U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-KSB

(Mark One)

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

For the year ended December 31, 2005

[   ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _______________

Commission File Number 000-51080



|CHEMOKINE THERAPEUTICS CORP.                                                            
|----------------------------------------------------------------------------------------
|(Name of small business issuer in its charter)                                          
|Delaware                                                                                
|(State or other jurisdiction of                                                         
|incorporation of organization)                                                          
|6190 Agronomy Road, Suite 405
University of British Columbia
Vancouver, British Columbia
|(Address of principal executive offices)                                                
|(604) 822-0301                                                                          
|(Issuers Telephone Number, Including Area Code)                                        



Securities registered under Section 12(b) of the Exchange Act: None

Securities registered under Section 12(g) of the Exchange Act: Common Stock, $0.001 Par Value per Share

Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  X No __

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.  __

State issuers revenues for its most recent fiscal year. $275,000

As of March 10, 2006, the approximate aggregate market value of voting and non-voting stock held by non-affiliates of the issuer was $29,360,865 (based upon the closing price for shares of the issuers common stock as reported by Toronto Stock Exchange on that date). Shares of common stock held by each officer, director, and holder of 5% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

As of March 10, 2006, there were 32,889,792 shares of the issuers common stock issued and outstanding.

Documents Incorporated By Reference:  Portions of the issuers definitive proxy statement relating to its 2006 annual meeting of shareholders, which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days of the close of the issuers last fiscal year, are incorporated by reference into Part III of this report.



Transitional Small Business Disclosure Format (check one): Yes  __  No  X







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CHEMOKINE THERAPEUTICS CORP.

2005 ANNUAL REPORT ON FORM 10-KSB



INDEX







|         |                                                                                     | Page
|-------- | ----------------------------------------------------------------------------------- | ----
|         | Part I                                                                              |     
|Item 1.  | Description of Business                                                             | 3   
|Item 2.  | Description of Property                                                             | 25  
|Item 3.  | Legal Proceedings                                                                   | 25  
|Item 4.  | Submission of Matters to a Vote of Security Holders                                 | 25  
|         | Part II.                                                                            |     
|Item 5.  | Market for Common Equity and Related Stockholder Matters                            | 25  
|Item 6.  | Managements Discussion and Analysis of Financial Condition and Plan of Operations  | 28  
|Item 7.  | Financial Statements                                                                | 34  
|Item 8A. | Changes in and Disagreement with Accountants on Accounting and Financial Disclosure | 34  
|Item 8B. | Other Information                                                                   | 34  
|         | Part III                                                                            |     
|Item 9.  | Directors, Executive Officers, Promoters and Control Persons                        | 34  
|Item 10. | Executive Compensation and Related Information                                      | 34  
|Item 11. | Security Ownership of Certain Beneficial Owners and Management                      | 34  
|Item 12. | Certain Relationships and Related Transactions                                      | 35  
|Item 13. | Exhibits and Reports on Form 8-K                                                    | 35  
|Item 14  | Principal Accounting Fees and Services                                              | 36  
|         | Exhibits                                                                            |     
|         | Exhibit Index                                                                       | 62  









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NOTE REGARDING FORWARD LOOKING STATEMENTS



This Annual Report on Form 10-KSB and other written reports and oral statements made from time to time by Chemokine may contain forward looking statements. Such forward looking statements may be identified by the use of such words as experts, plans, estimates, forecasts, projects, anticipates, believes and words of similar meaning. Forward looking statements are likely to address such matters as Chemokines business strategy, future operating results and clinical trial plans. As a result, investors should carefully consider any forward looking statements in light of the various factors which could affect future results. Some of these factors are discussed below.



All references to $ or dollars in this Form 10-KSB are to U.S. dollars unless otherwise noted.



PART I



ITEM 1.

DESCRIPTION OF BUSINESS

Overview

We are an early stage biotechnology company developing drugs in the field of chemokines. Chemokines are a class of cytokines which play major roles in physiological processes such as the metastasis of cancer, blood cell mobilization, autoimmune and inflammatory diseases.  Cytokines are proteins that regulate a large number of physiological functions, including blood cell supply and tissue development.  Some well known cytokines that are approved therapeutics for blood cell formation and are currently on the market are Neupogen® and Epogen®.

Our objective is to discover drug candidates that target chemokine receptors and develop them through Phase II clinical trials.  Provided that we reach this stage with individual drug candidates, we intend to enter into agreements with larger biotechnology and pharmaceutical companies to co-develop our drug candidates through Phase III and Phase IV of clinical trials.  In some circumstances, when appropriate, we may license a product to a partner at an earlier stage.  We intend to license the marketing of our product candidates to companies with existing infrastructure for the marketing of pharmaceutical drugs.

Chemokine Therapeutics Corp. was founded on July 15, 1998. We are incorporated under the laws of the State of Delaware.  We have a wholly owned subsidiary in British Columbia, Chemokine Therapeutics (B.C.) Corp., incorporated under the laws of the province of British Columbia, which employs all of our executive management.

Our Offices and Research Facilities

Our headquarters are located in Vancouver, British Columbia, at the University of British Columbia. Our research activities are centralized in Vancouver under Globe Laboratories Inc. in an incubator facility on the campus of University of British Columbia.  Globe Laboratories is a company beneficially owned by Dr. Hassan Salari and is engaged in chemokine research for us on a contracted operating cost basis plus a 2% margin.  Globe Laboratories is eligible for Canadian scientific research and development tax credits which are used to reduce the research and development costs charged to us.  Pursuant to a development agreement between Globe Laboratories and us, all proprietary interest, including all patent rights, trademarks, copyright, trade secrets and confidential information in the product candidates developed by Globe Laboratories for us is our exclusive property.

Through our location on the campus of University of British Columbia and our affiliation with University of British Columbia, we have access to a wide range of equipment and scientific facilities, such as University of British Columbias animal facility. This allows us to minimize costs while maintaining quality. We lease office space of 3,600 square feet at the University of British Columbia from a third party.

Dr. Hassan Salari, our president and chief executive officer, has had previous experience with the formation and development of biopharmaceutical companies and is a scientist in the field of drug discovery and development.



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We have established a network of research collaborations with the following universities or organizations:

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Memorial Sloan Kettering Cancer Center, New York

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M. D. Anderson Cancer Center, Houston, Texas

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Dana-Farber Cancer Institute, Boston, Massachusetts

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Indiana University Medical School, Indianapolis

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University of California, Blood and Marrow Transplantation Division, San Diego

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Chinese University, Hong Kong

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Center for Cancer Research, National Cancer Institute, Bethesda, Maryland

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Childrens Hospital Los Angeles, Los Angeles, California

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The Lady Davis Institute for Medical Research, Montreal, Quebec

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University of Pennsylvania, School of Medicine, Philadelphia, Pennsylvania

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University of Oslo, Oslo, Norway

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Heidelberg University, Heidelberg, Germany

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Mater Public Hospital, South Brisbane, Australia

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National University Hospital, Singapore

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Weill Medical College of Cornell University, The New York Presbyterian Hospital, New York, NY

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University of Illinois at Chicago, Chicago, Illinois

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Wayne State University School of Medicine, Detroit, Michigan

Although these are beneficial research collaborations, we are not dependent on any of such collaborations. We do not pay the institutions for these collaborations and the institutions are not required to provide us anything definite in return. These institutions have permission to use our products for research, but they do not otherwise gain any right to our technology. These collaborations allow researchers at these institutions to pursue their own research interests with our products. We may benefit from papers they publish and other results of their research. Many medical schools and cancer institutes conduct research on cancer-related topics and we believe we could establish collaborations with other institutions if it were beneficial to us.

We also maintain a close collaboration with the research scientists and doctors on our Medical and Scientific Advisory Board including, amongst others: Malcolm A. Moore, co-inventor of Neupogen®, and Edward D. Ball, co-founder of Medarex, Inc.

A Note on Clinical Trials

A clinical trial is a type of research study that tests an investigational new drug or method to evaluate its safety and efficacy in humans.  Clinical trials in the United States are overseen by the Food and Drug Administration, or FDA, and may be carried out in a clinic, hospital or other medical facility.  In Canada, clinical trials are overseen by the Therapeutics Products Directorate.  In both countries there are usually four phases of clinical trials, I through IV.

An Investigational New Drug application, or IND, is a request for authorization from the FDA to administer an investigational drug or biological product into humans.  Such authorization must be secured prior to commencement of Phase I clinical trials.

Phase I clinical trials are typically the first study of a drug in humans.  These studies typically evaluate safety, and pharmacokinetics, the metabolism and action of the drug, in a small group of usually fewer than 50 healthy subjects.  Phase I clinical trials can also allow researchers to evaluate dose levels as well as route of administration.



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Phase II clinical trials are designed to measure efficacy, short-term tolerability and further information related to the optimum dose in specific patient groups for specific diseases. These trials are usually conducted with patients who are suffering from the disease.  The studies involve a greater number of subjects than Phase I clinical trials.

A Phase III clinical trial compares the results of people taking a new treatment with results of people taking standard treatment, for example, which group has better survival rates or fewer side effects. In most cases, studies move into Phase III clinical trials only after a treatment has shown an acceptable safety profile and preliminary efficacy results in Phases I and II. Phase III trials may include hundreds of people.

A Phase IV clinical trial is conducted once a drug has been approved and is being marketed. The drug is studied in a Phase IV clinical trial to evaluate side effects of the new treatment that were not apparent in the Phase III trial.  Phase IV clinical trials involve testing in large groups of people, sometimes in the thousands.

Phase I, Phase II, Phase III and Phase IV generally have the same meaning in the U.S., Canada and Europe.  The clinical results from one jurisdiction can be used in an application in another jurisdiction to avoid duplicating clinical trials; however, generally, each of the U.S., Canada and Europe will require at least a Phase III study to be completed in their jurisdiction prior to granting new drug approval.

We intend to seek regulatory approval for marketing of a new drug in both North America and in Europe if and when our drug candidates are successful in completing Phase III clinical trials.  We cannot give you assurance that any of our drug candidates will demonstrate safety and efficacy during the conduct of clinical trials necessary to gain regulatory approval.

Our Relationship with Pharmaceutical Product Development, Inc.

We have a strategic relationship with Pharmaceutical Product Development, Inc. (PPDI) (NASDAQ: PPDI).  PPDI acquired 2,000,000 series A preferred shares through an investment of $2,700,000 and we granted to PPDI share purchase warrants entitling PPDI to purchase 500,000 common shares at an exercise price equal to CDN$1.00 per share expiring on December 29, 2007.  PPDI currently holds approximately 5.7% of our voting securities.

We granted PPDI an option, exercisable for up to 90 days, to license CTCE-0214 following completion of the Phase I clinical trials. PPDI also provides regulatory services and general consulting services for the development of CTCE-0214 at market rates.  If PPDI exercises its option, PPDI will pay us a total of $15 million in payments upon achieving certain milestones: (i) $1.5 million upon exercise of the option; (ii) $2 million upon initiation of Phase III clinical studies; (iii) $4,000,000 upon acceptance of a new drug application filing with the FDA; (iv) $7,500,000 upon approval of the new drug application by the FDA.  In addition we will receive a royalty at one of two rates based on whether or not CTCE-0214 is sold in a country in which we can enforce our patent rights. The rates will increase based on the level of net sales of CTCE-0214. The rates vary from 8% on net sales of less than or equal to $400,000,000, 10% on net sales of $400,000,000 to $1,000,000,000, and 12% on net sales above $1,000,000,000. In addition PPDI will pay the entire cost of drug development, including manufacturing, clinical trials and regulatory fillings.

Under our agreement with PPDI, we will fund the Phase I clinical studies of CTCE-0214. When we decide to license any other of our compounds to a third party, we will give notice to PPDI and allow PPDI the first opportunity to negotiate a license with us.  If PPDI has no interest in a compound or we are unable to reach an agreement on a license, we may then negotiate and grant licenses to other companies.

Although PPDI may terminate the relationship at any time, subject to any then existing obligations, we have no general right to terminate the relationship, except in case of PPDIs insolvency. If PPDI terminates the relationship, we would have no ongoing obligation to PPDI, other than with respect to options that PPDI had previously exercised.

During 2005 we engaged PPDI as a consultant relating to the development of CTCE-0214, including the design and execution of clinical trials; the evaluation of the results of clinical trials; and the design, execution and evaluation of research and development activities for which we paid PPDI a consulting fee of $150,000.



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Our Relationship with the University of British Columbia

On September 22, 1999 we entered into a license agreement with University of British Columbia.  The license grants to us exclusive worldwide rights to research, develop and commercially exploit certain patented technologies, which remain the property of University of British Columbia.  The licensed technology relates to therapeutics involving stromal cell-derived factor 1, or SDF-1 peptide antagonists and agonists which are currently applicable to our drug candidates CTCE-9908 and CTCE-0214, respectively.

Under the agreement we are obligated to achieve various milestones and to make milestone payments and to pay royalties of 2% of any revenues or other consideration derived from the licensed technologies.  The remaining milestone payments on one of either CTCE-9908 or CTCE-0214 include the following: (i) CDN$100,000 at the time of completion of Phase II clinical trials; (ii) CDN$250,000 at the time of completion of Phase III clinical trials; and (iii) CDN$500,000 on the filing for new drug approval. We have paid a total of CDN$15,000 to University of British Columbia upon the execution of the agreement in 1999 and CDN$50,000 in 2003 in connection with our filing of an Investigational New Drug application.

The term of the license agreement is the longer of 20 years from the date of the agreement and the expiration of the last patent relating to the licensed technology.  The license agreement shall automatically terminate if any proceeding under the Bankruptcy and Insolvency Act of Canada iscommenced by or against us.  In addition, University of British Columbia may terminate the agreement for various reasons including if we become insolvent, fail to pay monies due under the agreement, breach certain terms of the agreement, or if the licensed technology becomes subject to a lien, charge or encumbrance.

Our Business

Chemokine Therapeutics Corp. is a biotechnology company with specific interest in protein based drug development.  We are specifically focused on protein based drugs that target a class of cytokines known as chemokines. Cytokines are soluble proteins produced by cells to control interactions between other cells. Chemokines, more specifically, are a complex family of small proteins produced in the body, which have a regulatory function in the development and migration of various cell types.  Of particular interest is the role chemokines play in controlling the movement of cells in the immune system and in activating the immune system to fight disease or to maintain the normal functioning of the immune system.  We estimate that we spent on research and development activities approximately $1,786,000 in 2004 and $3,697,000 in 2005.

Drug Discovery Capabilities

We have a team of chemists and biologists headed by our Chief Executive Officer, Dr. Hassan Salari, that has developed an approach to discover chemokine based drug candidates.  Even though they occur naturally in the body, the majority of chemokines in their natural state are not suitable for use as therapeutic drugs due to their instability, potential side effects such as allergic reactions, fever and bone pain.  We have developed techniques to generate small versions or analogs of natural chemokines which copy the function of chemokines known as agonists or inhibit their function known as antagonists.  While these analogs function similarly to natural chemokines, we believe these analogs do not possess their side effect profiles; therefore these analogs could potentially be used as therapeutic drugs to replace natural chemokines.  We have designed several hundred of these analogs and have tested them in our laboratories.  We have selected five of these compounds as drug candidates, two of which, CTCE-9908 and CTCE-0214, we consider lead product candidates. We are testing CTCE-9908 for the prevention of the metastasis of cancer and we are testing CTCE-0214 for hematological support. We have completed lead optimization of CTCE-0324 and will continue to test it in animal models of arterial disease. We have also completed lead optimization of CTCE-0422 for infectious diseases and CTCE-0501 for stroke. We have additional compounds which require further testing and lead optimization, targeting hematological diseases, cardiovascular diseases and inflammatory diseases.

The scope of our drug development activities includes:

·

Investigation of natural chemokines;

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Identification of binding sites for chemokines;



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Design of new analogs, based on the structure of chemokines, that enhance or counteract the biological activities of their natural counterparts;

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Synthesis of the designed compounds;

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Screening and identification of drug potential;

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Proof of efficacy and pre-clinical development;

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Phase I and Phase II clinical trials; and

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Partnership with other established pharmaceutical companies with marketing infrastructure and expertise to further develop and commercialise our product candidates.

The Chemokine System

Chemokines are a recently discovered family of small, soluble proteins, structurally-related to cytokines.  They assume a range of important functions in the human body, mainly in relation to the immune system.  Among other functions, chemokines are responsible for blood cell formation through stem cell growth and differentiation.  In addition, chemokines participate in white blood cell mobilization and in the initiation of immune responses.  They are produced and released by a wide variety of cell types.

In addition to their designated natural functions, chemokines have been found to play an important role in the physiological processes of a variety of prominent and critical diseases.  There is a growing focus in the scientific community on chemokine involvement in cancer, both at the level of blood vessel generation and metastasis, in viral infections such as HIV and in autoimmune diseases, as evidenced by studies in an increasing number of research publications and articles.

The mechanism of chemokine action always involves initial binding to specific receptors on target cells, such as white blood cells.  Over fifty different human chemokines and seventeen human cell receptors have so far been identified and described.

We utilize peptide technologies known as solid phase synthesis to design proteins and peptide drugs that target chemokines.  However, the same technology is applicable to cytokines, hormones and growth factors.

As several chemokines normally interact with a specific receptor and certain chemokines can interact with several receptors, the apparent complexity and redundancy in the human system makes the identification of effective drug candidates difficult.  The principal challenge is to identify which chemokines and receptors should be targeted to produce the desired effects.

We have developed our own approach to address this challenge, consisting of a combination of the following elements:

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Identification and characterization of chemokine functions - A great deal of information is known about chemokines including their roles, linear amino acid sequence, 3-dimensional structure, genetic sequence, molecular weight and binding sites.  We leverage this information to identify the binding sites on chemokines which bind to receptors on the surface of various cells in the body.  We select chemokines and those important binding sites for further study and potentially to manufacture them synthetically.  These synthetic peptides are called analogs.  We produce analogs that have the potential to replace proteins for those chemokines that cannot be produced naturally due to either their breakdown, instability or their aggregation in the body.  We synthetically produce chemokines that we believe have important therapeutic properties and potentially represent large markets.

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Computational design of new chemokine-based drug candidates - Our understanding of the 3-dimensional structure and binding of a chemokine with its receptor is essential for the design of a smaller chemokine analog of its natural counterpart.

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Structural redesign for enhancement/improvement of critical activities and properties - Redesign of the original drug candidate is required as part of the rational peptide design process.  The changing of one linkage or an amino acid can cause the drug candidate to enhance or counteract the biological activities of their natural counterparts, or improve the pharmacokinetics. We continually redesign in an effort to obtain more desirable peptides.



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Synthesis of new analogs using solid phase technology - We use solid phase peptide synthesis to generate several amino acid peptides of relatively short length, typically 5 to 15 amino acids, or large sequence peptides, typically 15 - 70 amino acids in length.  The technology allows the cost effective production of peptides with yield levels that are greater than observed with recombinant protein production.  This is achieved synthetically through organic chemistry.  This process also allows for the introduction of non-natural amino acids and other chemical groups into peptides, allowing for rational design of a drug candidate.

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Systematic screening of promising chemokine agonists and antagonists using receptor binding studies - Systematic screening of promising chemokines is performed through receptor binding studies.  Analogs bearing the desired biological and chemical properties of a desired therapeutic are candidates for animal model evaluation.

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Evaluation of the novel drug candidates in animal models of the disease for proof of efficacy - Novel drug candidates are evaluated in animal models of the disease to assess safety and efficacy.  The first animal models are typically mice or rats.  These studies are categorized as preclinical studies.

Our Pharmaceutical Drug Candidates

CTCE-9908 (Anti-Metastasis)

When a cancer spreads from its original site to another area of the body, it is termed metastatic cancer. Cancer metastasis involves a complex interaction of many factors, including the type of cancer, the degree of maturity of the tumour cells, the location and how long the cancer has been present, as well as other factors not completely understood.

CTCE-9908, based on our laboratory studies in animal models of lung cancer, has the potential to reduce or delay the progression of metastasized lung cancers. We are developing CTCE-9908 to target specific types of cancer that we determine to best respond to this form of therapy.  We intend to test CTCE-9908 in cancers with high metastatic potential such as osteosarcoma, non-small cell lung cancer or NSCLC, breast cancer, ovarian cancer, brain cancer and prostate cancer.

Cancerous cells have been shown to express receptors on their cell surface known as CXCR4 receptors.  As these cells detach from the primary tumour and circulate throughout the body, they stop in the blood vessels of organs that produce high levels of the chemokine SDF-1 which binds to CXCR4 receptors.  This binding induces the migration of cancer cells into normal tissue and induces blood vessel generation leading to the growth of metastatic tumors.

CTCE-9908 is an antagonist of SDF-1, the chemokine that binds to the CXCR4 receptor.  The drug candidate inhibits the binding of cancer cells to other tissues, with the potential to reduce the spread of cancer throughout the body.

CTCE-9908 has the potential to become part of a new generation of drugs that acts to inhibit the metastasis of cancer cells from the primary tumour by preventing the binding of cancer cells to other tissues in the body.  In our animal trials, we found a reduction of 50% to 70% of the metastasis to the lungs as compared with untreated animals, and a prevention of detectable metastasis to other organs and tissues.

We have discovered in our animal models that CTCE-9908:

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prevents NSCLC metastasis to the lungs by approximately 68%;

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abolished detectable metastasis to sites outside of the lungs; and

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did not affect the anti-cancer activity of another chemotherapeutic drug tested in our animal model studies.

In addition, preliminary results from human Phase I clinical trials demonstrate low toxicity in humans.



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Development of CTCE-9908

We have completed a Phase I clinical trial in the United Kingdom on our drug candidate CTCE-9908.  The trial used single-dose escalation to assess safety in healthy volunteers.  The trial indicated that the test subjects tolerated CTCE-9908 with no serious or drug related adverse events.  According to the final report of the clinical trial prepared by DDS Medicines Research Limited, a total of 24 healthy subjects, of which 18 were male and six were female, were divided into four groups of six subjects. The study consisted of three dose levels with four subjects receiving CTCE-9908 and two receiving a placebo. The first group of subjects received placebo or CTCE-9908 at a dose of 0.5 mg/kg body weight with the subsequent groups receiving placebo or 2 and 5 mg/kg body weight respectively.  The fourth group consisted of healthy women of non-child bearing potential who were administered a dose of 5 mg/kg or placebo, in the same manner as the first three groups.  There were no serious adverse events in any test subject during the trial.  Overall, we found that the product was non-toxic and well tolerated.

