---

i

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549



FORM 20-F



|X   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2007
|-----------------------------------------------------------------------------------------------------------------------------------



|                                                                                                                                                                                                                                                                                                                                                         |                                                                                                    |  | 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------- |  | 
|Commission file number: 000-30076                                                                                                                                                                                                                                                                                                                       
|FORBES MEDI-TECH INC.
(Exact name of Registrant as specified in its charter)                                                                                                                                                                                                                                                                            
|British Columbia
(Jurisdiction of incorporation or organization)                                                                                                                                                                                                                                                                                        
|200  750 West Pender Street
Vancouver, British Columbia, Canada V6C 2T8
(Address of principal executive offices)                                                                                                                                                                                                                                       
|Securities registered or to be registered pursuant to Section 12(b) of the Act.                                                                                                                                                                                                                                                                         
|Title of each classCommon Shares, without par value                                                                                                                                                                                                                                                                                                      | Name of each exchange on which registeredNASDAQ Capital                                           
|Securities registered or to be registered pursuant to Section 12(g) of the Act.                                                                                                                                                                                                                                                                         
|None
(Title of Class)                                                                                                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                                        
|Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.                                                                                                                                                                                                                                                              
|Not applicable
(Title of Class)                                                                                                                                                                                                                                                                                                                         
|Indicate the number of outstanding shares of each of the issuers classes of capital or common stock as of the close of the period covered by the annual report.

38,412,100 Common Shares as at December 31, 2007                                                                                                                                      
|Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act____Yes     XNo                                                                                                                                                                                                                   
|If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

____ Yes      X No                                                                                                                                  
|Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
|XYes   ____ No                                                                                                                                                                                                                                                                                                                                          
|Indicated by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.  (Check one):                                                                                                      
|                                                                                                                                                                                                                                                                                                                                                         | _____X____ Non-accelerated filer
__________  Large accelerated filer
__________  Accelerated filer | 
|Indicate by check mark which financial statement item the registrant has elected to follow.                                                                                                                                                                                                                                                             
|_______  Item 17 X Item 18                                                                                                                                                                                                                                                                                                                              
|If this is an annual report, indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

_____ Yes     X No                                                                                                                                                                                      







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ii







TABLE OF CONTENTS





|                                                                                             |   
|-------------------------------------------------------------------------------------------- | --
|PART I                                                                                       | 1 
|ITEM 1
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS                                 | 1 
|ITEM 2
OFFER STATISTICS AND EXPECTED TIMETABLE                                               | 1 
|ITEM 3
KEY INFORMATION                                                                       | 1 
|ITEM 4
INFORMATION ON THE COMPANY                                                            | 15
|ITEM 5
OPERATING AND FINANCIAL REVIEW AND PROSPECTS                                          | 37
|ITEM 6
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                                            | 45
|ITEM 7
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                                     | 60
|ITEM 8
FINANCIAL INFORMATION                                                                 | 63
|ITEM 9
THE OFFER AND LISTING                                                                 | 67
|ITEM 10
ADDITIONAL INFORMATION                                                               | 68
|ITEM 11
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           | 85
|ITEM 12
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                               | 85
|PART II                                                                                      | 85
|ITEM 13
DEFAULTS, DIVIDEND, AVERAGES AND DELINQUENCIES                                       | 85
|ITEM 14
MATERIAL MODIFICATIONS OF THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS         | 85
|ITEM 15
CONTROLS AND PROCEDURES                                                              | 86
|ITEM 16                                                                                      | 88
|Item 16A.
Audit Committee Financial Expert                                                   | 88
|Item 16B.
Code Of Ethics For Chief Executive Officer, Chief Financial Officer And Controller | 88
|Item 16C.
Principal Accounting Fees And Services  Independent Auditors                      | 88
|Item 16D.
Exemptions from the Listing Standards for Audit Committee                          | 89
|Item 16E.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers             | 89
|PART III                                                                                     | 89
|ITEM 17
FINANCIAL STATEMENTS                                                                 | 89
|ITEM 18
FINANCIAL STATEMENTS                                                                 | 89
|ITEM 19
EXHIBITS                                                                             | 90
|                                                                                             |   









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iii







FORWARD-LOOKING STATEMENTS

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



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



·

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

·

our need for additional financing which may not be available on acceptable terms or at all;

·

uncertainty whether the Non Dilutive Financing will close as anticipated or at all;

·

the fact that our Independent Registered Public Accounting Firm's Auditors' Report to the Shareholders contains a going concern qualification;

·

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

·

our dependence on a few customers;

·

our dependence on Phyto-Source for our supplies of ReducolTM;

·

research and development risks;

·

uncertainty whether we will be able to out-license FM-VP4 on acceptable terms or at all;

·

uncertainty whether we will be able to obtain any collaboration agreements or upfront milestone payments for any of our FM-TP Series of Compounds at an early stage or at all;

·

uncertainty whether any compounds in research or development will be successfully commercialized or at all;

·

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

·

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







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iv







·

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

·

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

·

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

·

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

·

the risk that our common shares may be de-listed from The NASDAQ Capital Market unless we satisfy the U.S. $1.00 Minimum Bid Price Requirement;

·

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

·

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

·

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

·

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



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



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



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









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v







Glossary of Terms



|                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ACC2                       | Acetyl-CoA carboxylase 2, an enzyme which is linked to suppression of fat burning in the body.                                                                                                                                                                                                                                                                                                                                                                                                                  
|                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|Arrangement                | Plan of Arrangement, the transaction by which the Company acquired all outstanding shares, options, and warrants of  Old Forbes for shares of New Forbes.  See Item 4  Information on the Company  A. History and Development of the Company  Forbes Medi-Tech Inc.                                                                                                                                                                                                                                          
|                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|atherosclerosis            | A hardening of the arteries in which cholesterol, other fats and various blood components build up in the walls of the arteries. As atherosclerosis progresses, the arteries to the heart may narrow so that oxygen-rich blood and nutrients have difficulty reaching the heart. This condition leads to angina and heart attack (see coronary heart disease).                                                                                                                                                  
|                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|Canadian GAAP              | Generally accepted accounting principles in Canada.                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|cardiovascular disease     | A disease of the heart or arteries supplying the heart or other organs.                                                                                                                                                                                                                                                                                                                                                                                                                                         
|                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|cGMP                       | Current Good Manufacturing Practices - manufacturing practices for drugs and/or foods as set out in the regulations of the United States, Canada and other countries.                                                                                                                                                                                                                                                                                                                                           
|                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|cholesterol                | A soft, waxy substance essential for normal body functions, including the production of steroid-based hormones and bile acids. Cholesterol can be made by the body in sufficient quantities and is present in all tissues, including the nervous system, muscle, skin, liver, intestines and heart.                                                                                                                                                                                                             
|                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|cholesterol-lowering agent | A therapeutic agent that is used to reduce the level of circulating cholesterol in the blood.                                                                                                                                                                                                                                                                                                                                                                                                                   
|                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|Chusei                     | Chusei (U.S.A.) Inc., a Texas corporation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|coronary heart disease     | A common heart ailment caused by narrowing of the coronary arteries that supply oxygen and nutrients directly to the heart muscle, almost exclusively caused by atherosclerosis (see atherosclerosis).                                                                                                                                                                                                                                                                                                          
|                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|Development Agreement      | In October 2006, Forbes acquired 100% of TheraPei Pharmaceuticals, Inc. (TheraPei) of San Diego, California (now Forbes Medi-Tech (Research) Inc.). As part of the acquisition of TheraPei, Forbes entered into a development agreement which provides for the continuing development of one lead compound from each of two principal platforms acquired through TheraPei. See Item 4 - Information on the Company - A. History and Development of the Company  Acquisitions - TheraPei Pharmaceuticals, Inc.
|                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|dietary supplements        | Products intended to supplement the diet which are ingested in dosage form and which may contain a nutraceutical.                                                                                                                                                                                                                                                                                                                                                                                               







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vi









|                            |                                                                                                                                                                                                                                                                                                      
|--------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|dyslipidemia                | A metabolic lipid disorder.                                                                                                                                                                                                                                                                          
|                            |                                                                                                                                                                                                                                                                                                      
|EU                          | European Union.                                                                                                                                                                                                                                                                                      
|                            |                                                                                                                                                                                                                                                                                                      
|FDA                         | Food and Drug Administration - the government agency which regulates the manufacture, use and sale of food, human diagnostics and therapeutic products in the United States.                                                                                                                         
|                            |                                                                                                                                                                                                                                                                                                      
|FM-TP Series of Compounds   | A group of our early stage synthetic entities acquired from TheraPei Pharmaceuticals, with therapeutic potential targeting various aspects of Metabolic Syndrome.  See Item 4  Information on the Company  B. Business Overview  Our Pharmaceuticals  The FM-TP Series of Compounds.             
|                            |                                                                                                                                                                                                                                                                                                      
|FM-VP4                      | Forbes novel cholesterol absorption inhibitor.                                                                                                                                                                                                                                                      
|                            |                                                                                                                                                                                                                                                                                                      
|FM VPx Library of Compounds | The FM VPx Library of Compounds represents a group of synthetic entities with therapeutic potential targeting the cardiovascular market.                                                                                                                                                             
|                            |                                                                                                                                                                                                                                                                                                      
|Fayrefield                  | Fayrefield Foods Limited, a UK company that we work with through our Forbes-Fayrefield joint venture.  We had previously signed a sales and licensing agreement with Fayrefield in November 2004 to supply ReducolTM for use in ReducolTM-based products.                                              
|                            |                                                                                                                                                                                                                                                                                                      
|Forbes                      | Forbes Medi-Tech Inc., the Company, as constituted on the date hereof.                                                                                                                                                                                                                               
|                            |                                                                                                                                                                                                                                                                                                      
|Forbes Manufacturing        | Forbes Research & Manufacturing Inc., a wholly-owned subsidiary of Forbes Operations.                                                                                                                                                                                                                
|                            |                                                                                                                                                                                                                                                                                                      
|Forbes–Fayrefield or FFL    | Forbes-Fayrefield Ltd.  We have a 51% interest in Forbes Fayrefield Ltd. for an initial investment of £10,200, and Fayrefield has the remaining 49% interest for an initial investment of £9,800.  The Board of Directors of FFL consists of an equal number of nominees of Forbes and of Fayrefield.
|                            |                                                                                                                                                                                                                                                                                                      
|Forbes Operations or FMTO   | Forbes Medi-Tech Operations Inc., a wholly-owned subsidiary of Forbes.                                                                                                                                                                                                                               
|                            |                                                                                                                                                                                                                                                                                                      
|Forbes Research             | Forbes Medi-Tech (Research) Inc., a wholly-owned subsidiary of Forbes USA.                                                                                                                                                                                                                           
|                            |                                                                                                                                                                                                                                                                                                      
|Forbes USA                  | Forbes Medi-Tech (USA) Inc., a wholly-owned subsidiary of Forbes Operations.                                                                                                                                                                                                                         
|                            |                                                                                                                                                                                                                                                                                                      
|Functional Foods            | Conventional foods containing ingredients that provide health benefits beyond basic nutritional functions and/or reduce the risk of chronic disease.                                                                                                                                                 
|                            |                                                                                                                                                                                                                                                                                                      
|GRAS                        | Generally Recognized as Safe  Refers to substances that are generally recognized as safe for consumption in the US and can be added to foods by manufacturers without establishing their safety by rigorous experimental studies.                                                                 







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vii









|                              |                                                                                                                                                                                                                                                                                                                                                                  
|----------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|HDL                           | High density lipoproteins - HDL contains proteins which are involved in the removal of cholesterol from the tissues. High levels of HDL cholesterol are associated with a decreased risk of coronary heart disease. HDL cholesterol is known as the good cholesterol.                                                                                          
|                              |                                                                                                                                                                                                                                                                                                                                                                  
|Health Canada                 | The government agency which regulates the manufacture, use and sale of human diagnostics and therapeutic products in Canada.                                                                                                                                                                                                                                     
|                              |                                                                                                                                                                                                                                                                                                                                                                  
|hyperlipidemia                | An excessive amount of lipids in the blood (i.e. elevated cholesterol, triglyceride or lipoprotein levels).                                                                                                                                                                                                                                                      
|                              |                                                                                                                                                                                                                                                                                                                                                                  
|Inflammatory Lung Disease     | Any disease affecting the lungs influenced by inflammation, including, but not limited to, asthma, Chronic Obstructive Pulmonary Disease (COPD) and Pulmonary Arterial Hypertension (PAH).                                                                                                                                                                       
|                              |                                                                                                                                                                                                                                                                                                                                                                  
|LDL                           | Low density lipoproteins - LDL carries the largest amount of cholesterol. High levels of LDL cholesterol are associated with an increased risk of coronary heart disease.                                                                                                                                                                                        
|                              |                                                                                                                                                                                                                                                                                                                                                                  
|LDL-C                         | Cholesterol carried as a component of low density lipoprotein particles. LDL-C is known as the bad cholesterol.                                                                                                                                                                                                                                                
|                              |                                                                                                                                                                                                                                                                                                                                                                  
|lipids                        | Dietary or blood fatty substances, including cholesterol and triglycerides that are present in cell membranes and body tissues.                                                                                                                                                                                                                                  
|                              |                                                                                                                                                                                                                                                                                                                                                                  
|lipoproteins                  | Protein and lipid coated packages that transport fat and cholesterol in the blood. Lipoproteins are classified according to their density. Major lipoproteins include HDL and LDL.                                                                                                                                                                             
|                              |                                                                                                                                                                                                                                                                                                                                                                  
|Metabolic Syndrome            | A combination of conditions that increase a persons risk for both cardiovascular disease and diabetes. Factors include obesity, dyslipidemia, high blood pressure, insulin resistance, thrombosis and inflammation. See Item 4 - Information on the Company - B. Business Overview  Metabolic Syndrome.                                                        
|                              |                                                                                                                                                                                                                                                                                                                                                                  
|Minimum Bid Price Requirement | NASDAQs requirement for a listed company to maintain a minimum closing bid price of U.S. $1.00 for continued listing on NASDAQ.                                                                                                                                                                                                                                 
|                              |                                                                                                                                                                                                                                                                                                                                                                  
|New Forbes                    | Forbes Medi-Tech Inc., incorporated pursuant to the British Columbia Business Corporations Act effective January 10, 2008 under the name 0813361 B.C. Ltd., and subsequently changed its name to Forbes Medi-Tech Inc. effective February 27, 2008.  See Item 4   Information on the Company  A. History and Development of the Company  Forbes Medi-Tech Inc.
|                              |                                                                                                                                                                                                                                                                                                                                                                  
|New Plan                      | Rolling stock option plan initially approved by the Board of Directors of the Company on April 12, 2007 and approved by the shareholders on May 17, 2007.  See Item 6  Directors, Senior Management and Employees  E. Share Ownership  Stock Option Plan and Total Outstanding Stock Options.                                                                 
|                              |                                                                                                                                                                                                                                                                                                                                                                  
|Non Dilutive Financing        | The proposed Non Dilutive Financing described under Item 4 - Information on the Company - A. History and Development of the Company - Forbes Medi-Tech Inc.                                                                                                                                                                                                      







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viii









|                                       |                                                                                                                                                                                                                                                                     
|-------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|non-GMO                                | Non-Genetically Modified Organism.                                                                                                                                                                                                                                  
|                                       |                                                                                                                                                                                                                                                                     
|nutraceutical                          | Nutraceuticals can be generally described as ingredients extracted from natural sources which are incorporated into food or into capsules or other medicinal formats, and which have been demonstrated to have a physiological benefit and may help prevent disease.
|                                       |                                                                                                                                                                                                                                                                     
|Old Forbes                             | Forbes Medi-Tech Operations Inc., a wholly-owned subsidiary of Forbes.  See Item 4  Information on the Company  A. History and Development of the Company  Forbes Medi-Tech Inc.                                                                                 
|                                       |                                                                                                                                                                                                                                                                     
|Old Plan                               | Amended and restated 2000 Stock Option Plan.  See Item 6  Directors, Senior Management and Employees  E. Share Ownership  Stock Option Plan and Total Outstanding Stock Options.                                                                                 
|                                       |                                                                                                                                                                                                                                                                     
|peripheral vascular disease            | Narrowing of the arteries supplying the heart, brain or legs usually caused by atherosclerosis leading to impairment of blood supply.                                                                                                                               
|                                       |                                                                                                                                                                                                                                                                     
|Pharmavite                             | Pharmavite LLC of California.                                                                                                                                                                                                                                       
|                                       |                                                                                                                                                                                                                                                                     
|Phase I or phase I clinical trials     | Clinical trials used to assess the potential toxicity of a new drug, primarily involving healthy volunteers.                                                                                                                                                        
|                                       |                                                                                                                                                                                                                                                                     
|phase II clinical trials               | Clinical trials used to assess the effectiveness and most effective dosage of a new drug.                                                                                                                                                                           
|                                       |                                                                                                                                                                                                                                                                     
|Phase III or phase III clinical trials | Late stage clinical trials used to assess a drug for efficacy and safety at several independent sites in a large number of patients.                                                                                                                                
|                                       |                                                                                                                                                                                                                                                                     
|Phyto-Source, or Phyto-Source LP       | Phyto-Source LP, a Texas limited partnership. See Item 4 Information on the Company  A. History and Development of the Company  Dispositions  Phyto-Source LP.                                                                                                   
|                                       |                                                                                                                                                                                                                                                                     
|phytosterols                           | A class of natural products bearing a common tetracyclic carbon structure. Found in plants, where they serve functions as constituents of cell membranes (e.g. sitosterol, sitostanol, campesterol, campestanol and stigmasterol).                                  
|                                       |                                                                                                                                                                                                                                                                     
|Post-Arrangement Basis                 | This term refers to our common shares after giving effect to the one for eight reverse stock split pursuant to the Plan of Arrangement.   See Item 4 - Information on the Company - A. History and Development of the Company - Forbes Medi-Tech Inc.               
|                                       |                                                                                                                                                                                                                                                                     
|Pre-Arrangement Basis                  | This term refers to our common shares before giving effect to the one for eight reverse stock split pursuant to the Plan of Arrangement.  See Item 4 - Information on the Company - A. History and Development of the Company - Forbes Medi-Tech Inc.               
|                                       |                                                                                                                                                                                                                                                                     
|ReducolTM                               | A unique blend of phytosterols and phytostanols, sold as a food and dietary supplement ingredient.   See Item 4 – Information on the Company – B. Business Overview – ReducolTM.                                                                                     







---

ix









|                    |                                                                                                                                                                                                                                                                                        
|------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Rights Plan         | Shareholder rights plan adopted by the Board of Directors of the Company on February 9, 1998 and amended and restated by the Board of Directors on April 28, 2003.                                                                                                                     
|                    |                                                                                                                                                                                                                                                                                        
|SPT                 | Serine palmitoyltransferase, an enzyme which facilitates de novo ceramide synthesis, and hence pancreatic beta cell loss leading to diabetes.                                                                                                                                          
|                    |                                                                                                                                                                                                                                                                                        
|Staff Determination | NASDAQ Staff Determination.  See Item 3   Key Information   D. Risk Factors   Stock Exchange Minimum Listing Requirements.                                                                                                                                                          
|                    |                                                                                                                                                                                                                                                                                        
|stanols             | Hydrogenated sterols.                                                                                                                                                                                                                                                                  
|                    |                                                                                                                                                                                                                                                                                        
|sterols             | An abbreviated name for phytosterols.                                                                                                                                                                                                                                                
|                    |                                                                                                                                                                                                                                                                                        
|tall oil            | A substance formed by the acidification of tall oil soap, generally with sulphuric acid. It serves as a source of resins, fatty acids and fatty alcohols, as well as terpenes, used in the commercial manufacture of soaps, lubricants and paper sizings.                              
|                    |                                                                                                                                                                                                                                                                                        
|Tall Oil License    | A license of certain laboratory level phytosterol extraction technology developed at UBC.  See Item 4  Information on the Company  B. Business Overview  Technology Licenses Granted to the Company.                                                                                
|                    |                                                                                                                                                                                                                                                                                        
|tall oil pitch      | Pitch is the viscous, black tarry residue remaining after the volatile components of crude tall oil have been removed by distillation. It contains the non-volatile phytosterols and other higher molecular weight components that do not distill due to their very high boiling point.
|                    |                                                                                                                                                                                                                                                                                        
|tall oil soap       | The upper layer formed in the vat during the caustic soda treatment of wood chips in the pulping process. This layer contains the water insoluble natural substances present in the wood. These substances are a mixture of phytosterols, fatty acids and fatty alcohols and terpenes. 
|                    |                                                                                                                                                                                                                                                                                        
|TheraPei            | TheraPei Pharmaceuticals, Inc., of San Diego, California, acquired by Forbes in October 2006 and renamed Forbes Medi-Tech (Research), Inc.  See Item 4  Information on the Company  A. History and Development of the Company  Acquisitions  TheraPei Pharmaceuticals, Inc.        
|                    |                                                                                                                                                                                                                                                                                        
|therapeutic         | For treating a disease.                                                                                                                                                                                                                                                                
|                    |                                                                                                                                                                                                                                                                                        
|toxicity            | The quality of being poisonous.                                                                                                                                                                                                                                                        
|                    |                                                                                                                                                                                                                                                                                        
|toxicology          | The study of toxicity.                                                                                                                                                                                                                                                                 
|                    |                                                                                                                                                                                                                                                                                        
|triglycerides       | A dietary fat transported in blood as fatty acid esters of the alcohol glycerol.  Triglycerides are carried through the blood stream to the tissues where released fatty acids serve as a source of energy. Dietary fat is the primary source of triglycerides.                        







---

x









|               |                                                                                                                                                                                                                                                 
|-------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|UBC            | University of British Columbia located in Vancouver, British Columbia, Canada.                                                                                                                                                                  
|               |                                                                                                                                                                                                                                                 
|up-scaling     | Taking a small scale laboratory-scale biological or chemical process and increasing its physical scale.                                                                                                                                         
|               |                                                                                                                                                                                                                                                 
|US             | United States of America.                                                                                                                                                                                                                       
|               |                                                                                                                                                                                                                                                 
|Vendors        | TheraPei selling shareholders.  See Item 4  Information on the Company  A. History and Development of the Company  Acquisitions  TheraPei Pharmaceuticals, Inc.                                                                             
|               |                                                                                                                                                                                                                                                 
|VPAC2 agonist  | A compound that activates VPAC2 receptors. For the purposes of this document, the term VPAC2 Analog is used interchangeably with VPAC2 agonist.                                                                                                 
|               |                                                                                                                                                                                                                                                 
|VPAC2 receptor | A receptor type found on pancreatic beta cells, smooth muscle cells of the lung, and some inflammatory cells, stimulation of which causes insulin release, smooth muscle relaxation, and modulation of inflammatory cell function, respectively.
|               |                                                                                                                                                                                                                                                 







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1







PART I



ITEM 1

Identity of Directors, Senior Management and Advisers



Disclosure under this item is not required as this Form 20-F is filed as an annual report.



ITEM 2

Offer Statistics and Expected Timetable



Disclosure under this item is not required as this Form 20-F is filed as an annual report.



ITEM 3

Key Information



A.

Selected Financial Data



The following table sets forth selected financial data regarding our consolidated operating results and financial position.  The data has been derived from our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in Canada (Canadian GAAP).  For reconciliation to accounting principles generally accepted in the United States see Note 20 to the consolidated financial statements for the year ended December 31, 2007, and the years ended December 31, 2006, 2005, 2004 and 2003.  The following selected financial data should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report.  The selected financial data is expressed in Canadian dollars.



|                                                                         |             |             |             |              |            
|------------------------------------------------------------------------ | ----------- | ----------- | ----------- | ------------ | -----------
|Canadian GAAP unless otherwise noted                                     | Year ended  | Year ended  | Year ended  | Year ended   | Year ended 
|(Expressed in '000's , except per share information)                     | 31-Dec-07   | 31-Dec-06   | 31-Dec-05   | 31-Dec-04    | 31-Dec-03  
|                                                                         |             |             |             |              |            
|Revenues                                                                 | $     9,361 | $     7,242 | $     4,481 | $      2,994 | $     3,744
|Loss from continuing operations                                          | (11,415)    | (17,673)    | (16,464)    | (12,240)     | (6,780)    
|Gain on sale of AD/ADD technology                                        |            |            |            |              | 2,247      
|Impairment charge for Goodwill, intellectual property and Capital assets | (759)       |            |            |             |           
|Current income tax recovery (expense)                                    | 491         | (158)       |            |             |           
|Net loss from continuing operations                                      | $  (11,683) | $  (17,831) | $  (16,464) | $  (12,240)  | $   (4,533)
|                                                                         |             |             |             |              |            
|Income from discontinued operations, net of tax expense                  |            | 29          | 3,658       | 4,226        | 2,383      
|Gain from disposal of discontinued operations, net of taxes              |            | 6,958       |            |             |           
|                                                                         |             |             |             |              |            
|Net loss and comprehensive loss for year                                 | $  (11,683) | $  (10,844) | $  (12,806) | $  (8,014)   | $   (2,150)
|                                                                         |             |             |             |              |            







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|                                                                            |             |             |             |             |            
|--------------------------------------------------------------------------- | ----------- | ----------- | ----------- | ----------- | -----------
|Net Loss and comprehensive loss in accordance with US GAAP                  | $  (11,683) | $  (10,881) | $  (11,062) | $  (6,061)  | $  (1,060) 
|                                                                            |             |             |             |             |            
|Weighted average number of shares used to calculate (loss) income per share | 38,407      | 37,400      | 34,058      | 31,945      | 24,450     
|Loss per share from continuing operations                                   |             |             |             | $           |            
|Basic and diluted                                                           | $    (0.30) | $    (0.48) | $    (0.48) | $    (0.38) | $    (0.19)
|Income (loss) per share from discontinued operations                        |             |             |             |             |            
|Basic and diluted                                                           |            | $      0.00 | $      0.10 | $      0.13 | $      0.10
|Gain per share from disposal of discontinued operations                     |             |             |             |             |            
|Basic and diluted                                                           |            | $      0.19 |            |            |           
|Net loss per share                                                          |             |             |             |             |            
|Basic and diluted                                                           | $    (0.30) | $   (0.29)  | $    (0.38) | $    (0.25) | $    (0.09)
|                                                                            |             |             |             |             |            
|Basic and diluted loss per share in accordance with US GAAP                 | $    (0.30) | $   (0.29)  | $   (0.32)  | $   (0.19)  | $   (0.04) 
|                                                                            |             |             |             |             |            
|                                                                            |             |             |             |             |            
|Total assets                                                                |             |             |             |             |            
|                                                                            |             |             |             |             |            
|Canadian GAAP                                                               | $  12,951   | $  25,387   | $  35,975   | $  38,589   | $  28,434  
|US GAAP                                                                     | 12,951      | 25,387      | 36,485      | 38,589      | 28,434     
|                                                                            |             |             |             |             |            
|Total Liabilities                                                           |             |             |             |             |            
|Canadian GAAP                                                               | $    3,319  | $   5,037   | $   7,552   | $   6,132   | $   5,233  
|US GAAP                                                                     | 3,319       | 5,037       | 7,552       | 6,132       | 5,233      
|                                                                            |             |             |             |             |            
|Liability component of preferred shares                                     |             |             |             |             |            
|Canadian GAAP                                                               |            |            | $   2,341   |            |           
|US GAAP                                                                     |            |            | 2,268       |            |           
|                                                                            |             |             |             |             |            
|Shareholders Equity- Canadian GAAP                                          |             |             |             |             |            
|Common shares                                                               | $  101,027  | $  100,994  | $  94,790   | $  94,223   | $  79,557  
|Contributed surplus                                                         | 9,875       | 8,943       | 7,554       | 4,171       | 1,567      
|Equity component of preferred shares                                        |            |            | 2,481       |            |           
|Deficit                                                                     | (101,270)   | (89,587)    | (78,743)    | (65,937)    | (57,923)   
|                                                                            |             |             |             |             |            
|Shareholders Equity- US GAAP                                                |             |             |             |             |            
|Common shares                                                               | 100,064     | $  100,031  | $  93,827   | $  93,512   | $  79,251  
|Contributed surplus                                                         | 7,485       | 6,553       | 5,710       | 3,236       | 2,180      
|Equity component of preferred shares                                        |            |            | 2,481       |            |           
|Deficit                                                                     | (97,917)    | (86,234)    | (75,353)    | (64,291)    | (58,230)   
|                                                                            |             |             |             |             |            









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Currency Exchange Rates



Our accounts are maintained in Canadian dollars. In this Report all currency references are expressed in Canadian dollars ($) unless otherwise indicated.  The following tables set forth, for the periods and dates indicated, certain information concerning the exchange rates for the conversion of Canadian dollars into United States dollars, based on the noon buying rate in New York City as certified for customs purposes by the Federal Reserve Bank of New York.  The noon buying rate on March 28, 2008 as reported by the United States Federal Reserve Bank of New York for the purchase of one United States dollar with Canadian Dollars was Cdn$0.9823 (US$1.00 = Cdn$1.0180).



US Dollars per Canadian Dollar

|                              |        |        |        |        |       
|----------------------------- | ------ | ------ | ------ | ------ | ------
|Fiscal Year Ended December 31
|                              | 2007   | 2006   | 2005   | 2004   | 2003  
|Average for period            | 0.9309 | 0.8818 | 0.8254 | 0.7682 | 0.7139
|End of period                 | 1.0120 | 0.8582 | 0.8579 | 0.8310 | 0.7738



US Dollars per Canadian Dollar

|                   |               |              |               |               |              |               
|------------------ | ------------- | ------------ | ------------- | ------------- | ------------ | --------------
|                   | February
2008 | January
2008 | December
2007 | November
2007 | October
2007 | September
2007
|Low for the Month  | 0.9815        | 0.9714       | 0.9789        | 0.9993        | 0.9998       | 0.9482        
|High for the Month | 1.0291        | 1.0010       | 1.0221        | 1.0908        | 1.0531       | 1.0041        



B.

Capitalization and indebtedness



Disclosure under this item is not required as this Form 20-F is filed as an annual report.



C.

Reasons for the Offer and Use of Proceeds



Disclosure under this item is not required as this Form 20-F is filed as an annual report.



D.

Risk Factors



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



The following summarizes the major risks and uncertainties we face:



We have a History of Losses   We have a history of losses, including a net loss from continuing operations of $11.7 million, for the financial year ended 2007. For the fiscal year ended December 31, 2006, we reported a net loss from continuing operations of $17.8 million and a net loss, after accounting for gains and income from discontinued operations, of $10.8 million, and for the financial year ended 2005, we had a net loss from continuing operations of $16.5 million and a net loss of $12.8 million, after accounting for income from discontinued operations.  We anticipate that we will continue to incur significant losses during fiscal 2008 and that we will not reach profitability until further successful and profitable commercialization of one or more of our products.  Even then, the initial losses incurred by us may never be recovered.  There can be no assurance that any of our recently launched products or products currently under development will be commercially successful.







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Need for Additional Funds  As at December 31, 2007, we had a cumulative deficit of $101.3 million.  We anticipate that we will be expending substantial funds in 2008 and beyond to fund research and development activities related to our products, to meet our financial obligations, and on general and administrative expenditures.  See Item 5 - Operating and Financial Review and Prospects.



Our future operations are dependent on our ability to obtain third party financing in the form of debt and/or equity and ultimately to generate future profitable operations.  We are 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 current market for financing is challenging and there can be no assurance that such additional funds will be available on acceptable terms or at all.  We presently have 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 our cash flow and operations and our ability to continue our operations.  Any additional equity financing, if secured, may result in significant dilution to the existing shareholders at the time of such additional financing.



Our financial statements are prepared on a going concern basis, which assumes that we will continue in operation throughout 2008 and into the foreseeable future and will be able to realize our assets and discharge our liabilities and commitments in the ordinary course of business.  Our financial statements do not include any adjustments related to the recovery of assets and classification of assets and liabilities that might be necessary should we be unable to continue as a going concern. The Report Of Independent Registered Public Accounting Firm attached contains a going concern qualification.



Dependence Upon a Few Customers and Products  During the year ended December 31, 2007, we had phytosterol revenues of $8.9 million, including $ 8.8 million in sales and $0.1 million in licensing revenues.  Most of our revenue was earned from sales of phytosterols to a few customers.  We anticipate that we will be dependent on a few customers for most of our revenues for the fiscal year ending December 31, 2008.  Any material change in the relationship with such customers or in the demand for our phytosterol products will have a material effect on our business and results of operations. Our contract for the sale of ReducolTM to Pharmavite will end in June, 2008, and is subject to automatic one-year renewals unless either party provides 90 days’ prior written notice of its intention not to renew.  Failure to renew or otherwise extend this contract will have a material adverse effect on our product sales and revenue.



Additional Research and Development is Required Before We Can Commercialize Additional Products or Market Existing Products into Other Countries  To achieve sustained, profitable operations, we must successfully develop, obtain regulatory approvals for, and profitably manufacture and market one or more of our products.  Our products require extensive levels of research and development.  We have spent approximately $3.5 million, $9.6 million, and $11 million on research and development efforts during the fiscal years ended December 31, 2007, 2006, and 2005, respectively.



Since our inception, we have been engaged primarily in research and development.  In the last year our revenues have increased and we believe that our phytosterols may be incorporated into a wide variety of food, beverages, dietary supplements and medicines.  However, clinical studies proving the efficacy of our phytosterols in a wide variety of foods and beverages, in dietary supplements or as pharmaceutical products have not yet been completed, and stable and effective formulations have not yet been adequately tested or developed on a commercial scale.  In addition, further research may be required by regulatory authorities in certain countries prior to permitting phytosterol products to be sold in those countries, whether in food or beverages or as dietary supplements, and further extensive research will be required prior to any sale of a pharmaceutical product.    Accordingly, we may be required to conduct additional developmental activities on these products, and certain of our proposed products will require substantial additional research and development, including extensive pre-clinical and clinical testing, before we will be able to obtain the approvals of the FDA, Health Canada, and similar regulatory authorities in other countries.







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Development of New ProductsThe development of new products is subject to a number of significant risks and uncertainties. Potential products that appear to be promising in various stages of development, including many of the products currently being developed by us, may not reach the market for a number of reasons. Such reasons include the possibilities that the potential product will be found ineffective or unduly toxic during preclinical or clinical trials, failure to receive necessary regulatory approvals, be difficult or uneconomic to manufacture on a large scale, be uneconomical to market, not achieve market acceptance, or be precluded from commercialization by proprietary rights of third parties.



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



Risks Inherent in Nutraceutical and Pharmaceutical ResearchPharmaceutical and nutraceutical research and development is highly speculative and involves a significant degree of risk.  The marketability of any product developed by us will be affected by numerous factors beyond our control, including:



-

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

-

preliminary results as seen in animal and/or limited human testing may not be substantiated in larger controlled clinical trials;

-

manufacturing costs or other factors may make manufacturing of products impractical and non-competitive;

-

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

-

requisite regulatory approvals for the commercial distribution of products may not be obtained; and

-

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



Risks Related to Clinical TrialsWe must demonstrate through preclinical studies and clinical trials that our product is safe and efficacious before we can obtain regulatory approval for the commercial sale of such products for certain commercial applications.  The results from preclinical studies and clinical trials may not be totally predictive of results obtained in larger clinical trials, and there can be no assurance that any of our clinical trials or any of our collaborators will demonstrate safety and efficacy, achieve regulatory approvals or result in marketable products. A number of companies in the biotechnology and pharmaceutical industry have suffered significant setbacks in advanced clinical trials, even after achieving promising results in earlier trials. Failure to complete clinical trials successfully and on a timely basis could have an adverse effect on our future business.



Results of the US Phase II clinical trial for our innovative compound, FM-VP4, were released in late 2006.  They illustrated that while the compound was proven to have an excellent safety profile, reduced LDL cholesterol by 9% at the 900 mg level and demonstrated a dose response, it did not perform to our expectation.  We experienced a material adverse effect on our market capital and share price as a result, and various measures were taken, and continue to be taken, to decrease costs, including a corporate re-structuring.







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Risks Related to Strategic RelationshipsPart of our strategy is to enter into arrangements with third parties from time to time related to the development, clinical testing, up-scaling, manufacturing, marketing and commercialization of our products. Such relationships may enable us to market our products to new markets, generate additional revenue and develop and commercialize new products.  Entering into strategic relationships is complicated and the interests of our strategic partners may not be or remain consistent with our interests.  Some of our current and future strategic partners may decide to compete with us, refuse to fulfill or honor their contractual obligations to us, or change their strategic plans to reduce their commitment to, or even abandon, their relationships with us.  To the extent we enter into product out-licensing arrangements for the marketing or distribution of our products with collaborative partners, any revenues we receive will depend upon the efforts of third parties. There can be no assurance that any third party will market our products successfully or that any third-party collaboration will be on favorable terms. We may not be able to control the amount and timing of resources our strategic partners devote to our products.  The agreements may be terminated or altered by our strategic partners in certain circumstances.  If any marketing partner does not market a product successfully, our business might be materially and adversely affected.



One of the relationships we are currently seeking is an out-licensing opportunity for FM-VP4 based on our clinically significant results, dose responsiveness, and excellent safety profile.  There is no guarantee that such a relationship will be achieved, or that significant revenue will be generated should such a relationship be achieved.



We are also currently dependent for the majority of our ReducolTM sterol supply on performance by Phyto-Source.  Any disruption to this important strategic relationship may materially and adversely affect us.



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



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









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



Risks Associated with Our PatentsOur success will depend, in part, on our ability to obtain, enforce and maintain patent protection for our technology in Canada, the United States and other countries. (See Item 4  Information on the Company  B. Business Overview  Intellectual Property and Item 8 - Financial Information - A. Consolidated Statements and Other Financial Information - Legal Matters)  We cannot be assured that patents will issue from any pending applications or that claims now or in the future, if any, allowed under issued patents will be sufficiently broad to protect our technology.  In addition, no assurance can be given that any patents issued to or licensed by us will not be challenged, invalidated, infringed or circumvented, or that the rights granted thereunder will provide continuing competitive advantages to us.



The patent positions of pharmaceutical and biotechnology firms, including us, are generally uncertain and involve complex legal and factual questions. In addition, it is not known whether any of our current research endeavors will result in the issuance of patents in Canada, the United States, or elsewhere, or if any patents already issued will provide significant proprietary protection or will be circumvented or invalidated. Moreover, we cannot be certain that we or any licensor was the first to create inventions claimed by pending patent applications or that we were the first to file patent applications for such inventions. Loss of patent protection could lead to generic competition for these products, and others in the future, which would materially and adversely affect the financial prospects for these products and us.



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



Risks Associated with Claims of Infringement of Proprietary Rights of OthersThe functional food and pharmaceutical industries have experienced substantial litigation involving the manufacture, use and sale of new products that are the subject of conflicting proprietary rights.  As a result, there is a substantial risk that we, or one or more of our licensors, may become subject to litigation alleging that our or such licensors products and technologies infringe on the proprietary rights of third parties.  Whether or not our or such licensors products or technologies infringe on the proprietary rights of third parties, we or such licensors could incur significant expenses in defending allegations of infringement of proprietary rights. Further, we or such licensors may be required to modify their products or obtain licenses for intellectual property rights as a result of any alleged proprietary infringement.  We or such licensors may not be able to modify their products or obtain licenses on commercially reasonable terms, in a timely manner, or at all, any of which could adversely affect our business.



Third Party Payors/Government Controls Any revenues we may receive from future sales of pharmaceutical products will depend in part on reimbursement policies and regulations of government health administration authorities, private health insurers and other organizations.  The business and financial condition of pharmaceutical companies will continue to be affected by the efforts of governments and third-party payors to contain or reduce the costs of health care through various means. For example, in certain markets, including Canada, pricing or profitability of prescription pharmaceuticals is subject to government control.  In the United States there have been, and we expect that there will continue to be, a number of federal and state proposals to implement similar government controls.  In addition, an increasing emphasis on managed health care in the United States has increased and will continue to increase the pressure on pharmaceutical pricing. While we cannot predict whether such legislative or regulatory proposals will be adopted or the effects of such proposals or managed care efforts may have on our business, the announcement and/or adoption of such proposals or efforts could have a material adverse effect on our business and financial condition and that of our prospective corporate partners. Accordingly, our ability to establish strategic alliances may be adversely affected. In addition, in Canada, the United States and elsewhere, sales of prescription pharmaceutical products are dependent, in part, on the availability of reimbursement to the consumer from third-party payors, such as government and private insurance plans. Third-party payors are increasingly challenging the prices charged for medical products and services. To the extent we succeed in bringing new products to market, there can be no assurance that these products will be considered cost-effective, or that reimbursement to consumers will be available or will be sufficient to allow the sale of these products on a competitive basis. We may not be able to obtain prices for our products under development that will make them commercially viable.







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



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



CompetitionThe markets for products based on our technology are intensely competitive and, as a result, we face competition from several different sources, including nutraceutical companies, food companies, pharmaceutical companies, biotechnology companies, universities and other related institutions.



In the pharmaceutical market, we compete with Bayer, Merck & Co., Pfizer, Bristol-Myers Squibb Company, Lilly, Novo Nordisk, AstraZeneca AB and others.  In the functional foods market, our products will compete with the products of, among others, Johnson & Johnson, Unilever, Cargill Incorporated, Archer Daniels Midland Company, Cognis and Raisio Staest Oy. These companies are more established, benefit from greater name recognition and have substantially greater financial, technical and marketing resources than us.  In addition, many of our competitors have significantly greater experience in undertaking research, preclinical studies and human clinical studies and trials of new pharmaceutical and nutraceutical products, obtaining regulatory approvals and manufacturing and marketing such products. In addition, there are several other companies and products with which we may compete from time to time, and which may have significantly better and larger resources than us.  Accordingly, our competitors may succeed in commercializing products more rapidly or effectively, which could have a material adverse effect on our business, financial condition or results of operations.



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









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



The degree of market acceptance for our products will depend upon a number of factors, including competitive pricing, the extent to which the products fulfill customers expectations and demands, the receipt of regulatory approvals, the establishment and demonstration in the medical community of the clinical efficacy and safety of the products, the establishment and demonstration of the potential advantages over competing products and, in the case of pharmaceuticals, the establishment and demonstration of the potential advantages over existing and new treatment methods and the reimbursement policies of government and third-party payors, and in the case of our nutraceuticals, the acceptance of the listing of the product and appropriate distribution with large retailers. There can be no assurance that consumers, physicians, patients, payors or the medical community in general will accept and utilize any existing or new products that may be developed by us.



Need for GrowthWe intend to grow our business over the next few years. There is no assurance that our employees, systems, procedures, controls, and existing space will be adequate to support expansion of our operations.  Our future operating results will depend on the ability of our officers, key employees and manufacturing partners to manage changing business conditions and to implement and improve technical, administrative, financial control, reporting systems and operational excellence in order to achieve established business objectives.  We may not be able to expand and upgrade our facilities and supporting systems and infrastructure to accommodate increased business. Difficulties in managing any future growth could have a significant negative impact on our business because we may incur unexpected expenses and be unable to meet customers requirements.



Future Revenues and Profitability are UncertainOur financial results may fluctuate, and our future revenue and profitability are uncertain.  Our ability to achieve and maintain profitability in the foreseeable future depends on the commercial success of our products. Because we are and will be in the process of launching new products in new markets, revenues are difficult to predict and may fluctuate substantially from period to period. In addition, product development programs will require substantial additional investment, including the cost of pre-clinical and clinical trials, obtaining additional regulatory approvals, if necessary, and marketing and sales expenses associated with potential new product introductions.  The research, development, production and marketing of new products will require the application of considerable technical and financial resources by us and our collaborators, while revenues that are generated by such products, if successfully developed and marketed, may not be realized for several years. We may not be able to achieve or sustain profitability.



