**UNITED
      STATES**




**SECURITIES
      AND EXCHANGE COMMISSION**




**Washington,
      D.C. 20549**




___________




**Amendment
        No. 1 to**





**FORM
      20-F/A**




**þ**
            **Registration
                Statement Pursuant to Section 12(b) or 12(g) of*****The
                Securities Exchange Act of 1934*****OR****o**
            **Annual
                Report Pursuant to Section 13 or 15(d) of*****The
                Securities Exchange Act of 1934*****OR****o**
            **Transition
                Report Pursuant to Section 13 or 15(d) of*****The
                Securities Exchange Act*****of
                1934****OR****o**
            **Shell
                Company Report pursuant to Section 13 or 15(d) of*****The
                Securities Exchange Act*****of
                1934******





**Commission
                  file number:
                  0-52039**










**TM
      BIOSCIENCE CORPORATION**


(Exact
      Name of Registrant as Specified in its Charter)




**Not
      Applicable**


(Translation
      of Registrant’s Name into English)




**Province
      of Ontario, Canada**


(Jurisdiction
      of incorporation or organization)




**439
      University Ave**


**Suite
      2000**


**Toronto,
      Ontario**


**CANADA,
      M5G 1Y8**


(Address
      of principal executive offices)






Securities
      registered or to be registered pursuant to Section 12(b) of the Act:
      None.




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




**Title
                of Each Class**
            **Name
                of Each Exchange on Which Registered**Common
                Shares, No Par Value
            Not
                applicable.




Securities
      for which there is a reporting obligation pursuant to Section 15(d) of the
      Act:
      None.




Indicate
      the number of outstanding shares of each of the issuer’s classes of capital or
      common stock as of the close of the period covered by the annual report: Not
      applicable.




Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the *Securities
      Act.* o Yes þ No




If
      this
      report is an annual or transition report, indicate by check mark if the
      registrant is not required to file reports pursuant to Section 13 or 15(d)
      of
      the *Securities
      Exchange Act* of
      1934. o Yes o No







Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days. o Yes o No




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




Large
      accelerated filer o  Accelerated filer o   Non-accelerated
      Filer þ




Indicate
      by check mark which financial statement item the registrant has elected to
      follow. o Item 17 þ Item
      18




If
      this
      is an annual report, indicate by check mark whether the registrant is a shell
      company (as defined in Rule 12b-2 of the Exchange Act) o Yes o No






**TABLE
      OF CONTENTS**




Item
                1.
            Identity
                of Directors, Senior Management and Advisors
            3A.
            Directors
                and Senior Management
            3B.
            Advisors
            4C.
            Auditors
            4Item
                2.
            Offer
                Statistics and Expected Timetable
            5Item
                3.
            Key
                Information
            5A.
            Selected
                Consolidated Financial Data
            5B.
            Capitalization
                and Indebtedness
            6C.
            Reasons
                for the Offer and Use of Proceeds
            7D.
            Risk
                Factors
            7Item
                4.
            Information
                on the Company
            14A.
            History
                and Development of the Company
            14B.
            Business
                Overview
            17C.
            Organizational
                Structure
            25D.
            Property,
                Plant and Equipment
            26Item
                4A
            Unresolved
                Staff Comments
            26Item
                5.
            Operating
                and Financial Review and Prospects
            26Item
                6.
            Directors,
                Senior Management and Employees
            26A.
            Directors
                and Officers of the Company
            38B.
            Compensation
            40C.
            Board
                Practices
            43D.
            Employees
            47E.
            Share
                Ownership
            47Item
                7.
            Major
                Shareholders and Related Party Transactions
            50A.
            Major
                Shareholders
            50B.
            Related
                Party Transactions
            51C.
            Interests
                of Experts and Counsel
            51Item
                8.
            Financial
                Information
            52A.
            Consolidated
                Statements & Other Financial Information
            52B.
            Significant
                Changes
            52Item
                9.
            The
                Offer and Listing
            52A.
            Offer
                and Listing Details
            52B.
            Plan
                of Distribution
            54C.
            Markets
            54D.
            Selling
                Shareholders
            54E.
            Dilution
            54F.
            Expenses
                of the Issue
            54Item
                10.
            Additional
                Information
            54A.
            Share
                Capital
            54B.
            Memorandum
                and Articles of Association
            55C.
            Material
                Contracts
            58D.
            Exchange
                Controls
            59E.
            Taxation
            59F.
            Dividends
                and Paying Agents
            61G.
            Statements
                by Experts
            61H.
            Documents
                on Display
            61I.
            Subsidiary
                Information
            62Item
                11.
            Quantitative
                and Qualitative Disclosures About Market Risk
            62Item
                12.
            Description
                of Securities Other Than Equity Securities
            63A.
            Debt
                Securities
            63B.
            Warrants and
                Rights
            63C.
            Other
                Securities
            63D.
            American
                Depository Shares
            63Item
                13.
            Defaults,
                Dividend Arrearages and Delinquencies
            63Item
                14.
            Material
                Modification to the Rights of Security Holders and Use of
                Proceeds
            63Item
                15.
            Controls
                and Procedures
            63Item16A.
            Audit
                Committee Financial Expert
            63Item16B.
            Code
                of Ethics
            63Item16C.
            Principal
                Accountant Fees and Services
            63Item16D.
            Exemptions
                from the Listing Standards for Audit Committees
            63Item16E.
            Purchases
                  of Equity Securities by the Issuer and Affiliated
                  Purchasers
            63Item
              17
            Financial
              Statements
            64Item
              18.
            Financial
                Statements
            64Item
              19.
            Exhibits
            64





1


**Tm
      BIOSCIENCE CORPORATION**




**Presentation
      of Information**




Unless
      otherwise indicated, all references in this registration statement on Form
      20-F
      to “the Company”, “Tm”, “Tm Bioscience”, “we”, “us”, “our” or similar terms
      refer to Tm Bioscience Corporation together with its subsidiaries.




All
      dollar amounts in this registration statement on Form 20-F are expressed in
      Canadian dollars except where stated otherwise. In this registration statement,
      unless stated otherwise, all references to “U.S.$” are to the lawful currency of
      the United States and all references to “$” or “C$” are to the lawful currency
      of Canada.




The
      Company’s consolidated financial statements have been prepared in accordance
      with generally accepted accounting principles in Canada (“Canadian GAAP”). For a
      discussion of the principal differences between Canadian GAAP and the accounting
      principles generally accepted in the United States (“U.S. GAAP”) as they relate
      to the Company’s consolidated financial statements, see note 23 to the Company’s
      audited consolidated financial statements for the year ended December 31, 2005
      included in this registration statement.




The
      enforcement by investors of civil liabilities under the United States federal
      securities laws may be affected adversely by the fact that (1) the Company
      is
      incorporated and organized under and is governed by the *Business
      Corporations Act* (Ontario), (2) some or all of its directors and its officers may be residents
      of
      Canada, (3) some or all of the experts named in this registration statement
      on
      Form 20-F may be residents of Canada, and (4) all or a substantial portion
      of
      the assets of the Company and said persons may be located outside the United
      States.




**Forward
      Looking Statements**




This
      registration statement on Form 20-F contains certain forward-looking statements
      with respect to the Company. These include statements about management’s
      expectations, beliefs, intentions or strategies for the future, which are
      indicated by words such as “vision”, “may”, “will”, “should”, “plan”, “intend”,
“potential”, “estimate”, “anticipate”, “believe”, “forecast”, “project”,
“predict” and “expect” or the negative of these terms or other similar
      expressions concerning matters that are not historical facts. In particular,
      statements regarding the Company’s future operating results, economic
      performance, product development efforts and strategy to create shareholder
      value are or involve forward-looking statements. More specifically, statements
      about the planned development of diagnostic genetic tests, including the ID-TagTM
RVP, warfarin and sepsis tests, the potential efficacy of such tests, the
      anticipated timing of the commercial launch, the approximate revenues that
      will
      be generated by such tests and the market penetration the Company will obtain
      for such tests, are forward-looking statements.




Forward-looking
        statements are based on certain factors and assumptions. The Company has
        assumed
        that it will submit its PGx, sepsis, warfarin and ID-TagTM RVP tests for
        regulatory approval in 2006 (and in the case of the sepsis test, possibly
        2007),
        that it will receive the necessary regulatory approvals from the FDA and
        European regulatory authorities within one year of submission, and that as
        part
        of such approval the FDA and European regulatory authorities will have reviewed,
        as required, clinical and analytical validation of the PGx, sepsis, RVP,
        and
        warfarin tests. The Company has also assumed that it will have sufficient
        capital to develop and commercially roll-out and manufacture sufficient
        quantities of its tests and that genetic testing to predict drug responses
        or
        for infectious diseases will become more widespread. With respect to the
        sepsis
        test specifically, the Company has assumed that it will be able to successfully
        develop the sepsis test in two versions, as a real-time assay and in a Tag-It
TM
format. With respect to revenue generation and market penetration of the
        sepsis
        test, the Company has assumed that it will launch the sepsis test in the
        United
        States in both forms (i.e., as a real-time assay and in a Tag-It TM format)
        following receipt of the necessary regulatory approvals, that it will be
        able to
        sell the sepsis test at a price ranging from U.S.$300 to U.S.$500 per test,
        that
        there will be reimbursement available for this test by both private and public
        healthcare insurers, that there will be approximately 750,000 sepsis cases
        a
        year in each of the United States and the European Union, that the Company
        will
        achieve approximately 20% market penetration in both markets by the third
        year
        following launch, that the $U.S./$Cdn. exchange rate and the Euro/$Cdn. exchange
        rate will remain relatively constant at current rates, that the Company will
        sell the product directly to hospitals, that there will be no other directly
        competing technological or competitive advances in the treatment of sepsis,
        that
        Xigris® and vasopressin will continue to be widely used in the treatment of
        sepsis, that the Company will continue to enjoy the exclusive use of the
        patents
        to be licensed from Sirius, that these patents are and will remain valid
        and
        enforceable and that sufficient revenue and earnings will be generated from
        the
        sepsis test to recover the $4 million license fee advance paid to Sirius
        in the
        forecast timeframe. While the Company considers these assumptions to be
        reasonable based on information currently available to it, they may prove
        to be
        incorrect.




2


Forward-looking
      statements are not guarantees of future performance and by their nature
      necessarily involve risk and uncertainties that could cause actual results
      to
      differ materially from those contemplated by such statements including, without
      limitation, the difficulty of predicting regulatory approvals, market acceptance
      and demand for new products, the availability of appropriate genetic content,
      the protection of intellectual property connected with genetic content, the
      impact of competitive products and any other similar or related risks and
      uncertainties. See Item 3.D. *“Risk
      Factors”* of this
      registration statement on Form 20-F for additional details. If any of these
      or
      other risks or uncertainties were to materialize, or if the factors and
      assumptions underlying the forward-looking statements were to prove incorrect,
      actual results of the Company could vary materially from those that are
      expressed or implied by these forward-looking statements.




You
      should not place undue importance on forward-looking statements and should
      not
      rely on them as of any other date. Except as may be required by applicable
      law,
      the Company disclaims any intention or obligation to update or revise any
      forward-looking statements, whether as a result of new information, future
      events or otherwise *.*




**Exchange
      Rate Information**




The
        following table sets forth the exchange rates for one U.S. dollar in effect
        at
        the end of the periods noted, the highest and lowest exchange rates during
        such
        periods and the average of the exchange rates of such periods, calculated
        by
        using the average of the exchange rates on the last day of each month during
        such periods. The exchange rate expressed in Canadian dollars are based on
        the
        noon buying rate as reported by the Federal Reserve Bank of New York, which
        as
        of  September 6, 2006, was C$1.1052 = U.S.$1.00.




**Period**
              **High**
              **Low**
              **Average**
              **Period
                  End**Q2
                  2006
              C$1.1718
              C$1.0989
              C$1.1219
              C$1.1150Q1
                  2006
              C$1.1726
              C$1.1320
              C$1.1495
              C$1.16702005
              C$1.2703
              C$1.1507
              C$1.2083
              C$1.16562004
              C$1.3970
              C$1.1775
              C$1.2984
              C$1.20342003
              C$1.5750
              C$1.2923
              C$1.3916
              C$1.29232002
              C$1.6128
              C$1.5108
              C$1.5702
              C$1.58002001
              C$1.6023
              C$1.4933
              C$1.5519
              C$1.5925







The
      following table sets forth the highest and lowest exchange rates for one U.S.
      dollar for each month during the previous six months.




**March
                  2006**
              **April
                  2006**
              **May
                  2006**
              **June
                  2006**
              **July
                  2006**
              **August
                  2006**High
              
              C$1.1722
              C$1.1718
              C$1.1232
              C$1.1241
              C$1.1415
              C$1.1312Low
              
              C$1.1320
              C$1.1203
              C$1.0989
              C$1.0991
              C$1.1112
              C$1.1066




**PART
      I**




**Item
      1.**  **Identity
      of Directors, Senior Management and Advisors**




***A.***
            ***Directors
                and Senior Management***




As
      at
      June 1, 2006, the name, business address, positions with the Company and
      principal occupation of each director of the Company are set forth below:


3




Name
                  and Business Address
              Present
                  Office
              Committee
                  MembershipJOHN
                  R. FREDERICK
                Heatim
                  Capital Corporation
                24
                  Hazelton Ave.
                Toronto,
                  Ontario M5R 2E2
              Director
                  since 1987
              Audit
                  (chair)
                Corporate
                  Governance and NominatingGREGORY
                  C. HINES
                Tm
                  Bioscience Corporation
                439
                  University Ave.
                Suite
                  900
                Toronto,
                  Ontario M5G 1Y8
              President
                  and Chief Executive Officer of the Company
                Director
                  since 2000
              NoneMICHAEL
                  MUELLER
                4
                  Ridgefield Rd.
                Toronto,
                  Ontario M4N 3H8
              Director
                  since 2004
              Audit
                Human
                  Resources and CompensationNEIL
                  M. REID
                7
                  Reeve Drive
                Markham,
                  Ontario L3P 6B8
              Vice-Chairman
                  of the Company
                Director
                  since 2000
              Audit
                Corporate
                  Governance and Nominating (chair)PAUL
                  N. LUCAS
                GlaxoSmithKline
                  Inc.
                7333
                  Mississauga Rd. N
                Mississauga,
                  Ontario L5N 6L4
              Chairman
                  of the Company
                Director
                  since 2002
              Corporate
                  Governance and Nominating
                Human
                  Resources and CompensationBRADLEY
                  POPOVICH
                Sirius
                  Genomics Inc.
                603-1125
                  Howe Street
                Vancouver,
                  British Columbia
                V6Z
                  2K8
              Director
                  since March 2003
              Human
                  Resources and Compensation (chair)






The
      name
      and present office with the Company of each of the non-director executive
      officers of the Company are as follows:




**Name**
            **Present
                Office**RICHARD
                A. JANECZKO
            Chief
                Scientific OfficerJEREMY
                BRIDGE-COOK
            Senior
                Vice-President of Corporate DevelopmentALAN
                COLEY
            Vice-President
                of OperationsJAMES
                E. PELOT
            Chief
                Operating Officer and Chief Financial OfficerDANIEL
                KOBLER
            Vice
                President of Product Development and Bioinformatics






Each
      of
      the non-director executive officers have their business address at the Company’s
      headquarters at 439 University Avenue, Suite 2000, Toronto, Ontario, Canada,
      M5G
      1Y8.




***B.***
            ***Advisors***




The
      Company’s principal legal adviser is Stikeman Elliott LLP, 5300 Commerce Court
      West, 199 Bay Street, Toronto, Ontario M5L 1B9.





***C.***
            ***Auditors***




The
      Company’s external auditors are Ernst & Young LLP, Ernst & Young Tower,
      222 Bay Street, P. O. Box 251, Toronto-Dominion Centre, Toronto, Ontario,
      Canada, M5K 1J7. Ernst & Young LLP have been the Company’s auditors since
      1991.




4


Ernst
      & Young LLP is governed by the rules of the provincial Institutes of
      Chartered Accountants in Canada, is a participating audit firm with the Canadian
      Public Accountability Board and is registered with the Public Company Accounting
      Oversight Board.




**Item
      2.**  **Offer
      Statistics and Expected Timetable**




Not
      applicable.




**Item
      3.**  **Key
      Information**




***A.***
            ***Selected
                Consolidated Financial
                Data***




The
      following table presents selected financial data of the Company as of the dates
      and for each of the periods indicated. You should read the selected financial
      data set forth below together with Item 5. “ *Operating
      and Financial Review and Prospects* ”
as
      well
      as the Company’s audited consolidated financial statements and notes thereto and
      the Company’s unaudited consolidated financial statements and the notes thereto
      appearing elsewhere in this registration statement on Form 20-F.




The
      selected consolidated financial data as and for the financial years ended
      December 31, 2005, 2004, 2003, 2002 and 2001 have been derived from the
      Company's audited consolidated financial statements and the notes related
      thereto.




The
        selected consolidated financial data as of June 30, 2006 and June 30, 2005
        have
        been derived from the Company’s consolidated interim financial statements and
        notes thereto. The Company’s auditors have reviewed the Company’s unaudited
        consolidated interim financial statements.




The
      Company prepares its consolidated financial statements in accordance with
      Canadian GAAP, which differs in certain significant respects from U.S. GAAP.
      A
      description of the significant differences and reconciliations of net loss
      and
      shareholders’ equity for the periods and as of the dates therein indicated are
      set forth in note 23 to the Company’s audited consolidated financial statements
      included elsewhere in this registration statement on Form 20-F.




Selected
        consolidated financial data as of and for the years ended December 31, 2005,
        2004, 2003, 2002 and 2001 and as of and for the interim periods ended June
        30,
        2006 and 2005 is set out below.




**Year
                  ended December 31**
              
              **Interim
                  Period ended**
                **June
                  30**
                **(Unaudited)****2005**
              
              **2004**
              
              **2003**
              
              **2002**
              
              **2001**
              
              **2006**
              
              **2005****Canadian
                  GAAP**Revenue
                  - Product
              
              $
              6,725,432
              
              $
              3,460,747
              
              $
              1,054,923
              
              
              Nil
              
              
              Nil
              
              $
              5,405,645
              
              $
              2,659,585Revenue
                  - All other
              
              $
              948,738
              
              $
              389,266
              
              $
              100,710
              
              $
              25,525
              
              $
              988,373
              
              $
              577,215
              
              $
              405,603Expense
                  - Research and development
              
              $
              3,770,027
              
              $
              3,816,180
              
              $
              2,755,138
              
              $
              2,338,829
              
              $
              1,627,200
              
              $
              2,089,994
              
              $
              2,133,890Expense
                  - Sales, general and administration
              
              $
              10,980,247
              
              $
              8,165,723
              
              $
              4,561,407
              
              $
              3,106,797
              
              $
              2,466,045
              
              $
              8,123,645
              
              $
              4,885,951Financial
                  expense/(income), net
              
              $
              3,702,665
              
              $
              868,924
              
              $
              821,513
              
              $
              42,673
              
              
              ($186,920
              )
              $
              1,141,045
              
              $
              1,383,471Loss
                  from Operations
              
              
              ($15,167,466
              )
              
              ($11,838,498
              )
              
              ($7,808,889
              )
              
              ($5,462,774
              )
              
              ($2,917,952
              )
              
              ($8,738,041
              )
              
              ($7,121,335
              )Net
                  loss
              
              
              ($15,167,466
              )
              
              ($11,838,498
              )
              
              ($7,808,889
              )
              
              ($5,462,774
              )
              
              ($2,917,952
              )
              
              ($8,738,041
              )
              
              ($7,121,335
              )Net
                  loss per share
              
              
              ($0.37
              )
              
              ($0.34
              )
              
              ($0.31
              )
              
              ($0.24
              )
              
              ($0.15
              )
              
              ($0.18
              )
              
              ($0.18
              )Diluted
                  net loss per share
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              ($0.22
              )
              
              ($0.13
              )
              
              N/A
              
              
              N/ADividends
                  per share
              
              
              Nil
              
              
              Nil
              
              
              Nil
              
              
              Nil
              
              
              Nil
              
              
              Nil
              
              
              Nil


5





Basic
                  weighted average common shares outstanding
              
              
              40,644,715
              
              
              34,766,222
              
              
              25,237,393
              
              
              22,551,090
              
              
              19,771,341
              
              
              47,715,224
              
              
              38,786,432Fully
                  diluted weighted average common shares outstanding
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              24,947,393
              
              
              23,284,477
              
              
              N/A
              
              
              N/AWorking
                  capital without current portion of long-term debt
              
              $
              15,283,643
              
              $
              6,119,009
              
              $
              11,156,339
              
              $
              4,540,149
              
              $
              2,636,856
              
              $
              4,669,057
              
              $
              12,823,180Cash
                  flow (used in) operations
              
              
              ($9,879,191
              )
              
              ($10,801,835
              )
              
              ($7,408,095
              )
              
              ($5,071,684
              )
              
              ($2,673,091
              )
              
              ($11,616,454
              )
              
              ($5,721,506
              )Purchase
                  of capital assets
              
              $
              1,920,071
              
              $
              2,047,155
              
              $
              1,362,181
              
              $
              927,008
              
              $
              304,778
              
              $
              1,043,504
              
              $
              651,114Total
                  assets
              
              $
              30,861,984
              
              $
              12,764,556
              
              $
              15,715,288
              
              $
              7,024,850
              
              $
              4,240,708
              
              $
              21,430,282
              
              $
              20,191,856Total
                  long-term liabilities
              
              $
              11,509,764
              
              $
              12,086,214
              
              $
              3,637,757
              
              $
              3,932,143
              
              
              Nil
              
              $
              8,885,322
              
              $
              2,002,709Capital
                  stock
              
              $
              66,871,280
              
              $
              43,265,955
              
              $
              41,922,196
              
              $
              31,091,787
              
              $
              27,714,897
              
              $
              66,871,280
              
              $
              57,863,727Contributed
                  surplus
              
              $
              9,937,955
              
              $
              8,202,511
              
              $
              5,804,587
              
              $
              770,642
              
              
              Nil
              
              $
              10,179,847
              
              $
              6,609,168**US
                  GAAP**Net
                  loss
              
              
              ($14,302,347
              )
              
              ($11,536,151
              )
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              N/ANet
                  loss per share
              
              
              ($0.35
              )
              
              ($0.33
              )
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              N/AWorking
                  capital without current portion of long-term debt
              
              $
              15,283,643
              
              $
              6,119,009
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              N/ATotal
                  assets
              
              $
              30,901,992
              
              $
              12,768,079
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              N/ATotal
                  long-term liabilities
              
              $
              12,034,579
              
              $
              8,327,866
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              N/ACapital
                  stock
              
              $
              66,859,320
              
              $
              43,265,955
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              N/AContributed
                  surplus
              
              $
              8,352,456
              
              $
              7,772,076
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              N/A








***B.***
            ***Capitalization
                and Indebtedness***





**Capitalization
      and Indebtedness at July 31, 2006**




Liabilities
                  and Shareholder’s Equity
                Current
                  Liabilities:Accounts
                  payable and accrued liabilities
              
              $
              4,793,235Current
                  portion of deferred revenue
              
              
              126,708Current
                  portion of long-term debt - Convertible debenture
              
              
              3,224,352Current
                  portion of long-term debt - TPC
              
              
              168,437Current
                  portion of obligation under capital lease
              
              
              21,330Income
                  taxes payable
              
              
              37,5588,371,620




6




Long-term
                  liabilities:Deferred
                  leasehold inducement
              
              $
              310,557Deferred
                  revenue
              
              
              82,744Deferred
                  share units
              
              
              418,075Outstanding
                  - 244,890Long-term
                  debt - TPC
              
              
              2,995,808Long-term
                  debt
              
              
              4,853,829Obligation
                  under capital lease
              
              
              62,78617,093,419Shareholders’
                  Equity:Common
                  Shares
              
              $
              66,871,280Authorizes
                  - unlimitedIssued
                  and outstanding - 47,715,224Preference
                  shares
              
              
              NilWarrants
              
              
              7,998,511Outstanding
                  - 5,439,221Compensation
                  options
              
              
              307,627Outstanding
                  - 399,425Stock
                  options
              
              
              1,163,811Outstanding
                  - 2,416,721Conversion
                  options
              
              
              709,898$
              77,051,127Deficit
              
              
              ($
                  74,652,212
              )$
              2,398,915







***C.***
            ***Reasons
                for the Offer and Use of
                Proceeds***




Not
      applicable.







***D.***
            ***Risk
                Factors***




Prospects
        for companies in the biotechnology industry generally may be regarded as
        uncertain given the nature of the industry and, accordingly, investments
        in
        biotechnology companies should be regarded as speculative. Biotechnology
        research and development involves a high and significant degree of risk.
        An
        investor should carefully consider the risks and uncertainties described
        below,
        as well as other information contained in this registration statement on
        Form
        20-F. The list of risks and uncertainties described below is not an exhaustive
        list. If any one or more of the following risks occur, the Company’s business,
        financial condition and results of operations could be seriously harmed.
        Further, if the Company fails to meet the expectations of the public market
        in
        any given period, the market price of the common shares in the capital of
        the
        Company (the “Common Shares”) could decline.




**The
      Company has a history of losses and may not be able to achieve and maintain
      profitability.**




As
        at
        June 30, 2006, the Company had an accumulated deficit of $73,224,236 resulting
        from historical losses (as compared to $56,440,064 as at June 30, 2005).
        The
        Company’s net loss for the financial years ended December 31, 2005, 2004 and
        2003 was $15,167,466, $11,838,498 and $7,808,889 respectively. Had the Company’s
        consolidated financial statements been audited by U.S. auditors, the report
        of
        the independent registered accounting firm  included with our consolidated
        financial statements would have included an explanatory paragraph following
        the
        opinion  paragraph regarding the Company’s ability to operate as a going
        concern. The Company has never generated a profit and cannot guarantee that
        it
        will generate profits in the future. If the Company does not generate profits
        in
        the future, it will require additional sources of financing to meet ongoing
        operational requirements as well as future expansions. As the Company is
        in the
        early stages of commercialization for its products, the Company’s ability to
        continue operations is uncertain and is dependent upon its ability to obtain
        sufficient financing and improve operating results.


7




**The
      Company has limited financial resources and may not be able to raise additional
      funds on acceptable terms.**




The
        Company has limited financial resources. The Company has funded its operations
        thus far through private placements and public offerings of its debt, as
        well
        equity securities and early stage revenues. The Company’s monthly burn rate,
        based on the June 30, 2006 net cash used in operating activities related
        to the
        consolidated statement of loss and deficit, is estimated at $1,208,462. At
        June
        30, 2006, the Company had $1,348,540 in working capital. On August 15, 2006,
        the
        Company completed a private placement of unsecured subordinated debentures,
        raising gross proceeds of $6,240,000. In order to pursue its expanded regulatory
        drive, submit products for FDA certification in 2006, as well as open new
        markets for its RVP and sepsis tests, all the while continuing to serve its
        growing customer base, the Company foresees a need for additional growth
        capital. Management remains responsive to market conditions and will seek
        additional capital from traditional sources or through strategic partnerships
        as
        opportunities arise.




There
        is
        no assurance that the Company will be successful in generating sufficient
        revenue or raising sufficient funds on acceptable terms to continue to execute
        its business plan, commercialize its products and achieve profitability.
        If
        additional funds are raised from the issuance of equity or equity-linked
        securities, the percentage ownership of the then current shareholders of
        the
        Company will be reduced, and the newly issued securities may have rights,
        preferences or privileges senior to or equal to those of the holders of the
        Company existing common shareholders. As well, sales of substantial amounts
        of
        equity-linked securities, or the possibility of those sales, could adversely
        affect the market price of the Common Shares and impede the Company’s ability to
        raise capital through the issuance of equity securities. No assurance can
        be
        given that additional funding will be available or that, if available, it
        will
        be available on terms favourable to the Company or its shareholders. As note
        above, had the Company's consolidated financial statements been audited
        by U.S. auditors, the report of the independent registered accounting firm
        would have included an explanatory paragraph regarding the Company's ability
        to
        operate as a going concern which may adversely affect the Company’s ability to
        raise funds. If adequate funds are not available to satisfy the Company’s
        capital requirements, the Company may be required to curtail its operations
        significantly, or to cease operations.




**The
      Company operates in the high-risk genetic diagnostics market, where growth
      prospects and technology development remain uncertain.**




Significant
        risk exists with respect to the growth of the genetic diagnostics market.
        The
        biotechnology and life sciences industries are subject to rapid and substantial
        technology change. There is no assurance that developments by others will
        not
        render the Company’s products and technologies non-competitive or that the
        Company will be able to keep pace with technological developments. The Company’s
        projections rely to some extent on data related to the current market for
        specific genetic tests, as well as longer-term growth opportunities. Due
        to the
        early stage of the market for genetic tests, projected growth scenarios are
        highly volatile and are based on a number of underlying assumptions that
        may or
        may not prove to be valid.




**The
      Company relies on the innovation and resources of larger industry participants
      and public programs to advance genomic research and educate
      physicians/clinicians on genetic diagnostics.**




The
        linkages between genetic anomalies that the Company’s products detect and the
        underlying disease states associated with those genetic anomalies are not
        always
        fully medically correlated. Additionally, the availability of correlated
        genetic
        markers is dependent on significant investment in genomic research, often
        funded
        through public programs for which there are no assurances of on-going support.
        Should any government limit patent rights to specific genetic materials,
        private
        investment in this area could also be significantly curtailed. In addition,
        the
        adoption of genetic diagnostics is dependent to a great extent on the education
        and training of physicians and clinicians. The Company does not have the
        resources to undertake such training, and is relying on larger industry
        participants and professional medical colleges to establish, communicate
        and
        educate physicians and clinicians on best practices related to genetic
        diagnostics.




**The
        Company relies on third party suppliers for components and raw materials
        used in
        its products.**




Key
        components and raw materials such as microscopic beads, synthetic DNA and
        various chemicals used in the Company’s manufactured products are currently
        sourced from outside vendors. With the exception of the microscopic beads,
        which
        are sole sourced from Luminex Corporation, the Company does not believe that
        it
        is substantially dependent on any one specific supplier for any of the
        components and raw materials used in its products. In
        the
        event an existing supplier becomes unavailable, or that materials from any
        supplier


8


fail
        to meet the Company’s quality requirements, the
        Company will attempt to locate a qualified alternative. However, the Company
        may
        not be able to obtain the required components, raw
        materials or products at the right quality on a timely basis or at commercially
        reasonable prices. To the extent such difficulties cannot be resolved within
        a
        reasonable time, and at a reasonable cost, the Company’s business, financial
        condition, results of operation and cash flows could be materially adversely
        affected.




**The
        Company depends on strategic partners for the research and development of
        its
        products.**




The
        Company’s business strategy involves securing strategic partners for the
        research, development and commercialization of its products. The Company’s
        success depends in part on the success of its arrangements with these strategic
        partners. As the Company is in the early stages of the commercialization
        of its
        products, there is no assurance that the Company will generate revenue or
        derive
        any benefits from these arrangements. The Company may not be able to identify
        potential future strategic partners or enter into arrangements with them.
        As
        well, disputes may arise over ownership rights to intellectual property,
        know-how or technologies developed with the Company’s strategic
        partners.




**The
        Company’s products are built to be used on Luminex’s xMAP system and the Company
        may not be able to find a substitute for the Luminex xMAP system if the
        Company’s partnership with Luminex is terminated.**




The
        Company’s revenues are dependent on the uptake of its products into the market.
        The Company’s products were designed to be used on Luminex’s xMAP bead based
        array system. Ongoing integration of the Company’s products to Luminex’s xMAP
        system is dependent on the Company maintaining its development agreement
        with
        Luminex. On March 29, 2006, the Company and Luminex announced they had signed
        a
        multi-year extension of the agreement which incorporates similar terms to
        the
        original agreement.




The
        microscopic beads used in the Company’s products are also sole-sourced from
        Luminex. The Company may not be able to find a substitute for the Luminex
        xMAP
        system and/or microscopic beads if the Company’s partnership with Luminex is
        terminated. This would result in a material adverse effect on the Company’s
        customers, products and future prospects.




**The
      Company is in the early stages of commercialization and may experience
      significant fluctuations in revenues, expenses and losses.**




The
        Company is in the early stages of commercializing its products. Although
        the
        Company began shipping commercial products in 2003, future market uptake
        remains
        uncertain as the Company’s products represent novel technology that targets
        emerging markets. It is unclear at this point in time whether genetic testing
        will become widely adopted by healthcare practitioners and accepted by the
        general public. As a result, the Company cannot accurately predict if customers
        may want to adopt their products and their rates of demand for the Company’s
        products. As a result, the Company’s ability to continue operations is uncertain
        and is dependent on its ability to improve operating results or complete
        additional financings. The Company may experience significant fluctuations
        in
        revenues, expenses and losses. Such fluctuations may be affected by a number
        of
        factors, including variances in the sales cycle, the level of market acceptance
        for the Company’s products, responses by competitors, research and development
        expenses, financing and regulatory compliance costs and the acquisition/loss
        of
        key customers.




The
        Company may need to increase its spending levels in research and development,
        business development and investor relations in order to raise its profile
        in the
        marketplace and to commercialize and sell sufficient products to achieve
        and
        maintain profitability. The Company may need to incur such increased spending
        before knowing whether its efforts will be successful.




**The
        Company’s technology and products may not achieve market acceptance and generate
        sufficient revenue for the Company to become
        profitable.**




Although
        the Company has developed and commercialized a number of products, it may
        not be
        able to further develop these products or to develop additional products.
        Furthermore, there is no assurance that the Company’s products will achieve
        market acceptance. The Company may not be able to sell all the products produced
        at its manufacturing facility at the anticipated prices. The Company may
        have to
        reduce its profit margins or incur accounting charges or write-downs if it
        is
        unable to sell its product inventory in a timely fashion and at the expected
        price levels.




Market
        acceptance of the Company’s products will depend on many factors, including the
        Company’s ability to convince prospective strategic partners, customers,
        physicians and clinicians that the Company’s technology is an attractive
        alternative to other technologies, to manufacture products in sufficient
        quantities with an acceptable quality and at an acceptable cost, and to sell,
        place and service sufficient quantities of the Company’s products at a
        sufficient profit margin. If the Company’s products do not achieve market
        acceptance, it may not be able to generate sufficient revenue to become
        profitable.


9




**The
      Company operates in a competitive environment and may not have the resources
      to
      compete in the future.**




The
        Company faces competition from other biotechnology and life science companies.
        Many of the Company’s competitors and potential competitors have substantially
        greater product development capabilities and financial, scientific, marketing
        and human resources than the Company. They may also have greater name
        recognition and offer broader product lines, and may offer discounts as a
        competitive tactic. Other competitors may succeed in developing products
        earlier
        than the Company, obtaining regulatory approvals for such products more rapidly
        than the Company or in developing products that are more effective or
        commercially attractive than those proposed to be developed by the Company.
        There is no assurance that research and development by others will not render
        the Company’s technology or products obsolete or non-competitive or that any
        products developed by the Company will be preferred to any existing or newly
        developed technologies.




The
      Company may not have the financial resources, technical expertise or marketing,
      distribution or support capabilities to successfully compete in the
      future.




**The
      Company may not be able to develop, exploit, enforce and defend its intellectual
      property.**




The
      Company’s business is underpinned by the filing, in-licensing and
      cross-licensing of intellectual property. The Company’s success will depend on
      its ability to obtain and exploit intellectual property, and to operate without
      infringing on the proprietary rights of third parties or having third parties
      circumvent the Company’s rights.




The
      Company has a number of patents issued and pending in the United States and
      Canada. The Company’s issued patents may not become commercially exploitable.
      The issuance of a patent is also not conclusive as to its validity or
      enforceability. Furthermore, there is no assurance that the Company’s pending
      patent applications will result in the issuance of patents. The Company’s patent
      rights may be infringed by the products or processes of others. The cost of
      enforcing the Company’s patent rights against third party infringers, if such
      enforcement is required, could be significant, and the time demands could
      interfere with the Company’s operations. There has been substantial litigation
      and other proceedings regarding patent and other intellectual property rights
      in
      the pharmaceutical, biotechnology and life sciences industries, and the costs
      of
      such litigation are known to be substantial. Some of the Company’s competitors
      may be able to sustain the costs of such litigation more effectively than the
      Company because of their substantially greater financial resources. Litigation
      may also absorb significant management time.




The
        Company’s products require the Company to in-license required genetic markers
        from public and private holders of such patents. There is no assurance that
        these licenses will not terminate or that they will be renewed. The Company
        also
        has no assurance of the on-going availability of such licenses at commercially
        reasonable terms for products that the Company might develop.




The
      Company’s intellectual property also includes trade secrets and technical
      know-how. The Company seeks to protect its trade secrets and technical know-how
      in part by confidentiality and non-disclosure agreements with its employees,
      consultants and strategic partners. There is no assurance that the measures
      the
      Company takes to protect its trade secrets and technical know-how will be
      successful.




**The
        Company’s products may infringe the intellectual property rights of
        others.**




The
        Company’s products incorporate a number of technologies and chemistries that may
        expose the Company to claims surrounding the use of such technologies and
        chemistries. Although there are currently no threats of litigation, court
        proceedings or legal action surrounding the Company’s intellectual property, it
        is possible that the Company may unintentionally infringe intellectual property
        rights owned by or licensed to third parties. The Company may receive notices
        claiming infringement from third parties as well as invitations to take licenses
        under third-party patents. Any legal action against the Company or its strategic
        partners claiming damages and seeking to enjoin commercial activities relating
        to the Company’s products and processes affected by third-party rights may
        require the Company or its strategic partners to obtain licenses in order
        to
        continue to manufacture or market the affected products and processes. In
        addition, these actions may subject the Company to potential liability or
        damages. The Company or its strategic partners may not prevail in an action
        and
        any licenses required under a patent may not be made on commercially acceptable
        terms, or at all.




10


As
      set
      forth above, costs of litigation and other proceedings regarding patent and
      other intellectual property rights in the pharmaceutical, biotechnology and
      life
      sciences industries are known to be substantial and may absorb significant
      management time. The Company may be limited in its ability to defend itself
      in
      such proceedings due to resource constraints.




**The
      Company faces potential product liability claims.**




Medical
        and biotechnology products involve an inherent risk of product liability
        claims
        and associated adverse publicity. The Company currently maintains product
        liability insurance coverage in the aggregate amount of U.S.$10,000,000.
        While
        the Company believes such insurance coverage to be adequate, there is no
        assurance that future claims based on product liability will not exceed such
        amounts. In addition, should it prove impossible to obtain this type of
        insurance at reasonable rates or to otherwise protect the Company against
        potential product liability proceedings, the Company could be required to
        cease
        the commercialization of products it has developed or even be prevented from
        beginning the commercialization of new products. The Company’s obligation to pay
        indemnities or to withdraw a product following complaints could seriously
        affect
        its financial position as well as its future prospects.







**The
      Company operates in a regulated industry and may be subject to regulatory
      sanctions.**




Biotechnology,
        medical device and pharmaceutical companies operate in a high-risk regulatory
        environment. The FDA, Health Canada and other health agencies can be very
        slow
        to approve a product and can also withhold product approvals. In addition,
        these
        health agencies also oversee many other medical and biotechnology product
        operations, such as research and development, manufacturing, testing and
        safety
        regulation. As a result, regulatory risk is higher than in many other industry
        sectors. There is no assurance that the Company will be able to timely and
        profitably produce its products while complying with all the applicable
        regulatory requirements. If the Company fails to maintain compliance, regulatory
        authorities can institute proceedings to detain or seize products, issue
        a
        recall, enjoin future violations, assess civil and criminal penalties against
        the Company and its directors, officers and employees, or require the Company
        to
        make substantial changes to its manufacturing operations. While the Company
        is
        not aware of any pending or threatened governmental action against the Company
        in any country, any enforcement action by regulatory authorities with respect
        to
        past, or any future, regulatory non-compliance could have a material adverse
        effect on the Company’s business, financial condition, and results of
        operations.





**If
        the Company does not receive regulatory approval for its PGx, Sepsis, Warfarin
        and ID-TagTM RVP tests, it could be prevented from marketing such products which
        could harm its business.**





The
        FDA
        and Health Canada have established procedures and standards for initial approval
        to market medical and biotechnology devices and for the manufacture of the
        devices. The Company is subject to inspection by the FDA and Health Canada
        for
        compliance with these standards. Should the FDA and Health Canada determine,
        at
        any time, that the Company or any of its products are not in compliance with
        these standards, it may withhold or withdraw approval and prevent the
        marketing of the Company’s products. Negative determinations by the FDA and
        Health Canada and other governmental authorities could have a serious adverse
        effect on the Company.





To
        obtain
        US regulatory approval for PGx, Warfarin and ID-TagTM RVP tests, the Company
        intends to file separate 510(k) applications with the FDA by the end of 2006.
        Estimated costs to file these applications (i.e., submission fees) are
        relatively small compared with the research and development cost associated
        with
        carrying out analytical, clinical and software validations (i.e. performance
        evaluations). Once a 510(k) is submitted to the FDA, the expected time to
        clearance is 180 days. Submissions may be cleared at an earlier date. If
        a
        510(k) application is not approved due to insufficient validation data from
        the
        viewpoint of the FDA, the specific risk to the company would be additional
        R&D costs to carry out further validations on the investigational product
        and a delay to market of the IVD product. To obtain US regulatory approval
        for
        the Company’s sepsis product, the Company anticipates filing a Premarket
        Approval (PMA), the parameters of which are determined in consultation with
        the
        FDA through a Pre-IDE submission (i.e. consultation on a clinical study to
        be
        run under an Investigational Device Exemption). One possible outcome of this
        Pre-IDE is that the FDA considers the product suitable for clearance under
        a
        510(k). Regardless of whether the submission is a PMA or 510(k), it is
        anticipated that the clinical validation requirements and costs for this
        product
        will be greater than those for the other products highlighted above. Such
        costs
        can only be estimated once the Pre-IDE is closed. In addition, the filing
        fees
        associated with a PMA are significantly greater than those for 510(k)
        applications. There could be significant delays in filing the submission
        if the
        duration of a clinical study extends beyond what is currently anticipated.
        The
        Company is planning to submit a Pre-IDE for sepsis in 2006 and the current
        plan
        for the filing of the PMA/510(k) of the IVD is 2007. In general, approvals
        of
        PMA applications take longer than those of 510(k) applications and the risks
        of
        failing to obtain approval for this product are similar to those started
        above
        in terms of the FDA view on whether sufficient data has been filed to support
        safety and efficacy of the product PMA approval also requires manufacturing
        to
        pass  a pre-approved quality system inspection. All of these risks apply to
        planned regulatory filings in other regions.


11




**The
      Company is subject to evolving legislative, judicial and ethical standards
      on
      use of technology and biotechnology.**




The
        adoption of genetic testing is occurring within the broader context of a
        myriad
        of decisions related to genetic patenting and genotyping. Issues associated
        with
        health insurance, data access, intellectual property protection, national
        and
        international legislative initiatives and other variables may have a significant
        impact on the wide spread adoption of genetic testing or on specific segments
        or
        tests within the genetic testing market. For example, future legislative
        decisions regarding privacy and confidentiality of genetic information and
        the
        use of genetic information by insurers, employers, courts, schools, the military
        and others, could impede or accelerate demand for genetic testing. The ethical
        stance our society takes in using genetic information in reproductive decision
        making, for susceptibilities (e.g. testing children for adult-onset diseases)
        or
        complex conditions where there are greater uncertainties associated (e.g.
        heart
        disease) could also impede or accelerate demand for genetic
        testing.




**The
      Company receives financing from Technology Partnerships Canada
      (“TPC”).**




The
      Government of Canada as represented by the Minister of Industry, through TPC,
      has entered into an agreement to fund the Company in accordance with the terms
      set out therein. The actual funding received by the Company is predicated on
      the
      reimbursement of eligible expenditures that are submitted to TPC.




To
        date
        the Company has received 100% reimbursement on claimed eligible expenditures
        of
        $3,651,410. In the second quarter of 2006, the Company submitted a claim
        for
        reimbursements of approximately $652,000 to TPC. However, there is no assurance
        that the Company will continue to receive 100% reimbursement on claimed eligible
        expenditures. Failure to receive funding from TPC as anticipated may adversely
        affect the Company’s business, financial condition, cash flows and results of
        operations. Pursuant to the Company’s agreement with TPC, the Company also
        issued to TPC 2,336,449 Common Share purchase warrants. Each warrant is
        exercisable for one Common Share in the capital of the Company at $1.70 per
        Common Share until December 29, 2010.




**The
      Company is subject to currency risk.**




The
        Company’s revenues are denominated primarily in United States dollars as the
        Company sells its products primarily in the United States. As well, the Company
        has issued secured convertible debt which is denominated in U.S. dollars.
        The
        Company has not engaged in foreign exchange hedging transactions to manage
        its
        currency exposure. Accordingly, significant variations in the exchange rate
        of
        the Canadian dollar to the U.S. dollar can have a material impact on the
        Company’s profitability. Additional disclosure regarding the Company’s currency
        risk can be found under the liquidity and capital resources discussion under
        Item 5 “ *Operating
        and Financial Review and Prospects”* and the
        disclosure under Item 11 “ *Quantitative
        and Qualitative Disclosures About Market Risk* ”.




**The
      Company has not produced reagents at full production
      volume.**




The
        Company’s manufacturing facility has an engineered production capacity of
        approximately 6.0 million tests per annum in batches of up to 400,000 tests.
        The
        Company has validated scale-up activities to support its current needs. However,
        the Company may encounter unforeseen technological or operational obstacles
        when
        further growth is experienced as the behaviors of the raw materials and
        semi-finished good at larger production volumes are not necessarily comparable
        to those seen in smaller production lots. While the Company does not foresee
        a
        shortfall in capacity within its current forecasts, the Company has not yet
        produced tests at its manufacturing facility’s engineered batch size or
        aggregate volume. The Company may not be successful in scaling operations
        and
        manufacturing protocols to achieve this level of production.




**The
      Company has only one manufacturing facility and may not be able to replace
      its
      manufacturing capacity.**




The
        manufacture of the Company’s products involves a number of steps and requires
        compliance with stringent quality control specifications imposed by the FDA
        and
        other regulatory agencies. Moreover, the Company’s products can only be
        manufactured in a facility that has undergone a satisfactory inspection by
        the
        FDA and other relevant regulatory authorities. For these reasons, the Company
        will not be able to replace its manufacturing capacity quickly in the event
        of
        fire, natural disaster, equipment failure, act of terrorism or other difficulty
        which affects the manufacturing facility, or if the manufacturing facility
        is
        deemed not in compliance with the regulatory requirements and the non-compliance
        cannot be promptly remedied.




**Changes
      in U.S. border policy may impact the Company’s access to the U.S.
      marketplace.**




As
      the
      Company’s manufacturing facility is located in Canada while most of the
      Company’s sales are to customers in the U.S., any change in policy
      implementation relating to United States border protection, tariffs, duties
      or
      other protection measures may have an impact on the Company’s ease of access to
      the U.S. marketplace.


12




**The
        Company derives a substantial amount of its revenues from only a few of its
        customers. A loss of one or more of these major customers, or a material
        adverse
        change in any such customer’s business, could adversely impact the Company’s
        business.**




The
        Company is dependent on a few key customers with respect to sales of its
        products. As at June 30, 2006, the Company’s top three customers (Genzyme,
        Specialty Laboratories and Mayo) represented 57% of revenue (December 31,
        2005 -
        66%) and the top five customers represented 63% of total revenue (December
        31,
        2005 - 71%). Any of the Company’s major customers could refuse to renew their
        contracts, or could negotiate concessions, particularly on price, that would
        have a material adverse effect on the Company’s business, financial condition
        and results of operations. In addition, the Company’s customers could experience
        a downturn in their business, find themselves in financial difficulties or
        consolidate, which could result in their ceasing or reducing their consumption
        of the Company’s products (or becoming unable to pay for products they had
        contracted to buy). If any key customer discontinues its relationship with
        the
        Company for any reason, or reduces or postpones current or expected purchase
        commitments for the Company’s products, the Company’s business, financial
        condition, cash flow and results of operations could be materially adversely
        affected.





**The
        Company derives a substantial amount of its revenues from only a few of its
        products.**




Currently,
        sales of the Company’s cystic fibrosis products represent a significant portion
        of the Company’s revenues. If the volume or pricing of the Company’s largest
        selling products decline in the future, the Company’s business, financial
        condition, cash flow and results of operations could be materially adversely
        affected.




**If
        the Company is unable to attract and retain qualified scientific, technical
        and
        key management personnel, or if any of the Company's key executives,
        Gregory C. Hines, James Pelot and Richard Janeczko, discontinues his employment
        with the Company, the Company's research and development efforts may
        be delayed.**




The
        Company is highly dependant upon the efforts of its senior management team
        and
        scientific staff. The loss of the services of one or more members of the
        senior
        management team might impede the achievement of the Company’s development
        objectives. In particular, the Company is highly dependant upon and its business
        would be significantly harmed if it lost the services of Gregory C. Hines,
        the
        Company’s President and Chief Executive Officer, Richard A. Janeczko, its Chief
        Scientific Officer, or James E. Pelot, its Chief Financial Officer and Chief
        Operating Officer. The Company has entered into employment agreements with
        certain members of its senior management team pursuant to which certain members
        of the senior management team, including Gregory C. Hines, may only terminate
        their agreement with “good reason” or upon three (3) months’ written notice to
        the Company, but this does not ensure that it will retain their services
        for any
        period of time in the future.  The Company’s research and product
        development programs also depend on its ability to attract and retain highly
        skilled chemists, biologists and preclinical and clinical
        personnel.





The
        Company does not currently have any key man life insurance
        policies.





The
      Company faces competition from other companies, academic and research
      institutions and government organizations in attracting and retaining qualified
      personnel. In addition, the Company’s ability to manage growth effectively will
      require it to continue to implement and improve its management system and retain
      its key employees. Although the Company has done so in the past and expects
      to
      do so in the future, there is no assurance that the Company will successfully
      be
      able to attract and retain skilled and experienced personnel.




**The
      Company may be affected by health care reforms in the United States, Canada
      and
      other jurisdictions.**




In
      recent
      years, rising health care costs have caused governments and insurance companies
      to focus on reforming the health care systems in the United States and Canada.
      The Company cannot predict what effect, if any, the various health care reform
      initiatives may have on the Company’s business. Cost containment initiatives may
      reduce genetic research and development activities and retard the growth of
      the
      genetic testing market.




Furthermore,
        sales of the Company’s products will depend, in large part, on the availability
        in the United States and Canada of adequate reimbursement for users of those
        products from government insurance plans, managed care organizations and
        private
        insurance plans. There is no assurance that insurance companies or third
        party-payors will provide or continue to provide coverage for the Company’s
        products or that reimbursement levels will be adequate for the reimbursement
        of
        the providers of the Company’s products.




13


**The
      Company’s Common Shares are subject to significant market price
      volatility.**




Market
        prices for the securities of biotechnology companies, including the Company,
        have historically been highly volatile, and the market has from time to time
        experienced significant price and volume fluctuations that are unrelated
        to the
        operating performance of particular companies. Factors such as fluctuations
        in
        the Company’s operating results, the aftermath of public announcements by the
        Company, performance of the Company’s competitors or customers, concern as to
        safety and efficacy of the Company’s products, and general market conditions,
        can have an adverse effect on the market price of the Company’s Common Shares.
        The Company’s Common Shares are listed and trade on the Toronto Stock Exchange
        and have been subject to significant price and volume fluctuations and may
        continue to be subject to significant price and volume fluctuations in the
        future. During the period since January 1, 2004, the price of the Company’s
        Common Shares on the Toronto Stock Exchange have reached a high of $4.00
        and a
        low of $0.57.




**Item
      4.**  **Information
      on the Company**




***A.***
            ***History
                and Development of the
                Company***




The
      Company carries on business under its legal name. The Company was incorporated
      under the *Business
      Corporations Act* (Ontario) (“OBCA”) on December 19, 1980 under the name GFY Resources Inc.
      Pursuant to articles of amendment dated January 20, 1981, the Company’s name was
      changed to Dasher Resources Ltd. Pursuant to articles of amendment dated June
      21,1991, the Company's name was changed to Consolidated Dasher Resources Inc.
      and its then issued and outstanding Common Shares were consolidated on the
      basis
      of one (1) post-consolidation Common Share for every four (4) pre-consolidation
      Common Shares. Pursuant to articles of amendment dated April 16, 1993, the
      Company’s name was further changed to Tm Technologies Corp.




