Commissions for a prospectus qualifying the distribution of the common shares.  In the event that such receipts were not issued by December 8, 2002, each special warrant would be exercisable without payment of additional consideration for 1.05 common shares of the Company until January 24, 2003.  In December 2002, the special warrant holders waived the requirement for the Company to file and obtain receipts for a prospectus.  Accordingly, on January 24, 2003, the special warrants were converted into 1,575,000 common shares.

As part of the issue of special warrants on September 25, 2002 the Company issued 150,000 brokers' warrants to Dominick & Dominick Securities Inc.  Each brokers' warrant is exercisable into one common share of the Company at a price of $0.65 per common share until March 24, 2004.

(e)

Under the 2000 Stock Option Plan, the Company may grant options to its employees, officers, directors, and consultants ("optionees") for up to 5,000,000 shares of common stock. Options are usually granted at the hire date of employees, officers, and directors, the commencement date of services of consultants, or at the discretion of the Board of Directors. Under the 2000 Plan, options vest at the discretion of the Compensation Committee, and the majority of outstanding options vest ratably over an 18-month or two-year period. The exercise price of each option equals the market price of the Company's stock on the day prior to the date of grant and an option's maximum term is ten years. No individual may receive options on more than 5% of the aggregate number of common shares issued and outstanding at the date of grant.

(f)

Company's Stock Option Plan as at December 31, 2002 and December 31, 2001, and changes during the periods then ended:



December 31, 2002

December 31, 2001



Weighted

Weighted

average

average

Shares

exercise price

Shares

exercise price



Outstanding, beginning
of year

3,441,850

$

4.90

3,841,800

$

5.11

Granted

1,453,000

0.96

72,500

2.89

Exercised

-

-

(4,700)

2.57

Forfeited

(1,252,000)

5.29

(467,750)

6.38



Outstanding, end of year

3,642,850

$

3.19

3,441,850

$

4.90



Options exercisable, 
end of year

2,853,600

1,936,971









---

FORBES MEDI-TECH INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of Canadian dollars, except per share amounts)



Year ended December 31, 2002

Five months ended December 31, 2001

Years ended July 31, 2001 and 2000





10.

Share capital (continued):

(f)

Company's Stock Option Plan as at December 31, 2002 and December 31, 2001, and changes during the periods then ended (continued):

Stock options outstanding as at December 31, 2002:



Options outstanding

Options exercisable



Number

Number

outstanding at

Weighted

Weighted

exercisable at

Weighted

Range of

December 31,

average remaining

average

December 31,

average

Exercise prices                       
2002            contractual life           
exercise price                     
2002        exercise price



$0.55 to $1.20

1,110,000

4.31

$0.96

466,000

$1.02

$2.57 to $4.10

1,879,000

3.36

$2.79

1,752,500

$2.75

$4.55 to $6.60

246,850

0.98                   
$5.64

228,100

$5.70

$9.00 to $14.50

407,000

0.38                   
$9.64

407,000

$9.64



$0.55 to $14.50

3,642,850

3.16

$3.19

2,853,600

$3.68



(g)

During the year ended December 31, 2002, the Company granted 1,328,000 options to directors, officers and employees at exercise prices ranging from $0.55 to $1.20 per share.  These options had terms of five years at the date of grant.  The weighted average fair value of the options granted to employees in 2002 is $0.61.  In accordance with the Company's stated accounting policy (note 2(g)), no compensation cost is recorded in these financial statements for share options granted to directors, officers and employees.

The Company also granted 125,000 options to non-employees during fiscal 2002 at exercise prices ranging from $0.66 to $0.95 per share.  These options have vesting periods ranging from 1.5 to 2 years and terms of 5 years.  The fair value of the 125,000 options granted to non-employees has been estimated at $41 at December 31, 2002 and is being amortized to expense over the applicable vesting periods.  The total expense recorded in 2002 amounted to $20.

The table below presents pro forma net loss and net loss per share using the fair market value method of accounting for all employee and non-employee stock-based compensation plans.  The pro forma adjustments presented below pertain to the 1,328,000 new options granted to employees since adoption of the new stock-based compensation standards on January 1, 2002 as described in note 2(g).  The pro forma disclosure does not include the effect of awards granted before January 1, 2002.









---

FORBES MEDI-TECH INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of Canadian dollars, except per share amounts)



Year ended December 31, 2002

Five months ended December 31, 2001

Years ended July 31, 2001 and 2000





10.

Share capital (continued):

(g)

(continued):

Reconciliation of pro forma net loss to common shareholders:



Five

Year ended

months ended

December 31,

December 31,

2002

2001



Net loss as reported

$

(4,120)

$

(6,461)



Pro forma adjustment

(422)

-



Pro forma net loss

$

(4,542)

$

(6,461)



Pro forma basic and diluted loss per share

$

(0.21)

$

(0.30)



The fair value of the options granted to employees and non-employees in 2002 has been estimated on the date of the grant using the Black Scholes option pricing model with the following assumptions:





Dividend yield

0%

Expected volatility

114%

Risk-free interest rate

3.0%

Expected lives

3 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.









---

FORBES MEDI-TECH INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of Canadian dollars, except per share amounts)



Year ended December 31, 2002

Five months ended December 31, 2001

Years ended July 31, 2001 and 2000





11.

Commitments, contractual obligations and contingencies:

(a)

Novartis Strategic Alliance and Exclusive Master License Agreement:

During the year ended July 31, 1998, the Company entered into an option agreement with Novartis Consumer Health AG ("Novartis") related to licensing a plant-based sterol composition developed by the Company.  On April 16, 1999, the Company entered into a Strategic Alliance and Exclusive Master License Agreement ("MLA") with Novartis regarding the Company's unique plant-based sterol composition (PhytrolTM), a potential functional food ingredient for lowering cholesterol.

Under the MLA, Novartis had exclusive worldwide rights to use or sub-license PhytrolTM (consumer branded as ReducolTM) for use in functional foods, dietary supplements and over-the-counter products.  The Company received upfront payments, advance royalties, a manufacturing upcharge, milestone payments and royalties based on net sales.  The Company was committed to paying a 5% royalty to UBC on all monies received under this agreement (see note 7(e)).  The Company was responsible for ingredient research, manufacturing and supply in its collaboration with Novartis. Novartis was responsible for clinical trials, regulatory approvals and commercialization of products, including any sub-licensing.

The MLA was for a term of five years, with a provision for successive two-year renewal periods at the option of Novartis. The Agreement contained clauses whereby either party could terminate the Agreement upon the occurrence of certain events including:  (i) certain milestones relating to the development and commercialization of PhytrolTM not being achieved; or (ii) a significant change in the economics of the commercialization of PhytrolTM.

In June 2002, the Company signed an agreement with Novartis Consumer Health SA ("Novartis SA") to settle the licensing arrangement and re-acquire the rights to Reducol(tm).  Under the terms of the agreement, the Company has agreed to pay Novartis SA a total of US$2,500 (C$3,842).  In settling the licensing arrangement, the Company eliminated deferred revenue of $9,857 and accounts payable of $90 and hence recognized a gain of $6,044, net of transaction costs of $61.  Of the US$2,500 total cost, US$500 was paid, on signing, by way of offset against funds owed by Novartis SA to Forbes. The balance of US$2,000 is to be paid in royalties from phytosterol sales between June 22, 2002 and December 31, 2003.  At December 31, 2002, a total of US$44 is payable to Novartis in royalties from phytosterol sales.  A minimum of US$1,500 (C$2,366) must be paid to Novartis by June 30, 2003 with the remaining US$500 (C$789) due by December 31, 2003.







---

FORBES MEDI-TECH INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of Canadian dollars, except per share amounts)



Year ended December 31, 2002

Five months ended December 31, 2001

Years ended July 31, 2001 and 2000





11.

Commitments, contractual obligations and contingencies (continued):

(b)

University of British Columbia laboratory facility:

In mid-2002, the Company began scaling down the research projects performed at its biotechnology research laboratory at the University of British Columbia ("UBC").  Certain laboratory assets with net book value of $97 were sold for proceeds of $66 resulting in a loss on sale of $31.  Other lab equipment with net book value of $201 was contributed in kind to UBC as a prepayment for research costs.  The remaining laboratory assets and leasehold improvements were written down by $1,136 to $763 being the lower of carrying amount or fair value less cost to sell as at December 31, 2002.

(c)

Manufacturing agreement with Fermic:

In August 2000, the Company entered into a manufacturing agreement with Fermic, S.A. DE C.V. ("Fermic") for the commercial production of AD and ADD.  The Company is required to supply the necessary raw materials as well as paying prescribed monthly tolling fees based on the usage of Fermic's fermentation capacity.  Pursuant to the agreement, the Company is responsible for financing the cost of any additional auxiliary equipment required for the downstream processing of AD and ADD at Fermic's facilities.  The agreement provides for an initial term of three years, expiring September 15, 2003, and for automatic renewals for one-year terms unless terminated by either party.

Further activities regarding the processing of AD and ADD have been temporarily suspended as the Company is focused on current opportunities that may lead to the possible licensing and/or divestiture of the AD/ADD technology.

(d)

Tenure allowance:

On January 11, 1999, the shareholders approved agreements with certain key executive officers ("Executives") that provide for tenure allowances for services provided to the Company. Between the ages of 60 and 85, each Executive will be entitled to receive an allowance, provided the Executive has continued to provide his service to the Company to specified qualification dates which range from March 1, 2002 to January 1, 2005.  In 2002, one of these executives resigned from the Company prior to the date that his tenure allowance would have vested.  Accordingly, the tenure allowance liability was reduced by $436 with a credit to general and administrative expenses.

The Company is recording the cost of these allowances over the term from the date of shareholders' approval to the applicable qualification date.

The net tenure expense (recovery) for the period ended December 31, 2002 was $(229) (five-month period ended December 31, 2001 - $139; years ended July 31, 2001 - $128; 2000 - $358).

(e)

Research agreements:

As at December 31, 2002, the Company has not recorded future funding commitments under various research agreements totaling $759 of which $620 relates to ongoing clinical trials (December 31, 2001 - $1,803; July 31, 2001 - $127).  These amounts will be recorded at the earlier of when the funding is required or when the services have been performed.











---

FORBES MEDI-TECH INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of Canadian dollars, except per share amounts)



Year ended December 31, 2002

Five months ended December 31, 2001

Years ended July 31, 2001 and 2000





12.