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



Dependence upon Key PersonnelOur ability to develop marketable products and to maintain a competitive position in light of technological developments will also depend, in large part, upon our ability to attract and retain highly qualified scientific and management personnel.  Competition for such personnel is intense.  If we lose the services of key personnel, we may be unable to replace them, and our business could be negatively affected.



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







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



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



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



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



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



Health Canada has classified all phytosterol products, which would include sterol esters, stanol esters and free sterols, as drugs.  As such, we are prohibited from marketing our phytosterols in Canada until regulatory approval from Health Canada is obtained.  Additionally, the division which oversees food products has currently taken the position that no nutrients naturally present in foods can be enhanced in concentration to form functional foods.



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



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









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Government Regulation of PharmaceuticalsThe regulatory process for pharmaceuticals, which includes preclinical studies and clinical trials of each compound to establish its safety and efficacy, takes many years and requires the expenditure of substantial resources. Moreover, if regulatory approval of a drug is granted, such approval may entail limitations on the indicated uses for which it may be marketed. Failure to comply with applicable regulatory requirements can, among other things, result in suspension of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution. Further, government policy may change, and additional government regulations may be established that could prevent or delay regulatory approvals for our products. In addition, a marketed drug and its manufacturer are subject to continual review. Later discovery of previously unknown problems with the product or manufacturer may result in restrictions on such product or manufacturer, including withdrawal of the product from the market.



The FDA in the United States and Health Canada in Canada may deny approval of a NDA or NDS if required regulatory criteria are not satisfied, or may require additional testing.  Product approvals may be withdrawn if compliance with regulatory standards is not maintained or if problems occur after the product reaches the market.  The FDA and Health Canada may require further testing and surveillance programs to monitor the pharmaceutical product that has been commercialized.  Non-compliance with applicable requirements can result in fines and other judicially imposed sanctions, including product withdrawals, product seizures, injunction actions and criminal prosecutions.



Health Canada, the FDA and other governmental regulators have increased requirements for drug purity and have increased environmental burdens upon the pharmaceutical industry. Because pharmaceutical drug manufacturing is a highly regulated industry, requiring significant documentation and validation of manufacturing processes and quality control assurance prior to approval of the facility to manufacture a specific drug, there can be considerable transition time between the initiation of a contract to manufacture a product and the actual initiation of manufacture of that product. Any lag time in the initiation of a contract to manufacture product and the actual initiation of manufacture could cause us to lose profits or incur liabilities.



The pharmaceutical regulatory regime in Europe and other countries is, by and large, generally similar to that of Canada and the United States.  We could face similar risks in these other jurisdictions, as the risks described above.



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



Product Liability, Negative Publicity and InsuranceThe sale of our phytosterol products, the use of any of our unapproved products under development, the use of our products in clinical trials, including FM-VP4 and, if regulatory approval is received, the sale of such products, may expose us to liability claims which could adversely affect us.  Such claims might be made directly by consumers, healthcare providers or by pharmaceutical companies or others selling or consuming such products.  We currently have general liability and office contents insurance.  This insurance may not cover any potential claim or if coverage is available, may not provide sufficient coverage to protect us against loss.  We may not be able to maintain or obtain commercially reasonable product liability insurance for future products, and any claims under any insurance policies may adversely affect our ability to maintain existing policies or to obtain new insurance on existing or future products. Further, even if sufficient insurance coverage is available to cover any potential claim, publicity associated with any such claim could adversely affect public opinion regarding the safety or efficacy of our products. As a result, any product liability claim or recall could seriously adversely affect our business.







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



Manufacturing RisksWe rely substantially for our success on our ability to either manufacture or secure third party manufacture of our products. In the case of phytosterols, we currently rely on Phyto-Source for commercial manufacturing.  The Phyto-Source manufacturing facility is operated by Chusei.



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



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



Factors beyond our control could cause interruption in operations at the Phyto-Source manufacturing facilities, or at other contract manufacturing facilities, which could adversely affect our ability to supply our customers and in turn could adversely affect our reputation in the marketplace and our business.  These facilities could suffer an interruption caused by damage from a variety of sources, many of which are not within our control or our contract manufacturers, including, fire, flood and other natural disasters, power loss and telecommunication failure, software and hardware errors, failures or crashes and similar disruptions. Any significant interruptions in operations could interrupt our ability to supply our customers, which in turn could subject us to lawsuits, damage our reputation in the marketplace and have a negative impact on our business.



Risk of Side EffectsCurrently, there are no regulations in the United States, or in many other countries in which we currently intend to market our phytosterol products, used as functional foods and dietary supplements, which limit the total amount of such products a person may consume in any particular period.  In addition, the amounts of phytosterols which have been studied in clinical trials to date have been limited.  As a consequence, there is a risk that an individual could consume, through functional foods and dietary supplements, large quantities of phytosterols, and as a result, experience side effects yet to be determined.  We could face future liability for unknown side effects and any such liability could exceed our resources.



Political and Economic RisksWe rely in part on third parties located in the United States and other foreign countries for the development and manufacture of our products.  The current political and economic climate in these countries may be considered less predictable than in Canada and the United States.  Changes in government, economic and political policies may adversely affect our business and operating results.









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Environmental RisksResearch, development and commercial processes involve use of materials which may result in by-products that may be hazardous.  The Company, our strategic partners, distributors, manufacturers, sales agents and others involved in handling materials are subject to laws and regulations governing the use, manufacture, storage, handling and disposal of such materials and certain waste products. There is a risk of accidental contamination or injury from these materials which cannot be eliminated. We could be liable for any resulting damages and any such liability could exceed our resources. We may also be required to obtain permits to transport and dispose of hazardous waste under applicable environmental laws. We may not be able to obtain such permits, which would adversely affect our ability to efficiently manufacture or transport our products. We, our strategic partners, distributors, sales agents, manufacturers and others involved in handling materials may be required to incur significant costs to comply with environmental laws and regulations in the future or to remediate environmental violations.  We may be adversely affected by current or future environmental laws or regulations.  Any failure by us to comply with the present or future environmental laws in Canada and the United States, or elsewhere, could result in any of the following: (i) cessation of portions or all of our operations; (ii) imposition of fines; (iii) restrictions on our ability to carry on or expand operations; (iv) significant expenditures by us in order to comply with environmental laws and regulations; or (v) liabilities in excess of our resources. Any of these sanctions could have a material adverse effect on our business.  In addition, there is no assurance that we will be able to dispose of our waste products in a cost effective or timely manner, or at all.



Volatility of Stock Price/Liquidity of SharesThe market prices for the securities of pharmaceutical and biotechnology companies, including ours, have historically been highly volatile, and the market has, from time to time, experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. Factors such as fluctuations in our operating results, announcements of competing technological innovations or new therapeutic products by our competitors, clinical trial results, governmental regulation, developments in patent or other proprietary rights, public concern as to the safety of drugs developed by us or others and general market conditions, delay in achieving or failure to achieve previously announced milestones or Company goals, can have an adverse effect on the market price of our shares. In particular, the realization of any of the risks described herein could have a material adverse impact on such market price. Sales of substantial amounts of our shares in the public market, or the perception that such sales will occur, could also adversely affect the market price of our shares and make it more difficult in the future for us to raise funds through equity offerings.  As a result of the volatility of our stock price, there is no assurance that we will continue to meet the minimum listing requirements on The NASDAQ Capital Market, The Toronto Stock Exchange, or any other securities market on which our shares may be listed from time to time.  De-listing of us or our shares from any securities exchange could have a negative effect on the liquidity of our shares and/or the ability of a shareholder to trade in shares of the Company.



Our common share price has been, and is likely to continue to be, volatile.



Stock Exchange Minimum Listing Requirements  Our Common Shares are currently listed on the Toronto Stock Exchange and The NASDAQ Capital Market.  On January 22, 2008 we received a NASDAQ Staff Determination, (the Staff Determination) indicating that we failed to comply with the U.S. $1.00 Minimum Bid Price Requirement for continued listing set forth in Marketplace Rule 4310(c)(4), and that our securities were, therefore, subject to delisting from The NASDAQ Capital Market. We requested and had a hearing before a NASDAQ Listing Qualifications Panel to review the Staff Determination, in which we presented a plan for compliance.  The Panel granted our request for conditional listing, or an exception and we have until May 27, 2008 to regain compliance with NASDAQs Minimum Bid Price Requirement.  In the event that we determine that it is advisable to seek approval to alternative measures to comply with the Minimum Bid Price Requirement, we will notify our shareholders in our information circular for our Annual General Meeting, expected to be issued in the latter half of April, 2008.  On or before June 12, 2008, we must notify the Panel and demonstrate compliance with the Minimum Bid Price Requirement.









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Compliance with the Minimum Bid Price Requirement is normally demonstrated if the closing bid price for our common shares on NASDAQ is not less than U.S. $1.00 for ten consecutive trading days.   Depending upon the particular facts and circumstances, the Panel may, in its discretion, require that we evidence a bid price of at least $1.00 per share for a period in excess of ten consecutive trading days before determining that we have complied with the terms of the exception and demonstrated the ability to maintain long-term compliance with the Minimum Bid Price Requirement.  Failure to demonstrate compliance with the Minimum Bid Price Requirement within the appropriate time allowed will result in our shares being de-listed from NASDAQ.



No DividendsWe have not paid any cash dividends on our Common Shares and do not anticipate paying any dividends in the foreseeable future. We plan to retain any earnings for use in the operation of our business and to fund future growth.



Anti-Takeover ProvisionsOn February 9, 1998, our board of directors (the Board of Directors) adopted a shareholder rights plan which was amended and restated by our board of directors on April 28, 2003 (the Rights Plan). The Rights Plan was adopted by our shareholders at our Annual General Meeting on May 29, 2003.  The Rights Plan was adopted in part to discourage takeover attempts that may not be in the best interests of our shareholders. The Rights Plan is designed to give the Board of Directors of the Company time to pursue other alternatives to maximize shareholder value in the event of an unsolicited takeover offer for the Company. The effect of the Rights Plan could be to discourage a third party from attempting to acquire, or make it more difficult to acquire, control of the Company without first negotiating with our Board of Directors. The Rights Plan could also limit the price that certain investors might be willing to pay in the future for Common Shares.  The Rights Plan has been extended by our Board of Directors, subject to regulatory approval as required, beyond its latest expiry date to the next Annual General Meeting of Shareholders at which time shareholder approval will be sought to an updated, extended Plan.



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



ConflictsCertain of the Directors and Officers of the Company also serve as directors and officers of, or have significant shareholdings or other ownership interests in, other companies involved in the biotechnology industry or which may be involved in transactions with the Company or which may provide professional services to the Company.  Consequently there exists the possibility for such Directors and Officers to be in a position of conflict.  (See Item 6 - Directors, Senior Management and Employees - A  Directors and Senior Management - Principal Business Activities Performed Outside the Company).



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



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



Directors and Officers Indemnity We have entered into agreements pursuant to which we will indemnify our directors and officers in respect of certain claims made against them while acting in their capacity as such.  If we are called upon to perform our indemnity obligations, our finances will be adversely affected.



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







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ITEM 4

Information on the Company



We are a life sciences company dedicated to the research, development and commercialization of innovative products for the prevention and treatment of life-threatening diseases.  Our strategy and vision is to develop and market a portfolio of products for the benefit of all consumers, from the healthy person desiring consumer lifestyle products that can help reduce the risk of future disease, to medical patients needing therapeutic prescription products for the treatment of an established ailment.

Our infrastructure currently supports a portfolio of discovery and development stage pharmaceutical compounds and nutraceutical products.

Our pharmaceutical compounds are primarily targeting a number of conditions and diseases associated with Metabolic Syndrome, including cardiovascular disease and type 2 diabetes. Our pharmaceutical objectives are currently focused on out-licensing FM-VP4, our novel cholesterol-lowering drug candidate, to one or more third parties, and developing our FM-TP Series of Compounds targeting Metabolic Syndrome and Inflammatory Lung Disease.

Our nutraceutical products, both commercialized and under development, are intended to help reduce the risk of cardiovascular disease and the conditions that can cause it. Our lead product in the nutraceutical area is ReducolTM, our branded, clinically proven food and dietary supplement ingredient that helps lower LDL, or “bad” cholesterol, safely and naturally. LDL cholesterol is generally recognized as a significant risk factor for cardiovascular disease.

Going forward, we may expand our product focus to include other medical conditions, as opportunities to do so arise.

A.

History and Development of the Company



Forbes Medi-Tech Inc.



The Company (New Forbes) was incorporated on January 10, 2008 pursuant to the British Columbia Business Corporations Act as 0813361 B.C. Ltd.  On February 27, 2008, the Company changed its name to Forbes Medi-Tech Inc. and acquired all outstanding shares, options and warrants of the previous Forbes Medi-Tech Inc. (Old Forbes) for shares of the Company.   Old Forbes is therefore now a wholly-owned subsidiary of New Forbes, and changed its name on February 27, 2008 to Forbes Medi-Tech Operations Inc. This transaction was completed by way of Plan of Arrangement under the Canada Business Corporations Act, which governs Old Forbes.



Old Forbes was incorporated pursuant to the provisions of the Company Act(British Columbia) on September 17, 1985 as Amber Resources Ltd.  In 1992, Old Forbes changed its focus from mining exploration to pharmaceutical research and development and, accordingly, changed its name to Forbes Medi-Tech Inc. on July 8, 1992.  Old Forbes was continued under the federal laws of Canada pursuant to the Canada Business Corporation Act on April 11, 2001 and its previous Memorandum and Articles were replaced by Articles of Continuance and By-Laws.



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









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



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



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



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



Our principal acquisitions and dispositions, and principal capital expenditures from continuing operations, since the beginning of our last three financial years to date, and certain important events in our development since January 1, 2007,  were as follows:



Acquisitions



Forbes-Fayrefield Joint Venture

In June 2006, we announced the signing of an agreement with Fayrefield to establish a new UK company for the purpose of expanding distribution of finished products containing ReducolTM in Europe.  The new company, Forbes-Fayrefield Ltd. (“Forbes-Fayrefield”), distributes certain finished products containing ReducolTM directly to retail customers. We have an initial 51% interest in Forbes-Fayrefield for an initial investment of £10,200 (Cdn$21,000), and Fayrefield has the remaining 49% initial interest for an initial investment of £9,800 (Cdn$20,000).  The Board of Directors of Forbes-Fayrefield consists, and under the agreement with Fayrefield will continue to consist, of an equal number of nominees of Forbes and of Fayrefield.  We had previously signed a sales and licensing agreement with Fayrefield in November 2004 to supply ReducolTM for use in ReducolTM-based products.  Certain customers and finished products of Fayrefield’s are excluded from the new venture.  Either party may terminate the joint venture on 30 day’s notice in the event of an unresolved deadlock on certain specified issues, in which case we will retain the future benefit of any contracts which Forbes-Fayrefield has with customers within the European Union outside of the United Kingdom and Ireland, and Fayrefield will retain the future benefit of any contracts which Forbes-Fayrefield has with customers in the United Kingdom and Northern Ireland.



TheraPei Pharmaceuticals, Inc.

In October 2006, we acquired 100% of TheraPei Pharmaceuticals, Inc. (TheraPei) of San Diego, California, and subsequently changed the name of TheraPei to Forbes Medi-Tech (Research) Inc.



TheraPei was a privately held company formed with technology spun-out of Sequenom, Inc. (Sequenom) and is focused on developing novel pharmaceuticals directed at the underlying causes of type II diabetes and related metabolic diseases.  TheraPeis founder, Dr. John Nestor, was appointed as our Chief Scientific Officer effective on closing.









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TheraPeis intellectual property consists of the FM-TP Series of Compounds.   See B. Business Overview  The FM-TP Series of Compounds below.



Consideration payable to the TheraPei selling shareholders (the Vendors) for the acquisition of TheraPei is being made on a staged basis commensurate with development of TheraPeis technologies, and consists of cash and common shares of Forbes paid on closing, plus future milestone payments, licensing revenue and/or royalties as described below.  Dr. Nestor was the majority shareholder of TheraPei (87%) and as such, received approximately 87% of the acquisition consideration previously paid and will receive approximately 87% of future consideration.



On closing, we paid an initial amount of US$300,000 (Cdn$338,000) by way of the issuance of 94,672 common shares (Pre-Arrangement Basis) having a value of approximately US$240,000 (Cdn$270,000) and cash of US$60,000 (Cdn$68,000).  In addition, we paid out liabilities of TheraPei totaling approximately US$336,000 (Cdn$378,000), of which approximately US$25,000 (Cdn$28,000) was paid to Dr. Nestor.



Upon the first achievement of each of the events indicated below with respect to any VPAC2 Analog within the scope of the intellectual property acquired through TheraPei, we will make additional payments of consideration within 3 days following such event, consisting of 20% cash and 80% Forbes common shares, upon the first achievement of each such event set forth below for each indication (the Milestone Payments):



|                                |                                       |                                                       
|------------------------------- | ------------------------------------- | ------------------------------------------------------
|Milestone Event                 | Payment - VPAC2  
Analog for Diabetes | Payment - VPAC2  
Analog for Inflammatory Lung Disease
|Milestone                       |                                       |                                                       
|Approved IND                    | US$1,000,000                          | US$1,000,000                                          
|Successful Phase I
Completion   | US$1,000,000                          | US$1,000,000                                          
|Successful Phase II
Completion  | US$2,000,000                          | US$2,000,000                                          
|Successful Phase III
Completion | US$4,000,000                          | US$4,000,000                                          
|NDA Approval                    | US$4,000,000                          | US$4,000,000                                          
|1st Launch                      | US$5,000,000                          | US$5,000,000                                          
|2-3 Launch                      | US$8,000,000                          | US$8,000,000                                          
|Commercial Royalties            | 11%                                   | 11%                                                   



For clarity, the amounts indicated above for such events shall each be payable only one time for each column / indication set forth above.



In the event that we elect to license any VPAC2 Analog within the scope of the intellectual property acquired through TheraPei to an unaffiliated third party, the Vendors shall be entitled to receive 20% of the license revenue received by us under the license, and milestone payments set out in the above table shall cease.



Upon commercialization by us or our affiliates (but not licensees) for any purpose of VPAC2 analogs within the scope of the intellectual property acquired through TheraPei, the Vendors will receive an eleven percent (11%) commercial royalty on net sales.  In addition, should any ACC2 Inhibitor or SPT Inhibitor be commercialized for any purpose, the Vendors shall receive a three percent or four percent, respectively, commercial royalty on net sales by us, our affiliates and/or licensees.



All consideration shall be paid as to a minimum of 80% in common shares of Forbes, subject to regulatory and shareholder approval as required, and the balance, up to 20%, in cash.  If regulatory or shareholder approval is not forthcoming, we shall pay cash in lieu of the issuance of shares.  We may also elect to pay cash in lieu of the issuance of shares in certain circumstances.  All common shares shall be valued at the average of the high and low trading price of our common shares on NASDAQ, or if our  common shares are not then traded on NASDAQ, on the then principal trading market for our common shares, on the payment date.







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As part of the acquisition of TheraPei, we entered into a development agreement with the Vendors (the Development Agreement), which provides for the continuing development of one lead compound (a Compound) from each of two principal platforms acquired through TheraPei.   Under the Development Agreement, we will provide preclinical research and development funding for each of the identified compounds.  We retain the discretionary right to terminate funding for all or part of the development program.





Dispositions



Phyto-Source LP

During 2001, we formed Phyto-Source, a limited partnership joint venture with Chusei, to construct and operate a dedicated phytosterol manufacturing plant near Houston, Texas.  We and Chusei each owned a 50% interest in Phyto-Source.



The plant was originally completed in 2002 at an annual capacity of 1,000 metric tonnes.  In 2004, the plant’s annual capacity was increased to 1,500 metric tones.



Since its inception in 2001, the Phyto-Source joint venture has manufactured ReducolTM for our account, with sales to third parties made by us.   The non-branded phytosterols produced by Phyto-Source have been sold directly by Phyto-Source to third parties.



Our primary purpose in entering into the joint venture in 2001 was to create a supply source for ReducolTM.  Since then, alternative supply sources for sterols have developed.  In addition, we believe that owning an interest in a sterol manufacturing facility is no longer critical to our business strategy.



Accordingly, in March 2006, we sold our 50% interest in Phyto-Source for US$25 million to Chusei Oil Co. Ltd., the Japanese parent company of our joint venture partner, Chusei.  Prior to the closing of the sale, in February 2006, we signed a supply agreement with Phyto-Source which provides for the supply to us of ReducolTM and other wood sterols for a period of 5 years.  We agreed to buy all of our sterol requirements exclusively from Phyto-Source for the first year. (See below Business Overview Manufacturing of ReducolTM and other value-added sterol products)



Concurrently with the sale of our interest in Phyto-Source, we were repaid the remaining US$1 million of the US$4 million we originally loaned to the joint venture in 2001, and all guarantees provided by our subsidiary, Forbes USA, to Phyto-Source's lenders for the joint venture's commercial term loan, line of credit and capital equipment lease have been discharged. We have agreed not to compete with Phyto-Source in the manufacturing of wood sterols from tall oil soap, crude tall oil, tall oil pitch or any tall oil material containing phytosterols for 5 years. This agreement in no way prevents us from marketing and supplying ReducolTM and other value added sterol products.



Other Principal Capital Expenditures Since January 1, 2005



For the years ended December 31, 2007, 2006, and 2005, we acquired capital assets, for continuing operations, in the amounts of $99,000, $174,000, and $315,000, respectively, primarily for office equipment and furniture and leasehold improvements. Additionally, in the year ended December 2006, we paid out $436,000 in relation to the acquisition of TheraPei (See above Acquisitions  TheraPei Pharmaceuticals Inc.)







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Other Important Events Since January 1, 2007



ReducolTM



We have contracted with Pharmavite, LLC for the sale of ReducolTM since 2002. Pharmavite incorporates ReducolTM into one of its leading dietary supplements, Nature Made’s® Cholest-OffTM.  In March, 2003, we announced that we had extended our supply and licensing contract with Pharmavite for up to three years, and on May 8, 2007 we announced that we had again extended our supply and licensing contract with Pharmavite until mid 2008.  Under the terms of the agreement, the contract is subject to automatic one-year renewals unless either party provides 90 days prior written notice of its intention not to renew.  There can be no assurance that the contract will be further renewed.



In January 2007, we announced that one of Portugal's largest retail chains, Jeronimo Martins, had launched a range of dairy products incorporating ReducolTM, and would begin offering a Strawberry Flavor Yogurt Drink, Original Flavor Yogurt Drink & UHT Milk under the Salutare private-label brand.  Subsequently that month we announced the expansion of ReducolTM-based products in Portugal through one of its largest food retailers, Modelo Continente, which would be featuring the ingredient in a range of dairy products marketed under the Modelo Continente private-label brand, including a Strawberry Flavor Yogurt Drink, Original Flavor Yogurt Drink, UHT Milk and Dairy Spread.



In May 2007, we announced that Pharmavite LLC had extended its supply and licensing contract with us until mid 2008 for the continued sale of ReducolTM.  Pharmavite incorporates ReducolTM into its leading line of dietary, cholesterol-lowering supplements, Nature Made® CholestOff® and recently launched CholestOff Complete®.



Also in May 2007, we announced that Kesko Food Ltd. (Kesko) of Finland had launched a cholesterol-lowering Rye Bread with ReducolTM.  The Rye Bread will be marketed under the “Pirkka”premium private label brand name.



In August 2007, we announced that Uni-President Enterprises Corporation (UPEC), the largest non-alcoholic drinks producer in Taiwan, has launched a cholesterol-lowering milk drink incorporating ReducolTM.  The milk drink is marketed under the UPEC brand.



In September 2007, we announced that Fennobon of Finland had launched the first cholesterol-lowering Xylident Pro chewing gum incorporating ReducolTM, available in major retail chains across Finland.



In October 2007, we announced that Albert Heijn had launched an organic, cholesterol-lowering, skim milk drink incorporating ReducolTM, expanding its ranged of ReducolTM-containing dairy products .  The premium milk drink, marketed under the Albert Heijn private label brand, is available in stores across the Netherlands.



In December 2007, we announced that Auchan of France had launched a range of fruit yogurts and yogurt drink products featuring ReducolTM.  The Auchan dairy products are being marketed under the ‘Auchan’ private label brand.



In March, 2008, we announced that Fiave of Italy, one of the country's premium dairy producers, had launched a yogurt drink containing Forbes' cholesterol-lowering ingredient, ReducolTM.  We also announced that we have entered into collaboration with Max food ingredients GmbH, a member of the Uplegger food company GmbH group. Max food ingredients GmbH was formed for the purpose of selling Forbes' proprietary sterol ingredient, ReducolTM, and has obtained exclusive rights for Germany, Austria and Switzerland.



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









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Corporate Restructuring



Staff Reduction and New Facility

Effective March 1, 2007, we reduced our staff (primarily drug development) in Canada by 20%.  Drug discovery and development efforts focused on the FM-TP Series of Compounds acquired in October, 2006 are being undertaken at our new facility in La Jolla, California.



Plan of Arrangement

On February 27, 2008, we closed our Plan of Arrangement. (See above History and Development of the Company - Forbes Medi-Tech Inc.)



Reduction of Stated Capital

As a condition of implementing the Arrangement, Old Forbes reduced its stated capital by the amount of $98,460,000 so that, on the date of the Special General Meeting held on February 14, 2008, the realizable value of the assets of Old Forbes was greater than the aggregate of its liabilities and stated capital (as amended). After the reduction of the stated capital, Old Forbes stated capital was $2,567,000.



Non-Dilutive Financing

On March 20, 2008, as part of our continuing reorganization plan, we announced that we entered into an agreement with a private investor (the "Investor") to reorganize Old Forbes (Forbes Medi-Tech Operations Inc., or FMTO). The Investor is to make an investment of $3.8 million in a convertible debenture of FMTO. All of the assets, liabilities and operations of FMTO, including the proceeds from the issue of the convertible debenture, are to be transferred to Forbes, which will continue to carry on the business previously carried on by FMTO. The debenture is convertible into 35% of the voting common shares and all of the non-voting common shares of FMTO, representing 79% of the issued and outstanding common shares of FMTO at the time of completion of the transaction. The transaction is expected to close on or before April 30, 2008. Completion of the transaction is subject to the satisfaction of certain conditions. Following completion of the transaction, Forbes and the Investor will source and pursue other opportunities to maximize the value of their respective interests in FMTO. Additionally, subject to certain conditions, the Investor has agreed that Forbes will receive a minimum of $800,000 from these other opportunities within one year of completion of the transaction.



The transaction will not result in any change to our share ownership, our listing on The NASDAQ or TSX, the composition of our Board of Directors, management or in any of our relationships and commitments to shareholders, employees, government and industry partners, customers, and suppliers. From an operational perspective, there will be no changes, we will acquire from FMTO, and retain, all rights to our intellectual property and will continue to develop and market a portfolio of products for the benefit of all consumers, including the further commercialization of Reducol TM, and to continue our pharmaceutical programs under our current business plan.



NASDAQ



On January 25, 2007, we announced that we  had received a letter from NASDAQ indicating that the bid price for our common  stock has closed below the minimum of US $1.00 per share for the previous 30  consecutive trading days (the “Minimum Bid Price Requirement”), as required for  continued inclusion on The NASDAQ Global Market by Marketplace Rule 4450(a)  (5). NASDAQ provided us with 180 calendar days, or until July 23, 2007, to  regain compliance with the Minimum Bid Price Requirement. In July 2007, we  announced that our application to NASDAQ had been approved to transfer our  listing from the NASDAQ Global market to The NASDAQ Capital Market effective  the opening of business July 23, 2007. As a result, on July 24, 2007 NASDAQ  advised us that in accordance with Marketplace Rule 4310(c) (8)(D), which  provided an additional 180 calendar day compliance period, until January 18,  2008, to regain compliance with the Minimum Bid Price Requirement.

On January 22, 2008 we received the NASDAQ Staff  Determination, indicating that we failed to comply with the U.S. $1.00 Minimum  Bid Price Requirement for continued listing set forth in Marketplace Rule  4310(c)(4), and that our securities were, therefore, subject to delisting from  The NASDAQ Capital Market. We requested, and had, a hearing before a NASDAQ Listing  Qualifications Panel to review the Staff Determination, in which we presented a plan for compliance.  The Panel granted our request for conditional listing, or an exception, and we have until May 27, 2008 to regain compliance with NASDAQs Minimum Bid Price Requirement.  In the event that we determine that it is advisable to seek approval to alternative measures to comply with the Minimum Bid Price Requirement, we will notify our shareholders in our information circular for our Annual General Meeting, expected to be issued in the latter half of April, 2008.  On or before June 12, 2008, we must notify the Panel and demonstrate compliance with the Minimum Bid Price Requirement.

Compliance with the Minimum Bid Price Requirement  is normally demonstrated if the closing bid price for our common shares on  NASDAQ is not less than U.S. $1.00 for ten consecutive trading days.   Depending upon the particular facts and  circumstances, the Panel may, in its discretion, require that we evidence a bid  price of at least $1.00 per share for a period in excess of ten consecutive  trading days before determining that we have complied with the terms of the  exception and demonstrated the ability to maintain long-term compliance with  the Minimum Bid Price Requirement.   Failure to demonstrate compliance with the Minimum Bid Price Requirement  within the appropriate time allowed will result in our shares being de-listed  from NASDAQ.



B.

Business Overview



We are a life sciences company dedicated to the research, development and commercialization of innovative products for the prevention and treatment of life-threatening diseases.  Our strategy and vision is to develop and market a portfolio of products for the benefit of all consumers, from the healthy person desiring consumer lifestyle products that can help reduce the risk of future disease, to medical patients needing therapeutic prescription.

Our infrastructure currently supports a portfolio of discovery and development stage pharmaceutical compounds and nutraceutical products.   Our pharmaceutical compounds are primarily targeting a number of conditions and diseases associated with Metabolic Syndrome and Inflammatory Lung Disease.  Our nutraceutical products, both commercialized and under development, are intended to help reduce the risk of cardiovascular disease and the conditions that can cause it.

Going forward, we may expand our product focus to include other medical conditions, as opportunities to do so arise.







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Background on Cardiovascular Disease, Metabolic Syndrome and Inflammatory Lung Disease



Cardiovascular Disease

The cardiovascular disease market continues to be one of the largest, with increasing prevalence in the developed and developing worlds.  Patients are now living longer with the disease, which hosts a plethora of risk factors and interdependent manifestations.  As a result, long-term management, and complexity and diversity in approach, are required.



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



Cardiovascular Disease and Cholesterol

It is well recognized that an elevated level of LDL-C is an independent risk factor for cardiovascular disease, including coronary heart disease, and that the reduction of LDL-C can significantly reduce one of the major risks for these diseases.



About Cholesterol

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



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



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



Metabolic Syndrome

Metabolic Syndrome, also referred to as insulin resistance syndrome or syndrome-X,  is a grouping of associated conditions that correlate with a persons increased risk for both cardiovascular disease and diabetes.  According to the Executive Summary of the U.S. National Cholesterol Education Program (NCEP) Third Report of the Expert Panel on Detection, Evaluation and Treatment of High Blood Cholesterol in Adults (Adult Treatment Panel III or ATP III) (National Institutes of Health Publication No. 01-3670, May, 2001), factors characteristic of Metabolic Syndrome are the following:



·

abdominal obesity;

·

atherogenic dyslipidemia (elevated triglyceride, small LDL particles, low HDL cholesterol);

·

raised blood pressure;

·

insulin resistance (with or without glucose intolerance); and

·

prothrombotic and proinflammatory states.









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Thus it can be seen that this syndrome can be associated with the development of atherosclerosis, hypertension, type 2 diabetes and increased risk of heart attack. The diseases associated with the metabolic syndrome, are increasingly thought of as inflammatory conditions.



The American Heart Association currently reports that an estimated 50 million Americans have the Metabolic Syndrome (www.americanheart.org).  While there are no formally adopted criteria for diagnosing Metabolic Syndrome, the American Heart Association and the National Heart, Lung, and Blood Institute of the U.S. recommend that Metabolic Syndrome be identified as the presence of three or more of the following components:



·

an elevated waist circumference of equal to or greater than 40 inches (102 cm) for men, and equal to or greater than 35 inches (88 cm) for women;

·

an elevated triglyceride level of equal to or greater than 150 mg/dL;

·

a reduced HDL cholesterol level of less than 40 mg/dL for men, and less than 50 mg/dL for women;

·

an elevated blood pressure of equal to or greater than 130/85 mm Hg; and/or

·

an elevated fasting glucose level of equal to or greater than 100 mg/dL.



Inflammatory Lung Disease

Asthma, Chronic Obstructive Pulmonary Disease (COPD) and Pulmonary Arterial Hypertension (PAH) are all inflammatory lung diseases.  While inflammatory lung disease was not specifically targeted initially, our work with respect to Metabolic Syndrome includes the development of a receptor agonist for treatment of type 2 diabetes that may also have application as a therapeutic for one or more inflammatory lung diseases.



Our Pharmaceuticals



Our pharmaceutical objectives are currently focused on developing our FM-TP Series of Compounds targeting Metabolic Syndrome and Inflammatory Lung Disease.  We are also continuing to pursue the out-licensing of FM-VP4, our novel cholesterol-lowering drug candidate.



The FM-TP Series of Compounds



The FM-TP Series of Compounds were acquired by us in October 2006 through our acquisition of TheraPei Pharmaceuticals, Inc. (now Forbes Medi-Tech (Research) Inc.), a private company founded by Dr. John Nestor, who was appointed our Chief Scientific Officer in connection with such acquisition (See Item 4  Information on the Company  A. History and Development of the Company - Acquisitions  TheraPei Pharmaceuticals, Inc.).  These compounds are being designed to target specific aspects of Metabolic Syndrome and various Inflammatory Lung Diseases, as outlined below.  Such efforts are being conducted at our new facility in La Jolla, California under the direction of Dr. Nestor.



All of our FM-TP Series of Compounds are in early stages of preclinical development, and lead product candidates have yet to be identified. Our strategy is to capitalize on the intrinsic value of selected FM-TP Compounds through collaborative agreements and upfront milestone payments at an early stage.



Our FM-TP Series of Compounds currently under research and development are as follows:



FM-TP Series of Compounds for Metabolic Syndrome



FM-TP2000 series  Pancreatic beta cells, responsible for the release of insulin and the control of glucose levels in the body, have receptors for both neuronal and hormonal signals. These receptors normally act in a complementary fashion and, when triggered by the body’s control signals or drugs, stimulate these beta cells to release insulin more effectively as it is needed.  Recently entering the market are ByettaTM1 and JanuviaTM2 both of which act through the stimulation of beta cell hormonal receptors.  In contrast, the FM-TP2000 series of peptide compounds are being designed to selectively and effectively stimulate beta cell receptors for the neuronal signal, the VPAC2 receptors, thus triggering a more effective insulin release in response to the presence of glucose.  If brought to market, the FM-TP2000 compounds could be first-in-class drugs to stimulate enhanced, glucose-dependent insulin release via this mechanism and would provide an alternative therapeutic approach which could achieve benefits similar to ByettaTM, but also may be complementary in effect.





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1 ByettaTM is a registered trademark of Amylin Pharmaceuticals, Inc.

2 JanuviaTM is a trademark of Merck & Co., Inc.







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FM-TP4000 series – Elevated fatty acid levels in the body, associated with obesity and dyslipidemia, are known to cause an increase in synthesis of a product of an enzyme (SPT) which has pro-inflammatory activity.  This pro-inflammatory signal has been shown to cause pancreatic beta cell death through apoptosis (programmed cell death).  Beta cell death leads to diabetes.  The early stage FM-TP4000 series of compounds are small molecule inhibitors of this enzymatic pathway, which would treat type 2 diabetes by preventing beta cell loss in the pancreas and preserving  insulin secretory capacity. By inhibiting this pathway the early stage FM-TP4000 series of compounds also may preserve the normal proliferation of beta cells and block insulin resistance. This has the potential to address a major unmet clinical need in treating type 2 diabetes by preserving beta cell function.



FM-TP5000 series  Acetyl-CoA Carboxylase 2 (ACC2) is an enzyme linked to the suppression of fat burning in the body.  The early stage FM-TP5000 library of compounds are selective small molecules designed to inhibit ACC2, and therefore accelerate fat clearance from the body, potentially slowing or blocking the progression of obesity and diabetes.



FM-TP Series of Compounds for Inflammatory Lung Disease



FM-TP3000 series  The same receptor for neuronal signals that appears in pancreatic beta cells to control insulin response, the VPAC2 receptor, also appears on smooth muscle cells in the lungs and on inflammatory cells such as mast cells.  Coincident with our preparation of a long-acting VPAC2 agonist for diabetes, we also are preparing a related series of long-acting VPAC2 agonists for asthma, designed to rapidly relax the bronchial smooth muscle and thereby act as a prompt bronchodilator, with potential anti-inflammatory activity. By selectively targeting VPAC2 receptors, the FM-TP3000 series of compounds also are designed to suppress the release of inflammatory mediators (TNF-alpha, IL-12), as well as to suppress the eosinophil response to stimuli. This may provide an alternate therapeutic approach to treating asthma, COPD and PAH.



Market Opportunity and Competition



Metabolic Syndrome is an insidious and progressive disorder.  In many cases, obesity and insulin resistance lead to the development of type 2 diabetes, which is difficult to treat and carries a high risk for atherosclerotic cardiovascular diseases.



Type 2 diabetes is the most common form of diabetes. It is estimated that at least 171 million people worldwide have diabetes and this is projected to grow to 300 million by 2025. Of those who currently have diabetes,  approximately 135 million (90%) people have type 2 diabetes and approximately 45 million (~33.3%) people require insulin to control the disease.



There are various options currently available for the treatment of type 2 diabetes. Physicians typically recommend one or more of these options based on the severity and progression of the disease.  In fact, 60-80% of type 2 diabetics use more than one pharmacologic therapy.  There is currently no cure for type 2 diabetes.  There are several classes of type 2 diabetes drugs, such as oral medications (thiazolidinediones, sulfonylureas, biguanides, meglitinides) and insulin.  If the first line treatment with diet and oral agents is not sufficient to control the patients glucose levels, second line treatment has been initiation of a combination of several oral agents or initiation of insulin.  These medications vary somewhat in terms of efficacy and side-effect profiles and do not halt progression of the disease.  Recently, a promising new class of medications called incretin mimetics has been introduced and is related to the hormonal signal (incretin; e.g. Glucagon-Like Peptide 1, GLP-1) for the presence of food in the gut. Incretin mimetics sensitize the pancreas to release a bolus of insulin when glucose is present, typically in response to a meal.







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Incretin mimetics work to increase insulin produced by the pancreas by both stimulating cells to produce insulin and by causing proliferation of beta cells.  The first member of this class, ByettaTM (GLP-1 agonist), was approved by the FDA in April, 2005 for the treatment of patients with type 2 diabetes who were failing to achieve adequate blood glucose control with traditional therapuetic agents (metformin and sulfonylureas). ByettaTM has a highly differentiated efficacy profile with a glucose-dependent mechanism of action and concomitant weight loss.  Nausea is the most frequent adverse event, occurring in approximately 60% of patients. Although generally mild, it occurs more frequently upon initiation of therapy, causing some non-compliance.  Despite this shortcoming, ByettaTM has quickly become the 4th most commonly prescribed prescription drug for diabetics in the United States, and is anticipated to grow to $2.3B by 2015.  Additional prescribing considerations are its effect on absorption of other drugs due to slowed stomach emptying and a negative effect on fetal development.  The FM-TP2000 series of compounds have the potential to play a role in this market by exerting their effect through a separate, and complementary, physiological pathway from the GLP-1 receptor. (See above FM-TP2000 Series). This provides an alternative therapeutic approach to achieve similar clinical benefit to ByettaTM, potentially with a different and better tolerated side effect profile.



The natural incretin hormone is rapidly destroyed in the bloodstream (biological half life of minutes) by enzymatic systems such as dipeptidylpeptidase IV (DPPIV). Inhibitors of DPPIV therefore have been sought by many pharmaceutical companies, resulting in the recent marketing approval of the first-in-class agent, JanuviaTM. Inhibition of DPPIV activity decreases the rate of destruction of the natural incretin hormone and thereby increases the efficacy of the endogenous signal in improving the beta cell insulin release in response to a meal.  Another DPPIV inhibitor, GalvusTM3, is being evaluated by the FDA and may be approaching marketing approval.



Maximizing the commercial success of the FM-TP2000 series of compounds will be contingent on demonstrating that the compound can be dispensed on a once or twice daily basis, that it does not cause nausea, provides a comparable effect to ByettaTM and other incretin mimetics, and can be used concomitantly with other incretin mimetics.  The success of this series is also contingent on, among other things, validating the findings in humans, the number of alternate therapies that are commercially available in the next ten years, and generic alternatives to new classes of medications.  As many as four GLP-1 Agonists and eight DPPIV Inhibitors could reach the market before 2010.  In addition to Amylin/Lilly and Merck, which now have ByettaTM and JanuviaTM on the market, respectively, Novo Nordisk, Sanofi Aventis, Roche, GSK, BioRexis, Conjuchem, Novartis, Bristol-Myers, Takeda, Glenmark, Phenomix and OSI Pharmaceuticals also have active GLP-1 Agonist and DPPIV Inhibitor clinical development programs. Bayer, Lilly and Roche also have VPAC2 Agonist programs at varying stages of development.



The FM-TP4000 series of compounds represent a new, first in class potential alternative for the treatment of type 2 diabetes that may help address the greatest unmet aspect of the disease, beta cell death.  As inhibitors of a pro-inflammatory enzyme pathway that correlates with the development of Type 2 diabetes in animal models (e.g. Zucker diabetic fatty rat), this important series of compounds may protect and prolong the life of beta cells.  The commercial success of this series of compounds will be contingent on, among other things, validating the findings in human models, and developing a drug that is safe and effective.  Furthermore, the success of the drug will be closely linked to other commercial products that have demonstrated beta cell preserving functions.  To date there is anecdotal evidence to suggest that ByettaTM may have this effect.





____________________

3GalvusTM is a registered trademark of Novartis AG.









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In targeting weight gain associated with increased demand for insulin and increased likelihood of insulin resistance, the FM-TP5000 series of compounds offers a new class of compounds that can potentially play a role in supporting the health of diabetic patients.  Treatments such as Xenical®4, (GI lipase inhibitor) and Meridia®5 (monoamine reuptake inhibitor) currently lead the market but have been associated with some adverse side effects and less than optimal efficacy.  The FM-TP5000 series of compounds are selective ACC2 inhibitors. Validation of ACC2 inhibition  as a therapeutic target was shown in published studies using an ACC2 knock-out mouse model, where thin fat pads, a 30% decrease in body weight and protection against the adverse effects of a high fat/high calorie Western diet was demonstrated.  Commercial success of these compounds is contingent on, among other things, validating the findings in humans, and developing a drug that is well tolerated without unpleasant side effects such as is seen with currently marketed drugs.  The FM-TP5000 series could potentially face intense competition from other ACC2 inhibiting compounds that are currently being sought by Abbott and other pharmaceutical companies.