The
        business currently carried on by the Company commenced in 1993. Pursuant
        to
        articles of amendment dated July 11, 1997, the name of the Company was changed
        to Tm Bioscience Corporation. Pursuant to articles of amendment dated June
        21,
        2004, the Company consolidated its issued and outstanding Common Shares on
        the
        basis of one (1) post-consolidation Common Shares for every five (5)
        pre-consolidation Common Shares.




The
      Company’s registered and head office is located at 439 University Avenue, Suite
      2000, Toronto, Ontario, Canada, M5G 1Y8.




The
        Company is a DNA-based diagnostics company developing a suite of products.
        The
        Company’s research and development efforts and product pipeline are focused in
        the fields of human genetic disorders, personalized medicine (pharmacogenomics
        or PGx - the use of genetic testing to help determine the prescription of
        drugs)
        and infectious diseases. The Company’s underlying technology, the Tag-ItTM
Universal Array (in either the “Tm 100” or “Tm 1000” versions), is a microarray
“operating system”, which is a platform upon which tests for specific genetic
        mutations can be added. The Universal Array consists of short pieces of
        synthetic DNA which were designed using tools and technologies the Company
        created during the period from 1993 to 2000. The Tm 100 is capable of
        incorporating any set of 100 standard single DNA assays into a single genetic
        test, while the Tm 1000 is ten times more powerful and is capable of
        incorporating 1,000 standard simplex DNA assays into a single genetic test.
        The
        Tag-ItTM Universal Array platform operates in a manner which greatly simplifies
        the process by which genetic tests are created or existing test are modified
        to
        incorporated new genetic  discoveries. The platform does this
        by standardizing the key performance characteristic of a genetic test which
        is the thermally driven process of matching the human target DNA with the
        synthetic counterpart
        incorporated into the genetic test.. This standardization significantly reduces
        the complexity of creating the perfect human and synthetic DNA
        match resulting in lower cost of research and development ease of
        expanding test for newly discovered genetic markers while retaining a very
        high
        degree of accuracy. The Company subsequently determined that its market strategy
        would be best met by focusing the manufacturing and selling of its products
        for
        one particular instrument which it believed would come to dominate the DNA
        testing laboratory market. The Company chose the Luminex xMAP system, designed
        and manufactured by Luminex Corporation (NASDAQ: LMNX) (“Luminex”) of Austin,
        Texas, as its strategic partner to distribute and commercialize the Tag-ItTM
Universal Array. Currently the xMAP system can perform up to 100 simplex
        DNA
        assays in a single test.




The
      Company embarked on a multi-year strategy to commercialize genetic tests
      underpinned by the Tag-ItTM Universal Array operating system following its
      successful validation in 2001 and 2002. Over the last three years, this strategy
      has included establishing a productization capability, construction of a
      manufacturing facility and market channel development. The Company established
      the research, development and operational portion of a broad genetic test
      production capability, which involved securing experienced resources to staff
      the start-up of its development, manufacturing and quality control functions.
      It
      also involved the construction of a manufacturing facility at the Company’s
      leased premises at 439 University Avenue, Toronto, Ontario, M5G 1Y8, which
      was
      commissioned in 2003. The Company’s manufacturing facility currently has an
      engineered production capacity of approximately 6.0 million tests per year
      in
      batches of up to 400,000 tests and is certified to the United States Quality
      System requirements (21 CFR 820), the European ISO 13485:2003 Standards and
      the
      Canadian Medical Device Conformity Assessment System Standards.




14


The
        principal method of market development used by the Company over the last
        three
        years has been the “Early Access Program”, which the Company implemented with
        certain of the leading academic and commercial laboratories in the United
        States. The Early Access Program allows these reference laboratories, which
        are
        some of the biggest potential consumers of the Company’s products, to
        familiarize themselves with the Company’s products and technology prior to their
        commercialization. For example, with the Company’s ID-TagTM Respiratory Viral
        Panel, 25 leading healthcare institutions and laboratories across North America,
        Europe and Asia have entered its Early Access Program including community
        hospitals, pediatric hospitals, reference laboratories and public health
        labs
        such as the Alberta Provincial Lab for Public Health (ProvLab) in Calgary,
        AB, a
        leader in the area of molecular testing for respiratory viruses, and the
        Diagnostic Molecular Pathology Lab at Resurrection Medical Center, Chicago.
        These participants can use the test in their labs and evaluate the work flow
        processes required for the test, the parameters and tolerances ascribed to
        the
        test by the Company (such as amount of patient sample required or recommended
        amounts of ancillary reagents required), and provide feedback to the Company
        as
        to the appropriateness of these parameters. Past early access partners have
        included Quest, Specialty Laboratories, The University of Louisville and
        Mayo.





The
      Company’s initial early access participants include the Mayo Clinic, which
      subsequently entered into a two-year purchase agreement with respect to the
      Tag-ItTM P450-2D6 genetic test and a five-year master purchase agreement with
      respect to other products. The master purchase agreement also allows the Mayo
      Clinic to purchase additional products from the Company as they are
      commercialized. To date, the Company’s P450-2C9, P450-2C19 and Ashkenazi Jewish
      Panel tests have been incorporated into the Mayo Clinic master purchase
      agreement. Another early access participant, Specialty Laboratories, has also
      concluded and renewed a two-year purchase agreement for the Company’s CFTR 70
      test kit.




Beginning
      in 2004, the Company stepped up its efforts to pursue supply agreements with
      U.S. clinical laboratories to accelerate market penetration. The Company
      recruited and assembled a small but highly focused U.S. based sales team to
      market its products to U.S. laboratories. The U.S. sales team became operational
      in the mid-first quarter of 2004. The Company’s efforts yielded announced supply
      agreements with LabOne, Inc., University of Medicine and Dentistry of New
      Jersey, Resurrection Health Care, Pharmacogenetics Laboratory of the University
      of Louisville, InterGenetics Incorporated and Laboratory Corporation of America
      Holdings (“LabCorp”) in 2004. In 2005, the Company’s efforts in this regard
      yielded a number of additional announced supply agreements, including multi-year
      supply agreements with the two largest clinical laboratories in the world,
      Quest
      Diagnostics and LabCorp. The Company has since acquired its 34th customer in
      the
      highly consolidated U.S. clinical laboratory market, which collectively perform
      an estimated 80% of genetic testing in the United States.




In
        May
        2005, the FDA announced that the Company’s Tag-ItTM Cystic Fibrosis (“CF”) kit
        became the first multiplexed human disease genotyping test, that is, a genetic
        test that is able to detect and identify multiple mutations simultaneously
        in a
        single experiment performed in a clinical laboratory standard test tube,
        to be
        approved by the FDA as an IVD to help detect cystic fibrosis in the United
        States. The Tag-ItTM CF kit is used to simultaneously detect and identify
        mutations and variants in the gene associated with CF (the CF transmembrane
        conductance regulator gene) in human blood specimens in order to determine
        CF
        carrier status in adults, as an aid in newborn screening, and in confirmatory
        diagnostic testing in newborns and children. The kit is not indicated for
        fetal
        diagnostic, pre-implantation testing or for stand-alone diagnostic purposes.
        The
        Tag-ItTM CF kit has since received the European CE mark (the equivalent of IVD
        status in Europe).




The
        Company has also signed a development and supply agreement with Genzyme
        Corporation (“Genzyme”) which was amended in 2005, pursuant to which Genzyme
        agreed to assist in the development and validation of a custom CF product
        and to
        use such product for substantially all of its worldwide testing. The Company
        has
        since earned milestone revenue from Genzyme under the agreement. There are
        no
        research and development funding arrangements, no further potential milestone
        payments pending and no royalty provisions. Intellectual property remains
        with
        the original owner with joint inventions being jointly owned by both parties.
        The agreement has a four year period commencing from the effective date in
        2005,
        with successive one-year renewal periods, and has customary termination
        provisions such as termination upon bankruptcy and non-performance. As a
        result,
        in 2005, Genzyme launched, in concert with the Company, the CFplusTM assay which
        now includes testing for 97 mutations. The Company believes the CFplusTM assay is
        currently the most complex commercial CF genetic test on the market as it
        targets 97 mutations associated with CF simultaneously, whereas competitive
        products target less than 40 CF mutations simultaneously.




Outside
      of the United States, the Company signed a distribution agreement with Gamidor
      Diagnostics Ltd., pursuant to which Gamidor will have exclusive rights to
      distribute the Tag-ItTM menu of genetic tests in Israel for a minimum three (3)
      year term that can be extended annually. In Europe, the Company has had
      preliminary discussions with potential distribution partners but no definitive
      agreement has been entered into by the Company in respect of European
      distribution of products.




The
        Company continues to develop other access program partners to accelerate
        market
        development and establish relationships that will assist in the initial product
        validation of its pre-commercial prototypes. Additionally, using a portfolio
        approach to its product pipeline, the Company is pursuing longer-term research
        and/or co-development projects with a number of partners. This approach resulted
        in the Company’s announcement in 2003 of its collaboration with Calgary
        Laboratory Services of the University of Calgary on the




15


development
        of a genetic test for the identification and characterization of
        an antibiotic-resistant bacteria, methicillin-resistant Staphylococcus
        aureus (“MRSA”). Over the last two years, the Company has established the
        feasibility of utilizing its Tag-ItTM platform for the development of such a
        test, including a rapid detection step to enhance usability in a hospital
        urgent
        care environment. In establishing its commercialization program, the Company
        has
        faced a number of intellectual property hurdles related to the accelerated
        chemistry as well as the specific form of the genetic markers used in the
        current prototype of the MRSA test. Certain of these hurdles have been resolved
        in the Company’s favour; however, other significant hurdles remain. The Company
        continues to be interested in the use of its platform in the area of bacterial
        identification and related infection diagnosis and management and is now
        seeking
        a partner for the commercialization of a product in this area.




During
      2005, the Company collaborated with Dr. Jim Mahony of McMaster University to
      develop the ID-TagTM RVP (Respiratory Viral Panel), a comprehensive assay for the
      detection of various strains of viruses and subtypes, including H5 (Avian Flu).
      The Company expects that it could serve as a cornerstone diagnostic and
      screening product in the public health setting for the more efficient management
      and treatment of patients during flu season. The ID-TagTM RVP could also play a
      key role in managing the potential threat posed by the Avian Flu and the Company
      is actively promoting its adoption within the global public health community.




In
      January 2006, the Company made the ID-TagTM RVP commercially available outside
      the U.S. and for evaluation purposes within the U.S. To drive sales, the Company
      is establishing market presence by enabling key customers and thought leaders
      to
      gain experience with the test through its Early Access Program. The Company
      is
      also focused on gaining regulatory clearance for the test as an IVD and is
      undertaking validation studies to generate data for a FDA submission in the
      first half of 2006. The Company’s sales force expects to focus on marketing the
      test to hospital based laboratories in the U.S. The Company is also in
      discussion with potential distributors for selling the ID-TagTM RVP outside of
      the US.




The
        continual acquisition of proprietary biomarkers is essential to the Company’s
        strategy to develop new, innovative and high-value products. During 2005,
        the
        Company announced that it had concluded a license agreement with Abbott
        Laboratories (“Abbott”) whereby the Company licensed from Abbott certain of its
        intellectual property in the area of, among others, human and pathogen
        genotyping. The non-exclusive license is worldwide, expires co-terminously
        with
        the associated patents and covers the Company’s current and future products in
        all fields of use. In consideration for the grant of license, the Company
        paid
        Abbott the non-refundable sum of U.S.$2 million in the following instalments:
        (i) U.S.$1 million on or about October 30, 2005, and (ii) U.S.$1 million
        on or
        about January 31, 2006. The license is fully paid up and no additional fees
        are
        required to be paid by the Company to Abbott nor are there any obligations
        or
        rights for the Company to defend the patents .




Subsequent
        to the end of the 2005 financial year, the Company signed an agreement with
        EPIDAUROS Biotechnologie AG (Bernried, Germany) (“EPIDAUROS”) for a co-exclusive
        commercial license to EPIDAUROS’ patents on the most prevalent biomarker in
        Caucasians related to the P450-CYP2D6 gene, which occurs in 8.4% of the
        Caucasian population and can lead to changes in the function of an enzyme
        that
        metabolizes approximately 25% of all prescription drugs. Only one other company
        has a license to this genetic marker.




More
        recently, the Company announced on March 20, 2006 that it had signed an
        agreement with Sirius Genomics Inc. (“Sirius”) for an exclusive license to
        patents from Sirius for specific biomarkers related to drugs used to treat
        severe sepsis, a severe medical condition resulting from the immune response
        to
        a severe infection. The Company plans to incorporate the biomarkers into
        a
        genetic test which can be used to identify patients who are more likely to
        respond well to the two drugs currently used to treat severe sepsis, Xigris® and
        vasopressin. Under the terms of the agreement, the parties will share the
        development costs and the Company will provide an upfront payment of $4 million
        to be provided to Sirius in two equal instalments. The first instalment was
        paid
        on April 3, 2006 and the second instalment was due September 6, 2006
        and Management is currently in the process of obtaining an extension. These
        upfront payments will be repaid from net earnings on commercial sales of
        the
        sepsis test to be developed by the Company, with the remaining earnings shared
        equally by Sirius and the Company over the expected 20 year term of the
        agreement. The agreement terminates if the Company does not commercialize
        a
        product by June 30, 2007, upon insolvency of either party or a material
        unremedied breach or, in certain circumstances, upon early termination of
        the
        underlying license or upon one year's notice once the underlying license
        expires
        at its term. under the agreement, each party has the right, but not the
        obligation to institute, prosecute and control any action or proceeding for
        infringement or misappropriation of any intellectual property owned or
        controlled by it.




The
      Company is also developing a companion test for Warfarin which it expects to
      launch in 2006. The FDA’s Clinical Pharmacology Subcommittee of the Advisory
      Committee on Pharmaceutical Science voted in November 2005 in favor of changing
      Warfarin’s label to reflect the fact that genetic information from two genes,
      CYP450 2C9 and VKORC1, can be useful in deciding a patient’s individual dose.
      The market for such a test can be very significant; more than 30 million
      prescriptions are written for Warfarin each year in the U.S.




The
        Company’s core focus remains on developing proprietary tests for human genetics,
        personalized medicine and infectious disease; however, through partnerships
        the
        Company believes it can leverage its technology and
        cGMP
        (currently good manufacturing practice) manufacturing capabilities to address
        original equipment manufacturer (“OEM”) opportunities in other sectors and
        improve manufacturing efficiency. In April of 2005, the Company announced
        that
        it had entered into an agreement with Maxxam Analytics




16


(“Maxxam”)
        whereby Maxxam would develop a test for livestock food traceability which
        would
        be manufactured by the Company. Due to recent changes at Maxxam, it has
        postponed its genetic traceability program indefinitely. In June 2005 the
        Company entered into a five year agreement to supply custom Tag-ItTM reagents to
        InterGenetics Incorporated (“InterGenetics”) for OncoVueTM. According to
        InterGenetics, OncoVueTM has been developed as the first genetic-based cancer
        test relevant to all women. The agreement is contingent on the Company
        delivering the Tag-ItTM reagents which perform according to InterGenetics’
specifications.




Over
        the
        last three years, the Company has raised a total of $63.54 million from private
        and Canadian public offerings of debt and equity securities as well as
        government funding from TPC. In the financial year ended December 31, 2005,
        the
        Company completed three rounds of financing to fund its growing business.
        In
        2005, the Company also received a total of $4.17 million from the exercise
        of
        warrants and compensation options relating to two previous private placement
        which closed on June 26, 2003 and December 22, 2003, respectively. Any remaining
        warrants relating to those previous financings expired in late June 2005.
        Finally, on August 15, 2006, the company completed a private placement of
        unsecured subordinated debt and common share purchase warrants of the Company,
        raising gross proceeds of $6,240,000. Additional details regarding the Company’s
        financing activities can be found in Item 9.A. “ *Offer
        and Listing Details* ”.




On
        December 15, 2005, the Company effected a portion of phase one of a multi-phase
        internal corporate reorganization (“Reorganization”) and incorporated two new
        wholly-owned Canadian subsidiaries under the laws of Ontario, Tm Bioscience
        HG
        Inc. (“HG Inc.”) and Tm Bioscience PGX Inc. (“PGX Inc.”). The Company
        transferred certain intellectual property relating to its personalized medicine
        or pharmacogenomics (“PGx”) business to PGX Inc. and entered into certain
        management, research and development and license agreements with PGX Inc.
        The
        Company expects to complete the remaining portion of phase one as well as
        the
        remaining phases of the Reorganization in 2006. As part of the Reorganization,
        the Company expects to transfer certain intellectual property (i) relating
        to
        its human genetics business to HG Inc., and (ii) relating to its infectious
        disease business to a new wholly-owned Canadian subsidiary which will be
        incorporated. The Company also expects to transfer its technical services
        division to another new wholly-owned Canadian subsidiary to be incorporated
        and
        to effect a reorganization of its existing U.S. subsidiaries. The Company
        expects that completion of the Reorganization will provide it with greater
        flexibility for structuring future strategic partnership opportunities.
        Shareholders of the Company have approved the Reorganization at the Company's
        annual and special meeting held on May 30, 2006.




***B.***
            ***Business
                Overview***




**Principal
      Products and Revenue**




The
        Company is a DNA-based diagnostics company focused on the development of
        a suite
        of genetic diagnostic tests. The Company’s existing and planned products test
        for genetic markers correlated with human genetic disorders, infectious
        disease-causing pathogens, and patient responses (e.g., efficacy and side
        effects) to prescription drugs (also known as personalized medicine,
        pharmocogenomics, or PGX). The Company has commercialize analyte specific
        reagents (“ASRs”)  and a series of Tag-ItTM genetic tests 
(collectively, the “products”) for a variety of genetic analyses. The Company’s
        Tag-ItTM CF kit, which simultaneously screens for the 23 CFTR gene mutations and
        4 variants (polymorphisms) recommended by the American College of Medical
        Genetics (“ACMG”) and American College of Obstetricians and Gynecologists (ACOG)
        in 2004, plus 16 of the world’s most common and North American-prevalent
        mutations is the first multiplexed human disease genotyping test, that is,
        a
        genetic test that is able to detect and identify multiple mutations
        simultaneously, to be approved by the United States Food and Drug Administration
        (“FDA”) as an *in-vitro
        diagnostic* (“IVD”)
        device for diagnostic use to help detect cystic fibrosis in the United States,
        and has also subsequently received the European CE Mark (the equivalent of
        IVD
        in Europe) in January 2006. All products from the Company are based on the
        Tag-ItTM Universal Array platform, which utilizes a proprietary universal tag
        system that allows various diverse genetic tests to be developed to a
        single standardized platform for operating the tests, enabling easy
        optimization, product development and expansion. Products from the Company
        operate on the Luminex xMAP instruments, which enable the rapid production
        of
        flexible, high-throughput, low-cost DNA-based tests.




The
      Company is continually undertaking research and development and exploring
      opportunities to commercialize additional products and expand the Company’s
      pipeline and revenue base. The Company conducts much of its own research and
      development internally, but also engages the expertise of members of the
      Company’s Scientific Advisory Board, outside consultants and a variety of
      academic and commercial partners where necessary or desirable. The Company
      core
      focus remains on developing its own proprietary products. However, in 2005,
      the
      Company also adopted a strategy to maximize the investment made in the Company’s
      commercialization engine and cGMP (current good manufacturing practice)
      facilities through productization and manufacturing of tests and reagents for
      other
      companies’ genetic discoveries. The products resulting from these arrangements
      are custom built under OEM arrangements and are sold exclusively to the
      contracting partner. The Company has since entered into OEM supply agreements
      with Maxxam and InterGenetics, details of which are described in Item 4.A
“*History
      and Development of The Company*”
      above.


17





The
        Company’s products are launched with a plan to develop them into IVD devices. In
        the early launch phase, the Company’s products are sold for investigational use
        only (“IUO”) within the FDA regulatory framework, allowing laboratories to
        compare the results achieved using their current technology with the results
        from the Company’s products. The IUO products do not have established
        performance characteristics. The Company’s ASRs are sold to high complexity
        laboratories certified under the United States Clinical Laboratory Improvement
        Amendments regulations, otherwise known as CLIA, within the FDA regulatory
        framework. The ASRs do not have established analytical and performance
        characteristics.




The
      Company’s ASRs consist of small amounts of liquid reagent packaged in sterile
      vials. The Company’s IUO products consist of genetic tests formed of small
      amounts of liquid reagent packaged in sterile viles, which are then in turn
      placed in a carton. One carton is referred to as a kit. A kit is sold containing
      enough reagent to test 24 to 96 patients (in increments of 24) at one time.
      The
      kit contains a variety of synthetic pieces of DNA, the media for reading the
      results of the test (currently microscopic beads), various harmless but
      essential chemical compounds and a CD-ROM containing the necessary software
      for
      reading the test results. The Company’s IVD products consist of genetic tests to
      identify specific genetically linked diseases and are sold in kits as well.
      These products have extensive analytical and clinical support for the claims
      made. The data supporting these products have been reviewed by regulatory
      authorities such as the FDA prior to being labelled as IVD. As of June 30,
      2006,
      only the Company’s Tag-It TM CF kit
      has gained IVD status in the United States and Europe (where it has received
      the
      equivalent European CE Mark).




The
      microscopic beads which the Company currently favours to read the test results
      are solely sourced from its partner, Luminex Corporation. The synthetic DNA
      is a
      commodity, and may be ordered from one of several companies doing such work.
      The
      balance of the chemicals is sourced from a variety of laboratory supply houses
      throughout Canada, the U.S. and internationally.




The
      Company is developing products in three distinct segments of the genetic test
      market:




(i)
            Human
                Genetics: tests that identify mutations that are (typically) inherited
                which may be predictive or confirmatory of a disease or
                condition;




(ii)
            Personalized
                Medicine (Pharmacogenomics or PGx): tests that qualify an individual’s
                genetic profile for therapy optimization;
                and




(iii)
            Infectious
                Diseases: tests that quantify infectious agents or pathogens directly
                through genetic confirmation within a patient
                sample.




Between
      2003 and 2005 the Company developed and commercialized a number of new products.
      The following table sets forth the Company’s current menu of available products
      as well as products under development. Unless otherwise noted in this
      registration statement on Form 20-F or in the documents incorporated by
      reference herein, all products are provided for IUO and no claim is made as
      to
      product suitability or use as a diagnostic device.







**Market
                Segment**
            **Area
                of Interest**
            **Product**
            **Earliest
                Anticipated**
              **Commercial
                Availability**Human
                Genetics
            Coagulation
            Factor
                V
            currentFactors
                V and II
            currentFactors
                V, II and MTHFR
            currentCustom
                panel
            currentCystic
                Fibrosis
            ACMG
                - 23
            currentCF
                39 (IVD)
            currentCF
                70
            currentCF
                11
            currentCF
                97
            currentInherited
                disorders
            Ashkenazi
                Jewish Panel
            currentAneuploidy
            TBDFragile
                X
            TBD


18





Pharmacogenomics
            Drug
                Metabolization
            P450
                - 2D6
            currentP450
                - 2C9
            currentP450
                - 2C19
            currentP450-3A4/5
            TBDWarfarin
            2006Sepsis
            2007Infectious
                Diseases
            Infectious
                Diseases
            RVP
            2006MRSA
            TBDOEM
            Oncology
            OncoVueTM
              (breast
                cancer)
            TBD




The
      Company began shipping commercial genetic tests in the third quarter of 2003.
      Product revenue for 2003 was $1,054,923. The balance of the Company’s revenue
      for 2003 was comprised of licensing and development fees received in the form
      of
      royalties on the sales by Luminex of “FlexMap beads”TM. In 2004, the Company
      increased its revenue to $3,850,013, with product sales representing 90% of
      revenue, or $3,460,747.




Product
        sales for 2005 were $6,725,432, an increase of approximately 94% over 2004
        Product sales of $3,460,747 while instrument sales were $829,773 for 2005
        as
        compared with $242,271 in 2004. Instrument sales have increased as a percentage
        of revenue, a trend that the Company expects to see reverse in 2006 as the
        Company continues to grow its Tag-ItTM revenues by extending its customer
        footprint through adoption of additional product offerings to its existing
        customer base and by developing additional products including the ID-TagTM RVP.
        At June 30, 2006, instrument sales represented 7% of total year-to-date revenues
        (June 30, 2005 - 11%) and 4% of the quarterly revenues (June 30, 2005 - 18%).
        This trend supports the Company’s expectation that instrument sales as a
        percentage of company’s total revenues will continue to decline. The balance of
        revenue of $118,965 (2004 - $146,995) is comprised of licensing and development
        fees received in the form of royalties on the sales by Luminex of “FlexMap
        beads”TM and contract research and development fees reflecting the on-going
        pro-rata recognition of deferred milestone revenue. Product sales included
        all
        of the Company’s commercial products and they grew year-over-year due to the
        mid-year launch of the CFplusTM test by Genzyme and the adoption by the growing
        customer base of the Company’s expanded menu selections, primarily the Ashkenazi
        Jewish Panel and CF70 reagents. Luminex instrument placements continued in
        2005
        through direct customer purchases and the Company’s reagent rental programs. The
        Company’s customer base as at December 31, 2005 stands at 42, having grown 147%
        year-over-year.




The
        Company’s current customer base is primarily large United States reference
        laboratories. The Company, via its dedicated U.S. sales force, sells direct
        to
        commercial laboratories that are certified under the Clinical Laboratory
        Improvement Amendments (“CLIA”). The sales program generally consists of
        multi-year supply agreements which may incorporate the provisioning of a
        Luminex
        xMAP 100 reader to the customer for the term of the agreement under a reagent
        rental program.




The
      Company has concluded a distribution agreement for certain of its products
      in
      Israel and is actively seeking distributors for other international markets.
      Entering 2005, the Company had an objective to establish a presence in the
      smaller European market, but concluded that such an approach could preclude
      partnership with a larger global industry partner. The Company has since
      broadened business development efforts towards partnerships with larger global
      industry players.




**Technology**




The
      Company has developed a number of technologies that have emerged from the
      Company’s advanced understanding of DNA chemistry and thermodynamics and that
      underlie the Company’s commercial products. The Company’s technology focus has
      been in applying various strategies to control a process called DNA
      hybridization - the key fundamental step in virtually all genetic tests.
      Hybridization can be defined as the event in which a single-stranded DNA
      molecule, called a probe or tag, which is usually attached to a solid surface
      (such as a microarray), will grab and hold on to its single-stranded
      counterpart, or complement, present in a sample of interest. The rate at which
      the individual probe molecule grabs on to its counterpart and the final strength
      of this interaction depends on many parameters but most importantly on the
      actual design of the DNA probe molecule itself. Since on a DNA microarray every
      probe molecule has a unique design, each probe will have a different propensity
      to grab and hold onto its counterpart. This variability in the efficiency by
      which each probe functions is the underlying reason for the majority of
      technical problems in terms of obtaining the most accurate, consistent and
      reproducible results from current genetic test technologies.




The
        Company’s research investment over the years has resulted in the Tag-ItTM
Universal Array technology (Tm 100 and Tm 1000), as well as a number of
        ancillary technologies. Multiple patents have been filed in the United States
        and in other jurisdictions describing the Company’s technologies and their uses.
        The Company currently owns 47 patents/patent applications and has in-licensed
        or
        is in negotiation on 83 patents/patent applications in various jurisdictions.
        The Company considers its 18 owned patents relating to the Tm 100 and Tm
        1000
        Universal Arrays as its material patents, the subject matter of which covers
        the
        methods of designing and selecting polynucleotide sequences having desired
        properties and non-cross-hybridizing sets of polynucleotides and uses
        thereof.


19




**Universal
      Arrays**




A
      universal array standardizes the hybridization process, improving the
      effectiveness and efficiency of a sample to any disease template.




The
      Company’s research on DNA hybridization resulted in the validation of Tm 100, a
      universal hybridization operating system aimed at the diagnostic sector, being
      commercialized through an agreement with the Company’s first microarray platform
      partner, Luminex. The Company has also announced the successful validation
      of
      the Tm 1000 operating system, which offers a tenfold increase in test capacity
      over Tm 100 and which is especially suitable for early stage disease association
      studies and patient testing of highly complex genetically caused diseases and
      disorders.




In
      2001,
      the Company initiated its product commercialization strategy by entering into
      a
      five year agreement with Luminex. The strategic partnership grants Luminex
      rights to certain of the Company’s technology and also grants the Company rights
      to develop products on Luminex’s bead-based array platform. Luminex has an
      exclusive license to the Tm100 universal array in the field of bead-based
      assays. In January 2003, the Company and Luminex jointly announced the launch of
      the Tm 100 based universal array beads.




The
        agreement with Luminex provides the Company with a widely commercially deployed
        platform on which to develop and sell its products. As of December 31, 2005,
        Luminex reported that it has sold over 3,400 of its instruments worldwide.
        This
        installed base is available to operate the Company’s products. The Company has
        combined the advantages of the Luminex system, such as economy, flexibility
        and
        throughput, with its own knowledge of universal array technology to develop
        products for specific applications. The original agreement with Luminex expired
        on March 28, 2006. On March 29, 2006, the Company announced the conclusion
        of a
        multi-year extension of the Luminex agreement, which grants the Company rights
        to commercialize DNA-based molecular diagnostics that operate on Luminex’s xMAP®
technology platform. The renegotiated agreement incorporates similar terms
        to
        the original agreement, including the ability for the Company to distribute
        Luminex’s xMAP systems such as the new LX200 instrument. The agreement also
        provides for minimum annual royalty payments and defined pricing for beads
        and
        instrument purchases. The term of the agreement is for seven years with three
        successive one-year renewal periods. Termination of rights within specific
        field
        or territory can be triggered upon failure by the Company to commercialize
        a test within the  field or territory and generally upon a breach
        of the Agreement by either party. The Company plans to continue to assess
        the
        marketplace for new instruments that enhance the competitiveness of the
        Company’s genetic tests.




**Competitive
      Conditions in the Genetic Test Market**




The
      Company is seeing diagnostic applications evolve from large-scale, genome-wide
      studies which then become focused on smaller genetic subsets of medical
      relevance. Genetic researchers continue to use high-density array systems for
      broad gene expression and single nucleotide polymorphism (“SNP”) confirmation
      studies to draw correlates between gene profiles, disease conditions and
      therapeutic response. By comparing patterns and frequencies of SNPs (i.e.
      variations in the DNA sequence) in patients and in controls, researchers can
      identify associations between SNPs and particular diseases. As correlation
      data
      emerges, focus is shifting to lower density screening and diagnostic arrays
      to
      fully characterize genes of interest in patients. Large-scale expression and
      SNP
      scoring studies tend to involve greater than 1,000 genetic markers per run,
      while “theme-based” clinical screening and diagnostic applications tend to focus
      on fewer than 100 genetic markers per patient sample. With this shift towards
      screening and diagnostics, sample throughput requirements are significantly
      increasing. Correspondingly, demand is increasing for flexible, automated
      platforms with multiplexing capabilities (up to 100 genetic markers at one
      time)
      that are relatively uncomplicated and easy to use. Test accuracy and a low
      cost
      per mutation are also essential to drive technology into healthcare markets.




In
      addition, the following market dynamics continue to play a significant role
      in
      both the rate of growth and ultimate size of the genetic testing
      market:




·
            the
                available menu of validated genetic tests that doctors can
                order;




·
            the
                deployment of cost effective high throughput technology platforms
                that run
                these tests;




20





·
            the
                regulatory framework for the approval of new tests that are validated
                for
                medical applications, and the regulation of therapeutics susceptible
                to
                genetic effectiveness and safety;
                and




·
              the
                  process for determining, establishing and implementing a “standard of
                  care” as appropriate in each disease area. As genetic markers are
                  identified and correlated to disease, there are a number of organizations
                  and communities of interest who assume the role of corroborating
                  the
                  findings of various medical linkage studies in order to determine
                  the
                  applicability of a marker within defined population subgroups.
                  Among these
                  is the ACMG, which the FDA and other medical colleges in the U.S.
                  depend
                  upon for recommendations in this
                  area.




The
      Company faces competition from other pharmaceutical and biotechnology companies.
      The Company’s principal competitors may be characterized into three categories:
      large corporation, small corporation and new technologies.




*Large
      Corporations*




A
      number
      of large diagnostics companies are currently in the genetic diagnostic test
      market. Several of these companies are building from a base of revenue provided
      by older genetic testing technologies, while others view the current market
      opportunity as a discontinuity providing them with the entry point. Largest
      among the former, Roche, in alliance with Affymetrix, have entered the clinical
      genetic testing market. Among the latter, Abbott Laboratories, ABI and Celera
      Diagnostics continue to be a force in the genetic testing market. Other large
      diagnostic manufacturers and distributors have also entered into the molecular
      diagnostic segment more recently. Companies in this category would include
      Bayer, Johnson & Johnson, Becton-Dickinson, Beckman Coulter, Dade Behring
      and others. Non-traditional life sciences companies such as Motorola, Hewlett
      Packard, General Electric as well as, more recently, reagent companies such
      as
      Quiagen and Takara and others may be identified as potential competitors. These
      potential competitors have significantly more resources than the Company, and
      may undertake market strategies and tactics that the Company may not have the
      resources to counter.




*Small
      Corporations*




A
      significant number of companies have sprung up to capitalize on the promise
      of
      genetic testing. Within this broad array, a few have focused on the specific
      market that the Company’s products address. These include Nanogen, Third Wave,
      Eragen and others. All of these companies have developed and are marketing
      competing technologies to the Company. There is and will be significant
      technological contention for customers over the short to mid-term. The Company
      believes that it has secured a significant leadership position in the U.S.
      market against these competitors by establishing its technology in 34 clinical
      laboratories in the U.S., including the two largest reference laboratories
      in
      the world, Quest Diagnostics and Labcorp.




*New
      Technologies*




The
      industry in which the Company operates is experiencing rapid technological
      advancement. The Company is unable to predict the likelihood of the advent
      of
      technologies which may substantially impact the Company’s market opportunities
      in the mid to long term.




The
      Company believes that it has a strong competitive position in the marketplace.
      The Company’s genetic testing platform can be used in the transition from
      medium-density research tools to lower density, high throughput screening and
      diagnostic applications. The Company is building a menu of genetic tests which
      management believes has significant revenue and gross margin potential.





**Government
        Regulations**





In
        the
        United States, the Company is subject to regulation by the FDA under the *Food,
        Drug and Cosmetic Act* and
        other laws. The FDA regulates in vitro diagnostic products for human use
        and
        these products include reagents, instruments and systems intended for use
        in a
        variety of diagnostic applications. Medical devices are generally classified
        into one of three classes (i.e., Class I, II or III) on the basis of the
        controls deemed necessary by the FDA to reasonably ensure the safety and
        effectiveness of the product. Class I devices are generally subject to general
        controls (e.g., labeling, postmarket controls, Medical Device Reporting and
        adherence to Quality System Regulations, or QSR). Class II devices are generally
        subject to general and special controls (e.g., performance standards, premarket
        notification and postmarket surveillance). Class III devices are new technology
        or high-risk devices which must receive premarket approval by the FDA to
        ensure
        their safety and effectiveness (e.g., life-sustaining, life-supporting, and
        implantable devices or new devices which have been found not to be substantially
        equivalent to legally marketed devices).
        In other words, device classification depends on the intended use of the
        device
        and on the level of risk the device poses to the patient and/or user.


21





The *Food,
        Drug and Cosmetic Act* requires
        that medical devices introduced into the U.S. market, unless otherwise exempted,
        be the subject of either a premarket notification clearance, known as a 510(k),
        or a premarket approval, known as a PMA. A 510(k) is a pre-marketing submission
        made to FDA to demonstrate that the device to be marketed is as safe and
        effective as a currently legally marketed device through descriptive and
        performance data. A de novo 510(k) submission can be made for a new product
        for
        which there is no predicate (pre-existing, comparable) device with which
        the product in question can be compared. In such a case, the FDA is required
        under the Act to initially deem the device as a Class III product (based
        on the
        fact that no predicate exists) but the manufacturer is provided the mechanism
        to
        seek reclassification of the device into a Class II product. If a device
        is
        deemed to be a Class III product based on inherent risks associated with
        the
        product, then the manufacturer is required to seek approval under a
        PMA.





Within
        the FDA, the Center for Devices and Radiological Health (CDRH) regulates
        medical
        devices for their safety and effectiveness (assessed either through review
        of a
        510(k) or PMA) and also regulates these devices in terms of compliance to
        all
        applicable regulations under Title 21 of the Code of Federal Regulations
        . More
        particularly, the Office of Device Evaluation and Safety in CDRH is responsible
        for the processing and review of 510(k) and PMA submissions for marketing
        clearance in the United States.





The
        Company has received 510(k) clearance for its Tag-It TM Cystic
        Fibrosis Kit as a Class II / Special Controls product. In reviewing analytical
        and clinical data provided by the Company on the performance of the
        Tag-It TM Cystic
        Fibrosis Kit, the FDA accepted that the Company’s label and advertising may
        contain the claim that the product is 99.99% accurate. The Company will be
        seeking 510(k) or PMA clearance for a number of its other products. In
        particular, the Company will be submitting a de novo 510(k) for classification
        as a Class II /Special Controls device for its ID-Tag TM RVP.





The
        Company’s products may only be sold as IUOs until the Company’s products are
        cleared by the FDA as an IVD through the 510(k) or PMA process. IUOs are
        products for which the performance characteristics have not been established
        by
        the manufacturer and which are used by laboratories to determine the performance
        characteristics of the product prior to full commercial marketing. The IUO
        status allows the Company to sell its products to qualified laboratories
        under
        CLIA (Clinical Laboratory Improvement Amendments) for performance evaluations.
        The CLIA regulations establish quality standards for laboratory testing and
        an
        accreditation program for clinical laboratories. The regulations establish
        three
        categories of testing on the basis of the complexity of the testing methodology:
        waived tests, tests of moderate complexity, and tests of high complexity.
        Laboratories performing moderate or high complexity testing or both must
        meet
        requirements for proficiency testing, patient test management, quality control,
        quality assurance and personnel. High complexity laboratories may incorporate
        the Company’s ASRs (which are supplied without instructions for use or
        performance characteristics) in their “home brew” assays (i.e., laboratory
        developed tests) used for diagnostic purposes. Where the laboratories
        incorporate the Company’s ASRs in their “home brew” assay, it is the
        laboratories’ responsibility to develop a recipe for their test and to take
        responsibility for establishing and maintaining performance.





The
        FDA
        also has the authority to conduct annual facility inspections/audits of device
        manufacturers to determine compliance with current Good Manufacturing Practice
        (“cGMP”) requirements in the Quality System (“QS”) regulation. The current cGMP
        requirements set forth in the QS regulation by the FDA require that domestic
        or
        foreign manufacturers have a quality system for the design, manufacture,
        packaging, labeling, storage, installation, and servicing of finished medical
        devices intended for commercial distribution in the United States. The
        regulation requires that various specifications and controls be established
        for
        the design, development, manufacture and post-market surveillance of devices
        to
        help assure that medical devices are safe and effective for their intended
        use.
        All products sold as ASRS and IVD must be manufactured under
        CGMP.




**Business
      Strategy**




From
        2001
        to 2005, the Company adopted a competitive displacement strategy, pursuing
        genetic testing market segments that had existing high-volume demand and
        were
        growing. The Company’s selection of initial tests to design, manufacture and
        commercially launch during this period were predicated on two critical
        attributes:




(a)
            the
                tests had to be ones for which medical re-imbursement codes already
                exist
                and that physicians were already ordering in significant quantities;
                and


(b)
            the
                tests had to incorporate readily accessible genetic
                markers.




By
        commercializing products meeting these criteria, the Company believes was
        able
        to use its technology advantage to displace older technologies that were
        under-serving the customer base, thereby mitigating adoption, regulatory
        and, to a certain extent, pricing risk, as well as securing a presence for
        the
        commercialization of future products.


22




As
        the
        Company expands its customer base and secures an increasing share of the
        genetic
        testing market engendered from the successful launch of its initial products,
        the Company’s commercial strategy is evolving. This strategy now involves
        developing products in the healthcare segments where genetic testing is not
        currently widely used, such as: genetic testing to determine large scale
        genetic
        defects (cytogenetics); genetic testing to identify infectious diseases;
        and
        genetic testing linked to specific prescription drugs; etc).





For
        2006
        and beyond, the Company is focused on becoming a global leader in at least
        one
        of the three segments of the genetic testing market for which it is developing
        products; human genetics, personalized medicine and infectious disease. The
        Company plans to enhance its offering within each of its three key market
        segments and has developed tailored strategies to drive growth in each segment,
        described below.





*Human
        Genetics - Tag-It*




The
        Company’s strategy within the Human Genetics market segment is foremost to
        dominate the Cystic Fibrosis market. In the U.S., the Company estimates this
        market at 1.3 million tests annually and expects it to peak at approximately
        2.5
        million tests in the next five years, a growth rate of 15% per annum. The
        Company now estimates that on an annualized basis, it has secured approximately
        30% - 35% market share of the U.S. CF testing market. The majority of the
        remaining share of the CF market that has not been secured by the Company
        is
        accounted for by demand from the 2 largest reference laboratories in the
        U.S.,
        Labcorp and Quest. During 2005, the Company announced that LabCorp, the second
        largest reference laboratory in the U.S., had adopted the Company’s Tag-ItTM CF70
        reagents for use in their 70 mutation cystic fibrosis assay. LabCorp has
        seen
        significant growth in the use of Tag-ItTM reagents since that time. Quest does
        not purchase CF products from the Company but does purchase the Tag-ItTM AJP
        reagents. Also during the year, Genzyme Genetics launched their CFplusTM cystic
        fibrosis (CF) mutation analysis which includes testing for 97 mutations and
        incorporates reagents developed collaboratively with the Company. These highly
        multiplexed tests serve a broader and more ethnically diverse population
        than
        competing CF products, giving these labs unique and competitive offerings.




Along
        with a strong established customer base in the CF market, the Company believes
        that its uniquely comprehensive CF product line combined with the IVD status
        and
        CE marking of its Tag-ItTM Cystic Fibrosis kit place the Company in a strong
        competitive position to capture additional CF market share. Improvements
        to the
        Tag-ItTM platform with respect to automation and assay streamlining will provide
        the Company’s CF tests further competitive leverage with the largest reference
        laboratories.




The
        Company’s Human Genetics sales program will continue to promote the adoption of
        the Company’s remaining human genetics products to its existing customer base.
        To date approximately 50% of the customers have adopted two or more products
        from the Company’s menu.




Beyond
        North America, the Company intends to secure a distribution partner for its
        CF
        products. With its Tag-ItTM Cystic Fibrosis (CF) Kit now having the CE Mark
        (“Conformité Européene”), the genetic test can be marketed for diagnostic
        purposes in the European Union and other countries that recognize the CE
        Mark, a
        cornerstone to the process of securing a distributor.




New
        initiatives under evaluation by the Company within the Human Genetics market
        segment include efforts to pursue molecular diagnostic alternatives to cytology,
        the field of testing for chromosomal abnormalities. For example, the Company
        is
        performing feasibility work on tests for mutations associated with Aneuploidy
        and Fragile X.




*Personalized
        Medicine - Tag-It PGx*




The
        Company’s objective within the Personalized Medicine market segment is to
        establish the Company as the leader in PGx. The Company has developed a
        comprehensive strategy for achieving this goal:




1.
              Drive
                  the growth of the PGx market. In order for the PGx market to achieve
                  its
                  potential and to accelerate growth and adoption, physicians must
                  embrace
                  PGx testing. In 2005, the Company initiated programs focused on
                  supporting
                  the creation of consensus guidelines for certain clinical application
                  of
                  PGx. The first of these guidelines, targeting warfarin therapy,
                  is slated
                  for publication in mid 2006. The Company is also developing resources
                  for
                  physicians to learn more about PGx and plans to conduct opinion
                  leader
                  events in 2006 to establish the importance and potential of PGx
                  among
                  physicians. The other leading Company in the area of PGx, Roche
                  Molecular
                  Systems, is supporting similar initiatives. Ultimately, the Company
                  believes that it will benefit significantly from the investments
                  being
                  made by itself and Roche in this
                  sector.





23




2.
              Offer
                  the most comprehensive PGx menu available. In particular, the Company
                  is
                  focused on commercializing novel and proprietary PGx products which
                  address unmet medical needs and differentiate it from its
                  competitors.


3.
              Gain
                  IVD regulatory status for the Company’s PGx products. The Company believes
                  that regulatory clearance is essential for the widespread clinical
                  application of PGx.


4.
              Gain
                  market share with Contract Research Organizations and large pharmaceutical
                  companies. These customers are at the “ground floor” for PGx - they
                  develop and conduct clinical trials on new drugs. By embedding
                  the
                  Company’s tests at this level, there is the increased potential for the
                  same tests to be integrated into the dosing and prescribing process
                  once a
                  drug reaches market.




During
        2005 and the first quarter of 2006, the Company made significant progress
        towards expanding its PGx menu with novel products. During the first quarter
        of
        2006, the Company announced it had signed an agreement with EPIDAUROS
        Biotechnologie AG (Bernried, Germany) for a co-exclusive commercial license
        to
        EPIDAUROS’ patents on the most prevalent biomarker in Caucasians related to the
        P450-CYP2D6 gene, which is associated with an enzyme that metabolizes
        approximately 25% of all prescription drugs. Only one other company has a
        license to this genetic marker. The Company and EPIDAUROS have negotiated
        an
        agreement whereby no other licenses for this variant will be granted in the
        future.




Also
        in
        2006, following significant marketing and business development efforts through
        2005, the Company signed an agreement with Sirius Genomics (Vancouver, Canada)
        for an exclusive commercial license to patents from Sirius for specific
        biomarkers related to two drugs called Xigris® and vasopressin that are used to
        treat severe sepsis, a serious medical condition resulting from the immune
        response to a severe infection, The Company will incorporate these markers
        into
        a companion diagnostic for use by critical care physicians in order to treat
        patients with severe sepsis more effectively. Given the large market potential
        of this test as well as its potential importance in the selection of drugs
        and
        therapies that impact patient morbidity and mortality, the Company expects
        this
        test to achieve notable market penetration across North America and Europe,
        anticipating revenue that could be in excess of $100 million in the aggregate
        over the first three years following commercial launch.




The
        Company is also developing a companion test for Warfarin which it expects
        to
        launch in 2006. The FDA’s Clinical Pharmacology Subcommittee of the Advisory
        Committee on Pharmaceutical Science voted in November 2005 in favor of changing
        Warfarin’s label to reflect the fact that genetic information from two genes,
        CYP450 2C9 and VKORC1, can be useful in deciding a patient’s individual dose.
        The market for such a test is very significant; more than 30 million
        prescriptions are written for Warfarin each year in the U.S. The Company
        anticipates that the FDA may relabel warfarin in the fourth quarter of 2006.




The
        Company’s goal is to secure a position in this market upon the anticipated
        relabeling of Warfarin. Subsequent to the end of the first quarter of 2006,
        the
        Company initiated an Early Access Program (EAP) for the Tag-ItTM PGx
        CYP2C9+VKORC1 Mutation Detection Kit with key customers and opinion leaders.
        The
        Company intends to submit this product for FDA clearance as an IVD in 2006
        with
        clearance anticipated for late 2006 or early 2007.




*Infectious
        Diseases - ID-TagTM*




In
        late
        2003, the Company announced that it had entered into a collaboration with
        Calgary Laboratory Services to develop a test for the identification and
        characterization of Staphylococcus aureus (SA), particularly
        methicillin-resistant Staphylococcus aureus (“MRSA”) in a hospital setting. Over
        the last two years, the Company established the feasibility of utilizing
        its
        Tag-ItTM platform for the development of such a test, including a rapid detection
        step to enhance usability in a hospital urgent care environment. In establishing
        its commercialization program, the Company has faced a number of intellectual
        property (IP) hurdles related to accelerated chemistry as well as the specific
        form of the genetic markers used in the current prototype of the test. Certain
        of the IP hurdles have been resolved in the Company’s favour however, other
        significant hurdles remain. The Company continues to be interested in the
        use of
        its platform in the area of bacterial identification and related infection
        diagnosis and management and is now seeking partners for the commercialization
        of a product in this area.




During
        2005, the Company collaborated with Dr. Jim Mahony of McMaster University
        to
        develop the ID-TagTM RVP (Respiratory Viral Panel) kit, a comprehensive assay for
        the detection of various strains of viruses and subtypes, including H5 (avian
        flu). The Company expects that it will serve as a cornerstone diagnostic
        and
        screening product in the public health setting for the more efficient management
        and treatment of patients during flu season. The product could also play
        a key
        role in managing the potential threat posed by the avian flu and the Company
        is
        actively promoting its adoption within the global public health community.




24


In
        January 2006, the Company made the ID-TagTM RVP commercially available outside
        the U.S. and for evaluation purposes within the U.S. To drive sales, the
        Company
        is establishing market presence by enabling key customers and thought leaders
        to
        gain experience with the test through the Early Access Program. The Company
        is
        also planning to raise awareness of ID-TagTM RVP among clinical and public health
        labs through tradeshows and public relations and advertising campaigns. The
        Company is focused on gaining regulatory clearance for the test as an IVD
        and is
        undertaking validation studies to generate data for an FDA submission with
        regulatory clearance anticipated in the second half of 2006. The Company’s sales
        force will focus on marketing the test to hospital based laboratories in
        the
        U.S. The Company is also in discussion with potential distributors for selling
        the product outside of the US and in the second quarter of 2006 signed its
        first
        distribution agreement with a major diagnostics distribution to commercialize
        ID-TagTM RVP in Turkey.




*Other
        opportunities*




The
        Company’s core focus remains on developing proprietary tests for human genetics,
        pharmacogenetics and infectious disease; however, through partnerships the
        Company believes it can leverage its technology and cGMP manufacturing
        capabilities to address significant opportunities in other sectors and improve
        manufacturing efficiency. In April of 2005, the Company announced that it
        had
        entered an agreement with Maxxam Analytics whereby Maxxam would develop a
        test
        for livestock food traceability which would be manufactured by the Company.
        Due
        to changes at Maxxam, it has postponed its genetic traceability program
        indefinitely.




In
        June,
        2005 the Company announced it had signed a five year agreement to supply
        custom
        Tag-ItTM reagents to InterGenetics (Oklahoma City, Oklahoma) for OncoVueTM.
        According to InterGenetics, OncovueTM has been developed as the first
        genetic-based Breast Cancer Risk Test relevant to all women. The agreement
        anticipates InterGenetics will purchase a minimum of $7.5 million in reagents
        from the Company over the five year period. The agreement is contingent on
        the
        Company delivering Tag-ItTM reagents which perform according to InterGenetics’
specifications. InterGenetics has received regulatory input in the U.S. from
        the
        FDA which has required it to reschedule its commercial launch to the spring
        of
        2006. As the timing for the finalization of InterGenetics’ discussions with the
        FDA is currently uncertain, the Company’s delivery of commercial products to
        InterGenetics cannot be predicted at this time.




**Customer
      Base**




The
      Company’s early product launches and marketing efforts were directed at securing
      supply agreements with large U.S. reference laboratories, which account for
      an
      estimated 80% of the genetic testing market. The Company launched its “Early
      Access Program” in the first quarter of 2003 to market its products to these top
      reference laboratories. In human genetics and most PGx application, the
      remaining 20% of the U.S. market may be further divided into approximately
      100
      mid-sized commercial and hospital laboratories that have sufficient volume
      of
      genetic testing to warrant adopting the Company’s tests and approximately 500
      smaller laboratories. The Company has hired a small but focused sales force
      based in the U.S. to address the opportunity presented by these 100 mid-sized
      laboratories. In the areas of infectious disease and the Company’s ID-TagTM RVP,
      the customer base is substantially different as the information provided to
      physicians by these products requires very rapid response. As a result, the
      Company is evaluating the most effective market channel development strategies
      for these products and may determine that a distribution partner is best suited
      to fully exploiting one or more of these markets.




**Corporate
      Reorganization**




Shareholders
      of the Company have approved the Reorganization, the details of which
      are described above in Item 4.A “ *History
      and Development of the Company* ”
of
      this
      registration statement on Form 20-F.




***C.***
            ***Organizational
                Structure***




The
      Company currently has four wholly-owned subsidiaries: Tm Technologies, Inc.,
      Tm
      Bioscience Inc., Tm Bioscience HG Inc. and Tm Bioscience PGX Inc.