We expect to initiate a Phase I/II clinical trial of CTCE-9908 by the beginning of the second quarter of 2006.  This will be a trial in cancer patients assessing safety and preliminary efficacy.  The table below provides a summary of the CTCE-9908 clinical plan.

|Clinical Development Plan for CTCE-9908       
|----------------------------------------------
|Description                                   
|Single-Dose Safety Study in Healthy Volunteers
|Safety and Preliminary Efficacy Study         

Market Need for CTCE-9908

As a potential anti-metastasis cancer therapy, we believe that CTCE-9908 is unique and has the potential to address a large and growing cancer market.  Cancer is a major health care problem as approximately 23% of all deaths in the U.S. in 2001 were caused by cancer according to the National Cancer Institute.  The National Cancer Institute estimates that there were 1,372,910 new cases of cancer in 2005 in the U.S., including 232,090 prostate cancers; 211,240 female breast cancers; 172,570 lung cancers; and 145,290 cancers of the colon/rectum.  In addition, the risk of being diagnosed over ones lifetime with cancer is approximately 46% of U.S. males and 38% of U.S. females according to the National Cancer Institute.

According to the American Cancer Society, about one-third of patients with cancer, excluding nonmelanoma skin cancers, have metastases that are detected at the time their cancer is first diagnosed.  Another third of patients have metastases that are too small to be detected by usual diagnostic tests. These micrometastases, however, will eventually grow into clinically significant metastases if the patient receives no treatment or local treatment of the primary tumour only.

Competition for CTCE-9908

The market for cancer treatments is large and therefore it will continue to attract a significant number of competitors.  However, a smaller number of competitors specifically develop anti-metastasis drugs.  Currently, several companies, including OSI Pharmaceuticals, Inc. and Genentech Inc., maintain programs to develop drugs to treat primary and metastatic tumour sites by using inhibitors of Epidermal Derived Growth Factor Receptor (EGFR) and Vascular Endothelial Growth Factor (VEGF).



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Two of the main companies pursuing cancer drugs for metastatic cancer are:

|Company                   | Product    | Status                                                                                                                                                                                                                                                                                                                                                                                                 
|------------------------- | ---------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Genentech Inc.            | Herceptin® | Approved for the treatment of HER2 positive metastatic breast cancer.                                                                                                                                                                                                                                                                                                                                  
|Genentech Inc.            | Avastin®   | Approved for use in combination with intravenous 5-Fluorouracil-based chemotherapy as a treatment for patients with first-line  or previously untreated  metastatic cancer of the colon or rectum.  Genentech is pursuing a late-stage clinical development program with Avastin® evaluating its potential use in metastatic colorectal, renal cell (kidney), breast and non-small cell lung cancers.
|OSI Pharmaceuticals, Inc. | Tarceva®   | Approved for metastatic non-small cell lung cancer in combination with gemcitabine chemotherapy for the treatment of locally advanced, inoperable or metastatic pancreatic cancer in patients who have not received previous chemotherapy and pancreatic cancer.                                                                                                                                       

(Source: Company Reports)

To the best of our knowledge, we are the only company at this time that has been able to demonstrate significant prevention of cancer metastasis in animals with an SDF-1 antagonist drug candidate.

CTCE-0214 (Hematological Support)

The natural chemokine SDF-1 is known to have a role in blood cell formation in the body known as the hematopoietic process.  Currently, natural SDF-1 is not suitable for drug development due to its breakdown in circulation, the potential for allergic reactions due to production of antibodies and other complications.  We have designed and produced an analog of SDF-1 that possesses superior stability and potentially overcomes these issues.

CTCE-0214, based on our research in animal models, increases the level of circulating stem cells, white blood cells or neutrophils and bleeding prevention cells or platelets.  Blood is made up of a number of different types of cells involved in many different physiological functions, from infection fighting to blood clotting.  These cells have a limited life span; neutrophils live a few hours and erythrocytes or red blood cells survive for a few weeks.  Therefore the body needs to continually produce up to 1011 cells per day to maintain a normal balance (Source: Hematopoietic Lineages in Health and Disease).  The blood cell production process largely occurs in the bone marrow from hematopoietic stem cells that form progenitor cells, which proliferate and differentiate into mature blood cells.

In the setting of cancer, chemotherapeutic drugs are administered in patients to interrupt cell division in tumors that typically have a high rate of proliferation.  However, many of the currently available drugs are non-specific and target healthy cells that are replenishing themselves rapidly. These cells include; the lining of the gut, the mouth, and blood cells, including neutrophils, which are cells that provide the first-line of defense against bacterial infection.  A weakened barrier in the gut and mouth caused by chemotherapy allows for easy passage of invading bacteria with fewer neutrophils available to launch an attack against them.

In preclinical animal tests, CTCE-0214 mobilized cells that express the SDF-1 receptor, CXCR4, including neutrophils, platelets and hematopoietic progenitor cells, raising the animals level of cells in the blood.  We have shown in the laboratory that CTCE-0214 is an agonist of SDF-1 by its competition against SDF-1 in binding to cells bearing CXCR4.  Upon binding, CTCE-0214 induces a host of cellular activation responses, specifically mobilization of the cell.  In preclinical animal models, CTCE-0214 is effective in significantly raising the level of neutrophil, platelet and hematopoietic progenitor cells in the blood.  The lack of adverse effect towards blood cell and bone marrow cells demonstrates its low toxicity and good tolerability.  In addition, our animal model statistics have shown that our drug candidate may increase the benefits of Neupogen®, currently the main drug in use for immune system recovery.

One possible market for CTCE-0214 is for cancer patients undergoing myelosuppressive chemotherapy.  CTCE-0214 has the potential to restore infection-fighting neutrophils and platelets to prevent bleeding.  In this clinical scenario, patients might be able to receive aggressive chemotherapy by minimizing delays caused by infection, low white blood cell counts and/or low platelet counts.  We have discovered in a Phase I clinical trial in healthy human volunteers that CTCE-0214 injected in a single subcutaneous dose increased the number of neutrophils in the blood stream by approximately 300% over the number of neutrophils in the blood stream of the control.



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CTCE-0214 also has the potential to be used in stem cell mobilization indications and offers potential improvement compared to the currently available therapies. The results of our animal model hematological studies show that CTCE-0214 has a rapid mode of action, enabling the required increase of the stem cells, white blood cells and platelets within one hour.  Currently available treatments, if at all successful, require more time, typically a few days to a week.

Development of CTCE-0214

We have completed the pre-clinical work on CTCE-0214s efficacy and certain aspects of toxicology studies in support of initiation of a single dose Phase I study.  These studies included pivotal toxicology and safety studies in two animal species.

We initiated a Phase I clinical trial under a U.S.- Investigational New Drug application in Tacoma, Washington in the fourth quarter of 2004.  In June 2005, we announced preliminary results of this trial. The trial demonstrated that CTCE-0214 is associated with significant increases in total white blood cell and neutrophil counts in healthy volunteers treated at the highest dose. In the highest dose cohort, investigators observed up to a 300% increase in neutrophils compared to a placebo when measured from baseline within 6 hours of dosing (p<0.05) as well as a dose-dependent increase in neutrophil counts from baseline at 6, 12 and 24 hours after injection.  The primary objective of the Phase I study was to evaluate the safety of CTCE-0214, how it works in the body, as well as, how it is metabolized following a single subcutaneous injection. The randomized, double-blind, placebo-controlled dose-escalation trial enrolled 24 subjects in six dose-escalation groups. These tests indicated that no serious adverse events occurred in any of the dose levels studied. Common effects included injection site pain and erythema (injection site redness) which were transient and resolved without intervention.

The table below provides a summary of the CTCE-0214 clinical plan.



|Description                                                                                              | Clinical Phase                       | No. of Subjects | Duration         | Location(s)       
|-------------------------------------------------------------------------------------------------------- | ------------------------------------ | --------------- | ---------------- | ------------------
|Single-Dose Safety Study in Healthy Volunteers to Assess Safety and Preliminary Efficacy                 | I (Completed)                        | 24              | 6 months         | Tacoma, Washington
|Three Stage Single and Multi-Dose Study in Healthy Volunteers to Assess Safety and  Preliminary Efficacy | I (Commenced in 4th quarter of 2005) | approx. 50      | Approx. 9 months | Tacoma, Washington



If PPDI exercises its option to license CTCE-0214 after Phase I clinical trials, then PPDI would fund and carry out the Phase II and Phase III clinical trials. If PPDI does not exercise its option, then we will evaluate the feasibility of proceeding with, and funding a Phase II study internally, or with another partner.

Market Potential for CTCE-0214

CTCE-0214 is a potential therapy for patients with chemotherapy induced neutropenia and thrombocytopenia.  In addition, we will target other diseases or disorders that cause neutropenia or thrombocytopenia.  World-wide sales of neutropenia treatments in 2003 were approximately $3 billion and are projected to increase to over $4.5 billion by 2008 according to Business Communications Company, Inc.  Another potential application of CTCE-0214 is for enhancing stem cell mobilization from the bone marrow to the blood prior to blood transplantation.  In 2002, there were approximately 45,000 blood and marrow transplants world-wide, according to the International Bone Marrow Transplant Registry.



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The market for immune system recovery and stem cell mobilization is currently served by only a few products.  There is a strong need for products that have the potential to enhance the performance of the growth factors currently in use or provide additional resources in maintaining proper physiological responses in the body.

Competition for CTCE-0214

Although the FDA has approved a range of cytokine based drugs for stimulating blood cell recovery, we are not aware that the FDA has approved any chemokine based drug.

Stem Cells

Ex vivo.  Currently there are a number of cytokines, such as Neupogen® manufactured by Amgen, Inc., and stem cell factors and thrombopoietin that are used for ex vivo or out-of-the body stem cell expansion.  Since the ex vivo drug is not introduced into the body directly, the regulatory approval process follows that of a new device application rather than the more burdensome process required for a drug compound to be used in the body.

In vivo. The commonly used drug to elevate the number of stem cells in the blood in vivo or in-the-body is Neupogen®.  In a study conducted between 2000 and 2003, the drug was effective for 77% of patients, but in 23% of patients, it failed to mobilize sufficient stem cells after chemotherapy and Neupogen® treatment according to Transfusion, May 2004. There is a strong need for more efficacious products in this market.  There are some new drugs under development for this market. The most notable is AMD3100TM being developed by AnorMED Inc.  AMD3100TM has been shown to work in synergy with Neupogen® and increase the total number of transplantable stem cells. AMD3100TM is currently in clinical trials and we do not know when or if it might be approved.

CTCE-0214 does not work on the same target as Neupogen®, but focuses on a different part of the cell.  We hope to show that our drug will be more effective than currently available drugs.

Neutrophils

Neupogen®, approved in 1991, is approved for use in preventing infection in cancer patients undergoing chemotherapy treatment, in bone marrow transplant recovery, for use in severe chronic neutropenia (a rare white blood cell disorder) and for mobilization of peripheral blood progenitor cells for transplantation.  The limitations of Neupogen® include lack of rapid action and a relatively high failure rate due to lack of response of the drug in approximately one quarter of people.  The effect of the drug on the recovery of neutrophils is slow.  Usually the drug requires few days to a week to show some results.

Leukine®, manufactured by Berlex, Inc., is another product from the same class of cytokines as Neupogen®, and is used to stimulate neutrophil and monocyte progenitors, usually together with Neupogen®. Leukine® typically requires a few days to a week for mobilization. It has certain side effects and therefore is not used commonly.  As with Neupogen®, some portion of patients are non-responsive or become refractory.

Platelets

Platelets are small cellular fragments found in the blood that play a vital role in preventing bleeding. A low number of platelets, which is referred to as thrombocytopenia, leads to anemia, general fatigue and an inability to stop bleeding. Patients suffering from cancer and AIDS as well as those undergoing chemotherapy typically suffer from this condition. Patients with thrombocytopenia often receive platelet transfusions, in which healthy donor platelets are collected and transfused into the patient. However, multiple platelet transfusions are costly and associated with immune reactions. Patients can develop antibodies, making further transfusion of random donor platelets ineffective and requiring single donor platelets from compatible individuals. The transfused platelets are also sometimes underperforming platelets with a shortened life-span in circulation and unable to clot properly.



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We are aware of only one approved drug for increasing the number of platelets in the blood. Interleukin-11 (IL-11) is a thrombopoietic growth factor that is currently used in the application for increasing platelet production. The compound is marketed by Wyeth under the name Neumega®. We are investigating whether our compound CTCE-0214 will increase the level of circulating platelets more rapidly and with greater efficacy than Neumega®, and potentially be a more effective treatment for thrombocytopenia.

Other Drug Candidates

CTCE-0324

We believe, based on our research in animal models, CTCE-0324 increases the number of primitive stem cells, which have the potential to turn into the cells that comprise blood vessels.  Formation of the new blood vessels, known as angiogenesis or neovascularization, is a critical process in increasing blood supply to the areas of the body where vessels are occluded or have died.  Approximately 10 million Americans suffer from a condition referred to as peripheral arterial disease or PAD according to Medical Update - Shaping the Future of Medicine. This problem occurs most often in diabetics as well as elderly patients. The incidence of this disease increases with age. In western countries, approximately 5% of men aged 55-64 years and 3% of all women will have symptomatic PAD of the lower limbs. Out of this population, 30% have pain at rest with 5% to 10% requiring amputation in spite of treatment with medication, surgical bypass and angioplasty, according to The Practitioner, Western Countries: Lower Limb Occlusive Disease.

We are currently in the research and preclinical testing phase with CTCE-0324. We intend to carry out further animal testing of the compound to determine the potential of this agent for peripheral arterial disease.

Other CTCE Compounds

We are working with our compound CTCE-0422 for evaluation in infectious disease applications.  CTCE-0422 may have application in recruiting infection fighting cells.  We are also working with our compound CTCE-0501 for evaluation in patients afflicted with a stroke.  CTCE-0501 may have application in inhibiting platelet formation thereby preventing clots which can cause stroke.

Various Products Stage of Development

The chart below sets out our drug candidates and their respective stages of development:

|Product | Indication | Research/
Preclinical                                                                  | Phase I | Phase II | Phase III | Market
|------- | ---------- | -------------------------------------------------------------------------------------- | ------- | -------- | --------- | ------
|        |            |                                                                                        |         |          |           |       
|1.      | CTCE-9908  | Oncology- anti-metastasis                                                              |         |          |           |       
|        |            |                                                                                        |         |          |           |       
|2.      | CTCE-0214  | Hematological support; neutrophil and platelet regeneration and stem cell mobilization |         |          |           |       
|        |            |                                                                                        |         |          |           |       
|3.      | CTCE-0324  | Peripheral Arterial Disease                                                            |         |          |           |       
|        |            |                                                                                        |         |          |           |       
|4.      | CTCE-0422  | Infectious Disease                                                                     |         |          |           |       
|        |            |                                                                                        |         |          |           |       
|5.      | CTCE-0501  | Stroke                                                                                 |         |          |           |       



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Intellectual Property

We regard the protection of our intellectual property to be critical to the success of our business and accordingly, we actively seek patent protection for our intellectual property.  The following is a summary of our patents issued and pending in the United States (US), certain countries of Europe (EP), Australia (AU), Canada (CA), Japan (JP) and Brazil (BR):

|    | Patents Issued                                                                                                                                                             | Patent Applications(3)                                                            | Subject                                                                                                                                 
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------
|1.  | US 6,706,767 B2
Expires Jan. 22, 2021                                                                                                                                      |                                                                                   | Therapeutics for chemokine mediated diseases                                                                                            
|2.  | EP 1,286,684(1)(4):
UK 1,286,684(1)
FR 1,286,684(1)
DE 60,103,052(1)
Expiring May 9, 2021                                                                                  | CA 2,408,319(1)JP 2001-581,849(1)AU 2001258110(1)US 10/945,674 (1)                | CXCR4 antagonist treatment of hematopoeitic cells                                                                                       
|3.  | US 6,693,134
Expires Nov. 13, 2021                                                                                                                                         |                                                                                   | Bicyclic aromatic chemokine receptor ligands                                                                                            
|4.  | US 6,515,001
Expires Mar. 5, 2021                                                                                                                                          |                                                                                   | IL-8 receptor ligands-drugs for inflammatory
and autoimmune diseases                                                                    
|5.  | AU 762,472(2)
EP 1,061,944(2)(5):
FR 1,061,944(2)
UK 1,061,944(2)
IT 1,061,944(2)
DE 69,914,463(2)
US 6,946,445
Expiring Mar. 12, 2019
US 6,875,738
Expiring Aug. 16, 2019 | CA 2,322,764(2)JP 2000-536,397(2)                                                 | Therapeutic chemokine receptor antagonists                                                                                              
|6.  | EP 1,276,493(1)(5):
UK 1,276,493(1)
FR 1,276,493(1)
IT 1,276,493(1)
DE 60,106,0028(1)
AU 20012522081(1)
Expiring Apr. 12, 2021                                             | US 10/086,177(1)BR PI 0110049-1(1)CA 2,405,907(1)JP 2001-574,131(1)
AU 2005201244 | CXCR4 agonist treatment of hematopoietic
cells                                                                                          
|7.  |                                                                                                                                                                            | US 10/222,703                                                                     | Novel chemokine mimetics synthesis and their
use                                                                                        
|8.  |                                                                                                                                                                            | US 10/243,795                                                                     | Design of chemokine analogs for treatment of human diseases                                                                             
|9.  | US 6,831,101
Expires Nov. 13, 2021                                                                                                                                         |                                                                                   | Tricyclic terpenes of the family of abietic acid
as rantes inhibitor                                                                    
|10. |                                                                                                                                                                            | US 10/932,208                                                                     | Mimetics of Interleukin-8 and methods of
using them in the prevention, treatment, diagnosis, and ameliorization of symptoms of a disease
|11. |                                                                                                                                                                            | Application number not yet assigned (filed Jan. 4, 2006)                          | Design of CXC chemokine analogs for the treatment of human diseases                                                                     
|12. |                                                                                                                                                                            | US 60/735186                                                                      | Platelet Factor-4 (PF-4) analogs and their use                                                                                          

1.

Jointly owned by us and University of British Columbia, however we have obtained exclusive worldwide rights through a license agreement with University of British Columbia.

2.

Owned by University of British Columbia, however we have obtained exclusive worldwide rights through a license agreement with University of British Columbia.

3.

Patents have a life of 20 years from the filing date.

4.

This European patent has effect only in the United Kingdom (UK), France (FR) and Germany (DE).

5.

This European patent has effect only in the UK, FR, Italy (IT) and DE.



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As part of our confidentiality procedures, we enter into a non-disclosure and confidentiality agreement with each of our consultants, employees and specifically with any third party that would have access to our proprietary technology.

Manufacturing, Marketing and Distribution

We have not yet introduced any products and have no manufacturing, marketing or distribution capabilities.  If we develop products eligible for commercial sales, we intend to contract with third parties such as licensees, collaborators, joint venture partners or independent distributors to manufacture, market and distribute our products.

The Pharmaceutical Market

The pharmaceutical market in general has grown at rates above GDP growth.  According to IMS World Review 2005, audited pharmaceuticals sales grew at 7% in constant dollars to $550 billion in 2003.

Cytokines and cytokine targeted drugs are a class of drugs that are being developed by biotechnology companies.  The following table sets forth certain information, including approximate sales, for some well-known cytokines and peptide based drugs. At this time, we know of no chemokine-based drugs on the market.



| | Company           | Drug                 | Sales
(full year 2004)
(in Millions)
| | ----------------- | -------------------- | ------------------------------------
| | Amgen Inc.        | Epogen®              | $5,100                              
| | Aranesp®         
| | Neupogen®         | $2,900              
| | Neulasta®        
| | Enbrel®           | $1,900              
| | Biogen Inc.       | Avonex®              | $1,400                              
| | Chiron            | Betaseron®/Betaferon | $694(1)                             
| | Proleukin®        | $129                
| | Genentech         | Herceptin®           | $483                                
| | Rituxan®          | $1,711              
| | Avastin           | $555(2)             
| | Johnson & Johnson | Eprex/Procrit®       | $3,590                              
| | Schering AG       | Betaseron®/Betaferon | EURO782(1)                          
| | Serono            | Rebif®               | $1,091                              

(Sources Company SEC Filings. Cytokines, Chemokines and Growth Factors, December 2003, D&MD Publications)

(1)  Product sales and royalties.

(2)  Launched February 2004.



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Government Regulations

Regulation by government authorities in the United States and foreign countries is a significant factor in the research, development, manufacture, and marketing of our products.  Each of our product candidates will require regulatory approval before they can be commercialized.  In particular, human pharmaceutical products are subject to rigorous preclinical and clinical trials and other pre-market approval requirements by the FDA and other foreign authorities.  It often takes companies many years to satisfy these requirements, depending on the complexity and novelty of the product. The review process is also extensive which may delay the approval process even more.  As yet, we have not obtained any approvals to market our product candidates.  Further, our business is at risk that the FDA or any other regulatory agency will not grant us approval for any of our product candidates on a timely basis, if at all.  Even if regulatory clearances are obtained, a marketed product is subject to continual review, and later discovery of previously unknown problems may result in restrictions on marketing or withdrawal of the product from the market.

Clinical trials are conducted in accordance with certain standards under protocols that detail the objectives of the study, the parameters to be used to monitor safety, and the efficacy criteria to be evaluated. The phases of clinical studies may overlap. The designation of a clinical trial as being of a particular phase is not necessarily indicative that such a trial will be sufficient to satisfy the parameters of a particular phase, and a clinical trial may contain elements of more than one phase notwithstanding the designation of the trial as being of a particular phase.  Our business is at risk that the results of preclinical studies or early stage clinical trials will not predict long-term safety or efficacy of our compounds when they are tested or used more broadly in humans. Various federal and state statutes and regulations also govern or influence the research, manufacture, safety, labeling, storage, record keeping, marketing, transport, or other aspects of such products. The lengthy process of seeking these approvals and the compliance with applicable statutes and regulations require the expenditure of substantial resources. Any failure by us or any of our future collaborators or licensees to obtain, or any delay in obtaining, regulatory approvals could adversely affect the marketing of our product candidates and any other products and our ability to receive product or royalty revenue.

