##### 



Vasogen 2004
Managements Discussion and Analysis The following discussion and analysis should be read in conjunction with our audited
consolidated financial statements and the accompanying notes. The consolidated financial
statements have been prepared in accordance with generally accepted accounting principles (GAAP)
in Canada, which, except as described in note 15, conform in all material respects with generally
accepted accounting principles in the United States. All amounts are expressed in Canadian dollars
unless otherwise noted. Annual references are to Vasogens fiscal years, which end on November 30.
In this report, we, us, and our refer to Vasogen Inc. This document is current in all
material respects as of January 13, 2005. 2004 Highlights  
    We reached full enrollment in our 500-patient pivotal phase III SIMPADICO
trial of our Celacade technology in peripheral arterial disease.
    Results from the phase II trial of our Celacade technology in advanced
chronic heart failure patients were published in the Journal of the American
College of Cardiology.
    Preclinical results demonstrating the use of our Celacade technology to
reduce inflammation in the heart were presented at the 8th Annual
Scientific Meeting of the Heart Failure Society of America.
    We were granted CE Mark regulatory approval in Europe for our Celacade
technology for the treatment of chronic heart failure.
    We reported results from our preclinical program investigating the
therapeutic potential of VP025, the lead product candidate from our new class
of drugs for neuro-inflammatory conditions.
    In March 2004 we completed an offering of 9,775,000 common shares resulting
in gross proceeds to the Company of approximately US$57.7 million.
    At year end, our cash and marketable securities totaled $73.0 million,
compared with $60.1 million at the prior year-end.
    On December 17, 2003 the common shares of Vasogen Inc. began trading on the
NASDAQ National Market and on May 24, 2004 Vasogen was added to the NASDAQ
Biotechnology Index. OVERVIEW Our goal is to develop and commercialize new technologies for the treatment of cardiovascular,
neurological, and other chronic inflammatory diseases. We are currently conducting two pivotal
phase III clinical trials using our Celacade therapeutic device technology to target chronic
inflammation in cardiovascular disease. Our 500-patient pivotal phase III SIMPADICO trial, which
has completed patient enrollment, is designed to further evaluate the use of our Celacade
technology to reduce intermittent claudication in patients with moderate to severe peripheral
arterial disease (PAD). Our 2,000-patient pivotal phase III ACCLAIM trial is




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##### 



designed to further investigate the use of our Celacade technology to reduce mortality and morbidity risk in patients
with advanced chronic heart failure. We are also developing a new class of drugs for the treatment of inflammation in the brain and
central nervous system. VP025, the lead product candidate from this new class of drugs, is in
preclinical development for the treatment of neuro-inflammatory disorders, including Parkinsons
disease and Alzheimers disease. The following table sets out the stage of development for each of our programs: Product
    
    Indications
    
    Development StatusCelacade technology
    
    Peripheral arterial disease
    
    Pivotal phase III clinical trial*Celacade technology
    
    Chronic heart failure
    
    Pivotal phase III clinical trial*VP025
    
    Neuro-inflammatory conditions
    
    Preclinical
 *Pivotal phase III clinical trials are multi-center studies undertaken to confirm the efficacy of a
therapeutic intervention in large patient groups. WE PLAN TO ACHIEVE OUR GOAL BY PURSUING THE FOLLOWING STRATEGIES: Develop and commercialize our products for unmet medical needs We believe that our Celacade technology has the potential to be used for first-in-class therapy
targeting chronic inflammation in cardiovascular disease, providing a safe and effective addition
to the standard of care for chronic heart failure (HF) and peripheral arterial disease (PAD).
We are collaborating with opinion leaders in cardiovascular medicine to conduct our phase III
clinical trials in chronic HF and PAD and, if these trials are successfully completed, we believe
that these collaborations will enhance the potential for our Celacade technology to be adopted as
part of the standard of care in these conditions. Our phase III trials are designed to support
regulatory approvals in North America and commercial introduction in North America and Europe.
Through alliances with healthcare companies, we plan to establish the sales and marketing
capability needed to promote and facilitate the adoption of our products by the medical community. Continue to build a portfolio of new technologies targeting inflammatory disorders VP025 is the first product candidate from a new class of drugs that we have identified. This new
class of drugs represents a platform technology from which we may derive other product candidates
for development and commercialization. We are currently testing VP025 across a number of
preclinical models of neuro-inflammatory disorders and have reported results from a number of these
studies during 2004. We expect VP025 to enter phase I clinical development in the first half of
2005. Form strategic alliances with companies that can provide the sales and marketing capabilities
needed to promote and facilitate the adoption of our products by the medical community We intend to establish corporate alliances, primarily to support marketing and sales of our
products, in the United States, Canada, and elsewhere. We expect that the primary point of care
for integration of our Celacade technology will be the hospital clinic and/or cardiology and
interventional cardiology practices. To develop a potential secondary point of care for access to
our Celacade technology, in 2001 we entered into a strategic alliance with Quest Diagnostics
Incorporated (Quest Diagnostics) of New Jersey to establish an outpatient delivery model to
accommodate patient referrals outside hospital clinics and cardiology practices in the United
States on an exclusive basis.