Tm
      Technologies, Inc. was incorporated under the laws of the State of Delaware
      on
      July 27, 1992. Tm Technologies, Inc. has been inactive since 1998.




On
      February 4, 2004, the Company incorporated Tm Bioscience Inc. under the laws
      of
      the State of Delaware. Tm Bioscience Inc. currently employs five individuals
      in
      the United States and does not otherwise operate commercially. The registered
      office of Tm Bioscience Inc. is at One Rodney Square, 10th Floor, Tenth and
      King
      Streets, Wilmington, Delaware, 19801.




25


On
      December 15, 2005, the Company effected a portion of phase one of the
      Reorganization and incorporated two new wholly-owned Canadian subsidiaries
      under
      the laws of Ontario, Tm Bioscience HG Inc. (“HG Inc.”) and Tm Bioscience PGX
      Inc. (“PGX Inc.”). The Company transferred certain intellectual property
      relating to its pharmacogenomics business to PGX Inc. and entered into certain
      management, research and development and license agreements with PGX Inc.




The
      registered office for each of Tm Bioscience HG Inc. and Tm Bioscience PGX Inc.
      is at 439 University Avenue, Suite 2000, Toronto, Ontario, M5G 1Y8.




***D.***
            ***Property,
                Plant and Equipment***




The
        Company currently leases 27,354 square feet at its premises at 439 University
        Avenue, Toronto, Ontario, Canada, M5G 1Y8. The Company’s manufacturing facility
        occupies approximately 11,242 square feet of its leased premises, has an
        engineered production capacity of approximately 6.0 million tests per year
        in
        batches of up to 400,000 tests, and has been certified to U.S., European
        and
        Canadian quality management standards as described above in Item 4.A
“ *History
        and Development of the Company* ”
of
        this
        registration ** statement
        on Form 20-F. The Company is in the process of an expansion which has added
        an
        additional 2,989 square feet which may be used for the manufacturing and
        laboratory facilities.




**Item
      4A**  **Unresolved
      Staff Comments**




Not
      Applicable.




**Item
      5.**  **Operating
      and Financial Review and Prospects**




The
      following discussion and analysis should be read in conjunction with Item 3A.
      “ *Selected
      Consolidated Financial Dat* a”
and
      the Company’s consolidated financial statements, the notes thereto and other
      financial information appearing elsewhere in this registration statement on
      Form
      20-F.




The
      following review is based on the Company’s consolidated financial statements
      which are prepared under Canadian GAAP. A discussion of the principal
      differences between Canadian GAAP and U.S. GAAP is provided in note 23 of the
      Company’s audited consolidated financial statements included elsewhere in this
      registration statement on Form 20-F.




***Overview***




The
        Company is a DNA-based diagnostics company. From 2000 to 2005, the Company
        focused its resources on building a commercialization engine for the design,
        development, manufacture, marketing and selling of genetic tests, also referred
        to as “DNA-based tests”, “nucleic acid tests” or “molecular diagnostics”. For
        2006 and beyond, the Company is focused on leveraging this engine in order
        to
        become a global leader in at least one of the three segments of the genetic
        testing market for which it is developing products; human genetics, personalized
        medicine and infectious disease.




At
        the
        core of the Company’s value proposition is the Tag-ItTM Universal Array platform,
        a proprietary technology that simplifies the development of complex genetic
        tests, enabling the creation of genetic tests for up to 100 *(Tm
        100)* or 1000 *(Tm
        1000)* mutations to be combined and performed simultaneously in a single test -
        a
        concept called “multiplexing”. Furthermore, the Tag-ItTM platform enables
        multiplexing without sacrificing accuracy - tests developed to date have
        allowed
        an FDA approved claim of 99.99%. This level of accuracy is essential for
        diagnostic products.





***Revenues***





The
        Company is developing products for three major segments of the overall DNA
        testing market. The Company’s menu of Cystic Fibrosis products currently
        generate the majority of the Company’s recurring revenue. For 2006, the Company
        has dedicated most of its resources to the commercialization of six products
        within the Personalized Medicine (Tag-ItTM PGx) and Infectious Diseases (ID-TagTM)
        market segments. The market opportunities for these products are expected
        to
        each exceed that of the Cystic Fibrosis market; by volume of tests performed
        because within these markets, significantly more patients present with symptoms
        requiring a diagnosis; by revenue potential because for two of these products,
        the Company has obtained proprietary genetic content making the products
        novel
        to the Company and therefore the Company expects that they will command higher
        prices.









26


*Market Drivers*




The
        current global market for molecular diagnostic testing is estimated by
        management to be US$2.0 billion. Molecular diagnostic testing, with a compound
        annual growth rate estimated by management at 15%, is predicted by management
        to
        remain one of the most significant growth areas in the enormous global *in
        vitro* diagnostics industry, currently estimated by management at US$26
        billion.




In
        general, the following market dynamics continue to play a significant role
        in
        both the rate of growth and ultimate size of the DNA testing
        market:




·
            the
                available menu of validated genetic tests that doctors can
                order;


·
            the
                deployment of cost effective high throughput technology platforms
                that run
                these tests;


·
            the
                regulatory framework for the approval of new tests that are validated
                for
                medical applications, and the regulation of therapeutics susceptible
                to
                genetic effectiveness and safety;
                and


·
            the
                process for determining, establishing and implementing a “standard of
                care” as appropriate in each disease area. As genetic markers are
                identified and correlated to disease, there are a number of organizations
                and communities of interest who assume the role of corroborating
                the
                findings of various medical linkage studies in order to determine
                the
                applicability of a marker within defined population subgroups. Among
                these
                is the American College of Medical Genetics (ACMG), which the FDA
                and
                other medical colleges in the U.S. depend upon for recommendations
                in this
                area.





The
      key
      drivers specific to the Human Genetics, Personalized Medicine and Infectious
      Diseases markets are described below.




*Human
      Genetics - Am I a carrier of a genetic disease?*




Human
        Genetics refers to the testing of a person’s DNA for specific inherited
        mutations that have been correlated to a disease predisposition or disease
        state. Cystic fibrosis (CF) screening dominates the Human Genetics market
        mainly
        because within the North American population, CF is the most prevalent of
        the
        highly-correlated genetic diseases and because guidelines for CF screening
        have
        been published by the American College of Medical Genetics (ACMG), the American
        College of Obstetrics and Gynecology (ACOG) and the U.S. Department of Health
        and Human Services, National Institutes of Health (NIH). Because CF screening
        is
        a large, established market that management expects to continue to grow,
        the
        Company’s initial products have been focused here.




*Personalized
      Medicine - Can I safely take this drug?*




Personalized
        Medicine (PGx) combines genetic testing with the prescribing of drugs. Genetic
        tests in this market segment test genetic markers which correlate with patient
        responses to certain prescription drugs. Results of the tests can be used
        by
        physicians to help determine which prescription drugs will be effective for
        certain patients. The PGx market is not yet well established, but has the
        potential to become a very large segment of the genetic testing market. Driving
        this market over the near to mid term is a demonstrated willingness by the
        FDA
        to encourage PGx testing. The FDA’s focus on PGx relates to the potential of
        genetic testing to substantially enhance both the efficacy and safety of
        many
        drugs in accordance with its mandate.




*Infectious
      Diseases (ID) - Have I acquired a deadly infection?*




Infectious
      disease testing comprises the majority of the current molecular diagnostic
      market. Molecular diagnostics for a number of infectious diseases are well
      established and command significant markets. These tests have focused almost
      exclusively on detection of sexually transmitted diseases (STD’s) such as HIV,
      HPV, and Chlamydia. Access to these established markets is limited due to high
      competition and well-established intellectual property surrounding STD
      biomarkers.




Surprisingly,
      however, most of the technologies used for infectious disease testing are dated
      and either require significant time and labour, have poor sensitivity or are
      not
      efficiently multiplexed, and this presents an opportunity for entry to the
      Company’s technology. By applying the Tag-ItTM platform, the potential to develop
      more comprehensive, faster and higher throughput tests is possible. An example
      is the ID-TagTM RVP launched by the Company in January 2006. The recent rise of
      viruses with pandemic potential such as avian flu and SARS, demand has grown
      for
      rapid, highly sensitive assays that can identify multiple pathogens and screen
      large groups of people, such as in a hospital setting. The Tm ID-TagTM platform
      is well suited to such applications. A particular strength of ID-TagTM RVP is the
      number of viruses it covers such that when a negative result (known as the
      negative predictive value) is received, the physician gains certainty that
      the
      virus is not present.


27




*Financial*




The
        Company completed the year 2005 with working capital of $12,807,061 as compared
        to $6,119,009 at the end of 2004. In 2005, the Company raised $10,548,000
        of
        gross funds by way of a convertible debenture which matures in November of
        2008.
        $8,641,550 of the amount was used to repay the principal outstanding on current
        debentures maturing in May of 2006. In addition, the Company received an
        aggregate of $1,205,126 from the TPC program in 2005 in accordance with the
        investment agreement disclosed in note 8 a) of the consolidated financial
        statements. On December 19, 2005, the Company concluded a public offering
        yielding gross proceeds of $10,080,000 and on August 15, 2006, the Company
        concluded a private placement of unsecured subordinated debt and common share
        purchase warrants for gross proceeds of $6,240,000.




In
        order
        to pursue its expanded regulatory drive, submit products for FDA certification
        in 2006, as well as open new markets for its RVP and sepsis tests, all the
        while
        continuing to serve its growing customer base, the Company foresees a need
        for
        additional growth capital. Management remains responsive to market conditions
        and will seek additional capital from traditional sources or through strategic
        partnerships as opportunities arise.




On
        March
        17, 2006, the Company announced it had signed an agreement with Sirius Genomics
        (“Sirius”) for an exclusive commercial license to patents from Sirius for
        specific biomarkers related to drugs used to treat severe sepsis including
        vasopressin. A director, and then chair of the Scientific Advisory Board of
        the Company, is also the Chief Executive Officer of Sirius.




Under
        the
        terms of the agreement, the Company will provide an upfront payment of
        $4,000,000 in two equal instalments. The first instalment was paid on April
        3,
        2006 and the second instalment is due September 6, 2006. These upfront payments
        will be repaid from net earnings on commercial sales of the severe sepsis
        test,
        with the remaining earnings shared equally by Sirius and the Company over
        the
        term of the agreement.




These
      transactions are measured at the exchange amount of consideration established
      and agreed to by the related parties.




*Results
        of Operation for the Six Months ended June 30, 2006 Compared to the Six Months
        ended June 30, 2005.*




*Summary*




For
        the
        quarter ended June 30, 2006, the Company reported a net loss of $4,643,558
        or
        ($0.09) per share, compared with a net loss of $3,675,783 or ($0.09) per
        share,
        for the corresponding period in 2005, an increase in net loss of $967,775.
        For
        the six months ended June 30, 2006 and 2005, the net loss was $8,738,041
        and
        $7,121,335 and ($0.18) and ($0.18) per share, respectively. For the quarter
        ended June 30, 2006, revenues grew $1,084,880 to $3,074,786 resulting in
        a 43%
        gross margin, as compared to gross margin of 41% in the corresponding period
        in
        2005. For the six months ended June 30, 2006 and 2005, revenue growth of
        $2,917,672 and the increase in cost of goods sold of $1,579,533 resulted
        in a
        44% gross margin (42% for 2005). For the six months ended June 30, 2006
        increases in sales, general and administrative expenses of $3,237,694
        ($1,815,725 for the three months ended June 30, 2006) reflect the Company’s
        investments in the medical and regulatory, marketing and business development
        and quality assurance functions, as well as in the intellectual property
        and
        human resources functions. This was driven by product line growth, expanded
        licensing activities, increased marketing program expenditures and the Company’s
        drive to secure FDA clearance on a large number of products in 2006. Other
        contributing factors were increases in facilities, professional services
        and
        validation studies and design control activities associated with RVP and
        Warfarin clinical trials and EAPs.





For
        the
        six months ended June 30, 2006, research and development expense decreased
        by
        $43,896 (increased by $13,169 for the three months ending June 30, 2006)
        primarily due to the inclusion of Scientific Research and Experimental
        Development (SR&ED) tax credits received in the second quarter of 2006 which
        offset expenses.





For
        the
        six months ended June 30, 2006, interest expense from long-term debt increased
        by $146,513 (increased by $9,536 for the three months ended June 30, 2006).
        The
        increased interest expense reflects the increased debt resulting from additional
        funds advanced from TPC which grew by 93% year over year. Of the increase,
        $24,008 ($20,162 for the three months ended June 30, 2006) related to cash
        interest paid.


28


Gains
        on
        foreign exchange increased by $229,663 for the six months ended June 30,
        2006
        ($257,153 for the three months ended June 30, 2006) due to the strengthening
        Canadian dollar and its effect on the US dollar denominated debt. For the
        six
        months ended June 30, 2006, other financial income (expense) increased from
        a
        net expense in 2005 of $148,007 to net income of 11,269 in 2006; for the
        three
        months ended June 30, 2006, other financial income (expense) increased from
        a
        net expense of $77,266 to net income of 33,030. These increases in income
        are
        due to an increase in interest income on short-term investments from the
        $10
        million public offering closed in the fourth quarter of 2005 and interest
        income
        earned in the second quarter of 2006 from the Sirius license
        fee.





*Sales
      and Cost of goods sold*





Total
        quarterly revenues increased by $1,084,880 from $1,989,906 in 2005 to $3,074,786
        in 2006. Year to date revenues increased by $2,917,672 from $3,065,188 in
        2005
        to $5,982,860 in 2006. Product sales for the second quarter of 2006 were
        $2,905,280, an increase of 80% over 2005 product sales of $1,617,649. This
        quarterly growth is primarily driven by sales of Tag-ItTM CF70 reagents,
        increased demand from Genzyme since their mid-2005 launch of the CFplusTM test
        and market uptake of the Tag-ItTM Ashkenazi Jewish Panel (AJP). Year-to-date
        product sales in 2006 were $5,405,645 as compared with $2,659,585 for the
        same
        period in 2005, for growth of 103%. This growth is primarily driven by Genzyme
        and by the adoption by the growing customer base of the Company’s expanded menu
        selections, primarily Tag-ItTM Ashkenazi Jewish Panel (AJP) and Tag-ItTM CF70
        reagents. The Company has also begun generating initial sales of its RVP
        test,
        and expects these sales to grow as it expands its distribution network and
        continues its Early Access Program.





Luminex
        instrument placements continued in the quarter through direct customer purchases
        of $137,959 for the second quarter of 2006 as compared with $349,423 in 2005.
        Year-to-date instrument sales in 2006 were $431,083 compared to $349,423
        in
        2005. At June 30, 2006, instrument sales represented 7% of the total
        year-to-date revenues (2005 - 11%) and 4% of the quarterly revenues (2005
        -
        18%). This trend supports the Company’s expectation that instrument sales as a
        percentage of the Company’s total revenues will continue to
        decline.





Licensing
      and development fees received in the quarter reflect royalties on the sales
      by
      Luminex of “FlexMap beads”TM, development fees reflecting the on-going pro-rata
      recognition of deferred milestone revenue and contract research fees. These
      fees
      grew from $56,181 in the first half of 2005 to $146,133 in the same period
      in
      2006 due primarily to $81,627 in revenue earned in the first quarter of 2006
      from the collaborative development program for the OncovueTM, Intergenetics
      breast cancer risk test, and the pro-rata recognition of the milestone payment
      received from Genzyme in the second quarter of 2005.





Standard
        reagent product margins were 59% for the quarter ended June 30, 2006 as compared
        with 61% for the same period in 2005. Year-to-date standard reagent product
        margins were 59% for 2006 as compared with 62% in 2005. Standard reagent
        product
        margin is calculated by subtracting standard reagent cost of goods sold,
        genetic
        content and bead royalties costs and reagent rental depreciation from reagent
        product sales. The result is then divided by reagent product sales for the
        period. The measure of standard reagent product margins provides information
        on
        the margins of the Company excluding inefficiencies and yield volatility
        associated with the early stages of the Company’s manufacturing and revenue
        scale-up. The 3% year-to-date comparative decline is due in part to
        non-recurring favourable adjustments in the first quarter of 2005 to royalties
        which had been overpaid in 2004 and in part to an increased royalty rate
        payable
        to Luminex in accordance with the revised supply agreement concluded at the
        end
        of the first quarter of 2006.





This
        quarter includes a decrease in both yield and capacity utilization as compared
        to the same period in 2005. Expenses related to shrinkage, scrap and excess
        and
        obsolescence (collectively the yield expense) increased to 8% of gross margin
        for the second quarter of 2006 from 5% of gross margin in the second quarter
        of
        2005, primarily related to provision increases as detailed in the MD&A
        section on Inventory Provisions. Year-to-date, yield expense has remained
        constant at 5% of gross margin year-over-year. Capacity utilization was lower
        in
        the second quarter of 2006, with expense representing 8% of gross margin,
        up
        from 6% of gross margin the second quarter of 2005. Overall capacity utilization
        for the year-to-date shows improvement, with a decrease in the associated
        period
        expense from 8% in 2005 to 6% in 2006. As the Company continues to expand
        its
        customer base with the launch of the RVP and Warfarin tests, the Company
        continues to expect improvements in capacity utilization and a declining
        impact
        of yield expense on margins.





Cost
        of
        goods sold for the quarter also includes instrument costs of $134,809 (2005
        -
        $335,670). Year-to-date cost of goods sold for the first half of 2006 includes
        instrument costs of $419,441 (2005 - $335,670). Total margins were 43% for
        the
        second quarter of 2006 vs. 41% for the second quarter of 2005. Total margins
        were 44% for the first half of 2006 as compared with 42% of the same period
        of
        2005.




29




Expenses




Total
        expenses, excluding cost of goods sold, for the three-month period ended
        June
        30, 2006 increased by $1,828,894 to $5,574,946 as compared with $3,746,052
        in
        the same period in 2005. Year to date total expenses, excluding cost of goods
        sold were $10,213,639 in 2006, compared to $7,019,841 in 2005. Sales, general
        and administration (SG&A) for the second quarter of 2006 grew by $1,815,725
        to $4,467,770 from $2,652,045 in 2005. Year to date SG&A was $8,123,645 in
        2006 and $4,885,951 in 2005 and reflect the Company’s investments in the medical
        and regulatory, marketing and business development and quality assurance
        functions, as well as in the intellectual property and human resources
        functions. The increase in headcount reflects the Company’s growing customer
        base and expanded licensing activities as well as its 2006 drive for regulatory
        clearance on multiple products. In Marketing, product managers were added
        to
        specifically drive growth into new markets, and to a lesser extent, increase
        presence within existing markets and product lines. During 2006, the Company
        improved its employee benefits plan in order to remain competitive within
        the
        market resulting in an increase in expenses of approximately $212,500 for
        the
        six months ($106,250 for the three months) ended June 30, 2006. Other
        contributing factors were increases in facilities related to headcount growth,
        increased marketing program expenditures on the new products, professional
        services and validation studies and design control activities associated
        with
        RVP and Warfarin clinical trials and EAPs.




Research
        and development expense for the quarter and six months ended June 30, 2006
        and
        2005 increased by $13,169 and decreased by $43,896 respectively, primarily
        due
        to the inclusion of SR&ED tax credits of approximately $204,000 in 2006.
        This was offset by headcount growth towards the end of 2005 from the Company’s
        investment in research and product development infrastructure focused to
        ensure
        capability to expand the Company’s product menu in 2006.





Interest
        expense from long-term debt increased from $672,095 in the second quarter
        of
        2005 to $681,631 in the second quarter in 2006, an increase of $9,536 (increase
        of $146,513, from $1,246,643 to $1,393,156, for the six months ended the
        same
        date). Of the increase in the second quarter, $20,162 ($24,008 for the six
        months ended June 30, 2006) related to cash interest paid, due to an increase
        in
        net debt of $2.0 million associated with the refinancing of its debenture
        with a
        convertible instrument in November of 2005. This was partially offset by
        a
        reduction to the current quarter interest expense due to an accretion
        calculation adjustment as well as a reduction in the amount of the accretion
        of
        related warrant expense. A significant portion of the year-to-date increase
        is a
        result of additional advances from TPC in late 2005 and the second quarter
        of
        2006.





For
        the
        six months ended June 30, 2006, other financial income (expense) increased
        from
        a net expense in 2005 of $148,007 to net income of $11,269 in 2006 due to
        an
        increase in interest income on short-term investments generated from the
        $10
        million public offering closed in the fourth quarter of 2005 and interest
        income
        earned in the second quarter of 2006 from the Sirius license fee. These same
        factors contribute to the second quarter increase of $110,296 in other financial
        income (expense) from net expense of $77,266 in 2005 to net income of $33,030
        in
        2006.




*Results
      of Operations for the Financial Year ended December 31, 2005 Compared to
      the Financial Year ended December 31, 2004*




*Summary*




Net
      loss
      for the year ended December 31, 2005 was $15,167,466 ($0.37 per share), compared
      to a net loss of $11,838,498 ($0.34 per share), for the year ended December
      31,
      2004, reflecting an increase in net loss of $3,328,968. For 2005, the growth
      in
      revenues of $3,824,157 was offset by the increase in cost of goods sold of
      $1,490,058 where operational efficiencies were offset by costs associated with
      the reagent rental program and inventory provisions. Increases in sales, general
      and administrative expenses of $2,814,524 reflect the Company’s investments in
      headcount resources and programs while research and development expense declined
      nominally by $46,153. Interest expense from long-term debt increased by
      $2,434,944 due to the settlement of the 2004 debentures (reflecting the
      write-off of the imputed (non-cash) interest charges) and annualized interest
      payments for these debentures. Other non-operating expenses increased by
      $459,752 as the full recognition of the deferred financing costs on the
      settlement of the 2004 debentures was offset by the foreign exchange gain due
      to
      the November 2005 debentures.




*Sales
      and Costs of goods sold*




Product
        sales for 2005 were $6,725,432, an increase of approximately 94% over 2004
        product sales of $3,460,747 while instrument sales were $829,773 for 2005
        as
        compared with $242,271 in 2004. Instrument sales have increased as a percentage
        of revenue, a trend that the Company expects to see reverse in 2006 as the
        Company continues to grow its Tag-it revenues by extending its customer
        footprint through adoption of additional product offerings to its existing
        customer base and by developing additional products including the
        ID-Tag TM RVP. At
        June 30, 2006, instrument sales represented 7% of the total year-to-date
        revenues (June 30, 2005 - 11%) ad 4% of the quarterly revenues (June 30,
        2005 -
        18%). This trend supports the Company’s expectation that instrument sales as a
        percentage of the Company’s total revenues will continue to decline. The balance
        of revenue of $118,965 (2004 - $146,995) is comprised of licensing and
        development fees received in the form of royalties on the sales by Luminex
        of
“FlexMap beads”TM and contract research and development fees reflecting the
        on-going pro-rata recognition of deferred milestone revenue. As the Company’s
        customers are largely U.S. based, the Company’s revenues are subject to foreign
        exchange (FX) variations. As a result of the timing of sales in 2005 the
        effect
        of the strengthening Canadian dollar on revenues was
        immaterial.


30




Product
      sales included all of the Company’s commercial products and they grew
      year-over-year due to the mid-year launch of the CFplusTM test by Genzyme and the
      adoption by the growing customer base of the Company’s expanded menu selections,
      primarily AJP and CF70 reagents. Luminex instrument placements continued in
      2005
      through direct customer purchases and the Company’s reagent rental programs. The
      Company’s customer base as at December 31, 2005 stands at 42, having grown 147%
      year-over-year.




In
      2005,
      as in 2004, the Company invested modestly in production scaling activities
      to
      improve operational efficiencies. Standard reagent product margins were 55%
      for
      the year ended December 31, 2005 as compared with approximately 60% for the
      same
      period in 2004. Standard reagent product margin is calculated by subtracting
      standard reagent cost of goods sold and genetic content royalties costs from
      reagent product sales. The result is then divided by reagent product sales
      for
      the period due to the growth of the reagent rental program over the year. The
      5%
      decline is due to the expansion of the Company’s reagent rental program to the
      next tier of smaller customers and the impact of amortizing the Abbott license.
      The measure of standard reagent product margins provides information on the
      margins of the Company excluding inefficiencies and yield volatility associated
      with the early stages of the Company’s manufacturing and revenue scale-up. The
      measure excludes the impact of overhead underabsorption and material costs
      associated with initial production yield. It also excludes the impact of
      instrument sales which at $829,773 and 11% of total revenue for 2005 ($242,271
      and 6% for 2004) are expected to decrease in importance as use of the Company’s
      tests and reagent make greater use of the installed base of instruments. Total
      margins were 44% for 2005, compared to 27% for 2004.




Inventory
      adjustments grew from $90,716 in 2004 to $281,685 in 2005 due to (i) production
      scaling activities which restricted the use of residual materials generated
      from
      earlier small scale production batches and (ii) provisions primarily for
      work-in-process inventory manufactured in batch sizes selected to meet initial
      market estimates which have not been borne out by customer sales. Conversely,
      period expense for manufacturing underutilization as measured against normal
      capacity during 2005 was $141,858 as compared to $968,316 in 2004.




*Expenses*




The
      year
      over year growth in expense is a result of investment in the final
      implementation stages of the Company’s commercialization engine in accordance
      with its five year business plan. Notably, compensation costs (56%), related
      facility and travel costs (9%) and professional services fees (21%) account
      for
      the majority of the increase.




On
      a
      functional basis, in sales, general and administration (SG&A) the increase
      was driven largely by headcount growth and personnel related expenditures,
      increased marketing program expenditures, increased professional costs related
      to the corporate reorganization, and increased professional costs associated
      with clinical trial designs. In research and development (R&D), the Company
      invested in the areas of product development and bioinformatics, expanding
      the
      team by 50% from 2004 levels. This was offset by Scientific Research and
      Experimental Development (SR&ED) tax credits which offset expenses, of
      approximately $354,000 (2004 - $200,000).




The
      Company accounts for stock option compensation under revised CICA Handbook
      Section 3870, “Stock-Based Compensation and other Stock-Based Payments”. The
      Company prospectively adopted the fair value method of accounting for the stock
      options granted under its plan, which required that the Company charge income
      for the fair value of stock options granted, modified or settled in the fiscal
      year ended December 31, 2004 and subsequent. This charge amounts to $434,491
      for
      2005 (2004 - $327,504). The year over year increase is a result of both an
      increase in the number of grants, as well as in the average value of the grants
      as calculated using the Black-Scholes model.




Interest
      expense from long-term debt increased to $3,317,320 in 2005 (2004 - $882,376)
      reflecting the non-cash interest charges associated with increased borrowings
      from TPC and the debenture financing completed in November 2004. Of the interest
      charge only $927,709 was cash interest, the balance of $2,389,611 representing
      the non-cash amortization of discounts associated with warrants which were
      granted in conjunction with the November 2004 debenture and the TPC loan.
      Depreciation and amortization was $1,244,294 for the year ended December 31,
      2005 (2004 - $987,291), an increase of 26% over 2004. This increase corresponds
      to the capital expenditures related to the expansion of the premises as well
      as
      the investment in R & D and technical support capital expenditures.


31




*Taxes*




As
      a
      result of the transfer of certain intellectual property to one of the Company’s
      new Canadian subsidiaries, certain of the Company’s expiring tax loss
      carryforwards have been realized and the value retained in the newly formed
      subsidiary as undepreciated capital cost available for the reduction of future
      income for tax purposes. Because of the Company’s history of losses, a full
      value provision has been taken against this future tax asset. The Company pays
      a
      modest amount ($81,955 in 2005; $21,000 in 2004) of income and state tax in
      the
      United States based on the margin earned on activities undertaken in the
      U.S.





*Results
      of Operations for the Financial Year Ended December 31, 2004 Compared to the
      Financial Year Ended December 31, 2003*




*Summary*




Net
      loss
      for the year ended December 31, 2004 was $11,838,498 ($0.34 per share), compared
      to a net loss of $7,808,889 ($0.31 per share), for the year ended December
      31,
      2003.




The
      increased net loss of $4,029,609 for the year ended December 31, 2004 versus
      2003 may be largely apportioned between increased expenses (including
      depreciation and cost of goods sold) of $6,655,578, offset by increases in
      revenue of $2,694,380. Both the increase in expenses and the growth in revenue
      reflect the commercialization phase the Company is experiencing.




*Sales
      and Costs of Goods Sold*




Product
      sales for 2004 were $3,460,747, an increase of approximately 228% over 2003
      product sales of $1,054,923. The balance of revenue of $389,266 (2003 -
      $100,710) is comprised of licensing and development fees received in the form
      of
      royalties on the sales by Luminex of “FlexMap beads”TM, contract research and
      development fees reflecting the on-going pro-rata recognition of deferred
      milestone revenue as well as, for 2004, instrument sales.




The
      Company’s industry leading CFTR 40+4 remains the most significant component of
      sales, followed by the P450 drug metabolism suite of tests. The Company’s
      customer base grew substantially in the 2004 as prospective customers completed
      their product evaluations and commenced ordering. The Company initiated two
      new
      sales programs in the third quarter of the year, related to Luminex instrument
      placement. Customers who elected to acquire access to a Luminex machine through
      the Company opted either for payment via a reagent rental program, or through
      outright purchase. The Company expects to offer these two instrument marketing
      programs on an on-going basis. As a result of adopting these programs, an
      instrument ordered by a customer in the first quarter which had been recorded
      as
      an asset disposal has been restated retroactively as a sale of instruments
      included in product sales.




In
        2004,
        standard reagent product margins were approximately 60% as compared to such
        margins of approximately 53% in 2003 once commercial shipping began in the
        third
        quarter of 2003. Production scaling activities in the first quarter of 2004
        related to bead coupling has produced low absorption of overhead costs relative
        to overall annual production plan in subsequent quarters. This has resulted
        in a
        period charge to cost of goods sold of for the year of approximately $920,000.
        Production scaling activities were undertaken in the first quarter to
        demonstrate manufacturing capacity in support of negotiations with large
        potential customers. Excluding this period expense, standard reagent product
        margins were approximately 60%. Standard reagent product margin is calculated
        by
        subtracting standard reagent cost of goods sold and genetic content royalties
        costs from reagent product sales. The result is then divided by reagent product
        sales for the period. Similarly, cost of goods sold in 2003 reflects the
        charge
        to the period of underutilized manufacturing capacity. In 2003, this resulted
        from the facility’s ramp to its normalized capacity. These scaling and start-up
        activities for 2004 and 2003 impacted the total margins which were approximately
        27% and 13% respectively.




*Expenses*




The
      year
      over year growth in expense is a result investment in the final implementation
      stages of the Company’s commercialization engine in accordance with its five
      year business plan. Notably, compensation costs (50%), related facility and
      travel costs (23%) and professional services fees (13%) account for the majority
      of the increase.




On
      a
      functional basis, in sales, general and administration (SG&A) the increase
      was driven largely by headcount growth and personnel related expenditures as
      the
      Company added its sales function during the year, as well as
      increased marketing program expenditures. In research and development (R&D),
      the Company invested in the areas of product development and bioinformatics,
      expanding the team substantially from 2003 levels.


32




For
      the
      year ended December 31, 2003, under the transitional provisions of revised
      CICA
      Handbook Section 3870, “Stock-Based Compensation and other Stock-Based
      Payments”, the Company prospectively adopted the fair value method of accounting
      for the stock options granted under its plan. The prospective adoption required
      that the Company charge income for the fair value of stock options granted,
      modified or settled in the fiscal year ended December 31, 2003 and subsequent.
      This charge amounts to $327,504 (2003 - $171,883) for the year.




Interest
      expense from long-term debt increased to $882,376 in 2004 (2003 - $862,783)
      reflecting the declining balance of principal on the CMDF loan secured in
      November 2002, which was more than offset primarily by non-cash interest charges
      associated with increased borrowings from TPC and the debenture financing
      completed in November 2004. Depreciation and amortization was $987,291 for
      the
      year ended December 31, (2003 - $619,283), an increase of 59% over 2003. This
      increase corresponds to the capital expenditures related to the further
      automation of the Company’s manufacturing operations, increased production
      robustness and the instrument pool required to enable the Company’s instrument
      placement programs.




*Liquidity
      and Capital Resources*




Working
        capital at June 30, 2006 was $1,348,540 including cash and cash equivalents
        and
        short-term investments of $2,844,564, compared with $12,807,061 and $16,014,629,
        respectively as at December 31, 2005 and $6,119,009 and $5,013,160 respectively
        as at December 31, 2004.





The
        purchase of capital assets for the second quarter of 2006 amounted to $589,536
        and intangible assets to $90,329. For the second quarter of 2005, the amounts
        were $465,363 and $6,155 respectively. The majority of capital asset additions
        ($339,022) in the second quarter of 2006 relate to Luminex instruments which
        the
        Company has placed in a variety of evaluation studies with potential customers,
        the majority of which relate to the evaluation of the Company’s RVP test by
        Early Access Partners. An additional $62,229 relates to headcount related
        capital such as furniture and computer equipment. The second quarter of 2006
        also included the purchase of equipment under capital lease of
        $83,715.




On
        November 23, 2005, the Company completed a debt financing comprising (i)
        a
        secured convertible term note (the “Note”) in the aggregate principal amount of
        U.S. $9.0 million maturing on November 22, 2008, and (ii) a common stock
        purchase warrant (the “Warrant”] exercisable for 738,723 common shares of the
        Company at a price of $2.61 per share and expiring on November 22, 2010.
        . The
        maximum number of common shares of the Company issuable upon conversion under
        the Note varies in accordance with the Cdn.$/U.S.$ foreign exchange rate
        in
        effect at the time of each repayment but, for example, is 3,844,252 common
        shares at an exchange rate of Cdn.$1.1067 per U.S.$1.00. The Company may
        repay
        the Note at any time upon 10 business days’ notice to Laurus for a premium equal
        to 130% of the principal amount outstanding at the time of such redemption.
        The
        Note bears daily compound interest at a nominal rate per annum equal to the
        greater of (i) the prime rate published in The Wall Street Journal from time
        to
        time, plus 2% (200 basis points), and (ii) 8.5%, in each case plus applicable
        withholding taxes. The interest rate on the Note will decrease by 3% (300
        basis
        points), to a floor of 0%, for every 25% increase in the Company’s common share
        price above the “fixed conversion price” (as set out below). The Note is
        repayable in principal instalments plus interest over 32 months commencing
        in
        March 2006 (with payments of interest only commencing in January 2006). The
        fixed conversion price for the conversion of any principal amount outstanding
        under the Note from time to time is $2.39 (with respect to any principal
        amount
        that is less than U.S.$9.0 million and equal to or greater than U.S.$6.0
        million), $2.61 (with respect to any principal amount that is less than U.S.$6.0
        million and equal to or greater than U.S.$3.0 million) and $2.83 with respect
        to
        any remaining portion of the principal amount of the Note. Laurus has the
        right,
        but not the obligation, to convert all or any portion of the principal amount
        at
        any time and from time to time into common shares of the Company. Further
        details regarding the Note financing can be found under Item 9.A. “ *Offer
        and Listing Details* ”.
        Concurrently with the completion of this financing, the Company repaid the
        outstanding principal of $8,641,550 from its previous debentures. The repayment
        of the debentures has been accounted for as a settlement in accordance with
        EIC
        88, "Debtor's Accounting for a modification or Exchange of Debt
        Instruments".





The
        Company’s revenues are primarily denominated in U.S. dollars as a result of the
        location of its customers such that appreciation or devaluation of the Canadian
        to U.S. dollar causes an approximately equal improvement or decline in the
        Company’s reported sales against its forecast.




At
        the
        end of the second quarter of 2006, 95% of the Company’s account receivables were
        denominated in U.S. dollars. This exposure was more than offset as 36% of
        the
        Company’s accounts payable and accruals, as well as the convertible portion of
        its long term debt is also denominated in U.S. dollars. The Company’s net
        exposure to the U.S. dollar at June 30, 2006 is a $12,770,440 liability
        (measured in CDN dollars). A 1% appreciation or devaluation of the Canadian
        against the U.S. dollar would result in a net foreign exchange gain or loss
        respectively of $127,704. As at December 31, 2005, 99% of the Company’s accounts
        receivable were denominated in U.S. dollars. This exposure was more than
        offset
        as 51% of the





33


Company’s
        accounts payable and accruals, as well as the
        convertible portion of its long term debt is also denominated in U.S. dollars.
        The Company’s net exposure to the U.S. dollar at year-end is a $10,925,348
        liability (measured in CDN dollars). A 1% appreciation or devaluation of
        the
        Canadian against the U.S. dollar would result in a net foreign exchange gain
        or
        loss respectively of $109,253.




On
      December 19, 2005, the Company concluded a public offering of common shares
      at
      $1.80 per share, which represented approximately a 10% discount to the market
      price of such securities on the TSX on the applicable date.




On
        December 12, 2003, the Company entered into an agreement with the Ministry
        of
        Industry of the Government of Canada under which the government will invest
        up
        to $7,300,000 of the Company’s $25,000,000 project to establish novel processes,
        capabilities and facilities relating to the development of several genetic
        tests. Funds are being advanced from Technology Partnerships Canada (“TPC”), a
        special operating agency of Industry Canada with a mandate to provide funding
        support for strategic research and development, and demonstration projects
        that
        will produce economic, social and environmental benefits to Canadians.




The
      project includes the construction and certification of a pilot scale
      manufacturing facility and development of a minimum of five genetic tests to
      regulatory standards. The project was undertaken in September 2002 and is
      expected to be completed by the end of March 2007.




The
        $7,300,000 investment represents 29.2% of the total forecast project value
        and
        is classified on the Company’s financial statements as long term debt. The
        actual investment received by the Company is predicated on eligible expenditures
        made over the project period. Eligible expenditures are submitted to TPC
        for
        claims processing and audit on a quarterly basis. The investment is repayable
        by
        a modest royalty at a rate of  between 1% and 2.5% of the prior year’s
        sales over a multi-year period beginning in 2007. Aggregate royalty repayment
        will continue until a maximum of $9,750,000 has been repaid or until April
        30,
        2015, whichever is earlier. In December 2005, in accordance with the terms
        of
        the agreement, the Company issued 2,336,449 share purchase warrants to TPC.
        Prior to the issuance of warrants to TPC, contributed surplus was affected
        only
        on a pro-rata basis contingent upon the receipt of funds. Since the full
        amount
        of warrants were issued in December 2005, the balance of the Black-Scholes
        value
        of these warrants representing the proportion of the total amount of financing
        not yet advanced by TPC, has been reflected as an other asset, and will
        be amortized to contributed surplus on a pro-rata basis as the
        remaining funds are received. All amounts submitted for claims to date under
        the
        program have been reimbursed. During 2005, reimbursements of claims totalling
        $1,205,126 were received by the Company (2004 - $1,894,900). These claims
        represent reimbursable amounts expended to March 2005. In February 2006,
        the
        Company submitted a further claim for reimbursement of $551,384 (which was
        received by the Company subsequent to the end of the first quarter of 2006),
        reflecting project costs incurred to September 2005 and bringing the outstanding
        balance of the TPC funds received to $3,651,410. In the second quarter of
        2006,
        the Company submitted a claim for reimbursements of approximately $652,000
        to
        TPC which will bring the program current to March 31, 2006.




The
        program initially stated a project completion date of July 31, 2006. Management
        is currently in the process of obtaining an extension of the program and
        expansion of the projects that are deemed to be eligible expenditures under
        the
        program. Management is confident that the Company’s TPC agreement will be
        extended and that future claims to the full available loan will be recovered.
        If
        the Company were only able to submit claims up until July 31, 2006, the amount
        of the Other Asset after accretion for any claims submitted up to the project
        completion date would be reversed, with the corresponding charge to Contributed
        Surplus since this amount relates to warrants issued to TPC during fiscal
        2005
        based on the full value of the expected financing.




On
          August 15,
          2006, the Company completed a private placement financing of unsecured
          subordinated debentures  (the “Unsecured Debentures”), together with common
          share purchase warrants of the Company, for total gross proceeds to the
          Company
          of $6.24 million. The Unsecured Debentures carry an interest rate of 11%
          per
          annum with interest payable monthly in arrears and principal to be repaid
          in
          full at either 12 months from the closing date or within 30 days in the
          event of
          any cash infusion (as defined in the Unsecured Debentures) that results
          in
          proceeds to the Company of $15 million. Should the Company receive any
          cash
          infusion less than $15 million it will repay a pro-rata portion of the
          Unsecured
          Debentures. The Company has the option to repay the Unsecured Debentures
          at any
          time prior to 12 months from the closing date without penalty. The Unsecured
          Debentures are subordinated in all respects to the Company’s existing secured
          convertible note to Laurus and related security and contain customary covenants.
          Subscribers also received 250 warrants per $1,000 principal amount of the
          Unsecured Debentures purchased for an aggregate total of 1,560,000 warrants.
          Each warrant is exercisable for one common share of the Company at an exercise
          price of $1.15 for the period expiring five years from the closing date.
          The
          warrants are subject to customary restrictions on resale under the applicable
          securities laws. Westwind Partners Inc. and Canaccord Capital Corporation
          acted
          as co-lead agents for this financing.





Operating
        activities used $3,674,777 of cash in the second quarter of 2006. $3,625,387
        of
        the cash used related to the consolidated statement of loss and deficit,
        and
        $49,390 was used by changes in noncash working capital balances. Of the $49,390
        trade receivables increased $482,300 from year-end, due to two larger customer
        orders received and filled late in the second quarter, neither of which had
        orders in the prior quarter. Inventory decreased by $571,012 as coupled beads
        manufactured earlier in 2006 and 2005 were depleted to replenish finished
        goods
        stores for the quarter.




Finally,
        accounts payable and accrued liabilities decreased by $528,442 attributable
        primarily to the payment of the first instalment of the Sirius commercial
        license made in April 2006, which was offset by increases in accruals related
        to
        royalties, bonuses and professional fees.




The
      Company’s consolidated balance sheet includes an equity category called
“contributed surplus”. In accordance with GAAP, the Company values and
      segregates all non-cash equity items including the common share purchase
      warrants issued in conjunction with financing activities, the fair value of
      employee stock options granted and any agent or broker compensation options
      issued.


34




Capital
        expenditures for the year ended December 31, 2005 amounted to $1,920,071
        (2004 -
        $2,047,155). The largest portion (31%) of the capital expenditures relates
        to
        Luminex xMAPTM instruments purchased to support the Company’s customer trial
        programs. When successful, the instruments are then available on a reagent
        rental basis, or for purchase, to those customers wishing to partake in
        either of these,  the Company’s instrument placement programs. A further
        (18%) of the capital expenditure for the year relates to leasehold improvements.
        The Company worked to minimize these costs by employing a flexible executive
        seating arrangement which employs an open cubicle concept, thereby reducing
        costs normally required in a typical office environment, as well as negotiating
        leasehold inducement from the landlord. Under the agreement, the landlord
        provided an allowance of $168,680 towards the leasehold improvement of the
        premises as well as a period of rent-free use. The Company is amortizing
        this
        benefit and allowance over the lease term of three years and six months as
        a
        leasehold inducement. Finally, 19% of capital expenditures for the year was
        for
        headcount related capital such as furniture and equipment and computer
        equipment, and 18% related to automating the R&D process and expanding the
        technical support lab to further support the department's customer training
        and
        product evaluation functions. The investment in these four initiatives (net
        of
        the leasehold inducement) aggregated $1,637,597 in 2005.




The
      Company has secured license rights to certain intangible property from Abbott.
      The fully paid-up global license is valued at $2,345,800 and was paid in two
      equal instalments, one of which was made in October 2005, the other in January
      2006.




On
      March
      17, 2006, the Company signed an agreement with Sirius Genomics (“Sirius”) for an
      exclusive commercial license to patents from Sirius for specific biomarkers
      related to drugs used to treat severe sepsis and risk of sepsis. Under the
      terms
      of the agreement, the Company will pay a license fee advance of $4,000,000
      which
      will be provided in two equal instalments. In addition, the costs of product
      and
      market development as well as product launch will be shared equally between
      the
      parties. Once commercialized, the Company will remit license fees to Sirius
      equal to fifty percent of net earnings on the product commercialized under
      the
      agreement. The $4,000,000 advance to Sirius is reimbursable out of initial
      license fee obligations to Sirius and has been accounted for as a license fee
      advance. The first $2,000,000 was due upon signing of the agreement, and was
      paid on April 3, 2006, and the second instalment is due September 6, 2006.
      For
      the quarter ended June 30, 2006, the first license fee is recorded as
      a long-term asset and a current liability. The Company currently forecasts
      that
      the license fee advance will be fully recovered from the license fees which
      will
      be payable to Sirius by the end of 2007. These transactions are measured at
      the
      exchange amount of consideration established and agreed to by the related
      parties.




Since
      its
      inception, the Company has been financing its infrastructure and product
      development as well as its commercialization activities from public equity
      financing, debt and revenue from the sales of its products and licenses related
      to its technologies. The Company has also received funds from government
      agencies and from development agreements with Corporate partners. The Company
      expects revenue and margins from its existing products to continue to grow
      significantly quarter over quarter through 2006. The Company will also be
      investing in enhancing the regulatory status of its product menu, and
      undertaking significant marketing and sales efforts in the areas of PGx and
      infectious disease. In order to pursue its expanded regulatory drive, submit
      products for FDA certification in 2006, as well as open new markets for its
      RVP
      and sepsis tests, all the while continuing to serve its growing customer base,
      the Company foresees a need for growth capital in the future. Management remains
      responsive to market conditions and will seek additional capital from
      traditional sources or through strategic partnerships as opportunities arise.




***Contractual
      arrangements and commitments as at June 30, 2006***




**Total**
              
              **Less
                  than 1 year**
              
              **1
                  - 3 years**
              
              **4
                  - 5 years**
              
              **After
                  5 years**Convertible
                  debenture
              
              $
              10,765,626
              
              $
              4,815,599
              
              $
              5,950,027
              
              
              3⁄4
              
              
              3⁄4TPC
              
              $
              6,556,121
              
              $
              168,437
              
              $
              3,002,007
              
              $
              3,385,677
              
              
              3⁄4Sirius
                  Genomics license
              
              $
              2,000,000
              
              $
              2,000,000
              
              
              3⁄4
              
              
              3⁄4
              
              
              3⁄4Operating
                  leases
              
              $
              2,546,456
              
              $
              973,391
              
              $
              1,563,904
              
              $
              9,161
              
              
              3⁄4Capital
                  lease obligations
              
              $
              125,662
              
              $
              34,033
              
              $
              62,831
              
              $
              28,798
              
              
              3⁄4Purchase
                  obligations
              
              $
              282,497
              
              $
              275,988
              
              $
              3,004
              
              $
              3,004
              
              $
              501Deferred
                  share Units(1)
              
              $
              438,575
              
              $
              20,500
              
              
              3⁄4
              
              
              3⁄4
              
              $
              418,075**Total
                  Contractual Arrangements**
              
              **$**
              **22,714,937**
              
              **$**
              **8,287,948**
              
              **$**
              **10,581,773**
              
              **$**
              **3,426,640**
              
              **$**
              **418,576**




(1)
            Payment
                of Deferred share units is not made until the last business day in
                December of the first calendar year commencing after the director
                leaves
                the Board, and may be in cash or in common shares of the Company,
                at the
                discretion of the director. As the directors are elected annually,
                the
                DSUs which are not currently due have been classified as ‘After 5
                years’.






35


***Changes
      and adoptions of accounting policies***




*Intangible
      assets*




During
      2005, the Company secured license rights to certain intellectual property from
      Abbott Laboratories for which the Company created a new intangible asset class
      called ‘Fundamental Patents’. This class is amortized straight-line over the
      remaining life of the patent.




***Critical
      accounting estimates***




*Capital
        assets*





During
        the second quarter of 2006, the Company commenced a capital lease of equipment.
        The “Capital assets” portion of the Company’s Significant Accounting Policies as
        reported in its 2005 Annual Report is hereby expanded as per the addition
        below:





**Capital
        assets**





Capital
        assets include equipment under capital lease which is recorded at the present
        value of the future minimum lease payments less accumulated depreciation.
        The
        rate and method used to depreciate equipment under capital lease over its
        estimated useful life is as follows:





Equipment
        under capital lease   10
        years
        straight-line




*Provision
        for doubtful accounts*




The
        Company relies on its credit approval process and historical experience to
        evaluate the exposure to the potential for non-performing receivables. At
        June
        30, 2006, trade accounts receivable were outstanding from large and financially
        sound commercial laboratories. A provision was made during the quarter for
        $97,511 for one invoice for which collection is uncertain. Management estimates
        that no further provision for doubtful account is required as at June 30,
        2006.




*Inventory
      provisions*




At
        quarter-end, the Company performed a count of 50% of total inventory cost
        and
        completed a full reconciliation of its physical inventory. In addition,
        substantial work was performed to ensure that:




·
            an
                appropriate amount of labour and overhead expense was included in
                year-end
                inventory balances based on normalized
                capacity;




·
            the
                full cost of inventories were realizable in the context of the Company’s
                existing and prospective sales contracts
                and




·
            the
                volume of inventories did not exceed a reasonable forecast of future
                sales.




Based
        on
        these reviews, management has provided appropriately for realization of
        inventory balances as at June 30, 2006 by expensing $66,928 during the second
        quarter of 2006 (2005 - $3,505). The year-to-date expense is $88,188 (2005
        -
        $43,598) and the Company is maintaining an aggregate provision of $158,730
        as at
        June 30, 2006 (2005 - $71,599).





This
        provision is comprised of (i) 33% as the Company’s estimate of inventory in
        excess of forecast demand (2005 - 44%), (ii) 31% as work-in-process for a
        key
        constituent of the Company’s test which is purchased in the lowest
        commercially-available quantity but which has been estimated to be in excess
        of
        usage (2005 - 56%), (iii) 21% as potentially expiring residual semi-finished
        goods generated from 2005 batches produced for specific product offerings
        and
        (iv) 15% as short-dated finished goods.




36


*Equity
      based instruments*




Each
      time
      the Company issued equity based instruments, including common share purchase
      warrants, agent’s compensation options and employee stock options, a value was
      derived for the instrument using the Black-Scholes option pricing model. The
      application of this pricing model requires the determination of several
      variables, including the price volatility of the Company’s stock over a relevant
      timeframe, a conversion or exercise assumption related to the particular
      instrument, the determination of a relevant risk free rate and an assumption
      of
      the Company’s dividend policy in the future. Management has adopted a consistent
      implementation of the Black-Scholes model, source of variables and application
      of a framework to determine appropriate inputs.




*Warranties*




It
      is the
      Company’s revenue recognition policy to provide for estimated warranty expense
      when product revenue is recognized. Beginning in the third quarter of fiscal
      2004, the Company introduced a second form of warranty, reagent rental-based
      warranty, in addition to its existing product-based warranty. The reagent rental
      warranty provides service coverage to Luminex instruments placed with customers
      on reagent rental programs.




With
        respect to the product-based warranty, the Company’s customers continue to
        validate specific production lots which each customer had previously ascertained
        had met appropriate performance characteristics. As a result, management
        determined that no product warranty provision was required at June 30, 2006
        (2005 - nil). Management has provided $68,000 with respect to reagent
        rental-based instrument extended warranty obligations at June 30, 2006 (2005
        -
        $5,088). This growth is tied to the expansion of the Company’s reagent-rental
        program as the majority of customers participating in this program have been
        signed up since July 1, 2005.




*Intangible
      asset realization*




At
      year-end 2005, management determined that the carrying value of genetic marker
      licenses held on its thrombophilia products exceeded its fair value using a
      reasonable forecast of forward sales of these products. The carrying value
      of
      this asset at December 31, 2005 was reduced by $131,559 as a result of a one
      time charge to the statement of profit and loss.




All
      other
      intangible assets comprised of genetic marker licenses and acquired software
      rights are fully realizable in the normal course of business in the context
      of
      established and consistent amortization rates and net book values.




*Valuation
      allowance - taxes*




Given
      the
      Company’s history of operating losses, management deemed it appropriate to take
      a full provision on any deferred tax asset which was created from the Company’s
      prior period operating losses and other temporary differences.