Loss per share:

The basic loss per share figures are calculated using the weighted average number of shares outstanding during the year of 21,766,440 (five-month period ended December 31, 2001
- 21,225,189; years ended July 31, 2001 - 21,171,325; 2000 - 17,227,874).



13.

Supplementary information:



Five months

Year ended                    
ended

December 31,        December 31,                         
Years ended July 31,

2002                    
 
2001                        
2001                         
2000



Interest paid

$

218

$

43

$

99

$

2

Non-cash transactions:

Note receivable acquired on sale
of pilot facility

1,200

-

-

-

Prepayment of research costs by
transfer of property, plant and
equipment                                                             
201                               
-                            
-                            
-



14.

Related party transactions:

During the period, the Company paid or accrued to companies controlled by directors or officers:



Five months



Year ended                    
ended

December 31,        December 31,                         
Years ended July 31,

2002                    
 
2001                        
2001                         
2000



Legal fees and share issue costs

$

292

$

133

$

468

$

323

Consulting

171

-

-

-



$

463

$

133

$

468

$

323











---

FORBES MEDI-TECH INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of Canadian dollars, except per share amounts)



Year ended December 31, 2002

Five months ended December 31, 2001

Years ended July 31, 2001 and 2000





15.

Concentration of sales:

For the year ended December 31, 2002 and 2001, substantially all of the Company's revenue was generated from two customers.



16.

Income taxes:

The tax effects of temporary differences that give rise to significant components of the future tax assets and liabilities are presented below:



December 31,

December 31,

2002

2001



Non-capital loss carry-forwards

$

6,049

$

6,235

Research and development expenditures deferred for income tax purposes

11,600

10,669

(Excess) deficiency of property, plant and equipment and intangible assets over tax values

276

(1,388)

Share issue costs

348

674

Investment tax credits

4,324

6,521

Deferred revenue included in income for tax purposes

-

1,391

Other

296

-



Total gross future tax assets

22,893

24,102



Valuation allowance

(22,893)

(24,102)



Net tax assets

$

-

$

-











---

FORBES MEDI-TECH INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of Canadian dollars, except per share amounts)



Year ended December 31, 2002

Five months ended December 31, 2001

Years ended July 31, 2001 and 2000





16.

Income taxes (continued):

The operations of the Company and related tax interpretations, regulations and legislation are continually changing.  As a result, there are significant estimates required to compute income tax balances.  As at December 31, 2002, the Company has scientific research and experimental development expenditures in the amount of $32,584 (December 31, 2001 - $26,672) available for carry-forward indefinitely to reduce future taxable income.  The Company also has approximately $6,714 (December 31, 2001 - $6,521) of unclaimed investment tax credits expiring between 2003 to 2011, available to reduce future income taxes otherwise payable.  The Company also has non-capital losses in the amount of $17,139 available to offset future taxable income expiring at various dates through to 2009.  The future tax benefits of these expenditures, investment tax credits and non-capital losses have been offset by a valuation allowance. The benefits relating to investment tax credits will be recorded as a reduction of the related expense or asset in the year the valuation allowance is reduced.

Realization of the related future tax asset 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 asset will be realized.  Accordingly, a valuation allowance has been provided, equal to the net future 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.

Income tax recoveries attributable to losses from operations differs from the amounts calculated by applying the combined Canadian federal and provincial income tax rates to pretax income from operations primarily as a result of the provision of a valuation allowance on net future income tax benefits.



17.

Lease commitments:

The Company is committed under operating lease agreements for premises to lease payments in the following amounts:





2003

$

614

2004

612

2005

454

2006

139

2007

139



$

1,958











---

FORBES MEDI-TECH INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of Canadian dollars, except per share amounts)



Year ended December 31, 2002

Five months ended December 31, 2001

Years ended July 31, 2001 and 2000





18.

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 those principles and practices that the Company would have followed had its consolidated financial statements been prepared in accordance with generally accepted accounting principles in the United States ("United States GAAP").  Significant differences to these consolidated financial statements are as follows:

(a)

Consolidated statement of operations and deficit:





Year ended                      
ended

December 31,          December 31,                           
Years ended July 31,

2002                       
 
2001                            
2001                         
2000

Net loss in accordance with
Canadian GAAP                                                           
$    (4,120)       $           
(6,461)         $           
(19,722)       $           
(11,319)

Difference in non-employee stock
based compensation (see c(i))                                                   
121                  
    
(193)                           
(99)                     
   
(173)

Net loss in accordance with
United States GAAP                                                    
     
(3,999)                     
(6,654)                   
(19,821)                
   
(11,492)

Deficit, beginning of year,
United States GAAP                                                      
  
(53,171)               
  
(46,517)                   
(26,696)                     
(15,204)



Deficit, end of year, United
States GAAP                                                             
  
$  (57,170)     $           
(53,171)       $             
(46,517)       $             
(26,696)



Weighted average number
of shares outstanding                                              
    
21,766,440             
21,225,189                 
 
21,171,325                 
17,227,874



Basic and diluted loss per share                               
$         (0.18)     
$                
(0.31)      $                 
(0.94)      $                 
(0.67)



(b)

Consolidated balance sheet:







December
31, 2002                                       
December 31, 2001

Canadian           
United States              
Canadian               
United States

GAAP                 
GAAP                      
 GAAP                        
GAAP



Shareholders' equity:

Additional
paid-in capital from stock

based
compensation                                                 
$              
-              
$   
1,791              
 
$          
-                       
$    1,912

Deficit                                                                            
(55,379)               
(57,170)                  
(51,259)                       
(53,171)











---

FORBES MEDI-TECH INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of Canadian dollars, except per share amounts)



Year ended December 31, 2002

Five months ended December 31, 2001

Years ended July 31, 2001 and 2000





18.

United States generally accepted accounting principles (continued):

(c)

Differences:

(i)

Under Canadian GAAP, compensation expense is recognized for stock options issued to non-employees in accordance with the fair value based method as described in note 2(g) for grants made on or after January 1, 2002.  Under United States GAAP, the fair value of stock options grants to non-employees since 1995 is accounted for as compensation.  The fair value of the stock options granted to non-employees during the year ended December 31, 2002, the five-month period ended December 31, 2001 and each of the two years ended July 31, 2001 and 2000 was estimated at the dates the options vest and were earned by the non-employees using the Black-Scholes option-pricing model and the following weighted average assumptions:



Five months

Year ended                    
ended

December 31,        December 31,                         
Years ended July 31,

2002                    
 
2001                        
2001                         
2000



Expected dividend yield

$

-

$

-

$

-

$

-

Expected stock price volatility

114%

90%

80%

80%

Risk-free interest rate

3.00%

3.00%

3.00%

5.40%

Expected life of options

1.5 - 4.0 years

1.3 - 4.4 years

0.4
- 4.6 years

3 years





(ii)

Under United States GAAP, the Company's interest in joint ventures would be accounted for using the equity method of accounting as opposed to proportionate consolidation.  However, reconciliation of this difference may be omitted in accordance with SEC rules and regulations.









---

FORBES MEDI-TECH INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of Canadian dollars, except per share amounts)



Year ended December 31, 2002

Five months ended December 31, 2001

Years ended July 31, 2001 and 2000





18.

United States generally accepted accounting principles (continued):

(d)

Supplementary information for U.S. GAAP purposes on stock-based compensation:

For United States GAAP purposes, the Company applies the disclosure provisions of Statement of Financial Accounting Standards No. 123 ("SFAS 123"),
"Accounting for Stock-Based Compensation", for stock options granted to employees.  As allowed by SFAS 123, the Company follows the intrinsic value principles of APB Opinion 25,
"Accounting for Stock Issued to Employees", in measuring compensation expense for employee options.  The application of APB 25 results in no compensation expense being recognized for stock-based compensation plans for employees in the year ended December 31, 2002, the five-month period ended December 31, 2001 and the years ending July 31, 2001 and 2000 because none of the options were granted with an exercise price below market price at the date of grant.

The fair value of each option grant to employees is estimated on the date of the grant using the Black-Scholes option-pricing model with the following assumptions:



December 31,           
December 31,                   
______July 31_____

2002                          
2001                   
2001                   
2000



Expected dividend yield                          
$                
-             $                   
-               
$         -               
$        -

Expected stock price volatility                           
114%                            
90%                    
80%                   
80%

Risk-free interest rate                                        
3.00%                          
3.00%                 
3.00%               
5.40%

Expected life of options                                   
3 years                 
1.6 - 9 years        2 - 9.4 years             
3 years













---

FORBES MEDI-TECH INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of Canadian dollars, except per share amounts)



Year ended December 31, 2002

Five months ended December 31, 2001

Years ended July 31, 2001 and 2000





18.

United States generally accepted accounting principles (continued):

(d)

Supplementary information for U.S. GAAP purposes on stock-based compensation (continued):

The weighted average fair value of the options granted is $0.61 (December 2001 - $1.97; July 2001 - $2.12; 2000 - $6.12).  For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period on a straight-line basis.  Had recognized compensation expense for the Company's stock option plan been determined based on the fair value at the grant date for awards under those plans consistent with the provisions of SFAS 123 and the assumptions set out above, the Company's net loss and loss per share under United States GAAP would have been as follows:



December 31,           
December 31,               
______July 31_____

2002                       
2001                   
2001                   
2000



Pro forma loss

$

(6,306)

$

(7,990)

$

(23,590)

$

(12,978)

Pro forma basic loss per share

(0.29)

(0.38)

(1.11)

(0.75)





(e)

Recent accounting pronouncements:

During 2002, the Financial Accounting Standards Board ("FASB") has issued four new pronouncements.  None of these new pronouncements are expected to have a material impact on the Company's financial statements.

In addition, the FASB and Emerging Issues Task Force ("EITF") have issued a variety of interpretations including the following interpretations with wide applicability:

·

Financial Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Discount Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" which addresses disclosure and initial recognition and measurement provisions related to guarantees.  The disclosure provisions became effective for periods ending after December 15, 2002.  The initial recognition and measurement provisions apply to guarantees issued after December 31, 2002.

·

Financial Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities", which addresses the consolidation of variable interest entities (formerly referred to as
"Special-Purpose Entities").  The Interpretation is effect for interim or annual periods beginning after June 15, 2003.









---

FORBES MEDI-TECH INC.

Notes to Consolidated Financial Statements

(Expressed in thousands of Canadian dollars, except per share amounts)



Year ended December 31, 2002

Five months ended December 31, 2001

Years ended July 31, 2001 and 2000





18.