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##### 



RESULTS OF OPERATIONS We are a development-stage enterprise that dedicates the majority of our cash resources to research
and development (R&D) activities. Our products have not yet been approved by regulatory
authorities in all
relevant jurisdictions and we have not yet marketed products commercially; as such, we do not
currently generate any revenues from operations. Research and Development The changes in R&D expenditures, and their key components, for the three years ended November 30
are reflected in the following table: R&D Expenditures (in
    
    
    
    
    
    
    
    
    
    Increase
    
    
    
    
    
    
    
    
    
    
    Increasemillions of dollars, except
    
    2004
    
    
    2003
    
    
    (Decrease)
    
    
    2003
    
    
    2002
    
    
    (Decrease)percentages)Clinical costs:Direct
    
    $
    31.3
    
    
    $
    9.7
    
    
    $
    21.6
    
    
    $
    9.7
    
    
    $
    3.1
    
    
    $
    6.6Indirect
    
    $
    14.0
    
    
    $
    7.8
    
    
    $
    6.2
    
    
    $
    7.8
    
    
    $
    5.5
    
    
    $
    2.3Preclinical costs
    
    $
    4.0
    
    
    $
    2.0
    
    
    $
    2.0
    
    
    $
    2.0
    
    
    $
    1.9
    
    
    $
    0.1Intellectual property costs
    
    $
    2.2
    
    
    $
    1.6
    
    
    $
    0.6
    
    
    $
    1.6
    
    
    $
    1.6
    
    
    $
    0.0Other costs
    
    $
    0.3
    
    
    $
    0.6
    
    
    
    ($0.3
    )
    
    $
    0.6
    
    
    $
    0.6
    
    
    $
    0.0Total R&D
    
    $
    51.80
    
    
    $
    21.7
    
    
    $
    30.1
    
    
    $
    21.7
    
    
    $
    12.7
    
    
    $
    9.0R&D expenditures as a
percentage of the sum of
R&D and General
Administrative
Expenditures
    
    
    77
    %
    
    
    68
    %
    
    
    9
    %
    
    
    68
    %
    
    
    63
    %
    
    
    5
    %
 Clinical Costs As a development-stage company moves its products towards commercialization in the
biotechnology/pharmaceutical/medical device industry, investment in clinical development of these
products increases significantly. The investment associated with phase III clinical trials is
generally substantially greater than that for phase II trials. This results from the increased
numbers of clinical sites and patients that are required for phase III trials. The investment in
our phase III Celacade programs is expensed for accounting purposes and is the key driver of our
increased losses, which are a direct result of advancing our programs forward. Our phase III clinical programs in PAD and chronic HF, discussed in detail below, account for the
majority of the increase in our R&D spending in 2004 compared with 2003, and in 2003 compared with
2002. This increase has been driven primarily by the initiation of new clinical sites into these
programs and the associated increase in the number of patients enrolled.




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##### 



In fiscal 2004, the number of sites initiated and patients enrolled in our phase III programs has
increased from 2003, which increased from 2002, both of which are key drivers of R&D costs. The
number of clinical sites initiated increased by 163% during fiscal 2004 when compared to fiscal
2003, and increased by 159% in fiscal 2003 when compared to fiscal 2002. The number of patients
enrolled into our phase III trials increased by 875% in fiscal 2004 when compared to fiscal 2003,
and increased by 142% in fiscal 2003 when compared to fiscal 2002. Direct costs to support these
phase III programs include expenses for clinical site fees, study
monitoring, and product support. These costs increased in direct relation to the increase in the
number of clinical sites initiated in our phase III programs and the associated increase in the
number of patients enrolled. Indirect costs to support these programs consist of salaries,
professional fees, and other support costs. Such support costs increased significantly as the
number of clinical sites initiated in our phase III programs and the number of patients enrolled in
these programs increased, but not on a directly proportionate basis. A more detailed summary of
our two phase III clinical trials is provided below. SIMPADICO Our 500-patient pivotal phase III SIMPADICO trial has reached full enrollment of patients with
moderate to severe PAD and stable intermittent claudication (Fontaine stage II) at 50 clinical
sites in the United States and Canada. SIMPADICO is evaluating the use of our Celacade
technology to improve intermittent claudication and is designed to support regulatory approval in
North America and commercial introduction in North America and Europe. The Principal Investigator
and Chairman of the Steering Committee for the SIMPADICO trial is Dr. Jeffrey Olin, Director,
Vascular Medicine Program, The Zena and Michael A. Wiener Cardiovascular Institute, Mount Sinai
School of Medicine, New York. The primary endpoint of SIMPADICO is the change in maximal treadmill walking distance after six
months; a primary efficacy endpoint recognized by the FDA and other regulatory authorities for
approving new products for the treatment of patients with PAD and intermittent claudication. The
primary endpoint of the SIMPADICO study is expected to be completed by the end of the second
quarter of 2005, with results being made available following analysis of the data. Patients
enrolled in the SIMPADICO study will be treated for an additional six months following the
completion of the primary endpoint, to provide additional information, including additional safety
data. The initiation of our SIMPADICO trial was based on results from our double-blind,
placebo-controlled phase II clinical trial conducted in 85 patients with moderate to severe PAD.
Results of this study have been published in the European Journal of Vascular and Endovascular
Surgeryand showed that patients in the Celacade group walked further before the onset of pain,
compared to placebo. Furthermore, treatment was shown to be well tolerated and there were no
reports of treatment-related serious adverse side effects or interactions with existing
medications. ACCLAIM We continue to advance our 2,000-patient pivotal phase III ACCLAIM trial, which is investigating
the use of our Celacade technology to reduce mortality and morbidity risk in patients with advanced
chronic heart failure. Our ACCLAIM trial is being conducted at leading cardiac centers throughout
North America, Europe and Israel, and is designed to support the regulatory approval process for
our Celacade technology in North America and commercialization in North America and Europe. During
the year, we were granted an extension to the CE Mark for our Celacade technology, providing
regulatory approval in Europe for the treatment of chronic heart failure. The Global Principal
Investigator and Chairman of the Steering Committee for the ACCLAIM trial is Dr. James Young,
Chairman, Division of Medicine, The Cleveland Clinic Foundation and Medical Director of the Kaufman
Center for Heart Failure in Cleveland. The primary outcome measure for the ACCLAIM trial is the composite endpoint of all-cause mortality
or cardiovascular hospitalization (time to first event). The trial, which has been approved to
enroll up to 2,016 patients, will conclude when a minimum of 701 events (defined as death or first
cardiovascular hospitalization) has occurred and all patients have been followed for at least six
months. Based on patient recruitment trends, we expect that patient recruitment into the ACCLAIM
trial will be completed during the first half of 2005. Subject to achieving the pre-specified
number of minimum events and patient recruitment