Employees

We are an early-stage biotechnology development company and, as of March 16, 2006, we had 22 full-time employees between Globe Laboratories Inc. (14), which provides research on our behalf, and us (8).  We also employ consultants on various projects from time to time.  We have entered into employment agreements with certain officers and key employees. No employees are covered by a collective bargaining agreement.

Available Information

Our Internet website address is www.chemokine.net.  We make available free of charge on this website our Annual Reports on Form 10-KSB, Quarterly Reports on Form 10-QSB, Current Reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission.

Risk Factors

An investment in our common shares must be considered highly speculative, generally because of the nature of our business and the general stage of its development.  In addition to the usual risks associated with investment in a business, potential investors should carefully review the following factors together with the other information contained in this annual report before making an investment decision.  The risks described below are not the only ones facing us.  If any of the following risks actually occur, our business, financial condition and operating results could be materially affected.



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Risks Related to Our Industry

Because the manufacture and marketing of human pharmaceutical products requires the approval of the Food and Drug Administration in the United States and similar agencies in other countries, and since we do not yet have such approval, shareholders are at risk that we will be unable to successfully develop and market our products.  We have not yet established that our products will be safe and effective through clinical trials.

The manufacture and marketing of human pharmaceutical products in the United States, Canada and other countries, require the approval from the United States Food and Drug Administration, the Canadian Therapeutic Products Directorate and other similar foreign regulatory agencies.  The process that our pharmaceutical product candidates must undergo to obtain these approvals includes preclinical testing and clinical trials to demonstrate safety and efficacy.  Such process is expensive and time consuming.  Investors are at risk that we will be unable to successfully develop future products, prove safety and effectiveness in clinical trials, or receive applicable regulatory approvals.

We have no experience in manufacturing pharmaceuticals and the applicable good manufacturing practice regulations for the manufacture of our products.  These regulations include requirements relating to quality control, quality assurance and maintenance of records and documentation. If we cannot establish and demonstrate the proper manufacturing techniques and controls, whether by us or by a qualified manufacturer, we will not receive regulatory approval to manufacture and market our products.

Regulatory authorities have the power to withdraw a previously approved product from the market upon a change in regulations or upon receipt of newly discovered information and/or require additional, and potentially expensive, additional testing.  Since we have no history with our products, we might face such newly discovered information that comes to light after initial approval of our products.

Unanticipated changes in existing regulations or the adoption of new regulations could adversely affect the development, manufacture and marketing of our products.  Since we have no operating history, ongoing government regulation could cause unexpected delays and adversely impact our business in areas where our inexperience might lead to failure in complying with applicable requirements.  Such failure to comply might also result in criminal prosecution, civil penalties, recall or seizure of products, or partial or total suspension of production.  Any of these penalties could delay or prevent the promotion, marketing or sale of our products. Furthermore, the laws, regulations, policies or current administrative practices of any governmental body, organization or regulatory agency in the United States, Canada or any other jurisdiction, might be changed, or applied or interpreted in a manner which will fundamentally alter the ability of us or our collaborative partners to develop, operate, export or market the products or services which we may provide. We do not have lobbying or other resources to affect the course of such changes. If such future changes have an adverse impact on our products or their manufacture and marketing, the likelihood of our success could be damaged.

We are engaged in a rapidly changing field characterized by intense competition that we expect to increase. Since we are a small company with limited financial resources, and many of our competitors have products that have been approved or are in development and operate large, well-funded discovery and development programs, we will experience a competitive disadvantage.

We are engaged in a rapidly changing field characterized by rapid technological change, new and improved product introductions, changes in regulatory requirements and evolving industry standards.  Other products and therapies that will compete directly with the products that we are seeking to develop currently exist or are being developed.  We expect competition from fully integrated pharmaceutical companies and more established biotechnology companies to be intense and to increase.  These companies have significantly greater financial resources and expertise in discovery and development, manufacturing, preclinical and clinical testing, obtaining regulatory approvals and marketing than we do.  Many of our competitors have products that have been approved or are in development and operate large, well-funded discovery and development programs.  Academic institutions, governmental agencies and other public and private research organizations also conduct research, seek patent protection and establish collaborative arrangements for therapeutic products and clinical development and marketing. We have none of these resources.  In addition, we will face competition based on product efficacy and safety, the timing and scope of regulatory approvals, availability of supply, marketing and sales capability, reimbursement coverage, pricing and barriers from patent positions of larger companies. We do not have any experience in these areas at this time and therefore we are at a competitive disadvantage.



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If our competitors succeed in developing competing products earlier than we do, in obtaining regulatory approvals for such products more rapidly than we do, or in developing products that are more effective or less expensive than the products we develop, we will have difficulty competing with them.

Since our competitors keep this type of information confidential, we do not know where they stand in developing competing products. As a result, we might be using our resources, to develop products that will face such competition from our competitors and our products might not be successful in the marketplace. Our future success depends on our ability to timely identify new market trends and develop, introduce and support new and enhanced products on a successful and timely basis.  We might not be successful in developing or introducing to the market our products.  If we fail to develop and deploy new products on a successful and timely basis, we will be non-competitive and unable to recoup the research and development and other expenses we incur to develop and test new product candidates.

Even if our products are approved for sale by the regulatory authorities, we have not yet demonstrated their market acceptance and they might not gain market acceptance among physicians, patients, healthcare payers and the medical community.

The degree of market acceptance will depend on a number of factors, including:

·

demonstration of the clinical efficacy and safety of the products;

·

cost-effectiveness;

·

potential advantage over alternative treatment methods;

·

the effectiveness of marketing and distribution support for the products; and

·

reimbursement policies of government and third party payers.

If our product candidates do not achieve significant market acceptance, our business and financial condition will be materially adversely affected.

Our products may become technologically obsolete.

We have developed a particular skill in creating chemokine based product candidates. Biotechnology and related pharmaceutical technology are subject to rapid and significant change. Our success will depend in large part on our ability to maintain a competitive position with respect to our chemokine products in comparison to technologies that might be developed.  If we are unsuccessful in our ongoing development activities, our current compounds, products or processes that we develop may become obsolete before we recover any expenses incurred in connection with the development of these product candidates.

Our success may depend in part on the extent to which reimbursement for the cost of our products will be available from government health administration authorities, private health coverage insurers and other organizations, since potential customers might not use our products if such reimbursement is not available.

At the present time, we have not established that such governmental authorities or non-governmental providers will reimburse physicians and patients for the use of our products. Recently, the prices of medical products and services have increasingly been examined and challenged by third parties and consumers of such products and services.  We anticipate that new federal or state legislation will be proposed to attempt to provide broader and better health care and to manage and contain costs.  Since we have not yet established reimbursement coverage, we face significant uncertainty as to the reimbursement status of newly approved health-care products and whether third party reimbursement will be available at price levels sufficient for us to realize our desired returns.

Since we will be administering our products in human clinical trials and thereafter to patients, we will be subject to potential product liability risks which are inherent in the testing, manufacturing, marketing and sale of therapeutic products.



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Our clinical studies include trials on humans.  These studies create a risk of liability for serious side effects to participants resulting from an adverse reaction to the products being tested or resulting from negligence or misconduct and the associated adverse publicity.  We manage our liability risks by trying to follow proper protocols and through product liability insurance. We currently purchase liability insurance for clinical trials at the time we begin such trials. At the present moment, we have liability coverage limits of $3,000,000.  Such insurance is expensive and difficult to obtain. In the future, insurance coverage might not be available to us on acceptable terms, if at all.  If we are unable to obtain sufficient insurance coverage on reasonable terms or to otherwise protect against potential product liability claims we might not be able to commercialize our products.  If we face a future product liability claim or a product withdrawal, we will suffer a material adverse effect on our financial condition.

Our discovery and development processes involve the controlled use of hazardous and radioactive materials, which are subject to certain laws and regulations.  We cannot eliminate the risk of accidental contamination or injury from these materials.

We are subject to federal, provincial and local laws and regulations governing the use, manufacture, storage, handling and disposal of such materials and certain waste products.  We cannot eliminate the risk of accidental contamination or injury from these materials.  If such an accident occurs, we might be held liable for any damages that result and any such liability could exceed our resources.  We are not specifically insured with respect to this liability.

Risks Related to Our History or to Our Business

Since we are at an early stage of development, we have not completed the development of any product and we have not begun to market or generate revenues. We do not anticipate generating any revenue in the foreseeable future. If we are unsuccessful in completing the developing and marketing of our products, our securities will be worthless.

We were founded in 1998 and are at an early stage of development.  Our operations to date have consisted primarily of developing and testing our products.  Our products will require significant additional clinical testing and investment prior to commercialization.  A commitment of substantial resources by us and/or future collaborative partners to conduct time-consuming research and clinical trials will be required if we are to complete the development of our portfolio of products.  None of our products has yet met applicable regulatory standards, has received regulatory approvals, has been produced in commercial quantities at reasonable costs or has been successfully marketed. We do not know if we will be able to complete these tasks. Even if one or more of our products should be approved by the regulatory authorities, the approval may not be for the treatment of a disease whose market is large enough to recoup our investment in that product.  We do not expect any of our products to be commercially available for several years. Accordingly, we do not know if and when we will generate revenues from our products. Because of these uncertainties, we might never generate enough revenue to allow shareholders to recoup and profit from their investment.

Since we have a history of operating losses and expect expenses and losses to increase in the near term, we do not know if we will ever become profitable or that our investors will ever recoup or profit from their investment in our shares.

From the date of incorporation to December 31, 2005, our accumulated losses are approximately $17.0 million.  Since inception we have earned no revenues from the sale of any of our product candidates.  We expect expenses and losses to increase in the near term as we fund research and development and general and administrative expenses.  We expect to continue to incur substantial operating losses unless and until product sales and royalty payments generate sufficient revenues to fund continuing operations. As a result, investors might never recoup their investment or profit from their investment in our shares.

Since our success is dependent on the commencement and completion of clinical trials, regulatory approval and introduction of our products into the market, and since we have completed none of the tasks at this time, we do not know if we will be able to complete them.



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The actual timing of these events can vary dramatically due to factors such as delays or failures in our clinical trials, the uncertainties inherent in the regulatory approval process, and the inability to establish on favorable terms the collaborative partnerships that we plan to use for the completion of Phase III clinical trials and the marketing and manufacturing of our product candidates.  We might not be able to complete the clinical trials involving CTCE-9908, CTCE-0214 or any other product candidates, to make the necessary regulatory submissions, or to gain regulatory approvals necessary for marketing our products. Our failure to achieve these objectives will mean that investors will not be able to recoup their investment or to receive a profit on their investment.

We will continue to require substantial additional funds for further research and development, planned clinical trials and regulatory approvals.  We might not be able to obtain additional funding on acceptable terms if at all. Without additional funding, we will fail.

Since inception to December 31, 2005, we have raised approximately $21.8 million, net of offering costs, from the sale of equity securities, including proceeds from our initial public offering in December 2004.  Although we believe our current resources and the funds raised through our private placement completed in March 2006 will provide funds for our operations through June 30, 2007, we will require substantial additional funds for further research and development, planned clinical trials and regulatory approvals.  Our planned cash requirements may vary materially in response to a number of factors, including research and development on our products, clinical trial results, changes in any aspect of the regulatory process, and delays in obtaining regulatory approvals. We may seek further funding through public or private equity or debt financings, collaborative arrangements with pharmaceutical companies or from other sources.  Further equity financings may substantially dilute shareholders investment in our shares. If we cannot obtain the required additional funding, then investors will not be able to recoup their investment or to profit from their investment.

Since we rely substantially on our ability to patent our intellectual property or maintain our proprietary information as trade secrets in developing our products, our success will depend on our ability to obtain patents, maintain trade secret protection and operate without infringing on the proprietary rights of third parties or preventing third parties from circumventing our rights. As described below, there is considerable uncertainty about our intellectual property rights. If we are unsuccessful in establishing the validity of our intellectual property rights, we will likely fail as a company and our securities will be worthless.

The steps we have taken to protect our intellectual property may not prevent the misappropriation of our proprietary information and technologies.  We have filed and are actively pursuing applications for U.S., Canadian and foreign patents.  The patent positions of biotechnology and pharmaceutical companies can be highly uncertain and involve complex legal and factual questions.  We are uncertain whether:

·

any of our patent applications will result in the issuance of patents;

·

we will develop additional proprietary products that are patentable;

·

any patents issued to us or those that already have been issued will provide us with any competitive advantages;

·

we will be challenged by third parties on the validity of our patents;

·

the patents of others will impede our ability to do business;

·

third parties will be able to circumvent our patents;

·

third parties will independently develop similar products that will not infringe our products;

·

third parties will duplicate any of our products not covered by a patent; or

·

third parties will design around our patents.

A number of pharmaceutical and biotechnology companies and research and academic institutions have developed technologies, filed patent applications or received patents on various technologies that may be related to or affect our business.  Some of these technologies, applications or patents may conflict with our technologies or patent applications.  Such conflict could limit the scope of the patents, if any, that we may be able to obtain or result in the denial of our patent applications.  In addition, if patents that cover our activities are issued to other companies, we might not be able to obtain licenses to these patents at a reasonable cost or be able to develop or obtain alternative technology.  If such licenses are not obtained, we could encounter delays in the introduction of products or find that the development, manufacture or sale of products requiring such licenses could be prohibited.  There is a substantial amount of litigation over patent and other intellectual property rights in the pharmaceutical industry generally.  Infringement and other intellectual property claims, with or without merit, can be expensive and time-consuming to litigate and would divert resources from our core business. If we are faced with challenges or litigation, we might not have the financial resources to defend our rights.



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Since patent applications in the United States are maintained in secrecy until the patent is issued or foreign counterparts, if any, published and, since publication of discoveries in the scientific or patent literature often lag behind actual discoveries, we do not know if there are currently pending applications that would result in issued patents that would interfere with our products. Moreover, we might have to participate in interference proceedings declared by the U.S. Patent and Trademark Office to determine priority of invention, which could result in substantial cost to us, even if the eventual outcome is favourable to us.

Much of our know-how and technology might not be patentable.  To protect our rights, we require employees, consultants, advisors and collaborators to enter into confidentiality agreements.  However, these agreements might not provide meaningful protection for trade secrets, know-how or other proprietary information in the event of any unauthorized use or disclosure.

We intend to enter into various arrangements with corporate and academic collaborators, licensors, licensees and others for the research, development, clinical testing, manufacturing, marketing and commercialization of our products. We will not have control over how they perform their contractual obligations. Accordingly, we will suffer if they do not fulfill their contractual obligations.

For example, Pharmaceutical Product Development, Inc. has invested in our preferred shares and, on a fee-for-services basis, managed certain preclinical trials and preparation of our Investigational New Drug application of our product candidate, CTCE-0214.  We may enter into additional corporate agreements to develop and commercialize product candidates. We might not be able to establish such additional collaborations on favourable terms, if at all, or guarantee that our current or future collaborative arrangements will be successful.  In addition, third party arrangements may require us to grant certain rights to third parties, including exclusive marketing rights to one or more products, or may have other terms that are burdensome to us.

These arrangements may place responsibility on our collaborative partners for Phase III clinical trials, human clinical trials, the preparation and submission of applications for regulatory approval, or for marketing, sales and distribution support for product commercialization.  These third parties might not fulfill their obligations in a manner which maximizes our revenues.  These arrangements may also require us to transfer certain material rights or issue equity securities to corporate investors, licensees and others.  If we license or sublicense our commercial rights to others, as we intend to do, we might realize reduced product revenue compared to our direct commercial exploitation.  Moreover, we might not derive any revenue or profit from these arrangements.  In addition, our current strategic arrangements might not continue.  Collaborators might also pursue alternative technologies or drug candidates, either on their own or in collaboration with others, and compete directly with us.

In addition, we have no direct experience in marketing, sales or distribution, and we do not intend to develop a sales and marketing infrastructure to commercialize pharmaceutical products.  If we develop products eligible for commercial sales, we intend to rely on third parties such as licensees, collaborators, joint venture partners or independent distributors to market and sell these products.  We might not be able to obtain access to a marketing and sales force with sufficient technical expertise and distribution capability.  We also will not be able to control the resources and effort that a third party will devote to marketing our product candidates.  If we are unable to develop and maintain relationships with third parties with the necessary marketing and sales force, we may fail to gain market acceptance of our product candidates, and our revenues could be impaired.

We are dependent on Dr. Hassan Salari and the loss of his services will adversely impact the achievement of our objectives.

Dr. Hassan Salari has the scientific knowledge and research expertise in the field of chemokines and cytokines on which we depend for direction in developing our drug candidates. Dr. Salari has the reputation and respect required in the scientific and business community that we need in order to attract investors, customers, joint venturers, and strategic partners. If we were to lose his services, the probability of achieving our business and scientific objectives would be severely diminished.



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We must manage our growth effectively in order to keep pace with the market and with customer demand. If we are unable to do so, we will fail.

This growth might place significant strains on our management, financial position, sales and other employees and on our internal systems and controls.  If we are unable to effectively manage our growth, our business, financial condition and results of operations will be materially and adversely affected.

Since Dr. Hassan Salari is indirectly a large beneficial shareholder and has significant influence over our business and affairs, the election of our directors and the outcome of most corporate actions requiring shareholder approval, shareholders will have diminished influence on our management and our business decisions.

Dr. Hassan Salari is, indirectly, a significant shareholder, President and Chief Executive Officer.  Dr. Salaris family currently is the beneficial owner of 6,247,101 common shares held by Pacific Medical Corp., which represents approximately 17.9% of our voting common shares and voting series A preferred shares as of March 10, 2006.  Consequently, Dr. Salari has significant influence over our business and affairs, the election of our directors and over determining the outcome of most corporate actions requiring shareholder approval, including any merger, acquisition, consolidation or sale of all or substantially all of our assets. If he makes inappropriate decisions, our shareholders will suffer a decline in the value of their shares.

Sales of our common shares which are presently owned by our directors and officers could reduce the market price of our common shares when the resale restrictions expire.

Dr. Salari and other directors and officers own approximately 18.0% of our outstanding voting shares. The common shares controlled by Dr. Salari and other directors and officers are subject to escrow and or other restrictions on resale.  At the completion of our initial public offering, there were a total of 6,247,101 common shares subject to the escrow requirements of Canadian National Policy 46-201 or approximately 17.9% of our outstanding voting shares.  On December 30, 2004, after the listing of the common shares for trading on the Toronto Stock Exchange as an established issuer, as defined in NP46-201, 25% of the common shares held in escrow were released from escrow and 25% were released on June 30, 2005 and on December 30, 2005 and 25% will be released on June 30, 2006.  In addition, a total of 6,000,001 common shares held by Pacific Medical Corp., a company of which Dr. Hassan Salari is one of the beneficial owners, may be sold under Rule 144 subject to their release from escrow and volume limitations in any three month period of the higher of (i) 1% of our total issued and outstanding common shares; and (ii) the weekly trading volume for the four weeks preceding the sale, as long as Pacific Medical Corp. holds greater than 10% of our issued and outstanding common shares or Dr. Hassan Salari is an affiliate of us.  Once the restrictions fall away, Dr. Salari and our directors and officers may sell their shares in the market.  If Dr. Salari and our directors and officers sell substantial amounts of shares upon release from escrow, the market price of our common shares will decline.  The interests of our current management might conflict with shareholders interests.  Accordingly, if they sell their shares, the price of shareholders shares might decline.

Our common shares are listed on the Toronto Stock Exchange and not on any U.S. exchange.

Our common stock is listed on the Toronto Stock Exchange (TSX) and not on any exchange in the United States. Accordingly, investors in the United States may find it more difficult to buy and sell shares than if our common shares were traded in the United States. Furthermore, we do not currently meet the listing standards for the NASDAQ stock exchange, the New York Stock Exchange and the American Stock Exchange and do not know when or if we will ever meet such listing standards. Accordingly our common shares might have less liquidity than if our common shares were listed on such exchanges.  Although our common shares have been approved for inclusion on the OTC Bulletin Board, the securities have been thinly traded, and there can be no assurance that a more fluid trading market for the securities will develop or that, if developed, it will be sustained.  The OTC Bulletin Board is an unorganized, inter-dealer, over-the-counter market which provides significantly less liquidity than the NASDAQ Stock Market, and quotes for stocks included on the OTC Bulletin Board are not listed in the financial sections of newspapers as are those for the NASDAQ Stock Market. Therefore, prices for securities traded solely on the OTC Bulletin Board may be difficult to obtain and purchasers of our shares may be unable to resell the securities at or near their original price or at any price.  Although we are listed in Mergents Manuals and our shares qualify for secondary trading in numerous states in the United States, only a limited trading market has yet developed as a result of such listing and qualifications. We are uncertain whether a robust trading market in our shares will develop in the United States.



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Penny stock regulations of the SEC may impose certain restrictions on marketability of our shares. Accordingly, investors might not be able to sell their shares as easily or for the price that would be available to them if these restrictions did not apply.

The Securities and Exchange Commission has adopted regulations which generally define a "penny stock" to be any equity security that has a market price of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions.  As a result, additional sales practice requirements apply to United States broker-dealers who sell our securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000 or annual income exceeding $200,000, or $300,000 together with their spouse). For transactions covered by such rules, the broker-dealer must make a special suitability determination for the purchase of such securities and have received the purchaser's written consent to the transaction prior to the purchase.  These rules require, among other things, that a broker engaging in a transaction in our securities provide its customers with:

·

a standardized risk disclosure document;

·

current quotations or similar price information;

·

disclosure of the amount of compensation or other remuneration received by the broker and its sales persons as a result of the penny stock transactions; and

·

monthly account statements.

As a result of these additional sales practice and disclosure requirements, fewer broker/dealers may be willing to make a market in our common shares.  Consequently, investors may be unable to resell their common shares in the United States.

Overhang of common shares on the exercise of warrants and the sale of common shares by the selling shareholders could depress our stock price. The potential future sale of large amounts of common shares might depress the market price of our common shares. The common shares that might be sold in the future were issued in a series of private transactions.

On May 6, 2004, we completed a Regulation S offering of 1,697,715 units with each unit consisting of one common share and one share purchase warrant.  In addition we issued to Canaccord Capital Corporation (Canaccord) 528,977 common shares and 664,794 warrants to purchase common shares as compensation in the Regulation S offering.  Each warrant entitles the holder thereof to purchase an additional common share at a price of CDN$1.00 until May 6, 2006.