The FM-TP3000 series of compounds have potential for the asthma/COPD market due to their bronchodilating effects and complementary potential for anti-inflammatory activity.  In 2005, in the seven leading pharmaceutical markets worldwide, the prevalence of asthma was estimated at 53.2 million people (2005).  56.4 million individuals were estimated to suffer from COPD, although extremely low rates of diagnosis are thought to have resulted in a treated population of less than 10 million individuals.  Current options for patients with moderate-to-severe asthma include inhaled corticosteroids in combination with long-acting beta 2 adrenoceptor agonists.  Combination products, such as Advair®6, account for 40% of the asthma/COPD market which is approaching $20 billion per year (Espicom Healthcare).  However the existing treatments have significant side effects. For example, inhaled corticosteroids may inhibit statural growth in children as well as exposing patients to both systemic (skin thinning, cataracts, glaucoma, osteoporosis) and local side effects (rhinitis, oral candidiasis, hoarseness, etc.). Beta 2 adrenoceptor agonists have a black box warning for a recognized incidence of sudden death and have mechanism-related effects on heart rate and tremor. Recent labelling changes stress that beta 2 adrenoceptor agonists should not be first choice for treatment.  Commercial success of the FM-TP3000 series of compounds is contingent on, among other things, developing a product that provides the same bronchodilating effects as beta 2 andrenoceptor agonists and a safer side effect profile. The potential of VPAC2 agonists to cause an anti-inflammatory effect, demonstrated in animal models, makes this target particularly attractive for drug development.  The compounds could potentially face competition from other VPAC2 Agonists.  AstraZeneca supported a human trial on a short acting VPAC2 Agonist but development status is not known at this time.  Furthermore, the FM-TP3000 series of compounds would face competition from potential next generation beta 2 andrenoceptor agonists.  For example, GSK and Theravance have a joint development program to produce once daily beta 2 adreonceptor agonists, however the safety profile is not yet determined.



FM-VP4



We announced completion of our US Phase II clinical trial of FM-VP4 in October 2006, with top line results announced in December 2006. The primary efficacy objective of the trial was to determine the effect of two doses of FM-VP4, 450mg and 900mg given daily for 12 weeks, compared to placebo, on LDL-C. The goal of the trial was to demonstrate a minimum of 15% reduction from baseline in LDL -C at Week 12.

While the primary endpoint of the study was met with a statistically significant reduction in LDL-C after 12 weeks of 9% from baseline at 900mg, FM-VP4 did not achieve our established goal of a 15% reduction in LDL-C from baseline. We are pursuing an out-licensing strategy for FM-VP4 based on its clinically significant results, dose response (5% LDL -cholesterol decrease from baseline at 450mg/day and 9% decrease at 900mg/day implies a greater efficacy at higher doses), excellent safety profile and what we believe are existing market opportunities for alternative therapies for cholesterol reduction.





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4  Xenical® is a registered trademark of Hoffman-La Roche Inc.

5 Meridia® is a registered trademark of Abbot Laboratories, Inc.

6 Advair® is a registered trademark of Glaxo Group Limited.







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Any out-licensing arrangements for FM-VP4 will likely include the FM-VPx Library of Compounds, and accordingly, no further research or development work is contemplated on the FM-VPx Library at this time.



Market Opportunity and Competition



There are several categories of cholesterol-lowering drugs including bile acid sequestrants, fibric acid derivatives, nicotinic acid, and HMG-CoA reductase inhibitors (statins). Studies in the late 1980s that demonstrated a reduction in mortality with use of drugs to reduce cholesterol coincided with the development of the statins, which have become the dominant class of cholesterol-lowering drugs.  Our competition in this area includes large pharmaceutical companies such as Bristol-Myer Squibb Company, Pfizer, Schering-Plough, Merck & Co., Novartis, and AstraZeneca AB. As well, competition will significantly increase with the market introduction of generic versions of market leading statins.  There are currently generic versions of Lovastatin, Pravastatin, and Simvastatin available on the market.



Selective cholesterol absorption inhibitors are a new class of drugs for lipid management.  Our drug candidate, FM-VP4, falls into this class.  Merck and Schering-Plough have also developed a drug in this class, ezetimibe, (brand name ZetiaTM7) which is being marketed in the US and the EU.  Merck and Schering-Plough are now also marketing a combination drug, VytorinTM8, which combines the cholesterol absorption inhibitor, ZetiaTM, with ZocorTM9, a cholesterol-lowering statin drug.



Maximizing the commercial success of FM-VP4 will be contingent on demonstrating that the compound is safe to use concomitantly with statins, has a differentiated product profile as compared with Zetia, and is able to reach market as the second cholesterol absorption inhibitor.



Another important subpopulation related to the treatment of dyslipidemia is a group of patients who experience side effects on statins.  It is estimated that 5-10% of the general population will not be able to use these compounds due to muscle weakness and a more serious condition called rhabdomyolysis.  Patients in this subpopulation are candidates for alternative therapies such as bile acid sequestrants, fibric acid derivatives, and nicotinic acid.  Daiichi Sankyo has developed a drug in the bile acid sequestrant class, colesevelam HCl (brand name WelCholTM10) which is being marketed in the US targeting statin intolerant patients.  FM-VP4 also potentially could compete for patients in this subpopulation.



The treatment of dyslipidemia and prevention of atherosclerosis are very active areas for research and development, with most major pharmaceutical companies, specialty pharmaceutical companies and biopharmaceutical companies involved.



Our Nutraceuticals



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

____________________

7 ZetiaTM is a registered trademark of MSP Singapore Company, LLC.

8 VytorinTM is a registered trademark of MSP Singapore Company, LLC.

9 ZocorTM is a registered trademark of Merck & Co., Inc.

10 WelCholTM is a registered trademark of Daiichi Sankyo.







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



ReducolTM is a unique blend of phytosterols and phytostanols, derived from non-Genetically Modified Organism (“non-GMO”)  coniferous trees.  It is generally recognized that plant stanols/sterols can help enhance LDL-C lowering as part of a broader lifestyle changes approach.



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



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



ReducolTM



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



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



•

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

•

a favorable safety profile;

•

an absence of taste and odor;

•

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

•

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



the ability to be incorporated into certain foods without esterification.



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



Manufacturing of ReducolTM and other value-added sterol products



During 2001, we formed Phyto-Source, a limited partnership joint venture with Chusei, to construct and operate a dedicated phytosterol manufacturing facility near Houston, Texas.  We and Chusei each owned a 50% interest in Phyto-Source.









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The plant was originally completed in 2002 at an annual capacity of 1,000 metric tones and was expanded in 2004 to an annual capacity of 1,500 metric tonnes.



Since its inception in 2001, the Phyto-Source joint venture has manufactured ReducolTM for our account, with sales to third parties made by us. The non-branded phytosterols  produced by Phyto-Source have been sold directly by Phyto-Source to third parties.



Our primary purpose in entering into the joint venture in 2001 was to create a supply source for ReducolTM.  Since then, alternative supply sources for sterols have developed.  In addition, we believe that owning an interest in a sterol manufacturing facility is no longer critical to our business strategy in the nutraceutical area.



Accordingly, in March 2006, we sold our 50% interest in Phyto-Source for US$25 million to Chusei Oil Co. Ltd., the Japanese parent company of our joint venture partner, Chusei.  Prior to the closing of the sale, in February 2006, we signed a supply agreement with Phyto-Source which provides for the supply to us of ReducolTM and other wood sterols for a period of 5 years.  We have agreed to purchase, and Phyto-Source has agreed to manufacture and supply, certain minimum quantities of wood sterols annually.  In the event that such minimum quantities are not purchased or supplied, the party in default will be required to compensate the non-defaulting party for a percentage of the value of the sterols not purchased or supplied, as the case may be. We agreed to buy all of our sterol requirements exclusively from Phyto-Source for the first year.  In addition, we have agreed not to compete with Phyto-Source in the manufacturing of wood sterols from tall oil soap, crude tall oil, tall oil pitch or any tall oil material containing phytosterols for 5 years. This agreement in no way prevents us from marketing and supplying ReducolTM and other value added sterol products, such as sterol esters.



ReducolTM and Functional Foods



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



In November 2004, we announced that we had signed a 5-year sales and licensing agreement with Fayrefield of Crewe, UK to supply ReducolTM for use in milk-based drinks.  This announcement followed the approval, announced earlier that month, by the European Commission for the use of ReducolTM in milk-based beverages.  Fayrefield specializes in the production and marketing of dairy products and powders throughout Europe, the Middle East and North America.



Since entering into our agreement with Fayrefield in late 2004, we have been working closely with Fayrefield to develop products incorporating ReducolTM for distribution and sale by Tesco Stores Ltd. in the U.K. On December 20, 2005, we announced that ReducolTM had been launched in the UK by Tesco, the UK’s largest retailer, under their own private label.   Tesco is currently selling a yellow-fat spread (margarine), yogurt, and yogurt drink incorporating ReducolTM under their own private label brand.  Fayrefield has also developed their Heartfelt Plus Natural Cheese incorporating ReducolTM, which was launched by Wal-Mart / ASDA, the U.K.’s second-largest retailer, in May, 2006 and by Tesco in August, 2006.



In November 2004, we announced that we have agreed to supply ReducolTM for use in milk-based drinks to Scanvit Ltd., a Finnish healthcare company focusing on the prevention of cardiovascular diseases. Scanvit's core competency is in developing new markets for dietary supplements and functional foods in Scandinavia, the Baltic countries and Russia. As a result of our relationship with Scanvit, in May 2005 we announced that Kesko of Finland had launched a range of yogurts incorporating ReducolTM. The yogurt is sold under the “Pirkka” premium brand name.  In September 2006, we announced that Kesko had expanded their Pirkka range of products.  (See Item 4 – Information on the Company – A. History and Development of the Company - Other Important Events Since January 1, 2007).







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In June 2006, we announced that the Netherlands’s largest retailer, Albert Heijn, had launched a range of cholesterol-lowering dairy products incorporating ReducolTM.  The product range, marketed under the Albert Heijn private label brand, includes a margarine spread, a spoonable yogurt, and 'original' and 'strawberry flavor' yogurt drinks.  The finished products are being supplied to Albert Heijn through Forbes-Fayrefield, a joint venture formed by us with Fayrefield in June 2006.(See Item 10  Additional Information  C. Material Contracts  Forbes-Fayrefield).



In October 2006, we announced that Champion, based in France (a Groupe Carrefour banner), would be selling five dairy products containing ReducolTM. The products include; original and strawberry flavored yogurt drinks, a mixed strawberry and apricot flavored yogurt, and an all natural (fruit base) set yogurt.



In January 2007, we announced that one of Portugal's largest retail chains, Jeronimo Martins, had launched a range of dairy products incorporating ReducolTM, and would begin offering a Strawberry Flavor Yogurt Drink, Original Flavor Yogurt Drink & UHT Milk under the Salutare private-label brand.  Subsequently that month we announced the expansion of ReducolTM-based products in Portugal through one of its largest food retailers, Modelo Continente, which would be featuring the ingredient in a range of dairy products marketed under the Modelo Continente private-label brand, including a Strawberry Flavor Yogurt Drink, Original Flavor Yogurt Drink, UHT Milk and Dairy Spread.



In May 2007, we announced that Pharmavite LLC had extended its supply and licensing contract with us until mid 2008 for the continued sale of ReducolTM.  Pharmavite incorporates ReducolTM into its leading line of dietary, cholesterol-lowering supplements, Nature Made® CholestOff® and recently launched CholestOff Complete®.



Also in May 2007, we announced that Kesko Food Ltd. (Kesko) of Finland had launched a cholesterol-lowering Rye Bread with ReducolTM.  The Rye Bread will be marketed under the “Pirkka” premium private label brand name.



In August 2007, we announced that Uni-President Enterprises Corporation (UPEC), the largest non-alcoholic drinks producer in Taiwan, has launched a cholesterol-lowering milk drink incorporating ReducolTM.  The milk drink is marketed under the UPEC brand.



In September 2007, we announced that Fennobon of Finland had launched the first cholesterol-lowering Xylident Pro chewing gum incorporating ReducolTM, available in major retail chains across Finland.



In October 2007, we announced that Albert Heijn had launched an organic, cholesterol-lowering, skim milk drink incorporating ReducolTM, expanding its ranged of ReducolTM-containing dairy products .  The premium milk drink, marketed under the Albert Heijn private label brand, is available in stores across the Netherlands.



In December 2007, we announced that Auchan of France had launched a range of fruit yogurts and yogurt drink products featuring ReducolTM.  The Auchan dairy products will be marketed under the ‘Auchan’ private label brand.



In March, 2008, we announced that Fiave of Italy, one of the country's premium dairy producers, has launched a yogurt drink containing Forbes' cholesterol-lowering ingredient, ReducolTM.  We also announced that we have entered into collaboration with Max food ingredients GmbH, a member of the Uplegger food company GmbH group. Max food ingredients GmbH was formed for the purpose of selling Forbes' proprietary sterol ingredient, ReducolTM, and has obtained exclusive rights for Germany, Austria and Switzerland.

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







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ReducolTM and Dietary Supplements



ReducolTM has been incorporated by Pharmavite LLC of California into its nationally distributed dietary supplement, Nature Made® Cholest-OffTM. This supplement is sold through mass-market channels including food, drug and mass merchandising stores. Our contract with Pharmavite will end in June, 2008, and is subject to automatic one-year renewals unless either party provides 90 days’ prior written notice of its intention not to renew.    Failure to renew or otherwise extend this contract will have a material adverse effect on our product sales and revenue.



We have also developed a dietary supplement combination of ReducolTM with omega-3 fatty acids, and are in the process of seeking appropriate partners for commercialization. A patent application for the combination has been filed.



Phytosterol and Other Revenue



Revenues from continuing operations for the year ended December 31, 2007 include our proportionate share of the revenue generated by our joint venture, Forbes-Fayrefield. We started to recognize this joint venture revenue in June 2006.



Our Total Revenues can be broken down as follows:



|                           |                              |                              |                             
|-------------------------- | ---------------------------- | ---------------------------- | ----------------------------
|Summary:
(millions of $)   | Year ended
December 31, 2007 | Year ended
December 31, 2006 | Year ended
December 31, 2005
|                           |                              |                              |                             
|Sales-phytosterol products | $    7.7                     | $    5.3                     | $  3.8                      
|Sales-finished goods       | 1.1                          | 0.7                          |                            
|Licensing                  | 0.1                          | 0.1                          | 0.2                         
|Phytosterol revenues       | 8.9                          | 6.1                          | 4.0                         
|Interest and other         | 0.5                          | 1.1                          | 0.4                         
|Total revenues             | $   9.4                      | $   7.2                      | $  4.4                      





Our Phytosterol revenues can be broken down geographically as follows:



|                                           |                              |                              |                             
|------------------------------------------ | ---------------------------- | ---------------------------- | ----------------------------
|Annual Export Sales by Product             | Year ended
December 31, 2007 | Year ended
December 31, 2006 | Year ended
December 31, 2005
|(percentage of total phytosterol revenues) |                              |                              |                             
|Sterol Ingredient                          |                              |                              |                             
|North America                              | 49%                          | 56%                          | 84%                         
|Europe                                     | 37%                          | 28%                          | 16%                         
|Other                                      | 1%                           | 4%                           | 0%                          
|                                           |                              |                              |                             
|Finished Goods With Sterols                |                              |                              |                             
|North America                              |                             |                             |                            
|Europe                                     | 13%                          | 12%                          |                            
|Other                                      |                             |                             |                            









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



In the year ended December 31, 2007, the majority of our revenue was generated from four customers (December 31, 2006  four customers, December 31, 2005  two customer).  Customer A accounted for 40% (2006  38%, 2005  81%), Customer B accounted for 15% (2006  0%, 2005  0%), Customer C accounted for 13% (2006  12%, 2005  0%), and Customer D accounted for 10% (2005  0%, 2005  5%) of revenue. For 2007, 49% of sales are recorded in the USA, 50% of sales are recorded in Europe and the balance in Asia.



Competition



The functional food market is intensely competitive. In the phytosterol functional food market in particular, a number of players have substantial name recognition and financial, technical and marketing expertise.  These include McNeil Consumer Healthcare, a Johnson and Johnson company (J&J); Unilever NV Company (Unilever), Raisio and Tesco.



In Europe, Tesco is now competing with Raisio and Unilever in marketing a full range of cholesterol-lowering products.  In addition, the Danone Group has introduced a cholesterol-lowering yogurt in Europe which is being aggressively marketed throughout the European Union.



While Tesco’s products incorporate our branded ingredient ReducolTM, Unilever, McNeil, Raisio and Danone use sterol ingredients from competitive sources. Leading sterol suppliers are Phyto-Source, Arboris, Cargill, Cognis and ADM. Of these, only Phyto-Source and Arboris are suppliers of wood sterols, which are a type used in the manufacture of ReducolTM.  However, while wood sterols are non-genetically modified and as such have some consumer attractiveness, particularly in Europe, over other sterol products, the two classes of sterols do compete and accordingly, ReducolTM’s competitors include genetically modified sterols derived from other than wood sources.



In the United States, functional food products marketed to have a cholesterol-lowering effect, including products containing phytosterols and products containing soluble fiber continue to grow. However, existing products such as margarine spreads containing phytosterols have continued to experience flat, or decreases in, sales.  As well, the US market for phytosterol containing products still remains smaller in comparison to Europe. We will be competing in the U.S., directly and indirectly, primarily with Cognis, Cargill, Archer Midlands Daniels, Raisio and J&J, all of whom have substantially more resources and a greater market presence than us.  Currently, our competitors cholesterol-lowering products are being incorporated in the United States into food products such as orange juice, cereal, margarine spreads, yogurts, granola bars, milk drinks and chocolate bars.



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



Marketing Activities



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







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Technology Licenses Granted to the Company



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





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



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



The Tall Oil License grants us the exclusive worldwide right to manufacture, distribute, market, sell, license or sublicense any products derived from or developed from the technology.   Twenty-five per cent of cumulative royalties paid under the Tall Oil License in excess of $2.5 million shall be set aside in a special research fund so long as we provide matching funds to the special research fund.  Should we decline to provide matching funds or fail to agree with UBC on research terms, then the funds shall be released to UBC and treated as royalties.  The Tall Oil License continues until the later of the expiration of the 20-year term and the expiration of the last registered patent subject to the Tall Oil License.



Research and Development

In the prescription pharmaceutical area, our focus will remain primarily on cardiovascular and related diseases, including those associated with Metabolic Syndrome.  (See above Our Pharmaceuticals).



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



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



|                             |                  
|---------------------------- | -----------------
|Period                       | Expenses for Year
|Year ended December 31, 2007 | $3.5 million     
|Year ended December 31, 2006 | $9.6 million     
|Year ended December 31, 2005 | $11.0 million    



For the year ended December 31, 2007, $1.64 million (2006 - $nil, 2005 - $nil) of R&D costs were incurred on the FM-TP Series of Compounds and an insignificant amount (2006 - $6.25 million, 2005 - $7.39 million) of R&D costs were incurred on the FM-VP4 project.  R&D expenditures on the development of our Library of Compounds were $0.07 million in fiscal 2007 (2006 - $0.64 million, 2005 - $0.77 million).  Ongoing R&D projects in the nutraceutical area incurred R&D costs of $0.46 million in the year ended December 31, 2007 (2006 - $0.71 million, 2005 - $0.74 million). Patent and regulatory related costs were $0.96 million in fiscal 2007 (2006 - $1.35 million, 2005 - $1.26 million).  In 2007, allocation of stock based compensation to R&D was $0.35 million (2006 - $0.82 million, 2005 - $0.75 million).



Government Regulation



Pharmaceuticals

One of the major tasks for the development and commercialization of pharmaceutical drugs, such as FM-VP4, is to obtain regulatory approvals within a jurisdiction or a country. Every country has its own registration procedures and unique requirements. In the United States, the guidelines are enforced by the FDA, and in Canada by Health Canada.







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To receive regulatory approval in the United States and Canada, a new drug must pass through a number of testing stages. The first involves the drugs chemistry, manufacture, pharmacology and toxicology in animals. Successful results can lead to the initiation of clinical trials on humans.



These trials involve three Phases. In Phase I, the drugs effect on, and safety in, patients and healthy volunteers is assessed. In Phase II, the drugs efficacy, dosage, side effects and safety are established in a small number of patients who have the disease that the drug is intended to treat. In Phase III, there are controlled clinical trials in which the drug is administered to a large number of patients who are suffering from the disease that the drug is intended to treat, and in which further information relating to safety and efficacy is gathered. Further, in Phase III, the effectiveness of the new drug is compared to that of accepted treatment modalities. Following Phase III, the drug sponsor submits a New Drug Application (NDA) to the FDA or a New Drug Submission (NDS) to Health Canada for marketing approval. Generally, a similar approval process is required in all developed countries.



We cannot predict the time required for regulatory approval of our drugs/agents, or the extent of clinical testing and documentation that may be required by regulatory authorities. Any delays in obtaining, or failure to obtain regulatory approvals in the United States, Canada, Europe or other foreign countries could prevent or significantly delay our market entry and the receipt of revenues from the sale of our products.



Nutraceuticals

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



United States

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



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



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



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



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









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European Union (EU)

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



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



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



Structure/Function Claims:  In Europe, structure/function claims are allowed, but not medical claims (i.e., to cure, treat, or mitigate disease). However, the labeling regulation for phytosterol food products published in April 2004 requires the product label to say, this product is intended exclusively for people who want to lower their blood cholesterol level.



Australia

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



Dietary Supplements:  Our sterols received approval for marketing as a complementary medicine by the Office of Complementary Medicines in July 2001.



Canada

Novel Foods: Currently, applications for approval of food products containing ReducolTM must be made under the Novel Foods regulations. One application has been submitted for a food product. The approval process by this route is expected to be lengthy as any claims such as, reduction of cholesterol, will require an amendment to the Canadian Food & Drug Act.



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



Brazil

In 2007, ReducolTM was approved for use in food products by the Brazilian National Health Surveillance Agency, ANVISA. Each new food product in Brazil with Reducol , however, will require a separate petition from the local food manufacturer.











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Taiwan

Reducol was approved for use in milk in Taiwan in 2007; commercial sales of milk product with Reducol began later in the year.



Intellectual Property

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



As of March 1, 2008 we hold, directly or indirectly through license, rights to 205 patents and pending patent applications in the United States and worldwide, of which 17 (including a European Patent validated in 18 countries within the EU) are  exclusively licensed from UBC.  Many of the 205 patents and patent applications are interrelated and in effect assert rights to substantially similar inventions in different jurisdictions. Some are patents granted across the European Patent Community and have been validated in 18 or more of the available jurisdictions. In the United States, we have 6 issued patents, and 32 pending patent applications.  In addition to the United States, we have patents issued in China, Japan, Canada, Norway, Russia, South Africa, New Zealand and all countries of the European Patent Community.



Our first filed patent application in our portfolio is exclusively licensed from UBC and covers the preparation and purification of sterol compositions from the forest derived by-product tall oil soap, the actual compositions and use of these compositions and derivatives as agents to prevent or treat primary and secondary lipid disorders and their clinical complications including coronary heart disease, peripheral vascular disease and stroke.



The 172 patents and applications not licensed from UBC comprise additional therapeutic applications or indications for sterol compositions, formulations and delivery vehicles comprising sterol compositions, sterol-based derivatives, additional therapeutic indications for these derivatives, sterol-based combinations for use in lowering serum cholesterol,  compositions comprising sterols and additional components to assist in food and nutraceutical formulations. Also included in this 172 patents and applications are patents and pending applications covering technology assigned to us by TheraPei. This technology includes:



1)

the FM-TP2000 series of peptide compounds which are being designed to selectively and effectively stimulate the neuronal receptors of beta cells, called VPAC2 receptors, thus triggering insulin release;

2)

the FM-TP4000 series of compounds which would treat diabetes by preventing beta cell loss in the pancreas and preserving their insulin secreting activity; and

3)

the FM-TP3000 series of compounds which are long-acting VPAC2 agonists for asthma.



Notices of Opposition have been filed against four patents allowed in Europe, one covering sterol compositions, which includes the ReducolTM composition, one covering the process, which is currently used by Phyto-Source, to extract and purify phytosterols from tall oil pitch, one covering a process of microfluidizing or reducing the particle size of phytosterols to facilitate formulation and the final opposition covering a process of uniformly incorporating sterols in oils and fats by melting. All of these oppositions are filed by third parties on the ground that the patent claims are not unique and inventive.  There can be no assurance that all of these patent claims will ultimately be upheld.   If they are not upheld, then anyone will be able to immediately use the compositions and processes covered by the patent claims in competition with us.   In 2006, one of our patents, on which we are not currently reliant, was revoked, however, we have appealed this decision and may pursue the appeal so that we can explore the use of this technology in the future. (See Item 8  Financial Information  A. Legal Matters  Patent Oppositions)







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C.

Organizational Structure



SubsidiariesWe have four wholly-owned subsidiaries as follows:



·

Forbes Medi-Tech Operations Inc.(“Forbes Operations” or “Old Forbes”) was incorporated pursuant to the provisions of the Company Act(British Columbia) on September 17, 1985 as Amber Resources Ltd.  In 1992, Old Forbes changed its focus from mining exploration to pharmaceutical research and development and, accordingly, changed its name to Forbes Medi-Tech Inc. on July 8, 1992.  Old Forbes was continued under the federal laws of Canada pursuant to the Canada Business Corporation Act on April 11, 2001 and its previous Memorandum and Articles were replaced by Articles of Continuance and By-Laws. On February 27, 2008, Old Forbes changed its name from "Forbes Medi-Tech Inc." to "Forbes Medi-Tech Operations Inc.



Forbes Operations holds our 100% interest in Forbes Medi-Tech (USA) Inc. and Forbes Research & Manufacturing Inc.



·

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



·

Forbes Research & Manufacturing Inc. (“Forbes Manufacturing”) was incorporated pursuant to the provisions of the Canada Business Corporations Act on December 1, 1998.  Forbes Manufacturing was formed to operate our pilot manufacturing process development plant for phytosterol products in Amqui, Quebec.  We sold the Amqui Plant in August 2002 for staged payments of $1.6 million.



·

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



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



·

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



Our current organizational structure and our subsidiaries and associates are illustrated as follows.  Percentages shown are our percentage ownership interest in the relevant entity.  Solid lines indicate a 100% interest; dotted lines indicate an interest less than 100%.







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[forbes20fdecember001.jpg]





D.

Property, Plants and Equipment



Corporate Offices

·

We lease approximately 9,500 square feet of office space at executive offices located in Vancouver, British Columbia at an annual cost of approximately $279,000.  As of January 15, 2008, we have sublet approximately 2,400 square feet of this office space to a third party for annual proceeds of approximately $72,000.



Other Facilities

·

We lease approximately 3,000 square feet of laboratory/office space in La Jolla, California at an annual cost of approximately $150,000 per year. These premises are used for conducting research on the FM-TP compounds.



·

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



ITEM 5

Operating and Financial Review and Prospects



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



The following discussion is based on the consolidated financial statements included in the annual report which have been prepared in accordance with accounting principles generally accepted in Canada.  These principles differ in certain material respects from those accounting principles generally accepted in the United States.  These differences are described in Note 20 of our consolidated financial statements.



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



There are several accounting policies that we believe are critical to the presentation of our consolidated financial statements.  Note 3 - Significant accounting policies to our consolidated financial statements summarizes each of our significant accounting policies.  Those accounting policies should be read in conjunction with the other notes to our consolidated financial statements and managements discussion and analysis of results of operations and financial condition described in this Operating and Financial Review and Prospects.



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





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Critical Accounting Policies and Estimates



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



The preparation of our financial statements requires estimates and judgments that affect the reported amounts of assets, liabilities, equity, and revenues and expenses, and related disclosure of contingencies. Management evaluates the assumptions and estimates, including those related to sales, inventories, intangible assets and accrued liabilities. Management bases its estimates on historical experience and on various other assumptions believed to be reasonable under the circumstances. The results of those estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The actual results might differ materially from these estimates under different assumptions or conditions. The methodologies used and assumptions selected by management in making these estimates, as well as the related disclosures, have been reviewed by and discussed with the Audit Committee of the Board of Directors. Management believes the following critical accounting policies affect the more significant judgments and estimates used in the preparation of the consolidated financial statements. Notes 2 and 3 to the consolidated financial statements for the year ended December 31, 2007 should be read for a more comprehensive outline of our significant accounting policies.



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



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



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. Inventory is reviewed on a product-by-product basis, and any valuation allowances are written off to cost of sales.



We regularly review our inventories for obsolescence and valuation issues. Should selling prices and demand for our inventory decline, additional provisions for obsolescence and valuation may be necessary. In the year ended December 31, 2007, we recognized $0.45 million (December 31, 2006 - $0.35 million) of inventory reserves on excess inventories.



In addition, in the year ended December 31, 2007, $0.39 million (2006-$nil) was charged to cost of sales as a result of recognizing impairment losses on 2008 purchase commitments for inventory.



Accrued liabilities   We engage a number of third party service providers, contract manufacturing and logistic organizations. The basis of accruals is estimated expenses and/or inventory production. Where possible, detective controls, such as confirmations, are used to verify significant accruals. For example, we request and verify the accruals with statements from known, significant vendors and reconcile invoices received subsequent to the period end against those accruals. This accrual depends on the issuance and accuracy of estimates in purchase orders and contracts, and the accuracy of estimates of costs incurred to the end of the reporting period.



Stock-based CompensationWe have a stock-based compensation plan for our employees, officers, directors and consultants and for those of our affiliates.  Effective January 1, 2004, we have adopted, on a retroactive basis, the transitional provisions of CICA Handbook Section 3870, Stock-based compensation and other stock-based payments.  Beginning January 1, 2004, we account for employee stock options to include the recognition of compensation expense for stock options granted to employees, based on the fair value of the stock options issued.



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



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







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39



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 value 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.



During the year ended December 31, 2007, we evaluated our goodwill and intangible assets for impairment and recorded impairment charges of $0.37 million and $0.30 million, respectively, to write down the goodwill and intangible assets to reflect a reasonable estimate of their estimated fair values.





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



Operating ResultsAs we are continuing to further our pharmaceutical research of novel compounds, future losses are anticipated and additional financing will be required.  Our eventual profitability is dependent on many factors, including, but not limited to, successful development and market acceptance of our products and services, receiving the required regulatory approvals, the conclusion and implementation of applicable strategic and other alliances and adequate financing on a timely basis.  There can be no assurance that required regulatory approvals will be received or, if received, will be received on a timely basis.  In addition, the nutraceutical and pharmaceutical industries are subject to rapid and substantial technological change, which could reduce the marketability of our products or technology, and which requires ongoing issuance and maintenance of patents as well as continued investment in research and development.  It is not possible to predict the outcome of our future research and development activities or the financing thereof.



BASIS OF PRESENTATION



Our consolidated financial statements include the assets, liabilities and operating results of our wholly-owned subsidiaries, Forbes Research & Manufacturing Inc., Forbes Medi-Tech (Research) Inc., Forbes Medi-Tech (USA) Inc., and our 51% joint venture interests in Forbes-Fayrefield Ltd. ("Forbes-Fayrefield").  We account for our interests in Forbes-Fayrefield using the proportionate consolidation method.  Material inter-company balances and transactions have been eliminated in these consolidated financial statements.



For the fiscal year ended December 31, 2007, we reported a net loss of $11.7 million ($0.30 per share) compared with a net loss of $10.8 million ($0.29 per share) for the year ended December 31, 2006, and a net loss of $12.8 million ($0.38 per share) for the year ended December 31, 2005.



In February 2006, we announced the decision to dispose of our interest in the Phyto-Source joint venture. Our analysis will focus on the continuing operations, assets and liabilities of Forbes Medi-Tech Inc. and we will present separately the Phyto-Source operations, assets and liabilities under Discontinued Operations. In accordance with CICA Handbook Section 3475, the activities relating to the Phyto-Source joint venture operations, assets and liabilities then to be disposed of have been presented as discontinued operations in the consolidated financial statements ended December 31, 2007 and in the following analysis. Results for the year ended December 31, 2006 and 2005 have also been reclassified to reflect this treatment.



For the fiscal year ended December 31, 2007, we reported a net loss from continuing operations of $11.7 million ($0.30 per share) compared with a net loss from continuing operations of $17.8 million ($0.48 per share) for the year ended December 31, 2006, and a net loss from continuing operations of $16.5 million ($0.48 per share) for the year ended December 31, 2005.



To-date, we have focused on the research, development and commercialization of our phytosterol-based businesses and have incurred annual operating losses since our inception. We expects to continue incurring operational losses until the earnings from commercialization of one or more of our products exceed the costs of research and development, manufacturing, administration and other expenses. At December 31, 2007 our accumulated deficit was $101.3 million.







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40







RESULTS OF CONTINUING OPERATIONS



The following table summarizes our results of continuing operations and selected financial information for the years ended December 31, 2007, December 31, 2006 and December 31, 2005.



|                                                                         |                              |                              |                             
|------------------------------------------------------------------------ | ---------------------------- | ---------------------------- | ----------------------------
|Summary:
(millions of $ except per share values)                         | Year ended
December 31, 2007 | Year ended
December 31, 2006 | Year ended
December 31, 2005
|                                                                         |                              |                              |                             
|Revenues                                                                 | $           9.4              | $         7.2                | $        4.4                
|Expenses                                                                 | (20.8)                       | (24.9)                       | (20.9)                      
|Impairment charge for goodwill, intellectual property and capital assets | (0.8)                        |                             |                            
|Current income tax recovery (expense)                                    | 0.5                          | (0.1)                        |                            
|Loss from continuing operations                                          | $      (11.7)                | $     (17.8)                 | $    (16.5)                 
|Loss per share from continuing operations-basic and diluted              | $      (0.30)                | $     (0.48)                 | $    (0.48)                 



REVENUES



Revenues from continuing operations for year ended December 31, 2007 include our proportionate share of the revenue generated by our joint venture, Forbes-Fayrefield. We started to recognize this joint venture revenue in June 2006.



|                           |                              |                              |                             
|-------------------------- | ---------------------------- | ---------------------------- | ----------------------------
|Summary:
(millions of $)   | Year ended
December 31, 2007 | Year ended
December 31, 2006 | Year ended
December 31, 2005
|                           |                              |                              |                             
|Sales-phytosterol products | $    7.7                     | $    5.3                     | $  3.8                      
|Sales-finished goods       | 1.1                          | 0.7                          |                            
|Licensing                  | 0.1                          | 0.1                          | 0.2                         
|Phytosterol revenues       | 8.9                          | 6.1                          | 4.0                         
|Interest and other         | 0.5                          | 1.1                          | 0.4                         
|Total revenues             | $   9.4                      | $   7.2                      | $  4.4                      



Fiscal 2007 compared to Fiscal 2006

Total revenues, including interest income, for the fiscal year ended December 31, 2007 were $9.36 million compared with $7.24 million for the fiscal year ended December 31, 2006, an increase of 29%.  This increase was due to increases in our sales of Reducol and Phyto-S Sterols and increases in sales by Forbes-Fayrefield of finished products, such as margarine spread, spoonable yogurt, and yogurt drinks.



**Phytosterol revenues** include direct sales of phytosterol products (branded - Reducol, non-branded sterol esters and Phyto-S Sterols), sales of finished products containing Reducol and amortization of previously received license fees in accordance with our revenue recognition policies.  Phytosterol revenues for the year ended December 31, 2007 totaled $8.90 million compared with $6.12 million for the year ended December 31, 2006.  Licensing revenues are a result of our supply and licensing agreement with Pharmavite LLC for the continued sale of Reducol.



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



Fiscal 2006 compared to Fiscal 2005

Total revenues, including interest income, for the fiscal year ended December 31, 2006 were $7.24 million compared with $4.48 million for the fiscal year ended December 31, 2005, an increase of 62%. This increase is mainly attributable to the launch of Reducol in the EU and sales by Forbes-Fayrefield of finished products, such as margarine spread, spoonable yogurt, and yogurt drinks.



Concentration of sales and segmented disclosure

In the year ended December 31, 2007, the majority of our revenue was generated from four customers (December 31, 2006  four customers, December 31, 2005  two customers).  Customer A accounted for 40% (2006  38%, 2005  81%), Customer B accounted for 15% (2006  0%, 2005  0%), Customer C accounted for 13% (2006  12%, 2005  0%), and Customer D accounted for 10% (2005  0%, 2005  5%) of revenue. For 2007, 49% of sales are recorded in the USA, 50% of sales are recorded in Europe and the balance in Asia.







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41









OPERATING EXPENSES



|                                         |                              |                              |                             
|---------------------------------------- | ---------------------------- | ---------------------------- | ----------------------------
|Summary:
(millions of $)                 | Year ended
December 31, 2007 | Year ended
December 31, 2006 | Year ended
December 31, 2005
|                                         |                              |                              |                             
|Cost of sales                            | $        9.2                 | $     5.9                    | $     2.5                   
|General and administrative               | 5.0                          | 5.2                          | 5.4                         
|Research and development                 | 3.5                          | 9.6                          | 11.0                        
|Marketing, sales & product   development | 1.6                          | 2.8                          | 1.6                         
|Foreign exchange losses                  | 1.3                          | 1.3                          | 0.2                         
|Depreciation/amortization                | 0.2                          | 0.1                          | 0.2                         
|Total operating expenses                 | $     20.8                   | $  24.9                      | $  20.9                     



Research and Development   Our research and development (R&D) expenses for the year ended December 31, 2007, totalled $3.47 million compared with $9.63 million for the year ended December 31, 2006 and $10.99 million for the year ended December 31, 2005.



For the year ended December 31, 2007, $1.64 million (2006 - $nil, 2005 - $nil) of R&D costs were incurred on the FM-TP Series of Compounds and an insignificant amount (2006 - $6.25 million, 2005 - $7.39 million) of R&D costs were incurred on the FM-VP4 project.  R&D expenditures on the development of our Library of Compounds were $0.07 million in fiscal 2007 (2006 - $0.64 million, 2005 - $0.77 million).  Ongoing R&D projects in the nutraceutical area incurred R&D costs of $0.46 million in the year ended December 31, 2007 (2006 - $0.71 million, 2005 - $0.74 million). Patent and regulatory related costs were $0.96 million in fiscal 2007 (2006 - $1.35 million, 2005 - $1.26 million).  In 2007, allocation of stock based compensation to R&D was $0.35 million (2006 - $0.82 million, 2005 - $0.75 million).



R&D expenses are expected to increase as work progresses on the FM-TP Series of Compounds. As the FM-TP Series of Compounds are in the early stages of development and their continued development will depend on successfully reaching a number of milestones over the next several years, it is not possible at this time to estimate costs and timing to commercial production, or whether commercial production will occur at all.



General and Administrative  General and administrative expenditures (G&A) for fiscal year 2007 totaled $5.07 million, compared with $5.20 million in fiscal year 2006 and with $5.44 million in fiscal year 2005.  By type of costs incurred, G&A for 2007 consists of professional services - $0.86  million (2006 - $1.23 million, 2005 - $1.19 million), salaries and benefits - $1.75 million (2006 - $1.80 million, 2005 - $1.62 million); travel - $0.28 million (2006 - $0.37 million, 2005 - $0.36 million); occupancy costs - $0.42 million (2006 - $0.30 million, 2005 - $0.24 million); and operations - $0.84 million (2006 - $1.72 million, 2005 - $1.26 million).  In 2007, allocation of stock based compensation to G&A was $0.42 million (2006 - $0.68 million, 2005 - $0.78 million). The changes from year to year are in the normal course of business and the decrease in overall G&A expenditures is line with our objective to control expenditures.



Related Party Transactions  Included in professional services for the year ended December 31, 2007 were payments for legal services of $0.20 million, made to Cawkell Brodie Glaister LLP, a law firm of which the Companys Corporate Secretary, Nancy Glaister, is a partner (2006 - $0.23 million, 2005  $0.25 million).



Until May 18, 2005, the Chair of the Audit Committee, Nitin Kaushal, received $1 thousand for each non-meeting day during which he performed Audit Committee services. In the year ended December 31, 2005, we paid to Mr. Kaushal, a director of the Company, $6,000 for such services. Since then, fees for Mr. Kaushals additional duties as Audit Committee Chair have been included in his remuneration as such. These transactions are measured at the exchange amount of consideration established and agreed to by the related parties.







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42









Cost of Sales (Cost of Sales)  Cost of Sales for the year ended December 31, 2007 totaled $9.16 million on phytosterol revenues of $8.85 million, or (104%) of phytosterol revenues, for the year ended December 31, 2006 - $5.86 million on phytosterol revenues of $5.96 million or 98% of phytosterol revenues. In the year ended December 31, 2007, we recognized $0.45 million (December 31, 2006 - $0.35 million, December 31, 2005-$nil) of inventory valuation allowances on excess inventories and $0.39 million (December 31, 2006 - $nil, December 31, 2005-$nil) relating to allowances for losses on future year purchase commitments, which are included in Cost of Sales.  Prior to the impact of these allowances, in the year ended December 31, 2007, Cost of Sales as a percentage of phytosterol revenues was 94% compared to 92% for the year ended December 31, 2006.  Continued market price pressure has not enabled us to increase our sales prices to achieve higher margins.  In addition, selling high cost product, the inventory valuation adjustments (as further described below), the sale of excess inventories at reduced prices to align our inventory balances with forecasted demand, and lower margins being realized on the sales of finished goods sold through Forbes-Fayrefield have all contributed to a slight increase in Cost of Sales as a percentage of phytosterol revenues.  We are diligently working on alternative ways to decrease our Cost of Sales and improve our margins.



Cost of Sales for the year ended December 31, 2006 totaled $5.86 million on phytosterol revenues of $5.96 million or 98% of phytosterol revenues and for the year ended December 31, 2005 - $2.51 million on phytosterol revenues of $3.87 million or 65% of phytosterol revenues. In the year ended December 31, 2006, we recognized $0.35 million (December 31, 2005-$nil) of inventory valuation allowances on excess inventories.  Prior to the impact of this allowance, in the year ended December 31, 2006, Cost of Sales as a percentage of phytosterol revenues was 92% compared to 65% for the year ended December 31, 2006. The increase in percentage is attributable to selling high cost products, inventory valuation adjustment (as further described below), competitive customer pricing pressure and lower margins being realized on the sales of finished goods sold through Forbes-Fayrefield.



Fluctuations in Cost of Sales as a percentage of phytosterol revenue are attributable to the mix of product sold in a period, varying contractual sales terms, lower margins realized on the sales of finished goods sold through Forbes-Fayrefield and inventory valuation adjustments (as further described below).  We are working on improving our overall margins.



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



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



Having entered into a long-term supply agreement at the time of our disposition of Phyto-Source, for the supply of ReducolTM and other wood sterols, we also review contracted purchase commitments on a regular basis and record any necessary provision for losses on future year purchase commitments based primarily on our historical sales and expectations for future use.



Marketing, Sales & Product Development (“Marketing”)Totaled $1.61 million for 2007 compared with $2.76 million incurred in 2006 and $1.67 million in 2005.  The decrease in 2007 from 2006 is attributable to a reduction in staffing levels and reduced expenditures in the areas of material handling, and advertising, as a result of fewer product launches.  The increase in 2006, compared to 2005, was attributable to an increase in staffing levels and additional expenditures associated with the European product launches.  In 2007, allocation of stock based compensation to Marketing was $0.19 million (2006 - $0.32 million, 2005 - $0.25 million).



Foreign exchange lossestotaled $1.27 million for the year ended December 31, 2007 compared with $1.31 million in the year ended December 31, 2006.  Of the foreign exchange losses for the year ended December 31, 2007, $1.01 million (2006-$1.53 million) is attributable to unrealized foreign exchange losses and $0.26 million relates to realized exchange losses (2006-$0.22 million exchange gains).



Foreign exchange losses totaled $1.31 million for the year ended December 31, 2006 compared with $0.17 million in the year ended December 31, 2005.  Of the foreign exchange losses for the year ended December 31, 2006, $1.53 million (2005-$0.33 million) is attributable to unrealized foreign exchange losses and $0.22 million relates to realized exchange gains (2005-$0.16 million).



