Message to Shareholders

Annual

Report

2003

Profile

The exponential increase in the molecular diagnostics’ sector in the past three years combined with the lack of highly accurate cancer diagnostic tests in general create immediate opportunities for DiagnoCure (TSX: CUR). The company’s mission is to be a world leading developer and provider of innovative, high value diagnostics to detect early stage cancer.

The development of the uPM3TM test for the detection of prostate cancer was completed and sales in the United States under the ASR format were commenced by Bostwick Laboratories of Richmond, Virginia, in October 2003. This test, which detects the presence of the PCA3 gene and which is the most specific of all genes associated with prostate cancer identified to date, should constitute an important breakthrough in the improvement of prostate cancer diagnostics. In November 2003, DiagnoCure announced that it had granted to Gen-Probe an exclusive worldwide licence for the development and commercialization of diagnostic products incorporating the PCA3 gene for prostate cancer technology in consideration for upfront, milestone and royalty payments.

DiagnoCure’s first marketed product, ImmunoCyt / uCyt+, is an immunocytofluorescence test designed for the detection of bladder cancer cells in urine which is based on monoclonal antibodies. The Company’s direct promotional efforts in the United States in 2003 were successful in that ImmunoCytTM / uCyt+TM sales doubled from the previous year. DiagnoCure also expanded its international network by signing distribution agreements in Australia, Italy, the Netherlands, South Korea and Brazil. The Company also announced the recent acquisition of the assets of SAMBA Technologies, specialized in digital imaging and information technology. In addition to widely broadening its development potential for new applications of cancer diagnostic immunoassays, this acquisition will facilitate the introduction of an automated version of the ImmunoCytTM / uCyt+TM test.

As regards the lung cancer project, the Company diligently continued the evaluation of many molecular markers in the context of developing a prototype detection test. DiagnoCure has since commenced testing a few potentially interesting markers on bronchial and expectoration samples. In order to further develop its portfolio of diagnostic products, the Company initiated in 2003 the development of a molecular test for the detection of kidney cancer. This test complements well the urology cancer portfolio developed by DiagnoCure.

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Message to Shareholders

Dear Shareholders,

2003 was a year of important accomplishments. The cornerstone of this success was the significant milestones that were achieved due to our development efforts on uPM3TM, our test for the detection of prostate cancer. Upon completion of the first generation of the uPM3TM test, we initiated sales in the United States through the network of Bostwick Laboratories. Shortly after our financial year-end, and after having initiated discussions with several potential partners, we concluded an agreement with Gen-Probe Inc. (NASDAQ: GPRO) granting them an exclusive worldwide license on the PCA3 technology for prostate cancer diagnostics.

Our efforts in the lung cancer project progressed very well in that we evaluated numerous potential molecular markers from which a few will be validated for the development of a prototype assay in 2004. Our direct promotional efforts in the United States for ImmunoCytTM / uCyt+TM, our test for the detection of bladder cancer, resulted in the sales doubling from the previous year. Because we were convinced that an automated version of our test would meet the needs of the market as well as conferring a significant competitive advantage, we prioritized our efforts during the past year on this project and, last December, we acquired the assets of SAMBA Technologies SARL, a company specialized in image analysis.

Since our goal is to be recognized as a world leading developer and provider of innovative, high value-added diagnostic tests for the early detection of cancer, we initiated the research and development work on a molecular test for the detection of kidney cancer. We also began discussions with several companies and institutions aimed at establishing partnerships and collaborations in an effort to diversify our product portfolio and accelerate our growth.

U

PM3

In addition to the preclinical results of a Québec study on 443 patients, a recent study by Dr Schalken’s group from Nijmegen University in the Netherlands, published in the European

Urology journal in March 2003, indicated high levels of specificity and sensitivity that were very

similar to our results. These results were presented to a select panel of opinion leaders during the annual American Urology Association (AUA) in Chicago in the spring of 2003. Their extremely favorable reception and support convinced us to initiate sales of the uPM3TM test in the United States under the Analyte Specific Reagent (ASR) format.

The Company entered into an agreement with Bostwick Laboratories whereby they launched an in-house version made with the uPM3TM ASR for prostate cancer in the United States. This collaboration will, in addition to validating this test, provide the opportunity to introduce and increase the awareness to clinicians of the existence of a complementary alternative to the PSA-biopsy combination. The enthusiasm and collaboration of Dr David Bostwick, a recognized worldwide expert in prostate cancer, has had a significant impact on the success to date of the uPM3TM test.

As regards the licensing of the PCA3 technology, the negotiations and discussions spanned the entire year. In the end, the intrinsic qualities of Gen-Probe convinced us to pursue discussions with them over other companies. Specifically, their successful track record, their reputation, quality of technology, global presence as well as their vision and focus were important characteristics that we had identified in an ideal partner. The total consideration amounting to $ 10.5 million US, comprising an upfront, milestone and contract development payments as well as royalties of 16% on cumulative end-user net sales above $ 50 million was an exceptional package given the enormous market potential in prostate cancer diagnostics. Gen-Probe respected and understood our objectives, which were to assure that the development of the PCA3

Message to Shareholders

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technology would occur in a diligent manner and in collaboration with us. We are proud to have entered into this strategic alliance, which will exploit the synergy between the two companies.

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Approximately 1.3 million new cases worldwide are diagnosed each year, which represents 14% of all new cancer diagnoses and which has a mortality rate above 90%. DiagnoCure must act diligently to address this problem.

Our partnership with Compugen Inc. launched a research and development effort, which resulted in identifying several interesting potential molecular markers. However, none of these markers met our requisite technical criteria and, as a result, the parties mutually agreed to terminate the agreement.

Two consecutive clinical protocols were initiated with Hôpital Laval in Québec and, on the basis of additional selected and validated molecular markers, we anticipate the development of a prototype test and perform a pilot study in the coming year.

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Following the termination of the distribution agreement with Dako Corporation in 2002, we adopted a transition plan for the direct marketing and sales of our test for the detection of bladder cancer in the United States. The sales of ImmunoCytTM / uCyt+TM increased during each of the successive quarters of fiscal 2003 and, cumulatively, doubled for the year. We are very satisfied with these results as well as the valuable experience acquired during the past year and are now prepared to conclude a new distribution agreement in the United States in 2004.The Company also expanded its distribution network by signing agreements with new distributors in Australia, Italy, the Netherlands, South Korea and Brazil.

Last year’s priority for ImmunoCytTM / uCyt+TM was the automation of the test. This project was initiated at the end of 2002 through an agreement with Molecular Diagnostics, Inc. Thereafter, the software development portion of the agreement was transferred directly to SAMBA Technologies SARL. The development of the first phase of the software for image and data management has been completed and shall officially be launched at the USCAP (United States and Canadian Academy of Pathology) congress to be held in March 2004. The demand for the manual version of diagnostic tests will continue to dramatically erode. Because of this evolving market reality, we are confident that the automated version of ImmunoCytTM / uCyt+TM will increase product sales through increased market share.