Our registration statement that became effective on December 17, 2004, and amended on April 22, 2005, covers the offer and sale from time to time of the common shares issued to the investors in the Regulation S offering and the common shares to be issued upon the exercise of the share purchase warrants issued to the investors in the Regulation S offering.  The maximum number of common shares that may be resold by these investors or selling shareholders pursuant to the registration statement is 2,226,692 common shares directly owned. In addition, the selling shareholders and Canaccord may exercise their warrants for our common shares at any time through May 6, 2006, and resell such shares pursuant to the prospectus contained in the registration statement.  The total number of common shares subject to such warrants is 2,362,509.  Further, we issued to Canaccord, one of our agents in our initial public offering, in connection with our public offering, 100,000 common shares. In connection with our initial public offering, we also issued to our selling agents warrants to purchase a maximum of 1,472,000 common shares. We have registered the common shares underlying the warrants for resale by the warrant holders, and they may resell such common shares at anytime and in compliance with the then applicable laws and regulations.  We intend to keep such registration statement current through May 6, 2006. If it is not kept current, then the shareholders will not be able to sell their shares unless an exemption from registration is available.

The selling shareholders have indicated that they are acting independently of us in determining the manner and extent of sales of the common shares and warrants included in this offering.  We will receive none of the proceeds of such sales.  Selling shareholders have exercised 1,042,586 warrants as of March 10, 2006.

Such sales of our common shares and warrants by the selling shareholders, and by other existing shareholders, or the perception that those sales may occur, could cause the trading price of our stock to decrease or to be lower than it might be in the absence of those sales or perceptions.



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Pharmaceutical Product Development, Inc. holds 2,000,000 series A preferred shares that are superior to shares of common stock. These preferred shares may be converted at any time into common shares, thus diluting the common shares.

Each series A preferred share is convertible into one common share.  Accordingly, our common shares are subject to the preferences of 2,000,000 of the series A preferred shares.  The series A preferred shares are entitled to equal dividends with our common shares.  The series A preferred shares have a liquidation preference of $1.35 per series A preferred share.  Accordingly, if we are liquidated, the holders of common shares will be at risk that their return in any liquidation will be diluted by the preferred distributions to the series A preferred shareholders. Further, if the preferred shares are converted into common shares, the common shareholders will be subject to dilution.

Our stock price is likely to be volatile and could drop unexpectedly. As a result, we might be subject to lawsuits.

Our common shares have been publicly traded only since December 2004. We only have 32,889,792 common shares outstanding as of March 10, 2006, and our common stock is thinly traded. For example, in the five business days prior to March 10, 2006, the average daily trading volume of our common stock was 34,540 on the Toronto Stock Exchange and 11,920 on the OTCBB. The market price of our common stock could become subject to significant fluctuations. The stock market has from time to time experienced significant price and volume fluctuations that have affected the market prices of securities, particularly securities of technology companies. As a result, the market price of our common stock may materially decline, regardless of our operating performance. In the past, following periods of volatility in the market price of a particular companys securities, securities class action litigation has often been brought against that company. We may become involved in this type of litigation in the future. Litigation of this type is often expensive and diverts managements attention and resources.

Special note regarding forward-looking statements

This annual report contains forward-looking statements that reflect our current views with respect to future events and financial performance. In some cases, shareholders can identify forward-looking statements by words like believe, expect, estimate, anticipate, intend, project, plan, may, should, potential and continue.

These forward-looking statements include, among other things, statements relating to:

·

our anticipated business strategies;

·

our pending and anticipated clinical trials;

·

our intention to introduce new product candidates;

·

our relationships with third parties, including manufacturers, clinical research organizations, collaborative partners, contract sales organizations and suppliers;

·

anticipated trends in our business;

·

sufficiency of resources to fund operating and capital requirements;

·

operating cash burn rates;

·

future capital expenditures; and

·

our ability to conduct clinical trials and obtain regulatory approval.

The forward-looking statements included in this annual report are subject to risks, uncertainties and assumptions about us.  Our actual results of operations may differ materially from the forward-looking statements as a result of, among other things, the success or failure of our clinical trials, the speed at which our clinical trials progress, the success of our competitors in developing products equal or superior to ours and the timing of their development of such products, the success of our collaborative relationships and the other reasons described under "Risk Factors".  Except for our ongoing obligations to disclose material information under applicable securities laws, we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law.  In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this annual report might not occur.



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ITEM 2.

DESCRIPTION OF PROPERTY

We lease our laboratory and office facilities in Vancouver, B.C., under operating leases which expire at various dates ending July 31, 2008. As of December 31, 2005, we are obligated to make minimum lease payments totaling $221,000 to the end of July 2008.



We do not own any real estate property. We own very little tangible personal property, since we lease our space. Further we are paying to use some University of British Columbia equipment and facilities, including animal facilities. Other than our intellectual property, we own little property that has substantial value.

ITEM 3.

LEGAL PROCEEDINGS

We are not party to any pending litigation and, to the best of our knowledge, no litigation against us is contemplated or threatened.

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On May 10, 2005, we held our annual shareholders meeting. Our shareholders elected Dr. Hassan Salari, Michael Evans, Matthias Kurth, John Osth and C. Richard Piazza as directors to serve for the next year and until their successors are elected and qualified. The shareholders voted for these directors as follows: Dr. Salari received 17,986,051 votes; Mr. Evans received 18,011,051 votes; Mr. Kurth received 18,011,051 votes; Mr. Osth received 18,011,051 votes; and Mr. Piazza received 18,011,051 votes. 492,890 votes were withheld from each of Messrs Evans, Kurth, Osth and Piazza, who were elected. 517,890 votes were withheld from Dr. Salari, who was elected.

In addition, our shareholders voted to increase the authorized shares of stock, par value $0.001 per share, of the Company from 56,000,000 shares of stock to 106,000,000 shares of stock, consisting of 100,000,000 shares of common stock and 6,000,000 shares of preferred stock. 16,948,093 shares voted for the increase in authorized shares.



PART II



ITEM 5.

MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information

Our common stock has traded on the Toronto Stock Exchange under the ticker symbol CTI since December 30, 2004.  Prior to that time, there was no public market for our common stock. The table below lists the quarterly high and low closing sales prices for our common stock as reported by the Toronto Stock Exchange for the periods indicated. As of March 16, 2006, the closing sale price for our common stock was CDN$1.25 per share.



|               | High
(CDN$) |  | Low
(CDN$)
|-------------- | ----------- |  | ----------
|2004           |             |  |           
|Fourth Quarter | 1.05        |  | 1.00      
|2005           |             |  |           
|First Quarter  | 1.50        |  | 0.98      
|Second Quarter | 1.30        |  | 0.95      
|Third Quarter  | 1.43        |  | 0.89      
|Fourth Quarter | 1.35        |  | 1.03      
|               |             |  |           



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Holders

On March 16, 2006, there were approximately 154 shareholders of record of our common stock. This number does not include beneficial owners of our shares whose shares are held in street name by broker-dealers.

Dividends

We have not declared any cash dividends, nor do we intend to at this time. We are not subject to any legal restrictions respecting the payment of dividends, except that we may not pay dividends if the payment would render us insolvent. Our future dividend policy will be based on our cash resources and needs. We do not anticipate declaring dividends for the foreseeable future, as we anticipate that all our available cash will be needed for our operations.

Recent Sales of Unregistered Securities

We have financed our research and development activities, and our general business operations through the private issuance of securities under Section 4(2) of the Securities Act of 1933, as amended (the Securities Act), under Regulation S as promulgated by the Securities and Exchange Commission, and under Rule 701 as promulgated by the Securities and Exchange Commission. We describe below all the securities we have sold from January 1, 2003, through December 31, 2005 without registering the shares under the Securities Act.

From May 2003 through March 2004, we issued 769,184 common shares in a private placement at a prices ranging from $1.25 to $1.35 per share, receiving $979,000 in proceeds. We did not engage any underwriter. We sold our shares to accredited investors only. We relied on the exemption from registration contained in Section 4(2) of the Securities Act. In this private placement, we relied on the exemptions under Rule 506 of Regulation D as promulgated by the Securities and Exchange Commission and Section 4(2) of the Securities Act. Several days before we would accept a subscription from an investor, we gave each investor an opportunity to ask questions of and to receive answers from us and our officers and directors concerning the terms and conditions of each Regulation D offering.  We provided the investors all of the information they requested. In conducting the offerings under Regulation D, we did not use any form of general solicitation or general advertising.  The investors were personal acquaintances of our officers and directors, or were referred to us by such acquaintances. We informed each investor that the sale of securities was a "private placement" and that the common shares may not be resold without registration under the Securities Act unless there is an exemption from registration available.  We required each investor to complete a subscription agreement and questionnaire. We used these documents to determine that each investor was an accredited investor. These documents also establish that each investor purchased the securities for his own investment and not with a view to resale or further distribution.  The investor acknowledged that our common shares had not been registered under the Securities Act and may not be resold without registration under the Securities Act unless there is an exemption from registration available. We placed a legend on each certificate stating that the shares represented by the certificate had not been registered and that the shares could not be resold without registration under the Securities Act unless there is an exemption from registration available.  Accordingly, we believe that each offering complied with the requirements of Rule 506 of Regulation D and Section 4(2) of the Securities Act, and that if the offerings were deemed to be one integrated offering, the integrated offering as a whole has been in compliance with Rule 506 of Regulation D and Section 4(2) of the Securities Act.

In May 2004, we issued 1,697,715 units at a price of CDN$0.70 per unit for gross proceeds of CDN$1,188,400 in a Regulation S offering. Each Unit was comprised of one common share and one share purchase warrant. Each such warrant entitles the holder thereof to purchase an additional common share at a price of CDN$1.00 for a period of 24 months after the closing date of the Regulation S offering. We conducted this Regulation S offering in Canada with the assistance of Canaccord Capital Corporation, a Canadian broker-dealer. Each investor in this offering is a Canadian resident. Each share certificate contains a legend that the securities are restricted and may not be resold unless the shares are registered or an exemption from registration is available. The agency agreement between Canaccord and us, and each subscription agreement executed by an investor, includes the provisions required by Regulation S so that the offering would comply with Regulation S.



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In connection with the May 2004 Regulation S offering, we paid a commission to Canaccord of 8%, paid in cash, CDN$4,788, and by the issuance of 128,977 units and we granted 135,817 Agent's warrants to Canaccord, equal to 8% of that number of units sold. Each such warrant entitles Canaccord to purchase one common share at a price of CDN$1.00 per common share for a period of 24 months from May 6, 2004. We also paid a corporate finance fee to Canaccord consisting of 400,000 units.

From June 2004 through November 2004, we issued 30,000 common shares to David Karp, our chief financial officer, as compensation for services rendered to us.  The shares bear a legend restricting the transfer of the shares unless the shares are registered or unless and exemption is available. This issuance was exempt under Rule 701.

In 2004, we granted options to purchase up to 1,840,000 shares of common stock to 8 optionees in reliance on the exemption provided under Rule 701.  These options have an exercise price of CDN$1.00 per share, expire five years from date of grant and vest monthly, over a period of two years from the date of grant.

In December 2004 we issued 247,100 shares of common stock to Pacific Medical Corp. for settlement of $200,000 owing to Pacific Medical Corp.  The shares were issued at the close of our initial public offering and were priced at the offering price of CDN$1.00 ($0.81) per share.  The shares were issued in reliance on the exemption set forth in Section 4(2) of the Securities Act.

In connection with our initial public offering pursuant to our registration statement that became effective on December 17, 2004, we issued warrants to our selling agents for the purchase of 1,472,000 shares of our common stock with an exercise price of CDN$1.00 per share, expiring on June 30, 2006. We issued these securities pursuant to the exemption from registration set forth in Section 4(2) of the Securities Act.

Concurrent with our initial public offering, we renegotiated our agreements with Pharmaceutical Product Development, Inc., and issued warrants to Pharmaceutical Product Development, Inc. for purchase of 500,000 common shares, at a price equal to the initial public offering price.

In connection with our initial public offering pursuant to our registration statement that became effective on December 17, 2004, we issued 100,000 common shares to Canaccord Capital Corporation as a corporate finance fee, and we issued 60,000 warrants for the purchase of 60,000 common shares with an exercise price of CDN$1.00 per share, exercisable for eighteen months to The Equicom Group, Inc., as compensation for investor relations consulting. We issued these securities pursuant to the exemption from registration set forth in Section 4(2) of the Securities Act.

In February 2005, we issued to Strategic Growth International, Inc. options to purchase 400,000 shares of common stock at $1.00 per share, exercisable for a period of 60 months, as consideration for services to us. We issued these securities pursuant to the exemption from registration set forth in Section 4(2) of the Securities Act.  On July 11, 2005, we terminated our agreement with Strategic Growth International, Inc. and 320,000 options were cancelled.

Small Business Issuer Purchases of Equity Securities

We did not purchase any of our equity securities during the year ended December 31, 2005.

Use of Proceeds from Sales of Registered Securities

On December 17, 2004, our registration statement on Form SB-2 (Registration No. 333-117858) was declared effective for our initial public offering, pursuant to which we registered up to 16,000,000 shares of common stock to be sold by us, and an additional 2,400,000 shares subject to an over-allotment or greenshoe option if there were sufficient demand for our common stock.  We also registered 5,089,201 common shares for sale by our shareholders. The selling shareholders may from time to time offer and sell all or a portion of their shares. We will not receive any of the proceeds from the shares sold by the selling shareholders.  The common stock was offered at a price of CDN$1.00 per share.  The offering was offered on a commercially reasonable efforts basis.  The offering closed on December 30, 2004, after the sale of a total of 16,000,000 shares of our common stock and the greenshoe was exercised, in full, on January 31, 2005. Gross proceeds of the offering including the greenshoe were CDN$18,400,000 or $15,203,518 and net proceeds of $13,300,563 net of agents commissions of $1,140,264 and $762,692 for expenses in connection with the offering (including legal, accounting, translation, filing fees and printing costs).  No offering expenses were paid directly or indirectly to directors, officers (or their associates), or to persons owning 10% or more of any of our equity securities, or to our affiliates.  We intend to use the net proceeds of the offering to fund the costs of certain of the pre-clinical and clinical trials of our drug candidates, CTCE-9908, CTCE-0214 and our earlier stage compounds, fund capital expenditures and laboratory and office leasehold improvements and fund research and development of new drug candidates.  The net proceeds will also be used to fund our general and administrative expenses for a minimum of two years.



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ITEM 6.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF OPERATIONS

Shareholders should read the following discussion and analysis together with our financial statements and the notes to those statements included elsewhere in this Annual Report on Form 10-KSB.  This discussion contains forward-looking statements that involve risks and uncertainties.  As a result of many factors, such as those set forth under Risk Factors and elsewhere in this Annual Report, our actual results may differ materially from those anticipated in these forward-looking statements.

All references to $ or dollars in this discussion and analysis are to U.S. dollars unless otherwise noted.

Overview

We are in the biotechnology business with a focus on the discovery and development of protein based drugs.  In particular, we focus on the area of chemokines, proteins which regulate a large number of physiological functions.  Since inception on July 15, 1998, we have established and are developing five drug candidates.  Two of our drug candidates are in human clinical trials.  These two drug candidates are CTCE-9908 and CTCE-0214, indicated for the prevention of the metastasis of cancer tumors and for hematological support, respectively.  Our other three drug candidates are in preclinical development in the areas of neovascularization, CTCE-0324, infectious disease, CTCE-0422, and stroke, CTCE-0501. In addition, we maintain drug discovery programs to identify new drug candidates.

Limited Operating History

Since inception we have been in the development stage.  From inception to December 31, 2005, our accumulated deficit was approximately $17.0 million.  We expect to continue to incur operating losses in the near term as we fund clinical trials and until such time as product sales and/or royalty payments generate sufficient revenues to fund continuing operations.

We raised a total of CDN$18,400,000 in an initial public offering, including the exercise of the over-allotment or green shoe option in December 2004 and January 2005.  On March 22 2006 the Company entered into a private placement and issued a total of 6,471,698 common shares for gross proceeds of $ 5,882,857 (Cdn$ 6,860,000) and net proceeds after commissions of $ 5,587,428 (Cdn$ 6,515,500). Management believes that these funds, together with current working capital, will be sufficient to fund the Companys operations through June 30, 2007.  If we need additional funds to continue to advance the development of our drug candidates and such funds are not available in a timely matter or at a reasonable cost, we will either have to suspend operations until funds become available, or cease operations entirely.

Research and Development

Our research and development expenses consist primarily of costs associated with the clinical trials of our drug candidates, compensation and other expenses for research and development personnel, manufacturing of compounds, facility costs, supplies and materials, costs for consultants and related contract research and depreciation.  We engage Globe Laboratories Inc. to carry out our research and development under contract.  Globe Laboratories is controlled by Dr. Salari, our President and Chief Executive Officer and is engaged in research for us on a contracted operating cost basis plus a 2% margin.  Pursuant to a development agreement between us and Globe Laboratories, all proprietary interest, including all patent rights, trademarks, copyright, trade secrets and confidential information of the research and development conducted by Globe Laboratories on our products is our exclusive property.  Globe Laboratories is eligible for Canadian scientific research and experimental tax credits.

Our research and development activities are primarily focused on the clinical trials of CTCE-9908, a drug candidate for the prevention of metastasis of cancer tumors, and CTCE-0214, a drug candidate for hematological support.  We are responsible for all costs incurred in the research and development program of these two lead drug candidates.  Our research and development activities also include three other drug candidates that we intend to test in animal models of peripheral arterial disease, infectious disease and stroke.



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We expect our research and development expenses to increase as we continue work on our drug candidates and to expand our research and development programs.  Over the next twelve months, our product research and development plan is summarized as follows:

·

Prepare for and commencement of Phase I/II clinical trials for CTCE-9908, our anti-metastasis drug candidate.

·

Conduct additional Phase I clinical trials for CTCE-0214, our hematological support drug candidate.

·

Continue pre-clinical studies for CTCE-0324, CTCE-0422 and CTCE-0501.

Clinical development timelines, likelihood of success and total costs vary widely. Although we are currently focused primarily on advancing our five drug candidates, we anticipate that we will make determinations as to which research and development projects to pursue and how much funding to direct to each project on an ongoing basis in response to the scientific and clinical success of each product candidate, as well as an ongoing assessment of its market potential.

Completion dates and completion costs to bring a drug to market vary significantly for each drug candidate given the nature of the clinical trials and the fact that more clinical trials may need to be conducted to advance a drug candidate based upon the results of each phase.  In addition, we anticipate partnering with larger pharmaceutical companies to conduct and finance later stage clinical trials and therefore the timing of completion of the approval of a drug will likely not be within our control. Based on these factors we cannot reasonably estimate the completion dates and completion costs required to gain regulatory approval of our compounds for sale. The lengthy process of seeking regulatory approvals, and subsequent compliance with applicable regulations, require the expenditure of substantial resources.  Delays in obtaining, regulatory approvals could cause our research and development expenditures to increase and, in turn, require additional funding.

Strategic Relationship and Partnering Strategy

We have a strategic relationship with Pharmaceutical Product Development, Inc. (PPDI).  PPDI acquired 2,000,000 series A preferred shares through an investment of $2,700,000.  PPDI holds approximately 5.7% of our voting securities.  PPDI also holds share purchase warrants entitling them to purchase an additional 500,000 common shares at an exercise price equal to CDN$1.00 per share expiring on December 29, 2007.  As part of the strategic relationship, PPDI has obtained an option, exercisable for up to 90 days, to license CTCE-0214 following completion of the Phase I clinical trials.  If PPDI exercises its licensing option to license CTCE-0214 after Phase I clinical results, PPDI will assume all costs of further development of this drug candidate.

In a research collaboration established in July 2004 with Procter & Gamble Pharmaceuticals, Inc., we provided five of our early stage research compounds for testing in cardiovascular applications. All the compounds have been tested but none proved to be a lead for further development. We received $275,000 in consideration for providing the five compounds and that project is now concluded. Any future compounds for testing will be subject to a new agreement and terms.

We plan to enter into partnership agreements for non-partnered products by the end of Phase II clinical trials.  Due to the significant costs involved in conducting Phase III or Phase IV clinical trials, we intend to enter into agreements with larger biotechnology and pharmaceutical companies to co-develop our products through Phase III and Phase IV of clinical trials, thereby sharing the costs.  As our focus is on the discovery and development of drug candidates, we intend to license the marketing of the products to companies with existing infrastructure for the marketing of pharmaceutical drugs.  In addition, we will rely on third-party manufacturers with the manufacturing capabilities to produce sufficient quantities of these products for clinical studies and large-scale commercialization upon their approval.

General and Administrative

General and administrative expenses consist primarily of salaries and other related costs for personnel in executive, finance, accounting and business development functions.  Other costs include consulting, legal and accounting services fees, investor relations, patent fees, marketing and promotion and facility costs not otherwise included in research and development expenses.



29





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Capital Expenditures

We intend to acquire laboratory equipment over the next two years at an estimated cost of $400,000.

Foreign Exchange

Our functional currency, being the currency of the principal economic environment in which we operate, is the U.S. dollar.  Our consolidated financial statements are presented in U.S. dollars using the temporal rate method. Under the temporal method, non-monetary items are translated at historical exchange rates, while monetary and non-monetary items, which are carried at their fair value, are translated at a rate of exchange at the balance sheet date. Revenues and expenses are also translated at the weighted average rates of exchange for the respective periods. Amortization of assets translated at historical exchange rates are translated at the same exchange rates as the assets which they relate to.  The resulting exchange gain or loss in foreign currency is included on the income statement in the foreign exchange gain or loss account.

Fluctuations in the relative values of the Canadian and U.S dollars can affect the reported value of Canadian dollar denominated assets and liabilities on our balance sheet.  A strengthening (weakening) Canadian dollar in relation to the U.S. dollar results in higher (lower) reported values for our Canadian dollar denominated assets and liabilities.

Critical Accounting Policy

Our discussion and analysis of financial condition and results of operations are based on our financial statements, which have been prepared in accordance with United States generally accepted accounting principles.  Differences between U.S. and Canadian GAAP are presented in Note 16 to our annual financial statements.  The preparation of financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and related disclosure of contingent assets and liabilities.  We review our estimates on an ongoing basis.  We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities.  Actual results may differ from these estimates under different assumptions or conditions.  While our significant accounting policies are described in Note 2 to our annual financial statements, we believe the following accounting policy to be critical.