*Related
      Party Transactions*




On
        March
        17, 2006, the Company announced it had signed an agreement with Sirius Genomics
        [“Sirius”] for an exclusive commercial license to patents from Sirius for
        specific biomarkers related to drugs used to treat severe sepsis including
        vasopressin. A director, and the then chair of the Scientific Advisory
        Board of the Company, is also the Chief Executive Officer of Sirius. Under
        the
        terms of the agreement, the Company will provide a license fee advance of
        $4,000,000 which will be provided to Sirius in two equal instalments, the
        first
        of which was paid in the second quarter of 2006, with the second instalment
        due
        in the third quarter of 2006. This advance will be repaid from net earnings
        on
        commercial sales of the severe sepsis test, with the remaining earnings shared
        equally by Sirius and the Company over the term of the
        agreement.




On
          August 15,
          2006, the Company completed a private placement financing of unsecured
          subordinated debentures  (the “Unsecured Debentures”), together with common
          share purchase warrants of the Company, for total gross proceeds to the
          Company
          of $6.24 million. The Unsecured Debentures carry an interest rate of 11%
          per
          annum with interest payable monthly in arrears and principal to be repaid
          in
          full at either 12 months from the closing date or within 30 days in the
          event of
          any cash infusion (as defined in the Unsecured Debentures) that results
          in
          proceeds to the Company of $15 million. Should the Company receive any
          cash
          infusion less than $15 million it will repay a pro-rata portion of the
          Unsecured
          Debentures. The Company has the option to repay the Unsecured Debentures
          at any
          time prior to 12 months from the closing date without penalty. The Unsecured
          Debentures are subordinated in all respects to the Company’s existing secured
          convertible note to Laurus and related security and contain customary covenants.
          Subscribers also received 250 warrants per $1,000 principal amount of the
          Unsecured Debentures purchased for an aggregate total of 1,560,000 warrants.
          Each warrant is exercisable for one common share of the Company at an exercise
          price of $1.15 for the period expiring five years from the closing date.
          The
          warrants are subject to customary restrictions on resale under the applicable
          securities laws. Westwind Partners Inc. and Canaccord Capital Corporation
          acted
          as co-lead agents for this financing. Mckenzie
          Financial Corporation, the Company's largest shareholder subscribed for
          $1,950,000 of the Unsecured Debentures and receive 487,500
          warrants.




These
      transactions are measured at the exchange amount of consideration established
      and agreed to by the related parties.




*Off
      Balance Sheet Arrangements*




The
      Company has no off-balance sheet arrangements that have or are reasonably likely
      to have current or future effect on the Company’s financial condition, changes
      in financial condition, revenues or expenses, results of operations, liquidity,
      capital expenditures or capital resources that are material to
      investors.


37




**Item
      6.**  **Directors,
      Senior Management and Employees**




*A.*
            *Directors
                and Officers of the Company*




The
      names
      and ages of the directors and senior management of the Company as of June 1,
      2006 are set forth below:




**Directors:**




**Name**
            
            **Age**
            
            **Position**John
                R. Frederick
            
            56
            
            DirectorGregory
                C. Hines
            
            55
            
            President,
                Chief Executive Officer and DirectorMichael
                Mueller
            
            47
            
            DirectorNeil
                M. Reid
            
            63
            
            Vice-Chairman
                of the Board of DirectorsPaul
                N. Lucas
            
            56
            
            Chairman
                of the Board of DirectorsBradley
                Popovich
            
            52
            
            Director





**Senior
      Management:**




**Name**
            
            **Age**
            
            **Position**James
                E. Pelot
            
            46
            
            Chief
                Operating Officer and Chief Financial OfficerRichard
                A. Janeczko
            
            56
            
            Chief
                Scientific OfficerAlan
                Coley
            
            49
            
            Vice-President
                of OperationsJeremy
                Bridge-Cook
            
            37
            
            Senior
                Vice-President of Corporate DevelopmentDaniel
                Kobler
            
            34
            
            Vice
                President of Product Development and
                Bioinformatics







**Directors**




(1)
            *John
                R. Frederick*:
                Mr. Frederick has served as a director of the Company since 1987.
                He is
                also President of Heatim Capital Corporation. Prior to September
                2005, Mr.
                Frederick was the Chief Financial Officer and Vice President of Galaen
                Holdings Limited, which manages and advises private and public companies.
                Mr. Frederick is a chartered accountant by
                training.




(2)
            *Gregory
                C. Hines*:
                Mr. Hines was appointed President and Chief Executive Officer of
                the
                Company on March 31, 2000. Prior to such appointment, Mr. Hines was
                retained as a consultant by MDS Capital Inc. and served as President
                of
                Leo Pharma Inc., a privately held company which Mr. Hines founded
                in 1981.
                He currently serves on various advisory boards associated with the
                pharmaceutical and genomics
                industries.




(3)
            *Michael
                Mueller*:
                Mr. Mueller was appointed to the board of directors of the Company
                in
                November 2004. Mr. Mueller is the Past President, Chief Executive
                Officer
                and director of MDS Capital Corp., an investment management company
                that
                provides investment management advice to, among other entities, the
                Canadian Medical Discoveries Fund Inc. Mr. Mueller also served on
                the
                board of directors of Canadian Medical Discoveries Fund Inc. Mr.
                Mueller
                has been involved in the financial services industry for over 20
                years,
                with extensive management and business building experience in the
                United
                States, Europe, Asia, Latin America and Australia. He has a Bachelor
                of
                Science from the University of Western Ontario and a M.B.A. from
                York
                University.




38





(4)
            *Neil
                M. Reid, Ph.D.*:
                Dr. Reid was appointed to the board of directors of the Company in
                2000
                and was appointed as Vice-Chairman in November 2004. Dr. Reid is
                presently
                a senior management consultant and also serves on the board of Qustream
                Corporation, a TSX Venture Exchange listed company. Until October
                2005,
                Dr. Reid was Senior Vice President of Protana Inc., a company formed
                from
                the merger of MDS Proteomics Inc. and Optimol Inc. (of which Dr.
                Reid
                served as the President and CEO from January 2003 until the merger).
                Dr.
                Reid co-founded MDS Proteomics Inc. (a health and life sciences company)
                in January 2000 and held the position of Chief Technology Officer
                from
                December 2000 to April 2001 and Senior Vice President from 2001 until
                its
                merger with Optimol Inc. Dr. Reid was a Senior Vice President of
                MDS
                Pharma Services, a division of MDS Inc., from June 1999 to November
                1999.
                Prior to May 1999, Dr. Reid was the co-founder, Senior Vice President
                Strategy Development and General Manager of MDS Sciex, a division
                of MDS
                Inc.On
              or about November 1, 2005, Deloitte & Touche Inc. was appointed as
              interim receiver and manager of Protana Inc. Concurrent with the
              appointment of Deloitte & Touche,the
              Ontario Superior Court of Justice approved the sale of substantially
              all
              of the assets of Protana Inc. to Transition Therapeutics Inc. and Protana
              ceased operations.




(5)
            *Paul
                N. Lucas*:
                Mr. Lucas has served as a director of the Company since 2002 and
                was
                appointed as Chairman in November 2004. In June 2000, he was appointed
                President and Chief Executive Officer of GlaxoSmithKline Canada Inc.
                Mr.
                Lucas joined Glaxo Canada in September 1986. He has held executive
                positions in Marketing and Sales and was appointed President and
                Chief
                Executive Officer of Glaxo Canada in 1994. He was subsequently appointed
                as President and Chief Executive Officer of Glaxo Wellcome Canada
                after
                the merger of Glaxo and Burroughs
                Wellcome.




(6)
            *Brad
                Popovich*:
                Dr. Popovich was appointed to the board of directors of the Company
                in
                March 2003 and was chair of the Scientific Advisory Board of the
                Company
                from March 2003 until September 2006. Dr. Popovich is Chief Executive
                Officer of Sirius Genomics Inc. Dr. Popovich also serves as a director
                of
                DNA Direct, Inc. Dr. Popovich was Vice President of Operations of
                Xenon
                Genetics Inc. from January 2003 until March 2005. He previously held
                other
                senior scientific positions at Xenon Genetics Inc. between June 2001
                and
                December 2002. He previously held the position of Associate Professor,
                Director of the DNA Diagnostic Laboratory and Director of the Clinical
                Genetic Laboratories at the Department of Molecular and Medical Genetics
                of the Oregon Health Sciences University as well as Director of the
                Molecular Genetics Laboratory at the Children’s Hospital of San Diego. Dr.
                Popovich has been Vice President, Laboratory Genetics, of the American
                College of Medical Genetics (ACMG) from 1999 to 2005. He is presently
                on
                the board of directors of the American College of Medical Genetics
                Foundation.




**Senior
      Management**




(1)
            *James
                E. Pelot, B.Comm., CA:*Mr. Pelot has served as the Company’s Chief Financial Officer since
                September 4, 2001, during which time he has been responsible for
                the
                company’s financial reporting and infrastructure development. On March 10,
                2006, Mr. Pelot was appointed Chief Operating Officer of the Company.
                Mr.
                Pelot has retained the position of Chief Financial Officer. Mr. Pelot
                has
                served as the General Manager of Locus Dialogue, an InfoSpace company.
                Mr.
                Pelot also spent twelve years with Nortel Networks where he held
                a variety
                of Finance, Marketing and Sales
                positions.




(2)
            *Richard
                A. Janeczko:*Dr. Janeczko was appointed as the Chief Scientific Officer of the
                Company
                effective January 2004 and previously served as the Executive Vice
                President of the Company from February 2000 to December 2003 and
                as the
                Company’s Vice President, Business Development from September 1997 to
                February 2000. Prior to joining the Company, Dr. Janeczko was President
                of
                General Synthetics Diagnostics Inc., a DNA diagnostics company, from
                1989
                to 1997.




39





(3)
            *Alan
                Coley, B.Sc., Pharm.:*Mr. Coley was appointed as Vice President of Operations of the Company
                effective January 2003 and previously served as the Vice President,
                Corporate Communications of the Company from December 2000 until
                December
                2002. Mr. Coley is a graduate pharmacist with over twenty years experience
                in the pharmaceutical industry. He has held several senior management
                positions in regulatory affairs, market access, sales, and marketing,
                with
                two of Canada’s research-based pharmaceutical companies including seven
                years on the management committee of one of these companies. Mr.
                Coley’s
                experience includes the development of regulatory strategies for
                Canada,
                Europe and the U.S.




(4)
            *Jeremy
                Bridge-Cook, Ph.D.:*Dr. Bridge-Cook was appointed Senior Vice-President of Corporate
                Development in March 2006. He previously served as Vice-President
                of Sales
                and Marketing of the Company from January 2004 to March 2006 and
                as
                Vice-President, Business Development from July 2000 to December 2003.
                Dr.
                Bridge-Cook worked for three years as an Investment Analyst at MDS
                Capital
                Corp. and University Medical Discoveries Inc. While at MDS Capital
                Corp.
                he provided business development expertise to several Canadian
                biotechnology companies, as well as serving on the boards of two
                biotechnology start-ups. He has a Ph.D. in immunology from the University
                of Toronto.




(5)
            *Daniel
                Kobler, Ph.D.:*Dr. Kobler previously served as Vice-President of Bioinformatics
                and
                Computational Biology effective January 2005 and previously served
                as
                Director of Bioinformatics and Computational Biology from December
                2003 to
                December 2004. Dr. Kobler joined the Company in January 2001 as Manager,
                Computational Biology and has since held various positions before
                serving,
                since July 2005, as Vice-President of Product Development and
                Bioinformatics. He has a Ph.D. in mathematics from the Swiss Federal
                Institute of Technology in Lausanne (Switzerland) and was a post-doctoral
                fellow at the Fields Institute for Research in Mathematical Sciences
                in
                Toronto before joining the Company.




**Changes
      in the Composition of the Board of Directors During 2005**




Mr.
        W.
        Geoff Beattie resigned as a director in June 2005. After a thorough search
        and
        review of potential candidates, Dr. Trevor Hawkins was appointed to the
        Board of Directors of the Company in July 2005. Dr. Hawkins resigned from
        the
        Board of Directors of the Company in February 2006 following a change in
        employment and relocation to Europe.




*B.*
            *Compensation*




**Compensation
      of Directors**




During
      the financial year ended December 31, 2005, each director who was not an officer
      of the Company was remunerated with an honorarium totalling $20,000. The
      Chairman and Vice-Chairman of the Board of Directors each received an additional
      honorarium of $20,000 and $10,000, respectively. Each director who chaired
      a
      committee of the Board of Directors other than the Audit Committee also received
      an additional honorarium totalling a further $5,000. The director who chaired
      the Audit Committee received an additional honorarium totalling a further
      $10,000. For the year ended December 31, 2005, aggregate honorariums of $170,000
      were received by the eligible directors. Each director was entitled to a meeting
      fee of $500 for each board or board committee meeting such director attended
      in
      person and $250 for each board or board committee meeting attended by
      teleconference. Each non-employee director could elect to receive his
      aggregate honorariums and meeting fees in the form of deferred share units
      (“DSUs”) in accordance with the Company’s deferred share unit plan (“Deferred
      Share Unit Plan”). Directors of the Company are also eligible to participate in
      the Company’s Incentive Share Option Plan (“Share Option Plan”).




The
      following table sets forth the honorariums and meeting fees earned by each
      individual who served as a director of the Company during the financial year
      ended December 31, 2005:




**Remuneration
      of Directors for the 12-month period ended December 31,
      2005**






**Regular
                  Board
                  Fees**
              **Committee
                  Fees****Name
                of
                Director**
              **Honorarium**
              **Meeting
                  Fees**
              **Honorarium**
              **Meeting
                  Fees(1)**
              **Total****(2)**W.
                  Geoffrey Beattie(4)
              $10,000
              Nil
              Nil
              Nil
              $10,000John
                  R. Frederick
              $20,000
              $5,000
              $10,000
              $6,250
              $41,250Trevor
                  Hawkins(4)
              $10,000
              $3,000
              Nil
              $1,000
              $14,000Gregory
                  C. Hines(3)
              Nil
              Nil
              Nil
              Nil
              NilPaul
                  N. Lucas
              $40,000
              $4,750
              Nil
              $7,250
              $52,000Michael
                  Mueller
              $20,000
              $4,750
              Nil
              $4,750
              $29,500Brad
                  Popovich
              $20,000
              $6,000
              $5,000
              $3,500
              $34,500Neil
                  M. Reid
              $30,000
              $4,500
              $5,000
              $6,000
              $45,500







Notes:




(1)
            Board
                Committee meeting fees as disclosed includes fees for attendance
                at the
                2005 Annual General Meeting of Shareholders of the Company and the
                preparatory meeting in advance thereof, as well as fees for attendance
                at
                the two strategic planning sessions for the Company held during 2005.




(2)
            Pursuant
                to the Deferred Share Unit Plan, certain non-employee directors
                elected to receive all or a portion of their total honorarium and
                meeting
                fees in DSUs. A total of 167,910 DSUs were granted to the participating
                directors in the financial year ended December 31, 2005.




(3)
            As
                an executive director, Mr. Hines did not receive any fees for his
                services
                as a director of the Company.




(4)
              Mr.
                  Beattie and Mr. Hawkins resigned from the Board of Directors of
                  the
                  Company as of June 2005 and February 2006 respectively. See Item
                  6.A.
                  “Changes in the composition of the Board of Directors During
                  2005”.




(5)
              The
                  non-executive directors also received stock options during 2005
                  as
                  follows:




**Name**
              **Number
                  of Options**
              **Exercise
                  Price**John
                  Frederick
              1,320
                220
              $2.20
                $2.00Trevor
                  Hawkins
              7,500
              $2.00Paul
                  Lucas
              2,640
                440
              $2.20
                $2.00Michael
                  Mueller
              7,500
              $2.00Brad
                  Popovich
              2,640
                12,440
              $2.20
                $2.00Neil
                  M. Reid
              2,640
                440
              $2.20
                $2.00





All
                  options have a five-year term and expire in
                  2010.





**Remuneration
      of Officers**




The
      following table sets forth all annual and long-term compensation for services
      rendered in all capacities to the Company for the financial years ended December
      31, 2005 and December 31, 2004, and December 31, 2003 in respect of Gregory
      C.
      Hines, the President and Chief Executive Officer of the Company, James E. Pelot,
      the Chief Operating Officer and Chief Financial Officer of the Company, Richard
      A. Janeczko, the Chief Scientific Officer of the Company, Alan Coley, the Vice
      President, Operations of the Company and Jeremy Bridge-Cook, the Senior Vice
      President, Corporate Development of the Company (the “Named Executive
      Officers”)






40






**Remuneration
      of Officers for the 12-month period ended December 31,
      2005**




**Annual
                Compensation**
            **Long-Term
                Compensation****Name
                and Principal Position**
            **Year**
            **Salary**
            **Bonus****(1)**
            **Other**
              **Annual
                Compensation****(2)**
              **($)**
            **Shares**
              **Under
                Options Granted**
              **(#)**
            **Other
                Compensation**
              **($)**Gregory
                C. Hines
              President
                and
              Chief
                Executive Officer
            2005
              2004
              2003
            288,750
              275,000
              208,330(3)
            86,675
              82,500
              84,000(3)
            ---
              ---
              ---
            50,162
              11,444
              126,069
            ---
              ---
              ---James
                E. Pelot(4)
              Chief
                Operating Officer and
              Chief
                Financial Officer
            2005
              2004
              2003
            210,000
              200,000
              170,856
            42,000
              33,477
              43,945
            ---
              ---
              ---
            25,711
              ---
              43,611
            ---
              ---
              ---Richard
                A. Janeczko(5)
              Chief
                Scientific Officer
            2005
              2004
              2003
            177,975
              169,500
              162,729
            35,679
              36,833
              41,000
            ---
              ---
              ---
            27,988
              ---
              81,502
            ---
              ---
              ---Alan
                Coley(6)
              Vice
                President
              Operations
            2005
              2004
              2003
            168,000
              160,000
              140,000
            33,000
              34,314
              35,200
            ---
              ---
              ---
            19,579
              2,796
              68,713
            ---
              ---
              ---Jeremy
                Bridge-Cook(7)
              Senior
                Vice President
              Corporate
                Development
            2005
              2004
              2003
            168,000
              160,000
              140,000
            45,000
              67,748
              50,000
            ---
              ---
              ---
            16,946
              4,439
              39,750
            ---
              ---
              ---




Notes:




(1)
            Bonuses
                are accrued as compensation in the year
                earned.


(2)
            Perquisites
                and other personal benefits are not shown if they did not exceed
                the
                applicable disclosure threshold.


(3)
            The
                bonus amount was paid by the Company to Spectrum Pharma Inc., a consulting
                company owned by Mr. Hines, as a consulting payment. The salary amount
                was
                paid through reimbursement to MDS Capital Corporation on account
                of Mr.
                Hines’ services.


(4)
            Mr.
                Pelot was appointed the Chief Operating Officer in March 2006 and
                has
                retained the title of Chief Financial
                Officer.


(5)
            Dr.
                Janeczko served as Executive Vice President until December 31, 2003
                and
                effective January 1, 2004 was appointed as the Chief Scientific Officer
                of
                the Company.


(6)
            Mr.
                Coley served as Vice President, Corporate Communications from December
                2000 until December, 2002, and effective January 1, 2003, was appointed
                Vice President, Operations.


(7)
            Dr.
                Jeremy Bridge-Cook served as Vice President, Business Development,
                until
                December 31, 2003 and effective January 1, 2004 was appointed as
                Vice
                President, Sales and Marketing, a position he held until March 2006
                when
                he was appointed as Senior Vice President, Corporate
                Development.




**Options
      Granted During the Financial Year Ended December 31, 2005**


41




The
      following table provides details on options granted to the Named Executive
      Officers during the financial year ended December 31, 2005 pursuant to the
      Company’s Share Option Plan.




**Name**
            **Shares**
              **Under
                Options Granted****(1)**
              **(#)**
            **%
                of Total Options Granted to Employees in Financial**
              **Year**
            **Exercise
                or Base Price ($/Share)**
            **Market
                Value of Shares**
              **Underlying
                Options on the Date of Grant****(2)****($/Share)**
            **Expiration
                Date**Gregory
                C. Hines,
              President
                and Chief Executive Officer
            38,146
              12,016
            10%
            $2.20
              $2.00
            $2.20
              $2.00
            January
                5, 2010
              August
                18, 2010James
                E. Pelot,
              Chief
                Operating
              Officer
                and Chief Financial Officer
            21,825
              3,886
            5%
            $2.20
              $2.00
            $2.20
              $2.00
            January
                5, 2010
              August
                18, 2010Richard
                A. Janeczko,
              Chief
                Scientific
              Officer
            26,012
              1,976
            6%
            $2.20
              $2.00
            $2.20
              $2.00
            January
                5, 2010
              August
                18, 2010Alan
                Coley,
              Vice
                President,
              Operations
            14,682
              4,897
            4%
            $2.20
              $2.00
            $2.20
              $2.00
            January
                5, 2010
              August
                18, 2010Jeremy
                Bridge-Cook,
              Senior
                Vice President, Corporate Development
            8,379
              8,567
            4%
            $2.20
              $2.00
            $2.20
              $2.00
            January
                5, 2010
              August
                18, 2010




Notes:




(1)
            These
                options are exercisable from and after each anniversary of the date
                of the
                grant (including the date of the grant) as to 20% thereof on a cumulative
                basis.




(2)
            The
                market value of the securities listed above represents the five day
                volume
                weighted average trading price of the Common Shares listed on the
                TSX for
                the five trading days immediately preceding the date of grant in
                accordance with the terms of the Share Option
                Plan.




**Options
      Exercised and Aggregates Remaining at Year-End**




The
      following table sets forth information concerning options exercised under the
      Company’s Share Option Plan during 2005 and unexercised options under the
      Company’s Share Option Plan at December 31, 2005:






**Name**
            **Shares**
              **Acquired
                on Exercise**
              **(#)**
            **Aggregate
                Value Realized**
              **($)**
            **Unexercised
                Options at December 31, 2005**
              **(#)**
            **Value
                of Unexercised**
              **in-the-Money
                Options at December 31, 2005****(1)**
              **($)****Exercisable**
            **Unexercisable**
            **Exercisable**
            **Unexercisable**Gregory
                C. Hines
              President
                and Chief Executive Officer
            —
            —
            336,716
            133,552
            $182,644
            $52,238


42





James
                Pelot
              Chief
                Operating Officer and Chief Financial Officer
            —
            —
            142,683
            52,843
            $161,826
            $30,752Richard
                A. Janeczko
              Chief
                Scientific Officer
            —
            —
            142,009
            69,842
            $55,998
            $19,569Alan
                Coley
              Vice
                President, Operations
            —
            —
            117,802
            48,478
            $76,676
            $21,297Jeremy
                Bridge-Cook
              Senior
                Vice President, Corporate Development
            —
            —
            111,828
            45,540
            $62,122
            $17,692







Notes:




(1)
            Based
                on the closing price of the Common Shares on December 30, 2005 of
                $1.84.




No
      options granted under the Company’s Share Option Plan were repriced during 2005.




**Employment
          Agreements**
   The
          Company has in place written employment agreements with  its Named
          Executive Officers, Gregory C. Hines, Alan Coley, Jim Pelot, Richard Janeczko
          and Jeremy Bridge Cook. For these Named Executive Officers and the Company,
          these agreements serve to document previously agreed rights, responsibilities
          and conditions of employment. Under these agreements, each Named Executive
          Officer is entitled to a base salary, and to participate in the Company’s bonus
          plan and Share Option Plan. In addition, each Named Executive Officer is
          entitled to receive severance pay in the event of a termination of his
          employment by the Company without cause or in the event of a termination
          by the
          Named Executive Officer of his employment with the Company for good reason
          as
          defined in each such applicable employment agreement. The amount of any
          such
          severance pay to be made by the Company to any such Named Executive Officer
          is
          determined pursuant to the terms of their applicable employment agreement
          and is
          dependent upon, among other variables, the length of service of the Named
          Executive Officer, consistent with such Named Executive Officer’s common law
          rights.
  Each
          of
          the Named Executive officer is entitled to a payment of twenty-four (24)
          months
          severance upon the termination of their employment.
  The
          Named
          Executive Officers are also subject to customary restrictive covenants
          pursuant
          to the terms of their employment agreements.


**Directors’
      and Officers’ Liability Insurance**




The
      Company maintains directors’ and officers’ liability insurance on behalf of its
      directors and officers and the directors and officers of its subsidiaries.
      The
      policy provides protection to directors and officers against liability incurred
      by them in their capacity as directors and officers of the Company and its
      subsidiaries. The annual premium paid by the Company is approximately $55,000.
      The aggregate limit of liability (inclusive of costs of defence) under the
      policy is in the amount of $5,000,000 for the policy period, regardless of
      the
      time of payment or number of claims, with a corporate deductible of $25,000
      per
      claim. There is no deductible payable by directors and officers.




*C.*
            *Board
                Practices*




43


Each
      director elected holds office until the next annual meeting or until his
      successor is elected or appointed. Information as to the length of time each
      director has served as a director of the Company is set forth above in Item
      1.A
“ *Directors
      and Senior Management* ”
of
      this
      registration statement on Form 20-F.




Each
      of
      the directors of the Board of Directors and the management of the Company
      consider effective corporate governance as an important component of the
      continued success of the Company. The mandate of the Corporate Governance and
      Nominating Committee of the Board of Directors is, in part, to provide a focus
      on governance that will enhance the Company’s performance.




**Board
      of Directors**




·
            Five
                out of six of the current members of the Company’s Board of Directors are
                independent directors. The only director who is not independent is
                Mr.
                Hines, the Company’s President and Chief Executive
                Officer.




·
            Except
                as set forth below, none of the Company’s directors also serve as a
                director of another reporting issuer. Dr. Reid also serves as a director
                of Qustream Corporation, a TSX Venture Exchange listed company.




·
            Pursuant
                to the Company’s governance guidelines, the Board of Directors allows time
                at the end of each Board of Directors meeting for the independent
                directors to meet without the Chief Executive Officer, the only
                non-independent director. All fourteen (14) Board of Directors meetings
                held in 2005 were carried out in accordance with the above
                guideline.




·
            Mr.
                Lucas is the Chairman of the Board of Directors and is an independent
                director.




·
            The
                attendance record of each director for all Board of Directors and
                Board
                Committee meetings is fully disclosed
                below.




**Attendance
      of Directors**




A
      list of
      the number of board, committee and other meetings held and attended by the
      directors in 2005 is set out below, along with the attendance record of each
      director of the Company.






Board
                of Directors
            14Audit
                Committee
            6Human
                Resources and Compensation Committee
            4Nominating
                and Corporate Governance Committee
            4Strategic
                Planning and Annual General Meeting
            4






**Summary
      of Attendance of Directors for the twelve month period ended December 31,
      2005**




**Name
                of Director**
            **Attendance
                at Board of Directors Meetings**
            **Attendance
                at Committee Meetings**John
                R. Frederick
            14
                of 14
            13
                of 14Trevor
                Hawkins
            9
                of 14
            2
                of 2Gregory
                C. Hines
            14
                of 14
            18
                of 18Paul
                N. Lucas
            13
                of 14
            16
                of 18Michael
                Mueller
            13
                of 14
            10
                of 14Brad
                Popovich
            12
                of 14
            7
                of 8Neil
                M. Reid
            13
                of 14
            12
                of 14




44


Notes:




(1)
            Mr.
                Beattie did not attend the Board of Directors meetings which were
                held in
                2005 prior to his resignation from the Board of Directors of the
                Company
                in June 2005.





(2)
            Dr.
                Hawkins attended all the Board of Directors meetings and strategic
                planning sessions held in 2005 following his appointment to the Board
                of
                Directors of the Company in July
                2005.





(3)
            Attendance
                at committee meetings as disclosed includes attendance at the 2005
                Annual
                General Meeting of Shareholders of the Company and the preparatory
                meeting
                in advance thereof, as well as attendance at the two strategic planning
                sessions of the Company held during
                2005.




**Board
      Mandate and Position Descriptions**




·
            In
                addition to a written Terms of Reference for the Board of Directors,
                the
                Board of Directors has approved written Terms of Reference for the
                Board
                Chair, the Board Committee Chairs and for the
                directors.




·
            The
                Board of Directors has also approved a written Terms of Reference
                for the
                President and Chief Executive
                Officer.




**Orientation
      and Continuing Education**




·
            New
                directors are provided with an orientation and education program
                which
                includes the Board of Directors Manual and written information about
                the
                duties and obligations of directors, the business and operations
                of the
                Company, documents from recent Board of Directors meetings and
                opportunities for meetings and discussion with senior management
                of the
                Company and other directors. The details of the orientation of each
                new
                director are tailored to that director’s knowledge of the Company’s
                business and industry and his or her expertise, individual needs
                and areas
                of interest.




·
            Each
                director participates in director orientation and development programs
                developed by the Company from time to time and is required to maintain
                an
                understanding of the regulatory, legislative, business, social and
                political environments within which the Company operates. The Corporate
                Governance and Nominating Committee reviews, monitors and makes
                recommendations regarding the orientation, education and ongoing
                development of directors.




**Ethical
      Business Conduct**




·
            The
                Board of Directors has approved and adopted a Code of Business Conduct
                and
                Ethics (the “Code of Ethics”), which applies to all the directors,
                officers and employees of the Company.




·
            Pursuant
                to the Code of Ethics, directors, officers and employees of the Company
                shall avoid situations that may result in a conflict or perceived
                conflict
                between their personal interests and the interest of the Company.
                Full and
                timely disclosure of any actual or potential conflict of interest
                is
                strongly encouraged. Directors and officers of the Company are required
                to
                disclose any potential or actual material conflict of interest to
                the
                Board of Directors for its review.




·
            The
                Board of Directors seeks to monitor compliance with the Code of Ethics.
                Pursuant to the Code of Ethics, any concerns or complaints regarding
                the
                Code of Ethics shall be communicated to the Corporate Governance
                and
                Nominating Committee. Any complaints or concerns regarding accounting,
                internal accounting controls or auditing matters may be communicated
                to
                the Audit Committee in accordance with the Company’s Whistleblower Policy.
                Disciplinary measures may be taken against any director, officer
                or
                employee who authorizes, directs, approves or participates in any
                violation of a provision of the Code of Ethics. These measures depend
                on
                the circumstances of the violation and may range from formal sanction
                or
                reprimand to dismissal from employment. A director or officer who
                violates
                the Code of Ethics may be asked to resign or may not be nominated
                for
                re-election.




·
            No
                material change report has been filed by the Company in 2005 that
                pertains
                to any conduct of a director or executive officer that constitutes
                a
                departure from the Code of Ethics.





45





**Nomination
      of Directors**




·
            The
                Board of Directors has a Corporate Governance and Nominating Committee,
                composed of Neil M. Reid (chair), John R. Frederick and Paul N. Lucas,
                each of whom is independent. The Terms of Reference for the Corporate
                Governance and Nominating Committee require that the Committee be
                composed
                of not fewer than three and not more than five directors, each of
                which
                shall be independent.




·
            The
                Corporate Governance and Nominating Committee has the responsibility
                to,*inter
                alia*;




(a)
              develop,
                  and annually update, a long-term plan for Board of Directors composition
                  that takes into consideration the current strengths, skills and
                  experience
                  of the Board of Directors, retirement dates and strategic direction
                  of the
                  Company;




(b)
              develop
                  recommendations regarding the essential and desired experiences,
                  competencies, skills and personal qualities for potential directors,
                  taking into consideration the Board of Directors’ short-term needs and
                  long-term succession plan;
                  and





(c)
              recommend
                  to the Board of Directors (i) nominees for election as members
                  of the
                  Board of Directors, (ii) committee members and committee chair
                  appointments






·
            While
                all directors are encouraged to identify potential nominees for directors,
                the Corporate Governance and Nominating Committee has the responsibility
                for gathering the names of the potential nominees, screening their
                qualifications against the current skill and experience needs of
                the Board
                of Directors and making recommendations to the full Board of Directors.
                The Committee pays attention to the personality and other qualities
                of
                each potential nominee and director as they may ultimately affect
                the
                boardroom dynamic. The Board Chair and the Chief Executive Officer
                provide
                additional direct input into the director nomination process. When
                a
                suitable candidate is identified, an invitation to stand as a nominee
                for
                election to the Board of Directors will normally be made by the Board
                of
                Directors through the Board Chair.




**Assessments**




·
            The
                Corporate Governance and Nominating Committee is responsible for
                making an
                annual assessment of the overall performance of the Board of Directors,
                its committees and individual directors. The assessments of individual
                directors include assessments of the applicable terms of reference
                and the
                competencies and skill each director is expected to bring to the
                Board of
                Directors. The objective of the review is to contribute to a process
                of
                continuous improvement in the Board of Director’s execution of its
                responsibilities. The results of such reviews are used to confirm
                successful execution by the Board of Directors of its responsibilities
                and
                to identify any areas where the directors and/or management believe
                that
                the Board of Directors could make a better collective contribution
                to
                overseeing the affairs of the Company in such as a way as to increase
                shareholder value.




**Compensation
      Committee**




·
            The
                Board of Directors has a Human Resources and Compensation Committee,
                composed of Bradley Popovich (chair), Paul N. Lucas and Michael Mueller,
                each of whom is independent. The Terms of Reference for the Human
                Resources and Compensation Committee require that the Committee be
                composed of not fewer than three and not more than five directors,
                each of
                which shall be independent.




·
            The
                Human Resources and Compensation Committee recommends the compensation
                of
                the Chief Executive Officer to the Board of Directors and reviews
                compensation policies and levels for the Company’s other executive
                officers to ensure their compensation is competitive and reasonably
                related to personal and corporate performance. It uses various information
                sources, including independent consultants from time to time, to
                review
                the Company’s salaries, bonus plans and stock-based incentives and to
                assess the effectiveness of the Company’s incentive plans in contributing
                to corporate performance. The Company determines director compensation
                with reference to other comparably sized Canadian
                companies.




**Audit
      Committee**




46





·
            The
                Company’s audit committee is composed entirely of independent directors
                pursuant to applicable securities legislation. The Audit Committee
                is
                responsible for the oversight of the reliability and integrity of
                the
                accounting principles and practices, financial reporting and disclosure
                practices followed by management. The Audit Committee reviews the
                independence of the external auditors and confirms auditor independence
                to
                the Board of Directors. The Audit Committee has direct access to,
                and
                communicates directly with, the external auditors to review and discuss
                specific issues as appropriate.




·
            During
                the financial year ended December 31, 2005, the members of the Audit
                Committee were John R. Frederick (chair), Neil M. Reid and Michael
                Mueller. As Chair of the Board of Directors, Mr. Lucas also attends
                Audit
                Committee meetings on an*ex
                officio*basis.****




**Outside
      Advisors**




·
            Each
                Board Committee is entitled to engage outside advisors at the Company’s
                expense in connection with its mandate. Directors may engage advisors
                at
                the Company’s expense upon the authorization of the Board Chair or the
                Corporate Governance and Nominating
                Committee.




*D.*
            *Employees*




The
        Company has 88 active employees as at June 30, 2006, including 10 Ph.D.s.
        Of the
        88 employees, 26 are directly and primarily involved with research and
        development, 14 with operations and the balance with
        SG&A.




*E.*
            *Share
                Ownership*




To
      the
      knowledge of the Company, the following tables indicate the number and
      percentage of Common Shares beneficially owned, controlled or directed by each
      of the directors and Named Executive Officers of the Company.




Director
              Common
                  Shares Owned(1)
              %
                  Owned of total issued and outstanding
                Common
                  Shares(2)John
                  R. Frederick
              490,391
              1.02Gregory
                  C. Hines
              466,041
              n/aMichael
                  Mueller
              320,500
              n/aNeil
                  M. Reid
              53,026
              n/aPaul
                  N. Lucas
              65,432
              n/aBradley
                  Popovich
              42,608
              n/a







Named
                  Executive Officers
              Common
                  Shares Owned(1)
              %
                  Owned of total issued and outstanding
                Common
                  Shares(2)Gregory
                  C. Hines
              466,041
              n/aJames
                  E. Pelot
              282,422
              n/aRichard
                  A. Janeczko
              198,399
              n/aAlan
                  Coley
              149,168
              n/aJeremy
                  Bridge-Cook
              149,556
              n/a




Notes:




(1)
              Includes
                  Common Shares purchasable by the director or Named Executive Officer
                  within 60 days of September 8, 2006.(2)
              Other
                  than John R. Frederick, each director and Named Executive Officer
                  beneficially owns or exercises control or direction over less than
                  one
                  percent of issued and outstanding Common Shares.




The
      Company has established a Share Option Plan and a Deferred Share Unit Plan,
      both
      of which are designed to encourage eligible employees, officers and directors
      to
      align their interests with those of the Shareholders. The following information
      is at December 31, 2005, the Company’s most recently completed financial
      year.




47





Number
                of securities to be issued upon exercise of outstanding options,
                warrants
                and rights
            Weighted-average
                exercise price of outstanding options, warrants and rights
            Number
                of securities remaining available for future issuance under equity
                compensation plans (excluding securities reflected in column
                (a))**Plan
                Category**
            **(a)**
            **(b)**
            **(c)**Equity
                compensation plans approved by security holders
            2,601,562(1)
            $1.87
            2,169,960(2)Equity
                compensation plans not approved by security holders
            N/A.
            N/A.
            N/A.**Total**
            **2,601,562**
            
            **2,169,960**




Notes:




(1)
            In
                addition to the Common Shares issuable under the Share Option Plan,
                column
                (a) incorporates 228,354 DSUs earned by the directors of the Company
                under
                the Deferred Share Unit Plan, which securities have no exercise price.




(2)
            The
                maximum number of Common Shares issuable pursuant to the Company’s share
                compensation arrangements (i.e. the Share Option Plan and the Deferred
                Share Unit Plan) is equal to 10% of the Common Shares outstanding
                from
                time to time.




**Share
      Option Plan**




The
      Company has adopted the Share Option Plan for the directors, officers, employees
      and consultants (including members of the Company’s Scientific Advisory Board)
      of the Company and its affiliates. The Share Option Plan is administered by
      the
      Board of Directors of the Company or the Human Resources and Compensation
      Committee thereof appointed in accordance with the Share Option Plan, and is
      subject to the rules of the Toronto Stock Exchange.




At
      the
      Company’s annual general and special meeting of Shareholders held on June 2,
      2004, shareholders of the Company approved certain amendments to the Share
      Option Plan, including, without limitation, amendments providing for a rolling
      maximum number of shares to be issuable pursuant to the Share Option Plan equal
      to 10% of the number of Common Shares outstanding from time to time. These
      amendments came into effect on January 1, 2005. The full text of the Share
      Option Plan, as amended, are set out in the Company’s management information
      circular dated April 23, 2004 and is attached as Exhibit 4.9 to this
      registration statement on Form 20-F. No amendments to the Share Option Plan
      were
      adopted in the financial year ended December 31, 2005. The following is a
      summary of the Company’s Share Option Plan, which summary is qualified in its
      entirety by the full text of the plan.




The
      aggregate number of Common Shares reserved for issuance to any one person under
      the Share Option Plan is limited to 5% of the Common Shares outstanding at
      the
      time of grant. The aggregate number of Common Shares reserved for issuance
      to
      insiders of the Company under the Share Option Plan is limited to 10% of the
      Common Shares outstanding. As of December 31, 2005, the number of Common Shares
      issuable under actual grants made under the Share Option Plan, as a percentage
      of the Company’s currently outstanding capital, is 5.0%.




Pursuant
      to the Share Option Plan, the exercise price for the stock options is the volume
      weighted average trading price of the Common Shares on the Toronto Stock
      Exchange for the 5 trading days preceding the date of grant, or such greater
      amount as the Board of Directors of the Company may designate. Subject to early
      expiry as a result of death, disability, termination for cause or voluntary
      resignation, the stock options awarded under the Share Option Plan typically
      expire 5 years after the date of grant, and vest 20% on the date of grant and
      an
      additional 20% on each subsequent anniversary of the date of grant.




The
      Board
      of Directors of the Company may, subject to any necessary regulatory approval
      and necessary consents from the participants of the Share Option Plan, at its
      discretion from time to time, amend the Share Option Plan and the terms and
      conditions of any stock option thereafter to be granted, provided that any
      such
      amendment will not alter the terms or conditions of, or impair any right of
      any
      stock optionee pursuant to any stock option awarded prior to such amendment
      without the consent of such stock optionee, unless such amendment or alteration
      is required by any applicable stock exchange or governmental entity. The stock
      options issued under the Share Option Plan are not assignable or
      transferable.





The
          following table discloses the stock options granted under the share option
          plan:
 
 John
        Frederick
 Grant
                    date
                #
                    options granted
                Exercise
                    price
                Price
                    paid
                Expiration
                    dateMay
                    29, 2002
                880
                1.60
                0
                May
                    29, 2007May
                    29, 2002
                11,200
                2.00
                0
                May
                    29, 2007Sep
                    04, 2002
                2,200
                2.00
                0
                Sep
                    04, 2007Dec
                    04, 2002
                3,516
                1.50
                0
                Dec
                    04, 2007Jul
                    16, 2003
                330
                1.30
                0
                Jul
                    16, 2008Jul
                    16, 2003
                11,200
                2.00
                0
                Jul
                    16, 2008Dec
                    16, 2003
                2,640
                1.65
                0
                Dec
                    16, 2008Sep
                    02, 2004
                330
                1.15
                0
                Sep
                    02, 2009Jan
                    01, 2005
                17,500
                2.50
                0
                Jan
                    01, 2010Jan
                    05, 2005
                1,320
                2.20
                0
                Jan
                    05, 2010Aug
                    18, 2005
                220
                2.00
                0
                Aug
                    18, 2010Sept
                    5, 2006
                17,500
                1.80
                0
                Sept
                    5, 2011
 
 Greg
        Hines
 Grant
                    date
                #
                    options granted
                Exercise
                    price
                Price
                    paid
                Expiration
                    dateMay
                    29, 2002
                27,465
                1.60
                0
                May
                    29, 2007May
                    29, 2002
                87,327
                2.00
                0
                May
                    29, 2007Dec
                    04, 2002
                87,801
                1.50
                0
                Dec
                    04, 2007Jul
                    16, 2003
                13,400
                1.30
                0
                Jul
                    16, 2008Jul
                    16, 2003
                87,327
                2.00
                0
                Jul
                    16, 2008Dec
                    16, 2003
                25,343
                1.65
                0
                Dec
                    16, 2008May
                    12, 2004
                11,444
                3.15
                0
                May
                    12, 2009Jan
                    05, 2005
                38,146
                2.20
                0
                Jan
                    05, 2010Aug
                    18, 2005
                12,016
                2.00
                0
                Aug
                    18, 2010May
                    20, 2006
                32,040
                1.50
                0
                May
                    20, 2011Sept
                    5, 2006
                422,308
                1.80
                0
                Sept
                    5, 2011
 
 Mike
        Mueller
 Grant
                    date
                #
                    options granted
                Exercise
                    price
                Price
                    paid
                Expiration
                    dateJan
                    01, 2005
                10,000
                2.50
                0
                Jan
                    01, 2010Aug
                    18, 2005
                7,500
                2.00
                0
                Aug
                    18, 2010Sept
                    5, 2006
                10,000
                1.80
                0
                Sept
                    5, 2011
   48
 
 Neil
        Reid
 Grant
                    date
                #
                    options granted
                Exercise
                    price
                Price
                    paid
                Expiration
                    dateMay
                    29, 2002
                1,452
                1.60
                0
                May
                    29, 2007May
                    29, 2002
                1,630
                2.00
                0
                May
                    29, 2007Dec
                    04, 2002
                5,802
                1.50
                0
                Dec
                    04, 2007Jul
                    16, 2003
                1,630
                2.00
                0
                Jul
                    16, 2008Dec
                    16, 2003
                3,300
                1.65
                0
                Dec
                    16, 2008Mar
                    26, 2004
                660
                2.40
                0
                Mar
                    26, 2009Jan
                    01, 2005
                22,500
                2.50
                0
                Jan
                    01, 2010Jan
                    05, 2005
                2,640
                2.20
                0
                Jan
                    05, 2010Aug
                    18, 2005
                440
                2.00
                0
                Aug
                    18, 2010Sept
                    5, 2006
                22,500
                1.80
                0
                Sept
                    5, 2011
 
 Paul
        Lucas
 Grant
                    date
                #
                    options granted
                Exercise
                    price
                Price
                    paid
                Expiration
                    dateSep
                    04, 2002
                8,712
                1.10
                0
                Sep
                    04, 2007Dec
                    04, 2002
                3,385
                1.50
                0
                Dec
                    04, 2007Jul
                    16, 2003
                660
                1.30
                0
                Jul
                    16, 2008Dec
                    16, 2003
                2,640
                1.65
                0
                Dec
                    16, 2008Sep
                    02, 2004
                660
                1.15
                0
                Sep
                    02, 2009Jan
                    01, 2005
                20,000
                2.50
                0
                Jan
                    01, 2010Jan
                    05, 2005
                2,640
                2.20
                0
                Jan
                    05, 2010Aug
                    18, 2005
                440
                2.00
                0
                Aug
                    18, 2010Sept
                    5, 2006
                20,000
                1.80
                0
                Sept
                    5, 2011
 
 Brad
        Popovich
 Grant
                    date
                #
                    options granted
                Exercise
                    price
                Price
                    paid
                Expiration
                    dateMay
                    16, 2003
                12,000
                1.35
                0
                May
                    16, 2008Dec
                    16, 2003
                3,300
                1.65
                0
                Dec
                    16, 2008Mar
                    26, 2004
                660
                2.40
                0
                Mar
                    26, 2009Jan
                    01, 2005
                15,000
                2.50
                0
                Jan
                    01, 2010Jan
                    05, 2005
                2,640
                2.20
                0
                Jan
                    05, 2010Aug
                    18, 2005
                12,440
                2.00
                0
                Aug
                    18, 2010Sept
                    5, 2006
                15,000
                1.80
                0
                Sept
                    5, 2011
 
 James
        Pelot
 Grant
                    date
                #
                    options granted
                Exercise
                    price
                Price
                    paid
                Expiration
                    dateOct
                    02, 2001
                40,000
                1.45
                0
                Oct
                    03, 2006Dec
                    20, 2001
                4,000
                1.60
                0
                Dec
                    21, 2006May
                    29, 2002
                7,937
                1.60
                0
                May
                    29, 2007May
                    29, 2002
                15,243
                2.00
                0
                May
                    29, 2007Sep
                    04, 2002
                26,803
                1.10
                0
                Sep
                    04, 2007Dec
                    04, 2002
                32,220
                1.50
                0
                Dec
                    04, 2007Jan
                    31, 2003
                3,932
                1.95
                0
                Jan
                    31, 2008Jul
                    16, 2003
                7,584
                1.30
                0
                Jul
                    16, 2008Jul
                    16, 2003
                15,243
                2.00
                0
                Jul
                    16, 2008Dec
                    16, 2003
                16,852
                1.65
                0
                Dec
                    16, 2008Jan
                    05, 2005
                21,825
                2.20
                0
                Jan
                    05, 2010Aug
                    18, 2005
                3,886
                2.00
                0
                Aug
                    18, 2010May
                    20, 2006
                21,360
                1.50
                0
                May
                    20, 2011Sept
                    5, 2006
                216,885
                1.80
                0
                Sept
                    5, 2011
   Richard
        Janeczko
 Grant
                    date
                #
                    options granted
                Exercise
                    price
                Price
                    paid
                Expiration
                    dateDec
                    20, 2001
                4,000
                1.60
                0
                Dec
                    21, 2006May
                    29, 2002
                53,126
                2.00
                0
                May
                    29, 2007Sep
                    04, 2002
                8,809
                1.10
                0
                Sep
                    04, 2007Dec
                    04, 2002
                16,427
                1.50
                0
                Dec
                    04, 2007Jul
                    16, 2003
                1,204
                1.30
                0
                Jul
                    16, 2008Jul
                    16, 2003
                60,133
                2.00
                0
                Jul
                    16, 2008Dec
                    16, 2003
                20,165
                1.65
                0
                Dec
                    16, 2008Jan
                    05, 2005
                26,012
                2.20
                0
                Jan
                    05, 2010Aug
                    18, 2005
                1,976
                2.00
                0
                Aug
                    18, 2010May
                    20, 2006
                19,420
                1.50
                0
                May
                    20, 2011Sept
                    5, 2006
                211,272
                1.80
                0
                Sept
                    5, 2011
 
 Alan
        Coley
 Grant
                    date
                #
                    options granted
                Exercise
                    price
                Price
                    paid
                Expiration
                    dateDec
                    20, 2001
                8,000
                1.60
                0
                Dec
                    21, 2006May
                    29, 2002
                31,420
                2.00
                0
                May
                    29, 2007Dec
                    04, 2002
                35,788
                1.50
                0
                Dec
                    04, 2007Jul
                    16, 2003
                816
                1.30
                0
                Jul
                    16, 2008Jul
                    16, 2003
                31,420
                2.00
                0
                Jul
                    16, 2008Dec
                    16, 2003
                16,477
                1.65
                0
                Dec
                    16, 2008Sep
                    02, 2004
                2,796
                1.15
                0
                Sep
                    02, 2009Jan
                    05, 2005
                14,682
                2.20
                0
                Jan
                    05, 2010Aug
                    18, 2005
                4,897
                2.00
                0
                Aug
                    18, 2010May
                    20, 2006
                13,010
                1.50
                0
                May
                    20, 2011Sept
                    5, 2006
                144,708
                1.80
                0
                Sept
                    5, 2011





49





Jeremy
      Bridge-Cook


Grant
                  date
              #
                  options granted
              Exercise
                  price
              Price
                  paid
              Expiration
                  dateNov
                  06, 2001
              5,000
              1.45
              0
              Nov
                  07, 2006May
                  29, 2002
              9,680
              1.60
              0
              May
                  29, 2007May
                  29, 2002
              31,088
              2.00
              0
              May
                  29, 2007Sep
                  04, 2002
              13,924
              1.10
              0
              Sep
                  04, 2007Dec
                  04, 2002
              16,540
              1.50
              0
              Dec
                  04, 2007Jan
                  31, 2003
              9,592
              1.95
              0
              Jan
                  31, 2008Jul
                  16, 2003
              408
              1.30
              0
              Jul
                  16, 2008Jul
                  16, 2003
              22,920
              2.00
              0
              Jul
                  16, 2008Dec
                  16, 2003
              6,831
              1.65
              0
              Dec
                  16, 2008Sep
                  02, 2004
              4,439
              1.15
              0
              Sep
                  02, 2009Jan
                  05, 2005
              8,379
              2.20
              0
              Jan
                  05, 2010Aug
                  18, 2005
              8,567
              2.00
              0
              Aug
                  18, 2010May
                  20, 2006
              7,340
              1.50
              0
              May
                  20, 2011Sept
                  5, 2006
              159,306
              1.80
              0
              Sept
                  5, 2011




**Deferred
      Share Unit Plan**




At
      the
      Company’s annual general and special meeting of Shareholders held on June 2,
      2004, shareholders of the Company approved the adoption of the Deferred Share
      Unit Plan for the Company’s non-employee directors and Scientific Advisory Board
      members. The full text of the Deferred Share Unit Plan is set out in the
      Company’s management information circular dated April 23, 2004 and is attached
      as Exhibit 4.10 to this registration statement on Form 20-F. No amendments
      to
      the Deferred Share Unit Plan were adopted in the financial year ended December
      31, 2005. The following is a summary of the Company’s Deferred Share Unit Plan,
      which summary is qualified in its entirety by the full text of the
      plan.




Under
      the
      Deferred Share Unit Plan, each non-employee director and Scientific Advisory
      Board member may elect to receive either 50% or 100% of his or her retainer
      and
      attendance compensation in each calendar year as DSUs. The DSUs are credited
      as
      of the last business day of March, June, September and December (each a
“Reference Date”) of each financial year. The number of DSUs to be awarded on
      such Reference Dates is determined by dividing the amount of the retainer and
      attendance compensation attributable to each non-employee director and
      Scientific Advisory Board member in such quarter by the volume weighted average
      price of the Common Shares on the Toronto Stock Exchange for the 5 trading
      days
      preceding such Reference Date. The number of DSUs awarded is adjusted in
      accordance with any dividend payments, stock splits, mergers, consolidations
      or
      other reorganizations. Once each eligible participant under the Deferred Share
      Unit Plan ceases to be a non-employee director or Scientific Advisory Board
      member, he or she may elect to receive (i) a lump sum cash payment, net of
      any
      applicable withholdings, equal to the fair market value of the DSUs on the
      settlement date, or (ii) Common Shares of the Company equal to the number of
      DSUs credited to such eligible participant.