United States generally accepted accounting principles (continued):

(e)

Recent accounting pronouncements (continued):

·

The EITF reached a consensus on issue 00-21,
"Revenue Arrangements with Multiple Deliverables".  This consensus addresses issues related to separating and allocating value to the individual elements of a single customer arrangement involving obligations regarding multiple products, services, or rights which may be fulfilled at different points in time or over different periods of time.  The EITF guidance is applicable for arrangements entered into in fiscal periods beginning after June 15, 2003.

Although the Company has not completed its evaluation of the implications of EITF 00-21 on the Company's future financial statements, neither FIN 45 nor FIN 46 are expected to currently impact the Company's financial statements.



19.

Subsequent events:

On January 24, 2003, the 1,500,000 special warrants were converted into common shares of the Company at a rate of 1.05 common shares for one special warrant (note 10(d)).  This resulted in the issuance of 1,575,000 common shares of the Company.











---





FORBES MEDI-TECH INC.



MANAGEMENT'S DISCUSSION AND ANALYSIS

of financial conditions and results of operations



Year ended December 31, 2002



(All amounts following are expressed in Canadian dollars unless otherwise indicated.)



The following information should be read in conjunction with the Company's audited consolidated financial statements and related notes that are prepared in accordance with Canadian generally accepted accounting principles.



Overview:



FORBES MEDI-TECH, INC. ("Forbes" or the
"Company") is a biopharmaceutical company dedicated to the research, development and commercialization of innovative prescription pharmaceutical and nutraceutical products for the prevention and treatment of cardiovascular and related diseases. Forbes' scientific platform is based on core sterol technology.  By extracting plant sterols from by-products of the forestry industry, Forbes has developed cholesterol-lowering agents for use in pharmaceutical compounds, functional foods and dietary supplements.  Plant sterols, also referred to as phytosterols, are lipid-like compounds found in and derived from plants and have a similar molecular structure to cholesterol.



Forbes' main products under development and commercialization include its promising cholesterol-lowering pharmaceutical product, FM-VP4, which represents a new class of cardiovascular pharmaceuticals known as cholesterol transport inhibitors.  Other products under development for commercialization include phytosterol food additives and dietary supplements.  All of Forbes' research activities are currently focused on cholesterol-lowering benefits.



In the year 2002, Forbes attained key milestones for FM-VP4.  In January 2002, the Phase I clinical trial designed to establish the safety of FM-VP4 was initiated at the Academic Medical Center ("AMC") University of Amsterdam, one of the world's leading centers for the management and research of dyslipidemia. In August of 2002, Forbes received approval from the Medical Safety Review Panel of the AMC to initiate the Phase II component of its clinical trial on FM-VP4.  In early 2003, Forbes began the dosing component of FM-VP4's Phase II clinical trial, with Phase II completion expected in the fourth quarter of 2003.

In addition to FM-VP4, the Company anticipates exploring cardiovascular and related indications of the VPx Library of Compounds including: cholesterol and triglyceride-lowering; HDL-increasing (good cholesterol); anti-obesity; anti-diabetic; and anti-inflammatory.



In May of 2000, Forbes received clearance under the Generally Recognized as Safe ("GRAS") regulations to sell Reducol(tm) in food products and dietary supplements under the Dietary Supplement Health Education Act ("DSHEA") regulations in the USA.   Although able to sell Reducol(tm) and non-branded sterols in the USA, the Company has been awaiting a decision from the US Food and Drug Administration ("FDA") allowing Forbes to advertise the health benefits of its cholesterol-lowering ingredients.  While a final ruling is still pending, the FDA, in early 2003, issued a letter to Forbes which allows Forbes and its customers to immediately apply the phytosterol heart-health claim previously approved by the FDA to Forbes' range of phytosterol products, including Reducol(tm).  The Company considers this a major milestone in its ability to sell its clinically proven product, Reducol(tm).  The Company is also pursuing obtaining the relevant approvals for sales of its products in other international markets.



---

In the area of functional foods, Forbes announced clinical study results in May of 2002 for a
"designer" cooking oil, which was shown to lower cholesterol levels and may aid in the loss of body weight.  The clinical study conducted at McGill University in Montreal showed that a diet including Forbes'
"designer oil" resulted in a decrease of LDL cholesterol concentrations along with an added benefit of a decrease in total body weight tissue volumes compared with participants who consumed olive oil in the diet.  The benefits of Forbes'
"designer oil" were presented to the American Heart Association ("AHA") at a Scientific Sessions 2002 conference in Chicago, Illinois.



In late 2002, the Company's chocolate study findings were published in the British Journal of Nutrition.  These results showed study participants who consumed the phytosterol-enriched chocolate for a period of over four weeks experienced reductions in their LDL cholesterol levels of 10.3%.



Phytosterols historically have been incorporated into high fat foods such as spreads and dressings.   Forbes continues its research work in a wide area of phytosterol food additives in order to provide appealing vehicles for cholesterol lowering compounds by adding them to a variety of foods including dairy products, baked goods and cooking oil, with an emphasis on taste and texture.



Over the last several years, Forbes has invested significant funds in the areas of phytosterol food additives and dietary supplements.  These include an investment in the Phyto-Source Limited Partnership, a 50/50 joint venture between Forbes and Chusei (USA) Inc.  The Phyto-Source Limited Partnership operates a dedicated phytosterol manufacturing facility near Houston, Texas. This joint venture is accounted for by the proportionate consolidation method under which the Company's 50% proportionate share of the assets, liabilities, income and expense of the joint venture are reflected in the Company's financial statements.



In 2001, the Company changed its fiscal year-end from July 31 to December 31.  The Company's last financial year ended December 31, 2002 is accordingly being compared to the five-month transition period ended December 31, 2001 and to the twelve-month period ended July 31, 2001.



Critical Accounting Policies:



Forbes' 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 18 to the consolidated financial statements for the year ended December 31, 2002.  The Company  believes that the estimates and assumptions which it relies upon are reasonable based on information available to the Company at the time that these estimates and assumptions are made.  Actual results could differ from the Company's estimates.  Areas of significant estimates include amortization and recoverability of capital and intangible assets, and recognition of deferred revenues.  Note 2 to the consolidated financial statements for the year ended December 31, 2002 should be read in conjunction with this Management Discussion & Analysis for a more comprehensive outline of the Company's significant accounting policies.



---

Changes in Accounting Policies:

Revenue recognitionDuring the year ended July 31, 2001, the Company changed its accounting policy for revenue recognition of licensing option payments, upfront fees and milestone payments to conform with Staff Accounting Bulletin No. 101 (SAB No. 101) of the US Securities & Exchange Commission. Accordingly, contract research payments and milestone payments are recognized over the life of the technology license agreement to which they relate, unless the payments clearly have no relationship to potential future production, royalty or other related arrangements. Previously, the Company recognized such fees as revenue when they were non-refundable and the Company had performed all identified obligations leading to the payments.  This change in accounting policy was applied on a retroactive basis.

Stock-based compensationEffective January 1, 2002, the Company adopted the new Recommendation of the Canadian Institute of Chartered Accountants ("CICA") Handbook Section 3870,
"Stock-based Compensation and Other Stock-based Payments".  The Company applied Section 3870 prospectively to all stock-based payments to employees and non-employees granted on or after January 1, 2002.  The Company now accounts for all options granted to non-employees under the fair value based method which recognizes the fair value of the options as they are earned and the services are provided.  The Company continues to account for all options granted to employees and directors under the settlement method whereby no compensation cost is recorded and consideration paid by the employees upon the exercise of stock options is recorded as share capital.  The pro forma effect of accounting for these awards under the fair value based method is disclosed in note 10(g) of the consolidated financial statements.

Impairment of long lived assetsEffective January 1, 2002, the Company adopted the new Recommendation of the CICA handbook Section 3063 relating to impairments of long lived assets.  Long-lived assets, such as property, plant and equipment and intangible assets with finite useful lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to future undiscounted net cash flows expected to be generated by the assets.  If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. This change in policy did not result in any impairment charge for the year ended December 31, 2002.

---

Results of Operations:



Fiscal 2002 compared to Five- month period ended December 2001 and Fiscal year ended July 2001

For the fiscal year ended December 31, 2002, the Company reported a net loss of $4.1 million ($0.19 per share) compared with a net loss of $6.5 million ($0.30 per share) for the five months ended December 31, 2001, and a net loss of $19.7 million ($0.93 per share) for the year ended July 31, 2001.



Contributing to the reduced loss for the year ended December 31, 2002 of $4.1 million was a one-time net gain of $6.0 million realized on the settlement of the ReducolTM licensing agreement with Novartis (see note 11(a) to the consolidated financial statements) which was offset by a write-down of the Company's laboratory leaseholds and assets in the amount of $1.1 million.



Forbes, to date, has been focused on the research, development and commercialization of its phytosterol-based businesses and has incurred annual operating losses since its inception. The Company expects to continue incurring operational losses until the earnings from commercialization of one or more of its products exceed the costs of research and development, manufacturing, administration and other expenses. At December 31, 2002 the Company's accumulated deficit was $55.4 million.



RevenuesFor the year ended December 31, 2002, a majority of the Company's revenues were earned from sales of phytosterol products to two customers.  Forbes reported total revenues, including interest income, for the fiscal year ended December 31, 2002 of $8.0 million compared with $3.9 million for the five months ended December 31, 2001 and $7.9 million for the year ended July 31, 2001.







Phytosterol revenues have increased to $7.8 million for the year ended December 31, 2002, compared with $3.7 million for the five-month period ended December 31, 2001, and $5.8 million for the year ended July 31, 2001.  Phytosterol revenues include direct sales of phytosterol products during the period and amortization of previously received license fees in accordance with the Company's revenue recognition policies outlined above.  Sales of phytosterols were $6.9 million for the year ended December 31, 2002, compared with $2.8 million for the five months ended December 31, 2001, and $3.7 million for the year ended July 31, 2001.  The increase in sales for the year ended December 31, 2002 and the five-month period ended December 31, 2001 is primarily as a result of the Company's share of sales of non-branded sterols from the Phyto-Source joint venture. Sales of Forbes Phytrol(tm) product (consumer branded as Reducol(tm)) commenced in dietary supplements in the United States with Twin Laboratories (Cholesterol Success(tm)) and Pharmavite (Nature Made's Cholest-Off(tm)) in the latter part of 2001.