The emerging trend toward automated diagnostic tests was also a driving force behind the acquisition, at the end of 2003, of the assets of SAMBA Technologies SARL in France. The integration of this company, which has specialized in image analysis and telemedicine during the past 25 years, will help us to considerably extend the scope of our activities and pursue our mission to develop new cancer diagnostic tests as well as assure the priority of development of the ImmunoCytTM / uCyt+TM automation and requisite technical support.

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Message to Shareholders

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Last year, we initiated this project by commencing the review of potential markers for the detection of kidney cancer. Renal cell carcinoma is the sixth leading cause of cancer death, and, as is the case with other cancers in general, must be detected at an early stage since the probability of cure is directly related to its early detection. We have implemented a protocol at Hôtel-Dieu de Québec hospital to collect cancerous tissue samples to assist us in identifying and validating potential molecular markers.

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At the beginning of 2003, the Board of Directors created a committee to oversee strategic partnerships and alliances. We recognize that the growth of the Company will not only occur through the internal development of diagnostic tests, but also through alliances, partnerships and acquisitions. In this context, we have been very active during the past year. We have initiated discussions with several diagnostic companies regarding the possibility of acquisition, some of which are still ongoing. We have also commenced discussions and negotiations to establish partnerships and collaborations within the scope of our strategic plan. We firmly believe that these efforts, as was the case with Gen-Probe and SAMBA Technologies, will contribute to the acceleration of our strategic growth.

C

As part of the stock market resurgence, our market capitalization increased more than 500% during the last four months of 2003. Strict adherence to our cancer diagnostic focus in combination with a rigorous management of our operating costs has carried us through these past two difficult years while having achieved the above-mentioned results and success.

Consequently, in 2003, we altered our corporate mindset from one of survival towards one of growth. We are enthusiastic and excited about the potential for accomplishing our objectives, which will undoubtedly have a positive impact on the valuation of the Company. We take this opportunity to acknowledge the commitment and dedication of the DiagnoCure team in all aspects of our operations. Finally, we wish to thank our shareholders for their confidence and assure them that our strategic decisions will always take into consideration their best interests.

Pierre Lapalme Pierre Désy

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Our Corporate Strategy

MOLECULAR DIAGNOSTICS

VALUE CHAIN DEVELOPMENT PROCESS

RESEARCH

DEVELOPMENT

Marker discovery /

genes, proteins, monoclonal antibodies

Target(s) identification and validation Prototype assay

Clinical pilot study

ASR clinical trials ASR manufacturing

DIAGNOCURE’S

COMPETITIVE

ADVANTAGES

COMMERCIALIZATION

IVD test development IVD Clinical trials IVD Manufacturing FDA filing and approval

Marketing and sales

OTHERS: Partnership(s) Out-licensing Distribution OTHERS: Partnership(s) In-licensing Purchase

ASR test development

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Our Products

Product Development Status

Ide nti fica tio n o f m ark ers Pro toty pe Te st Pilo t S tud y Te st De ve lop me nt Pre clin ica l S tud y AS R C om me rcia liza tio n * Clin ica l S tud ies FD A A pp rov al IVD C om me rcia liza tio n * * ImmunoCytTM / uCyt+TM uPM3TM Lung Cancer Kidney Cancer

* ASR (Analyte Specific Reagent): Commercialization of test components for sale by reference laboratories under their label and responsibility

** IVD (in vitro Diagnostic): Commercialization of the test for direct sale by DiagnoCure and/or its partners

uPM3

for the Detection of Prostate Cancer

Prostate cancer is the most frequent cancer in men. More than 230,110 new cases are expected to be diagnosed in 2004 in the United States alone. Specifically, with an estimated 29,900 deaths in 2004, prostate cancer is the second leading cause of cancer deaths in men, surpassed only by lung cancer. Prostate cancer can, however, be treated in a highly effective manner when localized in the prostate and accounts for 33% of all male cancers and 10% of all male cancer-related deaths.

The usual screening method for prostate cancer is a combination of a digital rectal examination and of the measurement of the prostate-specific antigen (PSA) in the blood. It is estimated that approximately 40 million serum PSA tests worldwide are performed each year, representing a market of approximately US $ 1.5 billion worldwide. In 2000, the FDA approved the routine screening for prostate cancer in men over age 50, which represents approximately 35 million people in the United States. As a result, the market for prostate cancer diagnostic testing is expected to grow considerably within the aging populations.

uPM3TM is a non-invasive gene-based test which detects the PCA3 gene. Tests based upon the detection of genes are developed in order to detect diseases earlier, more easily and in a cost efficient manner. The test enables the detection of PCA3 RNA expression in prostate cells that are present in the urine of the population at risk. uPM3TM uses an amplification technique to detect the presence of the PCA3 gene.

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Based on the preclinical results obtained in 2002 from a DiagnoCure-sponsored study on 443 patients, it appears that the uPM3TM test provides more accurate information than the PSA test allowing for a potentially better detection of prostate cancer. The test specificity combined with its accuracy might allow for a more accurate identification of patients at high risk of prostate cancer. Global results indicated a sensitivity of 67%, a specificity of 89% and a predictive value of 75% compared with the 38% predictive value for PSA. The results are particularly outstanding for PSA levels between 2.5 and 4.0 ng/ml, with a sensitivity of 74% and a specificity of 91%, whereas PSA is estimated negative and would have little usefulness due to its very low specificity. In addition, the European Urology journal (44, 2003, 8-16) published, in March of 2003, an article written by Dr. Schalken’s group on a European clinical study of 108 men. Although this study was performed on a different technology platform, the results were similar to those from the Company’s study and demonstrated that if a PCA3 test were negative for prostate cancer, there would be a 90% chance that a subsequent biopsy would be negative. Therefore, the DiagnoCure uPM3TM test may prove to be an ideal complement to the existing prostate cancer diagnostic tools.

During the search for a commercial partner in the past year, DiagnoCure actively developed uPM3TM and initiated the process for commercialization of a first generation non-invasive version of the product as an Analyte Specific Reagent (ASR) in the United States. As a result, DiagnoCure entered into an agreement with Bostwick Laboratories of Richmond, Virginia, whereby Bostwick began offering an in-house version, made with the uPM3TM ASR for prostate cancer, in the United States by October 2003. Dr. Bostwick is recognized worldwide as a leading expert in prostate cancer pathology and his laboratory is a leading private anatomic pathology reference laboratory in the United States. Bostwick Laboratories focuses on the diagnosis of urological cancers with a primary interest in prostate cancer. The introduction of the uPM3TM ASR represents the first commercially available urine-based genetic test for prostate cancer and should constitute an important breakthrough in the improvement of prostate cancer diagnostics.