The
      number of Common Shares reserved for issuance under the Deferred Share Unit
      Plan
      shall not exceed 500,000 Common Shares. Notwithstanding the foregoing: (i)
      the
      number of Common Shares reserved for issuance under the Deferred Share Unit
      Plan, together with all Common Shares reserved for issuance under all of the
      Company’s other share compensation plans, shall not exceed 10% of the total
      number of outstanding Common Shares at any time, and (ii) the number of Common
      Shares reserved for issuance to any eligible participant under the Deferred
      Share Unit Plan shall not, together with all other Common Shares reserved for
      issuance to such eligible participant pursuant to all other share compensation
      plans of the Company, exceed 2% of the total number of outstanding Common Shares
      of the Company at any time. As of December 31, 2005, the number of Common Shares
      issuable under the grants made under the Deferred Share Unit Plan, as a
      percentage of the Company’s currently outstanding capital, is 0.4%.




The
      Board
      of Directors of the Company may, in its sole discretion and without the consent
      of any eligible participants, amend the Deferred Share Unit Plan at any time;
      provided, however, that no amendment shall reduce the number of DSUs credited
      to
      any eligible participant prior to such amendment. No amendment shall be
      effective until all applicable approvals, if any, of regulatory authorities
      and
      stock exchanges have been obtained. The DSUs issued under the Deferred Share
      Unit Plan are not assignable or transferable.




**Item
      7.**  **Major
      Shareholders and Related Party Transactions**




*A.*
            *Major
                Shareholders*




The
        authorized capital of the Company consists of an unlimited number of preference
        shares, issuable in series (“Preference Shares”), and an unlimited number of
        Common Shares. As of September 8, 2006, the Company had no Preference Shares
        and
        47,715,224 Common Shares issued and outstanding.




To
      the
      knowledge of the directors and officers of the Company, as at August 25, 2006,
      the only persons or corporations who beneficially own, directly
      or indirectly, or exercise control or direction over, more than 5% of the issued
      and outstanding Common Shares are indicated below:




**Name**
              **Number
                  and Class of Securities**
              **Percentage
                  of Class**Mackenzie
                  Financial Corporation (“MFC”)
              8,347,900Common
                  Shares
              17.5%Canadian
                  Medical Discoveries Fund Inc. (“CMDF”)
              7,250,183
                  Common Shares
              15.2%




1  Includes Common Shares purchasable within 60 days of August 25,
        2006.


50


To
        the
        knowledge of the Company, over the past three years, the percentage of the
        issued and outstanding Common Shares (on a non-diluted basis) held by CMDF
        has
        decreased from 21.66% to 12.2% as at April 17, 2006. To the knowledge of
        the
        Company, MFC first disclosed itself to be a major shareholder of the Company
        when it filed an early warning report on July 8, 2005, disclosing that it
        then
        held 12.3% of the Company’s issued and outstanding Common Shares (on a
        non-diluted basis).




As
      at May
      10, 2006, the Company is able to determine from the geographical analysis
      reports provided by the Company’s transfer agent, approximately 3.5% of the
      issued and outstanding Common Shares were held by 556 shareholders with
      addresses of record in the United States. A number of these shares are held
      in
“street” names and may, therefore, be held by several beneficial owners.




The
      Company is not aware of any arrangements, the operation of which may at a
      subsequent date result in a change in control of the Company.








*B.*
            *Related
                Party Transactions*




To
        the
        knowledge of the Company, during the three (3) most recently completed financial
        years and the current financial year the only transactions which materially
        affected the Company and which involved: (a) a director or executive officer
        of
        the Company; (b) a person or company beneficially owning or exercising control
        or direction over more than 10% of the Common Shares of the Company; or (c)
        an
        associate or affiliate of the persons or companies referred to in paragraphs
        (a)
        and (b), were transactions with Canadian Medical Discoveries Fund Inc. (“CMDF”),
        with Sirius and with MFC.




To
        the
        knowledge of the Company, as at June 30, 2006, CMDF held 5,828,264 Common
        Shares
        in the capital of the Company, representing approximately 12.2% of the issued
        and outstanding capital of the Company on a non-diluted basis. In November
        2004,
        CMDF subscribed for a secured debenture in the aggregate principal amount
        of
        $4,141,550 (“Debenture”). CMDF paid for the Debenture by (i) paying $2 million
        in cash, and (ii) acknowledging repayment of the then outstanding principal
        of
        $2,141,550 the Company owed to CMDF pursuant to a loan granted by CMDF in
        2002.
        CMDF also received 673,141 special warrants in connection with its purchase
        of
        the Debenture. Each warrant is exercisable for one Common Share at an exercise
        price of $1.22. The Debenture, which bore interest at 12% per year, was repaid
        in November 2005 using proceeds the Company received from the issuance of
        the
        Note to Laurus.




Dr.
        Popovich, a director and former chair of the Scientific Advisory Board of
        the Company, is also the Chief Executive Officer of Sirius, which has licensed
        certain biomarkers related to drugs used to treat sepsis. The details of
        this
        transaction are described above in Item 4.A. “ *History
        and Development of the Company* ”
of
        this
        registration statement on Form 20-F.





On
        August
        15, 2006, the Company completed a private placement financing of unsecured
        subordinated debt (the “Unsecured Debentures”), together with common share
        purchase warrants of the Company, for total gross proceeds to the Company
        of
        $6.24 million. The
        Unsecured Debentures carry an interest rate of 11% per annum with interest
        payable monthly in arrears and principal to be repaid in full at either 12
        months from the closing date or within 30 days in the event of any cash
        infusion  ( as defined in the Unsecured Debentures) that results in
        proceeds to the Company of $15 million. Should the Company receive any cash
        infusion less than $15 million it will repay a pro-rata portion of the Unsecured
        Debentures. The Company has the option to repay the Unsecured Debentures
        at any
        time prior to 12 months from the closing date without penalty. The Unsecured
        Debentures are subordinated in all respects to the Company’s existing secured
        convertible note to Laurus and related security and contain customary covenants. Subscribers
        also received 250 warrants per $1,000 principal amount of the Unsecured
        Debentures purchased for an aggregate total of 1,560,000 warrants. Each warrant
        is exercisable for one common share of the Company at an exercise price of
        $1.15
        for the period expiring five years from the closing date. The warrants are
        subject to customary restrictions on resale under the applicable securities
        laws. Westwind
        Partners Inc. and Canaccord Capital Corporation acted as co-lead agents for
        this
        financing.




MFC
        subscribed for $1,950,000 of the Unsecured Debentures and received 487,500
        warrants.




*C.*
            *Interests
                of Experts and Counsel*




Not
      applicable.




51


**Item
      8.**  **Financial
      Information**




*A.*
            *Consolidated
                Statements & Other Financial
                Information*




The
      Company’s audited consolidated financial statements for the financial years
      ended December 31, 2005, 2004 and 2003 and the consolidated interim
      financial statements for the interim periods ended June 30, 2006 and
      2005 are included elsewhere in this registration statement on Form
      20-F.




*B.*
            *Significant
                Changes*




The
      Company has disclosed events subsequent to the end of its financial year ended
      December 31, 2005 in note 22 to the Company’s audited consolidated financial
      statements.




**Item
      9.**  **The
      Offer and Listing**




*A.*
            *Offer
                and Listing Details*




On
      April
      12, 2004, the Company listed its Common Shares on the Toronto Stock Exchange
      (“TSX”) under the symbol TMC. Prior to that date, the Company’s Common Shares
      had been listed on the TSX Venture Exchange. No other securities of the Company
      are listed on a stock exchange. The last reported sales price of our Common
      Shares on September 6 ,
      2006 on
      the TSX was C$0.99. The following table sets forth the high and low per share
      sales prices for our Common Shares on the TSX for the periods indicated. A
      description of the features of the Common Shares can be found under Item 10.A,
      “ *Share
      Capital* ”
below.
      CIBC Mellon Trust Company is the registrar and transfer agent of the Common
      Shares. The Company has no current plans to seek a listing of the Common
      Shares on any other exchange.







**Common
                  Shares****TSX****High**
                **Cdn$**
              **Adjusted
                  High****(1)**
                **Cdn.
                  $**
              **Low**
                **Cdn$**
              **Adjusted
                  Low****(1)**
                **Cdn$****By
                  Year****2000**
              4.50
              22.50
              0.15
              0.75**2001**
              0.90
              4.50
              0.26
              1.30**2002**
              0.47
              2.35
              0.12
              0.60**2003**
              0.50
              2.50
              0.21
              1.05**2004**
              0.80
              4.00
              1.00
              1.00**2005**
              2.50
              2.50
              1.49
              1.49**By
                  Quarter****2003**Quarter
                  1
              0.48
              2.40
              0.27
              1.35Quarter
                  2
              0.32
              1.60
              0.21
              1.05Quarter
                  3
              0.50
              2.50
              0.25
              1.25Quarter
                  4
              0.49
              2.45
              0.28
              1.4**2004**Quarter
                  1
              0.71
              3.55
              0.36
              1.80Quarter
                  2
              0.80
              4.00
              0.45
              2.25Quarter
                  3
              2.73
              2.73
              1.00
              1.00Quarter
                  4
              2.45
              2.45
              1.04
              1.04**2005**Quarter
                  1
              2.40
              2.40
              1.62
              1.62Quarter
                  2
              2.00
              2.00
              1.49
              1.49Quarter
                  3
              2.25
              2.25
              1.83
              1.83Quarter
                  4
              2.50
              2.50
              1.60
              1.60**2006**Quarter
                  1
              1.95
              1.95
              1.40
              1.40Quarter
                  2
              1.70
              1.70
              1.01
              1.01**By
                  Month**October
                  2005
              1.94
              1.94
              1.68
              1.68November
                  2005
              2.50
              2.50
              1.80
              1.80


52





December
                  2005
              1.99
              1.99
              1.60
              1.60January
                  2006
              1.95
              1.95
              1.75
              1.75February
                  2006
              1.87
              1.87
              1.75
              1.75March
                  2006
              1.82
              1.82
              1.40
              1.40April
                  2006
              1.70
              1.70
              1.37
              1.37May 2006
              1.55
              1.55
              1.31
              1.31June
                  2006
              1.43
              1.43
              1.01
              1.01July
                  2006
              1.35
              1.35
              1.10
              1.10(i)Adjusted
                  for the Company’s 5:1 share consolidation completed in June
                  2004.







**Prior
      Sales**




The
        following is a summary of the Company’s financing activities during the
        financial year ended December 31, 2005 and during the current financial
        year.




*Private
      Placement*




On
      February 3, 2005 the Company completed a private placement of 4,330,000 common
      shares at $2.15 per common share for total gross proceeds of $9,309,500. The
      Company also issued 216,500 compensation options to the underwriters. Each
      compensation option is exercisable until close of business on February 2, 2007
      at a price of $2.15 per option, and entitles the holder to acquire one common
      share of the Company. The private placement was sold through a syndicate of
      underwriters consisting of Orion Securities Inc. as lead underwriter and
      including Dlouhy Merchant Group.




*2005
      Note Financing*




On
      November 23, 2005, the Company completed a debt financing resulting in the
      issuance by the Company to Laurus of (i) a secured convertible term note (the
      “Note”) in the aggregate principal amount of U.S. $9.0 million maturing on
      November 22, 2008, and (ii) a common stock purchase warrant exercisable for
      738,723 common shares of the Company at a price of $2.61 per share and expiring
      on November 22, 2010. The maximum number of common shares of the Company
      issuable upon conversion under the Note varies in accordance with the
      Cdn.$/U.S.$ foreign exchange rate in effect at the time of each repayment but,
      for example, is 3,844,252 common shares at an exchange rate of Cdn.$1.1067
      per
      U.S.$1.00. The Company may repay the Note at any time upon 10 business days’
notice to Laurus for a premium equal to 130% of the principal amount outstanding
      at the time of such redemption.




The
      Note
      bears daily compound interest at a nominal rate per annum equal to the greater
      of (i) the prime rate published in The Wall Street Journal from time to time,
      plus 2% (200 basis points), and (ii) 8.5%, in each case plus applicable
      withholding taxes. The interest rate on the Note will decrease by 3% (300 basis
      points), to a floor of 0%, for every 25% increase in the Company’s common share
      price above the “fixed conversion price” (as set out below).




The
      Note
      is repayable in principal instalments plus interest over 32 months commencing
      in
      March 2006 (with payments of interest only commencing in January 2006). The
      fixed conversion price for the conversion of any principal amount outstanding
      under the Note from time to time is $2.39 (with respect to any principal amount
      that is less than U.S.$9.0 million and equal to or greater than U.S.$6.0
      million), $2.61 (with respect to any principal amount that is less than U.S.$6.0
      million and equal to or greater than U.S.$3.0 million) and $2.83 with respect
      to
      any remaining portion of the principal amount of the Note. Laurus has the right,
      but not the obligation, to convert all or any portion of the principal amount
      at
      any time and from time to time into common shares of the Company. The Company
      is
      required to convert cash repayments under the Note into common shares (based
      on
      the then applicable fixed conversion price set out above) if the volume weighted
      average trading price of the Company’s common shares on the TSX for the five (5)
      trading days immediately preceding such repayment date is greater than or equal
      to $2.75, $3.00, and $3.25, with respect to each 1/3 principal amount of the
      Note the
      “Trading Price Condition”); provided, however, that the amount of such
      conversion does not exceed 25% of the aggregate dollar trading volume of the
      common shares for the 22 day trading period immediately preceding the applicable
      repayment date (the “Trading Volume Condition”). If the Trading Price Condition
      is satisfied but the Trading Volume Condition is not satisfied, the Company
      will
      convert into common shares only such part of the repayment amount that would
      permit the Trading Volume Condition to be satisfied and any part of such
      repayment amount that Laurus has not been able to convert into common shares
      by
      reason of failing to meet the Trading Volume Condition (or otherwise as a result
      of the ownership limitations set out below), shall be paid by the Company in
      cash at the rate of 102% of the repayment amount otherwise
      due.




.
      The
      number of common shares to be issued to Laurus where any principal amount is
      required to be converted into common shares of the Company, or upon Laurus’
exercise of its conversion rights, shall be the number determined by dividing
      the U.S.$ principal amount to be converted into common shares (converted into
      Cdn.$ at the U.S.$/Cdn.$ exchange rate in effect at the date of conversion)
      by
      the then applicable fixed conversion price.




Laurus
        is
        limited to beneficially owning 4.99% of the common shares of the Company
        outstanding at any time, subject to exceptions for an event of default under
        the
        Note or upon Laurus providing 75 days’ notice to the Company, in which case the
        maximum percentage of common shares of the Company that can be owned
        beneficially by
        Laurus
        is capped at 19.99%. Based on the year-end exchange rate of Cdn.$1.163 to
        U.S.$1.00 and conversion of the entire principal amount of the Note, Laurus’
beneficial ownership after giving pro-forma effect to the Offering, would
        be
        8.5% of the Company’s issued and outstanding common
        shares.


53




Upon
        an
        event of default under the Note, 115% of the principal amount then outstanding
        shall become due and payable together with interest at the rate of 1% per
        month.




As
        security for the Company’s performance of its obligations under the Note, the
        Company granted Laurus a continuing general security interest over all of
        the
        Company’s assets and its subsidiaries. The Company's  subsidiaries
        also unconditionally guaranteed the Company’s obligations and liabilities under
        the Note. As additional security in favour of Laurus, the Company pledged
        to
        Laurus its shares in its subsidiaries. The terms of the Note include no specific
        financial covenants.





The
      proceeds from the Note were used by the Company to repay the principal amount
      outstanding under the Company’s secured debentures issued on November 12, 2004,
      for new project development purposes and for general working capital
      purposes.




*Public
      Offering*




On
          December 19, 2005, the Company completed an offering of 5,600,000 common
          shares
          at $1.80 per common share for gross proceeds of $10,080,000. After
          deducting the financing cost of  $1,151,001, the offering consulted in net
          proceeds to the Company of $8,928,999. The offering was conducted by way of
          a short form prospectus in Canada and pursuant to private placement rules
          in the
          United States. The underwriting syndicate was led by Canaccord Capital
          Corporation and included Versant Partners Inc. and Westwind Partners Inc.


*TPC
      Warrant*




On
      December 29, 2005, and pursuant to the Company’s investment agreement with TPC,
      the Company issued to TPC 2,336,449 common share purchase warrants. Each warrant
      is exercisable for one common share in the capital of the Company at $1.70
      per
      common share until December 29, 2010.





*Unsecured
        Subordinated Debenture Financing*





On
        August
        15, 2006, the Company completed a private placement financing of unsecured
        subordinated debt, together with common share purchase warrants of the Company,
        for total gross proceeds to the Company of $6.24 million. Further details
        regarding this transaction can be found under item 7.B. “ *Related
        Party Transactions* ”.




*B.*
            *Plan
                of Distribution*




Not
      applicable.




*C.*
            *Markets*




The
      Company’s Common Shares, no par value, are traded on the TSX under the symbol
“TMC”. Prior to April 12, 2004, the Common Shares were traded on the TSX Venture
      Exchange under the symbol “TMC”.




*D.*
            *Selling
                Shareholders*




Not
      applicable.




*E.*
            *Dilution*




Not
      applicable.




*F.*
            *Expenses
                of the Issue*




Not
      applicable.




**Item
      10.**  **Additional
      Information**




*A.*
            *Share
                Capital*




54


The
        authorized share capital of the Company is comprised of an unlimited number
        of
        common shares and an unlimited number of preference shares. As of September
        8,
        2006, there were 47,715,224 common shares and no preference shares issued
        and
        outstanding which remains unchanged from the Company’s issued and outstanding
        capital as at December 31, 2005. Information regarding warrants, convertible
        obligations and other outstanding equity-linked securities can be found under
        Item 9.A “ *Offer
        and Listing Details* ”.
        In
        addition, shares may also be issuable under the Company’s Option Plan and
        Deferred Share Unit Plan, the terms of which are described elsewhere in this
        registration statement on Form 20-F. As discussed elsewhere in this registration
        statement, the Company consolidated its issued and outstanding Common Shares
        on
        the basis of one (1) post-consolidation Common Share for every five (5)
        pre-consolidation Common Shares on July 11, 1997. The material provisions
        of the
        common shares and the preference shares are discussed below.




**Common
      Shares**




The
      holders of the common shares are entitled to vote at all meetings of
      shareholders except meetings at which only holders of a specified class of
      shares are entitled to vote, and holders of the common shares are entitled
      to
      one vote for each common share held and, subject to the rights, privileges,
      restrictions and conditions attaching to any other class of shares of the
      Company, to receive the remaining property of the Company in the event of
      liquidation, dissolution or winding-up of the Company.




**Preference
      Shares**




The
      preference shares are issuable in one or more series. Subject to the Company’s
      articles and the issuance of a certificate of amendment of articles, the board
      of directors of the Company is authorized to fix the number of shares which
      is
      to comprise each series and the designation, rights, privileges, restrictions
      and conditions attaching to each series of preference shares. The preference
      shares of each series rank on a parity with the preference shares of every
      other
      series and are entitled to preference over the common shares and over any other
      shares of the Company ranking junior to the preference shares.




*B.*
            *Memorandum
                and Articles of Association*




**Articles**




The
      Company is governed by its articles of incorporation, as amended (the
“Articles”) under the OBCA and by its by-laws (the “By-laws”). The Company’s
      Ontario corporation number is 464951. The Company’s Articles provide that there
      are no restrictions on the business the Company may carry on or on the powers
      the Company may exercise. Companies incorporated under the OBCA are not required
      to include specific objects or purposes in their articles or by-laws.




**Directors**




The
      OBCA
      requires that every director who is a party to a material contract or
      transaction or a proposed material contract or transaction with a company,
      or
      who is a director or officer of, or has a material interest in, any person
      who
      is a party to a material contract or transaction or a proposed material contract
      or transaction with the company to disclose in writing to the company or request
      to have entered in the minutes of the meetings of directors the nature and
      extent of his or her interest, and shall refrain from voting in respect of
      the
      material contract or transaction or proposed material contract or transaction
      unless the contract or transaction is:




(i)
            an
                arrangement by way of security for money lent to, or obligations
                undertaken by the director for the benefit of the corporation or
                an
                affiliate;




(ii)
            one
                relating primarily to his or her remuneration as a director, officer,
                employee or agent of the corporation or an
                affiliate;




(iii)
            one
                for indemnity of, or insurance for directors, as contemplated under
                the
                OBCA; or




(iv)
            one
                with an affiliate.




However,
      a director who is prohibited by the OBCA from voting on a material contract
      or
      proposed material contract may be counted in determining whether a quorum is
      present for the purpose of the resolution, if the director disclosed his or
      her
      interest in accordance with the OBCA and the contract or transaction was
      reasonable and fair to the corporation at the time it was approved.




55


The
      Company’s By-laws also states that a director or officer who is a party to, or
      who is a director or officer of or has a material interest in, any person who
      is
      a party to a material contract or transaction or proposed material contract
      or
      transaction with the Company shall disclose the nature and extent of his
      interest at the time and in the manner provided by the OBCA.




The
      Company’s By-laws provide that the directors shall be paid such remuneration as
      the directors may from time to time by resolution determine. The directors
      shall
      also be entitled to be paid their traveling and other expenses properly incurred
      by them in going to, attending and returning from meetings of directors or
      committees of directors. If any director or officer of the Company shall be
      employed or shall perform services for the Company otherwise than as a director
      or officer or shall be a member of a firm or a shareholder, director or officer
      or a body corporate which is employed by or performs services for the Company,
      the fact of his being a director or officer of the Company shall not disentitle
      such director or officer or such firm or body corporate, as the case may be,
      from receiving proper remuneration for such services.




The
      By-laws also provide that, without limiting the borrowing powers of the Company
      as set forth in the OBCA, the directors of the Company may, from time to time,
      without the authorization of the shareholders:




(i)
            issue,
                re-issue, sell or pledge debt obligations of the Company, including
                without limitation, bonds, debentures, notes or other similar obligations
                of the Company whether secured or
                unsecured;




(ii)
            subject
                to section 20 of the OBCA, give a guarantee on behalf of the Company
                to
                secure performance of any present or future indebtedness, liability
                or
                obligation of any person; and




(iii)
            charge,
                mortgage, hypothecate, pledge or otherwise create a security interest
                in
                all or any currently owned or subsequently acquired, real or personal,
                movable or immovable, property of the Company, including without
                limitation, book debts, rights, powers, franchises and undertakings,
                to
                secure any present or future indebtedness, liabilities or other
                obligations of the Company.




The
      directors may, from time to time, by resolution delegate any of the borrowing
      powers referred to in the above paragraph to a director, a committee of
      directors or one or more officers of the Company.




The
      directors may, by resolution, amend or repeal any by-laws that regulate the
      business or affairs of the Company. The OBCA requires the directors to submit
      any such amendment or repeal to the Company’s shareholders at the next meeting
      of shareholders, and the shareholders may confirm, reject or amend the amendment
      or repeal.




There
      are
      currently no provisions in the Company’s Articles or By-laws that require
      directors to own shares in the capital of the Company, and no person may act
      as
      a director of the Company if he/she is less than 18 years of age, is of unsound
      mind and has been found so by a court in Canada or elsewhere, or is bankrupt.
      There is however, no retirement age limit for the directors of the
      Company.




**Rights,
      Preferences and Dividends Attaching to Shares**




Please
      refer to the description of the Company’s Common Shares and preference shares
      under Item 10.A “ *Share
      Capital* ”.




**Action
      Necessary to Change the Rights of Shareholders**




Under
      the
      OBCA, the rights attaching to the different classes of shares may be varied
      by
      special resolution passed at a meeting of shareholders by a majority of not
      less
      than two-thirds of the votes cast at the meeting or consented to in writing
      by
      all the shareholders. In addition, any class or series of the shares that is
      affected by the amendment in a manner set out in the OBCA is entitled to vote
      separately as a class. However, the Company’s Articles provide that holders of a
      share of a class or series shall not be entitled to vote separately as a class
      or series or dissent upon a proposal to amend the Articles to:




(a)
            increase
                or decrease any maximum number of authorized shares or such class
                or
                series, or increase any maximum number of authorized shares of a
                class or
                series having rights or privileges equal or superior to the shares
                of such
                class or series;




(b)
            effect
                an exchange, reclassification or cancellation of the shares of such
                class
                or series; or




(c)
            create
                a new class or series of shares equal or superior to the shares of
                such
                class or series.





56




**Disclosure
      of Share Ownership**




Under
      applicable securities regulation in Canada, a person or company who beneficially
      owns, directly or indirectly, voting securities of an issuer or who exercises
      control or direction over voting securities of an issuer or a combination of
      both, carrying more than 10% of the voting rights attached to all the issuer’s
      outstanding voting securities an insider must, within 10 days of becoming an
      insider, file a report in the required form effective the date on which the
      person became an insider, disclosing any direct or indirect beneficial ownership
      of, or control or direction over, securities of the reporting issuer.
      Additionally, securities regulation in Canada provides for the filing of a
      report by an insider of a reporting issuer who acquires or transfers securities
      of the issuer. This report must be filed within 10 days after the end of the
      month in which the acquisition or transfer takes place.




The
      rules
      in the U.S. governing the ownership threshold above which shareholder ownership
      must be disclosed are more stringent than those discussed above. Section 13
      of
      the *Securities
      Exchange Act of 1934* (the
‘‘Exchange Act’’) imposes reporting requirements on persons who acquire
      beneficial ownership (as such term is defined in the Rule 13d-3 under the
      Exchange Act) of more than 5% of a class of an equity security registered under
      Section 12 of the Exchange Act. In general, such persons must file, within
      10
      days after such acquisition, a report of beneficial ownership with the SEC
      containing the information prescribed by the regulations under Section 13 of
      the
      Exchange Act. This information is also required to be sent to the issuer of
      the
      securities and to each exchange where the securities are traded.




**Limitations
      on the Rights to Own Shares**




The
      Articles and By-laws do not contain any limitations on the rights to own shares.
      Furthermore, there are no limitations under the laws of Canada on the right
      of
      foreigners to hold or vote securities of the Company, except that the *Investment
      Canada Act* and the *Competition
      Act* may
      require review and approval by the Minister of Industry (Canada) of certain
      acquisitions or mergers. A summary of the *Investment
      Canada Act* and the *Competition
      Act* is set
      forth below.




**Investment
      Canada Act**




Under
      the *Investment
      Canada Act* ,
      the
      acquisition of control of a “Canadian business” by a “non-Canadian” will be
      subject to review by a government agency if it meets certain financial
      thresholds. A reviewable acquisition will not be allowed unless the responsible
      Minister finds that the investment is likely to be of “net benefit” to
      Canada.




An
      acquisition of control by a non-Canadian other than a member of the World Trade
      Organization (“WTO”) will be reviewable by the Investment Review Division of
      Industry Canada (“Investment Canada”) or the Ministry of Canadian Heritage, in
      the case of a cultural business, if the value of the assets of the Canadian
      business of which control is being acquired is (i) Cdn$5 million or more in
      the
      case of a “direct” acquisition of a Canadian business; (ii) Cdn$50 million or
      more in the case of an “indirect” acquisition, unless the Canadian assets
      acquired constitute more than 50% of the asset value of all entities acquired,
      in which case the lower threshold of Cdn $5 million or more applies.




Other
      than in respect of certain “sensitive sector” industries, described below, these
      thresholds have been increased where the investor is a WTO member, including
      the
      U.S. or a WTO member-controlled company or a non-WTO investor, where the
      Canadian business that is subject of the acquisition is, prior to the
      acquisition, controlled by a WTO investor. A direct acquisition by a WTO
      investor or of a WTO investor-controlled business is reviewable only if it
      involves the direct acquisition of a Canadian business with assets of Cdn $265
      million or more for the year 2006 (this figure is adjusted annually to reflect
      inflation). Indirect acquisitions by WTO investors or of WTO investor-controlled
      businesses are not reviewable, regardless of the size of the Canadian business
      acquired, unless the Canadian assets acquired constitute more than 50% of the
      value of all entities acquired, in which case the Cdn $265 million threshold
      may
      apply. However, Investment Canada expressed the view (in September 2002) that
      an
      indirect acquisition of control of a non-sensitive sector Canadian business
      does
      not require approval regardless of whether the value of the Canadian assets
      is
      more than 50% of the value of all of the assets that are acquired in the
      transaction.




As
      indicated above, these increased thresholds applicable to WTO investors do
      not
      apply to the acquisition of control of a Canadian business that is engaged
      in
      certain sensitive areas, namely uranium production, financial services,
      transportation or culture. In the case of the acquisition of control of a
      cultural business, the Minister of Canadian Heritage can elect to review the
      transaction even where it does not exceed the lower asset threshold tests above.
      Even if


57


the
      transaction is not reviewable, a non-Canadian must still give notice to
      Investment Canada of the acquisition of control of a Canadian business within
      30
      days after its implementation.




**Competition
      Act**




Under
      the
      Competition Act (Canada), certain transactions are subject to pre-merger
      notification requirements whereby notification of the transaction and specific
      information in connection therewith must be provided to the Commissioner of
      Competition (the “Commissioner”). Such transactions may not be completed until
      (i) the applicable statutory waiting period (namely 14 days or 42 days for
      a
      short-form or long-form filing, respectively) has expired, been waived or been
      earlier terminated by the Commissioner or ii) the Commissioner has issued an
      advance ruling certificate. Where the parties elect to file a short-form
      notification, the Commissioner may require a long-form filing, in which case
      the
      waiting period is 42 days from the time the parties submit their long
      form-filing.




A
      proposed transaction is subject to pre-merger notification only if the parties
      to the transaction together with their affiliates have total assets in Canada
      or
      total revenues from sales in, from or into Canada that exceed Cdn $400 million
      in aggregate value. Having met this first threshold, the parties must then
      provide a pre-merger notification if 1) for an acquisition of assets in Canada,
      the aggregate value of the assets in Canada or the gross revenues from sales
      in
      or from Canada generated by these assets exceeds Cdn $50 million; or 2) in
      the
      case of an acquisition of shares of a company, as a result of the proposed
      acquisition, the person acquiring the shares, together with its affiliates,
      would own more than 20% (or, if the person making the acquisition already owns
      more than 20% or more of the voting shares of the target, then more than 50%)
      of
      the voting shares of a corporation that are publicly traded, or in the case
      of a
      company of which the shares are not publicly traded, the threshold is more
      than
      35% of the voting shares (and more than 50% if the acquiror owns 35% or more
      of
      the voting shares of the subject company prior to making the acquisition) and
      the aggregate value of the assets owned by the target company or corporations
      controlled by that company in Canada or the revenues in or from Canada generated
      by those assets exceeds Cdn $50 million.




Whether
      or not a pre-merger notification filing is required, the Commissioner has
      jurisdiction to review and challenge the transaction if, in her view, it will
      or
      will likely result in a substantial lessening or prevention of competition
      in
      any relevant market in Canada.




**Annual
      and Special Meetings of Shareholders**




The
      OBCA,
      requires the Company to call an annual shareholders’ meeting not later than 15
      months after holding the last preceding annual meeting and permits the Company
      to call a special shareholders’ meeting at any time. In addition, in accordance
      with the OBCA, the holders of not less than 5% of the Company’s shares carrying
      the right to vote at a meeting sought to be held may requisition our directors
      to call a special shareholders’ meeting for the purposes stated in the
      requisition. The Company is required to mail a notice of meeting and management
      information circular to registered shareholders not less than 21 days and not
      more than 50 days prior to the date of any annual or special shareholders’
meeting. These materials also are filed with Canadian securities regulatory
      authorities and are available on SEDAR at http://www.sedar.com. The Company’s
      By-laws provide that a quorum of two shareholders in person and each being
      entitled to vote thereat shall constitute a quorum for the transaction of
      business at any meeting of shareholders. Shareholders, and their duly appointed
      proxies and corporate representatives, as well as the Company’s auditors, are
      entitled to be admitted to the Company’s annual and special shareholders’
meetings.




**Other
      Provisions of Articles and By-laws**




There
      are
      no provisions in the Articles or By-laws:




(a)
            delaying
                or prohibiting a change in control of the Company that operate only
                with
                respect to a merger, acquisition or corporate restructuring;




(b)
            discriminating
                against any existing or prospective holder of shares as a result
                of such
                shareholder owning a substantial number of shares;




(c)
            requiring
                disclosure of share ownership; and




(d)
            governing
                changes in capital, where such provisions are more stringent than
                those
                required by law.




*C.*
            *Material
                Contracts*




Other
      than the agreements which have been filed or are being filed as exhibit to
      this
      registration statement, the Company has not entered into
      any
      other material  agreements that are not in the ordinary course of business
      in the prescribed period and which are still in effect. Summaries of
      the Laurus note, TPC agreement,  and the employment agreements,
      the Unsecured Debentures and the Luminex agreement  can be found 
under Item 9.A. “*Offer
      and Listing Details*”.
      The
      "Employment Agreement" section under Item 6.B,  the "Universal Array"
      section under Item 4.B. "Business Overview" the Liquidity and Capital Resources"
      section under Item 5 "Operating and Financial Review and Prospectus" and
      "Related  Party Transactions" Item 7.B.


58




*D.*
            *Exchange
                Controls*




Canada
      has no system of exchange controls. There are no Canadian restrictions on the
      repatriation of capital or earnings of a Canadian public company to a
      non-resident investors. There are no laws in Canada or exchange restrictions
      affecting the remittance of dividends, profits, interest, royalties and other
      payments to non-resident holders of the Company’s securities, except as
      discussed in Item 10.E. “ *Taxation* ”
      below.




*E.*
            *Taxation*




**Canadian
      Federal Income Taxation**




The
      following discussion is a summary of the principal Canadian federal income
      tax
      considerations generally applicable to a holder of our Common Shares who, at
      all
      relevant times, for the purposes of the Canadian Tax Act (as defined below),
      and
      any applicable income tax convention, is not, and is not deemed to be resident
      in Canada, deals at arm’s length with the Company and is not affiliated with the
      Company, holds such Common Shares as capital property, and does not use or
      hold
      and is not deemed or otherwise considered to use or hold such Common Shares
      in
      carrying on a business in Canada (a “Non-Resident Shareholder”). Special rules,
      which are not discussed in the summary, may apply to a non-resident holder
      that
      is an insurer that carries on an insurance business in Canada and
      elsewhere.




This
      summary is based upon the current provisions of the *Income
      Tax Act* (Canada)
      (the “Canadian Tax Act”), the regulations thereunder, and the Company’s
      understanding of the current administrative and assessing policies and practices
      of the Canada Revenue Agency published in writing prior to the date hereof.
      This
      summary takes into account all specific proposals to amend the Canadian Tax
      Act
      and the regulations thereunder publicly announced by or on behalf of the
      Minister of Finance (Canada) prior to the date hereof. This summary does not
      otherwise take into account or anticipate changes in law or administrative
      or
      assessing practice, whether by judicial, regulatory, administrative or
      legislative decision or action, nor does it take into account provincial,
      territorial or foreign tax legislation or considerations which may be different
      from those discussed herein.




This
      summary is of a general nature only and is not intended to be, nor should it
      be
      construed to be, legal or tax advice generally or to any particular holder.
      Holders should consult their own tax advisors with respect to their own
      particular circumstances.




**Gains
      on Disposition of Common Shares**




No
      tax
      will generally be payable under the Canadian Tax Act on any capital gain
      realized by a Non-Resident Shareholder on the disposition of such Non-Resident
      Shareholder’s Common Shares unless the Common Shares are “taxable Canadian
      property” to the Non-Resident Shareholder and the Non-Resident Shareholder is
      not entitled to relief under an applicable income tax convention.




Generally,
      the Common Shares will not be taxable Canadian property to a Non-Resident
      Shareholder at a particular time provided that (1) the Common Shares are listed
      on a prescribed stock exchange (which includes the TSX) at that time, and (2)
      the Non-Resident Shareholder, persons with whom the Non-Resident Shareholder
      does not deal with at arm’s length, or the Non-Resident Shareholder together
      with all such persons, have not owned 25% or more of the issued shares of any
      class or series of the capital stock of the Company at any time during the
      60-month period that ends at that time. Notwithstanding the foregoing, in
      certain circumstances set out in the Tax Act, Common Shares could be deemed
      to
      be taxable Canadian property.




**Dividends
      on Common Shares**




Subject
      to the provisions of an applicable income tax convention between Canada and
      the
      country in which the Non-Resident Shareholder is resident, dividends paid or
      credited on the Common Shares or deemed to be paid or credited on the Common
      Shares to a Non-Resident Shareholder will generally be subject to non-resident
      withholding tax under the Canadian Tax Act at the rate of 25% of the amounts
      paid or credited. Under the provisions of the Canada-U.S. Income Tax Convention,
      (1980) (the “Convention”), the rate of withholding tax on dividends paid by the
      Company to a Non-Resident Shareholder that is a resident of the U.S. entitled
      to
      benefits under the Convention and is the beneficial owner of such dividends
      is
      generally reduced to (a) 5% if the Non-Resident Shareholder is a company which
      owns at least 10% of the Company’s voting stock or (b) 15% in all other
      cases.




59


**U.S.
      Federal Income Taxation**




The
      following discussion is a summary of certain material U.S. federal income tax
      consequences of the ownership and disposition of common shares to U.S. Holders
      (as defined below) who hold common shares as capital assets. This discussion
      is
      based upon laws, regulations, rulings and decisions currently in effect, all
      of
      which are subject to change, retroactively or prospectively.




The
      discussion is for general information only and may not apply to certain
      categories of shareholders subject to special treatment under the Internal
      Revenue Code of 1986, as amended (the “Code”), including Non-U.S. Holders (as
      defined below), holders that are passthrough entities or investors in
      passthrough entities, dealers or traders in securities or currencies, banks,
      insurance companies, traders who elect to mark-to-market their securities,
      persons whose “functional currency” is not the U.S. dollar, tax-exempt entities,
      and persons that hold common shares as a position in a straddle or as part
      of a
“hedging,” “integrated, “constructive sale” or “conversion” transaction.
      Moreover, the discussion summarizes only federal income tax consequences and
      does not address any other U.S. federal tax consequences or any state, local
      or
      other tax consequences. ACCORDINGLY, PROSPECTIVE INVESTORS ARE URGED TO CONSULT
      THEIR OWN TAX ADVISORS TO DETERMINE THE SPECIFIC TAX CONSEQUENCES OF THE
      OWNERSHIP AND DISPOSITION OF COMMON SHARES TO THEM, INCLUDING ANY U.S. FEDERAL,
      STATE, LOCAL OR OTHER TAX CONSEQUENCES (INCLUDING ANY TAX RETURN FILING OR
      OTHER
      TAX REPORTING REQUIREMENTS) OF THE OWNERSHIP AND DISPOSITION OF COMMON SHARES.




For
      purposes of the following discussion, the term “U.S. Holder” means a beneficial
      owner of common shares that is, for U.S. federal income tax purposes, a U.S.
      citizen or resident, a corporation created or organized in or under the laws
      of
      the United States or any political subdivision thereof, an estate the income
      of
      which is includable in gross income for U.S. income tax purposes regardless
      of
      its source, or a trust if (a) a U.S. court is able to exercise primary
      supervision over the administration of the trust and one or more United States
      fiduciaries have the authority to control all substantial decisions of the
      trust, or (b) the trust has a valid election in effect under applicable U.S.
      Treasury Regulations to be treated as a United States person. A “Non-U.S.
      Holder” means a beneficial owner of common shares that is, for U.S. federal
      income tax purposes, a nonresident alien or a corporation, estate or trust
      that
      is not a U.S. Holder.




**Taxation
      of Dividends**




Subject
      to the following discussion of special rules applicable to “PFICs,” a U.S.
      Holder will be required to include in gross income as ordinary income the amount
      of any distribution paid on its common shares, including any Canadian taxes
      withheld from the amount paid, on the date the distribution is received, to
      the
      extent that the distribution is paid out of current or accumulated earnings
      and
      profits as determined for U.S. federal income tax purposes. Distributions in
      excess of such earnings and profits will be applied against and will reduce
      the
      U.S. Holder’s tax basis in the common shares and, to the extent in excess of
      such basis, will be treated as a capital gain.




The
      gross
      amount of any dividends, if any, paid by the Company to individual U.S. Holders
      will be taxed for U.S. federal income tax purposes at recently enacted lower
      rates applicable to certain qualified dividends. The maximum federal income
      tax
      rate imposed on dividends received by individuals from U.S. and certain foreign
      corporations for years 2003 through 2008 is generally 15%. Individual recipients
      of dividends from foreign corporations will be taxed at this rate, provided
      that
      certain holding period requirements are satisfied, if the dividends are received
      from certain “qualified foreign corporations,” which generally includes
      corporations located and eligible for treaty benefits in a jurisdiction with
      which the United States has an income tax treaty that the Secretary of the
      Treasury determines is satisfactory and includes an information exchange
      program. The United States Department of the Treasury and the Internal Revenue
      Service have determined that the Canada-U.S. Income Tax Treaty is satisfactory
      for this purpose and the Company believes that it qualifies for benefits under
      that Canada - U.S. Income Tax Treaty. Accordingly, dividends received by U.S.
      Holders should be entitled to favorable treatment as dividends received with
      respect to stock of a “qualified foreign corporation.”




In
      certain circumstances, U.S. Holders may be eligible to receive a foreign tax
      credit for the Canadian withholding taxes and, in the case of a corporate U.S.
      Holder owning 10% or more of the voting shares of the Company, for a portion
      of
      the Canadian taxes paid by the Company itself. In the alternative, U.S. Holders
      may have the option of claiming the amount of Canadian taxes withheld as a
      deduction from gross income. Dividends paid by the Company, if any, generally
      will not qualify for the dividends received deduction otherwise available to
      corporate U.S. Holders.




The
      amount of any dividend paid in Canadian dollars will equal the U.S. dollar
      value
      of the Canadian dollars received calculated by reference to the exchange rate
      in
      effect on the date the dividend is distributed regardless of


60


whether
      the Canadian dollars are converted into U.S. dollars. If the Canadian dollars
      received as a dividend are not converted into U.S. dollars on the date of
      receipt, a U.S. Holder will have a basis in the Canadian dollars equal to its
      U.S. dollar value on the date of receipt. Any gain or loss realized on a
      subsequent conversion or other disposition of the Canadian dollars will be
      treated as ordinary income or loss.




**Sale,
      Exchange or Other Disposition**




Subject
      to the following discussion of special rules applicable to “PFICs,” U.S. Holders
      will generally recognize capital gain or loss on the sale, exchange or other
      disposition of common shares. A capital gain from the sale, exchange or other
      disposition of shares held for more than one year is a long-term capital gain
      and is eligible for a maximum 15% rate of taxation for non-corporate taxpayers.
      Any gain or loss recognized by a U.S. Holder will generally be treated as United
      States source gain or loss. The deduction of capital losses is subject to
      limitations.




**Passive
      Foreign Investment Company Considerations**




In
      general, a “passive foreign investment company” (a “PFIC”) is any foreign
      corporation if, after the application of certain “look-through” rules, (i) at
      least 75% of its gross income is “passive income” or (ii) at least 50% of the
      average value of its assets is attributable to assets that produce passive
      income or are held for the production of passive income.




The
      determination as to PFIC status is made annually. Generally, once a corporation
      becomes a PFIC, it remains a PFIC unless specific action is taken by
      shareholders. If a U.S. Holder is treated as owning PFIC stock, the U.S. Holder
      will be subject to special rules generally intended to eliminate the benefit
      of
      the deferral of U.S. federal income tax that results from investing in a foreign
      corporation that does not distribute all its earnings currently. These rules
      may
      adversely affect the tax treatment to a U.S. Holder of dividends paid by the
      Company and of sales, exchanges and other dispositions of the Company common
      shares, and may result in other adverse U.S. federal income tax
      consequences.







The
      Company believes that it is not currently a PFIC and does not expect to become
      a
      PFIC in the future. However, there can be no assurance that the Internal Revenue
      Service will not successfully challenge the Company’s position or that the
      Company will not become a PFIC at some future time as a result of changes in
      its
      assets, income or business operations.




**Information
      Reporting and Backup Withholding**




In
      general, information reporting requirements may apply to dividends in respect
      of
      the common shares and the proceeds received on the disposition of common shares
      paid within the United States (and, in certain cases, outside the United States)
      to U.S. Holders other than certain exempt recipients (such as corporations),
      and
      backup withholding may apply to such amounts if the U.S. Holder fails to provide
      an accurate taxpayer identification number or is otherwise subject to backup
      withholding. The amount of any backup withholding from a payment to a U.S.
      Holder will be allowed as a credit against the U.S. Holder’s U.S. federal income
      tax liability.




*F.*
            *Dividends
                and Paying Agents*




The
      Company’s current policy is to retain future earnings to finance the growth and
      development of the Company’s business. Therefore, the Company has no current
      intention of paying cash dividends in the foreseeable future. There may be
      circumstances, however, in the future, when the Company may change its position
      on paying dividends. Other than the Company’s obligations to TPC and to Laurus,
      which may affect the Company’s ability to pay dividends in certain
      circumstances, the Company is not aware of any restriction that could prevent
      it
      from paying dividends in the future.




*G.*
            *Statements
                by Experts*




The
      Company’s auditors, Ernst & Young LLP, Ernst & Young Tower, 222 Bay
      Street, P.O. Box 251, Toronto-Dominion Centre, Toronto, Ontario, Canada, M5K
      1J7, have consented to the inclusion in this registration statement on Form
      20-F
      of the auditors’ report on the Company’s audited consolidated balance sheets as
      at December 31, 2005 and 2004 and the consolidated statements of loss and
      deficit and cash flows for each of the years in the three-year period ended
      December 31, 2005.




*H.*
            *Documents
                on Display*




61


Upon
      effectiveness of this registration statement, the Company will be subject to
      the
      informational requirements of the Securities Exchange Act of 1934, as amended,
      and will file reports and other information with the Securities and Exchange
      Commission (“SEC”). You may read and copy any of the Company’s reports and other
      information at, and obtain copies upon payment of prescribed fees from, the
      Public Reference Room maintained by the SEC at 450 Fifth Street, N.W., Room
      1024, Washington, D.C. 20549. In addition, the SEC maintains a Web site that
      contains reports, proxy and information statements and other information
      regarding registrants that file electronically with the SEC at
      http://www.sec.gov/edgar.shtml. The public may obtain information on the
      operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.




The
      Company is required to file reports and other information with the Canadian
      securities regulators. You are invited to read and copy any reports, statements
      or other information, other than confidential filings, that we file with the
      Canadian securities regulators. These filings are also electronically available
      from the Canadian System for Electronics Document Analysis and Retrieval (SEDAR)
      at http://www.sedar.com, the Canadian equivalent of the SEC’s electronic
      document gathering and retrieval system.




As
      a
      foreign private issuer, the Company is exempt from the rules under the
      Securities Exchange Act of 1934, as amended, prescribing the furnishing and
      content of proxy statements to shareholder. This Company has included in this
      registration statement certain information disclosed in our Proxy Statement
      prepared under Canadian securities rules.




The
      Company will provide without charge to each person, including any beneficial
      owner, to whom a copy of this registration statement has been delivered, on
      the
      written or oral request of such person, a copy of any or all documents referred
      to above which have been or may be incorporated by reference in this prospectus
      (not including exhibits to such incorporated information that are not
      specifically incorporated by reference into such information). Requests for
      such
      copies should be directed to us at the following address: 439 University Avenue,
      Suite 900, Toronto, Ontario, Canada, M5G 1Y8, Attention: Chief Financial
      Officer, telephone number (416) 593-4323.




*I.*
            *Subsidiary
                Information*




Not
      applicable.







**Item
      11.**  **Quantitative
      and Qualitative Disclosures About Market Risk**




Market
      risk is the risk of loss from adverse changes in market prices and interest
      rates. The Company’s future earnings, cash flows and fair values of relevant
      financial instruments are dependent upon prevailing market interest and foreign
      exchange rates. The Company’s interest rate risk exposure results from its
      investment portfolio, its convertible debentures and its TPC loan.




The
      securities held by the Company in its investment portfolio are subject to
      changes in market interest rates. At any time, sharp changes in interest rates
      can affect the fair value of the investment portfolio and interest earnings.
      Due
      to the short-term to maturity and the conservative nature of the portfolio,
      the
      Company believes that in the event of a 10% change in market interest rates,
      the
      change in the fair value of its investment portfolio would be insignificant
      to
      the financial statements. Currently, the Company does not hedge these interest
      rate exposures. The Company places its investments with high quality issuers
      and
      limit the amount of credit exposure to any one issuer and do not use derivative
      financial instruments in its investment portfolio. The Company invests in highly
      liquid, investment-grade securities and money market funds of various issues,
      types and maturities. These securities are classified as available-for-sale
      and
      are recorded on the balance sheet at fair value with unrecorded gains or losses
      reported as accumulated other comprehensive income as a separate component
      of
      shareholders’ equity.




The
      fair
      value of the convertible debentures, which bears interest at variable rates,
      is
      affected by changes in interest rates and changes in foreign exchange rates.
      If
      market interest rates were to increase by 10%, the fair value of the debentures
      would increase by approximately $200,000, the increase in interest expense
      would
      decrease future cash flows by approximately $150,000 and increase future net
      loss by approximately $350,000. If market interest rates were to decrease by
      10%, the fair value of the debentures would decrease by approximately $300,000,
      the decrease in interest expense would increase future cash flows by
      approximately $150,000 and net loss by approximately $350,000.




If
      foreign rates were to increase by 10% the fair value of the convertible
      debentures and net loss would increase by approximately $1,000,000. If foreign
      exchange rates were to decrease by 10% the fair value of the convertible
      debentures and net loss would decrease by approximately $1,000,000.




62


The
      fair
      value of the TPC loan is affected by changes in interest rates and by changes
      in
      foreign exchange rates which affect the reported amounts of revenues and
      therefore the amount and timing of royalty payments to TPC. If market interest
      rates were to increase by 10% the fair value of the TPC loan would decrease
      by
      approximately $30,000. Further, if market interest rates were to decrease by
      10%
      the fair value of the TPC loan would increase by approximately $28,000. If
      foreign rates were to increase by 10% the fair value of the TPC loan would
      increase by approximately $76,000. Further, if foreign exchange rates were
      to
      decrease by 10% the fair value of the TPC loan would decrease by approximately
      $111,000.




**Item
      12.**  **Description
      of Securities Other Than Equity Securities**




*A.*  *Debt
      Securities*




Not
      Applicable.




*B.*  *Warrants
      and Rights*




Not
      Applicable.




*C.*  *Other
      Securities*




Not
      Applicable.




*D.*  *American
      Depository Shares*




Not
      Applicable.




**PART
      II**




**Item
      13.**  **Defaults,
      Dividend Arrearages and Delinquencies**




Not
      applicable.





**Item
      14.**  **Material
      Modification to the Rights of Security Holders and Use of
      Proceeds**




Not
      applicable.




**Item
      15.**  **Controls
      and Procedures**




Not
      applicable.




**Item
      16A.**  **Audit
      Committee Financial Expert**




Not
      applicable.




**Item
      16B.**  **Code
      of Ethics**




Not
      applicable.




**Item
      16C.**  **Principal
      Accountant Fees and Services**




Not
      applicable.




**Item
      16D.**  **Exemptions
      from the Listing Standards for Audit Committees**




Not
      applicable.




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




Not
      applicable.




**PART
      III**




63


**Item
      17.**  **Financial
      Statements**




Not
      applicable.




**Item
      18.**  **Financial
      Statements**




See
      pages
      F-1 to F-41.




**Item
      19.**  **Exhibits**




1.1
            Articles
                of Incorporation and amendments thereto of Tm
                Bioscience Corporation.




1.2**
              By-laws
                  of Tm Bioscience Corporation.




4.1 **
              Term
                  note dated November 22, 2005, issued to Laurus by the Company in the
                  amount of U.S. $9,000,000, which is secured and convertible into
                  common
                  shares of the Company.





4.2**
              Employment
                  Agreement dated January 1, 2005 between Tm Bioscience Corporation
                  and
                  Gregory C. Hines.


4.3
              Amending
                  Agreement dated September 5, 2006 between Tm
                  Bioscience Corporation and Gregory
                  C. Hines.


4.4**
              Employment
                  Agreement dated July 30, 2002 between Tm Bioscience Corporation
                  and Alan
                  Coley.