---



##### 



goals, we expect the primary endpoint of the study
to be completed during the second half of 2005, with results to be made available following
analysis of the data. The initiation of our ACCLAIM trial was based on results from our double-blind, placebo-controlled,
phase II clinical trial conducted in 73 patients with advanced chronic HF. The results of this
study, which have been published in the Journal of the American College of Cardiology, demonstrated
a significant reduction in mortality and morbidity risk for patients in the Celacade group,
compared to placebo. Furthermore, the
treatment was shown to be well tolerated and there were no reports of treatment-related serious
adverse side effects or interactions with existing medications. Preclinical Costs Our preclinical research programs are focused on developing a new class of drugs to treat diseases
characterized by chronic inflammation. VP025, our lead product candidate from this new class of
drugs, is in preclinical development for the treatment of neurological conditions characterized by
chronic inflammation, which may include such disorders as Alzheimers disease, Parkinsons disease,
and amyotrophic lateral sclerosis (ALS), also known as Lou Gehrigs disease. In 2004, we reported
the results of a number of preclinical programs evaluating the potential of VP025. Preclinical research data demonstrating the potential ability of VP025 to reverse a correlate of
memory impairment associated with aging was presented at the Fourth Federation of European
Neuroscience Societies Forum in Lisbon, Portugal and at Neuroscience 2004, the Society for
Neurosciences 34th Annual Meeting in San Diego. These results, presented by Dr. Marina Lynch and
her team from the Department of Physiology at Trinity College in Ireland, also showed that VP025
may prevent impairment of memory caused by beta-amyloid, a major component of the plaques found in
brains of Alzheimers disease patients. Preclinical research data demonstrating the ability of VP025 to significantly delay the onset of
disease and increase survival in a model of ALS were presented at both the 128th Annual Meeting of
the American Neurological Association held in Toronto and at Neuroscience 2004. This research was
conducted under the direction of Dr. Stanley Appel, Chief of Neurology at the Methodist Hospital,
Professor of Neurology at Baylor College of Medicine, and member of Vasogens Scientific Advisory
Board. In ALS, the immune system actively contributes to motor neuron injury through inflammatory
processes. Also presented during Neuroscience 2004, were results of preclinical research conducted at the
Department of Anatomy/Neuroscience, Biosciences Institute, University College Cork, Ireland in
Parkinsons disease. This research demonstrated the ability of VP025 to significantly reduce
movement abnormalities and provide a neuroprotective effect in a well-established model of
Parkinsons disease. Evidence is accumulating that inflammation plays an important role in the
pathogenesis of this disease. Based on the results in a number of models of neuro-inflammatory conditions, we have submitted an
investigational new drug application to advance VP025 into phase I clinical development, which we
expect will occur during the first half of 2005. The increase in R&D expenditures associated with
preclinical research activities during fiscal 2004 is primarily the result of the above studies, as
well as other preclinical studies necessary to support the advancement of VP025 into clinical
development. In addition to the VP025 program, our preclinical research continues to support the development of
our Celacade technology. A preclinical study conducted at Baylor College of Medicine in Houston,
Texas, in a murine model of cardiac inflammation (myosin-induced myocarditis) demonstrated that
treatment using our Celacade technology resulted in a marked reduction in heart muscle tissue
staining for TNF-alpha, an important inflammatory cytokine involved in the pathogenesis of chronic
heart failure, when compared to placebo. Results of this study were reported at the annual meeting
of the Heart Failure Society of America in September 2004.