Stock-Based Compensation

We account for our employee stock-based compensation plans under Accounting Principles Board Opinion No. 25 Accounting for Stock Issued to Employees (APB 25).  We present the pro forma impact of adopting the fair value based method of accounting, as promulgated by Financial Accounting Standards Board Statement of Financial Accounting Standard No. 123 Accounting for Stock-Based Compensation in the notes to our financial statements. On December 16, 2004, the FASB issued FASB Statement No. 123 (revised 2004), Share-Based Payment, which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. Statement 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative for the first interim or annual reporting period that begins after December 15, 2005. The company expects to adopt Statement 123(R) for its first interim period beginning January 1, 2006, and expects there to be no material impact on the Companys consolidated financial position or results of operations.

Results of Operations

Twelve Months Ended December 31, 2005 and 2004



30





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Revenues.  During the twelve months ended December 31, 2005, we recorded revenues of $275,000 from a research collaboration with Procter & Gamble Pharmaceuticals, Inc. (P&GP).  The research collaboration involved a nine month study period under which P&GP evaluated our compounds for cardiovascular applications.  We had no revenues in the twelve months ended December 31, 2004.

Research and development.  Research and development expenses were $3,697,005 during the twelve months ended December 31, 2005, compared to $1,786,427 recorded for the twelve months ended December 31, 2004.  Research and development expenses in the current year were primarily attributable to preclinical and clinical studies, manufacturing of compound for clinical trials and research staff salaries.

During the year we completed a Phase I clinical study and began a second Phase I clinical study for CTCE-0214.  Direct costs for CTCE-0214 were approximately $1,874,000 for the twelve months ended December 31, 2005 compared to approximately $1,289,100 for the twelve months ended December 31, 2004.

Direct costs for CTCE-9908 were approximately $1,276,800 for the twelve months ended December 31, 2005, and included manufacturing of compound and preparatory work for Phase I/II clinical trials.  Comparative costs were approximately $256,800 for the twelve months ended December 31, 2004.  We anticipate entering Phase I/II clinical trials for CTCE-9908 by the beginning of the second quarter of 2006.

We expect that research and development expenses will increase in the future as we fund clinical trials of CTCE-0214 and CTCE-9908. Completion dates and completion costs to bring a drug to market vary significantly for each drug candidate given the nature of the clinical trials and the fact that more clinical trials may need to be conducted to advance a drug candidate based upon the results of each phase. In addition, we anticipate partnering with larger pharmaceutical companies to conduct and finance later stage clinical trials and therefore the timing of completion of the approval of a drug will likely not be within our control. Based on these factors we cannot reasonably estimate the completion dates and completion costs required to gain regulatory approval of our compounds for sale. Drug candidates are required to successfully complete Phase III clinical trials before gaining regulatory approval for sale, which for our drug candidates is not expected to occur for several years.

General and administrative.  General and administrative expenses were $2,667,290 for the twelve months ended December 31, 2005, compared to $1,284,501 in the prior year.  The increase reflects higher professional fees for accounting and legal services and additional salary costs for employees we hired to assist us in managing the growth of our company as well as with the compliance as a publicly reporting company under Canadian and U.S. securities laws.  Other general and administrative expenses included patent costs, consulting, marketing and promotion expenses incurred for investor relations and business development.

Stock-based compensation.  A higher market share price at the end of the year compared to the market share price at the  beginning of the year resulted in a non-cash expense of $289,533 for stock-based compensation recorded under variable accounting.  The stock options that this expense applies to are stock options that were granted in 2004.  The comparative stock-based compensation expense recorded for the twelve months ended December 31, 2004 was $51,581.

Other income.  We realized other income of $231,654 for the twelve months ended December 31, 2005, compared to $12,692 for the twelve months ended December 31, 2004.  Other income consisted primarily of interest earned on cash balances and investments which benefited from increasing interest rates throughout the 2005 year.

Net loss.  We incurred a net loss of $6,020,166 ($0.19 per share) during the twelve months ended December 31, 2005 compared to $3,095,240 ($0.26 per share) during the twelve months ended December 31, 2004. The increase in our net loss resulted principally from the increase in research and development expenditures as well as the increase in our general and administrative expenses and stock-based compensation as described above.

Liquidity and Capital Resources

Since inception substantially all of our operations have been financed through the private and public offerings of equity securities. Through December 31, 2005, we received net proceeds of approximately $21.8 million from the issuance of shares of preferred and common stock.  As of December 31, 2005, we had funds available of $6,346,923.  We invest our surplus cash in redeemable, government treasuries and other investment grade commercial paper with maturities of under two years.



31





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On December 29, 2004, we closed our initial public offering of 16,000,000 shares of our common stock.  The common stock was offered at a price of CDN$1.00 per share for gross proceeds of CDN$16,000,000 or $13,264,799 and net proceeds of $11,576,484 after agents commissions of $994,860 and expenses in connection with the offering (including legal, accounting, translation, filing fees and printing costs) of $693,455.  The agents were also issued 1,280,000 warrants.  The over-allotment or greenshoe option of the initial public offering was subsequently exercised, in full, on January 31, 2005 for gross proceeds of CDN$2,400,000 or $1,968,651.

For the twelve months ended December 31, 2005, we used net cash of $6,435,948 in operating activities consisting primarily of the net loss for the period of $6,020,166.  Other uses of cash were a $359,968 decrease in accounts payable and accrued liabilities offset by a $289,533 non-cash stock-based compensation charge.

Financing activities during the twelve months ended December 31, 2005, were $1,690,240 comprised primarily of gross proceeds of $2,023,872 from the exercise of the greenshoe option of our initial public offering, offset by $213,682 in offering costs. Financing activities included the net repayment of funds of $118,105 due to our affiliate Globe Laboratories Inc., a company that carries out research and development activities.   During the year, we entered into a capital lease of CDN$41,628 for equipment and invested $343,847 primarily in equipment and leasehold improvements.

On March 22 2006, we entered into a private placement and issued a total of 6,471,698 common shares for gross proceeds of $ 5,882,857 (Cdn$ 6,860,000) and net proceeds after commissions of $ 5,587,428 (Cdn$ 6,515,500). Management believes that these funds, together with current working capital, will be sufficient to fund our operations through June 30, 2007.  However, our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially. If we are unable to raise additional capital when required or on acceptable terms, we may have to significantly delay, scale back or discontinue one or more of our clinical trials or our operations.

We expect to continue to incur substantial operating losses. Our future capital requirements are difficult to forecast and will depend on many factors, including:

·

the rate of progress and cost of our planned or future clinical trials and other development activities;

·

the scope, prioritization and number of clinical development and research programs we pursue;

·

the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;

·

the costs and timing of regulatory approval;

·

the costs of establishing or contracting for manufacturing, sales and marketing capabilities;

·

the costs of expanding our facilities to support our operations;

·

the effect of competing technological and market developments; and

·

the terms and timing of any collaborative, licensing and other arrangements that we may establish.

We intend to seek additional funding through sublicensing arrangements or through public or private financings, but our business and shareholders investment are at risk that we will be unable to obtain additional financing on acceptable terms or at all.

Long Term Obligations

We lease our office facilities under operating leases which expire at various dates ending July 31, 2008.  We are  obligated to make the following minimum lease payments under our operating leases in each of the fiscal years ending December 31:



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|     |   |        
|---- | - | -------
|2006 |   | 99,100 
|2007 |   | 79,300 
|2008 |   | 42,600 
|     | $ | 221,000

We have entered into a capital lease for certain laboratory equipment.  As of December 31, 2005, future minimum lease payments under the terms of the capital lease in each of the fiscal years ending December 31 are as follows:

|     |   |       
|---- | - | ------
|2006 |   | 13,414
|2007 |   | 13,414
|2008 |   | 8,951 
|     | $ | 35,779

We have entered into various research and development agreements with third parties to perform research and development services on our behalf.  We are committed to pay $1,689,875 in respect of contracts in place at December 31, 2005.

Off-Balance Sheet Arrangements

We do not have, and do not have any present plans to implement, any off-balance sheet arrangements.

Transactions with Related Parties

During the years ended December 31, 2005 and 2004, we paid $3,180,452 and $1,124,826, respectively, to Globe Laboratories Inc., a corporation controlled by Dr. Hassan Salari, our Chief Executive Officer, for research expenses.  Globe Laboratories Inc. is operated independently of us, is entitled to scientific research and experimental tax credits and is engaged in chemokine research for us on a contracted operating cost basis plus a 2% margin. We believe the terms of this arrangement are as favorable to us as we could have obtained from unrelated third parties.

During the year ended December 31, 2005, we paid board compensation to our non-management directors of $71,750.  There was no board compensation during 2004.  During the year ended December 31, 2004, we paid $121,863 to various directors for management and consulting services provided.

We accrued management fees of $62,500 and paid $22,500 for the three months ended March 31, 2004, payable to Pacific Medical Corp., a corporation of which Dr. Hassan Salari, our President and Chief Executive Officer is one of the beneficial owners.  These accrued management fees and payments were for services related to fund raising and business development. The management fees payable did not bear interest. We believe the terms of this arrangement were as favorable to us as we could have obtained from unrelated third parties.  This management agreement terminated on March 31, 2004 and provided for repayment of management fees at our discretion in cash or in common shares. We paid $200,000 of the outstanding $548,780 obligation to Pacific Medical Corp. in common shares issued at the price of $0.81 or CDN$1.00 per share at the close of our initial public offering on December 30, 2004 and $348,780 in cash.

We lease office space of 1,200 square feet in Vancouver, B.C., from Salari Enterprise Ltd., at the rate of CDN$2,000 per month. The monthly rent is the fair market rate for the market in Vancouver, B.C. The term of the lease commenced on January 1, 2003 and has been terminated effective June 30, 2006.  Salari Enterprise Ltd. is controlled by Dr. Hassan Salari, our President and Chief Executive Officer. During each of the years ended December 31, 2005 and 2004, we paid rent of CDN$24,000.  We believe the terms of this arrangement are as favorable to us as we could have obtained from unrelated third parties.



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During the year ended December 31, 2005 and 2004 we purchased key-man life insurance on the life of Dr. Hassan Salari, our President and Chief Executive Officer, in the amount of CDN$3,000,000. We paid annual premiums of CDN$4,680 in each of 2004 and 2005. Dr. Salaris family was a one-third beneficiary of this life insurance policy.  During the year ended December 31, 2005, this policy ended and we purchased key-man life insurance on the life of Dr. Hassan Salari, our President and Chief Executive Officer, in the amount of $3,000,000 exclusively for our benefit.

ITEM 7.

FINANCIAL STATEMENTS

Our financial statements required by this item are included after Part III, Item 14 of this Annual Report on Form 10-KSB.

ITEM 8.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 8A.

CONTROL AND PROCEDURES

We have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2005 (the Evaluation Date). We conducted our evaluation under the supervision and with the participation of our Chief Executive Officer (CEO) and the Chief Financial Officer (CFO). Based upon such evaluation, our CEO and CFO have concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective. There have been no significant changes in our internal controls or other factors that could significantly affect these controls subsequent to the date of their most recent evaluation.

ITEM 8B

OTHER INFORMATION

None.

PART III

ITEM 9.

DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

The information required by this Item 9 is set forth in our Proxy Statement for the 2006 Annual Meeting of Shareholders under the caption Election of Directors, Executive Officers, and Compliance With Section 16(a) of the Exchange Act, which is incorporated herein by reference.

ITEM 10.

EXECUTIVE COMPENSATION AND RELATED INFORMATION

The information required by this Item 10 is set forth in our Proxy Statement for the 2006 Annual Meeting of Shareholders under the caption Executive Compensation, which is incorporated herein by reference.

ITEM 11.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this Item 11 is set forth in our Proxy Statement for the 2006 Annual Meeting of Shareholders under the caption Security Ownership of Certain Beneficial Owners and Management and Equity Compensation Plan Information, which is incorporated herein by reference.



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ITEM 12.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item 12 is set forth in our Proxy Statement for the 2006 Annual Meeting of Shareholders under the caption Certain Relationships and Related Transactions, which is incorporated herein by reference.

ITEM 13.

EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

|        |                                                                                                                                                                     |              
|------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------
|        | EXHIBIT INDEX                                                                                                                                                       |              
|Exhibit |                                                                                                                                                                     | Page Number/ 
|Number  | Description                                                                                                                                                         | Filing Method
|        |                                                                                                                                                                     |              
|3.1     | Articles of Incorporation                                                                                                                                           | (1)          
|3.2     | Bylaws                                                                                                                                                              | (1)          
|4.1     | See Exhibits 3.1 and 3.2                                                                                                                                            |              
|10.1    | License Agreement between Chemokine Therapeutics Corp. and University of British Columbia dated September 22, 1999                                                  | (1)          
|10.2    | Development Agreement, dated January 1, 2003, between Chemokine Therapeutics Corp. and Globe Laboratories Inc.                                                      | (1)          
|10.3    | Employment Agreement dated April 1, 2004 between Chemokine
Therapeutics Corp. jointly with Chemokine Therapeutics (B.C.) Corp. and Dr. Hassan Salari                | (1)          
|10.4    | Employment Agreement dated April 1, 2004, between Chemokine Therapeutics Corp. jointly with Chemokine Therapeutics (B.C.) Corp. and Walter Korz                     | (1)          
|10.5    | Employment Agreement dated May 14, 2004, between Chemokine
Therapeutics Corp. jointly with Chemokine Therapeutics (B.C.) Corp. and David Karp                       | (1)          
|10.6    | Escrow Agreement between Chemokine Therapeutics Corp., Pacific Corporate Trust Company and Pacific Medical Corp.                                                    | (4)          
|10.7    | Loan and Stock Warrant Agreement dated October 16, 2002,
between Chemokine Therapeutics Corp. and Pharmaceutical Product Development, Inc.                          | (1)          
|10.8    | Option and License Agreement, dated April 15, 2003, between Chemokine Therapeutics Corp. and Pharmaceutical Product Development, Inc.                               | (1)          
|10.9    | Agreement re: Exercise of Warrant dated April 15, 2003                                                                                                              | (1)          
|10.10   | Modification and Waiver Agreement, dated September 14, 2004, between Chemokine Therapeutics Corp. and Pharmaceutical Product Development, Inc.                      | (2)          
|10.11   | 2004 Consulting Agreement between Pharmaceutical Product
Development, Inc. and  Chemokine Therapeutics Corp. dated September 14, 2004                               | (2)          
|10.12   | 2004 Warrant Agreement between Pharmaceutical Product Development, Inc. and Chemokine Therapeutics Corp. dated September 14, 2004                                   | (2)          
|10.13   | Amendment to Employment Agreement dated with Dr. Hassan between Chemokine Therapeutics Corp. jointly with Chemokine Therapeutics (B.C.) Corp. and Dr. Hassan Salari | (2)          
|10.14*  | Research and Development Agreement dated June 29, 2004, between Procter & Gamble Pharmaceuticals, Inc. and Chemokine Therapeutics Corp.                             | (2)          



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|10.15 | Lease Agreement dated January 1, 2003 between Salari Enterprises Ltd. and Chemokine Therapeutics Corp.                                                                                                        | (3)
|----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---
|10.16 | Form of Warrant Agreement for investors in May 6, 2004, Regulation S offering                                                                                                                                 | (3)
|10.17 | Agent Warrant Agreement for warrants issuable to agents upon closing of our offering pursuant to this registration statement                                                                                  | (4)
|10.18 | The 2004 Stock Option Plan                                                                                                                                                                                    | (2)
|10.19 | Amended Employment Agreement dated March 10, 2005, between Dr. Hassan Salari, our CEO, and President, and Chemokine Therapeutics Corp. jointly with Chemokine Therapeutics (B.C.) Corp.                       | (5)
|10.20 | Amended Employment Agreement dated March 10, 2005, between David Karp, our Chief Financial Officer and Corporate Secretary, and Chemokine Therapeutics Corp. jointly with Chemokine Therapeutics (B.C.) Corp. | (5)
|14.1  | Code of Ethics                                                                                                                                                                                                | (5)
|21.1  | List of Subsidiaries of Chemokine Therapeutics Corp.                                                                                                                                                          |    
|23.1  | Consent of Independent Registered Public Accounting Firm                                                                                                                                                      |    
|31.1  | Section 302 Certification of Chief Executive Officer                                                                                                                                                          |    
|31.2  | Section 302 Certification of Chief Financial Officer                                                                                                                                                          |    
|32    | Certification Pursuant to U.S.C. 18 Section 1350                                                                                                                                                              |    

_____________

*

Confidential treatment has been requested as to certain portions of this Agreement.



(1)

Previously filed on Registration Statement on Form SB-2 (Reg. No. 333-117858) on August 2, 2004.

(2)

Previously filed on Amendment No. 1 to Registration Statement on Form SB-2 (Reg. No. 333-117858) on October 20, 2004.

(3)

Previously filed on Amendment No. 2 to Registration Statement on Form SB-2 (Reg. No. 333-117858) on November 26, 2004.

(4)

Previously filed on Amendment No. 3 to Registration Statement on Form SB-2 (Reg. No. 333-117858) on December 17, 2004.

(5)

Previously filed on Form 10-KSB on March 15, 2005.

ITEM 14.

PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required by this Item 14 is set forth in our Proxy Statement for the 2006 Annual Meeting of Shareholders under the caption Ratification of Appointment of Independent Accountants section of our Proxy Statement to be filed in connection with our 2006 Annual Meeting of Shareholders and is incorporated herein by reference.





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CHEMOKINE THERAPEUTICS CORP.

(A Development Stage Company)

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005







|                                                        | Page 
|------------------------------------------------------- | -----
|                                                        |      
|Report of Independent Registered Public Accounting Firm | 38   
|                                                        |      
|Consolidated Balance Sheets                             | 39   
|                                                        |      
|Consolidated Statements of Operations                   | 40   
|                                                        |      
|Consolidated Statement of Stockholders' Equity          | 41-43
|                                                        |      
|Consolidated Statements of Cash Flow                    | 44   
|                                                        |      
|Notes to the Consolidated Financial Statements          | 45-60











37





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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





The Board of Directors of

Chemokine Therapeutics Corp.





We have audited the accompanying consolidated balance sheets of Chemokine Therapeutics Corp. (a development stage company), as of December 31, 2005 and 2004, and the related consolidated statements of operations, stockholders equity, and cash flows for the years then ended, and the related amounts included in the cumulative amounts for the period from inception (July 15, 1998) to December 31, 2005. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.



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 consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statements 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 consolidated financial position of Chemokine Therapeutics Corp. (a development stage company), as of December 31, 2005 and 2004, and the results of its operations and cash flows for the years then ended, and the related amounts included in the cumulative amounts for the period from inception (July 15, 1998) to December 31, 2005, in conformity with accounting principles generally accepted in the United States.







/s/ M.D. Sassi Co.



San Francisco, California

March 10, 2006









38





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CHEMOKINE THERAPEUTICS CORP.

(A Development Stage Company)

CONSOLIDATED BALANCE SHEETS

(Expressed in U.S. dollars)



|                                                                                   |   | December 31,
|---------------------------------------------------------------------------------- | - | ------------
|                                                                                   |   | 2005        
|ASSETS                                                                             |   |             
|                                                                                   |   |             
|CURRENT ASSETS                                                                     |   |             
|Cash and cash equivalents                                                          | $ | 3,719,163   
|Investments (Note 3)                                                               |   | 2,627,760   
|Amounts receivable                                                                 |   | 33,214      
|Prepaid expense and deposits                                                       |   | 154,969     
|                                                                                   |   |             
|TOTAL CURRENT ASSETS                                                               |   | 6,535,106   
|                                                                                   |   |             
|PROPERTY AND EQUIPMENT (Note 4)                                                    |   | 351,438     
|                                                                                   |   |             
|LICENSE (Note 5)                                                                   |   | 23,993      
|                                                                                   |   |             
|DUE FROM AFFILIATES (Note 6)                                                       |   | 91,783      
|                                                                                   |   |             
|                                                                                   | $ | 7,002,320   
|                                                                                   |   |             
|LIABILITIES                                                                        |   |             
|                                                                                   |   |             
|CURRENT LIABILITIES                                                                |   |             
|Accounts payable and accrued liabilities                                           | $ | 253,199     
|Deferred revenue                                                                   |   | -           
|Due to affiliates (Note 6)                                                         |   | -           
|Current portion of capital lease obligation (Note 7)                               |   | 11,648      
|                                                                                   |   |             
|TOTAL CURRENT LIABILITIES                                                          |   | 264,847     
|                                                                                   |   |             
|CAPITAL LEASE OBLIGATION (Note 7)                                                  |   | 21,157      
|                                                                                   |   |             
|                                                                                   |   | 286,004     
|                                                                                   |   |             
|COMMITMENTS (Note 12)                                                              |   |             
|                                                                                   |   |             
|STOCKHOLDERS EQUITY (Note 8)                                                      |   |             
|                                                                                   |   |             
|PREFERRED STOCK                                                                    |   |             
|Authorized  6,000,000 voting, participating shares; par
value $ 0.001 per share   |   |             
|Issued and outstanding: 2005  2,000,000; 2004  2,000,000                         |   | 2,000       
|                                                                                   |   |             
|COMMON STOCK                                                                       |   |             
|Authorized  100,000,000 voting, participating shares; par
value $ 0.001 per share |   |             
|Issued and outstanding: 2005  31,897,206; 2004  29,343,206                       |   | 31,897      
|                                                                                   |   |             
|ADDITIONAL PAID-IN CAPITAL                                                         |   | 23,717,965  
|                                                                                   |   |             
|(DEFICIT) ACCUMULATED DURING THE DEVELOPMENT STAGE                                 |   | (17,035,546)
|                                                                                   |   |             
|                                                                                   |   | 6,716,316   
|                                                                                   |   |             
|                                                                                   | $ | 7,002,320   

See accompanying notes to the consolidated financial statements.



39





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CHEMOKINE THERAPEUTICS CORP.