4.5
                Amending
                    Agreement dated September 5, 2006 between Tm
                    Bioscience Corporation and Alan
                    Coley.
  4.6
                      Employment
                          Agreement dated September 5, 2006 between
                          Tm Bioscience Corporation and Richard
                          Janeczko.
  4.7
                          Employment
                              Agreement dated September 5, 2006 between
                              Tm Bioscience Corporation and James
                              Pelot.
 4.8
              Employment
                  Agreement dated September 5,
                  2006 between Tm Bioscience Corporation and Jeremy
                  Bridge-Cook.


4.9**
              Incentive
                  Share Option Plan of Tm Bioscience
                  Corporation.




4.10**
              Deferred
                  Share Unit Plan of Tm Bioscience
                  Corporation.




4.11
            Agreement
                with Her Majesty the Queen in right of Canada,
                as represented by the Minister of Industry dated December 3,
                2003.




4.12
              Unsecured
                  Subordinated Debenture issued by the Company to
                  Gundy Co. in the aggregate principal amount of
                  $3,050,000.





4.13
              Unsecured
                  Subordinated Debenture issued by the Company to
                  Oppenheim Pramerica Asset Management S.à r.l. on behalf of the fund
                  FCP OP MEDICAL Biohealth-Trends in the aggregate principal amount
                  of
                  $1,100,000.




4.14
              Unsecured
                  Subordinated Debenture issued by the Company to
                  PHARMA/wHEALTH Management Company S.A. acting on behalf of the
                  fund
                  PHARMAw/HEALTH in the aggregate principal amount of
                  $140,000.





4.15
              Unsecured
                  Subordinated Debenture issued by the Company to
                  Jayvee & Co. in the aggregate principal amount of
                  $1,950,000.





4.16*
              Amended
                  and Restated Development and Supply Agreement dated March 28, 2006
                  with
                  Luminex Corporation.*





8.1**
              List
                  of Subsidiaries.




15.1
            Consent
                of Ernst & Young
                LLP





*To
        be
        filed by further amendment and following a confidential treatment
        request.





**
        Previously filed.






64




**SIGNATURES**




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








**TM
                  BIOSCIENCE CORPORATION**Date: September
                14, 2006
              By:
              /s/ James
                PelotJames
                PelotTitle Chief
                Operating Officer and Chief Financial
                Officer




65


Consolidated
      Financial Statements











**Tm
      Bioscience Corporation**





December
      31, 2005








F-1
 66


**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**














To
      the
      Directors of




**Tm
      Bioscience Corporation**




We
      have
      audited the consolidated balance sheets of Tm Bioscience Corporation (the
“Company”) as at December 31, 2005 and 2004 and the consolidated statements of
      loss and deficit and cash flows for each of the years in the three-year period
      ended 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 Canadian generally accepted auditing
      standards and the standards of the Public Company Accounting Oversight
      Board [United States]. Those standards require that we plan and perform an
      audit
      to obtain reasonable assurance whether the financial statements are free of
      material misstatement. We were not engaged to perform an audit of the Company’s
      internal control over financial reporting. Our audits included consideration
      of
      internal control over financial reporting as a basis for designing audit
      procedures that are appropriate in the circumstances, but not for the purpose
      of
      expressing an opinion on the effectiveness of the Company’s internal control
      over financial reporting. Accordingly, we express no such opinion. An audit
      also
      includes examining, on a test basis, evidence supporting the amounts and
      disclosures in the financial statements, assessing the accounting principles
      used and significant estimates made by management, and evaluating the overall
      financial statement presentation. We believe that our audits provide a
      reasonable basis for our opinion.




In
      our
      opinion, these financial statements present fairly, in all material
      respects, the consolidated financial position of the Company as at
      December 31, 2005 and 2004 and the consolidated results of its operations
      and its cash flows for each of the years in the three-year period ended December
      31, 2005 in conformity with Canadian generally accepted accounting
      principles.




Toronto,
                CanadaMarch
                17, 2006
            By:
            /s/ Ernst
              & Young LLPExcept
                for note 23, which is as of May 25, 2006
            Ernst
                & Young LLPTitle
              Chartered
                Accountants






**Comments
      by Auditors for U.S. Readers on Canada - U.S. Reporting
      Difference**




In
      the
      United States, reporting standards for auditors require the addition of an
      explanatory paragraph following the opinion paragraph when the financial
      statements are affected by conditions and events that cast substantial doubt
      on
      the Company’s ability to continue as a going concern, such as those described in
      note 1 to the consolidated financial statements. Our report to the Board of
      Directors dated March 17,  2006, is expressed in accordance with Canadian
      reporting standards which do not permit a reference to such events when they
      are
      adequately disclosed in the consolidated financial statements.






Toronto,
                  CanadaMarch
                  25, 2006
              By:
              /s/ Ernst
                & Young LLPErnst
                  & Young LLPTitle
                Chartered
                  Accountants





F-2
 67


**Tm
      Bioscience Corporation**


**CONSOLIDATED
        BALANCE SHEETS**
  *[see
        Basis of Presentation, note 1]*
  As
        at
        December 31
  **2005**
              
              **2004**$
              
              $**ASSETS***[note
                  8[b]]***Current**Cash
                  and cash equivalents
              
              
              **8,972,594**
              
              
              1,333,228Short-term
                  investments*[note
                  4]*
              
              
              **7,042,035**
              
              
              3,679,932Trade
                  accounts receivable*[note
                  17]*
              
              
              **1,245,333**
              
              
              1,020,966Other
                  accounts receivable
              
              
              **613,680**
              
              
              120,872Inventory*[note
                  5]*
              
              
              **3,619,714**
              
              
              1,855,456Prepaid
                  expenses
              
              
              **46,305**
              
              
              84,381**Total
                  current assets**
              
              
              **21,539,661**
              
              
              8,094,835Capital
                  assets, net*[note
                  6]*
              
              
              **4,340,712**
              
              
              3,434,821Intangible
                  assets, net*[note
                  7]*
              
              
              **2,765,363**
              
              
              699,495Deferred
                  financing costs, net*[note
                  9]*
              
              
              **777,901**
              
              
              535,405Other
                  asset*[note
                  10]*
              
              
              **1,438,347**
              
              
              —**30,861,984**
              
              
              12,764,556**LIABILITIES
                  AND SHAREHOLDERS’ EQUITY****Current**Accounts
                  payable and accrued liabilities*[note
                  17]*
              
              
              **6,049,940**
              
              
              1,875,583Current
                  portion of deferred revenue*[note
                  15]*
              
              
              **123,805**
              
              
              79,243Current
                  portion of long-term debt*[note
                  8]*
              
              
              **2,476,582**
              
              
              —Income
                  taxes payable*[note
                  16]*
              
              
              **82,273**
              
              
              21,000**Total
                  current liabilities**
              
              
              **8,732,600**
              
              
              1,975,826Deferred
                  leasehold inducement*[note
                  14]*
              
              
              **348,118**
              
              
              240,913Deferred
                  revenue*[note
                  15]*
              
              
              **123,970**
              
              
              144,127Deferred
                  share units*[note
                  12]*
              
              
              **301,075**
              
              
              127,896Long-term
                  debt*[note
                  8]*
              
              
              **9,033,181**
              
              
              8,126,057**Total
                  liabilities**
              
              
              **18,538,944**
              
              
              10,614,819**Shareholders’
                  equity**Capital
                  stock*[note
                  11]*
              
              
              **66,871,280**
              
              
              43,265,955Contributed
                  surplus*[note
                  11]*
              
              
              **9,937,955**
              
              
              8,202,511Deficit
              
              
              **(64,486,195**
              **)**
              
              (49,318,729
              )**Total
                  shareholders’ equity**
              
              
              **12,323,040**
              
              
              2,149,737**30,861,984**
              
              
              12,764,556
   Commitments *[note
        14]*
  *See
        accompanying notes*
  On
        behalf
        of the Board:
  /s/
                  Gregory C. Hines
              
              /s/
                  John R. FrederickDirector
              
              Director
 68
  **Tm
        Bioscience Corporation**
  **CONSOLIDATED
        STATEMENTS OF LOSS AND DEFICIT**
  
 Years
        ended December 31
   **2005**
              
              
              
              **2004**
              
              
              **2003****$**
              
              
              
              **$**
              
              
              **$****Revenue***[note
                  13]*
              
              
              
              **7,674,170**
              
              
              
              3,850,013
              
              
              1,155,633**Expenses**Cost
                  of goods sold
              
              
              
              **4,306,742**
              
              
              
              2,816,684
              
              
              826,464Research
                  and development, net*[note
                  16]*
              
              
              
              **3,770,027**
              
              
              
              3,816,180
              
              
              2,755,138Sales,
                  general and administrative
              
              
              
              **10,980,247**
              
              
              
              8,165,723
              
              
              4,561,407**19,057,016**
              
              
              
              14,798,587
              
              
              8,143,009Loss
                  before the undernoted
              
              
              
              **(11,382,846**
              **)**
              
              
              (10,948,574
              )
              
              (6,987,376
              )Interest
                  expense from long-term debt
              
              
              
              **(3,317,320**
              **)**
              
              
              (882,376
              )
              
              (862,783
              )Other
                  financial (expenses) income, net
              
              
              
              **(385,345**
              **)**
              
              
              13,452
              
              
              41,270Loss
                  before income taxes
              
              
              
              **(15,085,511**
              **)**
              
              
              (11,817,498
              )
              
              (7,808,889
              )Income
                  tax expense*[note
                  16]*
              
              
              
              **(81,955**
              **)**
              
              
              (21,000
              )
              
              -**Net
                  loss for the year**
              
              
              
              **(15,167,466**
              **)**
              
              
              (11,838,498
              )
              
              (7,808,889
              )Deficit,
                  beginning of year
              
              
              
              **(49,318,729**
              **)**
              
              
              (37,480,231
              )
              
              (29,671,342
              )**Deficit,
                  end of year**
              
              
              
              **(64,486,195**
              **)**
              
              
              (49,318,729
              )
              
              (37,480,231
              )**Basic
                  and diluted loss per common share***[note
                  11]*
              
              
              **$**
              **(0.37**
              **)**
              
              $
              (0.34
              )
              $
              (0.31
              )**Weighted
                  average number of common shares****outstanding***[note
                  11]*Basic****and
                  diluted
              
              
              
              **40,644,715**
              
              
              
              34,766,222
              
              
              25,237,393
  *See
        accompanying notes*
 69
  **Tm
        Bioscience Corporation**
  **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
   Years
        ended December 31
  **2005**
              
              **2004**
              
              **2003**$
              
              $
              
              $**OPERATING
                  ACTIVITIES**Net
                  loss for the year
              
              
              **(15,167,466**
              **)**
              
              (11,838,498
              )
              
              (7,808,889
              )Add
                  (deduct) items not involving cash:Depreciation
                  and amortization
              
              
              **1,244,294**
              
              
              987,291
              
              
              619,283Loss
                  (gain) on disposal of capital assets
              
              
              **30,380**
              
              
              (6,936
              )
              
              —Loss
                  on impairment of intangible assets
              
              
              **131,559**
              
              
              —
              
              
              —Amortization
                  of deferred leasehold inducement
              
              
              **(61,475**
              **)**
              
              (59,367
              )
              
              (22,465
              )Accretion
                  of loan discount*[note
                  8]*
              
              
              **1,184,865**
              
              
              198,671
              
              
              371,041Loss
                  on settlement of debt*[note
                  8]*
              
              
              **870,017**
              
              
              —
              
              
              —Accretion
                  of convertible debenture discount*[note
                  8]*
              
              
              **92,135**
              
              
              —
              
              
              —Amortization
                  of deferred financing costs*[note
                  9]*
              
              
              **380,235**
              
              
              105,013
              
              
              19,825Stock
                  option compensation expense and deferred share units*[note
                  12]*
              
              
              **661,241**
              
              
              455,400
              
              
              171,883Government
                  loan interest accrual*[note
                  8]*
              
              
              **300,313**
              
              
              110,291
              
              
              —(Gain)
                  loss on foreign exchange*[note
                  17]*
              
              
              **(76,367**
              **)**
              
              10,515
              
              
              —**(10,410,269**
              **)**
              
              (10,037,620
              )
              
              (6,649,322
              )Changes
                  in non-cash working capital balancesrelated
                  to operations:Increase
                  in trade accounts receivable
              
              
              **(224,367**
              **)**
              
              (302,777
              )
              
              (718,189
              )(Increase)
                  decrease in other accounts receivable
              
              
              **(492,808**
              **)**
              
              192,450
              
              
              (123,738
              )Increase
                  in inventory
              
              
              **(1,764,258**
              **)**
              
              (755,877
              )
              
              (1,032,017
              )Decrease
                  in prepaid expenses
              
              
              **38,076**
              
              
              6,940
              
              
              2,403Increase
                  (decrease) in deferred revenue
              
              
              **24,405**
              
              
              (21,177
              )
              
              244,547Increase
                  in accounts payable and accrued liabilities
              
              
              **2,888,757**
              
              
              95,226
              
              
              868,221Increase
                  in income taxes payable
              
              
              **61,273**
              
              
              21,000
              
              
              —**Cash
                  used in operating activities**
              
              
              **(9,879,191**
              **)**
              
              (10,801,835
              )
              
              (7,408,095
              )**INVESTING
                  ACTIVITIES**Purchase
                  of capital assets
              
              
              **(1,920,071**
              **)**
              
              (2,047,155
              )
              
              (1,362,181
              )Purchase
                  of intangible assets
              
              
              **(1,285,021**
              **)**
              
              (392,679
              )
              
              (421,814
              )Purchase
                  of short-term investments
              
              
              **(32,393,800**
              **)**
              
              (15,936,426
              )
              
              (14,006,615
              )Sale
                  of short-term investments
              
              
              **29,031,697**
              
              
              20,288,609
              
              
              10,998,152**Cash
                  (used in) provided by investing activities**
              
              
              **(6,567,195**
              **)**
              
              1,912,349
              
              
              (4,792,458
              )**FINANCING
                  ACTIVITIES**Increase
                  in deferred leasehold inducement
              
              
              **168,680**
              
              
              13,063
              
              
              309,682Proceeds
                  from long-term debt
              
              
              **11,753,126**
              
              
              10,536,450
              
              
              —Repayment
                  of long-term debt
              
              
              **(8,641,550**
              **)**
              
              (3,525,345
              )
              
              (1,136,055
              )Share
                  issuance costs*[note
                  11]*
              
              
              **(1,923,543**
              **)**
              
              —
              
              
              (1,418,926
              )Increase
                  in deferred financing costs*[note
                  9]*
              
              
              **(933,687**
              **)**
              
              (587,287
              )
              
              —Issuance
                  of common shares*[note
                  11]*
              
              
              **23,662,726**
              
              
              1,053,039
              
              
              17,111,398**Cash
                  provided by financing activities**
              
              
              **24,085,752**
              
              
              7,489,920
              
              
              14,866,099**Net
                  increase (decrease) in cash and cash equivalents****during
                  the year**
              
              
              **7,639,366**
              
              
              (1,399,566
              )
              
              2,665,546Cash
                  and cash equivalents, beginning of year
              
              
              **1,333,228**
              
              
              2,732,794
              
              
              67,248**Cash
                  and cash equivalents, end of year**
              
              
              **8,972,594**
              
              
              1,333,228
              
              
              2,732,794**Supplemental
                  cash flow information**Income
                  taxes paid
              
              
              **23,531**
              
              
              —
              
              
              —Interest
                  paid
              
              
              **927,709**
              
              
              442,274
              
              
              496,426
 
  *See
        accompanying notes*
  70
  **Tm
        Bioscience Corporation**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  December
        31, 2005
 
 **1.
        BASIS OF PRESENTATION**
  These
        consolidated financial statements of Tm Bioscience Corporation [“Tm” or the
“Company”] have been prepared in accordance with Canadian generally accepted
        accounting principles on a going concern basis which presumes the realization
        of
        assets and the discharge of liabilities in the normal course of business
        for the
        foreseeable future.
  As
        at
        December 31, 2005, the Company had working capital of $12,807,061 and an
        accumulated deficit of $64,486,195 resulting from losses in the current and
        prior periods. As the Company is in the early stages of commercialization
        for
        its products, the Company’s ability to continue operations is uncertain and is
        dependent upon its ability to obtain sufficient financing and improve operating
        results.
  These
        consolidated financial statements do not include any adjustments to the amounts
        and classification of assets and liabilities that might be necessary should
        the
        Company be unable to continue operations in the normal course of business.
        Such
        adjustments could be material.
  **2.
        DESCRIPTION OF BUSINESS**
  The
        Company is incorporated under the laws of the Province of Ontario. Tm is
        a
        DNA-based diagnostics company developing a suite of genetic tests. Tm’s product
        pipeline includes tests for genetic mutations related to hematology, cystic
        fibrosis, toxicology and other debilitating genetic disorders. The Company’s
        common shares trade on the Toronto Stock Exchange [“TSX”].
  These
        consolidated financial statements include the accounts of Tm, its wholly
        owned
        U.S. subsidiaries, Tm Technologies, Inc., and Tm Bioscience, Inc., and two
        wholly owned Canadian subsidiaries, Tm Bioscience PGX Inc. and Tm Bioscience
        HG
        Inc. All intercompany balances and transactions have been eliminated. The
        consolidated financial entity shall be referred to herein as the “Company”.
  **3.
        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**
  The
        following is a summary of the significant accounting policies followed in
        the
        preparation of these consolidated financial statements:
  **Cash
        and cash equivalents**
  Cash
        equivalents comprise only highly liquid investments with original maturities
        of
        less than 90 days at the time of purchase.
  **Short-term
        investments**
  Short-term
        investments are temporary investments with original maturities greater than
        90
        days and less than one year, and are valued at cost plus accrued interest
        which
        approximates market value.
  **Inventory**
  Inventory
        is comprised of raw materials, work-in-process, finished goods and packaging.
        Raw materials are stated at the lower of cost and replacement cost, and
        work-in-process and finished goods are valued at the lower of cost, determined
        on a first-in, first-out basis and market, determined by net realizable value
        assessment. The cost of raw materials and packaging is the purchase price
        of the
        product, net of trade discounts and the application of attributable overheads
        based on normalized production capacity. The cost of finished goods and
        work-in-process includes the cost of raw materials, direct labour, and the
        application of attributable overheads based on normalized production capacity.
  Goods
        in
        inventory including raw materials, work-in-process and finished goods may
        be
        consumed by the research and development group in the normal course of business.
        The cost of goods consumed by research and development is charged to expense
        in
        the period of consumption.
  **Capital
        assets**
  Capital
        assets are recorded at cost less accumulated depreciation. The rates and
        methods
        used to depreciate the cost of the capital assets over their estimated useful
        lives are as follows:
  Manufacturing
                  equipment
              5
                  -
                  7 years straight-lineResearch
                  equipment
              5
                  -
                  7 years straight-lineAssets
                  on loan/rental (Luminex xMAPTM Instrument)
              5
                  -
                  7 years straight-lineQuality
                  control equipment
              5
                  years straight-lineFurniture
                  and fixtures
              5
                  years straight-lineComputer
                  software
              30%
                  - 50% declining balanceComputer
                  equipment
              3
                  years straight-lineLeasehold
                  improvements
              Straight-line
                  over the term of the lease
 
  71
 **Tm
          Bioscience Corporation**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
  December
          31, 2005
  The
        Company classifies the recorded value of Luminex xMAPTM Instruments [“the
        Instruments”] placed within the reagent rental program and the Instruments on
        loan to customers separately from other capital assets [in “Assets on
        loan/rental”].
  **Government
        assistance**
  Government
        assistance with respect to capital assets is netted against the related asset
        when received. Assistance related to research and development costs is deferred
        until the respective costs are incurred and all conditions have been met
        and
        then is netted against associated research and development costs when assistance
        is received.
  **Intangible
        assets**
  Intangible
        assets are initially recorded at cost. The cost of intangible assets is
        amortized over their estimated useful lives using the following rates and
        methods:
  Product-related
                  software
              30%
                  declining balanceGenetic-marker
                  licenses
              5
                  years straight-line from sale of first productFundamental
                  patents
              Straight-line
                  over the remaining life of the
                  patent
 
  **Deferred
        financing costs**
  Financing
        costs relating to long-term debt have been deferred and are being amortized
        on
        the effective interest rate basis over the term of the debt.
  **Research
        and development**
  Research
        costs are expensed in the year incurred. Development costs related to the
        enhancement of the Company’s technology are expensed in the year in which they
        are incurred unless the costs meet generally accepted accounting criteria
        for
        deferral and amortization. No development costs have been deferred to
        date.
  **Foreign
        currency translation**
  Foreign
        currency transactions are translated into Canadian dollars using the exchange
        rate in effect at the date of the transaction. At each balance sheet date,
        monetary items denominated in foreign currencies are translated into Canadian
        dollars at the balance sheet date exchange rate. Non-monetary assets and
        liabilities denominated in foreign currencies, along with depreciation and
        amortization expense, are translated at historical exchange rates. Exchange
        gains and losses arising on translation or settlement of foreign currency
        denominated monetary items are included in net income or loss for the
        year.
  **Use
        of estimates**
  The
        preparation of the consolidated financial statements in conformity with Canadian
        generally accepted accounting principles requires management to make estimates
        and assumptions that affect the reported amounts of assets and liabilities
        at
        the date of the consolidated financial statements and the reported amounts
        of
        revenue and expenses during the reporting period. Actual results could differ
        from these estimates.
  **Financial
        instruments**
  The
        fair
        value of financial instruments approximates their carrying value unless
        otherwise disclosed in the consolidated financial statements.
  
 72
  **Tm
        Bioscience Corporation**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  December
        31, 2005
   **Loss
        per common share**
  Loss
        per
        common share is calculated based on loss attributable to common shareholders.
        Basic loss per common share is calculated using the weighted average number
        of
        common shares outstanding during the year. The computation of diluted loss
        per
        share assumes the basic weighted average number of common shares outstanding
        during the year is increased to include the number of additional common shares
        that would have been outstanding if the dilutive potential common shares
        had
        been issued. The dilutive effect of warrants and stock options is determined
        using the treasury stock method. The dilutive effect of convertible securities
        is determined using the “if-converted” method.
  **Income
        taxes**
  The
        Company uses the liability method of accounting for income taxes which requires
        the recognition of future income taxes for the differences between the carrying
        value of assets and liabilities and their related tax bases. Future income
        tax
        assets and liabilities are measured using the substantively enacted income
        tax
        rates expected to apply in the year in which timing differences are expected
        to
        be recovered or settled. They also establish criteria for recognition of
        future
        income tax assets related to tax losses carried forward based on a more likely
        than not test of recovery. Valuation allowances are established when necessary
        to reduce future income tax assets to the amount expected to be
        realized.
  **Operating
        leases and leasehold inducements**
  Payments
        for operating leases are charged to income on a straight-line basis over
        the
        term of the lease. In situations where the Company receives a leasehold
        inducement benefit in relation to its leased premises, the Company follows
        the
        treatment of amortizing the entire benefit over the term of the lease in
        order
        to produce an equal rent adjustment in each period.
  **Revenue
        recognition**
  The
        Company’s principal revenue streams and their respective accounting treatments
        are discussed below:
  **[i]
        Product sales**
  Product
        sales revenue is recognized when a persuasive commercial arrangement exists
        with
        the customer, the sales price is fixed and determinable at the time of shipment,
        upon shipment and transfer of title to the customer and fulfillment of any
        significant post-delivery obligations. For commercial reasons, the Company
        may
        provide a limited right of return. In such cases, the associated revenue
        must
        meet all the criteria for recognition in accordance with the Emerging Issues
        Committee [“EIC”] - 141 “Revenue Recognition” in order to be recognized in the
        period.
  Reserves
        are provided for anticipated warranty expenses at the time the associated
        revenue is recognized.
  Reagent
        rental transactions are structured such that customers pay an “Instrument
        premium” for the Company’s Tag-ItTM Mutation Detection Kits over a contractually
        agreed period, usually two or three years, and against a minimum purchase
        volume. The premium over the contract term is intended to provide a return
        to
        the Company on the value of the Instrument rented by the customer and any
        associated warranty costs. At the end of the contract term, the Instrument
        is
        returned to the Company. The portion of revenue related to the Instrument
        and
        warranty under the reagent rental program is recognized as Mutation Detection
        Kits are shipped over the period of the customer supply agreement in accordance
        with EIC-142 “Revenue Arrangements with Multiple Deliverables”. During the
        period of the contractual arrangement, costs associated with the Instruments
        used in the reagent rental program, including depreciation on the Instruments,
        are expensed to cost of sales.
  **[ii]
        Instrument sales**
  Revenue
        from the direct sale of the Instrument is recognized following receipt of
        a
        purchase order, shipment of product, and transfer of title when sold directly
        to
        the end user. When the Company enters into customer contracts where both
        the
        purchase of an Instrument and a subsequent sale of Mutation Detection Kits
        occur, the delivery of the Instrument is accounted for as a separate unit
        of
        accounting from the delivery of Mutation Detection Kits, in accordance with
        EIC
        - 142. The Instrument is normally sold with a one year manufacturer’s warranty.
        In certain cases, the Company provides, at the option of the Customer, an
        extended warranty for a maximum term of two years. The fair value of the
        warranty is recorded as deferred revenue and recognized rateably over the
        warranty period included in the customer contract. The fair value of the
        warranty is based on market value of the warranty service.
  
 73
  **Tm
        Bioscience Corporation**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  December
        31, 2005
   **[iii]
        Contract research and development fees**
  Contract
        research and development fees revenue consists of research and development
        funding under collaborative agreements with the Company’s various strategic
        partners and may include multiple elements within a single contract. The
        Company’s accounting policy complies with the revenue determination requirements
        set forth in EIC - 142, relating to the separation of multiple deliverables
        into
        individual accounting units with determinable fair values. Payments received
        under collaborative arrangements may include the following: non-refundable
        fees
        at inception of contract for technology rights; funding for services performed;
        and milestone payments for specific achievements.
  Contract
        research and development funding generally compensates the Company for technical
        integration and validation study expenses related to collaborative development
        programs for certain technologies, products and product candidates of the
        Company. Such funding may take the form of study expense recovery, or milestones
        relating to the delivery of specific technical achievements. Study expense
        recovery revenue is recognized at the time research and development activities
        are performed under the terms of the collaborative agreements. Milestone
        payments are recognized according to the contract terms as the milestones
        are
        achieved, to the extent that no performance obligations remain. In either
        case,
        collectibility must be reasonably assured.
  **[iv]
        Licensing and development fees**
  Licensing
        and development fees revenue comprises payments derived from licensing of
        the
        Company’s products and technologies. These payments may be earned in the form of
        milestones, either technical or commercial, periodic payments, or as royalties
        in proportion to the product licensee’s revenue. In collaborative agreements
        which include both license fees and contract research and development fees
        for
        which the fair value of the undelivered item is not available, the contract
        research and development payments are deferred and recognized on a straight-line
        basis over the term of the license, in accordance with EIC - 142.
  In
        the
        event that payments received exceed revenue earned, such funds are included
        in
        deferred revenue. The excess of revenue earned over payments received or
        amounts
        invoiced is included in accounts receivable.
  **Warranty
        provision**
  The
        Company has two types of warranties: product-based warranty and Instrument-based
        warranty. The estimated product warranties are provided for when product
        revenue
        is recognized. The estimated cost of Instrument warranties is provided for
        at
        the time associated warranty revenue is recognized. This warranty obligation
        is
        affected by Instrument failure rates, material usage and service delivery
        costs
        incurred in correcting Instrument failures. Should actual Instrument failure
        rates, material usage or service delivery costs differ from our estimates,
        revisions to the estimated warranty liability would be required.
  **Stock-based
        compensation plan**
  In
        the
        fiscal year ended December 31, 2003, under the transitional provisions of
        revised CICA Section 3870 “Stock-Based Compensation and other Stock-Based
        Payments”, the Company prospectively adopted the fair value method of accounting
        for the stock options granted under its stock option plan. The Company charges
        to income over the vesting period the fair value of stock options granted,
        modified or settled in fiscal 2005 and 2004. An amount equal to compensation
        expense is initially credited to contributed surplus and transferred to capital
        stock when the option is exercised. Consideration received on the exercise
        of
        stock options is credited to capital stock.
  **Deferred
        share unit plan**
  In
        the
        fiscal year ended December 31, 2004, the Company implemented a new stock-based
        compensation plan specifically for its non-employee directors. Under the
        ‘Deferred share unit plan for non-employee directors and SAB members’ [“DSU”]
        Plan, each eligible director may elect to be paid annual retainers fees and/or
        meeting attendance fees in DSUs rather than in cash. A DSU is a
        notional unit, equivalent in value to a common share, calculated quarterly
        using
        the volume weighted average trading price per common share for the five (5)
        trading days prior to the quarter. Payment of DSUs is not made until such
        time
        as the director leaves the Board, and may be in cash or in common shares
        of the
        Company, at the discretion of the director.
  74
  **Tm
        Bioscience Corporation**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  December
        31, 2005
   **Impairment
        of long-lived assets**
  Long-lived
        assets are comprised of capital assets and intangible assets subject to
        amortization, which are reviewed for impairment whenever events or changes
        in
        circumstances indicate that the carrying amount may not be recoverable. The
        recoverability of long-lived assets is determined by evaluating whether the
        carrying value of such assets can be recovered from estimated undiscounted
        future operating cash flows. Should impairment exist, the impairment loss
        would
        be measured based on the excess of the carrying value of the assets over
        the
        present value of the future operating cash flows.
  **Asset
        retirement obligations**
  Effective
        January 1, 2004, the Company adopted the recommendations of CICA Section
        3110
“Asset Retirement Obligations” [“CICA 3110”]. Under the new standard the Company
        records the fair value of a liability for an asset retirement obligation
        in the
        period in which it is incurred. The associated asset retirement costs are
        capitalized as part of the carrying amount of the long-lived asset and amortized
        over the expected useful life of the asset. The adoption of CICA 3110 did
        not
        have any impact on the Company’s consolidated financial statements.
  **4.
        SHORT-TERM INVESTMENTS**
  Short-term
        investments consist of the following:
  **2005**
              
              **2004**$
              
              $Commercial
                  paper and government bonds
              
              
              **7,007,035**
              
              
              3,644,932Guaranteed
                  investment certificates
              
              
              **35,000**
              
              
              35,000**7,042,035**
              
              
              3,679,932
 
  The
        Company invests cash on hand in fully liquid commercial paper and government
        bonds. At December 31, 2005, annualized yield to maturity on short-term
        investments ranged from 2.00% to 3.50% [2004 - 1.64% to 2.56%]. Interest
        income
        for the year was $205,147 [2004 - $138,799, 2003 - $63,156]. The Company
        purchases only investment-grade instruments comprised of bonds with a rating
        of
        A or better, as well as bankers’ acceptances and money market instruments with a
        rating of R1Mid or higher.
  **5.
        INVENTORY**
  Inventory
        consists of the following:
  **2005**
              
              **2004**$
              
              $Raw
                  Materials
              
              
              **940,640**
              
              
              642,466Work-in-progress
              
              
              **1,884,821**
              
              
              850,410Finished
                  goods
              
              
              **762,206**
              
              
              329,203Packaging
              
              
              **32,047**
              
              
              33,377**3,619,714**
              
              
              1,855,456
 75
  **Tm
        Bioscience Corporation**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  December
        31, 2005
  **6.
        CAPITAL ASSETS** ******
  Capital
        assets consist of the following:
  **2005**
              
              **2004****Accumulated**
              
              
              
              **Accumulated****Cost**
              
              **depreciation**
              
              **Cost**
              
              **depreciation**$
              
              $
              
              $
              
              $Manufacturing
                  equipment
              
              
              **483,487**
              
              
              **225,346**
              
              
              478,249
              
              
              132,524Research
                  equipment
              
              
              **1,311,495**
              
              
              **813,141**
              
              
              986,710
              
              
              673,214Assets
                  on loan/rental
              
              
              **1,771,187**
              
              
              **362,131**
              
              
              1,233,760
              
              
              183,015Quality
                  control equipment
              
              
              **240,380**
              
              
              **89,216**
              
              
              183,657
              
              
              49,392Furniture
                  and fixtures
              
              
              **495,066**
              
              
              **173,073**
              
              
              246,678
              
              
              126,410Computer
                  software
              
              
              **604,687**
              
              
              **295,354**
              
              
              552,855
              
              
              174,722Computer
                  equipment
              
              
              **566,080**
              
              
              **386,743**
              
              
              446,288
              
              
              289,341Leasehold
                  improvements
              
              
              **2,024,423**
              
              
              **811,089**
              
              
              1,506,892
              
              
              571,650**7,496,805**
              
              
              **3,156,093**
              
              
              5,635,089
              
              
              2,200,268Less
                  accumulated depreciation
              
              
              **3,156,093**
              
              
              
              
              
              2,200,268Net
                  book value
              
              
              **4,340,712**
              
              
              
              
              
              3,434,821
 
  In
        2005,
        the Company wrote off assets totaling $58,355 [2004 - nil, 2003 - $81,036]
        and
        having accumulated depreciation of $27,975 [2004 - nil, 2003 - $79,014].
        Depreciation expense related to capital assets for the year ended December
        31,
        2005 was $983,800 [2004 - $833,294, 2003 - $558,433].
  
  **7.
        INTANGIBLE ASSETS**
  Intangible
        assets consist of the following:
  **2005**
              
              **2004****Accumulated**
              
              
              
              **Accumulated****Cost**
              
              **amortization**
              
              **Cost**
              
              **amortization**$
              
              $
              
              $
              
              $Product-related
                  software
              
              
              **218,156**
              
              
              **123,771**
              
              
              218,156
              
              
              83,321Genetic-marker
                  licenses
              
              
              **517,065**
              
              
              **119,875**
              
              
              696,186
              
              
              131,526Fundamental
                  patents
              
              
              **2,345,800**
              
              
              **72,012**
              
              
              -
              
              
              -**3,081,021**
              
              
              **315,658**
              
              
              914,342
              
              
              214,847Less
                  accumulated amortization
              
              
              **315,658**
              
              
              
              
              
              214,847Net
                  book value
              
              
              **2,765,363**
              
              
              
              
              
              699,495
 
  In
        2005,
        the Company recognized an impairment loss of $131,559 [2004 - nil, 2003 -
        nil]
        on genetic-marker licenses with a cost of $291,243 and having accumulated
        amortization of $159,684 since their total carrying amount was not recoverable
        and exceeded their fair value. This loss has been included in sales, general
        and
        administrative expenses. Amortization expense related to intangible assets
        for
        the year ended December 31, 2005 was $260,494 [2004 - $153,997, 2003 -
        $60,850].
  During
        2005, the Company acquired license rights to certain intellectual property
        for
        which a new intangible asset class was created called ‘Fundamental Patents’.
        This class is amortized straight-line over the remaining life of the
        patent.
 76
  **Tm
        Bioscience Corporation**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  December
        31, 2005
  
  **8.
        LONG-TERM DEBT**
  Long-term
        debt is as follows:
 **$**
                  **TPC**
                  **[a]**
                
                
                **$**
                  **Debentures**
                  **[b]**
                
                
                **$**
                  **Convertible
                    debentures**
                  **[b]**
                
                
                **$**
                  **CMDF**
                  **[c]**
                
                
                **$**
                  **Total****Principal
                  outstanding - December 31, 2003**
                
                -
                
                
                -
                
                
                -
                
                
                **3,525,345**
                
                
                **3,525,345**Less:
                    amount representing future imputed interest
                
                -
                
                
                -
                
                
                -
                
                
                (358,215
                )
                
                (358,215
                )Recorded
                    loan balance - December 31, 2003
                
                -
                
                
                -
                
                
                -
                
                
                3,167,130
                
                
                3,167,130(Reductions)
                    increases in principal
                
                ******1,894,900**
                
                
                **8,641,550**
                
                
                **-**
                
                
                **(3,525,345**
                **)**
                
                **7,011,105**Less:
                    amount representing future imputed interest
                
                (648,938
                )
                
                (1,997,540
                )
                
                -
                
                
                -
                
                
                (2,646,478
                )Add:
                    imputed interest charge
                
                55,703
                
                
                125,794
                
                
                -
                
                
                131,073
                
                
                312,570Add:
                    loan interest accrual
                
                54,588
                
                
                -
                
                
                -
                
                
                227,142
                
                
                281,730**Increase
                    (decrease) in loan balance**
                
                **1,356,253**
                
                
                **6,769,804**
                
                
                -
                
                
                **(3,167,130**
                **)**
                
                **4,958,927****Recorded
                    loan balance - December 31, 2004**
                
                **1,356,253**
                
                
                **6,769,804**
                
                
                -
                
                
                -
                
                
                **8,126,057**(Reductions)
                  increases in principal
                
                1,205,126
                
                
                (8,641,550
                )
                
                10,548,000
                
                
                -
                
                
                3,111,576Less:
                    amount representing future imputed interest
                
                (412,714
                )
                
                686,881
                
                
                (1,443,854
                )
                
                -
                
                
                (1,169,687
                )Add:
                  imputed
                  interest charge
                
                149,073
                
                
                1,184,865
                
                
                92,135
                
                
                -
                
                
                1,426,073Add:
                  loan interest
                  accrual
                
                151,240
                
                
                -
                
                
                -
                
                
                -
                
                
                151,240Less:
                    foreign exchange gain
                
                -
                
                
                -
                
                
                (135,496
                )
                
                -
                
                
                (135,496
                )**Increase
                    (decrease) in loan balance**
                
                **1,092,725**
                
                
                **(6,769,804**
                **)**
                
                **9,060,785**
                
                
                -
                
                
                **3,383,706****Recorded
                    loan balance - December 31, 2005**
                
                **2,448,978**
                
                
                -
                
                
                **9,060,785**
                
                
                -
                
                
                **11,509,763****Principal outstanding - December
                    31,
                    2005**
                
                **3,100,026**
                
                
                -
                
                
                **10,467,000**
                
                
                -
                
                
                **13,567,026**Less:
                    amount representing future imputed interest
                
                (856,876
                )
                
                -
                
                
                (1,406,215
                )
                
                -
                
                
                (2,263,091
                )Add:
                    loan interest accrual
                
                205,828
                
                
                -
                
                
                -
                
                
                -
                
                
                205,828**Short-term
                    portion - recorded loan balance**
                
                -
                
                
                -
                
                
                **2,476,582**
                
                
                -
                
                
                **2,476,582****Long-term
                    portion - recorded loan balance**
                
                **2,448,978**
                
                
                -
                
                
                **6,584,203**
                
                
                -
                
                
                **9,033,181**
  In
        2005,
        the Company had a cash interest expense related to its long-term debt of
        $927,709 [2004 - $442,274, 2003- $496,426].
  [a] **** On
        December 12, 2003, the Company entered into an agreement with the Ministry
        of
        Industry of the Government of Canada under which the Government will invest
        up
        to $7,300,000 in the Company’s $25,000,000 project to establish novel processes,
        capabilities and facilities relating to the development of several genetic
        tests. Funds will be advanced from Technology Partnerships Canada [“TPC”], a
        special operating program. The $7,300,000 investment represents 29.2% of
        the
        total forecast project value. The actual investment received by the Company
        is
        predicated on eligible expenditures made over the project period. Eligible
        expenditures are submitted to TPC for claims processing and reviewed on a
        quarterly basis. The full amount of the investment is expected to be received
        by
        December 31, 2007.
  The
        Company has agreed to pay TPC a royalty on its revenue commencing in 2007
        at a
        rate between 1% and 2.5% of the prior year’s gross sales. Aggregate royalty
        repayment will continue until a maximum of $9,750,000 has been paid or until
        April 30, 2015, whichever is earlier. In December 2005, the Company issued
        2,336,449 share purchase warrants with a fair value of $2,500,000, each of
        which
        is exercisable at a price of $1.70 beginning from May 1, 2006 until close
        of
        business on December 29, 2010 and entitle the holder to acquire one common
        share
        of the Company *[Note
        11[i]]* .
        The
        royalty repayments and the warrants valuation will be pro-rated downward
        should
        TPC’s investment be less than the full $7,300,000.
  As
        funds
        are advanced, the recorded loan balance is reduced pro-rata to allow the
        Company
        to reflect the fair value of the committed warrants in contributed surplus.
        Based on these forecast values, using an amortization approach, the Company
        has
        established a yield on the funds over the life of the TPC investment. The
        portion of the yield represented by the royalties [6.7% effective annual
        yield]
        is reflected as a non-cash interest charge on the consolidated statements
        of
        loss and deficit and an accrual of interest payable added to the face value
        of
        the amount owing. This amount is $151,240 for the year ended December 31,
        2005
        [2004 - $54,588, 2003 - $nil]. The portion of the yield represented by the
        warrant value [6.8% effective annual yield] is also reflected as a non-cash
        interest charge on the consolidated statements of loss and deficit and a
        corresponding increase in the face value of the amount owing. This amount
        is
        $149,073 for the year ended December 31, 2005 [2004 - $55,703, 2003 -
        $nil].
  As
        at
        December 31, 2005, the Company has received 100% reimbursement on eligible
        expenditures claimed of $3,100,026.
  
 77
 **Tm
          Bioscience Corporation**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
  December
          31, 2005
 **8.
        LONG-TERM DEBT** ***(continued)***
  [b]
        On
        November 23, 2005, the Company completed a debt financing resulting in the
        issuance by the Company to Laurus Master Fund, Ltd. [“Laurus”] of (i) a secured
        convertible term note (the “Note”) in the aggregate principal amount of U.S.
        $9.0 million maturing on November 22, 2008, and (ii) a common stock purchase
        warrant [the “Warrant”] exercisable for 738,723 common shares of the Company at
        a price of $2.61 per share and expiring on November 22, 2010. The maximum
        number
        of common shares of the Company issuable upon conversion under the Note varies
        in accordance with the Cdn.$/U.S.$ foreign exchange rate in effect at the
        time
        of each repayment but, for example, is 4,039,817 common shares at the year
        end
        exchange rate of Cdn.$1.163 per U.S.$1.00. The Company may repay the Note
        at any
        time upon 10 business days’ notice to Laurus for a premium equal to 130% of the
        principal amount outstanding at the time of such redemption.
  The
        Note
        bears daily compound interest at a nominal rate per annum equal to the greater
        of (i) the prime rate published in The Wall Street Journal from time to time,
        plus 2% (200 basis points), and (ii) 8.5%, in each case plus applicable
        withholding taxes. The interest rate on the Note will decrease by 3% (300
        basis
        points), to a floor of 0%, for every 25% increase in the Company’s common share
        price above the “fixed conversion price” (as set out below).
  The
        Note
        is repayable in principal instalments plus interest over 32 months commencing
        in
        March 2006 (with payments of interest only commencing in January 2006). The
        fixed conversion price for the conversion of any principal amount outstanding
        under the Note from time to time is $2.39 (with respect to any principal
        amount
        that is less than U.S.$9.0 million and equal to or greater than U.S.$6.0
        million), $2.61 (with respect to any principal amount that is less than U.S.$6.0
        million and equal to or greater than U.S.$3.0 million) and $2.83 with respect
        to
        any remaining portion of the principal amount of the Note. Laurus has the
        right,
        but not the obligation, to convert all or any portion of the principal amount
        at
        any time and from time to time into common shares of the Company. Provided
        that
        certain trading volume conditions have been satisfied, the Company is required
        to convert cash repayments under the Note into common shares (based on the
        then
        applicable fixed conversion price set out above) if the volume weighted average
        trading price of such repayment date is greater than or equal to $2.75, $3.00,
        and $3.25, with respect to each 1/3 principal amount of the Note. The number
        of
        common shares to be issued to Laurus where any principal amount is required
        to
        be converted into common shares of the Company, or upon Laurus’ exercise of its
        conversion rights, shall be the number determined by dividing the U.S.$
        principal amount to be converted into common shares (converted into Cdn$
        at the
        U.S.$/Cdn.$ exchange rate in effect at the date of conversion) by the then
        applicable fixed conversion price.
  Laurus
        is
        limited to beneficially owning 4.99% of the common shares of the Company
        outstanding at any time, subject to exceptions for an event of default under
        the
        Note or upon Laurus providing 75 days’ notice to the Company, in which case the
        maximum percentage of common shares of the Company that can be owned
        beneficially by Laurus is capped at 19.99%. Based on the year end exchange
        rate
        of Cdn.$1.163 to U.S.$1.00 and conversion of the entire principal amount
        of the
        Note, Laurus’ beneficial ownership after giving pro-forma effect to the
        Offering, would be 8.5% of the Company’s issued and outstanding common
        shares.
  Upon
        an
        event of default under the Note, 115% of the principal amount then outstanding
        shall become due and payable together with interest at the rate of 1% per
        month.
  As
        security for the Company’s performance of its obligations under the Note, the
        Company granted Laurus a continuing general security interest over all of
        the
        Company’s assets and its Subsidiaries. The Subsidiaries also unconditionally
        guaranteed the Company’s obligations and liabilities under the Note. As
        additional security in favour of Laurus, the Company pledged to Laurus its
        shares in its Subsidiaries. The terms of the Note include no specific financial
        covenants.
  Proceeds
        from the Note financing were allocated to long term debt of $9,104,146, warrants
        of $665,000 *[note
        11[g]],* and
        equity conversion feature of $778,854 *[note
        11[g]]* based on
        their relative fair values at issuance. The Company determined the value
        of the
        long-term debt (without equity conversion features) using the discounted
        cash
        flow method, the warrants using the Black-Scholes model, and allocated the
        remaining proceeds to the equity conversion feature. The estimated effective
        interest rate on the debt is 22.5%. The recorded loan balance is being accreted
        over the term of the Note on an effective yield basis, which is reflected
        as a
        non-cash charge to interest expense of $92,135 for the year ended December
        31,
        2005. The portion of the yield represented by the interest rate in effect
        under
        the terms of the agreement is reflected as a non-cash charge to interest
        expense
        and a loan interest accrual on the consolidated balance sheet in the amount
        of
        $125,417 for the year ended December 31, 2005. Based on the year end exchange
        rate of Cdn.$1.163 to U.S.$1.00, the recorded loan balance has been revalued
        to
        $9,060,785. The foreign exchange gain related to the debt was
        $135,496.
  A
          pro-rata share of the total financing expenses associated with the debenture
          of
          $127,820 has been allocated to contributed surplus based on the percentage
          that
          the debenture warrant value represents of the total debenture
          financing.
  The
          proceeds from the Note were used by the Company to repay $8,641,550, being
          the
          principal amount outstanding under the Company’s secured debentures issued on
          November 12, 2004 [the “Debentures”].
  In
          accordance with EIC - 88, “Debtor’s Accounting for a Modification or Exchange of
          Debt Instruments” ["EIC - 88"] the repayment of the Debentures has been
          accounted for as a settlement. Consequently, the related unamortized balances
          of
          future imputed interest of $686,881 and deferred financing costs *[note
          9]* have
          been
          expensed in 2005, resulting in a total loss on settlement of $870,067.
 [c]
          The
          Company secured financing of $4,661,400 from the Canadian Medical Discoveries
          Fund ["CMDF"] in November 2002. CMDF is one of  the Company's 
shareholders. The financing was structured as a loan against which net
          assets,
          excluding intellectual property, were pledged as collateral. The loan had
          a term
          of 39 months, with payments of interest only during the first three months,
          followed by equal payments of principal and interest over the subsequent
          36
          months. The loan carried a nominal interest rate of 11.7% and under certain
          conditions, at CMDF or the Company's discretion, could be repaid in full
          or in
          part after eight months at a premium calculated as 25% of the excess of
          the loan
          interest rate over one year U.S. treasuries at the time of
          repayment.
  On
          November 12, 2002, concurrent with the closing of the financing, the Company
          issued the lender
          a
          total of 748,778 common share purchase warrants having a term of five years,
          exercisable at a price
          of $ 1.245 per common share. The warrants have a forced conversion clause
          should
          the Company's share price exceed five times the warrant exercise price
          over a
          period of 20 consecutive days after the date of the first anniversary of
          the
          loan. The Company had reflected the estimated fair value of the warrants,
          net of
          a proportionate share of financing costs, as contributed surplus of $770,642
          on
          its consolidated balance sheets, and had correspondingly reduced the nominal
          value of the loan by an  amount equal to the estimated fair value of the
          warrants . This discount was being charged to interest expense over the
          term of
          the loan on a yield basis, resulting in a loan yield of 20.7%. The fair
          value of
          the warrants was estimated using the Black-Scholes option pricing model.
          Key
          valuation assumptions included a
          five-year term, risk-free interest rate of 4.2% and stock volatility of
          1.195
          based on sixty months of trading
          history. Issue expenses associated with the loan totaling $76,771 were
          deferred
          and were being charged to expenses using an effective interest rate method *[note* *9].* As
          at
          December 31, 2003, the recorded loan balance was classified as $1,603,173
          current and $1,563,957 long-term debt.
  On
            November 12, 2004, the Company completed a financing consisting of secured
            debentures with an aggregate principal amount of $8,641,550 for new project
            development purposes and for general working capital purposes. against
            which net assets have been pledged. Concurrently with the completion
            of this
            financing, the Company repaid the outstanding principal of $2,141,550
            from its
            previous CMDF loan.
  The
            debentures have a term of 18 months, with monthly payments of interest
            only
            until maturity when the principal becomes due and payable. The debentures
            carry
            a coupon of 12% and may be repaid in whole or in part at the Company’s option
            after six months, subject to certain restrictions. Concurrent with the
            closing
            of the debenture financing, the Company issued to the lenders a total
            of
            1,595,271 special warrants, each special warrant being exercisable, for
            no
            additional consideration, for one common share purchase warrant. On exercise,
            each common share purchase warrant entitles the holder to purchase one
            common
            share of the Company at an exercise price of $1.22 at any time on or
            prior to
            May 15, 2009. The Company has reflected the estimated fair value of the
            warrants, as contributed surplus of $1,866,467 on its consolidated balance
            sheets, and has correspondingly reduced the nominal value of the debenture
            by an
            equivalent amount. The fair value of the warrants was estimated using
            the
            Black-Scholes option pricing model. Key valuation assumptions include
            a
            fifty-four month term, risk-free interest rate of 3.81% and stock volatility
            of
            0.845 based on a fifty-five month trading history.
 