---

Operating Expenses(excluding depreciation and amortization)







Cost of sales, marketing and product development  Cost of sales, marketing and product development  for the year ended December 31, 2002  totaled $7.2 million compared with $3.9 million for the five-month period ended December 31, 2001 and $9.7 million for the year ended July 31, 2001.  Included in fiscal 2002 was an amount of approximately  $0.8 million of upscaling costs for the Company's development of the fine chemical AD/ADD. On an annualized pro forma basis, cost of sales, marketing and product development for the year ended December 31, 2002 was $2.0 million less than for the five-month period ended December 31, 2001.  Cost of sales, marketing and product development for the year ended 2002 related primarily to the cost of sterols sold.  In the five-month period ended December 31, 2001 and the year ended July 31, 2001, significant inventory valuation adjustments were included in the cost of sales figure relating to start-up and development costs for both the sterols and fine chemicals businesses.



Research and developmentThe Company's net research and development (R&D) expenses for the year ended December 31, 2002, totaled $3.2 million, compared with $2.1 million for the five months ended December 31, 2001, and $7.1 million for the year ended July 31, 2001.  In the year ended December 31, 2002, on a monthly average basis, R&D expenditures have been reduced by 35% compared to the five months ended December 31, 2001.   The reduction in R&D expenditures is partly as a result of the Company's decision to focus its core research and development on cardiovascular and, specifically, cholesterol-lowering compounds such as FM-VP4.  Non-core research, not directly related to the Company's new and more focused R&D project pipeline, has been curtailed as the Company successfully continues its cost-saving directives.  The main R&D expenditures in 2002 were and, through 2003 will be, in the area of pre-clinical and clinical development, including the Phase II trial of FM-VP4.    Additional funding will be required in order for Forbes to be able to pursue the discovery and/or development of non-core compounds in 2003.



In an effort to further reduce operating costs, towards the end of 2002, the Company began scaling down research work conducted at its biotechnology research laboratory on the University of British Columbia (UBC) campus.  Research which had been conducted at the facility will be outsourced to third-party laboratories as in years prior to the opening of the laboratory facilities.  The decision to suspend Forbes' lab work at UBC was reached after analyzing the costs of fully staffing and operating the dedicated laboratory facilities in light of the Company's current objectives and on-going research projects.  R&D overhead expense was significantly reduced by contracting out the Company's research activities to other facilities and is expected to be further reduced by a potential sub-lease of the laboratory premises.



---



The Company is currently actively seeking sub-lessees for the laboratory facilities.   Laboratory equipment valued at $0.2 million has been transferred to UBC as payment in kind for future research services.  Laboratory assets valued at a net book value of $0.30 million were sold or disposed of for net proceeds of $0.27 million.   The Company decided in December of 2002 to write down the balance of the laboratory assets in anticipation that these assets may be disposed of in the near future.  The total net book value written down at December 31, 2002, amounted to $1.1 million including an amount of $0.7 million for leasehold improvements.



General and administrative  Continuing cost-cutting measures are evident from the reduction in general and administrative expenditures (G&A), from $7.0 million in the year ended July 31, 2001 to $4.2 million in the 2002 fiscal year.    On an average monthly basis, G&A costs have decreased to $0.35 million per month for the year ended December 31, 2002, from $0.43 million per month for the five-month period ended December 31, 2001 and $0.58 million per month for the year ended July 31, 2001. The reductions in administrative expenses are primarily attributable to downsized operations, resulting in lower personnel costs and such expenses as legal and travel.



Other income (expense)





In June 2002, Forbes signed an agreement with Novartis Consumer Health SA (Novartis) to acquire the rights to Reducol(tm), which had previously been licensed by Forbes to Novartis.  Under the terms of the agreement, the Company agreed to pay Novartis a total of US$2.5 million (C$3.8 million).  As a result of this $3.8 million purchase, the Company eliminated deferred revenue of $9.9 million and hence recognized a net gain of $6.0 million.  Of the US$2.5 million purchase price, US$0.5 million was paid, on signing, by way of offset against funds owed by Novartis to Forbes. The balance of US$2.0 million is to be paid in royalties from phytosterol sales between June 22, 2002 and December 31, 2003.   As of December 31, 2002, a total of US$0.04 million is payable to Novartis in royalties from phytosterol sales.  A minimum of US$1.5 million (C$2.4 million) is due to be paid to Novartis by June 30, 2003 with the remaining US$0.5 million (C$0.8 million) due by December 31, 2003.



The Company is continuing its sterol manufacturing efforts solely through the Phyto-Source LP joint venture in Pasadena, Texas.   In the year ended July 31, 2001, the Company wrote down the carrying value of its Amqui sterol manufacturing pilot plant in Quebec by $2.7 million to $3.0 million.  In the five months ended December 31, 2001, the Company took a further write-down of $1.3 million to reflect the anticipated sale price of the facility. On August 9, 2002, the Amqui pilot facility was sold to a third party for a total of $1.6 million.   Upon closing, Forbes received proceeds of $0.4 million.  The balance of $1.2 million is payable in the amount of $0.35 million plus interest on May 9, 2003, and $0.85 million divided into eighty-four monthly installments beginning September 2002 and ending August 2009.





---



Liquidity and Capital Resources:



Since inception, the Company has financed its operations and capital expenditures primarily through equity offerings and, to a lesser extent, license and sales revenues and government grants.



The Company's net cash and short-term investments as of December 31, 2002 was $0.4 million compared to December 31, 2001 of $6.7 million, and $18.0 million at July 31, 2001. The Company had a working capital deficit of $3.5 million at December 31, 2002.  The working capital deficit includes an amount of $3.2 million of royalties payable and $1.0 million convertible debenture due by the end of 2003.  Excluding such royalties and debenture, the Company's working capital was $0.7 million.



Cash used in operating activities was $3.8 million in fiscal 2002 compared to $6.2 million in the five-month period ended December 31, 2001, and $24.7 million in the fiscal year ended July 31, 2001.  The decreases in cash used primarily reflect the decrease in Forbes' net loss for each year.  Net changes in non-cash working capital items provided cash of $3.9 million compared to a use of cash of $1.0 million in the five-month period ended December 31, 2001, and a use of cash of $6.7 million in the year ended July 31, 2001.  The changes in non-cash working capital items each year mainly reflect the changes in inventory levels and changes in accounts receivable, accounts payable and accrued liabilities.



Net cash used in investing activities was $1.4 million for 2002 compared with cash provided of $4.1 million for the five-month period ended December 31, 2001, and cash provided of $21.8 million for the year ended July 31, 2001.  Cash provided in the five-month period ended December 31, 2001 and the year ended July 31, 2001 was due to proceeds from short-term investments which were used to fund on-going operations.   Also, additions to capital assets in 2002 were $1.6 million which related to the completion of the Phyto-Source joint venture phytosterol manufacturing facility near Houston, Texas.



In fiscal 2002, net cash of $1.1 million was provided by two private placements.  In August of 2002, the Company, through a private placement, issued 324,861 units at $0.65 per unit for net cash proceeds of  $0.2 million.  Each unit consisted of one common share plus .08 of a common share purchase warrant.   Each whole warrant entitles the holder to purchase one common share of the Company at $1.00 per share until March 10, 2004.  In September of 2002, Forbes issued 1.5 million special warrants at a price of $0.65 per special warrant for net cash proceeds of $0.9 million.  On January 24, 2003, the 1.5 million special warrants were converted, at no cost to the holders, into common shares of the Company at a rate of 1.05 common shares per warrant, further to the special warrant investors having waived the requirements for the Company to file and obtain receipts for a prospectus.  Also in fiscal 2002, a net amount of $1.2 million of cash was used to retire a US$2.0 million demand loan owed by the Phyto-Source joint venture to an unrelated third party, and to reduce notes payable.  Accordingly, net cash used in/provided by financing activities was not significant for 2002, nor was it significant for the five months ended December 31, 2001.  Cash provided by financing activities was $1.3 million in the year ended July 31, 2001.



---



At December 31, 2002, the Company was committed to invest a balance of $2.1 million (US$1.35) million in Phyto-Source LP towards completion and operation of the manufacturing facility.  The Company also had commitments under various research and development contracts for up to $0.8 million, which includes $0.6 million related to the Phase II clinical trial in Amsterdam for FM-VP4.



The Company is continuing to maintain its reductions in spending in an effort to improve its working capital position and to reduce the amount of cash used in operations.   In September of 2002, the Company announced that it and the Phyto-Source joint venture had secured sterols supply agreements for up to $40.0 million (US$26.0 million) over a two-year period based on customer forecasts.  These include a major agreement between the Phyto-Source joint venture and a large multinational company.  Production of the phytosterols is undertaken by Phyto-Source.  In 2003,the Company plans to set off its remaining capital commitment to Phyto-Source against amounts owed by Phyto-Source to the Company for inventory.  Based on supply forecasts provided by customers pursuant to current supply agreements, other receivables, projected expenditure levels, and planned divestiture of the Company's AD/ADD business, Forbes believes it will have sufficient capital to operate and fund its core development projects through the end of 2003. The Company, however, is continuing to look at various financing opportunities to further develop its pipeline of products, to retire its commitments to Novartis and its convertible debenture, and to provide alternate sources of funding in the event that expenditures or receivables are not realized as planned.  It will also be necessary for the Company to seek additional financing during 2003 to meet expenditures of continuing research and development work in 2004, to improve the Company's working capital position and to minimize risks to its operations.  The current financial market for equity offerings is challenging and there can be no assurance that additional financing will be available on favourable terms, if at all. The Company presently has no external sources of liquidity such as lines of credit, and the failure to obtain debt or equity financing may have a material effect on the Company's current cash-flow and the Company's ability to continue its operations. In addition to possible debt or equity financings, the Company is exploring possible licensing, partnering or additional long-term sterol contracts utilizing the phytosterol production capacity of the Phyto-Source plant. If successful, such arrangements could reduce the Company's requirement to raise capital through the equity markets. Forbes is in discussions with several parties regarding possible additional sterol contracts or alliances, as well as possible merger or acquisition (M&A) transactions.



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



Sales:



Based on existing sales contracts, and assuming that forecasted supply requirements will be ordered, the Company is projecting its share of revenue from sterol sales for 2003 of $12 million. This figure represents the Company's share of the $20 million projected revenue of the combined sales contracts of the Company and the Phyto-Source joint venture.