DiagnoCure, in November 2003, signed a license and collaboration agreement with Gen-Probe Inc. (NASDAQ: GPRO) to develop an innovative urine test to detect the PCA3 gene for prostate cancer. Under the terms of the agreement, Gen-Probe paid DiagnoCure an upfront US $ 3 million fee, and agreed to future fees and contract development payments of up to US $ 7.5 million over the next three years. Gen-Probe received exclusive worldwide rights to the

PCA3 gene for detection of prostate cancer, and will pay DiagnoCure royalties of 8% on cumulative end-user net product sales of up to $ 50 million, and, thereafter, royalties of 16% on cumulative end-user net sales above $ 50 million. Gen-Probe is a global leader in nucleic acid testing and believes that the development of a test to detect the PCA3 gene in urine on its proprietary APTIMA technology will accelerate its entry into the cancer screening market.

In 2004, the Company intends to continue studies on the PCA3 gene by, amongst others, evaluating the prognostic value of detecting the PCA3 gene expression to identify prostate cancer in patients with negative biopsies and a positive uPM3TM test.

DiagnoCure holds the exclusive worldwide license to all diagnostic and therapeutic applications of the PCA3 gene technology and the Company intends to enter into a partnership or a strategic alliance for the use of the PCA3 gene technology for therapeutic applications.

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Our Products

Lung Cancer

Cancer of the lung is the most common cancer and currently the leading cause of cancer death, accounting for 1.32 million cases worldwide and almost a million deaths in 1996. In 2004, in the United States, it is estimated that a 173,700 individuals will be diagnosed with lung cancer, accounting for 14% of all cancer diagnoses. An estimated 160,440 (68,500 women and 91,940 men) will die from lung cancer in 2004, accounting for about 28% of all cancer deaths. The Company estimates the total world market to be approximately US $ 2 billion. Approximately 85 to 90 percent of lung cancer cases are the result of tobacco smoking.

In today’s clinical practice, physicians study the patient's personal and family medical histories, smoking history and work history and perform a thorough physical examination. Other diagnostic procedures can include chest X-rays; CAT (computer-assisted tomography) and MRI (magnetic resonance imaging), which both use computerized pictures to develop three-dimensional images of the lung tumor; and nuclear medicine scans which use low-level radioactivity to identify abnormalities in other parts of the body. Removal and microscopic examination of sputum and tumor cells from the lung and of tissue from the breathing tube, procedures known as sputum cytology and biopsy, can also be useful in making a diagnosis. X-rays, CAT and MRI can reveal the size, shape and location of the lung tumor. Sputum cytology and biopsy can determine whether the lung tumor is cancerous.

Lung cancers are of two types, small-cell lung cancer (SCLC) or non small-cell lung cancer (NSCLC). SCLC accounts for approximately 20% of the cases. It is the most aggressive and has the worst prognosis. In light of the above currently available testing methods, survival rate depends on the staging at which the disease is detected. Thus, the five-year survival rate decreases rapidly reaching less than 2% with a stage 4 cancer whereas the two-year survival rate for SCLC is only 15 to 30%. The Company believes this is an excellent example of the inadequacy of the present diagnostic methods for detecting lung cancer and thus the urgent need for an effective detection test. At the same time, this data clearly illustrates the impact and benefit of early diagnosis of lung cancer and how this plays a critical role in the treatment of the cancer and the prognosis for the patient. The DiagnoCure molecular-based lung cancer test will attempt to detect changes at the cellular level prior to the onset of symptoms thereby increasing long-term survival rates.

In 2002, DiagnoCure entered into an agreement with Compugen, Ltd. (Nasdaq: CGEN) for the co-development and commercialization of a molecular diagnostic test for lung cancer. The objective of this collaboration was to develop a nucleic acid probe-based diagnostic kit for early detection of lung cancer, namely at a stage when the disease can be treated, controlled and, possibly, cured. During the past year, Compugen provided a limited number of Lung Cancer Markers (LCMs), which were evaluated. None of the LCMs demonstrated the requested sensitivity and specificity for the development of prototype assay. Because Compugen was unable to provide additional satisfactory LCM, the parties mutually agreed to terminate their collaboration in 2003.

DiagnoCure implemented two consecutive clinical protocols by drawing on its experience within its clinical trial network. The first protocol was accepted by the ethics committees of two Quebec hospitals whereby DiagnoCure has, to date accessed a bank comprising a total of 124 tumor and normal tissue samples to screen the candidate markers. The company continued to pursue the evaluation of other potential candidate markers for the development of a prototype

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assay. As a result, three potentially interesting markers for lung cancer and one marker of normal lung cells were identified, which are being considered for the development of a prototype nucleic acid-based assay using the BOOM, NASBA and BEACONS technology. To evaluate these markers for the prototype, the Company has completed a second protocol for the collection of a total of 100 blood, bronchial aspirate and expectoration samples from patients at high risk of being diagnosed with lung cancer. Preclinical results are expected by summer of 2004.

ImmunoCyt

/ uCyt+

for the Detection of Bladder Cancer

Bladder cancer is the most common tumor of the urinary system. It is estimated that 60,240 new cases of bladder cancer will be diagnosed with an estimated 12,710 deaths in 2004 in the United States. More than 90% of patients diagnosed with bladder cancer are treated with surgery, either alone or in combination with chemotherapy, immunotherapy or radiation treatment. Following surgery, patients for the most part are monitored quarterly for recurrence by cystoscopy and/or urinary cytology. The probability of recurrence of bladder cancer within five years after initial treatment is between 50% and 70%, with the majority of recurrence occurring within the first year.

Cystoscopy is an invasive procedure that involves the examination of the bladder wall with a cystoscope, a slender fiber optic tube with a light and lens. The cystoscope is inserted through the urethra and into the bladder in order for the urologist to view the inside of the bladder. This enables the urologist to search for protruding tumors or other unusual-looking growths that may be cancerous. While cystoscopy is effective inside the bladder in identifying protruding cancers, it has limitations since certain types of tumors are more difficult to view. This implies that cancer cannot be ruled out based on the absence of a visible tumor.

Urinary cytology is the microscopic analysis of cells collected from a urine sample. This histopathologic examination and cystoscopy are the actual gold standards for bladder cancer diagnosis. However, the interpretation of the results of the urinary cytology is subject to human error and its overall clinical sensitivity for all stages and grades of bladder cancer has an average of approximately 38%, thus missing 60% to 70% of cancers. Moreover, urinary cytology is less effective because of its low sensitivity in detecting the least aggressive forms of bladder cancer, which represent the largest portion of patients. Although urinary cytology lacks in sensitivity, it has a very high specificity and therefore is an excellent complement to DiagnoCure’s test. Approximately nine million urinary cytologies will take place worldwide this year, representing a market, for bladder cancer tests, of approximately $ 250 million.