 In
            accordance with EIC - 88, the repayment of the CMDF loan made in conjunction
            with the debenture financing has been accounted for as a renegotiation.
            Consequently, the unamortized value of the warrant discount [$131,073
            at
            November 15, 2004] originating with the November 2002 CMDF loan has been
            added
            to the warrant discount of $1,866,467 resulting from the issuance of
            the
            debenture warrants.
 78
  **Tm
        Bioscience Corporation**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  December
        31, 2005
  **8.
        LONG-TERM DEBT** ***(continued)***
  Estimated
        principal repayments of debt for the next 5 years are as follows:
  $2006
              
              
              3,270,9382007
              
              
              4,093,5622008
              
              
              3,575,2502009
              
              
              1,465,4812010
              
              
              1,161,795Thereafter
              
              
              **-**13,567,026
 
  **9.
        DEFERRED FINANCING COSTS**
  Deferred
        financing costs consist of the following:
   **2005**
              
              
              **2004****Accumulated**
              
              
              
              
              
              **Accumulated****Cost**
              
              
              **amortization**
              
              
              **Cost**
              
              
              **amortization**$
              
              
              $
              
              
              $
              
              
              $Deferred
                  financing costs
              
              
              **1,394,058**
              
              
              **616,157**
              
              
              588,191
              
              
              52,786Less:
                  accumulated amortization
              
              
              **616,157**
              
              
              
              
              
              52,786**Net
                  book value**
              
              
              **777,901**
              
              
              
              
              
              535,405
 
  Amortization
        expense related to deferred financing costs for the year ended December 31,
        2005
        was $563,371 [2004 - $105,013, 2003 - $19,825]. Amortization in 2005 includes
        $183,136 [2004 - $27,316, 2003 - $nil] written off in accordance with EIC
        - 88 *[note
        8[b]].*
  **10.
        OTHER ASSET**
  Prior
        to
        the issuance of warrants to TPC, contributed surplus was affected only on
        a
        pro-rata basis contingent upon the receipt of funds *[note
        8[a]]* .
        Since
        the full amount of warrants were issued in December 2005, the balance of
        the
        Black-Scholes value of these warrants *[note
        11[i]]* has been
        recorded in contributed surplus, and the amount representing the proportion
        of
        the total financing not yet advanced by TPC has been reflected as an other
        asset. As future funds are advanced, the recorded loan balance and the other
        asset will be reduced on a pro-rata basis to reflect the fair value of the
        issued warrants. The recorded loan balance is accreted over the term of the
        loan
        on an effective yield basis *[note
        8[a]].*
  **11.
        CAPITAL STOCK**
  The
        authorized capital stock of the Company consists of unlimited preferred shares
        and unlimited common shares.
  The
        preferred shares are non-voting, issuable in series, having such specific
        rights
        and privileges as may be deemed by the Board of Directors at the time of
        the
        creation of the series. The preferred shares have priority over the holders
        of
        the common shares with respect to dividends and return of capital on
        dissolution. No preferred shares have been issued. The common shares are
        voting
        and entitled to dividends as may be declared by the Board of
        Directors.
 79
  **Tm
        Bioscience Corporation**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  December
        31, 2005
  11.
        CAPITAL STOCK  (continued).
  On
        June
        25, 2004, following shareholder approval at the Company’s annual general meeting
        of shareholders, and all necessary regulatory approvals, the Company’s common
        shares commenced trading on the TSX on a consolidated basis of one (1)
        post-consolidation share for every five (5) pre-consolidation common shares.
        The
        following charts and figures have been retroactively restated to reflect
        the
        change in share number and price:
  **Issued
        and outstanding**
   **Non-employee**
                ********
                ****
                **Common**
                ****
                ****
                ****
                ****
                ****
                **Compensation**
                ********
                ****
                **shares**
                ****
                ****
                **Warrants**
                ****
                ****
                **options**
                ********
                ****
                **#**
                ****
                ****
                **#**
                ****
                ****
                **#****Balance,
                    December 31, 2002**
                ****
                ****
                **22,735,657**
                ****
                ****
                **748,778**
                ****
                ****
                **3⁄4**Pursuant
                    to exercise ofStock
                    options
                
                
                8,799
                
                
                3⁄4
                
                
                3⁄4Pursuant
                    to the issuance of Common Stock, warrantsand
                    conversion options June 2003 financing [ j]
                
                
                4,635,040
                
                
                2,317,520
                
                
                324,453December
                    2003 financing [k]
                
                
                7,500,000
                
                
                3,750,000
                
                
                525,000Cancellation
                    of escrowed shares [l]
                
                
                (600,000
                )
                
                3⁄4
                
                
                3⁄4**Balance,
                    December 31, 2003**
                ****
                ****
                **34,279,496**
                ****
                ****
                **6,816,298**
                ****
                ****
                **849,453**Pursuant
                    to exercise ofStock
                    options
                
                
                43,076
                
                
                3⁄4
                
                
                3⁄4Warrants
                    [a]
                
                
                485,705
                
                
                (485,705
                )
                
                3⁄4Compensation
                    options [a]
                
                
                119,891
                
                
                3⁄4
                
                
                (119,891
                )Warrants
                    issued upon conversion of compensation options [a]
                
                
                3⁄4
                
                
                55,000
                
                
                3⁄4Pursuant
                    to November 15, 2004Debenture
                    financingWarrants
                    issued [b]
                
                
                3⁄4
                
                
                1,595,271
                
                
                3⁄4Compensation
                    options issued [b]
                
                
                3⁄4
                
                
                3⁄4
                
                
                182,926**Balance,
                    December 31, 2004**
                ****
                ****
                **34,928,168**
                ****
                ****
                **7,980,864**
                ****
                ****
                **912,488**Pursuant
                    to exercise ofStock
                    options [note 12]
                
                
                56,577
                
                
                3⁄4
                
                
                3⁄4Compensation
                    options - issued June 2003 [c]
                
                
                204,563
                
                
                107,226
                
                
                (204,563
                )Compensation
                    options - issued December 2003 [c]
                
                
                525,000
                
                
                262,500
                
                
                (525,000
                )Warrants
                    - issued June 2003 [c]
                
                
                2,070,916
                
                
                (2,070,916
                )
                
                3⁄4Pursuant
                    to the issuance of common stock andCompensation
                    options [d], [h]
                
                
                9,930,000
                
                
                3⁄4
                
                
                216,500Pursuant
                    to the expiry of warrants - issued December 2003 [e]
                
                
                3⁄4
                
                
                (3,935,625
                )
                
                3⁄4Pursuant
                    to the issuance of warrants [f], [g], [i]
                
                
                3⁄4
                
                
                3,095,172
                
                
                3⁄4**Balance,
                    December 31, 2005**
                ****
                ****
                **47,715,224**
                ****
                ****
                **5,439,221**
                ****
                ****
                **399,425**
  The
          total
          number of shares reserved as at December 31, 2005 for the exercise of warrants,
          compensation options and the debt conversion feature is
          6,006,556.
   80
  **Tm
          Bioscience Corporation**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
  December
          31, 2005
  
 **11.
        CAPITAL STOCK** ***(continued)***
  
 **Contributed surplus****Capital**
                  **stock**
                  **$**
                ****
                **Total**
                  **$**
                ****
                **Warrants**
                  **$**
                ****
                **Compensation**
                  **options**
                  **$**
                ****
                **Stock**
                  **options**
                  **$**
                ****
                **Conversion**
                  **options**
                  **$**Balance,
                    December 31, 2002
                
                
                31,091,786
                
                
                770,642
                
                
                770,642
                
                
                3⁄4
                
                
                3⁄4
                
                
                3⁄4Pursuant
                    to exercise ofStock
                    options
                
                
                12,855
                
                
                3⁄4
                
                
                3⁄4
                
                
                3⁄4
                
                
                3⁄4
                
                
                3⁄4Pursuant
                    to issuance ofCommon
                    stock, warrants andCompensation
                    optionsJune
                    2003 financing [j]
                
                
                2,810,079
                
                
                1,847,062
                
                
                1,506,388
                
                
                340,674
                
                
                3⁄4
                
                
                3⁄4December
                    2003 financing [k]
                
                
                8,007,476
                
                
                3,015,000
                
                
                2,437,500
                
                
                577,500
                
                
                3⁄4
                
                
                3⁄42003
                    stock option compensationexpense
                    [note 12]
                
                
                3⁄4
                
                
                171,883
                
                
                3⁄4
                
                
                3⁄4
                
                
                171,883
                
                
                3⁄4Balance,
                    December 31, 2003
                
                
                41,922,196
                
                
                5,804,587
                
                
                4,714,530
                
                
                918,174
                
                
                171,883
                
                
                3⁄4Pursuant
                    to exercise ofStock
                    options
                
                
                118,892
                
                
                3⁄4
                
                
                3⁄4
                
                
                3⁄4
                
                
                3⁄4
                
                
                3⁄4Warrants
                    [a]
                
                
                1,082,683
                
                
                (315,708
                )
                
                (315,708
                )
                
                3⁄4
                
                
                3⁄4
                
                
                3⁄4Compensation
                    options [a]
                
                
                142,184
                
                
                (68,304
                )
                
                17,875
                
                
                (86,179
                )
                
                3⁄4
                
                
                3⁄42004
                    stock option compensationexpense
                    [note 12]
                
                
                3⁄4
                
                
                327,504
                
                
                3⁄4
                
                
                3⁄4
                
                
                327,504
                
                
                3⁄4TPC
                    warrant accrual [note 8[a]]
                
                
                3⁄4
                
                
                648,939
                
                
                648,939
                
                
                3⁄4
                
                
                3⁄4
                
                
                3⁄4Pursuant
                    to November 15, 2004debenture
                    financing [b]
                
                
                3⁄4
                
                
                1,805,493
                
                
                1,712,201
                
                
                93,292
                
                
                3⁄4
                
                
                3⁄4Balance,
                    December 31, 2004
                
                
                43,265,955
                
                
                8,202,511
                
                
                6,777,837
                
                
                925,287
                
                
                499,387
                
                
                3⁄4Pursuant
                    to exercise ofStock
                    options [note 12]
                
                
                91,793
                
                
                (11,960
                )
                
                3⁄4
                
                
                3⁄4
                
                
                (11,960
                )
                
                3⁄4Warrants
                    [c]
                
                
                4,471,375
                
                
                (1,365,001
                )
                
                (1,365,001
                )
                
                3⁄4
                
                
                3⁄4
                
                
                3⁄4Compensation
                    options [c]
                
                
                1,790,536
                
                
                (725,517
                )
                
                106,478
                
                
                (831,995
                )
                
                3⁄4
                
                
                3⁄42005
                    stock option compensationexpense
                
                
                3⁄4
                
                
                434,491
                
                
                3⁄4
                
                
                3⁄4
                
                
                434,491
                
                
                3⁄4TPC
                    warrant accrual [note 8[a]], [i]
                
                
                3⁄4
                
                
                1,851,061
                
                
                1,851,061
                
                
                3⁄4
                
                
                3⁄4
                
                
                3⁄4Pursuant
                    to the issuance ofcommon
                    stock andcompensation
                    options [d], [h]
                
                
                17,251,621
                
                
                214,335
                
                
                3⁄4
                
                
                214,335
                
                
                3⁄4
                
                
                3⁄4Pursuant
                    to November 23, 2005convertible
                    debenture financing[g]
                
                
                3⁄4
                
                
                1,316,034
                
                
                606,136
                
                
                3⁄4
                
                
                3⁄4
                
                
                709,898Pursuant
                    to the issuance ofwarrants
                    [f]
                
                
                3⁄4
                
                
                20,000
                
                
                20,000
                
                
                3⁄4
                
                
                3⁄4
                
                
                3⁄4Balance,
                    December 31, 2005
                
                
                66,871,280
                
                
                9,937,954
                
                
                7,998,511
                
                
                307,627
                
                
                921,918
                
                
                709,898
  [a] During
        the year ended December 31, 2004, 485,705 share purchase warrants and 119,891
        compensation options were exercised resulting in cash receipts of $766,995
        and
        $131,880, respectively. The exercise resulted in pro-rata reclassification
        to
        contributed surplus based on valuation at the time of the previous financing.
  The
        exercise of the compensation options also resulted in the issuance of 55,000
        common share purchase warrants valued consistently with the previous financing
        using the Black  Scholes option pricing model.
  [b]
              
              On
                  November 15, 2004, the Company completed a financing consisting
                  of secured
                  debentures with an aggregate principal amount of $8,641,550 [*note
                  8[b]*].
                  Concurrent with the closing, the Company issued to the lenders
                  a total of
                  1,595,271 special warrants, each special warrant being exercisable,
                  for no
                  additional consideration, for one common share purchase warrant.
                  On
                  exercise, each common share purchase warrant entitles the holder
                  to
                  purchase one common share of the Company at an exercise price of
                  $1.22 at
                  any time on or prior to May 15, 2009. The Company has reflected
                  the
                  estimated fair value of the warrants as contributed surplus of
                  $1,866,467
                  on its consolidated balance sheets, and has correspondingly reduced
                  the
                  nominal value of the debenture by an equivalent amount. The fair
                  value
                  of  the warrants was estimated using the Black-Scholes option pricing
                  model. Key valuation assumptions include a fifty-four month term,
                  risk-free interest rate of 3.81% and stock volatility of 0.845
                  based on a
                  fifty-five month trading history.
   81
  **Tm
          Bioscience Corporation**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
  December
          31, 2005
   **11.
        CAPITAL STOCK** ***(continued)***
  A pro-rata share of the total financing expenses associated with the debenture
        of $154,266 has been allocated to contributed surplus based on the percentage
        that the debenture warrant value represents of the total debenture financing.
        Total financing expenses include 182,926 special warrants issued to the
        debenture agent, each special warrant being exercisable, for no additional
        consideration, for one common share purchase warrant. On exercise, each common
        share purchase warrant entitles the holder to purchase one common share of
        the
        Company at an exercise price of $1.64 at any time on or prior to November
        15,
        2006. The Company has reflected the estimated fair value of the warrants
        as
        contributed surplus of $93,292 on its consolidated balance sheets, and has
        correspondingly increased the amount of its deferred financing charges. The
        fair
        value of the special agent warrants was estimated using the Black-Scholes
        option
        pricing model. Key valuation assumptions include a twelve month term, risk-free
        interest rate of 3.22% and stock volatility of 0.778 based on a fifty-two
        week
        trading history.
  [c]  
        At December 31, 2004, the Company had outstanding the following compensation
        options: 204,562 compensation options - issued June 2003; 525,000 compensation
        options - issued December 2003 and 182,926 compensation options with expiry
        dates after 2005. During 2005, 204,562 compensation options - issued June
        2003
        and 525,000 compensation options - issued December 2003 were exercised resulting
        in cash receipts of $1,065,019 and the issuance of 102,281 warrants - issued
        June 2003, 4,945 warrants issued June 2003 and 262,500 warrants - issued
        December 2003 which expired as discussed further below.
  At December 31, 2004, the Company had outstanding the following warrants:
        1,963,690 warrants - issued June 2003; 3,673,125 warrants - issued December
        2003; 2,344,049 warrants with expiry dates after 2005. During 2005, 1,963,690
        warrants - issued June 2003 and outstanding at December 31, 2004 and the
        102,281
        warrants - issued June 2003 and created upon the 2005 exercise of compensation
        options - issued June 2003, discussed above, and 4,945 warrants issued in
        2005
        upon the 2004 exercise of compensation options - issued June 2003 were fully
        exercised for 2,070,916 common shares for total cash receipts of
        $3,106,374.
  These
        exercises resulted in a reclassification of contributed surplus based on
        valuation of the compensation options and the warrants at the time of the
        related financing.
  [d]  
        In February 2005, the Company completed a private placement offering of
        4,330,000 common shares at $2.15 per common share for total gross proceeds
        of
        $9,309,500, with financing costs of $772,542. The Company also issued 216,500
        compensation options as part of agent service fees for the closing of the
        private placement. The options are exercisable at a price of $2.15 per option,
        entitle the holder to acquire one common share of the Company and are
        exercisable until close of business on February 2, 2007. The Company has
        reflected an estimated fair value of $214,335 as contributed surplus in its
        consolidated balance sheets. The estimated fair value of these options was
        determined using the Black-Scholes option pricing model. Key valuation
        assumptions include a 24-month term, Government of Canada risk-free interest
        rate of 2.96% and a stock volatility based on 25 months trading history of
        0.99.
  [e]  
        On June 26, 2005, 3,935,625 share purchase warrants expired. These share
        purchase warrants were issued pursuant to the Company’s December 2003
        financing.
  [f]  
        In June 2005, in connection with a professional services contract, the Company
        issued 20,000 share purchase warrants which are exercisable at a price of
        $1.67
        per warrant, entitle the holder to acquire one common share of the Company
        and
        are exercisable until close of business on June 3, 2010. The Company has
        reflected an estimated fair value of $22,000 as contributed surplus in its
        consolidated balance sheets. The estimated fair value of these options was
        determined using the Black-Scholes option pricing model. Key valuation
        assumptions include a 60-month term, Government of Canada risk-free interest
        rate of 3.27% and a stock volatility based on 60-month trading history of
        1.10.
 
 
 82
 **Tm
            Bioscience Corporation**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
  December
            31, 2005
  
 **11.
        CAPITAL STOCK** ***(continued)***
   [g]  
        In November 2005, the Company completed a financing consisting of a secured
        convertible term note with a principal amount of U.S.$9,000,000 [ *note
        8[b]* ].
        Concurrent with the closing, the Company issued to the lenders a total of
        738,723 common share purchase warrants which are exercisable at a price of
        $2.61
        per warrant, entitle the holder to acquire one common share of the Company
        and
        are exercisable until close of business on November 22, 2010. The Company
        has
        reflected an estimated fair value of $665,000 as contributed surplus relating
        to
        the warrants, and $778,854 as contributed surplus relating to the conversion
        option in its consolidated balance sheets. The estimated fair value of the
        warrants was determined using the Black-Scholes option pricing model. Key
        valuation assumptions include a 60-month term, Government of Canada risk-free
        interest rate of 3.82% and a stock volatility of 0.485. The equity conversion
        feature was allocated the remaining proceeds after determining the fair values
        of the convertible note and the share purchase warrants *[note
        8[b]].*
  A
        pro-rata share of the total financing expenses associated with the debenture
        of
        $127,820 has been allocated to contributed surplus based on the percentage
        that
        the debenture warrant value represents of the total debenture financing.
  [h]  
        In December 2005, the Company completed a public offering of 5,600,000 common
        shares at $1.80 per common share for total gross proceeds of $10,080,000,
        with
        financing costs of $1,151,001.
  [i]   
        In December 2005, in connection with the investment undertaken by TPC as
        described in note 8[a], the Company issued 2,336,449 share purchase warrants
        with an estimated fair value of $2,500,000 which are exercisable at a price
        of
        $1.70 per warrant, entitle the holder to acquire one common share of the
        Company
        and are exercisable from May 1, 2006 until close of business on December
        29,
        2010. The Company has reflected these warrants as contributed surplus in
        its
        consolidated balance sheets. The estimated fair value of the warrants was
        determined using the Black-Scholes option pricing model. Key valuation
        assumptions include a 60-month term, Government of Canada risk-free interest
        rate of 3.91% and a stock volatility based on 60-month trading history of
        0.741.
  [j] In
        June
        2003, the Company completed a private placement offering of 4,635,040 units.
        Each unit comprised one common share of the Company and one-half of one common
        share purchase warrant. Each full common share purchase warrant entitles
        the
        holder to purchase one common share of the Company at an exercise price of
        $1.50
        per share until close of business on June 26, 2005. Gross proceeds were
        $5,098,543, with financing costs of $441,402. The Company also issued 324,453
        compensation options as part of agent service fees for the closing of the
        private placement. The options are exercisable at a price of $1.10 per option
        and entitle the holder to acquire one common share and one-half of one common
        share purchase warrant of the Company. Each full common share purchase warrant
        entitles the holder to purchase one common share of the Company at an exercise
        price of $1.50. The compensation options and common share purchase warrants
        may
        be exercised until close of business on June 26, 2005. The Company has reflected
        an estimated fair value of $1,847,062 for the common share purchase warrants
        issued under the private placement offering and the compensation options
        issued
        as agent service fees as contributed surplus in its consolidated financial
        statements. The estimated fair values of the common share purchase warrants
        and
        compensation options were determined using the Black-Scholes option pricing
        model. Key valuation assumptions include a 2-year term, Government of Canada
        risk-free 2-year interest rate of 3.11% and stock volatility of 0.754 based
        on a
        24 month trading history.
 
 [k] In
        December 2003, the Company completed a private placement offering of 7,500,000
        units. Each unit comprised one common share of the Company and one-half of
        one
        common share purchase warrant. Each full common share purchase warrant entitles
        the holder to purchase one common share of the Company at an exercise price
        of
        $2.00 per share until close of business on June 22, 2005. Gross proceeds
        were
        $12,000,000, with financing costs of $977,524. The Company also issued 525,000
        compensation options as part of agent service fees for the closing of the
        private placement. The options are exercisable at a price of $1.60 per option
        and entitle the holder to acquire one common share and one-half of one common
        share purchase warrant of the Company. Each full common share purchase warrant
        entitles the holder to purchase one common share of the Company at an exercise
        price of $2.00. The compensation options and common share purchase warrants
        may
        be exercised until
        close of business on June 22, 2005. The Company has reflected an estimated
        fair
        value of $3,015,000 for the common share purchase warrants issued under the
        private placement offering and the compensation options issued as agent service
        fees as contributed surplus in its consolidated financial statements. The
        estimated fair values of the common share purchase warrants and compensation
        options were determined using the Black-Scholes option pricing model. Key
        valuation assumptions include an 18-month term, Government of Canada risk-free
        interest rate of 2.78% and stock volatility of 0.677 based on a seventy-two
        week
        trading history.
 
 83
 **Tm
          Bioscience Corporation**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
  December
          31, 2005
 
 **11.
        CAPITAL STOCK** ***(continued)***
  [l]   
        As
        at December 31, 2002, 600,000 of the Company's common shares were subject
        to an
        escrow arrangement. These common shares were only to be released with the
        prior
        consent of applicable regulatory authorities, subject to certain corporate
        performance criteria. During the fourth quarter of 2003, these escrowed common
        shares expired and were cancelled.
 **Loss
        per common share**
  Loss
        per
        common share has been calculated on the basis of net loss for the year divided
        by the weighted average number of common shares outstanding at the year end.
        After reflecting changes in the Company’s capital share structure due to the
        Company’s 2004 consolidation with one (1) post-consolidation common share
        equivalent to five (5) pre-consolidation common shares *[note
        11]* ,
        the
        weighted average number of common shares outstanding for the year ended December
        31, 2005 was 40,644,715 [2004 - 34,766,222,  2003- 25,237,393]. Diluted
        loss per common share was not calculated as the effect of converting the
        Laurus
        Note and exercising the outstanding warrants, compensation options and employee
        stock options would be anti-dilutive.
  **12.
        STOCK-BASED COMPENSATION PLAN**
  On
        June
        25, 2004, following shareholder approval at the Company’s annual general meeting
        of shareholders, and all necessary regulatory approvals, the Company’s common
        shares commenced trading on the TSX on a consolidated basis of one (1)
        post-consolidation share for every five (5) pre-consolidation common shares.
        The
        following figures and charts have been retroactively restated to reflect
        the
        change in share number and price.
  In
        May
        1998, the Company formalized a share option plan [the “Share Option Plan”] and
        allotted and reserved up to 1,300,000 of its authorized but unissued common
        shares for issuance pursuant to the Share Option Plan. Under the Share Option
        Plan, the exercise price of each option is based upon the closing market
        price
        of the Company’s stock on the last trading day preceding the date of the grant.
        Options granted under the Share Option Plan vest on a cumulative basis at
        25%
        per annum for four years based on continued eligible employment and service
        and
        expire after five years from the date of grant.
  On
        April
        17, 2002, the Board of Directors of the Company approved revisions to the
        Company’s stock-based compensation plan, resulting in an increase in shares
        available under the Share Option Plan to 2,260,000 [from 1,300,000] or 10%
        of
        issued and outstanding shares of the Company. In addition, the vesting schedule
        was modified for all new employee and director stock option grants, to vest
        20%
        of granted options on the grant date, with the remainder vesting equally
        over
        four years based on continued eligible employment and service and expire
        after
        five years from the date of grant. The plan was further amended in December
        16,
        2003 to increase the available pool of stock options in the plan by 460,000
        resulting in an approved plan of 2,720,000 or approximately 8% of the Company’s
        issued and outstanding shares.
  Further
        amendments to the Company’s Share Option Plan, as approved at the Company’s
        annual and special meeting of shareholders held on June 2, 2004, came into
        effect on January 1, 2005.
  These
        amendments provide for a rolling maximum number of shares to be issuable
        pursuant to the plan
        equal to 10% of the number of outstanding common shares of the Company. 
Any increase in the number of issued and outstanding common shares of the
        Company will result in an increase in the number of common shares issuable
        under
        the Company’s incentive share option plan, and any exercise of options will make
        new grants available under the plan. As a result of these amendments, there
        is
        now a combined maximum of approximately 3,492,816 shares available for issuance
        under the Company’s share incentive option plan and the Company’s deferred share
        unit plan.
  84
 **Tm
          Bioscience Corporation**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
  December
          31, 2005
  Under
        the
        transitional provision of revised CICA Section 3870, “Stock-Based Compensation
        and other Stock-Based Payments”, the Company has adopted the fair value method
        of accounting for the stock options granted under its Share Option Plan in
        the
        year ended December 31, 2003. The prospective adoption requires that the
        Company
        expense, over the vesting period, the fair value of stock options granted,
        modified or settled during the fiscal years 2003 and subsequent. The fair
        value
        was determined on a basis consistent with that used in the Company’s disclosure
        under the former Section 3870 and reported by the Company on a quarterly
        basis
        since January 1, 2002. The fair value of direct awards of stock is determined
        by
        the quoted market price of the Company’s stock and the fair value of stock
        options is determined using the Black-Scholes option pricing model. The charge
        for the year ended December 31, 2005 related to employee stock options was
        $413,027 [2004 - $312,774, 2003- $171,883]. The cash proceeds for exercises
        of
        employee stock options for the year ended December 31, 2005 were $79,833
        [2004 -
        $21,879, 2003- $12,318]. During 2005, the Company awarded 25,000 [2004 -
        15,000,
        2003- $5,000] options to scientific advisory board members, who are deemed
        non-employees, and the compensation expense related to this grant is $21,464
        [2004 - $14,730, 2003- $1,305].
  In
        periods prior to January 1, 2003, the
        Company recognized no compensation expense when stock or stock options were
        issued to employees.
  For
        the
        year ended December 31, 2005, the pro forma compensation charge for stock
        options granted in 2002 to employees was $72,200 [2004 - $176,417, 2003-
        $280,545].
  The
        following significant assumptions were used to estimate the fair value of
        the
        stock options in 2005:
  Risk-free
                  rate
              
              
              3.21%
                  to 3.91%Expected
                  option life
              
              
              36
                  months to 5 yearsExpected
                  dividends yield
              
              
              n/aCalculated
                  option volatility
              
              
              0.732
                  to 0.899
  The
        risk-free rate is determined by selecting the published Government of Canada
        rate for bonds and treasury bills with a term equal to the expected option
        life
        at the date of grant. Where a co-terminus risk-free financial instrument
        rate is
        not available, a rate is interpolated from the two closest rates using a
        yield
        curve approximation. Prior to 2004, the expected option life assumes that
        employees will exercise their options six months after they become vested,
        whereas executives will exercise 12 months after vesting. For grants in 2004
        and
        2005, based on revised stock option exercise experience, it is assumed that
        all
        grantees will exercise their vested options from their first three vesting
        periods after 36 months, following which they will exercise 12 months after
        vesting.
  
  85
 
 **Tm
        Bioscience Corporation**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  December
        31, 2005
 
 The
        Company does not anticipate paying any dividends over the expected life of
        these
        options. The calculated option volatility anticipates that historical share
        price variations over a period equal to that of the expected option life
        appropriately represent future volatility for the purposes of fair value
        calculations.
  While
        management believes that the estimates used to establish the above noted
        expected values were rationally determined and consistently applied, the
        valuation of stock-based compensation using this model is subject to a
        significant degree of variability.
  The
        grant-date fair value of options granted in 2005 to employees is $570,321
        [2004
        - $306,100,  2003- $439,458] and to non-employees is $14,280 [2004 -
        $28,650,  2003- $3,950].
  The
        tables below set forth information relating to the options outstanding under
        the
        Share Option Plan as at December 31, 2005, 2004 and 2003, after reflecting
        changes in the Company’s capital share structure due to the Company’s 2004
        consolidation with one (1) post-consolidation common share equivalent to
        five
        (5) pre-consolidation common shares [ *note
        11* ]:
  **2005**
              ****
              **2004**
              
              **2003****Weighted**
              
              
              
              **Weighted**
              
              
              
              **Weighted****average**
              
              
              
              **average**
              
              
              
              **average****exercise**
              
              
              
              **exercise**
              
              
              
              **exercise****Options**
              
              **price**
              
              **Options**
              
              **price**
              
              **Options**
              
              **price****#**
              
              **$**
              
              #
              
              **$**
              
              **#**
              
              **$****Outstanding,
                  beginning of year**
              
              
              **2,204,071**
              
              
              **2.04**
              
              
              2,048,060
              
              
              1.95
              
              1,463,556
              
              2.25Granted
              
              
              **514,775**
              
              
              **2.08**
              
              
              234,645
              
              
              2.46
              
              761,506
              
              1.75Exercised
              
              
              **(56,577**
              **)**
              
              **1.41**
              
              
              (43,081
              )
              
              1.41
              
              (8,799
              )
              1.40Forfeited
              
              
              **(107,318**
              **)**
              
              **1.79**
              
              
              (33,053
              )
              
              1.64
              
              (72,709
              )
              1.60Expired
              
              
              **(181,743**
              **)**
              
              **4.04**
              
              
              (2,500
              )
              
              1.65
              
              (95,500
              )
              5.00**Outstanding,
                  end of year**
              
              
              **2,373,208**
              
              
              **1.92**
              
              
              2,204,071
              
              
              2.04
              
              2,048,060
              
              1.95**Options
                  exercisable, end of year**
              
              
              **1,464,012**
              
              
              **1.87**
              
              
              1,172,271
              
              
              2.17
              
              764,905
              
              2.20
 
  **Options
                  outstanding**
              
              **Options
                  exercisable****Weighted**
              
              **Weighted**
              
              
              
              **Weighted****Range
                  of**
              
              
              
              **average**
              
              **average**
              
              
              
              **average****exercise**
              
              **Number**
              
              **remaining**
              
              **exercise**
              
              **Number**
              
              **exercise****prices**
              
              **outstanding**
              
              **life**
              
              **price**
              
              **exercisable**
              
              **price**$
              
              #
              
              **[years]**
              
              **$**
              
              #
              
              **$****1.10
                  to 1.65**
              
              
              **846,947**
              
              
              **2.88**
              
              
              **1.45**
              
              
              **644,514**
              
              
              **1.45****1.66
                  to 2.49**
              
              
              **1,246,418**
              
              
              **3.65**
              
              
              **2.04**
              
              
              **611,560**
              
              
              **2.02****2.50
                  to 3.75**
              
              
              **279,843**
              
              
              **2.28**
              
              
              **2.82**
              
              
              **207,938**
              
              
              **2.71****1.10
                  to 3.75**
              
              
              **2,373,208**
              
              
              **2.65**
              
              
              **1.71**
              
              
              **1,464,012**
              
              
              **1.80**
   86
 
 **Tm
        Bioscience Corporation**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  December
        31, 2005
  **Deferred
        Share Unit Plan**
 
 As
        at
        December 31, 2005, the total deferred share units held by participating
        directors were 167,910 [2004 - 60,444,  2003- nil] and the amount expensed
        for the year was $226,750 [2004 - $127,896,  2003 - nil].
  **13.
        REVENUE**
  Revenue
        consists of the following:
  **2005**
                **$**
              
              **2004**
                **$**
              
              **2003**
                **$**Product
                  sales
                Instrument
                  sales
                Licensing
                  and development fees
                Contract
                  research and development fees
              
              
              **6,725,432**
                **829,773**
                **51,232**
                **67,733**
              
              
              3,460,747
                242,271
                84,765
                62,230
              
              1,054,923
                -
                28,750
                71,960**7,674,170**
              
              
              3,850,013
              
              1,155,633
 
  **14.
        COMMITMENTS**
  In
        the
        second quarter of 2003, the Company renegotiated its existing premises lease
        agreement with the landlord to include the expansion into new premises. Under
        the agreement, the landlord provided an allowance of $218,235 towards the
        leasehold improvement of the premises as well as a period of rent free use.
        The
        Company is amortizing this benefit and allowance over the lease term of five
        years as a leasehold inducement. As at December 31, 2005, the unamortized
        inducement was $181,531.
  In
        the
        third quarter of 2005, the Company renegotiated its existing premises lease
        agreement with the landlord to include the expansion into new premises. Under
        the agreement, the landlord provided an allowance of $168,680 towards the
        leasehold improvement of the premises as well as a period of rent free use.
        The
        Company is amortizing this benefit and allowance over the lease term of three
        years and six months as a leasehold inducement. As at December 31, 2005,
        the
        unamortized inducement was $166,587.
  The
        Company is obligated under premises and equipment leases to make future minimum
        annual payments expiring through 2009 as follows:
  $2006
              
              
              931,1702007
              
              
              966,9882008
              
              
              971,9082009
              
              
              105,4232,975,489
 Premises
        lease represents 95% of minimum future lease payments.
  **15.
        DEFERRED REVENUE**
  During
        2005, the Company recognized contract research and development fees revenue
        of
        $67,732 [2004 - $62,230, 2003 - $61,136] as a pro-rata recognition of milestone
        payments received from three companies [2004 - two, 2003- one] related to
        the
        commercial availability of their Tm100-based Universal Array Microspheres.
        In
        addition, the Company had unearned revenue related to Instrument sales.
  As
        at
        December 31, 2005, deferred revenue for milestone payments and Instrument
        sales
        were $199,759 [2004 - $208,543], and $48,016 [2004 - $14,827]
        respectively.
 87
 **Tm
          Bioscience Corporation**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
  December
          31, 2005
 **16.
        INCOME TAXES**
  The
        reconciliation of income tax computed at the statutory tax rates to the
        provision for income taxes is as follows:
   **2005**
                
                **2004**
                
                
                **2003****$**
                
                **$**
                
                
                **$**Loss
                    before provision of income taxes
                
                
                **15,085,511**
                
                
                11,817,498
                
                
                7,808,889Expected
                    Canadian statutory rate
                
                
                **36.12**
                
                
                36.12
                
                
                36.62Expected
                    income tax recovery
                
                
                **5,448,887**
                
                
                4,268,480
                
                
                2,859,615Effect
                    on income tax rate resulting from:Unrecognized
                    income tax benefit of losses and increasesin
                    future tax assets
                
                
                **(3,887,646**
                **)**
                
                (4,091,230
                )
                
                (2,649,705
                )Accounting
                    charges not deductible for tax purposes
                
                
                **(2,019,671**
                **)**
                
                (202,053
                )
                
                (209,910
                )Difference
                    between U.S. and Canadian tax rate on U.S. income
                
                
                **10,734**
                
                
                3,803
                
                
                -Investment
                    tax credit net of tax
                
                
                **404,799**
                
                
                **-**
                
                
                -U.S.
                    state tax liability
                
                
                **(39,058**
                **)**
                
                **-**
                
                
                -Income
                    tax provision
                
                
                (**81,955**
                **)**
                
                (21,000
                )
                
                -The
                    tax effects of temporary differences that give rise to significant
                    portions of the future tax assets as at December 31 are presented
                    below:**2005**
                
                
                **2004**
                
                
                **2003****$**
                
                
                **$**
                
                
                **$****Future
                    tax assets (liabilities)**Tax
                    benefits of loss carryforwards and Scientific Research and Experimental
                    Development [“SR&ED”] pool carryforward
                
                
                **11,890,000**
                
                
                13,807,000
                
                
                10,242,000Investment
                    tax credits
                
                
                **1,481,000**
                
                
                1,076,000
                
                
                525,000Tax
                    basis in excess of book value
                
                
                **6,460,000**
                
                
                1,008,000
                
                
                609,000Share
                    issue costs
                
                
                **(454,000**
                **)**
                
                (238,000
                )
                
                1,000Other
                
                
                **135,000**
                
                
                70,000
                
                
                6,000Future
                    tax assets before valuation allowance
                
                
                **19,512,000**
                
                
                15,723,000
                
                
                11,383,000Less
                    valuation allowance
                
                
                **(19,512,000**
                **)**
                
                (15,723,000
                )
                
                (11,383,000
                )-
                
                
                -
                
                
                -
   At
        December 31, 2005  ,
        the
        Company and its subsidiary, Tm Technologies, Inc., have non-capital income
        tax
        losses and net operating losses of approximately CAD$13,057,000 [2004 - CAD
        $27,422,000, 2003- CAD $20,957,000] and U.S.$3,260,000 [2004 - U.S.$3,260,000,
        2003- $3,260,000], respectively, which are available for carry forward to
        reduce
        future years’ taxable income. The U.S. losses carried forward may be impacted
        due to restrictions imposed if an acquisition of control should occur.
  
 88
 
 **Tm
        Bioscience Corporation**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  December
        31, 2005
 
 These
        income tax losses expire as follows:
 **Cdn.**
              
              **U.S.**$
              
              $2006
              
              
              —
              
              
              —2007
              
              
              1,882,000
              
              
              —2008
              
              
              —
              
              
              —2009
              
              
              2,145,000
              
              
              —2010
              
              
              3,385,000
              
              
              —2012
              
              
              —
              
              
              797,0002014
              
              
              5,645,000
              
              
              —2018
              
              
              —
              
              
              2,394,0002019
              
              
              —
              
              
              69,00013,057,000
              
              
              3,260,000
  The
        Company has an SR&ED pool in Canada of approximately $15,652,000 [2004 -
        $6,448,000,  2003- $2,702,000] available to reduce future years’ taxable
        income. The SR&ED pool can be carried forward indefinitely.
  The
        Company has investment tax credits in Canada of approximately $1,952,000
        [2004 -
        $1,432,000, 2003- $822,000] available to reduce future years’ federal taxable
        income. The investment tax credits expire within 10 years.
  **17.
        FINANCIAL INSTRUMENTS**
  **Fair
        values**
  The
        fair
        market values of the Company’s current financial assets and liabilities
        approximate their carrying values due to their short-term nature.
  The
        fair
        market value of the Company’s long-term debt approximates its carrying value as
        the debt bears interest at rates comparable to current market
        rates.
  **Credit
        risk**
  The
        Company manages its credit risk with respect to trade accounts receivable
        by
        primarily dealing with creditworthy customers. As at December 31, 2005, the
        Company has trade accounts receivable with thirty-four [2004 - sixteen, 2003-
        two] customers. Of these customers, two [2004 - three, 2003- two] represent
        40%
        [2004 - 64%, 2003- 100%] of total trade accounts receivable at December 31,
        2005.
  **Interest
        rate risk**
  The
        Company is subject to risk in respect of fluctuating interest rates on its
        short-term investments and its U.S. dollar loan since the yield in some money
        market investments may vary. For the years ended December 31, 2005, 2004
        and 2003, this risk was not material.
  **Foreign
        currency rate risk**
  The
        Company’s activities that result in exposure to fluctuations in foreign currency
        exchange rates consist of the purchase of services, supplies and capital
        assets
        from suppliers billing in foreign currencies. The Company also licenses
        technology and sells products and services to non-Canadian customers in foreign
        currencies. The Company has not used derivative financial instruments to
        hedge
        its currency risk. As at December 31, 2005, 99% [2004 - 86%,  2003- 100%]
        of the Company’s trade accounts receivable, 51% [2004 - 43%, 2003 - 34%] of the
        Company’s accounts payable and accrued liabilities and 79% [2004 - 0%, 2003 -
        0%] of the Company’s long-term debt are denominated in foreign currencies. For
        the year ended December 31, 2005, foreign exchange gains (losses) included
        in
“Other financial income, net” totalled $76,367 [2004 - ($10,515), 2003-
        $9,163].
  **18.
        SEGMENTED INFORMATION**
  The
        Company considers itself to be in one business segment, that is, the research,
        development and commercialization of genomic products and
        technology.
  
 89
 
 **Tm
        Bioscience Corporation**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  December
        31, 2005
 
 [a] Geographic
        information is detailed as follows:
  **2005**
              
              **2004**
              
              **2003****Net**
              
              
              
              **Net**
              
              
              
              **Net****Revenue**
              
              **capital
                  assets**
              
              **Revenue**
              
              **capital
                  assets**
              
              **Renueve**
              
              **capital
                  assets**%
              
              %
              
              %
              
              %
              
              %
              
              %Canada
              
              
              **1.2**
              
              
              **70.8**
              
              
              4.0
              
              
              72.7
              
              —
              
              94.1United
                  States
              
              
              **97.7**
              
              
              **29.2**
              
              
              95.7
              
              
              27.3
              
              100.0
              
              5.9International
              
              
              **1.1**
              
              
              **—**
              
              
              0.3
              
              
              —
              
              —
              
              —**100.0**
              
              
              **100.0**
              
              
              100.0
              
              
              100.0
              
              100.0
              
              100.0
 
  Revenue
        is attributed to countries based on the location of the customers.
  [b]In
        2005, 2004 and 2003, the Company had three [2004 - two, 2003 - two] customers
        accounting for 66% [2004 - 83%, 2003 - 94%] of its total revenue.
  **19.
        CONTINGENCIES**
  From
        time
        to time the Company is involved in various claims and legal actions arising
        in
        the ordinary course of business. In the opinion of management, the ultimate
        disposition of these matters will not have a material adverse effect on the
        Company’s financial position, results of operations or cash flows.
  **20.
        CONSOLIDATED STATEMENTS OF CASH FLOWS**
  The
        consolidated statements of cash flows exclude the following non-cash investing
        and financing transactions:
  **·**
                Acquisition
                  of a portion of fundemental patent acquired of
                  $1,172,900 [note 7]  **·**
                Non-cash
                    items relating to the TPC debt include a non-cash interest charge
                    of
                    $300,313 a portion of which relates to the yield represented
                    by the
                    royalties, the other portion of which relates to the yield represented
                    by
                    the warrant value [note 8[a]]
  **·**
                Non-cash
                    transfer from loan to contributed surplus relating to pro-rata
                    allocation
                    of funds advanced by TPC of $1,851,061 [note
                    8[a]]
  **·**
                Non-cash
                    items relating to the Laurus debenture include accretion of $92,135
                    and
                    foreign exchange gain of $135,496 [note
                    8[b]]
  **21.
        COMPARATIVE CONSOLIDATED FINANCIAL STATEMENTS**
  The
        comparative consolidated financial statements have been reclassified from
        statements previously presented to conform to the presentation of the 2005
        consolidated financial statements.
  **22.
        SUBSEQUENT EVENT**
  On
        March
        17, 2006, the Company signed an agreement with Sirius Genomics [“Sirius”] for an
        exclusive commercial license to patents from Sirius for specific biomarkers
        related to drugs used to treat severe sepsis, including vasopressin.
  Under
        the
        terms of the agreement, the Company will provide an upfront payment of
        $4,000,000 which will be provided to Sirius in two equal instalments in the
        second and third quarters of 2006. These upfront payments will be repaid
        from
        net earnings on commercial sales of the severe sepsis test, with the remaining
        earnings shared equally by Sirius and the Company over the term of the
        agreement.
  A
        director, and chair of the Scientific Advisory Board of the Company, is also
        the
        Chief Executive Officer of Sirius.
  These
        transactions are measured at the exchange amount of consideration established
        and agreed to by the related parties.
  **23.
        RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
        STATES**
  The
        consolidated financial statements have been prepared in accordance with Canadian
        generally accepted accounting principles [“Canadian GAAP”], which differs in
        some respects from accounting principles generally accepted in the United
        States
        of America [“US GAAP”]. The significant differences between Canadian and US
        GAAP, and their effect on the consolidated financial statements as at December
        31, 2005 and 2004 and for the years then ended, are described
        below:
  90
 
 **Tm
        Bioscience Corporation**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  December
        31, 2005
  **Reconciliation
        of Consolidated Balance Sheets**
  The
        following table indicates the amounts for the items in the balance sheets
        of the
        Company that would be affected had the consolidated financial statements
        been
        prepared in accordance with US GAAP.
  **As
                  at December 31,**
              ********
              ****
              **2005**
                **$**
              ****
              **2004**
                **$**
              ********
              ****
              **Canadian
                  GAAP**
              ****
              **Adj.**
              ****
              **US
                  GAAP**
              ****
              **Canadian
                  GAAP**
              ****
              **Adj.**
              ****
              **US
                  GAAP**Current
                  assets
              
              
              21,539,661
              
              
              -
              
              
              21,539,661
              
              
              8,094,835
              
              
              -
              
              
              8,094,835Capital
                  assets, net
              
              
              4,340,712
              
              
              -
              
              
              4,340,712
              
              
              3,434,821
              
              
              -
              
              
              3,434,821Intangible
                  assets, net
              
              
              2,765,363
              
              
              -
              
              
              2,765,363
              
              
              699,495
              
              
              -
              
              
              699,495Deferred
                  financing costs, net [a [iv]]
              
              
              777,901
              
              
              68,435
              
              
              846,336
              
              
              535,405
              
              
              3,523
              
              
              538,928Other
                  asset [a [iii]]
              
              
              1,438,347
              
              
              (28,427
              )
              
              1,409,920
              
              
              -
              
              
              -
              
              
              -Current
                  liabilities, less current portion of long-term debt
              
              
              6,256,018
              
              
              -
              
              
              6,256,018
              
              
              1,975,826
              
              
              -
              
              
              1,975,826Deferred
                  leasehold inducement
              
              
              348,118
              
              
              -
              
              
              348,118
              
              
              240,913
              
              
              -
              
              
              240,913Deferred
                  revenue
              
              
              123,970
              
              
              -
              
              
              123,970
              
              
              144,127
              
              
              -
              
              
              144,127Deferred
                  share units
              
              
              301,075
              
              
              -
              
              
              301,075
              
              
              127,896
              
              
              -
              
              
              127,896Long-term
                  debt [a [i], [iii]]]
              
              
              2,448,978
              
              
              (28,427
              )
              
              2,420,551
              
              
              8,126,057
              
              
              201,809
              
              
              8,327,866Convertible
                  debentures [a [iv]]
              
              
              9,060,786
              
              
              553,242
              
              
              9,614,028
              
              
              -
              
              
              -
              
              
              -Capital
                  stock [b]
              
              
              66,871,280
              
              
              (11,960
              )
              
              66,859,320
              
              
              43,265,955
              
              
              -
              
              
              43,265,955Contributed
                  surplus [a [i], [ii], [iv]], [b]
              
              
              9,937,955
              
              
              (1,585,499
              )
              
              8,352,456
              
              
              8,202,511
              
              
              (430,435
              )
              
              7,772,076Accumulated
                  other comprehensive income [c]
              
              
              -
              
              
              25,522
              
              
              25,522
              
              
              -
              
              
              10,138
              
              
              10,138Deficit
                  [a [i], [ii]], [b], [c]
              
              
              (64,486,195
              )
              
              1,087,130
              
              
              (63,399,065
              )
              
              (49,318,729
              )
              
              222,011
              
              
              (49,096,718
              )Shareholders’
                  equity
              
              
              12,323,040
              
              
              (484,807
              )
              
              11,838,233
              
              
              2,149,737
              
              
              (198,286
              )
              
              1,951,451
 
  91
 **Tm
            Bioscience Corporation**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
  December
            31, 2005
  **Reconciliation
          of Consolidated Net Loss**
  Reconciliation
          of net loss under Canadian GAAP to net loss under US GAAP is as follows:
  **2005**
                ****
                **2004**
                ********
                ****
                **$**
                ****
                **$**Net
                    loss under Canadian GAAP
                
                
                (15,167,466
                )
                
                (11,838,498
                )Adjustments:Stock-based
                    compensation [b]
                
                
                413,027
                
                
                312,774Accretion
                    expense on CMDF financing [a [i]]
                
                
                -
                
                
                4,612Accretion
                    expense on debentures [a [ii]]
                
                
                179,670
                
                
                (2,665
                )Unrealized
                    (gains) losses on available-for-sale securities [c]
                
                
                (25,522
                )
                
                (10,138
                )Reclassification
                    adjustment for gains (losses) included in net income [c]
                
                
                10,138
                
                
                (2,236
                )Loss
                    on settlement of debentures [a [ii]]
                
                
                56,065
                
                
                -Gain
                    on change in fair value of the convertible debentures [a
                    [iv]]
                
                
                200,000
                
                
                -Accretion
                    expense on convertible debentures [a [iv]]
                
                
                44,621
                
                
                -Amortization
                    of deferred financing costs related to convertible debentures
                    [a
                    [iv]]
                
                
                (1,166
                )
                
                -Foreign
                    exchange effect on convertible debentures [a [iv]]
                
                
                (11,714
                )
                
                -Net
                    loss under US GAAP
                
                
                (14,302,347
                )
                
                (11,536,151
                )Other
                    comprehensive income (loss):Unrealized
                    gain on available-for-sale securities [c]
                
                
                25,522
                
                
                10,138Less:
                    reclassification adjustment for gains (losses) included in net
                    income
                    [c]
                
                
                (10,138
                )
                
                (2,236
                )Comprehensive
                    loss under US GAAP
                
                
                (14,266,687
                )
                
                (11,523,777
                )Weighted
                    average shares - basic and diluted
                
                
                40,644,715
                
                
                34,766,222Basic
                    and diluted net loss per share under US GAAP
                
                
                (0.35
                )
                
                (0.33
                )
 
  **Consolidated
          Statement of Cash Flows**
  The
          consolidated statements of cash flows comply with U.S. GAAP and there were
          no
          reconciling differences.
  **[a]
          Long term debt**
  i)
          Canadian Medical Discovery Fund [“CMDF”]
  The
          Company secured financing of $4,661,400 from CMDF in November 2002. Under
          Canadian GAAP, the proceeds received from the CMDF loan were allocated
          to the
          common stock purchase warrants based on their estimated fair value, which
          was
          estimated using the Black-Scholes option pricing model, with the remaining
          proceeds allocated to the loan. Under US GAAP, the proceeds received are
          required to be allocated to the loan and common stock purchase warrants
          on a pro
          rata basis based on their estimated fair values. The fair value of the
          loan and
          common stock purchase warrants were estimated to be $4,212,180 and $786,200,
          respectively, resulting in an allocation of $3,928,191 to the loan and
          $733,209
          to the common stock purchase warrants. Issue costs associated with the
          financing
          of $77,821 have been deferred and amortized to expenses using the effective
          interest method over the term of the loan. A further $14,525, representing
          a pro
          rata share of the total financing costs associated with the common stock
          purchase warrants, has been allocated to contributed surplus.
 92
 **Tm
            Bioscience Corporation**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
  December
            31, 2005
 ii)
          Debentures
  Under
          Canadian GAAP, the proceeds received from the Debentures issued on November
          12,
          2004 were allocated to the special warrants based on their estimated fair
          value,
          which was estimated using the Black-Scholes option pricing model, with
          the
          remaining proceeds allocated to the debenture. Under US GAAP, the proceeds
          received are required to be allocated to each component on a pro rata basis
          based on their estimated fair values . As
          disclosed in note 8[b], the repayment of the CMDF loan made in conjunction
          with
          the Debenture financing has been accounted for as a renegotiation. Therefore,
          the unamortized value of the warrant discount [$140,550 at November 15,
          2004]
          originating with the CMDF loan has been included in determining the allocation
          of the proceeds from the Debentures to each component. The fair value of
          the
          loan and special warrants were estimated to be $7,781,090 and $1,866,467,
          respectively, resulting in an allocation of $6,869,631 to the Debenture
          and
          $1,771,919 to the special warrants. An amount of $179,670 [2004- ($2,665)]
          was
          transferred from accretion expense to long-term debt. In 2004, $239,258
          was
          transferred from contributed surplus to long-term debt. Issue costs associated
          with the financing of $467,569 have been deferred and amortized to expenses
          using the effective interest method over the term of the Debenture. A further
          $120,602, representing a pro rata share of the total financing costs associated
          with the special warrants, has been allocated to contributed
          surplus.
  iii)
          Technology Partnerships Canada [“TPC”]
  Under
          Canadian GAAP, the proceeds received under the TPC program were allocated
          to the
          committed warrants based on their estimated fair value, which was estimated
          using the Black-Scholes option pricing model, with the remaining proceeds
          allocated to the amount repayable to TPC. Under US GAAP, the proceeds received
          are required to be allocated to each component on a pro rata basis based
          on
          their estimated fair values. As at December 31, 2005, the fair value of
          the
          amount repayable to TPC and the committed warrants were estimated to be
          $2,107,655 [2004 - $1,142,577] and $1,061,653 [2004 - $648,938], respectively,
          resulting in an allocation of $2,009,946 [2004 - $1,208,513] to the amount
          repayable and $1,090,080 [2004 - $686,387] to the committed warrants. As
          a
          result of this, an amount of $28,247 was transferred from other asset to
          long-term debt.
  iv)
          Convertible Debentures
  Under
          Canadian GAAP, the proceeds received from the Note were allocated to the
          convertible debt and warrants based on their estimated fair values, which
          were
          estimated using the discounted cash flow method and Black-Scholes model,
          with
          the remaining proceeds allocation to the equity conversion feature. Under
          US
          GAAP, the Company has adopted Financial Accounting Standard ["FAS"] 155,
          "Accounting for Certain Hybrid Financial Instruments - an amendment of
          FAS 133
          and FAS 140". Under the provisions of FAS 155, a company can elect irrevocably
          to record a hybrid financial instrument which contains one or more embedded
          derivatives that would otherwise require bifurcation under FAS 133, "Accounting
          for Derivative Instruments and Hedging Activities" at fair value in its
          entirety
          at each reporting date, with changes in fair value recognized in
          earnings.
  At
          November 23, 2005, the estimated fair value of the Note, based on comparable
          current market transactions, and the warrants, based on the Black-Scholes
          model,
          have been estimated to be $10,000,000 and $665,000, respectively, resulting
          in
          an allocation of $9,890,295 to the Note and $657,705 to the warrants. As
          at
          December 31, 2005, the fair value of the Note has been estimated to be
          $9,800,000. The change in fair value of $200,000 from the date of issuance
          has
          been recognized as a gain for the year ended December 31, 2005. An amount
          of
          $786,149 mostly related to the conversion feature was reallocated from
          contributed surplus to the convertible debenture. Other adjustments include
          a
          reduction of the recognized foreign exchange gain by $11,714, as well as
          a
          reduction in accretion and the convertible debenture of $44,621. Issue
          costs
          associated with the Note of $875,468 have been deferred and will be amortized
          to
          expenses using the effective interest method over the term of the Note.
          $58,219
          representing a pro rata share of financing costs associated with the warrants
          have been allocated to contributed surplus.
   