---

Forward Looking Statements and Risk Factors That May Affect Future Results:



This Management Discussion & Analysis contains forward-looking statements about the Company, 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. Any document that has been filed or will be filed with the Securities and Exchange Commission ("SEC"), the Ontario Securities Commission (the
"OSC"), the British Columbia Securities Commission (the "BCSC"), or any stock exchange also may include forward-looking statements.  Other written or oral forward-looking statements have been made and may in the future be made, from time to time, by or on behalf of the Company.  Forward-looking statements are statements that are not historical facts, and include financial projections and estimates and their underlying assumptions; statements regarding plans, objectives and expectations with respect to future sales, financings, operations, divestitures, products and services; the impact of regulatory initiatives on the Company's operations; the Company's share of new and existing markets; general industry and macroeconomic growth rates and the Company's performance relative to them and statements regarding future performance.  Forward-looking statements generally are identified by the words
"expected", "expects," "promising", "anticipates," "believes," "intends," "estimates,"
"projecting", "projects", "planned", "plans" and similar expressions or variations thereon, or that events or conditions
"will," "may," "could" or "should" occur.



The Company is subject to significant risks and past performance is no guarantee of future performance.  The Company cannot predict all of the risk factors, nor can it assess the impact, if any, of such risk factors on the Company's business 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. Accordingly, forward-looking statements should not be relied upon as a prediction of actual results.  The following offers a brief overview of some of the risk factors to be considered in relation to the Company's business.  This list may not be exhaustive, as the Company operates in a rapidly changing business environment, and new risk factors emerge from time to time:





- Need for Additional Funds  As at December 31, 2002, the Company had a working capital deficit.  The Company will be expending substantial funds in 2003 and will be required to obtain additional sources of capital to continue funding research and development, to improve its working capital position and to minimize risks to its operations.  The current financial market for equity offerings is challenging and there can be no assurance that such additional funds will be available on acceptable terms or at all.  The Company presently has no external sources of liquidity such as lines of credit, and the failure to obtain debt or equity financing on a timely basis or on commercially reasonable terms, may have negative effects on the Company's cash flow and operations and its ability to continue its operations.  Any additional equity financing, if secured, may result in significant dilution to the existing shareholders at the time of such additional financing.
- Dependence Upon a Few Customers and ProductsMost of the Company's revenue has been earned from sales to a few customers and any material change in the relationship with such customers, the customer's projected demands for the Company's products, or the ability of such customers to meet their contractual obligations may negatively impact the Company's business and operations.
- Development and Commercialization of Pharmaceutical and Nutraceutical Products To achieve sustained, profitable operations, the Company must successfully develop, obtain regulatory approvals for, and profitably manufacture and market one or more of its products. While the Company is marketing its phytosterols, sales have only commenced in recent years and such products are still relatively new on the market.  The development and commercialization of new products is subject to a number of significant risks and uncertainties, particularly in the pharmaceutical and 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, may not achieve profitable sales levels, for a number of reasons such as:



- ineffectiveness or unsuitability of the products for human use or the discovery of unexpected or unacceptable toxicity levels which may manifest itself through pre-clinical studies and clinical trials
- inability to receive necessary regulatory approvals from local and international government and regulators to
    manufacture, label, advertise, make claims and sell the Company's products
- costs or other factors which may make manufacturing or marketing of products impractical and non-competitive
- unacceptability of the products in the market place
- inability to protect the Company's intellectual property rights necessary for the research and development,  manufacture and sale of the Company's products
- 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 by the Company
- the risk of obsolescence of the Company's technology
- insufficient availability of raw materials and the inability to obtain raw materials on acceptable terms
- clinical trials may not be undertaken or completed as planned, and if undertaken or completed, may not achieve expected results



- Competition  The Company has a number of competitors, some of whom are better able commercialize their products, which could render the Company's products obsolete or uncompetitive prior to recovering its expenses.  The Company anticipates that it will face increased competition in the future as new products enter the market and advanced technologies become available.
- Risks Related to Joint Ventures and Strategic Relationships
    The Company is dependent upon joint ventures and strategic relationships to generate revenue and conduct its business, and the breakdown of these relationships may negatively affect the Company's future revenues and business.
- Future Revenues and Profitability are UncertainThe Company's future revenues and profitability are uncertain for a number of reasons, such as the future demand for the Company's products, the ability to control costs, unanticipated expenses, the expenses and effects of launching new products, and the ability to overcome risks of development and commercialization of pharmaceutical and nutraceutical products as set out above.
- Currency Fluctuation  The Company conducts and will conduct further business in foreign currency, hence, the Company is and will continue to be exposed to foreign currency fluctuations.  At present, the Company does not have any plans to hedge against any currency risk.



- The Company has a History of Losses   For the fiscal year ended December 31, 2002, the Company reported a net loss of $4.1 million and an accumulated deficit of $55.4 million.  The Company anticipates that it will continue to incur significant losses during fiscal 2003 and that it will not reach profitability until after further successful and profitable commercialization of its products.  Even then, the initial losses incurred by the Company may never be recovered.  There can be no assurance that any of the Company's recently launched products or products currently under development will be commercially successful.



- Need for GrowthThe Company intends to launch a series of products over the next few years, however, there is no assurance that the Company's resources will be able to adequately respond to support such growth.



- Dependence upon Key PersonnelThe Company's ability to develop marketable products and to maintain a competitive position in light of technological developments will depend upon its ability to attract and retain highly qualified scientific and management personnel.  Competition for such personnel is intense and if the Company loses the services of key personnel, it may be unable to replace
    the
- Product Liability, Negative Publicity and InsuranceThe Company is exposed to the risk of product liability claims for the use of its products.  The Company's insurance policy may not cover any potential claim or if coverage is available, may not provide sufficient coverage to protect the Company against loss and may affect the Company's ability to maintain and obtain adequate future insurance coverage.  Further, even if sufficient insurance coverage is available to cover any potential claim, publicity associated with any such claim could negatively taint public opinion about the Company and the safety or efficacy of its products.
- Political and Economic RisksThe Company has manufacturing facilities in the United States, conducts business in foreign countries and is seeking business opportunities worldwide. Changes in government, economic and political policies may adversely affect the Company's business and operating results.
- Environmental RisksThe Company is subject to laws and regulations governing hazardous by-products and the Company may be adversely affected by the requirements to comply with current or future environmental laws and regulations. There is also a risk of accidental contamination or injury from hazardous materials that cannot be eliminated and the Company could be liable for any resulting damages, such damages which may exceed the Company's resources.
- Inflation The impact of inflation on the Company's operations has been minimal and is expected to continue to be minimal in the next few years.

---



These risks and other uncertainties are more fully described in the Company's filings with the SEC (see www.edgar.com), OSC, and BCSC (see www.sedar.com), including, without limitation, in the Company's annual reports/annual information forms on Form 20-F.  Forward-looking statements are based on beliefs, opinions and expectations of the Company's management at the time they are made and the Company does not assume any obligation to update its forward-looking statements if those beliefs, expectations, opinions or other circumstances should change.







---

List
of Exhibits



















First
Quarter Report



March
31, 2003



(unaudited)











Consolidated
Balance Sheets



Consolidated
Statements of Operations and Deficit



Consolidated
Statements of Cash Flows

















---

FORBES
MEDI-TECH INC.

2

CONSOLIDATED
BALANCE SHEETS

in
thousands of Canadian dollars

|                                               | 31
      Mar 2003    (unaudited) | 31 Dec 2002
      (audited)
|---------------------------------------------- | -------------------------------- | ---------------------------
|                                               |                                  |                            
|ASSETS                                         |                                  |                            
|Current
      Assets                           |                                  |                            
|Cash
      and cash equivalents                | $
          1,070                | $
         413             
|Accounts
      receivable                      | 3,930                            | 4,190                      
|Inventories                                    | 399                              | 952                        
|Prepaid
      expenses and deposits            | 744                              | 537                        
|                                               | 6,143                            | 6,092                      
|                                               |                                  |                            
|Property,
      plant and equipment            | 11,876                           | 11,932                     
|Intangible
      and other assets              | 8,641                            | 9,393                      
|                                               | $
         26,660                | $
         27,417          
|                                               |                                  |                            
|LIABILITIES                                    |                                  |                            
|                                               |                                  |                            
|Current
      liabilities                      |                                  |                            
|Accounts
      payable and accrued liabilities | $
           3,865               | $
           4,740         
|Deferred
      revenues and royalties payable  | 3,046                            | 3,155                      
|Current
      portion of long-term debt        | 1,498                            | 1,691                      
|                                               | 8,409                            | 9,586                      
|                                               |                                  |                            
|Long-term
      liabilities                    |                                  |                            
|Deferred
      revenues                        | 264                              | -                          
|Long-term
      debt                           | 186                              | 217                        
|Tenure
      allowance                         | 614                              | 614                        
|                                               | 9,473                            | 10,417                     
|                                               |                                  |                            
|Shareholders'
      equity                     |                                  |                            
|Share
      Capital (Note 4)                   | 72,389                           | 71,472                     
|Special
      warrants                         | -                                | 887                        
|Contributed
      surplus(Note6)               | 34                               | 20                         
|Deficit                                        | (55,236)                         | (55,379)                   
|                                               | 17,187                           | 17,000                     
|                                               | $
         26,660                | $
         27,417          



Approved
on Behalf of the Board:





|"Charles
      Butt"          |  | "Tazdin
      Esmail"          | 
|----------------------------- |  | ------------------------------ | 
|Director
      - Charles Butt |  | Director
      - Tazdin Esmail | 





---



FORBES
MEDI-TECH INC.