ImmunoCytTM / uCyt+TM is a non-invasive test that detects superficial bladder cancer. DiagnoCure’s test enables the visualization of monoclonal antibody reactivity with tumor antigens expressed by cancer cells collected from urine using a fluorescence microscope. The Company’s test, authorized for a 510(k) by the FDA for commercialization in the United States, is indicated for use as an aid in the management of bladder cancer in conjunction with urinary cytology and cystoscopy. High sensitivity and high specificity, which would result in the ideal test, can be obtained by combining the highly sensitive ImmunoCytTM / uCyt+TM test with traditional highly specific urinary cytology. ImmunoCytTM / uCyt+TM alone has a high sensitivity of 94% and when combined with cytology has a sensitivity of 98%. This high sensitivity has lead several physicians to use ImmunoCytTM / uCyt+TM, combined with urinary cytology, to replace in some cases cystoscopy such as in follow-up protocols of low grade transitional cell carcinoma.

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Our Products

Since last year, in the context of DiagnoCure’s US marketing transition plan, sales and marketing activities have been focused on private laboratories described as reference laboratories. Major reference laboratories such as LabCorp®, AmeriPath, Inc., Bostwick Laboratories and Molecular Oncology continued to increase their ImmunoCytTM / uCyt+TM use during 2003 as reflected in the sales revenues which doubled from 2002 to 2003. Moreover, new laboratories have included ImmunoCytTM in their diagnostic arsenal and received their ImmunoCytTM / uCyt+TM Qualification, for example Pathology Inc., Acupath Laboratories and Shands Jacksonville. Other laboratories have requested product training and qualification for which they should be certified by the first quarter of 2004. Since DiagnoCure does not intend to distribute directly the test in the US on a permanent basis, these interesting results, combined with the automated version of ImmunoCytTM / uCyt+TM, which is progressing very well, should provide a solid foundation upon which to establish a new distribution partnership for the USA.

The automation of the ImmunoCytTM / uCyt+TM test is a critical requirement for increasing sales through increased market share. The developmental efforts, which were initiated last year, should enable the introduction of an automated version of the test in the spring of 2004. In December 2003, DiagnoCure acquired the assets of SAMBA Technologies, SARL. SAMBA, specialized in image analysis and information management, had been DiagnoCure’s partner for the software development component of the automation of ImmunoCytTM / uCyt+TM since May 2003. Samba’s products are already operational in numerous cancer centers and pathology reference laboratories throughout Europe and North America. This acquisition creates numerous possibilities for new applications in cancer diagnostic immunoassays as well as facilitates and assures the software development project for the automation of ImmunoCytTM / uCyt+TM.

Sales and Marketing activities in the bladder cancer market have resulted in brand and Company recognition, which was virtually non-existent prior to 2002. As a result of these activities, the Company has expanded its international network by signing distribution agreements in new markets like Australia, Italy, the Netherlands, South Korea and Brazil. In addition to these new markets, the test is distributed in the following countries: Algeria, Belgium, Denmark, Finland, France, Morocco, Norway, Portugal, Spain, Sweden and Tunisia.

Both the Alcoa and Alcan projects to evaluate ImmunoCytTM / uCyt+TM in the medical follow-up of worker populations are progressing well and on schedule.

The product robustness and reliability of ImmunoCytTM / uCyt+TM continue to be confirmed by many new studies. Indeed, five years after its market introduction, more than 10 studies involving approximately 2,000 patients were completed by leading pathologists and urologists and have been published in renowned medical journals or presented at their respective congresses, confirming the value of ImmunoCytTM / uCyt+TM in their management of bladder cancer.

Our Products

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Kidney Cancer

The Company’s primary focus will be Renal Cell Carcinoma (RRC), which is the most common tumor of the kidney in adults. RCC is the sixth leading cause of cancer death. In 2001, the number of deaths worldwide from kidney cancer was expected to exceed 100,000. RCC is twice as common in men as in women and accounts for approximately 3% of adult malignancies and 90-95% of neoplasms arising from the kidney. The probability of cure for RCC is related directly to the stage or degree of tumor dissemination, so the approach is curative for early stage disease. For example, the five-year survival rates for patients with stage IV disease are low (0-20%). It is characterized by a lack of early warning signs, diverse clinical manifestations, resistance to radiation and chemotherapy, and infrequent but reproducible responses to immunotherapy agents such as interferon alpha and interleukin (IL)-2.

Although kidney cancer is a small market in comparison to other cancers the Company is presently developing, it is important in that it will complete its urology cancer portfolio, having developed urine-based tests for bladder cancer, ImmunoCyt TM /uCyt+ TM and for prostate cancer, uPM3 TM.

In September of 2003, DiagnoCure initiated this project by commencing the review of the potential markers for the development of a prototype test for the detection of kidney cancer. The Company’s tumor marker discovery program, which is focused on Renal Cell Carcinoma, utilizes bioinformatics methods as data-mining tools for various Expressed Sequence Tag (EST) libraries. This ongoing extensive search has, to date, yielded approximately forty preliminary potential markers. In parallel to the continuous search process, the Company has begun evaluating these preliminary markers for their potential inclusion in a prototype assay.

Management’s Discussion and

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Analysis of Financial Condition and Results Operations

The following comments should be read in conjunction with the audited consolidated financial statements and accompanying notes that have been prepared in accordance with Canadian generally accepted accounting principles.

Overview

DiagnoCure, founded in 1994, is a world leading developer and provider of innovative high value-added diagnostic tests for the early detection of cancer. Specifically, the company specializes in the development of cancer diagnostic kits incorporating gene and monoclonal antibody markers. The first non-invasive test the Company developed was based on proprietary monoclonal antibodies designed to detect bladder cancer, which is presently commercialized under the brand name of ImmunoCytTM in the United States and uCyt+TM in the rest of the world. This year, DiagnoCure completed the development of uPM3TM, a non-invasive test for the detection of prostate cancer, and initiated the commercialization in the United States under the Analyte Specific Reagent (ASR) format based on the PCA3 gene technology for which the Company holds exclusive worldwide diagnostic and therapeutic rights.

2003 HIGHLIGHTS

DiagnoCure completed the development of the uPM3TM test for the detection of prostate cancer and, thus, achieved an important milestone in the Company’s business plan by commencing, in October 2003, sales of the test in the United States under the ASR format through the network of Bostwick Laboratories of Richmond, Virginia. DiagnoCure’s test, which detects the presence of the PCA3 gene and which is the most specific of all genes associated with prostate cancer identified to date, should constitute an important breakthrough in the improvement of prostate cancer diagnostics. The uPM3TM test, which was evaluated through a multicenter clinical study on 443 patients, indicated a positive predictive value of 75% and a negative predictive value of 84% on men with a PSA level of 2.5 ng/mL and over. In addition, the European Urology journal (44, 2003, 8-16) published, in March 2003, an article written by Dr. Schalken’s group on a European clinical study of 108 men. Although this study was performed on a different technology platform, the results were similar to those from the preceding study and demonstrated that if a PCA3 test were negative for prostate cancer, there would be a 90% chance that a subsequent biopsy would be negative.