 93
 Tm
            Bioscience Corporation
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
  December
            31, 2005
  **[b]
          Stock-based compensation**
  In
          2005
          and 2004, under Canadian GAAP, the Company recognized the fair value of
          stock
          options granted, modified or settled in the fiscal year. Under US GAAP, the
          Company measures compensation costs related to stock options granted to
          employees using the intrinsic value method as prescribed by APB Opinion
          No. 25, "Accounting for Stock Issued to Employees," as permitted by
          FAS No. 123, "Accounting for Stock-Based Compensation". Therefore, an
          adjustment has been recorded to eliminate the fair value of stock options
          issued
          to employees that were recognized in net loss under Canadian GAAP and
          contributed surplus. An adjustment has also been recorded to reverse the
          transfer of fair value relating to stock options exercised during the year
          ended
          December 31, 2005 from contributed surplus to capital stock.
  FAS No. 123
          requires the disclosure of pro forma net loss and loss per share
          information as if the Company had accounted for its employee stock options
          under
          the fair-value method prescribed by FAS No. 123. The estimated fair
          value of the options is amortized to expense over the vesting period, on
          a
          graded basis, and was determined using the Black-Scholes option pricing
          model
          with the weighted average assumptions disclosed in note 11.
  Under
          US
          GAAP, stock options issued in lieu of cash to non-employees for services
          performed are recorded at fair value measured using the Black-Scholes option
          pricing model at the date grant and are expensed as the services are
          provided.
  Pro forma
          disclosures under US GAAP are as follows:
  **2005**
                ****
                **2004**
                ********
                ****
                **$**
                ****
                **$**Net
                    loss in accordance with US GAAP - as reported
                
                
                (14,302,347
                )
                
                (11,536,151
                )Deduct:
                    Stock-based employee compensation cost using fair-value
                    method
                
                
                542,827
                
                
                559,058Pro
                    forma net loss in accordance with US GAAP
                
                
                (14,845,174
                )
                
                (12,095,209
                )Earnings
                    per shareBasic
                    and diluted - as reported
                
                
                (0.35
                )
                
                (0.33
                )Basic
                    and diluted - pro forma
                
                
                (0.37
                )
                
                (0.35
                )
 The
          Black-Scholes model requires the input of highly subjective assumptions
          including the expected stock price volatility and the expected time until
          exercise. Because the Company’s employee stock options have characteristics
          significantly different from those of traded options and awards, and because
          changes in the subjective input assumptions can materially affect the fair
          value
          estimate, in management’s opinion, existing models, including the Black-Scholes
          model, do not necessarily provide a reliable single measure of fair value
          of its
          employee stock options and stock awards.
  **[c]
          Short-term investments**
  For
          US
          GAAP purposes, the Company classifies its short-term investments as
          available-for-sale, which are recorded at fair value with unrealized gains
          or
          losses, net of tax, reflected as a component of other comprehensive income
          until
          realized. All short-term investments mature within one-year.
  Gross
          realized gains on sale of available-for-sale securities during the year
          ended
          December 31, 2005 were $157,765 [2004 - $125,206] and have been included
          in
          other financial [expense] income, net in the Company’s consolidated statement of
          loss and deficit. The cost of sold securities is determined on a specific
          identification basis.
   
 94
 Tm
            Bioscience Corporation
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
  December
            31, 2005
   **Other
          disclosures required under US GAAP**
  **[d]
          Warranty liability**
  The
          Company records a liability for future warranty costs based on management's
          best
          estimate of probable claims under its product warranties. The accrual is
          based
          on the terms of the warranty which vary by customer and product, and historical
          experience. The Company regularly evaluates the appropriateness of the
          remaining
          accrual.
  The
          following table details the changes in the Company’s warranty
          liability:
  **2005**
                ****
                **2004**
                ********
                ****
                **$**
                ****
                **$**Balance,
                    beginning of year
                
                
                2,544
                
                
                -Accruals
                    for warranties issued during the year
                
                
                76,271
                
                
                2,544Drawdowns
                
                
                (24,871
                )
                
                -Balance,
                    end of year
                
                
                53,943
                
                
                2,544
  **[e]
          Allowance for doubtful accounts**
  The
          Company relies on its credit approval process to evaluate the exposure
          to the
          potential for non-performing receivables. Estimated losses are recorded
          within
          an allowance for doubtful accounts and reported as a deduction from gross
          receivables.
  **[f]
          Investment tax credits**
  Investment
          tax credits are recorded as a reduction of research and development expenses
          as
          payments for the investment tax credits are received. Investment tax credits
          received during the year ended December 31, 2005 were $354,224 [2004 -
          $200,000].
  **[g]
          Accounts payable and accrued liabilities**
  Accounts
          payables and accrued liabilities consist of the following:
  **2005**
                ****
                **2004**
                ********
                ****
                **$**
                ****
                **$**Trade
                    accounts payable
                
                
                1,943,357
                
                
                796,611Royalties
                    payable
                
                
                294,110
                
                
                168,765Licence
                    fee payable
                
                
                1,169,200
                
                
                -Purchase
                    order accruals
                
                
                501,195
                
                
                65,133Bonus
                    accrual
                
                
                228,661
                
                
                213,912Audit
                    accrual
                
                
                89,200
                
                
                110,097Taxes
                    payable
                
                
                216,922
                
                
                70,027Professional
                    fees accrual
                
                
                617,457
                
                
                -Other
                    accruals
                
                
                989,838
                
                
                451,0386,049,940
                
                
                1,875,583
     95
 Tm
              Bioscience Corporation
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS**
  December
              31, 2005
  [h]
              Intangible assets
  The
          Company estimates its future intangible asset amortization expense as follows,
          based on existing asset balances:
  2006
                
                $
                435,0002007
                
                
                426,0002008
                
                
                414,0002009
                
                
                351,0002010
                    and thereafter
                
                
                1,139,000
  **[i]
          Advertising costs**
  Advertising
          costs are expensed as incurred. Advertising costs incurred for the year
          ended
          December 31, 2005 were $202,885 [2004 - $190,533].
  **[j]
          Rental expense**
  Rental
          expense for the year ending December 31, 2005 was $693,862 [2004
          -$546,450].
   **[k]Other
          financial [expenses] income, net**
  Other
          financial [expense] income, net consists of the following:
  **2005**
                
                **2004**$
                
                $Interest
                    income on available-for-sale securities
                
                
                183,287
                
                
                135,344Foreign
                    exchange gain [loss]
                
                
                76,367
                
                
                (10,515
                )Amortization
                    of deferred financing costs
                
                
                (563,371
                )
                
                (105,014
                )Other
                    financial [expense] income, net
                
                
                (81,628
                )
                
                (6,363
                )(385,345
                )
                
                13,452
  **[l]
          Continuity of qualifying reserves** In
          accordance with Article 12 of regulation S-X, the Company has set out details
          of
          the following reserves:
  **Reserve
                    for Accounts Receivable**
                
                **2005**
                
                **2004**$
                
                $Balance,
                    beginning of year
                
                
                21,116
                
                
                -Charged
                    to costs and expenses
                
                
                26,943
                
                
                21,116Deductions
                
                
                (21,116
                )
                
                -Foreign
                    exchange
                
                
                (1,397
                )
                
                -Balance,
                    end of year
                
                
                25,546
                
                
                21,116
 
  **Reserve
                    for Future Income Taxes**
                
                **2005**
                
                **2004**$
                
                $Balance,
                    beginning of year
                
                
                15,723,000
                
                
                11,383,000Charged
                    to costs and expenses
                
                
                3,789,000
                
                
                4,340,000Balance,
                    end of year
                
                
                19,512,000
                
                
                15,723,000
   96
 Tm
              Bioscience Corporation
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS**
  December
              31, 2005
 **[m]
          Income taxes** United
          States GAAP requires additional disclosures of the domestic and foreign
          components of income tax expense. These amounts are as follows:
  **2005**
                
                **2004**$
                
                $Income
                    tax expense:CurrentCanada
                
                
                -
                
                
                -Foreign
                
                
                81,955
                
                
                21,00081,955
                
                
                21,000
 
  Additionally,
          United States GAAP requires earnings (loss) before income taxes to be presented
          by geographic location. This information is presented in the following
          table:
  **2005**
                
                **2004**$
                
                $Earnings
                    (loss) before income taxes:Canada
                
                
                (15,233,988
                )
                
                (11,913,850
                )Foreign
                
                
                148,477
                
                
                96,350(15,085,511
                )
                
                (11,817,500
                )
  **[n]
            Adoption of new accounting pronouncements**
   i)
                Effective
                    January 1, 2005, the Company prospectively adopted FAS No. 151,
                    “*Inventory
                    Costs - An Amendment of ARB No. 43, Chapter 4*”.
                    FAS 151 amended the guidance in ARB No. 43, Chapter 4, “Inventory
                    Pricing”, to clarify the accounting for abnormal amounts of idle facility
                    expense, freight, handling costs, and wasted material (spoilage).
                    This
                    statement requires that these items be recognized as current-period
                    charges regardless of whether they meet the previous criterion
                    of “so
                    abnormal” and that allocation of fixed production overheads to the costs
                    of conversion be based on the normal capacity of the production
                    facilities. The adoption of FAS 151 had no material impact on
                    the
                    Company’s financial position, results of operations or cash
                    flows.  ii)
                Effective
                    January 1, 2005, the Company prospectively adopted FIN 47, “*Accounting
                    for Conditional Asset Retirement Obligations—an interpretation of FASB
                    Statement No. 143*”.
                    FIN 47 requires an entity to recognize a liability for the fair
                    value of a
                    conditional asset retirement obligation if the fair value can
                    be
                    reasonably estimated. FIN 47 states that a conditional asset
                    retirement
                    obligation is a legal obligation to perform an asset retirement
                    activity
                    in which the timing or method of settlement are conditional upon
                    a future
                    event that may or may not be within control of the entity. The
                    adoption of
                    FIN 47 had no material impact on the Company’s financial position, results
                    of operations or cash flows.
 **[o]
          Recent accounting pronouncements**
   i)
                  On
                      January 27, 2005, the Accounting Standards Board ["AcSB"] issued
                      the
                      following new standards: CICA 3855*Financial
                      Instruments - Recognition and Measurement, CICA 3865 Hedges,*and
                      CICA 1530*Comprehensive
                      Income,*effective
                      for interim and annual financial statements for fiscal years
                      beginning on
                      or after October 1, 2006. Management is currently in the process
                      of
                      assessing the impact of these
                      standards.
 ii)
                  In
                      December 2004, the Financial Accounting Standards Board ["FASB"]
                      issued FAS 123R, "Share-Based Payment", which replaces FAS
                      No. 123,
                      "Accounting for Stock-Based Compensation," and supercedes APB
                      Opinion
                      No. 25, "Accounting for Stock Issued to Employees". FAS 123R
                      requires all share-based payments to employees, including grants
                      of
                      employee stock options, to be recognized in the financial statements
                      based
                      on their fair values beginning with the first interim or annual
                      period
                      after June 15, 2005, with early adoption encouraged. The pro forma
                      disclosures previously permitted under FAS 123 no longer will be an
                      alternative to financial statement recognition. Under FAS 123R, the
                      Company must utilize one of the transition methods required
                      by the
                      standard to record the fair value of stock-based compensation
                      related to
                      these awards. The transition methods include the modified-prospective
                      and
                      the modified-retrospective adoption options. Both of these
                      methods require
                      that compensation expense be recorded for all share-based payments
                      granted, modified or settled after the date of adoption and
                      for all
                      unvested stock options at the date of adoption; however, under
                      the
                      modified-retrospective method, prior periods are restated by
                      recognizing
                      compensation cost in amounts previously reported in the pro
                      forma note
                      disclosures under FAS No. 123. Prior periods may be restated
                      either as of
                      the beginning of the year of adoption or for all periods presented.
                      Management is currently in the process of assessing the impact
                      of these
                      standards.
  iii)
                  In
                      December 2004, the FASB released FAS No. 153, “*Exchanges
                      of Nonmonetary Assets - An Amendment of APB Opinion No.
                      29*”.
                      This statement amends Opinion 29 to eliminate the exception
                      for
                      non-monetary exchanges of similar productive assets and replaces
                      it with a
                      general exception for exchanges of nonmonetary assets that
                      do not have
                      commercial substance. A nonmonetary exchange has commercial
                      substance if
                      the future cash flows of the entity are expected to change
                      significantly
                      as a result of the exchange. FAS No. 153 is effective for nonmonetary
                      exchanges occurring in fiscal periods beginning after June
                      15, 2005. The
                      Company performs a limited amount of exchanges of nonmonetary
                      assets, as
                      such the application of this standard will not have a material
                      impact on
                      the financial statements.
  iv)
                  In
                      May 2005, the FASB issued FAS No. 154, “Accounting Changes and Error
                      Corrections”, which replaces APB Opinion No. 20, “Accounting Changes” and
                      FAS No. 3, “Reporting Accounting Changes in Interim Financial
                      Statements—An Amendment of APB Opinion No. 28.” FAS No. 154 provides
                      guidance on the accounting for and reporting of accounting
                      changes and
                      error corrections. It establishes retrospective application,
                      or the latest
                      practicable date, as the required method for reporting a change
                      in
                      accounting principle and the reporting of a correction of an
                      error. FAS
                      No. 154 is effective for accounting changes and corrections
                      of errors made
                      in fiscal years beginning after December 15, 2005. The Company
                      does not
                      expect the implementation of FAS No. 154 to have a significant impact
                      on the Company's consolidated financial position, results of
                      operations or
                      cash flows.
 97
 **Statement
                  of Management Responsibility**
 
 The
                  accompanying consolidated financial statements are the responsibility
                  of
                  Management and have been approved by the Audit Committee on behalf
                  of the Board
                  of Directors of the Company. Management is responsible for and
                  has prepared and
                  presented the consolidated financial statements in accordance with
                  accounting
                  principles generally accepted in Canada and has made any significant
                  accounting
                  judgments and estimates required. Management has ensured that financial
                  information contained elsewhere in this Quarterly Report is consistent
                  with the
                  consolidated financial statements.
  Management
                  has developed and maintains systems of internal controls designed
                  to provide
                  reasonable assurance that reliable and relevant financial information
                  is
                  produced. Policies and procedures are designed to give reasonable
                  assurance that
                  transactions are properly authorized, assets are safeguarded and
                  financial
                  records properly maintained to provide reliable consolidated financial
                  statements.
  The
                  Board
                  of Directors is responsible for reviewing and approving the consolidated
                  financial statements and ensuring management meets their financial
                  reporting
                  responsibilities.
  The
                  Audit
                  Committee consists solely of directors who are not officers of
                  the Company and
                  reviews with Management and the external auditors, the quarterly
                  consolidated
                  financial statements of the Company prior to final approval. The
                  Audit Committee
                  also meets during the year with Management and the external auditors
                  to discuss
                  internal control issues, auditing matters, and financial reporting
                  issues.
                  External auditors have free access to the Audit Committee without
                  obtaining
                  prior Management approval.
  
 August
                            14, 2006
                        **Greg
                            Hines, B.Sc., C.I.M.**
                          President
                          & CEO
                        **James
                            Pelot, B.Comm., CA**
                          Chief
                          Financial Officer
 
   98
  **Tm
                  Bioscience Corporation**
 **Interim
                  Report**
 **(Unaudited)**
 
 **CONSOLIDATED
                  BALANCE SHEETS**
 *[see
                  Basis of Presentation - note 1]*
 
 
 ASSETS
                              [note 7[b]]
                          
                          
                          **As
                              at June 30,**
                            **2006**
                            **$**
                          
                          
                          **As
                              at December 31,****2005**
                            **$**CurrentCash
                              and cash equivalents
                          
                          
                          2,809,564
                          
                          
                          8,972,594Short-term
                              investments [note 3]
                          
                          
                          35,000
                          
                          
                          7,042,035Trade
                              accounts receivable [note 11]
                          
                          
                          2,792,104
                          
                          
                          1,245,333Other
                              accounts receivable
                          
                          
                          573,116
                          
                          
                          613,680Inventory
                              [note 4]
                          
                          
                          3,567,737
                          
                          
                          3,619,714Prepaid
                              expenses
                          
                          
                          289,088
                          
                          
                          46,305Total
                              current assets
                          
                          
                          10,066,609
                          
                          
                          21,539,661Capital
                              assets, net [note 5]
                          
                          
                          4,806,080
                          
                          
                          4,340,712Intangible
                              assets, net
                          
                          
                          2,663,383
                          
                          
                          2,765,363Deferred
                              financing costs, net
                          
                          
                          644,694
                          
                          
                          777,901Other
                              asset
                          
                          
                          1,249,516
                          
                          
                          1,438,347License
                              fee advances [note 6]
                          
                          
                          2,000,000
                          
                          
                          —21,430,282
                          
                          
                          30,861,984LIABILITIES
                              AND SHAREHOLDERS' EQUITYCurrentAccounts
                              payable and accrued liabilities [note 11]
                          
                          
                          5,171,868
                          
                          
                          6,049,940Current
                              portion of deferred revenue
                          
                          
                          166,873
                          
                          
                          123,805Current
                              portion of long-term debt [note 7]
                          
                          
                          3,320,517
                          
                          
                          2,476,582Current
                              portion of obligation under capital lease
                          
                          
                          21,252
                          
                          
                          —Income
                              taxes payable
                          
                          
                          37,559
                          
                          
                          82,273Total
                              current liabilities
                          
                          
                          8,718,069
                          
                          
                          8,732,600Deferred
                              leasehold inducement
                          
                          
                          315,922
                          
                          
                          348,118Deferred
                              revenue
                          
                          
                          91,704
                          
                          
                          123,970Deferred
                              share units [note 9]
                          
                          
                          418,075
                          
                          
                          301,075Long-term
                              debt [note 7]
                          
                          
                          7,997,158
                          
                          
                          9,033,181Obligation
                              under capital lease
                          
                          
                          62,463
                          
                          
                          —Total
                              liabilities
                          
                          
                          17,603,391
                          
                          
                          18,538,944Shareholders'
                              equityCapital
                              stock [note 8]
                          
                          
                          66,871,280
                          
                          
                          66,871,280Contributed
                              surplus [note 8]
                          
                          
                          10,179,847
                          
                          
                          9,937,955Deficit
                          
                          
                          (73,224,236
                          )
                          
                          (64,486,195
                          )Total
                              shareholders' equity
                          
                          
                          3,826,891
                          
                          
                          12,323,04021,430,282
                          
                          
                          30,861,984Commitments
                              [note 10]See
                              accompanying notesOn
                              behalf of the Board:
    Director
                        
                        Director
    99
  **Tm
                    Bioscience Corporation**
 **Interim
                    Report**
 **(Unaudited)**
 
 
 **CONSOLIDATED
                    STATEMENTS OF LOSS AND DEFICIT**
 
 
 
 **Three
                              Months Ended**
                            **June
                              30,**
                          
                          **Six
                              Months Ended**
                            **June
                              30,****2006**
                            **$**
                          
                          **2005**
                            **$**
                          
                          **2006**
                            **$**
                          
                          **2005**
                            **$****Revenue**
                          
                          
                          **3,074,786**
                          
                          
                          1,989,906
                          
                          
                          **5,982,860**
                          
                          
                          3,065,188**Expenses**
                            Cost
                              of goods sold
                            Research
                              and development, net
                            Sales,
                              general and administrative
                          
                          
                          **1,750,651**
                            **1,107,176**
                            **4,467,770**
                          
                          
                          1,169,944
                            1,094,007
                            2,652,045
                          
                          
                          **3,343,744**
                            **2,089,994**
                            **8,123,645**
                          
                          
                          1,764,211
                            2,133,890
                            4,885,951**7,325,597**
                          
                          
                          4,915,996
                          
                          
                          **13,557,383**
                          
                          
                          8,784,052**Loss
                            before
                            the undernoted**
                          
                          
                          **(4,250,811)**
                          
                          
                          (2,926,090
                          )
                          
                          **(7,574,523**
                          )
                          
                          (5,718,864
                          )Interest
                              expense on long-term debt
                            Gain
                              on foreign exchange
                            Other
                              financial income (expense), net
                          
                          
                          **(681,631)**
                            **266,721**
                            **33,030**
                          
                          
                          (672,095
                            9,568
                            (77,266
                          )
                            )
                            )
                          
                          **(1,393,156)**
                            **240,842**
                            **11,269**
                          
                          
                          (1,246,643
                            11,179
                            (148,007
                          )
                            
                            )**Loss
                              before income taxes**
                            Income
                              tax expense
                          
                          
                          **(4,632,691**
                            **(10,867**
                          **)**
                            **)**
                          
                          (3,665,883
                            (9,900
                          )
                            )
                          
                          **(8,715,568**
                            **(22,473**
                          **)**
                            **)**
                          
                          (7,102,335
                            (19,000
                          )
                            )**Net
                              loss for the period**
                            Deficit,
                              beginning of period
                          
                          
                          **(4,643,558**
                            **(68,580,678**
                          **)**
                            **)**
                          
                          (3,675,783
                            (52,764,281
                          )
                            )
                          
                          **(8,738,041**
                            **(64,486,195**
                          **)**
                            **)**
                          
                          (7,121,335
                            (49,318,729
                          )
                            )**Deficit,
                              end of period**
                          
                          
                          **(73,224,236**
                          **)**
                          
                          (56,440,064
                          )
                          
                          **(73,224,236**
                          **)**
                          
                          (56,440,064
                          )**Basic
                              and diluted loss**
                            **per
                              common share***[note
                              8]*
                          
                          
                          **(0.09**
                          **)**
                          
                          (0.09
                          )
                          
                          **(0.18**
                          **)**
                          
                          (0.18
                          )**Weighted
                              average number of common shares outstanding*******[note
                              8]*
                            Basic
                              and diluted
                          
                          
                          **47,715,224**
                          
                          
                          37,997,605
                          
                          
                          **47,715,224**
                          
                          
                          38,786,432
 
 
 *See
                    accompanying notes*
   100
 **Tm
                    Bioscience Corporation**
 **Interim
                    Report**
 **(Unaudited)**
 
 
 **CONSOLIDATED
                    STATEMENTS OF CASH FLOWS**
 
 **Three
                              Months Ended**
                            **June
                              30,**
                          
                          **Six
                              Months Ended**
                            **June
                              30,****2006**
                            **$**
                          
                          **2005**
                            **$**
                          
                          **2006**
                            **$**
                          
                          **2005**
                            **$****OPERATING
                            ACTIVITIES**Net
                            loss for the period
                          
                          
                          **(4,643,558**
                          **)**
                          
                          (3,675,783
                          )
                          
                          **(8,738,041**
                          **)**
                          
                          (7,121,335
                          )Add
                              (deduct) items not involving cash:
                            Depreciation
                              and amortization
                          
                          
                          **453,442**
                          
                          
                          291,085
                          
                          
                          **874,641**
                          
                          
                          578,901Amortization
                              of deferred leasehold inducement
                          
                          
                          **(16,098**
                          **)**
                          
                          (14,846
                          )
                          
                          **(32,196**
                          **)**
                          
                          (29,693
                          )Amortization
                              of loan discount
                          
                          
                          **479,787**
                          
                          
                          347,020
                          
                          
                          **431,914**
                          
                          
                          605,673Amortization
                              of deferred financing costs
                          
                          
                          **66,971**
                          
                          
                          98,032
                          
                          
                          **133,207**
                          
                          
                          194,987Stock
                              option compensation expense and deferred
                            share
                              units*(notes
                              8 and 9)*
                          
                          
                          **121,355**
                          
                          
                          120,836
                          
                          
                          **358,892**
                          
                          
                          364,199Government
                              loan interest accrual
                          
                          
                          **179,435**
                          
                          
                          66,539
                          
                          
                          **291,534**
                          
                          
                          126,741Gain
                              on foreign exchange
                          
                          
                          **(266,721**
                          **)**
                          
                          (9,568
                          )
                          
                          **(240,842**
                          **)**
                          
                          (11,179
                          )**(3,625,387**
                          **)**
                          
                          (2,776,685
                          )
                          
                          **(6,920,891**
                          **)**
                          
                          (5,291,706
                          )Change
                              in non-cash working capital balances related
                            to
                              operations:Increase
                            in trade accounts receivable
                          
                          
                          **(482,300**
                          **)**
                          
                          (466,154
                          )
                          
                          **(1,546,771**
                          **)**
                          
                          (724,110
                          )Decrease
                            (increase) in other accounts
                            receivable
                          
                          
                          **318,955**
                          
                          
                          51,643
                          
                          
                          **40,564**
                          
                          
                          (57,744
                          )Decrease
                            (increase) in inventory
                          
                          
                          **571,012**
                          
                          
                          (59,253
                          )
                          
                          **51,977**
                          
                          
                          (302,680
                          )Decrease
                            (increase) in prepaid expenses
                          
                          
                          **58,947**
                          
                          
                          (21,924
                          )
                          
                          **(242,783**
                          **)**
                          
                          (89,680
                          )Decrease
                            (increase) in deferred revenue
                          
                          
                          **24,044**
                          
                          
                          (1,337
                          )
                          
                          **10,802**
                          
                          
                          (22,674
                          )Decrease)
                            increase in accounts payable and
                            accrued
                              liabilities
                          
                          
                          **(528,442**
                          **)**
                          
                          1,300,081
                          
                          
                          **(2,964,639**
                          **)**
                          
                          748,088(Decrease)
                              increase in income taxes payable
                          
                          
                          **(11,606**
                          **)**
                          
                          9,900
                          
                          
                          **(44,713**
                          **)**
                          
                          19,000**Cash
                              used in operating activities**
                          
                          
                          **(3,674,777**
                          **)**
                          
                          (1,963,729
                          )
                          
                          **(11,616,454**
                          **)**
                          
                          (5,721,506
                          )**INVESTING
                            ACTIVITIES**Purchase
                            of capital assets
                          
                          
                          **(505,821**
                          **)**
                          
                          (465,363
                          )
                          
                          **(1,043,504**
                          **)**
                          
                          (651,114
                          )Purchase
                            of intangible assets
                          
                          
                          **(90,329**
                          **)**
                          
                          (6,155
                          )
                          
                          **(110,810**
                          **)**
                          
                          (40,890
                          )Purchase
                            of short-term investments
                          
                          
                          **(1,396,458**
                          **)**
                          
                          (8,691,240
                          )
                          
                          **(10,769,762**
                          **)**
                          
                          (21,121,229
                          )Sale
                              of short-term investments
                          
                          
                          **6,447,140**
                          
                          
                          8,539,687
                          
                          
                          **17,776,797**
                          
                          
                          15,115,156**Cash
                              provided by (used in) investing activities**
                          
                          
                          **4,454,532**
                          
                          
                          (623,071
                          )
                          
                          **5,852,721**
                          
                          
                          (6,698,077
                          )**FINANCING
                            ACTIVITIES**Proceeds
                            from long-term debt
                          
                          
                          **551,384**
                          
                          
                          -
                          
                          
                          **551,384**
                          
                          
                          -Repayment
                            of long-term debt
                          
                          
                          **(950,681**
                          **)**
                          
                          -
                          
                          
                          **(950,681**
                          **)**
                          
                          -Share
                            issuance costs
                          
                          
                          -
                          
                          
                          -
                          
                          
                          -
                          
                          
                          (772,542
                          )Net
                              change in share capital
                          
                          
                          **-**
                          
                          
                          3,833,251
                          
                          
                          -
                          
                          
                          13,521,022**Cash
                              (used in) provided by financing activities**
                          
                          
                          **(399,297**
                          **)**
                          
                          3,833,251
                          
                          
                          **(399,297**
                          **)**
                          
                          12,748,480**Net
                            increase (decrease) in cash and cash equivalents**
                            **during
                              the period**
                          
                          
                          **380,458**
                          
                          
                          1,246,451
                          
                          
                          **(6,163,030**
                          **)**
                          
                          328,897Cash
                              and cash equivalents, beginning of period
                          
                          
                          **2,429,106**
                          
                          
                          415,674
                          
                          
                          **8,972,594**
                          
                          
                          1,333,228**Cash
                              and cash equivalents, end of period**
                          
                          
                          **2,809,564**
                          
                          
                          1,662,125
                          
                          
                          **2,809,564**
                          
                          
                          1,662,125**Supplemental
                            cash flow
                            information**Income
                            taxes paid
                          
                          
                          -
                          
                          
                          -
                          
                          
                          **77,748**
                          
                          
                          -Interest
                              paid
                          
                          
                          **278,698**
                          
                          
                          258,536
                          
                          
                          **538,237**
                          
                          
                          514,229Non-cash
                              investing and financing activities related to capital
                              lease*(note
                              5)*
                          
                          
                          **(83,715**
                          **)**
                          
                          -
                          
                          
                          **(83,715**
                          **)**
                          
                          -
   *See
                    accompanying notes*
 101
 **Tm
                    Bioscience Corporation**
 
 **NOTES
                    TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **June
                    30, 2006**
 **(Unaudited)**
 
 **1.
                    BASIS OF PRESENTATION**
  These
                    consolidated financial statements of Tm Bioscience Corporation
                    ["Tm" or the
                    "Company"] have been prepared in accordance with Canadian generally
                    accepted
                    accounting principles on a going concern basis which presumes
                    the realization of
                    assets and the discharge of liabilities in the normal course
                    of business for the
                    foreseeable future.
  As
                    at
                    June 30, 2006, the Company had working capital of $1,348,540
                    and an accumulated
                    deficit of $73,224,236 resulting from losses in the current and
                    prior periods.
                    As the Company is in the early stages of commercialization for
                    its products, the
                    Company’s ability to continue operations is uncertain and is dependent
                    upon its
                    ability to obtain sufficient financing and improve operating
                    results.
  These
                    consolidated financial statements do not include any adjustments
                    to the amounts
                    and classification of assets and liabilities that might be necessary
                    should the
                    Company be unable to continue operations in the normal course
                    of business. Such
                    adjustments could be material.
  **2.
                    ACCOUNTING POLICIES**
 
 These
                    consolidated financial statements include the accounts of Tm,
                    its wholly owned
                    U.S. subsidiaries, Tm Technologies, Inc., and Tm Bioscience,
                    Inc., and two
                    wholly owned Canadian subsidiaries, Tm Bioscience PGX Inc. and
                    Tm Bioscience HG
                    Inc. All intercompany balances and transactions have been eliminated.
                    The
                    consolidated financial entity shall be referred to herein as
                    the "Company".
                    There were no new applicable pronouncements under Canadian Generally
                    Accepted
                    Accounting Principles ["GAAP"] which would result in changes
                    to accounting
                    policies since the year ended December 31, 2005. These consolidated
                    financial
                    statements have been prepared in accordance with Canadian GAAP
                    using the same
                    accounting policies as were applied in the audited consolidated
                    financial
                    statements for the year ended December 31, 2005. Additions to
                    accounting
                    policies since year-end 2005 reflecting new transaction types
                    are disclosed
                    below. These interim consolidated financial statements do not
                    include all of the
                    disclosure included in the Company’s annual audited consolidated financial
                    statements. Accordingly, these interim consolidated financial
                    statements should
                    be read in conjunction with the audited consolidated financial
                    statements for
                    the year ended December 31, 2005.
  **Capital
                    assets**
  Capital
                    assets include equipment under capital lease which is recorded
                    at the present
                    value of the future minimum lease payments less accumulated depreciation.
                    The
                    rate and method used to depreciate equipment under capital lease
                    over its
                    estimated useful life is as follows:
  Equipment
                    under capital lease 10
                    years
                    straight-line
  **3.
                    SHORT-TERM INVESTMENTS**
  Short-term
                    investments consist of the following:
  **Balance
                                as at**
                              **June
                                30, 2006**
                              **$**
                            ****
                            **Balance
                                as at**
                              **December
                                31, 2005**
                              **$**Commercial
                                paper and government bonds
                            
                            
                            -
                            
                            
                            7,007,035Guaranteed
                                investment certificates
                            
                            
                            35,000
                            
                            
                            35,00035,000
                            
                            
                            7,042,035
    102
  **Tm
                    Bioscience Corporation**
 
 
 **NOTES
                    TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **June
                    30, 2006**
 **(Unaudited)**
  **3.
                    SHORT-TERM INVESTMENTS** ***(continued)***
   The
                    Company invests cash on hand in fully liquid commercial paper
                    and government
                    bonds. At June 30, 2006, annualized yield to maturity on short-term
                    investments
                    ranged from 3.22% to 4.05% [2005 - 2.00% to 2.40%]. Interest
                    income from
                    short-term investments for the three month and six month periods
                    ended June 30,
                    2006 was $36,540 and $125,784 respectively [$39,185 and $87,702
                    for the three
                    month and six month periods ended June 30, 2005]. The Company
                    purchases only
                    investment-grade instruments comprised of bonds with a rating
                    of A or better, as
                    well as bankers’ acceptances and money market instruments with a rating of R1Mid
                    or higher.
  **4.
                    INVENTORY**
  Inventory
                    consists of the following:
  **Balance
                                as at**
                              **June
                                30, 2006**
                              **$**
                            
                            **Balance as at**
                              **December
                                  31, 2005**
                                **$**Raw
                                materials
                            
                            534,640
                            
                            940,640Work-in-process
                            
                            
                            1,689,156
                            
                            
                            1,884,821Finished
                                goods
                            
                            
                            1,302,213
                            
                            
                            762,206Packaging
                            
                            
                            41,728
                            
                            
                            32,0473,567,737
                            
                            
                            3,619,7145.
                                CAPITAL ASSETSIncluded
                                in capital assets is an asset under capital lease
                                which consists of the
                                following:**June
                                  30, 2006**
                                **$******
                            
                            
                            **December
                                31, 2005**
                              **$**Cost
                            
                            
                            83,715
                            
                            
                            -Less
                                accumulated depreciation
                            
                            
                            -
                            
                            
                            -Net
                                book value
                            
                            
                            83,715
                            
                            
                            -
   The
                    asset
                    under capital lease is held as security for the capital lease
                    obligation. As the
                    asset was acquired at the end of the period, there has not yet
                    been any amount
                    included in depreciation related to the asset under capital
                    lease.
  **6.
                    LICENSE FEE ADVANCES**
  On
                    March
                    17, 2006, the Company signed an agreement with Sirius Genomics
                    [ "Sirius"]
                    for an exclusive commercial license to patents from Sirius for
                    specific
                    biomarkers related to drugs used to treat severe sepsis and risk
                    of
                    sepsis.
  Under
                    the
                    terms of the agreement, the Company will provide a license fee
                    advance of
                    $4,000,000. The $4,000,000 payment to Sirius is reimbursable
                    out of license fee
                    obligations to Sirius and has been accounted for as a license
                    fee advance. The
                    advance is comprised of two separate payments of $2,000,000 each.
                    The first
                    $2,000,000 was due upon signing of the agreement, and was paid
                    on April 3, 2006,
                    and the second payment is due September 6, 2006. As at June 30,
                    2006, the first
                    license fee is recorded as a long-term asset.
  103
 **Tm
                    Bioscience Corporation**
 
 
 **NOTES
                    TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **June
                    30, 2006**
 **(Unaudited)**
  **6.
                    LICENSE FEE ADVANCES** ***(continued)***
  Development
                    costs incurred will be shared equally between the two parties.
                    Sirius’ 50%
                    portion of development costs will be recorded as a current receivable,
                    with the
                    credit applied to R&D and SG&A expenses in proportion to the basis of
                    calculation. Commercialization costs incurred will be shared
                    equally until
                    such time as a product operating profit is generated, after which
                    time they will
                    be included in the calculation of net profit. The Company will
                    pay
                    a license fee advance to Sirius equal to 50% of the net profit
                    on the
                    commercialization of the products, which will be recognized as
                    an intangible
                    asset, with the credit applied to R&D and SG&A. Any such payments
                    will be made to Sirius after recovery of the initial license
                    fee advance plus
                    accrued interest.
  The
                    $4,000,000 license fee advance bears interest on an annual rate
                    at a floor of
                    10%, a ceiling of 25% and a rate between the floor and ceiling
                    that varies in
                    accordance with Sirius’ performance. Interest earned will be included in other
                    financial income. The three month and six month periods ended
                    June 30, 2006
                    included income of nil and $48,767 respectively,  related to interest on
                    this license fee advance.
  A
                    director, and chair of the Scientific Advisory Board of the Company,
                    is also the
                    Chief Executive Officer of Sirius.
  These
                    transactions are in the normal course of operations and are measured
                    at the
                    exchange amount, which is the amount of consideration established
                    and agreed to
                    by the related parties.
  **7.
                    LONG-TERM DEBT**
  Long-term
                    debt is as follows:
 **$**
                            **TPC**
                            [a]
                          
                          **$**
                            **Convertible
                              debentures**
                            [b]
                          
                          **$**
                            **Total****Principal
                              outstanding - December 31, 2005**
                          
                          **3,100,026**
                          
                          **10,467,000**
                          
                          **13,567,026**Less:
                            amount representing future imputed
                            interest
                          
                          
                          (856,876
                          )
                          
                          (1,406,215
                          )
                          
                          (2,263,091
                          )Add:
                              loan interest accrual
                          
                          
                          205,828
                          
                          
                          **-**
                          
                          
                          205,828**Recorded
                              loan balance - December 31, 2005**
                          
                          
                          **2,448,978**
                          
                          
                          **9,060,785**
                          
                          
                          **11,509,763**Increases
                            (reductions) in principal
                          
                          
                          551,384
                          
                          
                          (950,681
                          )
                          
                          (399,297
                          )Add:
                            imputed interest charge
                          
                          
                          147,240
                          
                          
                          431,913
                          
                          
                          579,153Add
                            (deduct): amount representing future imputed
                            interest
                          
                          
                          (188,830
                          )
                          
                          -
                          
                          
                          (188,830
                          )Add:
                            loan interest accrual
                          
                          
                          144,295
                          
                          
                          -
                          
                          
                          144,295Less:
                              foreign exchange gain
                          
                          
                          -
                          
                          
                          (327,409
                          )
                          
                          (327,409
                          )**Increase
                              (decrease) in loan balance**
                          
                          
                          **654,089**
                          
                          
                          **(846,177**
                          **)**
                          
                          **(192,088**
                          **)****Recorded
                              loan balance - June 30, 2006**
                          
                          
                          **3,103,067**
                          
                          
                          **8,214,608**
                          
                          
                          **11,317,675****Principal
                            outstanding - June 30,
                            2006**
                          
                          
                          **3,651,410**
                          
                          
                          **9,104,006**
                          
                          
                          **12,755,416**Less:
                            amount representing future imputed interest
                          
                          
                          (898,468
                          )
                          
                          (889,398
                          )
                          
                          (1,787,866
                          )Add:
                            loan interest accrual
                          
                          
                          181,688
                          
                          
                          **-**
                          
                          
                          181,688Add:
                              repayments due transferred to current liabilities
                          
                          
                          168,437
                          
                          
                          **-**
                          
                          
                          168,437**Short-term
                              portion - recorded loan balance**
                          
                          
                          **168,437**
                          
                          
                          **3,152,080**
                          
                          
                          **3,320,517****Long-term
                              portion - recorded loan balance**
                          
                          
                          **2,934,630**
                          
                          
                          **5,062,528**
                          
                          
                          **7,997,158**
  [a] **** This
                    amount represents funds advanced to the Company from Technology
                    Partnerships
                    Canada ["TPC"], a special operating program under the Ministry
                    of Industry of
                    the Government of Canada, under which the Government will invest
                    up to
                    $7,300,000 as detailed in the Company’s audited consolidated financial
                    statements for the year ended December 31, 2005.
    104
  **Tm
                    Bioscience Corporation**
 
 
 **NOTES
                    TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **June
                    30, 2006**
 **(Unaudited)**
  **7.
                    LONG-TERM DEBT** ***(continued)***
   The
                    program initially stated a project completion date of July 31,
                    2006. Management
                    is currently in the process of obtaining an extension of the
                    program and
                    expansion of the projects that are deemed to be eligible expenditures
                    under the
                    program. Management is confident that the Company’s TPC agreement will be
                    extended and that future claims to the full available loan will
                    be recovered. If
                    the Company was only able to submit claims up until July 31,
                    2006, the amount of
                    the Other Asset after accretion for any claims submitted up to
                    the project
                    completion date would be reversed, with the corresponding charge
                    to Contributed
                    Surplus since this amount relates to warrants issued to TPC during
                    fiscal 2005
                    based on the full value of the expected financing.
  [b]
                    This
                    amount represents amounts financed under the Laurus Master Fund,
                    Ltd. ["Laurus"]
                    convertible term note agreement signed by the Company on November
                    23,
                    2005.
  As
                    security for the Company’s performance of its obligations under the Laurus
                    convertible term note [the "Note"], the Company granted Laurus
                    a continuing
                    general security interest over all of the Company’s assets and its Subsidiaries.
                    The Subsidiaries also unconditionally guaranteed the Company’s obligations and
                    liabilities under the Note. As additional security in favour
                    of Laurus, the
                    Company pledged to Laurus its shares in its Subsidiaries. The
                    terms of the Note
                    include no specific financial covenants.
  **8.
                    CAPITAL STOCK**
  The
                    authorized capital stock of the Company consists of unlimited
                    preferred shares
                    and unlimited common shares.
  The
                    preferred shares are non-voting, issuable in series, having such
                    specific rights
                    and privileges as may be deemed by the Board of Directors at
                    the time of the
                    creation of the series. The preferred shares have priority over
                    the holders of
                    the common shares with respect to dividends and return of capital
                    on
                    dissolution. No preferred shares have been issued. The common
                    shares are voting
                    and entitled to dividends as may be declared by the Board of
                    Directors.
  On
                    June
                    25, 2004, following shareholder approval at the Company’s annual general meeting
                    of shareholders, and all necessary regulatory approvals, the
                    Company’s common
                    shares commenced trading on the TSX on a consolidated basis of
                    one (1)
                    post-consolidation share for every five (5) pre-consolidation
                    common shares. The
                    following charts and figures have been retroactively restated
                    to reflect the
                    change in share number and price:
  **Issued
                    and outstanding**
   **Common**
                              **Shares**
                                **#**
                            
                            **Compensation**
                                **Warrants**
                                  **#**
                            
                            **Non-employee**
                              **Compensation**
                                Options
                                  #Balance,
                                December 31, 2005
                            
                            
                            47,715,224
                            
                            
                            5,439,221
                            
                            
                            399,425Balance,
                                June 30, 2006
                            
                            
                            47,715,224
                            
                            
                            5,439,221
                            
                            
                            399,425
  The
                    total
                    number of shares reserved as at June 30, 2006 for the exercise
                    of warrants,
                    compensation options and the deferred share units is
                    6,083,536.
  The
                    maximum number of common shares of the Company issuable upon
                    conversion under
                    the Note varies in accordance with the Cdn.$/U.S.$ foreign exchange
                    rate in
                    effect at the time of each repayment but, for example, is 3,877,251
                    common
                    shares at the period end exchange rate of Cdn.$1.1162 per U.S.$1.00.
                    The Company
                    may repay the Note at any time upon 10 business days’ notice to Laurus for a
                    premium equal to 130% of the principal amount outstanding at
                    the time of such
                    redemption.
   105
  **Tm
                    Bioscience Corporation**
 
 
 **NOTES
                    TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **June
                    30, 2006**
 **(Unaudited)**
  **8.
                    CAPITAL STOCK** ***(continued)***
  **Contributed
                              surplus****Capital**
                            **stock**
                            **$**
                          
                          **Total**
                            **$**
                          
                          **Warrants**
                            **$**
                          
                          **Compensation**
                            **options**
                            **$**
                          
                          **Stock**
                            **options**
                            **$**
                          
                          **Conversion**
                            **options**
                            **$****Balance,
                              December 31, 2005**
                          
                          
                          **66,871,280**
                          
                          
                          **9,937,955**
                          
                          
                          **7,998,511**
                          
                          
                          **307,627**
                          
                          
                          **921,919**
                          
                          
                          **709,898**2006
                              stock option compensation expense
                          
                          
                          3⁄4
                          
                          
                          241,892
                          
                          
                          3⁄4
                          
                          
                          3⁄4
                          
                          
                          241,892
                          
                          
                          3⁄4**Balance,
                              June 30, 2006**
                          
                          
                          **66,871,280**
                          
                          
                          **10,179,847**
                          
                          
                          **7,998,511**
                          
                          
                          **307,627**
                          
                          
                          **1,163,811**
                          
                          
                          **709,898**
  **Loss
                    per common share**
  Loss
                    per
                    common share has been calculated on the basis of net loss for
                    the period divided
                    by the weighted average number of common shares outstanding at
                    the period end.
                    After reflecting changes in the Company’s capital share structure due to the
                    Company’s 2004 consolidation with one (1) post-consolidation common share
                    equivalent to five (5) pre-consolidation common shares, the weighted
                    average
                    number of common shares outstanding for the six months ended
                    June 30, 2006 was
                    47,715,224 [2005 - 38,786,432]. Diluted loss per common share
                    was not calculated
                    as the effect of converting the Laurus Note and exercise of the
                    outstanding
                    warrants, compensation options and employee stock options would
                    be
                    anti-dilutive.
  **9.
                    STOCK-BASED COMPENSATION PLAN**
  Under
                    the
                    transitional provision of revised CICA Section 3870, "Stock-Based
                    Compensation
                    and other Stock-Based Payments", the Company has adopted the
                    fair value method
                    of accounting for the stock options granted under its Share Option
                    Plan in the
                    year ended December 31, 2003. The prospective adoption requires
                    that the Company
                    expense, over the vesting period, the fair value of stock options
                    granted,
                    modified or settled during the fiscal years 2003 and subsequent.
                    The fair value
                    was determined on a basis consistent with that used in the Company's
                    disclosure
                    under the former Section 3870 and reported by the Company on
                    a quarterly basis
                    since January 1, 2002. The fair value of direct awards of stock
                    is determined by
                    the quoted market price of the Company's stock and the fair value
                    of stock
                    options is determined using the Black-Scholes option pricing
                    model.
  The
                    charge for the three month and six month periods ended June 30,
                    2006 related to
                    employee stock options was $56,375 and $233,070 respectively
                    [$36,347 and
                    $190,437 for the three month and six month periods ended June
                    30, 2005
                    respectively]. The cash proceeds for exercises of employee stock
                    options for the
                    three month and six month periods ended June 30, 2006 were both
                    $nil [$18,128
                    for the three month and six month periods ended June 30, 2005].
                    The compensation
                    expense related to options awarded in 2005 to scientific advisory
                    board members,
                    who are deemed non-employees for the three month and six month
                    periods ended
                    June 30, 2006 is $4,230 and $8,822 respectively [$3,543 and $7,719
                    for the three
                    month and six month periods ended June 30, 2005 respectively].
  In
                    periods prior to January 1, 2003, the
                    Company recognized no compensation expense when stock or stock
                    options were
                    issued to employees.
  For
                    the
                    three month and six month periods ended June 30, 2006, the pro
                    forma
                    compensation charge for stock options granted in 2002 to employees
                    was ($536)
                    and $11,659 respectively [$6,668 and $37,265 for the three month
                    and six month
                    periods ended June 30, 2005, respectively].
  The
                    following significant assumptions were used to estimate the fair
                    value of the
                    stock options in 2006:
 
  106
  **Tm
                    Bioscience Corporation**
 
 
 **NOTES
                    TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **June
                    30, 2006**
 **(Unaudited)**
  **9.
                    STOCK-BASED COMPENSATION PLAN** ***(continued)***
  Risk-free
                                rate
                            3.19%
                                to 4.20%Expected
                                option life
                            36
                                months to 5 yearsExpected
                                dividends yield
                            n/aCalculated
                                option volatility
                            0.713
                                to 1.067
   While
                    management believes that the estimates used to establish the
                    above noted
                    expected values were rationally determined and consistently applied,
                    the
                    valuation of stock-based compensation using this model is subject
                    to a
                    significant degree of variability.
  The
                    grant-date fair value of options granted in both the three month
                    and six month
                    periods ended June 30, 2006 to employees is $167,311 [$11,330
                    and $470,701 for
                    the three month and six month periods ended June 30, 2005 respectively]
                    and to
                    non-employees is $nil [$nil and $6,640 for the three month and
                    six month periods
                    ended June 30, 2005 respectively].
   **Stock
                                Options**
                              **#**
                            
                            
                            **Weighted
                                Average**
                              **Exercise**
                              **Price**
                              **$**Granted
                                and Outstanding at December 31, 2005
                            
                            
                            2,373,208
                            
                            
                            1.922006
                                ActivityGranted
                            
                            
                            299,240
                            
                            
                            1.80Forfeited
                            
                            
                            (95,727
                            )
                            
                            2.03Expired
                            
                            
                            (160,000
                            )
                            
                            2.58Granted
                                and Outstanding at June 30, 2006
                            
                            
                            2,416,721
                            
                            
                            1.86Exercisable
                                at June 30, 2006
                            
                            
                            1,544,365
                            
                            
                            1.83
   The weighted  average  remaining  contractual  life of
                    options at June 30, 2006 is 2.4 years.
  **Deferred
                    share unit plan**
  As
                    at
                    June 30, 2006, the total deferred share units held by participating
                    directors
                    was 244,890 [2005 - 115,415]. The amount expensed for the three
                    month and six
                    month periods ended June 30, 2006 was $60,750 and $117,000 [$53,750
                    and $108,250
                    for the three month and six month periods ended June 30, 2005
                    respectively].
  **10.
                    COMMITMENTS**
  New
                    commitments undertaken in the second quarter of 2006 are as
                    follows:
  **Capital
                    Lease**
  Interest
                    on obligation under capital lease accrues at 4.4%.
  Future
                    minimum lease payments for this capital lease is as follows:
  $2007
                            
                            
                            31,4162008
                            
                            
                            31,4162009
                            
                            
                            31,4162010
                            
                            
                            13,090107,338
  As
                    the
                    liability was incurred at the end of the period, there were not
                    yet any amounts
                    included in interest expense relating to interest from the obligation
                    under
                    capital lease.
    107
 **Tm
                    Bioscience Corporation**
 
 
 **NOTES
                    TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **June
                    30, 2006**
 **(Unaudited)**
  **11.
                    FINANCIAL INSTRUMENTS**
  **Credit
                    risk**
  The
                    Company manages its credit risk with respect to trade accounts
                    receivable by
                    primarily dealing with creditworthy customers. As at June 30,
                    2006, the Company
                    has trade accounts receivable with 40 [December 31, 2005 - 34]
                    customers. Of
                    these customers, two [December 31, 2005 - two] represent 54%
                    [December 31, 2005
                    - 40%] of total trade accounts receivable at June 30, 2006.
  **Foreign
                    currency rate risk**
  The
                    Company's activities that result in exposure to fluctuations
                    in foreign currency
                    exchange rates consist of the purchase of services, supplies
                    and capital assets
                    from suppliers billing in foreign currencies. The Company also
                    licenses
                    technology and sells products and services to non-Canadian customers
                    in foreign
                    currencies. In addition, the Laurus convertible term note is
                    denominated in U.S.
                    dollars. The Company has not used derivative financial instruments
                    to hedge its
                    currency risk. As at June 30, 2006, 95% [December 31, 2005 -
                    99%] of the
                    Company's trade accounts receivable, 36% [December 31, 2005 -
                    51%] of the
                    Company's accounts payable and accrued liabilities and 73% [December
                    31, 2005 -
                    79%] of the Company’s long-term debt are denominated in foreign currencies.
  **12.
                    SEGMENTED INFORMATION**
  The
                    Company considers itself to be in one business segment, that
                    is, the research,
                    development and commercialization of genomic products and
                    technology.
  For
                    the
                    six months ended June 30, 2006 the Company had three [2005 -
                    three] customers
                    accounting for 57% [2005 - 65%] of its total revenue.
  **13.
                    COMPARATIVE CONSOLIDATED FINANCIAL STATEMENTS**
 
 The
                    comparative consolidated financial statements have been reclassified
                    from
                    statements previously presented to conform to the presentation
                    of the 2006
                    consolidated financial statements.