---



##### 



Intellectual Property Our research and development initiatives have resulted in the filing of numerous patent
applications. We own patents and pending patent applications relating to our products and
technologies in the United States, Canada and other jurisdictions around the world. Our
intellectual property expenditures primarily consist of fees paid to patent offices worldwide and
to external patent counsel. These costs are included in R&D expenditures and are expensed as
incurred. This expenditure is a result of advancing our patent protection into additional
countries, as a result of international patent grants, and additional patent and trademark
activities associated
with protecting our existing technologies as well as new discoveries and developments resulting
from our research and development programs. Nature and Treatment of Expenses We expense all research and development costs. The majority of our research is outsourced to
medical institutions, under contractual agreements, for which expenditures are settled with cash
payments that are aligned with the achievement of pre-defined activities. The costs of our prepaid
clinical supplies are deferred, on the basis that these supplies have future alternative uses
related to the various clinical applications of our Celacade technology, and are expensed as they
are shipped to outsourced research centers or clinical sites. The cost of our acquired technology, representing part of our platform medical device technology,
is amortized straight-line over 20 years in recognition of the term of the acquired patent. Our ability to recover the carrying value of our acquired technology and clinical supplies is
impacted by several factors, including, but not limited to, the progress of clinical trials, our
ongoing ability to fund clinical trials, feedback and decisions from health regulators regarding
clinical trial results, technological obsolescence, the development of our patent portfolio, the
ability to defend any claims made by third parties against our intellectual property, and our
financial ability to launch claims against those third parties who may infringe our intellectual
property. We are not aware of any factors that would impact adversely on the carrying value of our
acquired technology or the clinical supplies that would result in a material loss to our company. The majority of expenditures related to our phase III trials are payable in U.S. dollars. In
addition, a significant component of the costs with respect to our phase III ACCLAIM trial are
payable in Eurodollars. The majority of general and administrative costs are payable in Canadian
dollars. General and Administration The changes in general and administration expenditures, and their key components, for the three
years ended November 30 are reflected in the following table: General and Administration
    
    
    
    
    
    
    
    
    
    Increase
    
    
    
    
    
    
    
    
    
    
    IncreaseExpenditures (in millions of dollars)
    
    2004
    
    
    2003
    
    
    (Decrease)
    
    
    2003
    
    
    2002
    
    
    (Decrease)Infrastructure and
other support costs
    
    $
    13.3
    
    
    $
    8.2
    
    
    $
    5.1
    
    
    $
    8.2
    
    
    $
    6.7
    
    
    $
    1.5Insurance
    
    $
    1.4
    
    
    $
    1.2
    
    
    $
    0.2
    
    
    $
    1.2
    
    
    $
    0.4
    
    
    $
    0.8Professional fees
    
    $
    1.2
    
    
    $
    0.8
    
    
    $
    0.4
    
    
    $
    0.8
    
    
    $
    0.4
    
    
    $
    0.4Total General and
Administration
Expenditures
    
    $
    15.9
    
    
    $
    10.2
    
    
    $
    5.7
    
    
    $
    10.2
    
    
    $
    7.5
    
    
    $
    2.7




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##### 



Infrastructure and other support costs include salaries and related employee costs for those
employees not directly involved in research and development, as well as all facility-related and
information technology expenditures. This increase is primarily driven by an increase in full time
employees to 149 as at November 30, 2004 from 82 at as November 30, 2003, and from 61 as at
November 30, 2002. Professional fees include expenditures for legal, tax, accounting, and other
specialized services. Infrastructure support costs and
professional fees have increased to support our phase III clinical programs, and for corporate,
marketing, legal, and business development activities associated with preparing for the
commercialization of our products. Insurance costs are higher as a result of insurance required for our phase III clinical programs
and a general market increase in insurance premiums for directors and officers liability
insurance when comparing fiscal 2004 to 2003 and when comparing fiscal 2003 to 2002. We have adopted CICA handbook section 3870, Stock-based Compensation and Other Stock-based
Payments, effective for fiscal 2003. The adoption of this new section has resulted in a non-cash
charge included in our general and administrative expenses of $0.5 million in 2004 and $0.4 million
in 2003, whereas no such expense existed for fiscal 2002. These expenses consist of the fair value
of options, calculated using a Black-Scholes pricing model, granted to non-employees in exchange
for services. In addition, the fair value of compensation options and warrants issued for services
in connection with the private placement of common shares completed in 2003, in the amount of $1.8
million, has been recorded as a cost of issuing the related common shares. Subsequent amendments
to Section 3870, issued in December 2003, require the use of the fair value based method to account
for all stock-based transactions with employees in the financial statements of the Company in its
fiscal year beginning December 1, 2004. If the options granted to employees in fiscal 2004 had
been included in our financial statements, they would have been ascribed a fair value of $2.9
million; however, this pro forma expense might not be representative of the actual expense on
adoption of the new amendment. Foreign Exchange Foreign Exchange (in
    
    
    
    
    
    
    
    
    
    Increase
    
    
    
    
    
    
    
    
    
    Increasemillions of dollars)
    
    2004
    
    2003
    
    (Decrease)
    