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









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43









Stock-based Compensation  Stock-based compensation expense totaled $0.96 million for the year ended December 31, 2007 compared with $1.82 million for 2006 and with $1.78 million for 2005.  Of the $0.96 million of stock-based compensation expense recorded in 2007, $0.84 million (2006 - $1.59 million, 2005 - $1.77 million) relates to employee and $0.12 million (2006 - $0.23 million, 2005 - $0.01 million) to non-employee option grants. The fluctuations in these values are dependent upon the Companys stock prices as listed on the TSX at the grant or valuation date, the stocks volatility for the option life or vesting term, and the number of options granted in a given period.



For the years December 31, 2007, 2006 and 2005, this compensation expense was allocated to research and development expenses, general and administrative expenses, and marketing, sales and product development expenses on the same basis as for the allocations of cash compensation as summarized below:



|                                         |                              |                              |                             
|---------------------------------------- | ---------------------------- | ---------------------------- | ----------------------------
|Stock based compensation
(millions of $) | Year ended
December 31, 2007 | Year ended
December 31, 2006 | Year ended
December 31, 2005
|                                         |                              |                              |                             
|Research and development                 | $   0.4                      | $   0.8                      | $   0.8                     
|General and administrative               | 0.4                          | 0.7                          | 0.8                         
|Marketing, sales and product development | 0.2                          | 0.3                          | 0.2                         
|                                         | $   1.0                      | $   1.8                      | $  1.8                      



Impairment Charge For Goodwill, Intellectual Property And Capital Assets

In light of the Companys going concern issues, we reviewed the carrying value of our goodwill and concluded that the carrying value would not be recoverable. Accordingly, at December 31, 2007, we recorded an impairment charge of $0.37 million to write down the goodwill to reflect a reasonable estimate of its estimated fair value as at that date. We also reviewed the carrying value of our intangible assets and concluded that the carrying value of certain intangible assets would not be recoverable. At December 31, 2007, we recorded an impairment charge of $0.30 million to write down these intangible assets to reflect a reasonable estimate of their estimated fair value as at that date.



In January 2008, we reached an agreement to sublease a portion of our office space. At December 31, 2007, we recorded an impairment loss of $0.09 million to write down leasehold improvements relating to this space and certain office equipment that was disposed of at that time. The fair value of this office equipment was determined based on the proceeds received from its sale in January 2008.



DISCONTINUED OPERATIONS - PHYTO-SOURCE



The following table summarizes our results of discontinued operations of Phyto-Source for the years ended December 31, 2006 and 2005.



As previously disclosed, in February 2006, we announced our decision to dispose of our interest in Phyto-Source, and on March 14, 2006, we finalized an agreement to sell our interest for US$25 million (Cdn$28.9 million, based on then current exchange rates). On the sale, we recognized a net gain of $7.0 million, which was calculated as the excess of proceeds received over the net book value of the assets disposed of, write-down of capitalized technology in the amount of $1.7 million, $0.1 million in transaction fees, $7.2 million in income tax expense, less $0.8 million in a future tax liability reversal.



|                                                                           |                                 |                             
|-------------------------------------------------------------------------- | ------------------------------- | ----------------------------
|Summary:
(millions of $ except per share values)                           | Year ended
December 31, 2006(i) | Year ended
December 31, 2005
|                                                                           |                                 |                             
|Revenues                                                                   | $     2.5                       | $    16.5                   
|Expenses                                                                   | (2.0)                           | (10.4)                      
|Income taxes                                                               | (0.5)                           | (2.4)                       
|Income from discontinued operations                                        | $                              | $      3.7                  
|                                                                           |                                 |                             
|Gain from disposal of discontinued operations                              | 7.0                             |                            
|                                                                           |                                 |                             
|Income per share from discontinued operations
Basic and diluted            | $    0.00                       | $    0.10                   
|Gain per share from disposal of discontinued operations, basic and diluted | $    0.19                       |                            

(i) our proportionate share of the Phyto-Source operations for the period from January 1, 2006 to March 14, 2006 (date of disposal).













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44







LIQUIDITY AND CAPITAL RESOURCES



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



Our net cash and cash equivalents as of December 31, 2007 totaled $5.23 million, compared with $15.29 million as at December 31, 2006.  We had working capital of $9.67 million at December 31, 2007 (December 31, 2006  working capital $19.44 million).



Cash used in continuing operating activities was $10.10 million in fiscal 2007, compared to $17.85 million in fiscal 2006 and $17.38 million in fiscal 2005. Net cash used in continuing operations for 2007 was primarily a result of the net loss of $11.68 million for the period adjusted for non-cash expenses and increases in non-cash operating items of $0.29 million, primarily relating to decreases in inventories, prepaid expenses and accounts receivable offset by an increases in accounts payable and income tax.  Net cash used in continuing operations for 2006 was primarily a result of the net loss of $10.84 million for the period adjusted for non-cash expenses and discontinued operations items, and increases in non-cash operating items of $2.01 million, primarily relating to increases in inventories, offset by a decrease in prepaid expenses and in accounts payables.



Cash realized in investing activities in the year ended December 31, 2007 was $0.04 million relating to the acquisition of capital assets.  Investing activities in the year ended December 31, 2006 realized $28.46 million relating to the proceeds of $28.94 million on disposal of our interest in Phyto-Source, less $0.44 million invested in intangible assets arising on the acquisition of TheraPei Pharmaceuticals Inc. and $0.17 million in capital assets. Investing activities generated net cash of $5.85 million in 2005.  Cash provided in 2005, resulted primarily from $6.02 million transferred from short-term investments offset by expenditures of $0.32 million used in the acquisition of capital assets.



In fiscal 2007, financing activities provided $0.01 million of cash, from the exercise of options, compared with $0.59 million in 2006 and $5.12 million in 2005. In 2006, funds generated from financing activities resulted from the exercise of options and warrants.  In November 2005, we completed a private placement, which contributed US$6.2 million (Cdn$7.0 million, before $0.8 million of share issue costs).  Funds used in financing activities in 2005 were primarily used for repayment of loans and capital leases associated with the discontinued operations.



After taking into account our planned expenditures, our anticipated revenue, and assuming no unanticipated costs or expenses, but without taking into account the Non-Dilutive Financing, we now consider that our capital resources will be sufficient to finance operations into the beginning of the third quarter of 2008. Assuming that the Non-Dilutive Financing closes as anticipated, and after taking into account the same factors and assumptions, we consider that our capital resources would be sufficient to finance operations into the fourth quarter of 2008. In our previous Management Discussion and Analysis for Q3-2007, we reported that we considered that our capital resources would sufficient to finance operations into the beginning of the second quarter of 2008.

We have no external sources of liquidity such as lines of credit (excluding the line of credit in the Forbes-Fayrefield joint venture, which is restricted to use by that entity).  At the present time we consider that it will be necessary, in addition to the Non-Dilutive Financing, to conclude one or more debt or equity financings in the near term to be able to continue with our existing business plan.  The current market for both debt and equity financings for companies such as ours is challenging, and there can be no assurance that a financing, whether debt or equity, will be available on acceptable terms, or at all.  The failure to obtain financing on a timely basis (i) may result in our having to reduce or delay one or more of our planned research, development and marketing programs and to reduce related overhead, any of which could impair our current and future value, and (ii) may have a material adverse effect on our ability to continue.







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45







An equity financing at current market prices is anticipated to cause substantial dilution to our existing shareholders.  While we are continuing to explore the out-licensing of FM-VP4 and potential M&A transactions, and intend to complete the Non-Dilutive Financing, we do not expect that the achievement of any of these would replace the need for financing in the near term.



OFF-BALANCE SHEET ARRANGEMENTS



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



CONTRACTUAL OBLIGATIONS



|                                         |                        |             |             |                   |  
|---------------------------------------- | ---------------------- | ----------- | ----------- | ----------------- | -
|As at December 31, 2007
(millions of$)   | Payments due by period
|Total                                    | Less than
1 year       | 2  3 years | 4  5 years | More than
5 years
|                                         |                        |             |             |                   |  
|Operating lease obligations (i)          | $   1.0                | $   0.4     | $   0.6     |                  | 
|Sterol supply agreement (ii)             | 12.1                   | 5.0         | 7.1         |                  | 
|Research and development contracts (iii) | 0.2                    | 0.2         |            |                  | 
|Total                                    | $   13.3               | $   5.6     | $   7.7     |                  | 
|                                         |                        |             |             |                   |  

(i)

Operating leases comprise our long-term leases of rental properties, photocopiers, and postage meter

(ii)

Purchase obligations reflect our obligations under our Sterol Supply Agreement with Phyto-Source.

(iii)

Research and development contracts commitments relate to R&D projects initiated via contract or agreement; payment of commitments is executed when the relevant work is completed as per contract or agreement.



For a discussion of our commitments, contractual obligations and contingencies, see Note 12 to our consolidated financial statements and Item 5 -Operating and Financial Review and Prospects - Liquidity and Capital Resources.



ITEM 6

Directors, Senior Management and Employees



A.

Directors and Senior Management



The following table sets forth the name, date of birth, and the positions and offices held by our directors and senior management with us as of March 28, 2008, their respective business experience, functions and areas of experience in the company, and the period during which each director or executive officer has served as such.  Each director of our Company holds office until the next annual general meeting or until his or her successor is duly elected or appointed, unless his or her office is earlier vacated by resignation, death, removal or otherwise, or he or she becomes disqualified to act as a director. Each executive officer holds office at the discretion of the Board of Directors.







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46









|                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                       |                                         
|--------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------
|Name, Date of Birth, and Office Held with the Company(1)                                | Business Experience, Functions and Areas of Experience in the Company(1)                                                                                                                                                                                                                                                                                                              | Period Served                           
|Charles A. Butt, B.Comm.
March 22, 1951
Director, President and Chief Executive Officer | President of the Company since April 2001 and Chief Executive Officer since March 2002; Senior Vice President, Commercial Operations of the Company July 2000 to March 2002; Executive Vice President & Chief Operating Officer March 2002 to April 2001.                                                                                                                             | Director since September 9, 1999        
|Percy Skuy, Dipl. Pharm.(2) (3) (4)February 17, 1932
Director                           | Retired, July 1995 as President of Ortho Pharmaceutical and Ortho-McNeil Inc. affiliates of Johnson and Johnson, involved in family planning, immunology and psychiatry  1973 to July 1995.  Currently is a Health Care Consultant.                                                                                                                                                  | Director since November 3, 1997         
|Donald Buxton, Dipl. Physical Therapy (3) (4)
January 14, 1933
Director                 | Chairman of Labopharm Inc., a specialty pharmaceutical company developing novel drug products using proprietary drug delivery technologies, July 2000 to February 2005; President and Chief Executive Officer of Labopharm Inc., February 1997 to July 2000; Consultant, January 1995 to February 1997; Currently is a Health Care Consultant.                                        | Director since November 1, 2000         
|Joe Dunne, B.Sc., Ph.D. (2) (3) (4)
April 16, 1942
Director                             | Dr. Dunne is an independent consultant to the food industry.  Director of Westgate Biologicals Ltd., a start-up company in the Health Sciences area, 1999 to present; Chairman of the Board and Chief Executive Officer of Westgate Biological Ltd. June 1999 to December 2003; President, Cultor Food Science 1997 to 1999; President of Quest (Food) International NA 1993 to 1997. | Director since December 13, 2000        
|Lily Yang, Ph.D. (4)May 31, 1947
Director                                               | Dr. Yang is currently Chairman of the Board, TheraLife, Inc. 2006 to present, a private company involved in innovative botanical drugs and drug delivery technology; President & CEO of TheraLife from 2000-2006.                                                                                                                                                                     | Director since March 13, 2002           
|Nitin Kaushal, B.Sc., CA  (2)
September 30, 1965
Director                               | Managing Director Desjardins Securities July 2005 to present, Institutional Sales Orion Securities January 2005 to July 2005, Managing Director, McFarlane Gordon/ Vengate Capital, a Life Sciences and Healthcare Investment Banking & Advisory Firm based in Toronto, July 2001 to January 2005; Managing Director, HSBC Securities from June 1997 to July 2001.                    | Director since September 15, 2003       
|Laura Wessman, B.A.Sc, B.Sc, M.B.A.
November 28, 1966
Senior Vice President, Operations | Senior Vice President, Operations, January 2006 to present; Senior Vice President, Corporate Development of the Company January 2004 to January 2006; Vice President, Business Development of the Company October 2002 to January 2004; Marketing Manager December 2000 to October 2002; Plant Manger, Cominco Engineering Services Ltd., May 1996 to November 1999.                  | Senior VP, Operations since January 2006
|David Goold, CA
February 14, 1955
Chief Financial Officer                               | Chief Financial Officer of the Company October 2004 to present; Vice President, Finance and Chief Financial Officer of B.C. Research Inc. and Vizon SciTec Inc. (a related group of companies) 1998 to 2004.                                                                                                                                                                          | CFO since October 2004                  







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47









|                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                            
|-------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------
|John J. Nestor, Ph.D.
January 21, 1945
Chief Scientific Officer            | Chief Scientific Officer of the Company October 2006 to present; Founder, Acting CEO and Chief Scientific Officer of TheraPei Pharmaceuticals, Inc. 2004 to 2006; Executive Vice President, Drug Discovery, of Sequenom, Inc. 2003 to 2004; CSO, President and Vice President of Consensus Pharmaceuticals, Inc. 1999-2003; Executive Vice President and Co-Founder of Helios Pharmaceuticals, Inc. 1996-1999.                                                                                                    | CSO since October 2006                     
|Jeffrey J.E. Motley, B.Sc.
May 25, 1956 
Vice President, Marketing & Sales | Vice President, Marketing and Sales of the Company; Vice President, Commercial Operations May 2001 to January 2004; Vice President, Business Development of the Company, January 2000 to May 2001; Director of Marketing, Nutritional Division, Wyeth-Ayerst Canada, January 1996 to December 1999 and during this time acted as District Sales Manager, Nutritional Division for Wyeth-Ayerst Canada; Sales Manager, national and district levels and Product Manager for Lederle Pharmaceuticals, 1981 to 1995. | VP, Marketing and Sales since February 2004

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

2  Member of Audit Committee.

3  Member of Compensation Committee.

4 Member of Nomination and Corporate Governance Committee.



Charles A. Butt  Director, President and Chief Executive Officer  Mr. Butt has been a director of the Company since September 1999 and the President of the Company since April 2002, the CEO since March 2002; formerly the Executive Vice President and Chief Operating Officer March 2001 to April 2001 and the Senior Vice President, Commercial Operations of the Company July 2000 until March 2001.  Mr. Butt has extensive international and North American experience in business management, marketing and sales in the healthcare industry. Prior to joining Forbes as Senior Vice President, Mr. Butt served as President of The Charson Group Inc., a healthcare consulting company, specializing in strategic planning and new product introductions, based in Toronto. Before moving into consulting, Mr. Butt headed up the Consumer Health Products Division for Lederle Laboratories (Canada), where he was responsible for the initiation and development of the Consumer Health Products Group. Mr. Butt has also worked in a variety of marketing and sales roles at Shulton Inc. in Europe, Africa and the Middle East as well as Colgate-Palmolive (UK).



Percy Skuy  Director  Mr. Skuy has been a director of the Company since November 1997. Mr. Skuy had a 34-year career with Johnson & Johnson where he acquired experience in many aspects of the pharmaceutical business including new product development, sales, marketing, research and development and executive management.  He retired in 1995 as President of Ortho-McNeil Inc., one of the two J&J affiliate companies in which he held the presidency.  Mr. Skuy is a pharmacist, and has been involved in the pharmaceutical and medical communities for many years and is currently a Health Care Consultant.



Donald Buxton  DirectorMr. Buxton has been a director of the Company since December 2000.  Mr. Buxton brings an in-depth knowledge of the international pharmaceutical industry to the Company, having served at senior administrative levels of large pharmaceutical firms both in North America and in Europe. Well-known in the Canadian pharmaceutical milieu, Mr. Buxton was Chairman of the Board of Labopharm, Inc. July, 2000 to February 2005, President and Chief Executive officer of Labopharm Inc. from February 1997 to July 2000, a Consultant from January 1995 to February 1997, and President and Chief Executive Officer of Roussel Canada from 1970 to 1994 and of Hoechst-Roussel Canada from 1992 to 1994. He is currently a Health Care Consultant.



Dr. Joe Dunne  DirectorDr. Dunne has been a director of the Company since November 2000 and is currently an independent consultant to the food industry.  Dr. Dunne was Chairman of the Board and CEO of Westgate Biological Ltd., a startup company in the Health Sciences area from June, 1999 to December 2003.  Dr. Dunne has had a distinguished career in the multi-million dollar food ingredient industry. During his career, Dr. Dunne served as the President of Cultor Food Science from 1997 to 1999 with responsibility for global manufacturing and research & development as well as a worldwide network of sales offices and distributors. As President of Quest (Food) International from 1993 to 1997, Dr. Dunne managed the companys Flavor and Food Ingredient activities in the USA, Canada and Mexico.  Educated in Ireland, Dr. Dunne holds a B.Sc. and Ph.D. in Biochemistry from University College, Dublin and was a Postdoctoral Fellow at the University of California in San Diego and at the Max Planck Institute in Dortmund, West Germany.







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48









Dr. Lily Yang DirectorDr. Yang has been a director of the Company since March 2002.  Dr. Yang has been Chairman of the Board at TheraLife Inc. since 2006, a private company involved in innovative botanical drugs and drug delivery technology. She was also Chief Executive Officer, President and co-founder of TheraLife, Inc. from 2000 to 2006 and a consultant from June 1998 to March 2000. Dr. Yang has 20 years of industry experience from E.I. DuPont and Hewlett Packard Company in business development, worldwide marketing, sales, strategic planning, licensing, acquisition, and promotion. Dr. Yang managed the worldwide marketing organization for the Analytical Products Group at Hewlett Packard, and successfully promoted and created their Bioscience Products Group.  Dr. Yang has founded and worked with numerous Silicon Valley Venture Capitalists, Angel Investors and start-ups.  She received her doctorate in Immunology from the University of Chicago, as well as business training from the Wharton School of Business.



Nitin Kaushal Director Mr. Kaushal has been a director of the Company since September 2003. He is currently Managing Director of Desjardins Securities, since July 2005 and was Institutional Salesperson of Orion Securities Inc. January 2005 to July 2005. Mr. Kaushal was Managing Director of McFarlane Gordon / Vengate Capital, a Life Sciences and healthcare investment banking and advisory firm based in Toronto from July 2001 to January 2005 and Managing Director, HSBC Securities from June 1997 to July 2001.



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



David Goold  Chief Financial Officer  Mr. Goold has been Chief Financial Officer of the Company since October 2004.  Mr. Goold was formerly Vice President, Finance and Chief Financial Officer of B.C. Research Inc. and Vizon SciTec Inc. (a related group of companies) from 1998 to 2004. Mr. Goold has worked for other public and private corporations, in Canada and internationally, since obtaining his Chartered Accountant designation with Price Waterhouse in 1982. Mr. Goold was with Price Waterhouse in their Vancouver and Johannesburg offices for nine years.



Dr. John J. Nestor, Jr. Chief Scientific OfficerDr. Nestor was appointed Chief Scientific Officer of the Company in October 2006 pursuant to the acquisition of TheraPei Pharmaceuticals, Inc. by Forbes.  Previously, Dr. Nestor had been Chief Scientific Officer and Founding Chief Executive Officer of TheraPei, a biopharmaceutical company that he had spun out of Sequenom.  Dr. Nestor has more than 25 years of pharmaceutical industry experience in drug discovery and scientific management, much of that time at the VP level in major pharma.  He is co-inventor of 10 compounds that have reached the clinical development stage, including three currently marketed pharmaceuticals (SynarelTM, OrgalutranTM, ValcyteTM).  Prior to founding TheraPei, Dr. Nestor was Executive Vice President, Drug Discovery at Sequenom, President and Chief Scientific Officer at Consensus Pharmaceuticals, Vice President and Director, Institute of Bio-Organic Chemistry at Syntex Discovery Research, Distinguished Scientist at Roche Bioscience, and Executive Vice President and Co-Founder of Helios Pharmaceuticals.  Dr. Nestor obtained his B.Sc. in Chemistry from the Polytechnic Institute of Brooklyn and his Ph.D. in Organic Chemistry from the University of Arizona.









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49







Jeffrey J.E. Motley  Vice President, Marketing and SalesMr. Motley has been the Vice President, Marketing and Sales for the Company since February 2004, Vice President, Commercial Operations, May 2001 to January 2004, and Vice President, Business Development, January 2000 to May 2001. Mr. Motley was formerly Director of Marketing, Nutritional Division, for Wyeth-Ayerst Canada where he was responsible for sales, marketing and business development. He successfully re-engineered the selling and marketing strategy of Wyeth-Ayerst Canada and built and developed a highly motivated team. Mr. Motley also acted as District Sales Manager, Nutritional Division for Wyeth-Ayerst Canada. From 1981 to 1995, Mr. Motley was Sales Manager at the national and district levels as well as Product Manager for Lederle Pharmaceuticals.



Principal Business Activities Performed Outside the Company(including, in the case of directors, other principal directorships)



Certain of our directors and executive officers also serve as directors and officers of, or have significant shareholdings or other ownership interests in, other companies involved in the biotechnology industry or which may be involved in transactions with us or which may provide professional services to our Company.  For example, Percy Skuy, a Director of our Company, is also a Consultant for Humber College; Donald Buxton, the Chairman of our Company, is also a Director of Vacci-Test Corp. as well as a minority shareholder & member of the Management Advisory Committee for Baralex Inc.; Joe Dunne, a Director of our Company, is a Director of Westgate Biologicals Ltd. and a  Consultant to Bayer Crop Science, PTX Food Corp and Bear Stern; Lily Yang, a Director of our Company, is also Chairman of the Board of TheraLife Inc.; Nitin Kaushal, a Director of our Company, is also Managing Director with Desjardins Securities, and a director of Genizon Biosciences, Victhom Human Bionics and Protox Therapeutics. Consequently there exists the possibility for such directors and executive officers to be in a position of conflict.  Under the Canada Business Corporations Act,any decision made by such directors and executive officers involving our Company are required to be made in accordance with his or her duties and obligations to deal fairly and in good faith with our Company and such other companies.  In addition, such directors are required to declare, and refrain from voting on, any matter in which such directors may have a conflict of interest.



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



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



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



Pursuant to the acquisition of TheraPei Pharmaceuticals, Inc. by Forbes (See Item 4  Information on the Company  A. History and Development of the Company  Acquisitions - TheraPei Pharmaceuticals, Inc.), Dr. John Nestor was appointed as Chief Scientific Officer of the Company.



B.

Compensation



The following table sets forth the annual and long-term compensation for the fiscal years 2005, 2006, and 2007 of our current senior management (collectively, the Named Executive Officers). All Securities under Options/SARs granted are presented on a Pre-Arrangement Basis. (See Item 4 - Information on the Company - A. History and Development of the Company - Forbes Medi-Tech Inc.)







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50







SUMMARY COMPENSATION TABLE



|                                                                |                                             |                              |                        |                            |             |     |         |    
|--------------------------------------------------------------- | ------------------------------------------- | ---------------------------- | ---------------------- | -------------------------- | ----------- | --- | ------- | ---
|Name and Principal Position                                     | Year Ended December 31                      | Annual Compensation          | Long Term Compensation | All Other Compensation(12)
|Salary                                                          | Bonus                                       | Other Annual Compensation(1) | Awards                 | Payouts                   
|Securities Under Options/ SARs granted(2)
Pre-Arrangement Basis | Restricted Shares or Restricted Share Units | LTIP Payouts (3)            
|Butt, CharlesPresident and Chief Executive Officer(4)           | Dec. 31, 2007                               | $370,650                     | $37,065                | $19,941                    | 630,400(10) | Nil | Nil     | Nil
|Dec. 31, 2006                                                   | $353,000                                    | $70,600                      | $19,063                | 195,000(9)                 | Nil         | Nil | $44,650
|Dec. 31, 2005                                                   | $330,000                                    | $85,800                      | $27,287(5)             | 125,000                    | Nil         | Nil | Nil    
|Goold, David, CAChief Financial Officer(6)                      | Dec. 31, 2007                               | $183,750                     | $16,078                | $9,105                     | 96,000(10)  | Nil | Nil     | Nil
|Dec. 31, 2006                                                   | $175,000                                    | $24,500                      | $8,065                 | Nil                        | Nil         | Nil | Nil    
|Dec. 31, 2005                                                   | $155,000                                    | $35,000                      | $6,237                 | 50,000                     | Nil         | Nil | Nil    
|Nestor, John, Dr.
Chief Scientific Officer(11)                  | Dec. 31, 2007                               | $241,695                     | $16,919                | $6,257                     | 48,000(10)  | Nil | Nil     | Nil
|Dec. 31, 2006                                                   | $48,050                                     | Nil                          | Nil                    | 75,000                     | Nil         | Nil | Nil    
|Dec. 31, 2004                                                   | NA                                          | NA                           | NA                     | NA                         | NA          | NA  | NA     
|Wessman, LauraSenior Vice-President, Operations(7)              | Dec. 31, 2007                               | $198,500                     | $17,369                | $13,290                    | 227,200(10) | Nil | Nil     | Nil
|Dec. 31, 2006                                                   | $189,000                                    | $26,460                      | $11,534                | 15,000(9)                  | Nil         | Nil | $40,125
|Dec. 31, 2005                                                   | $170,000                                    | $38,500                      | $7,813                 | 90,000                     | Nil         | Nil | Nil    
|Motley, Jeff
Vice-President, Marketing and Sales(8)             | Dec. 31, 2007                               | $158,500                     | $9,510                 | $16,527                    | 179,880(10) | Nil | Nil     | Nil
|Dec. 31, 2006                                                   | $151,500                                    | $18,180                      | $16,426                | 25,000(9)                  | Nil         | Nil | $33,000
|Dec. 31, 2005                                                   | $144,000                                    | $25,000                      | $15,799                | 70,000                     | Nil         | Nil | $62,250

(1)

For the years ended December 31, 2005 thru December 31, 2007, Other Annual Compensation consists of car allowance for Messrs. Butt and Motley ($500 per month), company portion of RRSP contribution for Messrs. Butt, Goold, Motley and Ms. Wessman, company paid parking for Messrs. Butt, Goold, Motley and Ms. Wessman, life insurance premiums for all named executives. For Dr. John Nestor, Other Annual Compensation consists of the company portion of 401k contributions and life insurance premiums, which have been converted to Canadian funds at the average US / CDN exchange rates.

(2)

All securities are under options granted during the year covered, and are reported on a Pre-Arrangement Basis. No SARs (stock appreciation rights) have been granted.

(3)

LTIP or long term incentive plan means a plan which provides compensation intended to serve as incentive for performance to occur over a period longer than one financial year, but does not include option or stock appreciation right plans or plans for compensation through restricted shares or restricted share units.  The Company does not currently have an LTIP.

(4)

Effective January 1, 2008, Mr. Butts salary was increased to $378,804.

(5)

Salary at December 31, 2004 and December 31, 2003 was $300,000 and $280,000, respectively.  Mr. Butt was underpaid $3,000 and $6,000 in each of these years, respectively.  The total underpayment of $9,000 was paid in 2005.

(6)

Effective January 1, 2008, Mr. Goolds salary was increased to $187,793.

(7)

Effective January 1, 2008, Ms. Wessmans salary was increased to $202,867.

(8)

Effective January 1, 2008, Mr. Motleys salary was increased to $161,987

(9)

The options issued to Messrs. Butt, Motley and Ms. Wessman in 2006 were all granted to replace options that had expired.

(10)

For a description of the 2007 options granted, see Options and SARSfollowing

(11)

Dr. John Nestor commenced employment with the company on Oct 25, 2006 with an annual salary of US$225,000. Dr. Nestors salary compensation for 2007 was US$225,000, which has been converted to Canadian funds at the average US / CDN exchange rates.  Dr. Nestors 2007 bonus was US$ 15,750 which has been converted to Canadian funds at the average US / CDN exchange rates. The total compensation for 2006 was US$41,827, which has been converted to Canadian funds at the average US / CDN exchange rates. .  Effective January 1, 2008, Dr. Nestors salary was increased to US$229,950.

(12)

For the years ended December 31, 2005 thru December 31, 2007, All Other Compensation consists of the stock option benefit arising on exercise of stock options.



Options and SARS



The following table sets out incentive stock options and stock appreciation rights granted to each Named Executive Officer during our financial year ended December 31, 2007. All securities under Options/SARs granted, Exercise or Base Price, Market Value of Securities are presented on a Pre-Arrangment Basis. (See Item 4 - Information on the Company - A. History and Development of the Company - Forbes Medi-Tech Inc.)







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51









OPTIONS/SAR GRANTS DURING THE MOST RECENTLY COMPLETED FINANCIAL YEAR



|               |                                                                 |                                                                   |                                                                |                                                                                                                 |                                    
|-------------- | --------------------------------------------------------------- | ----------------------------------------------------------------- | -------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------- | -----------------------------------
|Name           | Securities Under Option/SARs Granted (5)
(Pre-ArrangementBasis) | % of Total Options/SARs Granted to Employees in Financial Year(2) | Exercise or Base Price ($/Security)(3)
(Pre-Arrangement Basis) | Market Value of Securities Underlying Options/SARs on the Date of Grant ($/Security)(4)
(Pre-Arrangement Basis) | Expiration Date                    
|Butt, Charles  | 60,000
  120,000(5)
  450,400(6)                                | 2.0%
4.1%
15.2%                                                   | $1.00
  $1.00
  $1.00                                          | $0.97
  $0.89
  $0.89                                                                                           | 17-Jan-2012
31-Mar-2012
31-Mar-2012
|Goold, David   | 40,000
56,000(6)                                                | 1.4%
1.9%                                                         | $1.00
$1.00                                                    | $0.97
$0.89                                                                                                     | 17-Jan-2012
31-Mar-2012            
|Nestor, John   | 48,000(6)                                                       | 1.6%                                                              | $1.00                                                          | $0.89                                                                                                           | 31-Mar-2012                        
|Wessman, Laura | 40,000
187,200(6)                                               | 1.4%
6.3%                                                         | $1.00
$1.00                                                    | $0.97
$0.89                                                                                                     | 17-Jan-2012
31-Mar-2012            
|Motley, Jeff   | 30,000
30,000(5)
119,880(6)                                     | 1.0%
1.0%
4.1%                                                    | $1.00
$1.00
$1.00                                              | $0.97
$0.89
$0.89                                                                                               | 17-Jan-2012
31-Mar-2012
31-Mar-2012



(1)

All securities under option are Common Shares; the Company has not granted any SARs.

(2)

Includes options to employees, officers, and directors.

(3)

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

(4)

Market Values are the Toronto Stock Exchange closing prices on the date of grant.

(5)

The options issued to Messrs. Butt and Motley were granted to replace options that had expired.

(6)

On June 29, 2007, the Company implemented a new rolling stock option plan entitled the 2007 Stock Option Plan (the New Plan).  The New Plan was initially approved by the Companys Board of Directors on April 12, 2007 and was also approved by the Companys shareholders at the Annual General and Special Meeting held May 17, 2007.  The New Plan replaces the Amended and Restated 2000 Stock Option Plan (the Old Plan), which was a fixed number plan.  The persons to whom options may be granted under the New Plan remain the same as under the Old Plan, being directors, officers, employees and consultants of the Company or an affiliate.  With the implementation of the New Plan, 3,801,625 options from the Old Plan, with exercise prices of more than $1.00 were replaced by 2,171,500 options under the New Plan and 1,510,575 of previously vested options were cancelled. These new options had an exercise price of $1.00  and an expiry date of March 31, 2012.



As a result of the adoption of the New Plan, Mr. Butt had 805,000 options (priced between $1.77 and $4.90 with expiry dates of between July 3, 2008 and May 19, 2011) cancelled. They were replaced with 450,400 options at $1.00 and they expire March 31, 2012. Mr. Goold had 110,000 options (priced between $2.13 and $2.91 with expiry dates of between October 5, 2009 and December 8, 2010) cancelled. They were replaced with 56,000 options at $1.00 and they expire March 31, 2012. Ms. Wessman had 315,000 options (priced between $1.77 and $3.69 with expiry dates of between July 3, 2008 and May 19, 2011) cancelled. They were replaced with 187,200 options at $1.00 and they expire March 31, 2012. Dr. Nestor had 75,000 options (priced at $2.69 with an expiry dates of October 31, 2011) cancelled. They were replaced with 48,000 options at $1.00 and they expire March 31, 2012. Mr. Motley had 229,500 options (priced between $1.77 and $3.69 with expiry dates of between July 3, 2008 and May 19, 2011) cancelled. They were replaced with 119,880 options at $1.00 and they expire March 31, 2012.



All figures are presented on a Pre-Arrangement Basis.













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52







Stock Option Repricing

The following table shows the repricing of options of the Named Executive Officers during the financial year of the Company ended December 31, 2007. On June 29, 2007, the Company implemented a new rolling stock option plan entitled the 2007 Stock Option Plan (the New Plan).  The New Plan was initially approved by the Companys Board of Directors on April 12, 2007 and was also approved by the Companys shareholders at the Annual General and Special Meeting held May 17, 2007.  The New Plan replaces the Amended and Restated 2000 Stock Option Plan (the Old Plan), which was a fixed number plan.  The persons to whom options may be granted under the New Plan remain the same as under the Old Plan, being directors, officers, employees and consultants of the Company or an affiliate.  With the implementation of the New Plan, 3,801,625 options from the Old Plan, with exercise prices of more than $1.00 were replaced by 2,171,500 options under the New Plan and 1,510,575 of previously vested options were cancelled. These new options have an exercise price of $1.00 and an expiry date of March 31, 2012.  A total of 880,250 options from the Old Plan having exercise prices of $1.00 or less remain in effect under the New Plan unamended.



OPTION/SAR REPRICED/ AMENDED DURING THE MOST RECENTLY COMPLETED FINANCIAL YEAR



All securities under Options/SARs Repriced on Amended, Market Value of Securities at Time of Repricing or Amendment, Exercise Price at the Time of Repricing or Amendment and New Exercise Price are presented on a Pre-Arrangement Basis.(See Item 4 - Information on the Company - A. History and Development of the Company - Forbes Medi-Tech Inc.)



|                                                 |                   |                                                                                                       |                                                                                                   |                                                                                       |                                                         |                                                                           
|------------------------------------------------ | ----------------- | ----------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------- | ------------------------------------------------------- | --------------------------------------------------------------------------
|Name of Executive Officer                        | Date of Repricing | Securities under Options/SARs Repriced or Amended
(#)(1)
Old Plan / New Plan
( Pre-Arrangement Basis) | Market Price of Securities at Time of Repricing or Amendment ($/Security)
(Pre-Arrangement Basis) | Exercise Price at Time of Repricing or Amendment ($/Security)
(Pre-Arrangement Basis) | New Exercise Price ($/Security)
(Pre-Arrangement Basis) | Length of Original Option Term Remaining at Date of Repricing or Amendment
|Charles A. Butt,President, CEO and Director      | April 12, 2007    | 20,000 / 11,190                                                                                       | $0.89                                                                                             | $4.90                                                                                 | $1.00                                                   | 12-Dec-10                                                                 
|150,000 / 83,926                                 | $1.77             | 03-Jul-08                                                                                            
|60,000 / 33,570                                  | $2.23             | 11-Jul-08                                                                                            
|5,000 / 2,797                                    | $2.61             | 28-Nov-08                                                                                            
|50,000 / 27,975                                  | $3.69             | 09-Jan-09                                                                                            
|200,000 / 111,901                                | $2.78             | 31-May-09                                                                                            
|50,000 / 27,975                                  | $2.98             | 06-Jan-10                                                                                            
|75,000 / 41,963                                  | $2.13             | 08-Dec-10                                                                                            
|20,000 / 11,190                                  | $3.05             | 03-Apr-11                                                                                            
|175,000 / 97,913                                 | $2.53             | 19-May-11                                                                                            
|David Goold,Chief Financial Officer              | April 12, 2007    | 60,000 / 30,545                                                                                       | $0.89                                                                                             | $2.91                                                                                 | $1.00                                                   | 5-Oct-09                                                                  
|50,000 / 25,455                                  | $2.13             | 8-Dec-10                                                                                             
|John Nestor,Chief Scientific Officer             | April 12, 2007    | 75,000 / 48,000                                                                                       | $0.89                                                                                             | $2.69                                                                                 | $1.00                                                   | 31-Oct-11                                                                 
|Laura Wessman,
Senior Vice President, Operations | April 12, 2007    | 50,000 / 29,714                                                                                       | $0.89                                                                                             | $1.77                                                                                 | $1.00                                                   | 3-Jul-08                                                                  
|10,000 / 5,943                                   | $2.61             | 28-Nov-08                                                                                            
|25,000 / 14,857                                  | $3.69             | 9-Jan-09                                                                                             
|125,000 / 74,286                                 | $2.78             | 31-May-09                                                                                            
|30,000 / 17,829                                  | $2.98             | 6-Jan-10                                                                                             
|60,000 / 35,657                                  | $2.13             | 8-Dec-10                                                                                             
|15,000 / 8,914                                   | $2.53             | 19-May-11                                                                                            
|Jeff Motley,Vice-President, Marketing & Sales    | April 12, 2007    | 7,500 / 3,918                                                                                         | $0.89                                                                                             | $2.23                                                                                 | $1.00                                                   | 11-Jul-08                                                                 
|50,000 / 26,118                                  | $1.77             | 3-Jul-08                                                                                             
|5,000 / 2,612                                    | $2.61             | 28-Nov-08                                                                                            
|12,000 / 6,268                                   | $3.69             | 9-Jan-09                                                                                             
|60,000 / 31,341                                  | $2.78             | 31-May-09                                                                                            
|30,000 / 15,670                                  | $2.98             | 6-Jan-10                                                                                             
|40,000 / 20,894                                  | $2.13             | 8-Dec-10                                                                                             
|25,000 / 13,059                                  | $2.53             | 19-May-11                                                                                            

(1)

The table indicates the number of options held prior to the April 12, 2007 option plan amendment, the reduced number of options held after the repricing of the options, and presented on a Pre-Arrangement Basis.







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53









The following table shows exercises of options by the Named Executive Officers during the financial year of the Company ended December 31, 2007 and the value of their unexercised options as at December 31, 2007:



AGGREGATED OPTION/SAR EXERCISES DURING THE MOST RECENTLY COMPLETED
FINANCIAL YEAR & YEAR-END OPTION VALUES



|                          |                                     |                              |                                                                                                                  |                                                                                                   
|------------------------- | ----------------------------------- | ---------------------------- | ---------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------
|Name of Executive Officer | Securities Acquired on Exercise (#) | Aggregate Value Realized ($) | Unexercised Options/SARs at Financial Year-end (#)
Pre-Arrangement  Exercisable / Pre-Arrangement  Unexercisable | Value of Unexercised In-the-Money Options/SARs at Financial Year-end ($)
Exercisable/Unexercisable
|Butt, Charles             | Nil                                 | $Nil                         | 585,400  Exercisable /   45,000 Unexercisable                                                                    | $Nil Exercisable / $Nil Unexercisable                                                             
|Goold, David              | Nil                                 | $Nil                         | 66,000  Exercisable  / 30,000 Unexercisable                                                                      | $Nil Exercisable /  $Nil Unexercisable                                                            
|Nestor, John              | Nil                                 | $Nil                         | 24,000  Exercisable  / 24,000 Unexercisable                                                                      | $Nil Exercisable /  $Nil Unexercisable                                                            
|Wessman, Laura            | Nil                                 | $Nil                         | 197,200 Exercisable / 30,000 Unexercisable                                                                       | $Nil Exercisable / $Nil Unexercisable                                                             
|Motley, Jeff              | Nil                                 | $Nil                         | 172,380 Exercisable /  22,500 Unexercisable                                                                      | $Nil Exercisable / $Nil Unexercisable                                                             



Defined Benefit or Actuarial Plan Disclosure



We do not maintain a Defined Benefit or Actuarial Plan for our officers or directors.  Pursuant to his previous employment agreement with us, between the ages of 60 and 85, Tazdin Esmail will be entitled to receive an annual reward for tenure allowance of $65,000.  We have not set aside any of our assets to cover our obligation under the reward for tenure arrangement.  At December 31, 2007, we have accrued $994 thousand in our consolidated financial statements towards our obligations under these arrangements. In addition, prior to his resignation as Chief Executive Officer, we purchased a whole life insurance policy on Mr. Esmail.



Compensation of Directors



In the fiscal year ended December 31, 2007, Charles Butt, a director and the President and Chief Executive Officer of the Company, received the compensation set out in the Summary Compensation Table above.



Effective as of July 1, 2006, the independent directors (See below Independent Director Compensation Fiscal 2007) each receive an annual retainer of $20,000. In addition, the Chairman receives an additional $24,000 annually in respect of his services provided outside the committee meetings, the Chair of the Audit Committee receives an additional $8,000 annually in respect of his Audit Committee services provided outside the committee meetings, and all Committee Chairs receive an additional $2,500 annually in respect of their service as Chair. Annual retainers are paid quarterly for the period July 1 through June 30.  In addition to the annual retainer, the independent directors are compensated in cash in the amount of $2,000 per meeting for in-person attendance at board meetings; $2,000 per meeting for in-person attendance at board committee meetings; and $750 for meetings attended by phone.  The independent directors also receive, on an annual basis, options to purchase a minimum of 1,650 Common Shares of the Company, subject to the Board determining that such number of options is readily available under our then current stock option plan.







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54









During the most recently completed financial year ended December 31, 2007, the independent Directors were granted the following options, earned the following Board and Board Committee meeting attendance fees, and were paid the following amounts as retainer, consulting fees and/or Audit Committee Service Fees:



INDEPENDENT DIRECTOR COMPENSATION FISCAL 2007



All shares under Options and Option Price are presented on a Pre-Arrangment Basis(See Item 4  - Information on the Company - A. History and Development of the Company -  Forbes Medi-Tech Inc.).



|                  |                                                   |                                        |                    |                   |                                                                
|----------------- | ------------------------------------------------- | -------------------------------------- | ------------------ | ----------------- | ---------------------------------------------------------------
|Director          | No. of Shares Under Option(Pre-Arrangement Basis) | Option Price
  (Pre-Arrangement Basis) | Option Expiry Date | Meeting Fees Paid | Retainer / Consulting Fees / Audit Committee Services Fees Paid
|Buxton, Donald(1) | 12,000                                            | $0.82                                  | 31-March-2012      | $21,250           | $44,000                                                        
|Dunne, Joe(1)     | 12,000                                            | $0.82                                  | 31-March-2012      | $23,500           | $22,500                                                        
|Kaushal, Nitin    | 12,000                                            | $0.82                                  | 31-March-2012      | $23,500           | $30,500                                                        
|Skuy, Percy(1)    | 12,000                                            | $0.82                                  | 31-March-2012      | $23,500           | $22,500                                                        
|Yang, Lily(1)     | 12,000                                            | $0.82                                  | 31-March-2012      | $20,500           | $20,000                                                        



(1)

On April 12, 2007, Donald Buxton, Joe Dunne, Percy Skuy and Lily Yang were re-issued 15,000 options at a price of $ 1.00, expiring on March 31, 2012 in replacement of a like number of options which expired unexercised.



Directors & Officers Liability Insurance



We maintain directors and officers liability insurance coverage through a policy covering us and our subsidiaries, which has an annual aggregate policy limit of US$10,000,000, subject to a deductible of up to US$250,000 per loss.  This insurance provides coverage for indemnity payments made by us to our directors and officers as required or permitted by law for losses, including legal costs, incurred by officers and directors in their capacity as such. This policy also provides coverage directly to individual directors and officers if they are not indemnified by us. The insurance coverage for directors and officers has customary exclusions, including libel and slander, and those acts determined to be uninsurable under law, or deliberately fraudulent or dishonest or to have resulted in personal profit or advantage. The current term (February 26, 2008 to February 25, 2009) premiums aggregating US$230,000 are paid entirely by us.