The Company also witnessed in 2003 a major achievement by the doubling of the sales of the ImmunoCytTM / uCyt+TM test for the detection of bladder cancer. DiagnoCure’s promotional efforts, within the context of the transition plan following the premature termination of the distribution agreement with a US distributor, were successful. Since DiagnoCure does not intend to distribute directly the test on a permanent basis, these results, combined with the automated version of ImmunoCytTM / uCyt+TM, which is progressing very well, should provide a solid foundation upon which to establish a new distribution partnership for the USA. DiagnoCure also increased its market penetration potential with the signature of distribution agreements in Italy, the Netherlands, South Korea, Australia and Brazil.

Last March, DiagnoCure was granted ISO 13485 certification, which is now a prerequisite prior to receiving from Health Canada the necessary authorization for the commercialization of new diagnostic products.

Management’s Discussions and

Analysis of Financial Condition and Results of Operations

Page 19

As regards the lung cancer project, the Company diligently continued the evaluation of many molecular markers in the context of developing a prototype detection test. DiagnoCure has since commenced the validation a few potentially interesting markers on a total of 100 blood, bronchial aspirate and expectoration samples from patients at high risk of being diagnosed with lung cancer. The Company intends to develop a prototype and to conduct a pilot study in 2004.

In order to expand the portfolio of diagnostic products, DiagnoCure initiated, during the last quarter of 2003, the development of a molecular test for the detection of kidney cancer by using bioinformatics tools as a search method within the expressed sequence libraries. This future test will complement the product line developed by DiagnoCure in the field of urological cancers.

SUBSEQUENT EVENTS

In November 2003, DiagnoCure announced that it had granted to Gen-Probe (NASDAQ: GPRO) an exclusive worldwide licence for the development and commercialization of diagnostic products incorporating the PCA3 gene for prostate cancer technology in consideration for the payment, over the next three years, of up to US $ 10.5 million, including milestone and contract development payments and an upfront fee of US $ 3 million. The Company will also receive royalties of 16% of the cumulative net product sales to end-users after receiving royalties of 8% on the first $ 50 million of cumulative net product sales to end-users. This partnership with Gen-Probe, a world leader in nucleic acid based tests, could allow uPM3TM to become the first genetic detection test used as a complement to the existing prostate cancer diagnostic tools.

On December 19th, 2003, the Company also announced the acquisition of the assets of SAMBA Technologies SARL, specializing in digital imaging and information technology. SAMBA’s products were already operational in numerous cancer centres and pathology reference laboratories throughout Europe and North America. In addition to widely broadening its development potential for new applications in cancer diagnostic immunoassays, this acquisition will enable DiagnoCure to accelerate the introduction of an automated version of its ImmunoCytTM / uCyt+TM test in the spring of 2004 which should have a positive impact on product sales.

2004 OBJECTIVES

In the spring of 2004, DiagnoCure is expected to successfully complete the development of a prototype test for the detection of lung cancer in accordance with the protocols and studies described above and, thereafter, start a pilot study in the summer of 2004. Positive results for this first study would pave the way for the completion of the development of a detection test by the fall of 2004 and, the Company believes, potentially, the commercialization of an ASR format test by the end of 2005. The Company also intends to commence working on the development of new cancer tests for the diagnosis of breast cancer and, possibly, cervical cancer.

Finally, DiagnoCure intends to establish new strategic alliances and licensing agreements with other biotechnology and pharmaceutical companies and institutions in order to enhance the commercialization of the Company’s technologies and, possibly, those of its partners.

Management’s Discussion and

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Analysis of Financial Condition and Results Operations

Revenues for 2003 totalled $775,486 compared with $1,319,666 in 2002. During the year ended October 31, 2002, the Company and a distributor privately decided to put an end to their distribution agreement and the Company was paid an amount of $866,658. Sales for ImmunoCytTM / uCyt+TM and uPM3TM ASR reagents were $637,780 in 2003 compared to $312,761 for 2002, an increase of 104%. Interest income went from $140,247 for 2002 to $137,706 for 2003, a decrease of $2,541.

Operating expenses increased slightly from $3,970,312 in 2002 to $4,004,502 in 2003, primarily as a result of the following:

• Research and development expenses, net of investment tax credits, decreased by $107,291, from $1,594,966 in 2002 to $1,487,675 in 2003. This decrease in research and development expenses is attributable to the abatement in investments on the uPM3™ test for prostate cancer.

• General and administrative expenses decreased from $1,108,118 for the year 2002 to $939,719 for the year 2003. This decrease of $168,399 is attributable to the reduction of professional and corporate communication fees.

• Selling and business development expenses increased by $364,362 during the year, from $583,481 for 2002 to $947,843 for 2003. This increase is attributable to the increased investment for the promotion of the ImmunoCytTM / uCyt+TM test and the business development plan for the commercialization of the uPM3TM ASR test.

• Manufacturing costs decreased from $366,785 in 2002 to $339,758 for 2003. This decrease is attributable to a more efficient management of human and material resources in the production of our products.

• Depreciation of tangible and intangible capital assets decreased $40,808, from $307,855 in 2002 to $267,047 in 2003. This decrease is due to the complete depreciation of certain pieces of equipment during fiscal year 2003.

Based on the above, for year ended October 31, 2003, DiagnoCure recorded a net loss of $3,229,016 or $0,11 per share, compared with $2,650,646, or $0.10 per share for the year ended October 31, 2002.

Total Assets and Shareholders’ Equity

Total assets totalled $5,279,716 as at October 31, 2003, compared with $8,384,596 as at October 31, 2002. This decrease is due mainly to the use of funds for operating activities during the year. The book value per Common Share is $0.16 as at October 31, 2003 compared to $0.27 per Common Share as at October 31, 2002. Since the inception of the Company, approximately $16,200,000 has been invested in research and development activities, before investment tax credits.

Management’s Discussions and

Analysis of Financial Condition and Results of Operations

Page 21

Cash flows used for operating activities amounted to $2,801,854 for the year 2003 compared with $2,360,515 for the year 2002, an increase of $441,339. This difference is due to the increase of the net loss in 2003, which resulted from the payment received by DiagnoCure in the amount of $866,658 from DAKO Corporation in 2002.