    2003
    
    2002
    
    (Decrease)Foreign exchange loss (gain)
    
    $
    8.3
    
    
    $
    1.1
    
    
    $
    7.2
    
    
    $
    1.1
    
    
    $
    0.3
    
    
    $
    0.8
 We are holding U.S. dollars in anticipation of the significant U.S. dollar R&D expenses that we
expect to incur as a result of our ongoing clinical trials. Our statement of operations includes a
foreign exchange loss for the year ended November 30, 2004 as a result of the strengthening of our
reporting currency, the Canadian dollar, relative to the U.S. dollar during this period. The
year-end conversion rates from U.S. dollar to Canadian dollar for November 30, 2004, 2003, and 2002
were 1.1858, 1.2965 and 1.3165 respectively. In addition, the financing that was completed in 2004
occurred when the conversion rate from the U.S. dollar to Canadian dollar was 1.33. While our
reporting currency is the Canadian dollar, the funds raised in the financings that we completed in
2003 and 2004 were in U.S. dollars, and their Canadian dollar equivalents are subject to
fluctuations in the U.S. exchange rate. The unrealized component of the 2004 foreign exchange loss
was $7.7 million and the realized component was $0.6 million. The exchange rate fluctuation,
although significant from an accounting viewpoint, does not impair our ability to pay these U.S.
dollar denominated R&D expenses.




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##### 



Investment Income Investment Income (in
    
    
    
    
    
    
    
    
    
    Increase
    
    
    
    
    
    
    
    
    
    
    Increasemillions of dollars)
    
    2004
    
    
    2003
    
    
    (Decrease)
    
    
    2003
    
    
    2002
    
    
    (Decrease)Investment income
    
    $
    1.4
    
    
    $
    1.1
    
    
    $
    0.3
    
    
    $
    1.1
    
    
    $
    1.0
    
    
    $
    0.1
 Investment income in 2004 was comparable to that in 2003, and 2002, even though cash invested in
marketable securities has increased for these periods. This is a result of lower returns on
investments available in the marketplace in general, and an increased weighting of lower-yielding
U.S. investments. Loss Loss (in millions of dollars,
    
    
    
    
    
    
    
    
    
    Increase
    
    
    
    
    
    
    
    
    
    
    Increaseexcept per-share amounts)
    
    2004
    
    
    2003
    
    
    (Decrease)
    
    
    2003
    
    
    2002
    
    
    (Decrease)Loss
    
    $
    74.6
    
    
    $
    31.9
    
    
    $
    42.7
    
    
    $
    31.9
    
    
    $
    19.5
    
    
    $
    12.4Loss per share
    
    $
    1.07
    
    
    $
    0.57
    
    
    $
    0.50
    
    
    $
    0.57
    
    
    $
    0.40
    
    
    $
    0.17
 As discussed above, the increased loss during the last three fiscal periods resulted mainly from
higher costs associated with the expansion of our clinical programs and the corporate costs
associated with supporting these programs. TREND INFORMATION It is important to note that historical patterns of expenditures cannot be taken as an indication
of future expenditures. The amount and timing of expenditures and therefore liquidity and capital
resources vary substantially from period to period depending on the preclinical and clinical
studies being undertaken at any one time and the availability of funding from investors and
prospective commercial partners. The following table presents unaudited selected financial data for each of the last eight quarters
ending November 30, 2004: Loss for the period
    
    
    Basic and diluted
    
    
    Foreign Exchange (000s)(000s)
    
    
    loss per share
    
    
    Gain/(Loss)February 28, 2004
    
    
    ($12,095
    )
    
    
    ($0.19
    )
    
    
    $628May 31, 2004
    
    
    ($14,069
    )
    
    
    ($0.20
    )
    
    
    $2,009August 31, 2004
    
    
    ($19,647
    )
    
    
    ($0.27
    )
    
    
    ($2,127
    )November 30, 2004
    
    
    ($28,739
    )
    
    
    ($0.41
    )
    
    
    ($8,798
    )February 28, 2003
    
    
    ($5,428
    )
    
    
    ($0.10
    )
    
    
    ($180
    )May 31, 2003
    
    
    ($7,335
    )
    
    
    ($0.14
    )
    
    
    ($135
    )August 31, 2003
    
    
    ($5,870
    )
    
    
    ($0.10
    )
    
    
    $2,206November 30, 2003
    
    
    ($13,315
    )
    
    
    ($0.23
    )
    
    
    ($3,002
    )