C.

Board Practices



Date of expiration of current term of office, if applicable, and the period during which the person has served in that office. Each director of our Company holds office until the next annual general meeting or until his or her successor is duly elected or appointed, unless his or her office is earlier vacated by resignation, death, removal or otherwise, or he or she becomes disqualified to act as a director. Each executive officer holds office at the discretion of the Board of Directors, subject to the terms of the employment contracts described below.



Service Contracts. We do not have any formal contracts with our directors in their capacities as such.  We have entered into service contracts with our senior management, or Named Executive Officers, as follows:









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55







Charles Butt acts as President and Chief Executive Officer of the Company.  The Employment Agreement entered into by the Company with Charles Butt, dated May 1, 2001, and subsequent Amending Agreements, provides for a base annual salary of $378,804 as of January 1, 2008, a monthly car allowance of $500, annual salary reviews, and bonuses to be determined by the Compensation Committee based on milestones achieved by the Company or by Mr. Butt.  In the event of termination without cause, which includes a change of control of the Company (other than a hostile change of control), the severance payment is an amount equal to the aggregate of two times Mr. Butts annual salary and car allowance; two times all other compensation, including bonuses, paid to Mr. Butt during the previous 12 months; the amount of any bonus approved but not yet paid; and all expenses incurred and not previously reimbursed.  In the event of termination by Mr. Butt for the Companys breach, or termination by the Company or Mr. Butt within 6 months following a hostile change of control, the severance payment is an amount equal to the aggregate of three times Mr. Butts annual salary and car allowance; three times all other compensation, including bonuses, paid to Mr. Butt during the previous 12 months; the amount of any bonus approved but not yet paid; and all expenses incurred by Mr. Butt and not previously reimbursed.



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



The Employment Agreements of each of Laura Wessman and Jeff Motley provide for a severance payment in the event of termination without cause (which includes a change of control of the Company, hostile or otherwise) of 18 months salary in the event that such termination occurs at anytime on or after June 1, 2007.  The Employment Agreement of Mr. Goold provides for a severance payment in the event of termination without cause (which includes a change of control of the Company, hostile or otherwise) of 16 months salary, in the event that such termination occurs on or after October 1, 2007 and prior to October 1, 2008, and 18 months salary in the event that such termination occurs at anytime on or after October 1, 2008. The Employment Agreement of Dr. John Nestor provides for a severance payment in the event of termination without cause (which includes a change of control of the Company, hostile or otherwise) of 14 months salary in the event that such termination occurs on or after October 24, 2007 and prior to October 24, 2008, 16 months salary in the event that such termination occurs on or after October 24, 2008 and prior to October 24, 2009, and 18 months salary in the event that such termination occurs at anytime on or after October 24, 2009.



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



The payment of bonuses granted in respect of the 2007 financial year has been deferred until the Companys first financing in 2008.



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







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56









Audit Committee



Pursuant to its charter, the Audit Committee has the following duties:



The Committee shall:



1.

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



2.

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



3.

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



4.

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



5.

Review and approve the independent auditors' annual engagement letter.



6.

Review and pre-approve audit and permitted non-audit related services as outlined in the Audit Pre-approval Policy adopted on May 13, 2004.



7.

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



8.

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







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57









9.

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



10.

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



11.

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



12.

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



13.

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



14.

Monitor the audit partners rotation as required by law.



15.

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



16.

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



17.

Annually review the Committees own performance.



18.

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



The Audit Committee is comprised of three independent and financially literate directors: Nitin Kaushal, Percy Skuy and Joe Dunne.   Following is a brief description of the education and experience of each of our Audit Committee members that is relevant to the performance of his or her responsibilities as such a member.



Mr. Kaushal has been a director of our Company and a member of our Audit Committee since September 2003.  Mr. Kaushal is also the Chair of our Audit Committee, and is a Chartered Accountant.  Our Board of Directors has determined that Mr. Kaushal satisfies the requirements of an audit committee financial expert pursuant to the criteria prescribed by the Securities and Exchange Commission (See Item 16A  Audit Committee Financial Expert). Since July 2005, Mr. Kaushal has been the Managing Director of Healthcare Investment Banking at Desjardins Securities in Toronto.  From January, 2005 until July 2005, Mr. Kaushal was an institutional salesperson with Orion Securities Inc. in Toronto, Ontario.  Previously, he was the Managing Director of McFarlane Gordon / Vengate Capital, a Life Sciences and Healthcare Investment Banking & Advisory Firm based in Toronto, Ontario since 2001. Prior to this, Mr. Kaushal was a Managing Director at HSBC Securities in its Healthcare Group and a Senior Investment Manager with MDS Capital Corp, a Health and Life Sciences Venture Firm. Mr. Kaushal was also the Assistant Manager at Price Waterhouse. Mr. Kaushal was awarded a Bachelor of Science (Chemistry) from the University of Toronto. Mr. Kaushal is a current member of the Board of Directors of Protox Therapeutics Inc., Victhom Human Bionics, Genizon Biosciences Inc. and a member of the Canadian Institute of Chartered Accountants.









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58







Mr. Skuy has been a director of our Company since November 1997 and a member of our Audit Committee since 1998. Mr. Skuy is currently a Health Care consultant and had a 34-year career with Johnson & Johnson where he acquired experience in many aspects of the pharmaceutical business including financial and business administration, new product development, sales, marketing, research and development and executive management.  He retired in 1995 as President of Ortho-McNeil Inc., one of the two J&J affiliate companies in which he held the presidency.  Mr. Skuy is a pharmacist, and has been involved in the pharmaceutical and medical communities for many years.



Dr. Dunne has been a director of our Company since November 2000 and a member of our Audit Committee since 2001.  Dr. Dunne is currently an independent consultant to the food industry and was Chairman of the Board and CEO of Westgate Biologicals Ltd., a start-up company in the Health Sciences area, from June 1999 to December 2003.  Dr. Dunne has had a distinguished career in the multi-million dollar food ingredient industry. During his career, Dr. Dunne served as the President of Cultor Food Science from 1997 to 1999 with responsibility for global manufacturing and research & development as well as a worldwide network of sales offices and distributors. As President of Quest (Food) International from 1993 to 1997, Dr. Dunne managed the companys Flavor and Food Ingredient activities in the USA, Canada and Mexico.  Educated in Ireland, Dr. Dunne holds a B.Sc. and Ph.D. in Biochemistry from University College, Dublin and was a Postdoctoral Fellow at the University of California in San Diego and at the Max Planck Institute in Dortmund, West Germany.



All audit and non-audit services performed by our auditors for the twelve-month period ended December 31, 2007 were pre-approved by our Audit Committee. It is our policy that all audit and non-audit services performed by our auditors will continue to be pre-approved by our Audit Committee.



Compensation Committee



Our remuneration committee, called our Compensation Committee, is comprised of Joe Dunne (Chair), Percy Skuy and Don Buxton.   The Compensation Committee is mandated to review and recommend to the Board for approval the remuneration of directors and officers, and meets at least once annually.  The Compensation Committee considers time commitment, comparative fees, qualifications and responsibilities in determining remuneration levels.  All members of the Compensation Committee are independent directors.



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



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



·

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

·

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

·

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

·

Amending and otherwise administering our stock option plan.

·

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











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59







Nomination and Corporate Governance Committee



We also have a Nomination and Corporate Governance Committee of the Board composed of Percy Skuy (Chair), Donald Buxton, Joe Dunne, and Lily Yang.  All four directors are independent directors.



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



D.

Employees



As of December 31, 2004 we employed 27 full-time management, scientific and administrative employees situated in Vancouver, British Columbia.



As of December 31, 2005 we employed 35 full-time management, scientific and administrative employees situated in Vancouver, British Columbia.



As of December 31, 2006 we employed 38 full-time management, scientific and administrative employees situated in Vancouver, British Columbia, and 2 full-time management and scientific employees situated in La Jolla, California.



By March 1, 2007 we reduced our total employees from 40 to 33 as the result of a corporate restructuring following our FM-VP4 Phase II U.S. clinical trial results.



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



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



E.

Share Ownership



As of  March 28, 2008, the directors and executive officers of the Company, as a group, beneficially owned, directly or indirectly, or exercised control or direction over, 31,920 common shares of the Company, being less than 1% of the issued and outstanding common shares of the Company.



Except as indicated in the footnotes below, as of March 28, 2008 the Directors and Named Executive Officers of the Company referred to in Item 6.B above held the following common shares and options to purchase common shares of the Company. All Shares Optioned Shares Owned and Exercise Price per Shares are presented on a Post-Arrangement Basis. (See Item 4  - Information on the Company - A. History and Development of the Company -  Forbes Medi-Tech Inc.)







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60









|                                                 |                                                 |                                          |                     |                    
|------------------------------------------------ | ----------------------------------------------- | ---------------------------------------- | ------------------- | -------------------
|Named Executive Officers, Directors              | Options                                         | Shares Owned(1)
  Post-Arrangement Basis
|No. of Shares Optioned
Post-Arrangement Basis    | Exercise Price per Share
Post-Arrangement Basis | Expiry Date                             
|Charles A. Butt,President, CEO and Director      | 7,500                                           | $8.00                                    | 17-Jan-12           |                    
|71,300                                           | $8.00                                           | 31-March-12                              | 5,587 common shares
|Laura Wessman,
Senior Vice President, Operations | 5,000                                           | $8.00                                    | 17-Jan-12           | 625  common shares 
|23,400                                           | $8.00                                           | 31-March-12                             
|David Goold,Chief Financial Officer              | 5,000                                           | $8.00                                    | 17-Jan-12           | 1,250 common shares
|7,000                                            | $8.00                                           | 31-March-12                             
|John Nestor,Chief Scientific Officer             | 6,000                                           | $8.00                                    | 31-March-12         | 8,166 common shares
|Jeff Motley,Vice-President, Marketing & Sales    | 3,750                                           | $8.00                                    | 17-Jan-12           | 812 common shares  
|18,735                                           | $8.00                                           | 31-March-12                             
|Donald Buxton,Director                           | 1,500                                           | $6.56                                    | 31-March-12         | 3,125 common shares
|14,400                                           | $8.00                                           | 31-March-12                             
|Percy Skuy,Director                              | 1,500                                           | $6.56                                    | 31-March-12         | 6,000 common shares
|14,400                                           | $8.00                                           | 31-March-12                             
|Joe Dunne,Director                               | 1,500                                           | $6.56                                    | 31-March-12         | 4,480 common shares
|13,725                                           | $8.00                                           | 31-March-12                             
|Nitin Kaushal,Director                           | 1,500                                           | $6.56                                    | 31-March-12         | nil                
|8,400                                            | $8.00                                           | 31-March-12                             
|Lily Yang,Director                               | 1,500                                           | $6.56                                    | 31-March-12         | 1,875 common shares
|10,800                                           | $8.00                                           | 31-March-12                             
|TOTAL                                            | 216,910                                         |                                          |                     |                    

(1)

Shares owned are based on Insider Reports filed with Canadian Securities Regulatory Authorities.



Stock Option Plan and Total Outstanding Stock Options



On June 29, 2007, our new rolling stock option plan entitled the 2007 Stock Option Plan (the New Plan), was implemented.  The New Plan was initially approved by our Board of Directors on April 12, 2007 and was also approved by shareholders at our Annual General and Special Meeting held May 17, 2007.  The New Plan replaces our Amended and Restated 2000 Stock Option Plan (the Old Plan), which was a fixed number plan.  It is intended to help us attract and retain personnel of the highest caliber by offering them an opportunity to share in any increase in value of our common shares resulting from their efforts. The persons to whom options may be granted under the New Plan remain the same as under the Old Plan, being directors, officers, employees and consultants of the Company or an affiliate.  Under the New Plan, the number of common shares which may be made subject to option at any time is up to 10% of the Companys outstanding shares at such time.  Concurrently with the implementation of the New Plan, a number of options under the Old Plan with exercise prices of more than $1.00 ($8.00 on a Post-Arrangement Basis) were replaced with a lesser number of options under the New Plan, such new options each having an exercise price of $1.00 ($8.00 on a Post-Arrangement Basis) and an expiry date of March 31, 2012.  Options under the Old Plan having exercise prices of $1.00 ($8.00 on a Post-Arrangement Basis) or less remain in effect under the New Plan unamended.  The number of options outstanding under our New Plan as of February, 27, 2008, the date of the one for eight exchange, as described in the Plan of Arrangement, was 2,906,380. As a result of the one for eight option exchange as described in the Arrangement (see Item 4 - Information on the Company - A. History  and Development of the Company - Forbes Medi-Tech Inc.), the number of options outstanding decreased from 2,906,380 to 363,296. These options entitled the holders to purchase a total of 363, 296 common shares exercisable at prices between $4.24 and $8.00 per share and have varying expiry dates.



ITEM 7

Major Shareholders and Related Party Transactions



A.

Major Shareholders



To the best of our knowledge, there are no current shareholders who beneficially own more than 5% of the outstanding common shares of the Company. From January 1, 2005 to March 28, 2008, significant changes in share ownership as filed on EDGAR were as follows:







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61





2005



As filed on February 10, 2005, Palo Alto Investors (consisting of Palo Alto Investors, LLC; Palo Alto Investors; and William Leland Edwards) collectively owned 2,685,130 common shares of the Company, accounting for 7.9% of the total number of voting securities.



As filed on February 14, 2005, RAM Trading continued to collectively own 2,275,000 common shares of the Company, accounting for 8.2% of the total number of voting securities.



As filed on May 3, 2005, BioAsia Investments (consisting of BioAsia Investments IV, LLC; Biotechnology Development Fund IV, L.P.; Frank Kung; and Edgar G. Engelman) collectively owned 469,523 common shares of the Company, accounting for 1.4% of the total number of voting securities.



2006



To the best of our knowledge and from what can be ascertained from public EDGAR filings, RAM Trading ceased to own at least 5% of the total number of the Companys shares by 2006.



As filed on February 14, 2006, Palo Alto Investors collectively owned 2,106,730 common shares of the Company, accounting for 6.2% of the total number of voting securities.



As filed on April 10, 2006, Cantor Fitzgerald (consisting of Cantor Fitzgerald & Co.; Cantor Fitzgerald Securities; Cantor Fitzgerald L.P.; CF Group Management, Inc.; and Howard W. Lutnick) collectively owned 4,514,396 common shares of the Company, accounting for 13.2% of the total number of voting securities.



As filed on April 28, 2006, Palo Alto Investors collectively owned 2,440,230 common shares of the Company, accounting for 6.77% of the total number of voting securities.



As filed on May 8, 2006, Palo Alto Investors collectively owned 3,123,330 common shares of the Company, accounting for 9.15% of the total number of voting securities.









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62









2007



As filed on January 11, 2007, Cantor Fitzgerald collectively owned 0 common shares of the Company, accounting for 0% of the total number of voting securities.



As filed on February 14, 2007, Palo Alto Investors collectively owned 1,567,540 common shares of the Company, accounting for 4.1% of the total number of voting securities.



2008



No changes in share ownership were filed on EDGAR.



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



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



United States Shareholders



Record Holders:  According to our register of shareholders, as of March 27, 2008, 44 registered shareholders (out of a total of 85, or 51.8%) had addresses in the United States, holding a combined 1,865,933 common shares (or 38.9%).



Record and Beneficial Holders:  Based on recent information provided by depository trust companies, clearing agencies and other intermediaries, approximately 51 % of our  outstanding shares are held, of record and beneficially, by approximately 3,700 shareholders with addresses in the United States.



B.

Related Party Transactions



Nancy E. Glaister, Corporate Secretary and General Counsel, is a partner of the law firm Cawkell Brodie Glaister LLP, Business Lawyers, which also provides legal services to us.  For the 12-month period ending December 31, 2007, Cawkell Brodie Glaister LLP billed us $204,000.  For the 12-month period ending December 31, 2006, Cawkell Brodie Glaister LLP billed us $229,000 ($246,000 for the year ended December 31, 2005) excluding GST, PST and disbursements, for legal services.



Until May 18, 2005, the Chair of the Audit Committee, Nitin Kaushal, received $1,000 for each non-meeting day during which he performed Audit Committee services. In the year ended December 31, 2005, we paid to Mr. Kaushal, a director of the Company, $6,000  for such services. Since then, fees for Mr. Kaushals additional duties as Audit Committee Chair have been included in his remuneration as such. These transactions are measured at the exchange amount of consideration established and agreed to by the related parties.



In October 2006, we acquired 100% of TheraPei Pharmaceuticals, Inc. (TheraPei) of San Diego, California, the terms of said acquisition being described in Item 4  Information on the Company  A. History and Development of the Company Acquisitions  TheraPei Pharmaceuticals, Inc.    The majority shareholder of TheraPei is Dr. John J. Nestor, who was appointed our Chief Scientific Officer on closing of the acquisition.   As such, Dr. Nestor is entitled to a majority of all future payments due in connection with the acquisition, and as well has rights under the Development Agreement.











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ITEM 8

Financial Information



A.

Consolidated Statements and Other Financial Information



Attached to this Report are consolidated financial statements audited by independent auditors and accompanied by an audit report consisting of the following:



Independent Registered Public Accounting Firm Auditors Report to the Shareholders

Consolidated Balance Sheets as at December 31, 2007 and 2006

Consolidated Statements of Operations Comprehensive Loss and Deficit for the fiscal years ended December 31, 2007, 2006 and 2005

Consolidated Statements of Cash Flows for the fiscal years ended December 31, 2007, 2006 and 2005.

Notes to Consolidated Financial Statements



Export Sales



|                               |       |       |      
|------------------------------ | ----- | ----- | -----
|Annual Export Sales by Product |       |      
|(in thousands)                 |       |       |      
|                               |       |       |      
|Sterol Ingredient              |       |       |      
|                               | 2007  | 2006  | 2005 
|North America                  | 4,360 | 3,451 | 3,374
|Europe                         | 3,272 | 1,724 | 630  
|Other                          | 85    | 213   | 16   
|                               |       |       |      
|                               |       |       |      
|Finished Goods With Sterols    |       |       |      
|                               | 2007  | 2006  | 2005 
|North America                  | -     | -     | -    
|Europe                         | 1,130 | 728   | -    
|Other                          | -     | -     | -    
|                               |       |       |      
|                               |       |       |      
|                               |       |       |      
|                               |       |       |      
|Annual Export Sales by Product |       |      
|(percentage of total sales)    |       |       |      
|                               |       |       |      
|Sterol Ingredient              |       |       |      
|                               | 2007  | 2006  | 2005 
|North America                  | 49%   | 56%   | 84%  
|Europe                         | 37%   | 28%   | 16%  
|Other                          | 1%    | 3%    | 0%   
|                               |       |       |      
|                               |       |       |      
|Finished Goods With Sterols    |       |       |      
|                               | 2007  | 2006  | 2005 
|North America                  | -     | -     | -    
|Europe                         | 13%   | 12%   | -    
|Other                          | -     | -     | -    
|                               |       |       |      









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Legal Matters



Patent Oppositions



Notices of Opposition have been filed against four patents allowed in Europe, one covering sterol compositions, which includes a ReducolTM composition, one covering the process, which is currently used by Phyto-Source, to extract and purify phytosterols from tall oil pitch, one covering a process of microfluidizing or reducing the particle size of phytosterols to facilitate formulation and the final covering a process of uniformly incorporating sterols in oils and fats by melting. All of these oppositions are filed by third parties on the ground that the patent claims are not unique and inventive.  We have presented submissions and arguments or will be preparing submission and arguments in support of the patents, and, while there can be no assurance of the outcome of these oppositions, we expect that all of these patent claims will ultimately be upheld through the oppositions or appeals.   If they are not upheld, then anyone will be able to immediately use the compositions and processes covered by the patent claims in competition with us.     More particularly:



(i)

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



(ii)

We have received Notices of Opposition to our granted European Patent 1148793 (Method of Preparing Microparticles of Phytosterols or Phytostanols) from two parties: (i) Raisio Benecol Ltd. and (ii) McNeil-PPC, Inc.  We prepared defense submissions and arguments in reply to these oppositions in December 2004. These written proceedings culminated in a hearing before the Opposition Division of the European Patent Office in Munich in June 2006. While we were successful on novelty arguments, we did not prevail on inventiveness and the patent was revoked. We have appealed, with new arguments and data which may achieve a better result. It will be as long as three years before we have an appeal date. We are not reliant upon the technology in the revoked patent in any of our current functional food or nutraceutical commercialization efforts. We may pursue this appeal so that we can explore the use of this technology in the future.



(iii)

We have received a Notice of Opposition to our granted European Patent 1056767 (Method for the Preparation of Phytosterols from Tall Oil Pitch) from Raisio Benecol Ltd. We prepared defense submissions and arguments in reply to this opposition in January 2005. These written proceedings will culminate in a hearing before the Opposition Division of the European Patent Office likely within the next year, although the time frames within the European Patent Office are currently exceeding this. We or the opponent may appeal the decision of the Opposition Division within further prescribed time frames.







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65







(iv)

We have received a Notice of Opposition to our granted European Patent 1227734 (Compositions comprising Edible Oils or Fats and Phytosterols and/or Phytostanols dissolved therein) from Kao Corporation. We prepared defense submissions and arguments and filed this reply in May 2006. These written proceedings will culminate in a hearing before the Opposition Division of the European Patent Office in approximately eighteen months, although the time frames within the European Patent Office are currently exceeding this. We or the opponent may appeal the decision of the Opposition Division within further prescribed time frames.



Trademark Matters Including Oppositions



We opposed an application filed by Heel Canada Inc. to register the trade-mark REDUCHOL in Canada for use with pharmaceutical preparations that purport to reduce high levels of total cholesterol in the blood.  We have recently been advised by the Trademarks Office that we were successful in this opposition.  Heel has not filed an appeal of this decision within the prescribed time frame.



In Pakistan, our trade-mark Reduchol has been opposed by Abbott GmbH & Co. KG ("Abbott"), with Abbott relying on its use and registration in Pakistan (and elsewhere) of the trade-mark REDUCTIL with "pharmaceutical preparations and substances used to treat obesity and associated clinical disorders in humans, in particular diabetes, hypertension, hyperlipidaemia, hyperinsulinaemia, heart disease, sleep apnea, arthritis and harmone [sic] sensitive cancers, food for infants, enteral feeding preparations for invalids, foods for invalids on medically restricted diets". We have prepared a detailed reply to this opposition arguing, among other things, that the marks are not confusing in sound or appearance. It may be over a year before a determination is made by the Pakistani Trademark Office as to the registrability of our trade-mark.



The trade-mark ReducolTM was owned by Novartis AG prior to assignment to the Company in 2002. A Community Trademark application was filed by Novartis but it was objected to by Walter Rau Lebensmittelwerke GMBH & CO. KG (Rau), which had previously filed a German Trademark application for Deli-Reform Reducol. In order to remove the objection, and to allow Reducol to register, Novartis and Rau entered a Prior Rights Agreement, which  purported to limit the Reducol mark to exclude edible fats and oils (i.e. spreads). There are two follow up actions that we have taken so that the Company can benefit from the ReducolTM mark in Europe in association with edible oils and fats: 1) We have re-filed a European Community Trademark Application for Reducol in Class 29 of the Nice Agreement (an international agreement which establishes a uniform classification system of goods and services for the purpose of filing trademarks). Class 29 allows us protection in the area of edible oils and fats including spreads; and 2) We applied to remove the mark Deli-Reform Reducol from the German register. Upon being notified of our application, Rau voluntarily withdrew its Deli-Reform Reducol mark thereby clearing the way for the Company to have rights in Class 29.



A company in Ecuador called Raserpharm S.A., in February 2006, filed a TM application for Reducolin Class 5 of the Nice Agreement which covers pharmaceuticals and supplements. In order to address this matter and to try and secure the broadest possible protection for itself, the Company has devised a trade-mark strategy for the Andean Community (Ecuador, Colombia, Peru, Bolivia). As part of this strategy, Novartis is currently co-operating with the Company and has opposed in the Andean Community the Raserpharm Reducol mark. It will likely be 1-3 years before we have a final resolution of this matter.



Lawsuit

We are a defendant in a lawsuit commenced in the Supreme Court of British Columbia by a former employee of the Company. Mohammed H. Moghadasian v. Forbes Medi-Tech Inc. and Dr. Egon Novak  Action No. S046980.  The plaintiff filed statement of claim on December 15, 2004 claiming cash damages of USD $150,000 for his contribution towards patents filed by us based on his ideas and discoveries, CAD $120,000 for promises by Dr. Novak, a former director, regarding plaintiffs student loan, CAD $100,000 from lost benefits due to lack of gain from stock options granted to plaintiff, CAD $15,000 for failure to review plaintiffs salary and incentive package, and CAD $17,000 for lack of reasonable notice of dismissal.  Forbes and Dr. Novak have each filed a defense.  The parties have exchanged documents in discovery but the plaintiff has requested further documents from us.  We deny the plaintiffs claim and are defending the plaintiffs action on its merits. The plaintiff has advised that he wishes to set the matter for trial but has not yet secured a trial date.







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NASDAQ Hearing

We do not currently meet NASDAQs Minimum Bid Price Requirement. We requested, and held, a hearing before The NASDAQ Listing Qualifications Panel in which we presented a plan  for compliance.  The Panel granted our request for a conditional listing, or an exception, and we have until May 27, 2008 to regain compliance with the Minimum Bid Price Requirement.  In the event that we determine that it is advisable to seek approval for alternative measures to comply with the Minimum Bid Price Requirement, we will notify our shareholders in our information circular for our Annual General Meeting, expected to be issued in the latter half of April, 2008.  On or before June 12, 2008, we must notify the Panel and demonstrate compliance with the Minimum Bid Price Requirement.



Dividend Policy



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



B.

Significant Changes



Since December 31, 2007, the following significant events have occurred:



On January 22, 2008 we received a NASDAQ Staff Determination, (the Staff Determination) indicating that we failed to comply with the Minimum Bid Price Requirement for continued listing set forth in Marketplace Rule 4310(c)(4), and that our securities were, therefore, subject to delisting from The NASDAQ Capital Market. We requested a hearing before a NASDAQ Listing Qualifications Panel to review the Staff Determination, which was held on March 20, 2008.  Based on the Panels approval to grant our request for a conditional listing, or an exception, we have until May 27, 2008 to regain compliance with NASDAQs Minimum Bid Price Requirement.  In the event that we determine that it may be advisable to seek approval for alternative measures to comply with the Minimum Bid Price Requirement, we will notify our shareholders in our information circular for our Annual General Meeting, expected to be issued in the latter half of April, 2008.  In such event, we may be able to extend the time within which we have to demonstrate compliance to June 12, 2008.



On February 27, 2008, we closed our Plan of Arrangement with Old Forbes.   See Item 4 - Information on the Company - A. History and Development of the Company - Forbes Medi-Tech Inc. above.  As a condition of implementing the Arrangement, Old Forbes reduced its stated capital by the amount of $98,460,000 so that, on the date of the Special General Meeting held on February 14, 2008, the realizable value of the assets of Old Forbes was greater than the aggregate of its liabilities and stated capital (as amended). After the reduction of the stated capital, Old Forbes stated capital was $2,567,000.



In March, 2008, we announced that Fiave of Italy, one of the country's premium dairy producers, has launched a yogurt drink containing Forbes' cholesterol-lowering ingredient, ReducolTM.  We also announced that we have entered into collaboration with Max food ingredients GmbH, a member of the Uplegger food company GmbH group. Max food ingredients GmbH was formed for the purpose of selling Forbes' proprietary sterol ingredient, ReducolTM, and has obtained exclusive rights for Germany, Austria and Switzerland.









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On March 20, 2008, as part of our continuing reorganization plan, we announced that we have entered into an agreement with a private investor (the "Investor") to reorganize Old Forbes (Forbes Medi-Tech Operations Inc., or "FMTO"). The Investor is to make an initial investment of $3 million in a convertible debenture of FMTO.  Completion of the transaction is subject to the satisfaction of certain conditions. Following completion of the transaction, Forbes and the Investor will source and pursue other opportunities to maximize the value of their respective interests in FMTO. Subject to certain conditions, the Investor has agreed that Forbes will receive a minimum of $800,000 from these other opportunities within one year of completion of the transaction.  See Item 4 - A. History and Development of the Company - Other Important Events Since January 1, 2007 - Non-Dilutive Financing.



ITEM 9

The Offer and Listing



Price History



The following tables set forth in Canadian dollars for the TSX tables and US dollars for the NASDAQ tables, for each of the periods indicated, the high and low closing market prices of our Common Shares on The Toronto Stock Exchange (TSX) and on NASDAQ.



As discussed above, (See Item 4 - Information on the Company - A. History and Development of the Company - Forbes Medi-Tech Inc.), in February, 2008 we undertook a one for eight reverse stock split, with an effective trading day of March 3, 2008. The following tables are presented on a Post-Arrangement Basis.  As of March 3, 2008,the trading symbol for our shares trading on NASDAQ changed from FMTI to "FMTID", - an interim symbol to denote the post-reverse split status. The trading symbol FMI for our shares trading on the TSX remained unchanged.





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



|         |       |      
|-------- | ----- | -----
|TSX: FMI | $CDN  | $CDN 
|Year     | High  | Low  
|2003     | 31.84 | 4.40 
|2004     | 88.40 | 16.80
|2005     | 25.20 | 15.20
|2006     | 25.04 | 6.72 
|2007     | 8.64  | 2.08 



|                     |       |      
|-------------------- | ----- | -----
|NASDAQ: FMTI / FMTID | $US   | $US  
|Year                 | High  | Low  
|2003                 | 24.00 | 2.72 
|2004                 | 66.80 | 13.04
|2005                 | 21.04 | 12.88
|2006                 | 21.44 | 5.76 
|2007                 | 6.80  | 2.08 



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



|         |       |      
|-------- | ----- | -----
|TSX: FMI | $CDN  | $CDN 
|Year     | High  | Low  
|2006     |       |      
|Q1/06    | 25.04 | 15.92
|Q2/06    | 24.40 | 17.76
|Q3/06    | 19.20 | 15.92
|Q4/06    | 22.88 | 6.72 
|2007     |       |      
|Q1/07    | 8.64  | 6.56 
|Q2/07    | 7.28  | 6.00 
|Q3/07    | 6.16  | 4.00 
|Q4/07    | 5.12  | 2.08 









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|                     |       |      
|-------------------- | ----- | -----
|NASDAQ: FMTI / FMTID | $US   | $US  
|Year                 | High  | Low  
|2006                 |       |      
|Q1/06                | 21.44 | 13.84
|Q2/06                | 21.12 | 16.08
|Q3/06                | 17.12 | 14.08
|Q4/06                | 20.24 | 5.76 
|2007                 |       |      
|Q1/07                | 6.80  | 5.60 
|Q2/07                | 6.56  | 5.68 
|Q3/07                | 5.92  | 4.00 
|Q4/07                | 5.20  | 2.08 



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



|         |      |     
|-------- | ---- | ----
|TSX: FMI | $CDN | $CDN
|Month    | High | Low 
|Sep-07   | 4.64 | 4.00
|Oct-07   | 4.88 | 3.60
|Nov-07   | 5.12 | 4.00
|Dec-07   | 4.32 | 1.92
|Jan-08   | 2.04 | 1.16
|Feb-08   | 1.68 | 1.12



|                     |      |     
|-------------------- | ---- | ----
|NASDAQ: FMTI / FMTID | $US  | $US 
|Month                | High | Low 
|Sep-07               | 4.48 | 4.00
|Oct-07               | 5.04 | 3.60
|Nov-07               | 5.20 | 4.00
|Dec-07               | 4.32 | 2.08
|Jan-08               | 2.00 | 1.28
|Feb-08               | 1.20 | 1.68



Markets



The Common shares of the Company trade on The Toronto Stock Exchange under the symbol “FMI” and, as of March 3, 2008, the trading symbol for our shares trading on the NASDAQ Capital Market changed form "FMTI" to "FMTID", -- an interim symbol to denote the post-reverse split status.  We do not currently meet NASDAQ’s Minimum Bid Price Requirement.   See Item 4 - Information on the Company - A. History and Development of the Company - NASDAQ.



ITEM 10

Additional Information



A.

Share Capital



Not applicable.











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B.

Memorandum and Articles of Association



NOTICE OF ARTICLES AND ARTICLES



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



DIRECTORS



The number of directors of the Company is currently fixed at six (6).  A director of the Company is not required to hold shares issued by the Company.  Under the British Columbia Business Corporations Act, directors are not required to be a resident of British Columbia or Canada.  In order to serve as a director, a person must be a natural person at least 18 years of age, of sound mind,  not bankrupt, not convicted in or out of British Columbia of an offence in connection with the promotion, formation or management of a corporation or unincorporated business, or of an offence involving fraud, unless (i) the court orders otherwise; (ii) five years has elapsed since the expiration of the period set for suspension of the passing of sentence without a sentence having been passed, or the imposition of a fine, or the conclusion of the term of any imprisonment or the conclusion of the term of any probation period; and (iii) a pardon was granted or issued under the Criminal Records Act (Canada). Neither the Notice of Articles, the Articles, nor the British Columbia Business Corporations Act (the Act) impose any mandatory retirement requirements for directors.



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



·

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

·

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

·

the other party is a wholly owned subsidiary of the company;

·

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

·

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

·

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

·

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

·

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

·

the contract or transaction is with an affiliate.



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



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



·

borrow money upon the credit of the Company;

·

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

·

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

·

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









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



Share Capitalization



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



COMMON SHARES



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



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



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



PREFERRED SHARES AS A CLASS



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

1.

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

2.

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

a.

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

b.

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

c.

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

d.

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

e.

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



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



Meetings of Shareholders

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







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71









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



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



Limitations on Right to Own Securities

Neither Canadian law nor our Notice of Articles or Articles limit the right of a non-resident to hold or vote common shares of the Company, other than as provided in the Investment Canada Act (the Investment Act), as amended by the World Trade Organization Agreement Implementation Act. The Investment Act generally prohibits implementation of a direct reviewable investment by an individual, government or agency thereof, corporation, partnership, trust or joint venture that is not a Canadian, as defined in the Investment Act (a non-Canadian), unless, after review, the minister responsible for the Investment Act is satisfied that the investment is likely to be of net benefit to Canada. An investment in the common shares of the Company by a non-Canadian (other than a WTO Investor, as defined below) would be reviewable under the Investment Act if it were an investment to acquire direct control of the Company, and the value of the assets of the Company were CDN$5.0 million or more (provided that immediately prior to the implementation of the investment the Company was not controlled by WTO Investors). An investment in common shares of the Company by a WTO Investor (or by a non-Canadian other than a WTO Investor if, immediately prior to the implementation of the investment the Company was controlled by WTO Investors) would be reviewable under the Investment Act if it were an investment to acquire direct control of the Company and the value of the assets of the Company equaled or exceeded an amount determined by the Minister on an annual basis (currently $295 million). A non-Canadian, whether a WTO Investor or otherwise, would be deemed to acquire control of the Company for purposes of the Investment Act if he or she acquired a majority of the common shares of the Company. The acquisition of less than a majority, but at least one-third of the shares, would be presumed to be an acquisition of control of the Company, unless it could be established that the Company is not controlled in fact by the acquirer through the ownership of the shares. In general, an individual is a WTO Investor if he or she is a national of a country (other than Canada) that is a member of the World Trade Organization (WTO Member) or has a right of permanent residence in a WTO Member. A corporation or other entity will be a WTO Investor if it is a WTO Investor-controlled entity, pursuant to detailed rules set out in the Investment Act. The United States is a WTO Member. Certain transactions involving our common shares would be exempt from the Investment Act, including:









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72







·

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

·

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

·

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



Change of Control

There are no provisions of our Notice of Articles or our Articles that would have an effect of delaying, deferring or preventing a change in control of the Company and that would operate only with respect to a merger, acquisition or corporate restructuring involving the Company. Our Articles do not contain a provision governing the ownership threshold above which shareholder ownership must be disclosed.



Shareholder Rights Plan

On February 10, 1998, the Board of Directors adopted a Shareholders Rights Plan, which was confirmed by the shareholders at the annual meeting of the Company held on January 11, 1999.  Effective April 28, 2003, the Board of Directors amended and restated the Shareholder Rights Plan, which was confirmed by the shareholders at the annual general meeting of the Company held on May 29, 2003 (the Shareholder Rights Plan, as so amended and restated, is hereinafter referred to as the Rights Plan).  The Rights Plan was amended and restated in order to take into account many of the terms of similar plans approved at the time by shareholders of other Canadian companies and the current expectations of major investors.   Our Rights Plan has been extended by our Board of Directors, subject to regulatory approval as required, beyond its latest expiry date to the next Annual General Meeting of Shareholders at which time shareholder approval will be sought to an updated, extended Plan.



Background to the Rights Plan

The Rights Plan was adopted to provide the Board of Directors of the Company with sufficient time, in the event of a public take-over bid or tender offer for the securities of the Company, to pursue alternatives which could enhance shareholder value.  These alternatives could involve the review of other take-over bids or offers from other interested parties with a view towards providing shareholders desiring to sell their securities with the best opportunity to realize the maximum sale price for their securities.  In addition, with sufficient time, the Board of Directors would be able to explore and, if feasible, advance alternatives to maximize share value through possible corporate reorganizations or restructuring.  The need for time is paramount if there is to be any real ability on the part of the directors to consider these alternatives.



The Rights Plan has been designed to protect shareholders of the Company from unfair, abusive or coercive take-over strategies, including the acquisition of control of the Company by a bidder in a transaction or series of transactions that may not treat all shareholders equally or fairly nor afford all shareholders an equal opportunity to share in the premium paid upon an acquisition of control.  The Rights Plan is not intended to prevent a take-over or deter fair offers for securities of the Company but rather to facilitate the maximization of shareholder values should anyone seek to acquire control.  Furthermore, it is designed to encourage anyone seeking to acquire control of the Company to make an offer that represents fair value to all holders of all securities and to provide a framework within which shareholders can make a fully informed decision regarding any such offer, within a reasonable time frame, having regard for the possibility that alternatives could be forthcoming which may enhance shareholder value.



The following description of the Rights Plan generally is qualified in its entirety by reference to the full text of the Rights Plan.  All capitalized terms used but not defined in these summaries are defined in the Rights Plan.









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The following description of the Rights Plan generally is qualified in its entirety by reference to the full text of the Rights Plan.  All capitalized terms used but not defined in these summaries are defined in the Rights Plan.



**Summary of the Rights Plan Characteristics**

Upon a person or related group making a Takeover Bid, or acquiring Beneficial Ownership of 20% or more of the outstanding Voting Shares, other than through certain Permitted Acquisitions (as discussed below) including a Permitted Bid or Competing Permitted Bid, or on terms otherwise approved by the Board of Directors, the Rights entitle their holders (other than the acquirer) to acquire Common Shares at a 50% discount from the then prevailing market price, with the result that the acquirer may suffer substantial dilution of its interest in the Company.



The dilutive effects of the Rights are not triggered by a Permitted Bid or Competing Permitted Bid, which are each a Takeover Bid made to all Independent Shareholders by take-over bid circular prepared in compliance with applicable laws and certain additional conditions (as set forth below).  The permitted bid concept, which is found in most of the shareholder rights plans adopted in Canada, is intended to permit shareholders to review and decide upon a take-over bid for themselves, while establishing a minimum standard of fairness and giving shareholders and the Board of Directors sufficient time to evaluate the Permitted Bid or Competing Permitted Bid.



The Rights Plan does not require that a special meeting of shareholders be called to approve a Permitted Bid or Competing Permitted Bid.  Instead, shareholders who favor the bid indicate their approval simply by tendering their Voting Shares to it.  If shareholders independent of the bidder tender Voting Shares representing more than 50% of the Voting Shares then outstanding by the end of the minimum initial tender period (i.e. 60 days), the bid must be extended for a further period of 10 days to allow initially non-tendering shareholders to tender their securities to the bid if they so choose.  Securities deposited pursuant to a bid for less than all of the securities held by Independent Shareholders must be taken up and paid for on a pro rata basis.  The initial tender acts as a surrogate for the costly and rather cumbersome process of requiring a shareholder vote at a special shareholders meeting.  As with a shareholder vote, there is no coercion to tender during the initial 60-day period as the bid, by definition, must be open for acceptance for at least 10 days after expiry of the initial tender period.  Of course, the Board of Directors may call a shareholders meeting at any time should it believe that a meeting would be beneficial to the shareholders.



Pursuant to the role of the Board of Directors to negotiate in the best interests of the Company and to ensure the opportunity for any prospective acquirer to negotiate in good faith with the Board of Directors, the Rights may be redeemed by the Board of Directors within 10 Business Days following the announcement of a Takeover Bid that is not a Permitted Bid or Competing Permitted Bid or the occurrence of any transaction in which 20% or more of the outstanding Voting Shares have been accumulated by an acquirer or group other than through Permitted Acquisitions (i.e. Flip-in Event).  In addition, until the occurrence of a Flip-in Event, the Board of Directors may determine to waive the application of the provisions of the Rights Plan to any transaction that would otherwise be subject to those provisions but in that event must waive the application of the Rights Plan to any other Takeover Bid occurring within 60 days of such waiver.



If a bidder does not wish to make a Permitted Bid or Competing Permitted Bid, he can negotiate with and seek prior approval of the Board of Directors to make an offer on terms which the Board of Directors considers fair to all shareholders.  In such circumstances, the Board of Directors may redeem the Rights or waive the application of the Rights Plan, as the case may be, thereby allowing the offer to proceed without dilution to the bidder.



**Summary of the Rights Plan Terms**



Distribution of Rights

In order to implement the Rights Plan, the Board of Directors authorized the Company to issue one Right in respect of each outstanding Voting Share and each Voting Share issuable upon the exercise or conversion of Convertible Securities to holders of record as at the Record Time and authorized the Company to issue one Right for each such security issued after the Record Time and prior to the Separation Time (as defined below).  The initial exercise price of a Right is $40 (the Exercise Price).  The Exercise Price is subject to certain adjustments as described below.  The Rights will expire 10 years after the Effective Date (the Expiration Date), unless exchanged or redeemed earlier by the Company as described below.







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Dilution

In the event a person announces the acquisition of 20% or more of the Voting Shares of the Company, as an example, assuming the Common Shares of the Company were trading at $1, for each share held at the time of the Flip-in Event, a shareholder would have the right to purchase a further 80 common shares of the Company (calculated by dividing twice the Exercise Price of $40 [i.e. $80] by the fair market value of the common shares [i.e. $1]) at an Exercise Price of $0.50 per share (one-half the fair market value of the common shares), for an aggregate of $40.  This effectively results in each shareholder of the Company, other than the potential bidder, being able to purchase a large block of common shares of the Company at one-half the fair market value of the common shares at the time of the Flip-in Event.  The threat of massive dilution posed by the Rights Plan is intended to force a potential bidder to negotiate with the Board of Directors to allow the offer to proceed.



Separation Time

The Separation Time is the Close of Business on the tenth Business Day following the earlier of:



(i)

the first date of public announcement (which for the purposes of this definition includes, without limitation, a report filed pursuant to securities laws of facts indicating that a Person has become an Acquiring Person;



(ii)

the date of the commencement of, or first public announcement of the intent of any Person (other than the Company or any Subsidiary of the Company) to commence a Takeover Bid (other than a Permitted Bid or a Competing Permitted Bid, so long as such Takeover Bid continues to satisfy the requirements of a Permitted Bid).