CONSOLIDATED
STATEMENTS OF OPERATIONS and DEFICIT

in
thousands of Canadian dollars

(unaudited)

|FORBES MEDI-TECH INC.                             |                    |           |   |          |   |         |        | 
|------------------------------------------------- | ------------------ | --------- | - | -------- | - | ------- | ------ | 
|                                                  |                    |           |   |          |   |         |        | 
|                                                  |                    |           |   |          |   |         |        | 
|CONSOLIDATED STATEMENTS OF OPERATIONS and DEFICIT |                   
|                                                  |                    |           |   |          |   |         |        | 
|in thousands of Canadian dollars                  |                    |           |   |          |   |         |        | 
|(unaudited)                                       |                    |           |   |          |   |         |        | 
|                                                  |                    |           |   |          |   |         |        | 
|                                                  | Three months ended
|                                                  |                    |           |   |          |   |         |        | 
|                                                  | March 31,          | March 31, |  
|                                                  |                    |           |   | 2003     |   |         | 2002   | 
|                                                  |                    |           |   |          |   |         |        | 
|                                                  |                    |           |   |          |   |         |        | 
|                                                  |                    |           |   |          |   |         |        | 
|REVENUES                                          |                    |           |   |          |   |         |        | 
|                                                  |                    |           |   |          |   |         |        | 
|Sales                                             |                    | $         |   | 3,347    |   | $       | 1,895  | 
|Licensing                                         |                    |           |   | 37       |   |         | 471    | 
|                                                  |                    |           |   |          |   |         |        | 
|Phytosterol revenues                              |                    |           |   | 3,384    |   |         | 2,366  | 
|Interest and other                                |                    |           |   | -        |   |         | 53     | 
|                                                  |                    |           |   |          |   |         |        | 
|                                                  |                    |           |   | 3,384    |   |         | 2,419  | 
|                                                  |                    |           |   |          |   |         |        | 
|                                                  |                    |           |   |          |   |         |        | 
|EXPENSES                                          |                    |           |   |          |   |         |        | 
|                                                  |                    |           |   |          |   |         |        | 
|General and administrative                        |                    |           |   | 936      |   |         | 1,090  | 
|Cost of sales, marketing and product              |                    |           |   | 1,952    |   |         | 1,858  | 
|development                                       |                    |           |   |          |   |         |        | 
|Research and development(Note 5)                  |                    |           |   | (204)    |   |         | 1,044  | 
|Depreciation and amortization                     |                    |           |   | 557      |   |         | 538    | 
|                                                  |                    |           |   |          |   |         |        | 
|                                                  |                    |           |   | 3,241    |   |         | 4,530  | 
|                                                  |                    |           |   |          |   |         |        | 
|                                                  |                    |           |   |          |   |         |        | 
|Net income (loss) for the period                  |                    |           | $ | 143      | $ | (2,111) |       
|                                                  |                    |           |   |          |   |         |        | 
|                                                  |                    |           |   |          |   |         |        | 
|Deficit, beginning of period                      |                    | (55,379)  |   | (51,259) |  
|                                                  |                    |           |   |          |  
|                                                  |                    |           |   |          |   |         |        | 
|                                                  |                    |           |   |          |   |         |        | 
|                                                  | $                  | (55,236)  | $ | (53,370) |  
|Deficit, end of period                            |                    |           |   |          |   |         |        | 
|                                                  |                    |           |   |          |   |         |        | 
|                                                  |                    |           |   |          |   |         |        | 
|                                                  |                    |           |   |          |   |         |        | 
|Basic and diluted income (loss) per share         |                    |           | $ | 0.01     |   | $       | (0.10) | 
|                                                  |                    |           |   |          |   |         |        | 
|                                                  |                    |           |   |          |   |         |        | 



---

FORBES
MEDI-TECH INC.











CONSOLIDATED
STATEMENTS OF CASH FLOWS

in
thousands of Canadian dollars (unaudited)

|                                            |           | Three months ended |  
|------------------------------------------- | --------- | ------------------ | -
|                                            | March 31, | March 31,          |  
|                                            | 2003      |                    |  
|                                            |           |                    |  
|                                            |           |                    |  
|Cash provided by (used in):                 |           |                    |  
|OPERATIONS                                  |           |                    |  
|                                            |           |                    |  
|Net income (loss) for the period            | $         | 143                | $
|Adjustment to reconcile net loss            |           |                    |  
|to cash flow provided (used) in operations: |           |                    |  
|Depreciation and amortization               |           | 557                |  
|Amortization of deferred license revenues   |           | (37)               |  
|Foreign exchange translation gain           |           | (20)               |  
|                                            |           |                    |  
|Stock-based compensation expense(Note 6)    |           | 14                 |  
|                                            |           |                    |  
|Changes in:                                 |           |                    |  
|Accounts receivable                         |           | 368                |  
|                                            |           |                    |  
|Inventories                                 |           | 553                |  
|                                            |           |                    |  
|Prepaid expenses and deposits               |           | (207)              |  
|                                            |           |                    |  
|Accounts payable and accruals               |           | (875)              |  
|                                            |           |                    |  
|Royalties payable                           |           | (43)               |  
|Increase in tenure allowance in excess      |           |                    |  
|of amount funded                            |           | 12                 |  
|Deferred revenues                           |           | 452                |  
|                                            |           |                    |  
|                                            |           | 917                |  
|                                            |           |                    |  
|INVESTING:                                  |           |                    |  
|Acquisition of capital assets               |           | (180)              |  
|Acquisition of intangible & other assets    |           | -                  |  
|Proceeds on disposal of pilot plant         |           | 26                 |  
|Proceeds on disposal of capital assets      |           | 65                 |  
|Short-term investments                      |           | -                  |  
|                                            |           |                    |  
|                                            |           | (89)               |  
|FINANCING:                                  |           |                    |  
|Issuance of common shares                   |           | 30                 |  
|Repayment of notes payable                  |           | (201)              |  
|Demand loans                                |           | -                  |  
|                                            |           |                    |  
|                                            |           | (171)              |  
|                                            |           |                    |  
|Increase (decrease) in cash and             |           |                    |  
|cash equivalents                            |           | 657                |  
|Cash and cash equivalents, beginning of     |           | 413                |  
|period                                      |           |                    |  
|                                            |           |                    |  
|Cash and cash equivalents, end of period    | $         | 1,070              |  





---



FORBES
MEDI-TECH INC.



NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS

For
the three months ended March 31, 2003

(unaudited)



1)

Basis
of Presentation and Significant Accounting Policies



These
unaudited consolidated interim financial statements are prepared in accordance
with Canadian generally accepted accounting principles for interim financial
information, do not include all disclosures required for annual financial
statements and accordingly should be read in conjunction with the Company's
audited financial statements and notes thereto including the going concern
disclosure presented in Note 1 for the year ended December 31, 2002 as part of
the Company's 2002 Annual Report filed with the Securities Commission.
 The results of operations for the interim periods reported are not
necessarily indicative of results to be expected for the year.



2)

Change
in Accounting Principles

These
consolidated financial statements reflect the same significant accounting
policies and accounting principles as those outlined in the notes to the audited
consolidated financial statements for the year ended December 31, 2002.  No
changes in accounting principles have been adopted in the first quarter of 2003.



4)

Common
Share Capital:



(a)

Authorized,
issued and allotted:



The
authorized share capital of the Company consists of 200,000,000 common shares
with no par value and 50,000,000 preferred shares with no par value.



Number
      of
      Shares
    AmountBalance,
      December 31, 2002
    21,550
    $
       71,472Issued
      during the three months ended
      March
      31, 2003:Exercise
      of special warrants
    1,575
    887Exercise
      of brokers' warrants
    46
    30Balance,
      September 30, 2002
    23,171
    $
       72,389










---

(a)

Income
(loss) per share



3
      months ended March 31, 2003
    3
      months ended March 31, 2002Net
      income (loss ) for the period
    $143
    ($2,111)Weighted
      average number of
      common
      shares outstanding
    23,130
    21,255Income
      (loss) per common share
    $0.01
    ($0.10)






(a)

Stock
options and stock option plan:



Number
      Of
      Optioned Shares
    Weighted
      Average Exercise PriceBalance,
      December 31, 2002
    3,642,850
    $3.19Options granted
    220,000
    $0.66Options
      forfeited
    (207,000)
    $6.72Balance,
      March 31, 2003
    3,655,850
    $2.84






The
stock options expire at various dates from April 6, 2003 to December 12, 2010
(December 31, 2002 - January 31, 2003 to December 12, 2010).



Under
the 2000 Stock Option Plan, the Company may grant options to its employees,
officers, directors, and consultants (optionees) for up to 5,000,000 shares of
common stock.







---

5)

Investment
tax credits



The
Company recorded the benefit of provincial investment tax credits received
during the first quarter of 2003 of $624 (2002 - nil)



6)

Stock-based
Compensation



The
Company has recorded $14 of compensation expense for stock-based compensation
awarded to non-employees during the three-month period ended March 31, 2003
calculated in accordance with the fair value method.  The Company has not
recognized any compensation expense for stock-based compensation awarded to
employees during the three-month period ended March 31, 2003.  Had
compensation expense for the Company's stock-based employee compensation plan
been determined for employee options based on the fair value at the grant dates,
the Company's net income and income per share would have been decreased to the
pro forma amounts indicated below:



3
      months ended March 31, 2003Net
      income (loss) - as reported
    $
           143Net
      income (loss) - pro forma
    $
               2Income
      (loss) per share - as reported
    $0.01Income
      (loss) per share - pro forma
    $0.00






The
fair value of each option is estimated at the date of grant using the Black
Scholes option-pricing model with the following weighted-average assumptions:
 dividend yield: 0.00%; expected volatility: 111%; risk-free interest rate:
3.0%; and expected average option term of three years.    The
weighted-average fair value of the options granted to employees during the three
months ended March 31, 2003, was $0.47 per option.







---



Forbes
Medi-Tech Inc.





MANAGEMENT'S
DISCUSSION AND ANALYSIS

of
financial conditions and results of operations



First
Quarter ended March 31, 2003



(All
amounts following are expressed in Canadian dollars unless otherwise indicated.)



The
following information should be read in conjunction with the Company's audited
consolidated financial statements for the year ended December 31, 2002 and
related notes that are prepared in accordance with Canadian generally accepted
accounting principles and in conjunction with the Company's unaudited
financial statements for the quarter ended March 31, 2003 and the notes thereto.





Overview:



FORBES
MEDI-TECH, INC. ("Forbes" or the "Company") is a biopharmaceutical
company dedicated to the research, development and commercialization of
innovative prescription pharmaceutical and nutraceutical products for the
prevention and treatment of cardiovascular and related diseases. Forbes'
scientific platform is based on core sterol technology.  By extracting
plant sterols from by-products of the forestry industry, Forbes has
developed cholesterol-lowering agents for use in pharmaceutical compounds,
functional foods and dietary supplements.  Plant sterols, also referred to
as phytosterols, are lipid-like compounds found in and derived from plants and
have a similar molecular structure to cholesterol.