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##### 



Our increasing quarterly loss over the past two years relates directly to the advancement of our
two phase III clinical trials. The other significant factor impacting our quarterly losses are
the changes in the U.S. dollar relative to the Canadian dollar over the past two years. Both of
these factors are discussed in greater detail elsewhere in this document. The operations of our
Company are not subject to any material seasonality or cyclicality factors. Fourth Quarter The increased loss in the fourth quarter of 2004, compared to the third quarter of 2004, is mainly
driven by the increase in the value of the Canadian dollar relative to the U.S. dollar over this
period. The impact of this
exchange rate fluctuation was a loss of $8.8 million in the fourth quarter. Our research and
development expenditures and our general and administrative expenditures for the fourth quarter
were $20.3 million compared with $17.9 million in the third quarter. As mentioned above, we are
holding U.S. dollars in anticipation of the significant U.S. dollar R&D expenses that we expect to
incur with respect to supporting our ongoing clinical trials, and therefore this exchange rate
fluctuation, although significant from an accounting point of view, does not impair our ability to
pay our U.S. dollar denominated R&D expenses. In addition to the foreign exchange loss, the increased loss in the fourth quarter is driven by the
increased costs associated with the ACCLAIM and SIMPADICO phase III trials. The number of clinical
sites initiated increased by 18% during the fourth quarter when compared to the third quarter. The
number of patients enrolled increased by 64% during the fourth quarter when compared to the third
quarter. LIQUIDITY AND CAPITAL RESOURCES Since our inception, we have financed our operations primarily from public and private sales of
equity, the exercise of warrants and stock options, and interest on funds held for future
investments. On March 4, 2004, we completed a public offering for gross proceeds of $76.9 million (US$57.7
million), resulting in the issuance of 9.8 million common shares. During 2004, we received $1.3
million from the exercise of options and warrants, compared with $1.9 million in 2003, and $0.5
million in 2002. The total number of common shares outstanding at the end of 2004 increased to
72.3 million from 62.0 million at year-end 2003. The number of options and warrants outstanding at
year-end is 4.5 million and could generate approximately $31 million if exercised. As at January 17, 2005, we have 72,395,516 common shares outstanding; and have granted 3,398,099
options to purchase common shares, and 985,237 warrants to purchase common shares. At November 30, 2004, our cashand marketable securities held to maturity totaled $73.0 million,
compared with $60.1 million at the prior year-end. The increase is a result of the net proceeds
received from the financing that was completed March 4, 2004, exceeding cash used in operations
during the year. We invest our cash resources in liquid government and corporate debt instruments
having a single A credit rating or greater. We are exposed to market-rate risk related to changes in interest rates and foreign exchange rates
between the Canadian and U.S. dollars, which could affect the value of our marketable securities.
At November 30, 2004, we held directly or indirectly through forward currency contracts, U.S.
dollar denominated securities in the amount of US$53.0 million (2003  US$31.4 million, 2002 
US$3.6 million). We do not believe that the results of operations or cash flows would be affected
to any significant degree by a sudden change in market interest rates relative to our investments,
due to the relative short-term nature of the investments. During the year, we entered into contracts to purchase Canadian dollars at specific times, totaling
$49.9 million (US$37.5 million) and concurrently entered into forward contracts to purchase U.S.
dollars at specific future dates. A portion, US$26.0 million of these forward contracts mature in
December 2004 and the balance




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will mature in April 2005. The Canadian dollars were acquired to
enable us to invest our cash resources in Canadian investments, however, these forward contracts
enabled us to preserve our U.S. funds, even when converted to Canadian dollars. Our U.S. funds
will be used to cover U.S. expenditures associated with our phase III clinical trials. At November
30, 2004 the equivalent value of these forward contracts was $44.7 million, which, when compared to
the amount due on maturity results in a $5.2 million unrealized foreign exchange loss. Our net cash used in operating activities for the year ended November 30, 2004 was $55.8 million
compared with $29.2 million for 2003 and $20.1 million for 2002. This increase is reflected in our
increased expenditures on research and development activity. The reasons for these higher
operating losses are detailed above. Changes in our working capital also have a significant impact
on our cash used in operations. Our working capital is also affected by the increase in our
accrued liabilities that is a result of certain expenses incurred in our ACCLAIM and SIMPADICO
clinical trials that will not be paid out until certain trial
milestones are reached, such as completion of recruitment or receipt of final study reports from
clinical sites at the end of the trials. The increased cash used in operations for 2004 and 2003
primarily reflects our expanded clinical development programs and the larger infrastructure
necessary to support these activities and expected growth. CRITICAL ACCOUNTING ESTIMATES The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial statements, and the
reported amount of revenue and expenses during the reporting period. Significant accounting
policies and methods used in preparation of the financial statements are described in note 1 to the
Consolidated Financial Statements. Critical accounting estimates include the amount of development
expenditures expensed as opposed to capitalized; the fair value of options and common share
purchase warrants; the testing for recoverability of long-lived assets; and the income tax
valuation allowance. We expense research costs as they are incurred. Development costs are expensed as incurred unless
they meet the criteria under Canadian generally accepted accounting principles for deferral and
amortization. We have not capitalized any such development costs to date Effective December 1, 2002, we adopted part of the new CICA Handbook Section 3870, Stock-based
Compensation and Other Stock-based Payments. The recommendations require all stock-based payments
to non-employees, and employee awards that are direct awards of stock, that call for settlement in
cash or other assets, or stock appreciation rights that call for settlement by the issuance of
equity instruments, granted on or after December 1, 2002, to be accounted for using the fair value
based method. Subsequent amendments to Section 3870 issued in December 2003 require the use of the
fair value based method to account for all stock-based transactions with employees in the financial
statements of the Company in its fiscal year beginning December 1, 2004. In 2003, we (a)
maintained our current policy for employee stock-based compensation using the settlement method,
and (b) changed our policy to record compensation costs for stock-based compensation issued on or
after December 1, 2002 to non-employees at fair value. The Company uses the Black-Scholes option pricing model to calculate the fair value of stock based
payments, which requires assumptions, including the average expected life and volatility of the
Companys stock, to be made at the time of grant. The Company amortizes the fair value of the
options over the expected service period which is reviewed for changes from period to period. We periodically review the useful lives and the carrying values of our long-lived assets. We
review for impairment in long-lived assets whenever events or changes in circumstances indicate
that the carrying amount of the assets may not be recoverable. If the sum of the undiscounted
expected future cash flows expected to result from the use and eventual disposition of an asset is
less than its carrying amount, it is considered to be impaired. An impairment loss is measured at
the amount by which the carrying amount of