Investing activities generated cash flows of $1,921,115 in 2003 following the use of investments for a total of $2,021,181 to finance operating activities. During the year 2002, investing activities required an amount of $5,689,589, attributable to temporary investments of $5,456,506. DiagnoCure also acquired tangible capital assets in order to improve the equipment used for the research and development and production activities and continued upgrading its computers to remain in line with technological advances. Acquisition of tangible and intangible assets amounted to $103,076 for the year 2003 compared with $233,083 for 2002.

Cash used by financing activities totalled $2,462 during the year. This amount corresponds to the balance on long-term debt which became payable in February 2003. No other debt was incurred during 2003. In 2002, the amount generated for financing activities amounted to $7,724,202 following the issuance of common shares in December 2001 for a gross product of $8,662,501.

As at October 31, 2003, cash, cash equivalents and temporary investments were $4,141,186 compared with $7,045,568 as at October 31, 2002.

DiagnoCure invests its cash reserves in liquid, high-grade investments with varying terms to maturity (generally not exceeding 12 months), selected with regard to the expected timing of operating and capital expenditures and prevailing interest rates.

DiagnoCure’s funding needs may vary depending upon a number of factors. The Company’s funding requirements for the next years will depend on its ability to generate revenues from sales and to form strategic partnerships, as well as on the scope and progress of its research and development activities.

Risk factors

The company’s activities are submitted to some risk factors that generally affect biopharmaceutical companies. The profitability of the company will depend upon its ability to successfully develop its products and technologies, to preserve its intellectual property rights, to maintain its highly qualified personnel, to conclude strategic alliances, research and development partnerships, strategic out-licensing agreements, to obtain satisfactory results as regards clinical studies and to obtain regulatory approvals required to commercialize its products.

This process required important financial income. Therefore, the company’s ability to obtain necessary liquidities to finance its activities is essential to assure future success and is as such a risk factor.

Management’s Discussion and

Page 22

Analysis of Financial Condition and Results Operations

Quarterly results

Unaudited

Quarters ended

2003 2002

Jan. 31 April 30 July 31 Oct. 31 Jan. 31 April 30 July 31 Oct. 31 Total Income 158,338 162,054 171,020 284,074 52,951 147,274 106,482 1,012,959 Net profit (net loss) (870,884) (848,594) (697,262) (812,276) (944,883) (975,477) (993,690) 263,404 Net profit (net loss) per

share (0.03) (0.03) (0.02) (0.03) (0.04) (0.03) (0.03) 0.01

Cautionary Statement

Management’s comments and analysis are intended to facilitate understanding of the audited consolidated financial statements and accompanying notes and should therefore be read in conjunction with that information. The comments and analysis may include objectives, projections, estimates, expectations and forecasts of the Company or management that are forward-looking. Positive or negative verbs such as to “believe”, “plan”, “estimate”, “expect” and “evaluate”, or similar expressions, are used to identify forward-looking statements. The Company cautions readers that, by their very nature, forward-looking statements involve major risks and uncertainties such that the Company’s activities or results could differ significantly from those indicated, whether explicitly or implicitly.

Management’s Responsibility for Financial Reporting

Page 23

The consolidated financial statements of DiagnoCure Inc. and all the information in this annual report are the responsibility of management and have been approved by the Board of Directors.

It is management’s responsibility to make sound and informed decisions to ensure the application of the appropriate accounting methods and principles. The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles. Financial information presented in this annual report is consistent with that in the consolidated financial statements.

DiagnoCure Inc. maintains systems of internal accounting and administrative controls which, in management’s opinion, provide reasonable assurance that the financial information is accurate, relevant and reliable and that the Company’s business is conducted efficiently and in an orderly manner.

The Board of Directors ensures that management fulfills its responsibilities for financial reporting and is ultimately responsible for reviewing and approving the financial statements. The Board carries out this responsibility through its Audit Committee. The Audit Committee members are outside directors; they meet with management and the external auditors to discuss internal controls over the financial reporting process, auditing matters and financial reporting issues to satisfy itself that each party is properly discharging its responsibilities, and to review the consolidated financial statements and the external auditors’ report.

The consolidated financial statements for the years ended October 31, 2003 and 2002 have been audited by Ernst & Young LLP, the external auditors appointed by the shareholders, in accordance with Canadian generally accepted auditing standards. Moreover, the auditors have access to the Audit Committee at all times.

Pierre Désy

President and CEO

Quebec, Canada February 25, 2004

Page 24

Consolidated Financial Statements

AUDITORS’ REPORT

To the Shareholders of

DiagnoCure Inc.

:

We have audited the consolidated balance sheets of

DiagnoCure Inc.

as at October 31,

2003 and 2002 and the consolidated statements of operations, deficit and cash flows for

the years then ended. 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. Those standards require that we plan and perform an audit to obtain

reasonable assurance whether the financial statements are free of material misstatement.

An audit includes examining, on a test basis, evidence supporting the amounts and

disclosures in the financial statements. An audit also includes assessing the accounting

principles used and significant estimates made by management, as well as evaluating the

overall financial statement presentation.

In our opinion, these consolidated financial statements present fairly, in all material

respects, the financial position of the Company as at October 31, 2003 and 2002 and the

results of its operations and its cash flows for the years then ended in accordance with

Canadian generally accepted accounting principles.

Québec City, Canada

Consolidated Financial Statements

Page 25

DiagnoCure Inc.

CONSOLIDATED BALANCE SHEETS

As at October 31

2003 2002

$ $

ASSETS Current assets

Cash and cash equivalents 390,881 1,274,082

Temporary investments [note 4] 3,750,305 5,771,486

Accounts receivable [note 5] 174,502 115,126

Investment tax credits receivable [note 10] 219,251 299,362

Prepaid expenses 85,189 97,971

Total current assets 4,620,128 7,558,027

Property, plant and equipment[note 6] 555,784 716,824

Intangibles [note 7] 103,804 109,745

5,279,716 8,384,596

LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities

Accounts payable and accrued liabilities 604,344 477,746

Current portion of long-term debt [note 8] — 2,462

Total current liabilities 604,344 480,208

Shareholders’ equity

Capital stock [note 9] 35,219,926 35,219,926

Contributed surplus [note 9] 1,301,050 1,301,050

Deficit (31,845,604 ) (28,616,588 )

4,675,372 7,904,388

5,279,716 8,384,596

Commitment [note 15] Subsequent events [note 16] See accompanying notes On behalf of the Board:

“Pierre Désy” “Yves Fradet”

Page 26

Consolidated Financial Statements

DiagnoCure Inc.