Trading and Exercise of Rights

The Rights will separate and trade apart from the securities and become exercisable after the Separation Time upon the issuance of Rights Certificates (as defined below).  Until the Separation Time, the Rights may be transferred only with the associated securities and will be represented by the outstanding certificates; new certificates issued on the transfer of existing securities or on the issuance of additional securities will contain a notation incorporating the Rights Agreement by reference.  Promptly following the Separation Time, separate certificates evidencing the Rights (the Rights Certificates) will be mailed to holders of record of securities as of the Separation Time; thereafter, the Rights Certificates will evidence the Rights.



Acquiring Person

Subject to certain exceptions set forth in the Rights Agreement, the dilutive effects of the Rights are triggered by a person becoming an Acquiring Person upon the acquisition of Beneficial Ownership of 20% or more of the outstanding Voting Shares.  A person will not trigger the separation and exercisability of the Rights if he becomes the Beneficial Owner of 20% or more of the Voting Shares as a result of Permitted Bid Acquisitions, Voting Share Reductions, Pro Rata Acquisitions, Convertible Securities Acquisitions or otherwise on terms approved by the Board of Directors (collectively the Permitted Acquisitions), provided that if he/she becomes the Beneficial Owner of 20% or more of the Voting Shares by such means and he is or subsequently becomes the Beneficial Owner of additional Voting Shares constituting more than 1% of the Voting Shares outstanding, other than by a Permitted Acquisition, then, as of the date of such additional acquisition, he shall become an Acquiring Person.









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Beneficial Ownership



Beneficial Ownership is broadly defined in the Rights Plan, but certain exceptions from its scope are provided, among them an exception designed to avoid inadvertent triggering of the dilutive effects of the Rights by portfolio managers acting for pension funds and others who do not intend to make a Takeover Bid for our Voting Shares and to Persons who enter into Permitted Lock-up Agreements in connection with a Takeover Bid.



Permitted Bid

As discussed above, a Permitted Bid or Competing Permitted Bid will not trigger the dilutive effects of the Rights.  A Permitted Bid or Competing Permitted Bid is a Takeover Bid made in compliance with, and not on a basis which is exempt from or otherwise not subject to, the take-over bid provisions of applicable corporate and securities laws and in compliance with all other applicable laws, and which also complies with the following conditions:



(a)

the bid must be made to all holders of record of Voting Shares, other than the Offeror, on identical terms;



(b)

the bid contains irrevocable and unqualified provisions that:



(i)

none of the bidder and its affiliates and associates will acquire any Voting Shares while the bid is outstanding;



(ii)

all Voting Shares may be deposited pursuant to the bid at any time prior to the close of business on the date referred to in (iii) below and that all Voting Shares deposited pursuant to the bid may be withdrawn at any time prior to the close of business on such date;



(iii)

no Voting Shares will be taken up or paid for pursuant to the bid prior to the close of business on a date which is not less than 60 days following the date of the bid and unless Independent Shareholders have deposited or tendered shares representing more than 50% of the Voting Shares then outstanding pursuant to the bid and have not withdrawn such shares; and



(iv)

should the condition referred to in (iii) above be met, the bid will be extended on the same terms for a period of not less than 10 days from the date referred to in (iii) above provided that where a greater number of Voting Shares are deposited than the bidder is bound or willing to acquire pursuant to a bid for less than all of the Voting Shares held by Independent Shareholders, the Voting Shares must be taken up and paid for on a pro rata basis.



A Competing Permitted Bid may proceed contemporaneously with a Permitted Bid provided it expires on the later of 35 days after the date of the Competing Permitted Bid and 60 days following the date of the earliest Permitted Bid.



Exchange Option

If at any time the Board of Directors, acting in good faith, determines that conditions exist which would eliminate or materially diminish in any respect the benefits intended to be afforded to the holders of Rights under the Rights Plan, it may at its option, at any time after a person has become an Acquiring Person, authorize the Company to issue or deliver, in exchange for each Right (excluding Rights held by an Acquiring Person), debt or equity securities or assets (or a combination thereof) of the Company and, in that event, the rights of holders of Rights to exercise the Rights will terminate.



Redemption and Waiver

The Board of Directors may, at its option, at any time prior to the Separation Time, elect to redeem all but not less than all of the Rights at a redemption price of $0.001 per Right and, in that event, the right of holders of Rights to exercise the Rights will terminate.  The Rights Plan also gives the Board of Directors the right, at its option, to waive the application of the Rights Plan to any particular Flip-in Event that would otherwise be subject to those provisions.







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Existing Charter Provisions

The Notice of Articles and Articles of the Company do not contain any provisions intended by the Company to have, or, to the knowledge of the Board of Directors having, an anti-take-over effect.  However, the power of the Board of Directors to issue additional Common Shares or preference shares (although subject to restrictions imposed by applicable law and regulatory requirements) could be used to dilute the share ownership of persons seeking to obtain control of the Company.



Supplements and Amendments

The Board of Directors may supplement, amend, vary or delete any of the provisions of the Rights Plan:  (i) to correct clerical or typographical errors, (ii) to revise the Exercise Price of the Rights, and (iii) as otherwise may be determined by the Board of Directors, acting in good faith, to be necessary or desirable.  Any amendment referred to in (iii) must, if made before the Separation Time, be submitted to the holders of Common Shares for ratification at the next general meeting of shareholders and, if made after the Separation Time, must be submitted to the holders of Rights for approval.



C.

Material Contracts



The following is a summary of the material contracts, other than contracts entered into in the ordinary course of business, to which the Company or our subsidiaries is a party for the two years immediately preceding the date of this Form 20-F:



Pharmavite LLC

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



Phyto-Source Supply Agreement

In February, 2006, we signed a supply agreement with Phyto-Source which provides for the supply to us of ReducolTM and other wood sterols for a period of 5 years.  For a further discussion of this agreement, see Item 4 - Information on the Company  A. History and Development of the Company  Dispositions.



Phyto-Source Sale Agreement

Pursuant to an agreement dated February, 2006, in March 2006 we sold our 50% interest in Phyto-Source for US$25 million to Chusei Oil Co. Ltd., the Japanese parent company of our joint venture partner, Chusei. For a further description of this sale, see Item 4 Information on the Company  A. History and Development of the Company  Dispositions. In connection with the sale, we also entered into a Supply Agreement with Phyto-Source which provides for the supply to us of ReducolTM and other wood sterols for a period of five years. (See Item 4  Information on the Company  B. Business Overview  Manufacturing of ReducolTM).



Forbes-Fayrefield

By an agreement dated June 19, 2006, we announced the signing of an agreement with Fayrefield to establish a new UK company for the purpose of expanding distribution of finished products containing ReducolTM in Europe.  For a further description of this transaction, see Item 4 - Information on the Company – A. History and Development of the Company – Acquisitions – Forbes-Fayrefield Joint Venture.









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TheraPei Pharmaceuticals, Inc.

In October, 2006, we acquired 100% of TheraPei Pharmaceuticals, Inc. (TheraPei) of San Diego, California, pursuant to an Agreement and Plan of Reorganization dated October 24, 2006 among us, Forbes Medi-Tech (Research) Inc., TheraPei Pharmaceuticals, Inc. and John J. Nestor, Jr. as stockholder representative.  In connection with the acquisition, we also entered into a Development Agreement among Forbes Medi-Tech (Research) Inc., TheraPei Pharmaceuticals Inc. and John J. Nestor Jr. as stockholder representative.   For a description of the transactions undertaken pursuant to these agreements, see Item 4 - Information on the Company  A. History and Development of the Company  Acquisitions  TheraPei Pharmaceuticals, Inc..



Plan of Arrangement

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



Investment Agreement

On March 20, 2008, as part of our continuing reorganization plan, we announced that we have entered into an agreement (the Investment Agreement) with a private investor (the "Investor") to reorganize Old Forbes (Forbes Medi-Tech Operations Inc., or FMTO"). The Investor is to make an initial investment of $3 million in a convertible debenture of FMTO.  Completion of the transaction is subject to the satisfaction of certain conditions. Following completion of the transaction, Forbes and the Investor will source and pursue other opportunities to maximize the value of their respective interests in FMTO. Subject to certain conditions, the Investor has agreed that Forbes will receive a minimum of $800,000 from these other opportunities within one year of completion of the transaction.  (See Item 4 - Information on the Company - A. History and Development of the Company - Other Important Events Since January 1, 2007 - Non-Dilutive Financing).



Management Contracts

We have entered into employment agreements with our senior executives.   For a description of these agreements, see Item 6 Directors, Senior Management and Employees  C. Board Practices  Service Contracts.



D.

Exchange Controls



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



E.

Taxation



U.S. Federal Income Tax Consequences

The following is a summary of the anticipated material U.S. federal income tax consequences to a U.S. Holder (as defined below) arising from and relating to the acquisition, ownership, and disposition of the common shares of Forbes Medi-Tech Inc. (the Common Shares).



This summary is for general information purposes only and does not purport to be a complete analysis or listing of all potential U.S. federal income tax consequences that may apply to a U.S. Holder as a result of the acquisition, ownership, and disposition of Common Shares.  In addition, this summary does not take into account the individual facts and circumstances of any particular U.S. Holder that may affect the U.S. federal income tax consequences of the acquisition, ownership, and disposition of Common Shares.  Accordingly, this summary is not intended to be, and should not be construed as, legal or U.S. federal income tax advice with respect to any U.S. Holder.  Each U.S. Holder should consult its own financial advisor, legal counsel, or accountant regarding the U.S. federal income, U.S. state and local, and foreign tax consequences of the acquisition, ownership, and disposition of Common Shares.







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Scope of this Summary



Authorities



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



U.S. Holders



For purposes of this summary, a U.S. Holder is a beneficial owner of Common Shares that, for U.S. federal income tax purposes, is (a) an individual who is a citizen or resident of the U.S., (b) a corporation, or any other entity classified as a corporation for U.S. federal income tax purposes, that is created or organized in or under the laws of the U.S. or any state in the U.S., including the District of Columbia, (c) an estate if the income of such estate is subject to U.S. federal income tax regardless of the source of such income, or (d) a trust if (i) such trust has validly elected to be treated as a U.S. person for U.S. federal income tax purposes or (ii) a U.S. court is able to exercise primary supervision over the administration of such trust and one or more U.S. persons have the authority to control all substantial decisions of such trust.



Non-U.S. Holders



For purposes of this summary, a non-U.S. Holder is a beneficial owner of Common Shares other than a U.S. Holder.  This summary does not address the U.S. federal income tax consequences of the acquisition, ownership, and disposition of Common Shares to non-U.S. Holders.  Accordingly, a non-U.S. Holder should consult its own financial advisor, legal counsel, or accountant regarding the U.S. federal income, U.S. state and local, and foreign tax consequences (including the potential application of and operation of any tax treaties) of the acquisition, ownership, and disposition of Common Shares.



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



This summary does not address the U.S. federal income tax consequences of the acquisition, ownership, and disposition of Common Shares to U.S. Holders that are subject to special provisions under the Code, including the following U.S. Holders:  (a) U.S. Holders that are tax-exempt organizations, qualified retirement plans, individual retirement accounts, or other tax-deferred accounts; (b) U.S. Holders that are financial institutions, insurance companies, real estate investment trusts, or regulated investment companies; (c) U.S. Holders that are dealers in securities or currencies or U.S. Holders that are traders in securities that elect to apply a mark-to-market accounting method; (d) U.S. Holders that have a functional currency other than the U.S. dollar; (e) U.S. Holders that are liable for the alternative minimum tax under the Code; (f) U.S. Holders that own Common Shares as part of a straddle, hedging transaction, conversion transaction, constructive sale, or other arrangement involving more than one position; (g) U.S. Holders that acquired Common Shares in connection with the exercise of employee stock options or otherwise as compensation for services; (h) U.S. Holders that hold Common Shares other than as a capital asset within the meaning of Section 1221 of the Code; or (i) U.S. Holders that own (directly, indirectly, or constructively) 10% or more of the total combined voting power of the outstanding shares of Forbes Medi-Tech Inc.  U.S. Holders that are subject to special provisions under the Code, including U.S. Holders described immediately above, should consult their own financial advisor, legal counsel or accountant regarding the U.S. federal income, U.S. state and local, and foreign tax consequences of the acquisition, ownership, and disposition of Common Shares.







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If an entity that is classified as a partnership (or pass-through entity) for U.S. federal income tax purposes holds Common Shares, the U.S. federal income tax consequences to such partnership (or pass-through entity) and the partners of such partnership (or owners of such pass-through entity) generally will depend on the activities of the partnership (or pass-through entity) and the status of such partners (or owners).  Partners of entities that are classified as partnerships (or owners of pass-through entities) for U.S. federal income tax purposes should consult their own financial advisor, legal counsel or accountant regarding the U.S. federal income tax consequences of the acquisition, ownership, and disposition of Common Shares.



Tax Consequences Other than U.S. Federal Income Tax Consequences Not Addressed



This summary does not address the U.S. state and local, U.S. federal estate and gift, or foreign tax consequences to U.S. Holders of the acquisition, ownership, and disposition of Common Shares.  Each U.S. Holder should consult its own financial advisor, legal counsel, or accountant regarding the U.S. state and local, U.S. federal estate and gift, and foreign tax consequences of the acquisition, ownership, and disposition of Common Shares.



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



Distributions on Common Shares



General Taxation of Distributions



A U.S. Holder that receives a distribution, including a constructive distribution, with respect to our common shares (the Common Shares) will be required to include the amount of such distribution in gross income as a dividend (without reduction for any Canadian income tax withheld from such distribution) to the extent of the current or accumulated earnings and profits of Forbes.  To the extent that a distribution exceeds the current and accumulated earnings and profits of Forbes, such distribution will be treated (a) first, as a tax-free return of capital to the extent of a U.S. Holders tax basis in the Common Shares and, (b) thereafter, as gain from the sale or exchange of such Common Shares.  (See more detailed discussion at Disposition of Common Shares below).



Reduced Tax Rates for Certain Dividends



For taxable years beginning before January 1, 2011, a dividend paid by Forbes generally will be taxed at the preferential tax rates applicable to long-term capital gains if (a) Forbes is a qualified foreign corporation (as defined below), (b) the U.S. Holder receiving such dividend is an individual, estate, or trust, and (c) such dividend is paid on Common Shares that have been held by such U.S. Holder for at least 61 days during the 121-day period beginning 60 days before the ex-dividend date.



Forbes generally will be a qualified foreign corporation under Section 1(h)(11) of the Code (a QFC) if (a) Forbes is eligible for the benefits of the Canada-U.S. Tax Convention, or (b) the Common Shares are readily tradable on an established securities market in the U.S.  However, even if Forbes satisfies one or more of such requirements, Forbes will not be treated as a QFC if Forbes is a passive foreign investment company or PFIC (as defined below) for the taxable year during which Forbes pays a dividend or for the preceding taxable year.









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As discussed below, Forbes does not believe that it constituted a PFIC for its taxable year ended December 31, 2006.  However, Forbes believes that it likely constituted a PFIC for the taxable year ended December 31, 2007, and based on current business plans and financial projections, Forbes expects that it will be a PFIC during the taxable period ending December 31, 2008.  Accordingly, Forbes does not anticipate that it will be a QFC.



If Forbes is not a QFC, a dividend paid by Forbes to a U.S. Holder, including a U.S. Holder that is an individual, estate, or trust, generally will be taxed at ordinary income tax rates (and not at the preferential tax rates applicable to long-term capital gains).  The dividend rules are complex, and each U.S. Holder should consult its own financial advisor, legal counsel, or accountant regarding the dividend rules.



Distributions Paid in Foreign Currency



The amount of a distribution paid to a U.S. Holder in foreign currency generally will be equal to the U.S. dollar value of such distribution based on the exchange rate applicable on the date of receipt.  A U.S. Holder that does not convert foreign currency received as a distribution into U.S. dollars on the date of receipt generally will have a tax basis in such foreign currency equal to the U.S. dollar value of such foreign currency on the date of receipt.  Such a U.S. Holder generally will recognize ordinary income or loss on the subsequent sale or other taxable disposition of such foreign currency (including an exchange for U.S. dollars).



Dividends Received Deduction



Dividends paid on the Common Shares generally will not be eligible for the dividends received deduction.  The availability of the dividends received deduction is subject to complex limitations that are beyond the scope of this discussion, and a U.S. Holder that is a corporation should consult its own financial advisor, legal counsel, or accountant regarding the dividends received deduction.



Disposition of Common Shares



A U.S. Holder will recognize gain or loss on the sale or other taxable disposition of Common Shares in an amount equal to the difference, if any, between (a) the amount of cash plus the fair market value of any property received and (b) such U.S. Holders tax basis in the Common Shares sold or otherwise disposed of.  Any such gain or loss generally will be capital gain or loss, which will be long-term capital gain or loss if the Common Shares are held for more than one year.  Gain or loss recognized by a U.S. Holder on the sale or other taxable disposition of Common Shares generally will be treated as U.S. source for purposes of applying the U.S. foreign tax credit rules, unless such gains are resourced as foreign source under an applicable income tax treaty, and an election is filed under the Code.   (See more detailed discussion at Foreign Tax Credit below).



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



Foreign Tax Credit



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









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Complex limitations apply to the foreign tax credit, including the general limitation that the credit cannot exceed the proportionate share of a U.S. Holders U.S. federal income tax liability that such U.S. Holders foreign source taxable income bears to such U.S. Holders worldwide taxable income.  In applying this limitation, a U.S. Holders various items of income and deduction must be classified, under complex rules, as either foreign source or U.S. source.  In addition, this limitation is calculated separately with respect to specific categories of income.  Dividends paid by Forbes generally will constitute foreign source income and generally will be categorized as passive income.  The foreign tax credit rules are complex, and each U.S. Holder should consult its own financial advisor, legal counsel, or accountant regarding the foreign tax credit rules.



Information Reporting; Backup Withholding Tax



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



Additional Rules that May Apply to U.S. Holders



If Forbes is a controlled foreign corporation or a passive foreign investment company (each as defined below), the preceding sections of this summary may not describe the U.S. federal income tax consequences to U.S. Holders of the acquisition, ownership, and disposition of Common Shares.



Controlled Foreign Corporation



Forbes generally will be a controlled foreign corporation under Section 957 of the Code (a CFC) if more than 50% of the total voting power or the total value of the outstanding shares of Forbes is owned, directly or indirectly, by citizens or residents of the U.S., domestic partnerships, domestic corporations, domestic estates, or domestic trusts (each as defined in Section 7701(a)(30) of the Code), each of which own, directly or indirectly, 10% or more of the total voting power of the outstanding shares of Forbes (a 10% Shareholder).



If Forbes is a CFC, a 10% Shareholder generally will be subject to current U.S. federal income tax with respect to (a) such 10% Shareholders pro rata share of the subpart F income (as defined in Section 952 of the Code) of Forbes and (b) such 10% Shareholders pro rata share of the earnings of Forbes invested in United States property (as defined in Section 956 of the Code).  In addition, under Section 1248 of the Code, any gain recognized on the sale or other taxable disposition of Common Shares by a U.S. Holder that was a 10% Shareholder at any time during the five-year period ending with such sale or other taxable disposition generally will be treated as a dividend to the extent of the earnings and profits of Forbes that are attributable to such Common Shares.  If Forbes is both a CFC and a passive foreign investment company (as defined below), Forbes generally will be treated as a CFC (and not as a passive foreign investment company) with respect to any 10% Shareholder.



Forbes does not believe that it has previously been, or currently is, a CFC.  However, there can be no assurance that Forbes will not be a CFC for the current or any subsequent taxable year.







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Passive Foreign Investment Company



Forbes generally will be a passive foreign investment company under Section 1297 of the Code (a PFIC) if, for a taxable year, (a) 75% or more of the gross income of Forbes for such taxable year is passive income or (b) 50% or more of the assets held by Forbes either produce passive income or are held for the production of passive income, based on the fair market value of such assets (or on the adjusted tax basis of such assets, if Forbes is not publicly traded and either is a controlled foreign corporation or makes an election).  Passive income includes, for example, dividends, interest, certain rents and royalties, certain gains from the sale of stock and securities, and certain gains from commodities transactions.



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



If Forbes is a PFIC, the U.S. federal income tax consequences to a U.S. Holder of the acquisition, ownership, and disposition of Common Shares will depend on whether such U.S. Holder makes an election to treat Forbes as a qualified electing fund or QEF under Section 1295 of the Code (a QEF Election) or a mark-to-market election under Section 1296 of the Code (a Mark-to-Market Election).  A U.S. Holder that does not make either a QEF Election or a Mark-to-Market Election will be referred to in this summary as a Non-Electing U.S. Holder.



Under Section 1291 of the Code, any gain recognized on the sale or other taxable disposition of Common Shares, and any excess distribution (as defined in Section 1291(b) of the Code) paid on the Common Shares, must be rateably allocated to each day in a Non-Electing U.S. Holders holding period for the Common Shares.  The amount of any such gain or excess distribution allocated to prior years of such Non-Electing U.S. Holders holding period for the Common Shares generally will be subject to U.S. federal income tax at the highest tax applicable to ordinary income in each such prior year.  A Non-Electing U.S. Holder will be required to pay interest on the resulting tax liability for each such prior year, calculated as if such tax liability had been due in each such prior year.



A U.S. Holder that makes a QEF Election generally will not be subject to the rules of Section 1291 of the Code discussed above.  However, a U.S. Holder that makes a QEF Election generally will be subject to U.S. federal income tax on such U.S. Holders pro rata share of (a) the net capital gain of Forbes, which will be taxed as long-term capital gain to such U.S. Holder, and (b) and the ordinary earnings of Forbes, which will be taxed as ordinary income to such U.S. Holder.  A U.S. Holder that makes a QEF Election will be subject to U.S. federal income tax on such amounts for each taxable year in which Forbes is a PFIC, regardless of whether such amounts are actually distributed to such U.S. Holder by Forbes.



A U.S. Holder that makes a Mark-to-Market Election generally will not be subject to the rules of Section 1291 of the Code discussed above.  A U.S. Holder may make a Mark-to-Market Election only if the Common Shares are marketable stock (as defined in Section 1296(e) of the Code).  A U.S. Holder that makes a Mark-to-Market Election will include in gross income, for each taxable year in which Forbes is a PFIC, an amount equal to the excess, if any, of (a) the fair market value of the Common Shares as of the close of such taxable year over (b) such U.S. Holders tax basis in such Common Shares.  A U.S. Holder that makes a Mark-to-Market Election will, subject to certain limitations, be allowed a deduction in an amount equal to the excess, if any, of (a) such U.S. Holders adjusted tax basis in the Common Shares over (b) the fair market value of such Common Shares as of the close of such taxable year.







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While there can be no assurance regarding the classification of Forbes as a PFIC, Forbes does not believe that it constituted a PFIC for its taxable year ended December 31, 2006.  However, Forbes believes that it likely constituted a PFIC for the taxable year ended December 31, 2007, and based on current business plans and financial projections, Forbes expects that it will be a PFIC during the taxable period ending on December 31, 2008.  Forbes has not made a determination regarding its PFIC status for all of its prior taxable years.  The determination of whether Forbes was, or will be, a PFIC for a taxable year depends, in part, on the application of complex U.S. federal income tax rules, which are subject to differing interpretations.  In addition, whether Forbes will be a PFIC for the taxable year ending December 31, 2008 and each subsequent taxable year depends on the assets and income of Forbes over the course of each such taxable year and, as a result, cannot be predicted with certainty as of the date of this Annual Report.  Accordingly, there can be no assurance that the IRS will not challenge the determination made by Forbes concerning its PFIC status or that Forbes will, or will not be, a PFIC for any taxable year.



The PFIC rules are complex, and each U.S. Holder should consult its own financial advisor, legal counsel, or accountant regarding the PFIC rules and how the PFIC rules may affect the U.S. federal income tax consequences of the acquisition, ownership, and disposition of Common Shares.



Canadian Federal Income Tax Consequences

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

Dividends

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

Disposition of Common Shares

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

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







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

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

Documents on Display

The Company is subject to the information requirements of the U.S. Securities Exchange Act of 1934, as amended. In accordance with these requirements, the Company files reports and other information with the United States Securities and Exchange Commission. These materials, including this Annual Report and the exhibits thereto, may be inspected and copied (at prescribed rates) at the Commissions Public Reference Room at One Station Place, 100 F Street NE, Washington, D.C., 20549. The public may obtain information on the operation of the Commissions Public Reference Room by calling the Commission in the United States at 1-800-SEC-0330. In addition, material filed by the Company can be inspected at the offices of The NASDAQ at 9801 Washingtonian Blvd., Gaithersburg, MD 20878, and on the Canadian Securities Administrators electronic filing system, SEDAR®, accessible at the web site http://www.sedar.com.



NASDAQ Corporate Governance

We are a foreign private issuer and our common shares are listed on The NASDAQ Capital Market (NASDAQ).  NASDAQ Rule 4350 (a)(1) permits a foreign private issuer to follow its home country practice in lieu of the requirements of Rule 4350, provided, however, that such an issuer shall: comply with Rules 4350(b)(1)(B), 4350(j) and 4350(m), have an audit committee that satisfies Rule 4350(d)(3), and ensure that such audit committee's members meet the independence requirement in Rule 4350(d)(2)(A)(ii). A foreign private issuer that follows a home country practice in lieu of one or more provisions of Rule 4350 shall disclose in its annual reports filed with the Commission each requirement of Rule 4350 that it does not follow and describe the home country practice followed by the issuer in lieu of such requirements.



We do not follow Rule 4350(f) (shareholder quorum) but instead follow our home country practice, as described below.



Shareholder Meeting Quorum Requirement:  The NASDAQ minimum quorum requirement under Rule 4350(f) for a shareholder meeting is 33-1/3% of the outstanding shares of common stock.  In addition, a company listed on NASDAQ is required to state its quorum requirement in its bylaws.  The Companys quorum requirement is set forth in its Articles, which are effectively the bylaws of the Company.  A quorum for a meeting of shareholders of the Company is shareholders or proxyholders holding a percentage of the issued and outstanding shares entitled to be voted at the meeting of between 5 and 33 1/3 percent, such percentage to be determined by the directors prior to the meeting.  The directors have traditionally determined the percentage for shareholder meetings to be 5 percent.









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The foregoing is consistent with the laws, customs and practices in Canada.



ITEM 11

Quantitative and Qualitative Disclosures About Market Risk



Foreign Currency Risk

The sales revenues for our current sales activities are based primarily on the U.S. dollar, and to a lesser degree on the European Union EURO. The Company does not engage in any foreign currency hedging activities. Assuming sterols revenues of between Cdn $9.75 to $10.5 million a 10 % point change in the Canadian/US exchange rate would increase revenue by approximately $0.85 million. A 10 % point change in the Canadian/ EURO exchange rate would change revenue by approximately $0.32 million.



A portion of our operating costs and product costs associated with our sales activities are based on U.S. dollars. Based on the assumptions for operating costs and sales activities in Item5  Operating and Financial Review and Prospects with the cost structure described therein, a 10 % point change in the Canadian/US exchange rate would change costs by approximately $1.1 million.



Interest Rate Risk

We do not have material floating rate debt obligations which may expose us to market risk.  The primary objective of our investment policy is the protection of principal, and accordingly we invest in overnight deposit accounts, saving accounts, or high-grade commercial paper and government securities with varying maturities, but typically less than 90 days. As it is our intent to hold these investments until maturity, we do not have a material exposure to interest rate risk.



Commodity Price Sensitivity

We have secured long term supply agreements for the supply of ReducolTM and other sterol ingredients, with fixed prices through fiscal 2008. For the final two years of the agreement, the annual prices are determined and fixed each year, based on market prices of similar commodities. In addition, we may source alternative supplies of the sterol products, subject to purchasing the minimum annual quantities as agreed to in the supply agreements. As we have secured this long term agreement, we do not have material exposure to commodity price risk.



ITEM 12

Description of Securities Other than Equity Securities



Disclosure under this item is not required as this Form 20-F is filed as an annual report.



PART II



ITEM 13

Defaults, Dividend, Averages and Delinquencies



Not applicable.



ITEM 14

Material Modifications of the Rights of Security Holders and Use of Proceeds



Effective February 9, 1998, the Company adopted a shareholder rights plan (the Rights Plan) to protect our shareholders from unfair, abusive or coercive take-over strategies. Effective April 28, 2003, the Board of Directors amended and restated the Rights Plan, which was confirmed by the shareholders at the annual general meeting of the Company held on May 29, 2003.  The Rights Plan was amended and restated in order to take into account many of the terms of similar plans recently approved by shareholders of other Canadian companies and the current expectations of major investors.   The Rights Plan has been extended by our Board of Directors, subject to regulatory approval as required, beyond its latest expiry date to the next Annual General Meeting of Shareholders at which time shareholder approval will be sought to an updated, extended Plan.







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The Rights Plan was adopted to provide the Board of Directors of the Company with sufficient time, in the event of a public take-over bid or tender offer for the securities of the Company, to pursue alternatives which could enhance shareholder value.  These alternatives could involve the review of other take-over bids or offers from other interested parties with a view towards providing shareholders desiring to sell their securities with the best opportunity to realize the maximum sale price for their securities.  In addition, with sufficient time, the Board of Directors would be able to explore and, if feasible, advance alternatives to maximize share value through possible corporate reorganizations or restructuring.  The need for time is paramount if there is to be any real ability on the part of the directors to consider these alternatives.



The Rights Plan has been designed to protect shareholders of the Company from unfair, abusive or coercive take-over strategies, including the acquisition of control of the Company by a bidder in a transaction or series of transactions that may not treat all shareholders equally or fairly nor afford all shareholders an equal opportunity to share in the premium paid upon an acquisition of control.  The Rights Plan is not intended to prevent a take-over or deter fair offers for securities of the Company but rather to facilitate the maximization of shareholder values should anyone seek to acquire control.  Furthermore, it is designed to encourage anyone seeking to acquire control of the Company to make an offer that represents fair value to all holders of all securities and to provide a framework within which shareholders can make a fully informed decision regarding any such offer, within a reasonable time frame, having regard for the possibility that alternatives could be forthcoming which may enhance shareholder value.



ITEM 15

Controls and Procedures



Managements Statement of Responsibility for Financial Reporting

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



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



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



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









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Disclosure Controls and Procedures

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



An evaluation was carried out under the supervision of, and with the participation of, our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of December 31, 2007. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of such period.



Management's Annual Report on Internal Control Over Financial Reporting

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



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



Under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, management conducted an evaluation of the effectiveness of our internal control over financial reporting, as of December 31, 2007, based on the framework set forth in Internal Control-Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on its evaluation under this framework, management concluded that our internal control over financial reporting was effective as of that date and no material weaknesses were discovered.



Auditor Attestation on Internal Control over Financial Reporting



As this report is required for U.S. reporting purposes, the Company is a foreign private issuer as defined in Rule 3b-4 of the Exchange Act, and the Company is a non-accelerated filer as defined in Rule 12b-2 of the Exchange Act, we are not required to have our auditor provide an attestation on our managements report on internal control over financial reporting until our annual report for the year ended December 31, 2008.


The requirement to have our auditor provide an attestation on our management’s report on internal control over financial reporting may be extended beyond the year ended December 31, 2008, as a result of pending changes to SEC regulations.



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



Changes in Internal Controls Over Financial Reporting

During fiscal 2007, there have been no changes in our internal controls over financial reporting during the year ended December 31, 2007 that have materially affected, or are reasonably likely to materially affect, our  internal controls over financial reporting.



The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of certain events. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.









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ITEM 16



Item 16A.

Audit Committee Financial Expert

Our Board of Directors has determined that Nitin Kaushal satisfies the requirements of an audit committee financial expert pursuant to the criteria prescribed by the Securities and Exchange Commission and has designated him as an audit committee financial expert for the Audit Committee.  Our Board of Directors has determined that Mr. Kaushal meets the requirements for independence as currently in effect under the rules and requirements of The NASDAQ Capital Market and the Toronto Stock Exchange.



Item 16B.

Code Of Ethics For Chief Executive Officer, Chief Financial Officer And Controller

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



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



Item 16C.

Principal Accounting Fees And Services  Independent Auditors

The fees paid to our independent auditor, KPMG LLP for the years ended December 31, 2007 and December 31, 2006 are set forth below:



|               |                         |         
|-------------- | ----------------------- | --------
|               | Years ended December 31
|               | 2007                    | 2006    
|Audit          | $172,355                | $152,000
|Audit-Related  | Nil                     | Nil     
|Tax            | 17,894                  | 6,000   
|All Other Fees | Nil                     | Nil     
|Total          | $190,249                | $158,000



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



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



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



No fees were paid to KPMG LLP for services that would be disclosed under the category and "All Other Fees."



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



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

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







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Item 16D.

Exemptions from the Listing Standards for Audit Committee



Not applicable.



Item 16E.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers



Not applicable.



PART III



ITEM 17

Financial Statements



Not applicable.



ITEM 18

Financial Statements



The Consolidated Financial Statements were prepared in accordance with Canadian GAAP and are presented in Canadian dollars.  There are differences between United States and Canadian GAAP.  A reconciliation of the financial statements to United States GAAP is set forth in Note 20 to the Consolidated Financial Statements.



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



Independent Registered Public Accounting Firm Auditors Report to the Shareholders

Consolidated Balance Sheets as at December 31, 2007 and 2006

Consolidated Statements of Operations, Comprehensive Loss and Deficit for the years ended December 31, 2007, 2006 and 2005.

Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005.

Notes to Consolidated Financial Statements







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ITEM 19



Exhibits



|            |                                                                                                                                                                 
|----------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. | Description                                                                                                                                                     
|1.1(1)      | Certificate of Name Change dated February 27, 2008                                                                                                              
|1.2(1)      | Certificate of Incorporation dated January 10, 2008                                                                                                             
|1.3(1)      | Articles of the Company dated January 10, 2008                                                                                                                  
|**1.4(2)**  | Court Order and Plan of Arrangement dated February 15, 2008                                                                                                     
|2.1(3)      | Amended and Restated Shareholder Rights Plan Agreement made as of April 28, 2003                                                                                
|2.2(6)      | 2007 Stock Option Plan                                                                                                                                          
|4.1*(4)     | License Agreement with UBC (re: Phytosterols) dated July 4, 1995                                                                                                
|4.10(5)     | Separate Registration Rights Agreements dated October 25, 2004 between Forbes Medi-Tech Inc. and various purchasers of our Series B Convertible Preferred Shares
|4.11(5)     | Class D Warrant Certificates                                                                                                                                    
|4.12(3)     | Settlement Agreement dated May 26, 2004 between Forbes Medi-Tech Inc., Tazdin Esmail and Vestco Enterprises Inc.                                                
|4.13(12)    | Amended and Restated Employment Agreement with Charles Butt dated September 8, 2004                                                                             
|4.14(12)    | Amended and Restated Employment Agreement with Jeff Motley dated January 1, 2005                                                                                
|4.15(12)    | Amended and Restated Employment Agreement with Laura Wessman dated January 1, 2005                                                                              
|4.17*(11)   | Employment Agreement with John Nestor dated October 25, 2006                                                                                                    
|4.18(12)    | Amended and Restated Employment Agreement with David Goold dated January 1, 2006                                                                                
|4.20*(11)   | Licence & Supply Agreement with Pharmavite LLC dated January 1, 2006                                                                                            
|4.21*(11)   | Supply Agreement with Phyto-Source dated January 1, 2006                                                                                                        
|4.22(7)     | Agreement of Purchase and Sale with Chusei Oil Co. Ltd. dated March 2006                                                                                        
|4.23(8)     | Joint Venture Agreement establishing Forbes-Fayrefield Ltd. dated June 2006                                                                                     
|4.24(13)    | Agreement and Plan of Reorganization with TheraPei Pharmaceuticals, Inc. and John J. Nestor dated October 24, 2006                                              
|4.25*(9)    | Investment Agreement dated March 19, 2008                                                                                                                       
|8.1         | List of Subsidiaries                                                                                                                                            
|12.1        | Section 302 Certificate of Chief Executive Officer                                                                                                              
|12.2        | Section 302 Certificate of Chief Financial Officer                                                                                                              
|13.1        | Certificate of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                 
|13.2        | Certificate of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                 
|99.6(10)    | Code of Ethics                                                                                                                                                  
|99.7        | Audit Committee Charter                                                                                                                                         









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

(2)

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

(3)

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

(4)

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

(5)

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

(6)

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

(7)

Incorporated herein by reference from the Companys Form 6-K filed with the SEC on February 24, 2006.

(8)

Incorporated herein by reference from the Companys Form 6-K filed with the SEC on June 21, 2006.

(9)

Incorporated herein by reference from the Companys Form 6-K  to be filed with the SEC on April 1, 2008.

(10)

Incorporated herein by reference from the Companys Form 40-F filed with the SEC on April 3, 2006.

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

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

(13) Incorporated herein by reference from the Company's Form 6-K Filed with the SEC on October 30, 2006.



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







---

92









SIGNATURES



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



| |                                      
| | -------------------------------------
| | FORBES MEDI-TECH INC.                
| | (Registrant)                         
| | (signed) Charles Butt              
| | CHARLES BUTT, CHIEF EXECUTIVE OFFICER



Dated:   March 31, 2008







---

93







Exhibit 13.1



CERTIFICATIONS



CERTIFICATION PURSUANT TO

18 U.S.C. §1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002



In connection with the Annual Report of Forbes Medi-Tech Inc. (the Company) on Form 20-F for the period ended December 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Charles A. Butt, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:



(1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and



(2)

The information contained in this Report fairly presents, in all material respects, the financial condition and results of operations of the Company.



|                       |  |     |  |                                                                                           
|---------------------- |  | --- |  | ------------------------------------------------------------------------------------------
|                       |  |     |  |                                                                                           
|Date:   March 31, 2008 |  | By: |  | /s/ Charles A. Butt

Charles A. Butt
Chief Executive Officer
(Principal Executive Officer)



A signed original of this written statement required by Section 906 has been provided to Forbes Medi-Tech Inc. and will be retained by Forbes Medi-Tech Inc. and furnished to the Securities and Exchange Commission or its staff upon request.







---

94







Exhibit 12.1



CERTIFICATIONS



I, Charles A. Butt, certify that:

I have reviewed this annual report on Form 20-F of Forbes Medi-Tech Inc.;

1.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

2.

Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in this report;

3.

The Companys other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the issuer and have:

4.

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)

Evaluated the effectiveness of the Companys disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)

Disclosed in this report any change in the Companys internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting; and

5.

The Companys other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Companys auditors and the audit committee of the Companys board of directors (or persons performing the equivalent functions):

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Companys ability to record, process, summarize and report financial information; and

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the Companys internal control over financial reporting.



|                       |  |     |  |                                                                                           
|---------------------- |  | --- |  | ------------------------------------------------------------------------------------------
|                       |  |     |  |                                                                                           
|Date:   March 31, 2008 |  | By: |  | /s/ Charles A. Butt

Charles A. Butt
Chief Executive Officer
(Principal Executive Officer)









---

95









Exhibit 13.2



CERTIFICATIONS



CERTIFICATION PURSUANT TO

18 U.S.C. §1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002



In connection with the Annual Report of Forbes Medi-Tech Inc. (the Company) on Form 20-F for the period ended December 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, David Goold, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:



(1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and



(2)

The information contained in this Report fairly presents, in all material respects, the financial condition and results of operations of the Company.



|                      |  |     |  |                                                                                                  
|--------------------- |  | --- |  | -------------------------------------------------------------------------------------------------
|                      |  |     |  |                                                                                                  
|Date:  March 31, 2008 |  | By: |  | /s/ David Goold

David Goold
Chief Financial Officer
(Principal Financial and Accounting Officer)



A signed original of this written statement required by Section 906 has been provided to Forbes Medi-Tech Inc. and will be retained by Forbes Medi-Tech Inc. and furnished to the Securities and Exchange Commission or its staff upon request.









---

96







Exhibit 12.2



CERTIFICATIONS



I, David Goold, certify that:

I have reviewed this annual report on Form 20-F of Forbes Medi-Tech Inc.;

1.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

2.

Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in this report;

3.

The Companys other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the issuer and have:

4.

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)

Evaluated the effectiveness of the Companys disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)

Disclosed in this report any change in the Companys internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting; and

5.

The Companys other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Companys auditors and the audit committee of the Companys board of directors (or persons performing the equivalent functions):

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Companys ability to record, process, summarize and report financial information; and

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the Companys internal control over financial reporting.



|                      |  |     |  |                                                                                                  
|--------------------- |  | --- |  | -------------------------------------------------------------------------------------------------
|                      |  |     |  |                                                                                                  
|Date:  March 31, 2008 |  | By: |  | /s/ David Goold

David Goold
Chief Financial Officer
(Principal Financial and Accounting Officer)









---











|Consolidated Financial Statements           
|--------------------------------------------
|(Expressed in thousands of Canadian dollars)
|FORBES MEDI-TECH INC.                       
|Years ended December 31, 2007, 2006 and 2005







---

MANAGEMENTS STATEMENT OF RESPONSIBILITY

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

To assist management in the discharge of these responsibilities, the Company maintains a system of internal controls over financial reporting as described in "Management's Annual Report of Internal Control Over Financial Reporting" on page 15 of the December 31, 2007 Managements Discussion and Analysis.

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

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





|Charles A. Butt                     | David Goold          
|------------------------------------- | -----------------------
|                                     
|CHARLES A. BUTT                       | DAVID GOOLD, CA        
|President and Chief Executive Officer | Chief Financial Officer

---

| | KPMG LLP                         | Telephone | (604)       | 691-3000
| | -------------------------------- | --------- | ----------- | --------
| | Chartered Accountants            | Fax       | (604)       | 691-3031
| | PO Box 10426 777 Dunsmuir Street | Internet  | www.kpmg.ca
| | Vancouver BC V7Y 1K3             |           |             |         
| | Canada                           |           |             |         

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors of 
Forbes Medi-Tech Inc.

We have audited the accompanying consolidated balance sheets of Forbes Medi-Tech Inc. and subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of operations, comprehensive loss and deficit and cash flows for each of the years in the three-year period ended December 31, 2006. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Forbes Medi-Tech Inc. and its subsidiaries as of December 31, 2007 and 2006, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2007, in conformity with Canadian generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations and has a deficit that raise substantial doubt about its ability to continue as a going concern. Managements plans in regard to these matters are also described in note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Canadian generally accepted accounting principles vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in Note 20 to the consolidated financial statements.

Chartered Accountants

Vancouver, CanadaMarch 7, 2008, except for note 21 which is as of March 20, 2008

****

KPMG LLP, a Canadian limited liability partnership is the Canadianmember firm of KPMG International, a Swiss cooperative.