(A Development Stage Company)

CONSOLIDATED STATEMENTS OF OPERATIONS

(Expressed in U.S. dollars)



|                                       |  |  |   |                          |   |             |   | Cumulative from inception on July 15, 1998 to
|-------------------------------------- |  |  | - | ------------------------ | - | ----------- | - | ---------------------------------------------
|                                       |  |  |   | Years ended December 31, |   | December   
|                                       |  |  |   | 2005                     |   | 2004        |   | 31, 2005                                     
|                                       |  |  |   |                          |   |             |   |                                              
|REVENUE                                |  |  | $ | 275,000                  | $ | -           | $ | 275,000                                      
|                                       |  |  |   |                          |   |             |   |                                              
|EXPENSES                               |  |  |   |                          |   |             |   |                                              
|Research and development               |  |  |   | 3,697,005                |   | 1,786,427   |   | 9,953,268                                    
|General and administrative             |  |  |   | 2,667,290                |   | 1,284,501   |   | 7,349,001                                    
|Stock-based compensation               |  |  |   | 289,533                  |   | 51,581      |   | 374,034                                      
|Amortization of license                |  |  |   | 7,694                    |   | 8,662       |   | 26,610                                       
|Depreciation of property and equipment |  |  |   | 46,684                   |   | 10,135      |   | 172,741                                      
|Foreign exchange gain                  |  |  |   | (181,386)                |   | (33,374)    |   | (293,820)                                    
|                                       |  |  |   |                          |   |             |   |                                              
|                                       |  |  |   | 6,526,820                |   | 3,107,932   |   | 17,581,834                                   
|                                       |  |  |   |                          |   |             |   |                                              
|OTHER INCOME                           |  |  |   | 231,654                  |   | 12,692      |   | 271,288                                      
|                                       |  |  |   |                          |   |             |   |                                              
|NET (LOSS)                             |  |  | $ | (6,020,166)              | $ | (3,095,240) | $ | (17,035,546)                                 
|                                       |  |  |   |                          |   |             |   |                                              
|NET (LOSS) PER COMMON SHARE -          |  |  |   |                          |   |             |   |                                              
|BASIC AND DILUTED                      |  |  | $ | (0.19)                   | $ | (0.26)      |   |                                              
|                                       |  |  |   |                          |   |             |   |                                              
|WEIGHTED AVERAGE NUMBER OF             |  |  |   |                          |   |             |   |                                              
|COMMON SHARES OUTSTANDING              |  |  |   | 31,605,162               |   | 12,059,677  |   |                                              







See accompanying notes to the consolidated financial statements.



40





---

CHEMOKINE THERAPEUTICS CORP.

(A Development Stage Company)

CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY

Period from inception on July 15, 1998 to December 31, 1998

and years ended December 31, 1999, 2000, 2001, 2002, 2003, 2004 and 2005

(Expressed in U.S. dollars)

|                                                                                                    |  |              |   |                 |  |             |   |           |   |            |   |           |   |          |   | (Deficit)   |   |            
|--------------------------------------------------------------------------------------------------- |  | ------------ | - | --------------- |  | ----------- | - | --------- | - | ---------- | - | --------- | - | -------- | - | ----------- | - | -----------
|                                                                                                    |  |              |   |                 |  |             |   |           |   |            |   |           |   |          |   | accu-       |   |            
|                                                                                                    |  |              |   |                 |  |             |   |           |   |            |   |           |   | Deferred |   | mulated     |   |            
|                                                                                                    |  |              |   |                 |  |             |   |           |   | Additional |   | Share     |   | stock    |   | during the  |   | Stock-     
|                                                                                                    |  | Common stock |   | Preferred stock |  | paid-       |   | subscrip- |   | compen-    |   | develop-  |   | holders
|                                                                                                    |  | Shares       |   | Amount          |  | Shares      |   | Amount    |   | in capital |   | tions     |   | sation   |   | ment stage  |   | equity     
|                                                                                                    |  |              |   |                 |  |             |   |           |   |            |   |           |   |          |   |             |   |            
|Inception, July 15, 1998                                                                            |  | -            | $ | -               |  | -           | $ | -         | $ | -          | $ | -         | $ | -        | $ | -           | $ | -          
|Issuance of common stock for cash                                                                   |  | 1            |   | -               |  | -           |   | -         |   | 70,650     |   | -         |   | -        |   | -           |   | 70,650     
|Issuance of preferred stock for cash                                                                |  | -            |   | -               |  | 6,000,000   |   | 6,000     |   | (4,800)    |   | -         |   | -        |   | -           |   | 1,200      
|Net (loss)                                                                                          |  | -            |   | -               |  | -           |   | -         |   | -          |   | -         |   | -        |   | (6,212)     |   | (6,212)    
|                                                                                                    |  |              |   |                 |  |             |   |           |   |            |   |           |   |          |   |             |   |            
|Balances at December 31, 1998                                                                       |  | 1            |   | -               |  | 6,000,000   |   | 6,000     |   | 65,850     |   | -         |   | -        |   | (6,212)     |   | 65,638     
|Issuance of common stock and subscriptions on private placement, net of offering costs of $ 58,794  |  | 263,535      |   | 264             |  | -           |   | -         |   | 342,332    |   | 461,205   |   | -        |   | -           |   | 803,801    
|Issuance of warrants for consulting services                                                        |  | -            |   | -               |  | -           |   | -         |   | 1,400      |   | -         |   | -        |   | -           |   | 1,400      
|Net (loss)                                                                                          |  | -            |   | -               |  | -           |   | -         |   | -          |   | -         |   | -        |   | (408,237)   |   | (408,237)  
|                                                                                                    |  |              |   |                 |  |             |   |           |   |            |   |           |   |          |   |             |   |            
|Balances at December 31, 1999                                                                       |  | 263,536      |   | 264             |  | 6,000,000   |   | 6,000     |   | 409,582    |   | 461,205   |   | -        |   | (414,449)   |   | 462,602    
|Issuance of common stock and subscriptions on private placement, net of offering costs of $ 214,300 |  | 783,228      |   | 783             |  | -           |   | -         |   | 1,116,790  |   | (461,205) |   | -        |   | -           |   | 656,368    
|Conversion of preferred stock                                                                       |  | 6,000,000    |   | 6,000           |  | (6,000,000) |   | (6,000)   |   | -          |   | -         |   | -        |   | -           |   | -          
|Issuance of options for consulting services                                                         |  | -            |   | -               |  | -           |   | -         |   | 87,968     |   | -         |   | -        |   | -           |   | 87,968     
|Deferred stock compensation                                                                         |  | -            |   | -               |  | -           |   | -         |   | 83,500     |   | -         |   | (83,500) |   | -           |   | -          
|Amortization of deferred stock compensation                                                         |  | -            |   | -               |  | -           |   | -         |   | -          |   | -         |   | 32,920   |   | -           |   | 32,920     
|Net (loss)                                                                                          |  | -            |   | -               |  | -           |   | -         |   | -          |   | -         |   | -        |   | (1,020,963) |   | (1,020,963)
|                                                                                                    |  |              |   |                 |  |             |   |           |   |            |   |           |   |          |   |             |   |            
|Balances at December 31, 2000                                                                       |  | 7,046,764    |   | 7,047           |  | -           |   | -         |   | 1,697,840  |   | -         |   | (50,580) |   | (1,435,412) |   | 218,895    
|Issuance of stock for cash                                                                          |  | -            |   | -               |  | 150,000     |   | 150       |   | 187,350    |   | -         |   | -        |   | -           |   | 187,500    
|Issuance of common shares net of offering costs of $ 64,585                                         |  | 1,280,496    |   | 1,280           |  | -           |   | -         |   | 1,362,532  |   | -         |   | -        |   | -           |   | 1,363,812  
|Issuance of warrants for offering costs                                                             |  | -            |   | -               |  | -           |   | -         |   | 17,850     |   | -         |   | -        |   | -           |   | 17,850     
|Cancellation of stock options                                                                       |  | -            |   | -               |  | -           |   | -         |   | (50,580)   |   | -         |   | 50,580   |   | -           |   | -          
|Net (loss)                                                                                          |  | -            |   | -               |  | -           |   | -         |   | -          |   | -         |   | -        |   | (1,743,962) |   | (1,743,962)
|                                                                                                    |  |              |   |                 |  |             |   |           |   |            |   |           |   |          |   |             |   |            
|Balances at December 31, 2001                                                                       |  | 8,327,260    |   | 8,327           |  | 150,000     |   | 150       |   | 3,214,992  |   | -         |   | -        |   | (3,179,374) |   | 44,095     



See next page



See accompanying notes to the consolidated financial statements



41





---

CHEMOKINE THERAPEUTICS CORP.

(A Development Stage Company)

CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY

Period from inception on July 15, 1998 to December 31, 1998

and years ended December 31, 1999, 2000, 2001, 2002, 2003, 2004 and 2005

(Expressed in U.S. dollars)

|                                                              |  |              |   |                 |  |           |   |           |   |            |   |          |   |          |   | (Deficit)    |   |            
|------------------------------------------------------------- |  | ------------ | - | --------------- |  | --------- | - | --------- | - | ---------- | - | -------- | - | -------- | - | ------------ | - | -----------
|                                                              |  |              |   |                 |  |           |   |           |   |            |   |          |   |          |   | accu-        |   |            
|                                                              |  |              |   |                 |  |           |   |           |   |            |   |          |   | Deferred |   | mulated      |   |            
|                                                              |  |              |   |                 |  |           |   |           |   | Additional |   | Share    |   | stock    |   | during the   |   | Stock-     
|                                                              |  | Common stock |   | Preferred stock |  | paid-     |   | subscrip- |   | compen-    |   | develop- |   | holders
|                                                              |  | Shares       |   | Amount          |  | Shares    |   | Amount    |   | in capital |   | tions    |   | sation   |   | ment stage   |   | equity     
|                                                              |  |              |   |                 |  |           |   |           |   |            |   |          |   |          |   |              |   |            
|Issuance of common stock net of offering costs of $ 194,474   |  | 1,492,970    | $ | 1,493           |  | -         | $ | -         | $ | 1,677,746  | $ | -        | $ | -        | $ | -            | $ | 1,679,239  
|Issuance of warrants for consulting services                  |  | -            |   | -               |  | -         |   | -         |   | 139,725    |   | -        |   | -        |   | -            |   | 139,725    
|Issuance of warrants for offering costs                       |  | -            |   | -               |  | -         |   | -         |   | 62,871     |   | -        |   | -        |   | -            |   | 62,871     
|Capital distribution on sale of subsidiary to related party   |  | -            |   | -               |  | -         |   | -         |   | 42,064     |   | -        |   | -        |   | -            |   | 42,064     
|Net (loss)                                                    |  | -            |   | -               |  | -         |   | -         |   | -          |   | -        |   | -        |   | (2,234,061)  |   | (2,234,061)
|                                                              |  |              |   |                 |  |           |   |           |   |            |   |          |   |          |   |              |   |            
|Balances at December 31, 2002                                 |  | 9,820,230    |   | 9,820           |  | 150,000   |   | 150       |   | 5,137,398  |   | -        |   | -        |   | (5,413,435)  |   | (266,067)  
|Issuance of common stock net of offering costs of $ 130,628   |  | 577,852      |   | 578             |  | -         |   | -         |   | 644,395    |   | -        |   | -        |   | -            |   | 644,973    
|Issuance of preferred shares                                  |  | -            |   | -               |  | 2,000,000 |   | 2,000     |   | 2,698,000  |   | -        |   | -        |   | -            |   | 2,700,000  
|Issuance of warrants for consulting services                  |  | -            |   | -               |  | -         |   | -         |   | 21,835     |   | -        |   | -        |   | -            |   | 21,835     
|Issuance of warrants for offering costs                       |  | -            |   | -               |  | -         |   | -         |   | 22,454     |   | -        |   | -        |   | -            |   | 22,454     
|Net (loss)                                                    |  | -            |   | -               |  | -         |   | -         |   | -          |   | -        |   | -        |   | (2,506,705)  |   | (2,506,705)
|                                                              |  |              |   |                 |  |           |   |           |   |            |   |          |   |          |   |              |   |            
|Balances at December 31, 2003                                 |  | 10,398,082   |   | 10,398          |  | 2,150,000 |   | 2,150     |   | 8,524,082  |   | -        |   | -        |   | (7,920,140)  |   | 616,490    
|Issuance of common stock net of offering costs of $ 2,234,671 |  | 17,915,714   |   | 17,916          |  | -         |   | -         |   | 12,144,538 |   | -        |   | -        |   | -            |   | 12,162,454 
|Issuance of common stock for agents fee                      |  | 628,977      |   | 629             |  | -         |   | -         |   | 352,054    |   | -        |   | -        |   | -            |   | 352,683    
|Issuance of common stock for settlement of debt               |  | 247,100      |   | 247             |  | -         |   | -         |   | 199,753    |   | -        |   | -        |   | -            |   | 200,000    
|Issuance of common stock for finders fees                    |  | 3,333        |   | 3               |  | -         |   | -         |   | 4,497      |   | -        |   | -        |   | -            |   | 4,500      
|Conversion of preferred stock to common stock                 |  | 150,000      |   | 150             |  | (150,000) |   | (150)     |   | -          |   | -        |   | -        |   | -            |   | -          
|Issuance of warrants for consulting services                  |  | -            |   | -               |  | -         |   | -         |   | 241,882    |   | -        |   | -        |   | -            |   | 241,882    
|Issuance of warrants for offering costs                       |  | -            |   | -               |  | -         |   | -         |   | 98,509     |   | -        |   | -        |   | -            |   | 98,509     
|Issuance of warrants for finders fees                        |  | -            |   | -               |  | -         |   | -         |   | 3,900      |   | -        |   | -        |   | -            |   | 3,900      
|Stock-based compensation                                      |  | -            |   | -               |  | -         |   | -         |   | 51,581     |   | -        |   | -        |   | -            |   | 51,581     
|Net (loss)                                                    |  | -            |   | -               |  | -         |   | -         |   | -          |   | -        |   | -        |   | (3,095,240)  |   | (3,095,240)
|                                                              |  |              |   |                 |  |           |   |           |   |            |   |          |   |          |   |              |   |            
|Balances at December 31, 2004                                 |  | 29,343,206   | $ | 29,343          |  | 2,000,000 | $ | 2,000     | $ | 21,620,796 | $ | -        | $ | -        | $ | (11,015,380) | $ | 10,636,759 



See next page



See accompanying notes to the consolidated financial statements.







42





---

CHEMOKINE THERAPEUTICS CORP.

(A Development Stage Company)

CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY

Period from inception on July 15, 1998 to December 31, 1998

and years ended December 31, 1999, 2000, 2001, 2002, 2003, 2004 and 2005

(Expressed in U.S. dollars)



|                                                            |  |              |   |                 |  |           |   |           |   |            |   |          |   |          |   | (Deficit)    |   |            
|----------------------------------------------------------- |  | ------------ | - | --------------- |  | --------- | - | --------- | - | ---------- | - | -------- | - | -------- | - | ------------ | - | -----------
|                                                            |  |              |   |                 |  |           |   |           |   |            |   |          |   |          |   | accu-        |   |            
|                                                            |  |              |   |                 |  |           |   |           |   |            |   |          |   | Deferred |   | mulated      |   |            
|                                                            |  |              |   |                 |  |           |   |           |   | Additional |   | Share    |   | stock    |   | during the   |   | Stock-     
|                                                            |  | Common stock |   | Preferred stock |  | paid-     |   | subscrip- |   | compen-    |   | develop- |   | holders
|                                                            |  | Shares       |   | Amount          |  | Shares    |   | Amount    |   | in capital |   | tions    |   | sation   |   | ment stage   |   | equity     
|                                                            |  |              |   |                 |  |           |   |           |   |            |   |          |   |          |   |              |   |            
|Issuance of common stock net of offering costs of $ 278,023 |  | 2,400,000    | $ | 2,400           |  | -         | $ | -         | $ | 1,658,297  | $ | -        | $ | -        | $ | -            | $ | 1,660,697  
|Conversion of warrants to common shares                     |  | 102,000      |   | 102             |  | -         |   |           |   | 85,050     |   | -        |   | -        |   | -            |   | 85,152     
|Issuance of common stock                                    |  | 52,000       |   | 52              |  | -         |   | -         |   | (52)       |   | -        |   | -        |   | -            |   | -          
|Issuance of warrants for agents fee                        |  | -            |   | -               |  | -         |   | -         |   | 49,453     |   | -        |   | -        |   | -            |   | 49,453     
|Issue of warrants for offering costs                        |  | -            |   | -               |  | -         |   | -         |   | 14,888     |   | -        |   | -        |   | -            |   | 14,888     
|Stock-based compensation                                    |  | -            |   | -               |  | -         |   | -         |   | 289,533    |   | -        |   | -        |   | -            |   | 289,533    
|Net (loss)                                                  |  | -            |   | -               |  | -         |   | -         |   | -          |   | -        |   | -        |   | (6,020,166)  |   | (6,020,166)
|                                                            |  |              |   |                 |  |           |   |           |   |            |   |          |   |          |   |              |   |            
|Balances at December 31, 2005                               |  | 31,897,206   | $ | 31,897          |  | 2,000,000 | $ | 2,000     | $ | 23,717,965 | $ | -        | $ | -        | $ | (17,035,546) | $ | 6,716,316  







See accompanying notes to the consolidated financial statements.







43





---

CHEMOKINE THERAPEUTICS CORP.

(A Development Stage Company)

CONSOLIDATED STATEMENTS OF CASH FLOW

(Expressed in U.S. dollars)

|                                                                   |  |   |                          |   |             |   | Cumulative from inception on July 15, 1998 to
|------------------------------------------------------------------ |  | - | ------------------------ | - | ----------- | - | ---------------------------------------------
|                                                                   |  |   | Years ended December 31, |   | December   
|                                                                   |  |   | 2005                     |   | 2004        |   | 31, 2005                                     
|                                                                   |  |   |                          |   |             |   |                                              
|CASH FLOW FROM OPERATING ACTIVITIES                                |  |   |                          |   |             |   |                                              
|Net (loss)                                                         |  | $ | (6,020,166)              | $ | (3,095,240) | $ | (17,035,546)                                 
|Adjustments to reconcile net cash                                  |  |   |                          |   |             |   |                                              
|provided by operating activities                                   |  |   |                          |   |             |   |                                              
|Depreciation and amortization                                      |  |   | 54,378                   |   | 18,797      |   | 199,351                                      
|Common shares issued for                                           |  |   |                          |   |             |   |                                              
|consulting services                                                |  |   | -                        |   | 16,305      |   | 1,033,669                                    
|Warrants issued for                                                |  |   |                          |   |             |   |                                              
|consulting services                                                |  |   | -                        |   | 241,882     |   | 404,842                                      
|Options issued for                                                 |  |   |                          |   |             |   |                                              
|consulting services                                                |  |   | -                        |   | -           |   | 87,968                                       
|Stock-based compensation                                           |  |   | 289,533                  |   | 51,581      |   | 374,034                                      
|Decrease (increase) in                                             |  |   |                          |   |             |   |                                              
|Amounts receivable                                                 |  |   | (27,654)                 |   | (5,060)     |   | (33,214)                                     
|Prepaid expense and deposit                                        |  |   | (97,071)                 |   | (44,832)    |   | (154,969)                                    
|Increase (decrease) in                                             |  |   |                          |   |             |   |                                              
|Accounts payable and                                               |  |   |                          |   |             |   |                                              
|accrued liabilities                                                |  |   | (359,968)                |   | 253,879     |   | 253,199                                      
|Management fees payable                                            |  |   | -                        |   | (508,780)   |   | -                                            
|Deferred revenue                                                   |  |   | (275,000)                |   | 275,000     |   | -                                            
|                                                                   |  |   |                          |   |             |   |                                              
|                                                                   |  |   | (6,435,948)              |   | (2,796,468) |   | (14,870,666)                                 
|                                                                   |  |   |                          |   |             |   |                                              
|CASH FLOW FROM FINANCING ACTIVITIES                                |  |   |                          |   |             |   |                                              
|Stock issued for cash                                              |  |   | 2,023,872                |   | 14,380,821  |   | 24,157,653                                   
|Stock issued for settlement of debt                                |  |   | -                        |   | 200,000     |   | 200,000                                      
|Offering costs                                                     |  |   | (213,682)                |   | (1,775,080) |   | (2,548,368)                                  
|Net advances from director                                         |  |   | -                        |   | 304         |   | -                                            
|Net advances from (repayment to) affiliates                        |  |   | (118,105)                |   | 322,664     |   | (44,965)                                     
|Capital lease payment                                              |  |   | (1,845)                  |   | -           |   | (1,845)                                      
|                                                                   |  |   |                          |   |             |   |                                              
|                                                                   |  |   | 1,690,240                |   | 13,128,709  |   | 21,762,475                                   
|                                                                   |  |   |                          |   |             |   |                                              
|CASH FLOW FROM INVESTING ACTIVITIES                                |  |   |                          |   |             |   |                                              
|Cash held by disposed subsidiary                                   |  |   | -                        |   | -           |   | (4,754)                                      
|Purchase of investments                                            |  |   | (2,627,760)              |   | -           |   | (2,627,760)                                  
|Payment under license agreement                                    |  |   |                          |   |             |   |                                              
|(Note 5)                                                           |  |   | -                        |   | (38,470)    |   | (50,603)                                     
|Purchase of property and equipment                                 |  |   | (343,847)                |   | (10,337)    |   | (489,529)                                    
|                                                                   |  |   |                          |   |             |   |                                              
|                                                                   |  |   | (2,971,607)              |   | (48,807)    |   | (3,172,646)                                  
|                                                                   |  |   |                          |   |             |   |                                              
|INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS DURING THE PERIOD |  |   | (7,717,315)              |   | 10,283,434  |   | 3,719,163                                    
|                                                                   |  |   |                          |   |             |   |                                              
|CASH AND CASH EQUIVALENTS, beginning of period                     |  |   | 11,436,478               |   | 1,153,044   |   | -                                            
|                                                                   |  |   |                          |   |             |   |                                              
|CASH AND CASH EQUIVALENTS, end of period                           |  | $ | 3,719,163                | $ | 11,436,478  | $ | 3,719,163                                    
|                                                                   |  |   |                          |   |             |   |                                              
|See Note 13.                                                       |  |   |                          |   |             |   |                                              



See accompanying notes to the consolidated financial statements.



44





---

CHEMOKINE THERAPEUTICS CORP.

(A Development Stage Company)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2005 and 2004

(Expressed in U.S. dollars)



|1. | DESCRIPTION OF BUSINESS
|-- | -----------------------



Chemokine Therapeutics Corp. (the "Company") was incorporated in the State of Washington on July 15, 1998 as PTM Molecular Biosystems Inc.  In 1999 the Company changed its name to Chemokine Therapeutics Corp. and in 2000 was reincorporated in the State of Delaware.