Forbes'
main products under development and commercialization include its promising
cholesterol-lowering pharmaceutical product, FM-VP4, which represents a new
class of cardiovascular pharmaceuticals known as cholesterol transport
inhibitors.  Other products under development for commercialization include
phytosterol food additives and dietary supplements.  All of Forbes'
research activities are currently focused on cholesterol-lowering benefits.



In
the first quarter of 2003, Forbes achieved several key milestones.  First,
in January of 2003, the Phase I Safety Study results for the clinical trial of
FM-VP4 being undertaken at the Academic Medical Centre, University of Amsterdam,
were announced.  These results established the safety and tolerability of
FM-VP4. In the same month, the dosing phase of the FM-VP4 Phase II clinical
study commenced.  In August of 2002, Forbes had received approval from the
Medical Safety Review Panel of the AMC to initiate the Phase II component of its
clinical trial on FM-VP4.  Phase II clinical trial completion is expected
in the fourth quarter of 2003.

In
addition to FM-VP4, the Company anticipates exploring cardiovascular and related
indications of the VPx Library of Compounds including: cholesterol and
triglyceride-lowering; HDL-(good cholesterol) increasing; anti-obesity;
anti-diabetic; and anti-inflammatory.



---



Also
in the first quarter of 2003, Forbes and its manufacturing joint venture, Phyto-Source
LP, attained several key milestones including the commencement of product
shipments under Phyto-Source's major sterols supply agreement entered into in
September 2002.  Sales of Forbes' sterol-based products in early 2003,
have exceeded first quarter expectations.     In March of
2003, Forbes extended its supply and licensing contract with Pharmavite LLC for
up to three years for the continued sale of Reducol(tm), an ingredient in one of
Pharmavite's leading dietary supplements, Nature Made(r) Cholest-Off(tm).
 Forbes continues to seek new customers for its branded
cholesterol-lowering product Reducol(tm).

In
early 2003, the U.S. Food and Drug Administration ("FDA") issued a letter to
Forbes, which, pending a final FDA ruling, allows Forbes and its customers to
immediately apply the phytosterol heart-health claim previously approved by the
FDA to Forbes' range of phytosterol products, including Reducol(tm).  The
Company considers this a major milestone in its ability to sell Reducol(tm).
   The Company is pursuing obtaining the relevant approvals for
sales of its functional food and nutraceutical products in other international
markets, primarily Europe.



Results
of Operations:

1Three
Months ended March 31, 2003, compared with Three Months ended March 31, 2002



For
the first quarter ended March 31, 2003, the Company reported a net profit of
$0.1 million ($0.01 per share) compared with a net loss of $2.1 million ($0.10
per share) for the first quarter ended March 31, 2002.  The net income
resulted primarily due to (i) the Company's share of the increase in sales by
the Phyto-Source joint venture as shipments under Phyto-Source's major sterols
agreement commenced, (ii) continuing curtailments in the areas of administrative
and non-core R&D expenditures, and (iii) the receipt of Quebec provincial
investment tax credits in the amount of $0.6 million.



Forbes,
to date, has been focused on the research, development and commercialization of
its phytosterol-based businesses and has incurred annual operating losses since
its inception. The Company expects to continue incurring operational losses
until the earnings from commercialization of one or more of its products exceed
the costs of research and development, manufacturing, administration and other
expenses. While the Company recorded net earnings of $0.1 million for the
quarter ended March 31, 2003, this is primarily attributable to Quebec
investment tax credits received from the Government of Quebec in respect of
research activities, which the Company had conducted in previous years in that
Province.  As the Company no longer maintains manufacturing facilities or
offices in Quebec, future Quebec investment tax credits, if any, are expected to
be minimal.  At March 31, 2003 the Company's accumulated deficit was
$55.2 million.



For
the quarter ended March 31, 2003, total revenues, including interest income,
were $3.4 million, compared with $2.4 million for the three months ended March
31, 2002.  Revenues for the quarter ended March 31, 2003 were primarily
from the Company's share of sales under Phyto-Source's major sterols supply
agreement announced in September, 2002.



Revenues(summary)

   1st Quarter 2003
   1st Quarter 2002Sales
   $
   3.35
   $
   1.90Licensing
   
   0.03
   
   0.47Phytosterol revenues
   
   3.38
   
   2.37Interest and other
   
   -
   
   0.05Total revenues
   $
   3.38
   $
   2.42




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Phytosterol
revenues include direct sales of phytosterol products during the period and
amortization of license fees in accordance with the Company's revenue
recognition policies outlined in the audited consolidated financial statements
for the year ended December 31, 2002.  Revenues from sales of sterols made
up virtually all of the Company's revenue of $3.4 million for the quarter
ended March 31, 2003, compared with $1.9 million for the quarter ended March 31,
2002.  As stated above, the increase in sales over the first quarter ended
March 31, 2002 is primarily attributable to the Company's share of sales of
non-branded sterols by the Phyto-Source joint venture under its major sterol
supply agreement. Sales of Forbes' Reducol(tm) (previously branded as Phytrol(tm)),
commenced in dietary supplements in the United States with Twin Laboratories
(Cholesterol Success(tm)) and Pharmavite (Nature Made(r) Cholest-Off(tm)) in the
latter part of 2001.  Licensing revenues are a result of the extension of
the Company's supply and licensing agreement with Pharmavite LLC for the
continued sale of Reducol(tm).  An amount of US$0.3 million in deferred
revenues was received under the terms of the agreement, which spans a period of
three years.  These deferred revenues are accordingly amortized over that
three-year period.



Expenses*(summary)
   1stQuarter 2003
   1stQuarter 2002Cost of sales, marketing &product development
   $
   1.95
   $
   1.86Research & development
   
   (0.20)
   
   1.04General & administrative
   
   0.94
   
   1.09Total expenses
   $
   2.69
   $
   3.99




*
excluding depreciation and amortization



For
the three months ended March 31, 2003, cost of sales, marketing and product
development were $2.0 million compared with $1.9 million for the three months
ended March 31, 2002. Cost of sales, marketing and product development in the
first quarter of 2003, in addition to marketing, and cost of goods sold,
includes $0.4 million in manufacturing overheads from the PhytoSource joint
venture manufacturing facility and has increased due to the increased level of
sales.



For
the quarter ended March 31, 2003, research and development (R&D) expenses
showed a recovery of $0.2 million compared to R&D expenses of $1.0 million
for the first quarter ended March 31, 2002.  Included in R&D for the
first quarter of 2003 is an amount of $0.6 million of Quebec investment tax
credits received in respect of prior years' research activities conducted in
that Province.  As the Company no longer has manufacturing facilities or
offices in Quebec, further investment tax credits from that Province, if any,
are expected to be minimal.



The
Company continues to focus its core research and development on cardiovascular
and, specifically, cholesterol-lowering compounds such as FM-VP4.  Non-core
research, not directly related to the Company's new and more focused R&D
project pipeline is expected to resume once the Company has established a
stronger working capital position.  The main R&D expenditures through
2003 and into 2004 will be, in the area of pre-clinical and clinical
development, including the Phase II trial of FM-VP4.
   Additional funding will be required in order for Forbes to be
able to pursue the discovery and/or development of non-core compounds in 2003.

---



Administrative
expenditures in the first quarter 2003 were $0.9 million compared to $1.1
million in the first quarter of 2002.  In the first quarter 2003,
administrative expenditures have decreased to  $0.31 million per month
compared to $0.36 million per month in the first quarter 2002.  The
reductions in administrative expenses are primarily attributable to downsized
operations, resulting in lower personnel costs and related administrative
expenses.



In
2002, Forbes signed an agreement with Novartis Consumer Health SA (Novartis) to
acquire the rights to Phytrol(tm) (consumer branded by Novartis as Reducol(tm)),
which had previously been licensed by Forbes to Novartis.  Under the terms
of the agreement, the Company agreed to pay Novartis a total of US$2.5 million
(C$3.8 million).  As a result of this $3.8 million purchase, the Company
eliminated deferred revenue of $9.9 million and hence recognized a net gain of
$6.0 million in 2002.  Of the US$2.5 million purchase price, US$0.5 million
was paid, on signing, by way of offset against funds owed by Novartis to Forbes.
The balance of US$2.0 million is to be paid in royalties from phytosterol sales
between June 22, 2002 and December 31, 2003.   As of March 31, 2003, a
total of US$0.2 million of the $2.0 million total owing to Novartis is payable
in the form of royalties from phytosterol sales.  A minimum of US$1.5
million is due to be paid to Novartis by June 30, 2003 with the remaining US$0.5
million due by December 31, 2003.



In
2002, the Company's Amqui pilot facility was sold to a third party for a total
of $1.6 million.   Upon closing, Forbes received proceeds of $0.4
million.  The balance of $1.2 million is payable in the amount of $0.35
million plus interest on May 9, 2003, and $0.85 million divided into eighty-four
monthly installments beginning September 2002 and ending August 2009.





Liquidity
and Capital Resources:



Since
inception, the Company has financed its operations and capital expenditures
primarily through equity offerings and, to a lesser extent, license and sales
revenues and government grants.



As
at March 31, 2003, the Company's net cash and cash equivalents were $1.1
million compared with $0.4 million as at December 31, 2002.  The Company's
working capital deficit at March 31, 2003 improved to $2.3 million from a
working capital deficit at December 31, 2002, of $3.5 million.  The working
capital position has improved mainly due to a reduction in accounts payable and
increased revenues.  Excluding royalties payable to Novartis in the amount
of US$2.0 million, and a $1.0 million convertible debenture due by the end of
2003, working capital at March 31, 2003 was $1.6 million



In
the first quarter of 2003, $0.9 million of cash was provided through operating
activities compared with $3.9 million of cash used in operating activities in
the first quarter of 2002. This improvement is primarily a result of the
increase in phytosterol sales during the period, receipt of deferred revenues
under the Pharmavite agreement and a reduction of inventories and accounts
receivable.



In
the first quarter of 2003, investing activities used $0.1 million of cash mainly
in the acquisition of capital assets of the Phyto-Source manufacturing plant
compared with cash provided of $0.5 million in the first quarter 2002 resulting
primarily from proceeds of short-term investments.



---

In
September of 2002 Forbes issued 1.5 million special warrants at a price of $0.65
per special warrant. On January 24, 2003, the 1.5 million special warrants were
converted, at no cost to the holders, into common shares of the Company at a
rate of 1.05 common shares per warrant, further to the special warrant investors
having waived the requirements for the Company to file and obtain receipts for a
prospectus.  As part of the issue of special warrants in 2002, the Company
issued 150,000 brokers' warrants to Dominick & Dominick Securities Inc. to
purchase 150,000 common shares at $0.65 per share until March 24, 2004.  In
March of 2003, 46,000 brokers' warrants were exercised for proceeds of $0.03
million.