CONSOLIDATED STATEMENTS OF DEFICIT

For the years ended October 31

2003 2002

$ $

Deficit, beginning of year (28,616,588 ) (24,842,851 )

Add

Net loss (3,229,016 ) (2,650,646 )

Common share issue expenses [note 9] — (1,123,091 )

(3,229,016 ) (3,773,737 )

Deficit, end of year (31,845,604 ) (28,616,588 )

Consolidated Financial Statements

Page 27

DiagnoCure Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

For the years ended October 31

2003 2002

$ $

Revenues

Sales 637,780 312,761

Interest 137,706 140,247

Gain from cancellation of an agreement [note 11] — 866,658

775,486 1,319,666

Operating expenses [note 14]

Research and development expenses 1,741,801 1,904,290

Investment tax credits (254,126 ) (309,324 )

1,487,675 1,594,966

General and administrative expenses 939,719 1,108,118

Selling and business development expenses 947,843 583,481

Manufacturing costs 339,758 366,785

Financial expenses 22,460 9,107

Depreciation of property, plant and equipment 247,730 289,845

Amortization of intangibles 19,317 18,010

4,004,502 3,970,312

Loss before income taxes (3,229,016 ) (2,650,646 )

Provision for income taxes [note 12] — —

Net loss (3,229,016 ) (2,650,646 )

Basic and diluted loss per share [note 9] (0.11 ) (0.10 )

Weighted average number of common shares outstanding 29,050,712 27,423,926

Page 28

Consolidated Financial Statements

DiagnoCure Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended October 31

2003 2002

$ $

OPERATING ACTIVITIES

Net loss (3,229,016 ) (2,650,646 )

Adjustment for:

Depreciation and amortization 267,047 307,855

(2,961,969 ) (2,342,791 )

Net change in non-cash working capital items 160,115 (17,724 )

Cash flows related to operating activities (2,801,854 ) (2,360,515 )

INVESTING ACTIVITIES

Change in temporary investments 2,021,181 (5,456,506 )

Proceeds from sale of property, plant and equipment 3,010 —

Acquisition of property, plant and equipment (89,700 ) (220,601 )

Acquisition of intangibles (13,376 ) (12,482 )

Cash flows related to investing activities 1,921,115 (5,689,589 )

FINANCING ACTIVITIES

Repayment of long-term debt (2,462 ) (10,008 )

Issue of capital stock — 8,662,501

Issue expenses related to common shares — (928,291 )

Cash flows related to financing activities (2,462 ) 7,724,202

Net decrease in cash and cash equivalents (883,201 ) (325,902 )

Cash and cash equivalents, beginning of year 1,274,082 1,599,984

Cash and cash equivalents, end of year 390,881 1,274,082

Supplemental cash flow information

Cash paid during the year for:

Interest 26 460

Income tax — —

Consolidated Financial Statements

Page 29

DiagnoCure Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

October 31, 2003

1.

INCORPORATION AND NATURE OF BUSINESS

The Company was incorporated on December 8, 1994 under Part 1A of the Companies Act (Québec). DiagnoCure Inc. is a biotechnology company which specializes in the development and commercialization of products relating to the diagnosis of cancer.

The Company intends to continue its research and development and marketing efforts. The Company’s operations are subject to all the inherent risks related to setting up and running an emerging biotechnology company, such as successfully completing its research and development activities, marketing its products and obtaining the required financing.

For the years ended October 31, 2003 and 2002, two products [one product for 2002] accounted for the Company’s sales, which were carried out almost entirely in the United States, with one client accounting for 57% and 64% respectively of the total sales of these fiscal years [note 11].

2.

SIGNIFICANT ACCOUNTING POLICIES

Basis of financial statement presentation

The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles and include the accounts of the Company and those of its wholly owned subsidiaries, Urotech Pharma Inc. and Urovac R&D Inc.

Use of estimates

In preparing these financial statements, management is required to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. In management’s opinion, the financial statements have been properly prepared using careful judgement within the reasonable limits of materiality and within the framework of the accounting policies summarized below.

Cash equivalents

Cash equivalents consist of investments that are readily convertible into a known amount of cash, that are subject to minimal risk of changes in value and which have an original maturity of three months or less from the date of purchase.

Temporary investments

Temporary investments consisting of commercial paper, mutual funds and short-term bonds, are recorded at cost plus accrued interest, which approximate fair value on a portfolio basis.

Page 30

Consolidated Financial Statements

2.

SIGNIFICANT ACCOUNTING POLICIES [Cont’d]

Property, plant and equipment and intangibles

Property, plant and equipment and intangibles are recorded at cost and depreciation is calculated using the straight-line method over the following estimated useful lives:

Property, plant and equipment

Leasehold improvements Lease term

Office furniture and equipment 5 years

Laboratory equipment 5 years

Computer hardware and software 3 years Intangibles

Licenses Period not exceeding ten years

Government assistance

Government assistance received in the form of grants and investment tax credits for qualifying research and development activities are applied as a reduction of the cost of the related property, plant and equipment or as a reduction of the applicable research and development expenses where there is reasonable assurance of their ultimate realization.

Revenue recognition

Sales revenue is recognized when the product is delivered to customers, title of property has passed to customers and collection is reasonably assured. Research contract revenue is recognized as services are performed and when collection is reasonably assured. License revenue is recognized over the term of the related license. Interest income is recognized on an accrual basis.

Income taxes

The Company follows the liability method of accounting for income taxes according to which future income tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities, measured using substantively enacted tax rates and laws that are expected to be realized or settled. Future income tax assets are recognized to the extent that it is more likely than not that they will be realized.

Research and development

Research expenses are charged to consolidated income as incurred. Development expenses are charged to consolidated income as incurred unless a development project meets the criteria under Canadian generally accepted accounting principles in respect of deferral and amortization. To date, the Company has not deferred any such development expenses.

Consolidated Financial Statements

Page 31

2.

SIGNIFICANT ACCOUNTING POLICIES [Cont’d]

Foreign currency translation

The consolidated financial statements are denominated in Canadian dollars. The temporal method is used whereby the monetary assets and liabilities recorded in a foreign currency are translated into Canadian dollars at year-end exchange rates and non-monetary assets and liabilities are translated at the exchange rates prevailing when the assets were acquired or liabilities were incurred. Revenue and expenses [other than depreciation and amortization, which are translated at the rate applicable to the corresponding assets] are translated at the average rate of exchange for the period. Gains and losses on translation of foreign currencies are included in the consolidated statement of operations in the current period.

Earnings per share

Basic earnings per share are calculated using the weighted average number of shares outstanding during the year. Diluted earnings per share are calculated using the treasury stock method, giving effect to the exercise of all dilutive securities. The treasury stock method assumes that proceeds from the exercise of options are used to purchase common shares at the average market price during the period. Shares issued in connection with share purchase loans are excluded from the calculation of basic earnings per share but are considered to be contingently returnable for purposes of calculating diluted earnings per share when the effect is dilutive.

Stock-based compensation plan

The Company has a stock-based compensation plan, which is described in note 9. No compensation expense is recognized for this plan when stock or stock options are issued to employees, officers and directors. Any consideration paid by employees, officers and directors on exercise of stock options or purchase of stock is credited to share capital. Options issued to consultants are recognized as an expense at the earlier of the vesting date or over the period over which the services are performed using the Black-Scholes option pricing model.