1

---

|FORBES MEDI-TECH INC.                       
|--------------------------------------------
|Consolidated Balance Sheets                 
|(Expressed in thousands of Canadian dollars)

December 31, 2007 and 2006

|                                                     |   | 2007     |   |   | 2006    |  
|---------------------------------------------------- | - | -------- | - | - | ------- | -
|                                                    
|Assets                                               |   |          |   |   |         |  
|                                                    
|Current assets:                                      |   |          |   |   |         |  
|Cash and cash equivalents                            | $ | 5,234    |   | $ | 15,287  |  
|Accounts receivable (note 4)                         |   | 1,277    |   |   | 1,546   |  
|Inventories (note 5)                                 |   | 5,317    |   |   | 6,093   |  
|Prepaid expenses and deposits                        |   | 224      |   |   | 598     |  
|                                                     |   | 12,052   |   |   | 23,524  |  
|                                                    
|Capital Assets (note 6)                              |   | 387      |   |   | 552     |  
|Intangible and other assets (note 8)                 |   | 512      |   |   | 944     |  
|Goodwill (note 9)                                    |   | -        |   |   | 367     |  
|                                                    
|                                                     | $ | 12,951   |   | $ | 25,387  |  
|                                                    
|Liabilities and Shareholders Equity                 |   |          |   |   |         |  
|                                                    
|Current liabilities:                                 |   |          |   |   |         |  
|Accounts payable and accrued liabilities (note 10)   | $ | 2,294    |   | $ | 3,486   |  
|Income tax liability                                 |   | 31       |   |   | 539     |  
|Deferred revenues                                    |   | -        |   |   | 58      |  
|Current portion tenure allowance payable(note 12(a)) |   | 54       |   |   | -       |  
|                                                     |   | 2,379    |   |   | 4,083   |  
|                                                    
|Long-term liabilities:                               |   |          |   |   |         |  
|Tenure allowance (note 12(a))                        |   | 940      |   |   | 954     |  
|                                                     |   | 3,319    |   |   | 5,037   |  
|                                                    
|                                                    
|Shareholders equity:                                |   |          |   |   |         |  
|Share capital (note 11(c))                           |   | 101,027  |   |   | 100,994 |  
|Contributed surplus (note 11(b))                     |   | 9,875    |   |   | 8,943   |  
|Deficit                                              |   | (101,270 | ) |   | (89,587 | )
|                                                     |   | 9,632    |   |   | 20,350  |  
|                                                    
|                                                     | $ | 12,951   |   | $ | 25,387  |  

Nature of operations and going concern (note 1)
  Commitments and contractual obligations (notes 10, 12 and 18) 
  Related party transactions (notes 12(b) and 15) 
  Subsequent events (note 21)

See accompanying notes to consolidated financial statements.

Approved on behalf of the Board:

|Don Buxton |          | Nitin Kaushal |         
|------------ | -------- | --------------- | --------
|             | Director |                 | Director
|            
|DON BUXTON   |          | NITIN KAUSHAL   |         

2

---

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

Years ended December 31, 2007, 2006 and 2005

|                                                                                               |   | 2007     |   |   | 2006    |   |   | 2005    |  
|---------------------------------------------------------------------------------------------- | - | -------- | - | - | ------- | - | - | ------- | -
|                                                                                              
|Revenue:                                                                                       |   |          |   |   |         |   |   |         |  
|Sales                                                                                          | $ | 8,847    |   | $ | 5,964   |   | $ | 3,867   |  
|Licensing                                                                                      |   | 57       |   |   | 152     |   |   | 153     |  
|Phytosterol revenues                                                                           |   | 8,904    |   |   | 6,116   |   |   | 4,020   |  
|Interest and other                                                                             |   | 457      |   |   | 1,126   |   |   | 461     |  
|                                                                                               |   | 9,361    |   |   | 7,242   |   |   | 4,481   |  
|                                                                                              
|Expenses:                                                                                      |   |          |   |   |         |   |   |         |  
|Cost of sales                                                                                  |   | 9,155    |   |   | 5,857   |   |   | 2,507   |  
|General and administrative                                                                     |   | 5,066    |   |   | 5,202   |   |   | 5,443   |  
|Research and development                                                                       |   | 3,469    |   |   | 9,634   |   |   | 10,994  |  
|Marketing, sales and product development                                                       |   | 1,606    |   |   | 2,762   |   |   | 1,665   |  
|Foreign exchange loss                                                                          |   | 1,267    |   |   | 1,311   |   |   | 174     |  
|Depreciation and amortization                                                                  |   | 213      |   |   | 149     |   |   | 162     |  
|                                                                                               |   | 20,776   |   |   | 24,915  |   |   | 20,945  |  
|                                                                                              
|Impairment charge for goodwill, intellectual property and capital assets (notes 6, 8(a) and 9) |   | 759      |   |   | -       |   |   | -       |  
|Loss from continuing operations for the year before taxes                                      |   | (12,174  | ) |   | (17,673 | ) |   | (16,464 | )
|                                                                                              
|Current income tax recovery / (expense) (note 17(a))                                           |   | 491      |   |   | (158    | ) |   | -       |  
|                                                                                              
|Net loss from continuing operations for the year                                               |   | (11,683  | ) |   | (17,831 | ) |   | (16,464 | )
|                                                                                              
|Discontinued Operations (note 19)                                                              |   |          |   |   |         |   |   |         |  
|                                                                                               |   |          |   |   |         |   |   |         |  
|Income from discontinued operations, net of income tax provision                               |   | -        |   |   | 29      |   |   | 3,658   |  
|                                                                                              
|Gain from disposal of discontinued operations, net of current                                  |   |          |   |   |         |   |   |         |  
|income tax provision of $7,243 and future tax reduction of                                     |   |          |   |   |         |   |   |         |  
|$(845)                                                                                         |   | -        |   |   | 6,958   |   |   | -       |  
|                                                                                              
|Net loss and comprehensive loss for the year                                                   |   | (11,683  | ) |   | (10,844 | ) |   | (12,806 | )
|                                                                                              
|Deficit, beginning of year                                                                     |   | (89,587  | ) |   | (78,743 | ) |   | (65,937 | )
|                                                                                              
|Deficit, end of year                                                                           | $ | (101,270 | ) | $ | (89,587 | ) | $ | (78,743 | )
|                                                                                              
|                                                                                              
|Weighted average number of common shares outstanding (000)                                    |   | 38,407   |   |   | 37,400  |   |   | 34,058  |  
|                                                                                              
|Basic and diluted loss per share from continuing operations                                    | $ | (0.30    | ) | $ | (0.48   | ) | $ | (0.48   | )
|                                                                                              
|Basic and diluted income per share from discontinued operations                                |   | -        |   | $ | 0.00    |   | $ | 0.10    |  
|                                                                                              
|Basic and diluted gain per share from disposal of                                              |   |          |   |   |         |   |   |         |  
|discontinued operations                                                                        |   | -        |   | $ | 0.19    |   |   | -       |  
|                                                                                              
|Basic and diluted loss per share                                                               | $ | (0.30    | ) | $ | (0.29   | ) | $ | (0.38   | )

See accompanying notes to consolidated financial statements.

3

---

|FORBES MEDI-TECH INC.                       
|--------------------------------------------
|Consolidated Statements of Cash Flows       
|(Expressed in thousands of Canadian dollars)

Years ended December 31, 2007, 2006 and 2005

|                                                                         |     | 2007    |   |   | 2006    |   |   | 2005    |  
|------------------------------------------------------------------------ | --- | ------- | - | - | ------- | - | - | ------- | -
|                                                                        
|Cash provided by (used in):                                              |     |         |   |   |         |   |   |         |  
|Operations:                                                              |     |         |   |   |         |   |   |         |  
|Net loss for the year                                                    | $   | (11,683 | ) | $ | (10,844 | ) | $ | (12,806 | )
|Adjustment for:                                                          |     |         |   |   |         |   |   |         |  
|                                                                        
|Depreciation and amortization                                            |     | 213     |   |   | 149     |   |   | 162     |  
|Amortization of deferred license revenues                                |     | (57     | ) |   | (115    | ) |   | (151    | )
|Impairment charge for goodwill, intellectual property and capital assets | 759 |         |   | - |         |   | - |        
|Stock-based compensation                                                 |     | 958     |   |   | 1,819   |   |   | 1,776   |  
|Amortization of capitalized financing fees                               |     | -       |   |   | 26      |   |   | 17      |  
|Accretion of interest                                                    |     | -       |   |   | 117     |   |   | 74      |  
|Loss (gain) on disposal of fixed assets                                  |     | -       |   |   | 1       |   |   | (9      | )
|Income from discontinued operations, net of taxes                        |     | **-**   |   |   | (29     | ) |   | (3,658  | )
|Gain on disposal of discontinued operations, net of taxes                |     | **-**   |   |   | (6,958  | ) |   | -       |  
|Foreign exchange translation                                             |     | -       |   |   | -       |   |   | (5      | )
|                                                                         |     | (9,810  | ) |   | (15,834 | ) |   | (14,600 | )
|Net change in non-cash operating items (note 13)                         |     | (291    | ) |   | (2,012  | ) |   | (2,776  | )
|Net cash used in continuing operations                                   |     | (10,101 | ) |   | (17,846 | ) |   | (17,376 | )
|                                                                        
|Net cash (used in) provided by discontinued operations                   |     | -       |   |   | (5,214  | ) |   | 7,180   |  
|                                                                         |     | (10,101 | ) |   | (23,060 | ) |   | (10,196 | )
|                                                                        
|Investments:                                                             |     |         |   |   |         |   |   |         |  
|Acquisition of property, plant and equipment                             |     | (99     | ) |   | (174    | ) |   | (315    | )
|Proceeds from long-term note receivable                                  |     | 140     |   |   | 131     |   |   | 302     |  
|Proceeds on disposal of Phyto-Source manufacturingjoint venture          |     | -       |   |   | 28,935  |   |   | -       |  
|Acquisition of intangible/other assets                                   |     | -       |   |   | (436    | ) |   | -       |  
|Acquisition of license                                                   |     | **-**   |   |   | -       |   |   | (11     | )
|Proceeds on disposal of fixed assets                                     |     | **-**   |   |   | -       |   |   | 186     |  
|Short-term investments                                                   |     | **-**   |   |   | -       |   |   | 6,018   |  
|Net cash invested by discontinued operations                             |     | **-**   |   |   | -       |   |   | (332    | )
|                                                                         |     | 41      |   |   | 28,456  |   |   | 5,848   |  
|Financing:                                                               |     |         |   |   |         |   |   |         |  
|Issuance of common shares                                                |     | 7       |   |   | 923     |   |   | 301     |  
|Issuance of preferred shares, net of share issue costs                   |     | -       |   |   | -       |   |   | 6,221   |  
|Repayment of notes payable                                               |     | **-**   |   |   | -       |   |   | (66     | )
|Decrease in long-term liabilities from discontinued operations           |     | **-**   |   |   | (330    | ) |   | (1,339  | )
|                                                                         |     | 7       |   |   | 593     |   |   | 5,117   |  
|                                                                        
|Increase / (decrease) in cash and cash equivalents                       |     | (10,053 | ) |   | 5,989   |   |   | 769     |  
|                                                                        
|Cash and cash equivalents, beginning of year                             |     | 15,287  |   |   | 9,298   |   |   | 8,529   |  
|                                                                        
|Cash and cash equivalents, end of year                                   | $   | 5,234   |   | $ | 15,287  |   | $ | 9,298   |  

Supplementary information (note 14)
  See accompanying notes to consolidated financial statements.

4

---

|FORBES MEDI-TECH INC.                                                           
|--------------------------------------------------------------------------------
|Notes to Consolidated Financial Statements                                      
|(Expressed in thousands of Canadian dollars, except share and per share amounts)
|                                                                                
|Years ended December 31, 2007, 2006 and 2005                                    

|1 . | Nature of operations and going concern:
|--- | ---------------------------------------

Forbes Medi-Tech Inc. (Forbes or the Company) is a life sciences company dedicated to the research, development and commercialization of innovative products for the prevention and treatment of life-threatening diseases. Our pharmaceutical compounds are primarily targeting a number of conditions and diseases associated with Metabolic Syndrome, and Inflammatory Lung Disease. Our nutraceutical products, both commercialized and under development, are intended to help reduce the risk of cardiovascular disease and the conditions that can cause it. The Company has operations in the nutraceutical/functional food ingredient market in the USA, Europe and other international markets.

As the Company is continuing to further its pharmaceutical research of novel compounds, future losses are anticipated and additional financing will be required. The eventual profitability of the Company is dependent on many factors, including, but not limited to, successful development and market acceptance of its products and services, receiving the required regulatory approvals, the conclusion and implementation of applicable strategic and other alliances and adequate financing on a timely basis. There can be no assurance that required regulatory approvals will be received or, if received, will be received on a timely basis. In addition, the nutraceutical 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. It is not possible to predict the outcome of the Companys future research and development activities or the financing thereof.

The Companys management is considering all financing alternatives and is seeking to raise additional funds for operations from potential investors. In addition, the Company is looking at options for liquidating certain of the long-term assets as recognized in note 8, and at other non-dilutive financing options. While the Company is striving to achieve the above plans, there is no assurance that such funding will be available or obtained on favorable terms.

The Companys management believes sufficient financial resources exist to fund operations into the third quarter of 2008.

These consolidated financial statements have been prepared on the basis that the Company will be able to continue as a going concern, which assumes the realization of assets and liquidation of liabilities in the normal course of business. These financial statements do not reflect adjustments to the carrying values of assets and liabilities that would be necessary if the Company was unable to continue as a going concern and s

|2 . | Changes in accounting standards:
|--- | --------------------------------

Such adjustments could be material.

| | (a) | Current year adoption of new accounting standards:
| | --- | --------------------------------------------------

Effective on January 1, 2007, the Company adopted the recommendations of CICA Handbook Section 1530, Comprehensive Income ("Section 1530") and Section 3855, Financial Instruments - Recognition and Measurement ("Section 3855").

5

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|FORBES MEDI-TECH INC.                                                           
|--------------------------------------------------------------------------------
|Notes to Consolidated Financial Statements                                      
|(Expressed in thousands of Canadian dollars, except share and per share amounts)
|                                                                                
|Years ended December 31, 2007, 2006 and 2005                                    

|2 . | Changes in accounting standards (continued):
|--- | --------------------------------------------

| | (a) | Current year adoption of new accounting standards (continued):
| | --- | --------------------------------------------------------------

Section 1530 provides standards for the reporting and presentation of comprehensive income / (loss), which represents the change in equity, from transactions and other events and circumstances from non-owner sources. Other comprehensive income / (loss) refers to items recognized in comprehensive income / (loss) that are excluded from net income / (loss) calculated in accordance with Canadian GAAP.

Section 3855 establishes standards for recognition and measurement of financial assets, financial liabilities and non-financial derivatives. Under the new standards, all financial instruments are classified into one of the following five categories: held for trading, held-to-maturity investments, loans and receivables, available-for-sale financial assets or other financial liabilities. All financial instruments, including derivatives, are included on the consolidated balance sheet and are initially measured at fair value. Held for trading financial investments are subsequently measured at fair value and all gains and losses are included in net income in the period in which they arise. Available-for-sale financial instruments are subsequently measured at fair value with revaluation gains and losses included in other comprehensive income until the instrument is derecognized or impaired. Loans and receivables, held to maturity investments and other financial liabilities are subsequently measured at amortized cost. As a result of the adoption of these standards, the Company has classified its cash and cash equivalents as held-for-trading. Accounts receivable are classified as loans and receivables. Accounts payable and the tenure allowance have been classified as other financial liabilities, both of which are measured at amortized cost.

| | (b) | Future changes in accounting standards:
| | --- | ---------------------------------------

In June 2007, the CICA issued a new Handbook Section 3031, Inventories(Section 3031). In December 2006, the CICA issued three new accounting standards: Handbook Section 1535, Capital Disclosures(Section 1535), Handbook Section 3862, Financial Instruments  Disclosures (Section 3862), and Handbook Section 3863, Financial Instruments  Presentation (Section 3863). These new standards become effective for the Company on January 1, 2008.

Section 1535 specifies the disclosure of (i) an entitys objectives, policies and processes for managing capital; (ii) quantitative data about what the entity regards as capital; (iii) whether the Company has complied with any capital requirements; and (iv) if it has not complied, the consequences of such non-compliance. The Company is presently evaluating the impact of this new standard.

Section 3031 replaces Handbook Section 3030, Inventories, providing more guidance on the measurement and disclosure requirements for inventories. Specifically, it requires inventories to be measured at the lower of cost and net realizable value, and provides guidance on the determination of cost and its subsequent recognition as an expense, including any write-down to net realizable value. The standard also provides guidance on the cost formulas used to assign costs to inventories. This new standard will not have any significant impact on the consolidated financial statements of the Company.

6

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|FORBES MEDI-TECH INC.                                                           
|--------------------------------------------------------------------------------
|Notes to Consolidated Financial Statements                                      
|(Expressed in thousands of Canadian dollars, except share and per share amounts)
|                                                                                
|Years ended December 31, 2007, 2006 and 2005                                    

|2 . | Changes in accounting standards (continued):
|--- | --------------------------------------------

| | (b) | Future changes in accounting standards (continued):
| | --- | ---------------------------------------------------

Sections 3862 and 3863 replace Handbook Section 3861, Financial Instruments  Disclosure and Presentation, revising and enhancing its disclosure requirements, and carrying forward unchanged its presentation requirements. These new sections place increased emphasis on disclosures about the nature and extent of risks arising from financial instruments and how the Company manages these risks. The Company is presently evaluating the impact of this new standard.

|3 . | Significant accounting policies:
|--- | --------------------------------

| | (a) | Basis of consolidation:
| | --- | -----------------------

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

| | (b) | Cash and cash equivalents:
| | --- | --------------------------

Cash and cash equivalents include cash and term deposits with initial maturities of three months or less when acquired.

| | (c) | Inventories:
| | --- | ------------

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

| | (d) | Capital and intangible assets:
| | --- | ------------------------------

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

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

7

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|FORBES MEDI-TECH INC.                                                           
|--------------------------------------------------------------------------------
|Notes to Consolidated Financial Statements                                      
|(Expressed in thousands of Canadian dollars, except share and per share amounts)
|                                                                                
|Years ended December 31, 2007, 2006 and 2005                                    

|3 . | Significant accounting policies (continued):
|--- | --------------------------------------------

| | (d) | Capital and intangible assets (continued):
| | --- | ------------------------------------------

Capital 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 estimated useful lives, not exceeding ten years.

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

| | (e) | Goodwill:
| | --- | ---------

Goodwill is the residual amount that results when the purchase price of an acquired business exceeds the sum of the amounts allocated to the identifiable assets acquired, less liabilities assumed, based on their fair values. Goodwill is not amortized and is tested for impairment annually or more frequently if events or changes in circumstances indicate that the goodwill might be impaired.

| | (f) | Stock-based compensation plan:
| | --- | ------------------------------

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

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

| | (g) | Research and development:
| | --- | -------------------------

All research costs are expensed as incurred. Development costs are expensed in the period incurred unless the Company believes a development project meets certain criteria for deferral and amortization. No development costs have been deferred to date.

| | (h) | Revenue recognition:
| | --- | --------------------

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

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

8

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|FORBES MEDI-TECH INC.                                                           
|--------------------------------------------------------------------------------
|Notes to Consolidated Financial Statements                                      
|(Expressed in thousands of Canadian dollars, except share and per share amounts)
|                                                                                
|Years ended December 31, 2007, 2006 and 2005                                    

|3 . | Significant accounting policies (continued):
|--- | --------------------------------------------

| | (i) | 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 inventory to net realizable value.

| | (j) | Government assistance:
| | --- | ----------------------

Government assistance is accounted for using the cost-reduction method, whereby the benefit is recognized as a reduction in the cost of the related asset or expenditure when there is reasonable assurance the government assistance will be received. During the year ended December 31, 2007, the Company received $20 (2006  $169) of government assistance which has been offset against research and development expense.

| | (k) | Income taxes:
| | --- | -------------

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

| | (l) | Foreign currency translation:
| | --- | -----------------------------

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

| | (m) | 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.

9

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|FORBES MEDI-TECH INC.                                                           
|--------------------------------------------------------------------------------
|Notes to Consolidated Financial Statements                                      
|(Expressed in thousands of Canadian dollars, except share and per share amounts)
|                                                                                
|Years ended December 31, 2007, 2006 and 2005                                    

|3 . | Significant accounting policies (continued):
|--- | --------------------------------------------

| | (n) | Common shares to be issued contingent upon future sales:
| | --- | --------------------------------------------------------

Under the UBC license agreements (note 12(d)) 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.

| | (o) | 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, approximate their fair values due to their short terms to maturity The carrying value of the tenure allowance is equal to its fair value being the present value of future payments discounted at the current market rate of interest.

| | (p) | Loss per share:
| | --- | ---------------

Basic loss per share is computed by dividing net loss by the weighted average number of common 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 and warrants, if dilutive. The number of additional shares is calculated by assuming that outstanding stock options and warrants 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. As the Company has incurred a loss for each period presented, all stock options and warrants are anti-dilutive and have been excluded from the weighted average shares outstanding.

|4 . | Accounts receivable:
|--- | --------------------

| |                               |   | 2007  |   | 2006  | 
| | ----------------------------- | - | ----- | - | ----- | 
| |                               |  
| | Trade receivables             | $ | 789   | $ | 1,172 | 
| | Note receivable (note 8(b))   |   | 140   |   | 131   | 
| | Other sales taxes recoverable |   | 114   |   | 201   | 
| | Other receivables             |   | 234   |   | 42    | 
| |                               |  
| |                               | $ | 1,277 | $ | 1,546 | 

10

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|FORBES MEDI-TECH INC.                                                           
|--------------------------------------------------------------------------------
|Notes to Consolidated Financial Statements                                      
|(Expressed in thousands of Canadian dollars, except share and per share amounts)
|                                                                                
|Years ended December 31, 2007, 2006 and 2005                                    

|5 . | Inventories:
|--- | ------------

| |                                              |   | 2007  |   | 2006 
| | -------------------------------------------- | - | ----- | - | -----
| |                                              |   |       |   |      
| | Raw materials, supplies and work in progress | $ | 1,499 | $ | 3,514
| | Finished goods                               |   | 3,818 |   | 2,579
| |                                              |   |       |   |      
| |                                              | $ | 5,317 | $ | 6,093
| |                                              |   |       |   |      

Inventory is reviewed on a product-by-product basis, and any valuation allowances are written off to cost of sales. In the year ended December 31, 2007, $450 (2006-$350) was charged to cost of sales.

|6 . | Capital assets:
|--- | ---------------

| |                                 |   |      |   | Accumulated  |   |   | Net book
| | ------------------------------- | - | ---- | - | ------------ | - | - | --------
| | 2007                            |   | Cost |   | amortization |   |   | value   
| |                                
| | Leasehold improvements          | $ | 209  | $ | (209         | ) | $ | 0       
| | Laboratory equipment            |   | 241  |   | (71          | ) |   | 170     
| | Office equipment                |   | 191  |   | (107         | ) |   | 84      
| | Computer equipment and software |   | 326  |   | (193         | ) |   | 133     
| |                                
| |                                 | $ | 967  | $ | (580         | ) | $ | 387     

| |                                 |   |      |   | Accumulated  |   |   | Net book
| | ------------------------------- | - | ---- | - | ------------ | - | - | --------
| | 2006                            |   | Cost |   | amortization |   |   | value   
| |                                
| | Leasehold improvements          | $ | 208  | $ | (90          | ) | $ | 118     
| | Laboratory equipment            |   | 165  |   | (42          | ) |   | 123     
| | Office equipment                |   | 190  |   | (64          | ) |   | 126     
| | Computer equipment and software |   | 305  |   | (120         | ) |   | 185     
| |                                
| |                                 | $ | 868  | $ | (316         | ) | $ | 552     

Amortization expense amounted to $213 in the year ended December 31, 2007 (2006 - $149, 2005 - $162).

In January 2008, the Company reached an agreement to sublease a portion of its office space. At December 31, 2007, the Company recorded a charge of $93 to record the accelerated amortization of leasehold improvements relating to this space and certain office equipment that was disposed of related to the sublease to reflect a reasonable estimate of its estimated fair value as at that date. The fair value of this office equipment was determined based on the $1 of proceeds received from its sale in January 2008.

11

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|FORBES MEDI-TECH INC.                                                           
|--------------------------------------------------------------------------------
|Notes to Consolidated Financial Statements                                      
|(Expressed in thousands of Canadian dollars, except share and per share amounts)
|                                                                                
|Years ended December 31, 2007, 2006 and 2005                                    

|7 . | Joint venture:
|--- | --------------

In June 2006 the Company entered into an Agreement with Fayrefield Foods Ltd. (Fayrefield) to establish a 51-49 venture, Forbes-Fayrefield Ltd. (Forbes-Fayrefield), to broaden the distribution of finished products containing the Companys proprietary ingredients. These Reducol containing products are sold directly to retail customers in the European Union, excluding certain retailers in the United Kingdom and Ireland.

Forbes-Fayrefield has arranged a 300,000 line of credit to support the operations. The line of credit bears interest at a floating rate of the Royal Bank of Scotland Currency Lending Rate for Euros (currently 4.0%) plus 2.0% per annum, calculated daily. Any funds drawn under this facility are repayable on demand, and the facility may be terminated at any time by the Lender. As at December 31, 2007, nil was drawn under the facility, and Forbes-Fayrefield was in compliance with all covenants with the Lender. Security for the line of credit is currently by way of a debenture registered over all of the assets of Forbes-Fayrefield. No guarantees have currently been provided by Forbes Medi-Tech Inc., or by Fayrefield.

Condensed balance sheets and statement of operations reflecting the Companys proportionate interests in the venture operations:

| |                                                     |   | December 31 |   |   | December 31 |  
| | --------------------------------------------------- | - | ----------- | - | - | ----------- | -
| |                                                     |   | 2007        |   |   | 2006        |  
| |                                                    
| | Assets                                              |   |             |   |   |             |  
| | Current assets                                      | $ | 261         |   | $ | 299         |  
| | Office equipment                                    |   | 6           |   |   | 1           |  
| |                                                    
| |                                                     | $ | 267         |   | $ | 300         |  
| | Liabilities                                         |   |             |   |   |             |  
| | Accounts payable, overdraft and accrued liabilities | $ | 150         |   | $ | 248         |  
| |                                                    
| | Equity                                              | $ | 117         |   | $ | 52          |  
| |                                                    
| |                                                    
| |                                                     |   | 2007        |   |   | 2006        |  
| |                                                    
| | Earnings                                            |   |             |   |   |             |  
| | Revenue                                             | $ | 1,130       |   | $ | 731         |  
| | Cost of goods sold                                  |   | 995         |   |   | 668         |  
| | Expenses                                            |   | 70          |   |   | 32          |  
| |                                                    
| | Net earnings                                        | $ | 65          |   | $ | 31          |  
| |                                                    
| |                                                    
| |                                                    
| |                                                     |   | 2007        |   |   | 2006        |  
| |                                                    
| | Cash Flow                                           |   |             |   |   |             |  
| | Operating activities                                |   | 37          |   | $ | (12         | )
| | Financing activities                                |   | -           |   |   | (1          | )
| | Investing activities                                |   | (5          | ) |   | 21          |  
| |                                                    
| | Increase in cash flow                               |   | 32          |   | $ | 8           |  

12

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|FORBES MEDI-TECH INC.                                                           
|--------------------------------------------------------------------------------
|Notes to Consolidated Financial Statements                                      
|(Expressed in thousands of Canadian dollars, except share and per share amounts)
|                                                                                
|Years ended December 31, 2007, 2006 and 2005                                    

|8. | **Intangible and other assets:**
|-- | --------------------------------

| |                                                |   |      |   | Accumulated  |   |   | Net book
| | ---------------------------------------------- | - | ---- | - | ------------ | - | - | --------
| | 2007                                           |   | Cost |   | amortization |   |   | value   
| |                                               
| | Intellectual property                          | $ | 339  | $ | (339         | ) | $ | 0       
| | Other                                          |   | 46   |   | (38          | ) |   | 8       
| |                                                |   | 385  |   | (377         | ) |   | 8       
| |                                               
| | Note receivable, long-term portion (note 8(b)) |   |      |   |              |   |   | 99      
| | Life insurance cash surrender value            |   |      |   |              |   |   | 389     
| | Restricted cash funds in trust account         |   |      |   |              |   |   | 16      
| |                                               
| |                                                |   |      |   |              |   | $ | 512     

| |                                                |   |      |   | Accumulated  |   |   | Net book
| | ---------------------------------------------- | - | ---- | - | ------------ | - | - | --------
| | 2006                                           |   | Cost |   | amortization |   |   | value   
| |                                               
| | Intellectual property                          | $ | 339  | $ | (6           | ) | $ | 333     
| | Other                                          |   | 46   |   | (30          | ) |   | 16      
| |                                                |   | 385  |   | (36          | ) |   | 349     
| | Note receivable, long-term portion (note 8(b)) |   |      |   |              |   |   | 239     
| | Life insurance cash surrender value            |   |      |   |              |   |   | 356     
| |                                               
| |                                                |   |      |   |              |   | $ | 944     

Amortization expense amounted to $42 in the year ended December 31, 2007 (2006 - $7, 2005 - $10).

|(a) | In light of the Companys going concern issues, management reviewed the carrying value of its intangible assets recognized as part of the acquisition of TheraPei Pharmaceuticals, Inc. (note 12(b) and concluded that the carrying value of these intangible assets would not be recoverable. At December 31, 2007, the Company recorded an impairment charge of $299 to write down these intangible assets to reflect a reasonable estimate of its estimated fair value as at that date.                                                  
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) | In August 2002, the Amqui pilot facility was sold to a third party for total consideration of $1,631. On closing, Forbes received proceeds of $332, net of transaction costs and a note receivable of $1,200 repayable in one payment of $350 plus interest on May 2004, with the remainder paid by monthly installments beginning September 2002 and ending August 2009. As at December 31, 2007, a total amount of $239 (short-term $140; long-term $99) (December 31, 2006  $370 (short-term $131; long-term $239)) remains outstanding.
|   

13

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|FORBES MEDI-TECH INC.                                                           
|--------------------------------------------------------------------------------
|Notes to Consolidated Financial Statements                                      
|(Expressed in thousands of Canadian dollars, except share and per share amounts)
|                                                                                
|Years ended December 31, 2007, 2006 and 2005                                    

|9. | Goodwill:
|-- | ---------

In light of the Companys going concern issues, management reviewed the carrying value of its goodwill recognized on of the acquisition of TheraPei Pharmaceuticals, Inc. (note 12(b), and concluded that the carrying value would not be recoverable. At December 31, 2007, the Company recorded an impairment charge of $367 to write down the goodwill to reflect a reasonable estimate of its estimated fair value as at that date.

|**10.** | Accounts payable and accrued liabilities:
|------- | -----------------------------------------

| |                                                     |   | 2007  |   | 2006 
| | --------------------------------------------------- | - | ----- | - | -----
| |                                                    
| | Trade payables                                      | $ | 1,368 | $ | 2,217
| | Other payables                                      |   | 535   |   | 1,269
| | Provision for loss on inventory purchase commitment |   | 391   |   | -    
| |                                                    
| |                                                     | $ | 2,294 | $ | 3,486

In the year ended December 31, 2007, $391 (2006-$nil) was charged to cost of sales as a result of recognizing the provision for loss on purchase commitments for inventory.

|**11.** | Share capital:
|------- | --------------

| | (a) | Authorized:
| | --- | -----------

Authorized share capital of the Company consists of an unlimited number of common shares without par value and 50,000,000 preferred shares without par value. At the annual meeting held in May 2006, the shareholders approved a resolution increasing the authorized common shares from 200,000,000 to an unlimited number. Of the preferred shares, 10,000,000 have been designated the Series A Convertible Preferred Shares and 6,000 have been designated the Series B Convertible Preferred Shares. Of the 10,000,000 designated Series A Convertible Preferred Shares, 5,375,000 were issued and converted into common shares in 2005, leaving 4,625,000 available to be issued. Of the 6,000 Series B Convertible Preferred Shares, all 6,000 have been issued and converted into common shares in 2006.

| | (b) | Contributed surplus relating to:
| | --- | --------------------------------

| |                                                         |   | 2007  |   | 2006 
| | ------------------------------------------------------- | - | ----- | - | -----
| | Surplus relating to stock compensation, warrants and    |   |       |   |      
| | options associated with common shares (note 11(c))      | $ | 8,002 | $ | 7,070
| |                                                         |   |       |   |      
| | Surplus relating to warrants associated with the Series |   |       |   |      
| | B Convertible Preferred Shares (note 11(d))             |   | 1,873 |   | 1,873
| |                                                         | $ | 9,875 | $ | 8,943

14

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|FORBES MEDI-TECH INC.                                                           
|--------------------------------------------------------------------------------
|Notes to Consolidated Financial Statements                                      
|(Expressed in thousands of Canadian dollars, except share and per share amounts)
|                                                                                
|Years ended December 31, 2007, 2006 and 2005                                    

|**11.** | Share capital (continued):
|------- | --------------------------

| | (c) | Common shares issued and allotted: (See subsequent events, note 21 (a))
| | --- | -----------------------------------------------------------------------

|                                                    |               |   |         |         |   | Contributed |  
|--------------------------------------------------- | ------------- | - | ------- | ------- | - | ----------- | -
|                                                    | Share Capital |   |         | Surplus |  
|                                                    |               |   |         |         |   |             |  
|                                                    | Number of     |   |         |         |   |             |  
|                                                    | Common        |   | Amount  |         |   | Amount      |  
|                                                    | Shares        |   |         |         |   |             |  
|                                                    |               |   |         |         |   |             |  
|Balance, December 31, 2004                          | 33,908,395    | $ | 94,223  |         | $ | 4,171       |  
|                                                    |               |   |         |         |   |             |  
|                                                    |               |   |         |         |   |             |  
|                                                    |               |   |         |         |   |             |  
|Issued during the year upon:                        |               |   |         |         |   |             |  
|Exercise of stock options for cash proceeds         | 214,200       |   | 301     |         |   | -           |  
|Employee stock based compensation expense           | -             |   | -       |         |   | 1,767       |  
|Non-employee stock based compensation expense       | -             |   | -       |         |   | 9           |  
|Transfer from contributed surplus for options       |               |   |         |         |   |             |  
|exercised:                                          |               |   |         |         |   |             |  
|Employee stock-options                              | -             |   | 252     |         |   | (252        | )
|Non-employee stock-options                          | -             |   | 14      |         |   | (14         | )
|Balance, December 31, 2005                          | 34,122,595    |   | 94,790  |         |   | 5,681       |  
|                                                    |               |   |         |         |   |             |  
|Issued during the year upon:                        |               |   |         |         |   |             |  
|Exercise of stock options for cash proceeds         | 313,500       |   | 511     |         |   | -           |  
|Exercise of warrants for cash proceeds              | 200,669       |   | 412     |         |   | -           |  
|Exercise of warrants on a cashless basis            | 34,301        |   | -       |         |   | -           |  
|Employee stock based compensation expense           | -             |   | -       |         |   | 1,589       |  
|Non-employee stock based compensation expense       | -             |   | -       |         |   | 230         |  
|Transfer from contributed surplus for options       |               |   |         |         |   |             |  
|exercised:                                          |               |   |         |         |   |             |  
|Employee stock-options                              | -             |   | 354     |         |   | (354        | )
|Non-employee stock-options                          | -             |   | 76      |         |   | (76         | )
|Conversion of Series B Preferred Shares             | 3,636,363     |   | 4,938   |         |   | -           |  
|Amortization of capitalized financing fees on       |               |   |         |         |   |             |  
|conversion of Series B Convertible Preferred Shares | -             |   | (357    | )       |   | -           |  
|Issuance of shares pursuant to purchase agreement   | 94,672        |   | 270     |         |   | -           |  
|Balance, December 31, 2006                          | 38,402,100    |   | 100,994 |         |   | 7,070       |  
|                                                    |               |   |         |         |   |             |  
|Issued during the year upon:                        |               |   |         |         |   |             |  
|Exercise of stock options for cash proceeds         | 10,000        |   | 7       |         |   | -           |  
|Employee stock based compensation expense           | -             |   | -       |         |   | 840         |  
|Non-employee stock based compensation expense       | -             |   | -       |         |   | 118         |  
|Transfer from contributed surplus for options       |               |   |         |         |   |             |  
|exercised:                                          |               |   |         |         |   |             |  
|Non-employee stock-options                          | -             |   | 26      |         |   | (26         | )
|                                                    |               |   |         |         |   |             |  
|Balance, December 31, 2007                          | 38,412,100    | $ | 101,027 |         | $ | 8,002       |  

15

---

|FORBES MEDI-TECH INC.                                                           
|--------------------------------------------------------------------------------
|Notes to Consolidated Financial Statements                                      
|(Expressed in thousands of Canadian dollars, except share and per share amounts)
|                                                                                
|Years ended December 31, 2007, 2006 and 2005                                    

|11. Share capital (continued):
|------------------------------

| | (d) | Series B Convertible Preferred Shares issued and allotted:
| | --- | ----------------------------------------------------------

| |                               | Number of |   |   | Liability     |   |   | Equity        |   |   | Contributed   |  
| | ----------------------------- | --------- | - | - | ------------- | - | - | ------------- | - | - | ------------- | -
| |                               | Preferred |   |   | Component     |   |   | Component     |   |   | Surplus       |  
| |                               | Shares    |   |   | (000s Cdn$) |   |   | (000s Cdn$) |   |   | (000s Cdn$) |  
| |                               |           |   |   |               |   |   |               |   |   |               |  
| | Balance, January 1, 2005      | -         |   | $ | -             |   | $ | -             |   | $ | -             |  
| |                               |           |   |   |               |   |   |               |   |   |               |  
| | Issued for cash               | 6,000     |   |   | 2,267         |   |   | 3,011         |   |   | 1,744         |  
| |                               |           |   |   |               |   |   |               |   |   |               |  
| | Share issue costs             | -         |   |   | -             |   |   | (343          | ) |   | (200          | )
| | Broker warrants               | -         |   |   | -             |   |   | (187          | ) |   | (109          | )
| | Fair value of broker warrants | -         |   |   | -             |   |   | -             |   |   | 438           |  
| | Accretion of interest         | -         |   |   | 74            |   |   | -             |   |   | -             |  
| |                               |           |   |   |               |   |   |               |   |   |               |  
| | Balance, December 31, 2005    | 6,000     |   |   | 2,341         |   |   | 2,481         |   |   | 1,873         |  
| |                               |           |   |   |               |   |   |               |   |   |               |  
| | Conversion to common shares   | (6,000    | ) |   | (2,458        | ) |   | (2,481        | ) |   | -             |  
| | Accretion of interest         | -         |   |   | 117           |   |   | -             |   |   | -             |  
| | Balance, December 31, 2006    |           |   |   |               |   |   |               |   |   |               |  
| | and 2007                      | -         |   |   | -             |   |   | -             |   |   | 1,873         |  

In November 2005, the Company completed a Private Placement raising US$6,000 (Cdn$7,022, before financing costs of Cdn$801) resulting from the issuance of 6,000 Series B Convertible Preferred Shares with 1,818,182 warrants attached. The Series B Convertible Preferred Shares were convertible at any time, at the option of the holder, without further consideration, into a total of 3,636,363 common shares, at a rate of US$1.65 per common share, subject to adjustment (approximately Cdn$1.93 per common share, based on the then current exchange rates). The Series B Convertible Preferred Shares matured on October 27, 2008, at which time the Company had the option to redeem the shares at their issue price or convert the Series B Convertible Preferred Shares to common shares at a per share price calculated at 90% of the date of maturity market price.

16

---

|FORBES MEDI-TECH INC.                                                           
|--------------------------------------------------------------------------------
|Notes to Consolidated Financial Statements                                      
|(Expressed in thousands of Canadian dollars, except share and per share amounts)
|                                                                                
|Years ended December 31, 2007, 2006 and 2005                                    

|**11.** | Share capital (continued):
|------- | --------------------------

| | (d) | Series B Convertible Preferred Shares issued and allotted (continued):
| | --- | ----------------------------------------------------------------------

While the legal form of this financial instrument was that of preferred shares, due to the mandatory redemption on October 27, 2008, the substance of the instrument was that of a financial liability. For accounting purposes, these shares were considered to have both a debt and equity component. The equity component of $2,481 was recorded in contributed surplus and related to the fair value of the detachable warrants and to the embedded conversion feature. The proceeds from the issuance of the preferred shares with detachable warrants were allocated to the warrants issued and the embedded conversion feature based on their fair values, and the remaining value of $2,341 was recorded as a liability. The carrying value of the liability portion was being accreted to its retraction value of $4,064, over a period from the date of issuance to its maturity date on October 27, 2008, or until conversion of the preferred shares into common shares. Interest accretion was charged to the statement of operations as interest expense. Of the total financing costs of $1,238, $839 was charged to shareholders equity and $399 was capitalized as capitalized financing fees in intangible and other assets.

In the year ended December 31, 2006, all 6,000 Series B Convertible Preferred Shares were converted into 3,636,363 common shares. The carrying value of the liability portion was decreased by $2,341 to reflect the conversion of the shares. The interest accretion of the liability portion for the year was $117, and was charged to the statement of operations as interest expense. Also, the amortization of the capitalized financing fees for 2006, in the amount of $26, was charged to the statement of operations as financing fees. In addition, $357 of the capitalized financing fees was recognized as reduction in share capital resulting from the conversion of the 6,000 Series B Convertible Preferred Shares into common shares.

| | (e) | Share purchase warrants
| | --- | -----------------------

As part of the January 6, 2004 Private Placement, 1,612,500 warrants were issued. Each warrant entitles the holder to purchase one common share of the Company at US$2.40 for three years from the date of closing. In connection with this private placement, the Company also issued to affiliates of a US registered broker, warrants exercisable to acquire 146,250 common shares as an advisory fee. As at December 31, 2006, 69,469 brokers warrants had been exercised on a cashless basis resulting in the issuance of 36,518 common shares. The balance of warrants and brokers warrants expired on January 6, 2007.

As part of the November 2005 Private Placement, 1,818,182 warrants were issued. Each warrant entitles the holder to purchase one common share of the Company at US$2.06, subject to adjustment, for five years from the date of closing. The warrants may be exercised on a cashless basis at the option of the holder. The Company also issued 254,545 brokers warrants, which have the same terms as the warrants issued to the investors. A balance of 1,818,182 warrants and 254,545 brokers warrants remain outstanding as at December 31, 2007 and expire on October 26, 2010. (See subsequent events, note 21 (a))

17

---

|FORBES MEDI-TECH INC.                                                           
|--------------------------------------------------------------------------------
|Notes to Consolidated Financial Statements                                      
|(Expressed in thousands of Canadian dollars, except share and per share amounts)
|                                                                                
|Years ended December 31, 2007, 2006 and 2005                                    

|**11.** | Share capital (continued):
|------- | --------------------------

| | (f) | Option Plan:
| | --- | ------------

On June 29, 2007, the Company implemented a new rolling stock option plan entitled the 2007 Stock Option Plan (the New Plan). The New Plan was initially approved by the Companys Board of Directors on April 12, 2007 and was also approved by the Companys shareholders at the Annual General and Special Meeting held May 17, 2007. The New Plan replaces the Amended and Restated 2000 Stock Option Plan (the Old Plan), which was a fixed number plan. The persons to whom options may be granted under the New Plan remain the same as under the Old Plan, being directors, officers, employees and consultants of the Company or an affiliate. With the implementation of the New Plan, 3,801,625 options from the Old Plan, with exercise prices of more than $1.00 were replaced by 2,171,500 options under the New Plan and 1,510,575 of previously vested options were cancelled. These new options which have an exercise price of $1.00 and an expiry date of March 31, 2012, increased the stock option expense by $589. A total of 880,250 options from the Old Plan having exercise prices of $1.00 or less remain in effect under the New Plan unamended. The stock compensation expense relevant to these options amounted to $229.

Under the new 2007 Stock Option Plan, the Company may grant options to its employees, officers, directors, and consultants (optionees) for up to 10 % of the outstanding common shares of the Company. At December 31, 2007, the Company could grant options for up to 3,841,210 common shares.

| | (g) | Outstanding Options:
| | --- | --------------------

The aggregate intrinsic values of all vested stock options outstanding at December 31, 2007, 2006 and 2005 were $nil, $8 and $584, respectively. The total fair value of stock options that vested during the year ended December 31, 2007, 2006 and 2005 were $362, $2,237 and $331, respectively. The weighted average grant-date fair values of stock options granted during the years ended December 31, 2007, 2006 and 2005 were $0.33, $1.06 and $1.21 per option, respectively. The total intrinsic values of the stock options exercised during the years ended December 31, 2007, 2006 and 2005 were $1, $340 and $224 respectively.