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the asset exceeds its fair value; which is estimated as
the expected future cash flows discounted at a rate commensurate with the risks associated with the
recovery of the asset. We have a net tax benefit resulting from non-capital losses carried forward, and pools of
scientific research and experimental development expenditures and investment tax credits. In view
of the recent net losses and expected future losses, management is of the opinion that it is
unlikely that these tax assets will be realized in the foreseeable future and hence, a full
valuation allowance has been recorded against these income tax assets. Accordingly, no future
income assets or liabilities are recorded on the balance sheets. OFF-BALANCE SHEET ARRANGEMENTS We have no debt, guarantees, off-balance sheet arrangements, capital lease obligations. Other
long-term obligations are discussed below. CONTRACTUAL OBLIGATIONS Our contractual obligations are as follows: Contractual Obligations(in millions of dollars)
    
    Total
    
    

Less
than1 year
    
    
    1  3 years
    
    
    4  5 years
    
    

More
than5 yearsOperating lease obligations
    
    $
    3.5
    
    
    $
    0.7
    
    
    $
    1.4
    
    
    $
    1.3
    
    
    $
    0.1
 We have entered into Clinical Research Services Agreements with a number of Clinical Research
Organizations (CROs) to conduct the phase III clinical trials of our Celacade technology and our
phase I clinical trial for VP025. The contracts with these CROs are payable over the terms of the
trials and the timing of payments is largely dependent on various milestones being met, such as the
number of patients recruited, number of monitoring visits conducted, the completion of certain data
management activities, trial completion, and other trial-related activities. We are also liable
for the payment of certain pass through costs. As part of phase III trials, we also enter into
agreements with the clinical sites participating in the trials. These agreements require payments
over the course of the study based on various activities being completed by the site, such as
patient visits and various testing and measurement activities required per the study protocol. A
significant portion of the amounts due to the sites for these activities is not payable until after
the completion of the trial. This holdback results in a significant accrual of trial-related
expenses during the course of the study, as the expense is recognized for accounting purposes but
the cash payment is not made until after the trial is completed. We have granted royalties to arms-length third parties based on gross amounts receivable by us
from future commercial sales of our Celacade technology, aggregating 1.5% on all sales to a maximum
royalty of $1.3 million per annum and an additional 2% with respect to revenue derived from certain
applications of this technology to a maximum royalty of $5.0 million per annum. To date, no
royalties are due and/or payable. RELATED PARTY TRANSACTIONS AND INTERESTS OF MANAGEMENT IN MATERIAL TRANSACTIONS Strategic Alliance with Quest Diagnostics Incorporated in the United States




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To develop a potential secondary point of care for integration of our Celacade technology, we have
a strategic alliance with Quest Diagnostics in the United States on an exclusive basis. The
purpose of this alliance is to establish an outpatient delivery model to accommodate patient
referrals outside hospital clinics and cardiology practices. The final terms of this alliance are
expected to be established prior to our filing for FDA review. In connection with this strategic
alliance, Quest Diagnostics made an equity investment in our common shares of US$7.5 million in
2001 at a price of C$8.49 per share, resulting in the issuance of 1,406,783 common shares. Quest
Diagnostics also received warrants to acquire 625,237 common shares at an exercise price of C$12.73
per share. These warrants are exercisable on or before November 6, 2006. Quest Diagnostics owns
3,056,783, or approximately 4.2%, of our common shares. We intend to establish additional
alliances, primarily to support marketing and sales of our products, in the United States, Canada,
and elsewhere. Clinical Trial Services Agreements with Quest Diagnostics We have entered into clinical trial services agreements with Quest Diagnostics to provide central
laboratory testing and related services in connection with the ACCLAIM and SIMPADICO trials. The
agreements are on terms customary for agreements of this nature. RISKS AND UNCERTAINTIES Our products are in development, have not yet been approved by regulatory authorities in all
relevant jurisdictions, and have not yet been marketed commercially. Our business entails
significant risks, including the costs and time involved in obtaining the required regulatory
approvals, our current reliance on primarily one product, the adequacy of our patent protection,
the uncertainties involved in clinical testing, the availability of capital to continue development
and commercialization of our products, and competition from pharmaceutical, biotechnology and
medical device companies. There can be no assurance that our ongoing preclinical and clinical
research activities will provide positive outcomes or that the results of our clinical trials will
meet the desired clinical endpoints established in the clinical study protocols. Even if the
clinical studies are successful, there can be no assurance that we will be successful in obtaining
necessary regulatory approvals or, once obtained, in maintaining these approvals. There can also be
no assurance that we will be successful in marketing and distributing our products, or achieve
reimbursement from government or private health authorities. We have also not yet demonstrated the
ability to manufacture a product commercially in large volumes. The actual timeline for completion of our ACCLAIM clinical trial could vary significantly from our
forecast due to a number of factors. A key risk factor is patient recruitment rates into this
trial, which are contingent on the clinical sites participating in the study having both an
appropriate patient population available and the necessary research capacity. An additional key
risk factor associated with the timeline specific to the ACCLAIM trial is achieving the pre-defined
number of events during a reasonable timeframe. Any delay in the completion of our ACCLAIM trial
could cause the price of our common shares to decline. We set goals for and make public statements regarding timing for the completion of objectives
material to our success, such as the commencement and completion of clinical trials, anticipated
regulatory approval dates, and time of product launch. The actual timing of these events can vary
dramatically due to factors such as delay or failures in our clinical trials, the uncertainties
inherent in the regulatory approval process and delays in achieving product development,
manufacturing, or marketing milestones necessary to commercialize our products. There can be no
assurance that our clinical trials will be completed as planned, that we will make regulatory
submissions or receive regulatory approvals as planned, or that we will be able to adhere to our
current schedule for the scale-up of manufacturing and launch of any of our products. If we fail to
achieve one or more of these planned milestones, the price of our common shares could decline.