For
the three months ended March 31, 2003, net cash used in financing activities was
$0.2 million compared with cash used of $0.8 million for the three months ended
March 31, 2002.  Cash used in the first quarter ended March 31, 2003
reduced notes payable and in the first quarter of 2002, reduced notes payable
and demand loans.



In
September of 2002, the Company and the Phyto-Source joint venture secured
sterols supply agreements for up to US$26.0 million over a two-year period based
on customer forecasts.  These include a major agreement between the Phyto-Source
joint venture and a large multinational company.  Production of the
phytosterols is undertaken by Phyto-Source.



At
December 31, 2002, the Company was committed to invest a balance of US$1.35
million in Phyto-Source LP towards completion and operation of the manufacturing
facility.  Later, in 2003,the Company plans to offset this
remaining capital commitment against amounts owed by Phyto-Source to the Company
for inventory transferred on formation of the joint venture.



Based
on supply forecasts provided by customers pursuant to current supply agreements,
other receivables, projected expenditure levels, and the recently announced
divestiture of the Company's AD/ADD business (see the Company's press release
dated April 29, 2003), Forbes believes it will have sufficient capital to
operate and fund its core development projects through the end of 2003; however
due to cash flow timing, the Company may need to finance its receivables on an
iterim basis during the year.  The Company is also continuing to look at
various financing opportunities to further develop its pipeline of products, to
retire its commitments to Novartis and its convertible debenture, and to provide
alternate sources of funding in the event that expenditures or receivables are
not realized as planned.  It will also be necessaryfor the Company to seek
additional financing during 2003 to meet expenditures of continuing research and
development work in 2004, to improve the Company's working capital position
and to minimize risks to its operations.  The current financial market for
equity offerings remains challenging and there can be no assurance that
additional financing will be available on favourable terms, if at all. The
Company presently has no external sources of liquidity such as lines of credit,
and the failure to obtain debt or equity financing may have a material effect on
the Company's current cash-flow and the Company's ability to continue its
operations. In addition to possible debt or equity financings, the Company is
exploring possible licensing, partnering or additional long-term sterol
contracts utilizing the phytosterol production capacity of the Phyto-Source
plant. If successful, such arrangements could reduce the Company's requirement
to raise capital through the equity markets. Forbes is in discussions with
several parties regarding possible additional sterol contracts or alliances, as
well as possible merger or acquisition (M&A) transactions.



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



---

Sales
Outlook:



Based
on existing sales contracts, and assuming that forecasted supply requirements
will be ordered and shipped, the Company is projecting its share of revenue from
sterol sales for 2003 of $12 million. This figure represents the Company's share
of the $20 million projected revenue of the combined sales contracts of the
Company and the Phyto-Source joint venture.



Forward
Looking Statements and Risk Factors That May Affect Future Results:



This
Management Discussion & Analysis contains forward-looking statements about
the Company, 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. Any document that has been filed or will be filed with the
Securities and Exchange Commission ("SEC"), the Ontario Securities
Commission (the "OSC"), the British Columbia Securities Commission (the "BCSC"),
or any stock exchange also may include forward-looking statements.  Other
written or oral forward-looking statements have been made and may in the future
be made, from time to time, by or on behalf of the Company.
 Forward-looking statements are statements that are not historical facts,
and include financial projections and estimates and their underlying
assumptions; statements regarding plans, objectives and expectations with
respect to future sales, financings, operations, divestitures, products and
services; the impact of regulatory initiatives on the Company's operations;
the Company's share of new and existing markets; general industry and
macroeconomic growth rates and the Company's performance relative to them and
statements regarding future performance.  Forward-looking statements
generally are identified by the words "expected", "expects", "promising", "forecasts",
"spans", "pursuing", "payable", "anticipates", "believes", "intends", "estimates",
"projecting", "projects", "planned", "plans", and similar expressions or variations thereon, or
that events or conditions "will," "may," "could" or "should"
occur.



The
Company is subject to significant risks and past performance is no guarantee of
future performance.  The Company cannot predict all of the risk factors,
nor can it assess the impact, if any, of such risk factors on the Company's
business 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. Accordingly, forward-looking statements should not be relied upon as
a prediction of actual results.  The following offers a brief overview of
some of the risk factors to be considered in relation to the Company's
business.  This list may not be exhaustive, as the Company operates in a
rapidly changing business environment, and new risk factors emerge from time to
time:



- Need
for Additional Funds  As at March 31, 2003, the Company had a working
capital deficit.  The Company will be expending substantial funds in 2003
and will be required to obtain additional sources of capital to continue funding
research and development, to improve its working capital position and to
minimize risks to its operations.  The current financial market for equity
offerings remains challenging and there can be no assurance that such additional
funds will be available on acceptable terms or at all.  The Company
presently has no external sources of liquidity such as lines of credit, and the
failure to obtain debt or equity financing on a timely basis or on commercially
reasonable terms, may have negative effects on the Company's cash flow and
operations and its ability to continue its operations.  Any additional
equity financing, if secured, may result in significant dilution to the existing
shareholders at the time of such additional financing

---

- Dependence
Upon a Few Customers and ProductsMost of the Company's revenue has
been earned from sales to a few customers and any material change in the
relationship with such customers, the customer's projected demands for the
Company's products, or the ability of such customers to meet their contractual
obligations may negatively impact the Company's business and operations.
- Development
and Commercialization of Pharmaceutical and Nutraceutical Products To
achieve sustained, profitable operations, the Company must successfully develop,
obtain regulatory approvals for, and profitably manufacture and market one or
more of its products. While the Company is marketing its phytosterols, sales
have only commenced in recent years and such products are still relatively new
on the market.  The development and commercialization of new products is
subject to a number of significant risks and uncertainties, particularly in the
pharmaceutical and 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, may not achieve profitable sales
levels, for a number of reasons such as:



- ineffectiveness
or unsuitability of the products for human use or the discovery of unexpected or
unacceptable toxicity levels which may manifest itself through pre-clinical
studies and clinical trial
- inability
to receive necessary regulatory approvals from local and international
government and regulators to manufacture, label, advertise, make claims and sell
the Company's products
- costs,
equipment failures or other factors which may make manufacturing or marketing of
products impractical, untimely or non-competitive
- unacceptability
of the products in the market place
- inability
to protect the Company's intellectual property rights necessary for the
research and development,  manufacture and sale of the Company's products
- 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 by the Company
- the
risk of obsolescence of the Company's technology
- insufficient
availability of raw materials and the inability to obtain raw materials on
acceptable terms
- clinical
trials may not be undertaken or completed as planned, and if undertaken or
completed, may not achieve expected results or may show adverse results.



- Competition
 The Company has a number of competitors, some of whom are better able
commercialize their products, which could render the Company's products
obsolete or uncompetitive prior to recovering its expenses.  The Company
anticipates that it will face increased competition in the future as new
products enter the market and advanced technologies become available.
- Risks
Related to Joint Ventures and Strategic RelationshipsThe Company is
dependent upon joint ventures and strategic relationships to generate revenue
and conduct its business, and the breakdown of these relationships may
negatively affect the Company's future revenues and business.

---



- Future
Revenues and Profitability are UncertainThe Company's future
revenues and profitability are uncertain for a number of reasons, such as the
future demand for the Company's products, the ability to control costs,
unanticipated expenses, the expenses and effects of launching new products, and
the ability to overcome risks of development and commercialization of
pharmaceutical and nutraceutical products as set out above.
- Currency
Fluctuation  The Company conducts and will conduct further business in
foreign currency, hence, the Company is and will continue to be exposed to
foreign currency fluctuations.  At present, the Company does not have any
plans to hedge against any currency risk.
- The
Company has a History of Losses   For the three months ended March
31, 2003, the Company reported net income of $143 thousand and an accumulated
deficit of $55.2 million.  The net income for the first quarter 2003, was
due to a one-time benefit of provincial government incentive tax credits.
 The Company anticipates that it will continue to incur losses during
fiscal 2003 and that it will not reach profitability until after further
successful and profitable commercialization of its products.  Even then,
the initial losses incurred by the Company may never be recovered.  There
can be no assurance that any of the Company's recently launched products or
products currently under development will be commercially successful.



- Need
for GrowthThe Company intends to launch a series of products over the
next few years, however, there is no assurance that the Company's resources
will be able to adequately respond to support such growth.
- Dependence
upon Key PersonnelThe Company's ability to develop marketable
products and to maintain a competitive position in light of technological
developments will depend upon its ability to attract and retain highly qualified
scientific and management personnel.  Competition for such personnel is
intense and if the Company loses the services of key personnel, it may be unable
to replace them.
- Product
Liability, Negative Publicity and InsuranceThe Company is exposed to
the risk of product liability claims for the use of its products.  The
Company's insurance policy may not cover any potential claim or if coverage is
available, may not provide sufficient coverage to protect the Company against
loss and may affect the Company's ability to maintain and obtain adequate
future insurance coverage.  Further, even if sufficient insurance coverage
is available to cover any potential claim, publicity associated with any such
claim could negatively taint public opinion about the Company and the safety or
efficacy of its products.
- Political
and Economic RisksThe Company has manufacturing facilities in the
United States, conducts business in foreign countries and is seeking business
opportunities worldwide. Changes in government, economic and political policies
may adversely affect the Company's business and operating results.

---





- Environmental
RisksThe Company is subject to laws and regulations governing
hazardous by-products and the Company may be adversely affected by the
requirements to comply with current or future environmental laws and
regulations. There is also a risk of accidental contamination or injury from
hazardous materials that cannot be eliminated and the Company could be liable
for any resulting damages, such damages which may exceed the Company's
resources.
- Inflation
The impact of inflation on the Company's operations has been
minimal and is expected to continue to be minimal in the next few years.



These
risks and other uncertainties are more fully described in the Company's
filings with the SEC (see www.edgar.com), OSC, and BCSC (see www.sedar.com),
including, without limitation, in the Company's annual reports/annual
information forms on Form 20-F.  Forward-looking statements are based on
beliefs, opinions and expectations of the Company's management at the time
they are made and the Company does not assume any obligation to update its
forward-looking statements if those beliefs, expectations, opinions or other
circumstances should change.







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