Stock options outstanding as at December 31, 2007: (See subsequent events, note 21 (a))

|                                        | Range of Exercise prices                    | Options outstanding |                                 | Options exercisable
|--------------------------------------- | ------------------------------------------- | ------------------- | ------------------------------- | -------------------
|Number outstanding at December 31, 2007 | Weighted average remaining contractual life |                     | Weighted average exercise price |                    
|                                        |                                            
|                                        | $0.53 - $0.99                               | 117,700             | 3.21                            | $                  
|                                        | $1.00                                       | 2,823,800           | 4.22                            | $                  
|                                        |                                            
|                                        |                                            
|                                        |                                             | 2,941,500           | 4.18                            | $                  

18

---

|FORBES MEDI-TECH INC.                                                           
|--------------------------------------------------------------------------------
|Notes to Consolidated Financial Statements                                      
|(Expressed in thousands of Canadian dollars, except share and per share amounts)
|                                                                                
|Years ended December 31, 2007, 2006 and 2005                                    

|**11.** | Share capital (continued):
|------- | --------------------------

| | (g) | Outstanding Options (continued):
| | --- | --------------------------------

Company's Stock Option Plan as at and changes for the years ended December 31, 2007, 2006 and 2005:

| |                                               |            |   |   | Weighted
| | --------------------------------------------- | ---------- | - | - | --------
| |                                               | Number of  |   |   | Average 
| |                                               | Optioned   |   |   | Exercise
| |                                               | Shares     |   |   | Price   
| |                                              
| | Balance, December 31, 2004                    | 4,290,975  |   | $ | 2.45    
| |                                              
| | Options granted                               | 1,421,500  |   |   | 2.35    
| | Options exercised                             | (214,200   | ) |   | 1.40    
| | Options forfeited                             | (605,567   | ) |   | 2.88    
| | Balance, December 31, 2005                    | 4,892,708  |   |   | 2.42    
| |                                              
| | Options granted                               | 965,000    |   |   | 2.53    
| | Options exercised                             | (313,500   | ) |   | 1.63    
| | Options forfeited                             | (972,583   | ) |   | 2.75    
| | Balance, December 31, 2006                    | 4,571,625  |   |   | 2.42    
| |                                              
| | Options granted                               | 711,500    |   |   | 1.00    
| | Options exercised                             | -          |   |   | -       
| | Options forfeited                             | (601,250   | ) |   | 1.93    
| |                                              
| | Balance, April 12, 2007                       | 4,681,875  |   |   | 2.27    
| | Options cancelled due to adoption of New Plan | (3,801,625 | ) |   | 2.51    
| | Options issued on adoption of New Plan        | 2,171,500  |   |   | 1.00    
| | Options granted                               | 72,700     |   |   | 0.78    
| | Options exercised                             | (10,000    | ) |   | 0.66    
| | Options forfeited                             | (172,950   | ) |   | 2.24    
| |                                              
| | Balance, December 31, 2007                    | 2,941,500  |   | $ | 0.99    

19

---

|FORBES MEDI-TECH INC.                                                           
|--------------------------------------------------------------------------------
|Notes to Consolidated Financial Statements                                      
|(Expressed in thousands of Canadian dollars, except share and per share amounts)
|                                                                                
|Years ended December 31, 2007, 2006 and 2005                                    

|**11.** | Share capital (continued):
|------- | --------------------------

| | (g) | Outstanding Options (continued):
| | --- | --------------------------------

A summary of the non-vested stock options as at and changes for the year ended December 31, 2007 are as follows:

| |                          | Options outstanding |   | Non-vested options
| | ------------------------ | ------------------- | - | ------------------
| |                          |                     |   | Weighted          
| |                          |                     |   | average           
| |                          |                     |   | exercise          
| |                          | Shares              |   | price             
| | Outstanding,             |                     |   |                   
| | beginning of year        | 4,571,625           | $ | 2.42              
| | Granted                  | 711,500             |   | 1.00              
| | Exercised                | -                   |   | -                 
| | Forfeited                | (601,250            | ) | 1.93              
| | Vested                   | -                   |   | -                 
| | Outstanding,             |                     |   |                   
| | End of Old Plan          | 4,681,875           |   | 2.27              
| | Options cancelled due to |                     |   |                   
| | adoption of New Plan     | (3,801,625          | ) | 2.51              
| | Outstanding,             |                     |   |                   
| | beginning of New Plan    | 880,250             |   | 1.23              
| | Granted                  | 2,244,200           |   | 0.99              
| | Exercised                | (10,000             | ) | 0.66              
| | Forfeited                | (172,950            | ) | 2.24              
| | Vested                   |                     |   |                   
| | Outstanding at           |                     |   |                   
| | December 31,2007         | 2,941,500           | $ | 0.99              
| | Options exercisable      | 2,538,695           | $ | 0.99              

The aggregate intrinsic value represents the pre-tax intrinsic value, based on the Companys closing stock price on December 31, 2007 of $0.26 on the Toronto Stock Exchange, which would have been received by option holders had they exercised their options at that date.

20

---

|FORBES MEDI-TECH INC.                                                           
|--------------------------------------------------------------------------------
|Notes to Consolidated Financial Statements                                      
|(Expressed in thousands of Canadian dollars, except share and per share amounts)
|                                                                                
|Years ended December 31, 2007, 2006 and 2005                                    

|**11.** | Share capital (continued):
|------- | --------------------------

| | (h) | Stock Based Compensation:
| | --- | -------------------------

Stock-based compensation recorded for the year ended December 31, 2007, 2006 and 2005 is summarized below:

| |                                               |   | 2007 |   | 2006  |  |   | 2005 
| | --------------------------------------------- | - | ---- | - | ----- |  | - | -----
| | Employee stock-based compensation expense     | $ | 840  | $ | 1,589 |  | $ | 1,767
| | Non-employee stock-based compensation expense |   | 118  |   | 230   |  |   | 9    
| |                                               | $ | 958  | $ | 1,819 |  | $ | 1,776

For the years ended December 31, 2007, 2006 and 2005, this compensation expense was allocated to research and development expenses, general and administrative expenses, and marketing, sales and product development expenses on the same basis as for the allocations of cash compensation as summarized below:

| |                                          |   | 2007 |   | 2006  |   | 2005 
| | ---------------------------------------- | - | ---- | - | ----- | - | -----
| |                                         
| | Research and development                 | $ | 350  | $ | 821   | $ | 752  
| | General and administrative               |   | 419  |   | 684   |   | 779  
| | Marketing, sales and product development |   | 189  |   | 314   |   | 245  
| |                                         
| |                                          | $ | 958  | $ | 1,819 | $ | 1,776

At December 31, 2007 there is a balance of $111 of unamortized stock based compensation expense, which will be recognized over the next 24 months on a weighted-average basis.

The fair value of each employee stock option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:

| |                         | 2007    |  | 2006    |  | 2005    | 
| | ----------------------- | ------- |  | ------- |  | ------- | 
| |                        
| | Expected dividend yield | 0%      |  | 0%      |  | 0%      | 
| | Expected volatility     | 81%     |  | 60%     |  | 96%     | 
| | Risk-free interest rate | 4.5%    |  | 4.3%    |  | 3.5%    | 
| | Expected lives          | 2 years |  | 2 years |  | 2 years | 

21

---

|FORBES MEDI-TECH INC.                                                           
|--------------------------------------------------------------------------------
|Notes to Consolidated Financial Statements                                      
|(Expressed in thousands of Canadian dollars, except share and per share amounts)
|                                                                                
|Years ended December 31, 2007, 2006 and 2005                                    

|**11.** | Share capital (continued):
|------- | --------------------------

| | (h) | Stock Based Compensation (continued):
| | --- | -------------------------------------

There is no dividend yield because the Company does not pay, and does not plan to pay, cash dividends on common shares. The expected stock price volatility is based on the historical volatility of the Companys average daily stock closing prices over a period equal to the expected life of each option grant. The risk-free interest rate is based on yields from Canadian Government Bond yields with a term equal to the expected term of the options being valued. The expected life of options represents the period of time that the options are expected to be outstanding based on historical data of option holder exercise and termination behavior. The effect of actual forfeitures is recognized as it occurs.

The fair value of each non-employee stock option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:

| |                         | 2007    |  | 2006    |  | 2005    | 
| | ----------------------- | ------- |  | ------- |  | ------- | 
| |                        
| | Expected dividend yield | 0%      |  | 0%      |  | 0%      | 
| | Expected volatility     | 92%     |  | 89%     |  | 102%    | 
| | Risk-free interest rate | 4.5%    |  | 4.1%    |  | 3.7%    | 
| | Expected lives          | 4 years |  | 4 years |  | 4 years | 

| | (i) | 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.

|**12.** | Commitments, contractual obligations and contingencies:
|------- | -------------------------------------------------------

| | (a) | Tenure allowance:
| | --- | -----------------

In January of 1999, the shareholders approved agreements with three key executive officers ("Executives") that provided for tenure allowances for services provided to the Company. The agreements entitled each Executive to receive an allowance provided the Executive had continued to provide his service to the Company to specified qualification dates, which ranged from March 1, 2002 to January 1, 2006. By 2002, two of these executives had resigned from the Company prior to the date that the tenure allowance would have vested. In 2004, the third Executive resigned, however he had reached his qualification date and has qualified for his tenure allowance. The Company recorded the cost of this allowance over the term from the date of shareholders' approval to the applicable qualification date.

22

---

|FORBES MEDI-TECH INC.                                                           
|--------------------------------------------------------------------------------
|Notes to Consolidated Financial Statements                                      
|(Expressed in thousands of Canadian dollars, except share and per share amounts)
|                                                                                
|Years ended December 31, 2007, 2006 and 2005                                    

|**12.** | Commitments, contractual obligations and contingencies (continued):
|------- | -------------------------------------------------------------------

| | (a) | Tenure allowance (continued):
| | --- | -----------------------------

The Company is obligated to pay $65 per annum for 25 years beginning March 1, 2008. As at December 31, 2007 the current portion of the tenure allowance is $54 and the long-term is $940. As the tenure allowance has not been fully funded, the interest accretion expense on the allowance for the year ended December 31, 2007 is $49 (2006  $(18)). The interest rate used to calculate the allowance is based on the Government of Canada 25-year bond rate.

| | (b) | Acquisition of TheraPei Pharmaceuticals, Inc.:
| | --- | ----------------------------------------------

In October 2006, Forbes acquired 100 percent of the outstanding common shares of TheraPei Pharmaceuticals, Inc. (TheraPei). The aggregate purchase price was $339 (US $300), including $69 of cash and common stock valued at $270. Dr. John Nestor, Forbes Chief Scientific Officer, was the majority shareholder of TheraPei and as such, received the majority of the acquisition consideration, and will receive the majority of any additional consideration paid.

Additional consideration for the acquisition will be made on a staged basis commensurate with development of the newly acquired technologies. Future consideration consisting of milestone payments, payable to the former shareholders of TheraPei, may reach up to US$50 million based upon the successful completion of key clinical development steps ranging from receiving approval for an Investigational New Drug application through to the successful product launches, for the compounds identified as the VPAC2 Analog for diabetes, or for the VPAC2 Analog for inflammatory lung disease.

In the event that the Forbes elects to license any VPAC2 Analog, to an unaffiliated third party, the former shareholders of TheraPei shall be entitled to receive 20% of the license revenue received by Forbes pursuant to such license, and any potential milestone payments with respect to such indication shall terminate.

Upon commercialization of either of the VPAC2 analogs by Forbes for any purpose, the former shareholders of TheraPei shall be entitled to receive an eleven percent (11%) commercial royalty on net sales.

In addition, should any ACC2 Inhibitor, which promotes fatty acid oxidation, be commercialized for any purpose, the former shareholders of TheraPei shall receive a three percent (3%) commercial royalty on net sales by Forbes. Should any SPT Inhibitor, which targets the treatment of diabetes, be commercialized for any purpose, the former shareholders of TheraPei shall receive a four percent (4%) commercial royalty on net sales by Forbes.

All consideration will paid as to a minimum of 80% in Forbes common shares, subject to regulatory and shareholder approval as required, and the balance, up to 20%, in cash. If regulatory or shareholder approval is not forthcoming, the Company shall pay cash in lieu of the issuance of shares. The Company may also elect to pay cash in lieu of the issuance of shares in certain circumstances.

23

---

|FORBES MEDI-TECH INC.                                                           
|--------------------------------------------------------------------------------
|Notes to Consolidated Financial Statements                                      
|(Expressed in thousands of Canadian dollars, except share and per share amounts)
|                                                                                
|Years ended December 31, 2007, 2006 and 2005                                    

|**12.** | Commitments, contractual obligations and contingencies (continued):
|------- | -------------------------------------------------------------------

| | (c) | Research agreements:
| | --- | --------------------

As at December 31, 2007, the Company had unrecorded future funding commitments under various research agreements totaling $190 (2006  $221). These amounts will be recorded at the earlier of when the funding is made or when the services have been performed.

| | (d) | University of British Columbia:
| | --- | -------------------------------

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 Androstenedione (AD) and Androstadienedione (ADD). Under the two sets of license agreements, the Company issued a total of 50,000 shares in fiscal 1996 and agreed to issue up to an additional 50,000 shares after the sale of any products derived from these technologies. In addition, the Company agreed to pay royalties on gross revenues of 1% to 1.5% .

| | (e) | Legal claims:
| | --- | -------------

The Company is subject to a legal claim arising from a disagreement with a former employee. The Company analyzed the legal proceeding and allegations of this claim. The outcome of this proceeding is not expected to have a material adverse effect on the Company's financial position, results of operations or liquidity.

|**13.** | Net change in non-cash operating items:
|------- | ---------------------------------------

| |                                          |   | 2007   |   |   | 2006   |   |   | 2005   |  
| | ---------------------------------------- | - | ------ | - | - | ------ | - | - | ------ | -
| |                                         
| | Accounts receivable                      | $ | 269    |   | $ | (377   | ) | $ | (53    | )
| | Inventories                              |   | 776    |   |   | (4,828 | ) |   | (1,258 | )
| | Prepaid expenses and deposits            |   | 374    |   |   | 2,153  |   |   | (2,888 | )
| | Accounts payable and accrued liabilities |   | (1,192 | ) |   | 1,576  |   |   | 1,193  |  
| | Deferred revenues                        |   | -      |   |   | 172    |   |   | (193   | )
| | Current income tax liability             |   | (508   | ) |   | (647   | ) |   | -      |  
| | Increase (decrease) in tenure allowance  |   | 6      |   |   | (61    | ) |   | 122    |  
| | Other                                    |   | (16    | ) |   | -      |   |   | 301    |  
| |                                          | $ | (291   | ) | $ | (2,012 | ) | $ | (2,776 | )

24

---

|FORBES MEDI-TECH INC.                                                           
|--------------------------------------------------------------------------------
|Notes to Consolidated Financial Statements                                      
|(Expressed in thousands of Canadian dollars, except share and per share amounts)
|                                                                                
|Years ended December 31, 2007, 2006 and 2005                                    

|**14.** | Supplementary cash flow information:
|------- | ------------------------------------

| |                                                         |   | 2007 |   | 2006  |   | 2005 
| | ------------------------------------------------------- | - | ---- | - | ----- | - | -----
| |                                                        
| | Supplementary cash flow information:                    |   |      |   |       |   |      
| | Interest paid                                           | $ | 3    | $ | 1     |   | -    
| | Interest paid- discontinued operations                  |   | -    |   | 18    | $ | 90   
| | Income taxes paid                                       |   | -    |   | 8,327 |   | 1,180
| | Non-cash financing and investing activities:            |   |      |   |       |   |      
| | Conversion of preferred shares to common shares         |   | -    |   | 4,581 |   | -    
| | Issuance of shares pursuant to purchase agreement       |   | -    |   | 270   |   | -    
| | Fair value assigned to brokers warrants                |   | -    |   | -     |   | 438  
| | Transfer from contributed surplus for options exercised | $ | 26   | $ | 430   | $ | 266  

|**15.** | Related party transactions:
|------- | ---------------------------

During the years ended December 31, 2007, 2006 and 2005, the Company paid or accrued to companies controlled by directors or officers:

| |                                  |   | 2007 |   | 2006 |   | 2005
| | -------------------------------- | - | ---- | - | ---- | - | ----
| | Legal fees and share issue costs | $ | 204  | $ | 229  | $ | 246 
| | Consulting                       |   | -    |   | -    |   | 6   
| |                                  | $ | 204  | $ | 229  | $ | 252 

These transactions are in the normal course of operations and are measured at the exchange amount of consideration established and agreed to by the related parties. These expenditures are included in general and administrative expenses and in intangible and other assets.

|**16.** | Concentration of sales and segmented disclosure:
|------- | ------------------------------------------------

For the year ended December 31, 2007, the majority of the Companys revenue was generated from four customers (year ended December 31, 2006  four customers). Customer A accounted for 40% (2006  38%), Customer B accounted for 15% (2006  0%), Customer C accounted for 13% (2006  12%), and Customer D accounted for 10% (2006  0%) of revenue. 49% of sales are recorded in the USA, 50% of sales are recorded in Europe and the balance in Asia.

The Company has operated in a single business segment developing, selling and licensing nutraceutical products to customers in the United States and the European Union. Revenues consist almost entirely of sales of nutraceutical products and related license revenues.

As of December 31, 2007, 2006 and 2005, the Companys long-lived assets used in continuing operations are primarily located in Canada.

25

---

|FORBES MEDI-TECH INC.                                                           
|--------------------------------------------------------------------------------
|Notes to Consolidated Financial Statements                                      
|(Expressed in thousands of Canadian dollars, except share and per share amounts)
|                                                                                
|Years ended December 31, 2007, 2006 and 2005                                    

|**17.** | Income taxes:
|------- | -------------

| | (a) | The reconciliation of income tax attributable to continuing operations computed at the statutory tax rates to income tax expense using a 34.12%, (2006  34.12%, 2005  34.85%) statutory rate is:
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                 |   | 2007   |   |   | 2006   |   |   | 2005   |  
| | ----------------------------------------------- | - | ------ | - | - | ------ | - | - | ------ | -
| |                                                
| | Income tax recovery at statutory rates          | $ | (4,155 | ) | $ | (6,027 | ) | $ | (5,738 | )
| | Change in valuation allowance                   |   | (5,929 | ) |   | 5,032  |   |   | 3,973  |  
| | Impact of substantially enacted income tax rate |   |        |   |   |        |   |   |        |  
| | on the valuation allowance                      |   | 8,357  |   |   | -      |   |   | -      |  
| | Permanent differences and other                 |   | 1,236  |   |   | 1,153  |   |   | 1,765  |  
| |                                                
| | Income tax expense                              | $ | (491   | ) | $ | 158    |   | $ | -      |  

| | (b) | The tax effects of temporary differences that give rise to significant components of the future income tax assets are presented below:
| | --- | --------------------------------------------------------------------------------------------------------------------------------------

| |                                                     |   | 2007    |   |   | 2006    |  
| | --------------------------------------------------- | - | ------- | - | - | ------- | -
| | Future tax assets:                                  |   |         |   |   |         |  
| |                                                    
| | Non-capital loss carry-forwards                     | $ | 13,472  |   | $ | 16,279  |  
| | Research and development expenditures               |   | 9,276   |   |   | 11,903  |  
| | Property, plant and equipment and intangible assets |   | 1,268   |   |   | 1,539   |  
| | Share issue costs                                   |   | 132     |   |   | 315     |  
| | Other                                               |   | 163     |   |   | 204     |  
| | Total gross future tax assets                       |   | 24,311  |   |   | 30,240  |  
| |                                                    
| | Valuation allowance                                 |   | (24,311 | ) |   | (30,240 | )
| |                                                    
| | Total future tax assets                             | $ | -       |   | $ | -       |  

Realization of the future income tax assets is dependent on generating sufficient taxable income prior to the expiration of any loss carry forward balance for tax purposes. Due to the Company's state of development and operations, the Company has not met the test that it is more likely than not that the future income tax assets will be realized. Accordingly, a valuation allowance has been provided, equal to the net future income tax asset. The valuation allowance is reviewed periodically and when the more likely than not criterion is met, the valuation allowance will be adjusted accordingly by a credit or charge to earnings in that period.

26

---

|FORBES MEDI-TECH INC.                                                           
|--------------------------------------------------------------------------------
|Notes to Consolidated Financial Statements                                      
|(Expressed in thousands of Canadian dollars, except share and per share amounts)
|                                                                                
|Years ended December 31, 2007, 2006 and 2005                                    

|**17.** | Income taxes (continued):
|------- | -------------------------

| | (b) | The tax effects of temporary differences (continued):
| | --- | -----------------------------------------------------

The Company is subject to assessments by various taxation authorities which may interpret tax legislations and tax filing positions differently from the Company. The Company provides for such differences when it is likely that a taxation authority will not sustain the Companys filing position and the amount of the tax exposure can be reasonably estimated. As at December 31, 2007, no provisions have been made in the financial statements for any estimated tax liability.

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, 2007, the Company has scientific research and experimental development expenditures in the amount of $34,399 (2006  $35,585) available for carry-forward indefinitely to reduce future Canadian taxable income. The Company also has approximately $7,097 (2006  $7,689) of unclaimed investment tax credits available to reduce future Canadian income taxes otherwise payable. The Company also has non-capital losses in the amount of $48,226 (2006  $47,376) available to offset future Canadian taxable income. The investment tax credits and Canadian non-capital losses for income tax purposes expire as follows:

| |                |  |   | Investment  |   | Non-capital
| | -------------- |  | - | ----------- | - | -----------
| |                |  |   | tax credits |   | losses     
| | Year of expiry |  |   |             |   |            
| |               
| | 2008           |  | $ | 265         | $ | 3,114      
| | 2009           |  |   | -           |   | 1,687      
| | 2010           |  |   | -           |   | 3,106      
| | 2014           |  |   | -           |   | 4,476      
| | 2015           |  |   | -           |   | 11,005     
| | 2019           |  |   | 990         |   | -          
| | 2020           |  |   | 1,872       |   | -          
| | 2021           |  |   | 2,483       |   | -          
| | 2022           |  |   | 298         |   | -          
| | 2023           |  |   | 187         |   | -          
| | 2024           |  |   | 496         |   | -          
| | 2025           |  |   | 506         |   | -          
| | 2026           |  |   | -           |   | 15,885     
| | 2027           |  |   | -           |   | 8,953      
| |                |  | $ | 7,097       | $ | 48,226     

The Company has net operating loss carryforwards for U.S. federal and state income tax purposes of approximately $1,194 (US$1,105) which begin to expire in 2014. Due to the change in control of TheraPei Pharmaceuticals, Inc. during the year ended December 31, 2006 [note 12(b)], the future utilization of certain net operating loss carryforwards that were incurred by TheraPei Pharmaceuticals, Inc. prior to acquisition will be restricted and subject to annual limitations.

27

---

|FORBES MEDI-TECH INC.                                                           
|--------------------------------------------------------------------------------
|Notes to Consolidated Financial Statements                                      
|(Expressed in thousands of Canadian dollars, except share and per share amounts)
|                                                                                
|Years ended December 31, 2007, 2006 and 2005                                    

|**18.** | Lease commitments:
|------- | ------------------

The Company is committed under operating lease agreements for premises and office equipment, for lease payments in the following amounts:

| | 2008                |   | 418  
| | ------------------- | - | -----
| | 2009                |   | 305  
| | 2010                |   | 299  
| | 2011                |   | 5    
| | 2012 and thereafter |   | -    
| |                     | $ | 1,027

|**19.** | Discontinued operations:
|------- | ------------------------

The Companys Board of Directors resolved in February 2006 to dispose of its interest in the 50-50 Phyto-Source manufacturing joint venture, comprised of its 50% membership interest in Phyto-Venture LLC, and its 49.5% limited partnership interest in Phyto-Source LP. Accordingly, all revenues, expenses, assets and liabilities related to the Phyto-Source joint venture have been classified as discontinued operations for 2006 and 2005.

On March 14, 2006, the Company completed the sale of its interest in the Phyto-Source joint venture to Chusei Oil Co., Ltd. The sales price was US$25,000 in cash (Cdn$28,935, based on the then current exchange rates). On the sale, the Company recognized a net gain of $6,958 which was calculated as the excess of proceeds received over the net book value of the assets disposed of, write-down of capitalized technology in the amount of $1,697, $134 in transaction fees, $7,243 in income tax expense, less $845 in a future tax liability reversal.

The following tables reflect the Companys proportionate share of the Phyto-Source operations for the years ended December 31, 2006 and 2005 are summarized below. The results for 2006 are from January 1, 2006 to March 14, 2006 (date of disposal).

Income from discontinued operations

| |                                             |   | 2006  |   | 2005  
| | ------------------------------------------- | - | ----- | - | ------
| | Revenue                                     | $ | 2,490 | $ | 16,525
| | Expenses                                    |   |       |   |       
| | Cost of goods sold                          |   | 1,564 |   | 7,874 
| | General and administrative                  |   | 193   |   | 900   
| | Depreciation and amortization               |   | 287   |   | 1,639 
| |                                             |   | 2,044 |   | 10,413
| | Net income before taxes                     |   | 446   |   | 6,112 
| | Current income tax                          |   | 417   |   | 1,606 
| | Future income tax                           |   | -     |   | 848   
| | Income from discontinued operations         | $ | 29    | $ | 3,658 
| | Gain on disposal of discontinued operations | $ | 6,958 | $ | -     

28

---

|FORBES MEDI-TECH INC.                                                           
|--------------------------------------------------------------------------------
|Notes to Consolidated Financial Statements                                      
|(Expressed in thousands of Canadian dollars, except share and per share amounts)
|                                                                                
|Years ended December 31, 2007, 2006 and 2005                                    

|**20.** | United States generally accepted accounting principles:
|------- | -------------------------------------------------------

These consolidated financial statements are prepared in accordance with generally accepted accounting principles in Canada (Canadian GAAP") which differ in certain respects from accounting principles generally accepted in the United States (United States GAAP) and pursuant to the rules and regulations of the Securities and Exchange Commission. Material issues that could give rise to differences to these consolidated financial statements are as follows:

| | (a) | Stock-based compensation:
| | --- | -------------------------

Under Canadian GAAP, all stock-based compensation granted to employee and non-employees on or after January 1, 2002 is accounted for at fair value. The value of any options granted prior to January 1, 2002 is not required to be recorded or presented under Canadian GAAP.

Under United States GAAP, and prior to January 1, 2006, the Company followed Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards 123, Accounting for Stock-based Compensation ("SFAS No. 123"), which requires the recognition of compensation costs for stock options issued after December 15, 1995 to non-employees, such as members of the Scientific Advisory Board and other consultants and advisors, at fair value.

The fair value of the non-employee stock options granted after December 15, 1995 has been estimated using the Black-Scholes option pricing model based on the assumptions set out in note 11 (h).

As a result, the fair value of any options granted to non-employees prior to January 1, 2002 and subsequent to December 15, 1995 has not been recorded under Canadian GAAP. Under United States GAAP, the value of these options is recorded in accordance with SFAS No. 123.

For United States GAAP, prior to January 1, 2006, the Company elected to account for employee share-based compensation using the intrinsic value method based upon Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"). In most cases the application of the intrinsic value method by the Company did not result in compensation expense under United States GAAP.

GAAP differences between intrinsic measurement under United States GAAP for employee and fair value measurement under Canadian GAAP prior to January 1, 2006 are presented in the United States GAAP reconciliation.

On January 1, 2006 under United States GAAP, the Company adopted the fair value-based method for measurement and cost recognition of employee share-based compensation arrangements under the provisions of FASB Statement of Accounting Standards No. 123 (Revised 2004), Share-Based Payment ("SFAS No. 123R"), using the modified prospective application transition approach.

There was no impact of adopting this standard on the accounting for non-employee awards.

Under Canadian GAAP, the Company records stock-based compensation expense as if all instruments granted that are subject only to a service requirement are expected to vest. The effect of actual forfeitures is recognized as it occurs.

29

---

|FORBES MEDI-TECH INC.                                                           
|--------------------------------------------------------------------------------
|Notes to Consolidated Financial Statements                                      
|(Expressed in thousands of Canadian dollars, except share and per share amounts)
|                                                                                
|Years ended December 31, 2007, 2006 and 2005                                    

|20. | United States generally accepted accounting principles (continued):
|--- | -------------------------------------------------------------------

| | (a) | Stock-based compensation (continued):
| | --- | -------------------------------------

Under United States GAAP, the Company is required to estimate the number of forfeitures expected in the year. Based on historical experience, forfeitures were estimated based on the preceding two years actual forfeitures, which approximates the actual number of forfeitures incurred. The Company has elected to record the actual number of forfeitures incurred. The Company has determined that the effect of estimated forfeitures upon the adoption on stock compensation expense, including the effect of estimating forfeitures on options granted, but not fully vested, prior to the adoption of SFAS No. 123R, is not material.

Under the modified prospective application transitional approach, the fair value of the cost of share-based compensation is recognized for awards granted, modified, repurchased or cancelled subsequent to the adoption of SFAS No. 123R. In addition, share-based compensation is recognized, subsequent to the adoption of SFAS No. 123R, for the remaining portion of the vesting period, if any, for outstanding awards granted prior to the date of adoption. Accordingly, on a modified prospective basis, there is no material difference in the recognition of stock-based compensation awards under Section 3870 and SFAS No. 123R for employee options. Prior years have not been adjusted and the Company continues to provide pro forma disclosures as if it had accounted for employee share-based payments in all periods presented under the fair value provisions of SFAS No. 123, Accounting for Stock-based Compensation, which is presented below:

| |                                                   |   | 2005    |  
| | ------------------------------------------------- | - | ------- | -
| |                                                  
| | Net loss in accordance with United States GAAP,   |   |         |  
| | as reported                                       | $ | (11,062 | )
| | Deduct: Employee stock-based compensation expense |   |         |  
| | determined under the fair value method            |   | (1,767  | )
| |                                                  
| | Pro forma net loss                                | $ | (12,829 | )
| |                                                  
| | Pro forma  basic and diluted net                 |   |         |  
| | loss per share                                    | $ | (0.38   | )

| | (b) | Joint ventures:
| | --- | ---------------

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

The equity method of accounting requires the investment in the joint venture to be recorded at cost and adjusted to recognize the investor's share of the earnings or losses of the investee after the date of acquisition.

Condensed balance sheets and statements of operations reflecting the Companys proportionate interests in its joint venture, in Forbes-Fayrefield, are disclosed in note 7.

30

---

|FORBES MEDI-TECH INC.                                                           
|--------------------------------------------------------------------------------
|Notes to Consolidated Financial Statements                                      
|(Expressed in thousands of Canadian dollars, except share and per share amounts)
|                                                                                
|Years ended December 31, 2007, 2006 and 2005                                    

|**20.** | United States generally accepted accounting principles (continued):
|------- | -------------------------------------------------------------------

| | (c) | Convertible preferred shares:
| | --- | -----------------------------

Under United States GAAP, the proceeds from the issuance of convertible preferred shares with detachable warrants are allocated to the fair value of warrants issued and the intrinsic value of beneficial conversion feature. The remaining proceeds are allocated to debt, which is accreted to the redemption value of the convertible preferred shares over the maturity period and is charged to the statement of operations. Also, when the convertible preferred shares are redeemed the redeemed the remaining accretion is recorded immediately.

Under Canadian GAAP, the proceeds from the issuance of convertible preferred shares with detachable warrants are allocated to the warrants issued and the conversion feature based on the fair values. The remaining proceeds are allocated to debt, which is accreted to the redemption value of the convertible preferred shares over the maturity period. On the date of conversion of debt to equity, the carrying value of debt is reclassified to equity with no additional interest accretion.

| | (d) | Share issuance costs:
| | --- | ---------------------

Under United States GAAP, share issuance costs pertaining to the beneficial conversion feature are recorded as deferred financing costs and are amortized over the maturity period. Under Canadian GAAP, the share issuance costs pertaining to the beneficial conversion feature are charged to equity.

| | (e) | Impact of differences:
| | --- | ----------------------

| | (i) | Consolidated statement of operations and comprehensive loss and deficit:
| | --- | ------------------------------------------------------------------------

| |                                                      |   | 2007       |   |   | 2006       |   |   | 2005       |  
| | ---------------------------------------------------- | - | ---------- | - | - | ---------- | - | - | ---------- | -
| |                                                     
| | Net loss and comprehensive loss in accordance with   |   |            |   |   |            |   |   |            |  
| | Canadian GAAP                                        | $ | (11,683    | ) | $ | (10,844    | ) | $ | (12,806    | )
| | Difference in employee stock based                   |   |            |   |   |            |   |   |            |  
| | compensation (note 19(a))                            |   | -          |   |   | -          |   |   | 1,767      |  
| | Difference in interest accretion and amortization of |   |            |   |   |            |   |   |            |  
| | capitalized financing fee (notes 19(c) and (d))      |   | -          |   |   | (37        | ) |   | (23        | )
| |                                                     
| | Net loss and comprehensive loss in                   |   |            |   |   |            |   |   |            |  
| | accordance with United States GAAP                   |   | (11,683    | ) |   | (10,881    | ) |   | (11,062    | )
| | Deficit, beginning of year, United States GAAP       |   | (86,234    | ) |   | (75,353    | ) |   | (64,291    | )
| |                                                     
| | Deficit, end of year, United States GAAP             | $ | (97,917    | ) | $ | (86,234    | ) | $ | (75,353    | )
| |                                                     
| | Weighted average number of shares                    |   |            |   |   |            |   |   |            |  
| | outstanding                                          |   | 38,407,388 |   |   | 37,400,378 |   |   | 34,057,703 |  
| |                                                     
| | Basic and diluted loss per share                     | $ | (0.30      | ) | $ | (0.29      | ) | $ | (0.32      | )

31

---

|FORBES MEDI-TECH INC.                                                           
|--------------------------------------------------------------------------------
|Notes to Consolidated Financial Statements                                      
|(Expressed in thousands of Canadian dollars, except share and per share amounts)
|                                                                                
|Years ended December 31, 2007, 2006 and 2005                                    

|**20.** | United States generally accepted accounting principles (continued):
|------- | -------------------------------------------------------------------

| | (e) | Impact of differences (continued):
| | --- | ----------------------------------

| | (ii) | Consolidated balance sheet:
| | ---- | ---------------------------

| |                                   |   | 2007     |   |   | 2006          |  
| | --------------------------------- | - | -------- | - | - | ------------- | -
| |                                   |   | Canadian |   |   | United States |  
| |                                   |   | GAAP     |   |   | GAAP          |  
| |                                  
| | Current assets                    | $ | 12,052   |   | $ | 12,052        |  
| | Capital assets                    |   | 387      |   |   | 387           |  
| |                                  
| | Intangible and other assets       |   | 512      |   |   | 512           |  
| |                                  
| | Current and Long-term liabilities |   | 3,319    |   |   | 3,319         |  
| |                                  
| | Shareholders equity:             |   |          |   |   |               |  
| | Common Shares                     |   | 101,027  |   |   | 100,064       |  
| | Contributed Surplus               |   | 9,875    |   |   | 7,485         |  
| | Deficit                           |   | (101,270 | ) |   | (97,917       | )

| | (f) | Other disclosures:
| | --- | ------------------

The following additional information would be presented if these consolidated financial statements were presented in accordance with United States GAAP:

| | (i) | Advertising expense:
| | --- | --------------------

Advertising expenses are recorded as an expense in the period they are incurred.

| | (ii) | Intangible assets:
| | ---- | ------------------

The following table summarizes the estimated future amortization expenses as of December 31, 2007:

| | Year ending December 31 |   |  
| | ----------------------- | - | -
| |                        
| | 2008                    | $ | 1
| | 2009                    |   | 1
| | 2010                    |   | 1
| | 2011                    |   | 1
| | 2012                    |   | 1
| | 2013                    |   | 1
| | Thereafter              |   | 2

32

---

|FORBES MEDI-TECH INC.                                                           
|--------------------------------------------------------------------------------
|Notes to Consolidated Financial Statements                                      
|(Expressed in thousands of Canadian dollars, except share and per share amounts)
|                                                                                
|Years ended December 31, 2007, 2006 and 2005                                    

|**20.** | United States generally accepted accounting principles (continued):
|------- | -------------------------------------------------------------------

| | (f) | Other disclosures (continued):
| | --- | ------------------------------

| | (iii) | Other disclosure items:
| | ----- | -----------------------

| |                                                   |   | 2007 |   | 2006 |   | 2005
| | ------------------------------------------------- | - | ---- | - | ---- | - | ----
| |                                                  
| | Depreciation                                      | $ | 171  | $ | 142  | $ | 152 
| | Amortization                                      |   | 42   |   | 7    |   | 10  
| |                                                  
| | Depreciation-discontinued operations              |   | -    | $ | 151  | $ | 958 
| | Amortization- discontinued operations             |   | -    |   | 136  |   | 681 
| |                                                  
| | Operating lease expense                           | $ | 339  | $ | 321  | $ | 526 
| | Operating lease expense  discontinued operations |   | -    |   | -    |   | 82  

| | (iv) | Allowance for doubtful accounts:
| | ---- | --------------------------------

The Company does not have any allowance for doubtful accounts for the years ended December 31, 2007, 2006 and 2005.

| | (g) | Recent accounting pronouncements:
| | --- | ---------------------------------

In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48 (FIN 48) entitled Accounting for Uncertainty in Income Taxes  An Interpretation of FASB Statement No. 109 to create a single model to address accounting for uncertainty in tax positions. FIN 48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold that a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on de-recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006.

The Company adopted the provisions of FIN 48 on January 1, 2007. As a result of the implementation of FIN 48, the Company evaluated all the tax positions in accordance with FIN 48 and determined no adjustment to the liability for unrecognized tax benefits; consequently no cumulative effect adjustment to the January 1, 2007 balance of retained earnings was required. The amount of liability for unrecognized tax benefits as of January 1, 2007 and December 31, 2007 is nil.

The Company recognizes interest and penalties related to income taxes in interest and other income. To date, the Company has not incurred any significant interest and penalties.

Tax years ranging from 2001 to 2007 remain subject to examination in Canada, United States, and the United Kingdom.

Prior to 2007, the Company determined its tax contingencies in accordance with Statement of Financial Accounting Standards No. 5, Accounting for Contingencies (FAS 5). The Company recorded estimated tax liabilities to the extent the contingencies were probable and could be reasonably estimated.

33

---

|FORBES MEDI-TECH INC.                                                           
|--------------------------------------------------------------------------------
|Notes to Consolidated Financial Statements                                      
|(Expressed in thousands of Canadian dollars, except share and per share amounts)
|                                                                                
|Years ended December 31, 2007, 2006 and 2005                                    

|**20.** | United States generally accepted accounting principles (continued):
|------- | -------------------------------------------------------------------

| | (g) | Recent accounting pronouncements (continued):
| | --- | ---------------------------------------------

In September 2006, FASB issued SFAS No. 157, "Fair Value Measurements". The statement defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. The statement is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company does not expect the adoption of this statement to have a material impact on its financial statements.

In September 2006, SAB No. 108 was issued by the Securities and Exchange Commission. The interpretations in the SAB express the SEC staff's views regarding the process of quantifying financial statement misstatements. Beginning with annual financial statements covering fiscal years ending after November 15, 2006, material misstatements in the current year may result in the need to correct prior year financial statements, even if the misstatement in the prior year or years is considered immaterial. SAB 108 does not require previously filed reports to be amended. Such correction may be made the next time the company files the prior year financial statements. There is no impact on the Companys results of operations, cash flows or balance sheet resulting from this interpretation.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities ("SFAS No. 159"). Under the provisions of SFAS No. 159, companies may choose to account for eligible financial instruments, warranties and insurance contracts at fair value on a contract-by-contract basis. Changes in fair value will be recognized in earnings each reporting period. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company is required to adopt the provisions of SFAS No. 159 effective January 1, 2008. The Company is currently assessing the impact of the adoption of SFAS No. 159.

34

---

|FORBES MEDI-TECH INC.                                                           
|--------------------------------------------------------------------------------
|Notes to Consolidated Financial Statements                                      
|(Expressed in thousands of Canadian dollars, except share and per share amounts)
|                                                                                
|Years ended December 31, 2007, 2006 and 2005                                    

|21. | Subsequent events:
|--- | ------------------

|a) | Plan of Arrangement
|-- | -------------------

On February 14, 2008, at a Special General Meeting, the Companys securityholders approved a Plan of Arrangement (Arrangement) and certain other resolutions as described below.

Each Shareholder of Forbes would exchange the common shares of Forbes Medi-Tech Inc. for common shares of a newly incorporated entity, 0813361 B.C. Ltd., (Newco) on the basis of one common share of Newco for between two and eight common shares of Forbes. The exchange ratio was to be determined by the Board of Directors of Forbes.

Each holder of an Option or Warrant would exchange the Option or Warrant for options or warrants to purchase a number of common shares of Newco equal to exchange ratio by which the number of common shares of Newco would be exchanged for the common shares of Forbes and at an exercise price that is a multiple of the existing exercise price equal to the number of common shares of Forbes that would exchanged for one common share of Newco. As a result of the Arrangement, Securityholders will hold common shares, options and warrants of Newco and Forbes will become a wholly owned subsidiary of Newco.

As of September 30, 2007, Forbes had a deficit of $98,460 and realizable assets with a value of approximately $15,936. In order to undertake the Arrangement, the Board of Directors proposed to reduce the stated capital of the Common shares by $98,460 so that, on the date of the Meeting, the realizable value of the assets of Forbes was greater than the aggregate of its liabilities and stated capital (as amended).

Under the Arrangement, Forbes became a wholly owned subsidiary of Newco, and Securityholders then held securities of Newco. It was considered desirable that Securityholders continue to hold their securities in an entity that has the same name as the entity in which they originally held their securities and that Forbes continue to be recognized in the business and financial markets by the same name. In order to effect the change of name of Newco to Forbes Medi-Tech Inc., Forbes first changed its name to Forbes Medi-Tech Operations Inc.

The determination date of the Arrangement was on February 26, 2008 and the Board of Directors determined that the exchange ratio would be on the basis of one common share of Newco for eight common shares of Forbes. After giving effect to the reorganization, the number of issued and outstanding common shares was reduced from 38,412,100 to approximately 4,801,512, the number of options outstanding reduced from 2,941,500 to 367,687, exercisable at prices between $4.24 and $8.00 per share and the number of warrants outstanding reduced from 2,072,727 to 259,091, exercisable at a price of US $16.48 per share.

35

---

|FORBES MEDI-TECH INC.                                                           
|--------------------------------------------------------------------------------
|Notes to Consolidated Financial Statements                                      
|(Expressed in thousands of Canadian dollars, except share and per share amounts)
|                                                                                
|Years ended December 31, 2007, 2006 and 2005                                    

|21. | Subsequent events (continued):
|--- | ------------------------------

|b) | Private investment
|-- | ------------------

On March 20, 2008 the Company announced that had entered into an agreement with a private investor to reorganize Forbes Medi-Tech Operations Inc. (FMTO), a wholly-owned subsidiary of Forbes, (the entity as described in note 21 a) above.) The private investor is to make an investment of $3,000 in a convertible debenture of FMTO. All of the assets, liabilities and operations of FMTO, including the proceeds from the issue of the convertible debenture, will then be transferred to Forbes, which will continue to carry on the business previously carried on by FMTO. The debenture is convertible into 35% of the voting common shares and all of the non-voting common shares of FMTO, representing 79% of the issued and outstanding common shares of FMTO at the time of completion of the transaction. The transaction is expected to close on or before April 30, 2008. Completion of the transaction is subject to the satisfaction of certain conditions. Additionally, subject to certain conditions, the private investor has agreed that Forbes will receive a minimum of $800 within one year of completion of the transaction.

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