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We intend to raise additional financing, as required, through strategic alliance arrangements, the
exercise of options and warrants, and the issuance of new share capital, as well as through other
financing opportunities. However, there can be no assurance that these financing efforts will be
successful or that we will continue to be able to meet our ongoing cash requirements. It is
possible that financing may not be available or, if available, will not be on favorable terms. The
availability of financing will be affected by the results of our scientific and clinical research,
our ability to obtain regulatory approvals, the market acceptance of our products, the state of the
capital markets generally (with particular reference to biotechnology and medical companies), the
status of strategic alliance agreements, and other relevant commercial considerations. A detailed list of the risks and uncertainties affecting our Company can be found in our Annual
Information Form. OUTLOOK We expect that our total expenditures will continue to grow in 2005 and that we will continue to
incur operating losses as a result of the clinical trial activity necessary to support regulatory
approvals in the United States, Canada, and other jurisdictions. We also anticipate that general
and administration expenses will continue to grow to provide the necessary infrastructure to
support our clinical activity, as well as the development of infrastructure and processes necessary
to support commercialization. We also believe that we have sufficient cash resources to support
operations into 2006. We expect to further increase our cash resources during 2005 through
additional corporate finance and/or strategic alliance activities. Over the long term, we expect
that we will require additional financing to grow and expand our operations, and we plan to raise
funds from time to time through either strategic partnering initiatives or from the capital
markets, even if we do not have an immediate need for additional capital. Funding requirements may
vary depending on a number of factors, including the progress of our research and development
programs; the extent and breadth of these programs; the results of preclinical studies and clinical
trials; the cost, timing, and outcome of the regulatory approvals process; the establishment of
marketing and sales or research and development collaborations; the cost of preparing, filing,
prosecuting, maintaining, defending, and enforcing patent claims; and competing technological and
market developments. We have been granted CE Mark regulatory approval for our Celacade medical device technology in
Europe. This regulatory approval enables us to market this technology in the 25 member countries
of the European Union  a strategy we plan to pursue upon the successful completion of our ongoing
phase III trials. Assuming these trials are successful, we also plan to file for regulatory
approval with the applicable regulatory authorities to market our products in the United States,
Canada, and potentially other jurisdictions. To commercialize our products, we intend to enter
into additional strategic alliances with established healthcare companies that have the commercial
infrastructure necessary to support successful market introduction in various geographical
jurisdictions. Depending upon the results of our research and development programs and the availability of
financial resources, we could decide to accelerate, terminate, or cut back on certain areas of
research and development, or commence new areas of research and development. These are complex
decisions with the goal of optimizing investment returns and managing the cash burn rate. We do not
presently know of any factors that would indicate that a change in strategy is needed in the next
year. Additional information relating to us, including our Annual Information Form, is on SEDAR at
www.sedar.com.




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Certain statements contained in this discussion and analysis constitute forward-looking
statements within the meaning of the United States Private Securities Litigation Reform Act of
1995. These statements include, without limitation, statements concerning our strategy, future
operations, future financial position, future revenues, projected costs, prospects, plans and
objectives of management. In some cases, you can identify forward-looking statements by terminology
such as may, will, should, expects, plans, anticipates, believes,
estimated, predicts, potential, continue, intends, could, or the negative of
such terms or other comparable terminology. You should not place undue reliance on our
forward-looking statements. Forward-looking statements, particularly those concerning anticipated
events relating to the development, the clinical trials, regulatory approval and marketing of our
products and the timing or magnitude of those events, are inherently risky and uncertain. The
factors discussed below and other considerations discussed in our annual information form could
cause our actual results to differ significantly from those contained in any forward-looking
statements.