Impairment of long-lived assets

Long-lived assets and certain identifiable intangibles are reviewed for impairment by management whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment is assessed by comparing the carrying amount of an asset with its expected future net undiscounted cash flows from use together with its residual value [net recoverable value]. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the net recoverable value.

Page 32

Consolidated Financial Statements

3.

CHANGE IN ACCOUNTING POLICIES

Intangible assets

Effective November 1, 2002, the Company prospectively adopted the new recommendations published by the Canadian Institute of Chartered Accountants relating to the method of valuation and the presentation and disclosure requirements for intangible assets. The new recommendations require recognized intangible assets to be amortized over their useful life to an enterprise, unless the life is determined to be indefinite. When an intangible asset is determined to have an indefinite useful life, it is not amortized until its life is determined to be no longer indefinite. The amortization method and estimate of the useful life of an intangible asset is reviewed annually. Intangible assets that are subject to amortization are tested for impairment by comparing the net carrying amount with the net recoverable amount whereas for intangible assets not subject to amortization, the net carrying amount with the net recoverable the asset’s fair value. The impact of the adoption of the new recommendations has not resulted in any change to the recognized intangible assets of the Company because its intangible assets are not considered to have an indefinite life.

Stock-based compensation and other stock-based payments

Effective November 1, 2002, the Company prospectively adopted the new recommendation published by the Canadian Institute of Chartered Accountants relating to based compensation and other stock-based payments. The Company has chosen to recognize no compensation when stock options are granted to employees and directors under the stock option plans at the prevailing market price and with no cash settlement features. However, direct awards of stock to employees and stock options awards granted to non-employees are accounted for in accordance with the fair value method of accounting for stock-based compensation, as they have been accounted for previously. The fair value of direct awards of stock is determined based on the quoted market price of the Company’s stock and the fair value of the stock options is determined using the Black-Scholes option pricing model. In periods prior to November 1, 2002, the Company recognized no compensation when stock options were issued to employees and directors. Pro forma information regarding net income is required to be disclosed as if the Company had accounted for its employee stock options granted after October 31, 2002 under the fair value method. The fair value of these options is estimated at the date of grant using the Black-Scholes option pricing model with assumptions for the weighted-average risk-free interest rates, dividend yields, weighted-average expected volatility of the market price of the Company’s common shares and the weighted-average expected life of the options. For purposes of the pro-forma disclosures, the estimated fair value of the options is amortized to the expense over the options’ vesting periods on a straight-line basis.

4. TEMPORARY

INVESTMENTS

2003 2002

Weighted Weighted

average average

Book effective Book effective

value rate value rate

$ % $ %

Bonds 2,700,503 2,21 2,872,793 2.81

Commercial paper 207,223 2,92 1,276,254 2.81

Mutual funds – Money

market 842,579 2,00 1,622,439 1.71

Consolidated Financial Statements

Page 33

5. ACCOUNTS

RECEIVABLE

2003 2002

$ $

Accounts receivable – Trade 152,202 78,188

Sales taxes 20,742 27,903

Government assistance — 7,000

Other 1,558 2,035

174,502 115,126

6.

PROPERTY, PLANT AND EQUIPMENT

2003 2002

Accumulated Accumulated

Cost depreciation Cost depreciation

$ $ $ $

Leasehold improvements 1,122,130 848,271 1,122,130 730,903

Office furniture and

equipment 260,364 249,341 258,475 242,649 Laboratory equipment 1,237,912 1,008,227 1,173,994 921,950 Computer hardware and software 225,698 184,481 204,815 147,088 2,846,104 2,290,320 2,759,414 2,042,590 Accumulated depreciation 2,290,320 2,042,590 555,784 716,824

7. INTANGIBLES

Less: accumulated amortization 95,723 76,406

103,804 109,745

8. LONG-TERM

DEBT

2003 2002

$ $

Term loan bearing interest at prime rate plus 1.75%, repayable in

monthly instalments of $834 and matured in February 2003 — 2,462

Less: current portion of long-term debt — 2,462

— —

Page 34

Consolidated Financial Statements

9. CAPITAL

STOCK

Authorized

An unlimited number of shares of the following classes, without par value: Common, voting and participating shares.

Preferred shares, issuable in series, non-voting, of which the rights, privileges, restrictions and conditions attached to each series will be determined by the directors upon the issuance of each series.

2003 2002

$ $

Issued and fully paid

29,050,712 common shares 35,219,926 35,219,926

During the year ended October 31, 2002, in connection with a public offering, the Company issued 10,147,060 common shares at a price of $0.85 per share for total gross proceeds of $8,625,001. The net proceeds of this offering, after deduction of underwriters’ commissions and issue expenses, amounted to $7,501,910. During the same year, the Company also issued 47,643 common shares for a cash consideration of $37,500.

Stock options

Employee stock option plan

The Company adopted a stock option plan for its managers, senior executives, employees and consultants under which a total of 2,600,000 common shares were reserved for issue. No stock options are granted for a period exceeding ten years and the exercise price of each stock option cannot be below the average market price of the five days preceding the grant. The stock options generally vest over a three-year period following the date of the grant.

Other stock options

During the year ended October 31, 2002, the Company issued additional compensation to the underwriters by way of stock options to purchase 811,764 common shares. These stock options might be exercised up to December 28, 2002 at a price of $0.90 per share. Management has estimated the fair value of these options to be $194,800. This amount has been recorded as a common share issue expense increasing the Company’s deficit and as a credit to contributed surplus during that year.

Consolidated Financial Statements

Page 35

9.

CAPITAL STOCK [Cont’d]

Stock options [cont’d]

Other stock options [cont’d]

The Company’s outstanding stock options as at October 31, 2003 and 2002 and changes that occurred during the years then ended are as follows:

2003 2002

Weighted Weighted

average average

Number of exercise Number of exercise

options price options price

$ $ Options outstanding, beginning of year 2,327,629 1.87 1,691,977 2.95 Granted 423,500 0.40 1,136,764 1.00 Cancelled or forfeited (873,097 ) 0.96 (501,112 ) 3.56 Options outstanding, end of year 1,878,032 2.12 2,327,629 1.87

Options exercisable, end

of year 1,191,530 2.91 1,869,515

The following table summarizes information relating to the stock options outstanding as at October 31, 2003:

Options outstanding Options exercisable

Weighted

average Weighted Weighted

remaining average average

Range of Number contractual exercise Number exercise

exercise prices of options life (years) price of options price

$ $

$5.90 224,175 1.30 5.90 224,175 5.90

$2.00 to $3.75 461,857 4.82 3.13 461,857 3.13

$0.37 to $1.85 1,192,000 7.88 1.02 505,498 1.37