The Company is in the business of discovering and developing innovative therapeutic products for the treatment of a variety of human diseases.  As of December 31, 2005 the Company is considered a development stage company as defined by Statement of Financial Accounting Standards No. 7 (SFAS No. 7). The Company commenced operations in July 1998 and has been devoting most of its efforts to date in raising capital and in research and development.  At December 31, 2005, the Company had not commenced planned principal operations and, as shown in the accompanying financial statements, has incurred losses during the period from inception to December 31, 2005 of $ 17,035,546.



On December 30, 2004 the Company announced its initial Public Offering (IPO) and its common shares were posted for trading on the Toronto Stock Exchange under the trading symbol CTI and in June 2005, the Company began trading on the Over-the-Counter Bulletin Board under the symbol CHKT.  Under its IPO the Company sold 18,400,000 common shares, including common shares sold under an over allotment option for gross cash proceeds of $ 15,203,519 (Cdn$ 18,400,000).



The Company is subject to all of the risks inherent in an early stage business operating in the biotechnology industry. These risks include, but are not limited to, a limited operating history, limited management resources, and the challenges of bringing a drug through development to approval for sale. On March 22, 2006, the Company completed a private placement and issued a total of 6,471,698 common shares for gross proceeds of $ 5,882,857 (Cdn$ 6,860,000) and net proceeds after commissions of $ 5,587,428 (Cdn$ 6,515,500).  Management believes that these funds, together with current working capital, will be sufficient to fund the Companys operations through June 30, 2007.



|2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|-- | ------------------------------------------



These financial statements are in accordance with generally accepted accounting principles in the United States of America.  Significant accounting policies utilized in the preparation of the financial statements are summarized below:



Basis of consolidation

The consolidated financial statements include the accounts of the Company, its former wholly-owned Canadian subsidiary, Chemokine Therapeutics Inc., through to June 9, 2002, the date of disposal of the subsidiary and its wholly-owed Canadian subsidiary Chemokine Therapeutics (B.C.) Corp.



Revenue recognition

Revenue is not recognized until the product or service has been delivered or otherwise earned, all contractual obligations have been satisfied and collection of amounts due to the Company is reasonably assured.  Amounts received by the Company prior to the recognition of associated revenue are reflected on the balance sheet as deferred revenue.



45





---

CHEMOKINE THERAPEUTICS CORP.

(A Development Stage Company)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (continued)



|2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
|-- | ------------------------------------------------------



Cash and cash equivalents

Cash and cash equivalents consist of cash on hand, balances with banks and short-term investments.  All highly liquid investments with original maturities of three months or less are classified as cash and cash equivalents.  The fair value of cash and cash equivalents approximates the amounts shown in the consolidated financial statements.



Investments

Investments consist of term deposits and investments in publicly traded debt securities with a maturity of less than one year but more than three months.  The Company records its investments in debt securities as held-to-maturity investments since the Company has the positive intent and ability to hold these investments to maturity.  The held-to-maturity investments are recorded at amortized cost unless a decline in value is deemed other-than-temporary, in which case the carrying value is adjusted.  The amortization of premium or accretion of discount and any unrealized loss deemed other-than-temporary are included in current period earnings.



Property and equipment

Property and equipment are recorded at cost.  Depreciation is recorded on a straight-line basis over the estimated useful lives of the property and equipment as follows:



| | Computer equipment     | - | 3 years
| | ---------------------- | - | -------
| | Computer software      | - | 2 years
| | Equipment              | - | 3 years
| | Furniture and fixtures | - | 3 years
| | Leasehold improvements | - | 3 years



License

Costs incurred to acquire the license (see Note 5) are capitalized in the accounts and are being amortized on a straight-line basis over five years.  The costs of developing and servicing patents on licensed technologies are expensed as incurred.



Impairment of long-lived assets

Long-lived assets to be held and used are assessed for impairment whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable.



Foreign currency translation

The United States dollar is the Companys functional currency.  For the purpose of preparing these financial statements, foreign currency denominated monetary assets and liabilities are translated to United States dollars at the exchange rates in effect at the balance sheet date.  Other balance sheet items and revenues and expenses are translated at the rates prevailing on the respective transaction dates.  Transaction gains and losses are included in expenses.



The Company's functional currency for its former Canadian subsidiary was the U.S. dollar.  The financial transactions, records and statements of the foreign subsidiary were all measured in U.S. dollars using daily exchange rates.  As a result, the Company has no material currency translation gains or losses.  Where the local currency is used to record transactions, any material currency translation gains or losses would be included as an element of comprehensive income in the statement of operations and in the equity section of the balance sheet.





46





---

CHEMOKINE THERAPEUTICS CORP.

(A Development Stage Company)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (continued)



|2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
|-- | ------------------------------------------------------



The Companys functional currency for its new Canadian subsidiary is the Canadian dollar.  As a result, monetary assets and liabilities of the integrated foreign operations are translated into U.S. dollars at the rate of exchange prevailing at the balance sheet date.  Non-monetary assets are translated at historical rates.  Long-term debt is translated at the rate of exchange rate prevailing at the balance sheet date with any resulting gain or loss being deferred and amortized over the remaining term of the debt.  Revenues and expenses, other than amortization of capital assets, are translated in U.S. dollars at the average rate for the year.



Research and development

All research and development costs are expensed when incurred.



Use of estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent 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 those estimates.



Reclassification

Certain 2004 amounts have been reclassified to conform to the presentation used in the current year.



(Loss) per common share

(Loss) per common share is computed based on the weighted average number of common shares outstanding during each period.  Convertible equity securities, such as convertible preferred stock, stock options and stock purchase warrants are not considered in the calculation of net loss per common share as their inclusion would be anti-dilutive.



Stock-based compensation

In October 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard (SFAS) No. 123, "Accounting for Stock-Based Compensation", effective for fiscal years beginning after December 15, 1995.  This statement defines a fair value method of accounting for employee stock options and encourages entities to adopt that method of accounting for its stock compensation plans.  SFAS No. 123 allows an entity to continue to measure compensation costs for these plans using the intrinsic value based method of accounting as described in Accounting Pronouncement Bulletin Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25").  The Company has elected to continue to account for its employee stock compensation plans as prescribed under APB 25.  Had compensation cost for the Company's stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method prescribed in SFAS No. 123, the Company's net (loss) and (loss) per share for the years ended December 31, 2005 and 2004 would have been the pro forma amounts indicated below:



47





---

CHEMOKINE THERAPEUTICS CORP.

(A Development Stage Company)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (continued)



|2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
|-- | ------------------------------------------------------



| |                                                                                                         |  |   | 2005        |   | 2004       
| | ------------------------------------------------------------------------------------------------------- |  | - | ----------- | - | -----------
| |                                                                                                         |  |   |             |   |            
| | Net (loss), as reported                                                                                 |  | $ | (6,020,166) | $ | (3,095,240)
| | Add:     Stock-based employee compensation
expense included in reported net (loss)                      |  |   | 289,533     |   | 51,581     
| | Deduct: Total stock-based employee
compensation determined under fair
value based method for all awards |  |   | (172,788)   |   | (55,619)   
| |                                                                                                         |  |   |             |   |            
| | Pro forma net (loss)                                                                                    |  | $ | (5,903,421) | $ | (3,099,278)
| |                                                                                                         |  |   |             |   |            
| | Net (loss) per common share, as reported                                                                |  | $ | (0.19)      | $ | (0.26)     
| |                                                                                                         |  |   |             |   |            
| | Net (loss) per common share, pro forma                                                                  |  | $ | (0.19)      | $ | (0.26)     



Fair value of financial instruments

The fair value of the Companys cash and cash equivalents, amounts receivable and accounts payable and accrued liabilities approximate their carrying values due to their short terms to maturity.  The fair value of investments is determined using quoted market prices for those securities or similar financial instruments.  The fair value of capital lease obligation is approximated by the carrying amount as the capital lease obligation bears a fair market rate of interest.



The amounts due from (to) affiliates do not bear interest and are carried at the amounts required to settle the balances on a current basis.



Recent accounting pronouncements

In December, 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123R, Share-Based Payment.  SFAS No. 123R is a revision to SFAS No. 123, Accounting for Stock-Based Compensation and supersedes Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statement of Cash Flows.  Generally, the approach in SFAS No. 123R is similar to the approach described in SFAS No. 123.  However, SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values and requires a forfeiture assumption on the Companys unvested awards.  Pro forma disclosure is no longer an alternative.  In addition, SFAS No. 123R requires additional accounting related to the income tax effects and additional disclosures regarding the cash flow effects resulting from share-based payment arrangements.  For public entities that file as a small business issuer, the requirements of SFAS No. 123R are effective for the first interim or annual reporting period beginning after December 31, 2005 and apply to all awards granted, modified or cancelled after that date.  The Company expects to adopt SFAS No. 123R for its first interim reporting period beginning on January 1, 2006.





48





---

CHEMOKINE THERAPEUTICS CORP.

(A Development Stage Company)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (continued)



|2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
|-- | ------------------------------------------------------



SFAS No. 123R permits companies to adopt its requirements using either a modified prospective method or a modified retrospective method.  Under the modified prospective method, compensation cost is recognized in the financial statements beginning with the effective date, based on the requirements of SFAS No. 123R for all share-based payments granted after that date, and based on the requirements of SFAS No. 123 for all unvested awards granted prior to the effective date of SFAS No. 123R.  Under the modified retrospective method, the requirements are the same as under the modified prospective method, except that entities also are allowed to restate, based on the amounts previously recognized under SFAS No. 123 for purposes of pro forma disclosures, either all prior periods presented or prior interim periods of the year of adoption.  The Company plans to adopt SFAS No. 123R using the modified prospective method.



As permitted by SFAS No. 123, the Company currently accounts for share-based payments to employees using APB 25s intrinsic value method and as such, generally recognizes no compensation cost for employee stock options granted at fair market value but recognizes compensation cost for grants of employee stock-based compensation awards equal to the excess of the market price of the underlying common stock at the date of grant over the exercise price of the stock-related award, if any (known as the intrinsic value).  However, the adoption of SFAS No. 123Rs fair value method is not expected to have a material impact on the Companys consolidated financial position or results of operations.  The impact of adoption of SFAS No. 123R cannot be predicted at this time because it will depend on levels of share-based payments granted in the future.  However, had the Company adopted SFAS No. 123R in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net (loss) and (loss) per share above under Stock-based compensation.



SFAS No. 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature.  This requirement may reduce the Companys future cash provided by operating activities and increase future cash provided by financing activities, to the extent of associated tax benefit that may be realized in the future.  The Company cannot estimate what those amounts will be in the future because they depend on, among other things, when employees exercise stock options.  Since the Company had not realized any deferred income tax benefits in 2005 and 2004 as disclosed in Note 11, there would be no impact on the consolidated cash flow of the Company for 2005 and 2004 had the Company adopted SFAS No. 123R in prior periods.



In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections  A Replacement of APB Opinion No. 20 and FASB Statement No. 3 (SFAS 154).  SFAS No. 154 replaces APB Opinion No. 20, Accounting Changes (APB 20) and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements, and changes the requirements for the accounting for and reporting of a change in accounting principle.  APB 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle.  SFAS No. 154 requires retrospective application to prior periods financial statements for voluntary changes in accounting principle.  SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.  The impact of SFAS No. 154 will depend on the accounting change, if any, in a future period.  The Company plans to adopt SFAS No. 154 for its first interim reporting period beginning on January 1, 2006.





49





---

CHEMOKINE THERAPEUTICS CORP.

(A Development Stage Company)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (continued)



|2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
|-- | ------------------------------------------------------



In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instrumentsan amendment of FASB Statements No. 133 and 140.  SFAS No. 155 amends FASB Statements No. 133, Accounting for Derivative Instruments and Hedging Activities, and No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No.155 amends SFAS No. 133 to permit fair value measurement for certain hybrid financial instruments that contain an embedded derivative, provides additional guidance on the applicability of SFAS No.133 and SFAS No.140 to certain financial instruments and subordinated concentrations of credit risk. SFAS No. 155 is effective for the first fiscal year that begins after September 15, 2006.  Adoption of this financial standard is not expected to have a material impact on the Companys consolidated financial position or results of operations.

|3. | HELD-TO-MATURITY INVESTMENTS
|-- | ----------------------------



The net carrying value and the aggregate fair value of the held-to-maturity investments as at December 31, 2005 are $ 2,627,760 and $ 2,623,633 respectively.  The unrealized holding gain from these investments in 2005 of $ 131,656 resulted from foreign exchange and is included in other income in the year.



|4. | PROPERTY AND EQUIPMENT                   |  | 
|-- | ---------------------------------------- |  | 
|   |                                          |  | 
|   |                                          |  | 
|   |                                          |  | 
|   | Computer equipment                       |  | 
|   | Computer software                        |  | 
|   | Furniture and fixtures                   |  | 
|   | Leasehold improvements                   |  | 
|   | Equipment                                |  | 
|   | Equipment under capital lease obligation |  | 
|   |                                          |  | 
|   |                                          |  | 
|   | Accumulated depreciation                 |  | 
|   |                                          |  | 
|   |                                          |  | 





|5. | LICENSE                  |  |  |   | 2005     |   | 2004    
|-- | ------------------------ |  |  | - | -------- | - | --------
|   |                          |  |  |   |          |   |         
|   | Cost                     |  |  | $ | 50,603   | $ | 50,603  
|   | Accumulated amortization |  |  |   | (26,610) |   | (18,916)
|   |                          |  |  |   |          |   |         
|   |                          |  |  | $ | 23,993   | $ | 31,687  



50





---

CHEMOKINE THERAPEUTICS CORP.

(A Development Stage Company)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (continued)



5.

LICENSE- continued



On September 22, 1999 the Company entered into a license agreement with the University of British Columbia (UBC).  The license grants the Company exclusive worldwide rights to research, develop and commercially exploit certain patented technologies, which remains the property of UBC.  The licensed technology relates to therapeutics for a variety of human diseases.



Under the agreement the Company is obligated to achieve various milestones and is committed to make milestone payments and to pay royalties of 2% of any revenues or other consideration derived from the licensed technologies.  Should the Company fail to satisfy any of its obligations, UBC has the right to terminate the license agreement.



-Milestone payments are to be made as follows:

- Cdn$ 100,000 at the time of completion of Phase II clinical trials

- Cdn$ 250,000 at the time of completion of Phase III clinical trials

- Cdn$ 500,000 at the time of filing for New Drug Approval



-Minimum annual royalty payments are to be made as follows:

- Cdn$ 25,000 one year from product approval

- Cdn$ 50,000 two years from product approval

- Cdn$ 75,000 three years from product approval

- Cdn$ 100,000 fours years from product approval

- Cdn$ 150,000 five years from product approval



|6. | DUE FROM (TO) AFFILIATES
|-- | ------------------------



The amounts due from (to) affiliates do not bear interest and have no fixed terms of repayment.



| |                                                                              |  |   | 2005   |   | 2004    
| | ---------------------------------------------------------------------------- |  | - | ------ | - | --------
| |                                                                              |  |   |        |   |         
| | Chemokine Therapeutics Inc., a Canadian corporation controlled
by a director |  | $ | -      | $ | (61)    
| | Globe Laboratories Inc., a Canadian corporation controlled by a
director     |  |   | 91,783 |   | (26,261)
| |                                                                              |  |   |        |   |         
| |                                                                              |  | $ | 91,783 | $ | (26,322)



|7. | CAPITAL LEASE OBLIGATION
|-- | ------------------------



The Company entered into a capital lease agreement with a third party during the year to lease equipment.





51





---

CHEMOKINE THERAPEUTICS CORP.

(A Development Stage Company)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (continued)



7.

CAPITAL LEASE OBLIGATION - continued



The Company estimates the following future minimum lease payments under the terms of the lease in each of the fiscal years ending December 31:

|   |               |                                           |  |  |   |          |  | 
|-- | ------------- | ----------------------------------------- |  |  | - | -------- |  | 
|   |               | 2006                                      |  |  | $ | 13,414   |  | 
|   |               | 2007                                      |  |  |   | 13,414   |  | 
|   |               | 2008                                      |  |  |   | 8,951    |  | 
|   |               |                                           |  |  |   |          |  | 
|   |               | Total minimum lease payments              |  |  |   | 35,779   |  | 
|   |               | Amount representing interest at 6.5%      |  |  |   | (2,974)  |  | 
|   |               |                                           |  |  |   |          |  | 
|   |               | Balance of the obligation                 |  |  |   | 32,805   |  | 
|   |               | Less: Current portion due within one year |  |  |   | (11,648) |  | 
|   |               |                                           |  |  |   |          |  | 
|   |               |                                           |  |  | $ | 21,157   |  | 
|8. | CAPITAL STOCK



Common stock

During the period from inception to December 31, 2005 the Company issued 31,897,206 common shares for total consideration of $ 22,691,322, net of offering costs of $ 3,175,475.



During the year ended December 31, 2004 the Company issued an aggregate 18,945,124 shares of common stock at $ 0.51 to $ 1.35 per share, for cash consideration of $ 14,380,821 before offering costs of $ 2,234,671, services valued at $ 16,305, settlement of debt valued at $ 200,000, and conversion of 150,000 shares of preferred stock.



During the year ended December 31, 2005, the Company issued an aggregate 2,554,000 shares of common stock at $ 0.79 to $ 0.86 per share, for cash consideration of $ 2,023,872, before offering costs of $ 278,023.



Preferred stock

As of December 31, 2005, the Company had 2,000,000 shares of convertible Series A preferred stock issued and outstanding.  These preferred shares were issued for cash proceeds of $ 2,700,000 and are convertible into common shares at no additional consideration, on a 1 for 1 basis.



During the year ended December 31, 2004 the Company issued 150,000 shares of common stock on conversion of 150,000 shares of convertible Series A preferred stock.



Warrants

During the year ended December 31, 2004 the Company issued 56,000 stock purchase warrants exercisable into common shares for $ 1.50 per share which expire between June 30, 2007 and November 10, 2007.  The stock purchase warrants were issued as partial consideration for consulting services.  The stock purchase warrants were accounted for at their fair value, as determined by the Black-Scholes option pricing model, of $ nil.



52





---

CHEMOKINE THERAPEUTICS CORP.

(A Development Stage Company)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (continued)



|8. | CAPITAL STOCK - continued
|-- | -------------------------



During the year ended December 31, 2004 the Company issued 30,000 stock purchase warrants exercisable into common shares for $ 1.35 per share which expire between July 31, 2007 and November 10, 2007, and issued 2,362,509 stock purchase warrants exercisable into common shares for $ 0.73 per share which expire on May 6, 2006.  The stock purchase warrants were issued, as partial consideration for finders fee.  The stock purchase warrants were accounted for at their fair value, as determined by the Black-Scholes option pricing model, of $ 3,900 which was charged to capital stock as an offering cost.



During the year ended December 31, 2004 the Company issued 1,280,000 stock purchase warrants exercisable into common shares at $ 0.83 per share which expire on June 30, 2006, issued 500,000 stock purchase warrants exercisable into common shares for $ 0.83 per share which expire December 30, 2007, and issued 60,000 stock purchase warrants exercisable into common shares for $ 0.83 per share which expire December 30, 2006.  The stock purchase warrants were issued, as to 1,280,000 stock purchase warrants, as partial consideration for agents fee and, as to 560,000 stock purchase warrants as consideration for consulting services.  The stock purchase warrants were accounted for at their fair value, as determined by the Black-Scholes option pricing model, of $ 340,391.  Of this amount, $ 98,509 was charged to capital stock as an offering cost, $ 22,048 was charged to general and administrative expense, and $ 219,834 was charged to research and development expense.



During the year ended December 31, 2005, the Company issued 192,000 stock purchase warrants exercisable into common shares at $ 0.86 per share which expire on June 30, 2006 and issued 50,000 stock purchase warrants exercisable into common shares at $ 0.80 per share which expire June 27, 2007.  The stock purchase warrants were issued, as to 192,000 stock purchase warrants, as partial consideration for agents fee and, as to 50,000 stock purchase warrants as consideration for consulting services.  The stock purchase warrants were accounted for at their fair value, as determined by the Black-Scholes option pricing model, of $ 64,340.  This amount was charged to capital stock as an offering cost.



During the year ended December 31, 2005, 102,000 stock purchase warrants were exercised into common shares at $ 0.86. In 2004, there were no warrants exercised into common shares.



During the year ended December 31, 2005, 283,650 stock purchase warrants issued to investors for exercising into common shares at $ 1.25 to $ 2.25 per share expired unexercised. In 2004, 34,153 stock purchase warrants issued to investors for exercising into common shares at $ 1.50 per share expired unexercised.



The following table summarizes information about stock purchase warrants outstanding at December 31, 2005:



| |   |                  |  | Number      |  |                           
| | - | ---------------- |  | ----------- |  | --------------------------
| |   |                  |  | outstanding |  |                           
| |   | Exercise         |  | and         |  | Expiry                    
| |   | price            |  | exercisable |  | dates                     
| |   |                  |  |             |  |                           
| | $ | 0.80             |  | 50,000      |  | June 2007                 
| |   | 0.86 (CDN$ 1.00) |  | 4,292,509   |  | May 2006 to December 2007 
| |   | 1.25             |  | 1,381,000   |  | May 2006 to November 2007 
| |   | 1.35             |  | 169,100     |  | July 2007 to November 2007
| |   | 1.50             |  | 56,000      |  | June 2007 to November 2007
| |   |                  |  |             |  |                           
| |   |                  |  | 5,948,609   |  |                           



53





---

CHEMOKINE THERAPEUTICS CORP.

(A Development Stage Company)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (continued)



|8. | CAPITAL STOCK - continued
|-- | -------------------------



Common stock reserved for future issuances

Common stock reserved for future issuances as of December 31, 2005 is as follows:



| | Outstanding stock options           | 2,656,500  | 
| | ----------------------------------- | ---------- | 
| | Stock options available for grant   | 1,893,916  | 
| | Preferred stock                     | 2,000,000  | 
| | Outstanding stock purchase
warrants | 5,948,609  | 
| |                                     |            | 
| |                                     | 12,499,025 | 



|9. | STOCK-BASED COMPENSATION
|-- | ------------------------



The Company has a stock option plan under which options to purchase common shares of the Company may be granted to employees, directors and consultants.  Stock options entitle the holder to purchase common stock at a subscription price determined by the Board of Directors at the time of the grant.  Options vest 4% at the time of grant and then at 4% per month for 24 months, at which time the options are fully vested in the holder.



The maximum number of shares of common stock authorized by the stockholders and reserved for issuance by the Board of Directors is 4,550,416.



The following summarizes the total number of stock options outstanding and the maximum number of stock options available to be granted at December 31, 2005.



| |                                |  |             |   | Weighted |  |            
| | ------------------------------ |  | ----------- | - | -------- |  | -----------
| |                                |  |             |   | average  |  |            
| |                                |  | Outstand-   |   | exercise |  | Available  
| |                                |  | ing options |   | price    |  | for grant  
| |                                |  |             |   |          |  |            
| | Balance at December 31, 2003   |  | 1,991,000   | $ | 1.27     |  | 9,000      
| | Increase in authorized options |  | -           |   | -        |  | 2,550,416  
| | Options granted                |  | 1,740,000   |   | 0.86     |  | (1,740,000)
| | Options cancelled              |  | (1,650,000) |   | 1.28     |  | 1,650,000  
| |                                |  |             |   |          |  |            
| | Balance at December 31, 2004   |  | 2,081,000   |   | 0.92     |  | 2,469,416  
| | Options granted                |  | 1,034,500   |   | 0.88     |  | (1,034,500)
| | Options cancelled              |  | (459,000)   |   | 0.99     |  | 459,000    
| |                                |  |             |   |          |  |            
| | Balance at December 31, 2005   |  | 2,656,500   | $ | 0.92     |  | 1,893,916  





54





---

CHEMOKINE THERAPEUTICS CORP.

(A Development Stage Company)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (continued)



|9. | STOCK-BASED COMPENSATION - continued
|-- | ------------------------------------



The following table summarizes information about stock options outstanding at December 31, 2005:



| |   | Weighted |  |             |  |             |  |              
| | - | -------- |  | ----------- |  | ----------- |  | -------------
| |   | exercise |  | Number      |  | Number      |  | Expiry       
| |   | price    |  | outstanding |  | exercisable |  | dates        
| |   |          |  |             |  |             |  |              
| | $ | 0.92     |  | 2,656,500   |  | 1,893,920   |  | June 2006    
| |   |          |  |             |  |             |  | to           
| |   |          |  |             |  |             |  | November 2010



The fair value of stock options used to compute the pro forma net loss is the estimated fair value at grant date using the Black-Scholes option pricing model with the following assumptions:



| |                         |  | 2005       |  | 2004    
| | ----------------------- |  | ---------- |  | --------
| |                         |  |            |  |         
| | Expected volatility     |  | 41% to 58% |  | 72%     
| | Risk-free interest rate |  | 2.82% to   |  | 3.06% to
| |                         |  | 3.92%      |  | 4.07%   
| | Expected lives in years |  | 5 years    |  | 5 years 
| | Expected dividends      |  | zero       |  | zero    





The fair value of stock options, calculated using the Black-Scholes option pricing model, awarded in 2005 ranged from $ 0.41 to $ 0.49 per option and 2004 was $ 0.14 per option.



|10. | RELATED PARTY TRANSACTIONS
|--- | --------------------------



During the years ended December 31, 2005 and 2004 the Company paid $ 3,180,452 and $ 1,124,826 to Globe Laboratories Inc., a corporation controlled by a director, for research expenses.



During the year ended December 31, 2005, the Company paid board compensation to its non-management directors totaling $ 71,750 (2004 - $ Nil) which was included in general and administrative expense.



During the year ended December 31, 2004, the Company paid directly or indirectly, to various directors $ 121,863 for management and consulting services provided, which was included in general and administrative expense.



During the years ended December 31, 2005 and 2004, the Company paid rent of $ 19,813 and $ 19,178, respectively, to a corporation with a director in common.  See Note 12.



55





---

CHEMOKINE THERAPEUTICS CORP.

(A Development Stage Company)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (continued)



|11. | INCOME TAXES
|--- | ------------



The provisions for income taxes are as follows:



| |                          |   | 2005 |   | 2004
| | ------------------------ | - | ---- | - | ----
| | Current                  |   |      |   |     
| | Federal                  | $ | -    | $ | -   
| | State                    |   | 800  |   | 800 
| | Foreign                  |   | -    |   | -   
| |                          |   |      |   |     
| | Total current            |   | 800  |   | 800 
| |                          |   |      |   |     
| | Deferred                 |   |      |   |     
| | Federal                  |   | -    |   | -   
| | State                    |   | -    |   | -   
| | Foreign                  |   | -    |   | -   
| |                          |   |      |   |     
| | Total deferred           |   | -    |   | -   
| |                          |   |      |   |     
| | Total income tax expense | $ | 800  | $ | 800 



The following is a reconciliation of income taxes at the statutory United States federal and state income tax rates to the income taxes at the effective income tax rates:



| |                                                                                   |   | 2005        |   | 2004     
| | --------------------------------------------------------------------------------- | - | ----------- | - | ---------
| |                                                                                   |   |             |   |          
| | Provision (recovery) at combined United States federal and state income tax rates | $ | (2,046,800) | $ | (936,000)
| |                                                                                   |   |             |   |          
| | Change in valuation allowance                                                     |   | 2,046,000   |   | 936,800  
| |                                                                                   |   |             |   |          
| | Effective income taxes                                                            | $ | 800         | $ | 800      



Deferred income tax assets and liabilities are as follows:



| |                                  |   | 2005        |   | 2004       
| | -------------------------------- | - | ----------- | - | -----------
| |                                  |   |             |   |            
| | Assets                           |   |             |   |            
| | Capitalized research expense     | $ | 2,518,200   | $ | 1,249,400  
| | Net operating loss carryforwards |   | 3,173,000   |   | 2,377,000  
| |                                  |   |             |   |            
| |                                  |   | 5,691,200   |   | 3,626,400  
| | Valuation allowance              |   | (5,691,200) |   | (3,626,400)
| |                                  |   |             |   |            
| | Net deferred income taxes        | $ | -           | $ | -          





56





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CHEMOKINE THERAPEUTICS CORP.

(A Development Stage Company)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (continued)



|11. | INCOME TAXES - continued
|--- | ------------------------



As of December 31, 2005 the Company had federal net operating loss carryforwards of approximately $ 9,319,500 and Canadian non-capital loss carryforwards of approximately $ 49,800.  The federal net operating loss carryforwards will expire at various dates beginning in 2018, if not utilized beforehand.  The Canadian non-capital loss carryforwards will expire at various dates beginning 2011, if not utilized beforehand.



Utilization of the net operating loss carryforwards may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions.  The annual limitation may result in the expiration of net operating losses before utilization.



|12. | COMMITMENTS
|--- | -----------



-Contractual agreements



The Company has entered in various research and development agreements with third parties to perform research and development services on its behalf.  The Company is committed to pay $ 1,689,875, in respect of contracts in place at December 31, 2005.



 Lease agreements



The Company leases office premises under operating leases which expire at various dates ending July 31, 2008.  Included in these commitments is one agreement entered into with a corporation under common control, which has been terminated effective June 30, 2006.  See Note 10.  The Company is obligated to make the following minimum lease payments under its operating leases in each of the fiscal years ending December 31:



| | 2006 | $ | 99,100  | 
| | ---- | - | ------- | 
| | 2007 |   | 79,300  | 
| | 2008 |   | 42,600  | 
| |      |   |         | 
| |      | $ | 221,000 | 
| |      |   |         | 





57





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CHEMOKINE THERAPEUTICS CORP.

(A Development Stage Company)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (continued)



|13. | SUPPLEMENTAL CASH FLOW INFORMATION
|--- | ----------------------------------



The Company conducted non-cash activities as follows:



| |                          |   | 2005     |   | 2004
| | ------------------------ | - | -------- | - | ----
| |                          |   |          |   |     
| | Financing activities     |   |          |   |     
| | Capital lease obligation | $ | 34,650   | $ | -   
| |                          |   |          |   |     
| | Investing activities     |   |          |   |     
| | Purchase of equipment    |   | (34,650) |   | -   
| |                          |   |          |   |     
| |                          | $ | -        | $ | -   



|14. | FINANCIAL INSTRUMENTS
|--- | ---------------------



The Companys financial instruments consist of cash and cash equivalents, investments, amounts receivable, amounts due from (to) affiliates, accounts payable and accrued liabilities and capital lease obligation.



Fair value

The fair value of cash and cash equivalents, amounts receivable and accounts payable and accrued liabilities approximates their carrying values due to their short terms to maturity.  The fair value of investments is determined using quoted market prices for those securities or similar financial instruments.



The fair value of the capital lease obligation approximates the carrying amount as the capital lease obligation bears a fair market rate of interest.



The fair value of the amounts due from (to) affiliates is not readily determinable as the amounts are due from related parties.  The amounts are carried at the amount of consideration required to discharge the obligations on a current basis.



Credit risk

Cash and cash equivalents, investments, amounts receivable and amounts due from affiliates expose the Company to credit risk.  The Company minimizes its exposure to credit risk by transacting with parties that are believed to be credit worthy.  The maximum potential loss on these financial instruments is equal to the carrying amounts of those items.



The Company has cash in excess of the Cdn$ 100,000 insured amount as established by the Canada Deposit Insurance Corporation.



58





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CHEMOKINE THERAPEUTICS CORP.

(A Development Stage Company)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (continued)





|15. | SUBSEQUENT EVENTS
|--- | -----------------



Subsequent to the year end the Company:



-

issued 992,586 common shares for cash of $ 865,825 (Cdn$ 992,586), resulting from the exercise of warrants and stock options.



-

issued 395,000 stock options which are exercisable at $ 1.08 per share.



-

completed a private placement on March 22, 2006 and issued a total of 6,471,698 common shares at a price of CDN$ 1.06 per common share for gross proceeds of $ 5,882,857 (Cdn$ 6,860,000) and net proceeds of $ 5,587,428 (Cdn$ 6,515,500) after cash commissions.  In addition, the Company issued agents warrants exercisable into 350,000 common shares at an exercise price of CDN $1.25 per common share and expiring on March 22, 2008.



|16. | DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
|--- | ---------------------------------------------------------------------------------------



The consolidated financial statements are presented in accordance with United States generally accepted accounting principles (GAAP).  GAAP differs in certain material respects from Canadian generally accepted accounting principles (Canadian GAAP).  The material differences between GAAP and Canadian GAAP are as follows:



Consolidated statement of operations



| |                                                    |   | 2005        |   | 2004       
| | -------------------------------------------------- | - | ----------- | - | -----------
| |                                                    |   |             |   |            
| | Net loss under GAAP                                | $ | (6,020,166) | $ | (3,095,240)
| | Stock-based compensation intrinsic value basis (i) |   | 289,533     |   | 51,581     
| | Stock-based compensation fair value basis (i)      |   | (172,788)   |   | (55,619)   
| |                                                    |   |             |   |            
| | Net loss under Canadian GAAP                       | $ | (5,903,421) | $ | (3,099,278)
| |                                                    |   |             |   |            
| | Loss per share under Canadian GAAP                 | $ | (0.19)      | $ | (0.26)     



| | (i) | Stock-based compensation
| | --- | ------------------------

On January 1, 2004 the Company retroactively adopted the revised provisions Canadian Institute of Chartered Accountants Handbook Section 3870 Stock-Based Compensation and Other Stock-based Payments (Section 3870).  Section 3870, as revised, requires stock-based compensation be charged to expense based on estimated fair value.  The fair value of stock-based compensation is determined, under 3870, the same way as under SFAS No. 123.  The adoption of this revised standard impacts net loss reported under Canadian GAAP and otherwise has no impact on stockholders equity or net cash used in operations.



59





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CHEMOKINE THERAPEUTICS CORP.

(A Development Stage Company)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (continued)





|16. | DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES- continued
|--- | --------------------------------------------------------------------------------------------------





| | (ii) | Contributed surplus
| | ---- | -------------------

U.S. GAAP uses the phrase Additional paid-in Capital to describe consideration received in excess of the par value of warrants and stock options.  Canadian GAAP uses the phrase Contributed Surplus.



| | (iii) | Development stage disclosure
| | ----- | ----------------------------

The Company is considered a development stage Company as defined by SFAS No. 7.  The Company is also considered a development stage Company under Accounting Guideline 11 Enterprises in the development stage of the Canadian Institute of Chartered Accountants Handbook.



| | (iv) | Foreign currency translation
| | ---- | ----------------------------

Canadian GAAP does not expressly provide for the concept of a functional currency with respect to foreign currency translation.  However, the method of translation used by the Company is equivalent to the method required under Canadian GAAP.



60





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SIGNATURES

In accordance with section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

CHEMOKINE THERAPEUTICS CORP.



Dated:  March 29, 2006

/s/ Hassan Salari



Hassan Salari, President and Chief Executive Officer

In accordance with the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

|Signatures                                  |  | Title                                                                |  | Date          
|------------------------------------------- |  | -------------------------------------------------------------------- |  | --------------
|                                            |  |                                                                      |  |               
|/s/ Hassan Salari                           |  | President and Chief Executive Officer                                |  | March 29, 2006
|Hassan Salari                               |  | And Member of the Board of Directors                                 |  |               
|*Principal Executive Officer                |  |                                                                      |  |               
|                                            |  |                                                                      |  |               
|/s/ David Karp                              |  | Director of Finance, Chief Financial Officer and Corporate Secretary |  | March 29, 2006
|David Karp                                  |  |                                                                      |  |               
|*Principal Financial and Accounting Officer |  |                                                                      |  |               
|                                            |  |                                                                      |  |               
|/s/ C. Richard Piazza                       |  | Chairman of the Board                                                |  | March 29, 2006
|C. Richard Piazza                           |  |                                                                      |  |               
|                                            |  |                                                                      |  |               
|/s/ Mohammad Azab                           |  | Director                                                             |  | March 29, 2006
|Mohammad Azab                               |  |                                                                      |  |               
|                                            |  |                                                                      |  |               
|/s/ Matthias C. Kurth                       |  | Director                                                             |  | March 29, 2006
|Matthias C. Kurth                           |  |                                                                      |  |               
|                                            |  |                                                                      |  |               
|/s/ Michael Evans                           |  | Director                                                             |  | March 29, 2006
|Michael Evans                               |  |                                                                      |  |               
|                                            |  |                                                                      |  |               
|/s/ John Osth                               |  | Director                                                             |  | March 29, 2006
|John Osth                                   |  |                                                                      |  |               
|                                            |  |                                                                      |  |               
|                                            |  |                                                                      |  |               
|                                            |  |                                                                      |  |               





61





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|        | EXHIBIT INDEX                                                                                                                                                                                                 |              
|------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------
|Exhibit |                                                                                                                                                                                                               | Page Number/ 
|Number  | Description                                                                                                                                                                                                   | Filing Method
|        |                                                                                                                                                                                                               |              
|3.1     | Articles of Incorporation                                                                                                                                                                                     | (1)          
|3.2     | Bylaws                                                                                                                                                                                                        | (1)          
|4.1     | See Exhibits 3.1 and 3.2                                                                                                                                                                                      |              
|10.1    | License Agreement between Chemokine Therapeutics Corp. and University of British Columbia dated September 22, 1999                                                                                            | (1)          
|10.2    | Development Agreement, dated January 1, 2003, between Chemokine Therapeutics Corp. and Globe Laboratories Inc.                                                                                                | (1)          
|10.3    | Employment Agreement dated April 1, 2004 between Chemokine
Therapeutics Corp. jointly with Chemokine Therapeutics (B.C.) Corp. and Dr. Hassan Salari                                                          | (1)          
|10.4    | Employment Agreement dated April 1, 2004, between Chemokine Therapeutics Corp. jointly with Chemokine Therapeutics (B.C.) Corp. and Walter Korz                                                               | (1)          
|10.5    | Employment Agreement dated May 14, 2004, between Chemokine
Therapeutics Corp. jointly with Chemokine Therapeutics (B.C.) Corp. and David Karp                                                                 | (1)          
|10.6    | Escrow Agreement between Chemokine Therapeutics Corp., Pacific Corporate Trust Company and Pacific Medical Corp.                                                                                              | (4)          
|10.7    | Loan and Stock Warrant Agreement dated October 16, 2002,
between Chemokine Therapeutics Corp. and Pharmaceutical Product Development, Inc.                                                                    | (1)          
|10.8    | Option and License Agreement, dated April 15, 2003, between Chemokine Therapeutics Corp. and Pharmaceutical Product Development, Inc.                                                                         | (1)          
|10.9    | Agreement re: Exercise of Warrant dated April 15, 2003                                                                                                                                                        | (1)          
|10.10   | Modification and Waiver Agreement, dated September 14, 2004, between Chemokine Therapeutics Corp. and Pharmaceutical Product Development, Inc.                                                                | (2)          
|10.11   | 2004 Consulting Agreement between Pharmaceutical Product
Development, Inc. and  Chemokine Therapeutics Corp. dated September 14, 2004                                                                         | (2)          
|10.12   | 2004 Warrant Agreement between Pharmaceutical Product Development, Inc. and Chemokine Therapeutics Corp. dated September 14, 2004                                                                             | (2)          
|10.13   | Amendment to Employment Agreement dated with Dr. Hassan between Chemokine Therapeutics Corp. jointly with Chemokine Therapeutics (B.C.) Corp. and Dr. Hassan Salari                                           | (2)          
|10.14*  | Research and Development Agreement dated June 29, 2004, between Procter & Gamble Pharmaceuticals, Inc. and Chemokine Therapeutics Corp.                                                                       | (2)          
|10.15   | Lease Agreement dated January 1, 2003 between Salari Enterprises Ltd. and Chemokine Therapeutics Corp.                                                                                                        | (3)          
|10.16   | Form of Warrant Agreement for investors in May 6, 2004, Regulation S offering                                                                                                                                 | (3)          
|10.17   | Agent Warrant Agreement for warrants issuable to agents upon closing of our offering pursuant to this registration statement                                                                                  | (4)          
|10.18   | The 2004 Stock Option Plan                                                                                                                                                                                    | (2)          
|10.19   | Amended Employment Agreement dated March 10, 2005, between Dr. Hassan Salari, our CEO, and President, and Chemokine Therapeutics Corp. jointly with Chemokine Therapeutics (B.C.) Corp.                       | (5)          
|10.20   | Amended Employment Agreement dated March 10, 2005, between David Karp, our Chief Financial Officer and Corporate Secretary, and Chemokine Therapeutics Corp. jointly with Chemokine Therapeutics (B.C.) Corp. | (5)          
|14.1    | Code of Ethics                                                                                                                                                                                                | (5)          
|21.1    | List of Subsidiaries of Chemokine Therapeutics Corp.                                                                                                                                                          |              
|23.1    | Consent of Independent Registered Public Accounting Firm                                                                                                                                                      |              
|31.1    | Section 302 Certification of Chief Executive Officer                                                                                                                                                          |              
|31.2    | Section 302 Certification of Chief Financial Officer                                                                                                                                                          |              
|32      | Certification Pursuant to U.S.C. 18 Section 1350                                                                                                                                                              |              



*

Confidential treatment has been requested as to certain portions of this Agreement.



(1)

Previously filed on Registration Statement on Form SB-2 (Reg. No. 333-117858) on August 2, 2004.

(2)

Previously filed on Amendment No. 1 to Registration Statement on Form SB-2  (Reg. No. 333-117858) on October 20, 2004.

(3)

Previously filed on Amendment No. 2 to Registration Statement on Form SB-2  (Reg. No. 333-117858) on November 26, 2004.

(4)

Previously filed on Amendment No. 3 to Registration Statement on Form SB-2  (Reg. No. 333-117858) on December 17, 2004.

(5)

Previously filed on Form 10-KSB on March 15, 2005.



62





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Exhibit 21.1





LIST OF SUBSIDIARIES OF CHEMOKINE THERAPEUTICS CORP.





|Name                              | State of Incorporation   | Name Under Which Subsidiary Does Business
|--------------------------------- | ------------------------ | -----------------------------------------
|Chemokine Therapeutics (BC) Corp. | British Columbia, Canada | Chemokine Therapeutics (BC) Corp.        





63





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Exhibit 23.1





CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANT FIRM





We hereby consent to the use in this Annual Report on Form 10-KSB, of our report dated March 10, 2006, relating to the consolidated financial statements of Chemokine Therapeutics Corp., and into the previously filed Registration Statement No. 333-117858 on Form SB-2.





/s/ M.D. Sassi Co.



San Francisco, California

March 29, 2006





64





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Exhibit 31.1



CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002



I, Hassan Salari,certify that:



1. I have reviewed this Annual Report on Form 10-KSB for the year ended December 31, 2005 of Chemokine Therapeutics Corp.;



2. 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;



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



4. The registrant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)) for the registrant and have:



(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 registrant, 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) [Paragraph omitted pursuant to SEC Release Nos. 33-8545 and 34-51293]



(c) Evaluated the effectiveness of the registrant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 registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting.



5. The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrant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 registrant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 registrants internal control over financial reporting.



Date: March 29, 2006

/s/  Hassan Salari





Hassan Salari



President and Chief Executive Officer





65





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Exhibit 31.2



CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002



I, David Karp,certify that:



1. I have reviewed this Annual Report on Form 10-KSB for the year ended December 31, 2005 of Chemokine Therapeutics Corp.;



2. 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;



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



4. The registrant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)) for the registrant and have:



(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 registrant, 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) [Paragraph omitted pursuant to SEC Release Nos. 33-8545 and 34-51293]



(c) Evaluated the effectiveness of the registrant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 registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting.



5. The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrant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 registrant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 registrants internal control over financial reporting.



Date: March 29, 2006

/s/ David Karp





David Karp



Chief Financial Officer





66





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Exhibit 32



CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF

THE SARBANES-OXLEY ACT OF 2002



I, Hassan Salari, President and Chief Executive Officer of Chemokine Therapeutics Corp. (the Company), certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:



(1) the Annual Report of the Company on Form 10-KSB for the year ended December 31, 2005, as filed with the Securities and Exchange Commission (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 the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.



/s/ Hassan Salari



Hassan Salari

President and Chief Executive Officer



March 29, 2006





I, David Karp, Chief Financial Officer of Chemokine Therapeutics Corp. (the Company), certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:



(1) the Annual Report of the Company on Form 10-KSB for the year ended December 31, 2005, as filed with the Securities and Exchange Commission (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 the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.



/s/ David Karp



David Karp

Chief Financial Officer



March 29, 2006



67